Richard Moss, formerly a director at Macosa, a Quito company producing software for the banking sector, was surprised to be called up to head the Ministry of Foreign Trade, Industrialization and Fishing (MICIP) last year. But once in the job he had little doubt as to his priorities: “What we need is an industrial policy for a dollarized economy,” he says. “We can’t print money to devalue our problems away, and we can’t create cheap labor through inflation. That means we have to go for one thing: competitiveness.”
“Competitiveness” is the word of the moment in Ecuador. Achieving it will mean reforms across the state and the economy – judicial reform, tax reform, labor reform – to create an environment conducive to investment in traditional and non-traditional business areas, and in basic infrastructure.
Judicial reform is essential to provide a reliable legal framework in which both government and businesses can operate with security. The government is keen to rein in the powers of the Constitutional Tribunal, which frequently questions and weakens government legislation. Businesses are keen to see reform of the basic judicial system, which is prone to interference from vested interests and represents a minefield for many foreign investors.
“We need more confidence in the legal system,” says Cristóbal Orrantia, a Guayaquil businessman with interests in traditional agricultural businesses, and in Mabe Andina, a joint venture with General Electric producing big ticket electrical goods. “A lot of decisions handed down by judges are not too kosher. I’m from here so I know my way around, but a foreigner could easily be scared off.”
Tax reform is needed to cut red tape and free the government from excessive earmarking of revenues. Labor reform is needed to increase access for women and other groups to the labor market, to end restrictions on hiring and firing, and, for example, to allow employees to carry out more than one function in a company. Business and government would also like to see the end of a law obliging companies to share 15% of pre-tax profits with employees. The rule encourages companies, legally or illegally, to hide profits, benefits few workers, and acts as a disincentive to investment.
The background to these and other distortions in the business environment is a fundamental aspect of Ecuadorian society: its fragmentation. The most obvious aspect is the rivalry and mutual suspicion between those on the coast and those in the highlands. “Those idiots up in Quito” is how one Guayaquil business leader describes government bureaucrats; in turn, many in Quito regard the coastal business community as spoon-fed on central government subsidies and rife with cronyism and corruption.
But the divisions go much deeper. In the words of Fernando Bustamante, professor of government at San Francisco University, Quito, the country operates as an unstable system of alliances between different vested interests, each with the power one way or another to bring government to a halt. “It’s the world of the turncoat,” he says, “an amazingly Baroque system of quid pro quos. Everything is very ad hoc and short term, and there’s no accountability. The buck never stops.”
Fostering an Entrepreneurial Spirit
It’s against this backdrop that people like Richard Moss are trying to encourage a new entrepreneurial spirit in which the public and private sector work together on initiatives to promote trade and investment. How will such efforts overcome the deep divides within the country?
“We’re still working on that one,” he admits. “Ecuador is very fragmented, and if you look for saviors or superministers to do everything, that’s not how progress will be made. But we have been able to work with relatively good chemistry and relatively good results. The most important thing is to create a consensus on where it is we want to go.”
“The disagreement tends to come not on what needs to be done but on how, who’s to do it, who pays for it, who gets the political credit for it,” he adds. But he points to initiatives to encourage businesses to work together in “clusters”. For example, to encourage cooperation in the banana industry by involving everyone from growers to suppliers and shippers. He also points to the council for modernization of the state (CONAM, in its Spanish acronym) as an organization that crosses the Quito/Guayaquil divide and comprises both ministers and business leaders.
CONAM, which reports directly to the President of the Republic, is behind the drive to privatize major parts of Ecuador’s infrastructure (see box). A similar organization is CORPEI, the export and investment promotion corporation, a non-government body funded by a levy on exports.
Alexander Mejía, manager of investment promotion at CORPEI, believes the two bodies between them will generate $10.5 billion in foreign and local investment during 2001-2010. That excludes investment in the oil industry, which has traditionally accounted for the vast majority of FDI into Ecuador. Some $3.5 billion is targeted from privatization; $4 billion from construction, mainly housing; and $3 billion from forestry, tourism, mining and fisheries. The aim is for investment in non-petroleum industries to match that in the oil sector. It’s an ambitious target: oil industry FDI in 2000 was more than $800 million, and non-oil FDI less than a tenth of that.
Ambitious Targets, Quiet Confidence
Mejía is confident the targets will be met. He points out that Ecuador is one of the last countries in the region to privatize, so telecoms operators, for example, will find it easy to extend operations from neighboring countries. The target of $400 million a year in construction is reachable as local investment is already running at $100 million, and companies in Colombia and Venezuela have the capital and capacity to make up much of the rest.
Agriculture and fisheries have a lot of lost ground to make up. The banana industry has suffered from under-investment due to bad weather and lost export markets, while the shrimp industry is recovering from the white spot virus which has wiped out 60% of shrimp stocks. “The shrimp industry will become more capital intensive because you need more oxygenators to fight the virus, as well as biological rather than chemical pesticides,” Mejía says.
In mining, Mejía points to studies showing potential investments of $2.2 billion over the next six years; CORPEI has set a “conservative” target of $1 billion in ten years. “New legislation [passed last year] will improve legal security for mining investments,” he says.
Finally, he expects tourism (see box) and forestry to be big growth sectors. Moves are underway to attract multinational companies in the paper and cellulose industries to invest mainly in softwood plantations. The country also plans to sell carbon dioxide certificates to overseas companies under international environmental agreements.
Moss is also keen to see initiatives spread the benefits of economic development to outlying regions. A national connectivity agenda, he says, “will ensure that regional members of society have the tools they need now and in the future, through education, e-government and e-procurement.” Part of that means increasing access to telecommunications; part means investing in education and health. Community development will also require access to local and international trade. A small business development agency will help cut out red tape and channel consulting support to entrepreneurs.