‘If we had not dollarized our economy, we would be in a worse position’
*Interview to Ecuadorian economic consultant and analyst, former Secretary General of Planning Pablo Lucio Paredes
Aug-30-01

 
To begin with, let us review Ecuador’s economic picture. What is the major economic problem?

I think the major problem in Ecuador as well as of most our economies is the low productivity in all areas, both public and private. For instance, if we ask what the Ecuadorian private sector does, one of the major activities is banana exports with a production of around 1.5 billion dollars a year, employing some 300,000 people. This means we are generating a wealth of 4,000 dollars a year per worker. By contrast, a Microsoft employee produces a wealth of 1 million dollars a year because that company sells 40 billion and employs some 40 thousand people. So this is one of the major problems of our economy: we produce low value and have little productivity. We need many people to produce little. This applies to the private and public sectors alike.

How is the dollarization process that began last year performing?
 


‘The major failure of our
economies lies on our slight
emphasis on productivity,
which is the bases of wealth’

Ecuador has been quite unstable in the last twenty years and deep down the cause of instability –I mean exchange rate instability, inflation, etc- is that we have always used our currency and exchange rate as tools to solve some people’s problems at the expense of others. If the private sector was in debt trouble, then the Central Bank took the responsibility for the debt. If exporters had problems, government decided to devalue to help them.

This is why the exchange rate in Ecuador increased from 25 sucres a dollar in 1981 to 6,000 or 7,000 in 1998. During 1998 and 1999 a series of economic problems unleash (El Niño phenomenon and the oil price slump among others) and affect the banking sector. Just as had happened in the last 17 years, the Central Bank and the exchange rate are used to rescue the situation. As a result, the exchange rate rises from 7,000 to 25,000 sucres a dollar. This situation sparked great uncertainty and the vicious circle the economy was immersed in had to be stopped. One of the ways to do it was dollarizing, the most extreme of the measures but the one adopted in January 2000.


The crisis of late ‘90s pushed the exchange rate to 25 thousand sucres a dollar’

Can we say the decision of dollarizing was right?

There is a problem in the economy and it is that the ‘right’ does not exist. There’s the lesser evil or the worst. It is impossible either to know what would have happened if another alternative had been taken. I think that if we had not dollarized we would be worse than now given the problems that had piled up in the local economy.

This was a totally creative measure. Did you emulate some pattern or base on some similar experience in other countries?

I believe Ecuador let the problem swell and when it was overwhelming, the decision was made. In fact, there was not much experience from which to learn in terms of dollarizarion. We could study the case of Panama, which was already dollarized 70 or 80 years ago. And there was Argentina’s currency board as a similar example. But I think Ecuador dived into unknown waters.

Can we draw a parallel between Ecuador’s economic situation and that of Argentina?

I deeply know the situation in Ecuador but not so much in Argentina. I would say that countries’ economies are like people’s economies: if one manages his own funds carefully, saving in good times for bad times, then one makes headway. Otherwise, problems arrive sometime and so the existing tools must be used to overcome them.

The only great benefit for Argentines and Ecuadorians from currency board or dollarization is that we have lost one of the mechanisms that allows us to deal with the problem –the instrument of devaluation. We have promised not to devalue and Argentina might still do it but not Ecuador. What devaluation contributes to the economy is mainly lowering prices and salaries in dollars. Once devaluation is ruled out, price and wage flexibility is necessary for the economy to adjust. Argentinians have not been disciplined and lack price and wage flexibility so it is obvious they are in trouble. The same happens in Ecuador and if we do not manage to forge discipline and flexibility we are going to be like them Of course, at least we have the Argentine mirror to watch.

Regarding regional economies, what are the visible strengths and weaknesses?

I think many positive things have taken place in Latin America despite people tend to be more pessimistic. The democratization process in itself is interesting. Today, we do not record the inflationary rates we had 10 or 20 years ago. Regional economies are more open. There is widespread agreement that governments should work better and there’s greater acceptance of the private sector. I think there is important institutional and ‘mental progress’.

The major weakness is we have fell short of improving productivity, which is the bases of wealth and is not the major issue in many nations. In Ecuador there are not productivity statistics and this also occurs in most Latin American countries.

If Latin American countries had to choose between the FTAA and strengthening regional blocs, which one should they choose?

As Ecuadorian citizen, when I’m told ‘we are going to build a regional bloc around us with Venezuela, Colombia, Peru’ and I am also told ‘we are going to mint our own currency’ I think I wouldn’t want to join only Colombia and Peru and don’t want to share currency with them. If we have failed in managing our currency and so have they, then we cannot work together. The successful countries in the world have globally opened to the markets. I favor a wide as possible openness and think the FTAA is the best scenario to do it.

Interview by Norma Domínguez

* Conducted during the XII Annual Plenary Session of CEAL, Buenos Aires, August 29-31, 2001

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