Hello. My name is Luis Fierro. I was Vice Minister of Economy of Ecuador in the previous administration, I write a column for the main daily newspaper, El Universo and for my SubStack Oikos - Economy and Ecology.
Dollarization was a policy taken by Ecuador in January 2000, faced with high inflation and rapid depreciation of the national currency, the Sucre. The exchange rate had increasef from 5,000 per dollar to 25,000 per dollar in less than a year.
Before dollarization, the Central Bank issued money (“Sucres”) in response to financial and economic crises. In particular, in 1998-99 there was a severe financial crisis, which led to the closing of several banks, and the “freezing” of funds in accounts. The government tried to bail out some of these private banks, and in the process expanded the money supply excessively.
While at the time of the adoption there were many critics of the decision, dollarization has proven to be highly effective. Inflation fell from three digits to international levels, and is currently 1.6 %, lower even than that of the United States.
Lower inflation in turn enables low and stable interest rates; and this also allows long-term investment at low rates, including mortgage loans for housing.
Dollarization has also been positive for real wages, which before this decision regularly fell due to high inflation. However, the government of Rafael Correa increased the minimum wage excessively, much more than the increase in productivity, and this led to the reduction in formal employment, which is currently about on third of the labor force. Even though the supposed “minimum wage” is $460 per month, the actual average wage is lower, at $300 per month.
Aside from price stability and lower uncertainty and risk premiums, one additional advantage of dollarization is that it enables greater economic integration.
Two valid criticisms of dollarization are: first, Ecuador loses “seigniorage,” that is the income received by the State upon first issuing money. And second, Ecuador loses the ability to conduct monetary policy, which can be useful as an anti-cyclical tool. However, as mentioned previously, monetary policy was very badly handled in the run up to dollarization.
Some critics of dollarization, including Rafael Correa and his candidate Andrés Arauz, have proposed leaving dollarization, or issuing some sort of “ecuadollars” that would create an alternative means of payment. This would be similar to the “zimdollars” that Zimbabwe created, and that rapidly went from being exchanged one-to-one to the dollar, to more than 30,000 per dollar, until it was replaced in April 2024.
Pros and cons of dollarization in Ecuador