Fifty international economists warn against the return of neoliberalism in Ecuador

By Ha-Joon Chang and James K. Galbraith

Over the past ten years, Ecuador has achieved major economic and social advances. We are concerned that many of these important gains in poverty reduction, wage growth, reduced inequality, and greater social inclusion could be eroded by a return to of the policies of austerity and neoliberalism that prevailed in Ecuador from the 1980s to the early 2000s. A return to such policies threatens to put Ecuador back on a path that leads not only to a more unequal society, but to more political instability as well. It is important to recall that from 1996 to 2006, Ecuador went through eight presidents.

Unfortunately, there is much confusion and misinformation about Ecuador’s achievements in recent years. It has all but become conventional wisdom that the economic and social progress in Ecuador, such as it is recognized, resulted simply from a commodities boom and a spike in oil revenues. This explanation ignores the innovative and important reforms that the Ecuadorian government has enacted that have played an instrumental role and allowed the country to emerge, relatively unscathed, from the 2009 Global Recession and the more recent collapse in oil prices. These reforms included bringing the central bank into the government’s economic team, a tax on capital exiting the country, a large increase in public investment, re-regulation of the financial sector, and counter-cyclical fiscal policy.

Rafael Correa speaking at a 2015 rally in Quito.

Neoliberal economic policies have been tried in Ecuador, and have failed to deliver. Compared to 1.5 percent annual per capita GDP growth from 2006 to 2016, per capita GDP growth averaged just 0.6 percent from 1980 to 2006. From 1980 to 2000, a period during which Ecuador had a number of loan agreements with the International Monetary Fund, Ecuador experienced a considerable economic failure, as GDP per capita fell by 1.5 percent over those two decades. This failure almost certainly resulted at least in part from the neoliberal policies of cutting spending, privatization, inflation-targeting, deregulation, and others that also made the Ecuadorian economy increasingly vulnerable to external shocks. In the 1960–1980 period, by contrast, per capita GDP growth was 110 percent.

Similarly, poverty increased by one-third between 1995 and 2001, when it reached 45 percent. Poverty did decline overall from 1995 to 2006, but by just 2.7 percent; by contrast, poverty fell by over 32 percent from 2006 to 2014. According to Ecuadorian government statistics, the Gini coefficient for net household income (a common measurement of inequality) decreased by over 10 percent between 2006 and 2014, after having increased by more than 7 percent from 1995 to 2006. The indicators from the pre-Correa years, as bad as they are, are bolstered by the fact that emigration of people from Ecuador under prior governments artificially held down Ecuador’s inequality, poverty, and unemployment rates.

For most of Ecuador’s modern history, its petroleum wealth has largely benefited a relative few. For example, a 2002 law supported by the IMF and World Bank required that Ecuador’s Stabilization Fund, an entity created with, and which received, revenues from oil exports, spend 70 percent of its revenues on debt payments, but just 10 percent on social spending.

Important reforms over the past decade have distributed oil revenues more equitably. Oil agreements that previously gave away Ecuador’s oil wealth to foreign companies were renegotiated, leading to increased revenues for the people of Ecuador (without these renegotiations, the rise in oil prices would not have generated substantially greater revenues to the government). These government revenues have been channeled into responsible state spending with impressive results: middle and secondary school enrollment shot up dramatically as higher education spending increased from 0.7 to 2.1 percent of GDP. As government spending on health services doubled, as a percentage of GDP, from 2006 to 2016, some 40 percent more patients were treated at public hospitals in 2014 than had been in 2006. The Ecuadorian government enacted a stimulus of about 5 percent of GDP that allowed it to weather the 2009 Global Recession with lost output of only about 1.3 percent.

The “Washington consensus” era in Ecuador did not benefit most Ecuadorians, and a majority of Ecuadorians let their feelings be known, through mass protests that helped to oust several presidents; and finally in the 2006 elections that ushered in an era of real change ― a historic break with the economic policies that had, in part, put the interests of Ecuador’s elite, of Washington, and of powerful international capital, ahead of the majority of Ecuadorians.

Our goal is not to tell Ecuadorians whom to vote for, or to interfere in Ecuador’s political processes. With the proliferation of misinformation and misunderstanding about Ecuador’s economy, however, we felt it necessary to correct the record.

Ecuador deserves leaders who will implement policies that benefit all Ecuadorians ― whoever they may be. It would be tragic for Ecuador’s next government to return to a less prosperous, less inclusive past.

Signed,

James K. Galbraith, Lloyd M. Bentsen Jr. Chair in Government/Business Relations and Professor of Government at the LBJ School of Public Affairs, University of Texas at Austin

Ha-Joon Chang, Department of Economics, University of Cambridge, United Kingdom

And 48 others

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Ha-Joon Chang is a South Korean institutional economist specialising in development economics, currently a reader in the Political Economy of Development at the University of Cambridge.

Economist James K. Galbraith is currently a professor at the Lyndon B. Johnson School of Public Affairs and at the Department of Government, University of Texas at Austin. He is the author of The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too.