Country Profile 2003 Ecuador This Country Profile is a reference work, analysing the countrys history, politics, infrastructure and economy. It is revised and updated annually. The Economist Intelligence Units Country Reports analyse current trends and provide a two-year forecast. The full publishing schedule for Country Profiles is now available on our website at http://www.eiu.com/schedule The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom
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Country Profile 2003
EcuadorThis Country Profile is a reference work, analysing thecountry�s history, politics, infrastructure and economy. It isrevised and updated annually. The Economist IntelligenceUnit�s Country Reports analyse current trends and provide atwo-year forecast.
The full publishing schedule for Country Profiles is nowavailable on our website at http://www.eiu.com/schedule
The Economist Intelligence Unit15 Regent St, London SW1Y 4LRUnited Kingdom
The Economist Intelligence Unit
The Economist Intelligence Unit is a specialist publisher serving companies establishing and managingoperations across national borders. For over 50 years it has been a source of information on businessdevelopments, economic and political trends, government regulations and corporate practice worldwide.
The Economist Intelligence Unit delivers its information in four ways: through its digital portfolio, where itslatest analysis is updated daily; through printed subscription products ranging from newsletters to annualreference works; through research reports; and by organising seminars and presentations. The firm is amember of The Economist Group.
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ISSN 0269-7971
Symbols for tables�n/a� means not available; ��� means not applicable
Printed and distributed by Patersons Dartford, Questor Trade Park, 151 Avery Way, Dartford, Kent DA1 1JS, UK.
4 Politics4 Political background5 Recent political developments9 Constitution, institutions and administration10 Political forces14 International relations and defence
16 Resources and infrastructure16 Population18 Education19 Health19 Natural resources and the environment20 Transport, communications and the Internet23 Energy provision
31 Economic sectors31 Agriculture33 Mining and semi-processing34 Manufacturing35 Construction36 Financial services37 Other services
38 The external sector38 Trade in goods41 Invisibles and the current account41 Capital flows and foreign debt44 Foreign reserves and the exchange rate
45 Appendices45 Membership of regional organisations46 Sources of information47 Reference tables47 Population48 Labour force48 Education statistics48 Health statistics49 National energy statistics49 Non-financial public sector finances49 Money supply50 Interest rates50 Gross domestic product50 Real gross domestic product by sector
51 Nominal gross domestic product by expenditure51 Real gross domestic product by expenditure51 Prices and earnings52 Assets and liabilities of deposit money banks52 Tourism statistics53 Exports53 Imports53 Main trading partners54 Balance of payments, IMF series54 Foreign direct investment by country of origin55 Foreign direct investment by economic sector55 External debt, World Bank series56 External debt by lender, national series56 Foreign reserves56 Exchange rates
Tropical on the coast and in the eastern region. Temperate in the centralmountain zone
Annual average temperature, 16°C; hottest months, December and January, 8-22°C (average daily minimum and maximum); coldest months, April and May,8-21°C; driest month, July, 20 mm average rainfall; wettest month, April, 175 mmaverage rainfall
Spanish (official); Indian languages, particularly Quechua, are also used
Metric system; also local units, including: 1 vara=84 centimetres
US dollar officially adopted as legal tender in March 2000, replacing the formernational currency, the sucre, at a conversion rate of Su25,000:US$1. The sucreceased to be legal tender in September 2000, apart from new sucre coinsequivalent to US nickels, dimes and cents used as fractionary money
5 hours behind GMT
New Year�s Day (January 1st), Good Friday, Labour Day (May 1st), Battle ofPichincha (May 24th), Founding of Guayaquil (Guayaquil only, July 25th),Independence of Quito (August 10th), Independence of Guayaquil (Guayaquilonly, October 9th), All Souls� Day (November 2nd), Independence of Cuenca(Cuenca only, November 3rd), Foundation of Quito (Quito only, December 6th),Christmas Day (December 25th)
Lucio Gutiérrez, a former army colonel, assumed the presidency on January15th 2003. One of the leaders of a left-wing coup that unseated the last electedpresident, Jamil Mahuad, in January 2000, Mr Gutiérrez founded his ownpolitical party, the Partido Sociedad Patriótica 21 de Enero (PSP), to fight thepresidential election in October 2002. His minority coalition in Congress isbased around the PSP and also includes the mainly indigenous Pachakútik andthe left-wing Movimiento Popular Democratico (MPD). In the short time sincehe took office, Mr Gutiérrez has demonstrated a pragmatic attitude towardspolicymaking, abandoning the left-wing stance he adopted during thecampaign. This abrupt change of direction has caused tensions within hiscoalition and angered his core supporters. Having won just 20% of the vote inthe first round, before winning 55% in a run-off against his closest rival in thesecond round, Mr Gutiérrez has the support of only a minority of thepopulation. As an outsider from the political and social elite, Mr Gutiérrez hasbeen the beneficiary of popular dissatisfaction with the political process andeconomic hardship. Ecuador has been one of the most perennially unstablecountries in Latin America. Two recently elected presidents (Abdalá Bucaramand Jamil Mahuad) were removed prematurely by extra-constitutional means.Despite constitutional changes, democratic participation is low, and mainstreampolitical parties are out of touch, providing fertile ground for opportunist,populist alternatives and the movement for indigenous rights.
Political background
For 80 years before the arrival of conquistadors from Spain in 1531, the territorythat is now Ecuador served as the northern outpost of the Inca empire, whichintroduced the Quechua language. The country gained independence fromSpain in 1822 and temporarily joined Venezuela, Colombia and Panama inSimón Bolívar�s Grancolombian Federation, before becoming an independentnation in 1830.
The period after independence was characterised by government instabilityand economic and political rivalry between coastal and highland regionalfactions. Political power was concentrated in the hands of a highland land-owning class allied with the Catholic Church. However, the growth of thebanking sector and a rapid expansion in cocoa production created a wealthycoastal banking and agricultural middle class that began to seek greater politicalinfluence.
External shocks, including a collapse in the cocoa market in the 1920s and theGreat Depression of the 1930s, were at the root of instability between 1931 and1948, and all 21 governments in this period failed to complete a full term inoffice. José María Velasco Ibarra was an important figure at this time. A populistfirst elected in 1933, he held office five times and was overthrown on fouroccasions. His final term was in 1968-72. Between 1948 and 1960 Ecuadorenjoyed 12 years of stable civilian rule. Increasing banana exports helped to
finance development policies and also shaped the emergence of growers as apowerful economic group.
As industrial development occurred in the 1960s, the influence of therevolution in Cuba contributed to growing social unrest, prompting the militarygovernment of 1963-66 to take a strongly anti-communist stance. Emphasis wasplaced on economic modernisation, and the role of the state in the economywas expanded. The exploitation of extensive oil reserves discovered in the late1960s was begun under another military dictatorship from 1972. The oil boomwas accompanied by the accumulation of high levels of indebtedness to foreignbanks, as governments contracted loans to finance a programme of state-ledindustrialisation. Easier access to external financing and a fixed exchange ratealso stimulated large borrowing in foreign currency by the private sector. In1978 a referendum approved a new constitution that formed the basis for areturn to democratic elections and civilian rule in 1979.
Since 1979 civilian governments have held power, but a lack of party discipline,deep-seated regionalism and political opportunism have all militated againstthe formation of stable government majorities with coherent policy agendas.Powerful interest groups and public-sector unions have stymied themodernisation efforts of successive governments. From 1996, a period ofrenewed political instability began, following the election of the leader of thepopulist Partido Roldosista Ecuatoriano (PRE), Abdalá Bucaram. Blatantcronyism and corruption, in addition to Mr Bucaram�s uncouth style of govern-ment, soon began to antagonise both members of the coalition governmentand voters, leading to massive popular protests, and his eventual removal byCongress�with dubious legal justification�on the grounds of �mentalincapacity� in February 1997. The congressional leader, Fabian Alarcón of thesmall Frente Radical Alfarista (FRA), was elected by legislators to serve out MrBucaram�s term until August 1998. Mr Alarcón�s concessions to both powerfulpublic-sector unions and regional lobbies contributed to a deteriorating fiscalsituation. Instead of tackling the economy, the government embarked on amajor constitutional reform aimed at improving governability and a newcharter was promulgated in May 1998.
Recent political developments
Mr Mahuad, a Harvard-trained, successful former mayor of Quito, and thecandidate of the centrist Democracia Popular (DP), was elected president in July1998 and assumed office in August. Although lacking an absolute majority inCongress, the DP was the largest party and Mr Mahuad took power under newconstitutional norms (see Constitution, institutions and administration) thatgave him several important advantages over his predecessors. Mid-termcongressional elections were abolished and the power of Congress to impeachministers was rescinded�both had debilitated many previous governments�inan attempt to provide greater administrative stability.
1992 Sixto Durán Ballénb Partido Unidad República 31.9 57.3Jaime Nebot Saadi Partido Social Cristiano 25.0 42.7
1996 Abdalá Bucaram Ortizb Partido Roldosista Ecuatoriano 26.3 54.5Jaime Nebot Saadi Partido Social Cristiano 27.2 45.5
1998 Jamil Mahuad Wittb Democracia Popular 35.2 51.2Alvaro Noboa Pontón Partido Roldosista Ecuatoriano 26.5 48.8
2002 Lucio Gutiérrez Borbuab Sociedad Patriótica 21 de Enero 20.6 54.8
Alvaro Noboa PontónPartido Renovador InstitucionalAcción Nacional 17.4 45.2
a % of votes excludes blank and null ballots. b Elected president.
Source: Corte Nacional Electoral, Tribunal Suprema Electoral.
However, Mr Mahuad proved unable to capitalise on his initial popularity toset in motion much-needed fiscal and structural reforms. His consensus-basedleadership style left him looking indecisive, as successive congressionalagreements broke down, dissent appeared within the government�s economicteam, and the economy deteriorated. In March 1999 the collapse of a short-livedalliance between the DP and the Partido Social Cristiano (PSC), the secondlargest party in Congress, destroyed any prospect for rapid reform and forcedMr Mahuad�s government to engage in laborious negotiations on an issue-by-issue basis with a variety of parties. By October 1999, little more than a yearinto the president�s term, three finance ministers had resigned as a result of acombination of opposition maneuvering and policy disagreements withingovernment.
One of the Mahuad government�s few remaining assets was that, unlike its pre-decessors, it appeared relatively free from corruption. However, in late 1999 ascandal broke over campaign financing of some US$3m, in which Mr Mahuadwas linked to Fernando Aspiazú, the disgraced former president of the Bancodel Progreso, which had been taken over by the state�at a cost of someUS$1bn�at the height of the banking crisis earlier that year (see Economicsectors: Financial services). The scandal fuelled public anger over the gov-ernment�s handling of the banking collapse, from which corrupt bankers werebelieved to have profited at the expense of the state. The government�sauthority was seriously diminished, and, having soared to over 60% with thesigning of a peace agreement with Peru in October 1998, Mr Mahuad�s approvalratings fell to single-digit levels by end-1999, reviving only briefly by theannouncement of a plan to dollarise the economy (see The economy:Economic policy).
A week of indigenous protests in the centre of Quito began in mid-January2000 and culminated on January 21st, when Ecuador narrowly escaped acollapse of constitutional order for the second time since 1997. The protests weremuch smaller in scale and had much less popular backing than those that led tothe ousting of Mr Bucaram in February 1997. However, the critical ingredient forthe success of the protests in 2000 was the direct participation of some sectionsof the military, which had become deeply politicised (see Political forces). Ashort-lived coup, during which Congress was occupied by around 10,000 indigen-ous protestors, removed Mr Mahuad and installed a ruling triumviratecomprising Antonio Vargas, the president of the Confederación deNacionalidades Indígenas del Ecuador (Conaie, the Confederation ofEcuadorian Indigenous Nationalities), the commander-in-chief of the armedforces, General Carlos Mendoza, and a former president of the Supreme Court,Carlos Solórzano. However, the heads of the National Security Council swiftlynegotiated the dissolution of the triumvirate in favour of a constitutionalsuccession of power. In the early hours of January 22nd the vice-president,Gustavo Noboa, assumed the presidency.
Mr Noboa, a political independent with no formal ties to any of the parties inCongress, appeared to be relatively free of the political debts that had helped toundo previous presidents. He was also on good terms with the powerful inter-ests in Guayaquil that had frequently opposed Mr Mahuad, a member of theQuito elite. Moreover, he had a reputation for honesty and a strong businesssense. Mr Noboa adopted the dollarisation project announced by Mr Mahuadshortly before his ouster, and espoused a pro-reform agenda, acknowledgingthe importance of IMF support for the new monetary system to succeed.Initially he made rapid progress; within a few months Congress had approvedlaws implementing dollarisation and allowing foreign investors to takemajority stakes in privatised state firms. In July 2000 Ecuador secured arestructuring of its foreign debt.
However, controversy surrounding the election of a new congressional speakerin August 2000 triggered a split in the DP, the largest party, and a breakdown inthe alliance between the DP and the PSC, which had formed the majorityvoting bloc in Congress. The Noboa government subsequently struggled tobuild support for its policies in a fragmented Congress. The president madeincreasing use of his powers of veto to reject amendments introduced byCongress that often radically altered the spirit of original legislation, but thegovernment still fell behind in the programme of reforms agreed with the IMF.While Mr Noboa remained fairly popular with the public, he faced continuedpressure from indigenous groups opposed to his reforms. The capital, Quito,was occupied by demonstrators in January and February 2001, after which anongoing consultation process with indigenous groups was set up.
By 2002 Mr Noboa had become increasingly concerned with maintaining socialstability, often at the expense of reform. Having presided successfully over theintroduction of dollarisation in 2000, and the completion of Ecuador�s first IMFstand-by agreement since the 1980s, the pace of reform slackened. Politicalsupport started to fall away. The appointment of Carlos Julio Emanuel asfinance minister in November 2001, ostensibly in return for the support of the
PRE for fiscal reforms, proved to be an error. The government lost control ofcurrent spending and Mr Emanuel resigned in disgrace in June 2002 after acorruption scandal came to light that involved the theft of around US$300m inpublic funds. By the final few months of his term, Mr Noboa had all but givenup seeking an agreement with the IMF. Public-sector workers were granted anunaffordable 40% wage rise and damaging concessions were made to theGuayaquil private sector, such as the scrapping of a range of import tariffs andthe vetoing of a competition law.
Electoral politics began to intervene from mid-2002, making it difficult to securethe co-operation of the parties in Congress. In October two populist candidates,Lucio Gutiérrez and Alvaro Noboa, narrowly polled the most votes in afragmented first round election, securing 20% and 17% of the vote respectively.Neither was from one of the traditional parties. In a run-off in November, MrGutiérrez won with 55% of the vote to Mr Noboa�s 45%, and immediately beganto moderate the left-wing stance he had taken during the campaign. MauricioPozo, a respected orthodox economist, was named finance minister andrelations with the IMF and with the US got off to a smooth start. However, thecongressional election had resulted in the election of a congress even morefragmented than its predecessor, and one where Mr Gutiérrez could count onthe support of only 25 of the 100 members. This, and the rumblings ofdiscontent over Mr Gutiérrez�s apparent conversion to neo-liberal policieswithin Pachakútik, which obtained only a small minority of cabinet posts andother presidential appointments, looked set to cause problems in the future.
Important recent events
February 1997
Mass street demonstrations culminate in the removal of the president, AbdaláBucaram, on grounds of �mental incapacity�.
December 1997-April 1998
Constitutional reform is undertaken by the popularly elected National Assembly.Major political changes include the abolition of mid-term congressional electionsand the removal of the legislature�s capacity to impeach cabinet ministers.
October 1998
A peace agreement is signed with Peru, following the cessation of hostilities in 1995.
January 2000
A quasi-coup, spearheaded by indigenous groups and sections of the military, oustsJamil Mahuad from the presidency. Confused negotiations avert the completecollapse of constitutional order. Gustavo Noboa becomes president.
March 2000
The Law for Economic Modernisation is passed in Congress, setting up the legalframework for dollarisation. The country is fully dollarised by September.
August 2000
In a restructuring, Ecuador receives a 40% reduction in its Brady bond and Eurobonddebt, issuing two global bonds to its creditors.
Ecuador completes its first IMF stand-by agreement since the 1980s.
June 2002
The resignation of Carlos Julio Emanuel from the Ministry of Finance amid acorruption scandal triggers a downturn in the fortunes of the Noboa government.
November 2002
The second round of the presidential election is won by a former army colonel,Lucio Gutiérrez, who takes office in January 2003.
Constitution, institutions and administration
Since 1830 Ecuador has had 18 different constitutions, all subject to a largenumber of amendments. The 1979 constitution underpinned the return tocivilian democracy and established a unicameral parliament and presidentialgovernment. The president is elected for four years, may not be re-electedimmediately, and can be impeached by a two-thirds majority of Congress. Theconstitution was reformed most recently in 1998, with the chief aim ofstrengthening the power of the executive vis-à-vis the legislature. Congress�spower to impeach ministers was removed, and mid-term elections wereabolished (see Recent political developments). However, the leaders ofpowerful blocs have shown that they are still able to weaken the government.
The election of deputies to the unicameral Congress for four-year terms takesplace at the same time as the presidential election, on the third Sunday ofOctober of the electoral year. The number of deputies in Congress has fluctuated inrecent years, expanded by the 1998 constitutional reforms from 82 to 121 members.and again in 1999, to 123 members, following the creation of a new province,Orellana. An electoral reform passed in March 2000, reduced the number ofdeputies in Congress to 100, starting from the congressional election in 2002.Representation is geographically based and deputies are elected from open lists.The most heavily populated provinces, Guayas and Pichincha, elect 18 and 14deputies to the chamber respectively. Nevertheless, the sparsely populatedprovinces of the Oriente (6 out of 22) are over-represented and congressmenfrom these areas need far fewer votes to be elected. The PSP used this to itsadvantage to perform strongly in the Oriente (Mr Gutiérrez�s home region) inthe 2002 elections. Parties that do not reach a threshold of 5% of the popularvote in two consecutive national elections are deprived of their party statusand banned from contesting future elections by the Supreme Electoral Tribunal.Independents have been allowed to run for Congress and other official positionssince 1996. Their number has grown in recent years.
There are 221 municipalities in Ecuador, but new ones are constantly beingcreated, normally as political favours to local notables who want to gain morefunding and powers. Congress takes office on January 5th of the year after it iselected, and the largest party bloc has the right to choose a president or speakerfor the first two years of the congress. In January 2003 the PSC, the largestparty, ceded its right to choose a president to the second largest party, ID. Thepresident of Congress has considerable power over legislation: he can call
extraordinary congressional sessions and determine the agenda for discussionand is an intermediary between the executive and the legislature.
Ecuador�s judicial and regulatory bodies have traditionally been highly pol-iticised. Congress appoints officials to the Supreme Electoral Tribunal and theSupreme Constitutional Court, as well as appointing the banking and companysuperintendents, the attorney-general and the comptroller-general. Following itsown inauguration, Congress chose the new members of these courts in January2003. In 1997 an attempt was made to depoliticise the Supreme Court, whichhad previously been appointed by Congress. In that year Congress selected 31new judges from a shortlist prepared by a commission, based on nominationsfrom 12 electoral colleges representing different civic groups and individuals.The court selects its own members upon the death or retirement of itsmembers. Judges still tend to serve the interests of the parties that selectedthem, with centre-left parties predominating. The Supreme Court hasresponsibility for appointing judges to the provincial superior courts.
The flawed political culture has impaired the quality of policymaking andlegislation. For example, the strong influence of interest groups hamperedefforts to deal effectively with the banking crisis by preventing the governmentfrom recovering most of the bad loans in the collapsed banks from beingrecovered (see Economic sectors: Financial services). Cronyism has led to aseries of corruption scandals over the past few years. The influence of themilitary over some policy areas, such as the oil industry, waned during the1990s, but received a boost when Mr Gutiérrez put former middle-rankingofficers in a number of important ministerial and administrative posts. Rivalrybetween the highlands and the coast remains intense, hampering the formationof consensus on important issues.
Political forces
Ecuador�s largest political parties in terms of congressional representation arethe centre-right PSC, the PRE and the centre-left Izquierda Democrática (ID). Allhave held power at some time since the transition to democracy in 1979.
Composition of Congress, Mar 2003No. of seats
Partido Social Cristiano (PSC) 25Izquierda Democrática (ID) 16Partido Roldosista Ecuatoriano (PRE) 14
Independents 10Partido Renovador Institucional Acción Nacional (PRIAN) 10
Movimiento Unidad Plurinacional Pachakútik �Nuevo País (MUPP-NP) 7Partido Sociedad Patriótica 21 de Enero (PSP) 7Movimiento Popular Democrático (MPD) 6
The PSC was founded in the 1950s in Quito by a group of upper-middle-classRoman Catholics, but is now identified with the coastal area around Guayaquil.The reformist agenda espoused by the party in the past, as in 1996 when JaimeNebot ran for president, has been superseded by stronger regionalist andclientelistic considerations. The party staunchly defends the interests of thecoastal private sector and opposes higher taxes. The elderly former president(1984-88) and former mayor of Guayaquil, León Febrés Cordero, continues to bea powerful influence in the party, but lacks an obvious successor. His protégéand former PSC congressional leader, Mr Nebot, became the mayor ofGuayaquil in 2000 when Mr Febrés Cordero decided to stand down ongrounds of poor health.
The populist PRE was founded in memory of a former president, Jaime Roldós,who was killed in a plane crash in 1981. Support for the party is strongest onthe coast, where it vies with the PSC and PRIAN for dominance, and inmarginal urban and rural areas. The party was discredited by the briefpresidency of Mr Bucaram in 1996-97, and by the disastrous tenure of CarlosJulio Emanuel as finance minister in 2001-02 (see Recent politicaldevelopments). The party continues to be led by Mr Bucaram from exile. Itspends much of its energies lobbying for his return, and appears to have littleinterest in serious policymaking.
The DP used to be the natural party of the highland middle classes. Formerly arelatively small and compact organisation controlled by a clique of Quitointellectuals gathered around a former president, Oswaldo Hurtado (1981-84), itgreatly increased its representation in Congress at the 1998 general election onthe back of a wave of support for Jamil Mahuad. His downfall as presidentamid corruption scandals caused the party to fragment. The rump of the DPstill in Congress now houses Mahuad loyalists, while the others have left.Mr Hurtado, in a bid to revive the original intellectual principles of the DP, setup the Patria Solidaria (PS) in early 2002, but it won only one seat in the 2002-06 Congress.
The ID, founded in 1970, is centre-left, with a moderate reformist wing and amore radical element. Presided over by a former president, Rodrigo Borja (1988-92), the ID tends to favour higher taxes for the wealthy, and to oppose public-sector job losses and privatisation. The ID-controlled administration inPichincha (the province surrounding Quito) blocked the privatisation of theregional electricity distributor in 2002. After the PSC, as the largest party inCongress, relinquished its prerogative of choosing the speaker of Congress, thispost was taken by the former congressional leader of ID, Guillermo Landázuri.
The Movimiento Unidad Plurinacional Pachakútik is the descendant of theumbrella group of indigenous organisations, social movements and tradeunions formed in 1996 that achieved immediate electoral success, winningseveral seats in Congress. Pachakútik rejects privatisation and opposesdollarisation on ideological grounds, but has appeared to moderate its policiessince winning a number of cabinet posts in the Gutiérrez administration.Although by no means exclusively indigenous, it remains the principalcongressional vehicle for indigenous groups represented in Conaie, theConfederation of Ecuadorian Indigenous Nationalities. This grass-roots
movement, which demonstrated its power in the January 2000 coup, continuesto lobby the government from outside Congress, using the threat of a return tomass protest as leverage. The group�s membership is divided over the extent towhich it should become involved in electoral politics, and disputes betweenhighland indigenous groups and the Amazonian minority have weakened it.
The Tribunal Supremo Electoral (the Supreme Electoral Tribunal or TSE, thebody overseeing elections) granted Alvaro Noboa a franchise to establish hisown personal political party, called PRIAN (the Institutional Renewal Party), tosupport its founder�s second bid for the presidency in 2002. An electoral veh-icle, the party does not have deep roots, raising support during the presidentialcampaign via populist gestures. Like its founder, PRIAN has not presented acoherent ideological position and is likely to act in an opportunist fashion inthe 2002-06 Congress. PRIAN obtained the presidency of the TSE in 2002.
The Partido Sociedad Patriótica 21 de Enero (PSP) was founded by LucioGutiérrez as a vehicle for his electoral bid and is dominated by his former armycolleagues. In addition, three of the PSP�s ten congressional representatives areGutiérrez relatives. The PSP has not espoused a particular ideology, although itis broadly motivated by the desire to promote social justice and eliminatecorruption. The party is trying to build up a popular base and its presence instate institutions. It is stronger in the highlands and in the Oriente than on thecoast, but it is not regionally exclusive.
The military plays an important political role behind the scenes, especially intimes of political instability. In February 1997 it helped negotiate the agreementthat brought a swift end to the constitutional crisis following the ousting ofMr Bucaram. Most people believe that the military is less corrupt than civilianpoliticians, business or the unions, although this image has been dented byrecent scandals. The military also commands respect among the populationowing to its role in providing education, infrastructure and healthcare facilitiesin marginal rural communities, especially in the Amazon region, during theyears of military rule. However, the military�s role as a guarantor of stabilitywas compromised by its involvement in the January 2000 quasi-coup. Soldierswere aggrieved at the mismanagement and corruption scandals of the 1990s,and some had become sympathetic to radical indigenous movements. Many ofthe mostly junior officers who supported the coup were removed in 2000,among them Lucio Gutiérrez and former army colleagues who have taken upimportant posts in the administration. Mr Gutiérrez sacked many of the mostsenior officers in the army and navy as one of his first acts as president,promoting officers sympathetic to his own views. The president continues toidentify strongly with the military and may seek to involve it more in civilianlife, for example by increasing its involvement in domestic security.
Main political figures
Lucio Gutiérrez
The son of a riverboat trader from the Amazon region, Mr Gutiérrez becamepresident in 2002 without having held any previous political office. In the army, hereached the rank of colonel and gained civil engineering qualifications from the
military academy, where he came under the influence of a previous generation ofnationalist army officers. He later served in military intelligence, before hisparticipation in the January 2000 coup led to his dismissal. At 46, he is younger andhas a better rapport with the population than any of his immediate predecessors.Having come to power on a left-wing political platform, and in alliance with radicalindigenous groups, Mr Gutiérrez�s sudden adoption of a pro-US foreign policy stanceand an orthodox economic strategy have revealed him to be a pragmatist. But hisdecision to appoint numerous relatives and former army colleagues to importantpositions has generated severe criticism. Some believe his military background couldlead him to favour authoritarian solutions if the tide turns against him, but given theopposition this would arouse from abroad, this seems unlikely.
Mauricio Pozo
Mr Pozo is one of the most respected economic analysts in Ecuador, and perhaps thesecond most important figure in the government after Mr Gutiérrez. He has noformal political affiliation. Trained in the US, he worked for the Banco Central delEcuador (BCE, the Central Bank) and commercial banks in Quito, before setting uphis own consultancy. He holds orthodox views on economic policy. Financeministers have tended to suffer a short life-span in Ecuador owing to politicalpressures and corruption scandals (four came and went during Gustavo Noboa�sterm of less than three years). Mr Pozo has a good chance of an extended stay in thejob, provided Mr Gutiérrez continues to back the current policy direction and thegovernment sticks to its IMF agreement.
Alvaro Noboa
Mr Noboa (no relation of the former president, Gustavo Noboa) is a leadingbusinessman, whose family firm is Ecuador�s largest banana exporter and apowerful conglomerate. He narrowly lost the presidential election of 1998 as thecandidate of the Partido Roldosista Ecuatoriano (PRE) and he reached the secondround again in 2002 on a vague populist platform, leading his own party, the PRIAN(the Institutional Renewal Party). Mr Noboa has almost unlimited resources forcampaigning and is likely to make another bid for the presidency in the nextelections in 2006. He vastly exceeded legal campaign spending limits in 2002 butsince PRIAN holds the presidency of the Supreme Electoral Tribunal, he willprobably escape being penalised.
Jaime Nebot
A major figure in the Partido Social Cristiano (PSC), Mr Nebot was runner-up in hissecond attempt to win the presidency in 1996 and disappointed his party by refusingto run in 1998. A protégé of a former president, León Febrés Cordero, Mr Nebot wasthe leader of the powerful PSC congressional bloc until May 2000, when he stooddown to assume his new post as mayor of Guayaquil. Mr Nebot will continue to bea prominent political player because of his influence in the PSC. Single-minded andstubborn, he has little patience with consensus-building.
León Febrés Cordero
At 72 years old, and suffering from a range of illnesses, the former president (1984-88)remains one of the most powerful politicians in the country and the de facto leaderof the country�s largest political party, the PSC. He won a congressional seat in the
2002 elections. He is especially popular in Guayaquil, where he was mayor forseveral years before retiring in 2000.
Abdalá Bucaram
The exiled former president (1996-97) remains a potent force in Ecuadorian politicsand would dearly like to make a comeback. Given the continued attractions ofpopulism for many disillusioned voters, particularly poor rural-to-urban migrants onthe Pacific coast, his party, the PRE, could well gather support.
Rodrigo Borja
The 68-year-old former president (1988-92) and leader of Izquierda Democrática (ID)is one of the most popular politicians in the Andean highlands, where he is regardedas capable and relatively honest, but he enjoys little support on the coast.
International relations and defence
A permanent peace agreement, signed in October 1998, brought to an end afive-decade border dispute with Peru which had led to war in 1941 and again�briefly�in 1995. As a result, relations with Peru have been normalised and tradehas grown rapidly in recent years. Since then Ecuador has had to switchattention, and defence resources, northwards to cope with a new securitythreat, incursions by guerrillas across the Colombian border. Relations with theUS are generally good. The US president, George W Bush, invited Mr Gutiérrezto Washington shortly after his inauguration, and bestowed an unusualamount of attention on him. The US is keen to cultivate strong ties and secureEcuador�s co-operation in containing the regional threat posed by Colombianguerrillas and the illegal drug trade. The US military has modernised an airbaseat Manta, which it uses for anti-drug surveillance operations. This is the causeof some domestic unease, with critics of the arrangement fearful that the basecould be used for military action against Colombian guerrillas, potentiallyimplicating Ecuador in the Colombian conflict. Ecuador maintains a neutralstance on Cuba.
Security risk in Ecuador
Armed conflict
Until the signing of a peace treaty in 1998, Peru represented Ecuador�s one serious external threat. Decades of tensionbetween the two nations over the demarcation of an 80-km stretch of the border led to a brief war in early 1995, in whichEcuador gained the upper hand. The treaty appears to have ended the conflict permanently. Since then, crossborder tradehas increased, although a lack of funds on both sides is likely to prevent infrastructure and other economic partnershipprojects�conceived as a way of cementing the peace�from being carried out fully.
Politically motivated armed insurgency originating within Ecuador itself has not been a serious problem for over a decade,especially when compared with the situation in Colombia. The main trouble spot is the northern border area, which haswitnessed an upsurge in criminal activity in the past few years. Since the start of 2000 hundreds of farmers along theborder have reported being forced off their land by gunmen. The northern Amazon region, centred on the town of LagoAgrio, is home to Ecuador�s main oilfields, and criminal groups have frequently targeted oil companies for extortion andkidnapping. As a result, the UK Foreign and Commonwealth Office currently advises against all travel to the zone borderingColombia (especially Sucumbios province), listing it among the world�s most risky areas.
Some of this criminal activity has been linked to the movement of Colombian guerrillas across the border, a problem thathas arisen comparatively recently to become the most serious security issue now facing Ecuador. Plan Colombia, a US-funded programme to eradicate drug crops in southern Colombia, has increased pressure on the Fuerzas ArmadasRevolucionarias de Colombia (FARC) rebels, and has led to more frequent incursions by the guerrillas into Ecuador. FARCcamps have been discovered within Ecuadorian territory, and the military has occasionally clashed with guerrillas. In May2001 the government announced a Citizen Security Plan, including the launch of joint military-police patrols, in response toescalating reports of intimidation of local residents by Colombian guerrillas and paramilitaries. Many Ecuadorians fear thatthe country could become dragged into the conflict itself, or that the state or armed forces could become a direct target forColombian guerrillas.
The government is anxious to bring the security situation under control, as it poses a serious risk to the development of theoil industry. A series of bomb attacks on the Trans-Ecuadorian Pipeline, or Sistema del Oleoducto TransEcuatoriano(SOTE) at end-2000 were never decisively attributed to guerrillas, or other criminal elements, but a repeat of such incidents,directed at the new Oleoducto de Crudos Pesados (OCP, heavy crude oil pipeline) from the Amazon region to the coast,could prove extremely damaging. Oil companies operating in the Amazon region also work under the threat of kidnap byarmed gangs, some of them based in Colombia.
Unrest and demonstrations
Economic dislocation and weak government have fostered a fragile sociopolitical climate in Ecuador. The radicalisation ofsections of the poor, indigenous minority has worsened the situation. Mass demonstrations, centred on Quito, broughtdown governments in 1997 and 2000. The inclusion of the political wing of the main indigenous organisation, Conaie, inMr Gutiérrez�s coalition, may neutralise this threat in the future. While foreign businesses have not been specificallytargeted in these protests, privatisation is unpopular and there is a degree of hostility to foreign capital.
Violent crime
Economic collapse in 1999 stimulated a rise in petty crime such as robbery, particularly in Guayaquil and Quito. Police arepoorly paid and trained. The murder rate is lower�and levels of personal safety slightly better�than in neighbouringcountries, but the gap is narrowing. Officials say that the number of reported crimes increased by 66% between 1995 and2000. In a survey carried out by Cedatos, a local polling organisation, in 2001, 67% of respondents said that they felt lesssecure than in the previous year and 80% felt that crime was on the rise. Local mafias are believed to have considerablepower in Ecuador, based on the drug trade�although Ecuador is only a marginal drug producer�and contraband.
Organised crime
Overall, the threat of organised crime to business, apart from the risks posed by criminal or guerrilla gangs to the oilindustry, is manageable. Corruption in the bureaucracy poses more problems for business than organised crime.
Kidnapping and extortion
The oil industry, which represents the bulk of foreign investment in Ecuador, faces the greatest risk of extortion andkidnapping. This type of crime has become increasingly prevalent, especially in the northern border region. Ten foreignworkers contracted by Repsol-YPF of Spain were kidnapped in October 2000, and one was murdered. Nineteen instancesof kidnapping, directed against local farmers as well as oil workers, were reported in January-July 2001, representing asignificant increase on the previous year. In October 2002 a UK oil worker employed by Techint, a member of theconsortium building the new pipeline, was kidnapped and later murdered in the province of Napo. Kidnappings are notjust carried out by criminals or rebel groups, or for financial gain�several workers from an Argentinian oil company,Compañia General de Combustibles, were kidnapped by Achuar Indians in December 2002, in a bid to stop the companyfrom prospecting for oil in Block 23. Kidnappings by gangs in urban areas, once rare, are also on the rise.
Preliminary results of the census carried out in November 2001 show thatpopulation growth has fallen short of national and UN projections based onthe 1990 census. The population count revealed by the new census was 12.1m,compared with a previous estimate of 12.9m. The Instituto Nacional deEstadística y Censos (INEC, national statistics institute) said that populationgrowth slowed to an average of 2% in the 1990s, compared with 2.2% in the1980s and 2.6% in the 1970s. The main reasons were increased use of familyplanning, greater participation of women in the labour force, and mostimportantly, the impact of mass emigration in the late 1990s.
Full data on emigration from the 2001 census are not yet available, but smallerstudies have been carried out by INEC. These confirm that emigrationaccelerated from 1998, as the economic crisis deepened. At least 200,000 peopleare estimated to have left the country between 1998 and 2000. Before 1995some 65% of migrants headed for the US. Since then, Spain has become theprimary destination, attracting over one-half of all migrants, with Italy hostinganother significant share. Many work illegally, but efforts have been made toformalise their status. By May 2001 the number of formally registeredEcuadorians in Spain had risen to over 124,000. Traditionally, the majority ofemigrants came from the highlands, but the pattern is changing, with morecoming from the coast in recent years. Emigrants are typically city-dwellersimpoverished by the economic crisis of the late 1990s. They are usuallyemployed, but leave in pursuit of higher wages. Many have left dependants inthe country; if they join their relatives overseas, emigration will continue torise, but growth in remittances to Ecuador, now the second largest source offoreign currency, may taper off.
Urbanisation has increased rapidly in the past two decades, although it remainsmoderate by regional standards. The 2001 census showed that the urbanpopulation accounted for 61% of the total, with the remaining 39% living inrural areas. The fastest population growth has taken place in the GalapagosIslands, as migrants have sought opportunities in the tourism and fishingsectors. The coast remains slightly more densely populated than the highlands.The three principal cities, Quito, Guayaquil and Cuenca, accounted for analmost constant 30% of the total population for most of the 1980s and 1990s. Arelative increase in the urban population is attributable to migration towardsmajor secondary cities such as Loja, Santo Domingo and Machala, a trend thatis expected to continue. Predominantly young, 33.8% of the population wasaged 0-14 years in 2000. Despite improvements since the 1970s, socialindicators remain among the poorest in the region.
By regionCoast 49.8Highlands 44.9Amazon 4.5Galapagos & others 0.8
By age profile0-14 33.315-64 61.965+ 4.8
Source: Instituto Nacional de Estadística y Censos (INEC), November 2001 census.
The formal economy employs just over one-half of the workforce, a share thatfell slightly during the 1990s. Around 70% of workers are employed in theservices sector, and this proportion has risen at the expense of manufacturingand primary-sector employment. The proportion of skilled workers in thelabour force has also increased. The recession of 1998-99 caused heavy joblosses in construction, agro-industry, commerce, manufacturing and financialservices, although these were partly reversed in 2000-01. The Ministry ofEconomy and Finance estimated the total number employed by the publicsector at around 279,000 in 2003, an increase of 6,000 on 2001.
A growth spurt triggered by trade and financial liberalisation helped to reduceinequality in the first half of the 1990s. However, the economic crisis, and thegrowing disparities between the earning capabilities of skilled and unskilledworkers, worsened income inequalities in the latter half of the decade. By2000, according to a study by INEC, the richest 10% of the population received45% of total income. The finance ministry estimated at the beginning of 2003that the proportion of citizens living below the statistical poverty line was 51%,up from 34% in a survey by INEC from 1995. Extreme poverty (defined as theinability to afford a stripped-down basic basket of goods) is estimated at 25%, aproportion the government aims to cut to 10% by 2007. Moreover, the shortfallin terms of purchasing power, measured as a proportion of national output,doubled to around 8% of GDP by 1999 (partly because of the exchange-rate-induced collapse in US dollar GDP).
In general terms, the highlands are poorer than the coast, while the incidenceof poverty is higher in rural areas than in the cities. The economic recovery in2000-01 reduced unemployment, but minimum-wage adjustments have notbeen sufficiently generous to redress the losses sustained during the crisis.Unions have lost influence over the past decade, and by 2002 had only 54,000registered members. They exert most influence in the oil and state sectors.
Life expectancy and mortality indicators1980 2000
Life expectancy at birth (years)Chile 69 76Venezuela 68 73Colombia 66 72Ecuador 63 70Peru 60 69
Infant mortality rate (deaths per 1,000 live births)Chile 32 10Venezuela 36 19Colombia 41 20Ecuador 74 28Peru 81 32
Source: World Bank, World Development Indicators, 2002.
Ecuador is ethnically diverse. Indigenous people account for around one-quarter of the population, according to estimates from the Confederación deNacionalidades Indígenas del Ecuador (Conaie, the Confederation ofEcuadorian Indigenous Nationalities). But definitions are fluid, and only 6.8% ofthe population reported itself as indigenous in the November 2001 census.Highland Quichua form the vast majority of this group, with smallerindigenous populations in the Amazon and coastal regions. The mestizo (mixedrace) population includes the descendants of foreign immigrants whointermarried with indigenous people. These immigrants included colonistsfrom Spain and other European settlers; Arabs, especially those from theLebanon, who arrived at the beginning of the 20th century and who form aneconomically and politically powerful community on the coast; and imm-igrants from China and from other countries in Latin America, in particular,from neighbouring Colombia. Two areas in northern Ecuador�around the portof Esmeraldas and in the Chota valley near the border with Colombia�have amainly black population, comprising the descendants of slaves of Africanorigin, numbering up to 500,000.
Education
Since the 1970s successive governments have sought to reduce illiteracy and toincrease the country�s number of trained professionals through the provision offree education. The illiteracy rate has fallen, although it remains high in olderage groups and among disadvantaged communities. Advances were madeduring the oil boom in the 1970s, but since the early 1980s state resources foreducation have been squeezed. Education accounted for 12.5% of governmentspending in 1995-98, but this fell to an average of 7.7% between 1998 and 2002.The 2003 budget allotted education spending 7.7% of the total, or 2.7% of GDP.Only a small proportion of the population can afford private education, whichis concentrated in urban areas at secondary and university levels. Poor healthand nutrition, a lack of transport and materials, and antiquated teacher-trainingmethods compound the problems, leading to high drop-out rates. Teachers areunderpaid and strikes cause repeated disruption.
Educational opportunities and achievement diverge sharply between rural andurban areas. In 2001 the average Ecuadorian over the age of 24 years in anurban area had received just over nine years of education; in the countryside,the average was below five years. Just under 30% of the population as a wholeabove 18 years of age have completed secondary school. Indigenous groupshave, on average, two years of schooling, with illiteracy rates of 40-50%.
In tertiary education, there has been a rapid rise in the number of institutions,pupils and teachers since the 1970s. There are as many as 57 universities andpolytechnics, of which 27 are public, 21 are private and the remainder draw ona mixture of public and private funds. A policy of free entry to stateuniversities, combined with budget cuts, has inevitably led to a decline inquality. Most university courses are directed towards training professionals forthe services sector and government administration, rather than for industry.
Health
Life expectancy in Ecuador is almost exactly the Latin American average, butthe country ranked 93rd out of 173 countries in the 2002 edition of the UNDevelopment Programme�s Human Development Index, over 20 places belowVenezuela and Colombia and 11 places behind Peru. According to the WorldBank, Ecuador had one of the lowest levels of expenditure on healthcare inLatin America in 1990-95�2% of GDP annually�compared with 4.3% inArgentina and 6.3% in Costa Rica. Central government expenditure onhealthcare dropped below 1% of GDP in the latter half of the 1990s, reaching alow of 0.6% of GDP in 1999. In the 2003 budget the proportion spent on healthrose to 1.1% of GDP.
Limited funding has been compounded by poor targeting, and a lack of co-ordination between different state agencies. State hospitals are run by theMinisterio de Salud Pública (MSP, the Ministry of Health) and the InstitutoEcuatoriano de Seguridad Social (IESS, the Ecuadorian Social Security Institute),with some sizeable voluntary organisations in Guayaquil. The poorest generallyreceive least benefit from state health spending, because of a lack of coverage,with around 23% of the population having no access to public healthcare.Barely 20% of the population, mostly state employees, are affiliated to aninsurance scheme. Most of the health budget is spent on salaries, yet in the late1990s conditions within public hospitals deteriorated and the value of healthprofessionals� wages was drastically eroded.
Up to 5,000 doctors and nurses left the country in the late 1990s, but they havebegun to return as the gap in standards of living between Ecuador andArgentina (and other host countries) has narrowed. There is a relatively highincidence of diseases related to inadequate nutrition and poor sanitation andhousing, especially in marginal urban and rural areas. Piped public water andsanitation reach less than half of the population. Urbanisation and the shift ofemployment towards more sedentary, office-based activities have also led to anincrease in those illnesses more prevalent in developed countries, such as heartdisease.
Natural resources and the environment
Ecuador covers a total area of 276,840 sq km and includes the Galapagos arch-ipelago, 1,552 km off the coast of Manabí province. The mainland falls into threeregions: the western coastal plain, the central highland corridor of volcanoes,and the eastern rainforest of the Amazon basin, known as the Oriente. Owing
to the country�s equatorial location, there are no extreme variations in climateduring the year. There are about 12 hours of daylight all year round. On thecoast the rainy season lasts from January to May, while the rest of the year isdry. In the highlands the rainy season lasts from October to June. Rainfall isheavier throughout the year in the Amazon basin. Around 78% of the country istropical or subtropical, while 20% is temperate. There are 23 different micro-climates, resulting in great biodiversity. The alluvial soils of the coast and theOriente are the most fertile and can support a wide range of crops.
Ecuador is prone to natural disasters: extremely heavy rains are occasionallyprovoked on the coast and in the highlands by the El Niño weather pattern,which occurred most recently in 1998, washing out roads and destroying crops.The country is also home to many active volcanoes. A minor eruption by theGuagua Pichincha volcano in 1999 blanketed nearby Quito with ash and forcedthe closure of the airport for several days. Earthquakes of varying severityoccur frequently both on the coast and in the highlands. A major quake causedextensive damage to Quito in 1987.
Ecuador is predominantly agricultural. Around 8.29m ha of land have the pot-ential for agricultural use, of which 74% lie in tropical and subtropical zones.Climatic diversity facilitates the cultivation of a wide variety of crops. Inlandrivers, lakes and the long coast provide an abundance of fish and seafood. Fresh-water shrimp production for export expanded rapidly in the 1990s, especially inthe Gulf of Guayaquil and in the provinces of Esmeraldas and Manabí, beforethe industry was ravaged by the white spot and yellow head viruses in 1999-2000. However, the industry has developed at the expense of the environment,with mangrove habitats being cleared to make way for shrimp farms.
Ecuador is considered one of the world�s richest centres of biodiversity. With0.2% of the world�s surface, it holds 10% of all plant species and 18% of birdspecies. However, the destruction of natural ecosystems is threatening thiswealth and diversity. There are regulations intended to protect the envir-onment�a total of 26 designated ecological reserves and national parks cover18% of the country�s land area�but the technical capacity, personnel andpolitical will necessary to implement the rules have been lacking. Control andoversight is dispersed among a number of organisations. The government isexpected to receive more international help to preserve the Galapagos Islands,the most ecologically valuable portion of Ecuadorian territory. The islands areunder threat from an increase in their population; their vulnerability wasfurther highlighted by an oil spill from an Ecuadorian tanker in January 2001.The ecology of the marine reserve, which stretches for 40 miles around thearchipelago, covering an area similar to the size of the Ecuadorian landmassitself, is also under attack from illegal fishing, often by foreign vessels.
Transport, communications and the Internet
Most transport in Ecuador is by road. However, with the exception of the low-lands around Guayaquil, where a huge donor-financed reconstruction pro-gramme took place following the flood damage caused by El Niño in 1997-98,
most of the road network is in poor condition, owing to years ofunderinvestment, and constitutes a drag on business activity. At the end of2002, the Asociación de Empresas Automotrices del Ecuador (the nationalmotor industry association, Aede) estimated the number of vehicles incirculation at 866,000, up from 563,523 in 1998. Vehicle purchases soared in2000-01, creating more congestion on the roads, as consumers sought a hedgeagainst inflation that did not involve entrusting their savings to the financialsector. The constitutional reforms of 1998 permitted the government to transferresponsibility for the provision of public services, including potable water,electricity, telecommunications, roads and ports, to the private sector, throughconcessions or the sale of partial stakes in state-run enterprises. The Ministry ofPublic Works and the local authorities in Guayas and Pichincha have so farconcessioned 1,219 km of roads to the private sector.
The railway system, built at the turn of the 19th century, is now almostderelict, and track and rolling stock are in urgent need of modernisation. A fewtourist trains still run on the main railway line between Riobamba and thecoast, but services are irregular. The Consejo Nacional de Modernización delEstado (Conam, the state modernisation body) plans to wind up the staterailway company, which receives a state subsidy of around US$8m per year,and seek private purchasers or subcontractors.
Ecuador�s two main airports are at Quito and Guayaquil. Although they wereoriginally built outside the cities, urban expansion in recent decades hasbrought them close to the city centres. Besides constraining their capacity, thishas raised safety concerns. In March 2000 Congress granted responsibility forthe tender process for the construction of new airports to the cities� respectivemunicipalities. In Quito, a local development company, Corpaq, was formed bythe municipality to oversee the bidding and award contracts. In November2002 a private consortium of Canadian and US airport developmentcontractors, Quiport, was granted a 35-year concession to operate the existingMariscal Sucre airport and, more importantly, to build a new airport 25 kmoutside Quito at Puembo which will replace it in mid-2007. Plans are lessadvanced at Guayaquil airport, although it is undergoing some modernisation,allowing more cargo to be transported.
Ecuador�s civil aviation industry is in a poor state, and suffers from a patchysafety record. In its survey of international compliance with the safety andregulatory requirements of the International Civil Aviation Organisation, theUS Federal Aviation Administration rates Ecuador as falling short of therequired standards (Category 2). This prevents new Ecuadorian carriers fromflying to the US. The air force retains influence over civil aviation, and ownsTAME, the only fully operational national airline. Its aging fleet operatesinternally and serves destinations in Latin America, but does not fly to the US.Ecuatoriana, the former state airline, was part-privatised in 1995 but is non-operational. Its routes are currently being operated by the Chilean airline LAN-Chile, but could be taken over permanently by another foreign carrier.
Ecuador has four main ports. Guayaquil handles 65% of all traffic, followed inimportance by Puerto Bolívar, which is the main gateway for banana exports.Esmeraldas, Manta and Bolívar. Two additional ports, at Balao and La Libertad,
are equipped to accommodate oil tankers. Manta mainly exports coffee andcocoa, and Esmeraldas is the main oil terminal. As with other sectors,modernisation has been held back by delays in passing legislation to enable thesubcontracting of port services to the private sector. Conam plans to awardconcessions to run the ports of Manta and Esmeraldas. Seven firms pre-qualified to bid for Esmeraldas in 2002 but so far no award has been made. Thegovernment has also made efforts in 2003 to tighten state control over customs.The Ecuadorian Customs Corporation (CAE) has been reformed, to reduceprivate-sector influence over its management, which had encouraged evasion.
Ecuador had 11.6 fixed telephone lines per 100 inhabitants as of March 2003,just over one-half of the Latin American average of 20. Services are concen-trated in urban areas Attempts to privatise the state telecoms companies,Andinatel and Pacifictel, which operate services in the highlands and coastalregion (another state-owned firm, Etapa, serves the third city of Cuenca)respectively began in 1992. Opposition from interest groups and a lack ofpolitical will initially led to delays, and two attempts to sell off a 35% stake inthe companies failed in 1997-98. The privatisation law was subsequentlyreformed in 2000 to allow the government to offer 51% of both firms, but noprivatisations took place under the Noboa government. Under the IMF stand-byagreement signed in February 2003, the government committed to puttingtelecoms and electricity distributors under private administration by June 2003.Allowing for inevitable delays, this could take place by the end of 2003. Whilethis will attract less private investment than an outright sale would have done,the management of the companies should improve.
The number of mobile users has grown rapidly in the past few years, to reach1,671,000 by March 2003, or around 13 mobile connections per 100 people. Thenumber of subscribers grew by 82% alone during 2002, according to theSuperintendencia de Telecomunicaciones, the body overseeing the sector. Thereare two main foreign-backed consortia operating mobile services, Porta andBellSouth. The government awarded a third mobile phone licence in February2003 to Andinatel. That the required investment will not be coming fromprivate sector is not an optimal result, but the entry of a new competitor shouldhelp to reduce cellular phone charges, which are high by Latin Americanstandards. The recent opening up of the wireless local loop (WLL) promises toreduce the costs of increasing coverage of households.
Telecoms infrastructure is one factor holding back the development of e-commerce in the country. However, prospects have improved since a law tofacilitate e-commerce, the Ley de Comercio Electrónico (electronic commercelaw), came into force in April 2002. A lobby group representing e-commerceentrepreneurs in Ecuador�Corpece (with a website at www.corpece.org.ec)�collaborated in the drafting of the bill. The law allows for electronic signaturesand provides a legal basis for e-commerce transactions. Access to the Internet inEcuador is widening, although it remains restricted. The telecoms super-intendency (Superintendencia de Telecomunicaciones, or Supertel) counted justover 103,000 corporate and individual Internet access accounts in January2003, and estimated that there were almost 330,000 Internet users, out of a
population of 12.1m. Several virtual business-to-business (B2B) marketplaceshave been established, serving specific industries, such as cut-flower exporters.
Telecommunications and IT indicators, 2002(per 100 people unless otherwise indicated)
Argentina Brazil Colombia Ecuador PeruNo. of fixed telephone lines 19.8 20.59 17.51 11.76 7.65
No. of mobile phone subscribers 16.05 19.35 10.11 9.94 8.83Estimated no. of PCs per 1,000
people. 79.26 84.27 67.13 24.52 44.78
Source: Economist Intelligence Unit, CountryIndicators.
The dominant news medium in Ecuador is television, followed by radio. Thetwo largest commercial television stations are Gamavisión and Ecuavisa.Supertel reported that there were 94,000 cable-TV subscribers in 2003.Broadcasting is regulated by the Consejo Nacional de Radiodifusión yTelevisión (Conartel). There are several daily national and local newspapers,but they reach far fewer people�the leading newspaper in Quito, El Comercio,has an accredited circulation of around 160,000. The influence of powerfulproprietors over media output is pronounced.
Energy provision
Ecuador has abundant hydroelectric power generation potential. The country isdependent for around 65% of its electricity on the Paute hydroelectric plant, butlow rainfall, inadequate water storage and the accumulation of silt as a result ofdeforestation have reduced generating capacity. In severe dry seasons, gener-ation can drop by 50%. During the mid-1990s, Ecuador often endured extendedblackouts, but the situation has improved in recent years If economic recoveryis sustained, the power infrastructure will be strained. The contribution ofthermal stations has declined markedly in recent years, owing to poor main-tenance and a lack of investment in new technology.
The government awarded a contract for the Mazar dam project to a Spanishconsortium, ACS-Omegaport, before this was annulled and the contract wasawarded instead to the state firm which runs Paute, Hidropaute. Locatedseveral kilometres upstream from Paute, Mazar will be used as a secondarywater-collection basin, both to provide Paute with the required flow duringthe dry season and to allow the dredging of sediment. Mazar should prolongthe useful life of the Paute dam and generate around 186 mw in its ownright, but it will take several years to build. A two-way transmission lineconnecting Ecuador to the Colombian national electricity grid enteredservice in March 2003. This will top up supplies of power during the dryseason when the contribution of hydroelectric power stations falls, at lesscost than building the equivalent amount of thermal capacity.
Successive governments have failed to attract private investment intoelectricity distribution. The 17 distributors are highly indebted and have apoor record of paying generating companies. However, privatisation planscollapsed in March and April 2002, as municipal and provincial
governments refused to release their stakes and grass-roots organisationsthreatened large-scale protests. The auction of Emelec, the company servingGuayaquil, which was formerly owned by the disgraced owner of the Bancodel Progreso, also failed in May 2002, in a further blow to hopes of attractingnew investment to the sector. The IMF stand-by agreement commits thegovernment to hire private-sector managers for the state electricity distributioncompanies by the end of June 2003.
Ecuador has the refining capacity to process only around 20% of the natural gasproduced in the Oriente oilfields and imports are necessary to meet about 50%of national demand. Most gas consumption is in the form of imported liquefiedpetroleum gas (LPG). The existing national network of ducts transporting gasand other derivatives is 1,300 km long, but there are plans to increase this to2,000 km. In 2000 work also began on the extraction of offshore natural gasfrom the Gulf of Guayaquil. EDC Ecuador, a subsidiary of US Noble Affiliates,is constructing a gas-fired power station using gas piped from the field.
The economy
Economic structure
Main economic indicators, 2002
Real GDP growth (%) 3.4Consumer price inflation (av; %) 12.5
Current-account balance (US$ m) -1,222.0Population (m) 12.4
External debt (year-end; US$ m) 14,149
Source: Economist Intelligence Unit, CountryData.
The Banco Central del Ecuador (BCE, the Central Bank) completed a revision ofits national accounts data in 2002. The national accounts data are nowdenominated in US dollars and the base year has been updated from 1975 to2000, giving a more accurate picture of the current structure of the economy.Oil and export agriculture are still the main pillars of the Ecuadorian economy.During 1998-2002, agriculture, forestry and fishing accounted on average for10.8% of GDP and primary agricultural exports accounted for an average of 42%of total exports. The share of the oil and mining sector (dominated by theextraction of crude oil) as a proportion of national output averaged 12.3% ofGDP in 1998-2002. However, oil price fluctuations cause the exact figure tooscillate, ranging between 4% and 21%, as the nominal value of oil outputchanges. In general, the export sector is more developed than the rest of theeconomy. Exports accounted for an average of 28% of GDP in 1998-2002. Thisincreases the economy�s vulnerability to external shocks, such as downturns incommodity prices. The domestic consumer market is small, with limitedpurchasing power.
Ecuador lagged well behind most of the region on structural reform in the 1990s,mainly because of political instability and opposition from vested interests andtrade unions. In 1998 income tax was abolished and replaced by a 1% tax oncapital circulation. Policymaking deficiencies were exacerbated in 1998-99 byseveral external shocks. The price of crude oil plunged and the El Niño weatherphenomenon caused extensive damage to the agricultural sector. The bankingsystem collapsed, requiring large infusions of public money. Policymakingbecame concentrated on short-term crisis management. Short-lived measures tocombat the crisis, including an import tariff surcharge, failed to prevent thefiscal deficit from reaching 4.7% of GDP in 1999. Interest rates spiralled and thegovernment issued increasing amounts of debt, before defaulting on Bradybonds and Eurobonds.
The decision, in January 2000, to adopt the US dollar as Ecuador�s currency (seeThe external sector: Foreign reserves and the exchange rate) avertedhyperinflation and the stabilisation of the economy brought a recovery ofgrowth in 2000-01. The capital circulation tax was removed at end-December2000, and the import tariff surcharge in March 2001. The focus of energiesshifted to macroeconomic and fiscal reforms that would boost growth and putthe public finances on a sustainable medium-term basis. With an IMF pro-gramme in place, the government of Gustavo Noboa made further achieve-ments, setting up a fund to capture windfall oil revenue and improving taxcollection. However, these were accompanied by some failures, such as thecollapse of attempts to privatise telecoms and electricity companies. Thesesetbacks highlighted the fact that the forces opposing the modernisation of thestate were still powerful, and included both private-sector and public-sectorinterests.
Political weakness and concern about the social consequences of raising theprice of public services and lifting subsidies on fuel curbed Mr Noboa�s appetitefor reform in the second half of his term. Defying expectations of a slowdownin the pace of reform, or a change in policy direction, Mr Gutiérrez obtained a
13-month, US$205m stand-by arrangement in March 2003, having convincedthe Fund of his commitment to a reform agenda.
Important recent economic policy initiatives
1998
In November the Agencia de Garantía de Depósitos (AGD, the Deposit GuaranteeAgency) is created and charged with overseeing a clean-up of the financial system. Inthe following nine months the government issues bonds for US$1.5bn to support theailing financial sector and 70% of the banking system is brought under state control.
1999
Income and corporate taxes are suspended in January in favour of a new 1% tax onthe circulation of capital. The currency is floated in March. Income and corporatetaxes are reinstated in May. Ecuador defaults by suspending payment of Brady bondcoupons in September and Eurobond coupons in October. In November the 1% taxon financial transactions is reduced to 0.8%, value-added tax (VAT) is increased to12% from 10%, and tax exemptions and loopholes are limited.
2000
The US dollar is adopted as the official currency in March, and dollarisation iseffectively complete by September. An IMF stand-by agreement is signed in April.The capital circulation tax is removed at the end of December. The governmentnegotiates a partial write-off, and a new restructuring, of US$6.6bn of Brady bonddebt held by private creditors, substantially reducing its debt-service commitmentsfor 2001-05 and thereafter.
2001
An agreement is signed with OCP Ltd, a private consortium of foreign oil companies,to build a heavy crude pipeline from the Amazon region to the coast, therebydoubling the country�s oil transport capacity by the end of 2003. The rate of VAT istemporarily raised from 12% to 14%, before being lowered again. The governmentproposes the creation of a new revenue stabilisation fund to save a proportion of theprojected oil revenue windfall. Filanbanco, the bank originally taken over by thestate in 1998, is closed down. The IMF stand-by arrangement, extended to December2001, is completed.
2002
A fiscal responsibility, stabilisation and transparency law passed in order to saverevenue from the new heavy crude oil pipeline and use 70% of this for buying backexternal debt, with the remainder to go to the social security fund and a revenuestabilisation fund. A limit of 3.5% in real terms is placed on spending growth in anygiven year. Attempts to privatise electricity and telecommunications companies fail.Planned rises in public utilities tariffs are frozen. Important elements of a bill toreform the bankrupt social security system are defeated in Congress and later in thecourts.
Under dollarisation, fiscal policy has assumed a key role. The government isaiming to record substantial overall public-sector surpluses in order to allow forsome flexibility in fiscal policy now that, under dollarisation, it has surrenderedcontrol of monetary policy. A long-term goal is to reduce dependence on
fluctuating oil revenue and to tap more stable sources of income. The non-financial public sector relied on oil revenue for 21.7% of income in 2002, downfrom 35% in 2000. Non-oil revenue almost doubled in nominal dollar termsduring the period, while oil revenue fell slightly.
But political factors and corruption also took their toll on policymaking underMr Noboa. In October, ten months into his job, the finance minister, JorgeGallardo, resigned, after a politically inspired campaign supported by thePartido Social Cristiano (PSC) to charge him with corruption. He was replacedby Carlos Julio Emanuel, who had strong links to the Partido RoldosistaEcuatoriano (PRE). One of Mr Emanuel�s first proposals, a generous debtrescheduling for defaulted private-sector creditors of troubled commercialbanks, was strongly opposed by the IMF. A corruption scandal brought MrEmanuel down in June 2002, to be replaced by a protégé of the president�s,Francisco Arosemena. Mr Arosemena struggled to rectify the impact of amassive unbudgeted increase in spending under his predecessor. The wage billrose by 51% in 2002, after a 40% increase was granted to public-sector workers.In October, Congress also approved an increase from US$8 to US$121 in one ofthe mandatory salary bonuses which the government was trying to abolishand incorporate into the overall minimum wage. As the government neared theend of its term, in a concession to coastal export lobbies, tariffs on a range ofinputs were temporarily reduced to zero, contravening IMF advice.
After falling deeply into deficit in 1998-99, the public finances have subse-quently performed better. In 2001 the government achieved an overall non-financial public-sector surplus of 1.2% of GDP. In 2002 the government recordeda surplus of 0.7% of GDP, although it only did so by delaying some payments inorder to prioritise debt service. Most of the improvements have been on therevenue side. Improvements were enabled partly by growth in tax collections,which have surpassed expectations, beating the target set in 2002 by 9.1%.Institutional changes at the Servicio de Rentas Internas (SRI, the internalrevenue service) contributed to large nominal increases in tax revenue between2000 and 2002. Collections of VAT averaged 6.5% of GDP in 2000-02, comparedwith an average of 3.3% of GDP in 1995-99. Growth in income tax has been lessimpressive, and still amounts to only 2.4% of GDP. In 2002 non-oil revenuereached 19.5% of US dollar GDP, compared with an average of 13.3% in 1995-99.During the post-dollarisation period, oil revenue also recovered from itsprevious lows because of high world prices, averaging US$1.4bn per year in2000-02, compared with US$980m per year in 1998-99.
Successive governments have tried and failed to privatise major state-ownedenterprises, such as the telecommunications and electricity companies. In 2000the Ley para la Promoción de la Inversión y la Participación Ciudadana(Investment Promotion and Citizen Participation Law, or Trole II) was submittedto Congress, containing reforms to labour markets and to the regulation of theindustries the government hoped to privatise. However, Mr Noboa lost thebattle to impose many of these reforms by veto on a reluctant Congress. Oneoutcome of this was the striking down of the existing legislation allowing jointventures between Petroecuador and private oil companies. Nothing was
Privatisation plans run intoobstacles
Tax collection and high oilprices support public finances
instituted to replace the (admittedly imperfect) existing guarantees, damagingconfidence among foreign oil investors. Several other important reforms,notably to the labour and mining laws, were passed.
Unlike Panama, the region�s other fully dollarised economy, Ecuador hasretained its Central Bank (the Banco Central del Ecuador�BCE), albeit withmuch reduced powers and fewer staff. The primary responsibilities of the BCEare now to manage the reserves that back both coins in circulation and thestock of Central Bank stabilisation bonds; administer the provision of US dollarnotes; maintain a reserve to provide short-term assistance to banks; conducteconomic research; and compile statistics. The Gutiérrez administration hastalked about putting the banking superintendency under the Central Bank�sremit, although this has yet to be achieved.
Ecuador�s relations with the IMF
Between 1985 and 1995 Ecuador managed to complete only one of the six stand-byagreements signed with the IMF. After a long spell without any IMF support, in April2000 the government signed a one-year stand-by agreement, which was laterextended until December 2001. The deal offered a total of US$304m in loans,conditional on the government achieving an extensive list of structural reforms,including a reduction in subsidies on fuel and a loosening of restrictions onprivatisation and foreign investment.
These reforms were designed to stimulate foreign investment inflows, regarded as aprerequisite for the economy to recover under a rigid money-supply constraint,particularly with the financial system in a weakened state. The other aim of the IMFprogramme was to stabilise public finances, reducing the state�s dependence onvolatile oil revenue by raising other taxes. Compliance with an IMF agreement was aprecondition for restructuring of the foreign debt, a major reduction of which wasachieved in July 2000 (see The external sector: Capital flows and foreign debt). Theunforeseen boost to the economy provided by high oil prices allowed Ecuador toexceed growth and fiscal targets, but some policy goals in the agreement, such as theremoval of subsidies on domestic fuel prices, were only partly implemented, orpostponed. Nevertheless, in December 2001 the IMF announced that Ecuador hadcompleted the programme, and released the final disbursement attached to it. AnIMF deal is a necessary precondition for Paris Club debt restructuring and for lendingfrom other multilaterals.
During 2002, the government tried and failed to obtain another IMF agreement. Thegovernment battled to obtain approval for a fund (the Cuenta de Estabilización yReducción de la Deuda Pública, or CEREP) designed to collect revenue from the newheavy crude oil pipeline, of which 70% was to be used for buying back external debt,in an ambitious plan to reduce the external debt burden. However, loopholesintroduced in the law convinced the IMF that it was not sufficiently watertight,delaying an agreement. The IMF lost confidence in the Noboa administration after acorruption scandal and a massive increase in current spending, and Mr Noboabecame increasingly strident in his criticisms of the Fund.
The change of government allowed a fresh start and Mr Gutiérrez�s economic team,led by the finance minister, Mauricio Pozo, obtained approval from the IMF board fora new 13-month, US$205m stand-by agreement in March 2003. The conditionsattached to the deal will form the basis for economic policy over the next year.These include reforms to the state banking sector, the privatisation of the maincommercial bank in state hands, the appointment of private-sector managers forstate enterprises, the reform of the tax system to expand the tax base and measuresto reduce evasion of customs revenue.
Source: Banco Central del Ecuador (BCE), Información Estadística Mensual.
Since Ecuador began producing oil in the early 1970s, economic growth haslargely tracked the performance of the oil sector, not least owing to the failure toinstitute reforms to promote growth in other areas. An expansion in productionfollowing Ecuador�s departure from OPEC in 1992 led to a period of stronggrowth, but this boom had come to an end by 1995, when the economy beganto weaken. Producers and the financial sector struggled against lower liquidityand bad debts, as interest rates were raised to deter capital flight. The economyexperienced another burst of growth in 1997, largely reflecting rising exportcommodity prices, before political instability began to take its toll. Short-termconsiderations then encouraged fiscal laxity, while investment in the state-ownedoil company, Petroecuador, was neglected. The damage inflicted on the economyby mismanagement was exacerbated in 1997-98 by an adverse external environ-ment, including natural shocks such as the devastation of a large segment ofcoastal agriculture by El Niño, a sharp drop in prices for oil and other commo-dities, and a credit crunch in the wake of the financial crises in Asia and Russia.
The banking and currency crises of 1998-99 were the main catalysts of thedeterioration from stagnation to deep recession in Ecuador in 1999.Government borrowing also fuelled upward pressure on interest rates, crowd-ing out productive lending to the private sector and aggravating the effects ofthe external credit crunch. The Central Bank�s increasingly desperate efforts tocontain pressure on the falling sucre�itself largely a function of politicalinstability and fiscal laxity�brought further huge increases in interest rates,compounding pressure on the increasingly fragile banking sector. An unprece-dented week-long bank holiday declared in March 1999, and a subsequent year-long deposit freeze, intensified a decline in domestic demand and contributedto a 6.3% economic contraction for the year as a whole, pushing aggregateoutput below 1994 levels.
A recovery began in 2000 following dollarisation. The economy grew by 2.8%,as private consumption rebounded after the steep drop of the previous year,helped by the unfreezing of bank deposits. Remittances from Ecuadorianemigrants surged, funding investment in housebuilding and durable goods, andgrowth accelerated in 2001. As the consumption boom began to taper off,construction of the new Oleoducto de Crudos Pesados (OCP, heavy crude oilpipeline) provided a massive boost to investment, allowing the economy torecord respectable growth in 2002.
One of the main advantages of dollarisation promises to be the reduction ofinflation to low levels, as the Central Bank now has no power to increase themoney supply. Ecuador has a history of high inflation, averaging 39.9% per yearin 1990-99, caused by lax fiscal policy, exchange-rate weakness, a lack ofcredibility in economic policy and entrenched structural rigidities. Wagecontracts have typically been indexed to past rather than expected inflation,while periodic attempts to cut fuel price subsidies have spurred increases inoverall price levels.
The annual rate of consumer price inflation continued to rise after dollarisationwas introduced, peaking at 107.9% in September 2000. The massive depreciationof the currency during the crisis caused a jump in producer prices, which fedthrough into consumer prices in 2000, as the backlog of inflationary pressures inthe system was worked out and state subsidies were lifted. Producer priceinflation peaked at 301% in February 2000. By mid-2001 monthly price increaseshad fallen to well below 1%, although one-off adjustments in publicly regulatedprices had yet to be made. However, there was evidence that some prices hadbeen speculatively raised, as dollarisation removed the basis for pricecomparison. This was in part encouraged by planned subsidy reductions forprices for energy, telecoms services and fuels. After these were halted byMr Noboa in early 2002, inflation ended the year at 9.4%. The price of servicesand non-tradeables rose substantially, driven up by education and utilities costs,while goods price inflation fell to low levels.
Chronic inflation decimated real wages during the latter half of the 1990s.Fiscal constraints combined with pressure from the business community tokeep wage increases below the level of inflation. The minimum wage lost one-third of its real purchasing power in the first three months of 2000, before thegovernment instituted a rise. In 2002 the real minimum wage was, on average,10% below its level in 1997. The official monthly minimum wage and associatedbenefits are revised intermittently�usually twice a year�by a committeecomprising representatives of the government, trade unions and employers.The latest intervention, in January 2003, raised the value of the minimum wageand compulsory allowances by 8% to US$148.6/month, far short of the cost of abasket of basic goods for a family of four, which was estimated atUS$366/month by the Instituto Nacional de Estadística y Censos (INEC,national statistics institute) in April 2003.
Between March 1998 and March 2000 the rate of total unemployment almostdoubled, to reach 16.1%. Economic recovery pushed the rate down to around 8%
by January 2003. Underemployment remains at around one-third of theworkforce. Unemployment figures are flattered to an extent by emigration.
Regional trends
Long-standing rivalry between the coast, home to the most powerful nationalbusiness interests, and the highlands has intensified in recent years. The largelycoastal export sector benefited from macro-devaluations in the late 1990s, butcoastal banks were harder hit during the economic crisis than their highlandcounterparts. Demands for the devolution of greater financial and admini-strative control to the provinces, voiced strongly by coastal elites, haveincreased in tandem. The Consejo Nacional de Modernización del Estado(Conam, the state modernisation body) published a draft bill fordecentralisation in October 2000, which established that provinces coulddecide whether to acquire more powers and revenue by holding a referendum.By mid-2001 six provinces (five of them in the coastal region) had heldreferendums, in which a loosely defined proposal on autonomy was over-whelmingly endorsed. The pro-autonomy movement is strongest in Guayaquil,which wants to retain more of its wealth to spend locally. Indigenousorganisations have additionally demanded the creation of autonomous ethnichomelands, in which indigenous and Afro-Ecuadorian communities wouldenjoy a considerable measure of self-government.
The Noboa government sought to gain control of the decentralisation agenda,agreeing to hand over responsibility and funding for agricultural, environ-mental, tourism and public works projects to the provinces, provided theycould demonstrate the administrative capacity needed to assume theseresponsibilities. The potential impact of decentralisation on the centralgovernment�s fiscal accounts, and on the welfare of the poorest provinces,remains a cause for concern.
Economic sectors
Agriculture
Around one-third of Ecuador�s land is used for agriculture. The 2001 censussurvey of the economically active population (4.6m of a population of 12.1m)estimated that 14% of the population was occupied in agriculture, but for thepopulation as a whole, this is an underestimate, with subsistence farmingproviding an income for the most of the poor in rural areas. Agriculture�scontribution to GDP has declined in recent years, from about 25% of totaloutput (at factor cost) in the 1960s to 12.1% in 2000. The more modern agro-export sector is concentrated on the coast, where forests and swamps havebeen converted into plantations for the production of bananas, coffee, cocoa,rice, other export fruits and shrimp. The principal traditional export crops�bananas, coffee and cocoa�are grown on the coastal plain.
In recent years, cut flowers, especially roses, cultivation of which is con-centrated in the central and northern highland areas, have surpassed coffee and
cocoa in value-added and export earnings. However, they face stiff competitionfrom other countries, including neighbouring Colombia. Other non-traditionalproducts that have flourished include broccoli and organic vegetables.
Ecuador is the world�s largest banana exporter, shipping almost twice as muchas Costa Rica, its closest rival. In contrast to many other banana-producingcountries, in Ecuador the main banana exporters are nationally owned. Thethree leading exporters, led by the Corporación Bananera Noboa, account fortwo-thirds of exports. Banana plantations employ around 200,000 people.Ecuador was mainly responsible for a large rise in global production in 1997-99,which pushed down world prices. The peak year for banana exports was 1997,when earnings reached US$1.3bn. The El Niño weather phenomenon curtailedoutput in 1998, and earnings have since been declining, owing to depressedprices. However, 2002 brought an upturn in fortunes, as rival producerssuffered reduced output.
Shrimp cultivation, concentrated in the provinces of Guayas and Esmeraldas,grew rapidly during the 1990s. By 1998 Ecuador was the world�s fourth largestproducer, after Thailand, the US and India, and shrimp was the country�s thirdlargest export earner, after oil and bananas. However, the outbreak of the whitespot and yellow head viruses devastated the industry, slashing exports by two-thirds between 1998 and 2000. Lack of financing delayed a recovery until thebeginning of 2003, when some improvement in financing, and the adoption ofnew techniques to prevent the disease, led to a substantial increase inproduction.
Cocoa was the country�s main export crop until bananas took over in the1940s. The sector still contributes around US$80m per year in export earnings,if cocoa products are taken into consideration. The sector recovered quicklyfrom damage caused by El Niño in 1998-99, and a surge in world cocoa pricesdrove earnings to US$127m in 2002. However, coffee production is continuingto suffer from the after-effects of the phenomenon. Export earnings from coffeeand coffee derivatives fell steadily from US$160m in 1996 to just US$41.4m in2002, as a result of lower output and declining prices. The prospects for thecoffee industry remain bleak, with global oversupply and prices forecast toremain low.
Landholdings in the non-export sector are generally small, with low rates ofproductivity and mechanisation. Poor conditions have led to migration intourban areas, and illegal occupations of marginal land. Infrastructure isinadequate and irrigation systems are in need of extension. The country islargely dependent on foreign aid to increase levels of productivity andmechanisation. Credit to agriculture is channelled through the loss-makingBanco Nacional de Fomento (BNF, the state development bank). Farmers havestruggled to service loans, especially since the economic crisis. The recentstabilisation of the economy has helped farmers to a certain extent, and thearea under seed for most staple crops, such as rice and maize, expanded during2000 and 2001.
Large-scale oil production in Ecuador took off in the 1970s. The main player inthe sector is the state oil company, Petróleos del Ecuador (Petroecuador), createdin 1972. The firm�s investment budget is set by central government and,particularly since the economic crisis, has often been cut and reallocated tocurrent spending. As a consequence of underinvestment, Petroecuador�s levelsof production declined every year between 1994 and 2002. Its share of outputslipped to 54.7% in 2002, compared with 60% in 2000. The remainder has beentaken up by private oil companies, under a variety of contracts.
Oil production rose steadily during the 1990s, reaching a peak of around400,000 barrels/day (b/d) in 2000. Ecuador exports some 60% of its productionin the form of crude oil, the country�s primary export revenue earner. The mainfields operated by the state oil company contain light crude, but crude exportsfrom the Oriente are of medium-heavy classification (27° API), and the mostrecent discoveries have been of super-heavy crude. Oil is transported mainlyvia the Sistema del Oleoducto TransEcuatoriano (SOTE), which since anexpansion in 2000 has the capacity to transport 390,000 b/d, with smalleramounts being shipped to Colombia along a branch of the Trans-Andeanpipeline (OTA).
Most oil exploration and production activity takes place in the Amazon region.The principal refining facilities are located at Esmeraldas on the northern coastand at La Libertad in the south. Ecuador has proven oil reserves of around 4bnbarrels, and probably much more. However, the largest deposits, such asIshpingo Tambococha Tiputini (ITT) field near the Peruvian border, areinaccessible and often in environmentally sensitive areas or the homelands ofindigenous people. Oil companies therefore face both technical obstacles andobstruction from native or environmental activists. The state�s main fields (LagoAgrio, Sacha, Shushufindi, Libertador, Auca and Cononaco) are maturing andyielding less oil every year. Investment in advanced recovery techniques isrequired to improve output. This will inevitably require private-sectorinvolvement. However, legislation allowing joint ventures with the state oilfirm was struck down by Congress in early 2001, and the government willnow have to offer other incentives, but with fewer formal guarantees.Relations with foreign oil companies have also been soured by disputes overtaxation. Until these problems are resolved, foreign investment in the sectormay not meet its potential.
A lack of transport capacity has been for many years the major constraint onincreasing production, but this is about to change. The construction of asecond oil pipeline for the transport of heavy crude, which had been at theplanning stage for almost a decade, finally began in June 2001. Thegovernment awarded the contract for building and maintaining the pipelineto OCP, an international consortium formed by EnCana of Canada, Italy�sAgip, Perenco of France (which replaced original member Kerr-McGee),Occidental of the US, Spain�s Repsol-YPF and from Argentina, Pecom Energía(formerly Pérez Companc), together with the pipeline builder Techint. The
pipeline will more than double transport capacity, to 850,000 b/d, andshould be operational by late 2003. It will also allow the separation of morecommercially valuable light crude from heavy crude. The route chosen forthe pipeline is controversial, as it passes through the Mindo cloud forest�anature reserve and eco-tourism destination. The SOTE has suffered 59 spillssince the mid-1970s, caused by landslides, accidents and on one or twooccasions, sabotage. This has convinced many that environmental damagefrom the new pipeline is inevitable.
The mining sector contributes less than 1% of GDP, and accounted for justUS$12m in exports in 2002, but has potential. Mineral resources include gold,silver, copper, iron, lead, zinc, uranium, magnesium, phosphates, limestone,kaolin, marble and sulphur. Most activity is concentrated in the production ofnon-metal construction materials such as limestone, sand and clay, as well aspumice stone. The southern provinces of Zamora-Chinchipe, El Oro and Azuay,where there are deposits of precious metals, are the main metallic mining areas.The most significant find in recent years has been of potential copper reservesin the Corriente copper belt in south-east Ecuador, which are being explored byseveral major mining companies.
A six-year multilateral-funded project called Prodeminca was completed in2001. Geological survey work was carried out and Ecuador�s mining admini-stration overhauled, with the aim of improving the concessioning process. Anew body was set up to oversee the sector, the Dirección Nacional de Minería(Dinami, with a website at www.mineriaecuador.com). Reforms to the mininglaw passed in 2000 also made significant progress in making the sector moreattractive to investors, by abolishing the previous 3% royalty, strengthening thelegal rights of mining companies and removing restrictions such as the need toobtain exploration rights from the military for projects near the Peruvianborder.
Manufacturing
Industrial development in the 1960s built on traditional manufacturing sectorssuch as textiles, food and drink, tobacco, oil-refining and cement production. Arapid expansion took place in the 1970s, accompanying the oil boom. Sectoraldevelopment laws encouraged import substitution and sheltered manufacturersbehind tariff and non-tariff barriers. These benefits were stripped away duringthe 1990s (see The external sector: Trade in goods). Although this has exposeddomestic industry to tough competition, it has also widened its traditionallynarrow focus on the national market, providing an incentive to export. Likeother sectors, manufacturers have been hampered by the lack of affordablefinancing and the travails of the banking sector. Apart from private financialinstitutions, the Corporación Financiera Nacional (CFN, the National FinanceCorporation) is the principal source of external funding for industry.Dollarisation has made conditions more difficult for manufacturers, who usedto rely on having lower costs than their competitors in neighbouring countries.
Stimulated by the prospect of new export markets, especially in the AndeanCommunity (which groups Bolivia, Colombia, Ecuador, Peru, and Venezuela),the chemicals, machinery, minerals, paper, printing and wood productsindustries were the growth areas of the 1990s. Food, drink and the tobaccoindustry remain the most important sectors. Canned fish, mostly exportedoutside the region, has seen the most significant growth in recent years, and by2002 was the single largest manufacturing export, earning an average ofUS$281m in 2000-02. Having received a boost from devaluation, the value ofvehicle exports jumped by 49% in 2001, following the decision of GeneralMotors of the US to allow new models to be assembled in Ecuador for exportto other Andean countries. It dropped back in 2002, as manufacturers focusedon the national market.
Some 78% of production and 70% of businesses remain concentrated in theprovinces of Guayas and Pichincha. A recent study by the Banco Central delEcuador (BCE, the Central Bank) estimated that Guayas accounted for 27% ofnational economic output, with Pichincha representing 22%. However, there arealso important industrial sectors in the provinces of Azuay (ceramics, furnitureand tyres), Esmeraldas (oil-refining and wood), Manabí (marine and agriculturalproducts), Cotopaxi (iron and steel) and in the towns of Ambato, Milagro,Riobamba and Latacunga.
In 1990 a maquiladora (in-bond) programme was established, but has remainedunderdeveloped. The main industrial free zone is Zofragua (Zona Franca deGuayas�Guayas Free Zone), which is located near Guayaquil. Several other freezones are being set up, both on the coast and near Quito, although some ofthese are transshipment, rather than manufacturing, sites. The extensive site ofthe new airport in Quito will include a duty-free zone. The body representingthese interests is the Consejo Nacional de Zonas Francas (National Council ofFree Zones), known as Conazofra.
Construction
The construction sector, a major employer of low-income, unskilled urbanworkers, has been hit hard in recent years by a combination of cuts in publicspending, a shortage of credit and high interest rates. The public sector accountsfor 55-60% of investment in construction, especially in infrastructure projectssuch as roadbuilding. In the absence of a nationwide housing programme, orsufficient cheap financing for construction, building tends to be informal�it isunregulated and not recorded by official statistics. The financial crisis�inparticular, the freezing of bank deposits�was also detrimental. In 2000-01 therewas a rebound in construction activity, especially in Guayaquil, with reports oflocalised shortages of experienced construction workers, owing to the recentwave of emigration. Reluctance to entrust savings to the banking sector has ledto a preference for bricks and mortar as a form of investment, and a significantproportion of remittance income has been spent on building homes. Thebuilding of the OCP oil pipeline created, at its peak, over 9,000 jobs in theconstruction industry.
Banks are the primary source of financing in Ecuador, which has under-developed capital markets. Long-term finance has been provided by the fourstate banks: Banco Nacional de Fomento, which typically funds agriculture;Corporación Financiera Nacional, directed at industry; Banco Ecuatoriano de laVivienda, the state mortgage bank; and the Banco del Estado, whichconcentrates on infrastructure projects. All have favoured large, well-connectedborrowers. Reform of the state banking sector, involving a merger of theseinstitutions and a change in their focus, is quite likely.
The banking sector is in the process of recovering from a severe crisis. Of the 22banks registered (down from 48 in 1998), four are dominant: Produbanco, Bancode Guayaquil, Banco Pacífico and especially Banco Pichincha, which accountsfor over one-third of deposits and lending and also owns the country�s leadingcredit card, Diner�s Club. Spreads between deposit and lending rates remainhigh, allowing banks to record US$85m in earnings in 2002. The past-due loanratio fell from 20% in January 2000 to 8.6% in December 2002. Lending grew by18% year on year in nominal terms in 2002, compared with deposit growth of26%. Deposits still outstrip lending, indicating that banks remain reluctant tolend. Instead they have used depositors� money to build up assets abroadequivalent to one-third of total sight deposits of US$3bn. Commercial lendingaccounts for around 60% of the total but consumer credit has grown stronglysince 2000, financing increased imports, vehicle purchases and construction.
How the banking crisis came about
The private financial system was transformed by deregulation in 1994, whichstimulated a large increase in the number of institutions in operation. In a climateof poor supervision, banks expanded their activities and borrowed heavily abroadto expand credit in the domestic market. Poorly developed risk assessment systems,the proliferation of connected lending and the fact that much of the lending wasdenominated in US dollars left banks particularly vulnerable to a decline in assetquality in the event of recession or a devaluation of the sucre.Increased political instability from 1997, together with the decline of oil and othercommodity prices, and macroeconomic destabilisation, contributed to a significantslowdown in the rate of deposit growth. Meanwhile, economic stagnation and thedamage caused by the El Niño weather phenomenon to production in coastal areasled to a sharp rise in bad debts among the important agro-export sector. Acombination of chronic exchange-rate depreciation and rising interest ratesexacerbated debtors� problems, increasing the bad loan ratio. By end-1998 four fin-ancial institutions, including the country�s largest bank, had collapsed. Days beforethe failure of Filanbanco in December, the Agencia de Garantía de Depósitos (AGD,the Deposit Guarantee Agency) was created as part of a new banking sector supportscheme, providing for unlimited deposit insurance. In 1999 the government imposeda week-long bank holiday in a desperate attempt to prevent further collapses. A year-long deposit freeze followed. Banco del Progreso�the second largest bank and thelargest in terms of deposits�then closed, followed by several others. Many of thechief executives of the banks left the country in order to avoid criminal proceedings.By mid-2000, over 90% of depositors had received their money back in full.
The deposit guarantee agency, or AGD, administrates the assets of eight closedbanks, which have yet to be wound up. Two of the largest banks prior to thecollapse of the financial sector, Filanbanco and Pacífico, remain a significantburden for the government. The state continued to keep Filanbanco open untilJuly 2001, when a renewed run on deposits and continuing losses forced itsclosure. A list of the debtors published soon afterwards revealed the names ofprominent businessmen with links to the political establishment. In 2003foreign consultants were appointed to oversee the recovery of loans, prior tothe liquidation of the bank, along with the other closed banks administrated bythe AGD. Banco del Pacífico remained open, after cash injections from thegovernment in 2001, but its management was handed over to private-sectorconsultants. The bank is to be sold to a foreign buyer, under the terms of thestand-by agreement signed with the IMF in March 2003. The AGD has comeunder heavy criticism for not recovering more of the defaulted loans, a task thatwas complicated by political pressure from large debtors and the scope forcorruption. Depositors have largely been paid back with government money,rather than with money recovered from debtors. However, as of May 2003, theAGD still had US$763.9m to pay to 5,851 claimants. The Inter-AmericanDevelopment Bank (IDB) estimates that the banking crisis has cost thegovernment US$3.5bn since 1999.
Capital markets are underdeveloped. However, transactions on the mainexchange, the Bolsa de Valores de Guayaquil (BVG), rose substantially in 2000-01. The exchange is positioning itself as a source of affordable debt finance.Share issues peaked at US$211m in 1994, but had fallen to US$1m by 1999. Sincethe financial crisis, few equities have been actively traded. Government andCentral Bank debt issues have traditionally accounted for around one-third oftransactions. Prospects for the stockmarket were dealt a blow in 2001, whenCongress firmly rejected a proposal to allow private-sector insurers to managesocial security contributions. In 2002 the Constitutional Tribunal declaredproposals for private pensions fund administrators to be unconstitutional. Thebankrupt, inefficient and corrupt public social security system is regarded asone of the main obstacles to increasing internal savings rates and providingadequate social services. So soon after the banking collapse, however, thepublic remains wary of entrusting its savings to the private sector.
Other services
Tourism is the country�s fourth largest earner of foreign exchange, behind oil,bananas and shrimp. In 2001 the government issued a decree identifyingtourism as a potential growth area, promising a large increase in funding for theMinistry of Tourism and legislation to encourage investment in the sector.Ecuador has a range of natural attractions in a relatively small area�mountains,beaches, tropical rainforest and a vast range of flora and fauna�making it aprime destination for ecotourists. According to the Ministry of Tourism, 654,000visitors arrived in 2002, compared with 365,000 in 1991. The Galapagos Islandsremain the destination of choice for foreign visitors, accounting for over one-quarter of income from tourism, followed by Quito, the highlands and theOriente. Indian villages, ruins and handicraft markets are the main attractions
in the highlands. Statistics are scant, but the Ministry of Tourism estimates thatthree jobs are indirectly linked to every full-time job in the tourism industry.
Most visitors to Ecuador are from Colombia, Peru, the US and Germany.International hotel chains are belatedly discovering the country, and the Hilton,Sheraton, Marriott and Radisson groups are among those to have built hotels ornegotiated management agreements in Quito and Guayaquil. This should seethe arrival of more international conference activity in Ecuador in the comingyears. Other opportunities are opening up as a result of the peace accord withPeru (see Politics: International relations and defence). One of the first tangiblesteps towards this was the establishment of direct air links between Lima andseveral cities in Ecuador in 2000. A constraint on the growth of tourism is theinadequacy of airport facilities, but this problem has begun to be tackled withthe refurbishment of the international airport in Quito (see Resources andinfrastructure: Transport, communications and the Internet).
The external sector
Trade in goods
Ecuador is one of the most open economies in the region. Foreign tradeaccounted for an average of 54.6% of GDP between 1993 and 2002. Until 2000,the merchandise trade balance was typically in surplus, except in years such as1998, when oil prices plunged. Since 2000, an import boom has pushed thetrade balance substantially into deficit. The trade regime underwentconsiderable liberalisation during the 1990s, with reforms stripping away theprotection previously enjoyed by manufacturing. Ecuador joined the AndeanCommunity in 1992 (see Appendices: Membership of regional organisations).Further advances on trade liberalisation were made after the country joined theWorld Trade Organisation (WTO) in 1996, including the ratification of theGeneral Agreement on Trade in Services. Ecuador has complied with most of itsWTO commitments to keep its tariff ceilings within permitted limits, but hasdeferred full compliance on some of its obligations in accordance with thegrace period offered to developing countries. Restrictions are maintained on theimports of used goods, such as vehicles, clothing and tyres. Prior authorisationis required to import around 1,300 goods. Regressive measures have, onoccasion, been applied to raise revenue, with the most recent case being theimposition of tariff surcharges in 1998-99 at varying levels (see box: Tradeliberalisation). All these surcharges were removed in March 2001, but thereremains a risk of reimposition at some point in the future, to cope withstraitened circumstances.
Ecuador�s standard national tariff is slightly below the level of the commonexternal tariff (CET) adopted by the Andean Community. Import duties rangefrom 0% to 20%, with raw materials from outside the Community attracting theleast duty, at 5-10%, and consumer goods the most, at 20%, with the average ataround 11-12%. The exception is car imports from outside the Community,which attract a 35% tariff designed to protect the local assembly industry. Up to130 agricultural products are subject to a price-band system, intended to protect
local producers. This system, whereby the import tariff varies in inverse relationto the international price of the relevant commodity, was due to be phased outover 1998-2001 under WTO rules, but remains in place.
Trade liberalisation
1990
The Tariff Law is reformed and import quotas, permits and subsidies are eliminated.Andean Community tariff classifications are adopted.
1992
The tariff ceiling is reduced from 290% to 27%, excluding vehicles, and exchangemarkets are unified.
1994
The Andean Pact common external tariff (CET) is introduced, with a 0% tariff forimports from Andean Pact countries and a 5-20% tariff for external imports,excluding vehicles. The Organic Customs Law is reformed and independentinternational inspection agencies are employed.
1995
Import and export registration procedures are transferred from the Banco Central delEcuador (BCE, the Central Bank) to private banks, and are simplified through thecreation of a documento único de importación (DUI, unique import document).
1996
Ecuador joins the World Trade Organisation (WTO).
1998
Adjustments to national intellectual property rights (IPRs), in pursuit of compliancewith WTO rules, are approved by Congress in the Intellectual Property Rights Law. A4% import surcharge is imposed on all imports in an effort to reduce the fiscal deficit.
1999
Restrictions on the participation of foreign banks in the local market are lifted.Ecuador is removed from the �priority watch list� for IPRs. The import surcharge isincreased to 10%.
2000
Import surcharges are lifted on specific items.
2001
All import surcharges are removed in March.
2002
Tariffs on a range of inputs used by exporters temporarily lifted by the Noboagovernment.
In the past 15 years the export sector has undergone significant changes. Tradeliberalisation in the early 1990s encouraged diversification. Manufacturedexports, which accounted for 12.3% of export earnings in 1991, had risen to 26%of total earnings by 2002. These were mostly processed, primary products, withthe main revenue-earners petroleum derivatives and products such as cannedfish, vehicles, textiles, chemicals and fruit conserves. Earnings from cut flowersrose from US$40m in 1993 to US$291m in 2002, benefiting from the preferentialaccess to the US market under the Andean Trade Preference Act (ATPA).
Despite diversification, Ecuador�s export offering is still predominantlycommodity-based, leaving the country highly vulnerable to terms-of-tradeshocks. Ecuador�s terms of trade deteriorated sharply in 1997-99, owing to a fallin global commodity prices. Export earnings recovered strongly in 2000, almostentirely as a result of a steep rise in oil prices, with proceeds from manyagricultural exports falling. In 2002 oil revenue increased on the back of highcommodity prices and bananas, and other agricultural exports performed well.
The pace of import growth has fluctuated with domestic demand. A deepeconomic contraction in 1999 caused imports to fall by up to 50% across allthe main sectors, as depreciation of the currency put imports out of the reachof many consumers. Since dollarisation, imports have grown very rapidly. Therecovery of the real exchange rate and the stabilisation of the economyallowed consumers to make long-deferred purchases (in many cases spendingremittance income) and permitted firms to reinvest in capital equipment. Theimport boom was perpetuated by the onset of construction work on thenew oil pipeline (see Economic sectors: Mining and semi-processing) whichsucked in large volumes of capital goods and raw materials. The vast majorityof pipeline-related imports had arrived by the fourth quarter of 2002, afterwhich import growth began to moderate.
Since the liberalisation of trade in the early 1990s, non-durable consumer goodshave outstripped durables. Even after the 1999 crisis, non-durable consumergoods imports for that year stood 95% higher than in 1993, indicating a localpreference for foreign, particularly US, food imports, as well as reflecting shocksto the domestic production chain.. In the decade since 1992, the value ofconsumer goods imports has risen more quickly than that of capital goods orraw materials. The share of imports accounted for by consumer goods rosefrom 21.8% in 1996 to 28% in 2002.
The US remains Ecuador�s most important trading partner, accounting for 45%of exports in 2001, a similar proportion to that in the early 1990s. Ecuador ran aUS$600m trade surplus with the US in 2002. The US renewed Ecuador�sentitlement to trade preferences under the ATPDEA (Andean Trade Preferenceand Drugs Eradication Act) in November 2002. This provides tariff-free accessfor a range of Ecuadorian non-traditional exports to the US, the most importantof which is cut flowers. The EU accounted for 20.6% of exports in 2002,according to Central Bank figures, some of them under the Generalised Systemof Preferences, a concessional tariff regime.
The process of regional integration in Latin America, and the establishment ofbilateral ties with Peru, has increased the importance of Ecuador�s trade with itsneighbours. Trade with the Andean Community has increased rapidly since theearly 1990s, but Ecuador�s deficit with other countries in the region haswidened sharply as domestic industry has struggled to compete. A post-dollarisation spurt in some categories of exports (such as vehicles) to the rest ofthe region in 2000-01, the result of an ultra-competitive exchange rate, peteredout as high inflation increased domestic costs. In 2002, according to CentralBank figures, Ecuador imported US$902m from Colombia, but exported onlyUS$361m, representing a virtual doubling of the bilateral trade deficit since2000. Ecuador�s exports to Latin American countries outside the AndeanCommunity were only US$300m in 2002.
Invisibles and the current account
Ecuador has traditionally recorded deficits on its services and income accounts.Earnings from tourism, the country�s fourth largest earner of foreign exchange,have usually produced a small surplus on the travel balance over the past tenyears. However, this has been outweighed by services outflows. Income creditsare generally small, reflecting low levels of outward investment. The deficit onthe income account is large, at US$1.3bn in 2002, mainly owing to interestpayments on the sizeable external debt. The deficit on invisibles has almostalways outweighed the merchandise trade surplus, producing a current-accountdeficit, except in years of unusually high oil prices, as in 1999 and 2000, whenimports were also depressed. An exodus of Ecuadorians to Spain and the USduring the economic crisis generated a huge rise in workers� remittances, whichreached US$1.43bn in 2002, according to Central Bank figures.
Capital flows and foreign debtExternal debt, 2001
US$ m % of totalPublic medium- & long-term debt 11,149 80.2Private medium- & long-term debt 1,071 7.7IMF 190 1.4
A boom in oil exploration in the early 1970s was accompanied by a rapid risein foreign indebtedness, as successive governments contracted foreign loans tofinance a state-led industrialisation programme and as the private sectorborrowed in foreign currency. Total external debt rose from 51% of GDP in 1980to an annual average of 104% of GDP in 1987-94, with around one-half derivedfrom a government bailout of private debtors in 1982-83, in which theadministration assumed the private sector�s debts with commercial banks. Afall in oil prices in 1982-86 saw Ecuador begin to accumulate modest paymentarrears. Arrears on external debt grew, until in May 1994 agreement wasreached with commercial bank creditors on a Brady plan, which was transacted
in February 1995. The restructuring convinced the markets that Ecuador wascreditworthy again, and in 1997-98 US$1.4bn in commercial debt alone flowedinto the country, including a US$500m Eurobond issue in 1997.
However, as early as 1996 interest and principal arrears began to accumulate onexisting obligations once more, mainly on Paris Club debt. Economic deter-ioration from 1997 brought a renewed deterioration in the country�s externaldebt indicators. The total external debt stock rose from an average of 67.5% ofGDP in 1995-98 to over 91.8% of GDP in 1999 (under the 2000 base yearmeasure of GDP), as the economy weakened and the sucre depreciated sharply,while low oil prices and the economic crisis undermined the government�spayments capacity. In September-October 1999 Ecuador became the firstcountry to default on its Brady and Eurobond obligations.
By 2000, some kind of restructuring, involving significant debt forgiveness, wasa necessity. The success of the government led by Gustavo Noboa in securing along-awaited deal with the IMF in April 2000 paved the way for such anagreement. In July 2000 a debt negotiation team struck a deal with private-sector creditors to swap US$6.6bn in Brady bonds and Eurobonds (plus debt-service arrears) for two classes of global bond: Global A (US$2.7bn) and GlobalB (US$1.25bn). The deal, supported by the IMF, represented a write-off of 40.6%.The recovery in dollar GDP lowered the total debt/GDP ratio to an estimated 66%in 2001, but the debt-servicing ratio remained heavy, at around 18% of goodsand services exports. Ecuador must now raise the funds to buy back debt, if thedebt burden is not once more to become unsustainable. The country�s riskpremium fell in 2001, but remains high, despite the apparent initial success ofdollarisation. The country has little access to international capital markets.
In September 2000, Ecuador agreed with Paris Club creditors a restructuring ofUS$880m of its bilateral debt, composed of arrears which had accumulated byApril 2000, together with the principal and interest payments due until the endof 2001. Ecuador fell behind again with Paris Club debt service in 2002 afterthe IMF agreement, and the scope of the Paris Club agreement, came to an end.As of May 2003, it was up to date with payments. A restructuring of Paris Clubdebt is likely to include a write-off of debt, with the savings spent ondesignated social projects.
Sweeping changes to the Foreign Investment Law in 1993 simplified investmentprocedures in Ecuador. However, it was the introduction of production-sharingcontracts (PSCs) in the oil sector in that year that was the main stimulus to asharp rise in investment inflows in the mid-1990s. Inflows rose from an annualaverage of US$108m in 1982-92 to US$589m in 1993-99. In a context ofdisorderly public finances and low domestic savings rates, foreign directinvestment (FDI) has been funding a growing share of gross fixed investment(GFI). Inflows of FDI rose from 3.7% of GFI in the 1980s to 15.4% in the 1990s,and an average of 26% in 2001-02.
Major changes to legislation on foreign direct investment (FDI)
January 1993
A new foreign investment code is introduced. The ceiling of 49% foreign equity infinancial sector and insurance holdings is removed, along with a requirement forprior authorisation. Limits on profit and dividend remittances are abolished.Restrictions are maintained on investment in fishing, domestic air transport and themedia, and in defence and border areas.
September 1997
Congress repeals a law imposing discriminatory restrictions on foreign companies intheir dealings with Ecuadorian agents.
April 1998
The National Assembly on Constitutional Reform scraps the remaining restrictionson foreign investment in strategic sectors and declares that foreign investment willenjoy the same rights and treatment as national investment. The only requirementfor foreign investors is that they register with the Banco Central del Ecuador (BCE,the Central Bank).
March 2000
The Ley de Transformación Económica (Economic Transformation Law) includesreforms to facilitate the privatisation of state enterprises, with the maximum stake thatmay be purchased by foreign investors rising from 35% to 51%.
Since 1986, around 65% of inflows have come from the US and Canada, 18%from Europe and 10% from elsewhere in the Americas. Some 80% of FDI hasbeen directed to the oil sector, with manufacturing, predominantly food,chemicals and timber-processing, receiving the next largest share, at 9%. Politicaland economic instability, and a lack of progress on economic reform, havedeterred FDI inflows to most other sectors of the economy. In 2001-02 theoverwhelming share of oil in FDI diminished slightly and both manufacturingand commerce attracted US$50m-60m of investment annually. Data on distrib-ution by geographical area are scant, but most oil exploration and productionactivities take place in the Oriente region. The Corporacion de Promoción deExportaciones y Inversiones (Corpei, the investment promotion agency)publishes data on foreign investment gathered by the Banco Central delEcuador (BCE, the Central Bank), with a breakdown by economic sector andcountry of origin. FDI increased markedly to around US$1.3bn per year in 2001-02 during the construction of the heavy crude oil pipeline, or OCP, by aconsortium led by US and Canadian investors.
Ecuador has made little progress with privatisation. The privatisationprogramme managed by the Consejo Nacional de Modernización del Estado(Conam, the state modernisation body) during the Noboa government, offeringopportunities in areas such as infrastructure, telecommunications and power,failed. The Gutiérrez administration plans to put state firms under private-sectormanagement instead of selling them off. An abundance of natural resources,low wage and property costs, membership of the Andean Community and therecent peace agreement with Peru are sources of attraction for FDI. However, a
skills shortage, legal insecurity, the small size of the market and anunderdeveloped business infrastructure are deterrents to FDI in several sectors.
Foreign reserves and the exchange rate
In the decade preceding the announcement of dollarisation in January 2000,Ecuador attempted various exchange-rate systems. Each was undermined byexternal shocks such as natural disasters and commodity price fluctuations,together with chronic fiscal deficits, a weak financial system and politicalinstability, and devaluations were regular. Dollarisation was formallyintroduced about a year after Ecuador had finally abandoned a crawling pegexchange-rate regime, in March 1999.
Ecuador pins its hopes to the dollar
Loss of confidence in the sucre intensified in January-February 1999 after theintroduction of a 1% tax on financial transactions and the devaluation of theBrazilian Real. Efforts to avoid the new 1% tax prompted a surge in demand for USdollars, as economic agents withdrew their funds from domestic banks. Amid ahaemorrhage of foreign reserves, and the raising of interbank interest rates tobetween 50% and 125%, the sucre was floated. However, a loss of confidence in thesucre, together with a financial crisis and fiscal imbalance, saw the price of the USdollar rise by around 200% in 1999, ending the year at Su20,243:US$1, compared withSu6,825:US$1 at end-1998. In the first two weeks of 2000, with the currency havingdepreciated by a further 20%, the authorities finally decided that radical action wasrequired. Traditional instruments of monetary policy had failed to stabilise thecurrency and there was a widespread belief that the country was on a path towardshyperinflation.Two options were considered: the introduction of a currency board, as in Argentina,or full dollarisation, as in Panama. Perhaps owing to the loss of confidence in thesucre�even if the currency was backed up by a convertibility law�the governmentopted for full dollarisation. Mr Mahuad made the announcement in mid-January butwas deposed before he could carry out the policy, a task which fell to his successor,Gustavo Noboa. The authorities fixed the exchange rate at Su25,000:US$1 and beganprogressively to withdraw sucre notes from circulation from April, replacing themwith US dollars. The process was largely completed by September, when sucresceased to be legal tender. The decision to dollarise wrought an immediate increase inconfidence, and imposed currency stability, but high rates of inflation saw the realexchange rate appreciate strongly in 2000-01, raising concerns over long-termcompetitiveness.
Under the dollarised system, the function of reserves is to back sucre-denominatedfractionary money, the stabilisation bonds issued by the Central Bank and liabilitiessuch as government and multilateral deposits, with the remainder used to supportother operational accounts and to capitalise a liquidity fund for the commercialbanks. From US$545m at the end of the first quarter of 2000, when dollarisationbegan, reserves had grown to US$840m by April 2003.
Ecuador is a member of the UN, the World Trade Organisation (WTO), theOrganisation of American States (OAS), the Inter-American Development Bank(IDB), the IMF, the International Bank for Reconstruction and Development(IBRD), the International Finance Corporation (IFC), the InternationalDevelopment Association (IDA), the World Health Organisation (WHO) and theRio Group.
Ecuador is also a member of the International Sugar Organisation (ISO), theInternational Cocoa Organisation (ICCO), the Sistema EconómicoLatinoamericano (Sela, the Latin American Economic System), the AsociaciónLatinoamericana de Integración (Aladi, the Latin American IntegrationAssociation), the Andean Community and the Non-Aligned Movement.
Ecuador was a member of OPEC until November 1992, when it downgraded itsparticipation to observer status. Ecuador left the International CoffeeOrganisation (ICO) in October 1998, after the body voted to make furtherexport cuts to counter falling world coffee prices.
Established in 1969 and originally known as the Andean Group, the AndeanCommunity of Nations (CAN) was established in March 1996, after membercountries signed a Reform Protocol of the Cartagena Agreement. The membersare Bolivia, Colombia, Ecuador, Peru, and Venezuela. Chile withdrew in 1974,and Panama holds observer status. In 2001 the combined population of themember states was estimated at 115m, and their total GDP at market-exchangerates was US$293bn.
The Andean Community comprises a free-trade area and an imperfect customsunion. The main objectives are to promote the development of member statesand to form a common market by 2005. Guidelines establishing the principlesof a common foreign policy were approved in 1999, committing theCommunity to open regionalism and to the strengthening of economic andpolitical links with other sub-regional, regional and interregional groups. TheCommunity is also participating in negotiations regarding a Free-Trade Area ofthe Americas (FTAA), a move originally proposed by the US. The Communityhas a number of institutions, including the Latin American Reserve Fund(FLAR), the Andean Development Corporation (CAF), the Andean Parliamentand the Commission of the Andean Community.
The Community has been successful in fostering trade between its members.The value of trade between the member states rose from US$3.6bn toUS$11.6bn between 1991 and 2001. However, progress towards a commonmarket has been complicated by a series of economic and political setbacks inthe region. Economic difficulties in some Andean countries, including Ecuador,have led to the increased use of unilateral, trade-distorting tariff and non-tariffmeasures, slowing the overall movement towards further intra-regionalliberalisation.
Ecuador�s trade has become closely integrated with the Andean Communityover the past decade. Member countries accounted for 21.9% of Ecuador�simports and 17.4% of its exports in 2001, up from 9.7% and 7.1%, respectively, in1991. The pace of growth in trade with other member states has exceeded therates for the Community as a whole. Whereas Ecuador�s total foreign trademeasured in US dollar terms grew by 1.9 times over this period, trade withmember states rose by 4.4 times, compared with a figure of 3.2 times for thetotal value of trade between all member states.
Sources of information
Banco Central del Ecuador (BCE), Boletín Anuario (annual)
BCE, Cuentas Nacionales (quarterly)
BCE, Información Estadística Mensual (monthly)
Corporación Ecuatoriana de Turismo, Boletín Estadística (annual)
Corporacion de Promoción de Exportaciones y Inversiones (Corpei)
INEC, VI Censo Nacional de Población y V de Vivienda, 2001
INEC, Encuesta Urbana de Empleo, Subempleo y Desempleo (biannual)
Sistema Integrado de Indicadores Sociales del Ecuador, Versión 2.0, 2000,http://www.siise.gov.ec
Centro Latinoamerico de Demografia (Celade), Boletín Demográfico No. 66,América Latina: Población por años calendario y edades simples 1995-2005,Santiago
IMF, International Financial Statistics (IFS), Washington DC
UN Economic Commission for Latin America and the Caribbean (ECLAC),Statistical Yearbook 2001, Santiago
UN Food and Agriculture Organisation (FAO), Faostat, Rome
US Energy Information Administration (EIA), An Energy Overview of Ecuador,Washington, DC
World Bank, Global Development Finance (annual), Washington, DC
Enrique Ayala Mora (ed), Nueva Historia del Ecuador, Vol.11, Epoca RepublicanaV, Quito, 1991
Paul Beckerman and Andrés Solimano (eds.), Crisis and Dollarization in Ecuador,World Bank, Washington, 2002.
Corporación de Estudios para el Desarrollo (Cordes, Development StudiesCorporation), Carta Económica, Quito (monthly)
Carlos de la Torre, Populist Seduction in Latin America; The EcuadorianExperience, Ohio University Press, 2000
Spurrier, Walter (ed), Análisis Semanal, Guayaquil (weekly)
Rob Vos and Niek de Jong, Rising Inequality during economic liberalisation andcrisis; macro or micro causes in Ecuador�s case?, ISS, The Hague, working paperno. 326
www.bce.fin.ec: Banco Central del Ecuador site, containing economic statistics
www.corpei.org: information from Ecuador�s export and investment promotionagency
www.ecuador.org: news and links provided by the Embassy of Ecuador inWashington, DC
www.elcomercio.com: site of El Comercio, a national daily newspaper based inQuito
www.inec.gov.ec: site of the national statistics agency
http://minfinanzas.ec-gov.net: Ministry of Economy site, incorporating text ofeconomic legislation and multilateral agreements
Reference tables
These reference tables provide the most up-to-date statistics available at the time ofpublication.
Population1998 1999 2000 2001 2002
Total population (m) 11.75 11.88 11.96 12.16 12.38 Males 5.91 5.98 6.02 6.11 6.23 Females 5.84 5.91 5.94 6.04 6.15
University education (%) 22.6 22.0 21.6 21.5 23.1 Male 24.8 24.9 23.5 23.3 24.0 Female 20.5 19.4 19.8 19.9 22.2
Note. Statistics refer to urban population unless otherwise indicated. a Percentage of populationaged 15 years and over unable to read and write. b Population aged 24 years and over. c Urban andrural population.
Source: Sistema Integrado de Indicadores Sociales del Ecuador.
