Ecuador’s economy and the people : Decoding the current Crisis

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What started off as peaceful protests turned into intractable political problems in Ecuador. The country was amidst political unrest in the month of October and witnessed indigenous groups, students, truckers, taxi drivers, daily wage workers and political opponents of the government protest against the austerity measures imposed by President Lenin Moreno and his administration. The revolts turned violent with the protesters vandalizing public property, government buildings, burning military vehicles and much more. Various groups were accused of fomenting political instability that led to the declaration of state emergency, impeding day to day government operations and overall halt in the economic activities of the country.

The trigger for these protests came after the government announced a set of new austerity measures which included the end of fuel subsidies, removal of some import tariffs and cuts in public worker benefits and wages. Moreno’s government stated that the subsidies had cost the country $1.4 billion annually and therefore needed assistance through a bailout package of US $ 4.2 billion in credit from the International Monetary Fund (IMF). Conditions that usually come with IMF loans forced Moreno’s government to implement austerity measures which eventually led to large scale protests across the country. On the other hand, protests from the people were centred around three main objectives – the first objective was the restitution of fuel subsidies, second was the revocation of austerity measures and thirdly they demanded the resignation of President Lenin Moreno. However, after the negotiation process, a deal was signed and the fuel subsidies were restored. While this was seen as a major win for the protesters, the issue regarding fuel subsidies has looming consequences on the political and economic front that would keep recurring if not addressed immediately.

The genesis of fuel subsidy dates back to mid-1970s during Ecuador’s first oil boom when the military led governments increased the subsidies with the intention of improving the lives of the lower income group as well as strengthening their own political support. Since then fuel subsidies have been an integral part of political campaigns. However, various governments have tried to reverse the subsidies but have failed time and again.  Furthermore, the discovery of oil and oil production became central to the government’s plan to resuscitate the economy rather than analysing the long-term effects of fuel subsidies on overall growth and development of the country.

The main conundrum that Ecuador faces is its inability to take advantage of its society’s potential for growth because it cannot function sustainably with fuel subsidies and the recent protests are a clear indication that it cannot function without them either. Therefore, there are two major issues that need to be addressed in terms of policy implementation – firstly, the long-term effects of continued fuel subsidies on the Ecuadorian economy. Secondly, the environmental considerations with the usage of fossil fuels over renewable resources, i.e. fuel subsidies tend to lower the prices of oil, gasoline and other petroleum products which encourage their usage rather than other alternatives. This poses a significant challenge at a time when environmental threat from fossil fuels has become a global issue. While there was no particular need or importance for fuel subsidies in the earlier years, its implementation has been driven by political and social factors of addressing low-income groups. There is an increased dependence on fuel subsidies and any sudden hike in the prices seem to set off alarm among the people. The recent revocation of subsidies without prior warning or general sensitization regarding its removal caused a lot of tension among the lower- and middle-income groups. The sudden change led to diesel fuel prices doubling, immediately followed by regular fuel prices increasing by 30%. This caused widespread panic and chaos and eventually led to violent protests with all major roads being blocked in the capital city of Quito, the government being moved from Quito to Guayaquil, oil productions being shut down at Sacha oil fields and at a few other production units leading to economic slowdown. The main take away from the recent protests is that while the intentions of the government was aimed at long term growth and security of its citizens, the short-term implications were overlooked and blindsided. The probable solution could have been a gradual increase in fuel prices followed by encouragement to alternative sources of energy, as well as other forms of social subsidy to the affected people. The immediate implementation not only left the citizens unprepared but also agitated them for not being consulted regarding the changes. Due to the sudden policy change, attention was drawn towards increased costs rather than probable long-term benefits.

Ecuador has a long history of political and economic challenges, be it unstable governments, military rule or the inequitable distribution of wealth. However, recent periods of instability have ranged from economic, political to social aspects. In terms of economy, the country has been entirely dependent on its oil production and the constant fluctuation in global commodity prices and especially crude prices has affected it drastically. Politically, the country has seen shifts in ideology between ruling presidents that has affected its policies and led to turmoil.  Be it the Socialist and Leftist ideology of former President Rafael Correa or the Leftist turned Centrist, President Lenin Moreno, the situation in Ecuador remains questionable. In terms of social aspects, reduction of government spending in order to abide by IMF loan stipulations has benefitted multinational corporations and other powerful economic groups at the expense of the working class. The overall rise in prices, has increased the burden on the working-class citizens leading to large scale protests and revolts.

Given the current circumstances, Moreno’s government has to take a step back and critically analyse the consequences of their policy change and the culmination of events that followed. What is significant is the fact that the dissent is driven by an increasing perception of the people that the government and political leaders are corrupt, inefficient, and support vested interests. While the dissent was largely internal, there could be cascading effects of these demonstrations upon neighbouring countries. The six neighbouring countries namely Argentina, Brazil, Colombia, Guatemala, Peru and Paraguay released a joint statement addressing the protests and condemning any act of destabilization attempts. The joint statement also directly warned Venezuelan President Nicolas Maduro’s regime from inciting any chaos in the region and causing further instability. The international community has largely remained silent on these protests with only the United States emphasising the importance of dialogue and respect for rule of law over dissent. The crisis in Ecuador and across Latin America needs to be addressed by the international community as the region is already struggling with massive migration and economic issues, and the added pressure of political instability will have a spiralling effect.

 What does this portend for the future?

Latin America is currently the melting pot of issues with almost every country having demonstrations and protestson corruption, rising fuel and public transportation prices, weak institutions to name a few. The current crisis in Ecuador is similar to the issues faced by its Latin American neighbours be it Chile, Bolivia, Argentina or Peru. It gives rise to a major concern regarding the stability of the region and the looming threat of a domino effect in a world where social media networks create instantaneous transmission of news and views.

The issue in Ecuador is not exclusive to its region as there have been so many instances from the past across various countries be it the Arab Spring, Yellow Vest movement or the protests in Hongkong. The common thread of dissent is dissatisfaction with the decisions taken by the regimes or governments in place, which raises questions about the need for active involvement of the international community and multilateral institutions. The current scenario of cascading instability could endanger international peace and stability, and that raises an important question about the sanctity of the concepts of sovereignty versus peoples’ power and good governance.

Swathi Kallur is a research intern with TPF. She holds a masters in international studies. Views expressed are the author’s own.

Photo: View of Quito from Basilica de Voto Nacional – copyright: M Matheswaran

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