Introduction

Ecuadorian Oil, Debt and Poverty: A True Story

It may seem absurd that a country with oil is also debt-ridden and poorer now than before the first barrel was shipped, but that is the reality in Ecuador.

It all started back in the late 1960s when Texaco began to re-explore in Ecuador’s Amazon region for oil deposits. This region had been abandoned by Shell in the 1950s because there were better deals to be had getting oil out of the Middle East. With the formation of OPEC in 1960 and a vertiginous rise in oil consumption through the boom in developed economies in the 1960s, oil in the Amazon started to look attractive despite the logistical problems of getting it out of the ground and out of the country. Texaco struck black gold in 1967 and by 1972 had completed Ecuador’s first pipeline, SOTE, from the newly founded oil town of Lago Agrio to Esmeraldas on the Pacific Coast.

At the same time, Ecuador’s government was ousted by the military who initiated a nationalist policy with regard to oil and joined OPEC. The contract they negotiated with Texaco left over 80% of the earnings from each barrel in government hands. Despite the sharp increase in oil prices after 1973, and the wealth it created for Ecuador, the military junta began borrowing to subsidize their program of building up national industries to reduce dependence on foreign imports. They also built roads and infrastructure across the country. This cost more money than even an oil boom could supply, and loans were readily available on the international market. While the oil crisis created an inflationary economy in developed countries, it resulted in massive earnings among Middle Eastern OPEC members. These newly wealthy regimes invested their Petrodollars in banks, including the World Bank, who in turn offered attractive loans around the world to countries with good credit. Before the boom, Ecuador had borrowed small amounts but was not considered a good risk for major lenders. After the boom, the sky was the limit and Ecuador was allowed to borrow freely, hedging their loans with future oil earnings. To put this concretely, the external debt rose from $260.8 million in 1971 to $5.87 billion in 1981 and debt service increased from 15% of GDP in 1971 to 71% in 1981. Per capita income rose from $260/annum to $1,668/annum in the same period.

While most of Latin America fell to repressive military regimes in the 1960s and 70s - supported by the US who feared the Cuban Revolution would spread - Ecuador’s military government is remembered fondly by most people. Their term of office (1972-78) was a time of increasing incomes, better roads and schools and general economic affluence, at least for the burgeoning middle classes and the elite. “The poor,” according to analyst Alberto Acosta, “got only the crumbs from the table at the Petrobanquet.” Unfortunately, the prolonged recession in developed countries eventually took its toll on a number of fronts simultaneously.

In the developed world, a variety of policies were implemented to reduce dependence on oil and this in turn resulted in falling oil prices in the early 1980s. As well, Reagonomics ushered in stricter terms for loans and higher interest rates. This initiated the Debt Crisis in the developing world as countries struggled to meet tougher debt repayment schedules at the same time that prices for their commodities were falling and sometimes free-falling. The World Bank and IMF began imposing structural adjustment regimes on debtor countries, demanding privatization of government enterprises, removal of consumer subsidies, reduction in government spending and wage freezes. Ecuador, newly returned to democratic government, delayed the pain experienced by its neighbours under structural adjustment by opening oil to private investors. They increased exploration and export in order to generate more oil earnings despite falling prices - oil sold for less than $9 per barrel in 1986, down from $40pb in 1981. This paved the way for new players like City and Occidental to cash in on Ecuador’s oil wealth but didn’t permit the governments of the 1980s to hide their heads in the sand entirely. Structural adjustment was implemented on a modest scale throughout the decade, thus ending the ‘oil boom’ of the 1970s.

By 1992, full-strength structural adjustment packages were handed down to Ecuador and applied. The last 10 years have seen Ecuador through natural and man-made disasters that have left the country destabilized and further than ever from social equity or justice. The shortlist of problems include El Niño’s destruction of infrastructure and crops on the coast, debt service, low oil prices, crashing banks and more recently, quick turnover of governments, all in a climate of extreme corruption.

By 1999, the simmering economic crisis provoked by the failure and subsequent government bailout of badly managed private banks, alongside runaway inflation and devaluation of the sucre, came to a head when Jamil Mahuad closed the banks for a week to prevent further bank closures. When the banks reopened, savings over a few hundred dollars were frozen and a new exchange rate was set. Within months, Mahuad announced that the only answer was to follow IMF advice and adopt the US dollar as the national currency. This provoked more social unrest and culminated in the shortlived coup by indigenous, military and a supreme court justice in January of 2000. Mahuad’s Vice President, Gustavo Noboa, resumed control of the country and began to implement a number of critical policies in order to qualify for an emergency loan and long term refinancing of Ecuador’s debt.

To qualify for IMF assistance, Noboa agreed to a second oil pipeline which would allow the privates to double or triple their production, ostensibly generating more foreign currency for Ecuador’s coffers. Secondly, Noboa made Ecuador the first Latin American country to totally abandon a national currency and adopt the greenback in 2001. This was supposed to reduce inflation and devaluation and thereby promote internal investment and growth. A quick look at the numbers suggests the plan has been a dismal failure. Inflation was 52% in 1999, 97% in 2000 and 40% in 2001 despite the ‘stabilizing’ dollar. Non-oil exports have fallen, 16.3% in 2000 and a further 8% in 2001. Meanwhile, imports increased 61.8% in 2000 and 45% in 2001 thus provoking a serious balance of trade problem. As usual, oil is heralded as the saviour but since structural adjustment, the terms between Ecuador and the private companies have changed dramatically. Under current service contracts, the state retains almost nothing of the value of a barrel of oil while under participation contracts a mere 18% stays in Ecuador. That means that Ecuador has to export far more oil than in the past to make the same amount of money. As well, dependency on the vicissitudes of international commodity markets is not reduced one iota.

An outside observer might argue that Ecuador is far more stable now than in 1999-2000, both economically and politically. This surface calm makes it appear as if the IMF recipe worked. Insider analysts agree, however, that the current calm is temporary and conditional on a number of unstable factors:
1. Narcodollars and counterfeit have flooded Ecuador from abroad
2. Consumers have preferred to invest their savings in major purchases like cars rather than trust the banks but once savings are spent, the market will slow down
3. At least 1,000,000 Ecuadorians have left the country in search of work which lowers unemployment figures and competition for the few jobs there are; and more significantly, represents a net inflow of $1.33 billion in 2000 and $1.45 billion in 2001 as remittances from Ecuadorians abroad.

Remittances in 2000 were greater than earnings from bananas, shrimp, coffee, cocoa and tuna exports combined and in 2001, they exceeded all oil investment including the new oil pipeline deal worth $1.1 billion. Given that the minimum wage is $128.80 while the minimum requirements for a family of four exceed $300, the only thing keeping a lid on social tensions is the money sent home by dutiful migrants. Many of these Ecuadorians can be found in Spain working in agriculture and domestic service. They are slowly realizing that they can invest in Spanish property more cheaply than in Ecuadorian and many are making new lives for themselves. If the majority of migrants decide to turn their backs on their families, as some have already done, many more people will find themselves unable to meet their minimum requirements. Indeed, the numbers of people living below the poverty line increased from 3.9 million in 1995 to 9.1 million in 2000 and the numbers of extremely poor doubled from 2.1 million (12%) to 4.5 million (31%). Inequality has also worsened:

Percent control of wealth by Quintile

The effects of structural adjustment and dollarization have left the poorest Ecuadorians quite literally out in the cold. Much of the middle class, born under the military, have returned to the ranks of the poor and the working poor have become unemployed absolutely poor. Per capita GDP fell 32% in 1999 to $1,109 - below 1979 levels. The downward spiral has been slowed by remittances but they will not flow forever and currently, there is nothing to take their place.

The new pipeline will allow the private companies to pump more oil and this may represent a short-term gain in terms of a few hundred jobs and some taxes, but by turning to oil at each and every crisis rather than developing a sound domestic economy, Ecuador condemns itself to a never-ending cycle of boom and bust with the busts overtaking the booms in duration and severity. The external debt stands at over $16 billion or over 80% of the GDP and it is unlikely that oil can solve the problem it ultimately helped to create.

Alberto Acosta, the renowned Ecuadorian economist, sums up the problem well:
“Under these circumstances, Ecuador will be what it has always been: a primary product producer. Petroleum appears to be a source of earnings that reduces the tension caused by a chronic trade deficit in the non-petroleum sector. The deal is to produce and transport the greatest quantity of crude possible. But desperation to increase oil earnings is driving Ecuador to ‘petrodollarization’ which means damage to the environment will increase dramatically alongside political tensions. In the current privatizing wave, whoever gains control over petroleum production gains the power of the state. The state will maintain the appearance of democracy while becoming increasingly authoritarian in practice. … And in this context, the manipulation of information and intolerance spreads in Ecuador. Those who protest are threatened or attacked. ‘The OCP is because it is’ … and meanwhile Ecuador advances toward the past.”
(2002, unpublished manuscript “Ecuador: Between the Illusion and Evil of Oil” pages 8,10)

© Dr. Leslie Jermyn and the
The Global Aware Cooperative
Contact cooperative@globalaware.org

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