New Paper Finds that
Ecuadorean Financial Reforms Under Correa Have Been Successful
Reforms Have Allowed
Ecuador to Weather Global Recession, Reduce Poverty and
Unemployment
Contact: Dan Beeton, 202-239-1460
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.
