The recolonization of Latin America

by Marcelo Garcia

International Socialist Review, Aug/Sep 2001


A QUALITATIVE leap is taking place with regard to the recolonization of Latin America at the hands of the United States. The most powerful imperialism on the planet has widened its policies of exploitative expansion to include the entire Latin American continent. In order to achieve its expansionist objectives, it has set as its primary goals the dollarization of the continent and the orchestration of free trade preached by the Free Trade Area of the Americas. External debts, privatizations, flexible labor, and militarization of the region-as in Plan Colombia-are the central elements of its recolonizing policy.


The process of introducing a single currency in Latin America has fairly distant antecedents, but never has there existed so great a drive as the one being felt today. There are two forms for the implementation of "dollarization." There are those countries that tie themselves to the dollar in an official way, and those that do it informally. In turn, there are those in the first group that abandon their local currencies in a bilateral way-reaching an agreement with the U.S. Federal Reserve, which implies sharing control and obtaining a cover for the issue of new dollars according to new demand-and those that opt for doing it unilaterally.

There are already four Latin American nations that have formally anchored their economies to the dollar: Ecuador, El Salvador, Guatemala, and Panama. In this last case, the balboa was replaced by the dollar in 1904. Dollarization in Ecuador occurred in January 2000; in El Salvador, a year later January 2001); and in Guatemala, in May 2001, after the Guatemalan Congress approved last December a law allowing free circulation of the dollar as a currency that, in principle, would coexist with the quetzal. The economy of Costa Rica will soon join them, although at the moment, the results of trial experiences are pending.

The rest of the Latin American continent is divided among those that are informally dollarized, those that are on the way there, and those that still have some reservations about joining in. Nations of the size of Argentina, Colombia, Peru, Paraguay, and Honduras are in the process of dollarizing formally. Something similar is happening in Mexico, since its type of exchange is related to "free floating," which has been the rule since the crisis of December 1994 and has become known as the "tequila effect." President Vicente Fox still has not given any favorable signs for complete dollarization of the Mexican economy, but the proximity of and close dependence on the U.S., as well as its participation in NAFTA, makes Mexico easy prey for the dollarizing project.

The case of Argentina is the most explicit, since the so-called Convertibility Plan was orchestrated in 1991 under the presidency of Carlos Menem and the economic leadership of Domingo Cavallo. With this, they "invented" the one-to-one equivalence of the peso and the dollar. Therein lies the key to informal dollarization. The International Monetary Fund (IMF) maintains that a country should be considered dollarized when it has more than 30 percent of its deposits in dollars; in Argentina, there exists overwhelming evidence to consider that the homeland of San Martin [Argentina's national liberator-ed.] has lost a good measure of its monetary independence. Sixty percent of deposits are held in U.S. currency, while 66 percent of bank loans are also made in that currency, and the same is true of 92 percent of public debt and 85 percent of private debt. All it would take is the application of the reforms already imposed in Ecuador, and Argentineans would definitively lose their economic sovereignty.

Paraguay and Colombia are not much different from the preceding example. Guarani economist Cesar Barreto discovered that "in our country, 65 percent of deposits are in dollars, as are 50 percent of private-sector loans. Paraguay is virtually dollarized and the guaranI has completely lost its role as a valuable reserve currency and accounting unit."

Among the states that maintain somewhat more distance from the process of dollarization, Brazil stands out for the moment. Its president, Henrique Cardoso, has declared that Brazilian dollarization is "unthinkable," although he hasn't shut all the doors. This is why he predicts that, "at the right moment," the country can adopt free convertibility as its exchange policy.

Economic sovereignty and international monetary stability

The total and absolute loss of economic and monetary sovereignty is one of the principle characteristics of dollarization, which undoubtedly brings with it a disaster for the political independence of the dollarized nation. At present, the Latin American countries as a whole are tied to the designs of U.S. imperialism, and it is for this reason that they religiously obey the proposals and models that organizations such as the IMF and the World Bank are imposing in the economic realm. But the adoption of the dollar will intensify their subjugation even more.

Any dollarized country will absolutely lose any possibility of designing a politics of growth, of independent development from the United States, or of real and definite attention to the social needs of its inhabitants. Its economic strategy will be completely tied to the U.S. Federal Reserve, which means that national governments will be converted into mere managers or administrators of the U.S. and its multinational corporations The Brazilian economist Theotonio dos Santos explains this clearly:

Such a policy is a rejection of monetary control, of any monetary policy, and lets prices adjust directly to the dollar. But if we don't have funds and there's no liquidity, then the economy doesn't function. The countries that adopt the dollar are going to be in very serious recessions.

The defenders of switching currency assert that the main advantage will reside in the eradication of exchange risk as a factor in price formation, above all in interest rates, such that the country risk and the credit risk would remain attached to the market's perception of the capacity and certainty of payment. But for researcher Ruben Pinero Santana, all of this could lead to a deflation that would be very difficult for the national productive apparatus to assimilate, as a result of its inefficiency and scarce technology. He wrote in his analysis for the Cuban publication El Economista:

It's quite probable that local industry would not succeed in lowering its costs with levels compatible with the fall of internal prices. The result would be the de-capitalization of national enterprises and their eventual replacement by foreign capital.

Looking ahead, the U.S. is continuing to open the path toward the monetary unification of the continent. Toward this end, U.S. professor Steve Hanke has drafted a dollarization bill aimed at Argentina-although this is only one step, since

Florida Republican senator Connie Mack has formulated a project for the dollarization of all of Latin America that is already being discussed in the U.S. Congress. The project, called the International Monetary Stability Act (IMSA), makes clear the alleged advantages that dollarization would produce. These include monetary stability, the lowering of inflation and interest rates to U.S. Ievels, greater economic growth that would stimulate savings and investments, and a strengthening of the financial system. But no one says anything about how a dollarized country could be easily converted into a fiscal paradise for money laundering and counterfeiting.

In this same line of argument, IMSA asserts that such changes would help to stabilize export markets and make them grow faster. It also states that it would give U.S. investors the opportunity to reduce their risk in the face of currency fluctuations in emerging markets and that it would lessen the liability of contributors when agreeing to financial aid to countries with financial problems. Because of its contribution to strengthening the international financial system, IMSA claims that it would increase profits in the United States.

Meanwhile, Guillermo Gil, a specialist in monetary policy at the Central Bank of Cuba, has offered this interpretation:

The total dollarization of Latin America would guarantee the existence, for U.S. enterprises, of steady markets for its products with a minimum of risk and an equally secure place for investments. Moreover, it would mean the complete hegemony of the dollar in the region, to the detriment of the euro, from which it is easy to infer that this is the U.S. response to the economic penetration of Europe into Latin America, and that it would mean the expulsion of European firms and banks from the continent. And it would constitute the most effective "weapon for destroying regional trade blocs-Mercosur- | thus avoiding the emergence of a common currency and the | integration of the region outside of U.S. designs.

In conclusion, the perspective is that the Latin American nations that accept this monster-dollarization-will be converted into colonies that are both integral and useful to the Empire. The governments of these nations will be transformed, as far as the United States is concerned, into mere administrators of second-rate provinces.


Marcelo Garcia is a journalist and member of the Front Obrero Socialista (Socialist Workers Front) in Comodoro Rivadavia, Argentina.

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