Thursday, March 15, 2007

Soon to be Republica Bolivariana de Ecuador?

One of the advantages of investing into a local opportunity through Kiva is, that you, consciously or subconsciously, keep better track of what is going on in those countries in which you invested. And therefore, when things are happening in Ecuador, it jumps to the attention as more than half of my Kiva loans are in this country.

What happened?
Late last year, Ecuador elected a new president, Rafael Correa, who closely aligned himself with president Hugo Chávez Frias from the Republica Bolivariana de Venezuela (a.k.a. Venezuela), and with president Evo Morales from Bolivia. That fact alone is scary, as both Mr. Chávez and Mr. Morales have made it clear that they see a solution to poverty not in stimulating and formalizing production by the poor and creating opportunities for them to help themselves, but through mass nationalizations of the exploitation of natural resources, redistribution of wealth and other "give-aways". This will certainly help the poor a little bit in the short term, but will leave them without a way to fence for themselves, without an international market that can help them grow, and without a stable, self-sustaining economy in the medium and long term.

The first step that Mr. Correa is taking, comes right from the script of Mr. Chávez: dissolving parliament, and writing out a referendum to form a Constitutional Assembly in charge of rewriting the constitution. This constitution can then be taken as a guideline to take away any incentive the middle class could have to succeed, just like was done in Venezuela.

There is one interesting difference between Venezuela and Ecuador: a few years ago, Ecuador changed their coin unit to be the US Dollar. Although this doesn't mean that Ecuador therefore couldn't restrict foreign imports or dollar-flight, it possibly could dampen inflation a bit, since there is no way for the government to control the actual exchange rate. Inflation will be noticed by higher prices (due to scarcity because of import restrictions), without an accompanying increase of salaries: it's not the economy that grows, it's the articles that become less available. As a result, the poor will get poorer and the rich... well... I doubt that they will wait to take their assets out until Mr. Correa stops them.

There is another fundamental difference between Ecuador and Venezuela: Mr. Chávez can actually afford to be the way he is. As a major oil exporter of the world, the oil dollars that he receives, offset his spending spree up to a point where he feels comfortable giving away oil to the needier around him: Cuba, Haiti, Nicaragua, and... the poor in New York State and Massachusetts in the US! Ecuador, although not as needy as Bolivia, simply can't afford such a splurge.

That is was time to upset the corrupt power-balance of old in Ecuador, that's something to which many people can agree. However, to replace it by something that has proven to be disastrous time and again, simply hurts.

There is a thin silver lining around the cloud: When Mr. Correa's experiment goes awry, the Ecuadoreans have been know to quickly (and sometimes violently) replace their president: the country counted 8 presidents in the last 10 years...

See here and here and here for some related BBCNews stories.


Pondering Pig said...

Interesting stuff. I too will start paying more attention to what is happening there, and I don't have KIVA investments in Ecuador.

My uninformed guess is that the governments of Latin America, both military and civil, in general have never given a damn about the poor of their nations, no more than did the king of France before the French Revolution.

Is there an existing country that models your hopes for Ecuador? Even in providing the raw basics of the Millennium Development Goals, so that the bottom classes can read and write, have access to clean water, etc? Seems to me there has to be a bottom line provided by the government to provide an atmosphere where people can gain adequate means for life through their own efforts.

Ramon said...

The problem of progress in Latin American countries, or any other developing country for that, is that the few success-stories are hardly cookie-cutter examples to be replicated:
- I'd say, the best relevant example is Chile. It has a flourishing economy and quite a low poverty rate. The problem of Chile is, that the reason for the economic success is because of Pinochet's regime. With all its human rights abuses, it's hardly something you'd want to copy.
- Costa Rica is another example. The main reason for their economic success is a stable, non-violent, reasonably democratic society, which has managed to avoid internal and external conflicts for many decades now.
- Although one of Latin America's largest economies, I'd say the place not to copy is probably Mexico. Although having a well sustained growth, the underclass hasn't gotten any richer. This means that either the top class is getting richer (and thereby increasing the gap) or that most of the wealth is taken out of the country.
- For my favorite LatAm country, Perú, there is hope. Perú has shown a sustained growth of about 7% annually over the last 10 years or so. Though the majority of the growth has been due to the expanding mining industry (run by Western and Asian companies that have taken most of the gains to their non-Peruvian shareholders), one can clearly see a movement of people from the (upper-)lower class to the (lower-)middle class. A campaign to formalize informal businesses has had not only the effect of increasing access to capital to informal businesses (and thereby enabling growth), but it also had the intangible effect of business owners taking their business more serious, becoming more reliable, and therefore more trustworthy as business partners.

As for a campaign to give the poor access to basic necessities, like water, education, health care, etc.: I see this done by governments and NGOs alike. In many places, the government is simply not able to provide this in a consistent way. Also, many times (especially in the Andean countries), the need is greatest in the rural areas, which often means inhospitable, high-altitude regions that lack basic infrastructure and that are many hours away from the nearest larger town. Governments are barely able to provide the extra incentives needed for good teachers to go there, and building roads, maintaining health centers, etc. is a very expensive business. Luckily, there are NGOs that are active in these areas. I may do some further investigation and highlight some of them in a separate post.

Julia said...

Very interesting stuff.
I tried to send you email to respond to your comment. Thanks for trying to translate. I can read Spanish. And he got funded! I got a response from Kiva too, saying it slipped through.

I asked Kiva if they could put up a comment section so we could translate if someone else hadn't.

Can't wait till we get the new Friend of Kiva discussion board!