Source: Ecuavisa
On February 19, Ecuador will face one of the most important elections in the country’s history. Citizens will manifest their support for the future administrative apparatus by either supporting the socialist incumbent party, Alianza Pais, or tend towards center-right policies. After ten years of Rafael Correa in power, there are eight possible presidential candidates with varying ideologies and backgrounds. Lenin Moreno, Correa’s former Vice-president between 2007 and 2013, is the so-called to keep the ruling party’s ideology.
With the drastic economic situation the country lives due to the drop in commodity prices, the appreciation of the dollar, high government spending, and low private investment, the upcoming elections will turn to be critical. Still, before discussing the electoral panorama and what may possibly happen on February 19, it is important to first understand the political, economic, and social situation in Ecuador.
If the opposition wins, Ecuador will be added to the list of Latin American countries that in recent years have moved away from the pink tide. In the past two years, Argentina elected Mauricio Macri, Peru elected Pedro Pablo Kuczynski, and the Brazilian Congress impeached Dilma Rousseff.
With the fiscal deficit increasing and an economic recession on its way, elections in Ecuador will not only define the next government but also the next economic plan. Politics have been greatly influenced by two conditions. The first, the lack of education in the electorate and the second, the lack of political stability. Over the last 20 years, Correa has been the only president that has managed to finish his administration. Due to the electorate’s lack of education, presidents have usually adopted populist policies to remain in power, promising far-fetched or unsustainable measures such as increasing subsidies, free education and health, and massive welfare programs.
In August 2016, Robert Ward, director of the Intelligence Unit at The Economist, published a list of the 20 worst performing economies for that year. Ecuador ranked 7th behind Venezuela, Brazil, Libya, Syria, Equatorial Guinea, and Azerbaijan. Ward said Ecuador’s economy was entering a recession, not because of the appreciation of the dollar or the decline in oil prices, but due to the lack of appropriate policies. The deficient management the government has engaged in surpasses the offsets of the two external factors because if Ecuador would have taken advantage of the economic boom experienced due to the high oil prices, the fiscal deficit would be lower.
According to the World Bank, Ecuador’s economic growth for 2017 will be of 0.2 percent, while the International Monetary Fund predicts the economy will shrink by 2.7 percent. Furthermore, according to Focus Economics, investment and consumption in the country are decreasing, while unemployment is growing from 4.3 percent in September 2015 to 5.3 percent in September 2016.
Public debt in Ecuador reaches close to 45 percent of its GDP, although the constitution establishes a ceiling at 40 percent. This presents a problem for the next government, considering most of the debt acquired must be repaid in the short or medium term, leaving the next President limited options to conduct major policy changes.
Rafael Correa’s administration faced rapid growth in its initial years, changing the policies implemented in previous governments towards more progressive ones. The initiative to shift from being an oil exporter towards a service-producing matrix helped foster and develop other industries, which historically lacked infrastructure and productivity. This initial change boosted the economy that reached impressive GDP growth, peaking in 2011 at 7.78 percent despite the world recession of 2008.
The economic policies the government implemented following this period increased government expenditure to improve highways, construct new airports and ports, build hydro-electric power plants as well as a new oil refinery. These measures were taken by the government to counteract the low private oil production since private companies left the country after changes in contract regulations between the state and the multinationals took place.
Although GDP was growing at an average of 4.69 percent annually between 2008 and 2014, funds received by the government were also used to cover the increasing bureaucracy, supporting intense propaganda campaigns, shelter corruption, and pay fines to some private multinationals that were expelled from Ecuador without complying to their contract agreements.
During Correa’s regime, government intervention in the economy has increased in order to finance development as well as to perform fiscal policy in a dollarized economy. As the government sought to move away from its dependency on foreign industries and markets, several policies led to a decline in foreign investment. For example, laws in Ecuador have discouraged investment in the country. According to the World Bank’s Doing Business Report for 2017, which measures the ability of companies to do business and invest in a country, Ecuador declined in 9 of the 10 monitored indicators, registering the biggest drops in “Paying Taxes” and “Protecting Minority Investors”. Yet overall, the country’s ranking at 114 out of 190 did not present any changes from the previous year.
Socially, according to the Human Development Report, Ecuador has presented big improvements in the last two decades. The HDI index assesses three basic indicators of human development in a country: a long and healthy life, access to knowledge, and a decent standard of living. This indicator has increased from 0.603 in 1990 to 0.732 in 2014. Life expectancy in Ecuador has increased by 12.8 years, while the Gross National Income per capita increased 42.4 percent between 1980 and 2014.
Source: Lainfo
Investment in infrastructure for the health, education and transportation sectors increased to about 14 percent of the overall GDP expenditure. This investment has allowed the country to progress towards the results depicted by the Human Development Report. Yet many problems still persist. With a lower revenue stream due to the drop in the price of oil, the government faces a budget deficit and has rushed to accumulate more debt. Bureaucracy increased in these past 10 years and according to a report done by the Inter-American Development Bank in 2014, Ecuador registered the second worst bureaucracy in Latin America, after Venezuela. Denounces in this area have been that officials working for the state and multinationals operating in Ecuador usually do not receive their payments on time, affecting the overall social situation in the country.
The state has stopped giving money to the Social Security Institution and studies suggest that besides presenting deficits, this institution will not be able to keep supporting its affiliates by 2050.
Corruption is still a big problem within the current administration. Recently, a major corruption scandal revealed that Brazilian multinational Odebrecht - that oversaw and conducted major construction projects in Ecuador - spent USD 33.5 million in bribes to government officials. The US Department of Justice has a list of officials implicated. Yet the names have not been released to the public but have been shared with Ecuador’s Attorney General.
Furthermore, the oil industry was also a playground for corruption. Carlos Pareja Yannuzzelli, former manager of Petroecuador - the biggest state oil producer - and former Minister of Non-Renewable Energy, published a series of around 20 videos talking about how important officials in the energy sector, including the incumbent vice-president who is running for reelection with Lenin Moreno, took bribes from contractors and diverted funds into their personal accounts.
Another big corruption scandal was released in 2014 when Pedro Delgado, the President’s cousin and former President of Ecuador’s Central Bank, diverted and misused public funds when he was overseeing the Bank’s management. During the investigation, he fled the country. Later the Justice Department discovered he had forged his degree in Economics. Corruption has not been thoroughly cleared due to the close association of the Attorney General and the judiciary power to the political apparatus, which cripples the need for further investigations.
Although there have been numerous advancements in the social sector, many of these have come at a very steep price due to the incorrect management of funds during periods of buoyancy attributed to high oil prices.
Rafael Correa’s administration has taken a disputed path to achieve its main objectives of increasing the life quality of citizens. During the first years of the administration, the high income and low bureaucracy allowed for a wide implementation of social programs in the country. Later, the opportunity cost of implementing these programs was raised, leaving the country’s economy damaged with a low growth rate and an excessive fiscal deficit.
Even though market conditions for Ecuador in the past three years were not as good as expected, the incumbent administration’s lack of responsible management has left Ecuador bounded to change its policies in order to navigate the recession and maintain social development.