People Reject Neoliberalism's Return, But Challenges Remain in Ecuador

Ecuador has just staged another successful democratic election--as even the Wall Street Journal now reports, based on international election observers from the Organization of American States (OAS) that have no love for the Ecuadorian party that won the election. Most of the foreign reportage on the election focuses on Julian Assange, who has taken refuge in Ecuador's embassy in London. But what are the real problems that Lenin Moreno and the people of Ecuador will face when he becomes President?

Ecuador's oligarchs have run the country for most of its existence, crippling economic development and producing high rates of unemployment, poverty, and inequality. The neo-liberal policies that became synonymous with the "Washington Consensus" led to extreme financial deregulation and privatization that produced the typical wave of "control fraud." The nation's leading bankers led that epidemic of fraud by seemingly legitimate banks. The fraud epidemic led to one of the many banking crises of the late 1990s that swept through Latin America. The banking crisis drove a serious recession, led to exceptional levels of emigration from Ecuador, produced extreme political instability in Ecuador--and set the stage for the election of the reformist Rafael Correa. Correa and his supporters created the Alianza Pais (AP). Correa became president in 2007. The AP has a majority holds a majority of the seats in Ecuador's unicameral legislature.

The election of Correa and AP supporters, and the discrediting of the oligarchs based on their economic and political malfeasance and thefts, created the political space for dramatic changes in Ecuador's public policies that have broad support among the people of Ecuador. Hundreds of thousands of Ecuadorians have "voted with their feet" to return from emigration to work and live in Ecuador. Poverty, unemployment, and inequality all fell under President Correa.

Any president of Ecuador faces six major challenges. The most basic is its poorly diversified economy. It is heavily dependent on oil sales to produce dollars--and the price of oil has collapsed.

This second problem is that Ecuador's oligarchs "dollarized" the economy. Ecuador gave up its sovereign currency and made the U.S. dollar its official currency. Argentina did something equivalent, pegging the exchange rate of its currency to the dollar at 1:1. Ecuador dollarized because the public did not trust its government to limit inflation. Dollarization was so politically powerful that the AP has not dared to readopt a sovereign currency. Dollarization degrades or destroys Ecuador's ability to use appropriate fiscal stimulus against a recession, increases Ecuador's cost of borrowing, and poses a critical risk to Ecuador's ability to export if the U.S. dollar appreciates compared to the currencies in Ecuador's trading partners. Argentina had to break its dollar peg when the U.S. dollar appreciated and savaged Argentina's ability to export. President Moreno is unlikely to want to take on this controversial issue near the beginning of his term, but I urge him to restore Ecuador's sovereign currency.

The third problem is that Ecuador, despite the AP's doubling of expenditures on education, health, and infrastructure, remains a nation with significant poverty and educational systems that are not world class. Ecuador has made enormous progress on these areas over the ten years of Correa's term in office, but it started from an impoverished base. When we teach public finance, we tell students that the budget constitutes the government's real policies. President Moreno can show in his budget his dedication to the virtuous trinity of successful development--health, education, and infrastructure. I urge him to wean Ecuador away from its public subsidies to consumers to purchase energy such as cheap gasoline. The subsidy creates perverse incentives that slow growth and create serious budgetary constraints.

The fourth problem is political and social divisions. During much of his term in office, Correa was exceptionally popular, but ten years in office inevitably lead to opposition. The AP lost mayoral elections in some of Ecuador's largest cities. The AP respected the democratic process and there was a peaceful transition of power in these cities. There are regional divisions, primarily between the peoples of the Andean highlands and the coast. There are divisions based on race and ethnicity.

There are also gaping divisions based on extreme wealth. The oligarchs have not gone away and they dominate industry and banking. The oligarchs view tax evasion with pride. Their (narrowly) defeated candidate in the presidential election, Guillermo Lasso, is a bank leader notorious for helping the oligarch's evade taxation by sending their vast wealth to tax havens. Lasso ran on a campaign of ending the AP's increased spending on education, health, and infrastructure--even after Ecuador's brutal earthquake caused serious harm to that infrastructure. President Moreno can demonstrate that he intends to be a leader devoted to the welfare of every resident of Ecuador.

The AP, unlike the Trump administration, has many government ministers that are scrupulously honest and highly skilled technocrats dedicated to improving the welfare of the average Ecuadorian. President Moreno has a majority in the legislature. President Moreno will soon signal with his cabinet appointments whether he supports these true public servants.

Fifth, Ecuador has serious problems with corruption, particularly in the government-owned oil company and probably in major construction. Correa appointed a strong reformer to run the government procurement authority to root out corruption. The procurement authority, however, does not have jurisdiction over the oil industry and defense spending. President Moreno could expand its mandate and encourage public prosecutors and Ecuador's stellar antitrust authority to work to prosecute vigorously fraud, corruption, and cartels.

Sixth, Ecuador is far too bureaucratic. Correa made a serious effort to reduce substantially the number of hurdles business people have to get over to start a new business, but the oligarchs do not want to encourage competition. Encouraging the lawful entry of small businesses in Ecuador should be one of President Moreno's top priorities.