Question

critically analyze the experience of a developing country (please choose one) adopting the dollar and the outcome of dollarization for domestic inflation and living standards

Answer 1

Ecuador is one of the Latin American nations that, in relation to Panama and El Salvador, utilizes the U.S. dollar as the only formal currency. Ecuador does not print bank notes of its own. The U.S. dollar has steadily improved against other currencies in Latin America in latest years, making commodities prices in Ecuador higher than in neighboring Colombia and Peru.

During a serious economic crisis in 2000, Ecuador left its ancient currency, the sugar, and has since used U.S. dollars. Doubts about the destiny of dollarization have surfaced with the appreciation of the U.S. dollar. Ecuador has the misfortune of being a producer of oil with a dollarized economy using the U.S. currency as a legal tender. The U.S. dollar's appreciation against other currencies has reduced Ecuador's net exports of non-oil commodities, which, combined with the drop in oil prices, has limited the country's economic growth potential.

In the last 16 years, it has produced significant macroeconomic advantages for Ecuador. By examining the impacts of 21st century dollarization and the financial values behind it, this paper claims that the beneficial and negative impacts of dollarization may be overstated, and that a de-dollarization method would have more adverse effects than favorable results for Ecuador.

There are several advantages to be observed from dollarization. Most evidently, transaction costs are reduced in international trade, which usually occurs when individuals exchange currencies for currencies. Dollarization eliminates this expense in trade with the United States, the biggest trading partner in Ecuador, as companies do not need to switch from currency to currency. It also encourages long-term investment and trade because the stability of the exchange rate tends to reassure companies.

Ecuador's exports to the United States have actually risen since dollarization, while neighboring Colombia and Peru's exports, both of which are greater than those of Ecuador, have stagnated, although dollarization may not be the only factor in such an rise.