South-Western College Publishing - Economics  
Trading Dollars for Sucres
Subject Monetary policy, Economic growth
Topic International Finance
Key Words Strike, contract, union, benefits, raises, bonuses
News Story

If you were to stand in the hallway of Ecuador's National Treasury building, you might see armed guards wheeling crates filed with sucre notes into a shredding machine and eventually the trash dump. The destruction of sucres, once the national currency of Ecuador is part of a program called dollarization. Ecuador has adopted the U.S. dollar as its currency in the hope that it will end Ecuador's economic problems.

Ecuador's economy is in crisis. It is suffering from the worst recession in a generation. The sucre has been devalued 244 percent in the last year, the inflation rate is about 60 percent, and over 78 percent of the population is in poverty. The government is hoping that adopting the dollar will bring monetary stability, lowered inflation, increased economic growth, and a reduction in the incidence of poverty. Ecuador has launched a 6-month program to phase out the sucre and replace it with the dollar.

Economists believe that one effect of the switch will be increased inflation. In order to make dollarization work, Ecuador will curb subsidies on many goods such as gasoline, electricity and water. Export goods will also rise as local prices approach world prices. The immediate impact of the price increases is to generate more poverty since it is unlikely that salaries will keep pace with the price increases. In the long run, economists argue, the change will be for the good. The use of the dollar will prevent the government from simply printing money to address economic problems. Privatization and cutbacks on the use of subsidies will make Ecuador's industries more competitive.

President Jamil Mahaud proposed dollarization in January. The response to his initiation of a dollarization program was a coup. Vice President Gustavo Noboa is now in power and there is growing dissatisfaction with the program. If economic conditions do not improve, dollarization may claim another of Ecuador's leaders.

(Updated May 1, 2000)

Questions
1. What are the attributes of money? Does the U.S. dollar qualify as money in Ecuador?
2. Retail stores are already posting prices for consumer goods in both sucres and dollars. What determines the dollar price of an Ecuadorean good? Does it help to know that 25,000 sucres are being exchanged for $1?
3. Ecuador is hoping that its dollarization program will encourage foreign investment. What role does the dollar have in encouraging foreign investment?
Source Anthony Faiola, "Putting Faith in the Dollar," The Washington Post, April 9, 2000.

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