2009 Index of Economic Freedom

Quick Facts

Population:

• 13.2 million

GDP (PPP):

• $94.3 billion
• 3.9% growth
• 5.1% 5-year compound annual growth
• $7145 per capita

Unemployment:

• 9.3%

Inflation (CPI):

• 2.2%

FDI Inflow:

• $2.1 billion

Ecuador's economic freedom score is 52.5, making its economy the 137th freest in the 2009 Index. Its overall score is 2.8 points lower than last year, primarily reflecting a decline in investment freedom and financial freedom. Ecuador is ranked 24th out of 29 countries in the South and Central America/Caribbean region, and its overall score is slightly below the world average.

Ecuador ranks above the world average in three freedoms. Fiscal freedom scores well because of moderate income and corporate tax rates and relatively low tax revenue as a percentage of GDP; government size reflects efforts at greater transparency and relatively low government spending; and monetary freedom remains stable.

Ecuador's score fell in seven of the 10 freedoms, most notably financial and investment freedom. Its property rights, freedom from corruption, and labor freedom scores are especially low. New tax and ownership laws have left private petroleum companies vulnerable to government intervention. Heavy regulation hurts business and labor flexibility. The rule of law is politically influenced and inefficient, and expropriation of private property is a constant concern. The judiciary rules erratically and is subject to corruption.

Background Back to the top

Ecuador is the world's largest banana exporter and has ample petroleum reserves. The government-run oil industry is mismanaged and corrupt, and production is dwindling. Factions in the legislature fuel political and institutional instability, and there is a lack of respect for the rule of law. In January 2007, U.S.-trained economist Rafael Correa was elected president on a populist platform of tighter government control of banking and oil production, default on debt owed to international lenders, and opposition to a proposed free trade agreement with the United States. Capital flight has soared, and foreign direct investment has fallen. Aligned with Venezuela's leftist President Hugo Chávez, Correa has worked to weaken constitutional and legislative restraints on his authority and to silence the press by seizing media companies.

Business Freedom 54.0 Back to the top

The overall freedom to conduct business is limited by Ecuador's regulatory environment. Starting a business takes an average of 65 days, compared to the world average of 38 days. Obtaining a business license takes about half of the world average of 18 procedures. Closing a business is a lengthy process.

Trade Freedom 72.6 Back to the top

Ecuador's weighted average tariff rate was 6.2 percent in 2006. Variable levies against certain agriculture goods, registration with the central bank to obtain import licenses for all products, mandatory pre-approval for imports of certain agriculture products, import bans, inefficient administration of tariff rate quotas, discriminatory standards and regulations, non-transparent government procurement, and issues involving the enforcement of intellectual property rights add to the cost of trade. Fifteen points were deducted from Ecuador's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 85.8 Back to the top

Ecuador has moderate corporate taxes. The top income and corporate tax rates are 25 percent. Oil companies are subject to a top tax rate of 44 percent on distributed profits. Other taxes include a value-added tax (VAT), an estate tax, and a capital gains tax. In the most recent year, overall tax revenue as a percentage of GDP was 13.2 percent.

Government Size 83.1 Back to the top

Total government expenditures, including consumption and transfer payments, are low. In the most recent year, government spending equaled 23.7 percent of GDP. Despite steps to improve fiscal management, state-owned electricity and telecommunications enterprises remain inefficient.

Monetary Freedom75.0 Back to the top

Inflation is relatively low, averaging 2.5 percent between 2005 and 2007. Monetary performance has been solid since the dollar became the national currency. The government applies price bands for agricultural products; controls the prices of electricity, telecommunications services, and pharmaceuticals; and subsidizes public transportation and cooking gas. Fifteen points were deducted from Ecuador's monetary freedom score to adjust for measures that distort domestic prices.

Investment Freedom30.0 Back to the top

Foreign investment receives national treatment, but investment in petroleum exploration and development, mining, domestic fishing, electricity, telecommunications, broadcast media, coastal and border real estate, and national security is subject to government approval and additional regulatory requirements. Regulation is complex, non-transparent, and prone to corruption. There are no antitrust laws, and industry is relatively concentrated. Systemic weakness and political or economic pressure in the rule of law are the most important problems for investors. Profit repatriation and foreign access to Ecuador's credit market are allowed. There are no restrictions on foreign exchange accounts, direct investment, or current transfers. In some cases, the judicial system has failed to provide adequate protection from unlawful expropriation.

Financial Freedom40.0 Back to the top

Ecuador's financial sector is not fully developed, and access to credit can be costly. In 2007, there were 25 commercial banks (one of them state-run), down from 48 in 1998. The four largest banks control 65 percent of deposits. The state controlled about 10 percent of bank assets at the end of 2007. The U.S. dollar is the official currency. Credit is available on market terms, but the lack of credit options hampers entrepreneurial activity. The two stock markets are underdeveloped, and little equity has been traded. Foreign takeovers of limited-partnership banks and insurance companies are restricted.

Property Rights25.0 Back to the top

The rule of law is weak, and intellectual property rights are not enforced. Court delays are significant, judgments are unpredictable and inconsistent, and the judicial system is subject to corruption. Expropriation is possible, and agricultural land may be seized by squatters. In 2006, the government amended the hydrocarbons law to modify the terms of oil production-sharing contracts. In 2007, President Correa increased the state's share of extraordinary petroleum revenues under this amendment to 99 percent, and in December 2007, a new tax law set the state's share of extraordinary petroleum revenues at 70 percent for contracts signed after the law goes into effect.

Freedom From Corruption21.0 Back to the top

Corruption is perceived as pervasive. Ecuador ranks 150th out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. Corruption is blamed for a decade of steady decline in state oil production. Anti-corruption statutes are not enforced, and demands for petty bribes and theft of public property are common among officials.

Labor Freedom38.3 Back to the top

Ecuador's burdensome labor regulations hinder employment opportunities and productivity growth. Job-tenure regulations create a disincentive for new hiring. Many employers resort to short-term outsourcing contracts.