Growth, Plus Discipline

After two years of dollarization, Ecuador is booming. The economy grew by a vertiginous 5.4% in 2001, the fastest rate in Latin America and it is expected to grow by another 4% this year. Productive investment and consumer spending are firmly on the up. Annual price inflation is heading towards single digits after topping out at 91% in 2000, and the government should comfortably meet fiscal targets agreed with the International Monetary Fund under a standby agreement. A new crude oil pipeline will double oil production, by far the country’s biggest export earner, and its construction is already generating both jobs and revenue.

But behind the headlines there is another story. Poverty is still widespread – most visibly on the perimeter fences of Ecuador’s airports where throngs gather to wave off family members departing for Europe or the US to earn the salaries they can’t earn at home. Only infrequently, too, is it explained that much of the current growth consists of recovery from the almighty lows of the late 1990s, which culminated in a 7.3% slump in GDP during 1999 and the collapse of the economy.

Ask the man on the street, however, and he’ll tell you that the throngs are smaller and that growth, wherever it may spring from, is growth. He would not dispute that the millennium ended badly for Ecuador. A border war with Peru, a slump in the price of oil, and devastation caused by the El Niño weather phenomenon proved too much for politicians with no taste for fiscal discipline and a penchant for printing money. The resulting default on the country’s Brady bonds – the first default on these restructured bonds, and Ecuador’s second default in a decade – shut the country off from global capital markets. On top of thatwas a collapse in the price of bananas, as well as an infestation of white-spot shrimp virus, which devastated Ecuador’s biggest export products after oil. Add to this string of crises that Ecuador is a deeply fragmented country – politically, economically and socially, not to mention geographically – and the road to recovery is bound to be both long and tortuous.

Dollarization, which was announced in January 2000 at the height of the crisis, has proved beneficial beyond the hopes of its strongest advocates. It stopped a run on the banks overnight and removed crippling uncertainty over the exchange rate. Above all, it boosted confidence. Money is slowly returning to the financial system (not least in the form of remittances from Ecuadorians abroad), and bank lending is on the increase.

The new pipeline will bring in direct foreign investment of $1.1 billion, most of it this year, plus an estimated additional $3 billion on related services; it will provide 7,000 direct jobs and up to 50,000 indirect ones during construction. When it comes on stream in mid-2003 it will guarantee export earnings to balance Ecuador’s external accounts and provide essential investment capital. This should give a breathing space to Ecuador’s politicians: with monetary policy out of their hands, there has been no escaping the stark realities of rigorous fiscal discipline.

Ecuador’s leaders have been quick to seize the vital role played by competitiveness. Without devaluation to make its exports cheaper, and without inflation to erode wages (and boost tax revenues), the productive sector from industry to banking to agriculture must become more efficient to compete on both global and domestic markets. That is now the overriding aim of government in all departments. Coordinating committees and joint public/private sector initiatives are springing up like jungle undergrowth.

The last country in the region to do so, Ecuador is now making efforts to privatize its electrical and telecommunications industries. Slowly but perceptibly, a professional management ethos is gaining ground on cronyism and corruption.

No Quick Fixes
But there are no quick fixes. The government’s program faces stiff opposition. Trade unions and other groups have promised permanent protest if privatization of the electricity industry goes ahead. The benefits of dollarization have been slow to translate into better conditions for many of the poor, partly because the highly inflated rate at which the old currency was swapped for the new has resulted in persistent inflation: if inflation does not fall quickly, and if wages continue failing to keep pace with prices, calls for abandoning the US currency will grow.

Above all, a deeply entrenched system of horse trading and quid pro quo, in business as well as politics, and a political system in which no party or group of parties is able to maintain a majority in Congress, mean that progress depends on perpetual and enervating alliance-building. President Gustavo Noboa has been remarkably successful in keeping a grip on government, partly through use of his veto powers. The question now is whether the momentum can be maintained.