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Economical and political environment in Ecuador

By Ec. Juan Felipe Bustamante
Posted: 7th July 2011 13:09

II. Economical  Environment in Ecuador

During the last decade, Ecuador has seen its economic environment strongly influenced by the financial and economic crisis of 1998-1999, and consequently by the process of currency convertibility through which the country crossed.

The adoption of the United States dollar as the legal currency in January of 2000 removed the monetary exchange risk and stabilized the expectations of the economic agents.  Between the years 2000 and 2004, the actual GDP grew at an average rate slightly over 4 percent.  Nevertheless, there exists and important difference between the performance of the oil related GDP and that of the non-oil related.  While the oil related GDP increased at an actual average rate of almost 10 percent per year between 2000 and 2004, the non-oil related GDP did so at rate of 3.3% (1)

The economic history in Ecuador has a direct correlation with the trajectory followed by the production and sale of crude oil.  During the last four decades, oil has been the economy’s main pillar.  The substantial increase in the oil’s sale price during the last 10 years has been of great support to the currency exchange measure implemented by former president Mahuad.

During the last decade, Ecuadorians have been able to enjoy a stable economy with one of the lowest inflation rates in Latin America.  Due to the economic stability and mainly because of Ecuadorians’ confidence in the new currency, the US Dollar, we have been able to access credit, and mainly consumer credit which before dollarization was practically inexistent due to the constant change in the political and economical environment.

While dollarization has brought to Ecuador countless benefits, it is undisputable that the dollar has depleted Ecuador’s competitive capacity towards neighboring and South American countries.  The trade balance in the latter years has evidenced a commercial surplus, which does not illustrate Ecuador’s economic reality.  Ecuador is currently a country highly dependent on its imports.  Should we remove from the equation the high volume of current-market-price oil export, we will recognize that Ecuador’s trade balance has quite an important commercial deficit.

The macro economical crisis of recent years and the evident currency depreciation and loss of purchasing power displayed by the dollar, are all unfavorable aspects for the local economy. The lack of a monetary policy in Ecuador, as well as the dilated state budget that Correa’s regime has maintained, are some of the reasons explaining the unfavorable economic measures which have been taken in recent years.  With no doubt Ecuador requires a strong dollar in order to become more competitive.

Following the most recent negotiation of the oil contracts, as a result of which the Ecuadorian government is the largest beneficiary; a strong investment on behalf of such oil companies will be required in order to comply with the contracts and consequently bring the oil production to the expected levels, which amount to a production of approximately 20% to 30% higher than the current production.

II. Political Environment in Ecuador

With the electoral victory of Ec. Rafael Correa Delgado in October 2006, Ecuador experienced a change among the general guidelines of its policy. During the last 25 years of democratic stability in Ecuador, the politic activity took place by means of a regime of parties in which the center-right through the Social Christian Party, the popular democracy, the leftist democracy over the coastal populism of Abdalá Bucaram Ortiz, and the Marxism of the Ecuadorian popular democratic movement (MPD) prevailed.

The economy revolved around the predominant Latin American thesis of the social market economy; private investment was favored, the government’s size was reduced and many public services and government institutions were privatized, however, regretfully, there was a lack of interconnection among the circles of power and the immense majorities, which were claiming for a greater public partaking through guilds and social movements.

The economy is today of public nature, and investments revolve around macro projects, however, during the year 2010, the president Correa has accommodated his economical policy in an effort to attract investment capitals into the country.  For such purpose he has issued a project for a production code, which has now become national law, and in which, although the employment sector has been benefited with an outline of salaries, an incentive tax-related and production package that clearly create the conditions for private investment projects nationwide, is contained. His mining policy is technical and the last political steps given by the president, such as avoiding that his group “Alianza País” gains an ideological scheme to follow should it become a political party, preferring that this group continues to be a movement that responds to his personal initiatives, lead us to think that the government is more inclined to a fascism or personal regimen, than to a socialist structure.

During the year 2011 the country should rely on clear taxation rules in labor matters and those in charge of the industrial sector should implement new promotion policies that follow the guidelines of the new production code.

As for the constitutional regime existing in the country since 2008, it is clear that a change in the public organization of the Ecuadorian government took place, along with a greater concern for the citizens’ rights.  Constitutional justice is thus developing with relative success in the country. Concerning the guarantees that businessmen have for the exercise of their activities, the Ecuadorian government has taken care to regulate competition among business in similar activities, with a competition law currently being discussed prior to its issuance probably in the next 90 days.  With respect to consumers’ guarantees and rights, while a consumer defense law has been in force since 1990, with its respective amendments, the structure of public organizations which work to take care of consumers’ requirements is still artisanal since the public defender and further authorities do not count with the necessary technical, bureaucratic, administrative and legal elements to provide the user with a better service.

(1) Ecuador Central Bank (2001)

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