Australia and the World Past and Present

Many Latin American countries have flirted with adopting the US dollar as their currency. In some cases there has been full adoption. In other cases, the adoption has been partial.

Countries have turned to the dollar in order to stabilise prices, restore investor confidence and curb inflation.

Panama (since 1904) and El Salvador (since 2001) have maintained dollarisation over time.

Argentina (1991-2001)

In the 1990s, Argentines were encouraged to use US dollars for savings, real estate and major transactions while the peso remained in circulation.

This approach was successful in the short term but it hurt exports.

The adoption of the US dollar represented a loss of economic sovereignty because the country could no longer independently set interest rates.

Peru

Peru experienced a partial dollarisation in the 1980s and 1990s.

The country was going through an episode of hyperinflation.

This was especially acute the early 1990s. The peak was in 1990 when there was annual inflation increase of over 7000%.

President Fujimori never formally replaced the national currency. The situation later improved and by the 2010s the country was “de-dollarising”.

Ecuador – full dollarisation

In 2000 full dollarisation was announced by President Jamil Mahuad and the sucre was abandoned.

In the short term price stability was restored and inflation curbed.

The cost of dollarisation was that Ecuador couldn’t devalue the currency to increase the competitiveness of its exports.

Bolivia – partial dollarisation and gradual retreat.

Bolivia was another Andean nation that experimented with the dollar.

Bolivia was also experiencing hyperinflation during the 1980s. The peak of Bolivia’s hyperinflation occurred in mid-1985, when the annualised inflation rate exceeded 24,000%.

Later, Evo Morales attempted to de-dollarise the economy. Fiscal surpluses and rising general revenue made reversion to the national currency possible.

Bolivia has undergone significant de-dollarisation—especially since the mid-2000s—though it has not completely eliminated the use of US dollars. The country moved from very high levels of dollarisation in the 1980s–1990s to a much more solvent, boliviano-based economy today.

Peru’s and Bolivia’s experiments with dollarisation were more crisis-driven rather than formal policy.

The general pattern

The general pattern is this: in times of hyperinflation Latin American countries look to other currency options.

Dollarisation is usually short term. Dollarisation tends to quickly bring about price stability and curtails inflation.

The downside is a loss of monetary sovereignty. Latin American countries will need to maintain fiscal discipline if their currency are to remain stable.

Adoption of the dollar may lead to a lack of export competitiveness.

Fiscal discipline may lead to public resentment and disquiet.

Most countries tend to revert back to the national currency when the economy improves.