Making Lenin Proud By Mary Anastasia O'Grady

The Wall Street Journal

Making Lenin Proud
By MARY ANASTASIA O'GRADY

January 22, 2007; Page A14

"The way to crush the bourgeoisie is to grind them between the millstones of taxation and inflation."

-- Vladimir Lenin

Mexican historian and author Enrique Krauze has written that he believes that the "last Marxist in history [will] die at a Latin American university." At a minimum, Mr. Krauze seems to have gotten the geography right.

Most of the rest of the world has stuffed communism into the dustbin of history but, as events over the past week remind, Latin America has not. Earlier this month, President Hugo Chávez officially took control of Venezuela's central bank and declared himself a communist. He then traveled to Ecuador to attend the swearing-in ceremony of his latest and perhaps most promising protégé, Rafael Correa, as that country's new president. Mr. Correa has lost no time emulating his mentor.

Mr. Correa, who was Ecuador's finance minister in 2005, was well known in the early stages of the presidential campaign last year as an anti-American, anti-market extremist with a view that "dollarization was the biggest economic error [Ecuador] has ever committed." But when he failed to win in the first round of voting in October, he was forced to adopt a more measured tone and backed off his pledge to end dollarization.

The trouble for Ecuadoreans, as we are now seeing, is that their new president's stripes have not changed. In his first week on the job, he has already demonstrated a profound understanding of Lenin's dictum that power over monetary matters is a revolutionary essential. To that end, he has begun an effort to destroy Ecuador's dollarization. From there, taxation and inflation will do much of his work for him.

At his inauguration last Monday Mr. Correa put on quite a show. Most extraordinary was his not-so-subtle admission that Mr. Chávez is going to be the power behind the Ecuadorean throne. Most Latin governments guard their independence as a matter of national pride. But Mr. Correa appeared quite happy to let the world know that he will be outsourcing Ecuadorean sovereignty to Venezuela.

Ecuador, the new president declared, is "leaving the night of neoliberalism behind" and the new "Bolivarian" government will pursue "21st-century socialism." He denounced competition and called for cooperation instead. He held up a sword that Mr. Chávez had given him as a gift and cried, "Look out, look out, Bolívar's sword is passing through Latin America," a reference to the Chávez agenda, which calls for South American integration under the thumb of the continent's largest energy producer. The Venezuelan president was perched behind the new president, eyes narrowed, enthusiastically applauding the performance. Iran's Mahmoud Ahmadinejad was also an honored guest, sitting next to Bolivian President Evo Morales.

Ecuador's political instability is legendary and Mr. Correa is the eighth president in 10 years. He will have to move quickly in his goal to consolidate power and if he is to avoid the fate of his predecessors, he will also have to move carefully.

Rewriting the constitution is so central to his agenda that on inauguration day he decreed a March 18 national referendum on the issue. The only problem is that Mr. Correa hasn't the power to call a constitutional referendum. Changes to the constitution fall under congress. Since Mr. Correa's party has no members in the 100-seat chamber and his coalition is shaky, it is not entirely clear that he will be able to push through the constitutional changes he seeks. His socialist revolution via a constitutional coup could be delayed.

Still, that doesn't leave the aspiring authoritarian without options. He has Lenin's millstones to fall back on, if only he can resurrect a local currency. This explains the assault on dollarization now under way.

The adoption of the greenback as Ecuador's currency seven years ago has been extremely popular among Ecuadoreans of all classes. A long history of repeated bouts of hyperinflation, which destroyed both wages and savings, has finally come to an end and been replaced by a new sense of stability. Mr. Correa knows full well that he cannot strip Ecuadoreans of this one economic gain without facing the kind of rebellion that brought down previous governments. Yet the control he yearns for will not be his as long as the dollar reigns.

To reverse dollarization and introduce a fiat currency, Mr. Correa will have to undermine the dollar economy. One step in that process is stifling commerce with the U.S., his country's largest trading partner. He has already pledged that under his guidance Ecuador will move away from trade liberalization with the gringos and throw its lot in with Mr. Chávez's Bolivarian Alternative for America trading block.

Protectionism will help weaken the dollar economy but it may not be enough to provoke a crisis. A forced restructuring of the country's $10.3 billion in external debt will provide further assistance by damaging the country's creditworthiness and discouraging new investment, particularly because it is well known that Ecuador's debt service as a percentage of gross domestic product is lower than Colombia's or Brazil's. Creditors understand that paying what is owed is a matter of willingness. Nevertheless, Mr. Correa's finance minister, Ricardo Patino, last week proposed a haircut of 60% on the country's debt and invited a team of Argentine officials -- otherwise known as the world's most experienced deadbeats -- to Quito this week to act as advisers.

It will be claimed that the "savings" on debt service will be used to help the poor. This will boost Mr. Correa's populist appeal but politicians never have enough revenue to meet their goals. Low growth rates and disappointing oil prices will exacerbate revenue shortfalls. In a fiscal crisis it is easy to imagine a government like Mr. Correa's issuing script or a new currency in parallel to the dollar.

The new president seems to be prepared for just such an outcome. In the past he has called for a regional currency and he has now announced that he will end central-bank autonomy. Once foreign investment and trade dry up and the bottomless pit of corruption and social spending drains public coffers, dollarization will be the scapegoat. Mr. Correa can then begin to print his own notes and make Lenin proud.

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