By Catherine Santos Helen Farfan Marcelo Moran

Slides:



Advertisements
Similar presentations
Characteristics of Money - Review A_______________S_______________D_______________D_______________P_______________.
Advertisements

Macroeconomics Unit 17 Global Macroeconomic Issues.
Chapter 4: Money and Inflation
Financial Forces McGraw-Hill/Irwin International Business, 11/e Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved. chapter eleven.
Brazil What is Balance of P. C.  When a country that has a large budget deficit, it has difficulty maintaining a fixed exchange rate, ultimately.
International Business
Foreign Direct Investment in European Union Members Poland, Romania, Bulgaria and Non-EU member Turkey Okan Büyükbay & Oğuzhan Şahin.
The Russian Default of 1998 A case study of a currency crisis Francisco J. Campos, UMKC 10 November 2004.
Chapter 14: Stabilization Policy
Economics 282 University of Alberta
The pros, the cons and a little background on the creation of the euro
Dollarization In El Salvador Nelson Sandeep Kumar.
William Gonzalez March 10, General ideas of why dollarization is necessary for the growth of the economy in El Salvador 2. Who benefit the most.
By Catherine Santos Helen Farfan Marcelo Moran By Catherine Santos Helen Farfan Marcelo Moran Dollarization in El Salvador.
Financial Crisis: The IMF in Latin America and East Asia Tom Schaller.
EF3461 The Economies of Mainland China and Hong Kong Tutorial 6 Hong Kong’s Monetary System City University of Hong Kong Dr. Isabel Yan.
Globalization: The Ups and Downs of Globalization or World economic integration Globalization: The Ups and Downs of Globalization or World economic integration.
Chapter 7.1 Trade Between Nations.
The Role of Government in the United States Economy How does the United States government promote and regulate competition?
Dollarization Erica Vega Marlene Mata. Dollarization  Adopting a foreign currency of choice in a country in parallel to or instead of the domestic currency.
Fixed and Floating Exchange Rates
Distinguished Lecture on Economics in Government Exchange rate Regimes: is the Bipolar View Correct? Stanley Fischer Ahmad Bash P13-18.
1 Chapter 3 Economic Decision Makers These slides supplement the textbook, but should not replace reading the textbook.
The Dollarization of Latin America: Beneficial or Detrimental to Economic Growth Iris Ceballos Wei-Han Chang Ryan Higashihara Keren Nahum Adriana Montes.
Response of the Reserve Bank of India (RBI) to the Financial and Economic Crisis Aleksandar Zaklan.
Government Chapter 20.2 Monetary Policy. General Economics competition The existence of two or more companies within a single industry that are trying.
Dollarization on El Salvador Team Members Nixon Orellana Mike Scott.
European Union Test This test consists of 10 questions designed to test your understanding of the EU, the single market and the Euro. The links provide.
Dollarization in ecuador
Balance of payments and Dollarization in Canada By: Gwendolyn Chee.
Households, Businesses, And Governments. Supply and Demand In economics, what does the word supply mean? The word supply is the amount of goods and.
Essay Skills 2 nd attempt!. Olde Edexcel Essay style! Feb 2010 UNIT 6 paper. 1. (a) Assess the impact on the world economy of the growth of regional trade.
Macroeconomics Review. Agenda GDP, Money Demand, and International Capital Flows Interest rates Monetary vs fiscal policy Currency rates and devaluation.
Chapter 16 Microeconomics International Trade. Some International Trade Facts The U.S. is the largest international trader in the world. Trade is a large.
TOPIC 1 INTRODUCTION TO MONEY AND THE FINANCIAL SYSTEM.
EXTERNAL INFLUENCES These are factors that the business can not control (External constraints) PESTEL Analysis is a part of the external analysis that.
Impact on businesses of government policy
Unit 5 and 6 Financial Markets, Consumer/Personal Finance, Economic Indicators and Measurements.
How much has happened after the crisis EUGENIA CORREA and ALICIA GIRÓN
Chapter 16 What Should Central Banks Do? Monetary Policy Goals, Strategy, and Targets.
Government’s Role in the economy
The Federal Reserve System
8.4 Federal Reserve System
Advantage Disadvantage
Financial System Examine the financial system in an advanced economy.
© 2007 Thomson South-Western
2.5, 2.6 Monetary and Supply-side Policies
AIM: How can U. S. trade impact us as consumers
City of London School – extra information
Loanable Fund and Exchange Markets
International Economics Analyze costs and benefits of global trade
Macro Free Responses Since 1995
Chapter 9 Debt Valuation
Open-Economy Macroeconomics
Trade with China remains positive for the United States.
NS3040 Dollarization in Latin America Fall Term, 2018
Open-Economy Macroeconomics: Basic Concepts
Economics - Notes for Teachers
Hyperinflation In Zimbabwe
NS4540 Winter Term 2018 Panama Indices
International Flow of Funds
Demand, Supply, and Equilibrium in the Money Market
NS4540 Winter Term 2018 El Salvador Indices
YEAR 2011 BUDGET JUSTIFICATION
Changes in political economy
NS4540 Winter Term 2016 Latin America: Recovery 2016
Open-Economy Macroeconomics: Basic Concepts
International Business 12e
EXCHANGE RATE DETERMINATION Arun Mishra
Dollarization in Emerging Market Economies
Presentation transcript:

By Catherine Santos Helen Farfan Marcelo Moran Dollarization in El Salvador By Catherine Santos Helen Farfan Marcelo Moran

What is dollarization? Official Dollarization Semi-official dollarization Unofficial dollarization Official Dollarization: The dollar is the only legal tender; there is no local currency. Examples of this can be seen in Panama, El Salvador and Ecuador. For example, since independence in 1903, Panama has only used the U.S. dollar. Surprisingly, the U.S. government does not have to provide approval for another country to use its currency as legal tender. Semi-Dollarization: A country will use both its own currency and the U.S. dollar interchangeably as legal tender. Lebanon and Cambodia are good examples of this. Unofficial Dollarization: For many countries in the developing world, the dollar will be widely used and accepted in private transactions, but it is not classified as legal tender by the country's government.

El Salvador

Facts about dollarization When do we implement dollarization in a country? The inflation rate in 2001 was around 4%. Real GDP was around 3% International economic analysts recommend dollarization to countries that are experiencing hyperinflation as a way of bringing about fiscal and budgetary discipline. In the year 2000, El Salvador's economy was not experiencing a crisis; but the government justified the decision to dollarize by stating the expectation that the policy would lower interest rates, increase foreign investment, and decrease transaction costs in international trade, thereby sparking economic growth.

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. -----privatizing the banking system, telecommunications, public pensions, and electrical services; lowering import tariffs; eliminating most price controls; and attempting to attract foreign investment through infrastructure improvements and greater enforcement of intellectual property rights -----total external debt was manageable, at about 23 percent of GDP in 2001 -----US receives about $1.6 billion, or 60 percent, of El Salvador's exports annually. This close trade with the United States does not increase El Salvador's stock of dollars, however, because imports from the United States are about $2.1 billion, resulting in a rather large trade deficit (U.S. Department of State 2002. -----it reached the hefty sum of $1.9 billion in 2001 (U.S. Department of State 2002, 7). This is equivalent to almost 15 percent of GDP.

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 Telephone services were privatized in 1998, and charges have increased 37 percent since 1999. Electricity was privatized in 1992, and prices have risen 221 percent over the last decade. Water service, not privatized, has also seen a 33 percent increase in cost over the last three years. Data from 2002 indicate that the cost of these thre basic services amounted to 41 percent of a minimum wage earner's salary

Gini 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). Lorenz curve is a graphical representation of the cumulative distribution function of a probability distribution; it is a graph showing the proportion of the distribution assumed by the bottom y% of the values. It is a curve that illustrates income distribution

Effects 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?

Positive and Negative Effects of Dollarization Positive Effects Negative 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 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 Policy Credibility & economic stability (brought by dollarization) can encourage reforms to promote competitiveness and productivity to overcome internal & external shocks. (refer to wall street journal example*- guy with sewing business in El Salvador) * Encouraging competition  refer to Wall street article on guy with his business finding new solutions to still be able to compete Negative Like that of foreign investment, and mention the theoretical benefits that never came about Taxi cab driver  The cost of basic products rose and wages didnt rise as much as prices 4. Monetary Integration Law – the decision to fully dollarize instead of having both currencies as legal tender was seen as a violation of MIL

Banking Positive Effects Negative 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 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 Positive  Dollarization supported the performance of an already established banking system. Regulators were given more power to take preventive measures against banks that showed signs of instability (ie political funding) Also brought banking system closer to Int’l standards Have benefited as their funding costs have converged with those of their larger competitors. Negative Elimination of a True Central Bank means no lender of last resort, they cant print their own money (#1, 2 & 3, 4)

Global Financial Integration Positive Effects Negative 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 Never attracted influx of Foreign Investment Foreign Bank presence remains negligible Posting some of the lowest Growth rates in the region

Annual Trends

Annual Trends

Annual Trends

The Issuing Country Choices: Passive Acceptance Active Encouragement Active Resistance

The Issuing Country (Cont.) Advantages May lead to increased trade Elimination of exchange rate risk

The Issuing Country (Cont.) Disadvantages Affected by shocks in other countries Losing control of currency in circulation outside of the U.S.