The Americas: Ecuador Struggles Toward a Dollar Economy
OTAVALO, Ecuador -- The long black braid, the blinding white cotton trousers and the woven shoes of the local businessmen here are visible reminders of this community's tenacious cultural pride. But it is at the markets, brimming with traditionally designed wool sweaters, bags, hammocks and wall hangings -- all crafted on imported looms -- that the Otavaleno's much-touted entrepreneurial savvy is on display. Behind the walls of many humble homes in this town, substantial inventories of those same products are bound for markets in Colombia, Chile, Venezuela, Europe and the U.S.</br></br>Located two hours north of Quito by car, on a winding and rutty road, this is said to be the only indigenous community -- of about 40 -- in the country never to have been brought under the control of the Spanish conquistadors. Ergo, instead of the stereotypical Indian poverty and isolation, the dignified Otavaleno is renowned for his independence and worldliness.</br></br>There is one thing, however, that Otavalenos share with this country's other Indian groups, mestizos and Europeans: profound economic suffering at the hands of the perniciously politicized Ecuadoran central bank. Since August 1998 the country's currency, known as the sucre, has lost 80% of its value in dollar terms, destroying savings and living standards; 1999 gross domestic product contracted 26.6% in dollar terms. Inflation, which in 1999 was more than 60%, is forecast to reach 90% in 2000.</br></br>Things are so bad here that even Ecuador's politicians, notorious fans of the central bank as an inexhaustible source of generosity, have caught on. This explains how it is that on Tuesday the Ecuadoran Congress narrowly passed a law mandating that within 180 days the central bank's dollar reserves will be used to retire the paper sucres currently in circulation -- at a rate of 25,000 to one. The new law marks the end of the central bank's power to print money and the beginning of economic hope for 12 million Ecuadorans.</br></br>Yet, it is still only hope. The law grossly perverts the term dollarization in order to preserve specific discretionary central-bank powers such as setting reserve requirements and interest rates and the ability to intervene in the markets through the use of repurchase agreements. The central bankers, it would seem, harbor a deep-seated desire to manipulate monetary outcomes even in the absence of a domestic currency system. This is absurd, but it is also illustrative in that it dramatically defines the core problems of the country: The central bankers, along with this country's other privileged elite, are dug in so hard that nonsense becomes law at their behest. Prying their hands off the economy and moving toward liberalization will mean a long, hard fight, well beyond the simple dollar-for-sucres exchange.