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The economic situation in Ecuador deteriorates.

It is not that long ago that Ecuador's economy suffered a meltdown of extraordinary proportions. In 1999, GDP contracted 6 percent. The banking system collapsed. Poverty increased sharply. The country defaulted on its foreign debt, and oil revenues were hit by falling prices as natural disasters increased the misery of its citizens.

Since that time Ecuador's macroeconomic statistics have recovered, and there did appear to be some reason for hope. But the average citizen has not seen any improvement in economic security.

A recent populist revolt sent the country's fiscally conservative President packing, and the new President has vowed to use oil revenues to ostensibly improve social conditions.

Ecuador's population of consumers who can be compared in any way to consumers in developed countries is small. And at the present time, this minority is an endangered species.

Ecuador is caught in an economic conundrum.

Oil is the backbone of its economy.

And currently high oil prices mean increased revenue. But there's a major problem in the oil fields. Because of a lack of maintenance and contemporary production technology, Ecuador is not pumping as much oil as it could.

Ecuador needs foreign investment to modernize its oil infrastructure. But the current President's insistence on using a reserve fund generated by oil revenue on social programs - instead of as a reserve to pay back foreign debt - has investors sitting on the sidelines.

Nor do potential investors like Ecuador's recent history of default.

It seems almost every day there is another story in the international press about looming default, and Ecuador further isolating itself from the international financial community - especially squabbles with the International Monetary Fund (IMF).

A late June Reuters story from New York reported rapidly eroding investor confidence. The story pointed out that Ecuador is the fifth largest producer of oil in South America, but that oil revenues were being spent by its current leadership to insure reelection.

A May 23, 2005 Associated Press (AP) story from Quito appeared with the headline, "Ecuador refuses to accept IMF pressure." The tone of quotes from Ecuador's current leadership sounded belligerent, as though the IMF staff was insulting the leadership by requesting reforms.

Obviously, the remarks were intended to play to a seriously disgruntled public, and not a true reflection of the relationship of the leadership with the IMF. But all the same, the remarks did not help the situation.

To its credit, the IMF's statement at the end of its visit was mild in tone. Nonetheless, it emphasized the need for reform in the country's non-oil sector. And it did not back away from pointing out that fiscal responsibility and efficiency in state-owned enterprises were the true key to social reform and poverty reduction.

What will happen in Ecuador?

Obviously, the situation is critical. There is a need for political leadership at the local level to come forward to work with the government toward reform. But these resources are scarce, and the international community does not have an effort in place to help provide them. Only if oil prices stay high will Ecuador narrowly escape another disaster.

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Publication:Market Latin America
Geographic Code:0LATI
Date:Jul 1, 2005
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