De-dollarizing an Economy is not an Easy Task but in the Case of Ecuador it Makes No Sense

Ecuador adopted the US Dollar as its currency on January, 2000. The country at the time had almost a 100% rate of inflation and it used the US currency for major transactions such as: house, cars, and importations purchases, to name a few. However, there was a huge social cost of implementing the US Dollar in Ecuador. The political cost took a big hit when President Mahuad was ousted due to his decision in 2000.

    Former President Jamil Mahuad in his book called: "This is how we dollarize Ecuador" (2021), makes a detailed account of the economic conditions in which the country was prior to the execution of the executive decree to use the US dollar as the country's official currency.  Mainly, in its chapter IX "Hyperinflation and freezing." Mahuad mentions the following:

“We then had a triple run: a bank run (due to the withdrawal of bank deposits), an exchange run (due to the loss of Central Bank reserves caused by the purchase of dollars) and a flight of capital abroad (due to the transfer of dollars abroad by large companies in the country).” (Mahuad, 2021, p. 278)

    Additionally, in the book "Dollarization an Urgent Report" (2000), a text compiled and edited by the left-leaning economist Alberto Acosta, who rightly includes studies from different perspectives on dollarization and its implementation. This document includes an article issued by the Ecuadorian Institute of Political Economy (IEEP) called "Official Dollarization in Ecuador."

The IEEP expresses in the document the following:

“Unofficial dollarization is not as beneficial as official dollarization. A country that is unofficially 80 percent dollarized receives much less than 80 percent of the benefits of official dollarization. The problem is that governments and central banks, in unofficially dollarized countries, try to create an artificial demand for the local currency through the imposition of financial regulations that lead to less efficient exchange and therefore impede economic growth. Moving from unofficial to official dollarization is a qualitative improvement in economic policy and not just a small quantitative change. […] Official dollarization works because it strengthens property rights to money and makes exchanges more efficient. With money being the broadest form of property in a society, dollarization ensures that the national government will not rob people of their money by creating high inflation. Inflation is a type of tax; reducing it from 60% or more per year, to low single digits, is a tremendous stimulus for economic growth. Official dollarization offers a true fixed rate because the Central Bank of Ecuador cannot devalue the dollar. That fixed exchange rate is therefore credible. A pegged exchange rate, by contrast, can be devalued, and in Ecuador, has often been devalued. Anchored exchange rates are unreliable and have been the main cause of currency crises in East Asia, Russia, and Brazil. Anchoring the Sucre would be no more successful now than it was before.

With dollarization, the issue of devaluation is eliminated, because Ecuador cannot devalue the dollar. There will be no speculative attacks and interest rates will be lower than in a system similar to Argentina's. […] at levels close to those existing in the United States of America (2-3 percent per year). Not being able to finance itself with inflation, the government will face strong pressure to reduce unsustainable deficits. As we will discuss later, dollarization will reduce the revenue loss that occurs now, when high inflation reduces the real value of taxes received by the state. By removing currency uncertainty, dollarization will remove what is currently the biggest obstacle to economic growth.” (IEEP, 2000, pp. 74 - 78)

    It is also important to recognize that there is an international movement led by China and Russia to de-dollarize de world after its reign for over 80 years in the international markets. These two countries, plus Brazil, India and South Africa conform the (BRICS, acronym for the first letter of these nations) move in an agenda to reduce the influence of the US currency worldwide. However, currently the US dollar represents more than 60% of the national reserves of all central banks; while the yen only covers 2.7% of those reserves. In other words, the US dollar is not going anywhere anytime soon.  (¿Qué Es La Desdolarización? Todo Lo Que Debes Saber Sobre El Empeño de China Y Rusia Por Desbancar al Dólar, 2023)

    Ecuador’s Presidential Election will take place on this August, 20^th. There are eight candidates for the highest office of the land and there is one candidate that beliefs in de-dollarize the nation it is right.  After exposing the arguments above, one cannot stop but wonder: 1) Is it in the interest of that presidential candidate to increase government spending and build a few more roads, hospitals, and or schools (in most cases with overpriced contracts)?, Knowing that the government has no funds from oil production and it can’t afford to increase taxes; therefore creating inflation and killing the economy after 23 years of stability. 2) What is the influence of China and Russia behind this candidate’s proposal? The political party behind the presidential candidate that proposes to de-dollarize the economy has previously held ties with those two countries and their partners.

    At the end, moving away from the best economic policy of the last 50 or more years for Ecuador would be economic suicide. The presidential candidate that seeks to implement the de-dollarization process aims for young voters –knowing that they may not remember a country without the US Dollar-. Plenty is at stake in this election. It is no only about electing a new president or increasing the security levels in country; this election is about keeping the instrument (US Dollar) that after years of government intervention in the economy has kept the economy and social levels at a relatively livable standard. Without this currency Ecuador is doomed to fail.