The Dollar Killed Inflation in Ecuador and El Salvador. It Didn't Buy Growth.

Start with what each side gets out of the decision. Giving up your currency takes one law and one afternoon. Building courts that enforce contracts, and fiscal rules that survive an election, takes decades. A politician who can buy the first and call it the second has an obvious incentive to try. Javier Milei campaigned in 2023 on replacing the Argentine peso with the US dollar and closing the central bank [1], and the case for it still rests on the same promise: import a credible money and growth will follow. My thesis is that the record contradicts that promise. Full dollarization gave Ecuador low inflation and gave El Salvador cheaper credit. In neither country did it raise trend growth relative to its regional peers. The binding constraint on investment was never the currency. It was the set of institutions a dollar cannot bring with it.

I came into this with a stated position, confidence 0.65, that dollarization lowered inflation in both countries but did not raise their trend growth. The data mostly back the growth half. They also correct me on inflation in El Salvador, and I report that below rather than bury it.

How I built the numbers

Before arguing from growth rates I should say how they are made. Every growth figure below comes from World Bank series in constant 2015 US dollars: GDP per capita (NY.GDP.PCAP.KD) [2], consumer price inflation (FP.CPI.TOTL.ZG) [3] and total GDP (NY.GDP.MKTP.KD) [4]. For a window from year 0 to year T, I compute the average annual log growth rate

$$g = \frac{\ln(Y_T / Y_0)}{T}$$

by hand from the levels the World Bank publishes. This is not Lab output, and anyone can reproduce it from the endpoints I quote. Two construction warnings matter here. First, constant-price series are the only fair ones. Ecuador's GDP measured in current dollars was crushed in 2000 by the sucre's collapse, so any "Ecuador quadrupled its income" chart drawn in current dollars mostly measures the exchange-rate crash it starts from. Second, per capita and total growth can rank countries differently when populations grow at very different rates. That happens in Central America, as you will see.

El Salvador: a growth gap the dollar left alone

El Salvador adopted the dollar in January 2001. Before that it already ran a fixed exchange rate through the 1990s, which is the comparison Andrew Swiston's IMF working paper uses [5]. Here is total real GDP growth before and after the switch, against three regional economies that kept their own currencies.

Country	1993 to 2000	2000 to 2019	Gap vs El Salvador, before	Gap vs El Salvador, after
El Salvador	2.7%	2.0%	n/a	n/a
Guatemala	4.0%	3.4%	1.3 pts	1.4 pts
Costa Rica	4.3%	4.0%	1.5 pts	2.0 pts
Dominican Republic	5.6%	4.8%	2.9 pts	2.8 pts

Average annual log growth of GDP, constant 2015 US$, computed by hand from World Bank levels [4]. Example: El Salvador 2000 to 2019 is ln(25.78/17.62)/19 = 2.0%.

That table is the cleanest unplanned natural experiment I know of in this debate. Growth slowed everywhere in the region, so the before-and-after drop for El Salvador alone tells you little. The gap is what matters, and it barely moved: about 1.3 points behind Guatemala before and 1.4 after, 2.9 behind the Dominican Republic before and 2.8 after. Costa Rica pulled further ahead. If the dollar had removed a binding constraint, the gap should have narrowed. It did not. Robert Looney's survey reaches the same verdict from a different series, putting pre-dollarization growth at 4.4% for 1993 to 2000 and saying that average growth "fell by half" after 2001 [6]. My World Bank endpoints give a lower pre-period figure than his, which is one more reason to compare gaps and not levels.

The per capita series tells a different story, and it is worth a moment because it is a construction effect. From 2000 to 2019 El Salvador's GDP per capita grew 1.76% a year, ahead of Guatemala (1.41%) and Honduras (1.65%) but behind Costa Rica (2.72%) [2]. Subtract per capita growth from total growth and El Salvador's population grew by roughly 0.2% a year, against about 2% in Guatemala. My reading, which is interpretation and not a computed result, is that emigration flatters the denominator. A country whose workers leave can post respectable income per head without producing much more. Nobody should credit that to the currency.

Dollarization did deliver something. Swiston estimates it lowered commercial bank interest rates by 4 to 5 percentage points by removing currency risk, saving the private sector about half a percent of GDP a year and the public sector about a quarter [5]. That is a real gain. It just did not show up as faster growth relative to neighbors. Looney notes that the foreign investment the cheaper credit was supposed to attract never arrived [6].

Now the correction to my own position. I claimed dollarization lowered inflation in El Salvador. It hardly could have. CPI inflation averaged 2.46% in 1997 to 2000 under the peg and 2.38% in 2001 to 2019 under the dollar (simple means of the annual World Bank figures [3], computed by hand). The peg had already done the disinflation. I withdraw the El Salvador half of the inflation claim. The Ecuador half stands, and it stands strongly.

Ecuador: a rebound, an oil boom, and then the bill

Ecuador dollarized in January 2000, in the middle of a banking collapse. CPI inflation was 52.2% in 1999 and 96.1% in 2000, fell to 12.5% by 2002, and averaged 3.1% from 2004 to 2019 [3]. In the five years before the switch, 1995 to 1999, it averaged 33.3%. Nobody serious disputes that this was the dollar's doing.

Growth is less clear-cut, and I want to show the version of the numbers that hurts my thesis first.

Country	1993 to 2000	2000 to 2014	2014 to 2019	2000 to 2019	2000 to 2019, per capita
Ecuador	1.7%	4.7%	1.3%	3.8%	2.2%
Colombia	2.2%	4.3%	2.4%	3.8%	2.5%
Peru	4.5%	5.3%	3.1%	4.7%	3.7%

Average annual log growth, constant 2015 US$, computed by hand from World Bank levels [2][4].

Read naively, the total GDP columns show Ecuador catching up: 0.5 points behind Colombia before dollarization and level after, 2.8 points behind Peru before and 0.9 after. That is the strongest case against me in the raw data, so here is why I do not read it as a change in trend.

The pre-period is selected on a crash. Ecuador dollarized because 1998 and 1999 were catastrophic, so any window that ends in 2000 includes the hole and any window that starts in 2000 includes the climb out of it. That is mean reversion, not a new growth rate. Then the post-period splits in two. From 2000 to 2014, a long oil boom, Ecuador outgrew Colombia by about 0.4 points a year. From 2014 to 2019, after oil prices fell, it grew 1.3% against Colombia's 2.4% and Peru's 3.1%. Its GDP per capita fell from $6,055 in 2014 to $5,971 in 2019 [2]. Looney says the same about the earlier good years: they were "probably fueled by the oil boom rather than adoption of the greenback" [6]. A commodity exporter without its own exchange rate does well when the commodity does well and has no shock absorber when it falls. Per head over the whole period, Ecuador grew more slowly than both neighbors.

Peru is the counterexample I like best, because it cuts against my own camp as well. Peru kept the sol, ran an inflation-targeting central bank, and averaged 2.9% inflation from 2004 to 2019, slightly below dollarized Ecuador's 3.1% [3]. It also grew faster in every window above. Name the country that proves you need the dollar to stop inflation in the Andes. It is not Peru.

The dollar removed the printing press, not the borrowing

The theory says dollarization imports discipline: with no central bank to finance it, a government must balance its books. The record shows it removes one way of financing a deficit and leaves the others open.

Ecuador defaulted in December 2008, under the dollar, when Rafael Correa called part of the foreign debt "immoral and illegitimate" and stopped payment [7]. In August 2020, after oil prices and the pandemic hit together, it restructured $17.4 billion of bonds [8], a restructuring Bloomberg's own headline later called a default [9]. That is two credit events in twenty years without a single peso, sucre or printing press involved. El Salvador's public debt peaked at about 85% of GDP in 2024, and in February 2025 the IMF approved a 40-month arrangement of about $1.4 billion, conditional on raising the primary balance (the budget balance before interest payments) by about 3.5% of GDP over three years [10]. A fiscal rule enforced by a creditor in Washington is still a fiscal rule the country did not produce on its own.

This is Hirschman in monetary form. Dollarization closes the exit a government used to take, which was inflating away its obligations. It does nothing to strengthen voice, meaning the courts, legislatures and audit offices that would stop the borrowing in the first place. So the pressure moves to the exits that remain: external debt and, when that fails, default. Luis Rivera-Solis put the El Salvador conclusion bluntly: dollarization "does nothing to resolve structural and institutional problems" [11].

The strongest objection: the counterfactual was Argentina

I owe the other side its best case. It is not that dollarized countries grow fast. It is that they avoid catastrophe, and that the right comparison for Ecuador is not Colombia but the populist path Ecuador would otherwise have taken.

Two pieces of evidence support it. Leonardo Vera and Bryan Perez build a synthetic control for Ecuador, a weighted mix of countries chosen to match its pre-2000 path. They find GDP per capita about 9.69 percentage points above that counterfactual after dollarization [12]. Nicolás Cachanosky argues that the dollar acted as a "populist shield". Under Correa from 2007 to 2015, Ecuador's real GDP per capita grew 2.20% a year against Argentina's 1.59%, with inflation around 4% against Argentina's 23% [13]. He puts the growth cost of populism at 0.8 to 2.2 points a year for Ecuador and 0.7 to almost 5 points for Argentina [13]. That is a serious argument, and on inflation I think it is simply right.

It does not, however, contradict my thesis. It concedes it. Vera and Perez report that the effect follows an inverted U: it is "very powerful at the beginning but fade[s] out over time" [12]. A gain that peaks and then fades is a one-time level effect from ending a monetary crisis, not a higher trend growth rate. Cachanosky's own limits section says dollarization "cannot prevent populist rhetoric from deterring foreign investment" and does not touch the institutional fragility underneath [13]. Insurance against the worst outcome is valuable. It is a different product from growth, and selling one as the other is the problem.

Panama, the usual trump card, works against the growth claim too. Panama has used the dollar since 1904, and from 2000 to 2019 its GDP per capita grew 4.33% a year, best in the region [2]. But the same currency sat under a collapse: GDP per capita fell from $5,803 in 1982 to $4,563 in 1989, a drop of about 21% [14]. One currency, two opposite decades. Whatever explains the difference, and I suspect the canal handover and the institutions built around it, it was not the money.

What follows, and who pays for it

If I am right, an Argentine dollarization should be judged by what it can do: lower inflation fast, which Ecuador's record supports, and cut borrowing costs, which El Salvador's supports. Expect no lasting growth premium over Chile, Uruguay or Brazil unless contract enforcement and a binding fiscal rule arrive separately, and the dollar will not deliver them. Argentina already has its own record on how much of its official statistics to believe, as my post on its shelved inflation basket argued, and the effort that goes into measurement and courts is the effort a currency switch tempts governments to skip.

Who pays for it? Ecuador from 2014 to 2019 answers that. When a dollarized commodity exporter is hit by a price shock, it cannot devalue, so the adjustment falls on wages, jobs and public spending, and after that on bondholders. My confidence in the growth half of my thesis rises: about 0.75 for El Salvador, about 0.55 for Ecuador, where the oil cycle and the crisis rebound make the evidence muddier. What would change my mind is a synthetic control for El Salvador, or for Ecuador estimated outside the oil years, that shows a growth gap still widening in the country's favor fifteen years after the switch. I have not seen one. Until someone produces it, the dollar is a cure for inflation that gets sold as a growth policy.