January 25, 2000

January 25, 2000 | Commentary on Latin America

Ecuador's Problems Not Just 'Bum Luck'

If the early 1990s marked the spread of democracy in Latin America, then it must seem like the turn of the century is the time of its unraveling. Even as the Clinton administration puts the final touches on a proposed $1.6 billion aid package to combat drug trafficking and rebuild Colombia, neighboring Ecuador is in the process of a meltdown -- not because it is fighting a war, but because it has avoided reform.

Last fall, Ecuador defaulted on $98 million in bond payments and pushed its external debt to a quarter of its gross domestic product. Meanwhile, its economy shrunk by about 7 percent while inflation spiked to 60 percent, putting its currency -- the sucre -- into near free fall. When President Jamil Mahuad proposed adopting the U.S. dollar as the official currency of the Ecuadorean economy to halt economic collapse, it was more than many citizens could take.

Indigenous protesters, rebel military, and a former colonel loyal to another ousted president -- Abdala Bucaram -- forced Mahuad out. Fortunately, at the international community's insistence, acting Defense Minister Carlos Mendoza arranged for Vice President Gustavo Noboa to take over, thus preserving constitutional order. Though the crowds dissipated, the economic and political situation is unchanged and Noboa's pledge to continue his predecessor's fight to ``dollarize'' the economy leaves protesters feeling betrayed.

Much of this could have been avoided. In 1979, Ecuador was ahead of other former military dictatorships in the region when it changed to democratic rule. But economic reforms took a back seat to welfare programs financed by petroleum exports and huge loans. In the 1980s, oil prices dropped and the economy slowed. Despite some token reforms, such as tariff reductions and the privatization of a few state enterprises, Ecuador's economy slipped further. Recently, the slide was accelerated by several outside factors: a trade dispute with the European Union over tariffs on bananas -- one of Ecuador's main exports, considerable crop and infrastructure damage caused by El NiƱo, a border dispute with Peru in 1995 and limits on foreign credit.

But the real problems have little to do with bum luck. For one thing, Ecuador's financial sector has been bankrupted by corruption and inflation, obliging the government to bail out institutions and freeze accounts. Foreign investment and new business traditionally has been discouraged by regulations and practices favoring existing monopolies. And despite small steps such as creating transparency commissions and signing international conventions, efforts to curb corruption have not taken root.

Furthermore, price controls and subsidies to make food and medicine affordable have warped markets and sustained government spending in the face of impossible debt. Indeed, government expenditures now consume 27 percent of Ecuador's economy -- compared to 18 percent in the United States. Anyway you look at it, Ecuador is an ``unsustainable economy.''

The very critics who forced out President Mahuad should look in the mirror -- for they are part of the problem. Many of these people -- the labor and party leaders, the political and economic elites, and special interest groups -- have resisted attempts to bring responsibility to Ecuador's government for two decades. Any time an elected official gets close to imposing economic discipline, these groups have forced his removal.

As the situation in neighboring Colombia and Venezuela deteriorates, the United States needs an ally in the conflicted northern Andes. Ecuador cannot fulfill that role until it puts its house in order. In 1994, the Clinton administration promised to help open markets and strengthen Latin American democracy at the First Summit of the Americas. Since then, it has largely disengaged from the region except to react to crises like this. Pressure by U.S. officials to maintain constitutional order in Ecuador may have put out temporary flames. But the crisis is hardly over. Unless the United States encourages a serious local effort to diversify Ecuador's economy, to cut government spending, to fight corruption and to dismantle old barriers to competition, these smoldering ashes could flare up into a much bigger blaze. Of course, U.S. taxpayers will largely end up paying the bill to put it out.

About the Author

Stephen Johnson Senior Policy Analyst
The Kathryn and Shelby Cullom Davis Institute for National Security and Foreign Policy

Related Issues: Latin America

Published in the Miami Herald