How was Ecuador affected by the recent financial crisis particularly with respect to trade?
Francisco Rivadeneira S.: In general, Ecuador is dealing well with respect to the impact of the financial crisis. We were one of the few countries in the region that grew (although relatively little) despite the crisis. Our exports were not strongly affected, except for some products, and we keep macroeconomic stability, which is critical for us. Moreover the government has developed public investment, especially in infra-structure, and we are managing to renegotiate our debt and to keep our public debt/GDP ratio relatively low. Regarding trade, Ecuador is rich in natural resources, so we benefited from the boom of commodity prices. We discovered our oil potential in the 1970s and additional sources of minerals (which can promote a second economic boom after oil) were discovered too. In addition, we are developing two big hydroelectric plants with some Chinese partners and we also have the privilege of potential solar and wind energy. Therefore, our strategy is to change our energy matrix in the next years and become a net exporter of these resources.
Moreover, we are trying to diversify our exports by increasing the value-added in products where we are already competitive, such as bananas, cocoa, coffee and tuna, but also improving intensity of knowledge in goods related to bio-chemistry and in the tourism industry. Furthermore, we are trying to diversify our spectrum of presence in different markets and reinforce our presence in the traditional ones (North America and Europe). For example, we restarted the negotiations of a Trade Agreement with Europe (which I hope will be concluded by the middle of next year). Furthermore, we are working to increase our exports to Latin American and Caribbean countries (especially from our small and medium enterprises), besides exporting and attracting investment from Gulf and Asian countries.
What type of trade policy measures are you taking in the short-term to react to the financial crisis? Also, since Ecuador has a dollarised economy, did the financial crisis stimulate a new debate on the role of the exchange rate?
Indeed it is important to highlight that Ecuador is a dollarised economy. This implies that the country could not use monetary policy as a tool to wave the effect of the financial crisis. We also have a macroeconomic disequilibrium in the external sector because Ecuador is importing exponentially while exports have been growing at a lower speed, with the result that we are importing more than we are exporting. This required us to take temporary measures (tariff and non-tariff) to control imports in the short-term, especially for consumer goods. In fact, even though the crisis was originally financial, it could touch the real economy and consumers in Europe and the US. This would affect our ability to obtain American dollars and consequently our economy, since we have a dollarised currency.
On one side, we are trying to keep liquidity to ensure that we can inject money into the economy if needed. On the other side, even if we have to reduce the concentration of our exports in the EU and the US, we have the potential to grow more and diversify within those markets. As an example, in the US we only had one commercial office, in Miami, which caused Ecuadorian product to be available mainly on the American Eastern Coast. To balance our presence across the country and increase the presence of Ecuadorian products also in other States, we opened more commercial offices in New York, Chicago, Huston and Los Angeles. These steps take into account the fact that the US is not one market, it is made of different markets. The same thing applies to Europe, where we are trying to depend less on the traditional markets (i.e. Germany, Spain, Italy and France) and to promote exports of Ecuadorian products to new markets, like Scandinavian and Baltic countries, or Central and Eastern European countries like Poland, Czech Republic, or Hungary, which have been affected relatively less by the financial crisis. This would allow us to counterbalance the problems we are having in the traditional markets.
We are also trying to attract more investment, especially in strategic sectors like petrol, minerals, energy, telecommunications, and on other prioritised sectors, both in goods (like wooden sector, pharmaceutical sector and agribusiness, among others) and services (like tourism, biotechnology or environmental sectors). The Ecuadorian Government is giving incentives to both national and foreign investors to canalise investments in these areas. As a conclusion, it would be unrealistic to say that Ecuador is not affected by the crisis, but we have a quite stable economy and have income from petrol that is helping us to wave the impact of the crisis.
How did the trade policy measures adopted by the government in response to the crisis affect the relationship between Ecuador and its Andean and Mercosur’s partners?
We can say that some specific sectors were affected, but, in general terms, our relationship with the Andean market and Mercosur was not affected because we are integrated. The adopted trade policy measures affected more trade with other parts of the world, like the US or Europe. Nevertheless, even though we are integrated in Mercosur and in the Andean Community, in the future this integration could become problematic. One example is Brazil, a country that produces similar products compared to Ecuador, but with bigger economies of scale. This means that it is very difficult for Ecuador to compete with Brazil. For example according to our Preferential Agreement with Mercosur, in 2014 we will start removing tariffs on cars imported from Brazil and Argentina. Ecuador has an assembly industry which will strive to survive if it has to compete with the gigantic industries in these countries.
As a consequence we are proposing an alternative, in order to complement each other’s production with intra-industry trade. Ecuador could specialise in one or two different models of the same brand and export them to Brazil, while at the same time import other models from Brazil. We want to develop bi-national or regional chains of production in different sectors. Another example is a bi-national chain we have created with Colombia in textiles and apparels. We export textiles to Colombia, which in turn produces garments both for the domestic market and for exports to the US. The key way to complement our production and create these regional chains of production is to implement different types of Preferential Agreements, namely “Acuerdos Para el Desarollo” (Agreements for Development).
Secondly, we are working to boost integration in the whole region. We consider that UNASUR is the future of integration in South America: it is the most important institution to represent its political interests and we want it to progressively take in charge also economic and trade issues. In this regard, an association agreement between Ecuador, Chile, Peru, Bolivia, Colombia - and maybe Venezuela - with the MERCOSUR countries will realise a free trade zone by 2018/2020. This implies that a community larger than MERCOSUR and the Andean community will need to be administered and UNASUR should be in charge of it and work in the common interest of the region.
Moreover, key areas that need to be managed regionally are the development of an energy sector and regional infrastructures in South America, which would allow Ecuador to be well interconnected. We have progressive ideas, different from what is normal thinking in the rest of the world. For instance, we are working to develop a new financial structure in South America and a new monetary system, called SUCRE - similar to ECU - among the ALBA countries and we would like all South America to adopt it. We also have our own bank of development called “Banco del Sur”, which has been ratified by five countries already, so we need one more country for it to become an official international organisation, something like the Inter American Development Bank (IADB) or the Corporation Andina de Fomento (CAF), so that we can use our money to invest in projects for the region.
What are the main barriers in negotiations related to the trade agreement with the European Union?
There are two major issues in these negotiations, a conceptual issue and a practical one. Regarding the former, the Ecuadorian Government doesn’t believe in Free Trade Agreements (between asymmetric countries): we think they are not necessarily positive when small countries negotiate with bigger countries because there is too much asymmetry. For this reason we proposed the EU a new type of agreement, a “Trade Agreement for Development”, where the objective is not only to strengthen commercial relations but to ensure that trade actually creates welfare in the country. Our suggestion is that negotiations should not be based on reciprocity, but should take into account the asymmetries with Ecuador and include special and differential treatment. The EU has been able to accept that in most of the areas. However, we still have some specific issues concerning property rights, services and investment. In fact we are interested in investment which respects the four ethics: compliance in obligations with the state, the consumer, the environment and the workers. Moreover there are some strategic sectors where we want to have investment but where the Government still want to keep control, and this has slowed down negotiations.
Is the WTO losing relevance as Regional Trade Agreements (RTAs) move ahead and the Doha Development Agenda lags?
We believe in multilateralism: Ecuador is committed to it. We also want the Doha Round to come to a successful end. Unfortunately the process is stuck in the WTO, so an option is to continue with FTAs, signing agreements in smaller groups of countries. Nevertheless, we have to start considering that this type of agreements does not necessarily have a net positive effect on our economies, in the long-term, as previously highlighted. For instance, currently there is a lot of discussion on the results of NAFTA for Mexico. That’s why we are suggesting a different type of agreements which do not necessarily aim at liberalising all trade. We propose liberalise more progressively and selectively, on the base of a complementary type of development. We have an interesting vision that should be taken into account, and that can help to develop the debate, especially after the financial crisis, since it is clear that things need to change.
by Valentina Rollo and Marcio José Vargas da Cruz, PhD Candidates in International Economics, The Graduate Institute of International and Development Studies