Contents | May 2001
In This Issue (Contributors)
More on foreign affairs from The Atlantic Monthly.
From the archives:
"Dirty Hands" (December 1998)
The success of U.S. policy in El Salvador—preventing a guerrilla victory—was based on 40,000 political murders. By Benjamin Schwarz
"Euroland Open for Business" (November 1999)
The European Monetary Union once seemed unimaginable. The questions now are What will it lead to? and Will Britain join? By Robert A. Levine
"Ferocious Differences" (July 1995)
The Mexican devaluation apparently caught Wall Street and the Clinton Administration by surprise—Mexico was opaque even to experts with a huge stake in knowing what was going on. The reason, writes the author, a Mexican intellectual, goes beyond finance to the Mexican national character and how enduringly different the country is from the United States. By Jorge G. Castañeda
Elsewhere on the Web
Links to related material on other Web sites.
"The Dollarization Debate" (Finance & Development, March 2000)
"What are the costs and benefits of dollarizing, and which developing countries are most likely to benefit?" By Andrew Berg and Eduardo Borensztein
"Dollarization: Fad or Future for Latin America" (June 1999)
The transcript of an International Monetary Fund conference. Panelists include economic experts and government officials from Mexico and Argentina.
The Atlantic Monthly | May 2001
Notes & Dispatches
hocks both natural and unnatural have long plagued El Salvador, a country so tectonically volatile that its capital city has been destroyed ten times in the past 400 years. At least twelve major earthquakes shook El Salvador during the twentieth century. And in this century disaster did not wait long to strike: two weeks into the new year a quake measuring 7.6 on the Richter scale leveled much of the country, killing almost a thousand people.
Getting Used to the Greenback
The peculiar hitches of a growing Third World trend: conversion to the dollar
by Benjamin Ryder Howe
Shortly before the January earthquake El Salvador experienced one of its unnatural shocks—"dollarization." Last November 23 Salvadorans awoke to the announcement that the government had decided to phase out the colon, the unit of national currency, named after Christopher Columbus. Starting on January 1 the U.S. greenback would become the country's primary legal tender. Those colones still in existence would be honored at banks and businesses, but it was hoped and expected that they would shortly disappear.
Arriving in San Salvador a week after dollarization took effect, I found little enthusiasm for the new policy. Although the government had been toying with the idea for several years, its decision was closely guarded, and few saw it coming. In bars and banks and at the airport people could be seen holding the new bills up to the light, turning them this way and that as they scrutinized the cryptic imagery and the portrait gallery of American leaders.
While strolling down the Boulevard of Heroes, a smog-choked fast-food strip, I met two women who were clearly struggling with the new system. Roxana and Josefina were selling roses beneath a rattling overpass. Roxana took out a handful of change and asked me the value of a particular coin. Glancing at it quickly, I told her it was a silver dollar.
"Really?" she asked. "Are you sure? It doesn't have a number."
Looking again, I realized that the coin was actually a fifty-cent piece—and that numerals of value appear nowhere on U.S. coins. "Sorry," I mumbled sheepishly. "That one's sort of rare even in our own country." Roxana and Josefina laughed and said they would continue doing business in colones for as long as they could.
Luis Membreno, the business editor of the daily La Prensa Grafica, told me that adapting to the dollar poses particular problems for the 20 percent or more of the population that cannot read or even distinguish numbers. Sitting in his modestly decorated office near the banking district, Membreno removed a wad of money from his wallet. "This is twenty-five colones," he said, holding up a bill. "See, it's blue. This is two hundred—red. Using the old system, you did not have to be able to read to know what you were getting. Dollars were not designed that way, so they will take some getting used to. Right now people are afraid to use dollars. They're afraid they're going to get tricked."
Or that they might crash a bus. One night during my stay a city bus driver interviewed on local television argued that he would be so busy doing calculations—at the awkward official exchange rate of 8.75 colones to the dollar—that the safety of his passengers would be compromised. "Why couldn't they have chosen an easier number?" he complained. To spare themselves the math, many Salvadorans took to carrying a page clipped from La Prensa Grafica that contained a handy table listing multiples of 8.75. Others, including the members of the largest union of bus drivers, declared that they would refuse to accept dollars.
To make matters worse, the media began running stories alleging that the country was being inundated by counterfeit dollars—fake fifties, twenties, even fives, totaling millions. Although the government denied the reports, they were cause for great alarm on the street: for the average Salvadoran getting duped by a bogus twenty would mean losing half a week's wages. It soon became impossible to find any business that would accept bills larger than a twenty.
After returning to the United States, I spoke with Alex Echo, a Secret Service agent based in Miami, who had headed a team sent to El Salvador to investigate the reports of counterfeit bills. Echo downplayed the rumors of a counterfeiting wave. He knew of only one "dollar factory" that had been found in El Salvador—whereas in Colombia, he said, such factories are discovered every week (large numbers of their bills turn up in Los Angeles, among other places). Still, Echo said, a surge in counterfeiting was a risk that came with dollarization. "Counterfeiting used to be done to fool the exchange houses. You did it with large bills—fifties, hundreds. Now you have an entire population inexperienced with using dollars, and your target is the street."
f course, in time the flower sellers and the bus drivers and everyone else will become proficient with the new currency. El Salvador is not the first country to switch to the dollar, nor is it likely to be the last. Panama has been dollarized for almost a century, Ecuador made the change last year, and Argentina essentially leaves its monetary policy to Alan Greenspan, so tightly is its peso anchored to the dollar. Guatemala may be next, having already approved the use of dollars in addition to its own currency, the quetzal. In Russia and in Mexico the dollar is often preferred—though not legally sanctioned—because the local currency has a history of volatility. Some economists believe that several decades from now the world will have only a handful of central banks. Ricardo Hausmann, a former chief economist at the Inter-American Development Bank, is among this group. "The idea that each country should have its own currency is very much an idea of the twentieth century," he told me recently. "It wasn't so in the nineteenth century, and it probably won't be in the twenty-first." Hausmann argued that in an age of global economic shakeups and speculative attacks on currencies, few developing nations can handle the intricacies of monetary policy. Better, he said, to take shelter with a powerhouse like the euro or the dollar. "What we are seeing is just the beginning," Hausmann said. "Once a country makes the change, its neighbors have an incentive to follow, so that they can trade more freely with one another."
But a government that dollarizes can risk unpopularity or worse. In Ecuador the proposal to switch to the dollar, announced in January of last year, proved to be a political last straw, prompting military officials to back an already active opposition and overthrow President Jamil Mahuad. (Mahuad's successor, Gustavo Noboa, moved ahead with dollarization without losing his office.) In El Salvador, predictably enough, the chief opposition party—the Farabundo Marti National Liberation Front (FMLN), an outgrowth of the rebels who fought a twelve-year civil war against the U.S.-backed government—accused President Francisco Flores of selling out to economic imperialism. The FMLN filed a lawsuit to try to reverse the currency change and organized protests at which dollars were burned.
There can be economic tradeoffs as well. Because dollarized countries are strictly limited in terms of how much currency they can issue, their inflation rates tend to stabilize. But their exports become more expensive than those from non-dollarized developing countries. Hector Silva, an FMLN leader and the mayor of San Salvador, points out that both Ecuador and Argentina had to take on hefty "rescue packages" from the International Monetary Fund after, respectively, converting and linking their currency to the dollar. "If my two friends have just eaten a meal that sent them to the hospital, I don't think I will want to share what they have been eating," Silva says.
But share it El Salvador has, and there is almost certainly no going back. If by adopting the dollar the government intended to send a message of stability, reverting to the colon would only undermine that message. (Some FMLN leaders appeared to acknowledge this implicitly, by not criticizing the move.) And the idea that the government was selling out to Washington seemed to fall flat with most of the people I spoke to. Returning to my hotel one night, I asked my taxi driver, in Spanish, what he thought of the new currency. He leaned over and said, in fluent English, "The colon is a symbol, just like the dollar. Can you imagine if America had to use the colon? But I can tell you this: if the economy is going well a year from now, no one here will care." The driver had once lived in Houston, working at a construction site and sending home $200 a month. Such remittances have become the backbone of El Salvador's economy; last year they totaled $1.6 billion, or about 11 percent of the gross domestic product. Arguably, it is the Salvadorans themselves, rather than their President, who brought about dollarization.
Illustration by Stan Fellows.
Copyright © 2001 by The Atlantic Monthly Group. All rights reserved.
The Atlantic Monthly; May 2001; Getting Used to the Greenback - 01.05; Volume 287, No. 5; page 23-28.