If you get the chance to swing through El Salvador while on the Pan-American Highway, you might notice that you won't need to change your currency from what was sitting in your wallet north of the border.
This is because back in 2001, El Salvador's government was the first Central American government to dollarize. They phased out the traditional Salvadoran monetary unit, colóns, and replaced them with the U.S. dollar as the official national currency. Unlike the process of "pegging," in which countries such as Argentina have picked one-to-one match rates of local currency against the dollar with the intent of stabilizing domestic currency, dollarization is when governments literally reject their old currency and all new transactions happen with greenbacks.
About seven other countries have dollarized as well: Ecuador, East Timor and Palau to name a few. The incentive to dollarize, more or less, is that developing countries get to enjoy the relatively stable currency of the U.S. Federal government, giving investors a little more faith that they will actually get their money back. Even in these Great Recession times, people are pretty sure that the dollar will not fail completely. The dollar, it seems, is a pretty good bet. Or so we hope.
If I did some hardcore economics research, I could probably tell you the amount of growth — or decline — El Salvador experienced following this pretty hefty change in the economic system. But this column is far from big business, and instead I'll recount some of the realities I saw in the countryside as a result of dollarization, even eight years later. Dollarization was a decision made by the government of El Salvador, and even here in the United States we can safely assume a close relationship between big business and the people in power — we need not look any further than the huge impact of the insurance and medical industries on the current health care debate to see this in practice.
Yet the move to the dollar may also have made sense because so much of the rural areas have a constant inflow of cash from menial-labor jobs in the United States; the CIA World Factbook identifies that remittances — money sent back from the States — as measured by per capita inflow is "equal to nearly all export income." In other words, monies sent back from the United States make up an enormous portion of the economy, especially rural parts where the dollar goes furthest.
Part of the problem in El Salvador, as in many Central American countries, is that there is simply no work to be had, and the small amount of work available pays extremely low. If an illegal immigrant makes it to the United States and can manage to score the federal minimum wage of $7.25, he earns almost three times in one hour what most Salvadorans live on per day. He is then able to send this money home without having to deal with tricky conversion rates, and his family's purchasing power is much higher than had he stayed at home.
Unfortunately, there is a flip side to the benefits experienced in the countryside. One organization I was able to witness in action was the local "popular radio" station, which was run by and for the people in rural parts. When their equipment breaks and they need to replace it, they have to go to the world market price — in dollars — to buy what they need. While international media conglomerates can afford these prices to pipe right-leaning messages across the country, community initiatives have dollars but far too few of them to buy what they need. Is dollarization to blame for inadequate community radio programs? Salvadorans are poor, no doubt about that. But I have a feeling the system could use some tweaking to help level the playing field to make community activism a little easier. If only we could figure out how.
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Jacob Kreimer is a junior majoring in international relations. He can be reached at Jacob.Kreimer@tufts.edu.
