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What is a Dollar Drain?

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  • Written By: Mary McMahon
  • Edited By: O. Wallace
  • Last Modified Date: 06 September 2016
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The term “dollar drain” is used to refer to a situation in which a nation is importing more than it is exporting, causing a net transfer of its assets overseas. The “dollar” is often taken to be a reference to the United States dollar, although technically any country can experience a currency drain. As a general rule, a prolonged dollar drain is viewed as a bad thing, and many countries will take steps to correct a currency drain if necessary.

A number of situations can lead to a dollar drain. For example, a country with prohibitive labor laws might import large amounts of cheap consumer goods from countries with more lax laws which permit the cheap production of such goods. A dollar drain can also occur when a country's infrastructure is limited, making it difficult to manufacture goods or produce food domestically. Dollar drains also occur when a nation has a surplus of something the rest of the world wants, like oil, along with extensive infrastructure which allows it to produce things domestically, allowing the country to charge a high price without needing to import goods and setting up a situation in which currency only flows in one direction.

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There are a number of reasons why a dollar drain can cause problems. The first has to do with a basic reduction of liquidity. The less of its own currency a country has, the less ability it has to cope with market fluctuations. A dollar drain can result in a mild economic depression as a result of less funds being available for use domestically, and it can also pin a country into a tight spot, when goods become available and it can't afford them because its assets are tied up elsewhere.

Some people also fear that dollar drains enrich some nations at the expense of others. This is a major concern with oil-producing countries, many of which are quite wealthy, and some of which harbor terrorists who are undoubtedly funded with oil dollars. To attempt to stave off a dollar drain, a country may curtail imports until the import/export balance stabilizes, or it may promote foreign investment, in the hopes of creating a flood of capital.

Encouraging foreign investment also has its dangers, however. Some countries have lost domestic control of valuable resources by opening themselves to foreign investment, meaning that they do not profit from oil fields, mineral deposits, and other domestic resources. As a result, the dollar drain can sometimes become even more severe, as the country has little left to bargain with, and it may be forced to import large amounts of food and consumer goods to sustain the citizens.

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