Dollarization in El Salvador

1. Dollarization in El Salvador William Gonzalez March 10, 2011

2. Context • General ideas of why dollarization is necessary for the growth of the economy in El Salvador • Who benefit the most from the Dollarization • The support of ANEP (National Association of Private Entrepreneur). • The effect that it had over the citizens • Is it going to help the nation at the long run?

3. Growth of the economy • By changing from colon to dollars, El Salvador is going to lower down interest rate • Bringing new investments to the nation • At the same time reducing the transaction cost of international trade • More importantly dollarization is going to solve the problem of inflation.

4. GDP Chart

5. Who benefit the most? • By having low interest rate investor and business owners are encourage to barrow money to improve different aspects of their business such as technology to increase their profits. • The problem with this is that more then 40% of the population of El Salvador works informal sector.

6. Bringing investors • The problem with this is that essential services such as electricity and telephone are being privatize and their cost have increased while the minimum wages are decreasing • Since 1999 the telephone service has increased around 37%, Electricity 221% and the increase of 33% in the last decade. Basic services take up to 41% of a minimum wage salary

7. Reducing transaction cost • El Salvador’s main trader partner was the United states before dollarization. • The main contributor of foreign currency is not the trade between this two nations, but the remittances of Salvadoran’s living in the USA. • The remittances form 15% of the GDP of El Salvador.

8. Inflation • It is true that El Salvador had a problem with inflation, but it was one of the few nations that kept for the most part a stable rate between 8-10 pesos per dollar.

9. GDP Chart Inflation, Average consumer prices Percent Change year

10. president Francisco Flores made the announcement in January first of 2001 that dollarization was going to take place in El Salvador. It took two weeks for the lenitive branch to vote in favor of the notion and in the same month dollars were already in circulation. • Many European countries took at least three years to educate their citizens about the new currency before taking place. While in El Salvador the change was over night. • The main reason of the dollarization was because it was in the interest of ENAP who is the main support of the political party Arena.

11. In other words, ENAP provide financial support for the candidates of Arena in exchange for political favor to increase the revenues of business of ENAP members. • It is necessary to point out that most members of Arena are members of the ENAP. • As result, the most affect by the change of dollarization was the poor citizen • As the change of the currency was taking place one of the issues that took place was that unskilled workers were getting pay in pesos while most of the stores require dollars. • Another issue that affects the citizens is the reduction of tourism to El Salvador.