Ecuador’s New Deal Has Allowed Ecuador to Weather Global Recession, Reduce Poverty and Unemployment
February 14, 2013
Washington, D.C.- A new paper from the Center for Economic and Policy Research (CEPR) examines the financial reforms carried out by the Rafael Correa administration, reforms which the paper concludes are in large part responsible for the economic success Ecuador has experienced over the past several years, including its successful counter-cyclical policies during the global recession after 2008. The paper, “Ecuador’s New Deal: Reforming and Regulating the Financial Sector,” examines the Correa government’s taking control of the Central Bank, implementation of capital controls, increased taxation of the financial sector, and other regulatory reforms. It concludes that these played a major role in bringing about Ecuador’s strong economic growth, increased government revenue, a substantial decline in poverty and unemployment, and other improvements in economic and social indicators.
Ecuador will hold presidential elections on Sunday, February 17. Correa is almost certain to be re-elected; Reuters reports that he “has a lead of as much as 50 percentage points over the nearest of his seven rivals in opinion polls.”
“Ecuador has gone against the conventional wisdom and shown that there are alternatives,” CEPR Co-Director Mark Weisbrot and lead author of the paper said. “By pursuing policies that have prioritized economic development, employment, and poverty reduction over financial and foreign interests, Ecuador has surmounted some of the problems that had previously held it back, and that have hampered progress in other countries.”
The paper notes that by the last quarter of 2012, unemployment had fallen to 4.1 percent, its lowest level on record (for at least 25 years), while the national poverty rate fell to 27.3 percent as of December 2012, 27 percent below its level in 2006.
The paper finds that financial reforms contributed significantly to an unprecedented rise in government revenue under Correa, from 27 percent of GDP in 2006 to more than 40 percent in 2012. This not only allowed for vitally important expansionary fiscal policy, but also a large increase in social spending. The biggest increase was in housing, but there were also significant increases in health care spending and other social spending. The government’s most important cash-transfer program (the Bono de Desarollo Humano) increased by one-fourth, and education funding more than doubled, as a percent of GDP, from 2006-2009.
The paper concludes that “What is most remarkable is that many of these reforms were unorthodox or against the prevailing wisdom of what governments are supposed to do in order to promote economic progress. Taking executive control over the central bank, defaulting on one-third of the foreign debt, increasing regulation and taxation of the financial sector, increasing restrictions on international capital flows, greatly expanding the size and role of government – these are measures that are supposed to lead to economic ruin. The conventional wisdom is also that it is most important to please investors, including foreign creditors, which this government clearly did not do.”
“While not all of Ecuador’s reforms went against orthodox policy advice,” Weisbrot said, “many of them did – and they succeeded. It should be no surprise that Correa is such a popular candidate heading into this Sunday’s elections.”
The paper notes that “Ecuador’s success shows that a government committed to reform of the financial system, can – with popular support – confront an alliance of powerful, entrenched financial, political, and media interests and win. The government also took on powerful international interests as well, in its foreign debt default, its renegotiation of oil contracts, and its refusal to renew the concession for one of the United States’ few remaining military bases in South America.” It notes that this success indicates that developing countries may have more and better policy options than is commonly believed to be the case.