Ecuador: Dollarization has brought stability, shielded economy from excesses of populism (Opinion)

Juan Carlos Hidalgo (CATO INSTITUTE)nacion.com(machine translated)

What if Ecuador had its own currency? Or rather, what if Rafael Correa had the ability to print money to finance the huge budget hole of your government? The question is timely because it highlights a huge benefit that gives dollarization countries with a sad history of fiscal irresponsibility (knock, knock).

After coming to power in January 2007, taking advantage of soaring oil prices, which came to represent more than one fifth of the total revenues of the government, Correa significantly expanded public spending, which rose from 21.2 % to 44% of GDP in the period 2006-2014. While there were significant investments in infrastructure, the bulk of the expenditures went in subsidies and increased bureaucracy.

Faced with such liquidity, the economy grew and particularly the middle class income also increased. This gave room for Correa to adopt anti-market policies: unlike its neighbors, Ecuador did not negotiate FTAs ​​with other nations, he threatened to invalidate more than 20 investment protection treaties and refused to pay part of its foreign debt. All this, coupled with the socialist government rhetoric, shooed capital: Ecuador is the country that attracts less foreign investment in Latin America.

But if the government and growing fiscal deficits incurred when a barrel of oil was above $ 100, now the situation has become critical. Correa has resorted to repeated tax increases, external debt and cuts in public investment. Still, the missing budget planned for this year is 6.2% of GDP.

According to the IMF, the economy will contract by 4.5% this year. But, unlike Venezuela, where a similar populist cycle, the government can not ask the Central Bank to print money to finance, since the country dollarized in 2000. So it happened while in Venezuela the annual inflation is 487.6%, with the resulting disaster widespread shortages that have led prices- controls in Ecuador is only 1.6%.

Obviously, dollarization has not been a canary ointment Ecuador -nothing in this life it is-but it has brought stability and has shielded the economy from the excesses of populism. It is no coincidence that, fifteen years after being implemented, a survey found that 85% of Ecuadorians behind it. Read Article

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