One key success story of Ecuador’s Citizens’ Revolution has been the strong economic growth achieved despite President Rafael Correa coming to power on the eve of the global crisis, and the fact the country does not have its own currency, after adopting the U.S. dollar in 2000.
teleSUR spoke to economist and co-director of the Center for Economic and Policy Research (CEPR), Mark Weisbrot, in Washington, to discuss how this came about.
teleSUR: How would you describe the economic record of the Correa government over the past 8 years?
“Under Correa, Ecuador broke with the neoliberal ‘Washington Consensus’ policies that it had long pursued.”
Mark Weisbrot: The Ecuadorean government has done very well over the past eight years, despite experiencing some serious shocks, including the oil price collapse in 2008, and then the Global Recession of 2008-2009. It did this despite its currency peg to the U.S. dollar, which meant that the government was severely limited in its use of monetary policy and could not use exchange rate policy at all in order to counter the downturn.
Gross domestic product growth per capita averaged 2.5 percent annually for 2007-2014, and poverty was reduced by more than 30 percent (from 36.7 to 24.8 percent of the population). Public investment increased from 4.6 percent of GDP to 14.8 percent, boosted by increased tax revenues. Government revenues increased enormously from 24.1 percent of GDP in 2006 to 38.9 percent in 2014, thanks to much faster economic growth, the new taxes on the financial sector, a bigger take from foreign oil companies, and better collection of taxes owed. Inequality was considerably reduced, with the ratio of the income of the richest decile and the poorest falling from 36 to 25. And the proportion of the urban labor force enrolled in the Social Security system increased from 26 to 67 percent.
teleSUR: Why has it experienced stronger growth than under previous governments?
MW: Under Correa, Ecuador broke with the neoliberal "Washington Consensus" policies that it had long pursued. Correa's government regained control over the Central Bank and was able to bring down interest rates. It increased the requirement for how much liquid assets banks are required to keep in Ecuador, from 45 percent to 60 percent. It instituted a tax on capital flight. The Central Bank was required to repatriate billions in assets held abroad. The government created a liquidity fund.
The government also took a tougher line with banks and other private business, with new restrictions preventing banks from owning media companies, and anti-trust enforcement, while at the same time promoting expansion of credit-unions, co-ops and other parts of the "popular and solidarity sector" of the financial system.
Expansionary fiscal policy was part of the solution, with a stimulus that amounted to nearly 5 percent of GDP beginning in 2009.
teleSUR: In which areas has Ecuador focused its public stimulus?
MW: Housing, health care, cash transfers and education have been key areas. There was a 50 percent increase in credit for housing, financed mainly through the Social Security Institute and including concessional mortgage lending, which targeted low income groups who might otherwise not have been able to afford to buy a home.
The government expanded its main cash transfer program, the Bono de Desarrollo Humano, by nearly one-fourth, through outreach to eligible families who were not already enrolled.
In its first few years, the Correa administration doubled spending on health care, as compared to past levels, to 3.5 percent of GDP (about US$1.8 billion). This included spending on free health care programs, which was expanded, especially for children and pregnant women.
Spending on education also increased, with school fees eliminated, a free breakfast program expanded, and the government providing school children with free textbooks, school materials and uniforms.
teleSUR: How important was the cancellation of its international debt in improving Ecuador’s economic performance?
MW: The international commission that was convened in 2007 to examine Ecuador's debt found that US$3.2 billion – about one-third of the country’s foreign debt – was illegally or illegitimately contracted. The government stopped payment on the debt the month after the commission announced its findings, and then defaulted, buying up the defaulted bonds for about 35 cents on the dollar. The country had little to lose since it could hardly borrow on international markets at the time. Still it was unusual, and perhaps unprecedented, to see such a “default of choice,” as the government’s debt service at the time was just 1.5 percent of GDP. Its debt service (interest payments on the public debt) remained at a low 1.3 percent of GDP in 2013.
The debt audit and subsequent default and buy-back was important in both the short and long term. In the short term, it wiped off a third of the country’s foreign debt and much of its debt service at a huge discount, reducing its foreign debt obligations to 17 percent of GDP. It also helped to convince foreign investors that Ecuador’s ability to repay its non-defaulted debt had increased.