“It’s Time For The Colombian Government to Dollarize”: Steve Hanke, Inflation Expert

The renowned economist Steve Hanke, professor at Johns Hopkins University, has given Colombia something to talk about with his proposal to dollarize the economy.

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“The world operates on a dollar standard. It’s as simple as that” (PanAm Post photo montage).

Spanish – “The Colombian peso is in trouble again. It’s time for the government to officially give up the peso and give Colombians what they want: dollars,” the renowned economist Steve Hanke wrote on Twitter a few days ago. The Johns Hopkins University professor has given Colombia something to talk about with his proposal to dollarize the economy.

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As Professor Hanke states, in just over a year, the Colombian peso has lost 20% of its value against the dollar. In the last month alone it depreciated 7%. Further, if you look at the performance of the peso since August 2014 to the present, the Colombian currency has depreciated 45% of its value against the U.S. currency.

In Colombia, as in any country, some sectors benefit from the devaluation of the peso. Thus, they push for the currency to lose value, even though this trend harms most Colombians. However, if depreciation is the key to making a country rich, why aren’t Venezuela or Zimbabwe, with their incredibly devalued currencies, prosperous countries?

The reality is that a country’s wealth does not come from devaluing its currency. Money is only a means of exchange, and prosperity comes from production; from creating value. Devaluation allows companies that are not competitive and do not satisfy international buyers to continue operating without having to restructure.

What advocates of monetary interventionism actually propose is to increase exports, not by increasing productivity (which would be appropriate and correct practice), but through devaluation.

Now, intervening to lower the value of the currency may increase exports at first, but sooner than later, those companies that are uncompetitive will have to reinvent themselves or go bankrupt. Devaluing is so easy that soon there will be a country that will lower prices more than we do.

The devaluation benefits a few business clusters that are unwilling to compete. The costs are borne by their workers who experience diminished purchasing power. Moreover, the workers will have to go without buying imported products that become very expensive following currency devaluation.

Professor Steve Hanke recognizes the poor performance of the Colombian peso and reopens the discussion around the need to dollarize the country’s economy.

The PanAm Post asked the economist the reason behind the poor performance of the Colombian peso. His response was the following:

The Colombian peso has shed 20% of its value in a little more than a year because Colombians don’t trust the peso. When they look ahead, they feel much more comfortable holding dollars than pesos. So, they dump their pesos and exchange them for dollars. Furthermore, the US dollar is the world’s international currency. Most commodities and even many manufactured goods are invoiced and priced in dollars. The world works on a dollar standard. It’s as simple as that.

Professor Hanke was also asked what his message would be for those sectors that persist in defending devaluation:

Those who believe that you can devalue your way to competitiveness and prosperity ignore all economic facts and evidence. If devaluation led to competitiveness and prosperity, Latin America would be the most prosperous region in the world.

So, what country is the most competitive and prosperous? It is Switzerland. It is because, since WWI, the Swiss franc has been the strongest currency in the world, appreciating one percent per year in real inflation-adjusted terms. 

This means that businesses in Switzerland do not embrace the devaluation fallacy. They know that they must manufacture superior products and do so in a cost-effective way to remain competitive. That’s precisely what they do, and the result is a steady stream of trade surpluses. In short, those who embrace the weak currency idea are merely not looking at the facts. Instead, they are talking nonsense.

Professor Hanke is a Professor of Applied Economics at the Johns Hopkins University in Baltimore and is one of the world’s experts on measuring and stopping hyperinflations.

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