Ecuador's Leader Scrambles to Fill a Credibility Gap --- Shift to U.S. Dollar Is Bold, but May Be Too Late to Help
The success or failure of Ecuadorean President Jamil Mahuad's push to dollarize his country's economy depends less on the technical details than on his ability to do something he has failed to do since taking office in August 1998: gain credibility.</br></br>Late Monday evening, Ecuador's Central Bank approved Mr. Mahuad's proposal to replace Ecuador's troubled currency, the sucre, with the U.S. dollar. The president of Ecuador's Central Bank, Pablo Better, resigned in protest. Mr. Better was the only member of the Central Bank's board to oppose the measure.</br></br>As Mr. Mahuad has struggled to deal with such multiple crises as widespread bank failures, a deep recession, foreign-debt defaults, rising inflation and unemployment, he has been dogged by criticism for acting too slowly and too late. His proposal to dollarize Ecuador's economy stands out as the boldest move he has made so far as president. The risk, say critics, is that Ecuadoreans and investors have lost so much faith in the beleaguered president that even this measure may not be enough to save his presidency. Mr. Mahuad's move puts Ecuador at the center of a growing and controversial movement in the developing world toward dollarization or so-called currency boards as pressures on weak currencies push countries to link them to stronger currencies. Some economists have expressed concern over the potential dangers of developing nations sacrificing control over monetary policy to the central banks of stronger, industrialized nations, whose economies have little in common with poor countries like Ecuador.</br></br>Mr. Mahuad's proposal to dollarize is meant to end the currency crisis and silence growing calls for his resignation. Last week, the president declared a state of emergency to keep protests against his government from getting out of control. Yesterday, there were announcements of a new wave of protests by leaders of Ecuador's indigenous groups who were angered by the dollarization move.</br></br>"It's not such a bad idea," says Michael Henry, Latin America economist at ING Baring. But Mr. Mahuad "has to build some credibility and break the cycle of low expectations" that has plagued his government almost from the start. "If this is enough to shock Ecuadorean politicians and get them to make the necessary changes" in how the country's economy is run, "then it's a good idea."