Home > economics profession, Keynes > Ecuador, Bolivia Show that Even Small Developing Countries Can Pursue Independent Economic Policies, Stand Up for Their Rights, and Win

Ecuador, Bolivia Show that Even Small Developing Countries Can Pursue Independent Economic Policies, Stand Up for Their Rights, and Win

Among the conventional wisdom that we hear everyday in the business press is that developing countries should bend over backwards to create a friendly climate for foreign corporations, follow orthodox (neoliberal) macroeconomic policy advice, and strive to achieve an investment-grade sovereign credit rating so as to attract more foreign capital.

Guess which country is expected to have the fastest economic growth in the Americas this year?  

Bolivia. The country’s first indigenous president, Evo Morales, was elected in 2005 and took office in January 2006. Bolivia, the poorest country in South America, had been operating under IMF agreements for 20 consecutive years, and had a per capita income lower than it had been 27 years earlier. Evo sent the IMF packing just three months after he took office, and then moved to re-nationalize the hydrocarbons industry (mostly natural gas). Needless to say this did not sit well with the international corporate community. Nor did Bolivia’s decision in May 2007 to withdraw from the World Bank’s international arbitration panel (ICSID), which had a tendency to settle disputes in favor of international corporations and against governments.

But Bolivia’s re-nationalization and increased royalties on hydrocarbons has given the government billions of dollars of additional revenue (Bolivia’s entire GDP is only about $16.6 billion, with a population of 10 million people). These revenues have been useful for a government that wants to promote development, and especially to maintain growth during the downturn. Public investment increased from 6.3 percent of GDP in 2005 to 10.5 percent for 2009. Bolivia’s growth through the current world downturn is even more remarkable in that it was hit hard by falling prices for its most important exports – natural gas and minerals, and also by a loss of important export preferences in the U.S. market. The Bush administration cut off Bolivia’s trade preferences that were granted under the ATPDEA (Andean Trade Promotion and Drug Eradication Act), allegedly to punish Bolivia for insufficient co-operation in the “war on drugs.” In reality, it was more complicated: Bolivia expelled the U.S. Ambassador because of evidence that the U.S. government was supporting the opposition to the Morales government, and the ATPDA revocation followed soon thereafter. In any case, the Obama administration has so far not changed the Bush administration’s policies toward Bolivia; but Bolivia has proven that it can do quite well with or without Washington’s cooperation.

Ecuador’s leftist president, Rafael Correa, is an economist who, well before he was elected in December 2006, had understood and written about the limitations of neoliberal economic dogma. He took office in 2007, and established an international tribunal to examine the legitimacy of the country’s debt. In November 2008 the commission found that part of the debt was not legally contracted, and in December Correa announced that the government would default on roughly $3.2 billion of its international debt. He was vilified in the business press, but the default was successful. Ecuador cleared a third of its foreign debt off its books by defaulting and then buying the debt back at about 35 cents on the dollar. The country’s international credit rating remains low, but no lower than it was before Correa’s election – and it was even raised a notch after buyback was completed.

The Correa government also incurred foreign investors’ wrath by renegotiating its deals with foreign oil companies to capture a larger share of revenue as oil prices rose. And Correa has bucked pressure from Chevron and its powerful allies in Washington to drop his support of a lawsuit against the company for massive pollution of ground waters, with damages that could exceed $27 billion.

How has Ecuador done? Growth has averaged a healthy 4.5 percent over Correa’s first two years. And the government has made sure that it has trickled down: health care spending as a percent of GDP has doubled, and social spending in general has expanded considerably from 5.4 percent to 8.3 percent of GDP in two years. This includes a doubling of the cash transfer program to poor households, a $474 million increase in spending for housing, and other programs for low-income families.

Ecuador was hit hard by a 77 percent drop in the price of its oil exports from June 2008 to February 2009, as well as a decline in remittances from abroad. Nonetheless it has weathered the storm pretty well. Other unorthodox policies, in addition to the debt default, have helped Ecuador to stimulate its economy without running too low on reserves. Ecuador’s currency is the U.S. dollar, so that rules out using exchange rate policy and most monetary policy for counter-cyclical efforts in a recession – a significant handicap. Instead Ecuador was able to cut deals with China for a billion-dollar advance payment for oil and another one billion dollar loan. The government also has begun requiring Ecuadorian banks to repatriate some of their reserves held abroad, expected to bring back another $1.2 billion, and has started repatriating $2.5 billion in Central Bank reserves held abroad in order to finance another large stimulus package. Ecuador’s growth will probably come in at about 1 percent this year, which is pretty good relative to most of the hemisphere – e.g. Mexico, at the other end of the spectrum, is projected to have a 7.5 percent decline in GDP for 2009.

The standard reporting and even quasi-academic analysis of Bolivia and Ecuador are that they are victims of populist, socialist, “anti-American” governments – aligned with Venezuela’s Hugo Chavez and Cuba, of course – and on the road to ruin. To be sure, both countries have many challenges ahead, the most important of which will be to implement economic strategies that can diversify and develop their economies over the long run. But they have made a good start so far, by giving the conventional wisdom of the economic and foreign policy establishment – in Washington and Europe — the respect that it has earned.

This column was published in The Guardian Unlimited on October 28, 2009.

  1. November 5, 2009 at 5:33 pm

    Hi there,

    A little problem with dying for the ideal. I too have been impressed by Bolivia – I haven’t looked too much at Ecuador. Their passion is sensational and is a great example of what an integrated social, economic and environmental policy looks like.

    BUT why does Morales beat his opposition and stamp down on free press?

    Economically brilliant, politically horrendous.

    And there are some cuts to freedom that no policy can justify.

    Simon

  2. Pablo M. Podhorzer
    November 5, 2009 at 6:59 pm

    The press in many Latin-American countries is today owned by powerful families from the oligarchy or directly by American or European corporations. A good part of their political sections are heavily slanted to the point of directly lying to the public about facts. Lying. Not expressing a political position: lying. It is not a secret that those families want Evo to be killed. Whay would you do?

  3. rachelincolombia
    April 26, 2010 at 11:32 am

    Yes agreed they have done well, but personally I am still reserving judgement. There was a time when Venezuela was heavily praised by heterodox economists, and to some extent still is, but there is a wealth of evidence that the government is at least partly blamed for very high levels of urban violence, endemic corruption (particularly in Chavez´s home state of Barinas), and social policies which seem to be very much focused on drawing people into a long-term dependency on the state rather than genuinely promoting social development and community activity. Of course, that doesn´t necessarily mean that all this will happen in Ecuador and Bolivia as well, but it needs to be considered critically. Also, it might be worth considering ODI´s analysis of Bolivia, which basically said what you just said, although they also pointed out that a lack of investment in hydrocarbons means that there are questions of the sustainability of Bolivia´s growth and poverty reduction (no I am not predicting economic collapse, just posing a possible caveat. Finally, let´s not forget that these governments are still very much wedded to extractive, export-oriented development which is highly dependent on rapid capitalist growth in India and China, and I see little evidence that they are considering broader issues of sustainability. Chavez, for example, continues to subsidize gasoline massively and his policies with regards to indigenous communities and coal mining are extremely ambiguous. Both Correa and Morales have repeatedly shown utter disdain for any local opposition to mining and oil activities. I am not of course saying that they should simply turn the taps off (and Ecuador´s Yasuni-ITT initiative remains the best proposal out there, although Correa seems to have gone cold on it) but in the long term there needs to be a transition towards the more sustainable, non-destructive consumerist models that Chavez and Morales always claim to support in their speeches on climate change. Anyway, thanks for the article and for anyone interested in these issues, please check out IIED´s new blog, Due South, which looks at the recession and impacts on sustainable development. http://www.iied.org/sustainable-markets/blog/due-south

  1. No trackbacks yet.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.