The Miami Herald
January 19, 1999
Latin America flirts with idea of dropping currencies for the U.S. dollar

             Herald Staff Writer

             Only two weeks after much of Europe adopted a common currency, some Latin
             American countries are debating a bold idea -- dropping their national currencies
             in favor of the U.S. dollar.
             Few are predicting that countries in the region will soon make bonfires out of
             domestic currency notes bearing images of their national heroes, but growing
             numbers of economists say it's only a matter of time before they act.

             As of now, only Panama has a fully dollarized economy, and Argentina has pegged
             the peso to the dollar, effectively using both currencies interchangeably.

             A boisterous debate on the issue has begun in several countries. It was sparked by
             Argentine President Carlos Menem's request to his finance minister last week to
             look into the convenience of a full-fledged ``dollarization,'' coupled with a
             regionwide exhaustion over the attacks on local currencies by global speculators.

             On Monday, Eduardo Bours Castelo, president of Mexico's Business
             Coordinating Council, the country's largest private-sector umbrella organization,
             called on Mexicans to leave aside outdated definitions of nationalism and move
             toward a ``hard currency'' -- most likely the U.S. dollar.

             Mexico is one of the countries where ``dollarization'' is most hotly debated,
             because its economy is already tied to that of the United States under the North
             American Free Trade Agreement. Mexico does more than 80 percent of its trade
             with the United States, and gets millions a year in dollar remittances from
             Mexicans in the United States.

             ``We have studied how to better protect our inflation levels, interest rates and
             influx or outflows of capital every time there is an international financial crisis, and
             we have come to the conclusion that the best way would be creating a monetary
             union with the United States and Canada,'' Bours said in a telephone interview.

             ``Whenever there is an international crisis, there is a massive flight to quality
             [currencies],'' Bours said. ``If we had a hard currency, we would be part of the

             Bours' statements came a day after former Argentine Economy Minister Domingo
             Cavallo, the architect of Argentina's one-peso-to-the-dollar fixed exchange rate,
             was quoted by El Nuevo Herald as saying that ``there is no doubt in my mind that
             Mexico would gain a lot by adopting a dual monetary system, such as Argentina,
             or a complete dollarization of its economy.''

             And days earlier, Nobel Prize-winning economist Gary Becker had made the
             same suggestion in a speech in Mexico, cautioning that such a goal should be
             achieved over several years.

             Mexico's finance ministry officials have dismissed the idea, citing monetary
             sovereignty concerns, but central bank authorities are believed to be warmer to it.
             Mexican bankers and other private-sector leaders who back the project say it will
             be much easier to advance after 2000, when a new president will take office with
             greater political capital to spend on such ambitious proposals.

             Supporters of ``dollarization'' argue that by adopting the U.S. currency, countries
             could not only prevent the recurrent attacks from global speculators -- who
             withdraw their funds from all emerging markets at the slightest sign of economic
             trouble -- but would also reduce interest rates and stimulate foreign investment.

             Currently, most countries with weak currencies are forced to raise interest rates to
             capture foreign money and make up for capital flight. The trouble is that high
             interest rates slow the economy, they say. In addition, by eliminating currency
             speculation, corporations can make long-term plans and are more likely to invest,
             supporters say.

             But, leaving aside the political perils of proposing a conversion to the U.S. dollar in
             Mexico, some economists say it would hurt the country's economy.

             Rogelio Ramirez de la O, president of Mexico's Ecanal economic research firm,
             says his studies show that pegging the local currency to the dollar works in
             countries that rely heavily on commodity exports, such as Argentina, but would not
             necessarily help countries that depend on manufacturing exports, such as Mexico.

             This is because Mexican exports of computer parts or cars have large built-in
             costs, such as wages and electricity. If Mexico were to pay its workers in dollars,
             production costs would go up immediately, yet the price of the final product would
             remain the same. ``It would strangle the economy,'' Ramirez de la O says.

             Brazil's decision Monday to allow a free float of the U.S. dollar is in step with
             what Mexico did four years ago and what Far East countries did last year,
             Ramirez de la O said.

             ``In the long run, we will move in that direction,'' he said, referring to the U.S.
             dollar. ``But we are talking about 10 years from now or so. Before we do that, we
             would have to adjust our salaries and other domestic costs to U.S. levels.''

             But others counter that Europe's recent introduction of the euro will accelerate the

             ``The whole thing is inevitable,'' says Antonio Villamil, a former undersecretary of
             commerce with the Bush administration, who has just been appointed Florida's
             trade secretary. ``As you proceed with economic integration, you will have three
             major currencies: the yen, the dollar and the euro. Whoever operates outside these
             currencies will incur significant costs.''


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