Dollarization
Encyclopedia
Dollarization occurs when the inhabitants of a country use foreign currency
Currency
In economics, currency refers to a generally accepted medium of exchange. These are usually the coins and banknotes of a particular government, which comprise the physical aspects of a nation's money supply...
in parallel to or instead of the domestic currency. The term is not only applied to usage of the United States dollar
United States dollar
The United States dollar , also referred to as the American dollar, is the official currency of the United States of America. It is divided into 100 smaller units called cents or pennies....
, but generally to the use of any foreign currency as the national currency.
The biggest economies to have officially dollarized as of June 2002 are Panama
Panama
Panama , officially the Republic of Panama , is the southernmost country of Central America. Situated on the isthmus connecting North and South America, it is bordered by Costa Rica to the northwest, Colombia to the southeast, the Caribbean Sea to the north and the Pacific Ocean to the south. The...
(since 1904), Ecuador
Ecuador
Ecuador , officially the Republic of Ecuador is a representative democratic republic in South America, bordered by Colombia on the north, Peru on the east and south, and by the Pacific Ocean to the west. It is one of only two countries in South America, along with Chile, that do not have a border...
(since 2000), and El Salvador
El Salvador
El Salvador or simply Salvador is the smallest and the most densely populated country in Central America. The country's capital city and largest city is San Salvador; Santa Ana and San Miguel are also important cultural and commercial centers in the country and in all of Central America...
(since 2001). , the United States dollar
United States dollar
The United States dollar , also referred to as the American dollar, is the official currency of the United States of America. It is divided into 100 smaller units called cents or pennies....
, the Euro
Euro
The euro is the official currency of the eurozone: 17 of the 27 member states of the European Union. It is also the currency used by the Institutions of the European Union. The eurozone consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,...
, the New Zealand dollar
New Zealand dollar
The New Zealand dollar is the currency of New Zealand. It also circulates in the Cook Islands , Niue, Tokelau, and the Pitcairn Islands. It is divided into 100 cents....
, the Swiss franc
Swiss franc
The franc is the currency and legal tender of Switzerland and Liechtenstein; it is also legal tender in the Italian exclave Campione d'Italia. Although not formally legal tender in the German exclave Büsingen , it is in wide daily use there...
, the Indian rupee
Indian rupee
The Indian rupee is the official currency of the Republic of India. The issuance of the currency is controlled by the Reserve Bank of India....
, and the Australian dollar
Australian dollar
The Australian dollar is the currency of the Commonwealth of Australia, including Christmas Island, Cocos Islands, and Norfolk Island, as well as the independent Pacific Island states of Kiribati, Nauru and Tuvalu...
were the only currencies used by other countries for official dollarization. In addition, the Armenian dram
Armenian dram
The dram is the monetary unit of Armenia and the Nagorno-Karabakh Republic. It is subdivided into 100 luma . The word "dram" translates into English as "money" and is cognate with the Greek drachma...
, Turkish lira
Turkish lira
The Turkish lira is the currency of Turkey and the de facto independent state of the Turkish Republic of Northern Cyprus. The lira is subdivided into 100 kuruş...
, the Israeli shekel, and the Russian ruble
Russian ruble
The ruble or rouble is the currency of the Russian Federation and the two partially recognized republics of Abkhazia and South Ossetia. Formerly, the ruble was also the currency of the Russian Empire and the Soviet Union prior to their breakups. Belarus and Transnistria also use currencies with...
are used by internationally unrecognized but de facto independent states.
Origins
After the gold standardGold standard
The gold standard is a monetary system in which the standard economic unit of account is a fixed mass of gold. There are distinct kinds of gold standard...
was abandoned at the outbreak of World War I
World War I
World War I , which was predominantly called the World War or the Great War from its occurrence until 1939, and the First World War or World War I thereafter, was a major war centred in Europe that began on 28 July 1914 and lasted until 11 November 1918...
and the Bretton Woods Conference following World War II
World War II
World War II, or the Second World War , was a global conflict lasting from 1939 to 1945, involving most of the world's nations—including all of the great powers—eventually forming two opposing military alliances: the Allies and the Axis...
, some countries were desperately seeking ways to promote global economic stability and hence their own prosperity. Countries usually peg their currency to a major convertible currency. When countries choose to use a major convertible currency parallel to or in place of their national currency, this is called the process of dollarization.
Effects of dollarization
The major benefit of dollarization is the elimination of risk of exchange rate fluctuations and possible reduction in the country's international exposure. Though dollarization cannot eliminate the risk of an external crisis, it provides steadier markets as a result of elimination of fluctuations in exchange rates. Dollarized economies can invoke greater confidence among international investors inducing increased investments and growth. Economic integration with the rest of the world becomes easier as a result of lowered transaction costs and greater acceptability of the dollarized currency. It helps promote greater fiscal discipline and thus greater financial stability and lower inflation.On the other hand, dollarization leads to loss of revenue by seigniorage, is almost certainly met by political resistance and most importantly leads to absence of monetary policy autonomy. The country losses the rights to its autonomous monetary as well as exchange rate policies even in times of financial emergencies.
Types
Dollarization can occur in a number of situations. It can be used unofficially, when private agents prefer the foreign currency over the domestic currency. For example, they hold deposits in the foreign currency because of a bad track record of the local currency, or as a hedge against inflation of the domestic currency.It can be used semiofficially (or officially bimonetary systems), where the foreign currency is legal tender
Legal tender
Legal tender is a medium of payment allowed by law or recognized by a legal system to be valid for meeting a financial obligation. Paper currency is a common form of legal tender in many countries....
alongside the domestic currency.
Some countries use a foreign currency as the sole legal tender, and have ceased to issue the domestic currency. Another effect of a country adopting a foreign currency as its own is that the country gives up all power to vary its exchange rate, with its economy being pegged to that of the foreign country.
Countries using the U.S. dollar exclusively
- British Virgin IslandsBritish Virgin IslandsThe Virgin Islands, often called the British Virgin Islands , is a British overseas territory and overseas territory of the European Union, located in the Caribbean to the east of Puerto Rico. The islands make up part of the Virgin Islands archipelago, the remaining islands constituting the U.S...
- Caribbean Netherlands (from 1 January 2011)
- East TimorEast TimorThe Democratic Republic of Timor-Leste, commonly known as East Timor , is a state in Southeast Asia. It comprises the eastern half of the island of Timor, the nearby islands of Atauro and Jaco, and Oecusse, an exclave on the northwestern side of the island, within Indonesian West Timor...
(uses its own coinsEast Timor centavo coinsFor earlier currencies issued by East Timor, see Portuguese Timorese escudo and Portuguese Timorese pataca.East Timor centavo coins were introduced in East Timor in 2003 for use alongside United States Dollar banknotes and coins, which had been introduced in 2000 to replace the Indonesian rupiah...
) - EcuadorEcuadorEcuador , officially the Republic of Ecuador is a representative democratic republic in South America, bordered by Colombia on the north, Peru on the east and south, and by the Pacific Ocean to the west. It is one of only two countries in South America, along with Chile, that do not have a border...
(uses its own coinsEcuadorian centavo coinsEcuadorian centavo coins were introduced in 2000 when Ecuador converted its currency from the sucre to the U.S. dollar. The coins are in denominations of 1, 5, 10, 25 and 50 centavos and are identical in size and value to their U.S. cent counterparts They circulate within Ecuador alongside coins...
in addition to U.S. coins) - El SalvadorEl SalvadorEl Salvador or simply Salvador is the smallest and the most densely populated country in Central America. The country's capital city and largest city is San Salvador; Santa Ana and San Miguel are also important cultural and commercial centers in the country and in all of Central America...
- Marshall IslandsMarshall IslandsThe Republic of the Marshall Islands , , is a Micronesian nation of atolls and islands in the middle of the Pacific Ocean, just west of the International Date Line and just north of the Equator. As of July 2011 the population was 67,182...
- Federated States of MicronesiaFederated States of MicronesiaThe Federated States of Micronesia or FSM is an independent, sovereign island nation, made up of four states from west to east: Yap, Chuuk, Pohnpei and Kosrae. It comprises approximately 607 islands with c...
- PalauPalauPalau , officially the Republic of Palau , is an island nation in the Pacific Ocean, east of the Philippines and south of Tokyo. In 1978, after three decades as being part of the United Nations trusteeship, Palau chose independence instead of becoming part of the Federated States of Micronesia, a...
- PanamaPanamaPanama , officially the Republic of Panama , is the southernmost country of Central America. Situated on the isthmus connecting North and South America, it is bordered by Costa Rica to the northwest, Colombia to the southeast, the Caribbean Sea to the north and the Pacific Ocean to the south. The...
(uses its own coinsPanamanian balboaThe balboa is, along with the United States dollar, one of the official currencies of Panama. It is named in honor of the Spanish explorer/conquistador Vasco Núñez de Balboa. The balboa is subdivided into 100 centésimos.-The History of the Panamanian Balboa:The balboa replaced the Colombian peso...
in addition to U.S. coins) - Turks and Caicos IslandsTurks and Caicos IslandsThe Turks and Caicos Islands are a British Overseas Territory and overseas territory of the European Union consisting of two groups of tropical islands in the Caribbean, the larger Caicos Islands and the smaller Turks Islands, known for tourism and as an offshore financial centre.The Turks and...
Countries using the U.S. dollar alongside other currencies
- CambodiaCambodiaCambodia , officially known as the Kingdom of Cambodia, is a country located in the southern portion of the Indochina Peninsula in Southeast Asia...
(uses Cambodian RielCambodian rielFor earlier Cambodian currencies, see Cambodian tical and Cambodian franc.The riel is the currency of Cambodia. There have been two distinct riel, the first issued between 1953 and May 1975. Between 1975 and 1980, the country had no monetary system. A second currency, also named "riel", has been...
for many official transactions but most businesses deal exclusively in dollars) - LebanonLebanonLebanon , officially the Republic of LebanonRepublic of Lebanon is the most common term used by Lebanese government agencies. The term Lebanese Republic, a literal translation of the official Arabic and French names that is not used in today's world. Arabic is the most common language spoken among...
(along with the Lebanese poundLebanese poundThe Lebanese pound is the currency unit of Lebanon. It is divided into 100 piastres but inflation has eliminated the subdivisions....
) - LiberiaLiberiaLiberia , officially the Republic of Liberia, is a country in West Africa. It is bordered by Sierra Leone on the west, Guinea on the north and Côte d'Ivoire on the east. Liberia's coastline is composed of mostly mangrove forests while the more sparsely populated inland consists of forests that open...
(was fully dollarized until 1982; U.S. dollar still in common usage alongside Liberian dollarLiberian dollarThe dollar has been the currency of Liberia since 1943. It was also the country's currency between 1847 and 1907. It is normally abbreviated with the dollar sign $, or alternatively L$ or LD$ to distinguish it from other dollar-denominated currencies. It is divided into 100 cents.-First dollar:The...
) - ZimbabweZimbabweZimbabwe is a landlocked country located in the southern part of the African continent, between the Zambezi and Limpopo rivers. It is bordered by South Africa to the south, Botswana to the southwest, Zambia and a tip of Namibia to the northwest and Mozambique to the east. Zimbabwe has three...
- HaitiHaitiHaiti , officially the Republic of Haiti , is a Caribbean country. It occupies the western, smaller portion of the island of Hispaniola, in the Greater Antillean archipelago, which it shares with the Dominican Republic. Ayiti was the indigenous Taíno or Amerindian name for the island...
uses the U.S Dollar alongside its domestic currency called "Gourde"
Euro
- AndorraAndorraAndorra , officially the Principality of Andorra , also called the Principality of the Valleys of Andorra, , is a small landlocked country in southwestern Europe, located in the eastern Pyrenees mountains and bordered by Spain and France. It is the sixth smallest nation in Europe having an area of...
(formerly French francFrench francThe franc was a currency of France. Along with the Spanish peseta, it was also a de facto currency used in Andorra . Between 1360 and 1641, it was the name of coins worth 1 livre tournois and it remained in common parlance as a term for this amount of money...
and Spanish pesetaSpanish pesetaThe peseta was the currency of Spain between 1869 and 2002. Along with the French franc, it was also a de facto currency used in Andorra .- Etymology :...
) - KosovoKosovoKosovo is a region in southeastern Europe. Part of the Ottoman Empire for more than five centuries, later the Autonomous Province of Kosovo and Metohija within Serbia...
- MonacoMonacoMonaco , officially the Principality of Monaco , is a sovereign city state on the French Riviera. It is bordered on three sides by its neighbour, France, and its centre is about from Italy. Its area is with a population of 35,986 as of 2011 and is the most densely populated country in the...
(formerly French francFrench francThe franc was a currency of France. Along with the Spanish peseta, it was also a de facto currency used in Andorra . Between 1360 and 1641, it was the name of coins worth 1 livre tournois and it remained in common parlance as a term for this amount of money...
; issues its own euro coins) - MontenegroMontenegroMontenegro Montenegrin: Crna Gora Црна Гора , meaning "Black Mountain") is a country located in Southeastern Europe. It has a coast on the Adriatic Sea to the south-west and is bordered by Croatia to the west, Bosnia and Herzegovina to the northwest, Serbia to the northeast and Albania to the...
(formerly German markGerman markThe Deutsche Mark |mark]], abbreviated "DM") was the official currency of West Germany and Germany until the adoption of the euro in 2002. It is commonly called the "Deutschmark" in English but not in German. Germans often say "Mark" or "D-Mark"...
and Yugoslav dinarYugoslav dinarThe dinar was the currency of the three Yugoslav states: the Kingdom of Yugoslavia , the Socialist Federal Republic of Yugoslavia and the Federal Republic of Yugoslavia between 1918 and 2003. The dinar was subdivided into 100 para...
) - San MarinoSan MarinoSan Marino, officially the Republic of San Marino , is a state situated on the Italian Peninsula on the eastern side of the Apennine Mountains. It is an enclave surrounded by Italy. Its size is just over with an estimated population of over 30,000. Its capital is the City of San Marino...
(formerly Italian liraItalian liraThe lira was the currency of Italy between 1861 and 2002. Between 1999 and 2002, the Italian lira was officially a “national subunit” of the euro...
; issues its own euro coins) - Vatican CityVatican CityVatican City , or Vatican City State, in Italian officially Stato della Città del Vaticano , which translates literally as State of the City of the Vatican, is a landlocked sovereign city-state whose territory consists of a walled enclave within the city of Rome, Italy. It has an area of...
(formerly Italian liraItalian liraThe lira was the currency of Italy between 1861 and 2002. Between 1999 and 2002, the Italian lira was officially a “national subunit” of the euro...
; issues its own euro coins)
New Zealand dollar
- Cook IslandsCook IslandsThe Cook Islands is a self-governing parliamentary democracy in the South Pacific Ocean in free association with New Zealand...
(issues its own coins and some notes) - NiueNiueNiue , is an island country in the South Pacific Ocean. It is commonly known as the "Rock of Polynesia", and inhabitants of the island call it "the Rock" for short. Niue is northeast of New Zealand in a triangle between Tonga to the southwest, the Samoas to the northwest, and the Cook Islands to...
- Pitcairn Island
- TokelauTokelauTokelau is a territory of New Zealand in the South Pacific Ocean that consists of three tropical coral atolls with a combined land area of 10 km2 and a population of approximately 1,400...
Australian dollar
- KiribatiKiribatiKiribati , officially the Republic of Kiribati, is an island nation located in the central tropical Pacific Ocean. The permanent population exceeds just over 100,000 , and is composed of 32 atolls and one raised coral island, dispersed over 3.5 million square kilometres, straddling the...
(issues its own coinsKiribati dollarThe dollar is the currency of Kiribati. It is not an independent currency but is pegged at 1:1 ratio to the Australian dollar. Coins were issued in 1979 and circulate alongside banknotes and coins of the Australian dollar.-History:...
) - NauruNauruNauru , officially the Republic of Nauru and formerly known as Pleasant Island, is an island country in Micronesia in the South Pacific. Its nearest neighbour is Banaba Island in Kiribati, to the east. Nauru is the world's smallest republic, covering just...
- TuvaluTuvaluTuvalu , formerly known as the Ellice Islands, is a Polynesian island nation located in the Pacific Ocean, midway between Hawaii and Australia. Its nearest neighbours are Kiribati, Nauru, Samoa and Fiji. It comprises four reef islands and five true atolls...
(issues its own coinsTuvaluan dollarThe dollar is the currency of Tuvalu. From 1966 to 1976, Tuvalu officially used the Australian dollar. In 1976, Tuvalu began issuing its own coins for circulation, although these circulate alongside Australian coins and Tuvalu continues to use Australian banknotes...
)
Zimbabwe
Due to the hyperinflation and official abandonment of the Zimbabwean dollarZimbabwean dollar
The Zimbabwean dollar was the official currency of Zimbabwe from 1980 to 12 April 2009....
several currencies are used instead:
- British Pound SterlingPound sterlingThe pound sterling , commonly called the pound, is the official currency of the United Kingdom, its Crown Dependencies and the British Overseas Territories of South Georgia and the South Sandwich Islands, British Antarctic Territory and Tristan da Cunha. It is subdivided into 100 pence...
- Botswana pulaBotswana pulaThe pula is the currency of Botswana. It has the ISO 4217 code BWP and is subdivided into 100 thebe. Pula literally means "rain" in Setswana, because rain is very scarce in Botswana - home to much of the Kalahari Desert - and therefore valuable. Pula also means "blessing" as rain is considered a...
- EuroEuroThe euro is the official currency of the eurozone: 17 of the 27 member states of the European Union. It is also the currency used by the Institutions of the European Union. The eurozone consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,...
- South African randSouth African randThe rand is the currency of South Africa. It takes its name from the Witwatersrand , the ridge upon which Johannesburg is built and where most of South Africa's gold deposits were found. The rand has the symbol "R" and is subdivided into 100 cents, symbol "c"...
- United States dollarUnited States dollarThe United States dollar , also referred to as the American dollar, is the official currency of the United States of America. It is divided into 100 smaller units called cents or pennies....
The U.S. dollar has been officially adopted for all transactions involving the new power-sharing government.
Others
- Armenian dramArmenian dramThe dram is the monetary unit of Armenia and the Nagorno-Karabakh Republic. It is subdivided into 100 luma . The word "dram" translates into English as "money" and is cognate with the Greek drachma...
: Nagorno-Karabakh RepublicNagorno-Karabakh RepublicThe Nagorno-Karabakh Republic , or Artsakh Republic is a de facto independent republic located in the South Caucasus region of Eurasia... - Russian rubleRussian rubleThe ruble or rouble is the currency of the Russian Federation and the two partially recognized republics of Abkhazia and South Ossetia. Formerly, the ruble was also the currency of the Russian Empire and the Soviet Union prior to their breakups. Belarus and Transnistria also use currencies with...
: AbkhaziaAbkhaziaAbkhazia is a disputed political entity on the eastern coast of the Black Sea and the south-western flank of the Caucasus.Abkhazia considers itself an independent state, called the Republic of Abkhazia or Apsny...
and South OssetiaSouth OssetiaSouth Ossetia or Tskhinvali Region is a disputed region and partly recognized state in the South Caucasus, located in the territory of the South Ossetian Autonomous Oblast within the former Georgian Soviet Socialist Republic....
(de facto independent states, but recognized as part of GeorgiaGeorgia (country)Georgia is a sovereign state in the Caucasus region of Eurasia. Located at the crossroads of Western Asia and Eastern Europe, it is bounded to the west by the Black Sea, to the north by Russia, to the southwest by Turkey, to the south by Armenia, and to the southeast by Azerbaijan. The capital of...
by nearly all other states) - Indian rupeeIndian rupeeThe Indian rupee is the official currency of the Republic of India. The issuance of the currency is controlled by the Reserve Bank of India....
: BhutanBhutanBhutan , officially the Kingdom of Bhutan, is a landlocked state in South Asia, located at the eastern end of the Himalayas and bordered to the south, east and west by the Republic of India and to the north by the People's Republic of China...
and NepalNepalNepal , officially the Federal Democratic Republic of Nepal, is a landlocked sovereign state located in South Asia. It is located in the Himalayas and bordered to the north by the People's Republic of China, and to the south, east, and west by the Republic of India... - Swiss francSwiss francThe franc is the currency and legal tender of Switzerland and Liechtenstein; it is also legal tender in the Italian exclave Campione d'Italia. Although not formally legal tender in the German exclave Büsingen , it is in wide daily use there...
: LiechtensteinLiechtensteinThe Principality of Liechtenstein is a doubly landlocked alpine country in Central Europe, bordered by Switzerland to the west and south and by Austria to the east. Its area is just over , and it has an estimated population of 35,000. Its capital is Vaduz. The biggest town is Schaan... - Israeli shekel: Palestinian territoriesPalestinian territoriesThe Palestinian territories comprise the West Bank and the Gaza Strip. Since the Palestinian Declaration of Independence in 1988, the region is today recognized by three-quarters of the world's countries as the State of Palestine or simply Palestine, although this status is not recognized by the...
- Turkish liraTurkish liraThe Turkish lira is the currency of Turkey and the de facto independent state of the Turkish Republic of Northern Cyprus. The lira is subdivided into 100 kuruş...
: Turkish Republic of Northern CyprusTurkish Republic of Northern CyprusNorthern Cyprus or North Cyprus , officially the Turkish Republic of Northern Cyprus , is a self-declared state that comprises the northeastern part of the island of Cyprus...
(de facto independent state, but recognized as part of CyprusCyprusCyprus , officially the Republic of Cyprus , is a Eurasian island country, member of the European Union, in the Eastern Mediterranean, east of Greece, south of Turkey, west of Syria and north of Egypt. It is the third largest island in the Mediterranean Sea.The earliest known human activity on the...
by all states but Turkey)