This document discusses dollarization in Ecuador and its potential effects on development. It analyzes actual economic data from Ecuador following its official dollarization in 2000 and considers hypothetical scenarios. Dollarization aimed to lower inflation and increase stability. While it succeeded in reducing inflation, it also eliminated monetary policy autonomy and seigniorage revenues. The document explores different econometric models to assess dollarization's impact on development indicators like GDP, poverty, and unemployment, but finds projections difficult due to limited currency data and the many political factors involved.

1. IPOL 8661 Trade and Development
Victoria Powell

2.  Ecuador
 What is Dollarization?
 Literature Review
 Research Model
 Conclusions
 Policy Implications
 Questions

3. The Lost
Decade
1990’s Dollarization

5. Official
Full
De
Jure
Unofficial
Partial
De
Facto

6. Pros
• Absence of crisis and
speculative attacks
• Closer integration in
World economy
• Strong financial
institutions
• Lower inflation
Cons
• Loss of seignorage
revenues
• No autonomous
monetary and
exchange rate policy
• No LOLR

7.  Improve efficiency and stability
 Lower transaction costs with other dollarized countries
 Proliferation of Semi-dollarization
 Last resort during Crises
 Historical process

8. • Broad country Base
• Dollarization as a process
• Some correlation to other economic
indicators
General
Effects of
Dollarization
• Uses various definitions of
“dollarization”
• Historical and Political contexts
Dollarization
and Latin
America
• Before and after analysis based on
Official Date
• Loosely links dollarization to other
economic indicators
Dollarization
and Ecuador
 De Jure and
De Facto
 Substantial
Links

10. Net bilateral aid flows from DAC
donors; United States (US dollar)
Net ODA received per capita (US
dollar)
0
10000000
20000000
30000000
40000000
50000000
60000000
70000000
80000000
1950 1960 1970 1980 1990 2000 2010 2020
0
5
10
15
20
25
1960 1970 1980 1990 2000 2010

11. Trade with the U.S
 Has increased
 33%
Trade (% of GDP)
30
35
40
45
50
55
60
65
70
75
80
1960 1970 1980 1990 2000 2010

12. Before Dollarization After Dollarization
1995 1996 1997 1998 1999
Real GDP
growth
rate 2.1 3 5.2 2.2 5.7
Export
Growth 10.7 1.2 5.7 4.1 5.9
Import
Growth 7.4 9.7 18.4 13.3 36.4
Inflation 22.8 25.6 30.7 43.4 60.7
Unemplo
yment 7.7 10.4 9.3 11.5 15.1
Budget
Deficit
GDP 0.8‐0.4 ‐1.2 ‐0.6 ‐0.6
Current
Account
GDP 3.6‐0.7 ‐3.0 ‐9.3 ‐4.6
2000 2001 2002 2003 2004 2005
Real GDP
growth
rate 0.9 5.5 3.8 2.3 6.3 3
Export
Growth -3.2 7.8 5.4 8.5 5.8 n.a.
Import
Growth 5.3 2.2 0.9 2.4 1.9 n.a.
Inflation
Rate 91 22.4 9.4 6.1 2 4.4
Unemplo
yment 14.1 10.4 8.6 9.8 11 9.7
Budget
deficit/G
DP 0.1 ‐3.2 ‐0.6 1.2 ‐0.1 0.9
Current
account/
GDP 5.3 3.2 ‐4.9 ‐1.7 ‐0.5 ‐0.8

13.  Attempts to analyze development implications of Official
Dollarization in Ecuador by comparing actual data sets
with hypothetical data sets derived from unofficial
dollarization and exchange rate trends.
 Scenario 1
 Actual data from IMF
 Scenario 2
 Data derived from a modest interpretation of dollarization
trends
 Scenario 3
 “Hard Peg”
 Beneficial
 Argentinean style

14. Independent
Variables
• Exchange
Rate
• Dollarization
Dependent
Variables
• Inflation
• Development
Indicators
• GDP
• Poverty

17.  Continual increased usage of dollar
 Continual increased inflation
 Weak banking system
 Continued unemployment
 This is a contentious issue
 More likely there would be a reduction of WR
 Decrease in U.S. aid

18.  Increased
Unemployment
 Increased Inflation
 Deepening of Recession
 Lack of Remittances
Possible Implications

19.  Dollarization was it Positive for Development
Ecuador?
 Better Banking
 Fiscal rigor
 Workers Remittances
 Key Factors
 Oil exporting (OPEC)
 Trade with the US? (aid)
 Political viability

20.  Projections difficult to establish
 Only highly correlated statistical indicators is inflation
 Lack of currency data