Ecuador: Another economy is possible

Ecuador: Another economy is possible

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By Rafael Correa

Economic policy is a purely normative field of economics, that is, it responds to ideologies, value judgments and, unfortunately quite frequently, to particular interests. For a long time in Ecuador an economic policy has been applied basically based on capital, especially financial.

Towards a new economic policy

Economic policy is a purely normative field of economics, that is, it responds to ideologies, value judgments and, unfortunately quite frequently, to particular interests.

For a long time in Ecuador an economic policy has been applied basically based on capital, especially financial. To legitimize this policy "option", there has been no hesitation in distorting such fundamental concepts as economic stabilization, which has been reduced to the simple control of inflation, when in reality, this concept refers to the achievement of the maximum level of production. and sustainable employment over time; the scope of economic policy has been limited to simple fiscal programming that guarantees surpluses to maximize the payment of the public debt and, in altering even ethical priorities, such as the supremacy of human labor over capital.

The results of these policies are in sight; and, after fifteen years of application - with special emphasis on incapacity and corruption in the government of Colonel Lucio Gutiérrez - the consequences have been disastrous. In this way, Ecuador has practically not grown in the last three decades, inequality has increased and unemployment has doubled in relation to the figures of the early 1990s, despite the massive emigration of compatriots that occurred in recent years .

These policies have been able to be maintained based on deception and undemocratic attitudes on the part of their beneficiaries, with the full support of multilateral organizations, who have become representatives of the creditors and the executing arms of the foreign policy of certain countries; Therefore, in addition to the economic failure, the sovereignty and representativeness of the democratic system has also been reduced (1).

However, in 106 days at the Ministry of Economy and Finance, it was demonstrated not only that another agenda is possible, but that a truly sovereign management of economic policy is viable - that is, more than freeing markets, freeing the country from atavism and powerful national and international interests that dominate it - with a clear preferential option for the poorest and weakest and prioritizing man over capital. Within this new line of economic policy, several actions were carried out and key guidelines were proposed. Among the main ones, we have the elimination of the FEIREP, a new debt and indebtedness treatment policy, the search for regional integration, and the definitive overcoming of the false dilemma between the economic and the social.

The elimination of FEIREP and the priority of the social

The Law of "Responsibility, Stabilization and Fiscal Transparency" (LOREYTF), approved in 2002, created the Fund for Stabilization, Social and Productive Investment, and Reduction of Public Debt - FEIREP, which was nourished by state participation in private production of oil to be transported through the new heavy crude oil pipeline (OCP) concluded in 2003; 45% of the excess of oil revenues over those budgeted and of the budget surplus, if any. In a situation, perhaps unique in the world, 70% of all these resources, by law, were destined to the repurchase of public debt, which artificially revalued the Ecuadorian debt bonds and generated an enormous profit for the holders of debt. In other words, while in other countries it is even a crime to anticipate financial operations that give rise to illegitimate gains for the holders of securities, with the FEIREP this practice was raised to the rank of law of the Republic. Incomprehensibly, only 10% of these resources were destined for human development and the remaining 20% ​​was destined to a stabilization fund in the event of a drop in oil prices, as well as for national emergencies. In this way, as the State receives around 20% of the heavy crude transported by the OCP, the previous distribution meant that out of every 100 barrels of new oil production, only "two" barrels went to education and health of the Ecuadorian people.

On the other hand, also incomprehensibly, the FEIREP resources did not even enter the budget of the central government and were kept in a trust administered by the Central Bank of Ecuador. This situation underreported revenues, which in turn artificially increased the deficit, and, above all, there was an underreporting of public debt service. The situation was so absurd that while the country put hundreds of millions of dollars from the trust abroad, yielding approximately 2% per year, at the same time it had to borrow with costs higher than 8% per year.

In addition to the above, the LOREYTF established -among other macro-fiscal rules- a maximum growth for primary spending of 3.5% per year in real terms, which meant that in Ecuador there was a ceiling for everything, except for debt service (2). Thus, with this "rule" aspects as essential as public investment were limited; a policy that does not withstand any technical analysis and that can only be explained by the pretense of maximizing the resources available for debt repayment, as well as by an ideological fundamentalism that seeks that any investment be exclusively with private capital (3).

Finally, it should be noted that the Law of "Responsibility, Stabilization and Fiscal Transparency" was imposed by the International Monetary Fund (IMF) as one of the conditions to sign an agreement with the government of Gustavo Noboa, an agreement that was never finalized. In other words, while the IMF is supposedly against budgetary pre-allocations, since they "reduce flexibility in the management of public finances," the Fund itself imposed the creation of the FEIREP, which is probably the largest budget pre-allocation in all of Ecuadorian history. Paradoxically, all these distortions of information and fiscal management were produced thanks to a fiscal "transparency" law.

After the fall of Colonel Gutiérrez, this situation changed in less than 100 days, through an urgent bill sent to the National Congress, which was approved practically unanimously by the legislators. In its most relevant parts, the reform eliminated the trust and entered the FEIREP resources into the General State Budget, in order to achieve greater transparency in public finances; changed the distribution of resources and eliminated the annual growth ceiling for public investment.

With the new distribution of FEIREP resources, 30% was allocated to investment projects in health and education; 35% for productive credit or debt repurchase - the latter, in case market conditions are convenient for the country-; 5% for science and technology; 5% for road maintenance, and 5% for environmental remediation in areas affected by oil exploitation (4). It should be noted that, contrary to what alleged economic analysts opposed to the reform stated, 20% of the funds for stabilization and emergencies were maintained. Furthermore, according to the reform, any unused balance in the aforementioned items will go to feed the stabilization and emergency fund, so the amendment to the law "increases" the fund's income, does not decrease it, and, even less does it eliminate them, as certain sectors perversely repeat.

Finally, thanks to the new resources for health and education, and the elimination of the ceiling for public investment, in the 2006 budget reform there is an increase of 20% in public investment, that is, about 300 million dollars, which It will give an important boost to the economic reactivation, as well as the payment of the social debt.

Sovereign debt policy and public debt management

One of the main challenges for Ecuador is to overcome the culture of indebtedness that we have acquired over the years, and which has led us to a situation of highly costly over-indebtedness for the country. In this way, the new indebtedness policy established that the country should use as much domestic savings as possible, and only borrow what is strictly necessary. To this end, the debt policy with multilateral organizations and governments was redefined, establishing that these external loans would be used primarily for productive investments that generate a flow of foreign exchange to pay debts, while social projects would be financed with their own resources. This line of action did not cease to anger some international organizations, perhaps because there was an Ecuadorian Minister of Economy who "rejected" credits, which supposedly altered the "strategy" they had for the country.

However, there will be no comprehensive solution to the debt problem until the international financial architecture is reformed. Therefore, it was sought to redefine the criterion of sustainability of the debt service, determine the illegitimate external debt, as well as promote the creation of an "international arbitration court of sovereign debt". Although, from a purely financial point of view, the sustainability of debt service means everything that a country can pay without compromising future financial flows, regardless of the levels of well-being to which it subjects its population; A properly defined sustainability criterion must consider welfare implications, such as debt service that allows indebted countries to achieve the Millennium Goals.

On the other hand, there is an illegitimate foreign debt, acquired in doubtful situations, not used for the purposes for which it was contracted, or that has been paid several times. After adequately defining the sustainability criteria and what is illegitimate debt, an international court, that is, an impartial third party, should decide the debt to be paid, the payment capacity and mode of payment of the indebted countries. It should be noted that at this time, there is no such impartial third party and indebted countries have to go to the IMF, that is, to the representative of the creditors.

On the other hand, while Latin American countries must and do transfer huge amounts of resources to the first world, a fact that prevents their development, at the same time the countries of the Amazon Basin constitute the lung of the planet, a lung without which life on the planet it would simply die out. However, since clean air is a freely accessible good, they do not receive just compensation for the service they generate. In this way, it was also sought to promote the creation of an international agency that adequately values ​​the environmental goods generated by the indebted countries and, in turn, that charges the consumption of said goods to the polluting industrialized countries (the ecological debt). With these funds, it would be possible to pay the creditors of the indebted countries that generate the environment, without compromising their development, within the framework of a logic not of charity, but of strict justice.

Reduce dependency and vulnerability through regional integration

The Latin American countries would not need debt cancellation, but rather adequate debt restructuring and financing. In fact, in the case of Ecuador, the net transfer to international organizations is negative, that is, it is more what it pays than what it receives from these organizations. Consequently, one cannot speak of development aid if this situation continues. Ecuador should begin to become independent from these international organizations, which, as mentioned above, are representatives of foreign paradigms and interests. Furthermore, the freely available multilateral credits that serve, especially, to pay those same organizations and financing in general, are the new ways of subordinating our countries.

Latin American countries seek permanent financing and, nevertheless, the region has hundreds of billions of dollars in reserves invested in the first world, a fact that constitutes a true absurdity. Therefore, recovering these reserves for the region, pooling them and managing them properly would allow the countries of the region to finance itself, that is, it would be the beginning of a great financial integration. More than an economic imperative, this is a common sense imperative. For all the above, during the 106 days of management in the Ministry of Economy and Finance, new sources of financing were sought at the regional level, mainly with the government of Venezuela. This operation will allow the country to diversify its sources of financing and access international markets after 20 years. This action, which with Venezuela alone could reach 300 million dollars, will make possible a major restructuring of the domestic debt, short-term and highly costly for the country. However, it is necessary to continue diversifying the sources of financing in order, as mentioned above, to reduce dependence on multilateral organizations and even local power groups. It is necessary to look for countries with financing capacity, as in the case of Brazil and China.

In this line of reflection, other options are also opened to consolidate integration, such as the multiple possibilities of energy integration with Venezuela and the other countries of the region. In this sense, the possibility of refining Ecuadorian crude in Venezuelan refineries was raised to improve economic performance and even to ensure the supply of derivatives in the Ecuadorian market. Thus, the absurdity of exporting crude oil and importing derivatives, which costs the country millions of dollars annually, would end. Likewise, joint financing proposals could be heard for the construction of hydroelectric projects, which Ecuador is sorely lacking. Finally, there are facts so obvious that their inattention can only be explained by the powerful interests at stake. For example, an agreement with PEDEVESA, the Venezuelan public oil company, which provides 100% of the liquefied petroleum gas (LPG) imported by Ecuador, an import that is currently carried out through the intermediation of a private Ecuadorian company, which means to the country tens of millions of dollars annually wasted uselessly.

Investment in human capital and social capital

Investment in human capital, in addition to being an end in itself (5), constitutes the best investment for long-term equitable growth. However, Ecuador is one of the five Latin American countries with the lowest social investment per inhabitant. While the Latin American average is 540 dollars per inhabitant, Ecuadorian social spending is 115 dollars per inhabitant (UNICEF, 2003) (6). Although there are serious quality problems in social investment in Ecuador, the figures clearly show that it is also a problem of the level of resources. Thus, trying to maintain and even reduce public spending in these sectors, arguing that the problem is only one of quality and not quantity, does not withstand any serious analysis. This also includes the much-maligned current spending in social sectors (wages and salaries, training, etc.), which economically may constitute the best investment in human capital. Reversing the low investment in human capital then implies allocating more resources for this purpose, which implies freeing up resources from other areas. Precisely, the FEIREP reform aimed in this direction, although there is still much to do.

However, successful countries have not only had high human capital, but they have also been motivated societies, with intrinsic energies, looking together towards the same goals, socially cohesive, etc .; a set of characteristics known as social capital. Unfortunately, in the last decades, the deterioration of social capital in Latin America is evident; a phenomenon that can be linked to the development strategy based on market individualism and to stabilization and structural adjustment programs designed based on the fulfillment of external commitments, obviating major national commitments and, thus, breaking social cohesion.

Consequently, economic policies must explicitly integrate their effects on human and social capital, considering their preservation as fundamental elements for development and, beyond temporary and often apparent economic achievements (7). In this sense, social policy must be designed as a fundamental part of economic policy, and not simply with a welfare criterion and as a patch for the latter. In accordance with this perspective, the Ministry of Economy and Finance designed the creation of the Undersecretariat of Social Policy, to organically integrate economic and social policies, and definitively overcome the false dilemma between the economic and the social.

In conclusion:

Towards a new notion and development strategy

The economic policy followed by Ecuador since the end of the eighties has been faithfully framed in the dominant development paradigm in Latin America, neoliberalism, which is based on the fact that national and international markets resolve all economic questions, including social ones; with the inconsistencies of corruption, the need to maintain economic subordination and the requirement to service the foreign debt. Happily, after a resounding failure, the neoliberal cycle is coming to an end in Latin America, as the processes in Argentina, Brazil, Uruguay and Venezuela show.

In this way, Ecuador and Latin America must seek not only a new strategy but also a new notion of development, where it is not simply to imitate models that only reflect perceptions, experiences and interests of dominant countries and groups; where such vulnerable economies are not completely subjected to the entelechy called the market; where the State and collective action recover their essential role for development; where intangible but fundamental assets such as social capital are preserved; and where the apparent demands of the economy are not exclusive and worse still antagonistic to social development.

Bibliography and references
Correa, Rafael (2004) "The Vulnerability of the Ecuadorian Economy: Towards a better economic policy for the generation of employment, reduction of poverty and inequality". Quito: United Nations Development Program.
Correa, Rafael (2005) "Work Report as Minister of Economy and Finance of Ecuador". Quito. Not published.
UNICEF (2003) "Social Expenditure in the Proforma 2004". Not published.

(1) A very clear and recent example of this was the government of Lucio Gutiérrez, which, after offering in the campaign a profound change in economic management, once in power, applied the economic program and even used collaborators of the candidate Osvaldo Hurtado, who had obtained just over 1% of the popular vote.
(2) In effect, primary spending is all fiscal spending, except interest and capital payments on the public debt.
(3) This meant that even if the country discovered uranium and obtained billions of dollars annually, the State could not, for example, build a simple hydroelectric dam, as it would have "broken the law". In this way, the dam had to be built only by the private sector, and extraordinary public funds had to be used exclusively to pay debt.
(4) It should be noted that the original project contemplated 40% for productive credit and debt repurchase, and 10% for the promotion of science and technology. The change in these percentages and the inclusion of new items was decided by the National Congress.
(5) In fact, it can even be insulting to speak of human capital, since this implies putting man as a means of production, when it is the very end of production and the economy in general. Consequently, we will use this term here only as a methodological resource. (6) Data for the year 1998-1999, in 1997 dollars.
(7) This occurs, for example, when talking about labor flexibility in societies that do not have the capacity to generate employment and do not even have unemployment subsidies, or when wages become the adjustment variable in the face of crises, while they are allocated huge resources to remunerate capital and external commitments.

Text belonging to the book Sieges of the impossible. Economic policies under construction
Editors: Alberto Acosta and Fander Falconí. Ecuador, November 2005. - Internet Edition: La Insignia

Video: How the Ecuadorian Economy Grew in a Global Recession (May 2022).


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