Why Ecuador's economic future depends on retaining dollarization

Dollar bill stock

Having access to a stable currency is crucial in order for people to make prudent financial and economic decisions, and stable monetary policy directly contributes to a country’s standing in the world’s economy. Throughout its 26-year history, Atlas Network partner Instituto Ecuatoriano de Económia Política (IEEP) has argued for sound monetary policy in Ecuador. The organization was instrumental in Ecuador’s adoption of the U.S. dollar as its official currency in 2000, and it has since remained vocal in educating the Ecuadorian public about the many benefits that dollarization has provided.

IEEP has been working with professors from the economics faculty of the Universidad San Francisco de Quito (USFQ) and American economists to push back against calls to move away from dollarization in Ecuador. This effort recently culminated in the launch of the Forum for Dollarization (link in Spanish). Among the signatories committing to be “Defenders of Dollarization” are Pablo Lucio Paredes, professor at USFQ; Luis Espinosa Goded, professor at USFQ; Dora de Ampuero, founder and director of IEEP; Gabriela Calderon de Burgos, research associate at the Cato Institute’s Center for Global Liberty and Prosperity and editor of elcato.org; José Luis Cordeiro, chair of the Venezuelan node of the Millennium Project and research fellow at the Institute of Developing Economies (IDE-JETRO) in Tokyo; Lawrence H. White, professor of Monetary Theory at George Mason University and a senior fellow at the Cato Institute; and Steven H. Hanke, a senior fellow and director of the Troubled Currencies Project at the Cato Institute and co-director of the Institute for Applied Economics, Global Health, and the Study of Business Enterprise at the Johns Hopkins University.

Hanke was invited by the Chamber of Commerce in Guayaquil to give presentations about the good that dollarization has done for Ecuador and to discuss the dangers of the new “e-money” system being floated by the Ecuadorian government (link in Spanish) instead. Hanke also recently wrote a commentary for Globe Asia Magazine criticizing Ecuadorian President Rafael Correa’s recent clamors to move away from dollarization in Ecuador.

“I had a front-row seat in Ecuador’s dollarization drama — both as a participant in the dollarization debates that preceded the sucre’s collapse and also during the replacement of the sucre and the greenback’s implementation phase, when I was an advisor to Carlos Julio Emanuel, the Minister of Finance and Economy,” Hanke wrote, contrasting Ecuador’s growth with the economic collapse of Venezuela. “As for Venezuela, I had another front row seat, as President Rafael Caldera’s adviser in 1995-96, prior the arrival of Chávez. To put discipline into Venezuela’s monetary and fiscal spheres, I recommended an orthodox currency board – one that would have made the bolívar a clone of the U.S. dollar.”

Unfortunately, Venezuela followed a drastically different path.

“Caldera came close to adopting my recommendations,” Hanke continued. “But, in the end, he failed to do so. The elites and special interest groups, as well as a variety of leftists, were opposed to any reform that would introduce the rule of law and impose monetary and fiscal discipline. The failure to adopt the rule of law has been catastrophic.”

Hanke’s influence has grown to such a degree that President Correa mentions him by name during his “Macroeconomics, Transformation, and Development in Ecuador” lecture (video in Spanish).

The battle of ideas is still ongoing, and dollarization is once again a focal point of public discourse in Ecuador. The IEEP, the USFQ, and individuals like Hanke are mobilizing to defend the role that dollarization has had in maintaining Ecuador’s economy. Now, more than ever, it is important for sound monetary policy to prevail in Ecuador.