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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.

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