The Buck Does Not Stop Here

In a land where old struggles with the United States linger ghostlike in the public psyche, Raymundo Winkler offers an almost unnerving vision for the future.

“Maybe we would have coins with the faces of our Mexican heroes for use in parking meters,” declares Winkler, who heads the largest council of industries in Mexico City. “But the dominant currency obviously would be the U.S. dollar.”

Remarkably, his voice is blending with a larger chorus throughout the Americas.

At dinner parties in Caracas, news briefings in Mexico City, and political speeches in Buenos Aires and other cities, opinion leaders are debating a notion that would have seemed unthinkable not long ago: linking their economies, indeed their financial destinies, to the very symbol of Yankee capitalism, the dollar.

If emerging nations were to cast aside their own crumbly currencies for the muscular greenback, the thinking goes, they would be shielded from the demoralizing spasms of inflation and recession that rack their societies with numbing regularity. And if the price of shelter from the storm is surrendering crucial financial powers to the U.S. Federal Reserve, they are saying, in effect, so be it.

“It is a step that Salvadoran society should take,” outgoing President Armando Calderon Sol of El Salvador said recently.

Argentina, the second-largest economy in South America behind Brazil, is leading the way, and President Carlos Menem has urged an official shift from pesos to dollars as his top economic priority.

Elsewhere, the conversation is more preliminary and can still spark a heated, nationalistic backlash.

Nonetheless, the start of any debate at all is a resounding sign of a world in flux, an example of the agonizing choices that sovereign nations confront in an era when they often bounce around like loose change in the pocket of a giant global economy.

Just last week, a group of Mexico’s leading business executives called on President Ernesto Zedillo to shift his economy broadly into dollars, a goal sought increasingly by business groups throughout Latin America.

At the same time, the influential Inter-American Development Bank was urging nations of the hemisphere to start using dollars instead of their own shakier money, or perhaps even to create a new regional dollar-linked currency bearing the likeness of, say, Christopher Columbus.

“Given their historic distrust of the Yankee neighbor in the north, it’s quite remarkable that any of them would be willing to surrender such an example of nationhood” as their currency, said Benjamin J. Cohen, a political economist at UC Santa Barbara and author of “The Geography of Money,” a book about international monetary issues.

Yet more and more countries are “coming to the conclusion that the cost of maintaining a national currency--no matter how satisfying to their emotions--has simply become too high to bear,” he said.

Further inspiring champions of the dollar is the example of Europe, where 11 nations this year began to phase out their familiar currencies in favor of the new euro. While such an elaborate regional accord remains out of reach on this side of the Atlantic, U.S. officials are wary of a more ad hoc rush to dollars, perhaps in some future financial crisis. In theory, at least, a stampede could develop without U.S. approval, unleashing new pressures on Washington to alter its own monetary policies for the benefit of beleaguered neighbors.

Throughout the Americas, meanwhile, countries are quietly watching the experience in Argentina, which has shored up its peso with huge dollar holdings since 1991 and where the U.S. currency already is widely used for rent, home purchases and a broad range of everyday transactions.

“We’ve had discussions with virtually all the countries in the region about our policies and different monetary arrangements,” said a senior official of Argentina’s central bank, which is working out the final details of its “dollarization” plan.

As some Latin America specialists see it, a move by Argentina to run its economy entirely on U.S. money could be the first step in a more profound hemispheric shift toward the greenback.

“If Argentina goes, I see Uruguay, Paraguay, Bolivia and maybe Peru,” says Guillermo Calvo, a Latin America expert at the University of Maryland. “If Mexico goes for it, I can see Costa Rica and the rest of Central America going for it.”

Steve H. Hanke, an economist at Johns Hopkins University who has championed switching to the dollar to Menem and other foreign leaders, declares flatly: “In five years, most of the economic activity in Latin America will be dollarized.”

Dollarization is a murky term. A nation can choose to use dollars without any special arrangement with Washington, as Panama and Liberia do and as Israel pondered doing in the early 1980s. Canadians also have kicked around the idea of the U.S. dollar as a common currency for North American Free Trade Agreement signatories Canada, the U.S. and Mexico.

Or, like Argentina and Hong Kong, a country might establish a “currency board,” in which it backs up domestic cash with large dollar holdings, in effect relying on the greenback’s solidity to maintain investor confidence in its own money.

In a currency zone or union, a group of countries would share a common form of money, such as the U.S. dollar or the euro, rather than maintaining individual currencies of their own.

Whatever the variant, countries that quit making their own money give up some of the fundamental privileges that go with being an independent nation: the ability to manipulate the money supply, exchange rates and interest rates, all of which can be used to speed up or slow down an economy and defuse fierce political pressures.

Dollars, in other words, come with a price. But in a global economy, emerging nations face an arguably steeper price should they lose the confidence of investors.

“This is the new world in which they find themselves,” said Raul A. Hinojosa, director of the North American Immigration and Development Center at UCLA, “and their choices become much starker.”

Here in Mexico City, the allure of a stable new currency--even from the gringos’ own central bank--is obvious. Yet the cost of such a move, psychic and otherwise, is obvious as well.

The peso crisis of late 1994 and 1995 remains a painful memory for everyone from blue-collar workers knocked far down the wage ladder to business executives whose firms have yet to make up the lost ground.

Last fall, with investors panicky about the security of emerging economies, Mexican interest rates rocketed to 50%. The peso, meanwhile, lost about a quarter of its value against the dollar, a direct assault on the purchasing power of ordinary Mexicans. The peso has since recovered, but people remain uneasy.

At the Tacuba marketplace in the Mexican capital, not far from the towering Corona brewery sign that looms against a gray, industrial sky, merchants provide witness to the wrenching ups and downs of the peso economy. Osvaldo Arellano Rodriguez takes a break from the stand where he sells watches, batteries and headsets to consider what it would mean if the U.S. dollar became legal tender.

“If that was the case, you wouldn’t always have to be changing pesos for dollars and dollars for pesos,” said Rodriguez, 27, clad in a Pittsburgh Steeler football jersey. But he touched on a different feeling as well, one that goes far deeper than mere financial calculation: “The peso is Mexican--and we’d be losing something of ourselves.”

Nearby, at a booth where video games, CD-ROMs and remote-control toy cars were neatly lined up, another vendor blasted the peso without remorse, noting Mexico’s recent history of currency devaluations, inflation and declining purchasing power.

“What matters most is to eat,” said Dazhid al Yashid, 33, a native Mexican who has adopted an Islamic name. “The only thing we produce here,” he added bitterly, “is cactus.”

It is a lament that echoes through much of Latin America: People work hard to scrape forward, only to be shoved back by the battering ram of inflation, high interest rates and unemployment.

Mexico’s 18% inflation last year was tame in comparison with the triple-digit rates in Argentina and some of its neighbors some years ago, though such a rate would be a scandal in the United States. Even now, the purchasing power of the average Mexican worker is less than what it was in the early 1980s.

At Plaza Polanco, a gray-marbled mall where soft, piped-in music makes a striking contrast to the din of television sets in gritty Tacuba, a similar division of views is evident. Even among the well-dressed office workers, there is ambivalence.

Rushing to a business meeting, a green blazer draped over his shoulder, travel agent Jose Castro sees advantages in shifting to the dollar. “We won’t be dependent on so many changes in the worldwide environment,” said the 38-year-old. “ . . . We will be a little stronger.”

But at the mall’s Beverly Hills Workout center, Elvia Vargas pointed to her head and said that a shift out of the peso might make sense for Mexico. Then the grade-school teacher, 41, pointed to her heart and added, “But here’s where it gets more complicated.”

If the peso crisis set the stage for the dollar debate in Mexico, it took the turbulent financial winds of last year to push the matter forward. Mexican leaders, who believed they had stuck to responsible economic policies, were chagrined to see that bad news out of Asia, Russia and Brazil somehow threatened their own fragile economy.

In quiet conversations with business executives and journalists, central bank officials floated the proposal of phasing in dollars as Mexico’s currency, or at least using dollar guarantees to shore up the peso. But rather than remain an arcane matter of interest to a few financial enthusiasts, it rocketed into the public consciousness as a major news story.

To the surprise of many, public opinion polls suggested widespread support for the idea of dollarizing. One survey of more than 1,500 radio listeners found 87% approval for some linkage between the Mexican and American currencies, although analysts note that support declines sharply when the issue is framed in terms of losing national sovereignty to America.

Publicly, Mexican financial officials continue to oppose the idea. But “most of them in private are totally in favor of moving in that direction,” maintained Luis F. Rubio, a prominent Mexican political scientist.

If some see the spread of dollars as a triumph for American stature in the hemisphere, officials in Washington are actually quite leery of the whole matter. Dollarization, they fear, could lead to unwelcome new pressures on U.S. monetary policy. Even the perception of such pressures could affect financial markets and lead to misunderstandings of U.S. interest rate policies, they caution. It could also be a possible new source of resentment toward Washington, they say.

Already, U.S. officials have signaled strong resistance to Washington taking on new obligations for countries that might embrace the dollar. In a dollarization treaty, for example, the U.S. Federal Reserve could be asked to perform special services for other countries in crisis, such as helping to rescue foreign banks.

“We have to be particularly careful to remember that our monetary policy is first and always for the United States,” Fed Chairman Alan Greenspan told the Senate Banking Committee last month. His remarks made headlines in Latin America. Greenspan noted that while “a broadened dollar market would clearly have stabilizing effects, and that is positive,” the United States should not be “perceived as creating a safety net” for countries that switch to dollars.

But even without U.S. sanction, advocates say a nation could benefit from using dollars: It would enjoy much of the stability that goes with America’s currency, appear more attractive to foreign investors and become immunized from the inflationary outbreaks that might beset a weaker currency.

And yet, there’s that price to pay for countries that would switch entirely to dollars: loss of control over much of their economic destiny.

For example, the U.S. economy might be chugging along nicely while a dollarized Venezuela was plunging into recession. The Venezuelans might wish for lower interest rates and an expanding supply of dollars, but the U.S. Fed would be loath to oblige.

Countries that stopped making their own money would suffer other costs as well. Printing money can itself be profitable when it comes to such matters as the cost of operating government. Argentina, for example, estimates that shifting entirely to dollars would cost it $750 million a year through the loss of such benefits.

On top of all that, a country that relies on the currency of another could become vulnerable to financial coercion. When the Bush administration lost faith in the Panamanian regime of Manuel Noriega, U.S. officials attempted to cut off his supply of dollars, a move that met with mixed success, experts say.

“In effect, what they did was freeze the supply of dollars to the Panamanian economy,” political economist Cohen said.

But dollar boosters are unmoved. For countries struggling to thrive in today’s volatile global economy, the benefits of stability, they argue, would outweigh the drawbacks.

For some, the goal is a dollar zone, much like Europe is doing with the euro, or a regional scheme building upon the North American Free Trade Agreement, in which neighboring countries share a common currency and try to coordinate economic policies, all for the goal of broad, regional stability.

In his 16th-floor office suite with a commanding view of bustling Mexico City, Carlos Gomez y Gomez is among those who share the vision.

“I think we have to start to talk about a monetary union,” said the president of the Mexican Bankers Assn. and chairman of Banco Santander Mexicano. “Every day it’s a smaller and smaller world.”

As with much of Latin America, Gomez looks upon financial partnership with the U.S. as a means to help lift up his still-poor country at a time when there is no escape from a relentless global economy. The issue is not ideology, nor is it about a blind devotion to the United States. It’s a matter of dollars and cents.

“The closer we can get to the United States--being the first economy in the world--our people and our nation will be better off,” Gomez maintains.

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Times staff writer James F. Smith and researcher Greg Brosnan in Mexico City, Rio de Janeiro bureau chief Sebastian Rotella and researcher Vanessa Petit contributed to this report.

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Latin Dollars?

Latin American nations are considering casting aside their volatile currencies in favor of the muscular greenback in an effort to shield themselves from the turmoil regularly visited on their economies.

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Mexican Peso

Mexico’s unreliable peso and close ties to the U.S. have prompted support for adopting the dollar--or at least using dollar guaran-tees to stabilize the peso.

Pesos to the dollar

Thursday: 9.52

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Argentine Peso

Argentina has enjoyed a stable currency since it pegged its peso to the dollar, backed by dollar reserves, starting in 1991.

Pesos to the dollar

Thursday: 0.995

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Brazilian RealBrazilian officials are weighing “dollarization” after experiencing significant economic fallout from the Asian crisis last year.

Reals to the dollar

Thursday: 1.725

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Sources: Bloomberg News