Ecuador Turns to Dollarisation

Ecuadorian President Jamil Mahuad was deposed shortly after announcing a radical plan to stop his country's hyperinflation by adopting the U.S. dollar as the nation's currency. However, his successor, Vice President Gustavo Noboa
Beharano has pledged to continue the process.

Some U.S. economists say "dollarisation" is Ecuador's best hope for monetary stabilisation, and that other countries are moving in that direction.

  • The interbank borrowing rate -- the rate banks charge other banks -- was 152 percent before Mahuad's announcement, but less than 24 hours after his announcement tumbled to 25 percent, says Johns Hopkins University economist Steve H. Hanke -- a leading proponent of dollarisation.

  • Panama dollarised in 1903, as have Liberia and a few tiny island nations in the Pacific.

  • Argentina and Hong Kong -- the latter since 1983 -- tie the value of their currencies directly to the U.S. dollar, and use a currency board to maintain the full convertibility of their currencies into dollars.

  • Sixty-five percent of Argentina's private bank accounts, 75 percent of Uruguay's and 85 percent of Peru's are in dollars.

    "Full dollarisation, if credible, eliminates devaluation risk, and, consequently, will likely result in interest rates which are both lower and less sensitive to crisis in other countries," testified Guillermo Calvo, director of the Center for International Economics at the University of Maryland, in recent congressional hearings.

    The risk to the U.S. is that it might feel compelled to serve as other countries' lender of last resort and set monetary policy to accommodate their needs.

    The Fraser Institute of Canada has even proposed a common currency for the U.S., Mexico and Canada. Observers say common currencies may be the wave of the future, but dollarisation is a readier option.

    Source: Editorial, "To Dollarize? Despite Ecuadoran Coup, It's a Good Option," Dallas Morning News, January 24, 2000; Steve H. Hanke, "Ignore Markets' 'Vote' at Your Peril," Letters to the Editor, Wall Street Journal, January 18, 2000; Larry Rohter, "Using the Dollar To Hold the Line," New York Times, January 18, 2000.

    For text (Dallas Morning News)

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    (SA Comment: Dollarisation of the Rand would reduce interest rates over-night, eliminate currency devaluation except against the currencies of countries with lower inflation rates and more positive currency flows than the U.S., and bring about the immediate disappearance of exchange control. Another plus would be that the government would be compelled to balance its budget. The only risk is the slim possibility of U.S. inflation becoming higher than South African inflation would have been in the absence of dollarisation. At this stage there is probably a greater chance of rivers running uphill. Eustace Davie, Director, FMF.)
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