27 Oct 2009

Can Somebody Tell Me What Happened in Ecuador?

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From Krugman, who is quoting from 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.

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.

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.

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