Download Dollarization in El Salvador

William Gonzalez
March 10, 2011
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General ideas of why dollarization is
necessary for the growth of the economy in
El Salvador
Who benefit the most from the Dollarization
The support of ANEP (National Association of
Private Entrepreneur).
The effect that it had over the citizens
Is it going to help the nation at the long run?
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By changing from colon to dollars, El Salvador
is going to lower down interest rate
Bringing new investments to the nation
At the same time reducing the transaction
cost of international trade
More importantly dollarization is going to
solve the problem of inflation.
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By having low interest rate investor and
business owners are encourage to barrow
money to improve different aspects of their
business such as technology to increase their
profits.
The problem with this is that more then 40%
of the population of El Salvador works
informal sector.
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Bringing investors
◦ The problem with this is that essential services such
as electricity and telephone are being privatize and
their cost have increased while the minimum wages
are decreasing
◦ Since 1999 the telephone service has increased
around 37%, Electricity 221% and the increase of
33% in the last decade.
Basic services take up to 41% of a minimum wage
salary
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Reducing transaction
cost
El Salvador’s main trader
partner was the United
states before
dollarization.
The main contributor of
foreign currency is not
the trade between this
two nations, but the
remittances of
Salvadoran’s living in the
USA.
The remittances form
15% of the GDP of El
Salvador.
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Inflation
It is true that El Salvador had a problem with
inflation, but it was one of the few nations
that kept for the most part a stable rate
between 8-10 pesos per dollar.
Percent Change
Inflation, Average consumer prices
year
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president Francisco Flores
made the announcement in
January first of 2001 that
dollarization was going to take
place in El Salvador. It took two
weeks for the lenitive branch to
vote in favor of the notion and
in the same month dollars were
already in circulation.
Many European countries took
at least three years to educate
their citizens about the new
currency before taking place.
While in El Salvador the change
was over night.
The main reason of the
dollarization was because it
was in the interest of ENAP who
is the main support of the
political party Arena.
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In other words, ENAP provide financial support for the
candidates of Arena in exchange for political favor to
increase the revenues of business of ENAP members.
It is necessary to point out that most members of
Arena are members of the ENAP.
As result, the most affect by the change of
dollarization was the poor citizen
As the change of the currency was taking place one
of the issues that took place was that unskilled
workers were getting pay in pesos while most of the
stores require dollars.
Another issue that affects the citizens is the
reduction of tourism to El Salvador.