An Analysis of Dollarization and its Effects on the Ecuadorian Tourism Industry

Abstract

The world financial crisis, el nifio, the drop in oil prices, the collapse of the banking sector, the border dispute with Peru, and the eruption of volcanoes all contributed to the economic and political instability in which Ecuador found itself prior to dollarization. For these reasons, the dollarization decision was not a carefully calculated and informed one. Rather, it was made in haste during a time of turmoil for Ecuador. It was theorized that dollarization would establish greater fiscal austerity, guide all factors of production toward greater efficiency, and create a predictable environment for investing typified by stable interest rates and prices. By analyzing the tourism industry of Ecuador it is suggested that dollarization does not deliver on all its promises. Inflation is going up still, interest rates are still too high to promote substantial amounts of investment, and the current account deficit is growing. Due to dollarization, Ecuador is losing international competitiveness. The appreciation of the real exchange rate has created a mismatch between the quality of prices and goods, commodities, and services. The pre-conditions for the success of dollarization were not in place. A sustainable fiscal position, well functioning labor markets, the proper legislation, and the enforcement of laws were lacking. The authorities were concerned with implementation rather than sustainability. Dollarization in Ecuador could lead to a financial crisis comparable to that of Argentina's. If faced with a crisis, it is possible that Ecuador would have to create a new currency and financial system. Ecuador should consider ridding itself of dollarization before dollarization gets rid of it. Dollarization is not inherently bad, even though it may not be the answer for Ecuador. As countries stray away from floating exchange rate regimes and the traditional fixed exchange regimes in search for economic stability, the lessons from Ecuador will be of great importance.