Advantages And Disadvantages Of Dollarization

Dollarization is the process in which nations “replace their domestic currencies [with foreign legal tender] …to obtain economic growth and stability” (Rivera-Solis 330). The US dollar is the most common choice of exchange in this practice, though the adoption of other first world states currencies may be entertained as well. Though its affects are not instant, US dollarization has brought many gradual benefits to the economic statuses of several countries. There are two types of dollarization: official and unofficial. In the process of official dollarization, a state gives complete monetary control to a foreign nation, ceding its right to both create a central bank and issue a domestic form of currency. Where as a nation loses its sovereignty

By decreasing the purchasing power of money, or rather the amount of goods that can be bought, the economy suffers as consumers begin to withhold their funds. Without the stimulation of purchasing, the economy begins to contract. When El Salvador adopted the US dollar as its legal currency, the nation ceded monetary control to US. This means that the “US Federal Reserve’s policy rate is effectively the… rate in El Salvador” (“Country Reports” 2). Since the official dollarization of El Salvador, inflation has remained “relatively low” (Rivera-Solis 331) which encourages the growth of the economy. The lower inflation is, the more consumers can purchase and take loans from the local banks. All of this activity fosters stable economic conditions. However, despite the progress dollarization has afforded El Salvador, many economists claim that its costs outweigh such

Zimbabwe is one of those nations. Over the years many nations have withdrawn their aid from Zimbabwe. Much conflict has arisen between those who send foreign aid and those who believe that the assistance does nothing but further social divide and corruption. The longer conflict lasts in the African nations, the more inclined those who send aid financially are to cease assisting as conditions worsen. The decrease in funding, along with various other factors, has played into Zimbabwe’s recent economic crisis. Hyperinflation has plagued the African state for the last few years, a result of “unaccounted-for expenditures of the Second Congo War and… inflationary policies of the reserve bank” (Noko 346). Dollarization functioned as a highly effective solution to the issues posed in Zimbabwe. Although Zimbabwe is geographically closer to South Africa, the decision was made to use US currency as the new official legal tender rather than the rand. Thus, the “monetary policy… of the US” (Noko 349) became that of Zimbabwe. However, unlike Panama and El Salvador, officials in Zimbabwe did not encourage the phasing out of other nations currency. The circulation of money from other nations allowed a safe guard against any negative effects that might occur in results of the adoption of the US greenback. Though dollarization has brought about a few