Tuesday, October 27, 2009
Can Somebody Tell Me What Happened in Ecuador?
From Krugman, who is quoting from here:
So what does it mean to say they "had" to impose tariffs to fix a current account deficit? Isn't the fix automatic, namely that Ecuadorans stop spending as much when they run low on dollar bills?
I'm not being facetious, I really want someone to explain this to me. I've asked three economists on email so far, and I'm reminded of a Beatles song.
In January 2009 Ecuador announced a series of stiff import restrictions on 630 tariff lines, affecting 8.7 percent of its ‘tariff universe’ and 23 percent of the volume of imports. Duties were raised on 369 tariff lines and quota restrictions imposed on 271 others for a one-year period. They cover products ranging from processed foods and shoes to cars, mobile phones and sunglasses, as well as many other goods that can be manufactured in Ecuador.I don't get it. If Ecuador had its own currency with a peg to the USD, then I would understand. But Krugman claims--and my trusty research assistant Google verified--that Ecuador literally uses the USD as its currency.
Ecuador insisted that the measures it proposed were necessary to balance its widening current account deficit.
So what does it mean to say they "had" to impose tariffs to fix a current account deficit? Isn't the fix automatic, namely that Ecuadorans stop spending as much when they run low on dollar bills?
I'm not being facetious, I really want someone to explain this to me. I've asked three economists on email so far, and I'm reminded of a Beatles song.
Comments:
Dr. Murphy,
I don't suppose you would mind moseying on down to the Horwitz 20-21 depression thread, would you?
I don't suppose you would mind moseying on down to the Horwitz 20-21 depression thread, would you?
# posted by 
: October 28, 2009 at 4:10 AM
: October 28, 2009 at 4:10 AM
My first thought is that it's just the state inadvertently destroying things (again.)
# posted by : October 28, 2009 at 10:23 AM
: October 28, 2009 at 10:23 AM
Seriously, do governments need a reason to tax other than that they need some money to spend?
# posted by : October 28, 2009 at 11:10 AM
: October 28, 2009 at 11:10 AM
"So what does it mean to say they "had" to impose tariffs to fix a current account deficit? Isn't the fix automatic, namely that Ecuadorans stop spending as much when they run low on dollar bills?"
Not quite. If there are dollar bills flowing to Ecuador through the capital account, then the current account deficit might not self-correct (at least not quickly - it's probably true that eventually people will stop lending money to a country that just spends it all... though the case of the US calls that claim into question).
I just checked the Banco Central del Ecuador, and found this:
http://www.bce.fin.ec/docs.php?path=./documentos/Estadisticas/SectorExterno/BalanzaPagos/boletin28/indice.htm
(Click on #1, and it gives the Balance of Payments up to the 2nd quarter of this year. Most of the words are cognates, so you should be able to make most of it out.)
Looking at the 4th quarter of 2008 (which is what would impact Ecuador's decision re: tariffs), it looks like they do have a pretty large decrease in their central bank reserves. ("divisas" is roughly translated as "currency", and a positive number there in the account indicates the dollars are flowing out. Man, I hate the way they do international accounts.)
Clicking around their "Estadisticas" section, I found RILD - which is apparently a measure of how much foreign currency reserves they have. Clicking on that, it does show a sharp decline from November 2008 to January 2009 (the fall was about 1/3).
Which means that, in this case, you're probably right that this will self-correct. Since the deficit was paid for with dollars leaving reserve (rather than with borrowing those dollars from abroad), the Ecuadoreans should run low on dollars and stop importing.
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Not quite. If there are dollar bills flowing to Ecuador through the capital account, then the current account deficit might not self-correct (at least not quickly - it's probably true that eventually people will stop lending money to a country that just spends it all... though the case of the US calls that claim into question).
I just checked the Banco Central del Ecuador, and found this:
http://www.bce.fin.ec/docs.php?path=./documentos/Estadisticas/SectorExterno/BalanzaPagos/boletin28/indice.htm
(Click on #1, and it gives the Balance of Payments up to the 2nd quarter of this year. Most of the words are cognates, so you should be able to make most of it out.)
Looking at the 4th quarter of 2008 (which is what would impact Ecuador's decision re: tariffs), it looks like they do have a pretty large decrease in their central bank reserves. ("divisas" is roughly translated as "currency", and a positive number there in the account indicates the dollars are flowing out. Man, I hate the way they do international accounts.)
Clicking around their "Estadisticas" section, I found RILD - which is apparently a measure of how much foreign currency reserves they have. Clicking on that, it does show a sharp decline from November 2008 to January 2009 (the fall was about 1/3).
Which means that, in this case, you're probably right that this will self-correct. Since the deficit was paid for with dollars leaving reserve (rather than with borrowing those dollars from abroad), the Ecuadoreans should run low on dollars and stop importing.
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