ECUADOR: PRESIDENT GUSTAVO NOBOA BEGINS FINAL YEAR IN OFFICE WITH MIXED REVIEW OF DOLLARIZATION.

As Ecuadoran President Gustavo Noboa began his last year in office, he gave a report to the nation extolling the successes of his administration. Two years after Ecuador dollarized its economy, Noboa faces growing public discontent and a shaky economy. Presidential elections are scheduled for October, and the new president will take over in January 2003.

Then President Jamil Mahuad (1998-2000) announced the decision to dollarize the economy on Jan. 9, 2000, and began the process two days later, setting off widespread protests that forced him from office within a week (see NotiSur, 2000- 01-14, 2000-01-28).

When Noboa took office, Ecuador was in the worst economic crisis in the country's history. Noboa continued the dollarization process in an effort to halt the rapid devaluation of the sucre currency and stem rampant inflation. The results, say experts, have been mixed. Noboa has been able to reduce inflation and put the economy on the path to recovery, although his successes have not been felt by the poor, whose discontent is growing.

On Jan. 9, Economy and Finance Minister Carlos Julio Emanuel said, "Dollarization is here to stay." He said dollarization has given Ecuador stability, improved the buying power of people's salaries, increased the wealth of individuals and businesses, and stimulated private investment. The minister said dollarization had also improved the nation's image abroad, increasing the value of Ecuador's global bonds on international financial markets.

Noboa reports to the nation

In his report to the nation Jan. 15, Noboa said his administration had brought stability to the economy through dollarization and the reduction of the nation's foreign debt. He said inflation had dropped from 91% in 2000 to 22.5% in 2001, and unemployment had gone from 16.8% when he took office to 9.5% now. He said the foreign debt had been reduced from US$14.3 million in March 2000 to US$11.3 million now, thanks to the restructuring of the country's Brady bonds, which were exchanged for 20- and 30-year global bonds.

"Ecuador has a future," said Noboa. "Inflation is the worst tax...the worse enemy of the people." He vowed to reduce inflation to a single-digit before he leaves office.

Noboa said GDP grew 2.5% in 2000 and 5.4% in 2001, despite a worldwide economic downturn. It was the highest growth rate in Latin America, where overall growth barely reached 0.4%. The president said he would create a Fondo de Estabilizacion Petrolero, to be set up with money from the sale of crude. The fund would devote 20% of its resources to social development and 80% would be held in reserve to offset periods of international economic downturn that bring volatility in the price of oil.

Noboa did not mention the latest round of protests set off by a 13.9% increase in the price of gasoline, nor did he discuss the allegations of corruption that have tainted the highest levels of the armed forces and the police.

Critics challenge Noboa's assessment of dollarization

Most of the Ecuadoran business class rate dollarization positively, saying it has provided a favorable climate for investment. And supporters say the drop in inflation is a direct consequence of dollarization.

Mauricio Pozo, writing in the economic magazine Gestion, said the absence of a devaluation, plus the Central Bank's inability to print money, helped tame inflation. But he said that dollarization, the currency-board system, fixed exchange rates, flexible exchange rates, or bands in which currencies are allowed to float are neither good nor bad, but simply useful depending on what is done in the overall management of economic policy.

"If public finances are not sorted out, if the financial crisis is not resolved, if the foreign reserves fall short, if productivity does not improve, if we fail to keep economic decisions independent from political ones, no exchange regimen will last," he said.

Leaders of indigenous and opposition groups said little has changed since Noboa took office. While some economic indicators show improvement, that improvement is built on a fragile foundation. They said 80% of Ecuadorans still live in poverty, and, official statistics notwithstanding, un- and underemployment affect 50% of the work force and salaries do not cover the cost of the basic necessities.

While economic analysts point to different macroeconomic indicators to back up their arguments supporting or opposing dollarization, many Ecuadorans have drawn their own conclusions about its impact, citing the rise in the cost of the basic basket of consumer goods. Instituto Nacional de Estadisticas y Censo (INEC) figures show it costs US$313 a month to support a typical family in Ecuador, while the minimum monthly salary is US$115.

Prominent economic analyst Alberto Acosta said dollarization has failed to bring concrete benefits to the Ecuadoran population. He said employment possibilities have not improved, imports of consumer goods have been favored over national production, and the buying power of most people has not increased.

Other critics say dollarization has been supported by oil revenues and remittances sent by Ecuadorans living outside the country. Were it not for oil revenues and remittances, they say, the economy would be in serious trouble. The sustained growth that the export sector enjoyed from 1998 to 2000, despite the economic crisis in the country, has stopped. Ecuador had a trade deficit of US$508 million in 2001, something not seen in a decade.

Economy Minister Emanuel admitted that one of the principal problems in the dollarized economy is Ecuador's reduced competitiveness. He said one measure the government was considering to offset that was reducing interest rates. Interest rates are about 16%, a level some economists consider excessive for a dollarized economy.

Economists warn that if Ecuador does not improve its competitiveness and diversify its exports, it could have problems similar to those in Argentina.

Argentine crisis casts shadow over Ecuador

The crisis in Argentina has brought calls for measures to protect Ecuador from similar problems. Critics note that Argentina also saw strong growth in the first few years following the implementation of its convertibility system that pegged the peso to the US dollar, but fell into bankruptcy and devaluation, and the biggest sovereign debt default in history.

Acosta sees Argentina as an example of the consequences of a "straitjacket" like dollarization or a currency-board scheme.

Opponents also cite Ecuador's trade deficit. "That is very similar to what happened in Argentina, where convertibility led to an increase in imports at the expense of national production, and many local companies went under, thus triggering even higher unemployment," said analyst Gerard Coffy of the Institute of Studies on Globalization.

Coffy said Argentina has moved one step closer to adoption of the dollar, which the International Monetary Fund (IMF) wants. "Both the US and the IMF would like the countries of Latin America to move toward adoption of the dollar before the Free Trade Area of the Americas (FTAA) is implemented, and Argentina is on its way," he said. "What is happening [in Argentina] is what already occurred in Ecuador, where devaluation preceded dollarization."

The Pachakutik indigenous movement has called on Noboa to adopt a plan for an "orderly exit" from dollarization, a proposal supported by Acosta. Acosta said such a move would not only imply a change in the monetary system but also the adoption of an integral economic policy that protects determined sectors of the economy. Acosta said abandoning dollarization would not necessarily mean returning to the sucre, but could mean the adoption of a regional currency to be used among countries with relatively equal economic development.

An undeniable effect of the Argentine crisis on Ecuador is increased nervousness and fear that eventually Ecuador's dollarization will suffer the same fate as Argentina's convertibility scheme. (Sources: Inter Press Service, 01/10/02; Associated Press, 01/16/02; Spanish news service EFE, 01/07/02, 01/10-12/02, 01/14/02, 01/15/02, 01/18/02, 01/19/02; Notimex, 01/06-09/02, 01/11/02, 01/19/02, 01/21/02, 01/22/02)