The effect of dollarization in Ecuador

It’s been about six years since the Ecuadorian government, in an attempt to restore stability to its shattered economy, officially made the decision to abandon the hyper-inflated sucre and adopt the US dollar as the nation’s official currency. What have the results of this interesting (some would even say drastic) experiment been so far?


Ecuador’s economy has historically depended on the production and export of raw products such as bananas, cocao, coffee and shrimp. In the early 1970s, oil was discovered and quickly became Ecuador’s primary export. This new oil wealth actually allowed Ecuador to finance new public services, infrastructure and the like, and in order to leverage this newfound wealth as much as possible the government (which, after 1972, was under military control) also began to borrow heavily. The 70s were good for Ecuador as the small Andean nation rapidly modernized, and in 1979 the country returned to democratic rule.

The problem with depending on oil, however, is that it left the nation at the mercy of fluctuations in world market prices. And, as everybody who lived in Houston during this time painfully remembers, the oil market crashed in the early 1980s. The collapse of oil prices sent Ecuador’s economy into a crisis characterized by inflation, mounting debt service and uncompetitive industries. This crisis was exacerbated by the El Niño weather phenomenon, which wrecked the country's infrastructure and had a profoundly negative effect on other key exports such as shrimp and bananas. It was during this time that the Ecuadorian government began a policy of currency devaluation, which was designed to “inflate away” the country’s internal debt as well as make Ecuadorian products cheaper (and therefore, more competitive) on the foreign market.

Ecuador ambled on, through the presidencies of Leon Febres-Cordero (84-88), Rodrigo Borja (88-92) and Sixto Duran (92-96), all the while facing budget crises, currency devaluations, wildly-fluctuating export prices, earthquakes, volcanic eruptions, disruptive weather phenomena and, in early 1995, even a brief border war with Peru. It wasn’t until the late 1990s, however, that things began to really deteriorate.

In many countries, political instability and economic stability go hand in hand; Ecuador is no exception. Its 17-year period of relative political stability ended in February 1997 when Guayaquil populist Abdala Bucaram, who was elected to the presidency only a year earlier and who ironically chose the nickname “El Loco,” was deposed by Congress on grounds of mental incompetence. An interim president was appointed until new elections were held in May of 1998. Former Quito major Jamil Mahuad was elected president and faced even more hardship, as the particularly destructive 1997 - 1998 El Niño ravaged Ecuador’s agricultural economy and damaged parts of its infrastructure and the Asian economic meltdown of that year sent oil prices to new lows. Collapses in other South American economies such as Brazil took their toll as well. Ecuador’s economy was sent into a tailspin; the sucre fell into hyperinflation, the country defaulted on its foreign debt, and Ecuador’s entire banking sector collapsed as Ecuadorians rushed to put their accounts into a more stable currency, such as the US dollar. This impromptu wave of “semi-dollarization” in turn prompted the Mahuad administration to propose officially replacing the country’s currency with the dollar.

This proposal, however, proved be unpopular and widespread dissatisfaction with the Mahuad administration bubbled over in January 2000. An uprising led by indigenous and labor leaders as well as junior military officers occurred, as tens of thousands of protesters from around the nation descended onto Quito and demanded Mahuad’s resignation. On January 21st demonstrators entered the National Assembly building and declared a three-person junta in charge of the country. President Mahuad was obliged to flee the presidential palace, and Vice President Gustavo Noboa took charge. Congress met in emergency session in Guayaquil on January 22 to ratify Noboa as Mahuad's successor. The coup really didn't result in any major changes for Ecuador, since Naboa supported his predecessor's plans for dollarizing the economy. 

In the spring of 2000 the Ecuadorian government began exchanging sucres for dollars at the rate of S/. 25,000 = $1. From this point on, the Ecuadorian government would only mint coins in equal value to the American penny, nickel, dime, quarter and half-dollar. By the end of the year, the sucre had disappeared completely from circulation. In the meantime, new deals with international creditors were arranged.

At first glance, the scheme appears to have been successful. Consider that the Ecuadorian economy, which shrunk by a whopping –7.3% in 1999, grew by 2.3% in 2000, the year dollarization occurred, and by 5.6% in 2001, which made Ecuador’s economy the fast-growing in all of Latin America. Growth continued in subsequent years, with 3.4% expansion in 2002 and 2.7% growth in 2003. In 2004 the economy grew by an impressive 6.9%, due mainly to the recent opening of a new oil pipeline that more than doubled Ecuador’s oil output. In 2005 the estimated rate of economic growth was 3.9%. 

These rosy economic figures don't tell the whole story, however. As the BBC reported in January of 2004, “such healthy macroeconomic figures mask serious problems in the micro-economy, where jobs are hard to find, the cost of living is high and obtaining credit is often prohibitively expensive. With interest rates of around 20% and credit tight, persuading potential foreign investors - and, indeed, local ones - to invest in Ecuador is a tall order."

Advantages and Disadvantages

The chief advantage to dollarization is that rampant inflation has been dramatically stabilized. This has, in turn, stabilized the overall economy, sustained the buying power of the Ecuadorian people, and allowed the nation as a whole to experience significant economic growth. Long-term economic planning is easier to do under a stable currency, and the hope is that the dollar will attract foreign investors who were previously reluctant to invest in Ecuador due to its economic and monetary weaknesses.

On the other hand, there is also a downside to dollarization. By scrapping its own currency, the Ecuadorian government can no longer make its own monetary decisions. Ecuador’s monetary policy is now essentially made thousands of miles away in Washington, D.C. by the Federal Reserve Board. The decisions the Fed makes, furthermore, might not necessarily be in Ecuador’s best interests. Moreover, Ecuador is at a competitive disadvantage to its trading partners in that, unlike neighboring countries such as Colombia or Peru, it cannot make its goods cheaper in the worldwide market by devaluing its currency. Other drawbacks to dollarization became apparent during its implementation: people were unfamiliar with the currency, which made counterfeiting easier, and the illiterate portion of Ecuador's population (which, unfortunately, is significant) had difficulty identifying the uniformly-green bills (the sucre had been printed in different colors for different denominations).

Perhaps most importantly, dollarization still does nothing to address the core problems that are dragging Ecuador’s economy, such as the nation's woeful lack of infrastructure, Ecuador’s massive internal and external debts caused by rampant spending, continued political instability, and debilitating corruption.

The Results So Far

The Sunday, June 6, 2004 El Comercio had an interesting article about the effects of dollarization in Ecuador. It is long and technical, but it’s worth a read because it documents the profound impacts, both positive and negative, of dollarization on the country’s economy, politics, and commerce. I translated the article (the Spanish original is no longer online), first by using an online translation tool and then by “cleaning it up” with my knowledge of Spanish and my English-Spanish dictionary. I am by no means fluent in Spanish so I can’t guarantee a 100% accurate translation, but I think it gets the point across.

Dollarization is a factor of stability

6 June 2004

Commerce and services grow rapidly in Ecuador, encouraged by dollarization. The monetary scheme succeeded in that the spending power of Ecuadorians is maintained and is going towards the purchase of goods and services, many of which are imported. The control of inflation was key for these activities.

This is reflected in the shopping centers, harbors, bazaars, stores and in the streets of the main cities, where the supply of products of Chinese, Taiwanese, Colombian, Peruvian, and American origin at low prices is unlimited.

The statistics of the Central bank of Ecuador confirm it. In 2003 commerce, hotels, restaurants, transport and communication contributed 31.2 percent of the country’s internal production, the highest of the last decade. When dollarization began, these same sectors, altogether, represented 27.6 percent.

Walter Spurrier, director of Weekly Analysis, explains that now entrepreneurs prefer to invest in services or businesses of importation of mass consumer goods. “Weve turned ourselves over to an economy of services and not one of production,” he says.

But all have not been able to get the same advantage from the dollar. Farmers and small industries look for formulas to compete in the market. The lack of investment, expensive credit, low levels of technology, and high costs of production impede recovery of the productive sector. In only three years, the contribution of the agricultural, cattle, forestry and fishing sectors of internal production fell from 10.6 percent to 8.8 percent.

Industry fell, as well, from 13.6 to 10.6 percent. Few companies of great size generate profit around a strategy of high volumes of sale and relatively low margins of profit.

For Luis Rosero, director of the Research Center of the University of Guayaquil, dollarization only gave stability to some of the economic variables that were used by entrepreneurs to plan their businesses. He refers to inflation and the stability of foreign exchange. Rosero recognizes that now the economy is concentrated in the services, while the contribution of national production is reduced. “Dollarization has weaknesses, because it does not generate wealth from exports. It is reducing industry and increasing imported goods,” he explains.

Rosero and Spurrier recommend increasing productivity and reducing costs of production so that industrial activity does not further decay.

But Spurrier adds that, first, the Government must lower the public debt and maintain an economic policy of fiscal austerity and reduced taxes. “Dollarization is like a straitjacket, but heretofore it hasn’t felt like one and we continue spending more.”

Rosero, on the other hand, maintains that the presence of wealth from exports in the economy is generated by high prices of petroleum and the remittances of emigrants. “That allows there to be a balance in the public finances and the balance of payments,” he adds.

But the predicaments are not only for entrepreneurs. Dollars do not circulate easily in the marginal urban areas of the country. The unemployment rate is 11.9 percent whereas underemployment surpasses 42 percent. Three years ago the unemployment rate did not surpass 10 percent. The rate is high, thus in the last years the emigration of thousands from people to Europe and the United States has steadily increased. Spurrier thinks that idleness increases because industry and agriculture have not recovered.

Joyce de Ginatta, president of the National Council of Competitiveness, supported the system from before its application and defends it: "with dollarization complete, now it is time to correct problems with electricity, petroleum, telecommunications and interest rates. We cannot continue ignoring (washing away) inefficiency.”

[Note: the last sentence translated as "we cannot continue washing inefficiency." I took this to have a similar connotation as "whitewashing" or "covering up."]

POLITICS. The dollar has been a stability factor

In order to visualize the relation that dollarization has had on political policy, a small exercise of imagination is required. What might have happened with the sucre had rumors of political instability actually existed? It is not difficult to imagine terrible devaluation that would have occurred and the effect that would have had on the Government.

Dollarization has been, then, an economic phenomenon that has had enormous political meaning.

In fact, the decision to adopt that model was a political measurement. As economic analyst Vicente Albornoz says, when it was proposed it was a political weapon to reduce the power of the Central Bank and, consequently, of the central Government.

"Let us not forget that in 1999, when the idea of dollarization was launched, there existed great discontent because of the banking crisis and a negative feeling towards the central Government. Certain sectors saw dollarization as a way to divest the Central bank of monetary policy and strongly reduce their power."

Another political consequence of dollarization has been the way in which the last two governments have driven away the specters of political destabilization with the argument that, should the President fall, the process of dollarization will end and with it economic stability. Gustavo Noboa and Lucio Gutiérrez have made use of this resource several times.

Some analysts also agree that dollarization has created an atmosphere of stability for the public, soothed by their purchase capacity, that neutralizes the calls to mobilization that indigenous and labor leadership often make.

In Ecuador the dollarization process also has meant a certain change in the behavior of the political class regarding the topic of the budget.

Although the old custom still exists to press the government in power to add items to the budget for political purposes, every day grows a new, more conscious understanding of the State’s inability to put more money into circulation. Nevertheless, the old custom does not completely yield and the Government has had to emit bonds and to acquire external debt to fulfill certain political pressures.

For analysts like Hernán Reyes, the political dimension does not stop there. The dollarized country, he maintains, can count on the implicit support of the U.S.A. because it is now part of its economic model. Moreover, it is agreed that the logic of the economic blocks which have formed in the world and which compete with one another is the order of the the day. That is the case of the U.S.A. and the dollar in America; Europe and the euro in that continent and Japan and the yen in Asia.

ECONOMY. From the emission of sucres to the emission of debt

[Note: this section was the most difficult for me to translate, because it is somewhat technical. Parts of it might not make sense. Anybody whose knowledge of Spanish (or fiscal administration, for that matter) is welcome to provide a better translation.]

Before dollarization, the printing of sucres had become the solution to the problems of budgetary deficits, to rescue or to improve banking positions or for other hardships. Those practices had an unhappy ending with dollarization. Therefore the scheme did not please many sectors that benefited from those great amounts of sucres, which soon were rendered into crisis and faced the necessity of hard economic measures for "solving the structural problems".

But once the sucre died, the analysts warned of the danger of a sudden emission of papers to help ease these hardships.

In the last years there has been a strong increase in the internal debt approved in the budgets, although this has not happened to worry the legislative confines of the Congress.

The ex-minister of Economy, César Robalino, says that, in a country that chooses a type of fixed exchange (such as dollarization) so that the Central bank cannot print its own money, "the governmental discretion to manipulate the exchange rate and monetary policy for economic or political objectives disappears.”

The internal debt that a government contracts with public or private institutions within its country (it generally trades papers in the bond market which recognizes the capital and an interest)"permits the gathering of money, to handle temporary situations of nonliquidity in the national treasury", explains Luis Loria of the Latin American Foundation of Economic and Political Investigation (FLIEP).

The internal public indebtedness in Ecuador grew between 2000 (the year of dollarization) and 2003 from 607.4 million to 1,056.8 million dollars, between interests and amortizations made by the Portfolio of Economy.

The necessity of the Government’s internal financing expressed in the General Budget of the State (PGE) in 2003 was estimated to be 900 million dollars. This year the number surpassed 1,450 million dollars. The Executive considers that the internal market is indeed in capacity to catch those resources, because the main buyer of the papers of the State (bonds, certificates of treasury...) is the Ecuadorian Institute of Social Security (IESS). Even the new minister of Economy, Mauricio Yépez, will insist on selling papers to it by 400 million.

The sustenance of these type of transactions, says the authorities, is the growth of the contributions that IESS has since dollarization arrived and, with it, a larger portfolio of investments that the public organization accumulates.

In effect, the Institute’s global portfolio of financial investments, including the credit portfolio, was $1,479 million on December 31, 2002, 54.8 percent greater than in 2001 when it was $965 million. On December 30, 2003, the amount was even higher at $2,122.6 million.

If those originating resources of obtained financial gains with the affiliated savings are translated in investment (social or public), one of the economic formulas will be fulfilled: investment of the savings. If not, it will be no different than before.

COMMERCE. A system that has given transparency

A peculiar phenomenon happened in March of 1999. The retailers and companies of Cuenca went ahead with dollarization. The city’s stores exhibited prices in dollars in their display cabinets.

they were not the only ones. The industries and the businesses also adopted this measurement as protection.

The dollar had seduced the owners of those businesses. No longer it was rare to find dealerships, for example, that sold their cars in dollars. Or real estate that commercialized houses in that currency.

It was not for less, because the dollar had happened to quote 899.50 sucres December of 1990 and to 19,917.14 sucres, in the last month of 1999.

Definitively, it was a time of instability for the productive sector. The constant complaint was that the prices of the inputs and capital assets increased daily and that the clients of the industries delayed the payment or let cancel their debts, the president of the Federation of Chambers of Industrialists of Ecuador remembers, Roberto Dassum Aivas.

It was the time in which it was difficult to plan. For example, the Vecachi company, which manufactures footwear, set margins of profit of 50 percent, because they feared to lose their investments due to constant devaluations. The manager, Calixto Peñaloza, say that before dollarization he did not know with certainty how much he gained. "Now, when we gain 10 cents we know that that is the yield.”

But, also there were sectors that resisted the new system. That was the case of the president of the Federation of Exporters at moments at which the measurement was dictated: Luis Maldonado Lince. He heretofore maintains that the process has eliminated the competitiveness of this sector and that the breach between imports and exports has grown.

But the numbers do not seem to back him up. From the following year, when dollarization was dictated, the sales to the external markets, without counting those of petroleum, have had a recovery process. Thus in 2001 they grew 12 percent, in 2002 seven and the previous year 13.

However, in 1998 the reality was another one, since exports had fallen 12 percent in that year and 16 percent in 2000.

The rate of unemployment also fell. The January 31, 2000 unemployment was 16.8 percent of the economically active population (PEA). But, as of that date a decreasing tendency is registered so that by 31 of December of the 2003 the rate was set at 9.3 percent.

[Note: elsewhere, the article says that unemployment is increasing. I think this means that unemployment fell dramatically after dollarization was implemented and the economy recovered, but that it's been sliding upwards ever since then.]

Of course, since dollarization began about 2 million Ecuadorians have emigrated, many of them of working age; that is to say, within the PEA.

Joyce de Ginatta, a proponent of the system, says that before the bankruptcy of small and medium companies was permanent. The Supervision of Companies does not have data but it registers the eliminated or dissolved ones at 1,831 in 1999; 2,125 in 2000; 377 in 2001 and 1,601 in 2003.

Four visions

Carlos Díez, Research center of the School of Economists

"The payments of the external debt, low competitiveness and high costs of production demand solutions.

"Dollarization in these four years and five months has demonstrated advantages and problems. Although some of its effects on macroeconomic variables have been successful, others have had a negative impact, for example, in the rate of unemployment. The tendency is that unemployment continues to increase, although emigration has helped to control it.

"We cannot successfully circumscribe the analysis only to indicators like inflation and economic growth. It is necessary to ask if the model of dollarization has contributed the growth, so that poverty is reduced and that less imbalances exist in the distribution of wealth. And it is necessary to ask if the foundations are being laid so that dollarization is sustainable in the medium and long term. The results do not say that we are headed that way.

The art of the good immediate economic handling is to be pending of the immediate and most remote evils, to try to be aware of what can happen in the immediate future immediate.

At the moment, we continue with structural problems: payments of the external debt, low competitiveness, high costs of production and a productive sector that demands solutions. These problems should be solved immediately.

Eduardo Valencia, Director, Institute of Economic Investment, Catholic University of Ecuador

“Truly, the secret to stabilize an economy is to increase the capacity of production.

"The important and urgent thing is to change the development model. The subject is not only to leave dollarization. Dollarization is one of the elements.

This restrictive policy, which is over and above what is prudent and beyond fiscal discipline - which is needed but never at such extreme levels – has meant the destruction of the productive apparatus of Ecuador.

In a globalized world, it is important to gather the most important contributions of the economists of all history. And all of them have said that production should be made stronger. We must return to a model where production returns to be the protagonist.

That is obtained by radically changing the development model. What does that imply? First, returning to an own currency, and, second, recovering the importance of the Central Bank. Printing a currency with one-to-one parity.

This new model does not imply the retirement of the dollars of the economy of the country. The only condition that is needed is that the emission of the money on the part of the Central Bank has a limit, and that this limit is present in the Constitution of the Republic.

The Directory of the Central bank will be able to emit money to foment production until the limit of which it is possible to be produced.

Pablo Lucio Paredes, Economic Analyst

"The financial institutions must make an effort to fortify the system of dollarization within the country.

"The bank was cause and consequence of the ’99 crisis. Without a doubt, dollarization restrained the deterioration of the confidence in the system, and the substantial recovery of the banks has been an important element in the stabilization of the economy.

"The margins of the system are still excessive since the average savings rate is 3.5 percent, the average corporate rate is 10.5 percent and for the rest of citizens over 16 percent, giving an average of loan rates of 12 percent. For these margins to fall, the institutions need to make an effort towards greater efficiency.

"In addition, the elimination of taxes, rates and contributions that load down the system; recovery of the solvency indices and confidence in the economy. Also, to have a better collective system of cover of the liquidity risk and adapted regulations of the Banking Meeting more to the reality.

"It is necessary to insist on the development of the markets of capitals. The economy has paralyzed resources that do not find relief: $600 million to the IESS and this year more, $600 million to the FEIREP that in case are not used in debt repurchase are going to be paralyzed and $1,500 million to outside banks."

Vicente Albornoz, Investigator of Cordes

"Dollarization has protected to the country from the bad economic policies and the damages by the political problems

"Dollarization has been used like a political weapon by the last two governments. Gustavo Noboa as well as Lucio Gutiérrez have argued against their opponents, arguing that the critics of their governments can cause the collapse of dollarization.

"But more than a weapon, dollarization has served like a shield that has given stability to the country. And that stability has come from two sources: to being a very strict straitjacket, has prevented the government from abandoning fiscal discipline.

"The average non-financial deficit of the Public Sector between 1990 and 1997 (years of relative stability) was equivalent to –1.7% of the GIP, whereas period 2000-2003, it has become a surplus of 0.9% of the GIP. This demonstrates that it has had a positive effect in the public finances.

[Note: GIP = gross internal product. I'm unsure how this differs from GDP, or gross domestic product, if at all.]

On the other hand, the public is conscious that the system forces he Government to maintain greater discipline and that, therefore, the bases of the economy are going to be healthier.

This way, the conjunctural political crises have less importance, because the public knows that the Government will not be able to solve them by leaving good fiscal handling or resorting to the inorganic printing of sucres.


It will probably take many years before the effects of dollarization in Ecuador can be fully catalogued and understood, but so far the results have been clearly mixed. On one hand, inflation is under control, the economy is growing and it is easier to do business in the country. On the other hand, the Ecuadorian economy is becoming less goods-oriented and more service-oriented. Jobs are still scare and interest rates are still high. The government continues to heavily rely on borrowing to finance its expenditures.

Ecuador's political scene also remains tumultuous. In April of 2005, President Lucio Gutierrez was forced out of office by the National Congress amid widespread anti-government protests in Quito. Vice-president Alfredo Palacio was sworn in as the new president, becoming Ecuador's eighth head of state in ten years; no president has been allowed to finish a four-year term of office since 1996. Ecuador's official national anthem is "Salve O Patria," but its unofficial national anthem ought to be The Who's "Won't Get Fooled Again."

Ironically, Lucio Gutierrez was one of the leaders of the January 2000 coup that deposed Jamil Mahuad. Neither anger over dollarization nor economic instability appeared to be an underlying cause of Gutierrez's ouster, however; as was noted previously the country's economy grew by almost 7 percent in 2004 and the nation has benefitted from high oil prices. Instead, this most recent round of political instability appeared to be due to the Ecuadorean population's growing frustration with corrupt politicians. Gutierrez campaigned for the presidency on a populist, anti-corruption platform. But, critics argued, once in office Gutierrez got into bed with those same corrupt politicans he attacked as a candidate, installed family members in various government positions, and imposed harsh economic austerity measures that angered his core constituency. 

Indeed, the nation's political infrastructure is rife with corruption - the watchdog group Transparency International claims that Ecuador is one of the most corrupt nations in the region. Dollarization has done nothing to improve this problem.

Ecuador's experiment with the dollar proves that there is no "magic bullet" when it comes to repairing a moribund economy. The bottom line is this: unless Ecuador can rectify its real problems, such as a lack of infrastructure, high costs of production, rampant corruption, rampant spending and debilitating political infighting, the grand scheme of dollarization will be little more than a quick fix.

Ecuador's next round of presidential and congressional elections will occur in October 2006.

Ecuador is not the only Latin American country that has adopted the US dollar as its currency. El Salvador followed Ecuador's lead and switched to the dollar in 2002. Panama's economy is also dollarized, but it has been so for about a century, due to its longstanding ties to the United States (i.e. the Panama Canal).

Here are some additional websites regarding Ecuador, its economy, and dollarization: has a lot of interesting information about dollarization. The term "dollarization" doesn't necessarily imply a country's use of the US dollar; any country which uses a currency other than their own (i.e. the euro, etc.) is considered to be "dollarized."

Articles about dollarization in Ecuador are also available from the World Bank and the IMF. Ecuador's Rocky Road to Dollarization is also an interesting read, as is a recent powerpoint presentation by Julian Diaz, a Ph.D student at the University of Minnesota who is originally from Ecuador.   

The US Department of State's background notes on Ecuador are accessible here. is the website of the Banco Central del Ecuador. It's all in Spanish, but several economic statistics are available here, including Ecuador's rate of unemployment and the rate of inflation.

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