If there’s one thing that Ecuador’s 14 million people can agree on, it’s the need for sweeping change in the way the impoverished Andean nation is run – politically and economically. But that’s where the agreement stops.
Rafael Correa, the firebrand young leftist-economist who won top office in late 2006, has been promising an “economic revolution”. The president and his cabinet ministers have routinely outlined the changes needed, focusing on five major areas – debt, taxes, banking, production and social programmes. “There will be profound reform in different areas of the economy that will substantially change the way things are done,” says deputy economy minister Luis Rosero, in a nod to the vision of “21st century socialism” also espoused by Venezuela’s Hugo Chavez.
Prospects for such reform have suddenly become a lot more viable, after a September 30 election of a 130-member Constituent Assembly, which has the power to rewrite the constitution and dissolve a congress that has battled to resist the president’s leftist proposals. Correa’s Alianza Pais party won the largest share of seats, profoundly strengthening his hand. “We have won the mother of all battles,” Correa told supporters.
Correa says the proposed constitutional reforms will make Ecuador a more just society and tackle the endemic political instability.
The president’s critics say he will use the assembly to entrench his hold on power, and this will frighten off foreign investors. They also charge that Correa’s revolution is nothing more than a return to the big government, welfare policies of the past, which have not only contributed to economic stagnation but are also to blame for the political crisis that has seen eight presidents come and go in a decade.
“No one denies that change is urgently needed, but instead of a revolution, we are witnessing an involution. We are returning to the 1970s, with a free-spending, bloated state. It made little sense then, and makes no sense today,” says Ramiro Crespo, an economist and president of Ecuador’s Analytica Securities.
How the Ecuadorian state will deal with its $16.8 billion debt as well as tax reform are two of the most pressing issues facing the administration. Rosero says that concrete plans for both areas are ready, but the government could hold off presenting them until the end of the year. “We have prepared a package of 10 laws, but are not going to present them until the [Constituent] Assembly is in place and working,” he says.
The Assembly started work on October 31 and is scheduled to last 180 days, with a possible extension of up to 60 days. The constitution the Assembly drafts will then be put to a national referendum for approval.
Bad debts
The government’s debt policy has raised hackles both within and beyond Ecuador’s borders. Correa took office pledging to negotiate debt payments and refuse to repay debt his government considered illegitimate. The first hint of this came in February, when then-finance minister Ricardo Patino announced that Ecuador would delay a $130 million payment on its 2030 global bonds.
The announcement sent markets reeling, but the government backtracked immediately, saying it would pay, but late. It ended up paying on time, creating a politically dicey situation that eventually led to congressional hearings and Patino’s resignation from the ministry. The incident was not only confusing, but replete with intrigue. Allegations surfaced that Patino had struck a deal with some creditors – Venezuelans were mentioned most often – a charge that gained force after a video surfaced showing Patino talking to bankers about not paying the coupon.
Patino remarked that he himself had made the video and that there was nothing illegal about a friendly chat with bankers about Ecuador’s debt plan. The investigation has grown increasingly sordid. One of Patino’s former advisers, Quinto Pazmino, has been arrested for threatening President Correa. He claims to have compromising videos of the president that he plans to make public.
In the meantime, Rosero says the government will continue to service its debt commitments as long as they are legitimate and the state has the resources. This, he says, is contingent upon the price of oil staying high. “The only thing the government has said is that it will not pay the debt that was illegitimately incurred. There is a commission working on this to define the illegitimate debt. They will set out the government’s guidelines, but basically the idea is to repay what we legitimately owe,” he says.
He cites the case of Norway, which announced last year that it would cancel $52.5 million in debt owed by Ecuador for the purchase of four ships in 1980. The ships never arrived.
Giving the cold shoulder
Adding to the concern of analysts and investors are Ecuador’s regional relations, particularly Correa’s links to Venezuelan president Hugo Chavez, and the decision to downplay ties with the United States. Foreign minister Maria Espinosa announced in May that Ecuador would not extend a 1993 investment protection treaty with the United States and had no plans to return to the table to negotiate a free trade agreement with Washington. President Correa has added that Ecuador is done begging the United States to extend the Andean Trade Promotion and Drug Eradication Act (ATPDEA), which lets the country and three other Andean nations – Bolivia, Colombia and Peru – export more than 6,000 products tariff free to the United States.
ATPDEA is set to expire at the end of the year. The US government hopes to have approved free trade agreements in place with Colombia and Peru, but is likely to extend the agreement for a few more months while the treaties are implemented. After that, Ecuador and Bolivia could be out of luck.
The Correa administration has a few plans to deal with the lost revenue if ATPDEA is scrapped. First, it is part of the Andean Community (CAN) negotiations for an association agreement with the European Union. The first round talks between CAN (Bolivia, Colombia, Ecuador and Peru) and the 27-member EU were held on September 17-21. They include political, trade and cooperation negotiations.
The more controversial idea is to compensate exporters who would have to pay duty to dispatch products to the United States. The state would reimburse them the cost of the tariff, which Rosero estimates could cost between $30 and $40 million annually. “There will be an impact from a loss of ATPDEA, but we have a compensation strategy in mind. Ecuador is in favour of economic openness, but not the unequal kind proposed by the United States,” he says.
The compensation plan is ridiculed by opponents, who say it reflects the government’s complete misunderstanding of economics. Crespo says the administration overlooks the fact that the impact from a loss of trade preferences is not only about the amount of duty that has to be paid. “The government thinks that it can compensate $30 to $40 million in losses, but it neglects to see that importers will not be interested in what we have to offer. Buyers in the United States are already looking elsewhere because of the uncertainty,” he says.
For an interview with Ecuador's economy minister Fausto Ortiz, please see "Ecuador reassures investors".