Quito, Ecuador
03 October 2008
U.S. financial problems are affecting economies around the world, especially Ecuador which uses the U.S. dollar as its national currency. VOA's Brian Wagner visited Quito, where the economic crisis is sparking debate on whether or not to continue the dollarization program.
U.S. dollars have flowed freely in Ecuador since the Quito government in 2000 stopped circulating the sucre in an effort to stem rampant inflation. Since then, reaction to the decision has been mixed. But most economists agree that dollarization has brought stability to Ecuador's economy, allowing for greater investment and business opportunities. Panama, El Salvador and several smaller nations have pursued dollar programs as well.
Now however, some business and political leaders are reassessing the decision as the ripple effects from the United States spread around the world.
Pablo Davalos, economist at the Catholic University of Ecuador, says the dollar economy means Ecuador's Central Bank has few tools to protect itself from the widening crisis.
He says international economic problems often spread, but Ecuador is more vulnerable because it has no monetary policy. He says Ecuador's dollar-economy allows U.S. problems to spread directly to Ecuador.
Davalos says U.S. problems have weakened the value of the dollar around the world, leading to inflation inside Ecuador. Already this year, Ecuadorian officials report domestic prices have jumped more than eight percent.
In Quito, market owner Jose Rivadeneira says many consumers are complaining about rising prices for food and other goods.
He says inflation is apparent at the market, because prices often go up with every new shipment he receives.
Experts say price hikes also are a result of economic and political concerns inside Ecuador, such as a recent referendum to approve a new constitution.
Department store owner Jose Cueva says a slight downturn at his business is a result of domestic factors.
Cueva said domestic policy mistakes and not U.S. troubles are the cause of rising prices, but he said the latest round of bank failures in the United States will eventually hit Ecuador.
In recent months, President Rafael Correa has criticized the adoption of the dollar economy, saying it hobbles future economic growth in the Andean nation. Some opposition leaders have expressed fear the president may abandon the current system, but Mr. Correa has ruled out making any such changes so far.
One positive note in the current economy is that a weaker U.S. dollar has made some Ecuadorian exports more attractive to foreign buyers, especially in Europe. John Price, managing director of Kroll consulting in Miami, says shrimp and banana exporters based in the coastal city of Guayaquil stand to benefit.
"The folks in Guayaquil were not happy with the dollarization. However, we live in a world of a weak dollar and those folks are [now] reasonably happy with their level of competitiveness."
Price says many exporters and other business leaders would oppose an end to the dollar economy, if Quito's government decided to launch its own currency.
Economist Pablo Davalos in Quito says the government is unlikely to move in that direction, because the political risks are too great.
He says the government may criticize the dollar economy, but right now the president must defend the program to ensure his own political stability.
Davalos says the government could be forced to change that position in coming months, however, if the fallout from the U.S. crisis continues to hurt Ecuador's economy.