Latin America

How a Socialist Candidate Plans To Destroy Ecuador's Currency

Will Ecuador make the same mistake Venezuela already suffered through with dedollarization?

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In 2018, Venezuela's dictator, Nicolás Maduro, got rid of many of Hugo Chávez's currency and price controls, which were largely responsible for massive food shortages and 2,000 percent annual inflation levels. Now, as Reuters reports, over 50 percent of all transactions for basic goods in the country's major cities are carried out in U.S. dollars or euros, a figure that rises to 90 percent in cities near the Colombian border. Steve Hanke, professor of applied economics at Johns Hopkins University, argues that all transactions carried out in local bolivares are calculated in terms of the dollar, which has become Venezuela's unofficial unit of account. In the midst of hyperinflation, Venezuela's de facto dollarization has provided some monetary stability and a degree of safety for citizens' savings.

Meanwhile, a socialist politician in another Andean nation wants to lead his country in the opposite direction. In Ecuador, where the U.S. dollar has been the official currency since the year 2000, presidential candidate Andrés Arauz, who won the first round of voting with 32 percent of the vote last month and awaits a runoff on April 7, is a longtime critic of dollarization and has been outspoken about the need to dismantle it. Officially, his opponent has not been named due to an extremely close result for second place amid electoral chaos and accusations of voter fraud. But if Arauz prevails next month, the future of money in Ecuador will be at stake.

Ecuador's dollarization was the response to an economic crisis that bred political mayhem. Between 1998 and 2007, seven presidents served less than a full term; three of them were ousted from the government by either the legislature or the military. In 2000, then-President Gustavo Noboa decided to fully dollarize the economy as annual inflation levels reached 96 percent. The sucre, the official currency since the 19th century, had lost 115 percent of its value against the dollar between 1998 and 1999. Dollarization, however, was hardly an undisputed alternative; one of Noboa's predecessors, Jamil Mahuad, fell victim to a coup when he tried to dollarize, an unpopular option at the time, with 69 percent of the population opposed according to one report.

At the time, one of the most vociferous critics of dollarization was a U.S.-trained economics professor named Rafael Correa. Adopting the dollar, he argued, meant renouncing national sovereignty and the ability to stabilize the economy through monetary policy in times of crisis. In 2007, Correa was elected president. He governed until 2017 under the banner of socialism, having changed the constitution so as to enable his own reelection. Like his ally, Hugo Chávez, he railed against the private sector and took a number of heavy-handed measures to silence critical news media.

While in power, Correa repeatedly referred to dollarization as a costly mistake and touted the importance of a national currency as a tool of "social coordination." Correa's main monetary novelty, however, was a government-controlled electronic payment scheme, another part of his legacy that his successor quickly dismantled by removing its control from the central bank. Crucially, Correa never tried overtly to get rid of the dollar, which remains Ecuador's currency and enjoys outstanding levels of popularity.

Last January, after 21 years of low inflation and stable levels of purchasing power, 88.7 percent of respondents told polling firm Cedatos that Ecuador should not dedollarize in spite of the economic downturn. In fact, holding a currency that local politicians can't devalue by printing bills as if they were bingo cardsà la Chávez or Robert Mugabe—is the one thing that protects regular Ecuadorians from the inevitable excesses of 21st century socialism. As Ecuadorian economist Dora Ampuero said during Correa's last term, "dollarization saved us from ending up like Venezuela."

According to Hanke, Correa was "clever enough as a politician to know that if he got rid of the dollar, that would have been the end of his government." However, Luis Espinosa Goded, professor of economics at Universidad San Francisco de Quito, argues that Correa's digital payment system, initially a means to pay government employees, was an underhanded attempt to create an alternative currency. Correa's government even tried to give away the new money, offering businesses value-added tax (VAT) refunds to adopt it, and spent millions on advertising campaigns for the scheme. The attempt failed after five years, with the equivalent of only $15 million of the new money in circulation according to Espinosa Goded. However, Arauz, whom The Economist calls Correa's proxy, says that he will set up a similar payment system if he wins.

This concerns strong money advocates, who recall that Arauz, a University of Michigan-trained economist, attacked dollarization as late as last year, even though he now promises to strengthen it. In April 2020, Arauz published a blog post with a detailed plan of how to dedollarize the economy. It contained not only Correa's trick of using "a means of national payments for national transactions," but also "increasing internal liquidity, including that of the central bank." While campaigning, Arauz has said he will spend $8 billion of the central bank's international reserves, which he assures belong to the state, and he intends to send a $1,000 check to one million families. But laying hands on the central bank's high-quality foreign assets, besides compromising its liabilities on the balance sheet, is the equivalent of a raid on citizens' deposits, says Espinosa Goded. Ecuador's reserves include commercial bank balances as well as those of local governments.

On his blog, Arauz also mentions the need to impose capital controls through a fixed quota set by the central bank and a 27 percent "currency exit" tax, which will be charged to anyone who tries to move money out of Ecuador. According to Hanke, implementing Arauz's proposal would mean "that dollars held by Ecuadorians would not be freely convertible, since conversion would carry a massive cost." This measure, which is likely to exert considerable downward pressure on all asset prices, makes Arauz "much more dangerous than people realize," moreso than even Correa when he was in power. Hanke recalls that Friedrich Hayek, an advocate of competition among currencies, called capital controls "the final suppression of all means of escape" from state tyranny, "not merely for the rich but for everybody."

If Arauz gains power, any attempt to dedollarize Ecuador likely would face popular resistance, not only because of the dollar's massive approval in the country, but also because such a move runs counter to 21st century socialism's latest tendencies, even in Venezuela. The 36-year-old Arauz, however, appears to be less pragmatic and more ideologically driven than the power-obsessed Correa, whose political future hangs in the balance.

Lenín Moreno, the current president and Correa's former vice president, turned on his old boss over the corrupt practices of Odebrecht, a Brazilian infrastructure company that ran a bribes-for-government-contracts scheme across Latin America. As a result of the scandal, Jorge Glas, who served as vice president under both Correa and Moreno, was sentenced in 2017 for receiving over USD $13 million in bribes.

Moreno also stated publicly that Correa had left him a nearly bankrupt country, with a bloated public sector and USD $60 billion of debt, which amounted to 60 percent of GDP in 2018. He proceeded to take austerity measures, cutting the government payroll—even getting rid of 43 state agencies, among them ministries—and sharply reducing gasoline subsidies. Once COVID-19 hit Ecuador in 2020, the country failed to pay its sovereign debt for the third time since 1999.

Correa, who has called Moreno the greatest traitor in Ecuadorian history and—perhaps even worse from his perspective—a neoliberal, was himself convicted of corruption last year, as he was preparing his fourth presidential run from Belgium, where he lives in exile. Arauz says that, if he were to win, Correa's sentence would be overturned. Unbiased judges, he claims, suddenly would be free of government pressure against the former president, who, presumably, would be able to run for office again in 2025. The question is whether the U.S. dollar will remain Ecuador's currency by then.  

Beyond destructive government interference, the future of dollarization in Latin America depends, of course, on the dollar itself. By increasing the M2 money supply by 26 percent in 2020 alone, the Federal Reserve has behaved much like the Latin American central banks that dollarization proponents often criticize, even if the Fed's monetary expansion remains minuscule compared to that of Venezuela or Argentina, countries with no foreign demand for their currencies. However, Espinosa Goded argues that, in the worst of cases, fully dollarized countries such as Ecuador and Panama—and even semidollarized ones like Peru and Guatemala—are well prepared for a potential downfall of the dollar as the global reserve currency, especially since its citizens are accustomed to using foreign money. Switching to any other type of currency or cryptocurrency that eventually topples the dollar—or the entire fiat-based system—would be relatively simple, he says. 

The debate is certainly not new; individuals have always found ways to protect their assets from government-induced inflation and currency devaluations. As Spanish scholar Juan de Mariana wrote in the 17th century, it was with good reason that, when crowning a monarch, the people of Aragon made their new king swear not to debase their money. Ecuadorians would do well to heed this lesson.

 

CORRECTION: This article originally named Abdalá Bucaram as the Ecuadorian president who was toppled in a coup for attempting to dollarize. It was Jamil Mahuad who was forced out of office for this reason. 

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  1. But for liberty.

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  2. The Native Americans didn’t need dollars to survive before the white man arrived to the Americas. They just used corn kernels for currency and life was good without the white man’s greed disrupting everything.

    1. Yea they were murdering each other just fine before whitey came.

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  3. Some wonder why those on the right are reluctant to open the southern border when Latinxs are “natural conservatives.” It should be clear to anyone with eyes to see that the concern is that, generally speaking, Latinx Americans have an irrational affinity for socialism, despite the repeated examples of socialisms perils shown by Venezuela, Argentina, Brazil, etc. The last thing we need is for them to vote here.

    1. Nixon’s 1971 anti-libertarian law was received by caudillo kleptocracies with whoops of joy. Meanwhile Southern Command’s hired murderers have deep pockets to bribe and finance national socialist politicians willing to enforce superstitious gringo laws making a crime of trade and production. Walk into a bank and posters blare shrill diatribes against financial “crimes,” reefer madness and assassins of youth with fanatical vehemence worthy of Harry Anslinger.

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    2. Latinx lol

      1. The more we use it, the more ridiculous it becomes.

        1. Pronounce it la-tinks. No sense not treating it with the respect it deserves.

          1. Mormon bigot.

        2. Didn’t you know that English is the only appropriately woke language?

      2. Latin ten?

  4. “Adopting the dollar, he argued, meant renouncing…the ability to stabilize the economy through monetary policy in times of crisis” (i.e. inflating away debt). Hey Einstein, this is a primary reason for dollarization in the first place.

  5. Here we go again, first using the polls to show one thing:

    Abdalá Bucaram, fell victim to a coup when he tried to dollarize, an unpopular option at the time, with 69 percent of the population opposed according to one report.

    Then using polls to justify the opposite:

    Last January, after 21 years of low inflation and stable levels of purchasing power, 88.7 percent of respondents told polling firm Cedatos that Ecuador should not dedollarize in spite of the economic downturn.

    You can’t have it both ways. Stop cherry picking.

    1. Those polls were taken over a decade apart. People started off opposed, but then they experienced it, it worked, and they don’t want to fix something that’s not broken.

  6. a currency that local politicians can’t devalue by printing bills as if they were bingo cards—à la Chávez or Robert Mugabe

    Or the U.S. Treasury for that matter.

    1. There will be a day of reckoning for these hand outs at some point.

    2. Hmm? The U.S. Treasury can’t print a bunch of bills. The quantity of United States Notes is fixed by law at a maximum value of $346,681,016, and has been since 1876.

      The Federal Reserve, which issues Federal Reserve Notes, is an entirely separate institution.

  7. Excellent article and a meaningful topic. Even if I really tend to disagree with dollarization in most cases.

    In fact, holding a currency that local politicians can’t devalue by printing bills as if they were bingo cards—à la Chávez or Robert Mugabe—is the one thing that protects regular Ecuadorians from the inevitable excesses of 21st century socialism.

    THIS is the main problem. Not what you think by reading this sentence – but the FRAMING of the only possible options as a)some form of Mugabe/Chavez socialism (you really should have added PolPot and Mao and Stalin in order to attach a couple hundred million deaths) v b)dollarization and subordination of a local economy to overseas banks

    Is that really the only option for those who claim to support free markets, etc? To be a fucking tool for Wall St in the Third World? No wonder its a losing proposition since it specifically repudiates self-governance.

    Why not a commodity-based currency?

    1. If they had a stable government that their people could trust to not play with the money, then their own currency would be very reasonable. They also have the possibility of a backed currency, such as the gold standard.

      However, with a corrupt government and low confidence, with no large scale resources to back their currency, I’m afraid that these binary options are actually their only choices.

      1. True. We could set the example by backing the Almighty dollar with kilowatt-hours rather than lead.

      2. Something like Bitcoin might ultimately be an option, but Bitcoin itself is probably *too* supply constrained (rewarding early movers unreasonably), and its stability is not time-tested enough for official use. So for now, dollarization (or euroization, if the euro looks more attractive) are probably the only real alternatives at the moment when you can’t trust your own government.

      3. I wish we had one of those governments too.

        Chavez and Maduro are economic idiots, but let us not discount the effects of US sanctions. It’s like someone raping your daughter and then calling her a slut.

        1. The downward arc of their economies began long before any sanctions were in place.

        2. And the sanctions on Venezuela were put into place after the country nationalized all the oil industry in the country, stealing tens or hundreds of millions of dollars worth of equipment, land, and facilities.

          Objecting to sanctions after that that is like complaining that the bank you burgled last week won’t let you open a checking account.

        3. the sanctions were largely in response to the economic idiocy

          it’s like someone raping your daughter and you calling the cops and your daughter complaining you’re just making things worse

  8. If you have to ask whether a socialist will fuck things up, you’re really not well informed or wise.

  9. Only evil selfish capitalists insist on not starving to death.

    1. Socialism will work this time just watch!

  10. People who’ve never been farther from CNN than the icebox cannot conceive of how international and national socialism dominate Latin America. Nixon’s exports–looter campaign subsidies and superstitious prohibitionism–have WRECKED already poor economies in these faith-addled, caudillo-State banana republics. Exports of raw materials for Birney’s Catarrh Cure and Ryno Catarrh Powder once kept the Andes solvent and American shop girls smiling, until shoot-first Republican prohibitionism made asset-forfeiture crashes and mob violence the dominant feature everywhere.

  11. “The sucre, the official currency since the 19th century, had lost 115 percent of its value against the dollar between 1998 and 1999.”

    Sigh, the frustration with the STEM illiterate continues. WTF do you think that even means? Here’s what that really means. In 1998 the exchange rate was 5,446.6 sucre for 1 dollar. 115% of that value is 6,263.6. If it lost 6,263.6 in a year it would be worth -817 sucre per dollar meaning you’d pay someone a dollar to take 817 sucre off your hands.

    This is how bald tires and scrap lead acid batteries work and it’s why you often have to pay people to take them away. It’s also why they can be found abandoned on the sides of fire roads in rural areas that are seldom traveled along with the occasional appliance or mattress.

    What you meant to say is that it lost 53.5% of it’s value and that it took 115% more sucre to have the buying power of one dollar.

    1. FYI, the formula for gain/loss is just (new value / old value) – 1. If it’s positive then it’s a gain and if it’s negative, it’s a loss. Apologies if it’s the linked author’s incomprehensible failure but it’s something I can not abide.

      If you’d like consulting to prevent mistakes like this from happening in the future I’m sure we can arrange a trade in units of Knob Creek bourbon as the 1.75 liter bottle at Costco in SudCali was only about $45-$50 when I left a bit over a year ago which is about $5 cheaper than a 0.75 liter is here in Nord Carolina’s ABC land. Yes, had I checked I’d have packed the minivan very differently for the move. Yes, very good, that is 170% more expensive.

    2. 115% inflation means that something that cost 1.00 last year now costs 2.15. But “lost value” is a different calculation.

  12. Reason could (and should) put a piece out on how a socialist candidate plans to destroy America’s currency. Look at USD/Latam currency pairs up until around 2014, when American oil production resumed. Stop the drilling and start the printing, what possible outcome could that have?

    1. Pardon, on paper he is now president lol.

  13. Reason will support him if his opponent wrote mean tweets.

  14. I worry for the large US ex-pat population in Ecuador. I am surprised Raisbeck did not mention this. Ecuador has one of the largest US ex-pay populations in South America.

    What happens when a retiree moves money to and from their retirement accounts? The capital export controls might wind up making some unforeseen problems, like ex-pats leaving. They drive considerable business in Ecuador.

  15. “amid electoral chaos and accusations of voter fraud. ”

    you don’t say

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