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Trust, Freedom, and Wealth Creation: A Political Economy of Dollarization in Lebanon

By Armen Papazian | October 17, 2005

Abstract: This paper explores currency substitution in Lebanon within the context of the recently growing debate on dollarization. Indeed, a number of distinguished scholars have lately made the case for full dollarization following its adoption in Ecuador (2000) and El Salvador (2001). This study, one of the very few focusing on Lebanon, looks at deposit, broad money, private liability, and public debt dollarization ratios and finds that Lebanon, when compared to Latin American countries, ranks 5th in deposit dollarization and 2nd in liability dollarization alongside Nicaragua. The study also reveals that dollarization ratios have stayed persistently high despite declining inflation rates and high real returns on Lebanese Pound denominated assets. The paper suggests a political economy based interpretation of the persistently high rates of dollarization, and finds that the latter seem to be a market imposed monetary condition, a response to the unfree and co-opted nature of the state. Indeed, it is possible to argue that currency substitution gives domestic consumers the necessary protection from local wealth-destroying policies. Moreover, dollarization is evidence of a freedom of choice, which is inline with free market economics. While advocates of dollarization perceive the process as the least bad alternative, I suggest that it is in fact the worst alternative to learning the tools and techniques of domestic wealth creation.

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Read More: Debt, Economy, Finance, Lebanon, Middle East

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