Economic
Environment
In
1999, faced with a severe recession and a currency that
was losing its value by the day, President Mahuad decided
to take the drastic measure of dollarizing the Ecuadorian
economy. At the time, this was a step that was vigorously
debated by economists throughout the world. The principal
argument for dollarization was to restore currency stability
to the country and to bring devaluation-induced inflation
under control. The inflation rate stood at 60.70% in 1999.
A major argument against dollarization, meanwhile, was that
it would cause Ecuador to surrender control of its monetary
policy, as well as an escape mechanism for ensuring that
its exports remain priced appropriately in world markets
- free currency fluctuations (and the too-often-used currency
devaluation). Following much debate both inside and outside
of the country, the dollarization program was finally approved
and put into effect in 2000.
As
of this time, the jury is still out on whether dollarization
was an appropriate step to take and whether, or not, the
country's economic situation has improved as a result. On
the positive side, the GDP growth rate has been moving in
the right direction. After contracting by a stunning 7.3%
in 1999, GDP growth climbed into positive territory in 2000,
registering a growth rate of 2.3%. In 2001, the GDP picture
has become rosier still. For 2001, the GDP growth rate was
5.40% - the highest in the Latin American region.
In
spite of the healthy GDP growth figures, however, various
other macroeconomic indicators have not been nearly as positive.
For example, it was once hoped that a single-digit inflation
rate would be achieved in 2001. Inflation, however, ended
up registering at 22.40% for this year. Although this is
down significantly from the inflation figure at the time
when the dollarization plan was conceived, it is also quite
far from the targeted rate.
