The Dollar Rescued Ecuador. Can It Save Venezuela?

By John Otis and Kejal Vyas

QUITO, Ecuador—Devalued and derided, this country’s former currency, the sucre, has been out of circulation for so long that when shopkeeper Raúl Jumbo was shown an old 20-sucre coin he didn’t recognize it.

Ecuadoreans have grown accustomed to U.S. dollars, which their government adopted in 2000 to overcome soaring inflation and the sucre’s collapse. A similar action is now being proposed for Venezuela by Henri Falcón, an opposition candidate in the inflation-racked country’s May 20 presidential election. Dollarization is the course Mr. Falcon, in his long-shot bid to unseat President Nicolás Maduro, says will extract Venezuela from its worst economic crisis in modern history.

Mr. Falcón, a former state governor who broke years ago with the country’s long-ruling Socialist Party, says using the U.S. dollar would end hyperinflation by stopping the overprinting of bolivars, the national currency, which has lost 99.9% of its value since Mr. Maduro took office in 2013.

For Venezuela’s government, which routinely attacks U.S. capitalism, abandoning a currency named after independence hero Simón Bolívar for the U.S. dollar is too painful a comeuppance to contemplate. “We are not going to be a colony of the dollar,” Mr. Maduro declared Thursday as he unveiled plans to erase three zeros off the bolivar, a measure economists say will have little impact on Venezuelans’ daily struggle to pay for increasingly scarce food.

De facto dollarization is already under way in the state-dominated economy, Mr. Falcón says. Ignoring price controls, merchants often sell goods at prices that reflect their free-market value. That is often too much for most Venezuelans, who earn the equivalent of a few dollars a month.

“The biggest enemy of our people is hyperinflation,” Mr. Falcón said in a recent interview. “Why are we so scared to dollarize? Others have done it.” The process involves a government introducing enough dollar-denominated cash to keep commerce moving and allowing its own currency to wither away. Mr. Falcón last week proposed getting the process under way by issuing $25 monthly stipends to adults and $10 for children.

Latin American nations that use the greenback include Panama, El Salvador and Ecuador, an OPEC member that grappled in the late 1990s with some of the same problems now ravaging oil-rich Venezuela. Although Ecuador’s currency transition was traumatic, analysts say the dollar eventually helped the nation’s economy recover.

“People here have no faith in politicians,” Ecuadorean Congressman Paco Moncayo said, “but they do have faith in the dollar.”

That faith was born from disaster. A severe banking and economic crisis in 1999 prompted the Ecuadorean government to go on a sucre-printing spree, causing the currency to fall from 3,000 to 25,000 to the dollar in the four years ending at the beginning of 2000. In a desperate move to save his government, then-President Jamil Mahuad announced on Jan. 9, 2000, that Ecuador would adopt the U.S. dollar. Twelve days later Mr. Mahuad was ousted in a military-backed revolt, but his successor endorsed dollarization.

The introduction of the greenback jolted Ecuador’s economy. Salaries initially fell by 40%, Quito economist John Cajas said, and peoples’ savings accounts and pensions were ravaged. Some Ecuadoreans committed suicide. But prices and wages eventually stabilized. Helped along by a rise in oil prices and remittances from some of the 1 million Ecuadoreans who had fled the country, the country’s export-based economy recovered.

There is still some grumbling 18 years later. Dairy farmer Roberto Bourneo says the dollar makes Ecuadorean goods, including the milk he produces, more expensive, causing him and other farmers to losing domestic market share to imported Colombian milk, which sells for half the price. But when he travels to Colombia with dollars in his pocket, Mr. Bourneo says, “I can buy everything. I feel like a king.”

Quito investment banker Ramiro Crespo recommends dollarization for Venezuela, comparing it to gun control. “When in the hands of crazy guys, like Maduro, letting them print money is like giving an AR-15 to an irresponsible person,” he said.

Detractors say dollarization prevents governments from devaluing or taking other measures during tough times. Rafael Correa, Ecuador’s president from 2007 to 2017, once described it as “being in a boxing ring wearing a straitjacket.” But he never pulled the trigger on abandoning the dollar, a move many believed would have exposed his country to economic uncertainties.

For all the stability the dollar brings, introducing it is expensive. Ricardo Hausmann, a former Venezuelan planning minister who advised Ecuador on dollarization, said Venezuela would need to spend $10 billion just to import U.S. bills and coins—more than the country’s foreign-currency reserves of $9.4 billion, held mostly in gold. Those funds would be better used to resolve food and medicine shortages, he said, adding Venezuela’s problems are so extensive—from a collapse in national production to a massive fiscal deficit and debt load—that dollarizing would have limited impact.

“This is more a gimmick than a solution,” Mr. Hausmann said. “It’s like saying you’re going to lose weight because you bought pants four sizes smaller.”

But other economists endorse the idea. “Dollarization may be the only answer” in Venezuela, said Joseph Stiglitz, a Nobel Prize winner who has advised several Latin American governments. Johns Hopkins University currency expert Steve Hanke, writing last year in Forbes, called it “a proven elixir.”

Few Ecuadoreans mourn the loss of the sucre, and Mr. Crespo predicted a similar result should Venezuela move to the dollar, however hurtful losing the bolivar might seem to national pride.

“You have more sovereignty when people are proud, healthy and free, not when they are starving,” he said.

The Wall Street Journal.