An austerity program including the devaluation of the sucre proved unpopular domestically but allowed Ecuador to negotiate debt repayment with the International Monetary Fund and receive financial aid.
The GDP growth rate recovered, but a drop in petroleum export prices led to a fiscal deficit and the economy neared crisis.
The 1987 Ecuador earthquakes destroyed large parts of the Trans-Ecuadorian Pipeline and oil production ceased for sixth months.
The government raised domestic gas prices by 80% and Ecuador acquired international loans to save the ailing economy.
President Jamil Mahuad announced the implementation of the U.S dollar as Ecuador's currency leading to coup d'état and his replacement with vice-president Gustavo Noboa.
Manufacturing never became a significant economic activity in colonial Ecuador, but busy sweatshops, called obrajes, in Riobamba and Latacunga made Ecuador an exporter of woolen and cotton fabrics; a shipyard in Guayaquil was one of the largest and best in Spanish America; and sugar mills manufactured sugar, molasses, and rum made from molasses.
The rural economy came to rely on a system of peonage, in which Sierra and Costa Indians were allowed to settle on the lands belonging to the hacendado, to whom they paid rent in the form of labor and a share of their crop.
The economy of the new republic, based on the cultivation of cash crops and inexpensive raw materials for the world market and dependent on peonage labor, changed little during the remainder of the nineteenth and first half of the twentieth century.
Vulnerable to changing international market demands and price fluctuations, Ecuador's economy was often characterized by instability and malaise.
The decline of the cacao industry in the 1930s and 1940s, brought about by chronic pestilence and the loss of foreign markets to competitors, had debilitating repercussions for the entire economy.
[1] The 1960s saw an acceleration and diversification of the manufacturing sector to meet domestic demand, with an emphasis on intermediate inputs and consumer durable goods.
[1] The discovery of new petroleum fields in the Oriente (eastern region) after 1967 transformed the country into a world producer of oil and brought large increases in government revenue beginning in 1972.
[1] The production and export of oil that began in the early 1970s, coupled with dramatic international price increases for petroleum, contributed significantly to unprecedented economic growth.
[1] In the early 1980s, the economy faltered as the international price of petroleum began a gradual decline and the country lost some foreign markets for its traditional agricultural products.
Dramatic climatic changes caused by El Niño during 1982-83 produced coastal floods, torrential rains, and severe drought, which were highly damaging to crops and to the transportation and marketing infrastructures.
Foreign sources of credit began to dry up as early as 1982, leaving the national government and hundreds of state-owned companies short of capital.
To meet the economic crisis, in January 1987 the government suspended debt repayments to all private lending institutions and imposed a 25-percent surcharge on many imported items.
To fulfill these promises, Febres Cordero removed government price controls, devalued the currency, and eliminated most import quotas.
[2] In March 1987, an earthquake destroyed about forty kilometers of the Trans-Ecuadorian Pipeline and its pumping stations, causing a nearly six-month suspension in crude petroleum production and the loss of an additional US$700 million in export revenue.
To help make up for the oil revenue shortfall, a consortium of international banks loaned Ecuador an additional US$220 million, bringing public-sector external debt at the end of 1987 to about US$9.6 billion, one of the world's highest on a per-capita basis.
)[2] During Febres Cordero's last two years in office, his economic team concentrated on implementing monetary reforms, renegotiating the external debt, and encouraging foreign investment.
Ecuador's halting experiment with neoliberal economic measures unofficially came to a close on March 3, 1988, when Febres Cordero announced the end of the free-market foreign-exchange system.
Two months later, on May 8, 1988, Febres Cordero's longtime rival, Rodrigo Borja of the center-left Democratic Left (Izquierda Democrática, ID) was elected president with 46 percent of the vote.
Borja, however, inherited a rapidly worsening economy as he assumed office on August 10, 1988; within a month he announced a national economic austerity program that included a sharp devaluation of the sucre, tax increases, new import restrictions, a reduction in public-sector spending, a 100-percent increase in fuel prices, and a 40-percent boost in electricity rates for private households.
[2] Borja's austerity policies and the resulting climb in the unemployment rate to 13 percent by the end of 1988, the highest in ten years, spawned strikes by labor unions, public employees, and students.
[2] In an attempt to blunt criticism of his policies, Borja introduced a new package of economic liberalization measures in 1989, including a relaxation of import restrictions, a further devaluation of the official exchange rate to prod exports, and a loosening of banking controls to stimulate the manufacturing sector.
The crisis was precipitated by a number of external shocks, including the El Niño weather phenomenon in 1997, a sharp drop in global oil prices in 1997–98, and international emerging market instability in 1997–98.
On January 9, 2000, the administration of President Jamil Mahuad announced its intention to adopt the U.S. dollar as the official currency of Ecuador to address the ongoing economic crisis.