Analysis of Dollarization in Ecuador

By Sam Wang, Research Associate at the Council on Hemispheric Affairs

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Every day since 2015, thousands of Ecuadorians have crossed the bridge from Tulcán, Ecuador to the border town of Ipiales, Colombia to go shopping. Goods they purchase in Colombia include food, cars, television, and even bulldogs. On a holiday weekend between May 27 and 29, more than 50,000 Ecuadorians crossed the border to Ipiales.[1] Some shoppers come from as far as Quito, a five-hour drive south of the border. Ecuadorians purchase goods in Colombia en masse due to a simple fact: prices in Colombia have become significantly cheaper. For example, a 50-inch TV costs $1,300 USD in Ecuador, but less than $800 USD in Colombia.[2] The situation has become of such concern to the Ecuadorian government that last year, President Rafael Correa issued a “call of conscience” to Ecuadorians, asking his compatriots to “offer support to the national production” by buying Ecuadorian products.[3]

In addition to Panama and El Salvador, Ecuador is one of the Latin American countries that uses the U.S. dollar as the only official currency. Ecuador does not print its own bank notes. In recent years, the U.S. dollar has continuously appreciated against other currencies in Latin America, making the price of goods in Ecuador higher than that in neighboring Colombia and Peru. Ecuador abandoned its old currency, the sucre, during a severe economic crisis in 2000 and has been using U.S. dollars ever since. With the appreciation of the U.S. dollar, doubts have emerged regarding the fate of dollarization. A recent Wall Street Journal article stated that Ecuador “has the misfortune to be an oil producer with a ‘dollarized’ economy that uses the U.S. currency as legal tender.”[4] The appreciation of the U.S. dollar against other currencies has decreased the net exports of non-oil commodities from Ecuador, which, coupled with the fall in oil prices, has constrained the country’s potential for economic growth.

The government of Ecuador has also cast doubt on the success of dollarization; as early as 2014, Correa said that “dollarization was a bad idea.”[5] In the same year, he established a parallel electronic currency for domestic use, which some believe is the first step of de-dollarizing the economy. However, proponents of dollarization believe that it has generated considerable macroeconomic benefits to Ecuador in the past 16 years. Through an examination of the impacts of dollarization in the 21st century and the economic principles behind it, this article argues that both the positive and negative impacts of dollarization are perhaps being overstated, and that a de-dollarization process would provide more negative effects than positive outcomes for Ecuador.Read Article

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