Ecuador: Political Reform Should Bring No Major Storms

From Stratfor, 2 July 2007.
Summary

Although Ecuadorian President Rafael Correa rules as a populist, he will be able to guide the Constitutional Assembly to a stable outcome that is not overly threatening to business interests.

Analysis

Ecuador's political framework likely will see significant revisions -- with socialist tendencies -- in the Constitutional Assembly process starting at the end of 2007. However, Ecuador's political makeover will not be nearly as chaotic as Bolivia's, and the outcome will not be as threatening to business or the country's economic health as Venezuelan President Hugo Chavez's recent moves. Ecuadorian President Rafael Correa's "socialist" vision is primarily against the entrenched party system rather than against capitalism per se.

Ecuador's constitutional reform process likely will be neater than Bolivia's because Ecuadorian President Rafael Correa's popular support is not fractured by a venomous ethnic, geographic and ideological conflict. Like Bolivia, Ecuador has an indigenous -- and increasingly politically organized -- population in the mountains and a wealthier class of European descendants in the plains. Unlike Bolivia, Ecuador's leading narrative driving political change is not based on pitting these groups directly against each other. Ecuador's population is nearly unanimous in its view that the ruling parties of the past several years have put their own interests ahead of those of the people and that the current political structure has failed to represent popular sovereignty.

Correa came to power because he offered hope to a populace that was thoroughly disgusted with the ruling social democrat consensus and the entire political structure. The public consensus remains overwhelmingly that Ecuador needs change and that Correa will deliver it.

Correa's approval rating reached 76 percent in April as a result of the overwhelming public support for the referendum to create a Constitutional Assembly. His popularity dipped to 62 percent in June -- a natural occurrence exacerbated by a scandal involving videos of Ecuador's economic minister discussing the country's debt, which the opposition tried to cast as evidence of the Correa administration's loyalty to foreign business interests. However, the Sept. 30 election of the Constitutional Assembly's 130 members likely will boost Correa's popularity.

Correa's popularity has persisted despite his brazen moves to disregard judicial and legislative decisions when they threaten to interfere with his constitutional revision project. He has even called for the Constitutional Assembly to dissolve Congress as soon as it begins deliberations. The public's tolerance of such actions indicates the depth of popular dissatisfaction with the current political framework. However, it also raises grave concerns about whether the new political structure Correa aims to build will be an expression of populist enthusiasm enabling authoritarian or radical nationalist rule rather than a restoration of credible and balanced political institutions safeguarding the rule of law.

Despite Correa's friendly affiliation with Chavez, their shared willingness to self-identify as socialists and their disdain for so-called "neoliberalism," fears of an extreme radicalization as a result of Ecuador's left turn likely are misplaced.

Correa is much less of an ideologue than Chavez -- at least for now. In Venezuela, the government presents the socialist "movement" as God, Chavez as its prophet and the United States as the devil. Ecuador exhibits very few signs of such fanaticism. Correa is appreciated for his work to satisfy the populace, not worshipped in and of himself. Furthermore, his objections to the United States and capitalist excesses are bound up in specific complaints. Correa's resentment of the World Bank is related to a loan denied the country as leverage over its policy decisions when he was finance minister. Rhetoric against "neoliberalism" is standard in the whole region and really just means the area does not want Washington telling it what to do. Correa's decision not to reauthorize U.S. use of the Manta air base also reflects a general regional tendency against looking like a U.S. pawn, not actual hostility to the United States.

Discussion of socialist principles in Ecuador is much milder than in Venezuela, focusing on language such as "market forces must be held accountable to social objectives for the common good" rather than "the revolution must press on until the evils of capitalism are buried." Socialism of any sort is generally a red flag for business interests, however, since it implies a threat to property rights, and Ecuador's rhetoric is too vague to be completely reassuring.

A more reliable indicator of the future business climate in Ecuador is the administration's perception of the country's needs. Ecuador and Venezuela are both heavily dependent on oil revenues, but Correa expresses much more concern about the environmental effects of oil drilling than does Chavez. More important, Correa seems more aware that high oil prices might not last and that his country's economic future depends on maintaining a successful diversity of business activity. Aside from Ecuador's traditional exports -- oil, bananas, flowers and seafood -- the country has an emerging mining sector with significant potential, as well as investment opportunities in manufacturing and domestic services such as telecommunications. More than half of Ecuador's exports are sent to the United States.

Many of Correa's proposed policies suggest moderation. Though Correa has suggested that oil profits in the country should be taxed much more heavily, he has not suggested nationalizing the sector. Furthermore, he reassured the mining sector that he will not implement any surprise measures that would constitute an undue burden. Correa favors government intervention to cap interest rates in the banking sector, but he aims to open up the sector to foreign companies -- which are currently banned from providing domestic banking services. Correa wants to lessen the central legislature's power and provide more power to regional and local representative bodies. So far, this has not been accompanied by threats of land expropriation or redistribution.

Though Ecuador's business class is wary of many of Correa's moves, it is not panicked. Business interests realize that with the general population strongly behind him, Correa is a tough target to confront directly, and they believe they can have an effective role in the Constitutional Assembly even though Correa loyalists will dominate the body. Therefore, the business community -- including a core group of leaders from Ecuador's commercial and industrial center Guayaquil -- will likely aim to temper Correa's agenda in the Constitutional Assembly, rather than lead a losing campaign against it.

Correa's agenda will become clearer in the lead-up to the Constitutional Assembly elections in September, and his willingness to compromise -- and to build adequate checks and balances into the new political structure -- will either be reinforced or fall by the wayside thereafter. He is likely to continue being reasonable. He could still become a little too enthralled with his own success and rhetoric and become tempted to develop the kind of cult of personality that periodically appears in Latin American politics. He is undoubtedly a populist, and the question becomes whether he will be willing to check his own power to forge new, more effective checks and balances in the political structure. For businesses, restraint would certainly be the ideal outcome, but even if Correa follows the regional tendency toward an overly strong executive, he likely will govern as a proud pragmatist rather than a radical revolutionary.