Tag Archives: Monetary Policy

Fixed rates and protectionism: monetary stability as a guise?

Paul Krugman has an interesting blog post on comparing current protectionist policies in Ecuador put in place that are similar to those put in place in the U.S. during the great depression.   The reason? Krugman points to a new paper that yields evidence to suggest that protectionist policies were a crude means of attempting to gain monetary stability as opposed to the popular argument that it was just simply economic ignorance.   Assuming that this new paper is correct in its findings, ( which makes sense given the tumultuous environment of international exchange rates and the gold standard during the depression era) Krugman may have missed the difference between the Ecuadorian economy and the depression era U.S.

While the Ecuadorian dollar being pegged to the U.S. is an appropriate similarity to the gold standard, the U.S. was flush with gold reserves pre-depression, which marked it as an economic juggernaut for international lending.  This is a starkly different position than what Ecuador is in right now.

While the protectionist policies Ecuador has decided to use may help stabilize their monetary stability, Krugman failed to highlight an important peice of what Ecudor actually put it on: (from the article he quoted, here)

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.

Ecuador insisted that the measures it proposed were necessary to balance its widening current account deficit.

As you can see in bold, whether or not this really is a correct justification for stabilizing their monetary system, what Ecuador has done invariably (or intentionally) is take down the forced liberalization that the WTO places on many other developing nations.  In essence, Ecuador has made a move that will protect infant industries, which would hopefully help Ecuador be able to level the playing field concerning international trade.  This level of protectionism, for at least their infant industries, has been proven to work in many of the high growth Asian developing nations including South Korea, China, Malaysia, Taiwan, and Vietnam.   Ecuador has been able to use monetary stability as a guise for doing something more important for their economic development.  The best part? The WTO is unphased, as they will let Ecuador do what their doing for now and hopefully, they will keep it that way.

Krugman, there is a deep moral here and that is to give Ecuador the right to develop their economy, whether it is in the name of monetary stability or just plain old protectionism.