correa and moreno cover.jpg

Photo by:  Alberto Romo

Lenin Moreno’s Path to the Middle: An Institutional Development Model for

Ecuador

by Felipe Deidan       
          August 17th, 2020

This paper explores three development models and their impact on Ecuador’s development over the past 20 years. COVID-19 presents a huge crisis for the developing country - but also a chance to change. The institutional development model provides middle-ground institutional incrementalism. In a region battered by crisis, will Moreno consider a shift in his neoliberal crusade, or will the country continue to be engulfed in social unrest?

Abstract

In the aftermath of Ecuador’s 2017 presidential election, the country stood at a crossroads as to whether Lenin Moreno would continue Rafael Correa’s populist agenda or detract from his predecessor. The Correa administration strengthened the role and capacity of state planning and the central government. Lenin Moreno shifted towards a neoclassical development model, which centers the role of development on the market with limited state intervention. This paper explores Ecuador’s vacillation between two developmental extremes, and the extent to which their failures prompted large debt obligations and social unrest. Recent trends indicate a need for a development model centered on the structure of its institutions. This paper discusses the value of an institutional model and its central focus on transparency, efficiency, and middle-ground institutional incrementalism through social policy. Moreno faces a monumental period in his country’s future; a development model centered on government institutions is fundamental for structural change that would stabilize the country’s trajectory away from its populist past.

Rafael Correa’s National Development Plan

Rafael Correa stepped into power on January 15th, 2007, at a time of political instability and economic stagnation. Dressed in a colorful poncho for a ritual blessing by indigenous elders in the provincial town of Zumbahua, the populist leader proclaimed to his supporters the social advancements of Simon Bolivar and Che Guevara, and the start of a “new homeland,” giving the “reigns of development” to the people. 

Vladimir Putin talks in the Kremlin with President of Ecuador Rafael Correa.

Source: Office of the President of Russia

Correa’s first revolutionary steps centered on his 2007 National Development Plan (NDP), which placed emphasis on sustainable human development, national sovereignty, and citizen participation in the public sphere. The planning model focused on his Buen Vivir initiative, which by design held the state to a larger role in economics, politics, and society through labor policies and trade restrictions. In accordance with his National Development Plan, Correa took a series of stands against Western and international financial influence to build Ecuador's economic independence. He confronted the International Monetary Fund and the World Bank in a push to stray away from the neoliberal policies that plagued the nation prior to his term; the country faced austerity measures set in place after the 1998–1999 financial crisis, when severe inflation and devaluation of the Ecuadorian sucre led then-President Jamil Mahuad to announce on January 9, 2000 the US dollar as the national currency. The fiscal stabilization of the new currency allowed steady economic recovery, but a fixed exchange rate of 25,000:1 resulted in a six percent GDP contraction. Without a national currency, however, the country lost its monetary policy as a macroeconomic tool.

 

In response, Correa removed the Central Bank’s independence and made it part of his planning model. He established capital controls by making banks hold "45 percent of their liquid assets domestically in 2009" and increasing the threshold to “60 percent” by August of 2012. The policy reduced capital flight substantially, after nearly $30 billion exited the country between 1983 and 2008. Increased savings allowed Correa to spend against a countercyclical period in 2009, and reduced Ecuador’s recessionary period as other countries tied to the U.S economy staggered. 

 

Correa then began his assault against the West. Between 2008 and 2009, Ecuador faced debt obligations from bond holders as bonds reached their maturity. Despite the country’s ability to pay its American debt, Correa deemed two-thirds of debt obligation from bonds to be illegitimate, citing the doctrine of odious debt, which denotes that any debt incurred by “corrupt and despotic prior regimes” should not be repaid by the subsequent regime because it is immoral and essentially illegal debt. Correa cited three main catalysts of “aggressive indebtedness”: the military dictatorships of Guillermo Lara and Alfredo Poveda during the 1970’s which started Ecuador’s debt cycle; the Brady Bonds issued in 1989 which were “imposed on the country”; debt restructuring and austerity measures after the 1998-1999 financial crisis. International law does not accept any procedural application of odious debt due to the ambiguity of the term ‘odious;’ there are no procedures to identify what specific actions taken by a tyrannical regime can be considered to be deplorable. Regardless, Correa offered to purchase the defaulted bonds at a 35% discount. With little other recourse, 91% of the bondholders sold their bonds in the exchange. Western lenders, who relied on their trust structure to come to their legal aid, were ignored by the US trustee venture. The populist leader won a political victory against the West at grave costs; he pushed away a valid debt obligation and ostracized his country’s credibility.

 

Correa’s continued alienation against Western capital prompted a need for alternative investment: Chinese loans, particularly on infrastructure programs. Shunned by most lenders from debt default in 2008, Ecuador relied heavily on Chinese funds that covered 61 percent of the government’s $6.2 billion in financing in 2013 and claimed as much as 90 percent of Ecuador’s oil shipments. Oil concessions on the Yasuní National Park, which were once protected by Correa through the ITT initiative, were opened for drilling.


In Ecuador’s case, Rafael Correa’s leniency towards China’s growing influence in the region sparked nationalist resentment against the country’s mounting debt. The country took a total of 15 loans estimated at US$18.4 billion, and currently faces a $6 billion debt. Chinese loans maintain high interest rates with a requirement that Ecuador use Chinese companies in construction instead of local industry. These construction projects, however, have faced severe concerns about their capacity and quality. The most notorious example is the Coca Codo Sinclair dam, located at the base of the Reventador volcano. Expected to power one-third of Ecuador’s electricity, the dam received wide approval from Correa and Chinese President Xi Jinping. Currently, the dam runs at half capacity, dependent on rain or dry seasons, and faces 7,648 cracks across its structure due to poor construction oversight by the Chinese construction firm, Sinohydro. The dam, along with other projects, also represent points of corruption and bribery. Vice President Jorge Glas and Energy Minister Carlos Pareja are currently serving prison sentences due to receiving bribes from Odebrecht, a Brazilian construction giant. Pareja embezzled $44.8 million from construction contracts at the Esmeraldas oil refinery. A lack of transparency in these project’s proceedings facilitated concessions and bribes on failing infrastructure projects.

Oil blocks in the Ecuadorian Amazon pose grave environmental risks for the country. Once protected by Correa, the Yasuni National Park faces oil concessions as Ecuador struggles to pay off its development projects.

Data Source:  Finer et al."Oil and Gas Projects in the Western Amazon: Threats to Wilderness, Biodiversity, and Indigenous Peoples" 

Rafael Correa opened Ecuador’s development to Chinese investment. In 2015, China had invested $18.4 billion in dozens of infrastructure projects.

Data Source: Mandler et al. "Land Use & Foreign Capital  Investments in Ecuador"

Along with project debacles, burdening loans, and corruption, Ecuador also faces payment obligations: loan-for-oil contracts provide 80 percent of the oil the country produces to China until 2024, leaving the country with substantially less revenues to pay off their debts. The country continues to suffer from low oil prices, an appreciation of the U.S. dollar, increasing external financing costs, and growing commodity dependency. Ecuador faces 26 percent of its central government’s external debt from Chinese credit, making China the country’s largest creditor and its most formidable debtor. Essentially, Correa’s NDP shifted Ecuador’s reliance on foreign markets to Chinese economic hegemony.

 

Under Correa’s state planning coordination, autocratic political reforms limited the capacity for public protest and veto power. He cracked down on reporters who spoke against his economic largesse, often shaming them publicly in his Sunday speeches. Professor Roberto Izurieta, Director of Latin American Projects for the Graduate School of Political Management at the George Washington University and former campaign advisor for 2017 presidential candidate Guillermo Lasso, believes this new push for press restrictions to be a recurring theme for Latin American populists. Despite more “stabilizing systems” put in place to mitigate the destabilizing factors of “post-imperialist stigmas,” Latin America faces an uphill battle against “extensive right-wing nationalism reemergence.” Izurieta also notes that Correa’s policies “constituted a shift from legal norms,” guaranteeing certain aspects of a neoliberal agenda to “difficult-to-change constitutional laws that increase state planning, intervention, and regulatory power, all while prioritizing state-building over quick economic recovery.” For example, state-building initiatives increased the number of civil servants from 230,185 to 510,436 since 2004, driving the country into deficit spending to maintain this government labor pool. Increasing the number of public servants provided more opportunities for Ecuadorians, but resulted in bureaucratic backlogs and large inefficiencies. Backlash arose due to the structure of Correa’s spending and his increasingly authoritarian leadership. Regardless, the 2017 general election, noted Izurieta, “tested the resilience of Rafael Correa’s grasp on Ecuador’s fragile democracy” in spite of Correa’s spending failures.

 

By distracting the population from his policies and putting the spotlight on targeting opposition leaders and reporters, Correa, as Professor Izurieta put it, “hid himself from the country’s impending economic downfall.”  With Lenin Moreno narrowly winning a run-off election under Correa’s PAIS Alliance, the populist Ecuadorian leader secured political influence for another four years; however, his opponents tapped into Correa’s legacy and created “resistance stemming from feminist, indigenous, and environmental groups that refused to be folded into Mr. Correa’s ruling party,” which later unraveled under the 2019 October protests. 

Rafael Correa, left, with his successor, Lenin Moreno in 2017

Photo by:  Alberto Romo / Asamblea Nacional del Ecuador

Lenin Moreno's Neoliberal U-Turn

While expected to act independently from Correa, Lenin Moreno surprised the global community by turning against his predecessor, going as far as imprisoning his vice president and barring the former president from a likely reelection run in 2021. Moreno immediately shifted the developmental trajectory of Rafael Correa by removing his centralized planning model and placing more emphasis on neoliberal policies as a step into restoring credibility with foreign investors and the United States, and steering the country into a much-needed austerity period. Moreno laid off government workers, attempted to slash gas subsidies, and relaxed financial regulations. While Correa isolated Western influence through improved relations with China and Iran, Moreno embraced Western institutions and sought to repair diplomatic relations with the U.S and the Organization of American States.

 

Moreno immediately removed restrictions on the media, emphasized compromise in congress, and improved anti-corruption measures, thus improving democratic proceedings within his government. On July 6th, 2020, Moreno’s preliminary agreement with some of Ecuador’s largest bondholders and the IMF worked to restructure $17.4 billion in outstanding debt, a feat he accomplished through restoring confidence with foreign lenders.

 

By cutting bureaucratic oversights on economic sectors, Moreno’s policymaking severely affected the state’s capacity to monitor, control, and regulate private economic activities. While Moreno argues that cutting the deficit is paramount in combating corruption and stemming growth, his policies have had limited effects and have only pushed social sectors of society away from him. They have been particularly unpopular in poor communities, and have further alienated indigenous populations, who were previously exploited by the Correa administration through the establishment of mining programs on ancestral lands, the revocation of individual rights to control one’s own irrigation system, and disregard for judicial proceedings relating to claims of genocide carried out by foreign oil corporations against two native communities in the Amazon. 

 

Under Moreno’s neoliberal policy, markets do not have the incentive to promote transparency, especially in privatization. Therefore, the Moreno government needs to set a precedent for stronger governmental structures that incorporate the market in a controlled manner. Given Ecuador’s dollarized economy, Moreno should continue Correa’s Central Bank incorporation. Even with stronger government structures, Moreno will need to allow for some specific privatizations, such as transportation sectors like airports and roads. These privatization efforts must be vetted and have an oversight committee. Each committee must be rotated depending on how long the project will take. This provides an alternative to neoliberal investments because it places more accountability on foreign investment. However, these policies may disincentivize foreign investment that refuses to concede these conditional measures. Given the commodity market in the region, developing countries compete by providing concessions to foreign investors. I argue that providing transparency as a fundamental part of Moreno’s development plan will allow for a more diverse foreign investment portfolio in the long term. 


If Moreno continues with a neoclassical model through the IMF, there will be a fiscal tightening of about 6 percent of GDP over the next three years; given that Ecuador’s current GDP deficit runs at 0.3 percent, these measures seem excessively austere. In a country with minimal social safety nets, years of economic progress could be wiped out in a few months. On February 29th, 2020, the coronavirus pandemic reached Ecuador, wreaking havoc in a seemingly apocalyptic scenario in the coastal city of Guayaquil. Ecuador’s medical resources were vastly unprepared for this disease, and quarantine measures placed restraints on many informal communities that relied on physical interactions for their transactions. According to Goldman Sachs, Latin America’s GDP is expected to retract at a minimum average of 9 percent, the worst contraction in modern history; for comparison, the worst performing GDP in the 1980’s debt crisis ranged between a 5-6% retraction. The Council of The Americas (COA) predicts that 22 Latin American countries will default within the same timeframe; for comparison, the 1980’s debt crisis saw only 16 countries episodically default between a 10 year period. The coronavirus pandemic continues to ravage Ecuador, forcing the government to consider social expenditure. Austerity fails to meet the social responsiveness needed to deal with a pandemic, and precarious markets bode uncertainty for future foreign direct investment.

Given the explosion of protests that consumed Ecuador this past year, Moreno’s neoliberal push has demonstrated few signs of economic success and caused significant social unrest. His favorability fell from above 60 percent in 2017 to 33 percent in mid-2019. If Moreno is to gain legitimacy and continue his reformist policies, he must follow a more institutional model that focuses state intervention on strengthening judicial, legislative, and provincial organizations. 

 

The Institutional Model in Ecuador

Moreno’s credibility must be restored through trust in his government’s institutions. An institutional model in Ecuador serves as the backbone for transparency and sustainability within the country’s government. Ecuador’s vacillation between central planning and neoclassical development polarized the country, and prompted long-standing consequences that persist beyond any regime. Accountability serves as the center point of any institution, and implementing practices that reflect transparency and political reform are key steps in restoring trust between foreign investors and Moreno’s constituency.

 

Since 2017, Moreno widened the divide within his Alianza País party and placed significant blame on Rafael Correa for the political and economic problems facing the country while himself failing to address institutional problems. To improve trust within his government, Moreno must look to implement a national government ethics board to provide nonpartisan accountability and to create policy transparency for open source information with government procedures. In theory, this ethics board would consist of people voted in by the general public. Furthermore, the ethics board would have the capacity to oversee state-owned enterprises such as PetroEcuador, the national oil company, which was plagued with corruption under the Correa administration and was the epicenter for Operation Car Wash’s corruption probe in Ecuador. Whereas Brazil’s impromptu ethics board has been selected by the ruling party and has recently been accused of partisan prosecutions, Ecuador’s directly elected board must be accountable to its electorate rather than its party. While efforts have been made to combat corruption, including the arrest of Moreno’s vice president, Jorge Glas, Moreno’s banning of a Correa-backed political party puts into question the partisan implications of accountability. An institutional ethics board must implement lasting transparency measures on both the government and its enterprises, and it must be removed entirely from binary cycles between planning and neoliberal models.

 

Given Moreno’s betrayal of Correa's emphasis on human development and Ecuadorian sovereignty, there lies uncertainty as to his commitment towards the people. The long-lasting effects of IMF austerity in Ecuador have created a negative public sentiment towards neoliberal policies because of the rollback of social policies. After enjoying economic growth and the decrease of inequality rates under Chinese investment, the Ecuadorian people are unwilling to return to strict austerity measures. As a result, a sharp push for a more neoliberal approach could threaten Ecuador’s stability and transparency.

Thousands marched with sticks and wooden shields through Quito’s center in a 10-block-long protest that ended in Plaza Santo Domingo.

Source: Voice of America

In response to the cut of fuel subsidies in October 2019, sizable protests consumed the region, forcing Lenin Moreno to temporarily move his capital from Quito to Guayaquil, and revoke Decree 883, a cut in subsidies to energy that would have saved the country $1.3 billion a year. While Ecuador struggles with diminishing revenue from oil production, the future of social programs remains a key issue for the indigenous community, which has placed pressure on Moreno to find an alternative solution outside of the typical neoclassical agenda. An institutional model allows for a transparent, merit-based programmatic governance, which aligns directly with my recommendation for conditional cash transfers similar to Brazil’s Bolsa Familia (BF). Conditional cash transfers (CCT) seek to reduce poverty by providing money to households on the condition that they comply with certain requirements. CCT works to build the country’s institutions by placing both the federal and provincial governments in charge of administration. Furthermore, providing conditional cash transfers as an institutional part of the state corresponds with promoting long-term human development. It also fits with Correa’s education and health reforms, as families would receive a monthly stipend from the government under the conditions that their children attend school and receive vaccinations. 


In regards to combatting the informal market, the Bolsa Familia style debit card that Ecuador could apply acts as an interaction with the state because these families would need to register with the state in order to receive certain benefits. This social inclusion allows for a multiplier factor, which has been successfully demonstrated in Brazil’s economy. Additionally, it provides a safety net for the middle class, whose progress has been backsliding within the past decade. The people would also have more agency with their provincial electorate, which would administer the program. Bringing in indigenous populations through this program will allow for a more representative democracy and the promotion of more socially and politically engaging policies. An institutional model that effectively employs these programs can subdue the rising unrest among marginalized groups. While these programs might create short term deficits, their investment will seed economic development if they are placed under the right institutional conditions.

 

The institutional model would allow for an easier transition from Correa’s planning model because of its central focus on the state and the market. It allows for more accountability to the ruling government while also encouraging state-backed liberalization. However, the planning model is more effective because it bypasses checks and balances, therefore implementing policy faster, but obscuring its effectiveness, as can be seen through the failed construction of the Coca Codo Sinclair Dam.

 

While creating strong institutions could provide a more established government that would be able to ensure a consistent government behavior, it can also be expensive and can slow progress due to increased bureaucracy. For comparison, in Brazil’s extensive bureaucracy, it takes almost 2,000 hours per year for a medium-size company to make their tax payments. Many Latin American countries face an overbearing state with little capacity to execute policy. These excessive bureaucracies also deter people from starting up their own business, thus keeping a large part of the population in the informal market. Increasing bureaucracy also reduces international incentive to invest, given that bureaucracies can delay the processing of documentation and can place more red tape. Correa’s bureaucratic expansion increased people’s reliance on the informal sector and embedded more opportunities for corruption.

 

As the economic forecast for the country dwindles, social pressures from the coronavirus and the collapsing middle class have caused insatiable civil unrest that will manifest itself through populist leaders and large-scale protests. Fortunately, Ecuador's ability to reach a rather quick debt restructuring deal with creditors poses an optimistic sign for bondholders and potential future defaults. According to Bloomberg News, Ecuador is expected to create $1.4 billion in savings this year and free up $16 billion in the coming decade. Furthermore, bond payments are expected to stay below $2 billion per year through 2030 at 50 cents on the dollar, essentially giving Ecuador a two year grace period with no principal payments. Moreno has been accused of neglecting social contracts with his people by creating more acceptable conditions in his first proposal in favor of creditors. Ecuador’s development plan must balance the demands of foreign investment and social policy - alienating either group has proven fatal.

Anti-American graffiti in Latin America

Photo by: Erik Cleves Kristensen

Conclusion

Ecuador risks sliding back into the political and economic instability it faced in the late 1990s if it continues to allow social conditions to deteriorate. While Lenin Moreno faces economic and social pressures from marginalized groups because of his neoliberal policies, he should implement an institutional model that incorporates both his market principles and Correa’s planning initiative in order to create a smoother transition path, including an ethics board to serve as an insulated layer against divisive partisan politics that deter political stability. Creating a structure of governance centered away from the populist turbulence that plagues the region, Ecuador can steer through crisis without political instability. Institutions can serve as the backbone for social safety nets and adequate distribution of conditional transfers. Ecuador’s institutional model guarantees stability and transparency, which would attract risk-averse foreign investors; lower risk would then entail fewer concessions in austerity and policy intervention. As COVID-19 devastates Ecuador’s ill-prepared institutions, Moreno must change his development model. Opting for an institutional model will help navigate the equatorial country through troubling times ahead.

Acknowledgements:  ​I would like to thank Dr. Stephen Kaplan for his timely consideration and expertise on the topic. I also want to thank Bernardo Acosta for his professional perspective on the issue. Finally, I would like to applaud Elad Raymond for his continued support and contribution on the paper, as well as the ruthless dedication he continues to put into the Onero Institute.
About the Author:  ​Felipe Deidan-Fernandez is a rising junior at the Elliott School of International Affairs at the George Washington University in Washington D.C. He is pursuing a triple concentration in international development, Latin America, and Africa. As a native of Ecuador, Felipe focuses on a people-first development approach and structured distributive leadership models influenced by marginalized communities. He hopes to promote social responsiveness through policy advocacy in Latin America.

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