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     Proceso is published weekly in Spanish by the Center for Information, Documentation and Research Support (CIDAI) of the Central American University (UCA) of El Salvador. Portions are sent in English to the *reg.elsalvador* conference of PeaceNet in the USA and may be forwarded or copied to other networks and electronic mailing lists. Please make sure to mention Proceso when quoting from this publication.
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INDEX

Editorial: A worrisome beginning for the new year
Politics: January: a month of confusion, discontent and suspense
Economy: The dolarization of the economy: an unfortunate experiment
 

EDITORIAL

     If one takes as a reference point what happened during the early days of the new year, all does not augur well for El Salvador. Most noteworthy of all is the implementation of the dolarization program, which has caused generalized social confusion and generated fears of various kinds among the populace.  The dolarization program involves three kinds of problems.  The first knot of problems has to do with the clarity —or lack thereof— which might be said to exist among those who are responsible for the implementation of the measure on the issue of the economic proposition which the measure is meant set in motion.  Until now, neither President Francisco Flores nor the members of his economic cabinet have known how to explain, in a convincing way, what it is they aim to achieve with such a level of vagueness and lack of precision: either they aim to confuse public opinion or they do not understand what they themselves are doing.  The practical consequence of this is that the populace has no other alternative than to passively accept a decision, the objectives of which they neither understand nor see how it is meant to resolve their daily problems of survival.

     A second kind of problem focuses on the governmental knowledge of the social impact of the dolarization program.  To the suspicion that the members of the economic cabinet —and even President Flores himself— do not have the economic objectives of the dolarization policy clearly in mind, is added the almost clear certainty of an almost complete lack of understanding of the impact which this abrupt change from colon to dollars will have upon the Salvadoran society.  That impact has a dimension of social apprenticeship which, although it is not perhaps the most relevant, cannot (nor should it) be underestimated as something of only minor importance.  Of course, in either the long or short run, Salvadorans are going to get used to using dollars.  So now then, how long will this learning process take?  The most optimistic among us knows that on the basis of such evidence, a period of time comprehending only a few months is mentioned.  In this, as in all other things —it may be that the period of apprenticeship in how to use dollars may become longer or may turn out to be shorter—, in this we are dealing with mere opinions, supported by nothing more than the optimism or pessimism of the spokespersons expressing them.  The truth is that we do not know how long it will take Salvadorans to become used to using currency other than the colon.

     In examining this apprenticeship, we must begin with an anterior point: while the national currency is not withdrawn from circulation, and as long as it takes to learn to convert colones into dollars and vice-versa, the apprenticeship will not be completely accomplished throughout the national territory.  Take note: we are not speaking of a small number of transactions but of thousands which take place on a daily basis and in which the diverse sectors of the society are involved.  This poses huge practical difficulties which government spokespersons tend stubbornly to ignore.  A minimal dose of common sense is enough to see that the thousands of situations in which an exchange of currency takes place on a daily basis will be slowed down (and are even now being slowed down, by the necessity of making the conversion from colones to dollars, which will create (and is even now creating) bottlenecks, especially in the areas where this massive exchange takes place: in public transportation, supermarkets, markets, food services…. In a society such as the Salvadoran society which is characterized by high levels of aggression, the difficulties provoked by the processes of implementation of dolarization will create new focal points of collective tension, which is not a good thing if what is being sought is the construction of a peaceful living together in society.

     But beyond the complications which this conversion of currency creates in and of itself, there is an additional problem: in significant sectors of the population (above all, in the rural areas) the folks cannot add, subtract, multiply and divide.  And, in order to change coins into another currency, these operations are basic, whether they are accomplished mentally or with the aid of a calculator.  The rural population —it will be said— learned to use the colon and its small change coins.  This being the case, why now, cannot they learn to use the new currency and also learn how to convert one into the other as long as the two currencies are in effect? But this assumption presupposes a particular difficulty for those who, only with luck, can barely sign their name.  It is possible that for the government, the rural sectors do not count when one is speaking in economic terms; therefore, as members of the economic cabinet like to say, the problems which the problems of dolarization bring with it are not “substantial, basic problems”.  When one looks at this phenomenon from the perspective of the whole of society, precisely basic problems are the ones which touch them and which make their living conditions precarious.

     So it is that dolarization —and this is the third kind of problem— threatens to make survival more difficult for Salvadorans, particularly among the poorer sectors.  One should not overlook the fact that  —while the two currencies are in effect— that the prices of the prices of the diverse goods must be converted from colones into dollars.  These last not only do not have an exact equivalence to the Salvadoran currency; they have a higher value.  The inexactitude of the equivalence in exchange rates will require a “rounding off” of the prices, and the most likely is that it will be rounded off to the highest number and, therefore, finally, detrimental to the consumers.

    So now, as it will be a question of an increase in the prices already converted into dollars, the impact will be greater than if it were a question of an increment in colones. Perhaps the theory being used by government economists will explain this to the contrary; but in the current context of El Salvador, it is difficult not to expect generalized abuses of all kinds.  In a situation in which those offering goods and services for sale will be tempted to round off the prices to the higher number, those suffering the consequential adverse effects will be those who depend upon a salary for their survival because they are suffering the loss because of the rounding off to the higher number which affects their income which compensates for the increase in prices which is coming into effect as a result of the dolarization processes.

     In conclusion, dolarization, at least from a social perspective, threatens to become an additional factor in the deterioration of the living conditions of the Salvadoran people.  Aside from their presumed economic benefits —which are still to be seen—, their promoters ought to consider the social impact in a more serious way.  By not doing so, they have failed society yet again.
 

     It would be easy to agree that confusion, discontent and suspense are not good allies for the well-being and successful forward movement of a country at an economic, political and social level.  Nevertheless, these last are the most clearly outstanding elements in national reality as the year begins.  As a result of the entering into effect of the Monetary Integration Law last January 1, confusion among the popular sectors who are obliged to adopt the U.S. dollar as the national currency, the discontent resulting from the dolarization measure of the national currency and the discontent of a good part of the political class are the subject of many and varied debates.

     The opposition parties have, in general, concentrated on denouncing the problem resulting from the fact that the dolarization measure was not presented for consultation before it was implemented.  The idea, according to which such an important decision for the economic and cultural life of the country ought not to be the decision of a single sector has, undeniably, some basis.  If, added to this, is the absence of national studies about the real effects of the measure, the situation becomes particularly worrisome.  Definitively speaking, the unilateral character of the decision to dolarize and the lack of existence of a deep-level discussion concerning its benefits, the serious nature of the struggle and lack of confidence among the political sectors of the countries is laid bare.  For whatever reason, the government party sector and the opposition exclude each other mutually from the discussion of national problems.

     The solution to the sharpening crisis in political leadership has not been found.  The much-publicized consensus building has not been translated into tangible reality.  Mutual accusations of a lack of flexibility and stubbornness between the political parties have been the political norm.  All of this has led to the adoption transcendental measures without any fundamental discussion having taken place and without the approval of society itself.

     At the same time, the population not only lacks confidence in the supposed benefits of the dolarization measure announced, but has also denounced a deficient level of understanding of the rules of currency exchange between the two currencies.  In fact, since the law entered into effect, important social sectors have not taken it up for fear that the consequences of its functioning, as well as because of the lack of understanding of how it is to be applied.  On the other hand, the implementation of the new law has meant a considerable increase in the prices of some products.

     The government administration, then, finds itself in a very delicate situation: it ought to favor the massive use of the dollar in order to take its critics to task, while significant sectors of the population continue to oppose the use of the dollar, but, at the same time, there exist confusion and inconvenience as a result of their lack of knowledge about it.  The argument, which the principal functionaries present, according to which, with time they will solve their problems and reduce their resistance, is very difficult to maintain in the current context.  Time could be the worst enemy of the government sector in these circumstances.  The reiterated denunciation of price increases combined with the resistance to the use of the dollar could carry with it results which could prove to be undesirable for the government —all of which could presuppose a political failure that would favor those who have spoken out against the measure.  For this reason, the time factor could become very important in the transition from one posture to the other.

     The Flores Administration ought to be particularly interested in a continued increase in the volume of economic transactions in dollars.  Flores will be able to convince the Salvadoran people of the convenience of the dolarization process without their having recourse to the denunciations by the opposition only in the measure in which these transactions increase. All in all, one should not lose sight of the fact that the publicity which the opposition has won in the process of the dolarization process has increased much beyond the much touted lowering of interest rates by the banks.  The multiple inconveniences which the currency conversion has brought with it obstruct any possibility of convincing people of the possibility of its positive impact.

     The political weakening of the government administration explains, in good part, the low level of popular support, which it must deal with in the current state of affairs.  The uncompleted promises, improvisation and arrogance have seriously undermined the popularity of Francisco Flores during the course of his administration.  Because of the inconsistencies of their empty discourse, the population has learned not to give it much credence.  That is the reason why the opposition, without any great effort, has been able to win the media battle.  The heavy reaction among the population seems not to be precisely because of the use of the dollar, but because of the fact that the government administration did not even consult them before implementing it and because of the very real effects on their daily life and the possible benefits in its implementation.  People are accustomed to seeing the most publicized measure translated into increased deterioration in their quality of life.

     This last ought to be reason for concern by the political figures in general, including the government administration in particular.  The generalized discontent with the economic measures and the constant devaluation of national policy can bring with it undesirable consequences for the course being pursued towards democratization.  The government’s incapacity to respond to national demands does not contribute to social stability or governability.  This situation, characterized by a growing lack of satisfaction with price increases the deterioration in the quality of life and the low level of confidence enjoyed by political leaders does not augur well for society.  All to the contrary: these are dangerous ingredients, the mixture of which ought to be blocked by the political class.

     While the battle for public opinion continues, the administration must await the decision of the supreme Court with regard to the constitutionality, or lack thereof, of the Monetary Integration Law.  There are great expectations among the opposition forces.  Nevertheless, the question must be asked as to whether it is possible that the Supreme Court might rule against a government administration measure of this stripe?

     From a theoretical point of view, there is nothing to impede a negative decision —that is, one favorable to government interests.  Several Salvadoran constitutional lawyers have made statements on this point.  Not only does the law consider that it is the province of the Judicial Organ of government to rule in cases of this nature, but serious reasons exist to think that the Monetary Integration Law is actually in conflict with the Political Constitution of the Republic.  Nevertheless, the biggest doubt arises at the moment in time in which the Supreme Court on this issue analyzes the antecedents of the measure.  The Court has been characterized, in the past, by its late decisions and silent accomplices.  At crucial moments such as the present one, it ought not simply to demonstrate its technical capacity, but also demonstrate leadership, which would permit it to overcome political pressures.  Is it possible to think that social and juridical criteria might prevail over official influences?  That is the question which the court has to respond to in the coming days.

    As for national interests, a prompt resolution by the highest court of the land on this topic is urgent.  As long as there is no basic and fundamental legal decision in existence, the parties at odds can continue with their push and pull tactics, and so feed confusion and disorientation in the society.  Each side has the right to expect that a decision will be taken in its favor, but no one ought to forget that it is the Supreme Court, which must clarify the situation.

ECONOMY

     This year began with the entering into effect of the Monetary Integration Law, which, in a surprise move, was approved at the end of last year.  Early experiences confirm some of the early projections concerning its effects —especially on the question of the inflationary “rounding off” or conversion of dollars to colones or vice-versa as well as the confusion which reigns at the moment in time when transactions must take place in both currencies.  By the same token, fears that, in practice, the banks might begin to encourage the disappearance of the colon take on real life proportions because only two days after the entering into effect of this particular law, the majority of all banks declared that they “did not have any colones” to effect the transactions which are called for because they only had dollars.  According to the President of the Salvadoran Banking Association, “the colon will eventually have to disappear” because of the normal process of deterioration of the banknotes (colones) currently in use.

     Although two temporary restraining orders alleging the unconstitutionality of the polemical law have been presented, the dollar is becoming the predominant currency, although not without obstacles, which governmental functionaries consider to be “normal”.

     On the other hand, beyond the practical problems, heavy questioning of dolarization persists, as was indicated earlier (PROCESO, 930) and these problems have not been dealt with satisfactorily by the economic cabinet: the fiscal deficit, low level of competitivenes in the economy, weak regulation of the financial system, among other matters.  But even more important is the fact that dolarization also implies the unnecessary renunciation of the possibility of developing a monetary policy and, with this, the possibility of using currency variables to affect real variables (especially in investment and production), such as currency liquidity, interest rates and the growth of credit.

     Among practical problems, the most notorious have been those generated by the public transportation businessmen, for whom the new bus fare must be increased as a product of the already mentioned “rounding off”: bus fare of 1.50 colones (or, 0.17 cents on the dollar) become equivalent to 0.20 cents on the dollar, or 1.75 colones, which represents a 22% increase in bus fare.  Given this, the government decided to fix bus fares in order to avoid increase in fares by using the following formula: 17 cents on the dollar, the equivalent of 1.49 on the colon (which means that the transportation businessmen lose one cent on the colon).  In spite of this ruling, some of the urban microbus lines have decided to increase their fares by 12.5% or 2 to 2.25 colones.

    Expectations of increases in prices include many other activities and, in fact, led the Consumer Protection Agency to implement programs for overseeing the correct manner for “rounding off” prices which, nevertheless, will be insufficient to control increases in prices, which are an inevitable byproduct of the change of currency, as with the already mentioned increase in bus fare rates for public transportation.  The problem will be greater in the informal sector where there will be no greater state controls or managerial capacity to assimilate the change without even greater traumas taking place.

    If the truth be known, the operation and processes for converting dollars to colones and vice-verse would cause confusions for the most tidy-minded mathematician, because the coin denominations of the currencies do not have exact equivalents and at one time or another, everyone will have to pay either more or less than the real price of the product.  By the same token, businessmen will have to charge more or less than required by the exact conversion.  This problem is especially noteworthy when it comes time to make conversions between coins and banknotes, which are in colones, to their equivalent in dollars.  For example, the 50 colon banknote is equivalent to 5.714 collars, but, in practice, the exchange takes place for 5.71 or 5.72 dollars, depending on the approximation used.  According to the government administration, the correct amount would be 5.71 dollars, which implies that half a cent on the dollar (or four on the colon) will be lose for every exchange of a 50 colon banknote.  On the contrary, some few coins are obtained when exchanges take place in the category of 25, 100 and 200 colon banknotes.  These practical problems do not occur when there is an exchange of dollars for colones, given that the exact coins are available in that currency.

     Be that as it may, one has to admit that the inflationary effects and practical problems caused by dolarization will be overcome in the short run, depending on how rapidly the withdrawal of colones from circulation takes place and how rapidly prices and transactions in dollars are in force.  The principal mechanism for adjustment will be when prices go up all at once at an accelerated rhythm of growth during 2001, but in the medium and long range is to be perceived a more deeply rooted problem related to the uncertainty caused by the new economic dependence on the U.S.

     We call this economic dependency “new” because it is not a question of the flow of technical assistance, donations and bonds that are traditionally sent by the government of the U.S. It is, rather, more practically, a question of a monetary policy which is being dictated by the currency authorities of that country, as has been insinuated since January 4 when the Federal Reserve (FED) of the United States —which plays the role of the Central Reserve Bank— announced that it would reduce the interest rates by a total of 0.5, jumping to 6.5% to 6% for inter-bank loans.

     According to a communiqué attributed to the Federal Reserve, it has been established that the decision was taken “in the light of a major weakening in sales and production, and in the context of lesser confidence among consumers, conditions adjusted in some sectors of the finance markets and the high prices for energy”.  One notices immediately how the U.S. —which has one of the most prosperous economies in the world and from where, as of now, our currency and legal tender is being emitted— still uses currency policy to confront economic problems as with the reduction in the production growth rates.

     On the other hand, what the apologists for the dolarization of the Salvadoran government are proposing is the elimination of currency and exchange policy once and for all.  They have been working on this in a more subtle way all along, as when they refused the Central Reserve Bank of El Salvador the right to fix the interest rates as the FED itself does, without the slightest concern, in order to conjure up possible decelerations and/or economic recessions.

     On the other hand, in El Salvador, there is a pretense of an attack on economic deceleration through the use of dolarization which it is hoped will reduce risk in the country and active interest rates so that, in this way, a process of stimulating investment and production is put into effect.  The option for using currency policy to confront a cycle of slow growth has been practically laid aside, in spite of the fact that it was begun in 10996 along with the implementation of a restrictive currency policy.

     For the moment, private banks have only reacted by lowering their passive interest rates (or, those paid on deposits) and leaving active rates unaltered (those charged on credit), which will obviously increase their profits but will generate no benefits for the majority of the population;  there will, rather, be a negative effect on those who have savings accounts.

     The recently sketched out reduction of interest rates adopted by the FED will cause, according to the President of the BCR, new reductions in local interest rates, but what is certain is that as long as active interest rates are not substantially reduced, dolarization will not be more than a simple and unfortunate experiment, the only permanent consequence of which will be the elimination of the colon and the monetary policies and the currency exchange policies.

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