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ANALYSIS-Latin America unlikely to rush to dollar

By Jason Webb

BUENOS AIRES, March 1 (Reuters) - Ecuador's drastic decision to adopt the U.S. dollar is unlikely to herald similar moves by other Latin American countries soon, not least because it runs the risk of failing, currency specialists said.

Even well-known advocates of reducing the number of world currencies had grave reservations about the 85-article dollar law Ecuador's Congress approved Tuesday, fearing it will not do enough to clean up the country's underlying economic problems.

Adopting the dollar, or ``dollarization,'' is a fashionable if controversial remedy touted by many economists for curing the ills of countries as different in size, population and culture as Brazil, Argentina and Mexico.

Ecuador's government hopes the stable greenback will give its battered economy something better to grab hold of than the sucre, which lost two-thirds of its value last year, feeding an inflation rate that surged 91 percent in the 12 months ending in February.

Ecuador's economy, reeling from El Nino damage and a period of low oil prices, contracted by 7.5 percent in 1999 and the government horrified investors by defaulting on foreign debt payments.

Panama adopted the dollar in 1904, but the dollar tide really began to move in 1991, when Argentina, Latin America's third-largest economy pegged its peso at one dollar.

The U.S. government, while pledging to support Ecuador's dollar plan, has been circumspect on whether it wants more countries to follow its lead. But U.S. Sen. Connie Mack. Chairman of the Joint Economic Committee, has introduced legislation to make it easier for countries to dollarize.

``For the United States, dollarization by these countries would mean faster-growing and more stable export markets, less currency risk in international trade and investment and less of a need to bail out foreign central banks,'' he said Wednesday.

But a prominent proponent of dollarization fears Ecuador, addicted to political dithering, rotten with corruption, and rife with social discontent, will do his cause little good.

``They could foul the thing up and the thing could blow up in their face because the articles aren't foolproof the way they're written now,'' said Steve Hanke, professor of applied economics at Johns Hopkins University in Baltimore.

He called the bill vaguely worded and foolishly ambitious, for including measures to open up the oil, electricity and telecoms sectors and return money to savers burnt by the collapse of much of the banking system.

``Success will hinge on the implementation and whether someone in the government actually takes a leadership role and gets the momentum going,'' said Hanke, who advised Bulgaria on a ``currency board'' tying its money to the German mark in 1997.

But Hanke still believes most of Latin America will have dollarized one way or another by 2005, even regional giant Brazil, which regards the idea with distaste.

Abandoning national currencies for the dollar, the symbol of a superpower widely regarded with a mixture of envy and resentment, would be a highly emotive matter in Latin America, despite its woeful record of monetary stability.

But Brazil's sharp devaluation of its real at the beginning of last year led its neighbor Argentina to study the possibility of going one step further and dropping its peso altogether. Mexico started thinking about the same thing.

Brazilian officials argue that dollarization would not work there because Latin America's largest economy is too big and too socially varied, with a poverty rate exceeding 50 percent. The government is also reluctant to dollarize because the economy has gotten a boost from devaluation, which helped boost foreign investment and Brazilian exports.

In Mexico, which sends 80 percent of its exports to the United States, local business has passed through moments of enthusiasm for a common currency with its northern neighbor.

But the head of Mexico's central bank, Banco de Mexico Governor Guillermo Ortiz, argues the country has been well-served by its free-floating peso. He says it allowed Mexico to absorb shock financial crises in Asia and Russia without depleting foreign reserves.

Opponents of dollarization say adopting the dollar is not an economic panacea, and removes room for maneuvering by ending the possibility of printing money or devaluing. They will have more ammunition if Ecuador's attempt fails.

An economist who advised Ecuador's former President Jamil Mahuad on the dollarization project, Guillermo Calvo of the University of Maryland, said he feared that measures to return money to savers at failed banks could backfire.

``I think (dollarization) is the right thing for them to do. But there is still a risk that as the banking sector is in such a poor shape that if they return to the depositors more than a critical amount that they may face a bank run,'' he said.

Walter Molano at BCP Securities, a U.S.-based Latin American brokerage, was even more pessimistic. He predicted dollarization would quickly cut inflation but would be unsustainable and could collapse and lead to hyperinflation.