Ecuador: Is there a future beyond Correa?

Key Points

• Elected president in 2007 as a maverick outsider, Rafael Correa has centralized economic and political power in his hands, outmaneuvered potential rivals, and bullied the independent media.
• Correa benefited from unsustainable social spending and artificial economic growth, buoyed by the oil and commodity boom, but internal opposition is growing as he is forced to reduce spending and raise taxes.
• As he considers an unprecedented fourth term, it remains to be seen whether Correa will resort to authoritarian tactics to manage the economic downturn and burgeoning opposition.

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Since taking office as a maverick outsider nearly nine years ago, Ecuadorian President Rafael Correa has transformed the country by centralizing economic and political power under his authority and suppressing potential opponents in the private sector, media, and civil society. He has implemented a costly populist agenda, which has bolstered his popularity—initially tapping increased oil revenue but gradually becoming more dependent on Chinese loans and investments.[1] The steep decline in the price of oil and other commodities has forced Correa to cut spending and to propose tax increases. As a result, popular unrest has intensified in the last year, testing his popularity just as he decides whether to seek an unprecedented fourth term.

Mercurial and belligerent, Correa took power by railing against his country’s old political order—much like Hugo Chávez in Venezuela. Mimicking Chávez, Correa has waged a controversial battle with independent media and civil society, drawing increasing criticism from the international community for cracking down on freedom of expression; an editorial in the Washington Post in January 2012 branded him “Ecuador’s bully.”[2] Yet, in spite of his irascible behavior and numerous corruption scandals involving members of his family and political inner circle, Correa’s fragmented opposition has yet to coalesce around a significant rival.[3]

Recent polls show that Correa’s approval remains at more than 60 percent.[4] Analysts attribute his resilient popularity to the windfall from oil prices earlier in his term, significant growth in the public-sector payroll, and cash transfers to well over one million low-income Ecuadorians. A slowing economy and fiscal deficit will curtail Correa’s ability to shore up support through social spending, so only the depth of Ecuador’s economic crisis will determine his political fate.

The Economy

Throughout most of his time in office, Correa’s import substitution policies and high protective tariffs have benefited the country’s powerful private sector, and generous social programs have helped Ecuador’s poor. Economic growth was respectable until this year. However, in the face of declining petroleum and commodity prices, Correa imposed strict import and banking controls and proposed new capital gains and inheritance taxes, which alienated a growing segment of the private sector.

From 2009 to 2014, his administration has doubled public spending, reaching a record 44 percent of gross domestic product (GDP). Coupled with a poor record on debt repayment, his economic and fiscal policies have discouraged investment and private-sector growth and weakened the country’s international competitiveness significantly. Foreign direct investment in Ecuador made up just 0.6 percent of GDP in 2014, one of South America’s lowest rates.[5]

A recent report from Fitch Ratings found that “economic growth is heavily dependent on fiscal stimulus. Government intervention, real exchange appreciation, and a weak business environment weigh on private investment, economic diversification, and the development of oil reserves.” The dollarization of Ecuador’s economy 15 years ago has limited excessive government manipulation and has generally been a source of economic stability.[6] However, Correa has complained that dollarization limits his government’s ability to mitigate the effects of an economic crisis, and he may be tempted to scuttle this policy to stimulate growth.[7]

Until recently, substantial oil revenues and favorable trade and investment with China have sustained economic growth and mitigated the impact of Correa’s statist policies. Today, Ecuador is heavily dependent on the sale of oil and other commodities. Primary products made up 77 percent of Ecuador’s total exports in 2014, with oil alone representing 28 percent of public revenue.[8]

China’s large-scale construction projects and loans in Ecuador’s energy sector, including building dams and an oil refinery, have raised expectations for the state-dominated oil sector, but these Chinese investments are not without controversy. The Coca Codo Sinclair hydroelectric power plant provides a snapshot of the typical complaints that arise from such projects, including criticism about low wages, the project’s energy output, and unsafe work conditions. The latter was highlighted by a tragic flooding accident on the hydropower plant’s worksite in December 2014, which killed 14 workers.[9] Another complaint is that Ecuador is awarding contracts to China with overly favorable and unsustainable terms.

As with many oil-rich countries, Ecuador has been hit hard by the drop in commodity prices. The county’s oil revenue is expected to decline by as much as 48 percent in 2015, dramatically affecting the government’s budget and the broader economy. So far in 2015, Ecuador has announced cuts to public spending totaling $2.2 billion.[10] Ecuador’s annual growth rate—which averaged 5 percent from 2010 to 2014—also has decelerated significantly, with Fitch recently revising its growth forecast for 2015 to just 0.4 percent.[11] Financial analysts also have noted dropping consumer confidence, a 14.4 percent decline in cash deposits in the nation’s banks, and doubts about Correa’s ability to navigate the economic crisis.[12]

As a US-trained economist, Correa is certainly aware that he cannot sustain current spending and economic policies. In the wake of the commodity bust, he has realized he must embark on a new campaign to attract much-needed foreign direct investment. For example, the Correa administration imposed prohibitive taxes of 50 percent or more on the mining sector; the mining giant Kinross Gold Corporation abandoned a billion-dollar investment in Ecuador in 2013 after Ecuador demanded a 70 percent windfall tax. Now, Correa’s government hopes to entice $2 billion in mining investment over the next two years by offering access to gold and copper reserves.[13] However, given his past disregard for the interests of the private sector, investors may be wary that Correa will revert to his profligate spending and shortsighted policies once the economy recovers.

Perhaps nothing symbolizes Correa’s misguided public-sector investment strategy better than the hundreds of millions of dollars spent developing Yachay Tech University, located north of Quito, to replicate Silicon Valley in Ecuador. In 2015 the university’s rector, Fernando Albericio, resigned, charging widespread corruption, mismanagement, and political favoritism. Afterward, Albericio reported receiving death threats. To date, the university has produced no graduates and no new private investment, becoming a significant international embarrassment for Correa and his party.[14]

Correa never employed the kind of draconian economic measures that Chávez used to bring most of Venezuela’s private sector under state control. Until his proposed tax hikes, most of Ecuador’s private sector rarely felt threatened by Correa’s policies. In the end, however, Correa’s economic mismanagement and lack of fiscal discipline during the commodity and oil boom may make it harder for Ecuador to withstand and rebound from the ongoing downturn. He also squandered the opportunity to retool the economy to prepare for the challenges of the 21st century.

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Notes

1. Lily Kuo, “Ecuador’s Unhealthy Dependence on China Is about to Get $1.5 Billion Worse,” Quartz, August 27, 2014, http://ift.tt/1AW1BZj.
2.  Editorial Board, “Ahmedinejad Trip to Ecuador: A Meeting of International Pariahs,” Washington Post, January 11, 2012, http://ift.tt/1SbW359. The published version of this editorial was titled “Ecuador’s Bully.”
3. “Rafael Correa demanda a los autores del libro ‘El Gran Hermano’” [Rafael Correa Sues Authors of the Book “The Big Brother”], El Universo, March 17, 2011, http://ift.tt/1MwobBb.
4. “Gestión del presidente de Ecuador registra 63,4% de calificación positiva” [Approval Rating of President of Ecuador Registers at 63.4%], Agencia Pública de Noticias del Ecuador y Suramérica, October 12, 2015, http://ift.tt/1Ga3AzV.
5. Economist Intelligence Unit, “Ecuador Economy: Quick View — Potential Payment to Occidental Highlights Fiscal Strains,” October 15, 2015.
6. Fitch Ratings, “Fitch Affirms Ecuador at ‘B’; Outlook Stable,” October 2, 2015, http://ift.tt/1MwobBf.
7. Steve Hanke, “Ecuador’s Ambassador Misses the Point: Dollarization,” Huffington Post, October 10, 2015, http://ift.tt/1ThnQFu.
8. Fitch Ratings, “Ecuador: Full Ratings Report,” October 8, 2015.
9. Clifford Kraus and Keith Bradsher, “China’s Global Ambitions, with Loans and Strings Attached,” New York Times, July 24, 2015, http://ift.tt/1KnWUMS.
10. Fitch Ratings, “Fitch Affirms Ecuador at ‘B’; Outlook Stable.”
11. International Monetary Fund, “IMF Executive Board Concludes 2015 Article IV Consultation with Ecuador,” October 21, 2015, http://ift.tt/1SbW5tS; and Fitch Ratings, “Fitch Affirms Ecuador at ‘B’; Outlook Stable.”
12. Analytica Investments, “Weekly Report for October 5–October 9, 2015,” http://analytica.ec/.
13. “Ecuador Seeks Foreign Investment for New Mining Areas,” Reuters, October 26, 2015, http://ift.tt/1MwobBl.
14. Fernando Albericio, interview, “Las verdades del despedido rector de Yachay” [The Truth behind the Departure of the Rector of Yachay], La Historia, July 29, 2015, http://ift.tt/1SbW5tT.

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