IPOL 8661 Trade and Development

Victoria Powell

Ecuador and Impacts of Official Dollarization

EcuadorWhat is Dollarization?Literature ReviewResearch Model ConclusionsPolicy ImplicationsQuestions

Outline of Presentation

Ecuador’s Background

Exports

What is Dollarization?

Pros and Cons of Dollarization

Improve efficiency and stabilityLower transaction costs with other dollarized

countriesProliferation of Semi-dollarizationLast resort during CrisesHistorical process

Why do countries Dollarize?

Lit Review

De Jure and De Facto

Substantial Links

Research Gaps

Infl

ation an

d R

eal G

DP

Net bilateral aid flows from DAC donors; United States (US dollar)

Aid FlowsNet ODA received per capita (US dollar)

1950 1960 1970 1980 1990 2000 2010 20200

10000000

20000000

30000000

40000000

50000000

60000000

70000000

80000000

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 20100

5

10

15

20

25

Trade with the U.SHas increased33%

Trade

Trade (% of GDP)

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 201030

35

40

45

50

55

60

65

70

75

80

Before Dollarization

Other indicators

After Dollarization

1995 1996 1997 1998 1999Real GDP growth rate 2.1 3 5.2 2.2 5.7Export Growth 10.7 1.2 5.7 4.1 5.9Import Growth 7.4 9.7 18.4 13.3 36.4Inflation 22.8 25.6 30.7 43.4 60.7Unemployment 7.7 10.4 9.3 11.5 15.1Budget Deficit GDP 0.8 ‐0.4 ‐1.2 ‐0.6 ‐0.6Current Account GDP 3.6 ‐0.7 ‐3.0 ‐9.3 ‐4.6

2000 2001 2002 2003 2004 2005Real GDP growth rate 0.9 5.5 3.8 2.3 6.3 3

Export Growth -3.2 7.8 5.4 8.5 5.8n.a.

Import Growth 5.3 2.2 0.9 2.4 1.9n.a.

Inflation Rate 91 22.4 9.4 6.1 2 4.4

Unemployment 14.1 10.4 8.6 9.8 11 9.7Budget deficit/GDP 0.1 ‐3.2 ‐0.6 1.2 ‐0.1 0.9Current account/GDP 5.3 3.2 ‐4.9 ‐1.7 ‐0.5 ‐0.8

Attempts to analyze development implications of Official Dollarization in Ecuador by comparing actual data sets with hypothetical data sets derived from unofficial dollarization and exchange rate trends.

Scenario 1Actual data from IMF

Scenario 2Data derived from a modest interpretation of

dollarization trendsScenario 3

“Hard Peg”BeneficialArgentinean style

Research Design

Research Model: Units

De Facto Dollarization

Liquid Assets

Continual increased usage of dollarContinual increased inflationWeak banking systemContinued unemployment

This is a contentious issueMore likely there would be a reduction of WR

Decrease in U.S. aid

Continued De Facto Dollarization

Increased Unemployment

Increased InflationDeepening of

RecessionLack of Remittances

Hard PegPossible Implications

Dollarization was it Positive for Development Ecuador?Better BankingFiscal rigor

Workers RemittancesKey Factors

Oil exporting (OPEC)Trade with the US? (aid)Political viability

Policy Implications

Projections difficult to establishOnly highly correlated statistical indicators is

inflationLack of currency data

Stumbling Blocs

Questions