By ANDRES OPPENHEIMER
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
the peso to the dollar, effectively using both currencies interchangeably.
A boisterous debate on the issue has begun in several countries. It was
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called on Mexicans to leave aside outdated definitions of nationalism and move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
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
[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,
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
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,
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
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
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 whole thing is inevitable,'' says Antonio Villamil, a former undersecretary
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.''
Copyright © 1999 The Miami Herald