Economy of Ecuador

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The economy of Ecuador is based on petroleum production, money transfers from nearly a million Ecuadorian emigrants employed abroad, and exports of bananas, shrimp, and other primary agricultural products. In 2002, oil accounted for about one-third of public sector revenue and 40% of export earnings. Ecuador is the world's largest exporter of bananas ($936.5 million in 2002) and a major exporter of shrimp ($251 million in 2002). Exports of nontraditional products such as flowers ($291 million in 2002) and canned fish ($333 million in 2002) have grown in recent years. Industry is largely oriented to servicing the domestic market.

Deteriorating economic performance in 1997-98 culminated in a severe economic and financial crisis in 1999. The crisis was precipitated by a number of external shocks, including the El Niño weather phenomenon in 1997, a sharp drop in global oil prices in 1997-98, and international emerging market instability in 1997-98. These factors highlighted the Government of Ecuador's unsustainable economic policy mix of large fiscal deficits and expansionary money policy and resulted in an 7.3% contraction of GDP, annual year-on-year inflation of 52.2%, and a 65% devaluation of the national currency in 1999.

On January 9, 2000, the administration of President Jamil Mahuad announced its intention to adopt the U.S. dollar as the official currency of Ecuador to address the ongoing economic crisis. Subsequent protest led to the removal of Mahuad from office and the elevation of Vice President Gustavo Noboa to the presidency.

The Noboa government confirmed its commitment to dollarize as the centerpiece of its economic recovery strategy, successfully completing the transition from sucres to dollars in 2001. Following the completion of a one-year stand-by program with the International Monetary Fund(IMF) in December 2001, Ecuador successfully negotiated a new $205 million stand-by agreement with the IMF in March 2003.

Buoyed by higher oil prices, the Ecuadorian economy experienced a modest recovery in 2000-01, with GDP rising 2.3% in 2000 and 5.4% in 2001. GDP growth leveled off to 3.3% in 2002. Although final figures are not yet available, it is expected to fall further, to about 1.7%, for 2003. But GDP growth is estimated to recover to over 4% in 2004, due largely to expanded oil exports. Inflation fell from an annual rate of 96.1% in 2000 to an annual rate of 22.4% in 2001; although final figures are not yet available, it is expected to drop below 7% for 2003. Despite recent gains, 70% of the population lives below the poverty line, more than double the rate of 5 years ago.

The completion of the second Transandean Oil Pipeline (OCP in Spanish) in 2003 will enable Ecuador to expand oil exports. The OCP will double Ecuador’s oil transport capacity, but Ecuador will need to attract additional foreign investment to realize the full economic potential of the added capacity.

[edit] Economic history

The colonial economy of Ecuador's Sierra region revolved around textiles and other light manufactures, while the coastal economy, based largely in Guayaquil, relied on shipping and trade. The eighteenth century brought hardship to Spain, and consequently, to its colonies. Ecuador suffered a severe depression throughout most of the eighteenth century. Textile production, the staple of the Sierra economy, fell to less than half of its seventeenth century height. The weak economy hurt the "haves" more than the "have-nots"; by some accounts, the situation actually improved for Ecuador's native population during the colony's economic decline.

Colonial Ecuador was governed first by the Viceroyalty of Peru and then by the Viceroyalty of Nueva Granada. Ecuador differed significantly from the viceroyalty centers (Lima and Bogotá), however, in that mining never became a vital part of the economy. Instead, crop cultivation and livestock raising dominated the economy, especially in the Sierra. The Sierra's temperate climate was ideal for producing barley, wheat, and corn. The Costa became one of the world's leading producers of cacao. Sugarcane, bananas, coconuts, tobacco, and cotton also were grown in the Costa for export purposes. Foreign commerce expanded gradually during the eighteenth century, but agricultural exports remained paramount. Manufacturing never became a significant economic activity in colonial Ecuador, but busy sweatshops, called obrajes, in Riobamba and Latacunga made Ecuador an exporter of woolen and cotton fabrics; a shipyard in Guayaquil was one of the largest and best in Spanish America; and sugar mills manufactured sugar, molasses, and rum made from molasses.

When Ecuador gained complete independence in 1830, it had a largely rural population of about one-half million. The rural economy came to rely on a system of peonage, in which Sierra and Costa Indians were allowed to settle on the lands belonging to the hacendado, to whom they paid rent in the form of labor and a share of their crop. The economy of the new republic, based on the cultivation of cash crops and inexpensive raw materials for the world market and dependent on peonage labor, changed little during the remainder of the nineteenth and first half of the twentieth century. Vulnerable to changing international market demands and price fluctuations, Ecuador's economy was often characterized by instability and malaise.

During the second half of the nineteenth century, cacao production nearly tripled, and total exports increased tenfold. As a result, the Costa became the country's center of economic activity. Guayaquil dominated banking, commercial, and export-import affairs. During the first two decades of the twentieth century, cacao exports continued to be the mainstay of the economy and the principal source of foreign exchange, but other agricultural products like coffee and sugar and fish products were also important exports. The decline of the cacao industry in the 1930s and 1940s, brought about by chronic pestilence and the loss of foreign markets to competitors, had debilitating repercussions for the entire economy. During the 1950s, government-sponsored replanting efforts contributed to a partial revival of the cacao industry, so that by 1958 Ecuador was the world's sixth leading exporter of cacao. Nonetheless, by the early 1950s bananas had replaced cacao as the country's primary export crop.

The Ecuadorian economy made great strides after 1950, when annual exports, 90 percent of which were agricultural, were valued at less than US$30 million, and foreign-exchange reserves stood at about US$15 million. Between 1950 and 1970, a slow, steady expansion of nonagricultural activities took place, especially in the construction, utilities, and services sectors. Construction, for example, made up only 3 percent of the GDP in 1950, but it contributed 7.6 percent to the GDP in 1971. Agriculture's annual share of the GDP was 38.8 percent in 1950 compared with a 24.7 percent share in 1971.

The 1960s saw an acceleration and diversification of the manufacturing sector to meet domestic demand, with an emphasis on intermediate inputs and consumer durable goods. By 1971 these accounted for about 50 percent of industrial output. Still, manufactured products--mainly processed agricultural goods--made up only about 10 percent of Ecuador's exports in 1971. Industry was still at an early stage of development, and about 50 percent of the labor force worked in agriculture, forestry, and fishing. Traditional industries, such as food processing, beverages, and textiles, were largely dependent on agriculture. The small size of the domestic market, the high production cost in relation to available external markets, and an undeveloped human, physical, and financial infrastructure all combined to limit the expansion of consumer durable goods in the Ecuadorian economy.

The discovery of new petroleum fields in the Oriente (eastern region) after 1967 transformed the country into a world producer of oil and brought large increases in government revenue beginning in 1972. That year saw the completion of the Trans-Ecuadorian Pipeline, a 503-kilometer-long oil pipeline leading from the Oriente to the port city of Esmeraldas. A refinery also was constructed just south of Esmeraldas. In addition, in 1970 large quantities of natural gas deposits were discovered in the Gulf of Guayaquil. Largely because of petroleum exports, Ecuador's net foreign-exchange earnings climbed from US$43 million in 1971 to over US$350 million in 1974.

The production and export of oil that began in the early 1970s, coupled with dramatic international price increases for petroleum, contributed significantly to unprecedented economic growth. Real GDP increased by an average of more than 9 percent per year during 1970 to 1977 as compared with only 5.9 percent from 1960 to 1970. The manufacturing sector alone experienced a 12.9 percent average annual GDP real growth rate during 1975-77. Ecuador became a lower middle-income country, although it remained one of the poorer countries of South America. Economic growth had negative side effects, however. Real imports increased by an annual average of 7 percent between 1974 and 1979; this spawned an inflationary pattern that eroded income. During the same period, the country's external debt grew from US$324 million to about US$4.5 billion.

Ecuador has substantial petroleum resources, which have accounted for 40% of the country's export earnings and one-third of central government budget revenues in recent years. Consequently, fluctuations in world market prices can have a substantial domestic impact. In the late 1990s, Ecuador suffered its worst economic crisis, with natural disasters and sharp declines in world petroleum prices driving Ecuador's economy into free fall in 1999. Real GDP contracted by more than 6%, with poverty worsening significantly. The banking system also collapsed, and Ecuador defaulted on its external debt later that year. The currency depreciated by some 70% in 1999, and, on the brink of hyperinflation, the MAHAUD government announced it would dollarize the economy. A coup, however, ousted MAHAUD from office in January 2000, and after a short-lived junta failed to garner military support, Vice President Gustavo NOBOA took over the presidency. In March 2000, Congress approved a series of structural reforms that also provided the framework for the adoption of the US dollar as legal tender. Dollarization stabilized the economy, and growth returned to its pre-crisis levels in the years that followed. Under the administration of Lucio GUTIERREZ - January 2003 to April 2005 - Ecuador benefited from higher world petroleum prices. However, the government under Alfredo PALACIO has reversed economic reforms that reduced Ecuador's vulnerability to petroleum price swings and financial crises, allowing the central government greater access to oil windfalls and disbursing surplus retirement funds.