Today in the Wall Street Journal, economist Judy Shelton suggests that Latin American countries adopt the US dollar. She weighs in on the pros and cons of dollarization as a regional phenomenon. Ms. Shelton argues that “Greater financial stability and rapid development in emerging-market nations within our hemisphere could serve US national interests as shared prosperity strengthens political alliances.” And Ecuador, one of the United States’s closest allies in South America, is a case in point.

This month marks 26 years since dollarization came into effect in Ecuador. Since adopting the dollar on January 9, 2000, the country has enjoyed the longest period of monetary stability in its republican history. Ecuador’s dollarization is a success story little known outside the country and little appreciated within it: economic stability coexisting with high political volatility.

The deepest financial crisis in Ecuador’s republican history occurred in 1998–1999 and can be traced back to a fateful decision made by President Oswaldo Hurtado in 1983: the bailout of banks through the assumption of private external debt by the government, thus expanding the role of the Central Bank of Ecuador (BCE) as lender of last resort. This led to a massive transfer of wealth to bank owners. Dollarization eliminated the perverse incentives that affected the behavior of bankers and politicians, decoupling public finances from the private financial system.

...read more at cato.org