Economic Overview & History

Turbulence and painful economic reform characterized Ecuador’s economy in the 1990’s. In an effort to break the cycle of “boom” and “bust” that plagued the nation for more than a century, the last decade of Ecuadorian regimes instituted a number of fiscal reforms. The current president of Ecuador, Rafael Correa, is an opponent of neoliberalism, and has sought to un-do many Washington Consensus reforms made by his predecessors

Discovery of large oil deposits in the Amazon region in the 1970’s transformed Ecuador’s economy from an agrarian one based on the export of a few commodities, such as bananas, cocoa, and coffee, to one reliant on petroleum.

After a brief period of economic prosperity brought on by its new oil wealth, Ecuador experienced its first post “oil boom” economic slowdown. What began as a slowdown ended in a near economic collapse with the sharp decline in world oil prices in 1986, followed by the destruction of a large stretch of Ecuador’s sole oil pipeline by an earthquake in 1987. The depression of the late 80’s accentuated the country’s over reliance on oil and, likewise, pushed the government in the direction of liberalization and diversification, the two elements necessary to insulate the economy against future disasters brought on by the decline of a single product.

An increase in oil export prices in the late 80’s allowed Ecuador to recover, at least in part, and from 1988 to 1992, with the oil crisis still fresh in its mind, the Ecuadorian Government began taking measures to stabilize the economy. In 1992, shortly after assuming the presidency, President Sixto Durán Ballén implemented a Macroeconomic Stabilization Plan to fulfill his campaign promise to expand modernization and stabilization efforts.

Adoption of the International Monetary Fund (“IMF”) backed Stabilization Plan jump-started a brief economic recovery. Inflation decreased from 60.2% in 1992 to 31% in 1993 and 25.4% in 1994, international reserves increased from a low of USD 224 million in August 1992 to USD 1.2 billion in December 1993 and USD 1.7 billion in December 1994, the GDP grew by 2% in 1993 and 4.3% in 1994.

In January 1995, several crisis, including the military confrontation with Peru, known as the Cenepa Incident, the resignation of the vice-president amidst widespread allegations of graft, and an energy crisis brought on by the recurrence of seasonal shortages, interfered with Ecuador’s stabilization efforts and again sent its economy and political system into a tailspin.

In 1996, coastal millionaire Abdalá Bucaram won the presidency based on an unorthodox platform, known as the “Convertibility plan”, that he vowed would curb inflation and correct macroeconomic imbalances. The unconventional plan that helped Bucaram ascend to the office of the president, in combination with his own intricacies, ultimately lead to a heated conflict with Congress and a national protest in February1997 that demanded the ousting of his regime. Empowered by the President’s unpopularity with organized labor, business, and professional organizations, Congress unseated Bucaram in February 1997 on grounds of mental incompetence.

In May of 1997, following the demonstrations that led to the ousting of Bucaram and the appointment of Interim President Fabián Alarcón, the people of Ecuador called for a National Assembly to reform the Constitution and the country’s political structure. On the same day Ecuador’s new constitution came into effect, Jamil Mahuad assumed the presidency.

Mahuad, the former Quito Mayor, inherited an unsustainable fiscal deficit, a heavily El Niño damaged infrastructure, a hostile public, as well as Ecuador’s myriad of chronic problems. Despite Ecuador’s precarious and unsettled state, Mahuad aggressively set out liberalizing the economy and introducing free market policies. His administration received congressional approval to partially privatize some of the major state enterprises, announced the cancellation of subsidies on electricity, cooking gas, and fuel, and attempted to reform the sickly social security system. However unpopular, the changes significantly reduced the government’s fiscal deficit and made possibly discussions with the IMF concerning a possible standby agreement.

In 1999, Ecuador’s economic woes reached new heights. Political uncertainty and plunging public confidence in the economy brought on by a broad freeze on banking deposits and Mahuad’s plans to privatize many state industries and “dollarize” the economy, caused Ecuador’s GDP to fall more than 30% in just a year. Other economic indicators told an equally dismal fiscal tale; Ecuador’s GDP growth rate fell from a relatively healthy 3.3% in 1998 to a dismal -7% in 1999, and, during the same time span, the per capita income of the nation’s 12.4 million inhabitants plummeted more than 30% from USD 1,619 to USD 1,101. In January 2000, the wretched state of Ecuador’s economy prompted widespread street protests, which culminated in Mahuad being forced from office.

On January 22, 2000, the Ecuadorian National Congress rejected a break in the constitutional order and ratified the procedure of presidential succession and affirmed Gustavo Noboa Bejarano, Mahuad’s vice-president, as new president. Noboa quietly finished out Mahuad’s term and in 2002 Lúcio Gutiérrez, a former army Colonel who had a hand in kicking out Mahuad, was elected.

In April, 2005, Gutiérrez made a series of political blunders that cost him the presidency. First, he used a constitutional technicality to disband the Supreme Court, which was opposed to many of his actions and policies. The people of Quito were furious and took to the streets to protest. Shortly thereafter he allowed the hugely unpopular Abdalá Bucaram to return to Ecuador, essentially pardoning him. Gutiérrez probably knew that the people would not like it, but he owed Bucaram’s party certain favors and they called them in.

The protests intensified. Gutiérrez dismissed the protestors, calling them a bunch of “forajidos.” (A reasonable translation for forajidos would be ‘riff-raff.’) The protestors adopted the name, and the Forajidos marched on the presidential palace, eventually causing Gutiérrez to flee. The Forajidos wanted Congress out as well, but Congress saved itself by charging Gutiérrez with abandoning his post and handing the presidency to Dr. Alfredo Palacios, who completed Gutiérrez’ term.

In late 2006, the people elected leftist Rafael Correa, who openly admires Venezuela’s firebrand president Hugo Chavez and who is opposed to increasing economic ties to the United States. A reformer, he wants to make fundamental changes to Ecuador’s political society, which is among the most corrupt in the world. As he has little support in congress, he may not be able to accomplish much, but the voters sent their leaders a clear message by electing him: they’ve had enough. A former university professor with a doctorate in economics, Correa may just be the man to put Ecuador on the path to a sound economy for the future.