Agencia de Noticias ANDES
World News /16 Oct 2019
10.16.19

Perfect Storm in Ecuador: A Brief Glance at the Reasons Behind the Crisis

Ecuador has been beaten down by debt for decades, as is the rest of Latin America. Since the 1960s the region has tried to push for an “import substitution” economic model where the macroeconomic objective of each country was to become decently self-sufficient in terms of consumer goods. Different welfare state theories rose and fell throughout the years, while the struggling economies tried to shamble through political crises into a positive balance of trade.

Ecuador’s tale differed from the rest of its neighbor’s in three important ways after 2000. After the weather phenomenon called “El Niño” devastated Ecuador’s economy in 1998, the country threw out its currency and replaced it with the U.S. dollar in 2000. Foreign debt was declared “illegitimate, hateful and unconstitutional” by former President Rafael Correa in 2008. Finally, Ecuador refused to pay even government bonds and as a whole became divorced from the World Bank and the International Monetary Fund from 2007 to 2018.

These decisions may have made sense at the time, from a certain point of view. In fact, “dollarization” may have saved Ecuador’s economy after El Niño. However, this same decision would bite down much harder. Without a local currency, there is no real monetary policy to speak of.

Due to this, Ecuadorian products are expensive and comparatively cheap imports flood the market ─ the balance of payments reached a deficit of $3 billion in 2010 and nearly $2.5 billion in 2015. There was a $500 million surplus in 2016 that turned into a $0.97 billion deficit in 2018 ─ while tourism is dismal at best. The U.S. dollar is expensive compared to Ecuador’s neighboring currencies. People will go far to buy their groceries across borders because they can buy much more by importing than by consuming locally.

Without a monetary policy, an unwieldy economy, and soured relations with the exterior, President Lenin Moreno’s administration inherited a complex country in 2018. As if this was not enough, Ecuador has a long story of indigenous and worker activism that has transformed the political theater. Rafael Correa, who governed from 2007 to 2017, managed to keep indigenous, leftist, rightist and unionist movements at bay by trying to negotiate with all of them at the same time. Right now, however, the differences between these groups have put too much strain on the political system and most of them are unhappy with recent events.

Since dollarization has made imports much cheaper, local products have suffered. If people do not buy locally then local businesses perform badly, which means salaries stay low. Normally, the currency value could be manipulated throughout this process, at least aiding in compensating for market shocks; a central bank would be able to manage interest rates to alter investments and consumption to lower inflation. However, this is not the case. Imports reign, salaries plummet, informality and underemployment affect 62.1% of the workforce while the real average salary is $324, which is $69 less than the official minimum.

This was compensated with outrageous government spending for years. The deficit had become too much of a burden for the country to bear. Lenin Moreno decided to open ties with the exterior and negotiate a $4.2 billion dollar loan with the IMF as well as a $6 billion dollar loan split between the Inter-American Development Bank and the World Bank. The loans come with a catch, besides the interest, there must be massive cuts in government spending. Not only will thousands of government employees be fired, but there is also going to be a massive cut in fuel subsidies.

The political crisis exploded and the government had to be moved from Quito to Guayaquil in anticipation of the general protest that took place on October 9. Diesel is the fuel that transport and agriculture use, which means this price spike will affect all consumer goods and foodstuffs produced locally. On the other hand, gasoline only affects people with cars, the wealthiest 25% of the population.

The government’s fuel subsidy is split between diesel (78%) and gasoline (22%). This means that the wealthiest 25% will immediately absorb 22% of the damage from the spending cuts while the poorest 75% will pay 78% of the cuts. Moreover, the wealthiest 25% is harmed less, comparatively, from the indirect consequences that the measure will have on consumer goods and foodstuffs.

A polarized society, the return of old practices from the IMF and the World Bank, and a new, shiny, $10 million dollar loan in a country with an uncertain economy. This, coupled with measures that will make consumer prices go up in a country where consumer prices are high enough to guarantee crossing borders for groceries, make the perfect recipe for what is happening right now. An all-out insurrection. This is what is happening in Ecuador and the worst part is: no one is entirely wrong. On the one hand, the measures driven by Lenin’s government and the IMF seem terribly unfair and damage the poor more than anyone. On the other hand, Ecuador’s deficit is undeniable and something had to be done.

Perhaps dollarization is the problem, perhaps it is the spending. Something that is certain, however, is that Ecuador’s population paid dearly for splitting up with the IMF and the World Bank; undoing these steps now may seem like an absolute loss for the groups that tried to cut ties with these organizations for years. What this means is that there are only two ways out for Moreno’s administration: he will negotiate with the opposition or he will turn to violence.

If you're interested in writing for International Policy Digest - please send us an email via submissions@intpolicydigest.org