Which process involves adopting another country's currency as one's own, effectively surrendering monetary sovereignty?

• A. Dollarization
• B. Structural Adjustment Loans
• C. HDI
• D. Maquiladoras

Answer: (A)

Dollarization is when a country adopts another nation’s currency as its own legal tender, effectively giving up its own monetary policy. This means people use the foreign currency for most or all payments, and the country’s central bank loses the ability to set interest rates or control the money supply. The appeal is clear: it can bring immediate price stability and credibility, reduce inflation, lower exchange-rate risk, and make trade with the currency’s country simpler. But the price is high: you sacrifice monetary autonomy, cannot respond with independent monetary easing or tightening during shocks, and you lose seigniorage revenue—the profit from issuing money. Countries often choose dollarization to stabilize an unstable currency and attract investment, hoping the benefits of credibility outweigh the lost policy tools. Real-world examples include nations that shifted toward the U.S. dollar to anchor their economies, such as Ecuador and El Salvador, with Panama operating similarly in practice through its currency arrangements. The other terms don’t describe this process: they refer to policy loans, development indices, or manufacturing arrangements, none of which involve surrendering monetary sovereignty or adopting another country’s currency.