Just as in 2000 the brains of the convertibility that governed Argentina – and would explode the following year – advised Ecuador for the implementation of an even more radical scheme, dollarization, that country is today the laboratory that provides the results of an experiment of more than two decades. star proposal of Javier Mileyhas gained centrality, especially since the success of the far-right in the Open, Simultaneous and Mandatory Primaries (PASO), which positioned him as one of the three presidential candidates with a chance to govern the country since December 10.
Dollarized Ecuador managed to put an end to the hyperinflation that afflicted it at the beginning of the century, but it pays costs linked to increasing rigidities that hinder growth and an improvement in living conditions. In parallel, it has become a country ravaged by gangs linked to drug traffickingto the point of turning one of the most insecure in Latin Americawith a homicide rate that almost doubled between 2021 and 2022 to reach an impressive figure of 26 per 100,000 inhabitants.
However, the latter, which became a topic on the international agenda after the assassination of the presidential candidate Fernando Villavicencio, to what extent is it linked to a monetary system that divides society, but retains majority support? So much so, that violence and not dollarization is the dominant theme of the election this Sunday, crowded with applicants wearing bulletproof vests, armored shields and helmets and destined –after the activation of the “cross death” clause of the executive and legislative branches– to the election of a new president and a new National Assembly to complete the mandate of Guillermo Lasso.
Robin Brooksis chief economist of Institute of International Finance (IIF), which defines itself as “the global association of the financial industry, with 400 members from more than 60 countries”, the main global banks. He is also an economist senior of the IMF and former head of Strategy of Goldman Sachs. As he has just said in reference to the Argentine debate, “Ecuador is presented as a success story that is not such. It locked into a super-strong currency, even as others in Latin America depreciated. The result is weak growth and an overvalued currency, which is the trap Argentina is trying to escape from.”
Story of a magical “solution”
In the midst of hyperinflation, a process of confiscation of deposits and a state of social unrest and political instability, the then president Jamil Mahuad he imposed the dollarization of the economy in January 2000. Popular reaction and a military uprising took him away, but who would end up happening, his vice Gustavo Noboakept the scheme.
Inflation was controlled, but the Ecuadorian economy registers growing difficulties to grow, is over-indebted and living conditions do not improve. Its productive structure has no hope of overcoming primarization and continues to depend on oil exports, followed by bananas, shrimp and cocoa.
Fuente: world Bank.
In a fact that recalls what happened in Argentina from “1 to 1”, inflation in dollars in Ecuador was in 2001 of 40% y that of 2002, 15%. Thus, like the convertibility of our country –with a CPI of 70% in its first year of validity–, Ecuadorian dollarization was born with a certain exchange rate delay.
Poverty, as expected, fell sharply in the initial years of stabilization, but today it is at the same level as in 2010.
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Fuente: world Bank.
It is worth noting that, for the Ecuadorian government, a person is poor if they have to live with a family income per capita inferior a $88.72 per monthequivalent to the exchange rate blue from last Friday to 63,878.4 Argentine pesos. In our country, the total basic food basket for July was 80.570 pesos and it should be reiterated that Ecuador is an expensive country in dollars. If that country measured its poverty with Argentine criteria, its index would be higher than the one it disseminates.
This state of affairs is linked to the progress of the activity. This grew vigorously until 2011, but not because of the benefits of dollarization, but rather because of the high international prices of raw materials that benefited all emerging countries. Meanwhile, even apart from the collapse of the 7,8% of the Great Confinement of 2020, the outlook since 2015 is, on average, one of stagnation.
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Fuente: world Bank.
The social situation is one of the reasons that explains the rise in crime in a country that until a few years ago perceived itself as an island of tranquility to the south of troubled Colombia. However, its geographical location between that country and Peru –another major drug producer–, the strategic role of the port of Guayaquil, failed policies and widespread corruption weigh more as factors that explain the actions of gangs such as those indicated for the murder of Villavicencio.
According to official data, at least 13 “organized crime groups” (GDO) -as they define themselves- operate in the country, among which stand out The Choneros –linked to the Mexican Sinaloa Cartel– and its detachment, The Wolves -associated with Jalisco Nueva Generación-, which disputes territories and prisons with extreme violence.
In addition to the big Mexican cartels, the Colombians and the Albanian mafia are present in a country where the lack of sufficient controls and dollarization facilitate money laundering.
bitter remedy
In recent months, dollarization has been a hooker sloganan idea that Milei is now looking for some specific way of implementation. One that he himself repudiated four years ago.
The peso-dollar parity at the time of entry is a subject of severe controversy, even in the business Red Circle, due to private calculations that indicate that, due to lack of reserves, the decision to dollarize would cause an uncontrolled jump in the exchange rate and a hyperinflation. However, one must also think what would the country get into in the long run.
Dollarization implies tying yourself to the mast of a ship that sails without sails.
As happened to Ecuador during the shock The external impact of the pandemic, it is worth asking what would be of a dollarized Argentina in a context like that or like this year, of a drought that reduced exports by 25%, that is, 20,000 million dollars. The issue is not minor, because, if a country does not have a currency to issue –even at the cost of assuming higher inflation, such as the one temporarily experienced by the United States and the eurozone countries–, all the adjustment of working capital is made in nominal terms. As? With cuts in salaries, retirements, social benefits, state budget and, above all, based on recession, without any chance of alleviating the blow with monetary policy. Dollarization implies tying yourself to the mast of a ship that sails without sails.
Milei’s entourage does not ignore that helplessness before the shocks external, but considers it a lesser evil in the face of the inflationary drama. However, if the application of the scheme would imply an impressive adjustment of five percentage points of the GDP, which –as he himself has said– would place his eventual administration to the right of the IMF itself, why hold on indefinitely if the basic stabilizing measures would they be taken anyway?
Dollarization would permanently crystallize a certain pattern of income distribution, almost impossible to alter due to the rigidities imposed by the scheme. It would “discipline” the state, limiting any expansion in spending to the ability to take on more debt. It should be noted that country risk –the rate at which financing is accessed– does not have to do primarily with whether there is more or less inflation, but rather with the level of indebtedness, so there would be no dollarization capable of making an Argentina so committed solvent with international and local private creditors, with the IMF, other international organizations and even with China.
