Dollarization - Term Overview


Dollarization is the process by which a country officially adopts the currency of the United States as its legal tender.

That is, a country intends to substitute the local currency for the dollar in all its functions (reserve of value, means of payment, transactions, unit of account…).

It can be established officially (if a country adopts the dollar as legal tender exclusively or predominantly), or unofficially (when there is a local currency anchored to the dollar, so that economic agents carry out transactions, savings and movements of your processes in dollars).

This process occurs mainly due to two circumstances

The fact that a country is obliged, or the desire, to apply a polarization may be for various reasons:

- Being a small country without the capacity to issue moderately strong local currency with which to carry out transactions. Or desist from exercising your own monetary policy, depending on the American one.
- There are countries with difficulties and whose local currency is barely accepted in most European countries, or it's strongly devalued, the result of financial, economic and capital crises that have weighed down the national economic system. This is the case, for example, of countries like Ecuador.
- Another situation in the dollarization of an economy can occur when the productive sectors of a country carry out international trade transactions (exports or imports) that represent a large volume within its GDP, so that transactions in dollars end up assuming an excessive use of this currency, thus producing dollarization.

Advantages and disadvantages

Adopting the dollar as a local currency has all the advantages of using a large currency, but on the other hand it has some notable disadvantages. The main one is that the country stops controlling monetary policy, so that all monetary decisions become dependent on the country that issued the currency, in this case the American Federal Reserve (FED), losing sovereignty in control monetary, and placing itself at the expense of what the market and a foreign country decide.

Countries that have the US dollar as their official currency

- USA and its territories.
- Ecuador.
- The Savior.
- Marshall Islands.
- Federated States of Micronesia.
- Palau.
- East Timor.
- Zimbabwe.
- Panama, along with its official currency: the Panamanian Balboa.

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