El dolar wins fans in Latin America

As Salvadorans bustle around the capital doing holiday shopping, many know this will be the last Christmas they will be paying with the colorful bills of the colon, their national currency.

In a controversial move, the Salvadoran government made the announcement in late November that beginning Jan. 1, the nation will start using dollars alongside the colon. The measure is aimed at the eventual total replacement of the national currency.

Greenbacks already circulate widely in this tiny Central American nation, which receives $1.5 billion a year in remittances from family members residing in the US.

With this move, El Salvador has taken a clear position in the growing international debate as to whether emerging markets, like those in Latin America, should dollarize. Analysts here maintain that the US and multinational lending intuitions are increasingly pressing for dollarization, and that El Salvador's experience could influence whether other nations follow suit.

"El Salvador is the test for the thesis that some maintain, that the countries in Latin America should adopt the dollar. The rest of the nations are going to watch carefully what happens here," says Hector Dada Hirezi, director of the El Salvador program of the Latin American Faculty for Social Sciences (FLACSO).

El Salvador is the second country, behind Ecuador, to dollarize in the past year. Panama has used the dollar since the early 1900s. Since 1991, Argentina's peso has been fixed at a one-to-one rate with the dollar and is convertible on demand. The country has since debated dollarizing.

Since El Salvador's decision, Guatemala's Congress has been considering legalizing bank accounts and the payment of checks in dollars. Meanwhile, Vicente Fox, Mexico's newly inaugurated president, already has vowed not to dollarize. The dollar is widely used in many countries in Latin America, such as Peru, some states in Mexico, and Nicaragua, which have not officially dollarized.

The Salvadoran government says its move will legalize the already prevalent use of the dollar and prevent devaluation of its currency. The colon's value will be fixed at 8.75 to the dollar. "Now there will be no risk of fluctuating exchange rates and this will give international and national investors more confidence in El Salvador," says Jose Mauricio Quinteros, a congressman with ARENA, the right-wing ruling party.

In past weeks, the government has flooded the airways with propaganda extolling the benefits of dollarization. According to the government, Salvadorans will enjoy more access to loans, and interest rates will fall since loans will be given in a stable currency.

The FMLN, the left-leaning party of the former guerrilla movement of the same name, firmly opposes the measure. "The nation's economy has been in decline since 1995 and the government took this measure to try and save its failing economic plan. But this is not going to change the economic situation," says Schafik Handal, a prominent FMLN congressman.

His party says the measure is unconstitutional and, as soon as it takes effect, will bring a case before El Salvador's Supreme Court.

The pros and cons of such a complicated economic policy escape most Salvadorans, who are more worried about how they will manage their day-to-day finances in two currencies during the transition period.

In San Salvador's bustling central market there is an ever-present cacophony as vendors shout their best offers: chicken at 7 a pound, grapes at 2. With the dollarization, many believe that to avoid awkward numbers, prices will be rounded off, most probably upward. Many say the accumulation of these fractional increases could greatly affect the nation's poorest.

"For people like me who don't know how to read, how are we supposed to give customers change? It will be confusing. I don't think I'll even come to the market anymore, I'll just stay home and be hungry," says Paula Melen, a yucca vendor in the central market.

Juan Antonio Mira, a banana seller, traces his fingers over a colon bill. "This is Jose Manuel Arce, our first president," he says. "Now they say our bills will have the faces of George Washington, Abraham Lincoln, and Richard Nixon."

Analysts, however, are worried about a different sovereignty issue. With dollarization, the government will no longer produce money and will lose two important instruments of economic policymaking: monetary and exchange-rate policy. Control of these aspects of policy will lie with the US federal reserve.

Some analysts say the pressure to dollarize not only comes from elite sectors of Salvadoran society likely to benefit with this measure, but from the US.

"The theme of dollarization is a strategy [used] in the US and by multilateral lenders. There is a desire for the dollar to be the primary money in a much wider circle. Dollarization will also have major benefits for transnational companies," says Raul Moreno, an economist with the San Salvador think tank, the National Foundation for Development.

Some analysts say they believe the US government was involved in El Salvador's decision, adding that just one hour after the government announced the measure, Treasury Secretary Lawrence Summers made a statement welcoming the decision. A 1999 report written for the US Congress's joint economic committee titled "Promoting Dollarization in Emerging Markets," states that a country's decision to dollarize benefits the US by eliminating that country's risk of devaluation, which makes US investments there safer. It also helps defend the dollar's status as the money of preference worldwide, a status currently threatened, the report says, by the euro, the common European Union currency.

While no one can be sure what the outcome of this policy will be, ever-pragmatic Salvadorans are getting used to the idea. Carlos Alberto Henriquez, for one, will change the name of his gift shop to "The Dollar."

(c) Copyright 2000. The Christian Science Publishing Society