ECUADOR OPENING NATIONAL SAPRI FORUM
14-15 January 1999
Civil Society Perspectives on Structural Adjustment Policies
Ecuador held its Opening National SAPRI Forum on 14-15 January in Quito. The Forum was organized by a broad-based steering committee of the local civil-society network, SAPRIN, which is coordinated by the lead organization in Ecuador, the Instituto de Ecologia y Desarrollo de las Comunidades Andinas (IEDECA). More than 200 people representing indigenous and peasant organizations, unions, small-business associations, NGOs, urban neighborhood organizations and a wide range of other sectors came to the capital from virtually all regions of the country to participate. They were joined by officials of the Central Bank, the Ministry of Finance and other economic ministries, as well as by World Bank officials from Ecuador and Washington, in a vigorous discussion of the effects of structural adjustment measures implemented over the previous 17 years. Newly adopted and proposed policies were also debated, and a number of policy recommendations were put forward by civil society.
The Forum followed more than a year of civil-society organizing across Ecuador. Through the convening of nine regional workshops, citizen concerns about structural adjustment, as well as priority areas for investigation and possible economic-policy alternatives, were elicited. The Forum, which was itself repeatedly delayed because of changes in government, was held in an environment of widespread street protest against adjustment policies and amidst a serious financial crisis that was engulfing the continent.
The Forum opened with plenary presentations from representatives of civil society, the government and the World Bank and then broke into three work groups, each focusing on a different theme. Summaries of the key points made by each group are presented below. Given the breadth of the first issue, Group I divided itself into three smaller groups and convened its own plenary before reporting back with the other two groups to the Forum plenary.
I. The Impact of Adjustment Policies on Living Conditions of Middle- and Low-Income Groups
Participants in this session addressed adjustment policies, which are having a catastrophic impact on the living conditions for the majority of the population, as well as the absence of policies that could improve those conditions. Adjustment measures affecting the financial sector, public expenditure and the role of the state, and the labor market were the focus of criticism from civil society. These policies were felt to have the greatest impact on low-income families, in general, and on women, in particular, especially in rural and marginal urban areas.
According to participants, private-sector financial institutions have benefitted from government subsidies and debt forgiveness, the cost of which has fallen upon the majority of the population. Monetary policy has favored devaluations, which have negatively affected purchasing power, particularly that of low-income families. Interest rates are reaching as high as 70 percent and are engendering a great deal of speculation while devastating national production. Meanwhile, restrictions on foreign investment have been eliminated. Forum participants also criticized the newly applied tax of one percent on all financial transactions, claiming that it is inflationary and places the greatest burden on low-income groups.
At the same time, the state apparatus is being dismantled, as public agencies involved in promoting productive activities have been weakened and public enterprises and agencies involved in service delivery have been allowed to deteriorate in order to justify their privatization. Following the initial process of privatization in some areas, however, the cost of services has risen while their quality has declined and layoffs by the new private-sector owners stoke the ranks of the unemployed. Cuts in social spending were also cited as a direct consequence of adjustment policies. In 1980, 38 percent of the national budget was dedicated to social spending, with foreign-debt service representing only eight percent. In 1998 debt servicing soared to over 40 percent of budget expenditures. This year social spending has dropped to about 20 percent of the fiscal budget, while debt service may even surpass 42 percent. As a result, access to and the quality of public services are being sacrificed in order to free up funds to service the foreign debt. Per capita spending for health and education in Ecuador is one of the lowest in Latin America.
Meanwhile, real wages have fallen precipitously during the adjustment decades of the 1980s and 1990s. Wage policy has contributed to the insufficiency of salary increases to compensate for inflationary effects on the cost of basic goods and the continuing rate increases for public services. The policy of labor-market flexibility has weakened respect for workers' rights, leaving them unprotected and often leading to abuse by employers. Under structural adjustment, poverty in Ecuador has grown to encompass nearly two-thirds of the population. This compares to a poverty rate of less than 50 percent in 1975.
Forum participants signaled the absence of integrated rural development policies, particularly those related to the agricultural sector, where a lack of financing and improvements in technology and productivity had been especially damaging to small farmers and indigenous people. The importance of land redistribution, anathema under the adjustment program, was also emphasized by civil-society participants. In addition, participants indicated the lack of policies to generate new jobs, as well as to support development and access to credit in the area of artisan and micro enterprise. They also deplored inadequate social policies, particularly those targeting support for low-income urban areas.
II. The Impact of the Policy of Subsidies on Social Conditions
The discussion in this session centered on the important role of subsidies in the broader context of public-sector reform and the reduction of the state under the structural adjustment program. Forum participants noted that a policy of subsidies is based on the notion that a country's resources and state revenue are public goods that should be distributed to improve the welfare of the entire population. They referred to different types of subsidies: those of a social nature, which help satisfy the basic needs of the population; and indirect subsidies, which benefit powerful economic groups through financial policies that result in bailouts, currency devaluation or laxity in tax collection. They also noted the negative impact on the country of what in effect are subsidies to foreign buyers through the export of commodities, such as oil, at prices below their real cost.
Serious concern was expressed over growing inequities resulting from a fiscal policy that reduces government expenditure while at the same time increasing tax revenues in a manner that benefits a small group of businesspeople and banking interests at the expense of the majority of the population. Ecuador has one of the highest levels of income inequality in Latin America. Under adjustment, the distribution of income has become increasingly regressive. Wages, which in 1980 accounted for 32 percent of GDP, currently comprise less than 15 percent. Adjustment has taken away more than half of workers' incomes and substantially increased unemployment and underemployment.
According to civil-society participants, the elimination of social subsidies in Ecuador has generated a chain of negative effects. For example, inflation has escalated, the price of basic goods and services has suffered proportionally higher increases, and producers have transferred cost increases to consumers. The income level of 60 percent of households in Ecuador does not cover the cost of a basket of basic goods. The elimination of subsidies for electricity, gas, oil and transportation has raised the cost of living. As a result, the limited purchasing power of low-income households was further reduced by 45 percent, and small producers, such as those in the fishing sector, have been particularly hurt, as they rely on these services to make a living. In addition, the lack of price controls has led to abuse by speculators, who reap large profits, particularly where monopolies exist.
Civil-society participants also criticized the voucher system for the poor, supposedly established to compensate the poor for the elimination of subsidies, arguing that it does not come close to alleviating the negative impact of adjustment policies on low-income households. They called the new policy of targeted subsidies unjust because, at best, 17 percent of the more than 7 million Ecuadorans living in poverty receive benefits, while most find their already difficult living conditions further deteriorating.
The overall policies of public finance and modernization of the state were also discussed. Civil-society participants blamed the fiscal deficit on poor administration, tax evasion, corruption and ever higher foreign-debt service. They charged that the aggressive process of privatization has created private monopolies in public-service delivery, increased prices and the reduced quality of services, while leading to greater inefficiency and even bankruptcy in some cases. In addition, they signaled the foreign debt as a factor responsible for deepening poverty and the economic crisis in general and for providing a mechanism by which international financial institutions can apply external political pressure for policy reform. As a result, social and productive investment has suffered.
III. The Impact of Trade Liberalization on Production and Employment
Under structural adjustment, Ecuador has lost productive capacity and the ability to feed itself. According to participants in this session, trade liberalization policies and the export-oriented strategy have severely affected production and employment and resulted in a process of de-industrialization. The export-oriented strategy that relied on traditional commodities has not been an engine for sustainable growth in Ecuador. Liberalization policies have not helped GDP growth, which has remained under two percent annually, and have led to a worsening trade imbalance as cheap Asian exports begin to flood into the country
Civil-society participants argued that Ecuador needs a more diverse economy, but diversification, even through the expansion of non-traditional products, has not occurred. In fact, trade liberalization has boosted not the levels of production for export, but rather the profits of large exporters, who have benefitted from currency devaluations under adjustment. International competitiveness has depended on devaluations instead of expansion of domestic productive capacity. Participants also noted that the export-oriented strategy does not take into account the environmental degradation resulting from the exploitation of natural resources and thus ignores a significant economic and social cost to society today and in the future.
Forum participants emphasized that the flood of imports due to trade liberalization has had a negative impact on national production, particularly in the agricultural sector, where domestic food production has been hurt the most. National industry has also been unable to compete with cheap imports or generate conditions that would improve production in order to compete in foreign markets. It was noted that this problem is made worse by the fact that trade liberalization has not taken place in a free-market framework or on a level playing field in the international context.
The recession affecting national production was considered by civil-society participants to be one of the fundamental problems of the current crisis in Ecuador because it is intimately linked with the problem of employment. Official figures show that open unemployment has risen from a level of four percent in 1980 to reach 13 percent of the economically active population, while underemployment is now over 55 percent. In addition, recent estimates show that rural underemployment has reached 68 percent. Forum participants also criticized the lack of policies to support small and medium-scale enterprises. They noted that financial bailouts have benefitted private banking interests -- which have favored big business -- while the National Development Bank has been forced into bankruptcy.
Participants in this session made several recommendations geared to bolstering productive activities in order to counter the damage caused by trade liberalization. These related to industrial reconversion and the development of productive capacity, as well as the rehabilitation of the National Development Bank. They also recommended improving both production for domestic markets and competitive capacity in order to diversify exports, while avoiding further environmental degradation. In addition, the need for policies to encourage the development of productive capacity at the local level, involving all community actors, as well as to make credit more easily accessible to small and medium-scale enterprises, was noted. Finally, civil-society participants recommended that the state play a more active role in fostering national productive capacity. Suggestions included improving basic infrastructure and maintaining price bands in order to increase the competitiveness of domestic production, as well as establishing safeguards for protection of domestic producers against unfair international trade practices.
Discussions in the group sessions and plenaries coincided in emphasizing common themes. The civil-society participants emphasized repeatedly that the economic strategy of adjustment had, over the past two decades, stripped Ecuador of its productive capacity, de-industrialized the country, reduced food security, denied productive resources to low-income sectors, generated greater poverty and inequality, and destabilized Ecuador financially. They indicated that, as a result of structural adjustment policies, the foreign debt burden had become significantly worse and was both negatively affecting the national economy and weakening the state and its ability to put in place national economic and social development policies. Participants called repeatedly for deferment of debt payments so as to create opportunities to reactivate production and meet the needs of the Ecuadoran people.
Civil-society participants joined with the government and the World Bank in concluding that the Forum demonstrated the usefulness of establishing a constructive dialogue and the importance of seeking mechanisms for sustaining that dialogue in order to engender policies that are participatory, viable, objective and just. In this regard, civil-society participants called on the government to expand its involvement in the SAPRI dialogue and to listen to and hear what people across Ecuadoran society are saying, especially in light of the government's unresponsiveness to popular protests against its economic policies. They also asked for clarification as to where respective World Bank and government responsibilities for Ecuador's economic policy lie.
Based on the broad-based input provided during the Forum, joint conclusions were subsequently reached regarding the economic-policy areas and impacts requiring further investigation. As there was agreement that economic policies should lead to social development and sustained poverty reduction and that the results of the SAPRI investigation should serve to reorient policies toward that end, the SAPRI research agenda was modified to make the effects of adjustment on the living conditions of the poor and middle-income groups the overarching subject of investigation. Issues raised and discussed in that broad context at the Forum were integrated into the other two preselected topics, while one new issue was defined. Civil society, organized under SAPRIN/Ecuador, will now collaborate with the government and the World Bank to investigate: the effects of fiscal reform on the conditions faced by poor and middle-income families; the effects of trade and investment liberalization and labor-market reform on production, employment and incomes; and the effects of monetary and financial reform on production and consumption.