They said it couldn’t be done, then that it wouldn’t be done, and finally that it shouldn’t be done. It was done and they foresaw trouble. “It” was dollarization in Ecuador, which is now 15 years old. Unlike almost every other country in South America, Ecuador had never suffered a hyperinflation. In late 1999, though, it was on the brink of one, as a low price for oil (the country’s leading export), a banking crisis, and a central bank seemingly unable to get a grip on the situation created great distrust of the local currency, the sucre. Merchants started to post prices in dollars and people began to spend their sucres as fast as they could. In desperation, president Jamil Mahuad announced that Ecuador would eliminate the sucre and use the dollar as its official currency. Some Ecuadorian economists and business leaders had been making the case for dollarization for months, but the announcement was a surprise even to them.
Dollarization began to work immediately, despite much skepticism from international observers (quoted in this article by Steve Hanke, pp. 134-5). As it happened, I visited Ecuador just after dollarization was announced. Interest rates started dropping and the feeling of panic started receding immediately. There was worry about whether the economic situation was so bad that dollarization would make little difference over a longer period, but now it can be stated with confidence that dollarization did make a difference. By my calculations, it is the longest-lasting monetary policy Ecuador has had since the 19th century. It has persisted through an attempted coup, four peaceful changes of president, and a global financial crisis. Now the price of oil is again low, and it remains to be seen how Ecuador’s economy will adjust. But whether we are thinking about something as grandiose as a “new Bretton Woods” or as comparatively modest as monetary reform in one midsize country, let us not dismiss an idea simply because we do not think it is politically feasible at the moment. As the saying goes, a week is a long time in politics; certainly it was 15 years ago in Ecuador.
Those who understand Spanish may be interested in an Ecuadorian site with material from a recent conference looking back at 15 years of dollarization.