Rudenkov, I.N. What is dollarization for?

Abstract: The goal of this article is to analyze the causes for the substitution of the national currency for the US Dollar in the Ecuador and Salvador, as well as to evaluate the political and economic influence of dollarization in these states. Dollarization was meant to stop hyper-inflation and to bring stability to Ecuador, and it was meant to facilitate the economic growth in the Salvador, however, the positive attitudes soon were weakened. The object of study is positive and negative influences of dollarization in these states. By comparative analysis of dollarization in Ecuador and Salvador the author means to evaluate the following issues: a) Why the governments of Ecuador and Salvador started to use the US Dollar instead of the national currencies, and what the motives for such decisions were; b) political and economic profits from dollarization in these states. While Ecuador and Salvador are similar in many respects, they have just as many differences. They were both dollarized at about the same time – 2000 and 2001. They are both parts of the Latin American region. The states were in different conditions prior to dollarization and they had different motives for the transfer to a different currency. In Ecuador dollarization was used as an instrument in order to deal with the financial crisis, while there was no financial crisis in Salvador prior to dollarization. The analysis of the process in both states allows one to understand the reasons for such radical political decisions. The article is based on written sources of the period between October and December of 2006. The primary sources were the official political documents of these states, as well as official statements of members of government, and official statistics of the banks of these states. The secondary sources were the reports on the states by various international organizations, such as the World Bank and the IMF. Based on the results of the study one may establish that in the short-term perspective the stability and trust to politics are enhanced by dollarization, but there is also need for the reforms in order to support the long-term stability. Dollarization should be followed by the structural reforms in order to achieve economic growth in the longterm perspectives. According to the empiric analysis of the two states, the transfer to a different currency in itself does not stimulate the economic growth.

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