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CIAO DATE: 04/03
Ecuador Alert: Election and Crisis
Paul Crespo *
Hemisphere Focus: 2001-2002
October 18, 2002
Overview
Ecuador is in the final leg of its presidential elections scheduled for October 20, 2002. This election is critical for a country so plagued by political crises that six presidents have served in six years, and the last two elected leaders were removed from office less than halfway through their terms. Economically the country has been more stable since the adoption of the U.S. dollar as the national currency two years ago. Notwithstanding, half of this oil-rich country’s population lives in poverty. The next president will undoubtedly have his work cut out for him; in addition to having to contend with myriad economic problems, he will also have to address high unemployment, rampant corruption, a heavy foreign debt, and rising crime rates.
The presidential roster includes two former presidents, a billionaire banana magnate, two coup plotters, and a former fugitive. Most voters seem uninspired by any of the candidates. With a few days before the election, not one of the eleven candidates appears to have enough support to win outright in the first round (a candidate would need a 50 percent majority or 40 percent with a 10-point lead), in all likelihood, necessitating a runoff in November.
For most of this election season, Alvaro Noboa-the richest man in Ecuador (no relation to the current caretaker president, Gustavo Noboa)-has been the front-runner. He is backed by his PRIAN party, which he created after he lost his first bid for president to Jamil Mahuad in 1998. A notoriously poor public speaker with few proposals, Noboa is popular largely because of his years-long campaign to distribute free food and medicine to the poor.
An early Cedatos-Gallup poll showed that 21 percent of Ecuadorians would vote for Noboa, and for weeks no other candidate came close. But the latest Cedatos poll, conducted in late September, shows Noboa’s popularity slipping, and the support level of former president Rodrigo Borja-who ruled for the center-left Democratic Left party between 1988 and 1992-jumping to a close second place, putting him in a statistical tie with Noboa.
Borja is considered an elder statesman whose presidency enjoyed high oil prices and few crises. Many argue, however, that he is simply an anti-free market, old-style leftist with outdated ideas. “Borja knows how to run the country, but his economic beliefs are from the 1970s,” said Walter Spurrier, editor of Weekly Analysis, an economic newsletter.
The latest survey gave Noboa 17 percent, with Borja close behind at 16 percent. This was a major leap forward for Borja, who was 10 points behind in prior polls. Both candidates could make it to the second round on November 24, but some analysts actually believe that if Noboa keeps dropping, he might not make it to the runoff at all. Center-right lawmaker Xavier Neira of the powerful Social Christian party, socialist legislator and university professor Leon Roldos, and leader of the 2000 revolt against Mahuad and retired military colonel Lucio Gutierrez, all followed Borja in the polls. A sizable number of voters, 18 percent, said they have no preference largely because the nation’s biggest political figures are not running, making it a virtual toss-up.
In the last several months, many of Ecuador’s critical issues have been placed on the back burner by the caretaker president, Gustavo Noboa, and the Congress, further increasing political and economic turmoil in the country. Among the most important of these issues are privatization, the status of dollarization, and fundamental political and economic reform needed to gain additional International Monetary Fund (IMF) financing. The outcome of the runoff election in November is therefore critical to Ecuador’s future.
Despite the recent economic rebound, failure to address these problems could put Ecuador on the path to Argentina-style default and devaluation in two or three years, while attacking such problems head-on may cause massive social and political unrest in the short term. Whether and how Ecuador faces the issue of much- needed economic reforms may be the key factor affecting the country’s continued stability in the next year and beyond.
Dollarization and Growth
Ecuador’s democracy only dates back to 1979, and its political institutions are still fragile; Gustavo Noboa is the sixth president since 1996, and economic deterioration over the past decade has greatly contributed to increased political instability. In early 2000, then-President Mahuad adopted the U.S. dollar as Ecuador’s currency to avoid economic collapse (especially in the banking sector) and hyperinflation caused by years of mismanagement and poor economic policy. In practice, the dollar replaced the sucre, but sucre coins continue to circulate and, according to the constitution, the sucre remains the official currency.
This dollarization decision, further implemented by Mahuad’s successor, has proven successful in a macroeconomic sense, but it also helped to provoke a short-lived military coup and an indigenous-led revolt in January 2000, which toppled Mahuad and elevated then-Vice President Noboa to office. Mr. Noboa is completing Mahuad’s term as president, until January 15, 2003.
Fortunately, the adoption of the dollar, a surge in global oil prices, a construction boom, and a massive IMF stabilization loan, helped Ecuador stave off economic calamity and experience a phenomenal growth rate of 5.4 percent of GDP in 2001. According to the country’s Central Bank this growth is expected to continue. Ecuador is experiencing a consumption boom, and the economy is projected to grow an average of 7 percent per year between 2003 and 2006 as a new $1.1-billion oil pipeline roughly doubles the country’s oil exports. These recent positive developments may only encourage the political leaders to again avoid making the hard choices on reforms the country desperately needs.
Economic Problems
Despite last year’s growth and such rosy future projections, the country still has serious structural problems, which could bubble up and quickly deflate the economy again, provoking unrest and even economic collapse, if not addressed in the short run. Last year’s growth followed a modest 2.3 percent growth in 2000 and a severe 7.3 percent contraction and economic crisis in 1999, which made Ecuador the first country to default on its Brady bonds (valued at U.S.$6.5 billion).
Ecuador’s economy is almost totally reliant on a few export-driven commodities, such as oil, coffee, fish, and bananas. Oil accounted for 45 percent of merchandise exports in 2001 and 20 percent of the country’s GDP. Periods of high economic growth are therefore often temporary and can be expected to be followed by dramatic declines caused by price fluctuations in commodities markets.
Due to continued government budget deficits and high debt repayments, the country is still seeking financial aid from multilateral lending institutions such as the IMF to cover its 2002 fiscal shortfalls. It was hoped that the IMF would provide a $240-million loan, which would usher in other funding from the World Bank and the Inter-American Development Bank, and signal investors that its economic plans are solid. But the IMF has serious reservations about Ecuador’s medium-term fiscal outlook. While negotiating the loan with the Noboa government, the IMF has asked that all future revenues from the new oil pipeline be used to pay down the $14 billion in foreign debt (equivalent to 68 percent of Ecuador’s projected GDP in 2002) owed to private banks, multilateral lending agencies, and Paris Club creditor nations.
In May 2002, Equador’s Congress passed the Fiscal Responsibility, Stabilization, and Transparency Law, which earmarked only 70 percent of the new oil income to foreign debt repayment while placing 10 percent aside for social spending. If Congress does not delete the social spending category, the IMF will probably not approve the bridge loan Noboa is seeking.
In mid-September, the IMF and Ecuador reportedly failed to hammer out a new loan pact. Despite official statements to the contrary, it now appears that the IMF prefers to wait until a new government takes office in January. The fact that the IMF is willing to leave the Andean nation waiting another few months seems to indicate that Washington does not expect Ecuador to default on its debts or suffer a major economic meltdown before the new administration takes office next year?a positive sign.
While progress has been made on a draft letter of intent to the IMF by Ecuador toward remaining fiscal objectives for 2002-2003, there are still important remaining issues to be settled. Those issues include the budget, keeping the government wage bill under control, and the timing and scope of the structural reform agenda. The loan is seen as vital for Ecuador if it is to maintain investor confidence during a potentially turbulent election year and continue servicing its $14-billion debt.
Reforms and Stability
In order to avoid serious future economic slumps caused by commodity price drops, Ecuador must institute fundamental reforms, including restructuring the banking sector, reducing state subsidies, and privatizing state- owned industries, such as telecommunications and power. Unfortunately, as has been the case in the past, Congressional opposition and popular dissent are stalling attempts at liberalizing Ecuador’s economy. Reforms including significant increases in utility rates or other government-subsidized services are likely to trigger social unrest, often in the form of protests and strikes, which could grind the country to a halt.
In January 2001, the Noboa government potentially averted a civil war when it negotiated a settlement with the Confederation of Indigenous Nationalities of Ecuador (CONAIE) after a two-week national uprising to protest economic reforms that doubled fuel prices and increased public transportation costs by 75 percent. CONAIE also opposes raising the value added tax from 12 percent to 15 percent and wants the sucre restored as the national currency.
More recently, Ecuador declared a state of emergency on May 7, 2002, in response to large-scale protests by bus drivers wanting a fare increase. The government deployed police to keep roads clear and aid traffic flow as well as to detain protesting bus drivers. The government fears that increasing fares would spur inflation. It has offered cheap incentives to buy new vehicles and simplified tax schemes for urban bus drivers, but these efforts have failed to appease the bus drivers’ desire for a fare increase. More strikes and protests can be expected. Government salaries continue to rise and threaten inflation.
Ecuador has a history of currency devaluations and inflation. The inflation rate was 91 percent in 2000- the highest in Latin America. That figure fell to 22.4 percent in 2001, and the government has been battling since to keep prices under control.
The country’s political stability is directly linked to its economic performance and social welfare programs. Despite Noboa’s short-term success in buying time with CONAIE last year, he has generally avoided confronting entrenched and often corrupt business groups and politicians in order to fight for further dramatic reforms. How far the next president will go in this regard is an important question.
The political parties and business elites in Ecuador have consistently opposed efforts to liberalize the economy, increase productivity, reduce the size of the state, and dismantle protectionist trade barriers. They have also continued to actively exclude the country’s nearly four million poor Indians (nearly one-third of the population) from the political and economic mainstream. With the recent increase in oil prices and Ecuador’s rising oil production, they may believe they can continue to follow the same policies, but despite positive short-term developments, time may be running out to avert a crisis.
Endnotes
Note *: Paul Crespo is an editorial writer and member of the Miami Herald Editorial Board. He has a varied background in political military affairs, intelligence, international business, and diplomacy. A former Marine Corps officer with special operations experience, he has served in the Far East and Europe.A graduate of the Georgetown University School of Foreign Service, he has a masters degrees in war studies from the University of London and in international relations from Cambridge University in the UK. He is a member of the Council on Emerging National Security Affairs (CENSA) in Washington, D.C. Back.
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