Ecuador's dollarized recovery
QUITO, ECUADOR AND ARLINGTON, VA. — These days, the almighty dollar is getting a less-than-stellar welcome in Ecuador. Since the government began retiring the national currency - the sucre - from circulation and replacing it with the US dollar in January, Ecuadoreans have grown increasingly frustrated with the day-to-day reality of the dollarization transition.
Mundane monetary transactions have become complex and fraught with uncertainty. An ATM may dispense dollars or sucres or neither. Cashiers struggle to give correct change in both currencies, and rarely have the right combination of coins and cash when a $10 or $20 bill is used. Some don't even trust the money; cab drivers, among others, carefully check to make sure the bills aren't counterfeit.
Recent protests have also demonstrated a deeper, and far more problematic discontent with this latest economic fix.
Many are dubious dollarization will really help Ecuador's crushing poverty. To make matters worse, the government's dollarization education campaign has largely been restricted to the urban centers. Farmers and indigenous people in less-developed rural areas have little awareness of changes. Skeptical and suspicious, they often refuse to accept dollars. These areas, unprepared and occasionally unwilling to make the needed adjustments, could fall further behind.
Rising nationalistic opposition to dollarization may also contribute to political instability. The Ecuadorean government will have to work hard to win over citizens like Miguel Cardenas, the owner of a local Internet cafe who feels that dollarization will undermine "the already low sense of identity that Ecuador has." When Ecuadoreans worry that, "next we'll have to learn English," (as one protester's sign blared), the government has clearly failed to assuage dangerously vague fears of Americanization.
Yet the plan has garnered much public support, albeit with some apprehension about the future.
Diego Rendn, manager of the restaurant La Boca Del Lobo, believes that dollarization is the best solution to the chronic currency crises that have racked his country: "I'm excited. Last year we had to change the prices on our menu five times and still couldn't keep up with inflation. Now we have an account in dollars, and as long as the dollar stays strong, we'll be fine."
Mr. Rendn's concern about the strength of the dollar in the long run is shared by many here, and economists everywhere. Critics point out that a dollarized country will lack autonomy in monetary policy and be subject to policy decisions made in the US. For example, the Fed's decision to use contractionary measures in the US will reverberate strongly in Ecuador.
However, most economists also recognize that in an increasingly globalized world, external factors and international conditions already have an impact on the economic well-being of emerging economies.
University of Maryland economist Guillermo Calvo demonstrated that US interest rates and business cycles can affect exchange rates and international reserves of emerging markets whether they are dollarized or not. A hike in interest rates in the US triggered the 1982 Mexican crisis that ultimately resulted in the international debt crisis of the 1980s.
Though dollarization seems better for Ecuador than other exchange-rate regimes, its success depends on the implementation of extensive complementary economic reforms. Ecuador needs strong banks, a healthy fiscal situation, proper rule of law to fight corruption, and extensive privatization of inefficient government-owned monopolies.
Many of these steps, along with the dollarization plan, are being implemented by the government. The effectiveness of these changes is yet to be seen, but people are hopeful that they will bear fruit soon. Additionally, the government must have political stability to push through the strict fiscal policies necessary for true economic reform.
If President Gustavo Noboa and his administration don't help Ecuadoreans deal with the tough trade-offs of dollarization and the other reforms, such as reductions in public gas, telephone, and electricity subsidies, they may find themselves facing a repeat of January's debilitating coup d'tat as popular support wanes.
Ecuador has taken drastic but courageous steps aimed at improving the country's economy and promoting long-term currency stability. None of these measures alone will cure all of Ecuador's ills. But careful coordination of dollarization and accompanying reforms, buttressed by government and public support, will put Ecuador on the road to recovery.
*Peter Mountford and Margalit Edelman, researchers at the Alexis de Tocqueville Institution, work in Quito, Ecuador and Arlington, Va., respectively.
(c) Copyright 2000. The Christian Science Publishing Society