El Salvador’s Dollar Adoption, a Crime Turnaround and and Practical Pitfalls
When I first met my wife Cecy a couple of decades ago, I was surprised to learn an unusual fact about El Salvador, the Central American nation where she grew up. On January 1, 2001, El Salvador had retired its existing currency, the Colon, and officially switched to the U.S. dollar as legal tender.
Around the world, dozens of nations now use the U.S. dollar alongside their native currency, or as their main currency, or, like El Salvador, as their sole currency. When countries institute this process of ‘dollarization’, it often improves their national economic health. However, keeping up that improvement takes constant effort, which comes at a cost. If a dollarized country returns to the bad habits that spurred the change in its currency, the cost of backsliding may make earlier economic losses seem trivial.
Dollarized nations may also fail to make full use of the dollar in their home economies. This can limit or reverse the growth that U.S. dollars can promote.
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Dollarizing nations can force their people to accept U.S. dollars as legal tender for all transactions, business and personal. But they can’t force the people or businesses of other countries to go along with the switch.
Cecy and I got an example of that problem recently.
Cecy’s mother died in late 2019, decades after the death of her husband. The family home was a substantial asset, but needed some repairs to make it salable. Due to the pandemic, the repairs and sale took till 2023.
The participating bank, lawyers and real estate agents had a discussion about the best way to transfer the sale proceeds to the heirs. Because of the cost and issues with electronic transfers, they recommended courier-delivered certified cheques. This worked fine for Cecy’s two brothers who never left El Salvador.
Cecy is a Canadian citizen and resident, and her sister lives in Florida. They expected that thanks to dollarization, it would be a simple-but-slow matter to deposit their cheques locally and get the money from El Salvador into their local banks. They were mistaken.
Cecy and I have long working relationships with a couple of Canada’s biggest banks. We tried over a period of months to exchange the certified cheque for the funds on deposit in the Salvadorean bank. It turned out that neither of our Canadian banks were able to carry out that task. Both explained that there is no established procedure for doing so. Cecy’s sister ran into similar roadblocks in Florida.
Cecy tried to authorize her brother to take the money out and put it in a Salvadorian bank account in her name. But Cecy moved to Canada in the 1980s and closed all her Salvadorian accounts long ago. To open a new account at the bank, she has to sign paperwork in person. After that, the bank can wire the money to her U.S. dollar bank account in Canada.
This requirement isn’t as negative as it sounds.
In March 2022, Salvadorian crime reached a peak when 87 people were murdered in three days, including 62 on a single Saturday night. That was up from 79 murders in all of February. Worse still, victims were targeted randomly, in retaliation for government anti-gang measures. This sparked a government crime crackdown that continues to this day.
The crackdown attracts a lot of foreign criticism on human/civil rights issues. However, according to Wikipedia, the crackdown has great local support. It says,
Cecy and I enjoyed all our past visits to El Salvador, despite the crime problem that forced us to plan our activities as if we were in a war zone. We’ll be able to relax a bit more on this trip than in the past. But from now on, we’ll be more vigilant than ever about issues involving the transfer of money.
Have you experienced any unexpected challenges or benefits related to dollarization in your country or during international transactions? Share your thoughts on the pros and cons of dollarization below!
