Chapter 6: Corruption: Is Dollarisation a Solution?
Jennifer S. Holmes and Sheila Amin Gutiérrez de Piñeres INTRODUCTION Dollarisation removes the ability of governments to print money. In theory, dollarisation would limit the opportunity for politicians to use discretionary spending for bribes, private use and wasteful programmes. Under dollarisation, misuse of funds becomes more apparent because every dollar spent on illegitimate uses reduces the amount of funds available for necessary government activities and programmes. It may be easier to hide graft and corruption in countries with national currencies. Endemic corruption hinders development.1 Corruption redirects resources from productive uses to perpetual graft and corruption, resulting in large social welfare losses. Additionally, once corruption becomes pervasive and systemic, it becomes almost impossible to remove. Although some scholars view corruption as conducive to development,2 corruption may undermine institutions and public conﬁdence.3 Previous studies examine the development of dollarisation and the impact of dollarisation on monetary policy and seigniorage.4 This chapter asks diﬀerent questions. How can a society with pervasive corruption change its incentive structure to discourage dishonest and corrupt behaviour? In theory, dollarisation should reduce opportunities for corruption at the federal level.5 Does dollarisation restrict the opportunity for corruption at the federal level by increasing transparency and budget discipline? What is the impact of dollarisation on federal ﬁscal responsibility and corruption? Despite few cases, this chapter provides an initial assessment of the eﬀects of dollarisation. DOLLARISATION BASICS There are two types of dollarisation: demand side dollarisation, when citizens on their own decide to convert their...
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