Dollar Democracy: The Politics of Dollarization in Latin America

The state\u27s right to print money and control monetary policy is among its most powerful abilities: it allows the state to manage the economy, raise revenue, and reward political allies. Since the establishment of the Westphalian state system, the state\u27s monopoly of money within its borders has been a source of wealth and within the last century, influence over the macroeconomy and local actors. Nevertheless, in the year 2000, Ecuador and El Salvador surprised the world by announcing that they would officially dollarize their economies, replacing their national currencies with the dollar. What can explain why countries, such as Ecuador and El Salvador, would voluntarily subjugate themselves completely to another country\u27s monetary regime? Given its dramatic impact on the power of the state, why would any independent country choose to dollarize? Up until now, scholarly attempts to explain dollarization have focused on its theoretical economic advantages and disadvantages : its impact on lowering interest rates, greater access to credit, the economic benefits of currency stability versus reductions in seigniorage and the loss of monetary sovereignty. In the case of Ecuador, economists and political scientists, alike, agreed that dollarization was the only option available: it was a sheer act of desperation divorced from social or political considerations other than the desperate need for quick stability. However, these answers fall flat, as they ignore 1) the relationship between local struggles over dollarization and financial globalization, 2) the differential ways in which dollarization impacts various societal groups, creating winners and losers with strong interests in influencing policy adoption, and 3) the ways in which internal political struggles and coalitional alliances impact the outcome of these struggles. Differing monetary regimes create concentrated groups of winners and losers and where there are winners and losers, actors will work to impose their preferred policies. Through detailed case studies of two countries where a campaign for dollarization was successful (Ecuador and El Salvador) and one case study of a country where dollarization was defeated (Argentina), this dissertation shows that struggles over dollarization reflect sectorial distributional struggles that are intrinsically related to processes of financial globalization