There is a period of almost eight years (2000 – 2008) in which dollarization worked well without the need for a whole apparatus of regulations, taxes and protectionist measures in the field of trade. Until Correa, the avowed enemy of dollarization, arrived and convinced many that more economic interventionism was needed to survive. Nothing could be further from reality. Dollarization is hard to die because it is based on Ecuadorians overwhelming preference for the dollar over the real alternatives available.

Correa wrote a plan to de-dollarize the economy that is available on the web (“From Absurd Dollarizations to Monetary Unions”). The steps involved in de-dollarization included (1) the concentration of foreign currency in the ECB (bank reserves) and the imposition of capital outflow controls (foreign exchange outflow tax, ISD); (2) put the new national currency into circulation at the same time as the dollar, establishing a fixed exchange rate between them (here we can imagine what was intended with the failed ECB electronic money); and, (3) “when the economy is de-dollarized to the extent possible, a depreciation of the national currency will be necessary to correct the relative price distortion,” that is, to reduce the real income of Ecuadorians.

When the dangerous practice of using reserves to finance public spending began, there was a brutal mismatch, which has still not been fully corrected, although today the reserves of the financial system deposited at the ECB are covered. As of the end of August, of the total liquidity of the private financial system ($7,971 million), 42.8% ($3,412 million) was deposited in the ECB. If the next government decides to return to the practice of financing using funds from reserves, it risks triggering a bank run or limiting the supply of credit and currency growth, putting upward pressure on interest rates.

(…) in dollarization, it is not even necessary to have a central bank, on the contrary, it is dangerous.

Most of the currency in an economy (dollarized or not) with a fractional reserve banking system is created by commercial banks. By approving loans, they increase deposits, and the loan you get for building your house becomes a deposit of the builder and other people involved in the project. Banks today have 44,000 million dollars in deposits, liquidity of 7,971 million dollars and a gross portfolio (total approved loans) of 40,937 million dollars.

Economist Steve Hanke explains that “bank money” is much more important than “government money,” with the former accounting for 78% of the money supply in the United States in 2018 (M4). For this reason, he adds, “the populist rhetoric of politicians attacking banks and financial regulations is holding back the growth of bank money and economic activity.”

If they really want to strengthen the economy, the candidates should emulate the Panamanian model of financial openness or, even better, the Singapore one. It is neither necessary nor desirable to centralize bank reserves, control interest rates and capital movements by imposing barriers such as FDI. Finally, in dollarization it is not necessary to have a central bank, on the contrary, it is dangerous. (OR)