Economist of the day
from David Ruccio
Ecuador’s president Rafael Correa [ht: ke] has been elected to a third term in power.
What policies has your government pursued in order to reduce inequality?
Latin America holds the grim title of most unequal region in the world, and the Andean countries are the most unequal part of that region. This is why it was crazy to apply the neoliberal system, supposedly based on competition and the liberation of the market, in countries like Ecuador in recent decades. What competition were they talking about? It was a massacre. Now we are reducing inequality, and poverty with it, through a combination of four things. Firstly, making the rich pay more taxes. We have instituted a much more progressive taxation system, and people now actually pay their taxes—collection has doubled. These resources, together with oil revenues and the money saved by reducing the debt burden, can be devoted to education, health and so on. This is the second point: giving equality of opportunities. People no longer have to pay for healthcare or education, which were quite expensive for the poor—school enrolment cost $25 per child, but is now completely free; some children are given books and uniforms too.
Thirdly, governing the market and improving the labour system. The market is a reality that we cannot avoid; but believing the market should allocate everything is a different matter. The market needs to be governed by collective action. We are putting an end to forms of exploitation such as subcontracting. We are improving real wages—we have been able to close the gap between family incomes and a basic basket of consumption goods. Around 60–65 per cent of families could afford the basic basket at the start of our mandate, now we’ve reached 93 per cent, the highest in the country’s history. We’ve disproved orthodox economic theory, the idea that to generate employment one needs to lower real wages: here the real wage has risen substantially, and we have one of the lowest unemployment rates in the region—just under 5 per cent. We’ve also paid attention to the quality of employment, making sure businesses comply with labour laws. While raising wages for labour, we’ve reduced the remuneration for capital. In this country, if one proposed raising the minimum wage by a few dollars one was called a demagogue, a populist, but no one was surprised by interest rates of 24–45 per cent. We drastically lowered interest rates, to 8–9 per cent, for the corporate sector.
Fourthly, distributing adequately our social patrimony. We used to give away our oil: before the Palacio government, transnational companies would take the equivalent of 85 out of every 100 barrels and leave us with 15; now we have renegotiated the contracts, the proportions have been reversed. Another example: after the economic crisis of 1999–2000, many enterprises which were used as collateral for loans should have ended up in state hands; it was we who finally seized them. In the case of the Isaías Group, owned by the family of the same name, in 2008 we recovered around 200 enterprises. Other governments would probably have privatized them again, so they would end up in the same hands as usual. We’ve used the public banking system to provide finance so that the workers themselves can buy all or part of these enterprises.
Great to see Latin America finally getting the leaders they need
I second Robert’s sentiments
There is perhaps one problem with growth and redistribution primarily based on the export of exhaustible resources, which is the case of Ecuador (and Bolivia and Venezuela). Under the label of “extractivismo,” this is being criticized by people on the left as e.g. Alberto Acosta. The problem is that, living ecological considerations aside, it does not seem to be economically rational to extract and export the oil in order to consume the receipts — e.g., in the best of cases, to distribute them as transfers to the poor. As ethically and socially justifiable as reducing poverty is, oil reserves are part of the social capital and should not be consumed, but transformed in other forms of social capital, if these other forms of investment are as profitable as oil reserves increasing in value in the ground. If you don’t have public investment alternatives which can give, at a minimum, the same rate of return as the oil in the ground, you should leave the oil in the ground. Oil reserves are increasing in value at 13 per cent per year since 1999 — this rate of increase of the oil price will probably not decrease much in the future, given the “peak oil” panic. The Ecuadorian economy is growing quite well — at almost 5 per cent per year since 2000 — so public investments are probably doing very well, but not as well as oil reserves increasing in value by 13 per cent per year. At present production rates and proven reserves, oil will be exhausted in Ecuador in 33 years. The challenge is to create a diversified, modern economy long before the Ecuadorian oil era is over.
Note: the data is from http://www.bp.com/assets/bp_internet/globalbp/globalbp_uk_english/reports_and_publications/statistical_energy_review_2011/STAGING/local_assets/pdf/statistical_review_of_world_energy_full_report_2012.pdf
Jorge,
That is a very good point, but it also seems like that is what Correa is trying to do. Part of the problem is that the oil may be extracted anyway in the future, since the world economy is still massively dependent on hydrocarbon energy sources. What Correa is doing, as I understand it, is to say, “Look, the oil may have to come out of the ground for the time being, but before I came to power, it was being used to enrich the few at the top. The oil was being transformed into consumables for a very rich elite. This way, we use a lot of the revenue to try to build the social capital you suggest.”
Its only a start. The signs are very encouraging. But a lot can happen in thirty years, and to solidify the place of people in that economy equal access to education and health care are essential. If you can also improve tax collections (like Correa claims in the interview), then you also immediately build into the social fabric the idea that there is a collective responsibility for human welfare. Besides, education potentially gets people thinking about the kind of economy they might like to have in the absence of oil, and possibly how to get there. They might not have to extract all the oil, since they might be able to stop after 20 years. In fact, that might be a good thing to build into the plans now.
There is always the potential for a move back in the other direction. Market monitoring could break down, regulators could be captured, etc. It could still be a devil’s bargain, but Ecuador is partly constrained by the actions and choices of other people and countries. And as long as markets can’t be avoided, the ability to regulate them properly is key. Markets, especially capitalist ones, seem to have a tendency to implant the idea of growth. . The target, from an ecological point of view, is some form of the ‘steady state.’ Education leads to productivity increases by and large, so that may be a growth stimulant too. The key is how well the markets can be regulated. If they can’t be well regulated, what then?
Fun fact: as far as I know the UK government in the time of Margaret Thatcher took a 90% share of the North Sea oil pie (I’m however not entirely sure how this was calculated, it was probably after a deduction for driling costs): “Throughout the 1980s revenue from the 90 per cent tax on North Sea oil extraction was used as a short-term funding source to balance the economy and pay the costs of reform.[90]” from http://en.wikipedia.org/wiki/Margaret_Thatcher
I agree with Jeff that policy could change in the future, with people increasingly conscious about their (and their descendants) rights to the oil commons — that would result in a more rational use the oil resources. But as you say, things could change in the other sense also — oil riches could end again in the hands of a corrupt oligarchy, as in many places around the world. (Of course this should not mean that we should extract and distribute as much as possible as long as the government is in the hands of the people.) In any case, Ecuador is extracting oil at about the same rate since 2004 (when it made a 25 per cent jump).
Very interesting merijnknibbe also about the Thatcher government’s use of the oil rents. And they claimed to be the bearers of the strictest orthodox economic rationality! Given the evolution of income distribution in the UK since Thatcher, the money largely went into the pockets of the rich. According to the same source as above, at present rates the UK has oil for 7 years only. Poor Queen Elisabeth…
Another interesting case is Norway, often presented as the perfect model of rational planning and management of oil resources. Norway is disinheriting her descendants at a high pace; there is oil for 9 years only … Where is the money? A lot of it in “sovereign funds,” you would say, but what are the returns? The risks? Norway’s oil production continues (although at slightly declining rates) to the bitter end.