“It’s time for the Colombian government to dollarize”: Steve Hanke, inflation expert


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

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 has depreciated by 7%. Additionally, if you look at the performance of the peso from August 2014 until today, the Colombian currency has depreciated 45% of its value against the US dollar.

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In Colombia, as in any country, certain sectors benefit from the devaluation of the peso. Thus, they cause the currency to lose value, even though this trend hurts most Colombians. However, if depreciation is the key to making a country richer, 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 the devaluation of its currency. Money is only a medium of exchange, and prosperity comes from production; to create value. Devaluation allows companies that are not competitive and do not satisfy international buyers to continue operating without having to restructure.

What proponents of monetary interventionism are actually proposing is to increase exports, not by increasing productivity (which would be an appropriate and correct practice), but by devaluation.

Now intervening to lower the value of the currency may increase exports at first, but sooner rather than later companies that are not competitive will have to reinvent themselves or go bankrupt. Devaluation is so easy that soon there will be a country that will lower prices more than us.

The devaluation benefits a few clusters of businesses that do not want to compete. The costs are borne by their workers whose purchasing power decreases. In addition, workers will have to do without buying imported products which become very expensive following the devaluation of the currency.

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

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The PanAm Post asked the economist the reason for the Colombian peso’s poor performance. His response was as follows:

The Colombian peso has lost 20% of its value in just over a year because Colombians don’t trust the peso. When they look to the future, they feel much more comfortable holding dollars than pesos. So they throw away their pesos and exchange them for dollars. In addition, the US dollar is the international currency of the world. Most commodities and even many manufactured goods are billed and priced in dollars. The world operates on a dollar standard. It’s that simple.

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

Those who believe you can devalue your path 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 which country is the most competitive and the most prosperous? This is Switzerland. This is because, since World War I, the Swiss franc has been the strongest currency in the world, appreciating by 1% per year in real inflation-adjusted terms.

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This means that companies in Switzerland do not embrace the fallacy of devaluation. They know they have to make top-quality products and do so cost-effectively to stay competitive. This is precisely what they do, and the result is a constant flow of trade surpluses. In short, those who embrace the idea of ​​a weak currency are simply not looking at the facts. Instead, they are talking nonsense.

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

The original article “Es hora de que el Gobierno colombiano dolarice: Steve Hanke, experto en inflación” here (in Spanish)

Article originally appeared on Today Colombia and is republished here with permission.

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