Dollarization in Developing Countries - Book Report/Review Example

The issue has been a concern for developing countries, particularly Latin America because of the prominent of US as a trade partner of the region. Bogetic (2000) points out that the main advantage raised by its proponents see it as a means to diminish control or influence of currencies and markets which in turn will enhance liberalization of trade and commerce in the region. Therefore, dollarization should be considered using long-term local and international perspectives and taken up only when either currencies involved have reached a degree of stability.

However, Hinds (2004) points out that dollarization does not address the weakness of countries' monetary policies. He also points out that this diminished the level of control nations have over their own currencies. Therefore, the country that has opted for dollarization is at the mercy of the currency it has adopted. Another challenge for the dollarization is determining monetary bases for conversion. In the case of Argentina for example, critics of its efforts in dollarization point out that neither current formals nor do transfer systems been adequately defined (Berg & Borensztein, 2000).

Taylor (2000) point out that dollarization should be considered as form of importation or technology transfer and therefore has inherent disadvantages to less developed countries, or in this case the country opting for dollarization. Furthermore, a dollarizing country loses loss of seigniorage revenues from the production of its national currency. On the other hand, Bogetic (2000) points out that dollarization are only adopted when there is a significant dependence in economies. In such a scenario, the currency is pegged so closely with the other currency that they essentially become interchangeable.

Therefore, dollarization becomes only a formalization of this relationship. One of the models used to support dollarization is the case of Panama's adoption of the US dollar. Another argument for dollarization is in recognition of the prevalence of "electronic" money which makes actual currency unnecessary (Berg & Borensztein, 2000). At the same time, dollarization is considered to be an effort in the direction of the development of a universal currency, and issue that has gained significant interest due to the scale of globalization of economies.

Conclusion Considering fluctuation in world currencies recently, the consequences of dollarization becomes even more of a concern (Schoen, 2007). At the same time, there is an assumption that the resolution differences in currency will result in an enhancement in trade and commerce. If such a perspective is to be accepted, currency can be considered as a limitation to liberalization. However, Berg and Borensztein (2000) point out that dollarization is a means to create monetary stability but is not an assurance of it since it merely shifts seigniorage to another country and monetary and fiscal management is still dependent on the management of respective countries.

Taylor (2000) also points out that if a country is already at a disadvantage in terms of economies of scale, this state of affairs will likely persist and states that before currencies should be stable before dollarization is considered. There are advantages and disadvantages to dollarization. Bogetic (2000) concludes his study by pointing out that there is an assumption of currency stability in implementing dollarization and that the relationship of the countries will remain.