Dollar Democracy: the Politics of Dollarization in Latin America
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City University of New York (CUNY) CUNY Academic Works All Dissertations, Theses, and Capstone Projects Dissertations, Theses, and Capstone Projects 2-2014 Dollar Democracy: The Politics of Dollarization in Latin America Cori Madrid Graduate Center, City University of New York How does access to this work benefit ou?y Let us know! More information about this work at: https://academicworks.cuny.edu/gc_etds/68 Discover additional works at: https://academicworks.cuny.edu This work is made publicly available by the City University of New York (CUNY). Contact: [email protected] DOLLAR DEMOCRACY: THE POLITICS OF DOLLARIZATION IN LATIN AMERICA by CORI MADRID A dissertation submitted to the Graduate Faculty in Political Science in partial fulfillment of the requirements for the degree of Doctor of Philosophy, The City University of New York 2014 © 2014 CORI MADRID All Rights Reserved ii This manuscript has been read and accepted for the Graduate Faculty in Political Science in satisfaction of the dissertation requirement for the degree of Doctor of Philosophy. Irving L. Markovitz _____________ ________________________________ Date Chair of Examining Committee Alyson Cole _____________ ________________________________ Date Executive Officer Kenneth Erickson Sherrie Baver Supervisory Committee THE CITY UNIVERSITY OF NEW YORK iii Abstract DOLLAR DEMOCRACY: THE POLITICS OF DOLLARIZATION IN LATIN AMERICA by Cori Madrid Adviser: Professor Irving Leonard Markovitz The state’s right to print money and control monetary policy is among its most powerful abilities: it allows the state to manage the economy, raise revenue, and reward political allies. Since the establishment of the Westphalian state system, the state’s monopoly of money within its borders has been a source of wealth and within the last century, influence over the macroeconomy and local actors. Nevertheless, in the year 2000, Ecuador and El Salvador surprised the world by announcing that they would officially dollarize their economies, replacing their national currencies with the dollar. What can explain why countries, such as Ecuador and El Salvador, would voluntarily subjugate themselves completely to another country’s monetary regime? Given its dramatic impact on the power of the state, why would any independent country choose to dollarize? iv Up until now, scholarly attempts to explain dollarization have focused on its theoretical economic “advantages” and “disadvantages”: its impact on lowering interest rates, greater access to credit, the economic benefits of currency stability versus reductions in seigniorage and the loss of monetary sovereignty. In the case of Ecuador, economists and political scientists, alike, agreed that dollarization was the only option available: it was a sheer act of desperation divorced from social or political considerations other than the desperate need for quick stability. However, these answers fall flat, as they ignore 1) the relationship between local struggles over dollarization and financial globalization, 2) the differential ways in which dollarization impacts various societal groups, creating winners and losers with strong interests in influencing policy adoption, and 3) the ways in which internal political struggles and coalitional alliances impact the outcome of these struggles. Differing monetary regimes create concentrated groups of winners and losers and where there are winners and losers, actors will work to impose their preferred policies. Through detailed case studies of two countries where a campaign for dollarization was successful (Ecuador and El Salvador) and one case study of a country where dollarization was defeated (Argentina), this dissertation shows that struggles over dollarization reflect sectorial distributional struggles that are intrinsically related to processes of financial globalization. v ACKNOWLEDGEMENTS I would like to thank my adviser and mentor, Lenny Markovitz, for his tireless support and guidance during this process, without which I would have never dared such an undertaking or finished it. I would also like to thank the members of my dissertation committee for their thoughtful feedback and tough questions that, although frustrating at times, greatly improved the quality of this study. Finally, I would like to thank my husband, Javier, whose love, support, and not-so-subtle prodding got me here. vi DOLLAR DEMOCRACY: THE POLITICS OF DOLLARIZATION IN LATIN AMERICA TABLE OF CONTENTS Lists of Tables viii Introduction 1 Ecuador 36 El Salvador 100 Argentina 146 Conclusion 195 Appendix 229 Bibliography 247 vii LIST OF TABLES Introduction Table 1. Indicators of International Financial Integration, Emerging Markets (percent of GDP) 19 Table 2. Features of Selected Exchange Rate Regimes 34 Ecuador Table 1. Total Credit From Private Banking Sector (Millions) 95 Table 2. Total Unsecured Debt From Private Banking Sector to Firms (millions) 96 Table 3. Total Credit From Private Banking Sector Home Loans (millions) 96 Table 4. Private Bank System Deposits (Constant 2010 Sucres-Millions) 97 Table 5. Total Private Banking Sector Quasi-Money (National and Foreign) 97 Table 6. Private Credit in Foreign Currency (FX) (Millions of 2010 Sucres/2010 dollars) 98 Table 7. Private Debt Instrument Emissions in Foreign Currency (FX) 98 El Salvador Table 1 Remittances 107 Table 2: Domestic Bank Assets by Country 108 Table 3. El Salvador GDP by Economic Sector (% of nominal GDP) 109 Table 4. External Sector 1991-1999 (in millions of US dollars) 112 Table 5. Private Bank Profitability 129 Table 6. Net Banking Spreads 130 Table 7. Nominal and Real Interest Rates 133 Table 8. Foreign Debt Stock of Private Financial Institutions 136 Argentina Table 1. Share of GDP by Selected Sectors 156 Table 2. Private Sector Credit (in millions of Aug. 1999 pesos) 157 Table 3. Percentage of Private Sector Loans in Domestic and Foreign Currency 158 Table 4. Market Share by Type of Institutions (%) - December 2000 170 Table 5 :Big Business in Argentina: Exportation of Goods by Principal Economic Activity 172 Table 6. Big Business in Argentina: Number of Companies that Export by Principal Economic Activity 173 Table 7. Big Business in Argentina: Profits of Companies Belonging to Economic Groups: 1993-2001 174 viii CH. 1: INTRODUCTION I. INTRODUCTION The state’s right to print money and control monetary policy is among its most powerful abilities: it allows the state to manage the economy, raise revenue, and reward political allies. Since the establishment of the Westphalian state system, the state’s monopoly of money within its borders has been a source of wealth and within the last century, influence over the macroeconomy and local actors. Nevertheless, in the year 2000, Ecuador and El Salvador surprised the world by announcing that they would officially dollarize their economies, replacing their national currencies with the dollar.1 Countries that fully dollarize give up their ability to print their own money (although they may mint coins or very small bills). Instead, they rely on a foreign currency to conduct all transactions, foreign and domestic. Dollarization removes any vestige of monetary sovereignty by eliminating the Central Bank’s monetary policy duties. Prior to 2000, only the smallest economies, often territories or protectorates of the country whose currency they adopted (i.e. Puerto Rico, Guam, etc.), were fully dollarized. Panama, which had been the largest dollarized country prior to 2000, adopted the US dollar as its currency in 1904, while still under US tutelage. What can explain why larger and sovereign countries, such as Ecuador and El Salvador, would voluntarily subjugate themselves completely to another country’s monetary regime? Given its dramatic impact on the power of the state, why would any independent country choose to dollarize? 1 Despite its seeming specificity to the US Dollar, the term, dollarization is also the generic term for when a country replaces its currency with that of any other country, whether it be the US dollar, the Euro, or otherwise. 1 Argentina presents us with an important comparison: as a country that had implemented a currency board in 1991, Argentina was considered by a number of scholars and political figures to be an excellent candidate for dollarization. In fact, after Argentina's president Carlos Menem announced his government's intention to explore dollarization in 1999, the US Congressional Joint Economic Committee, led by Senator Connie Mack, held a series of hearings to determine what the US' official stance on dollarization should be. Senator Mack eventually proposed the International Monetary Stability Act, otherwise known as the Mack Bill (Cohen 2003a), with the goal of promoting dollarization by creating a mechanism for the US to share seigniorage2 with dollarized countries. Ultimately, the US government never took an official stance on dollarization and Mack Bill never made it out of committee in the Senate or the House, despite several reintroductions. Nevertheless, Argentina's potential dollarization took center stage during the hearings. The controversy over whether Argentina should dollarize came to a head in 2001- 2002 during an economic crisis that plunged more than half of argentines into poverty and threatened the future of its currency board, popularly known as Convertibility. Despite the country's highly financialized economy and the emergence of a strong globally oriented financial sector, Argentina chose not to dollarize and, in fact, abandoned its fixed exchange