Like most Latin American countries, Ecuador should be reasonably well-off. It has a productive commercial agriculture (bananas and other tropical fruits, coffee, cocoa, rice, and sugar) and is South America’s fourth largest producer of oil and petroleum byproducts. It is also the world’s principal source of balsa wood. The port of Guayaquil is the most important on the west coast of South America, home to commercial fishing fleets that supply American and European markets with lobsters, shellfish, and other marine species. The figures on the economy, however, reflect no such happy prospects. The gross national product shrank by 7 percent last year and may do so by nearly half that number this year. Inflation was running at 70 percent for the first seven months of 2000. Eighty percent of Ecuadorians are judged to be living in poverty, and only two out of ten have stable employment.

This parlous state of affairs is amply reflected in the country’s international financial position. Ecuador is the first country to default on its Brady debt,[1] and its credit rating remains one of the lowest in the world. Although in August the government managed to raise nearly $4 billion, largely by exchanging heavily discounted Brady bonds and Eurobonds, its complete return to capital markets is a long way off. Even these prophylactics would have been impossible in the absence of rising oil prices—that, and dollarization of the economy, which has attracted fresh reserves to the banking system. Even so, Standard and Poor’s warns that Ecuador’s debt remains among the highest of any sovereign it rates and that the country will have to post large primary budget surpluses for years to come.

In analyzing Ecuador’s economic troubles, it is difficult to know quite where to start. Some of its problems are due to events well beyond its control. Oil prices were in a slump throughout the last two decades, and the El Niño currents caused more than $3 billion in damage in 1997 and 1998. Ecuador was strongly affected by the aftershocks of the Asian economic meltdown, and a border conflict with Peru led to much local capital flight as well as the allocation of millions of dollars into expensive military hardware.

Other problems are embedded within the country’s culture and history. It is, to begin with, an imperfectly integrated society. Forty percent of the population is indigenous, speaking either Quechua or any of ten other native languages. The country’s power structure is divided between the highland capital of Quito and the sultry port of Guayaquil, two cities that regard each other with a combination of envy and contempt. With so many have-nots, demagogic populism tends to be the instrument of choice for the political class. As in many such countries, the state in Ecuador has been a kind of employment agency for the middle class, and as such has been blown up to elephantine proportions.

With a political system set up ab initio to consume more resources than it produces, it is no wonder that the Ecuadorian treasury has periodically run into trouble. In the past the impending social crisis generated by overdrawn accounts and the lack of political consensus was forestalled by military intervention. In fact, for much of the twentieth century Ecuador (along with Bolivia) was among the most coup-prone South American states. Since 1979, however, the armed forces have largely retreated to a passive role. The result has been not resolution of differences among politicians, but deadlock.

For the past ten years, Ecuador has been perhaps Latin America’s most ungovernable society. Politician after politician has vaulted into the presidency on extravagant promises to solve everyone’s problems, only to be impaled upon expectations of his own creation. The archetypical case is that of former president Abdalá Bucaram, scion of one of the great Syro-Lebanese political and business families of Guayaquil. During the 1996 elections he promised huge across-the-board salary increases, a heavy dose of soak-the-rich popu-lism, and a massive transfer of resources to the very poor. Within weeks of taking office, however, he had switched ideological gears and summoned the ultra-orthodox former Argentine finance minister Domingo Cavallo to draw up an economic program. This included tying the sucre to the U.S. dollar, ending subsidies for public utilities, and putting many state enterprises on the auction block. The first steps of the Cavallo plan led to a fivefold increase in the price of electricity, a threefold increase in the price of domestic gas, and a 65 percent increase in the cost of public transportation. Within weeks a national protest brought the government to its knees, and the national congress opted to replace Bucaram with the president of the congress, Fabián Alarcón (see Latin American Outlook, March 1997).

Ousting Bucaram purchased a few moments of social peace while Ecuadorians prepared for new presidential elections. In July 1998 Jamil Mahuad, mayor of Quito, was elected in a second round of voting, defeating banana tycoon Alvaro Noboa in an extraordinarily close race. Mahuad’s narrow margin of victory was due largely to the fact that during the campaign Noboa pulled out all the populist stops, pledging to create 1 million jobs and to build (an unspecified number of) houses for the poor. He also successfully linked Mahuad—despite his disclaimers—to an increase in the price of gas decreed by the outgoing government. Under these circumstances, Mahuad’s presidency was a disaster foretold.

In an effort to assert some control over the country’s inflationary spiral, Mahuad announced the formal dollarization of the economy. This was sufficient to mobilize a wide range of protests not only by student and labor groups, but also by members of the country’s populous indigenous community. In late January of this year, some five thousand angry critics of the president stormed the congress building in Quito demanding Mahuad’s resignation. The movement itself might not have reached lethal proportions were it not for a new development in Ecuadorian politics—the sudden decision of middle-ranking army officers to stand aside and let mob action determine the outcome of a political conflict. A few hours later, the Ecuadorian congress, meeting in a special session in Guayaquil, voted to oust Mahuad and replace him with Vice President Gustavo Noboa.

Mahuad’s ousting has not caused a shift in the direction of government policy; on the other hand, neither has the political turmoil subsided. On March 9 President Noboa signed a bill formally adopting the dollar as the national currency (Ecuadorians can no longer write checks in sucres). The same bill included measures that allowed increased foreign investment in oil, electricity, and telecommunications sectors and granted permission to private companies to construct a $600 million oil pipeline. The same day—presumably no coincidence—the International Monetary Fund announced plans to assemble a $2 billion aid package.

Meanwhile, the decision to privatize has led to massive strikes by electrical and oil workers. The prospect of major stoppages in the petroleum industry has led the president to warn that he will call out the army to operate the oil industry if the strikers succeed in halting production, distribution, and shipping of the country’s principal source of foreign exchange. He is also actively discussing putting the fundamental economic issues of the day up to a plebiscite—as if such matters were amenable to an up-or-down vote.

Understandably, the experience of having brought down Mahuad with strikes and demonstrations has whetted the appetite of dissident groups, large and small. The Patriotic Front is an umbrella organization of radical unions opposed to dollarization, supported by teachers, oil workers, and other public sector employees. Various indigenous groups have joined in the fray, most of whose members are small farmers who produce for the local market and who resent the sudden increase in the price of (imported) fertilizer. The largest of these, the Confederation of Indigenous Nationalities of Ecuador (COAIE), claims to represent some 4 million persons. While these groups lack the coherence and unified strategy necessary to rule the country on their own, they have succeeded in making it difficult for anyone else to do so either. Meanwhile, the constant reminders of the country’s ungovernability have undermined what little business confidence remains.

Rich Ecuadorians have always been able to circumvent their country’s troubles by putting their money in European or American banks. Now they are not merely sending their resources abroad; they are going with them. Miami is fast becoming Ecuador’s second or third city, with many of the well-to-do setting up homes there or at least sending their children off to be educated there. In the past, the Ecuadorian poor had no choice but to stay home and reap the consequences of this form of disinvestment. Now, however, the country’s crisis has produced a new demographic wrinkle: Over the last two years Ecuador has experienced the largest wave of out-migration in its history—perhaps somewhere between 700,000 to 1 million Ecuadorians, many of modest circumstances, have fled to other countries in search of work. (One survey found that 35 percent of the population are considering emigration, and fully 21 percent have already attempted it.) Those who can evade border controls prefer the United States, but there is a growing Ecuadorian presence in Spain and Italy, as well as in Argentina and Chile, particularly for physicians, nurses, and other health professionals. According to one recent press report, remittances from expatriate Ecuadorians amounted last year to some $679 million, which is about half the annual income from oil exports.[2] The full social cost of this out-migration has yet to be determined, however. Many villages and towns, particularly in the Andean highlands, are dominated by women and men over sixty or children under the age of fifteen. Even from a strictly financial point of view, whatever the short-term benefits of expatriation, they will never provide the country with a platform for broad and sustained development.

There is another, even more sinister twist to Ecuadorian demography these days—the spillover effect of Colombia’s civil war. Violence in the Colombian departments of Nariño and Putumayo are pushing refugees into northern Ecuador at alarming rates. At present there are some 12,000 Colombians in the Carchi province, virtually all of whom are there illegally. Most work in agriculture, where they are poorly paid and ineligible for social security benefits. This flood of helpless Colombians has led to the deployment of major units of the Ecuadorian army, not only to Carchi, but also to Sucumbíos and Esmeraldas provinces.

Long before the Colombian conflict became front-page news in the United States, Ecuador had already agreed to allow Washington to establish a forward operating location (FOL) at Manta, a port on the country’s central Pacific coast, to monitor drug flights. This FOL is part of a network of sites that the U.S. Department of Defense was forced to cobble together in the late 1990s when it became clear that Panama would not contemplate a residual U.S. military presence in the isthmus after the year 2000, when all American troops were required under the Carter-Torrijos Treaties to leave the country. (Other FOLs will be located in Central America and the former Netherlands Antilles.)

The subsequent decision of the United States to invest heavily in the Colombian government’s antidrug (and antiguerrilla) efforts in the form of a $1 billion plus package of military and economic aid—better known as Plan Colombia—has suddenly become the subject of acute controversy in Ecuador, as it has elsewhere in northern South America. Although the Ecuadorian foreign ministry denies that the U.S. presence at Manta is likely to drag the country into the Colombian imbroglio, it has become a rallying point for the Catholic church, the media, and human rights and environmental groups. On August 21 the Miami Herald added fuel to the controversy by publishing a dispatch from the Colombian capital claiming that experiments were being conducted in the Ecuadorian Amazon region with Fusarium oxysporum, a fungus that is used to eradicate coca and poppy crops in Colombia. Although the Ecuadorian government and the U.S. embassy have denied the report, the Manta base has become one more target for antigovernment forces.

The truth is, of course, that Ecuador cannot isolate itself from the Colombian civil war by mere diplomatic posturing or pious affirmations of neutrality; as recently as last July, the important Quito daily El Comercio reported that the Colombian FARC guerrillas are already using the province of Sucumbíos as a strategic rear area and as a funnel for the introduction of fresh weaponry. Even assuming that some future Ecuadorian government agrees to shut down the Manta base, geography alone condemns the country to be hostage to the outcome of the Colombian conflict, whether the United States stays the course or not.

Ecuador’s problems are those of all Latin America—only posed in more exaggerated relief. Almost every one of the issues that have rendered it ungovernable is present in greater or lesser measure elsewhere in the region. Brazil seems congenitally unable to embrace full-scale economic reform; in Argentina the public employees unions are trying to repeal the ordinary laws of budgetary mathematics by strikes, demonstrations, and rallies. Mexico and Central America depend heavily upon out-migration and remittances, as (in a different and unexpected way) does communist Cuba. Almost everywhere the modern sector of the economy, which requires foreign capital and credit, as well as stable monetary policies, is at odds with grass-roots economic groups. The introduction of democratic pluralism, far from leading to legitimacy and consensus, has in many countries simply divided political opinion into mutually irreconcilable halves or, in the case of Ecuador, articulated new ethnic divisions. The removal of the military as the final arbiter of civil conflict has not been always accompanied by a growth in civility, maturity, and a willingness to compromise. The world—perhaps even neighboring countries—can live without a stable and viable Ecuador. The question remains, however, whether the Ecuadorian disease will confine its virulence to a single state or become a more generalized Latin American affliction.

1. The Brady bonds were introduced during the Bush administration to allow Latin American countries to refinance their external debt at conditions sufficiently favorable to lure capital back to the region.

2. Houston Chronicle, August 20, 2000.

Mark Falcoff is a resident scholar at AEI.