An important message from Ecuador

by | Feb 25, 2001 | Archives

When Merri and I headed south we took lots of ones, tens and twenty dollar bills. Read below to see why.

Excerpts from a message from reader LARRY ROHTER shows why you should bring small denomination bills with you to Ecuador. My comments are below.

A year ago, the government announced that it was abandoning the sucre as the national currency and adopting the American dollar as the solution to its chronic economic problems. While the promised benefits have been slow to arrive for ordinary Ecuadoreans, the move has proved an unexpected boon to counterfeiters in neighboring Colombia.

Colombia produces 40 percent of the fake dollars worldwide, American officials say. Almost overnight, its counterfeiters were presented with a new market of 12.5 million people right on their doorstep. Not ones to miss an opportunity, they cranked up the presses.

Now, as other Latin American countries also switch to the dollar (El Salvador did on Jan. 1 and Guatemala will on May 1) the problem of counterfeiting is expected to grow, American officials say. And the move to the dollar is only likely to accelerate as negotiations with the United States for a hemispheric trade agreement progress, with several other small Central American and Caribbean nations reportedly considering the switch. “There is just a lot more counterfeit currency circulating in Latin America right now, and a lot of it has to do with the fact that countries like Ecuador are now accepting the dollar,” said Alex Echo, supervisor of the international team at the Miami office of the United States Secret Service. “The Colombians are a tough adversary who keep up with the latest technology to improve their product and put out a lot of currency, so you can only catch so much of it.”

Before Ecuador adopted the dollar, Mr. Echo explained, “you had to go to an exchange house to get dollars, and the people there were very good at spotting fakes because it was their livelihood.” But now “everyone has to accept dollars, and a lot of people just do not have that trained eye,” he added. As a result, “our seizures have gone up in the region, and that’s natural,” Mr. Echo added. “The populace needs to get used to the new currency, and it is going to be a little while before everyone feels comfortable.”

For Ecuador, adopting the dollar was a way of imposing strict fiscal discipline, in effect by turning monetary policy over to the United States Federal Reserve Board. Other nations are considering the shift for similar reasons. But the increasing circulation of bogus money has proved an unanticipated complication, with the Colombians quickly learning how to reproduce even the new design of American bills, which was first implemented in 1996 largely to thwart counterfeiting.

Until Ecuador unexpectedly took the leap to the dollar, which led to the overthrow of President Jamil Mahuad, Panama was the only country in the Western Hemisphere that officially used the dollar as its currency. But Panama has used dollars for nearly a century (meaning its people are familiar with greenbacks and are more savvy about detecting fakes) and it has only one-fifth the population of Ecuador. “Asking people to change their currency is like asking them to change their language or religion,” said Fernando Guzmn, Deputy Governor of Ecuador’s Central Bank. “We were doing something that no one else had done, we were doing it rapidly, and we had no one to guide us or tell us of their experience.” To help Ecuador deal with the problems, a United States government team representing the Federal Reserve, the Secret Service and the Treasury Department visited here in the fall. One result, Mr. Guzmn said, was that instead of destroying counterfeit bills, Ecuador now “sends our bad notes intact to the United States so that their characteristics can be studied and identified.”

Afraid of being bamboozled by counterfeiters, many stores here are refusing to accept large denomination bills. “I won’t take anything larger than a $20 bill,” said Luis Edgardo Melネndez, owner of a photo- supply shop here. “The first time that the bank rejected a $100 bill that I had accepted as genuine was lesson enough for me.” Even coins, though not generally counterfeited, have proved to be a major headache. Financial transactions in Ecuador, where the minimum wage is under $100 a month, involve much smaller sums than in the United States, and thus the demand for coins has been greater than the government’s ability to meet it. For one thing, coins are heavy, and the government has had difficulty finding planes that can fly the necessary amounts to remote areas. In addition, American coins do not show their values in figures. “That has proved a big problem for people here who can’t speak English or can’t read,” Mr. Guzmn said. To meet the demand, Ecuador has begun minting coins of its own that are the same size, color, composition and value as American coins. But those coins are beginning to show up in parking meters and vending machines in American cities (though the United States government considers the problem a minor one). If Ecuador’s government had it to do all over again, Mr. Lucio-Paredes said, it might take things more slowly and do more advance work. At the very least, other countries might consider that path if they hope to avoid similar problems, he said. “One way to dollarize is to do what El Salvador is doing right now, from a position of strength in an atmosphere of stability,” he said. “Or you can do it as Ecuador did, on the brink of economic chaos, with a lot of problems in government finances and the bank system, as a sort of life-saving measure. Obviously the most difficult circumstances are those Ecuador chose.”

This article shows three important points. First that big changes can great all types of small changes one would never expect. Second that Ecuador is serious about resolving its economic dilemma and third that Ecuador is still a country where prices are very low. That is why we are here now and hope to meet you here soon. Until then, good global investing!