There are two types of dollarization, official and unofficial, official is when a country completely replaces its home currency for another currency, in this case, the American dollar, and unofficial is when a country has foreign local money circulating outside its banking system. Dollarization brings along several benefits that could help improvea countries economy, but the main reason of why is not highly used is because it diminishes the country’s sovereignty perception and makes the economy dependent form the other.
When Ecuador´s bank system collapsed, Ecuadorians rushed to change their sucres for American dollars and take them out of the banking system, because with the threat of losing their savings and hard work, they wanted toprotect their money with a more stabled currency; creating a semi-dollarization inside Ecuador and stating the possible solution of official dollarization to affront the crisis.
The proposal was made by the ex president, Mahuad, who found a wide opposition towards the idea of dollarization, and whom was asked to resign by thousands of protesters. Vise-president Gustavo Noboa took charge, butdespite the popular opposition, in March 2000, Ecuador adopted the American dollar as their official currency.
“Acusamos a los bancos de la República la culpabilidad del desastre nacional, por pecados de acción y de omisión. De acción, porque han explotado la crisis en toda forma, como el vampiro chupa la sangre de la bestia inerme. De omisión, porque con sustácticas de resistencia pasiva y su labor subterránea, han mantenido en auge el sistema que les aprovechaba inmensamente pero que, por otra parte, ha significado la muerte lenta del pueblo ecuatoriano"
Luis Napoleón Dillón, La crisis Económico Financiera del Ecuador, 1927
With dollarization Ecuador lost the ability to generate its own money, and with this, their power of seignorage, meaning theirability to profit out of making their own money. Their central bank lost the power of being a money lender, and they lost the right of making their own monetary policy and the managing of both, the money supply and the interest rates. Also Ecuador´s exchange rate became fixed forever and their economy is forced to closely follow the American economy.
On the other hand, dollarization alsobrought a better environment for businesses and new enterprises, because being the country a highly exporter with high sensitivity to out-side events, the dollar provided a higher safe-margin than the Sucre, and the people immediately returned their savings into the banking system. It also brought economic stability and increased the expectations for economic integration, with countries like the U.S andothers with dollar-based markets. Dollarization did not reduce Ecuador´s high inflation rates immediately, but is expected to generate a change that would improve these inflation rates over the years. It also brought along a boost for tourism and helped improve the internal market.
Dollarization seemed like the right way to go at the given time, but with the resent American crisis we see thatEcuador saw itself greatly affected due to the fall in international demand and reducing national income and domestic investment.
The Ecuador economy depends on stable prices for its three main exports: oil, bananas and shrimp. The value of a set quantity of each of these three products can fluctuate wildly. An oil glut, poor weather and an El Nino event can cause prices to crash, hurtingconfidence in the country - and its currency. Can, and did... time after time, and Ecuadorians were being stretched to their limits.
The main reason dollarization is not practiced is political. A country’s currency, like a flag or a national airline, is a symbol of sovereignty. Giving up on your currency is, well, almost treasonous. Yet Ecuadorian President Jamil Mahuad was willing to take that...