by catherine santos helen farfan marcelo moran by catherine santos helen farfan marcelo moran...
TRANSCRIPT
By Catherine Santos
Helen Farfan Marcelo Moran
By Catherine Santos
Helen Farfan Marcelo Moran
Dollarization in El SalvadorDollarization in El Salvador
What is dollarization?
What is dollarization?
• Official Dollarization
• Semi-official dollarization
• Unofficial dollarization
Facts about dollarizationFacts about
dollarization
• When do we implement dollarization in a country?
• The inflation rate in 2001 was around 4%.
• Real GDP was around 3%
El Salvador at the beginning of the 21st Century
El Salvador at the beginning of the 21st Century
• Implementation of neoliberal economic policies.
• External debt was manageable.• The economy is strongly tied to the United States.
• The real source of foreign exchange was remittances from the U.S.
• Implementation of neoliberal economic policies.
• External debt was manageable.• The economy is strongly tied to the United States.
• The real source of foreign exchange was remittances from the U.S.
El Salvador at the beginning of the 21st Century
El Salvador at the beginning of the 21st Century
Service Privatized Change Since
Telephone 1998 37%
1999
Electricity
1992 221%
Over the last decade
Water Not priv 33%
Since 2005
Data from 2002 indicate the cost of these basic services amounted to 41% of a minimum wage earner's salary
Gini CoefficientGini Coefficient
•40.5% of income is captured by the top 10% of the population
•It has the 5th highest Gini coefficient in the world wth a coefficient of 52.3 (World Bank 2002).
•40.5% of income is captured by the top 10% of the population
•It has the 5th highest Gini coefficient in the world wth a coefficient of 52.3 (World Bank 2002).
Effects of Dollarization in El SalvadorEffects of Dollarization in El Salvador
• Dollarization ensures that El Salvador’s fortunes will rise & fall with America’s.
• El Salvador faced several shocks initially– Increasing oil prices, US economy slowdown
• The effects are both positive and negative
Would El Salvador be better off having not Dollarized?
• Dollarization ensures that El Salvador’s fortunes will rise & fall with America’s.
• El Salvador faced several shocks initially– Increasing oil prices, US economy slowdown
• The effects are both positive and negative
Would El Salvador be better off having not Dollarized?
Positive and Negative Effects of DollarizationPositive and Negative Effects of Dollarization
Positive Effects Positive Effects Negative EffectsNegative Effects
• Currency Risk Eliminated• A more stable currency• Lower Country Risk
Premiums• Lower transaction costs
between former currency & the US dollar
• Gains in policy credibility
• Encourages competition– Boosts productivity & innovation
• Currency Risk Eliminated• A more stable currency• Lower Country Risk
Premiums• Lower transaction costs
between former currency & the US dollar
• Gains in policy credibility
• Encourages competition– Boosts productivity & innovation
• Predicted benefits that never materialized
• Prices have increased rather than dropping
• Wages only rose minimally
• Distrust of Gov’t by some of its constituents– Monetary Integration Law
• Predicted benefits that never materialized
• Prices have increased rather than dropping
• Wages only rose minimally
• Distrust of Gov’t by some of its constituents– Monetary Integration Law
BankingBanking
Positive EffectsPositive Effects Negative EffectsNegative Effects
• Regulations were restructured & tightened
• Improved transparency• Small Banks can compete
with larger banks• Initially Lower
Interest Rates on Mortgage and Personal Loans
• Corporate borrowing rates are low
• Regulations were restructured & tightened
• Improved transparency• Small Banks can compete
with larger banks• Initially Lower
Interest Rates on Mortgage and Personal Loans
• Corporate borrowing rates are low
• Elimination of True Central Bank
• No Lender of Last Resort
• Lost control of their own money supply
• Lost income through Seigniorage
• Currently Interest Rates are almost as high as before dollarization
• Nearly impossible to reverse
• Elimination of True Central Bank
• No Lender of Last Resort
• Lost control of their own money supply
• Lost income through Seigniorage
• Currently Interest Rates are almost as high as before dollarization
• Nearly impossible to reverse
Global Financial IntegrationGlobal Financial Integration
Positive EffectsPositive Effects Negative EffectsNegative Effects
• Banks have improved their performance– Gaining competitiveness in the Central American Region
• Better integration into the Int’l financial system
• Higher credibility among foreign investors
• Easier access to cheaper Int’l borrowing
• Banks have improved their performance– Gaining competitiveness in the Central American Region
• Better integration into the Int’l financial system
• Higher credibility among foreign investors
• Easier access to cheaper Int’l borrowing
• Never attracted influx of Foreign Investment– Foreign Bank presence remains negligible
• Posting some of the lowest Growth rates in the region
• Never attracted influx of Foreign Investment– Foreign Bank presence remains negligible
• Posting some of the lowest Growth rates in the region
The Issuing Country
The Issuing Country
Choices:•Passive Acceptance•Active Encouragement•Active Resistance
Choices:•Passive Acceptance•Active Encouragement•Active Resistance
The Issuing Country (Cont.)
The Issuing Country (Cont.)
Advantages• May lead to increased trade• Elimination of exchange rate risk
Advantages• May lead to increased trade• Elimination of exchange rate risk