The Battle Over Ecuador’s Economic Reforms

Protesters are decrying government reforms undertaken at the behest of the International Monetary Fund.

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Ecuador is nearly a week into a government-declared state of emergency after President Lenin Moreno’s Oct. 1 announcement of a slate of economic reforms sparked widespread protests. Despite the state of emergency, indigenous communities, unions and civil society organizations convened in the capital, Quito, again on Wednesday to protest the government’s most recent economic and austerity measures. Moreno was so perturbed by the past week’s protests that on Monday he ordered the seat of government moved out of Quito.

The backlash is aimed at more than just Moreno’s administration, however. Demonstrators are also decrying what they see as the co-conspirator behind the government’s reforms: the International Monetary Fund. Moreno’s government signed an IMF agreement earlier this year that laid out measures to stimulate Ecuador’s stagnant economy, fortify the country’s dollarization (it adopted the U.S. dollar as its currency in 2000), create jobs, increase competitiveness, protect vulnerable sectors and improve anticorruption measures. The IMF’s plan may have been theoretically and technically sound, but it did not reflect Ecuador’s reality and it went awry upon implementation.

No Good Options

Moreno’s predecessor, Rafael Correa, oversaw a decade of socialist-populist governance that created significant distortions in the economy. Moreno inherited an economy hobbled by the 2014 drop in oil prices, high public debt and severely depleted international reserves. Reforms were necessary. But rather than trying to fix the entire mess in one fell swoop, Moreno adopted a gradual, piecemeal approach to normalize the economy and adopt more open-market policies. The changes were unpopular – reflected in Moreno’s approval ratings – but his approach allowed him to make important changes without generating serious public backlash.

Presidential Approval Ratings in Ecuador

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Earlier this year, however, Moreno, still dealing with fiscal imbalances, a sluggish economy, limited domestic resources and the threat of a global economic slowdown, turned to the IMF. The two reached a deal in February 2019. The IMF package totaled $10.2 billion, of which $4.2 billion was a loan, and came with austerity and government spending restrictions attached. The package generally followed the trajectory of Moreno’s existing efforts, but the IMF mandated a more aggressive approach. In short, the terms set forth by the IMF carried with them high social and political risks, which could jeopardize the overall economy.

On Oct. 1, the president announced a series of measures to reduce Ecuador’s fiscal deficit, in line with the IMF’s requirements to tighten up government spending. Most controversial, the government said it would eliminate fuel subsidies, which would save it $1.4 billion annually. Other measures included increasing select value-added taxes, allowing temporary labor contracts, reducing paid vacation time for public employees and withdrawing tariffs on capital goods and raw materials. In all, the government would see a $2.27 billion benefit each year from the changes – equivalent to nearly 6 percent of gross domestic product. Protests began less than 24 hours after the announcement and spread across the country over the next few days, resulting in road blockades, vandalism, arrests and clashes between protesters and security forces. The government has deployed the military and other security forces to restore and maintain order, so far with limited success.

Culture Clash

Ecuador’s current unrest reflects a major shortcoming of the IMF: It is an institution designed by and in the image of the developed world (in particular the United States and the European Union) but which primarily supports emerging economies. As a result, its policies frequently fail – or create socio-political crises in recipient countries. The IMF typically conditions its aid packages (which often include loans) on a recipient country’s compliance with its stringent policy requirements. From the IMF’s perspective, this is a way to guarantee that its funds will help solve the underlying economic problems at hand and ensure that a government will make the policy changes it prescribes (whether or not those are the changes the recipient needs). But from a recipient’s perspective, the IMF is imposing the solutions of Western (and, in this case, Northern), developed economies on Southern, less-developed economies. The realities of the IMF and its recipients are very different, and indeed, recipient countries often chafe against this prescriptiveness, at times resulting in social and political backlash that can jeopardize an entire economic recovery plan.

For decades, the U.S. and Europe, as leading economic powers, have provided loans, aid and development funding to emerging economies. Institutions like the IMF painstakingly outline on paper what they believe is the perfect formula for solving an economic problem. In August, for example, the IMF Blog published an excerpt from a working paper that calls for the elimination of fuel subsidies. It argues those funds will be better spent on investments in health and education, particularly in emerging economies. And yet in practice, the formula has ignited explosive social and political consequences. Even with the promise of long-term payoffs, the proposal reflects the IMF’s blindness to the deep political and social impacts that can jeopardize and work directly against said long-term goals.

Fuel Subsidies as a Percent of Gross Domestic Product

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This reality has hit Moreno hard. Since the government announced the new measures, it’s been engaged in social and political triage. The administration negotiated a settlement with transportation workers, allowing them to increase rates to make up for increased fuel prices. But this sparked fears of rising costs across the board, and cases of speculative pricing of goods have already been registered, prompting the government to put in place price controls on some basic goods. Demonstrators’ complaints are rife with anti-IMF sentiment; they have criticized its “neo-liberal” model (a phrase that in Ecuador has negative connotations), rejected its U.S.-led policies and asserted that the Fund has no place in Ecuador. The politically influential Confederation of Indigenous Nationalities of Ecuador (or CONAIE) declared a state of emergency of its own on ancestral lands, citing the government’s use of force and failure to understand the popular nature of protesters’ demands, and threatened to subject any government security forces who violated the decree to indigenous law and punishment. CONAIE’s protests have also targeted the engine of Ecuador’s economy. The group has questioned the government’s handling of the oil and mining industries, and the state oil company, Petroamazonas, has suspended work in three oil fields because of the unrest.

Ecuador has clashed with the IMF before. In the late 1990s, the country was in the midst of an economic crisis in the lead-up to its dollarization. Jamil Mahuad was elected president in August 1998 with hopes that he could help fix the economy. Mahuad told the IMF he would manage the crisis and fix the deficit without its help. In his first months in office, he cut subsidies, raised prices and devalued the exchange rate band by 15 percent. Just over a year later, Ecuador notified the IMF that it intended to adopt the dollar, defer select debt payments and request financial assistance. Within two weeks of the dollarization announcement, CONAIE banded together with midlevel military officers and ousted Mahuad from office.

The strings attached to the IMF package have raised social and political issues that challenge the core of the country’s governance and social makeup. Austerity measures are rarely well-received by the general population, but it’s a jump from a few protests to weekslong demonstrations that bring together multiple pillars of society seeking to completely override, undo or replace the government. For Ecuador, finding a way out of its dire economic straits will require either choosing the lesser of two evils – either the social unrest that comes with the IMF deal or continued economic malaise – or concocting some other domestic solution. Moreover, there’s little the IMF can do to support the Moreno government’s efforts to address these massive social consequences.

Lender of Last Resort

Cases like Ecuador’s reignite a debate over the role and effectiveness of institutions like the IMF. The U.S.-based Center for Economic and Policy Research recently published a report concluding that the IMF loan will do more harm than good in Ecuador and criticizing the lender for its baseline assumptions. Harvard Professor Kenneth Rogoff, inspired by the situation in Argentina, has called on the IMF to reassess how it handles emerging economies. He highlights the recurrence of economic crises in past IMF recipient countries and points out the failure to prevent relapse. His proposal envisions a heavier emphasis on the aid component and less on austerity. The discourse over a global lender of last resort gains importance in the context of an expected global economic slowdown and growing concerns of debt crises in emerging markets.

Still, the governments of emerging economies continue to apply for IMF loans despite the Fund’s arguable ineffectiveness and propensity to offer solutions that just cause more problems. It may be because the IMF has long been the global lender of last resort, and because there are no consistently good alternatives. But trying to force IMF solutions on emerging economies too often results in a package that doesn’t reflect the realities of the recipient country. And from that standpoint, the unintended and dramatic socio-political consequences should come as no surprise.

Allison Fedirka
Allison Fedirka is a senior analyst for Geopolitical Futures. In addition to writing analyses, she helps train new analysts, oversees the intellectual quality of analyst work and helps guide the forecasting process. Prior to joining Geopolitical Futures, Ms. Fedirka worked for Stratfor as a Latin America specialist and subsequently as the Latin America regional director. She lived in South America – primarily Argentina and Brazil – for more than seven years and, in addition to English, fluently speaks Spanish and Portuguese. Ms. Fedirka has a bachelor’s degree in Spanish and international studies from Washington University in St. Louis and a master’s degree in international relations and affairs from the University of Belgrano, Argentina. Her thesis was on Brazil and Angola and south-south cooperation.