A recent analysis of Ecuadorian President Rafael Correa’s financial reforms found that the regulatory changes have helped drive the country’s economic growth, increased revenue, and contributed to a decline in poverty and unemployment.
In 2008, the Ecuadorian economy was hit hard by the global economic crisis, due in part to its dependence on oil revenue and remittance from abroad. Oil exports comprised 62 percent of export earnings and 34 percent of government revenue. When oil prices fell by 79 percent and remittances crashed, it created an effect on Ecuador’s economy similar to that of the housing bubble in the U.S, Information Clearing House reports.
The Correa administration took control of Ecuador’s central bank and forced it to re-centralize $2 billion of reserves held abroad to be used by public banks to increase lending for domestic investments, including infrastructure, housing and agriculture. The administration also taxed foreign investments, required banks to maintain 60 percent of liquid assets domestically, reduced interest rates, increased bank taxes and freed up funding for member-based financial operations like co-ops and credit unions.
“Ecuador has gone against the conventional wisdom and shown that there are alternatives,” Mark Weisbrot, the co-director of the Center for Economic and Policy Research, which compiled the report, said, according to Eurasia Review. “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.”
By the fourth quarter of 2012, the employment rate in Ecuador had decreased to 4.1 percent, the lowest level in 25 years, and the national poverty rate fell to 27.3 percent, 27 percent below its 2006 level. The CEPR analysis, of which Weisbrot was lead author, found that the Correa administration’s reforms led to an increase in government revenue from 27 percent of GDP in 2006 to more than 40 percent in 2012, contributing to a large increase in consumer spending.
“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,” the analysis said, Eurasia Review reports. “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.”
Correa, a PhD economist, went against conventional wisdom in imposing financial reform, though it did result in some criticism by the media. He was, nonetheless, re-elected on Sunday after he took 56 percent of the vote.
“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 analysis said, according to Eurasia Review.