The Dollar's Allure

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My first experience with dollarization in a foreign country--the practice of adopting the U.S. dollar as legal currency--came as a bit of a shock. Standing on a street corner in Buenos Aires in late 1997 taking cash out of an ATM, you can imagine my surprise when, expecting 100 Argentine pesos, the machine spat out only 60 pesos, and two crisp U.S. twenty dollar bills.

Like many other developing countries, I discovered, Argentina has long pegged the value of the peso to the dollar, making both currencies essentially interchangeable--a policy that halted the hyperinflation which plagued many Latin American economies throughout the 1980s. Imagine having to spend your entire paycheck the day you get it because the price of eggs will double in 24 hours and you get the idea.

Now more and more countries are making similar moves, writes David Ingram in the economics webzine The Dismal Scientist. Panama, Cuba, Hong Kong, Bolivia, and a number of other small countries have some form of dollarization in place. And a new bill in Congress, the International Monetary Stability Act, sponsored by Florida Senator Connie Mack, would make it easier for them to do so.

Such a move, says Ingram, has major benefits for developing economies, particularly for countries with a history of out-of-control inflation. However, he adds, 'dollarization has undeniable risks, and it is not a one-size-fits-all panacea for troubled economies.' Though he occasionally slips into arcane economic-speak, Ingram does an excellent job deciphering the issues. --Leif UtneGo there>>

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