Their view: Ecuador’s sound currency and sound decisions

Michael A. - MacDowell
Misericordia -

We traveled to Ecuador to see the beautiful colonial city of Quito and learn about the curious animals of the Galapagos Islands. We learned much more.

Not dissimilar from its northern neighbor Venezuela, Ecuador has experienced an economic growth spurt from its Amazon oil reserves beginning in the l970s. Revenue from oil raised the standard of living in Ecuador and helped bring relative sophisticated infrastructure including new roads and sanitation systems to the country.

Historically both Venezuela and Ecuador were plagued by income inequality, but unlike its neighbor to the north, Ecuadorians were less swayed by the socialistic pronouncements of presidents Hugo Chavez and his successor Nicholas Maduro of Venezuela. As a result, Ecuador has not experienced the downward spiral of hyperinflation and economic stagnation that has plagued Venezuela.

However, the story does not end here. There was another important factor that added to Ecuador’s economic success. In 1999 Ecuador was faced with major problems. Its economy had contracted by 7.5 percent and the rate of inflation stood at 60 percent. President Jamil Mahuar, who had studied at Harvard, determined that one way to stabilize the country was to adopt the American dollar as Ecuador’s national currency. In 2000 the dollar replaced the sucre which had been Ecuador’s unit of currency since its founding in 1884. Ecuadorians exchanged 100,000 sucre notes for a single dollar.

As you can imagine there was consternation among Ecuadorians. Primary among their concerns was giving up the national identity inherent in their own currency. EL Commercio, the country’s leading newspaper stated, “This is a sad day in Ecuador’s history. The country is losing its traditional currency, the sucre, and officially adopting a foreign one.” Among other demonstrations was one that included artists and actors carrying “anti-dollarization” posters in the capital. The protests were such that President Mahuad resigned in 2000. But this alien currency, the dollar, proved to be the country’s salvation.

Dollarization almost immediately arrested Ecuador’s inflation. As a result, economic growth returned to Ecuador. Income distribution, which had been skewed toward the wealthy, was slowly turned around. One of Ecuador’s biggest industries, tourism, was aided significantly because of the dollar. Today many U.S. citizens are retiring in Ecuador. And international companies and banks recognize Ecuador as a stable place to invest.

By adopting the dollar Ecuador has put an end to policies and politicians which had caused so many problems in developing countries around the world. Through dollarization Ecuador was inhibited from spending beyond its means. Dollarization limited the supply of money relegating hyperinflation to a thing of the past.

Ecuador effectively “outsourced” its monetary policy to the U.S. Federal Reserve system thereby creating greater economic stability than most developing countries enjoy. No longer was Ecuador subject to the whims of populist politicians who captured the imagination of an electorate with promises of instantaneous prosperity at zero costs and initiate enormous social and infrastructure projects with unrestrained borrowing.

To be sure Ecuador is not without its problems. Its economy is still rooted deeply in agriculture products and extractive industries such as oil. Despite the restructuring of its debt, partially precipitated by dollarization, its national debt is more than $15 billion making it a high-risk area for investment.

And political shenanigans still abound. Ecuador’s current president, Lenin Moreno has accused his anti-American predecessor Rafael Correa of hiding weaknesses in Ecuador’s oil dependent economy from the people. In 2015 when Correra was president he pushed through a constitutional amendment that eliminated presidential term limits. Much like Vladimir Putin did, Correa intended to be re-elected again in 2021 following a four-year hiatus. This would have assured his long-term tenure and his ability to control the country and its economy. But on February 4 Ecuadorians voted to overturn the constitutional amendment thereby null in voiding Correra’s plans to run again.

Despite these political developments Ecuador remains a relatively strong and stable Latin American country. It is now enjoying an influx of U.S. retirees, increased exports, expanding tourism and a strengthening economy. There is little doubt that adhering to a prudent monetary policy by adopting the dollar along with the work ethic of Ecuadorian people has led Ecuador to relative economic success among Latin American countries.

Misericordia
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Michael A.

MacDowell

Michael A. MacDowell is Managing Director of the Calvin K. Kazanjian Foundation and is President Emeritus of Misericordia University.

Michael A. MacDowell is Managing Director of the Calvin K. Kazanjian Foundation and is President Emeritus of Misericordia University.