When El Salvador decided Jan. 1 to phase out its currency, the colon, in favor of the dollar, it became the third country in Latin America to switch to U.S. currency. Panama has used U.S. dollars as national currency since 1904, and Ecuador switched to dollars in 1999 following a banking crisis. Argentina looks poised as the next candidate, and economists predict that other neighbors will join the American monetary club within the next five years.
What is fueling the currency turnover? Nothing like Europe's programmed push for uniformity. It's the economy, stupid. Dollarization has stabilized Latin markets where hyperinflation once ruined all chance of economic progress. In Panama, for instance, stable prices and low interest rates are the rule, unlike most of Central and South America. Ecuador, whose economy was in shambles because of corruption and runaway inflation, has begun a road to recovery since the switch. Along the way, dollarization provides an all-important intangible: confidence.
Economic theorists say changing to a dollar-based system works best in small countries where trade is heavily tied to countries already using the dollar. That makes all Central American countries likely candidates for the move. Ironically, unstable regimes in Cuba, Haiti, and the drug cartels of Colombia have learned to hang onto power by unofficially using dollars in nearly all transactions.
Mexico, the United States' largest trading partner south of the border, would like to dollarize, too. President Vincente Fox, who met with President George W. Bush last month, has proposed that the North American Free Trade Agreement become a full economic union. U.S. officials are not as comfortable with a collective approach, and any overarching plan for union this side of the Atlantic will get skeptical attention for a long time to come.