Dollarization will serve to enhance the economic and political stability of Mexico.
By replacing the peso with the US dollar, the Mexican government will remove the stigma of having a currency that has lost over 98 percent of its dollar value in the past twenty-five years (The Cato Journal). The reestablishment of economic stability within the country would help to rebuild the Mexican people’s faith in the administration (that adopts dollarization), and would strengthen the people’s confidence in their own economic and political prospects.This, in turn, could lead to more domestic investment within the country. Another issue is that many of Mexico’s northern border states are already unofficially dollarized (CNN). This means that there is already widespread use of US dollars in these states.
Furthermore, many large companies throughout the country use dollars to conduct business, especially companies that engage in exports (Id. ). While these larger firms are able to secure dollar financing, at low rates, most other Mexican businesses are forced to have to deal with high cost peso loans (Id.).Dollarization would help to level the playing field between these businesses by making low rates available to all firms that seek financing (as long as they meet the loan requirements).
One major obstacle toward dollarization is the political fear that the Mexican people will experience a decrease in national pride resulting from the loss off the peso (The Dallas Fed). From a political standpoint, this could be very dangerous for the administration that ratifies dollarization (Id. ).Angry Mexicans could use elections to retaliate against the administration if the economy does not immediately show signs of growth from the dollarization (Id. ).
However, if positioned properly, dollarization could be marketed as a return to Mexico’s original currency (Id. ). Originally, the US dollar was based on the Spanish/Mexican dollar, both in terms of silver content and in the symbol that is now the dollar sign (Id.
). The current dollar sign symbol that is used originally came from the Spanish royal family’s shield (Id. ).The government should use marketing and public awareness campaigns to proliferate the spread of this information in order to build solidarity between the Mexican people and the proposed new currency. Furthermore, the government could also issue coins, as discussed in the previous section, as another potential solution to this problem (Joint Economic Committee).
Another major obstacle is the loss of monetary control that would result from dollarization. This issue will be covered in the next section in terms of its economic cost, but it is also important to note that there is a political and emotional cost here as well.Losing monetary authority may be viewed by some Mexicans as an admission of government inability to manage the currency. Politically, this could hurt the administration that tries to adopt dollarization because some of the population may view that administration as inept. However, given Mexico’s history regarding the mismanagement of monetary policy over the past 25 years, we feel that most Mexicans will likely welcome a change towards a more stable monetary system (The Cato Journal).