Shopping in Ecuador with dollars

Shopping in Ecuador with dollars

How a tiny financial experiment could hold the key to global well-being

Dollars and desperation
Ecuador is a small, faraway country of which most Americans probably know nothing. (Hint: it's on the equator.) One suspects that few noticed the surprise announcement by President Jamil Mahuad that he would abolish his nation's currency and replace it with the US dollar. But there is an important story behind that story, which is not so much about Ecuador as about the great financial crisis that swept Asia in 1997-98, and the continuing debate over what to do when the next crisis strikes.

Everyone agrees that the Asian crisis was, in the first instance, a case of financial panic... But there is a sharp difference of views over what could have prevented or at least mitigated that crisis. Broadly speaking, one view holds that in times of panic the normal rules of business should be suspended that investors should be persuaded, or if necessary forced, to keep their money in place while theauthorities get things under control. In the oddly euphemistic jargon of international finance, this is known as "burden-sharing".

The other view holds that the way to deal with panic is to try to reassure investors that their money is absolutely secure and that one way to do that is to offer an ironclad guarantee that their holdings of Korean won, or Indonesian rupiah, or Ecuadorian sucres, will not lose their value in terms of dollars. This can be done by establishing a "currency board," which holds dollar reserves large enough to back the entire national money supply; it can be done even more decisively by "dollarizing" that is, abandoning the national currency and using dollars instead. It is an unresolved debate, because neither approach was given much of a trial.

And that's where Ecuador comes in. The small Latin nation has the dubious distinction of having plunged into crisis just as Asia climbed out; and as a result it has become a sort of guinea pig for economic nostrums.

Economist PaulKrugman in his column Reckonings in the `New York Times', January 19The heat is on
Faced with the threat of the millennium bug crashing the world's computers, some people bought blankets and hurricane lamps and headed for the hills. Others paid software engineers to fix the bug. Yet when 1999 turned to 2000, no aircraft fell from the skies, no governments collapsed and no missiles inadvertently triggered a nuclear holocaust.

For a real millennial disaster, however, computer gli-tches cannot hold a candle to global warming. In the past half century, humanity has inadvertently interfered with the Earth's carbon cycle. We now have a hand on the planet's thermostat... The turn of this millennium is more than a symbolic moment to consider this. For we appear to be at the crest of the industrialising and demographic wa-ves that are transforming the world's climate. We may also be seeing the start of the solution. Historically, 80 per cent of global warming has stemmed from industrialised nations,which are rich enough and technologically savvy enough to begin cutting their carbon emissions. But future warming will also depend on the increasing number of nations that are racing into the industrial age.

An editorial in the `New Scientist', January 8