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CONTENTS Introduction

That is the dollarization

Possible causes of dollarization in El Salvador

History of dollarization in El Salvador

experience of other countries with the dollarization

dollarization contribution to the economy of El Salvador



Conclusion Annexes

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In this study we tried consientizarnos ourselves what really is the dollarization, and that the media only tells us what each of whom is, for this reason we wanted to take a little bit about the history and roots of dollarization in our country, taken different views and try to compare them to be more clear about the benefits or consequences of this drastic change we had in 2001, some statistics found in some media tell us that dollarization was a good decision, on the other hand most of the population are those earn minimum wage or less, said to live another day reality, this shows us (we could say) the other side of the coin, first try to convince some of us has been a good decision, and others telling us that no but, what is the reality of things?, do you think?

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WHAT IS Dollarization?

Dollarization is the process by which a country adopts the U.S. dollar as a currency for use in economic transactions. Foreign currency replaces the domestic currency in all its functions (store of value, unit of account, medium of payment ).
Official Dollarization is when a country adopts the currency as legal tender sole or predominant.

-Possible causes of the dollarization process.
When the official dollarization, its causes are focused on economic policy decisions through the government, usually motivated by a restructuring process in turn caused by a severe crisis of rising prices (hyperinflation). For its part, the explanation informal dollarization is a little wider, it involved the perception of economic agents, mainly suggests that it arises from the loss of value of local currency and its use to build value, these events occur in situations high economic instability, where the use of foreign currency (foreign exchange) are increased to reduce the loss of wealth (store of value), and to settle (payment method), making for a more detailed analysis of these phenomena, requires looking at both institutional and economic factors.
Institutional factors include the degree of openness of the economy itself, and the degree of liberalization markets, especially the exchange, in addition depend on the size of the domestic financial market which motivate the demand for assets or foreign currencies.


The Salvadoran currency circulating in this country since October 1862.
One of the innovations that emerged in the Latin American economy has been the announcement of the dollarization process of the Salvadoran economy. This is a set of measures taken by the regime of former President Francisco Flores that gradually promoted Salvadoran Colon substitution for the U.S. currency. Under this administration (1999-2004), with the support of Congress dominated by the right, El Salvador dollarized the January 1, 2001, to take effect called Monetary Integration Law (LIM), which fixed the exchange rate 8.75 colones to the dollar.

The Act called for the International Monetary Stability (IMSA, in the acronym), provides no more and no less, that the principles and lines of work for the dollarization of the world. Start giving the advantages of adopting the dollar as currency: monetary stability, lower inflation and interest rates to U.S. levels, higher economic growth encourage savings and investment, fiscal discipline, contribution to strengthening the financial system and lower volatility of interest rates and inflation.

The document details the obligations to be met by the country that dollarized and the actions and responsibilities of the U.S. monetary authorities to this situation. It also recognizes that dollarization will help stabilize and increase U.S. exports and decrease the risks of exchange rate to U.S. investors when investing in these countries. It also notes that the U.S. draft will save significant sums in financial assistance to countries in financial money problems and to increase seigniorage profits (return on reserves) U.S.
In the mechanism of enforcement, the proposed formula explains that countries are not obliged to dollarization, but if they do have to meet certain conditions. Among them, the full opening of the financial system to foreign banks, the cessation of issuance of national currency and the destruction of the materials (plates and dies), used to produce coins. Should eliminate legal tender status of national currency and to grant legal tender status to the U.S. dollar. Must engage with the U.S. Treasury Secretary to determine whether the country is a good candidate for Official dollarization and cooperate with the United States on the prevention of money laundering and counterfeiting.

With dollarization, El Salvador ran out monetary policy and the Central Bank fell under the U.S. Federal Reserve (Fed), which is now paying for that print the currency.
El Salvador, on the advice of the Chilean economist Sebastian Edwards, presents a plan of substitution of money that required a series of legal and economic reforms. These reforms included the banking sector reforms, labor and tax, in November 2000, former President Francisco Flores announced the decision of dollarization and January 2001 begins the gradual substitution of the colon for the U.S. dollar.
The process of dollarization in El Salvador had been given advance because the number of transactions which for years had been making many firms and businesses. These businesses operate in El Salvador, moved by the significant presence of Salvadorans in the United States.

From its earliest days dollarization seems doomed to be a catalyst of contradictions. Days before the end of 2000, the Foundation for the Study of Law (FESPAD) filed a lawsuit challenging the constitutionality of the Law of Monetary Integration since it was approved with lack of knowledge of both the population and lawmakers.
The challenge of monetary stability in the subcontinent passed mainly through a common currency. A more favorable, even within Latin America, is the creation of a regional currency, something like a Latin American Peso. This currency if it could handle more "fair" level of the dollar. But that creation includes major challenges to overcome especially in the backward concepts "national" in a region that requires integration. If dollarization was the simple answer is clear that Europe would have done without the "complications" of all the European Monetary System regional macroeconomic coordination and the creation of Euro .

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addition to the measures of the "dollarization" arrive, in the case of El Salvador, Panama and Ecuador, on special media. El Salvador already has many mechanisms of "dollarization", because their prices "indexed" with the exchange rate to the dollar. In fact, the remarkable stability of the exchange rate of -8.75 Salvadoran Colon Colones to the dollar has due to a fundamental factor: the large inflow of foreign exchange remittances product.
A basic feature that distinguishes the Salvadoran process of dollarization in Ecuador is implemented its "inductive establishment." These are measures that promoted dollarization sequentially, rather than run it as fulminant as in the case of Ecuador
Panama is a major international financial center where the U.S. dollar circulates along the Balboa, the official currency, and the adaptation process has been years. Ecuador can now finally "managed" well based on the flood of dollars that have been representing in 2000, the significant price increase oil.
The dollarization of the economy was the extreme solution of which came two small Latin American economies, El Salvador and Ecuador, adopted given some specific circumstances. Both nations agreed to abandon its monetary sovereignty (the ability to issue national currency), making two similar cases for economists. In both cases, the decision to adopt a foreign currency as currency was made despite the circumstances, in theory, they estimated a high probability of failure given the macroeconomic conditions in both countries. However, even today, both countries have this system, although sustainability is questionable.
Ecuador and El Salvador share many common political and economic factors: high instability, dependence on a small group of export products or income and companies even before the dollarization have already adopted the U.S. currency as de facto currency for everyday transactions. Ecuador has had multiple coups and natural disasters, while El Salvador came to recover from a bloody civil war. For both economies, remittances (international money transfers) from migrants located in the United States and Europe are a major revenue and were a key element to support the new monetary system: In Ecuador, remittances accounted for 8% of GNP while in El Salvador by 13%.
Another important factor is the undeniable influence of the United States in both economies, is the main trading partner and, with the exception of the government of Correa in Ecuador, its politicians usually have close political and military relations with its northern neighbor.
The dollarization of the economy decision in the case of Ecuador, was the result of an extreme situation: after several short-lived governments between 1997 and 2000, multiple natural disasters and the bankruptcy of the banking system, the government of Jamil Mahuad takes dollarization decision to avoid an impending hyperinflation. Although several types of "dollarization" were considered, the desperate situation forces a former convertible currency (the sucre) to a fixed exchange rate and the subsequent replacement of national currencies with the dollar. Although Mahuad is later ousted on charges of corruption, continued with the process of change, given the difficult financial situation the result of public distrust in government economic management.
The Ecuadorian situation was desperate. During 1999, poverty had increased from 38 to 44%, inflation reached 60%, unemployment is 50%, real wages had declined by 20%, school children between 6 and 15 years had fallen 50% to 4%. The currency, the sucre, down two-thirds its value dollarization has dragged along the ground the value of real wages. A third of the population lacks access to safe drinking water and more than 40% have no hygiene or minimal health services. Why should this situation in a country like Ecuador, an OPEC member and rich in natural resources? The origin goes back to 1983, when the ambient IMF forced the government of Ecuador to take over private debts of Ecuador's ruling class had with foreign banks. For this operation to rescue U.S. financial institutions and Ecuador, Ecuador requested a loan of 1,500 million dollars. So he could return, the IMF demanded a price increase of electricity and other basic necessities. And when the money from this route was not enough, came a new plan of assistance conditional on the elimination of 120,000 jobs.
In contrast, the decision of dollarization in El Salvador was much more gradual because since 1994 the colon was "stuck" to the dollar and by 1995 El Salvador was studying the possibility of dollarization of its economy. After the respective price adjustments, inflation was controlled, El Salvador saw inflation was reduced, from 25% in the 80's to 1.4% in 2001.
El Salvador Ecuador has an advantage because, in addition to its openness to the United States, planning and transition was the result of a consensus among various sectors and not the result of extreme circumstances, as was the case in Ecuador. Many countries will disappear
its central bank, which will mean their economic policies put in the hands of the U.S. Federal Reserve. For now, much of the middle class of Argentina, Ecuador and El Salvador have seen their savings in domestic currency collapsed. By dollarization, and even with the currency, governments are no longer free to print money or use their reserves. There is no other way to cover the deficit balance commercial or the national budget than by borrowing from abroad, especially now that it is ending up in almost every country in the auction of almost all state property. "In a dollarized country or just in a situation of convertibility (peg to the dollar), unable to operate with the exchange rate, the only way to make its economy competitive is the wage, ie, less benefits, less pay and more hours "

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came with Dollarization the prospect of being a stabilizing factor, but has high costs, dramatically affects especially instruments for monetary and exchange policy. An example: with dollarization is not possible to take advantage of export promotion. Being tied to the dollar means that wages and costs in general have to be lower to be "competitive" and stop encouraging profit margins for exporters.
Benefits of Dollarization:

- Elimination of exchange risk, but country risk and sovereign risk are still valid.
- Elimination of currency crises (relatively), but still hangs on the Euro and Yen.
- More loans international, that there is greater confidence in the currency.
- Reduction of interest rates (there is no exchange risk)
- Easy to greater integration with the U.S.
- requires fiscal discipline.
- Requires homework on reform and efficiency of the economy.

"Time has shown that dollarization myths were false, as in times of crisis it has served as a shield, says economist Claudio De Rosa.
"The current monetary system, he says, has given stability to the financial system, maintaining low interest rates and inflation and long-term loans.
"The former finance minister Manuel Enrique Hinds, who has often discussed the subject, agrees with the previous position, as it has been shown that inflation and interest rates are higher in dollarized economies unless, like Panama, Ecuador and El Salvador.
"Another phenomenon that occurs in non-dollarized economies is that cash reserves begin to decline, at which central banks react to the injection of funds into the financial systems. However, the measure triggered increases in interest rates, and hence, currencies devalued.
"Just that picture is already being observed in some countries, for which demand significant dollar is rising. "De Rosa says
that the local financial system is still liquid, but said that the deposit base is growing at a slower pace, due to uncertainty generated by municipal and presidential elections.
"financial liquidity problems are global because foreign capital flows that were previously available are drying up. There is tight liquidity, but is less severe than in non-dollarized countries because people take their deposits to buy dollars"
Assumptions benefits have been questioned by local economists who have suggested that interest rates have been declining since before the adoption of the currency law. Moreover, the country not be attractive for investment as long as insecurity, legal and corruption and the alleged fiscal discipline is the least has been implemented so far.

-Place in open economy dependent on the behavior of business cycles in the United States.
-Lose seigniorage benefits, to transfer to U.S. monetary issue.
-create the foundation to promote high American interference in internal affairs.
-inequalities grow with the economy of the North, because of discrepancies in the production, trade and labor mobility.
-behavior the U.S. economic variables determine the behavior of the local economy.
-dollarization continues to be rejected by the people, because today the promises were false and did not enter the country in economic growth, as it gave the leaders.
- Now El Salvador is the most expensive country in Central America and the economy survives on family remittances from Salvadorans living abroad.
"The unemployment and underemployment in El Salvador is 41%. ----------------------------------------------

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There are many people who claim that the cause of inflation in El Salvador, dollarization has been offering as evidence the fact that prices were lower in the moment when it dollarized, than they are now. These people assume that prices had been frozen in time if they were followed by measuring in colones, an assumption which obviously goes against what was the story of the colon and the behavior of other Latin American currencies since January 2001 when it dollarized El Salvador.
Of course, prices are now higher than in January 2001. This is true in all countries. The important thing is how much higher they compare with what others have risen countries and what they were up before in El Salvador.
According to recent data (April 2008), the inflation rate in El Salvador was 6.8 percent, the average of 7.8 percent dollarized countries and the average non-dollarized countries, 10.9 percent. That is not true that non-dollarized countries have an inflation rate lower than that of the dollarized.

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general secretary of the General Public and Municipal Employees (AGEPYM) William Huezo, told AFP that six years of dollarization, "the wages of workers is lower due to the" rounding (setting the rate of local currency to the dollar). "

A Bank expert Inter-American Development Bank (IDB) has been recognized in the newspaper El Pais (Spain) that dollarization "Americans try to weaken Mercosur, the South American common market, for personal gain."

Guillermo Gil, a specialist in the Bank's Monetary Policy Central de Cuba, has reported in The Economist of Cuba, that "full dollarization in Latin America would ensure the existence, for U.S. companies markets for their products with minimal risk and as safe a place for investment. In addition, represent the total dollar hegemony in the region, to the detriment of the euro, so you can easily infer that this is the U.S. response to European economic penetration in Latin America, and will also mean removal of businesses and continental European banks. And crucially, would be the most effective weapon to destroy the trade blocs in Latin America and avoid, in fact, the emergence of a common currency and the total integration of the region. "
Guillermo Gil, an expert on Monetary Policy Central Bank of Cuba, stated in The Economist of Cuba, "Latin American governments to accept this monstrosity, they would become second-class provincial governors, the state's role in these economies will not fall but would be eliminated and the countries would become the same ceased to be for many years, colonies. And precisely this is the true intent of this bill: the Latin American monetary settlement and later the complete annexation to the United States. In simple words it all ideas of Simón Bolívar and José Martí would fly apart and the word sovereignty practically exclude dictionary these countries. "

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Dollarization in El Salvador, is a daily issue of the Salvadorans, and we can not fully understand the benefits or consequences of this change has brought us to the country, we see all kinds of comments. Many say that we are protected from the international crisis in some way. But dollarization did not protect us when fuel prices soared to exorbitant prices that we face in 2008, in cases like this is that most population relies and feels that dollarization did not bring any benefit. We have the example, that when we made the change or conversion into colones, had small businesses that dollarization persisted and perhaps even these small and micro enterprises have disappeared, this means fewer jobs. It is necessary to delve deeper into the subject to be certain of the benefits that dollarization is leaving us.

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Contradictions in the dollarization policy.
Mauricio Funes, presidential candidate from the leftist FMLN party agrees with the opinion of Arthur Zablah, the vice presidential nominee by the ARENA party.

Both agree that the decision by former President Francisco Flores of dollarization of the country was a serious error which has now become a serious problem for the national economy. Zablah sure that now is better to stick with the dollarization of the economy of El Salvador, Funes for his part expressed that winning the election is March 15 the dollar will continue to support his government. Rodrigo Avila
But a presidential candidate by the right-wing party believes that dollarization is a brake on inflation and while acknowledging that inflation in our country today can be historically insisted that the crisis is affecting all of Latin America, and that El Salvador is one of the least hit by the dollar.
Although it is clear that each political party supports its bases, you can see a great difference of opinion between the left and right for our country, but we can also see some differences between the same bases. Since a few years ago the right support in full the decision of Flores are now many ex-MPs are against him right. Similarly, we see that the FMLN is always opposed measure, now takes the decision to continue with her presidential candidate says.


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