El Salvador’s Currency

Yes, the U.S. Dollar.


El Salvador is one of three countries in Latin American that uses the U.S. Dollar – the others being Ecuador and Panama (four other independent nations also use the dollar: East Timor, the Marshall Islands, Micronesia and Palau).  The country made the controversial move in 2001, when the government unexpectedly announced one day in November that the country would be phasing out the colón (named after Christopher Columbus) and phasing in the dollar. 


The government at the time argued certain benefits would come from dollarization.  First, they felt that the dollar would help keep inflation in check (since dollarized countries tend to be more restricted in the amount of currency then can print, hyperinflation is a rarity).  Second, the move was also meant to boost investors’ confidence in the economy, reduce interest rates and increase foreign direct investment, and spur economic growth.  Indeed, foreign direct investment has climbed from $1.97 billion in 2000 to $2.6 billion in 2004.  Next, it was seen as a way to force the country to diversify its economy by financing public debt through ways other than printing money.  What is more, so much money is already sent in remittances from the U.S. in dollars – totaling more than one-third of the El Salvadoran economy – that simply having the dollar as a currency simplifies matters.


However, the move was deeply unpopular at the time and remains so among most El Salvadorans I have interacted with (though in full disclosure I don’t know many people from the upper class who might feel differently) for a number of reasons: 


• Prices spiked for every day goods during the turnover.  This is similar to what European countries have experienced with the changeover to the Euro; 
• The 8.75 colón to $1.00 exchange rate was tough to calculate while both currencies were still in circulation.  I’ve heard some stories about people struggling to figure out the conversion, leading to lots of wasted time and a run on calculators.  All through the streets, people could be seen punching in numbers - to such a degree that I imagine that among the greatest beneficiaries of dollarization were calculator manufacturers;
• For people who were illiterate, the new money was incomprehensible, at least for a time (they had relied on the colors of the previous currency as evidence of a bill’s denomination);
• El Salvadoran exports became more expensive than products from non-dollar countries, hurting local manufacturers;
• All of a sudden (and still) people had images on their money that meant absolutely nothing to them.  Can you imagine if the U.S. all of a sudden adopted another country’s currency?  It would be quite strange.  I have always been proud to look at our money and see great leaders like Lincoln, Jefferson and Washington staring back.  Sure, the cryptic symbolism on the reverse side might be a little confusing at times, but I like that our currency speaks to our history.  Of course, the primary objective of a currency is not to serve as an expression of national pride, but it is an added bonus; 
• Many people seem to see the changeover as simply another example of a corrupt, out-of-touch government making policy to benefit the wealthy (it’s hard to overstate the extent to which class comes into play in El Salvador, with its history of authoritarianism and incredible inequality).  I’m told there was a limit on the amount of colóns that could be exchanged into dollars in a day, which made both money laundering and getting your money out of the country quickly in case of political instability more difficult.  
• Many El Salvadorans are wary of giving the U.S. more control over decision-making in their country (of which we already has plenty).  They see dollarization as a loss of soverienty, for El Salvadoran monetary policy is now essentially made in Washington, DC.
• Finally, there’s no evidence that the change has measurably affected the lives of the poor, except to make consumer goods more expensive for them. 

I think the economic growth decision must have been the linchpin for the ruling party at the time (if not the corruption – I’m not in a position to say), for El Salvador had pretty stable inflation at the time and was not anywhere near a crisis.  While it could still turn out for the best, this quote from Latin American Politics and Society seems to echo most of the articles and reports that I found:


“GDP growth has averaged 1.9% over the past five years -- the most sluggish of any Central American country... Although this predicted growth may indeed take place in the future, the data collected thus far demonstrate that El Salvador did not need such a drastic measure and that the policy is not generating the expected economic growth.”


So the decision is still up for debate, though few talk seriously of going back to the colón.   The dollar is here to stay.