Ecuador's moves to dollarise the economy and privatise state assets, at the instance the IMF, lead to popular resistance, a consequent change of government and further uncertainty ahead.
JAYATI GHOSHECUADOR could be described as the quintessential banana republic. As a matter of fact, bananas themselves actually account for around a quarter of the country's exports, even more than petroleum. The United States dominates the economy of Ecuador, throug h the control of U.S.-based multinational companies on all major aspects of production and trade. And recent events underline U.S. control of the country's polity as well.
Ecuador's population is ethnically mixed. The largest ethnic groups are indigenous (mainly of the Quichua tribal groups) and mestizo (mixed Indian-Caucasian), which together account for more than 85 per cent of the population. Yet these groups form the p oorest and most disadvantaged sections of society, and have benefited little from even the meagre economic growth that the country has experienced over the past few decades.
As for much of Latin America, the external debt problems Ecuador experienced over the 1980s made it a "lost decade" in terms of growth and development. Per capita incomes fell by nearly one per cent per annum - an enormous cumulative decline over the dec ade. Since then, the much-acclaimed "revival" in Latin America has been relatively weak in Ecuador: per capita incomes up to 1998 have risen by only 0.8 per cent per annum on average.
Real wages got back to their 1980 level only in 1995. The past year (1999) was marked by very severe economic contraction, with real gross national product (GNP) falling by around 8 per cent.
Ecuador's economy falls into the classic pattern of underdevelopment: dominated by primary production for export, which is controlled by multinational companies, and heavily dependent not only on the import of most manufactured goods but also on meagre f oreign capital inflows, and prone to a high degree of volatility. The country continues to face chronic and severe problems of high unemployment, rampaging inflation and high poverty incidence. One estimate suggests that currently only one in three of th e labour force has a full-time job. Inflation has averaged around 50 per cent over the decade, and is currently running at around 60 per cent.
The proportion of people below the poverty line in the urban areas has been doggedly above 50 per cent through the 1990s, and it should be noted that well above half of Ecuador's people live in urban areas. Those in extreme indigence account for around 2 0 per cent of the population. Although there are no reliable estimates of rural poverty, the general feeling is that rural poverty is likely to be higher, even though extreme indigence may be slightly less.
Almost all of the absolutely poor population of Ecuador is composed of indigenous and mestizo groups, and the highland Quichua (around one-third of the total population) are among the most desperately poor. While lack of development in general has meant that their condition did not improve much even in periods of growth, they have been especially hit by government "austerity" measures which have cut what little was provided by way of public services. These cuts have also adversely affected the condition of the poor in the urban areas, who increasingly face not just unemployment and rising prices but also growing inadequacy of the most basic infrastructure and public services.
INEVITABLY, Ecuador has been under several International Monetary Fund (IMF) adjustment programmes over the past decade, which have prompted these "austerity" measures affecting most of the population. And there are no prizes for guessing which major U.S . economist has been advising various governments in Quito in the run-up to the present extreme crisis: Jeffrey Sachs. (The extraordinary career of this footloose economic policy adviser may deserve even more attention than it gets. Despite an alarming t rack record of policy advice across so many continents - think, for example, of Poland, Russia and Indonesia, to name just a few of his more spectacular failures - he seems to retain his appeal for many developing country governments, including our own.)
The general mismanagement of the economy over the 1990s, for which the foreign advisers must surely take the blame along with the government, resulted in yet another debt crisis last September, when Ecuador was unable to fulfil its debt-servicing commitm ents. The international financial community did not make much of a fuss about it at the time, mainly because the small size of Ecuador's economy and its external debt meant that it was not very important in overall financial portfolios.
In consequence of the effective default (subsequently converted into yet another "debt rescheduling") the currency - the sucre - plummeted in value in the foreign exchange markets, and inflation spiralled. Also, stringent economic measures were sought to be imposed on the government headed by Jamil Mahuad, which was the sixth such government since 1996.
The scheme proposed by Mahuad early in January this year involved the dollarisation of the Ecuadorean economy, which is a system even more extreme than that of Argentina's Currency Board. This would have meant adopting the U.S. dollar as the principal cu rrency of the country, and forcing the government to spend only on the basis of the dollar resources available to it. The fiscal deficit was proposed to be met by breaking up and selling off major public sector assets, including in the oil, telecommunica tions and electricity sectors, mainly to foreign buyers. Much public expenditure would be further curtailed.
The Opposition - some in Congress, but many outside, including trade unions, peasant groups and others - protested that this scheme would not create a sustainable solution to the economic problems, and would further impoverish millions of people living b elow the poverty line. Matters came to a head in the third week of January, when tens of thousands of protesters marched into the capital Quito. They were mainly indigenous people to start with, but were rapidly joined by local workers and students.
Ecuador's indigenous movement has been a formidable social force for over a decade, but mainly expressed itself in sudden spurts of street-based activity. Beginning with the 1996 elections, the indigenous population had abandoned its traditional policy o f shunning the official political system and had participated more actively, thus establishing itself as a significant political force. The current movement also has a charismatic leader - Antonio Vargas - who has been emphasising the imperative need not only for structural redistributive reform but also to reorient macroeconomic policies in favour of the citizenry at large.
The public protests brought Quito to a standstill for several days, and finally culminated on Friday, January 21, the day the bill for dollarisation was to be introduced in Congress. Instead, what happened was a takeover of the empty Congress building an d the Supreme Court building by several thousand protesters. This was possible also because of an effective revolt in the army, as thousands of soldiers and hundreds of junior officers - up to the rank of Colonel - joined the protesters, in a unique comb ination of forces.
For several hours the protesters declared a "people's parliament", and a new "government of national salvation" was placed in power by this spontaneous uprising. This was headed by a troika composed of the representative of the indigenous people's moveme nt, Antonio Vargas, a military leader, Colonel Gutierrez, and a retired Supreme Court Judge highly respected among the people. It publicly resolved to reverse the economic policies and chart a new course based on the ordinary people's needs, leading to w ild celebrations in the streets.
Matters moved swiftly after that, as the international community, and especially the U.S., stepped in to exercise its usual damage limitation and finally effective control. First, the head of the armed forces in Ecuador, General Mendoza, replaced Colonel Gutierrez in the ruling junta. Within the space of five hours, and after only a few calls from Washington D.C., General Mendoza also disbanded the new government and declared that the new President would be elected by Congress. According to local radio reports, U.S. officials had threatened to withdraw aid and to oppose a long-awaited IMF loan, but the General himself said his decision was made to avoid a split in the military and "a futile bloodbath".
Congress then elected the earlier Vice-President, Gustavo Noboa, to head the country. The people's movements were suddenly in disarray, and despite the feeling of betrayal, most of the outside protesters left the capital. President Noboa, a former univer sity Professor with little political experience, rapidly showed his own inclination. He pledged to press ahead with his deposed predecessor's plan to dollarise the currency and privatise state assets in the face of continued opposition from trade unions and indigenous organisations.
Noboa's first interview was, perhaps predictably, with a foreign news agency, Reuters, in which he announced that "I am strict when it comes to complying with one's duties... Ecuador has to modernise, privatise. But to say that is repetitive. Now we have to really do it... I will use an iron hand when necessary" to push forward with aggressive policies of privatisation and further expenditure control and to crush opposition to these measures.
The army officers and soldiers who participated in what is now being termed as the "revolt" are to be tried, and action may well be taken against some of the other protesters as well. The attempt of the government is now to show that it is business (or t he lack of it) as usual, and that the focus of economic policy will continue to be that of placating and pleasing the international community, rather than addressing the urgent needs of the local population.
Financial markets reacted with predictable relief at this proof that the new President was, after all, one of the boys, and could be trusted not to divert from those policies which are most favourable to it. And the Western media too have been welcoming this restoration of elected democracy, with a Western-trained academic to lead it.
But the people's movements remain unconvinced. Vargas announced (from hiding) that the indigenous groups have given the new government a grace period of six months, to show whether the leaders are willing to take measures to improve the lot of the poor. Otherwise, they threaten not just another agitation but a more comprehensive struggle, which could engulf the small Andean country.
All this means that the future - even over the next few months - is still highly uncertain for Ecuador. But while this episode does raise questions about the nature of true democracy and the power of the people's voice, it also points to the sheer diffic ulty of popular movements pressing for social and economic change in the U.S.' backyard. Much may have to change, not only in Ecuador but also in its apparently all-powerful northern neighbour, before the people's movements can be successful in moving to wards the granting of basic economic rights to the citizens.
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