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Defending the dollar in Ecuador

December 30, 2014

This past August, Mary O’Grady made a claim in the Wall Street Journal that few people would argue against when she stated that “few economic injustices are more villainous than stealing from the poor.”

Really, she was speaking about the devaluation of currency at the hands of governments and their central banks.

As O’Grady notes, currency devaluation was a common theme in Ecuador throughout the 20th century and governments used their ability to “print” money in order to engage in dishonest political and economic activities. Inevitably, this led to hyperinflation and eventually formal dollarization in an attempt to save the country from further economic turmoil. All in all,  this measure worked and Ecuador has experienced reasonable financial stability in spite of Correa’s misguided political and fiscal policies. That is not to say that the growth figures in Ecuador should not be called into question, however.

The Devil really is in the details, as the article points out.

These days, however, President Correa is doing everything he can to create a crypto-currency to run parallel to the U.S. dollar (via mobile payments) effectively undermining the 15 years of sound monetary policy that dollarization brought to his country. Unfortunately, he seems to be getting his way and congress approved a measure that would bring that “electronic currency” into existence.  What that means is that “the central bank again has a vehicle that will allow it to conjure money out of thin air to finance a political agenda.”

There are, however, those who have jumped to the defense of the dollar. Earlier this month,  The Instituto Ecuatoriano de Economia Politica (IEEP) held a monetary policy conference which featured Larry White, professor at the George Mason University in Fairfax, Virginia.

While there, Professor White presented his paper titled “Defending Dollarization in Ecuador” where he argues in favor of the merit of dollarization, listing some of its achievements, namely: 1) the lowering of inflation 2) the fostering of financial deepening and thereby real growth, 3) the lowering of transaction costs of importing, exporting and making remittences and finally, 4) the elimination of the ability to cover deficits by printing money.

Professor White, directly tackling the idea of an electronic currency that would be handled by the Ecuadorian government, notes that:

There is no plausibly efficient or honorable reason for the Ecuadoran government to go into the business of providing an exclusive medium for mobile payments. Consequently it is hard to make any sense of the project other than as fiscal maneuver that paves the way toward official de-dollarization. I gather that President Correa does not like the way that dollarization limits his government’s power to manage the economy. He has compared the limitation to “boxing with one arm.” But as I have already emphasized, retiring the government from boxing against the economy by means of money-printing is precisely dollarization’s great virtue.

While defenders of sound money should hope for the best in Ecuador, only time will tell what a government that relies so heavily on oil exports to fund its social programs will do in order to stay afloat. After all, the ability to create money makes life much easier for those who are concerned with staying in power.