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Ecuador's Bittersweet Pill

Woman stands in front of colorful market stall selling clothes, hats, and bags.

Lucila, 47, stands at her stall inside Plaza de Ponchos in the Andean market town of Otavalo.

It'd been 22 years since I'd last been to Ecuador and I found a few changes to be sure. The capital, Quito, more than doubled in size, is now nearly cosmopolitan. The high mountain roads are a good deal less treacherous. And Otavalo, one of South America's premier market towns and my destination on this trip, has decorative streetlights, a movie house and a few too many Internet cafes.

Otavalo sits in an Andean valley about two hours north of Quito, and the town of 30,000 is shadowed by three towering volcanic peaks. What I remembered best about Otavalo was the Saturday market, where the region's indigenous artisans pour into the central square to peddle their hand-made wares.

In Plaza de Ponchos, a sea of woven wool creates a colorful market canopy. The ever-present pitch of Andean flutes wafts through the streets. And the angular brown faces of the Otavalenos, in traditional dress and distinguishing felt hats, remain cheerful, even through the requisite haggling over the price of their goods.

But one stark difference was unavoidable. All the market haggling is now over the U.S. dollar. And these aren't blackmarket transactions. Dollars have been used everywhere for everything here since 2000, when Ecuador became the first country in Latin America to dump its national currency and "dollarize." (El Salvador followed soon after and in Guatemala you can now choose to use either dollars or Quetzals).

The historic monetary change-over six years ago was Ecuador's answer to a hyperinflated economy of the late 90's, and a homegrown banking crisis that rivaled our own Savings and Loan disaster.

While it seemed awfully strange to be withdrawing dead presidents from an ATM high in the Andes, I was even more perplexed by the monetary figure most prevalent on Ecuador's streets. It wasn't Washington, Lincoln or Jackson, but rather Sacawagea, the young Shoshone Indian guide. I hadn't seen a Sacagawea gold coin back home for a long time and now I knew why. Half the coins -- 500 million of them -- had been shipped off to Ecuador after dollarization.

The historic monetary change-over six years ago was Ecuador's answer to a hyperinflated economy of the late 90's, and a homegrown banking crisis that rivaled our own Savings and Loan disaster. Today, traditional economic indicators might suggest that dollarization has been good to Ecuador. Buoyed by the rising price of oil, Ecuador's chief export, GDP has been growing at around 3 percent over the past several years following more than a decade of stagnant growth. But out in the markets and amongst the people, I didn't get the feeling that U.S. presidents, dead or alive, are very popular.

At a stall deep inside Plaza de Ponchos, I found 47-year-old Lucila, who has worked the market since she was eight and still remembers the days her father would walk their wares all the way to Quito and back. Lucila is in the market nearly every day, selling an array of handbags and scarves along with colorfully woven wall hangings.

Street scene in Otavalo.

The town of Otavalo, with 30,000 inhabitants, is about 2 hours from the capital Quito and surrounded by volcanoes.

It seems the Ecuadoran greenback experiment has been hard on Lucila. When the country dollarized, prices skyrocketed immediately and, while more stable today, they remain a good deal higher than their continental neighbors. The result has been a dramatic drop off in tourist traffic and in Lucila's cash-flow. Some days she sells only $5 to $10 of goods and some days she sells nothing at all. "This is the way it is for all the vendors," says Lucila.

Lucila may not fully understand how her fortunes, and those of Ecuador's economy, are now tightly tied to decisions by the U.S. Federal Reserve, but she has no trouble articulating the cause of her financial woes: the U.S. greenback. She says that before dollarization she was able to save some money. Now with dollars, her family barely gets by. I asked her if there wasn't some value in helping to stabilize the national economy, and she shrugged with indifference. "We have nothing to say about it. They dollarize and we have to work."

Lucila is lucky, says Americo Paez, a smartly dressed professor of economics at the University of Otavalo. "Her situation is typical of the artisans. It is a real struggle, but at least they have something to sell. Seventy to eighty percent of Ecuadorans are in a much worse situation. They're living on $1 to $2 a day and their buying power has gone way down with the dollar."

"Seventy to eighty percent of Ecuadorans are living on $1 to $2 a day and their buying power has gone way down with the dollar."

Professor Paez says the conversion to dollars has "amplified what already existed in Latin America," an enormous and growing disparity between haves and have-nots. Transplanting the U.S. economic model to Ecuador, he argues, has further consolidated capital in the hands of the wealthy few, creating an even greater polarization of the country's economic and social classes.

But Ramiro Buitron doesn't see it that way. Ramiro works just three blocks east of Plaza de Ponchos at the Hostel Valle de Amanecer he opened 12 years ago with his two brothers and sister. While Ramiro concedes that tourism has been off over the past several years, he says business has improved this year and he credits dollarization with allowing the family to grow its business.

Mountainous view of the Andes.

Ecuador is the smallest of the Andean nations, slightly smaller than the state of Nevada.

During the hyperinflated days of the Ecuadoran sucre, says Ramiro, the family would never have risked a big bank loan. But with the stability of the U.S. dollar, they were able to borrow the money they needed to improve the Hostel and buy a 12-seat KIA tourist van. "It's been good for business," says Ramiro. "We know how much we have to pay back and it doesn't change."

Putting a lid on inflation may have bought some economic stability, but in Ecuador that has yet to translate into political stability. Since 1997, the country has churned through seven administrations. Three presidents have been unceremoniously toppled. And, mounting middle-class discontent with Ecuador's adopted economic plan continues to roil the political waters, according to Professor Paez, who says dollarization was the "virus" that led to a change in governments just last year.

On October 15, Ecuadorans faced yet another presidential election. Banana tycoon Alvaro Noboa, the richest man in Ecuador, came out slightly ahead of his leftist rival Rafael Correa, but not enough to avoid a run-off in November. Whatever the final result, the winner will be Ecuador's eighth leader in 10 years.

Whether dissatisfaction with the dollar translates into a major political shift to the left here -- following Bolivia and Venezuela's lead -- is yet to be seen. Conventional wisdom suggests that Chavez and Morales are populist aberrations. But that assessment may miss a more fundamental problem: the very free-market agendas that U.S. policy-makers hope will more tightly align the economies and politics of the Americas may be backfiring.

Anti-U.S. dollar graffiti scrawled on a wall.

In a suburb of Otavalo, the "skull and dollars" insignia is accompanied by the message: Fuera el imperialismo Norte Americano (Fight the imperialism of North America).

For better or worse, dollarization and the possible expansion of Free Trade Agreements (US-Ecuador talks broke down earlier this year) have tied the financial fortunes of average Ecuadorans directly to Washington. And that ought to make Uncle Sam nervous.

To the extent that graffiti is the vox populi of a community, there's plenty of evidence that a backlash is taking hold here, and not just in the economically oppressed Ecuadorian favelas. Painted on a neighborhood wall, just a block from our two-story home in an upper-end suburb of Otavalo, is the increasingly common "skull and dollars" insignia, accompanied by a call to economic arms: Fuera el imperialismo Norte Americano (Fight the imperialism of North America).

Back in the Plaza de Ponchos, Lucila, the indigenous artisan vendor, hesitated briefly, as if weighing the cost of candor, when I asked whether dollarization had affected her view of America. "It's kind of like the President of the United States wants to govern us now," she reasons, "and Ecuadorans don't like that idea."

Rick Young is a producer/director who works regularly for FRONTLINE covering the business and economics beat. His stories include, "Is Wal-Mart Good for America?" and, most recently, "Can You Afford to Retire?" scheduled for re-broadcast on November 7). Young was the correspondent and producer of "Sierra Leone: Gunrunners," the premier episode of FRONTLINE/World in May 2002.

REACTIONS

Jersey City, NJ
I went to Ecuador for the first time last month, at 21 years old, a country I had only heard about in stories and pictures from my parents, aunts, uncles and cousins who had immigrated from there. I witnessed a tremendous amount of poverty there, but i was told that it was nothing compared to the desperation of the 80s and 90s. Supermarkets are stocked with food and the middle and lower middle class is no longer going hungry. Of course there is a stunning disparity between the haves and the havenots, but this gap is not as wide as it once was. Dollarization has opened up to foreign investment, tourism, and job opportunities for Ecuadorians. After ten years of dollarization some Ecuadorians even speak highly of the move, and refer to it as a turn around for the economic instability of the late 90s. Of course it has caused people to be left out of the party, but for the most part Ecuadorians are happy to have the stability they were not able to enjoy. Even supporters of the leftist President Correa could not imagine going back to the sucre. Ecuador is slowly a rising economy and many attribute that to dollarization

Juan Vallarino - Panama, Panama
FYI - But for a very brief period in 1940/41, Panama has never had another paper currency other than the dollar (we have coins which are the same size as U.S. coins, but no bank notes or other paper currency).

Justus - Victoria, BC
Wherever the US dollar pops up like this, you can bet oil is involved. There is a reason the US dollar is now in Ecuador -- Ecuador's main export is oil.

Fort lauderdale, Florida
I agree with almost everything in the article, I also want to add that even though 7 years have passed since my country change it's currency, there are still some people that don't fully understand the concept of "Dollarization" and they still think of "Sucres", but then again how can you blame them? They only used " Sucres " for at least a century, and I hope it doesn't take much longer for everyone to finally accept the "new money".Part of a country's identity is wihtouth a doubt their currency, and because of the political instability that Ecuador has had in the last (forever) we have lost ours. It's very sad, but we can only learn to deal with it, and deal with it.A positive thing, when I go to visit I don't get charge any fees for using my credit cards over there.

Lawrence Feldman - Cedar Key, FL
I enjoyed reading the Frontline Bittersweet Pill. Rick, I have a friend; she is a flight attendant and tells me about Quito all the time. Yes things are hard for some but the dollar is not the issue; it's the political shift. Yes it helps to have a stable government. Ecuadorians lack this in their homeland. The people are hard working and have no voice. Us Yankees get the blame.

Mike - Chicago, IL
An interesting piece indeed. It's a tricky issue to pin down if dollarization is a winner or a loser. There are definite negatives associated with dropping the local currency for the US greenback like increased costs for goods and services and having to deal with a growing difference between the haves and have-nots. However, there are plenty of positives with the dollarization too. Though there's an increase in the difference between the haves and have-nots, I assume there are more "haves" than before. Further, the US dollar brings a new world of stabilization to a the South American's economic structure. Let us not forget that prices in Ecuador used to swing wildly before the dollarization, and savings were almost non-existent. Now that the election is over and the populist candidate has won, I wonder how long he will keep the dollar. Best wishes for Ecuador and here's hoping they stay with the dollar. If not, I fully expect savings and investment interest to drop in Ecuador significantly, which would lead to hyperinflation and another new populist leader.

Tahir Naim - Mountain View, CA
The effects described seem more likely to be attributable to the skewing effect of being an oil exporter rather than dollarization. Ditto for the haves and have-nots, as the divide between them would have been growing during the hyperinflation and again due to oil's effect on other exports and the tourist trade. It would have been more informative to also at least look at El Salvador and Guatemala, as I suspect dollarization has been more benign in those countries. What dollarization will crimp is the ability of the national government to engage in Keynesian deficit spending to expand the economy during downturns.

Gerry Molina - New York, NY
I myself am proudly a daughter of Ecuadorians and I have recently visited Ecuador. I see clearly how Ecuador suffers to keep up with the "new money" as they call it.

wilmette, illinois
I would be interested to see reports about the upcoming run-off election and how this university of illinois graduate is aligning himself with cesar chavez and what implications this will have for Ecuador.

marin scordato - bethesda, maryland
This is a facinating story. A smart and humane look at a place and a subject about which I would otherwise know very little. Great work. Thank you.