Volume 44, Number 175,
October-December 2013
Would a more flexible exchange rate improve competitiveness?
Guadalupe Mántey
Liability Dollarization

Rajan and Zingales (2001) found that export companies are much more dependent on foreign financing, while Baldwin and Krugman (1989) observed that these businesses operate with a greater proportion of liabilities in foreign currency than companies producing for internal markets. In developing countries, the tendency of export enterprises to obtain foreign financing is even greater, due to the following:

  • They cannot obtain foreign debt in their own currency (Eichengreen et al., 2003).
  • They obtain financing at a lower cost than in the local market.
  • They depend less on their collateral to obtain loans in developed financial markets and this is important for when they want to finance intangible expenses, such as the fixed sunk costs of exporting (Berman and Berthou, 2009).
  • Securities issued in foreign currency in developed financial markets are more liquid.
  • They import a considerable amount of their inputs and therefore obtain credit in the currency of their foreign suppliers.

For these companies, the real devaluation of national currency raises the value of their liabilities with respect to their assets, which reduces their wealth and solvency, making refinancing more difficult.

Impaired solvency for export companies can also have negative long-term effects on their competitiveness, because by slowing investment, the increases in productivity that would have been achieved with technical progress and new capital goods are delayed.


The high liability dollarization observed in developing economies has been explained in a variety of ways.

Castaignts (2000, 2004) believes that dollarization in developing economies is the result of tensions in financial markets, where weak currencies only serve the purpose of being a deposit for values subordinated to a stronger currency, which means there is a double monetary circuit. In financial markets, the value of the currency is determined by international power relations, because the local money is convertible into currency. To maintain savings in their national currency, governments of developing countries pay a higher interest rate than those that prevail in developed countries, especially in the United States.

Castaignts does not deny that there are other economic factors that affect dollarization (like the productive capacity of the United States economy, their commercial balance, solidity of their banks, etc.), but he observes that symbolic predictions are extremely important. If economic actors believe that a currency is stable, regardless of the origin of their beliefs, this currency will remain stable.

Yotopoulos and Sawada (1999) also believe that the preference of investors for hard currency is not based on economic factors, but rather on the "asymmetric reputation" of different currency systems. Liability dollarization and the external financial instability of developing economies, they ascertain, are due to the presence of exchange rates where weak and strong currencies compete freely. Investor preference for hard currencies as a safe haven means that strong currencies fluctuate, while weaker ones are systematically devalued.

Aglietta and Deusy-Fournier (1995) reached similar conclusions when studying the factors that determine the internationalization of currencies. They found that following the financial deregulation of the 1980s, the choice of currencies in international transactions no longer depended on the real conditions of the economy of origin, but rather on the size and depth of their financial markets. Larger and deeper financial markets are more liquid, offer a greater diversity of coverage instruments and have lower transaction and information costs than leaner or smaller markets, even when the latter come from countries with healthy and industrialized economies. For this reason, these authors believe that the internationalization of a currency depends on the geopolitical development of the country of origin, as this factor determines the size of the financial markets in which the currency circulates.

Eichengreen et al., (2003) also acknowledges that the size of an economy is an influential factor in the extent to which its currency is used internationally, which led him to write that the incapacity of developing countries to obtain foreign debt in their own currencies is like their "original sin."

By contrast, some authors, such as Calvo et al. (2004) and Reinhart et al. (2003), explain the high liability dollarization observed in developing economies as the result of inadequate policies that fail to promote increased productivity.

Regardless of the cause of the significant liability dollarization found in developing countries, the salient idea is that this feature makes them more vulnerable to adjustments in exchange rates.

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PROBLEMAS DEL DESARROLLO. REVISTA LATINOAMERICANA DE ECONOMÍA, Volume 49, Number 195 October-December 2018 is a quarterly publication by the Universidad Nacional Autónoma de México, Ciudad Universitaria, Coyoacán, CP 04510, México, D.F. by Instituto de Investigaciones Económicas, Circuito Mario de la Cueva, Ciudad Universitaria, Coyoacán,
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