Envío Digital
Central American University - UCA  
  Number 236 | Marzo 2001



Dollarization: El Salvador’s Third Earthquake

The government of El Salvador sold the United States the image of a "stable economy" making possible an experiment with dollarizing. But what neither government could have predicted were the tremors of the fault-riddled land that sustains this economy.

Aldo Díaz Lacayo

Only mischief is planned in secret," charged Bishop Gregorio Rosa Chávez when the government unveiled its plan to dollarize the national economy. The decision had been planned in jealous secrecy and protected by a vow of silence for eight long months. The President had carefully handpicked the team that was in on the plan and its members had been sworn to secrecy even within their own homes.

Rejection of the dollarization process increased throughout the country in direct proportion to the population’s growing confusion and the mounting enthusiastic government propaganda. Soon, the January 13 and February 13 earthquakes brought new factors to bear on an already critical situation. The fire under the political cauldron of this new millennium was now being fueled not only by rejection of dollarization, but also by the government’s inadequate response to the tragic consequences of the earthquakes and by the victims’ indignation. The first march took place in San Salvador at the end of February and the government responded to the roughly two thousand earthquake victims with billyclubs and teargas, an ominous foretaste of the juncture that is opening up in a country rocked by seismic faults and economic uncertainties. As a commentator on one of the capital’s radio stations correctly put it: "El Salvador has suffered three earthquakes almost simultaneously: that of January 13, with an intensity of 7.6; that of February 13, with an intensity of 6.1; and the dollarization, with an intensity of 8.75." It was a clever description of the combined intensity of seismic phenomena on the Richter scale and the setting of the country’s dollar exchange rate at 8.75 colons as a result of the Monetary Integration Law that came into effect on January 1.

Regional dollarization?

On February 2, in the midst of the emergency caused by the first quake, the National University of El Salvador (UES) publicly announced its rejection of the Monetary Integration Law because it would not resolve the people’s economic problems. According to the UES, the government’s rushed approval of such an important law and the absence of any consultation process demonstrated a lack of respect for Salvadoran society. "If the essence of democracy resides in the people’s sovereignty, then the current government has turned the people into a non-consulted sovereign," commented the UES, denouncing the measure as one externally imposed and aimed at the future dollarization of the whole Central American region. If they want monetary integration, why not do it openly and gradually? The European Community’s member countries have spent two years so far educating their respective populations on the use of a new common currency—the Euro—without imposing any single country’s currency over those of the others.

Risks of dollarization

According to independent economists, dollarizing the economy involves the following big risks:
* That El Salvador will be dragged into any financial crisis that the US economy and the dollar suffers, leaving the country totally exposed to external fluctuations.

* That the lowest-income sector of the population will be directly affected by price rises resulting from "rounding up" cents and fractions, as already shown during the short time the law has been in effect.

* That the process will create new and greater possibilities for large-scale money laundering and counterfeiting operations.

* That the fall in interest rates for savings will discourage private savings in the national financial system.

Stressing that most of the population rejected the process, the UES considered that the government should act boldly and reverse the law. It thus proposed:
* That the Legislative Assembly repeal the Monetary Integration Law.

* That the government call a referendum so people can decide if they want to replace the colon with the dollar.

* That the Supreme Court speed up the process for declaring the law unconstitutional.

A dangerous boomerang

Meanwhile, Jesuit priest Javier Ibisate, an economist from the Central American University (UCA) in San Salvador, warned about the probable consequences of the expectations the government has stirred up with the new monetary law. According to Ibisate, they "could come back like a boomerang against the government that published the law and against the parties that approved it." The government has made so many promises that if they do not materialize Ibisate predicts "protests and demonstrations " against "a hurried and unconsulted process carried out with great secrecy."
He also takes President Flores up on his argument that the Monetary Integration Law responds to a need to "disentangle" the Salvadoran economy. Ibisate reads this as acceptance by the President of the Republic that the neoliberal model installed by Alfredo Cristiani’s ARENA government in 1989 has effectively "ensnared" the Salvadoran economy. He adds that trying to get out of the trap by subjecting the country to an even more drastic neoliberal measure like dollarization will solve nothing.

The colon: A "false" currency

In fact, the UCA economist warned that the Monetary Integration Law could lead to exactly the opposite of what its title promises. It could involve a process of "monetary disintegration" on three levels: disintegration of the national currency, disintegration of monetary policy and disintegration of Central America’s economic integration.

According to Ibisate, "The colon is being sentenced to a quick form of euthanasia." He backs this up with a quote from Manuel E. Hinds, former minister of the economy in Calderón Sol’s administration: "We have two currencies in Latin America; a real one and a false one. The real one is the dollar and the false one is the local currency in each of our countries. The dollar is the real currency because we think of it in terms of conserving value over time, which is money’s main function. This is because Latin America’s local currencies have repeatedly lost their value in the past, causing serious complications to consumers, businesspeople, workers, savers and investors."
Ibisate is certain that the Monetary Integration Law is aimed at getting rid of the colon. After all, as he points out, "the great mass of currency documents is pegged to the dollar: all savings and deposits, all Central Reserve Bank bonds, all of the pension fund administrator savings and, increasingly, the stock exchange certificates." Ibisate notes that other economic values will be lost along with the colon and stresses that the country’s diverse lifestyles are monetarily differentiated. "Up to now, different lifestyles have used different currencies or measures of value. Now, with dollarization, a minimum wage of 1,260 colons is equivalent to $144, which is what it costs to spend a night at one of San Salvador’s elegant hotels. Is this economically real? Will the productivity of one month’s work equal the productivity of one night in a hotel?" he asks. Ibisate follows up with a key question: "Our economy already practiced two value measurements. Will dollarization do even more?"

Without a national helmsman

In Ibisate’s analysis, dollarization will also cause a disintegration of national monetary policy. The Central Reserve Bank (BCR) will stop being a national bank, and will lose control of the principal monetary policy measures precisely when greater autonomy and political neutrality were being called for. Now the BCR’s mission and objectives have changed and it is losing its previous capacity to define monetary policy. "This is an about-face," says Ibisate, interpreting the official propaganda in favor of dollarization. The BCR has been turned into a "mini central bank" whose function is strictly to "report to the Superintendence of the Financial System on the banks’ percentage of liquid reserves and pull together the country’s economic statistics, which we can only hope will be more transparent and reliable than before." Meanwhile, the government loses control over exchange policy and monetary policy, which leaves it controlling only fiscal policy.

The Disunited States of Central America

Finally, Ibisate questions whether monetary integration will not also imply the disintegration of the Central American region itself. At least three countries— El Salvador, Honduras and Guatemala—have negotiated with Mexico as a single trade bloc, but El Salvador’s dollarization process has affirmed this country’s decision to go it alone. This underscores the Central American countries’ obstinate tendency to rhetorically speak of the advantages of integration while prioritizing bilateral alliances. The dollarization of El Salvador provides yet more proof that as a region we really amount to the Disunited States of Central America.

"There is no doubt about it, said FMLN economist Salvador Arias in a conversation with envío, "the only way out for this country in ruins would be for the government to find the courage to repeal the Monetary Integration Law." Arias does not see dollarization offering anything positive to the country and believes that if the government wants to launch a program that really tackles the disastrous situation caused by the earthquakes it has to back down. "Dollarization should disappear and the whole country should prepare to search for a new model that is national, inclusive, popular, and, why not say it, revolutionary," he proposed.

"Agreements just get in the way!"

Salvador Arias was the FMLN economist responsible for drawing up the first alternative proposal to the economic crisis, presented to the government in mid-February as a starting point for rapprochement and dialogue in the lead-up to the Consultative Group meeting in Madrid at the beginning of March. The government rejected it out of hand and ignored the leftist party during the preparation of the official reconstruction and development proposal presented to international government agencies and other organizations that will support the country’s reconstruction.
President Flores traveled to Madrid on March 5, leaving in his wake a trail of unrest and division after his declaration that if the FMLN did not support El Salvador’s proposal then it should at least not damage it. It was another confirmation of his constantly arrogant attitude, which is even more questionable at a time when the country desperately needs rapprochement if it is to address so many calamities. He had already displayed the same attitude in mid-February when, assuming the role not only of a spokesperson but of the sole spokesperson for earthquake victims, he declared that this was no time for rapprochement or political agreements with anybody. "At times like these, political agreements get in the way!" he announced, thus aborting any possibility of discussion.

Testing the North’s interests on the South’s guinea pigs

Although he belongs to the FMLN’s orthodox sector and is thus a genuine representative of the Left’s most radical wing, Salvador Arias’ conviction that dollarization does not respond to the country’s real needs is shared by other national economists. The process has more to do with the interests of a certain Northern colossus than the interests of this little Southern country. It responds to the US interest of unifying Latin American trade and the Latin American economy to strengthen its own capacity to compete successfully with the Europeans. If Europe has progressed toward a unified economy with the Euro as a single currency, the United States is interested in controlling the Latin American market with the dollar as its single currency. The Salvadoran government did a good job of selling the United States the image of a stable economy in which it could initiate its experiment and thus analyze economic, social and political behaviors that could be taken into account when extending dollarization to other Central and Latin American countries. What neither the powerful US government nor the slavish Salvadoran one could predict was that this "stable economy" was built on tremendously unstable ground, riddled with fault lines, and yet no preventive or damage control measures were designed for earth tremors and other cataclysms. Could it be that this geological uncertainty will save us from the false economic certainty that they wanted to impose on us via dollarization?

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