By William K. Black
Editor's note: William Black is an Associate Professor at the University of Missouri, Kansas City. A regulator during the U.S. Savings and Loan collapse in the 1980s and 1990s, he recently presented a series of lectures contrasting the economic policies of Ecuador and Italy.
In making presentations in Spain, Ireland, and Italy the most poignant conversations I have had were with parents whose children have emigrated or plan to emigrate upon graduation from university because of the high unemployment rates in those nations. Unemployment rates for those aged 15-24 are at Great Depression levels through most of the EU periphery. Emigration is depriving the periphery of its most precious endowment — its children. The young adults that leave the periphery are disproportionately their best and brightest. They are better educated and more entrepreneurial than their peers.
One of my recent articles explored the question of why the U.S. media treats Ecuador's President Rafael Correa with hostility and Italy's Prime Minister Monti with the greatest respect given the fact that Ecuador has experienced economic and social success under Correa's leadership and Italy has experienced severe failures under Monti's leadership. Correa is an official who has been elected and reelected and has the highest popularity rating of any leader in the Americas. Monti has never been elected and is unpopular with Italians. Correa and Monti are economists, with doctorates from U.S. universities, but Correa has succeeded because he understands economics while Monti has failed because he still worships a series of dogmatic theories that were falsified decades ago. Monti's dogmas have a consistent bias — they serve as apologies for economic, social, and political domination by the wealthy at the expense of the working class. Correa's economic views have a consistent overlay of Catholic social justice teachings. Correa's economics have also proven to work in the real world.
This article focuses on migration, which has played such a critical role in recent times for Italy and Ecuador. Correa inherited an emigration crisis. Ecuador went through a financial crisis driven by the failure of its largest banks in the late 1990s that caused catastrophic harm to the economy. The crisis prompted over 10 percent of Ecuadorians to emigrate, mostly to Spain and the U.S. (I play soccer here in Kansas City with three Ecuadorians, but the great migrations were originally to New York and New Jersey.) The Spanish and U.S. economies were experiencing the rapid expansion of real estate bubbles in the mid-2000s, but as a percentage of GDP the Spanish bubble inflated almost twice as much as the U.S. bubble. Emigration to Spain from Ecuador faced lower legal barriers so more Ecuadorians went to Spain than the U.S. Ecuador's emigration rate was the highest in South America.
The Spanish, Irish, U.K., and U.S. property bubbles all stalled in 2006. Correa was first elected president in late 2006. As he came to leadership in 2007, many of Ecuador's leading trading partners' economies were slowing. By 2008, the U.S. and much of Europe were recognizing that they had fallen into the Great Recession. The fact that these nations were falling into recession made it less attractive for Ecuadorians to emigrate to Spain and the U.S., but it also reduced remittances and potential Ecuadorian exports. Remittances are Ecuador's second largest source of external funds (after oil sales), so any reduction in remittances posed a serious danger to Ecuador's economy. Spain and the U.S. are important trade partners of Ecuador, so their severe recessions were likely to drag Ecuador into recession. The combined effect of the recessions in Spain and the U.S. on remittances and exports was likely to lead to increased Ecuadorian unemployment. Increased unemployment could have increased emigration from Ecuador.
From the start of his presidency, Correa made reducing unemployment and emigration major priorities. Correa's task was made much more difficult by the fact that Ecuador does not have a sovereign currency (it uses the U.S. dollar as its currency). This meant that it was exposed to the bond vigilantes and had vastly less ability to adopt the stimulus programs that could have reduced unemployment much more quickly. As an economist, Correa was aware of these facts and warned that the use of the U.S. dollar as Ecuador's currency sharply constrained the nation's policy options. Correa warned the nation about the risk but he is a pragmatist rather than a dogmatist and he recognized that readopting a sovereign currency was not politically feasible. He was a great proponent of the creation of a Bank of the South that could finesse some of the problems caused by Ecuador's use of the U.S. dollar, but he realized that this was a long-term project. Correa realized that he would need to create immediately the ability to expand education and jobs programs. He also recognized that Ecuador's sovereign debt added a crippling constraint to Ecuador's ability to grow and reduce unemployment and migration through such programs.
Correa took the three essential steps to minimize this sovereign debt constraint. He repudiated the debt, repurchased the great bulk of the debt at a large discount, and he secured a large loan from China. The loan ensured that Ecuador would continue to have access to credit to fund investments that would increase jobs, increase social mobility and stability, and reduce emigration. This creative and just solution demonstrated the advantages of having a real economist not in thrall of failed dogmas as a national leader.
One of the programs Correa promptly adopted was the "Welcome Home Plan" to encourage emigrants to return to Ecuador. The program proved well-timed because of the Spanish and U.S. crises. The innovative program aids returnees start productive businesses in Ecuador, further reducing unemployment. The symbolism of making such a program a national priority was also highly useful. Ecuador has also adopted reforms under Correa that make it far easier to emigrate to Ecuador.
Correa's task in reducing unemployment and emigration was difficult enough given all these difficulties, but fate conspired to make the task far tougher. Continuing violence in Colombia has led to large-scale emigration to Ecuador. The official numbers are large, but most unofficial estimates by experts place the number of refugees or émigrés at 200,000 – 300,000. That is a staggering burden for a nation like Ecuador and the northern portion of Ecuador, where the Colombians settle, already was less economically developed. This makes Ecuador's success in avoiding recession and reducing unemployment, youth unemployment, and emigration all the more impressive.
The most recent figure I found for unemployment in 2012 was 4.6 percent. The most recent figure for unemployment of those 15-24 years old is from 2009 when it was 14.1 percent. In 2009, the overall unemployment rate was 7.3 percent, so it is likely that unemployment of those 15-24 years old has fallen materially. These are remarkable results, but it is astounding that a nation that was synonymous with severe emigration attained a negative emigration balance no later than 2009 (I do not have data for when the rate first turned negative) and has maintained it for several years. That means that more people move to Ecuador than leave it. Ecuador now ranks a spectacular 137 compared to other nations in this category. [My source for migration data is the CIA World Factbook — a delicious irony given the CIA's dim view of Correa.]