Opinions

Ecuador shows how a leftist government can survive and thrive in Latin America

By Mark Weisbrot

In a shift supported and welcomed in Washington, Latin America has been moving to the right in the last year or so. Three of South America’s largest economies — Brazil, Argentina, and Peru — now have right-wing presidents with close ties to Washington and its foreign policy. The standard “Washington Consensus” narrative, while ignoring any U.S. role in the region, sees the left governments that were elected in South America over the past couple decades as having ridden a commodities boom to populist victories, with handouts to the poor and unsustainable spending. When that boom collapsed, the story goes, so did the finances of left governments and therefore their political fortunes.

But this is a highly exaggerated and self-serving narrative. Ecuador is a good example of how a leftist government achieved success over the past decade through positive and creative changes in economic policy, as well as financial, institutional, and regulatory reform.

The details are also worth looking at because Ecuador’s experience shows that much of the rhetoric about how “globalization” restricts the choices of governments to those that please international investors is also exaggerated. It turns out that even a relatively small, middle-income developing country can adopt workable alternative policy options — if people can elect a government that is independent and responsible enough to use them.

Public health spending increased dramatically in last decade.

The results for the decade of left government in Ecuador (2007–16) include a 38 percent reduction in poverty and a 47 percent reduction in extreme poverty. Social spending as a percentage of GDP doubled, including large increases in spending on education and healthcare. Educational enrollment increased sharply for ages 17 and under, and spending on higher education as a percent of GDP became the highest in Latin America. Average annual growth of income per capita was much higher than in the prior 26 years (1.5 versus 0.6 percent), and inequality was considerably reduced.

Public investment as a percent of GDP more than doubled, and the results were widely appreciated in new roads, hospitals, schools, and access to electricity.

President Rafael Correa

Rafael Correa was elected president of Ecuador in 2006 and took office in January of 2007. A former economy minister who was trained in the United States, he set out to fix some of the structural and institutional problems that had kept Ecuador from advancing. Policy was handicapped by the fact that Ecuador had adopted the U.S. dollar as its currency in 2000. This meant that the government couldn’t influence its exchange rate and was limited in how much it could use monetary policy. And it reduced the Central Bank’s ability to act as a lender of last resort to the banking system.

This meant that the government had to be more efficient and creative, and exert more control over the financial system. In 2008, a new constitution was approved in a referendum, and the central bank — which was previously “independent” and mandated to focus on low inflation — was now made part of the government’s economic team. This was very important in coordinating economic policy. The conventional wisdom among most economists—and a pillar of neoliberalism — is that central banks should be independent of elected officials. In practice, this usually means that they are unaccountable to the public, but not so independent of powerful financial interests.

A new law in 2009 required that banks in Ecuador bring 45 percent of their liquid assets back into the country; this requirement increased to 60 percent in 2012, and the actual level was more than 80 percent by 2015. These and other reforms that kept dollars in the country were essential to overcoming the new government’s first serious challenge: the world financial crisis of 2008 and world recession of 2009. Ecuador was one of the hardest-hit countries in the hemisphere, since oil prices collapsed and the government depended on oil for the majority of its revenue. Another major source of dollars, remittances — mostly money sent home by Ecuadorians working abroad — also collapsed during the recession. This double shock could have caused a prolonged recession or depression, but it didn’t, thanks to large increases in government spending and a large stimulus in 2009. The recession lasted just three quarters, costing about 1.3 percent of GDP.

The next big economic shock was the much more prolonged collapse in oil prices that began in the third quarter of 2014. This time, the government was even more creative: In addition to some expansionary fiscal policy (i.e., running bigger budget deficits), the central bank actually engaged in quantitative easing, much as the US Federal Reserve did in response to the recession. Ecuador’s central bank created billions of dollars that it lent to the government for spending (and also to state-owned banks). This was unexpected for a government that did not even have its own currency, but it proved to be very helpful in the recovery.

The most important decision in bringing about Ecuador’s current economic recovery was also perhaps the most unorthodox: The government imposed a variety of tariffs on imports under the World Trade Organization’s provision for emergency balance-of-payments safeguards. This reduction of imports in 2015–16 added about 7.6 percentage points to GDP during those years. This counteracted spending cuts that the government had to make as revenues crashed.

The government of Correa and his party (Alianza País) was thus able to achieve considerable economic and social progress, despite two recessions caused by serious external shocks. Contrary to the Washington narrative, this depended on major institutional reforms, financial regulation, and smart policy choices, many of which went against the conventional neoliberal wisdom.

Of course it helped that the president himself has a PhD in economics and knew what he was doing, and that he had a serious commitment to progressive governance from the beginning. Still, Correa’s government had to fight powerful entrenched interests, including the bankers who owned most of the television media when he took office. A referendum in 2011 prohibited banks from owning media (and vice versa), and that helped to reduce their stranglehold on public debate. But the media have remained a powerful and politicized right-wing force, as in other countries with left governments — e.g. Brazil, where the major media led a successful effort last year to remove Workers’ Party President Dilma Rousseff from office — despite the lack of any impeachable offense.

The government’s legacy will be tested in an election this Sunday for president and national assembly. The candidate of Correa’s party is Lenín Moreno, who is well known for his national and international activism for disability rights (he himself has been in a wheelchair since having been shot in a robbery in 1998). Moreno, who is popular with his party and the public and promises to expand upon the economic and social gains of the past decade, is leading in the polls. His closest opponent is Guillermo Lasso — not surprisingly, a big banker — who promises tax cuts, including the elimination of capital gains taxes, that will benefit mainly upper-income groups. Lasso lost to Correa in 2013 by a landslide. Next in line is right-wing former Congresswoman Cynthia Viteri, who wants to dismantle some of Correa’s main reforms, including restoring the autonomy of the Central Bank, removing taxes on capital flight, reducing the power of the central government.

Moreno needs 40 percent of the vote, plus at least a 10-point lead on the next runner-up, in order to win in the first round. Although many pre-election polls in Ecuador are unreliable, Moreno is generally seen as leading, but not necessarily by enough to win in the first round.

Why does this election matter? As Noam Chomsky pointed out last month, “During this century, Latin America, for the first time in 500 years, has freed itself from Western imperialism. Last century, that’s the United States.” The “pink tide” is also a rare event in world history: citizens in developing countries winning economic and social progress through democratic elections. (Very few of the development success stories of the 20th century or even more recently, e.g. China, have been electoral democracies). From 2002 to 2014, the poverty rate for Latin America dropped from 43.9 to 28.2 percent, after rising over the previous two decades.

All of these gains — national sovereignty, social progress, democracy — are proving tough to hang on to as progressive forces in the region face a slowing world and regional economy; a resurgent right that still controls most of their countries’ wealth, income, and media; and in some cases their own economic mistakes. And if all that weren’t enough, there is Washington, which for the past 16 years has had a simple strategy: Get rid of all the left governments that we can get rid of, and make sure they never come back. (See e.g., here, here, here, here, and here.) Nobody is expecting anything better from the new U.S. regime.

It may not get a lot of media attention here, but supporters and opponents of Latin America’s moves toward independence and progressive government in the 21st century will be following this election.

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Mark Weisbrot is Co-Director of the Center for Economic and Policy Research in Washington, DC and president of Just Foreign Policy. He is also the author of the new book Failed: What the “Experts” Got Wrong About the Global Economy (Oxford University Press, 2015).

Credit: The Nation, www.thenation.com

  • Steve JM

    An interesting if biased article. The author mentions the recovery from the 2014 oil-price-fall-shock. Recovery, what recovery?

    • Aging Expat

      Biased article? Much worse than that.

      No mention is made of the fact that to fund prosperity, Ecuador borrowed enormously, placing the country in debt such that it will take generations to pay it off — if (like the U.S.) it is ever paid off, at all. It’s $20 billion from the Chinese, half the gold to Goldman Sacks, liquidation of Puerto Bolivar, etc. . . . this discussion is meaningless with someone who doesn’t understand accrual accounting. That is to say, the difference between income and loan proceeds. I know it would be asking too much for voters to be required to understand an Income Statement and Balance Sheet that reflects a government’s true fiscal health, but the simple fact is that the Ecuador is broke and financially exhausted . . . Scrambled eggs, well done, just like the IMF likes it.

      If people are allowed to vote who think this is how you prosper, God help us all.

      • sueb4bs

        Relax…..tomarlo con calma, Aging Expat. The developed world IS DEBT, sir…

      • Globetrotter

        You have a fundamental misunderstanding of government and its proper goals. Nations are not run the same way as a profit-making enterprise. Your template suggests they should be greedy. Do you think China will foreclose on the highways, hospitals, universities they have built and haul them back to Beijing?

        The only thing that counts is that Ecuador has brought more people out of poverty than any other UN country in a shorter period than any other in history. Pointing to anything else is foolish.

    • cuenca guy

      how about from $36 bl to $55 today???? At 500,000 bl a day thats $9,500,000 a day. You say no recovery?? Your wrong!!!

  • Joe

    I’ll take and accept what is happening in Ecuador as their recession is far less than many others in the world! I criticized what was going on in the U.S and did what anyone who is unhappy with their wife or country should do, I left.

    Is Correa perfect? Hell no! Has he done a lot for this country? Hell yes. So much has been done for Ecuador and brought it’s standard of living up and yet people who left the U.S feel compelled to make negative or snide remarks. I am guest in this country which I chose and appreciate it’s hospitality and am not interested in getting involved in THEIR politics as they seem to be doing just fine!

    • StillWatching

      God save us from all the “I am (a) guest in this country” people who toss that label around as an explanation why expats automatically forfeit their right to complain about anything in this culture.

      Never mind that many of us speak fluent Spanish, have been here for decades, have become citizens, not just legal residents, vote in elections, pay taxes, support local charities and cultural institutions, may marry Ecuadorians and in general, contribute to society here.

      According to these people, we will be guests forever. Of course the saving grace here is that it is usually these “guests” that are the first to pull up stakes and return to wherever it is they came from when they discover that Ecuador isn’t quite the panacea they once thought it to be. Good riddance.

  • sueb4bs

    The credibility of this article is high. THis was taken from a recent CEPR blog. Mark Weisbrot writes thoughtfully and regularly in CEPR about Latin America including mezo America and Mexico, of course. CEPT is a think tank in Washington, D.C. In the more than 8 years I have lived on this continent, I read them often to get a wide ranging set of opinions and ideas about this interesting, changing continent.

    • StillWatching

      Your take is interesting. Although the author is pretty far to the left on the political spectrum and I am a Libertarian (characterize that any way you choose) I prefer to evaluate his writing based on content rather than from what pigeon hole I might place him. On that basis, I agree with you that the credibility of the article is high as long as you understand that it isn’t based on some sort of objective reality, but rather on Weisbrot’s world view.

      Weisbrot’s political view is informed by his belief in and reliance on standard, but largely discredited Keynesian economic thinking. As a libertarian (small “l” in this case) schooled in Austrian Economic teachings, I reject virtually everything that Weisbrot believes in. That takes nothing from the valid points he makes.

      What impresses me about your own post is your allusion to seeking out a wide range of opinions and ideas to inform your own beliefs. What a pleasant departure from what I see from most ideologues (on all sides of issues) that post here who have scanning biases so intense that you would think it would kill them to actually read what others think with an open mind. How on earth can you refute what another person says if you don’t take the time to become familiar with what they believe?

      • sueb4bs

        So, Still Watching — in your quite hypercritical, attacking way of judging others, there are many of us critical thinkers remaining in the world with open minds.
        Imagine that… creative , huh?

        • StillWatching

          Jajajajajajaja you label me hypercritical and jump on me with your own tacit and overt criticism. I’ll happily own up to being hypercritical of dolts, but you need to own up to being hypocritical. Given the choice between hypercritical and hypocritical, I’ll happily choose the former.

          Take some acyclovir for that problem you have with the SO virus.

        • Globetrotter

          Yes, he IS inconsistent, and that is unmitigated by a tolerance of any other view other than his own. A Kelly-Ann brand of “creativity”… pigeon-holing, a format that denies dialogue.

          He repeatedly proclaims he adheres to an imported culture. No one can ever fully escape all elements of the culture they were born to, even the patently toxic ones. Yet he assumes his presence is unquestionably beneficial to this country. Same old, same old….

  • Romulo Maldonado

    Mr. Weisbrot needs to visit Óptica Vázquez immediately. Then watch to see what happens to his article. He will edit it to reflect a 180 turn toward a totally different reality.