Greenback Guinea Pigs.

Panacea or remedy? Ecuador tries dollarization to cure its economic ills.

A NGELITA MAILA WOULD BATHER BE roasting cuys, or guinea pigs, than Fried plantains on the street-side grill she owns near a monument where tourists flock to straddle the equatorial line. But since Ecuador abandoned its sucre currency for the dollar last year to halt an economic crisis, the price of cuy has increased threefold. "With the dollar everything has gone up," says the 35-year-old mother of four. "A whole cuy now costs US$10."

Ecuadorans themselves are feeling like guinea pigs these days after the government replaced the century-old currency with the dollar, in September, to control inflation and broaden trade ties. If the experiment works, several other Latin American nations are poised to take the plunge.

Most of the 12.5 million inhabitants of Ecuador believe that the change has brought some improvements to this impoverished Andean nation. Gross domestic product, which fell 7.3% in 1999, was up 2.3% last year. Currency stability has also fueled domestic and foreign investment. But the dollar could still be a prime political target during next year's presidential elections.

"The single biggest threat to dollarization right now is inflation," says economist Pablo Lucio Paredes, whose book El Libro de la Dolarizacion (The Dollarization Book) is a national bestseller. "Inflation has slowed, but if it doesn't decrease fast enough everybody will be asking for a change."

Inflation has tapped the brakes, from 91% last year--the region's highest rate--to just under 59% for the 12 months ending in March 2001. The government has vowed to keep inflation below 25% this year.

In God Ecuadorans trust. According to a study by polling firm Cedatos, dollarization has also exacerbated the breach between the haves and have-nots. In 1999, 70% of the population lived under a poverty line of $278 a month for a family of four. A year later that figure had increased to 79% as salaries failed to keep pace with inflation.

Former president Jamil Mahuad was ousted three weeks after introducing dollarization, a move made to head off an economic meltdown. Few observers think sweeping economic reforms could have taken the sting out of what has been a politically painful process.

"When [Ecuadorans] see Grant or Franklin on a bill, it doesn't mean anything to them," says President Gustavo Noboa. "It has been a tremendous cultural blow."

In the past, the Central Bank could simply print money to cover holes in the budget and suffer the ensuing rise in inflation. Noboa, who assumed the presidency after Mahuad was knocked from power by protests, must now convince a combative Congress of the need for new taxes to cover the gap or face strikes when he proposes spending cuts.

Another concern is high-quality counterfeit bills streaming across the border from Colombia. Rings of counterfeiters have even churned out lead U.S. quarters. Authorities say they seized a mere $436,881 in fake U.S. notes in 1999; they nabbed $1.5 million worth of funny money in 2000.

Leon Merchan, the head of the National Judicial Police, says $10,000 in counterfeit bills had recently slipped through the security measures at the Banco de Guayaquil. He conceded that he wouldn't be surprised if fake notes were found in Central Bank vaults.

"It's hard to say exactly how big the problem is, but it is quite obvious that there is a high incidence of fake dollar bills circulating in our economy," says Merchan.

Not surprisingly, impatience is growing and dollarization is taking flak.

"Dollarization could definitely be an issue of debate in the upcoming presidential races, especially if it comes tied to proposals for changing economic policies," says Simon Pachano, a political analyst at the Latin American Faculty for Social Sciences in Quito. "Despite all the talk of losing our national identity with the dollar I don't think that will be a huge issue [in the elections]. Very few people think their national identity is trapped inside a dirty bill."