Daniel Raisbeck is an independent policy analyst
On August 10, Eric Graf and I argued in Economic Affairs that Venezuela needs to shut down its central bank so that it can prosper in the post-Maduro age. Surprisingly, full, official dollarisation was not being discussed despite persistent triple-digit inflation levels.
This changed last week, when Antonio Ecarri, a member of the National Assembly, announced that he was drafting a bill to dollarise the Venezuelan economy formally. Informally, Ecarri stated correctly, Venezuela has already been de facto dollarised for years, as people use the U.S. dollar as a unit of account for all transactions, from buying cars and real estate to calculating prices when selling groceries (from supermarkets’ perspectives). Salaries, however, must be paid in devalued and highly inflationary bolívares under state mandate.
The ace under Ecarri’s sleeve is that he is working under the tutelage of Steve Hanke, a Johns Hopkins University economist who has helped to dollarise numerous countries. Since “dollarisation” in the broad sense of the term refers to the formal adoption of any foreign currency, Hanke’s portfolio includes Montenegro’s unilateral adoption of the Deutsche Mark in 1999 (which later shifted to the unilateral adoption of the euro).
Quite predictably, Ecarri’s proposal unleashed a backlash from both the Chavista remnants now in charge of Venezuela— albeit under U.S. scrutiny— and opposition economists broadly tied to Nobel peace laureate María Corina Machado.
Jorge Rodríguez, the head of the Chavista-imposed National Assembly and brother of current tyrant Delcy Rodríguez, Maduro’s former vice-president, launched an investigation against Ecarri for allegedly violating the constitution, which grants the bolívar legal tender and the central bank a monopoly over monetary policy.
On the other hand, pro-Machado commentators have portrayed Ecarri as a Chavista collaborator, since he won his seat to an illegitamate body after Maduro created a new assembly once the opposition won the 2015 parliamentary election. Ecarri’s political consistency or the legitimacy of the National Assemnly, however, are not the issues now at stake. Recall, for instance, that West Germany introduced the Deutsche Mark under foreign occupation. The urgency is taking away the ability of the political class to debase the people’s currency.
Pro-Machado and opposition economists have also resorted to the usual barrage of myths to discredit dollarisation. I addressed them in 2023 as follows:
1. Dollarisation leads to a loss of competitiveness and weak growth:
False: Competitiveness does not depend on currency devaluation, but rather on high-value-added production and free trade conditions, including in the financial sector. See Panama’s strong per capita growth under a dollarised system.
2. Because growth has been slow in Ecuador and El Salvador, dollarisation has not succeeded there.
False: These countries have poor growth rates because of a lack of broad free market reforms. Dollarisation has protected citizens’ purchasing power from fiscal recklessness and hyperinflation under far left governments.
3. Dollarisation failed in Argentina in the 1990s.
False: Argentina implemented a flawed, unorthodox currency board with active central bank intervention beyond exchange rate management. It kept the peso and did not dollarise formally.
4. The loss of monetary sovereignty leaves a country at a disadvantage due to the inability to counter external shocks with monetary policy.
False: Devaluation hurts the poor especially and increases the costs of capital. Dollarised economies maintain lower interest rates, remain stable during crises, and tend to bounce back rapidly from external shocks.
5. Dollarisation can lead to very high unemployment levels because of external shocks, while flexible exchange rate regimes can withstand such shocks far better.
False: Since currency depreciation raises the cost of capital, it hurts long-term job creation. The evidence shows no link between dollarisation and high unemployment (which in Latin America is often caused by rigid labour laws).
6. The Federal Reserve oversees all monetary policy for dollarised countries.
False: Local credit demand, not Fed oversight, determines a dollarised country’s monetary conditions. Full integration into the global financial system ensures clear supply and demand signals (again, see the case of Panama).
7. Dollarisation is a U.S. imperialist policy.
False: Neither the White House nor Congress has shown much interest in dollarisation for Latin America. The Treasury recently propped up the Argentine peso. The IMF actually opposes dollarisation; it is in the business of training local central bankers.
The IMF’s anti-dollarisation stance is reflected, of course, among economists in Latin American countries, for whom a stint at the central bank is a mark of prestige. There is also the fatal conceit of exerting power over an entire population through monetary policy, a power that dollarisation explicitly and permanently takes away from the local political class (hence its effectiveness). This factor is also at play in Venezuela, where the opposition has drafted several plans for a post-tyranny, independent, and technocratic monetary authority. As I wrote in January, such plans have an Achilles heel: the continued existence of a national currency and of the Venezuelan central bank.
With its triple-digit inflation even before Chávez rose to power, Venezuela—along with Argentina—is the poster child for why Latin American countries should not have their own currencies or central banks. Nominally independent, central banks are easily politicized. In the worst of cases, this leaves spendthrift governments with a carte blanche to monetize their deficits. In cases of supposed success, central banks lauded for their technical outlook and approach, such as Colombia’s, can generate greater inflation than necessary and oversee heavily devalued national currencies over the long term.
In Venezuela’s worst-case scenario, annual inflation persistently remains at triple digits. As recently as 2018, the currency became worthless, with street vendors selling goods woven with bolívar banknotes.
It is no wonder that Venezuelans have already voted informally and en masse against the bolívar by shunning its use completely, except when forced to do otherwise. It is time for the political class to accept this reality.
Excellent - thank you for this, and apologies for taking so long to read it. I ask out of ignorance:
1) Why tie a local currency to the dollar, which like all major fiat currencies, is losing value due to a lack of fiscal discipline, requiring borrowing or money printing to fund the interest on the debt, let alone the principal? Wouldn't gold make more sense?
2) Does point (4) mean that the UK should adopt the Euro, or the dollar?
For what should be a major petro economy, dollarisation is a clear choice. Thanks for the well laid out critique illustrating the falsehoods surrounding the debate.