CUENCA DIGESTIs the dollar in Ecuador in better shape than in the U.S.?

Apr 28, 2011

It's a common topic of discussion around here in expat circles: What impact will the fate of the U.S. dollar have in Ecuador, which uses the U.S. dollar as its currency?

Everyone seems to have a different idea about the future of the U.S. dollar in Ecuador. Some people point to evidence that price appreciation is already apparent in Ecuador, as it is in the U.S.  Others believe that when (not if) the dollar is severely devalued by inflation or hyperinflation, everyone here will be wiped out. And a few subscribe to the somewhat radical idea that's been circulating for a few years, that Ecuador will have to introduce its own new currency. (In fact, that very thing, a currency called the Solidarity Exchange Unit (UDI), is already being traded for certain commercial transactions among cooperatives in Azuay and Cotopaxi provinces.)

But I'm not quite so pessimistic. I see how much “real wealth” there is around here, in terms of self-sufficiency, the strength of family, the sense of community, and cultural stability. Ecuadorians lived through the death of its 80-year-old currency, the sucre, little more than 10 years ago and though it was disruptive, it wasn’t crippling. And the country recovered from it fairly quickly.

I also see a comparatively weak central government whose policies seem to have a minimal effect on the day-to-day lives of citizens. Hand in hand with that is a Central Bank that can't play any of the fast-and-loose national-currency games available to most other countries in the world.

Because Ecuador can't print money (they do issue their own coins — and we could sure use more quarters — but it’s virtually impossible to inflate the money supply five, ten, or twenty-five cents at a time), there seems to me to be a perpetual shortage of cash around here. You could flood this place with dollars and it probably wouldn’t make a blip.

Another element impacting the Ecuadorian economy is that thanks to the last two defaults (the big one in 1999 when the sucre died and dollarization followed; a smaller one in 2008), fiscal management is much more conservative and stable than in many countries around the world. The banking-system workout process, in which the non-performing assets were divested and the financial system was restored to a semblance of soundness, took place ten years ago. The U.S., by contrast, is still flushing toxic assets as fast as robo-signers can process the fraudulent paperwork.  

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In addition, after these defaults, Ecuador has been unable to borrow mucho dinero on the international debt markets, meaning this country has had to live pretty much within its means. Of the nearly $20 billion in assets held by the banking sector, not quite 15% is controlled by foreign interests. More than 85% is in national hands, which gives the country a little leeway, given reserves of nearly $17 billion, compared to debts of $6 billion.

Another major element factoring into my positive prognosis is the food-supply system. Considering how cheap food prices are starting out here, and the minor distances it travels to reach the markets, it's difficult for me to imagine how price appreciation in the U.S. — with its high taxes, fuel prices, insurance premiums; lawyers and bureaucrats ready to pounce on any anomaly; just-in-time supply chains; and weasel factors every step in the process — will impact the price of potatoes grown 10 miles from here or even pineapples that come from the coast.

And even if prices appreciate by 50%, potatoes would go up from 10 cents a pound to 15 cents; pineapples might go from $1.25 cents a pound to $1.80.

Furthermore, though I'm not a big fan of government subsidies, the price of regular gasoline is held down in Ecuador to an artificially low $1.45 or so, which means that the costs of transporting food and goods internally don't cascade quite so quickly as they do in countries with high fuel prices.  

And here’s one last idea for those of you reading this in the U.S. to consider. As the dollar continues to diminish in value and it gets more and more expensive to live at home and around the world, it seems to me that a good alternative is to move to one of the few other countries that use the U.S. dollar and where it’s still maintaining its value (Panama and El Salvador are the other two in this hemisphere). That's a big reason why I'm here.

All paper money is a convenient fiction, smoke and mirrors based on a shared hallucination of value. But to me, most of the evidence points to an inflation-adjusted standard of living in Ecuador that should remain relatively stable.

And then there’s the bottom-line gut reaction: how I feel. The fact is, I worry about you guys up there way more than I worry about us guys down here.

Contact Deke Castleman at deke@accessecuador.com.

 

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