CRISIS AND ECONOMIC TRENDS IN RAFAEL CORREA’S ECUADOR. By Pablo Ospina Peralta*

 

May-June 2015

ECUADOR: Crisis – impacts and responses

During the latter months of 2014 Ecuador’s eight-year economic boom changed abruptly to one of austerity management, but everything suggests that this time the economic crisis will not be similar that of 2009, when two years of euphoric defiance of fiscal discipline were followed by a problematic six months and a recovery that followed almost immediately. At the time the country was still in possession of monetary reserves resulting from the savings required by neoliberal orthodoxy. However, despite both positive factors – the remaining reserves and the short duration of the crisis – 2009 is still remembered for the government’s lowest levels of popularity in eight years: the positive public assessment of government performance reached almost 50% while the average in subsequent years has exceeded 70%. [1]

This time around things look somewhat more complicated. No internal reserves are available and although the duration of the crisis is uncertain, it could conceivably last for several years. [2] A revaluation of the dollar, a contraction of international credit and the reduction in the price of the raw materials which form the basis of Ecuadorian exports, have all combined to create a difficult situation. The combination of the appreciation of the currency (The US dollar has been Ecuador’s national currency since 2000) and the fall in oil exports has put pressure on both trade and fiscal deficits. The latter has in turn had a negative impact on two of the main factors of growth in recent years: public spending and the dynamism of the construction sector. [3] Closing the vicious circle is a predictable deterioration in the level of general tax revenue due to a decline in economic activity.

While the depth of the shadows looming over the government and the country will, of course, depend on the seriousness and duration of the global recession, the budget figures are presently little short of frightening. Budget oil revenues fell from $US 6 billion (thousand million) in 2013 to just over $US2 billion in 2014 and, to make the matters worse, 2015 prices have dropped to half the average value of 2014. While in 2012 it took five months to finance the budget deficit, in 2013 it took eight months and in 2014 eleven.

The country’s deficit has been financed through external and internal debt: amounting to more than 4 billion dollars in 2013 and $US7 billion in 2014, while the proposed deficit for 2015 is $US8,000.9 million, despite being based on an average oil price of US$80 a barrel. [4] A conservative estimate of the financing needs for 2015 based on modeling the impacts of sales of crude and the importation of derivatives, is assumed to be about 12% of GDP if the price of WTI [5] remains at $50 a barrel throughout the year. [6]

The trade balance is also a concern. Notwithstanding high oil prices, Ecuador has been running a negative balance of trade since 2009 and in 2013 the deficit in non-oil trade reached more than US$9 billion dollars, although in 2014 it fell somewhat, to US$7,600 million, thanks to increased mining and shrimp exports, as well as a series of restrictions on imports.[7]

Given the seriousness of the situation, the government decided to impose much wider restrictions on imports. However, unlike in 2009, the Andean Community of Nations declared the initial safeguards imposed on imports from Colombia and Peru to be illegal. A system of generalized safeguards consistent with World Trade Organisation rules was consequently implemented with a goal of reducing at least 2,200 million imported goods: the safeguards cover 2,800 tariff lines and US$8,500 billion in imported goods and are scheduled to last for 15 months from March of this year.

 

As the country is unable to devalue its currency due to the use of the US dollar, restrictions on imports are inevitable, as is the attendant pressure on inflation. However, given their temporary nature business leaders are hoping the safeguards will not delay the ratification and enforcement of the Free Trade Agreement Ecuador recently signed with the European Union. The FTA is still waiting to be debated in the National Assembly, where perhaps hitherto unavailable details of the pact will be made public. [8] In whatever case, it is foreseeable that the coming into force of the treaty will further restrict the government’s room for maneuver in the fight against external economic impacts and new cheaper imports in the near future.

Overwhelmed by economic necessities, President Rafael Correa announced the most controversial of his emergency measures. He refused to acknowledge a debt of US$1,749 million in mandatory contributions to the Ecuadorian Institute of Social Security (IESS) for pensioners health services, and was later able to pass legislation in the National Assembly (the so called “Labor Justice Law” ) that eliminated the obligation to provide US$1.100 million for pensions in 2015. [9] At a stroke, the government was almost three billion less indebted, but at a possible cost to future pensions.
It was an extremely risky move with a very high political cost, gainsaying as it does the priority the government has always publicly placed on social spending. In a demonstration of its opposition the unpopular legislation, Alianza Pais’ major ally in the National Assembly, the AVANZA movement, distanced itself from the government. Ramiro Gonzalez, minister of Indudstry, former chairman and of the IESS board, and leader of AVANZA, also resigned from cabinet. As further evidence of discontent, twenty seven government deputies voted via their alternates while nine did not vote at all. [10]

The debate, and government justifications for the measure, take us into the tortuous landscape of the Correa government’s project and the results of its economic policy. The President and his spokespeople explained that the government debt to the IESS did not in fact exist due to the lack of a regulation requiring the state to pay 40% of the annual costs of pensions. The explanation is surprising to say the least: during the present government several agreements have been made to pay that ‘non-existent’ debt, and payments were in fact made, although always in bonds (except for the first, paid in cash in 2008). The justification for the measure was no less strange: classifying the 2001 legislation that specified the compulsory contribution of 40% as neoliberal, even though the obligatory nature of government contributions to pensions has been in effect since 1942, long before neoliberalism existed as an economic doctrine. [11] What is clear, however, is that none of the neoliberal governments of the last 30 years had dared, until now, to do away with state contributions to the pension fund.

Beyond the justifications, debate has made it evident that compulsory state contribution is a key factor in reducing the “actuarial deficit” of Compulsory Social Security: i.e. the future deficits in pension payments when the number of the retired increases. [12] The norm approved by the government of the Citizen’s Revolution specifies that the central government will make contributions whenever necessary. However, the contribution to reducing the actuarial deficit apparently does not qualify as “necessary”, implying that the state will no longer commit itself to present savings in order to ensure income for tomorrow’s retirees, who will have to find ways to finance the state neglect of today.

Trends: economic and social model

Government reactions to the crisis have not been exhausted by any means. [13] A lot of deficit is still to be reduced, and the magnitude of the impacts cannot at this point be known with any certainty. However, it is worth trying to establish some connections between the government’s economic and social model, the characteristics of the crisis and the nature of the reactions.

What I am arguing here is that the dramatic reductions the economic crisis has imposed on public spending have accelerated a previously observed underlying trend to reduce, reverse or directly eliminate any progressive features that still formed part of the Citizens’ Revolution political project. I will demonstrate a series of three proofs related to three central aspects of the project and its progressive achievements, and will connect them with the responses to the crisis.

First case. In 2009, the first national Buen Vivir Plan proposed the ambitious and progressive goal of “changing the capital accumulation regime”. This consisted of abandoning the century old structure based on raw material exports, and replacing it with a system based on local industrial production, eco-tourism and environmental services. To do this it would be necessary, it was said, to “produce distributing, and distribute producing” by means of an ambitious program of resource reallocation – starting with land and water – together with a selective substitution of imports. But any dreams of embarking on the redistribution of land and water resources were abandoned in 2011, and replacing the accumulation regime gave way in 2013 to a “change in the productive matrix” driven and managed by the conservative groups within the government.[14]

The rampant increase in imports since 2008 should have given rise to import substitution policies and the active promotion of local industry, but nothing was done, and the 2015 crisis finds us much worse off than when the goal was originally set. Safeguards and tariff surcharges, rather than being a tool to promote national industrialization, are now a matter of looking for a lifeline amidst the wreckage. In fact, the figures lead us to believe, without exaggeration, that changing the productive matrix is ​​exactly the reverse of changing the capital accumulation regime: it is a step towards the consolidation of the economy’s primary resource base. The trend, which has become increasingly important in Ecuador and in Latin America as a whole due to the primary resource boom is under way at the same time as the third sector is also gaining in importance.

Exports of industrial products are a good indicator of the underlying trend in government policy. While in 2007 exports of industrialized products represented 25.7% of total exports, in 2010 they were 22.7% and in 2014 ended up being 16.5%.[15] If by “change in the productive matrix” we mean something like “industrialization”, or replacing the production of raw materials, this is far away over the horizon, in never-never land. We are going in exactly the opposite direction. Now, without public funds, under pressure due to the crisis, and condemned to a reduction in private sector economic activity, attempts at structural change in the economy have given way to efforts to salvage the furniture from the wreck by increasing credit to the construction sector.

As Ekos business magazine put it:

“The importance of consolidating programmes such as ‘Mucho Mejor si es Hecho en Ecuador’ (It’s much better if it’s made in in Ecuador) and changes in the productive matrix are vital and should have been applied long ago.” [16]

Second case. The principal, and much trumpeted offer of the Citizen’s Revolution government was to build a more just, i.e. less unequal, society, and in the new government’s early stages social investment was increased, the State was established as market regulator and direct progressive such as income tax taxation was increased vis a vis regressive and indirect taxes such as VAT. However, all this came to an end in 2010. In 2008 income tax was 46% of combined tax revenue from the two sources, but from 2009 onwards its share began to drop and remained at 38% until 2014. In 2014 debt service payment exceeded public expenditure on education: the first exceeding US$4,900 million while the second reaching slightly more than US$3.600 million. More significantly, the 2008 Constitution states in its twenty-third transitional provision that expenditures on health as a percentage of the General State Budget should increase by 0.5% of GDP each year until reaching 4%, but health spending was 1.4% of GDP in 2009 and reached only 2.1% in 2014. Is it even conceivable that universal access to health can be achieved with such a low level of social investment? The economic crisis has only exacerbated the already observed trend: the government has decided, in practice, to reduce the state contribution to pensions. [17]

The figures for poverty reduction and income inequality in Ecuador since 2001 are no doubt very positive. However, it is clear that the rate of reduction was more pronounced between 2001 and 2006 than between 2007 and 2011, while between 2011 and 2014 things began to stagnate or worse. Indeed, poverty fell from 64% to 37% between 2001 and 2006 and from there dropped to 24% in 2014. More significant is that since June 2013 poverty initially dropped and then started to climb slowly (from 23% to 24%). Something similar happened with income inequality, the Gini index which in 2001 was at 59 points, fell to 54 in 2006 and reached 48 in 2014. The significant thing is that December 2011, when the index was at its lowest point (around 47) it stagnated and then began to climb. [18]

The reason for the slowdown is that after the 1999 national crisis, poverty and inequality reached very high levels due to a combination of factors. Since that time, with the help of the boom in raw materials numbers have been significantly reduced. However, structural poverty and inequality were not affected, as these are not related to income but to the possession of productive assets, i.e. with large holdings. In fact, the most recent study of Ecuadorian companies shows that revenues of the 300 largest private companies in the country grew at a faster rate than GDP. As a result, while their combined income in 2011 represented 54% of GDP; combined revenues in 2013 amounted to 57% of GDP. [19] The same trend towards concentration exists in the financial sector: while in 2012 the seven largest private banks accounted for 82% of assets, in 2014 the figure reached 87%. [20] In fact, bank profits grew 20% last year (2014), well above the level of inflation, wages or the economy as a whole. Given this trend in the concentration of ownership and profits, it is pertinent to ask how the government hopes to create a less unequal society?

Third example. The Citizens’ Revolution is identified with progress and modernization; Rafael Correa was always a modernizer. The big question is: what kind of modernization and progress is he promoting? Is there only one? I believe not. There are various forms of capitalist modernization, such as that under way in the province of Tungurahua: a model based on small enterprises within a more egalitarian agrarian structure; a connection to markets that are not oligopolistic; and diversification based on family activities and the prominent role of women. The result is a less concentrated and more equitable industrialization.[21] Other forms of capitalist modernization are better known and more familiar to Latin Americans; they involve heavy injections of transnational capital, loss of local autonomy, social plunder and environmental destruction. And since 2013 we have been treated to an excellent, though certainly extreme, example of the ideal model of modernization of the country and its population, as understood by the mainstream within the governing party, Alianza País.

As I say, this is an extreme example, but for that very reason it is revealing. We were already familiar with the concept of ‘millennium schools’, i.e. schools full of technology located in places with historically very poor school infrastructure. Thanks to these wonders the poor were to finally see the bright light of technological civilization. ‘Millennium Villages’ are a step in the same direction, but in a particularly disturbing way. They are managed by Ecuador Strategic, an agency responsible to the Vice Presidency. Ecuador Strategic is a public company that controls revenues from non-renewable resource projects and invests them in the municipalities where the projects are located. The investment is therefore not managed by the municipalities and civil society organizations, but by this public company managed by the Vice Presidency. The investment is usually one of the offers made in order to gain the consent of populations to be affected by the projects.

One of these ‘Millenium Villages’ is ‘Playas del Cuyabeno’, an Amazonian community bordering the Aguarico River and laying within the Cuyabeno Wildlife Reserve, where until 2007 the community lived in houses built with poles and thatched roofs. [22] In 2008 Ecuador Strategic presented a proposal for investment in urban improvement. Instead of the old model of a community with few houses in the village center and many scattered around about, where people live, plant and harvest, the public company proposed to build 83 prefabricated houses equipped with internet, running water, two bicycles, electricity and other urban amenities. Just one of 200 similar Amazonian villages planned by the government of the Citizen’s Revolution, work began on ‘Playas de Cuyabeno’ in 2011 and the new settlement was inaugurated in October 2013 by the President of the Republic himself, who stated: “This is the new Amazon, poverty is not good.”

Judging by Ecuador Strategic’s modus operandi and the rules established in this Millennium Village, poverty from the government’s perspective is more than a lack of money, it is the rural, forest way of life itself. The village therefore includes streets and sidewalks where no cars exist, but where the inhabitants can now use their bicycles. Of course, bicycles cannot be used outside the village and spare parts can only be found in the city of Lago Agrio, two hours downriver on the Aguarico.

The people of the village agreed not to make changes to the houses for five years after choosing, in a community consultation, between two models of prefabricated houses but are now not allowed to raise chickens, cows or pigs or to grow crops. Smoking fish or meat, and making manioc beer is also prohibited within the Village.

“We used to live in huts with thatched roofs. Now it’s different. In the houses we had before we had everything. Now it is difficult to get used to. Before the children went to school and we went to work in our fields. There were right next to our homes … banana, cassava crops. We had animals, chickens, dogs. I miss that. On weekends I go to our land, but [during the week] have to stay here so my children can go to school. On weekends, I clean the banana, being with my chickens and my pigs, and there is silence”. (interview in Playas de Cuyabeno, February 2014). [23]

The village center not only houses the school but also the community police headquarters. The trees have been felled, the streets cobbled, and the grass must be cut every week. For the first five years Strategic Ecuador has guaranteed to assume the costs of transporting the materials necessary for the maintenance of homes, gardens and equipment; activities that require a great many external inputs. Rain water was previously collected in barrels in every house while the children bathed in the river. Now water comes directly to the houses and a concrete promenade cuts the village off from the river. On the outskirts of the village a fence separates the urban area from ​​the forest that surrounds it.

This is not simply a matter of criticizing the model imposed in the millennium villages in the name of an idealized, harmonious and picturesque pastoral society. Nor is the idea to criticize the alleged betrayal of the radical anti-capitalist project of the government’s early period. Neither one, nor the other. However, the least that could be asked of a social intervention project is that the physical and social improvements respect the knowledge, lifestyle and autonomy of the people involved. Is it not possible to create an architecture adapted to Amazon environments and cultures? It is not impossible to adjust an intervention to the needs of rural indigenous cultures and civilizations, and while some aspects of the Millennium Villages may be valued by the people who live there, the structure is not self-sustaining. Repairs, materials and maintenance work, everything in fact, depends on inputs from outside.

Uncertainty about what will happen to the infrastructure and equipment when Ecuador Strategic is no longer responsible for it, is also a major concern for the inhabitants. They will have to earn money now and save it to pay for what comes later. Previously, people made use of local materials and knowledge that are now useless in the context of the new urban infrastructure. The electricity generator must not only be constantly fed, it also makes a lot of noise, while the village itself, with its imposed rules, prevents subsistence and productive activities being carried out in a domestic environment that is now separated from the area where the necessities of life are grown.

The Millenium Village demonstrates the extremes to which a concept of modernization imposed from above can go. The old abandoned way of life is identified with poverty and neglect, when in reality it also means greater autonomy, better use of local resources and the alternative civilizational values ​​of a forest community. Within Ecuador Strategic there does not appear to be even a minimum appreciation of people’s way of life, customs and knowledge.

The economic crisis and the fiscal shortfall are threatening the sustainability of the model of externally imposed civilization and modernization which lies behind the Citizen’s Revolution political project. The indications could be clearly seen even before the storm broke. The progressive achievements had reached their limits, and the most conservative and absurd features had come to the fore. The Conservative Restoration within ‘Correismo’ did not begin with the crisis, but the crisis clearly threatens to intensify it.

NOTES

[1] The figures on public expenditure and on governance approval ratings can be found in Pablo Ospina 2013. “We are doing better things with the same model rather than changing it”. The citizens’ revolution in Ecuador (2007-2012). In Edgardo Lander, Carlos Arze, Javier Gomez, Pablo Ospina, Victor Alvarez. Promises in their Labyrinth: Changes and continuities in the progressive governments of Latin America. La Paz: Institute of Ecuadorian Studies (IEE) / Center for Labor and Agrarian Development (CEDLA) / Centro Internacional Miranda (CIM).

[2] Diego Grijalba 2014. The end of the super commodity cycle and its impact on Latin America. In Koyuntura. Institute of Economics USFQ. No. 48, Year 7 September, Quito.

[3] In 2013, for example, the income of the thousand largest of Ecuadorian companies rose 11.5% compared to 2012; but the real estate and construction sector companies saw their income grow by 63.5% and 57.6% respectively, cfr. Fausto Maldonado and Ana Puebla 2014. The dynamism of the Ecuadorian company. Company Ranking Top 1000 Ekos Business. August, p. 50. Available in www.ekosnegocios.com

[4] The data related to the fiscal deficit is taken from the Ecuadorian Central Bank, Monthly Statistical Information. No. 1957. April. 2015. Quito: ECB.

[5] WTI- West Texas Intermediate crude stream produced in Texas that serves as a benchmark for pricing other crude streams.

[6] Alberto Acosta and John Banks-Guilarro 2015. The crisis reveals the seams of Rafael Correa’s economic management. La Tendencia: Journal of Policy Analysis. No.14.Abril-May, pp.56-8

[7] Tariff surcharges, a complete analysis: the reason for their application, features and impact. In Ekos Business. April 2015. Available at www.ekosnegocios.com
[8] “Government of Ecuador and employers agree on new investments and set date for meeting on safeguards,” Andes News Agency, Thursday, March 19, 2015. Available at http://www.andes.info.ec/es/noticias/gobierno-ecuador-empresarios-acuerdan-avances-nuevas-inversiones-proxima-cita-salvaguardias ; “Minister Diego Aulestia explains the issue of safeguards in the European Union” El Universo, Thursday, March 26, 2015. Available at http://www.eluniverso.com/noticias/2015/03/26/nota/4704401/ministro-diego-aulestia-explica-salvaguardias-union-europea.
[9] “The IESS lacks US $339.1 million to pay for pensions this year,” El Comercio, February 8, 2015, available at http://www.elcomercio.com/actualidad/iess-pensiones-jubilados-2015 -deuda.html

[10] “Correa approves the Labor Justice Law of without a veto”, Expresso, 17 April 2015. Available at http://expreso.ec/expreso/plantillas/nota.aspx?idart=7808510&idcat=38269&tipo=2

[11] “No regulation, no payment” El Universo, 25 March 2015. Available at http://www.eluniverso.com/noticias/2015/03/25/nota/4699426/falta-reglamento-no-hay-pago     Jorge Leon. Neoliberal welfare state?, El Comercio, 13 April 2015. Available at http://www.elcomercio.com/opinion/columna-jorgeleon-deuda-iess.html . The long history of state contributions to social security, with its roots in the so-called “Schoenbaum report” can be found in Cecilia Mantilla and Enrique Abad 1984. The National Insurance Institute (1935-1970). Nunez J. (ed.). History of Ecuadorian Social Security. Institutional evolution. Quito: Editorial Will, especially p.135.

[12] The number of pensioners increased from 214, 000 in 2007 to 432,000 in late 2014, “The IESS lacks USD 339.1 million to pay for pensions this year,” El Comercio, February 8, 2015, available at http://www.elcomercio.com/actualidad/iess-pensiones-jubilados-2015 -deuda.html
[13] Among other measures taken to alleviate the fiscal deficit are: a reduction of US$1,400 million in the 2015 state budget; the declaration of a tax amnesty by means of which the government expects to recover about US$500 million; and placing US$750 million in bonds on the international market at the astronomical interest rate of 10.5%.

[14] These groups, associated primarily with economic sectors linked to and dependent on government procurement were not able to produce any change in the accumulation regime. I analyzed this issue in 2013. Pablo Ospina “Ecuador: the new term of government and changing the productive matrix. Situational Report “, July 2013. Quito: Ecumenical Projects Committee. Digital publication available at www.cepecuador.org

[15] Central Bank of Ecuador. Monthly Statistical Information. No. 1957. April. 2015 Quito: ECB Table 3.1.1. The 2007 figures can be found in edition No.1920, 2012.

[16] Tariff surcharges, a complete analysis: the reason for their application, features and impact. In Ekos Business. April 2015, p. 90. Available in www.ekosnegocios.com

[17] Data collection of taxes and social spending taken from the Central Bank of Ecuador. Monthly Statistical Information. No. 1957. April 2015. Quito: ECB, tables 2.4.2 and 2.4.3.

[18] Data from 2001 to 2006 taken from the Central Bank of Ecuador. Department of economic statistics 2011. Macroeconomic statistics. 2011. Structural analysis. Quito: ECB; data from 2011-2014, INEC, National Survey of Employment, Unemployment and Underemployment – ENEMDU. Indicators of Poverty and Inequality. June 2014. Power Point available at www.ecuadorencifras.gob.ec

[19] Fausto Maldonado and Ana Puebla 2014. The dynamism of the Ecuadorian company. Company Ranking Top 1000 Ekos Business. August, p. 50. Available at www.ekosnegocios.com

[20] Victor Zabala, Silvana González and José María Muñoz 2015. Ekos Business Financial Ranking 2015. March, p. 42-44. Available at www.ekosnegocios.com

[21] Cf. Paul Ospina Peralta (ed.). 2011. The territory of the forking pathways. Tungurahua. economy, society and development. Quito: Andean University Simon Bolivar – National Publishing Corporation. 68 Social Sciences Library.

[22] The following information has been taken from Lisset Coba, Cristina Cielo and Ivette Vallejo. “Women, Nature and Development in sites of Ecuador’s Petroleum Circuit”, Quito, FLACSO – Ecuador, 2014 unpublished, pp. 9-20.

[23] Ibid., P. 15.

Source: Comité Ecuménico de Proyectos www.cepecuador.org

Original document published in Spanish: https://lalineadefuego.info/2015/04/28/crisis-y-tendencias-economicas-en-el-ecuador-de-rafael-correa-por-pablo-ospina-peralta/