Economy and Trade
What is now Ecuador formed part of the northern Inca Empire until the Spanish conquest in 1533. Quito became a seat of Spanish colonial government in 1563, and part of the Viceroyalty of New Granada in 1717. The territories of the Viceroyalty—New Granada (Colombia), Venezuela, and Quito—gained their independence between 1819 and 1822, and formed a federation known as Gran Colombia. When Quito withdrew in 1830, the traditional name was changed in favor of the Republic of the Equator. Although Ecuador marked 25 years of civilian governance in 2004, the period has been marred by political instability. Protests in Quito have contributed to the mid-term ousting of Ecuador’s last three democratically elected Presidents. In 2007, a constituent assembly was elected to draft a new constitution; Ecuador’s twentieth since gaining independence. The country is substantially dependent on its petroleum resources, and manufacturing is primarily for the domestic market.
Economic Policy over 12 Months
The Ecuadorian economy is based on petroleum production, manufacturing (primarily for the domestic market), and agricultural production for domestic consumption and export. Principal exports are petroleum, bananas, shrimp, flowers, and other primary agricultural products.
Ecuador adopted the US dollar as its national currency in 2000, following a major banking crisis and recession in 1999. Dollarization led to stability, which helped Ecuador achieve solid economic performance up to 2006, with growth averaging 4.6% per year, supported by high oil prices, strong domestic consumer demand, increased non-traditional exports, and growing remittances (US$3 billion a year) from Ecuadorians living abroad.
President Correa’s economic policies include higher social spending, increased government control over strategic sectors, and a greater share of natural resource revenues for the state. After two years in office, the overall direction of economic policy is unclear, creating uncertainty for the business community. One example of uncertain direction is debt policy, where the government initially suggested it might default, then honored the debt for almost two years, and then defaulted on some debt issuances but not others (source: US Department of State). Other examples are the fact that the government’s policies for the petroleum and mining sectors were still undefined in March 2009.
An additional source of uncertainty is the new economic provisions in the 2008 constitution, which still await the issuance of implementing laws and regulations. In addition, the government is taking a number of new measures to adjust to falling petroleum revenues, and the full scope and effectiveness of those measures were unknown as of early 2009.
Ecuador is rich in natural resources, with significant oil and mineral reserves, although its mineral sector is largely undeveloped. Oil production is by both government and private companies. The state oil company, which is viewed as inefficient, operates mature oil fields that were developed by private companies in the 1970s. It has also assumed the operation of an oil field that was seized from a US oil company when that company’s contract was cancelled in 2006 for alleged contract violations, an action that is being challenged in international arbitration.
Starting in 2006, the government, through laws and decrees, has changed the terms of private-sector oil contracts, and has attempted to renegotiate new contracts with those companies, although as of early 2009 it had not renegotiated any new long-term contracts. The contractual uncertainty has led to a drop in private-sector investment in the oil sector. In 2008 (until November), overall oil production had fallen slightly since 2007, and significantly since 2006. State oil-company production rose slightly, but private production fell. Ecuador is a member of OPEC.
Economic Performance over 12 Months
In 2007, crude and refined petroleum products accounted for 58% of total export earnings. Ecuador is the world’s largest exporter of bananas and plantains (about US$1.3 billion), and a major exporter of shrimp (US$613 million). Exports of non-traditional products such as flowers (US$469 million), canned fish (US$671 million), and automobiles (US$383 million) have grown in recent years (all trade data from 2007).
Per capita income increased from US$1,296 in 2000 to an estimated US$3,670 in 2008, while the poverty rate fell from 51% in 2000 to 38% in 2006. In 2007, economic growth slowed, constrained by declining petroleum production and reduced private-sector investment, but appeared to recover somewhat in 2008, due to increased government spending and strong domestic demand.
By the end of 2008, it was clear that the global financial crisis and economic downturn were resulting in falling remittances sent home from Ecuadorians abroad, and falling oil prices. In January 2009, the government invoked the World Trade Organization (WTO) balance of payments safeguard provision to increase tariffs, and impose quotas on consumer goods that exceed its WTO bindings. These provisions will be evaluated by the WTO. The government also announced that it is cutting or restricting public-sector spending, although it did not provide many specifics on how it would do so.
In early 2008, an International Monetary Fund (IMF) country visit to Ecuador found some positives, including the healthy performance of non-oil exports, which led it to conclude that Ecuador’s dollarized system had not generated competitiveness issues. That said, the IMF noted that Ecuador’s investment and production trends lag behind other economies in the region. Among the clearest examples of this was the state oil company and the state-owned electricity company, both of which have a history of underinvestment.
The current president of Ecuador, Rafael Correa, is both left-wing and an admirer of Venezuela’s president, Hugo Chavez. Opposed to increasing economic ties to the United States, President Correa is keen to address the corruption in Ecuadorian society, which is said to be far-reaching. A former university professor, Correa has a graduate degree in economics, but has yet to demonstrate that he can give clear direction to the country. The government has passed some far-reaching tax reforms, which exempt low-income earners, and progressively tax higher-income earners up to a maximum of 35%.
On the plus side, the region is one of the fastest-growing Internet markets in the world, and the entrepreneurial spirit of Ecuador’s businesses has been well demonstrated by the growth of export-oriented business using the Internet to enable Ecuador’s flower growers to trade around the world. Access to open-source technology, such as the Linux operating system and Java, has enabled Ecuadorian entrepreneurs to develop a flourishing software industry.
Support for Inward Investment and Imports
Ecuador’s legal framework is favorable to foreign investment. The government has removed barriers to the remittance of profits, and is promoting investment in sectors that had previously been barred to foreign investment. Twelve of the 20 largest mining companies in the world are now investing in Ecuador’s mining sector. Further information can be obtained from the Ministry of Finance.
Information can be obtained from the Ministry of Finance.
GDP growth: 3.4% (2008)
GDP per capita: US$7,700
CPI: 8.6% (2008)
Key interest rate: 12.5%
Exchange rate versus dollar: N/A
FDI: US$16.81 billion
Current account surplus: US$2.008 billion (2008)
Source: CIA World Factbook except where stated