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THIS STORY HAS BEEN FORMATTED FOR EASY PRINTING
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Ecuador, economy hurting, warily switches to the dollar
By Richard Chacón, Globe Staff, 6/1/2000
QUITO, Ecuador - Mauro Vallejo fumbled with his socks and pulled out two thick, wrinkled wads of sucres, his country's currency. Then, he reached into his shirt pocket and quickly produced a thin roll of crisp US dollars.
''Dollars are easier to handle,'' said Vallejo, a 24-year-old currency vendor, who did brisk business selling greenbacks to passing motorists despite a steady drizzle. ''I don't have to keep every pocket full of sucres anymore. But I feel a little lighter, and a little poorer.''
This small Andean country is in the midst of a radical, closely watched experiment - converting its currency to dollars. The move has many of its 12 million citizens filled with hope, nostalgia, dread and doubt.
In an attempt to stabilize an economy that has been battered by 60 percent inflation and triple-digit devaluation over two years, Ecuador has officially adopted the dollar as its main currency.
Supporters argue that making the dollar king will help rein in inflation and will attract badly needed private investment to the country, which is living through its worst economic crisis in more than 20 years.
Critics, including many of the country's vocal and restless indigenous groups, argue that the dollar plan is a loss of national identity, an empty promise of better economic times, an open door for more drug-related money-laundering, and a coverup for years of corrupt political behavior.
''The problem is not about our currency,'' said Josefina Andrade, a 31-year-old who sells indigenous crafts in El Ejido Park in central Quito, the capital. ''It's about politicians and their friends in the banks who have betrayed our people.''
On Jan. 9, the president at the time, Jamil Mahuad, announced the decision to convert to a dollar-based economy. The idea drew thousands of angry indigenous residents to the capital.
With encouragement from military leaders, the protesters stormed the congressional and presidential palaces on Jan. 21, forcing Mahuad to flee. Under pressure from US officials, who pleaded for peace on Ecuadoran TV, military officials backed down and supported Vice President Gustavo Noboa, another proponent of the dollar plan, to replace Mahuad.
The government's conversion plan fixed the exchange rate at 25,000 sucres to $1, eroding wages for most workers. As part of the six-month dollar-transition program, however, Noboa is expected to raise salaries for police, teachers and government workers.
But the new president will also lift subsidies on gas, electricity, and other basic products within the next two weeks, leaving residents bracing for higher prices and more social unrest.
''The tension is everywhere, and we're all waiting for what the government will do this time,'' said the leader of one indigenous religious group who identified himself as Jose Carlos. ''There is still the chance that the protests will return, only next time it might be bigger.''
Ecuador was the latest and most dramatic example of a Latin American country turning to the dollar for economic prosperity. In 1903, Panama replaced its paper Balboas with dollars and reminted its coins with US denominations.
Argentina kept its currency, the peso, but fixed the exchange rate at 1 to $1 in 1991 to stem inflation and devaluation. Three years later, Cuba adopted the US dollar as the only currency that tourists could spend, while residents continued to use Cuban pesos.
Other countries in the region, particularly in Central America, have debated taking similar measures but have refused, mostly out of nationalism and concerns about losing control over their monetary policy. Many of them are watching Ecuador's experience.
Supporters of the currency change in Ecuador said the conversion would not be traumatic for the country. As of last year, 60 percent of the country's bank accounts were in dollars.
Still, many residents said they cried in March as heaps of 50,000 sucre bills, all of them bearing the goateed image of the national hero, Eloy Alfaro, leader of a revolution in 1895, were dumped into a shredder at the Central Bank. The event was covered on national television.
To acquire the greenbacks, the government has been cashing in part of its reserves and international investments and flying in bundles of dollars under heavy security. Merchants have also begun posting prices and accepting payments in both currencies.
But there doesn't seem to be enough new money available yet - at least not in small bills. The question heard most often on Quito's streets these days is, ''Can you make change?''
Even those who endorse the measure warn that dollarization is not a panacea, and that conversion won't work unless the Ecuadoran government follows through on its pledges to privatize stagnant, state-owned industries like telephones, petroleum and electricity and to attract revenues to pay off its $15 billion foreign debt.
Analysts also said that Ecuador's banks, notorious for making bad loans to well-connected political and business figures, must be overhauled and regulated. Some have warned that a loosely regulated banking sector in a dollar-based economy could lead to more money-laundering in a country nestled in the Andean drug region.
Other experts believe that the new currency should have come after government and business reforms, not before them.
''Ecuador needs to change its political culture and institutions as a prerequisite to dollarization,'' said Jerry Haar, a Latin America economics expert at the North-South Center at the University of Miami. ''To do otherwise puts at risk not only a dollarized monetary system but the very social, political, and economic foundation of the nation.''
This story ran on page A01 of the Boston Globe on 6/1/2000.
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