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.