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Viva La Revolucion

Letter from the Galapagos: Ecuador’s President Rafael Correa and his country’s Bolivarian Revolution.

President Rafael Correa of Ecuador

“Evolve or die” is what’s printed on the most popular t-shirt sold in the Galapagos Islands. A common misperception that people have about Charles Darwin’s theory of evolution is that it is the strong who survive.

However, to paraphrase the man, it’s not the strongest or the smartest who survive, it’s those who can best adapt to change.

After four trips to Ecuador in the past two years, I have finally decided to visit these famous islands because this year marks the 150th anniversary of the publication of Darwin’s Origin of Species and the 200th anniversary of his birth.

My interest in Ecuador, and South America in general, is to learn more about the economic/political evolution known as the “Bolivarian Revolution”: the election of leftist-socialist parties throughout the continent. Hugo Chavez may be the most infamous of these leaders, but the list includes Evo Morales of Bolivia, Michelle Bachelet of Chile, Luiz Inacio Lula da Silva of Brazil, Tabaré Vasquez of Uruguay, and Rafael Correa in Ecuador.

The movement is a consequence of several factors, including the rejection of US influence and the neoliberal policies—the market-based approach to economic development that focuses on opening of markets to multinational corporations, especially access to natural resources—foisted on South America through the International Monetary Fund. Add to that the extreme inequality associated with race: Minority light-skinned Spanish descendents have always ruled these countries, and they own/earn most of the wealth/income. Last, I would argue that the myopic focus on the Middle East by the Bush-Cheney administration has allowed democracy to finally work—the indigenous dark-skinned majority have elected presidents who, for the most part, look like themselves.

Rafael Correa was elected president of Ecuador in 2006 with promises to nationalize resources, reject the US-IMF policies, and pursue policies that help the poor. (A little over 30 percent of the population is classified as living in poverty.) But how can one improve the lot of the poor without taking from the rich? Furthermore, if Correa tried to increase taxes on the rich to pay for his programs, more than likely he’d end up walking through the revolving door of presidents Ecuador has seen over the past 10 years (Correa makes six in that period.) So where can he find the resources to pursue his goals?

The Bolivarian Revolution’s alternative economic development strategy is being funding by reclaiming “ownership” of the country’s natural resources. Correa and his counterparts have renegotiated contracts with the multinational corporations extracting their resources; many of the original contracts put in place by previous, US-friendly governments favored the multinational corporations. The combination of increased extraction fees and higher prices for oil and other resources has allowed Correa (and the others) to fund job-creating infrastructure projects (for example, a new rail line being built between Quito and Guayaquil) and social programs (healthcare, housing, education) without having to over-tax the elites.

This concept certainly isn’t foreign to the US. The State of Alaska’s oil fund, started with the money earned from the sale of public lands to the oil companies, currently pays each resident $900 per year. Maybe we should ask our Congress to renegotiate federal public land contracts sold to oil and mining interests for literally a few dollars per acre? Apparently our government prefers to reward the companies that extract rather than its taxpayers.

Ecuador’s economy and Correa’s strategy face further challenges: First, Ecuador does not have the level of oil or other natural resources that countries like Venezuela and Chile have; and second, in order to control rampant inflation, Ecuador adopted the US dollar as its currency in 1999. While dollarization has brought inflation under control (Ecuador’s central bank can’t print dollars), it requires the country to run a current account surplus in order to generate more dollars for economic circulation.

Here’s how that works:

The current account balance consists of trade in goods, services, and income flows. A surplus occurs when a country sells (exports) more goods and services to foreigners than it buys from them (imports). If a foreign firm wants to buy Ecuadorian products or services, it must buy them with dollars, exchanging their currency on foreign exchange markets for dollars in order to buy the goods; this increases the number of dollars in Ecuador’s banking system.’

Ecuador’s main exports include oil, shrimp, flowers, and fruits. However, Ecuador has two other significant factors influencing its current account balance: tourism and remittances. Tourism is counted as a service in the accounts, and the Galapagos are the Niagara Falls of Ecuador, drawing thousands of tourists every year.(However, the country is currently trying to manage the number of visitors to limit their environmental impact.) Ecuador has a population of 14 million, but about one million people reside and work in foreign countries, mainly the US and Spain. In the past three years these Ecuadorean workers have sent about $1.5 billion back to the country, a much needed source of dollars for the domestic economy.

All of these factors have helped generate current account balance surpluses, and dollar inflows, for Ecuador since 2005.

So all has been going relatively well for Correa: Real gross domestic product expanded about seven percent in 2008, the fastest in a decade; high oil prices allowed him to increase funding for his programs to help the poor; and a new constitution, giving him greater power, was passed in September by a two-thirds majority of the population. However, the global economic crisis and falling oil prices are creating significant challenges for Correa and the Bolivarian Revolution in general. Ecuador’s exports have declined, and a larger public deficit is now being projected due to the loss of oil revenues.

Correa has responded to the crisis by pushing import restrictions to maintain the current account balance surplus, and “restructuring” the country’s external debt—that is, declaring null and void foreign debts incurred illegally by previous governments. Even before the current economic crisis, Correa had appointed a commission to study the bonds issued by previous administrations for possible illegalities. The commission found that $3.35 billion (out of $3.86 billion) was illegally issued—the bonds didn’t go through the proper legal process for approval. Most of these funds were used on unproductive investments like expenditures for the military, and some funds were for personal use by those in power.

While there may be some legitimacy to Correa’s gambit, it is a risky strategy. On the positive side, it will free up significant funds to meet his social goals; in 2007 Ecuador spent $1.75 billion more on debt service payments than it spent on healthcare, social services, environment, housing, and urban development combined. On the negative side, it will increase interest rates and make credit more difficult to obtain for its private sector, especially exporters. In addition, the US has threatened to revoke “duty free status” on 5,000 Ecuadorean products given through the Andean Trade Promotion and Drug Eradication Act.

This month the government will offer to repurchase the bonds deemed illegal for 30 cents on the dollar. (Correa believes that some compensation is necessary as the investors were certainly not aware of the illegality of the bonds.) Most financial analysts are highly critical of Correa’s move, and group of investors is threatening to sue. However, even anti-Correa Ecuadoreans like Don Jaime, the owner of an inn I often stay at, believes Correa has the right to rid the country of a debt burden placed on it by former pro-US (dare I say puppet?) presidents.

Correa is up for re-election this year, but he is essentially running unopposed. While he has the support of the majority indigenous population, he is by no means unanimously popular. In Guayaquil, the largest city in Ecuador, the new constitution was overwhelmingly opposed. The city is run by a fiercely independent, market-oriented mayor, Jaime Nebot, who openly fueds with Correa—a fact the Guayaquilenos love to boast about. Still, despite the significant challenges posed by the global economic crisis and falling oil prices, it appears that Correa will be able to continue to pursue his version of the Bolivarian Revolution for some years to come.

Violent revolutions are usually the consequence of extreme inequality and poverty. However, the Bolivarian Revolution has come to South America through democratic means. Leaders like Correa are pursuing an alternative economic strategy, a “bottom-up” approach focused on policies that help the poor, versus the “trickle-down” version imposed by the US and the IMF.

In the US we are currently experiencing a severe recession which is a consequence of greed and dogmatice free market ideologies. It’s time to change: The market system is at a point where it must evolve or die.

Dr. Ted P. Schmidt is an associate professor in the Department of Economics & Finance at Buffalo State College.

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