In an age of increasing globalization, unlike any before, countries feel more pressure to open all aspects of their economies. There is a large movement towards regionalism in the form of national free trade associations. There is money to make, markets to tap and trade alliances to form. No one wants to be left behind in this revolution. Countries feel the pressure to either join the revolution or fall farther behind developmentally. Dollarization, which is when a foreign country adopts the United States currency as its main form of currency, is at the intersection of these pressures.
The dollar is used for many purposes: it is the most important currency in international trade transactions; dollars are held as foreign reserves more than any other currency; individuals and companies fearful of the stability of their own currency hold dollars to safeguard the real value of their assets. Many contracts in foreign countries - such as leases - are expressed in dollars to protect against national inflation and effective depreciation of the national currency.
The argument often made is that many countries - Mexico is an example - are already de facto dollarized and why Canada not take the next step and dollarize de jure.
Advocates of dollarization suggest that economies that replace their less stable domestic currency with the U.S. dollar experience a lower and more stable inflation rate. A lower and more stable inflation rate, in turn, is expected to lead to a higher level of investment and a faster rate of economic growth. This benefit is larger when the domestic monetary authorities have established a poor track record in maintaining a stable domestic money supply.
Dollarization may contribute to greater economic integration than otherwise would be possible with the United States, or any other country whose currency is adopted.