Dollarization

 Dollarization

Intro

The funny thing about currency is that it’s only worth something if someone says so. Say you’ve been stockpiling the national currency of your country for many years, then one day the president says: “This currency means nothing now. Go go to the bank and cash in your currency for dollars.” This is a process called dollarization. It has happened in a handful of countries, but today I’m going to focus on one in particular: Ecuador.  There are a lot of things to discuss on this topic, however I’m going to talk about just three things: why Ecuador dollarized, how Ecuador dollarized, and the aftermath. 

Why

Around 1998-1999 the Ecuadorian economy started to decline in value, and inflation rates started to rise. One of the factors for this declining economy was “El Niño” which destroyed the roads out of banana plantations and shrimp farms. This meant that their only source of income was oil. Oil costs dropped down to 7 dollars per barrel, and citizens' salaries started to go down as well. Around this time, people were going to the bank to cash sucres into dollars and send them abroad in anticipation of economic trouble and in hopes that they could save their money in a more stable currency. This caused inflation rates to rise and the president at the time froze all national bank accounts. This freeze was eased over the next month, but the economic damage was done. After that, Ecuador had two options: dollarize or ban the movement of capital. 

How

The president of Ecuador met with the IDB’s (Inter-American Development Bank) chief economist, and shortly after drafted a law with congress to dollarize. This process of running it through congress took a while and eventually was completed in 2000. During the process the president tried to get the IMF to help with the logistics but they kept pushing the date back, claiming that they’d be better organized later. However, Ecuador proceeded with the dollarization anyway. At this point, Ecuadorians were told to bring their sucres in to exchange them for dollars. Bank accounts were converted.

Aftermath

The first couple of years after the dollarization were rough and unstable. Some of the citizens didn’t want to let go of their national currency and held on to the Sucres.  This led to many Ecuadorians losing a lot of money because they didn’t cash their Sucres in. Many Ecuadorians had a bunch of leftover sucres that now meant nothing.  With the leftover Sucres (there were millions) the government recycled some, but mostly threw them away.  Eventually Ecuadorians accepted the dollar as its official currency.  However, they couldn’t print dollars and relied on the US. After Ecuador dollarized, the cost of goods went up. For example a 50 inch TV would cost $1,300 in Ecuador but in Columbia it would cost less than $800. This led to many Ecuadorians crossing the border into Columbia and buying goods there. Ecuador incurred a lot of debt from dollarizing, so the IMF and other organizations gave them 10.2 billion dollars to pay it. Since then, the country has had 7.3 billion dollars in debt each year.  However the size of the debt is mostly from the past. To maintain a stable economy the country of Ecuador has to rely heavily on foreign trade with the US being #1, China being #6 and lots of trade with other South American countries.

Conclusion

Ecuador has been affected positively and negatively by the dollarization. While the decision led to short therm economic instability, it may have helped the economy in the long-run, and the dollar is more stable than the sucre was. In addition to Ecuador, Panama and El Salvador have also dollarization.  Maybe other countries (such as Peru and Venezuela) that are going through tough economic times could benefit from dollarizing.