Traditional scalable video encoders sacrifice coding efficiency to reduce error propagation because they have avoided using enhancement-layer (EL) information to predict the base layer (BL) to prevent the error propagation termed "drift". Drift can produce very poor video quality if left unchecked. We propose a video coder with significantly better compression efficiency because it intentionally allows the drift produced by predicting the BL from the EL. Our drift management system balances the tradeoff between compression efficiency and error propagation. The proposed scalable coder uses a spatially adaptive procedure that optimally selects key encoder parameters: the quantizer and the prediction strategy. Our numerical results indicate the encoder is very powerful, and the selection procedure is effective. The video quality of our coder at low rates is only marginally worse than the drift-free case, while its overall compression efficiency is not much worse than a one-layer nonscalable encoder.