dollarization (was: imposing)

["Alan G. Isaac" <aisaac@xxxxxxxxxxxx>]

Regarding dollarization, I said:
>> Some of us just noted, to the dismay of the politically
>> correct, that it need not always be a bad idea.

On Fri, 20 Apr 2001, Henry C.K. Liu wrote in response:
> 1) Can you name one example where it is not a bad idea?

Panama seems not to have been hurt by use of the dollar.
El Salvador and Ecuador had perfectly good reasons for
dollarizing.  We'll have to wait a couple years to see
how that turns out.  Argentina's reason's for considering
dollarization are not obviously silly.  But in each case
the actual effects of dollarization are difficult to
determine, like the effects of so many economic policies.
Every time the question is: what is the credible
counterfactual?

Of course the term dollarization is used broadly to refer
to substitution into other currencies as well.  It is not
clear that Euroland has been hurt by adopting the mark.
(Apologies to those who prefer to call it the euro.)
And from the history of the past couple decades, it seems
that Turkey would do well to adopt the mark as well.
(As many Turks have in daily life.)

In terms just of the economics, the issue is often seen as
turning primarily on the question of whether the countries involved
form an optimum currency area and the related question
of whether a common currency will reduce relative price
fluctuations vis a vis a major trading partner.  But of
course to understand the implications of abandoning (at
least in principle) the possibility of independent monetary
policy, it is important to understand how political as well
as economic considerations will influence the actual policies
followed in a country.

We also need to say what we mean by dollarization being a bad
idea or a good idea.  My general stance on dollarization,
as on other economics policies, is that it is a good idea for a country
if the average person in that country will experience a higher
standard of living as a result.  This is still not a precise
criterion, but it conveys the flavor of things.

> 2) What is wrong with being politically correct if it happens to be also
> analytically correct?

Nothing at all.  It even happens on occasion (although
not on this one.)
A fortuitious coincidence is nothing to be ashamed of.

Alan