(Based on the text: Micro and Macroeconomics, Theory and Exercises Solved author)
In the following lines we will try to make a technical analysis of dollarization, background, application and development in Ecuador in recent years.
To facilitate understanding of an event that has raised opinions for and against, begin by defining, and say:
Dollarization is a process of nullification or currency substitution, where an economy replaces the original currency for the US dollar, bringing its currency circulation. Do not confuse this process with convertibility, where the national currency is not replaced, but amounts to a given amount of foreign exchange.
Having defined this process, we will try now see, in what circumstances is preferable even against all nationalist sentiment, without the national currency.
First, having its own currency, attaches ample access to monetary and exchange rate policy as a resource to try to finance a gap in the trade balance through issuance or currency devaluation; however these practices (own of Keynesian expansionary monetary policy), are not sustainable in the long run, because the first is inflation and the second does not offer a competitive improvement of the country. In our case this resource was used to try to boost the competitiveness of the external sector, in addition to defray public spending unfortunately this resource was almost a norm in pre-dollarization period.
A coin is sustainable when the economy is managed responsibly, there is a sound financial system, there is a very steep inflation, and has a strong external sector in entering the international market.
When we speak of Ecuador who came to be breached in full all the above constraints, for starters, the trend even before the crisis was that public spending is financed via monetary issue, then the Financial Crisis 99 the financial system decays abruptly result of inter alia a painful wave of corruption (connected lending, etc.), as evidenced with interbank interest rate of 152% at the end of the year in question (that's up to boost demand for local currency, which never happened, unlike people kept taking refuge in the dollar, especially for purchases of durable goods such as cars or houses), also with respect to inflation can cite the 90s, began with fluctuations ranging from 49% annual inflation in the early, up to 94% per annum ("runaway") at the end of it, implying that even before the crisis and inflation was a problem in tow on the other hand we mention that in the external sector crisis like the Mexican and Venezuelan (1994), Asian (1997), Russian (1998) also represented an unfavorable international scenario, which affected the falling price of oil, category which by then already constituted 37% of total exports, given the dependence of this product is our external sector. All this was presented as a negative to the problem of sustainability of the late Sucre monetary incentive.
In the context we saw emerge two clear options dollarization seen, the first was the nullification or currency substitution and the subsequent adoption of a currency that is the dollar; and second, the creation of a currency (currency, as happened in Argentina, for example), which would implement a bimonetarism legally in progress, ie a currency board (which as we saw in 2001 in Argentina would not have been the best solution, since there is always the temptation to continue issuing currency irresponsibly to finance fiscal deficits) in any case it should be noted that above all the adoption of the dollar as legal tender was a measure required by a chaotic situation, whose consequences she is told, and a sharp deterioration in living conditions was expressed in a migratory outflow. Furthermore, if it has not adopted, our country could have been faced with the specter of hyperinflation that once ravaged five Latin American countries: Argentina, Bolivia, Brazil, Peru and Nicaragua.
Ultimately after implementation of this coin we can distinguish both positives and negatives of it, however in general, the balance is more positive than negative, to the point that according to a survey in 2009, the Quantum polling, published in El Comercio of Quito, 84% of the population, ie, four out of five people, support:
The main advantage resulting from monetary stability, is certainly creating a scenario of certainty where possible long-term planning, which should result in a less unstable environment for private investment (domestic and foreign), if we had a government that was more pragmatic and less ideological in their approach (following successful models such as the social market economy and not the socialism of the XXI century, for example). Yes consumption has increased dollarization, the main beneficiary, the middle class and fixed income available to the extent that dramatically increased purchases of homes and vehicles, which is easily verifiable when passing through the main streets of big cities, crowded with vehicles, and encouraged by subsidizing gasoline, which makes citizens prefer own car over public transport, which should improve and receive full support of the Executive, that the circulation is smoother.
ü Another of the benefits of dollarization, monetary stability is derived from the loss of foreign exchange risk. In addition dollarization has given reason to monetarist approach that the main cause for inflation is monetary issue, which is not based on production growth, because due to that it was implemented in the country in 2000, inflation rates have declined, having benefited from it four governments in the country: Noboa, Gutiérrez, Palacio and Correa (although the latter was once a hard critic of it). Inflation benefits everyone, because the lower rate, there is an increase in consumption, investment, and even exports, which are variables members of aggregate demand. The more developed countries are those where the growth in the price level are minimal and not as in Venezuela, for example, the most inflationary nation in Latin America (30% by 2010) and where its President blames the rich and entrepreneurs inflation, when the main culprit is the same, the colossal increase in public spending, monetary issue indiscriminate, fiscal deficits, increased imports and currency devaluation "competitive".
Importers benefit from a currency that does not represent them unpredictable changes and with which countries get better prices if devalue its currency. But not only they win, also triumph consumers for whom it is possible to access lower quality goods at lower prices.
ü Many intellectuals identified with the left, note that the loss of an instrument such as the devaluation hurts producers and exporters, who no longer count on the benefits of devaluation are at a disadvantage to those who do have this resource, which is a half truth because the famous "competitive devaluations" encouraged once by the IMF, are typical short-term measures that do not serve you to the economy in a longer time horizon, because in the long run, producers are required to improve, to be competitive with similar products and lower prices, benefiting consumers, who were concerned: Adam Smith and John Maynard Keynes, having sustained and rightly so, that is demand creates its own supply. It was another liberal, Say, who said it is still supply creates its own demand and history proved them right both Smith and Keynes, when we see that contemporary companies invest heavily in market research, enabling them satisfy your customers better than its competitors.
While listening insists erroneously say that monetary policy was eliminated after dollarization, it should be noted that monetary policy is broader than mere monetary issue, because it also includes other tools such as: bank reserves and issuance of coins (cents), the same as in any way gone. It was already limited monetary policy, but this has not been eliminated. Reminding that through the bank reserves, banks have the ability to create money. So, when trying to increase the money supply (due to a recession, for example), it could decrease the reserve for this purpose and whether the reduction would be opt rather for raising that lace. The coins although no significant amounts nevertheless helps to pocket cash grant citizenship.
The main challenge imposed dollarization to be sustainable, it is the political will that should have those in power to not make public expenditure bulky ending affecting public finances, it must be remembered here that there are three ways to finance a budget deficit: 1) through taxes; 2) via domestic borrowing and / or external; and, 3) via monetary emission.
Being impossible due to dollarization, the third and dangerous path, are only two options. Therefore in the present Government of Ecuador, we must recognize that they have improved tax collection and the work of SRI focus on large taxpayers, it must however also provide tax incentives in order not to discourage investment and private initiative . As for the debt, there have been two major financiers of the scheme: 1) The IESS; and 2) China, as international financial institutions are reluctant to provide loans to Ecuador, by country risk, which is a real variable and there, regardless of the opinions of the President and his staff in this regard.
CONCLUSIONS
In short and making an objective balance in this regard, we can say dollarization, this monetary and exchange rate instrument, has contributed positively to the performance of the Ecuadorian economy, giving a considerable and sustained macroeconomic stability, which outweighs the supposed economic prejudice attributed dollarization, as is for example, as proclaimed loss of the possibility of "competitive devaluations" which, as already noted, only serve on the short term and even there, we would be subject to trade retaliation by country affected, because we must remember that this policy technically known as "beggar thy neighbor" annoys trading partners, as are artificial measures in the medium and long term, could become a boomerang for the country, as far as inflation rates refer, as the imported component is very important in developing countries where import of machinery and raw material is constant. It is what is happening now in Venezuela and what already happened in the past, in the previous Ecuador dollarization, when he was in effect the Sucre.
On the "loss of monetary sovereignty", ie here that this is a simple ideological criticism foisted by those who prefer to do business with like-minded countries to their thinking, type: Cuba, Iran and Venezuela, before signing agreements with "imperialist" nations case: the US or Europe, for example; forgetting these critics, that the world has already changed and former socialist countries like China, Russia, Poland and Eastern Europe, massively turned to the market economy, socially responsible. More than that, being a mere political argument, without financial support without solid arguments, does not deserve any attention.
To think that only dollarization we can be a better country, has no meaning. It is necessary to correct the huge existing structural imbalances in the Ecuadorian economy, which is not achieved if we anchored the "revolutionary" past in Latin America. Today, governments are not "left" or "right", at present these concepts become obsolete and outdated, after the actual collapse of the socialist economies around the globe.
The contemporary world is divided into two types of countries (as Andrés Oppenheimer in his book, "Cuentos Chinos"), which attract and those who scare capital. Where we are located Us ?, if we see ECLAC in its latest report dating from 2010, states that caught Chile: $ 15,000 million, Peru $ 7,000 million, $ 6,000 million Colombia, Ecuador and Venezuela $ 164 million minus (- ) $ 1,440 million, ie, the latter was even capital flight.
Is not it rather than sending countries of foreign capital prefer to invest productively in nations with effective social market economy or social liberalism, instead of going to countries with systems like socialism of the XXI century, where its inventor, Dieterich proposes resurrect Marx, returning to the centrally planned economy, which failed in the former USSR and its satellites this European, replacing the market and its pricing system for labor value theory and the return of goodwill to the workers?
Clearing here who will not only work adds value, as there are goods that do not require transformation to be sold such as natural resources, whose price fluctuates rather marginal consumer preferences, reflected in the forces of supply and demand, present in all market, irrespective of whether they are competitive perfectly or imperfectly. More than that, we must also consider that not every business can benefit financially, there are occasions where they suffer losses and finally, the employer advances to the worker his wages, long before even the sale of goods on the market is made.
By José Martí, whom both revere Castro socialist type (although Martí, by their thinking seems liberal rather than Marxist, as with other ancient heroes of socialism as: Simón Bolívar and Eloy Alfaro, or other contemporary exponents as Lula, Bachelet or Mujica, for example), has a phrase which states that hatred does not make sense to capital, which unlike the union between labor and capital is the source of production and hence national prosperity.
In terms of inequality and poverty deserves relievarse in Ecuador, despite what they say many scholars anchored to past theories fashionable in modern times, there is an effective reduction of poverty in these ten years of operation of the dollarization. Thus, according to ECLAC it stood before dollarization levels of 60%, which is down at the present time 37% or so. This being done, attributable to dollarization positive situation.
However, dollarization is no panacea for ills as embodied within the Ecuadorian economy, as inequality in income distribution, today after 10 years of life of the measure, have not changed significantly.
Thus, taking as a reference the Gini index [1] that the early 90's was located around 46%, in 2001 was 62% and for December 2010 was 50.5%, which we indicates that in terms of income distribution are today even more inequitable than 20 years ago, which shows, that the problem of inequality in Ecuador, is a structural evil, that deserves greater effort and dedication on the part of rulers turn.
No need to change the economic model of capitalism to socialism, it takes just the effective implementation of a capitalist system with social policies that combat inequality, as they have in other countries where the economy is, the technique take precedence on the political ideology of their rulers. In this regard, it must implement appropriate measures such as eg adequate tax policy to increase direct charges (income tax for example), to the detriment of indirect taxes (all taxes on consumption, basically). Likewise, it should favor direct subsidies (production or unemployment, for example) rather than inefficient and inequitable fuel subsidies that favor more people who have higher incomes, or did the poor have own vehicle?
[1] GINI index: index obtained from the GINI coefficient, which expresses the ratio of unequal distribution of income, the higher and closer to each other, the greater the inequality in income distribution.
