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Many will read a recent Economist article about Ecuador (“Scraping the barrel”) and wrongly assume that they’ve been brought up to speed about a country they seldom hear much about.
“Will Ecuador turn into Latin America’s Greece?” is the ludicrous question posed beneath the title. There are so many things wrong with the following passage alone that succinctly explaining them is a challenge.
“The administration has introduced regulations that would allow it to issue electronic money and Central Bank paper. That way lies Greece, warns Abelardo Pachano, a former banker. Printing a quasi-currency risks a run on the banks by savers who fear deposits would not be returned in dollars; the Central Bank has hard-currency reserves of only $4.6 billion. Mr Correa, seeming to recognise the danger, has been cautious in implementing these measures.”
First, since 2007, when President Rafael Correa first took office, Ecuador’s reserves have fluctuated from $2 to $6.5 billion with no trend. One of the main reasons for holding reserves does not apply to Ecuador. It need not worry about speculative attacks on its currency because, since 2000, its currency has been the US dollar. The claim that Ecuador is printing quasi–currency is an attempt to spread panic that it is abandoning the dollar. Ecuador has introduced a system that allows people to swap US dollars for an equal value of electronic money they can store on their cellphones. It is similar to depositing cash to a bank account and then using a debit card to make purchases. Governments do not introduce “quasi-currencies” by allowing people to use debit cards. The system was introduced because so more people have cell phones in Ecuador than bank accounts. Even some news articles in Ecuador’s opposition press have clarified this a year ago.
Second, Greece never issued a quasi-currency as the article could easily mislead readers to believe. Since 2010, Greece has experienced a Great Depression level of collapse because of austerity measures forced on it by the “Troika” – the IMF, European Union, European Central Bank. The recent run on Greek banks was deliberately caused by the European Central Bank. It cut liquidity to the Greek banking system to blackmail Greece into accepting continued austerity measures. Fortunately, Ecuador cannot be similarly blackmailed by the US because its banks are not supported by the Federal Reserve.
Third, vaguely describing Abelardo Pachano as a “former banker” is very disingenuous. Pachano was head of Ecuador’s central bank under the administration of Osvaldo Hurtado (1981-1984). According to Hurtado himself, Pachano helped his government mastermind one of the most infamous private sector bailouts in Ecuadorian history. It is referred to as “sucretización”. Ecuador’s private sector (mainly banks) owed very dangerous levels of debt to foreigners in US dollars. In 1983, Hurtado’s government took responsibility for paying the private sector’s dollar denominated debt. In return, the private sector paid the Ecuadorian government in sucres - Ecuador’s national currency at the time. The government of Febres Cordero (1984-1988) further sweetened this deal for the Ecuadorian elite. It was a classic example of socialism for the rich. By 1994, the accumulated cost of “sucretización” to the Ecuadorian state was US$4.4 billion according to a commission established by Rafael Correa’s government. That amount is equal to 25 percent of Ecuador’s GDP in 1994. The findings of the commission provided the legal basis for Ecuador’s default on a third of its public debt in 2008 – an extremely successful move that Pachano opposed at the time and was still trashing years later.
Pachano writes regularly for El Comercio, one of Ecuador’s largest newspapers. That will surprise people who believe the Economist’s claim that Correa’s government “has bullied the media into self-censorship”. The output of Ecuavisa, a private TV broadcaster, will also surprise many people. In this broadcast last year, before introducing a guest to spread alarm about electronic money, Alfredo Pinoargote quickly ran through a list of many of the same allegations against Correa’s government made by the Economist. Quite absurdly, given Pinoargote’s platform, a crackdown on freedom of expression was one of them.
The Economist closes by warning Correa that he “faces a choice”:
“He could persist in his bid for permanent power and risk being kicked out by the street, like his predecessors. Or he could swallow his pride, stabilise the economy and drop his re-election bid. He would then go down in history as one of Ecuador’s most successful presidents.”
The bit about “permanent power” refers to the National Assembly possibly amending the constitution to abolish term limits for all elected officials. Does the Economist, a UK based magazine, say that David Cameron has “permanent power” because the UK does not have term limits? Under the present Ecuadorian constitution – which was written by elected representatives shortly after Correa took office and ratified in a 2008 referendum - article 105 allows voters to subject the president to a recall referendum. The UK doesn’t allow recall referendums, doesn’t have a constitution, and still calls itself a “kingdom”. Given there are fewer democratic options available to UK voters, I wonder if the Economist would advise David Cameron to capitulate if he faced any risk of being ousted "by the street".
Much else has changed since the days when bankers like Abelardo Pachano put Ecuador through ruinous decades that culminated in a major economic collapse in 1999. Under the new constitution (articles 130 and 148), the National Assembly cannot dismiss the president (or vice versa) without new elections being held immediately for both the presidency and National Assembly. The Ecuadorian elite can no longer dominate the media to the extent it once did (which is denounced as a “crackdown on freedom of expression” by the international media and establishment-friendly NGOs). South America governments have also reacted strongly against recent coups and coup attempts. Thanks in part to Wikileaks, Washington’s capacity to destabilize Correa’s government has been greatly reduced.
Correa’s government is already one of most successful in Ecuador’s history because it has rejected the neoliberal dogmas promoted by the Economist. The Center for Economic and Policy Research shows this in a very detailed assessment of Ecuador’s key economic policies since 2007.
Nevertheless, despite so much positive change, the threat of a coup cannot be dismissed. There was an attempt in 2010 in which Correa was briefly held hostage by mutinous police. If the Economist valued democracy at all, it would not regurgitate the talking points of the people who want a coup - much less tell Correa to obey a violent minority .
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