Two decades of dollarization in El Salvador: pains and gains in a road less traveled

Abstract

This chapter examines the effects of two decades of dollarization on the Salvadorean economy and its perspectives. The first section presents the arguments that were used, mostly by the government decades ago, to support the adoption of the dollar as legal tender, as well as its theoretical premises. The second section analyzes the performance of the Salvadorean economy since then, identifying the extent to which the dollarization promises on growth and stabilization were fulfilled or not. The third section discusses the implications of dollarization on the binding constraints on the economy's long-term growth, mainly on the balance of payments constraint. Finally, the chapter concludes with our thoughts on the road ahead for El Salvador's economic growth, particularly in light of the recent approval of Bitcoin as legal tender.