In January 2000, Ecuadorian president Jamil Mahaud announced that his country would dollarize its economy, replacing the national currency, the sucre, with the American dollar as full legal tender. Meant to stabilize Ecuador’s failing economy, the policy was controversial, and now, two years later, the debate is heating up—did it work? It is a question of vast regional importance as other Latin American countries consider trading in their reals, pesos, quetzals and colones for the stability of the American greenback.

To assess dollarization’s impact, two Emory College undergraduates spent their winter break in the high Andean town of Quito, Ecuador. They were given the opportunity through the Institute for Comparative and International Studies’ International Scholars Program, which funds undergraduates to create and conduct independent research projects abroad.

Sophomore Hugo Aparicio knew nothing about the economics of Ecuador (his mother’s native country) before he began the project. “But I did know that every time I went back to Ecuador to visit, the coins I still had from my last visit would be useless,” he said. “They’d become too small.”

What Aparicio was unwittingly experiencing was an economy in crisis. Low market prices and the excessive rainwaters of El Niño had crippled an economy fuelled by petroleum and nourished by agricultural products such bananas and cacao. By 1999, the sucre was in freefall, plunging from 5,000 to the dollar at the beginning of the year to 25,000 to the dollar by the end.

It was then that Mahaud decided to abandon the sinking sucre and adopt the dollar, a strategy meant to inject confidence into the Ecuadorian market. “The dollar is seen as a sign of stability,” Emory College junior Alex Henderson said. “It encourages foreign investment.”

While in Ecuador, Aparicio and Henderson interviewed economists and officials from the Ministry of the Economy, the Central Bank, UNICEF and the National Institute of the Child and Family to ascertain whether the strategy had worked.

“Macroeconomically, dollarization has been very successful for Ecuador,” Henderson said. “Inflation fell from 90 percent in 2000 to 20 percent last year. Domestic investment increased six times in the same period. But there have been significant downsides to the policy as well. The social effects have been enormous. Between 70 and 80 percent of the Ecuadorian population are now living below the poverty line, which is an increase of 40 percent since 1999.”

What is largely unknown is whether the blame for this increase in poverty lies with dollarization itself or the sharp devaluation of the sucre that preceded it. Other economic issues in Ecuador include endemic corruption, minimal industrialization and a large foreign debt.

“Basically, anyone we talked to in the government and in the private sector seemed to be for dollarizaion,” Aparicio said, “but the economists and people on the social side had their doubts, or at least made sure to stress that dollarization was not the magic cure to Ecuador’s problems.”

Opponents of dollarization also voiced concerns over Ecuador’s loss of ability to print its own money, a side effect of the policy that essentially ties the fate of Ecuador’s currency to the U.S. Federal Reserve. According to the students, these critics argued that renunciation of monetary control was tantamount to renunciation of Ecuador’s national sovereignty.

Other Latin American countries considering adoption of the dollar include Argentina, Costa Rica and Guatemala. Both students see this trend as an effect of globalization.

“In the future, we may end up seeing that there are only a few strong currencies used worldwide,” Aparicio said. “And while adoption of the euro by European nations is a widely publicized event, the impending dollarization of Latin America isn’t.”

Aparicio and Henderson are assessing their research and will turn the experience into a four-credit independent course under the Spanish department. They hope to use the project to raise consciousness in the Emory community about Latin American issues.