Transition Economies Essay

Many countries these days have switched from a command to a more market orientated economy. This process is called a transition in which many countries have taken, including Ecuador. Prior to being a market economy, Ecuador was once a command economy which is an economy that has all its decisions made by a central government such as: what to produce, how to produce it, and for whom to produce.

Ecuador’s economy depends heavily on petroleum production and exports of agricultural commodities and seafood [1] . In the 1990s Ecuador devoted itself to an efficient free market economy.In the year 1999 a hyper inflation occurred in Ecuador’s currency, the Sucre. The inflation of Ecuador was caused by two main reasons, the first reason was that Ecuador had taken a loans that led up to a total of ten-billion dollars of debt[2], this led Ecuador to the second reason which was that the government printed and an excessive amount of money to pay off debt. This had a negative effect because prices ended up rising rapidly to keep up with the currency excess. Inflation is an increase in the general level of price for goods and services; it is measured as an annual percentage increase.Hyperinflation is unusually rapid inflation. This caused a major economic crisis, the GDP contracting by 5.

3%; this was a tremendous down fall. [3] The inflation had risen from 52. 2% in 1999 to 96. 1% in 2000.

The banking system failed, poverty increased, and the debt possessed by Ecuador became much more rigid than planned the hyperinflation created a tiny middle class in this third world country [4]. In March 2000, the government decided to adopt the United States dollar, this process is called dollarization. There are two types of dollarization, the unofficial dollarization and the full dollarization.The unofficial dollarization is when a country chooses to hold a significant share of their financial assets denominated in foreign currency, although the foreign currency lacks the legal tender [5] the full dollarization is when a country adopts a foreign currency and abandons its local currency fully, and ceases to issue the domestic currency. This was a very superior decision as it helped stabilize the economy. Positive growth was displayed in the years that followed Ecuador’s calamity.

Ecuador’s GDP has been rising ever since. A deflation has occurred which lowered the inflation from the year 2000 (96. 1%) to a 37. % in 2001 to a 7. 9% in 2002 etc. The use of the United states dollar did not just help stabilize the economy but it caused deflation , deflation is the opposite of inflation which is the general level of prices falling, deflation also helped decrease poverty and to increase the supply and demand. Parallel market causes a problem to many countries and economies because the black market operates without any consumer protection, authenticity, quality, and guarantee of purity. The black market also known as the shadow economy in Ecuador also involves illegal activities and products that creates or leads up to corruption.

The government of Ecuador set pegs; a peg is to keep the commodity price, exchange rate, etc. At a set level by manipulation or by law. The United States does not simply bring the money to Ecuador, the free market system brings them in. tourists coming into Ecuador would smuggle in counterfeit bills to sell to the black markets [6]. The peg on the Ecuadorian local currency has been over valued by the United States dollar. Those in possession of the local currency of Ecuador which is the Sucre are able to use the black market to buy the United States dollar at better exchange rate than they can get formally.Deregulations can be a solution to a parallel market; a deregulation is when a country removes government regulatory controls from an industry, a commodity, etc. the counterfeit of money can also be resolved.

Every free market system can be in possession of a counterfeit detector. This detector is able to detect the authenticity and the quality of the money, this is a way to stop the counterfeit money from getting wide spread, laws can be remade but in a stricter form. The parallel market A.

K. A the black market cannot be stopped as long as trade or an economic system exists.Ecuador has done nothing to prevent the wide spread of the counterfeit currency. In conclusion Ecuador’s transition to a more market orientated economy was a good transition because it helped stabilize its economy, nevertheless Ecuador could have carried out and solved their crisis in a more constructive and different manner to guarantee a stronger potential in growth, acting in a more constructive manner could have prevented the recession to begin with. , but acting in the same manner would have led to the dollarization of Ecuador’s currency which boosted its economy. Ecuador should continue making good decisions to benefit from its market based economy, and to thrive in a reliable and steady mannerCitations1.

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