A President With a PhD Tried to Kill the Dollar for a Decade. The Dollar Won, and Argentina Should Pay Attention
(SeaPRwire) –
By: Raymond Vance
Dollarization is usually debated as a theory. Ecuador turned it into a stress test, and the results should embarrass every finance ministry in Latin America that still treats a local currency as sacred. The country adopted the dollar in January 2000, after the sucre collapsed from 6,825 per dollar at the end of 1998 to 28,000 per dollar in the first week of 2000. President Jamil Mahuad made the switch at 25,000 sucres to the dollar, encouraged at the time by President Bill Clinton and Treasury Secretary Lawrence Summers. What followed was not a miracle, but something rarer in the region. Inflation dropped sharply, deposits returned to the banking system, growth turned positive, and exports surged. Then came the real experiment. Rafael Correa, an economist with a PhD from the University of Illinois who had denounced dollarization in print before taking power, governed from January 2007 to May 2017 with an open desire to unwind it. He failed. That failure, more than the adoption itself, is the finding that matters for Caracas, Buenos Aires, and now Washington, D.C., where promoting the greenback abroad is back on the agenda.
The official record from Quito is unambiguous. Dollarization today enjoys roughly 90% public approval. It is the longest-lived currency regime since Ecuador’s independence in May 1830, outlasting every constitution the country has written. Correa called it “an immense error” and “monetary suicide” as president, yet publicly assured voters that abandoning the dollar would be catastrophic and off his agenda. He understood the politics. An open dedollarization push would have triggered bank runs, economic collapse, and possibly his own impeachment. So the public face of the regime stayed intact while the machinery underneath was quietly reworked. This is the part that rarely makes it into the policy papers circulating in Argentina, where dollarization is debated as a binary switch rather than a system that can be hollowed out from within.
The subtext of the Correa years is a manual in covert dedollarization, and it deserves to be read clause by clause. In his first year, he scrapped the oil reserve fund, the fiscal anchor that had produced Ecuador’s first run of concurrent surpluses in its oil era. He closed the economy to foreign capital, defaulted selectively on foreign debt despite record oil revenues, imposed an exit tax on every dollar leaving the country, and raised import tariffs. He forced private banks to repatriate 45% of their liquidity and park it at the central bank. He launched a central bank electronic money scheme, sold as financial inclusion, which would have let the state pay bills in digital credits not fully backed by dollars. The public rejected it and the program died. Most egregiously, the central bank lent directly to the treasury, peaking at about 10% of GDP according to the IMF, with the heaviest lending between 2009 and 2014. In effect, Correa printed unbacked “ecuadollars” and the system still held, because the public’s dollars stayed dollars.
The lesson for Venezuela, Argentina, and the rest of the region is not that dollarization is painless. It is that the dollar does its job even under a hostile government, but only if the host country resists the temptation to rebuild a shadow printing press inside the central bank. Ecuador’s lingering distortions prove the point. The central bank still sets interest rates and steers credit toward favored sectors. Capital controls still cut the country off from the deepest pools of dollar liquidity. Twenty-six years without a currency crisis is a remarkable asset, yet the full benefits remain unrealized. Any government weighing the switch should read Ecuador as both vindication and warning: adopt the dollar and you buy credibility instantly, but keep the Correa-era architecture of directed lending and controls, and you are simply renting that credibility at a price your sovereign credit rating will eventually refuse to pay.
Author bio: Raymond Vance, a senior macro-economist and consultant to central banking policy research working groups, with two decades advising on currency regimes, sovereign debt, and fiscal anchors across emerging markets.