Chavistas in Quito

From Forbes.com
by Kerry A. Dolan

Ecuador's Rafael Correa is puffing up his chest with anti-American rhetoric. Should we give him a break on tariffs anyway?

Venezuela, wallowing in anti-American populism, is a lost cause. But is Ecuador destined to go down the same chute? That's an open question.

Until recently Ecuador was on a growth path. In 2000 it stopped runaway inflation by adopting the U.S. dollar as its currency. In 2002 the U.S. granted the country favored status as a trading partner, as a reward for cracking down on the illegal drug trade. And so exports boomed, with 53% of 2006's $13 billion total going to the U.S. Out in the countryside the peasants grew broccoli and flowers instead of transporting cocaine; in the cities the factory workers churned out chefs' uniforms and indigo for jeans.

Now the political winds have shifted in both Quito and Washington. In late 2006 Ecuador elected a leftist president, Rafael Correa, who is making a career of denouncing oil corporations, banks and Americans. In the U.S. politicians are having second thoughts about promoting free trade with Latin America. The five-year-old law allowing in duty free many categories of imports from Ecuador is set to expire in February, and might well not be renewed.

The tariff exemptions have helped some export categories grow as much as 40% a year, creating work apart from the narco fare that keeps neighboring Colombia so busy. "This is the most highly successful antidrug program in the world, and it doesn't cost the U.S. taxpayer anything," pleads Jeff S. Sheedy, an American who heads the Ecuadoran association of textile manufacturers and is one himself. He says 360,000 jobs are linked to the trade rules, a significant number in a country of 13.7 million people.

But in May 2006 Ecuador seized the fields of Occidental Petroleum, claiming that the company had violated its operating contract. Oxy is seeking $1 billion in damages in an arbitration. Six months later Ecuadorians elected Correa, who, among other things, has busied himself trying to vacuum up the "windfall profits" of the remaining private oil operations. The tax rate on oil extractions (per a recent executive decree) is 99% of any yield above $24 a barrel. Not exactly conducive to attracting capital from abroad.

Correa has indulged in the antigringo rhetoric of the region, at least that directed at Washington. After Venezuela's Hugo Chávez last year called President Bush a "devil" at the UN General Assembly, Correa joked on Ecuadoran TV that Chávez had insulted the devil. Since taking office he has threatened to default on Ecuador's foreign debt, expelled the chief World Bank representative from Ecuador, sued an Ecuadoran journalist for writing a column that criticized him and threatened to pass a law further capping private banks' interest rates.

"Some of the congressional staffers ask us, 'Why should we extend [trade] preferences to a country that speaks badly about the U.S.?'" says Alfredo Zeller, an American whose Provefrut, with $30 million in revenues, is Ecuador's largest exporter of frozen broccoli.

Ecuadorians are ambivalent about free-market capitalism. Dollarization allowed more people to buy big-ticket items. There's been a 50% increase in the number of cars in Quito in the last five years. But all the while the usual disparities of wealth persisted--nearly 40% of Ecuador's population live in poverty--and the charismatic Correa marshaled a political force to exploit this. Lately he's been seeking to consolidate his victory with a proposal for a new constitution that critics say would increase the president's powers. Chávez just stumbled in his power grab; Correa's still on a roll.

A youthful-looking 44, Correa isn't letting a lack of political experience slow him down. With a doctorate in economics from the University of Illinois at Urbana-Champaign, he was teaching at a university in Quito when he was made minister of finance in 2005. He quit after four months, in part to protest the World Bank's withholding of a loan to Ecuador.

Correa's election followed a long period of instability. The country suffered through six presidents in a decade, several of whom were booted out of office. One, Abdalá Bucaram, nicknamed El Loco, was declared mentally incompetent by the country's congress and fled to Panama.

Correa denounces the former ruling elite. "The citizens' revolution marks the end of the oligarchs' party and the pretensions of those who always believed they owned the country," he boomed in a typical speech in September in the coastal province of Manabí. And he thumbs his nose north: Asked about renewing a U.S. military base lease, he advised reporters that one for Ecuador in Miami might give Americans a similar taste of foreign boots.

Much of what Correa's government says it wants to do sounds sensible: diversify the economy; add half a million jobs by 2011; improve health care and schools; build hydroelectric plants; make the roads better; and perhaps build a new refinery so the nation doesn't have to import gasoline while exporting oil.

Unemployment stands at 11% and underemployment at 47%--and that doesn't include at least 1.5 million Ecuadorians who have gone abroad to find work, primarily in Spain and the U.S. They send home $2 billion annually in remittances. The export of oil from government-owned fields--not including, that is, "windfall" taxes--accounted in 2006 for 45% of government income.

Correa faced resistance from the national legislature, which was dissolved in late November by the newly elected constitutional assembly--62% of whose members belong to Correa's party. The assembly is charged with writing a new constitution within six months, the twentieth since the country's birth in 1830.

Though the U.S. is Ecuador's most important trading partner, Alberto Acosta, who was elected to the constitutional assembly and serves as its president, opposes negotiations for a free trade agreement with the U.S. Instead, he wants "a commercial agreement"--some kind of half-step toward free trade. And Acosta vows to revise all the mining concessions, which affect several publicly traded Canadian companies preparing to unearth gold and copper, to allow Ecuadorians to vote on whether they want mining operations near their homes or not. "Our wealth is not in the ground, but in our biodiversity," he declares.

Meantime, Correa has boosted subsidies for gasoline and flour and for army and police pension funds. Subsidies, by some accounts, eat up 40% of the government budget. The president "is a very smart politician but a very bad economist," says Mauricio Pozo, a former finance minister who now runs a large private hospital in Quito. "Expenditures are growing at 32%, but the economy is only growing at 3%." Isn't the government enjoying a windfall from high oil prices? Not fully, since Petroecuador is inept. Its production in 2007 was 10% less than in 2006, estimates Vicente Albornoz of economic think tank Cordes, even though the later year includes Oxy's wells.

Nonetheless, those toughing it out for exports don't want to see any more political doors shut. Dean Edward Rule, an American whose Conectiflor consultancy introduces new flower breeds to Ecuadoran growers, wants the U.S. Congress to see strains of moderation amid the revolutionary rhetoric. Says Rule: "Ecuador is not Venezuela. It doesn't need a shove toward the Venezuelan way."

But Quito's business chiefs aren't enthusiastic and the banks especially are feeling squeezed. Their profits plaint, however, seems to fall on deaf ears. Mauricio Dávalos, a former member of Correa's cabinet who held the unwieldy title of Minister of Economic Production & Quality Coordination, smiles and says, "That's life in the tropics!"