ECUADOR'S DOLLARIZATION In the late 90s the Ecuador was in a social as well as economic crisis, as a result of political changes

a few years ago with the aim of encouraging exports and industrialization. Also, at that time the oil boom of the 80s was over and the Ecuador needed some source of money to compensate you, for example, develop export products to reduce the deficit in the trade balance creating competitive products in the foreign market but this did not happen due to lack of local investment and Ecuador was stuck with just a 5% income per capita was higher than that measured in 1980.

In the period before the economic crisis, the unemployment rate was highest in 1996 with 10% and 7% lower in 1994 and 1995. During the economic crisis, the unemployment rate reached 12% in 1998 and 14% by the year 1999, affecting 600,000 people of the 4.3 million comprising the PEA of that year. The high unemployment rate caused a mass migration out of the country. For the year 2000, when the country was already dollarized, the unemployment rate decreased to levels comparable to those to be had before the crisis. But this rate increased slightly in the following years and remains at an average rate of 10%, while in the years before the crisis and exchange rate average was 8.33%, as shown in Figure. The following governments such as that of Lucio Gutirrez Gustavo Noboa and consolidated monetary policies of Jamil Mahuad, even though the current

president of Ecuador Rafael Correa does not agree with the change of currency, is willing to hold this monetary system since he notes that "things are easy to enter, but almost impossible to remove", referring to the dollar. Dollarization is the process by which a country adopts a foreign currency, in this case is the U.S. dollar, hence the origin of the term, for use in domestic economic transactions. Foreign currency replaces the domestic currency in all its functions: Book value Unit of account Method of payment

Dollarization may be official or unofficial Unofficial Dollarization: When economic agents perform most domestic transactions in foreign currency and held primarily checking or bank deposits. Official Dollarization: When a country is Adopts the foreign currency legal tender as the exclusive or predominant. In Ecuador dollarization was adopted officially, after suffering a major economic crisis in the late 90s and a sharp devaluation of the Sucre, its former currency. The process was partially successful, but with a high degree of rising cost of living. Dollarization has given him an advantage in Ecuador: First, having an international currency, but that has failed to stop the rising cost of living and the difficulty for investment and productivity, among others, in contrast, the stability relative economic is strengthened by the Ecuadorian migrant remittances and the high price of oil in recent years. One of the great controversies regarding Ecuadorian dollarization was not only the loss of monetary sovereignty, but the low rate at which it is adopted, to 25,000 Sucres to the dollar, benefiting sectors of political and economic

influence already warned of dollarization and anticipated future measures buying dollars, while the rest of the population were encouraged to trust in the national currency through government propaganda favorable to economic nationalism, in that if they changed their Dollars to Sucres or if invested in Sucres improve the economy. Compound these counterproductive actions of the Central Bank of Ecuador and the Internal Revenue Service to hinder the process. That explains in large part to the relatively stable despite inflation rising why the Ecuadorian migration and the collapse of the middle classes. However, comparatively, the dollarization of the Ecuadorian economy stabilized preventing the governments in power after the devaluation of currency and eliminating the seigniorage, preserving the best value for money of citizens, stabilizing prices. Most of Ecuador's population sees it as one of the best decisions made in the economic field, but cannot agree on public policies used to establish it and maintain it. The role of international reserves in a dollarized economy Before the effect of dollarization in Ecuador, one of the functions of the Central Bank of Ecuador (BCE) was the control of the dollar in the market, which bought or sold dollars for cheaper or more expensive to Sucre, according to the country's needs. In order to perform this function, the ECB provided a currency amount called International Monetary Reserve (RMI), which is equivalent to International Reserves as defined above.

However, from dollarization, the concept of RMI has been replaced by the International Reserve Freely Available (LAIR), which, although essentially the same RMI, now acts as a backup of all the monetary (coins) issued by the ECB and the deposits that the public and private financial system maintained at the Bank and are the resources that can be immediately and freely provide the Central Bank to perform its functions.

The balance of this reserve comprises foreign money, the dollar is still a foreign currency, the ECB has on hand, demand deposits and investments held in financial institutions abroad, gold held by the Bank itself abroad deposits that Ecuador is in the International Monetary Fund to be part of it and credits or debts that the country has with members of the Latin American Integration Association (LAIA) for their reciprocal trade. Currently the RILD is one of the most important indicators of the stability of the Ecuadorian economy and dollarization, since it shows the liquidity and ability to cope with situations of shock. Low oil prices, damaging the infrastructure of production, for example, maintaining the economic model. Exports Oil exports being the first entry and the main export product of the country, is seen as a fundamental item of the Ecuadorian economy. Its export has averaged 43% of exports from 1995 to 2005.

Since the early 90's oil exports have remained stable with some variations and remained about two dollars 1.4 billion per year. In the economic downturn, revenues from oil exports had a drastic drop due to significant price declines caused by the Asian crisis and overproduction of OPEC member countries (organization of petroleum exporting countries .) oil prices had a dramatic drop in the average price per year to U.S. $ 9.2 per barrel in 1999, which deepened the economic crisis and which normalized after put OPEC production limits to

members of the organization. From 2000 oil exports have become favorable for the Ecuadorian economy, oil prices have maintained an upward trend increasing (see Annex 6.5). The increase in oil prices led to an export growth of 68% in 2004. The oil export volumes have grown considerably but the country has not had a beneficial use as it should because the new production comes from foreign companies and much of the oil profits out of the country. As for the export of non-oil, is considered one of the most important ways for the country development. In the 90s, non-oil exports were in development, with an increasing trend, reaching the highest point exported 3.707 billion non-oil products in 1997. By 1998 exports were not encouraging, its slope increasing and decreasing turned oil exports fell to 2.484 billion dollars. The recovery of non-oil exports has been central to the country's economy; remain at a low level in 2003, reaching similar values to be had in 1997. In the period 2000-2003 the recovery of non-oil exports had an annual growth rate of 20.5%, the reason for this is that the real exchange rate was favorable for exports that helped the export development non-oil. Figure 6 illustrates that exports of oil and oil products are recovered from the impact of the economic crisis and reach a peak in 2004 with 7.75289 billion dollars. Imports Since the beginning of the last decade, non-oil imports were moderately high. With a peak of 5.198 billion dollars in 1998. For the year 1999 the real exchange rate was experienced rapid growth due to the devaluation of the Sucre. For the year 2000 the real exchange rate was over 200% compared to 1994. This had a direct effect on the country's imports as it fell significantly due to an increase in its price. From 1998 to 1999 imports fell by 2.412 billion dollars.

When it adopted the dollar as its currency, imported goods had a decrease in their prices because the dollar was more appreciated than the Sucre. Figure 7 shows that the imported products had an increasing slope from dollarization to achieve in 2004 imported goods twice four years ago, seriously affecting the trade balance of the time. The high growth in imports is due to the negative effects brought with dollarization. Balance of trade The trade balance before the economic crisis the country had a surplus despite the negative values in the non-oil trade balance; however, had relatively large values. In the economic crisis, the trade balance was quite negative in 1998 due to the sharp fall in oil prices. For the year 1999, which was readjusted OPEC oil production limits and the Sucre was devalued, the trade balance was the highest of the decade with 1.66518 billion dollars. However, for subsequent years where the cheaper imported products, increasing consumer credit has had a profound imbalance in the trade balance further disfavoring negative values in the non-oil trade balance. In 2001 and 2002, Ecuador has a deficit in the trade balance, in the last year the deficit had a value similar to that of 1998 and for 2003 shows a surplus almost nil. This was disappointing considering foreign debt whose values are still very high. For 2004, the trade balance was in surplus due to the taxation of

imported products in order to reduce consumption and encourage goods produced within the country. After dollarization trade balance had an average of only 146.11 million dollars until 2004. As seen in Figure 8, the values of the trade balance were higher before adapting the dollar as currency. When analyzing inflation before and after dollarization can conclude that the rate of this indicator if it has shrunk considerably. Before dollarization, the lowest inflation exceeded 20% in 1995. Only four years after dollarization, this indicator dropped to 2% in 2004. This hypothesis is accepted.