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  • Is Ecuador's Economic Policy a Non Neo-Liberal Alternative?

    Rebecca Ray: Ecuador's economy continues to grow in spite of recession as they pursue policies that target poverty alleviation -   June 7, 12
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    Is Ecuador's Economic Policy a Non Neo-Liberal Alternative?PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in Washington.

    During the crash of '08-09, Ecuador apparently did not suffer as much as many other countries. A new report suggests the reason for that is that they follow different economic policies. They didn't go along with the neoliberal model as many other countries in the world did.

    Now joining us to talk about that report and Ecuador's policies is Rebecca Ray. She's a research associate at the Center for Economic and Policy Research in Washington. Her academic fieldwork has included consulting in Nicaragua for the Partnership for Food Industry Development and other such work. And she now joins us from CEPR offices in D.C. Thanks for joining us, Rebecca.


    JAY: So, first of all, what are the facts of the situation in terms of Ecuador's growth and the recession? And then what policies do you think made a difference?

    RAY: So the remarkable thing about Ecuador's experience with the recession is that they came out of the recession after only three quarters of declining GDP, and it only took them four additional quarters to reach their previous GDP levels. Meanwhile, their poverty, unemployment levels, these are all lower than they were before the crisis already, well below. [Unemployment's] at a record low.

    JAY: Give us some examples of the numbers.

    RAY: Okay. The numbers. Well, unemployment before the crisis had reached a low of 6.4 percent. During the crisis it shot up to 9, but it's now down to 4.9 percent. Poverty actually has been even better. Poverty had reached a low of 35 percent before the recession. It rose to [inaud.] 36 during the recession. And now it's down to 28.6, which is really remarkable given how other countries who don't have their own currency, similar to Ecuador—which we see in the periphery of Europe, for example—are doing much worse, and it doesn't seem to have an end in sight for them.

    JAY: Ecuador uses the U.S. dollar?

    RAY: Yes, that's right. They been dollarized for about 12 years now.

    JAY: Right. Okay. So why and how did this happen?

    RAY: Well, there was a couple of interesting points, that, first of all, Ecuador took several steps that would be severely frowned upon in Washington, D.C., or by the European Central Bank, for example. First of all, they're involved in their export commodity. They're not—it's not just a privatized system of petroleum exports like in other countries. There, Petroecuador was able to funnel those during the good times, funnel the petroleum money into the central bank reserves. And that's how they funded their stimulus. So they're involved in the economy. They could use those reserves as a cushion.

    [incompr.] commodity export [incompr.] country means that during the good times you have really good times, but during the bad times, you have very [incompr.] crises, especially if you don't have your own currency. So you can't really help when it comes to monetary policy. You can't print more currency, and you can't change the value of your currency like China does to make their other exports more attractive.

    But Ecuador's involved in the petroleum sector. There it's publicly owned as well as privately owned. So they've been funnelling that money during the good times into central bank reserves. So during the recession they used those reserves, brought them back down to their old pre-boom levels, used those reserves to fund huge projects domestically to bring up the domestic [inaud.] to be less reliant on the U.S. and Europe, which is primarily where the dependency was before.

    JAY: What are some of the examples of those projects?

    RAY: Well, the biggest project that's been done is a tremendous construction boom. They've started an enormous project for low-income families who've never owned a home before—and that's a large swath of the Ecuadorian population—to give concessional financing for new homes to be built. So this has been a huge—construction's actually been where the boom happened in Ecuador. It hasn't been brought back up by higher oil prices; it's been brought back up completely in the construction sector.

    Now, the good thing about this is we're not going to see a housing bubble like you did in the U.S., because these are—only new homebuyers can—are the only people who can take advantage of this. There's no flipping, there's no subprime. It's all above board. Furthermore, [incompr.] bank regulation involved in it. There's no predatory lending allowed. Homeowners who are not able to continue to pay their mortgage rates are not allowed to be taken advantage of—very strict lending regulations. So they're able to—were able to finance a stimulus through housing assistance programs that translated very quickly into jobs, because the government isn't building it themselves; they're able to extend the financing out and let the private sector do that quickly.

    But also, in addition to that, they souped up their safety net. They doubled funding for education within a five-year period. They doubled it. So their secondary education enrollment rates rose by 10 percentage points in just two years. They rose from 69 percent to over 80 percent from 2007 to 2009. That's huge. They also expanded their main social safety net program by about 25 percent. They expanded the enrollment rates by just going out and finding families that weren't ever enrolled that were eligible.

    So these simple steps were very fast to be able to put into effect. You don't have to go to the trouble of the larger projects, expanding the eligibility requirements for a social safety net, when you have a low enrollment rate among eligible families. You can just go out and find them. And that's what they did. And they expanded the enrollment rates about 25 percent in a one-year period. So through these unusual ways, more creative ways—.

    JAY: Let's go back to the construction stimulus again, because in other countries, including United States and others, construction often is a way to introduce stimulus, and then sometimes you get into this kind of overcapacity. You build all this stuff, but the people can't afford to move into it. So how do they avoid that in Ecuador?

    RAY: The loan programs are—actually, the concessional finance programs are only part loans. Grants are a very large part of the project. So each—there's an analysis step of it, of figuring out what your family can afford, and there's grants and there's loans, and different aspects of a family's financial situation are taken into account. It's not simply, oh, we're going to put money in the construction sector because that creates jobs quickly. Well, that's true, but we've just seen a massive failure of that as the backbone of an economy. So Ecuador's attempt at working with the construction sector has been, I think, made wiser by seeing how things failed here.

    JAY: So when you compare Ecuador's recovery from the recession, what you're saying was much speedier, how does that compare to other Latin American countries? 'Cause if I understand it correctly, quite a few Latin American countries did kind of better than their northern neighbors, and there was growth in countries that you could say did not follow the same kind of policies as Ecuador. How does that compare?

    RAY: So the important thing to pay attention to with this crisis is how connected a particular economy was with the global north, because that's where the crisis started from. So countries that were especially dependent on the global north for exports or for remittances from workers abroad were at a special disadvantage. And Ecuador finds itself in a particular situation—particularly bad situation in that aspect, because they're also using the U.S. dollar as their currency. And among countries that are highly dependent on the global north, either for remittances or for exports or both, Ecuador's recession was the shortest—it reached its previous peak in less time than any of those other countries. And that's because it developed its domestic market and it took care of its people domestically rather than trying to ride out the global commodity waves.

    JAY: Which countries are you comparing it to?

    RAY: I'm comparing it to Mexico, for example, Argentina, Chile, other countries that are heavy exporters and also very dependent on remittances being sent home. There's actually a piece that we'll be having coming out in NACLA, in an issue of NACLA soon, which specifically breaks the region into heavily dependant on the global north and less so. And Ecuador is the best-performing country that is more dependent on the global north, because it does rely on exports of a commodity and remittances. And the way it was able to get around that is by building up the cushion of reserves, by having the government involved in its strategic sector and being able to amass those reserves during the good time, being able to use countercyclical policies during the bad times.

    JAY: And what are some other examples of Ecuador policies other than the piggybanking, if you will, from profits from the commodities sector? Are there other policies that have made Ecuador stand out?

    RAY: Yes, absolutely. A big one is in 2008. Of course you'll remember the inflation of 2008, which was seen in high gas prices. In the developing world it was seen dramatically in much higher food prices [snip] seen in years. And that is primarily the driver of the inflation in 2008 that we saw all over Latin America with food prices.

    And some countries saw the rising inflation and immediately raised interest rates, because that is by the book what the neoliberal prescription says to do in high interest rate times. But in this case, because it was imported inflation from world food markets, raising interest rates wouldn't have fixed the higher food prices. They brought on the recession faster and they would have kept it deeper. And that's what we saw happen in other countries. Mexico raised interest rates during 2008, for example, in the face of this [inaud.] recession, in the face of these higher inflation rates, and it was right before the recession. It was not beneficial. [In Ecuador] they kept their interest rates low and actually continued to lower them throughout 2008 and 2009, because they recognized that they weren't going—raising interest rates wasn't going to fix the inflation; it was just going to put people out of work.

    JAY: So what has Ecuador done to avoid this? Venezuela, which has done—somewhat similar issues when it comes to taking oil revenues and putting it into social programs and public investment, but they've had a terrible problem with inflation. What's the situation in Ecuador?

    RAY: Well, the situation is quite different because Ecuador has the U.S. dollar, so it is cushioned from a lot of the inflation problems that Venezuela has. So it's a little bit of comparing apples to oranges to look at the inflation experiences in the two countries. Ecuador is cushioned from inflation in a lot of imports. So that is part of the reason why they have the freedom to pursue that, of keeping interest rates low.

    However, we see in Europe, for example, the temptation to have interest rates rely—reacting solely to inflation rates, rather than to unemployment and growth rates, and we can see that it's had quite problematic results. So just because you have the freedom to keep interest rates low because you don't have to worry about inflation as much because you have the U.S. dollar, in Europe we see, even though Greece, Spain have the euro, theoretically there should be freedom to keep interest rates low, but the European Central Bank is very adverse to inflation, and so much so that they're willing to sacrifice growth and employment.

    JAY: And to what extent is Ecuador diversifying their economy? 'Cause if there's another—I don't know when it will come, but another downturn in commodity prices and oil prices, you do need more to your economy than just saved profits from petroleum. What—is Ecuador making moves in that direction?

    RAY: You're absolutely right. It's very important to diversify. Unfortunately, when a country doesn't have its own currency, the main way of diversifying is cut off from it. China is the obvious example of a country that uses its control over its currency value to make its exports more competitive in other markets. But what Ecuador can do and has begun to do is diversify its export markets so they're not tied simply to the United States economy, it's not tied simply to Spain, which is the other country from which remittances come. It's now sending exports to a broader array of countries. For example, the United States was over half—over half of Ecuador's exports went to the United States in 2006. By 2010, it had fallen to just a third. So Ecuador has begun to diversify its export markets, even though it's harder for it to diversify its export products. Now, what it can do is on the supply side it can enable other industries to export and to grow through subsidies, through training, through assistance programs, and those are areas that all can still be explored. But diversifying your export markets is something that Ecuador has begun to do and will probably continue to do.

    JAY: Now, we've seen in Greece and other places a lot of calls to get off the euro and to have your own currency, that you give up a certain amount of sovereignty and control of your own economy when you don't have your own currency. What is Ecuador's thinking on this in terms of staying on the U.S. dollar or not?

    RAY: Ecuador doesn't have plans to get off of the U.S. dollar any time soon. And the main reason for that is, whenever you do something that dramatic, it's a huge shock to the economy. Even if in the long term it has positive consequences, it's an enormous shock in the short term, and that kind of thing is something that you pull out only if you need to. So, looking at countries like Spain and like Greece, ordinarily you would say, oh, well, you're giving up stability in order to have growth, in order to have local standards of living rise. In Spain and Greece, we don't have stability now, so they wouldn't be giving up any stability to leave the euro. Ecuador, on the other hand, has growth with stability now, so there's no need to introduce that kind of a dramatic shock to the economy. It may be for that reason that President Correa has said many times it would not be a good idea to leave the U.S. dollar at this point.

    JAY: What are the weaknesses of the financial policy in Ecuador? And one question within that would be: what's happening with wages? Are they—you can say there's stimulus coming through the construction industry and subsidies. What's happening in terms of wage rates?

    RAY: Wages are up. Wages have been above the rate of inflation for long time. So this is good. People are getting ahead. If you're looking for weaknesses in the economy, I would just say back to what we just talked about before, that [incompr.] can be done to diversify the economy away from being based on petroleum. Of course a stimulus based on construction is a short-term thing. It's meant to be a short-term thing. That's the nature of countercyclical policy. It comes in when it's needed. But it's not a long-term strategy to be diversified away from petroleum, of course. So anything that can be done to further diversify, to give assistance to other budding industries, would be very welcome.

    JAY: Alright. Thanks a lot for joining us.

    RAY: Thank you.

    JAY: And thank you for joining us on The Real News Network.


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