TRACKING THE ECONOMY Ecuador's Dollar Doldrums
Larrea, Carlos
IN 2000, ECUADOR BECAME THE FIRST LATIN American country to officially eliminate its own currency and adopt the U.S. dollar. The government hoped that "dollarizing" would stabilize the...
...But it has lowered inflation only slowly and partially As a result, prices of domestic products have become too expensive, limiting the country's export competitiveness...
...It failed to lower interest rates sufficiently and the resulting credit scarcity has hampered growth...
...Moreover, under dollarization the government cannot control exchange rates to compensate for external shocks, like natural disasters or export price fluctuations...
...Dollarization has not fostered significant economic recovery...
...Poverty and extreme poverty, however, remain above their pre-crisis levels and the reduction in unemployment was mainly due to a massive spurt in emigration...
...Poverty increased by 13%, reaching 69...
...and real wages dropped by 40...
...Urban unemployment bounced back to 10% and real wages almost returned to their pre-crisis values...
...Amid the crisis, foreign exchange speculation fuelled the devaluation of the national currency...
...After dollarization, a partial recovery took place from mid-2000 to 2001, but later flattened out...
...Ecuador has for decades ranked among the least developed countries in Latin America, with levels of social inequality long among the worst in South America and deeply entrenched regional and ethnic disparities...
...From 1998 to 2000, social deterioration was severe...
...The limited recovery was also partly attributable to the construction, at high environmental cost, of a new oil pipeline from the Amazon basin to the Pacific coast, as the state promoted oil investments to attract foreign exchange...
...The government hoped that "dollarizing" would stabilize the country's economy, then experiencing its worst crisis since the 1920s...
...For Ecuadorans the crisis was disastrous...
...No clear signs of job expansion appear...
...But dollarization does not address the underlying problems...
...Poverty receded by 8...
...By the late 1990s, floods induced by "El Nifio," a dramatic fall in oil prices and the international financial crisis sparked by developments in Southeast Asia combined to provoke the country's near total economic collapse...
...In the long term, only a prolonged effort to promote education, labor training, employment generation and improved income distribution will create the conditions for sustainable human development in Ecuador...
...Now it can only respond with recessive adjustments that bring high employment costs and increase poverty-by drastically reducing imports, for example...
...Instead, dollarization has introduced its own problems as new imbalances emerge: exchange rates are undervalued, dependence on the export of primary products is deepening, export competitiveness is eroding and painful recessive adjustments loom ahead...
...Nor, after four years, has it managed to meaningfully ameliorate their effects...
...Dollarization has favored a degree of price stability...
...At least 800,000 Ecuadorans emigrated between 1998 and 2003 mostly to Spain, the United States and Italy, and foreign remittances have become a chief recovery factor...
...To prevent hyperinflation of the kind that would have likely immiserated most Ecuadorans, the government dollarized the economy in January 2000...
...An oildriven recovery, though, is doubtful given the country's limited reserves and the low distributive reach of oil income, which remains concentrated in few hands...
...Dollarization is hardly the cause of Ecuador's ongoing socioeconomic malaise...
...Persistent structural factors are primarily to blame for Ecuador's disappointing post-1982 economic performance...
...Other countries facing similar economic troubles have since considered dollarization an attractive policy option, but the social and economic impacts of dollarization in Ecuador demonstrate that the measure is no panacea...
...After rapid growth stimulated by oil exports in the 1970s, Ecuador's economy began to stagnate in 1982...
...Dollarization is not even an effective Band-Aid, much less a cure, for its socioeconomic problems...
...urban unemployment increased by 9%, reaching 17...
Vol. 38 • November 2004 • No. 3
