When the world gets closer.

We help you see farther.

Sign up to our expressly international daily newsletter.

Economy

How Dollarization Saved Ecuador's Economy

When Ecuador ditched its currency for the dollar in 2000, it deprived governments the possibility to overspend, and gave ordinary people control of their money.

Counting dollar bills in a market in downtown Quito, Ecuador
Counting dollar bills in a market in downtown Quito, Ecuador
Mauricio Ríos García

-OpEd-

LA PAZ — This month marks 20 years since the most successful monetary policy in Ecuador's history: dollarization and the shutting down the Central Bank. While some still criticize the move, and the former president even tried to reverse it, the economic benefits of dollarization are clear. On this anniversary, it's worth looking more closely at what the move has meant for the country.

Dollarization in Ecuador, which officially took place on Jan. 9, 2000, has been the subject of myths and speculation. The same can be said for the role of the currency and the Central bank in the economy, the nature of inflation, or how exchange rates can affect exports and a country's competitive profile. These have been of relevance at least since the mercantilist system of the 15th and 16th centuries.

Dollarization's first and foremost success since imposed in January 2000, was to check inflation and the so-called "inflation-tax." That is effectively a tax that needs no parliamentary approval and would have allowed someone like President Rafael Correa, who wanted to recover the Sucre currency, to lay his hands on the savings of people forced to use the old currency.

Likewise as the analyst Gabriela Calderón has said, one of dollarization's biggest benefits was to eliminate any possibility of public finances affecting the banking and financial system. With a fiscal crisis equal to or worse than Argentina's today, Ecuador most likely would have had to devalue the Sucre countless times as a public financing mechanism. Dollarization makes it impossible for currency devaluation to slide toward a typical financial crisis.

Private investment would be even more costly with a highly volatile national currency.

Another myth is that dollarization has made Ecuador's productive structure more costly, yielding bad results in terms of competitiveness. Yet if reduced competitiveness were due to the exchange rate, Ecuador could not benefit from the current state of globalization as it does, without dollar-priced products. As in Bolivia, Ecuador's relatively low competitive profile is due to its rigid labor regime, taxes, highly protectionist trade policies, and a hyper-regulated and obsolete banking and financial system. Private investment in Ecuador would be even more costly with a highly volatile national currency.

Why was it practically impossible for Correa to renationalize the currency? Because in contrast with the Argentinian convertibility plan in the 1990s under President Carlos Menem, the dollars were not in the hands of politicians and tax-greedy governments, nor in the banking or financial system — but with ordinary people.

Fortunately, in the same way that it was difficult for countries like Greece and Italy to abandon the euro to recover the drachma or lira to liquidate their bloated debts and pay off deficits, so Ecuador and its politicians were unable to abandon the dollar in recent years. And just like in Bolivia, the biggest risk to the economy now would be to abandon a fixed exchange rate.

You've reached your limit of free articles.

To read the full story, start your free trial today.

Get unlimited access. Cancel anytime.

Exclusive coverage from the world's top sources, in English for the first time.

Insights from the widest range of perspectives, languages and countries.

Migrant Lives

What's Driving More Venezuelans To Migrate To The U.S.

With dimmed hopes of a transition from the economic crisis and repressive regime of Nicolas Maduro, many Venezuelans increasingly see the United States, rather than Latin America, as the place to rebuild a life..

Photo of a family of Migrants from Venezuela crossing the Rio Grande between Mexico and the U.S. to surrender to the border patrol with the intention of requesting humanitarian asylum​

Migrants from Venezuela crossed the Rio Grande between Mexico and the U.S. to surrender to the border patrol with the intention of requesting humanitarian asylum.

Julio Borges

-Analysis-

Migration has too many elements to count. Beyond the matter of leaving your homeland, the process creates a gaping emptiness inside the migrant — and outside, in their lives. If forced upon someone, it can cause psychological and anthropological harm, as it involves the destruction of roots. That's in fact the case of millions of Venezuelans who have left their country without plans for the future or pleasurable intentions.

Their experience is comparable to paddling desperately in shark-infested waters. As many Mexicans will concur, it is one thing to take a plane, and another to pay a coyote to smuggle you to some place 'safe.'

Venezuela's mass emigration of recent years has evolved in time. Initially, it was the middle and upper classes and especially their youth, migrating to escape the socialist regime's socio-political and economic policies. Evidently, they sought countries with better work, study and business opportunities like the United States, Panama or Spain. The process intensified after 2017 when the regime's erosion of democratic structures and unrelenting economic vandalism were harming all Venezuelans.

Keep reading...Show less

You've reached your limit of free articles.

To read the full story, start your free trial today.

Get unlimited access. Cancel anytime.

Exclusive coverage from the world's top sources, in English for the first time.

Insights from the widest range of perspectives, languages and countries.

The latest