Ecuador Country Brief - December 2007
Introduction
Australia and Ecuador share modest and friendly relations. Australia cooperates with Ecuador in a number of multilateral and regional forums, including the Forum for East Asia Latin America Cooperation (FEALAC). Ecuador also participates as an observer in the South Pacific Regional Fisheries Management Organisation (RFMO), an initiative led by Australia, New Zealand and Chile. The former Australian Government also contributed to an Organization of American State (OAS) fund which assisted Ecuador, and a number of other countries in the Americas, to destroy its stockpile of anti-personnel landmines in 2001-02.
Australia’s Embassy in Santiago de Chile is responsible for Ecuador. Ecuador maintains an Embassy in Canberra.
Political Overview
Background
Ecuador gained independence from Spain in 1822, joining the Federation of Gran Colombia with Venezuela, Colombia and Panama. In 1830 Ecuador left to become an independent country. Political rivalry between the coast and mountains, which emerged soon after independence, has become one of the country’s defining political characteristic. Landowners from the mountain region combined with the Catholic Church to create a strong political alliance, opposed by the rapidly growing banking and agricultural (particularly cocoa) interests of the coast.
Ecuador’s twentieth century political history is marked by instability. The collapse of the global cocoa market in the 1920s and the Great Depression of the 1930s created a period of political turmoil lasting until 1948, in which no single government completed a term in office. From 1948 to 1960 political order was restored as the economy improved with the benefit of the growing export of bananas. Instability again became a feature of Ecuadorian political life in the early 1960s, with the influence of the Cuban revolution leading to a series of military, anti-communist governments. The military has traditionally enjoyed a high degree of independence in Ecuador and exerted considerable political control behind the scenes. In 1972 a military government reserved petroleum exploration rights for the state. Modernisation of the state was in part paid for by the influx of petro-dollars during the boom period of the 1970s but also by heavy foreign debt commitments. A constitutional referendum in 1978 provided the basis for a return to civilian rule the following year.
Ecuador has had eight Presidents in the past ten years, three of whom were dismissed due to social unrest and public pressure. In April 2005, Alfredo Palacio was sworn in as interim-President, following a vote by Congress to dismiss his predecessor, Luis Guitierrez. New Presidential Elections were held in October 15, 2006 with a run-off on November 26.
Ecuador has a democratically elected representative system of Government. The President, who is the head of state, is elected for a non-renewable four-year term and has the power to appoint and remove Cabinet Ministers. The legislature is a unicameral congress consisting of 100 members elected for a four year term.
The 2006 Congressional elections saw the collapse of the traditional parties in Congress. The largest single party is the Institutional Renovation Party (Prian) headed by the defeated presidential candidate Alvaro Noboa. Other main parties include: Patriotic Society Party (PSP) of ex President Gutierrez, the Socialist Christian Party (PSC), Izquierda Democratica and Red Etica y Democracia. No party has a majority in Congress.
Outlook
Rafael Correa won the run-off presidential elections on November 26 2006.
Correa, of the leftist Alianza Pais party (AP), secured 68 per cent of votes, defeating his conservative rival and one of Ecuador’s richest businessmen, Alvaro Noboa.
Correa’s victory highlighted the deep-seated polarisation between the coast and mountains, with Noboa winning support from the coastal business community and Correa canvassing the votes of the country’s interior.
Correa campaigned on a platform of promoting economic growth and attracting foreign investment to aid poverty reduction, whilst opposing a US-style of neoliberal economic management. Correa promised to restructure the country’s external debt and has indicated that he does not support an FTA with the United States, Ecuador’s largest source of exports.
Correa’s key early priority has been to hold a Constituent Assembly to review Ecuador’s Constitution. On 30 September 2007 Correa won a decisive victory in the elections for the Assembly, claiming around 70 per cent of the vote. His political group is set to command a majority of seats in the 130 member Assembly. The party of former President Gutierrez received the second highest percentage of votes and the party of former Presidential candidate Noboa finished third. The Assembly will rewrite the Constitution. While Correa’s support was strong in the lead-up to the elections, the result represents a decisive endorsement for the President’s constitutional reform agenda.
The Assembly convened at the end of November 2007 and has up to six months to draft a new Constitution, though given the Government’s majority; it may conclude this work earlier. Correa has indicated that the new Constitution will pave the way for “21st Century Socialism” with an overhaul of Ecuador’s unstable political system, although it is still uncertain exactly what these reforms will involve. It is possible that the Assembly will dissolve Congress while it carries out its work on the new Constitution and that once its work is complete, fresh presidential and congressional elections will be held.
Economic Overview
At a Glance
Ecuador is principally an agrarian economy, although the oil industry grew rapidly during the 1990s. Ecuador's reliance on these products has made it vulnerable to external price variations. Overriding economic difficulties stem from the country’s weak financial sector, dependence on short-term capital inflows to finance the current-account deficit, overdependence on oil export receipts for fiscal revenue, tax evasion and wage indexation which obstructs progress in fighting inflation. Trade liberalisation has stimulated the growth of non-traditional exports, but Ecuador remains over dependent on oil and bananas, exposing the economy to external shocks and renewed calls for greater state intervention.
Whilst dollarisation of the Ecuadorian economy in 2000 helped lower inflation, it also exposed underlying uncompetitiveness and highlighted the need for microeconomic and institutional reforms and deficiencies in the business environment. Deepening the process of fiscal reform will also be central to consolidating macroeconomic stability and ensuring that the country can continue to meet its external liabilities.
Policy Directions & Economic Outlook
In terms of trade policy, Ecuador embraced trade liberalisation in 1990 with reforms that eliminated import quotas, permits and subsidies. Ecuador is a founding member of the Andean Community and, since 1996, a member of the WTO. The windfall in oil export revenues is placing pressure on the government to spend more on social projects, healthcare and education. Ecuador rejoined the G-20 trade grouping in 2006, in an effort to remain engaged on WTO issues in the wake of the suspension of the Doha round. Ecuador currently enjoys preferential trade access to the United States under the Andean Trade Promotion and Drug Eradication Act, but might shortly faced increased competition from Colombian and Peruvian exports, if FTAs negotiated with both those countries are approved by the US Congress.
Trade and Investment
Two-way merchandise trade between Australia and Ecuador is small, yet increasing gradually, and totalled approximately A$26 million in 2006-07 (up from A$15.4 million in 2005-06). Australia’s exports to Ecuador were A$9.4 million in 2006-07, and primarily consisted of medicaments, coated flat rolled steel and pumps for gas. Australian imports from Ecuador totalled A$16.8 million in 2006-07, mainly comprised of animal feed, medicaments, wood and woven synthetic fabrics.
Export Opportunities
Opportunities to strengthen bilateral trade and investment ties exist in the energy and mining sectors. There may also be potential for Australian companies to invest in telecommunications services and equipment, port infrastructure and information technology (though many of these opportunities will depend on the ongoing privatisation process). Cooperation in agribusiness and tourism could also lead to further business opportunities. The educational services sector holds good potential, and is growing, albeit from a low base.