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Shift to Dollar Not a Cure-All

Latin America: Ecuador's adoption of the U.S. currency slows rate of inflation, but there is a downside.


MANTA, Ecuador — Facing economic and political chaos two years ago, Ecuador replaced its national currency, the sucre, with U.S. dollars. The move calmed the country that suffered through an inflation rate of 30% a month, was on its fourth president in three years and had even been the scene of a brief coup attempt.

Dollarization may have brought a much-needed stability, but it has also produced a new problem: a widening trade deficit. That is a big reason Ecuador is pressuring the United States to renew a law that extends preferential trade status to Andean countries.

Juan Carlos Calero, manager of the Isabel tuna cannery in this Pacific port city, understands the double-edged nature--the benefits and the drawbacks--of dollarization. His tuna sales have softened, partly because dollarization makes him less competitive on global markets. But the proposed Andean Trade Preference Act would eliminate U.S. duties on canned Ecuadorean tuna and giving him a bit of a competitive boost.

"Up to now the U.S. market has been difficult because Thailand produces tuna more cheaply than we do and U.S. consumers don't differentiate high quality, which is what we offer," said Calero, whose company has Spanish-Ecuadorean joint ownership. "But if the ATPA passes, we should be able to ship more."

After being stalled in Congress for months, there was renewed hope last week that an omnibus trade bill that includes ATPA will come up for a vote before the session recesses this month.

Meanwhile, inflation is down to 13% and bank deposits are on the upswing.

"We have had two years of recovery stabilization and increased consumption. There is no going back from dollarization. Without it we would be in shambles," said Raul Gangotena, a former government minister and now executive director of the Quito Chamber of Commerce, the most powerful business group in Ecuador.

But there is a downside to dollarization: Ecuador's growing trade deficit has some economists worrying that the scenario that played out in Argentina before its meltdown earlier this year could be repeated here.

With dollars in their pockets, Ecuadoreans are on a spending spree, snapping up imports that have never been so affordable. Meanwhile, the stronger currency has made its exports more expensive on global markets and less competitive. Tourism, which also generates foreign exchange, has been hurt by weakened currencies or devaluations in competing destinations such as Brazil and Argentina.

"Tourists aren't coming now. It's cheaper in other places," said Milton Ledesma, who operates a fleet of tourist buses.

Maria de la Paz Vela, an economist at Multiplica researchers in Quito, said Ecuador's balance of trade has dramatically worsened this year, with exports declining 13% over the first four months while imports were up 29%, creating a half-billion-dollar trade deficit.

Trade deficits are dangerous because countries have to borrow to finance them and Ecuador, as a poor credit risk, must pay high interest rates on such loans.

"This is an unsustainable situation and getting worse. We are moving toward Argentina," Vela said. Rising deficits in Argentina ultimately caused a crisis of confidence.

Some in the government say the country's red ink in trade will soon be lessened by a new 250-mile pipeline from Ecuador's rich oil fields in the Amazon basin to Pacific ports. Due for completion in mid-2003, the pipeline could double Ecuador's oil exports, which now are maxed out at about 450,000 barrels of crude a day.

But oil producers are said to be much less eager to spend the capital to produce the oil to fill the pipeline since the government, slapped a value added tax that will cost the companies some $250 million for the 17-month period ending this December. The government imposed the tax because it was faced with a revenue shortfall that would have put it at odds with International Monetary Fund targets.

"We are reviewing our investment options very carefully," said an executive with one U.S. oil firm in the capital of Quito.

The uncertainty over oil is one reason top Ecuadorean officials are eager for the U.S. Congress to renew the Andean Trade Preference Act, which lapsed in May after more than 10 years in effect. President Bush is a strong proponent of a renewal and expansion of the bill to include duty-free status on products, including Ecuadorean tuna.

The original law was enacted in 1991 to give incentives to farmers in Peru, Ecuador, Bolivia and Colombia to not produce or process the raw materials of cocaine. It led to the birth of entire export industries in Ecuador, including a $250-million flowers market, said Heinz Moeller, Ecuador's foreign minister, in an interview.

"Now that industry is suffering and that's too bad. Drug eradication has much to do with crop substitution. If we don't allow peasants in depressed areas to grow legitimate products, what alternative [to illicit drugs] are we giving them?" Moeller said.

The lapsed law helped boost Andean exports to the United States by 124% from 1991 to 2000, according to the U.S. Trade Representative's office in Washington.

Bill Pryce, vice president of the Council of the Americas in Washington and a former U.S. ambassador to Honduras, said chances of ATPA being passed this session took a turn for the better last week.

House Ways and Means Committee Chairman William M. Thomas (R-Bakersfield) and Sen. Max Baucus (D-Montana) agreed Thursday to co-chair a conference committee to hammer out a possible compromise bill that would reconcile House and Senate versions.

The omnibus trade bill at issue includes not just ATPA but also Trade Promotion Authority law that would give Bush the "fast track" power to negotiate a bilateral trade agreement with Chile and the U.S. role in the hemisphere-wide Free Trade Agreement of Americas. The third element of the bill is Trade Adjustment Assistance, a benefit for U.S. workers who are displaced by expanded trade.

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