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Public spending fuels Ecuador leader’s popularity

QUITO, Ecuador (AP) — Amparo Martinez’s universe is two small, tidy rooms in a poor Quito neighborhood that she shares with her 83-year-old mother and a severely handicapped daughter.

Her predicament makes holding a job impossible, so the three depend on a $240-a-month government stipend introduced by President Rafael Correa under a program for the disabled.

Martinez adores Correa.

“I hope he’s re-elected many times,” she says.

Correa is regularly assailed by human rights, press freedom and business groups as intemperate, autocratic and intolerant of dissent. Yet he is popular among millions of Ecuadoreans for programs which, like the initiative for the disabled, have improved their lives.

An array of state-funded programs implemented or broadened since Correa’s 2006 election have brought stability to this traditionally unruly South American nation that previously churned through six presidents in 10 years.

A doubling in public spending under Correa adheres to a formula that has also aided the political longevity of his leftist allies Presidents Hugo Chavez of Venezuela, Cristina Fernandez of Argentina and Evo Morales of Bolivia.

But Ecuador devotes a greater share of its economy to public investment than any other nation in Latin America and the Caribbean, spending 10 percent of gross domestic product.

The main strategic ally of this tall, pugnacious U.S.- and European-trained economist has been the high price of oil, currently at $99.50 per barrel, which helped fuel 8.9 percent economic growth last year.

Oil accounts for about a third of government revenues in this OPEC member nation, whose proven oil reserves of 6.5 billion barrels are surpassed in South America only by those of Venezuela and Brazil.

According to Oil and Gas Journal (OGJ), Ecuador held proven oil reserves of 6.51 billion barrels in January 2011 the third largest reserves in South America after Venezuela and Brazil. Ecuador is the fifth-largest producer of oil in South America, producing 486,000 bbl/d of oil in 2010 (almost all of which was crude oil), down from a 2006 peak of 536,000 bbl/d. Data from the first half of 2011 show a rebound in production, which averaged 501,000 bbl/d through June.

Straying from Latin American custom, Correa has also engineered a vertiginous rise in income tax collection, boosting compliance by businesses and professionals. From $4.9 billion in 2007, income tax receipts rose to $8.4 billion last year.

He has exhibited uncanny resolve in coaxing higher numbers into the revenue columns of the balance sheet in a country that made the U.S. dollar its national currency in 2000.

That included rewriting oil extraction contracts with multinationals to radically boost the state’s share of windfall profits. Some multinationals left, others stayed.

The government is now on the verge of reaping more raw material royalties. It is set to shortly sign contracts designed to yield the state $3 billion annually from the mining of gold, copper and other metals.

Correa has been coy on whether he’ll run for re-election in balloting that could come as early as a year from now. If voting were held today, he’d be difficult to beat. Never in five years in office has Correa’s approval rating dipped below 50 percent. It currently stands around 70 percent.

Critics accuse Correa of building castles in the air by creating expectations on the uncertain promise of continued high oil prices. If oil drops below $73 a barrel, they say, his ambitious public spending will need to be curbed.

“It’s not sustainable as an economic model over time,” said Xavier Ordenana, an economist with the Escuela Politecnica del Litoral in Guayaquil. “It can last for some years but not forever.”

Ordenana says the government realizes the private sector must also grow or it risks insolvency. Heavy industry, export-oriented manufacturing and high-tech work remain scarce in Ecuador.

In all, 5 million of Ecuador’s total population of 14 million have personally benefited in some measure from government largesse, researchers at the FLACSO graduate school calculate. Under Correa, the state has built homes for 30,000 families, plowed $8.5 billion into education and $5.3 billion into health care. It has rebuilt or improved nearly 3,400 miles (5,500 kilometers) of roads, nearly two-thirds of Ecuador’s highway system, spending $4.5 billion.

Other programs have zeroed in on helping individuals and families.

The government says the program for the disabled, a flagship Correa initiative, has benefited 300,000 people. They receive medical attention, welfare payments and equipment including wheelchairs. Some have even been given housing. Public wheelchair access is improving.

Another popular program provides a $35 monthly boost to 1.6 million poor people, chiefly homemakers with no other formal income.

“My husband died many years ago but now I have the president as a spouse because he gives me a little money every month,” said Maria Pillajo, a stooped 67-year-old who scrapes by washing clothes and loading baskets in the market of Quito’s poor southern district of El Camal.

“Until poverty is eliminated it’s a good measure,” Correa said of the program when asked about it during a recent meeting with foreign correspondents. The government says the poverty rate stands at 29 percent, down nine percentage points from when Correa took office. Meanwhile, unemployment is officially at 5.1 percent.

It’s not just the poor for whom the government is writing checks.

Some 100,000 middle-class first-time home buyers have received a $5,000 one-time “housing subsidy” grant that enable them to afford down payments.

“The payments have a direct bearing on the president’s image. In political terms, they have the excellent effect of sustaining his political project,” said Simon Pachano, a FLACSO political scientist.

Correa has also plowed millions into education, giving free uniforms to a million students, texts to 3 million and regularly feeding 1.6 million breakfast.

“It’s a great relief because sometimes we just don’t have the money,” said Francisco Carvajal, a 28-year-old father of three who said he earns $750 a month from his job as a construction material sales company.

His children got free uniforms and texts as well as English and computing classes free of charge.

Correa is far from Ecuador’s first populist leader. Yet he has been hounded by none of the accusations of corruption that drove previous presidents from office.

His popularity is anything but universal, however.

In striving for what he and Chavez call “21st-century socialism,” Correa has alienated bankers, industrialists, the Roman Catholic Church and even indigenous groups. Initially backing him, the latter now object to his insistence that the state can extract minerals from their traditional lands without their consent.

Many business leaders are angry with Correa over his chumminess with Iran, fearing that he is distancing Ecuador from Washington, still the country’s top trading partner.

On no adversary has Correa unleashed such bile as on the opposition news media, which he claims “oligarchs” have used to seek to discredit him.

Correa has had a columnist and three directors of the opposition newspaper El Universo successfully prosecuted for criminal defamation. They have been sentenced to three years in prison each and a collective total of $40 million in fines, though the sentence is on appeal.

Human Rights Watch has decried how Correa used a May referendum to obtain a popular mandate for reforms that could “constrain media and influence the appointment and dismissal of judges.”

It also complained that people involved in protests where violence occurs “may be prosecuted on inflated and inappropriate terrorism charges.”

Associated Press Writer Frank Bajak contributed to this report from Lima, Peru.

Copyright © 2012 The Associated Press. All rights reserved.

Story Transcript

PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Washington.

One of the countries in Latin America that is not talked about very much but perhaps—and some people suggest it is one of the more interesting models for development on the globe, and that’s Ecuador. What you read in the press these days is mostly about a legal case that’s going on. The president of Ecuador sued a newspaper for libel, won the case, and a penalty was assessed, including some jail time for those involved. The case is now being appealed. But you don’t hear much about what seems to be a whole new way of economic development. And it’s very interesting: International Living magazine just selected Ecuador as the number-one place in the world to retire. But you don’t get a lot of news about what’s happening with poor in Ecuador and this new model of economic development.

Now joining us, and recently returned from Ecuador, now in New Delhi, is Jayati Ghosh. Jayati teaches economics at JNU in New Delhi. Thanks for joining us, Jayati.

GHOSH: It’s a pleasure.

JAY: So, I mean, just very quickly, ’cause if you do a Google search for Ecuador in the news, mostly what you see is about this legal case and this issue of whether there’s freedom of the press and such in Ecuador, what—you know, I don’t think you were there enough to give an extensive take, but what was your impression?

GHOSH: Well, it’s true that I don’t also—I’m not literate in Spanish, but the few Spanish newspapers that I did see were highly critical of the government, and of the president in particular. So it didn’t, certainly, feel that they were being muzzled. And, in fact, a lot of the television also is very openly critical, and even defamatory. So I don’t think that there’s a muzzling of the press. I do agree that jail terms for libel is a source of concern, but I think that that’s really nothing compared to the kinds of press oppression that we’re finding in a number of countries where it’s never mentioned, for example, Turkey, where, you know, just because that government is currently the darling of the Western media, you never hear about the journalists who have been jailed there for more than three years without trial simply for writing critical articles.

JAY: Yeah, I think the one thing can be said for sure is if you have a neoliberal economic model, you’re given a lot more room in terms of freedom of the press and suppression of such and so on. So let’s talk a little bit about this, because it seems Ecuador is not going down the neoliberal path. And that’s quite unique, ’cause there’s not many countries that are not. So what have you found? You’re an economist, so let’s talk about that.

GHOSH: Well, you know, what I found really interesting about Ecuador is that on the face of it, it would seem like one of those countries that really doesn’t have policy space. You know how we keep talking about countries need to have policy space to do interesting things? And our governments all over the world, even in big countries like India, keep telling us, well, what can we do? There’s globalization, there are all these global forces, and we really don’t have the room for maneuver. Well, here is a tiny country with only 14 million people which has been, really, a banana republic for most of its history. It is a dollarized economy—it doesn’t even have its own currency. So you would think it has no policy space at all. It’s a primary product exporter. It has—you know, very close links it has had in trade and investment with the United States. So you would imagine that this is a country where very little can be done.

JAY: Right.

GHOSH: And I discovered when I was there that in fact they have had not just a transformatory approach in terms of how they want to shape development and where they want to take the economy and how they see the economy functioning for the people and for nature rather than for finance and for capital, but also that they’ve taken very specific steps which many other countries can do.

JAY: For those of you who don’t know, Ecuador is the third-largest producer of oil in Latin America and it’s a major part of its revenues. So talk—first of all, talk a little bit about what they did to change the royalty structure in Ecuador.

GHOSH: Interesting things, how Ecuador has been able to take on large multinational capital and in a sense get away with it. It’s an oil producer. Oil accounts for about 60 percent of the export revenues, and on average over the past ten years about one-third of the government’s revenues. Now, what they discovered—in fact, the story is really that it emerged in the process when they discovered that one of the foreign oil companies was actually misusing its rights to drill by putting in horizontal pipes to drill from other areas as well. Now, this allowed them to open up all the oil contracts. Before 2009, Ecuador, the government, was getting about 13 percent on average of the total oil revenues, and the companies, the foreign companies, were getting 87 percent. They passed a law in July 2010 that completely reversed the terms. So now the government gets on average 87 percent, and the companies get 13 percent. It’s actually extraordinary that they managed to do this. Six—there are 18 oil companies operating in Ecuador. Six of them said that this is unacceptable and they left. And the government basically said, well, goodbye and good luck. They took over the oil fields of the companies that had left. But 12 of the companies decided to stay, which means that it was still profitable for them. And now, as a result, the Ecuador government gets a massive benefit from any increase in oil prices.

JAY: Now, the other big issue was what the taxation—they’ve actually started collecting taxes from the local elite, which is also quite unique in Latin America.

GHOSH: Absolutely. What is actually most surprising is that despite the fact that oil prices have been so high and despite the fact that they changed the terms of these oil contracts, in fact, tax revenues have increased faster than oil revenues for Ecuador’s government. And that is really a tribute to the massive tax enforcement drive that they undertook from 2007 onwards.

It’s interesting that this has not been accompanied by a rise in the tax rates. Tax rates remain stable. And, in fact, now corporation taxes are going to be brought down from 25 percent to 22 percent. But what they did was simply enforce the law. And the head of the Internal Revenue Service says that this was done, really, by just breaking what used to be a very cozy nexus between big business and the tax administration. So they demanded much more information, they got everything computerized, and they calculated exactly what would be the actual tax payable. And then they enforced—they just brought the stick. They said, well, if you don’t pay up, if you don’t pay your arrears, if you don’t pay your dues, we’re closing down your offices. They did this with three or four companies, and then the rest all started paying up.

JAY: Now, usually these countries are told that if you do this, there’ll be capital flight, everybody will leave. But that doesn’t seem to be what happened.

GHOSH: Absolutely not. In fact, the opposite has happened. Because these increased revenues of the state have been used in very significant increases in public investment, the public investment to GDP ratio in Ecuador is now the highest in Latin America. It’s 10 percent. And that has actually brought forth more private investment, because when you actually spend on infrastructure, you make it more profitable to have more private investment as well. So the investment ratio has gone up to 26 percent, it’s one of the higher ratios, again, in the region, and you have no evidence of capital flight. In fact, there’s been a big inflow of capital in the last year.

JAY: Yeah, I saw, in fact—just today as we do the interview, there’s an article on Bloomberg that for the first time in a while, Ecuador’s issuing some bonds, 2015 bonds, and the yield is actually down, the price of the bonds is up, and the bonds are quite in demand. So I guess bond owners or buyers are voting with their dollars that they think this Ecuadorian experiment seems to be stable and working. Talk a little bit about what’s being done with the money.

GHOSH: Well, this is in a sense the kind of ideal that all of us would like to push our governments towards: tax the rich, take money from foreign corporations and your own domestic corporations, and use it for the people. So they’ve raised public investment, and that means a lot of infrastructure that really does matter for the people. So the money went into roads and bridges, transport connectivity, things that actually matter for the people. But also they have doubled social spending in the aggregate as a share of GDP. So that is also now 10 percent of GDP.

JAY: So examples of the social spending are what?

GHOSH: Health spending has gone up by about 129 percent in these five years. Education spending has tripled. And they’ve brought in benefits for handicapped peoples. They brought in all kinds of other—cash transfers for mothers. They have increased Social Security payments. One very good thing they’ve done is that they’ve increased public employment, not just by having more social sector spending, but also by getting rid of outsourcing and contractors, so that now the government employs directly. So all government workers get the benefit of those better working conditions.

JAY: Now, one of the critiques of this is Ecuador is able to do this because of high oil prices, and that this is not a sustainable model, because if the price of oil comes down, this level of social spending won’t be possible. What do you make of that?

GHOSH: Well, you know, what I think is important is that if you do have the advantage of, let’s say, a resource that has high prices globally at the moment, then you must make the best possible use of it. So the best possible use would be to use that money to diversify your economy, improve the living standards of your people, and generate employment. That’s what they’re doing. There are other countries that have oil—Nigeria is of course a classic example—which don’t do that, where most people are not better off because they have oil.

But the other point I would make is that in fact the tax revenue increases show that it’s not just oil. This is something that Bangladesh can do. This is something that Ghana can do or Ivory Coast can do. Every country like this has got a small elite that is the major beneficiary of the production system and the structure of accumulation and distribution. So it’s possible to tax the rich without affecting investment, without affecting growth, and to use that money to generate employment and improve the conditions of the people.

JAY: Now, the other thing that seems interesting is they’re experimenting with different forms of ownership. They’re talking about a new form of socialism. But it doesn’t seem to be the socialism we knew from the 20th century, you know, central state-owned property. So what are they doing in that area?

GHOSH: I think that what they’re doing is trying—well, explicitly what they say is that they’re trying for a middle path between those who say, well, you know, let’s just manage capitalism and somehow make it better and, you know, less oppressive, and those who say, no, no, just get rid of capitalism, just, you know, junk it altogether and go for something completely new. They’re trying for a middle path. And in this middle path, the notion that there can be one centralized state that controls an undifferentiated mass of workers, that doesn’t exist. It’s very much a focus on citizens’ rights and on collective rights, so that they recognize different communities, different ethnic groups, indigenous and different language speaking peoples. They call themselves a pluri-national state. And what is very important is that they recognize the rights of nature. They say that nature—patsamama, as they say—has specific rights, and duties and obligations that the state must bear to ensure the preservation of nature, and that all citizens and all economic actors also have to ensure the preservation of nature.

JAY: Now, there was a controversy where there—in terms of opening up some of the land that was traditionally considered indigenous peoples’ land for mineral exploration and exploitation, there was some real opposition coming from indigenous people who had supported President Correa, and from the left on these issues. Did you get some sense of what’s happening on that?

GHOSH: Yes. I think that, you know, like everywhere else, these are dynamic situations, and there are pulls and pressures in all directions. So there are the large bourgeoisie and those who are close to the foreign owners and so on who are extremely upset with what’s going on. There are sections of the middle class that are upset at what’s going on. And then there are those who are pushing from the left, as it were, those who are pushing for a greater realization of the Constitution. There was a new constitution brought in in 2008 which made—which is excellent, but it’s extremely ambitious, and, of course, that creates demands that are not so easily met.

So it’s a very complex situation, and I think the government’s response is also inevitably uneven. Sometimes they give way to a particular force. Sometimes they reject that force. So I won’t say that it’s a very clear, homogenous, straight-line process. It’s an uneven process. But the direction of the change is extremely positive.

JAY: So in terms of what we in the North and you and the other parts of the South can learn from Ecuador, what else do you think? You talked about the ability to actually raise some tax revenue and go after the elites in that way. What other things do you think people could learn [crosstalk]

GHOSH: Another very interesting thing: that you can improve the conditions of workers, you can provide Social Security. They passed—first of all they created the Social Security Institute, and all public employees, of course, have access. But they also are trying to ensure that all workers have access to Social Security. And they passed a law that every employer must ensure that their workers get Social Security, including those who employ domestic workers. And if they don’t, they’re liable to two years imprisonment. Now, you can say that’s really tough, but the point is that in 2009 they imprisoned a lot of people. So already in 2010 you see that there’s a big increase in the number of workers covered with Social Security, from 35 percent to 55 percent. So these things do make a difference. You can give dignity to workers, you can raise the minimum wages, and you can do that without worsening unemployment rates. I think that’s very important.

JAY: And in terms of the struggle in Ecuador between the elites and the people and the class struggle that takes place there, the power of the elites in all of our countries essentially comes from concentration of ownership, whether it’s media or whether it’s in minerals or anywhere else in the economy. How do they plan to take on that concentration of ownership which leads to such political power?

GHOSH: One of the interesting things I found is that a lot of the major decisions have been preceded by referendum. So even, you know, the decision to have a new constitution, the decision to go in for general elections, a number of other important decisions have all been preceded by referendum, and it is the popular vote in that referendum which gives the government that kind of political strength, which gives it the ability to take on vested interests and very powerful lobbies. Of course, there are these attempts at undermining it. You know, I mean, I believe that the role of the U.S. has been less than savory and continues to be so, that there will be internal and external attempts at undermining it.

JAY: Well, we’ll do a lot more on digging into what’s going on in Ecuador. We’re going to be interviewing some other academics, like Bob Pollin, I think, that went with you to Ecuador when you were there. We’re going to be talking to, I believe, the finance minister of Ecuador. This is an experiment that deserves a lot more focus. Anything else you want to end with, Jayati?

GHOSH: Well, no, just to repeat what I said at the very beginning. I think what is most inspiring about this case is that even if it doesn’t succeed more than what it already has, it shows that you can do a lot if there is internal political demand for it, and you don’t have to worry about the global conditions in order to transform things within your own country.

JAY: Thanks very much for joining us.

GHOSH: Thank you.

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


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