Sunday, February 19, 2006

Dollarization: the view from the bottom in Ecuador

Interesting NY Times story on countries linking their currency to the dollar--or to the Euro, although it gives no examples of the latter. It notes that Ecuador is a good example of how this tends to help your economy a bit--6.6% growth last year, well above its neighbors--but I asked a lot of the people I met in Ecuador whether they were helped or hurt by trading in the sucre.

The results were about 100-0 that the dollar sucked. Not a single person supported dollarization. The country has gone from being a bargain to being considerably more expensive than its neighbors. This cuts down on tourism, and hurts those with fixed incomes. I like the idea of dollarization: it does seem likely that crappy money management really hurts the country's economy as a whole. But if switching currencies is so universally condemned by common folks who assert they suffer by it, who are the gainers? What policies can help fiscal responsibility without ending up hurting the poor? Sigh.


Blogger Justin Cox said...

I liked the post on the dollarization. From my experience in dollarized countries (Ecuador and El Salvador), I agree that it has had a detrimental effect on the tourism industries and the locals' buying power. However, I think it's too early to come to any conclusions as to the wisdom of the policy. Latin America in general has historically been plagued by very high inflation, thanks in large part to a) populist presidents running on platforms of unsustainable handouts to the poor masses; and b) rent-seeking politicians (particularly Presidents, who have often been precluded from seeking immediate re-election) who use their short time in office to steal everything not nailed down, then hightail it out of the country before the mobs get to them (they usually land either in Brazil or the faculty of Harvard). So taking the fiscal policy lever out of the hands of politicians might be a good long-term policy, even if it hurts in the short-run.

I would be interested in seeing the conclusions from countries that don't use the dollar, but have pegged their own currency to it 1:1 (like the Bahamas, the only place I have been that has done that). Argentina did that for a long time, but eventually their fiscal mismanagement caught up to them and they had to devalue their currency, devastating the economy.

Another variation is a fixed exchange rate, like that in Venezuela. While I was there, the official exchange rate was $1:2150 Bolivares (the Bolivar was devalued some just before I got there). The Venezuelan government made it quasi-illegal to transact in anything but the national currency, but the black market for dollars was huge (Venezuelans who could save money only did so in dollars because of inflation concerns, so one could always sell dollars at a ~20% premium).

Latin American politicians, with a few exceptions (Chile), just don't seem trustworthy enough to have this lever at their disposal. I would be curious to see which of the policies (dollarization, pegging, fixed exchange rate or a floating exchange rate) is best, though I guess that would depend on the politicians...

9:25 PM  

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