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How Ecuador Transitioned From 20th Century Neoliberalism to 21st Century Socialism

Ecuador is an exciting country to watch, as its dynamic president navigates new ground in the midst of a changing international political economy.

Ecuador's President Rafael Correa addresses a crowd in Juan Benigno Vela, Tungurahua, Ecuador, March 26. (Photo: Mauricio Munoz / Presidency of the Republic)

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In June, Josh Hoxie published a piece in Foreign Policy in Focus highlighting Ecuador’s adoption of an especially progressive version of the estate tax. In the article, he advised that Americans “pay closer attention to this small South American nation” and that the United States consider similar redistributive policies. Hoxie is not the first writer to highlight Ecuador as a model of 21st century socialism. In 2012, a Guardian piece by Jayati Ghosh called Ecuador “the most radical and exciting place on Earth” and suggested that “the rest of the world has much to learn” from its example.

With Ecuador having emerged as a poster child for political and economic leftism, readers may be surprised to learn that it only recently shifted away from a long-standing policy approach consistent with the neoliberal Washington Consensus. This shift coincided with the first election of President Rafael Correa in 2006, leading many analysts, including Ghosh, to credit Correa with Ecuador’s shift to the left. While Correa certainly deserves credit for policies implemented by his administration, the role that changes in the international political economy have played in facilitating Ecuador’s shift should not be overlooked.

For example, new economic partners have emerged for Ecuador, with Venezuela and China being particularly important. As I have documented in an academic article for Latin American Perspectives, trade, investment and credit lines from these countries have provided Ecuador with new revenue for social spending and with new leverage to rebuff Western creditors, multinational corporations and the Washington political establishment.

Before exploring these processes in greater depth, it is important to put Correa’s reformism into proper context. It must first be noted that Correa is hardly the first Ecuadorian president to have campaigned on a leftist platform. For example, 1996 presidential candidate Abdalá Bucaram promised voters that he would protect local industries, extend social security benefits and increase salaries of government employees. Lucio Gutiérrez similarly baited voters with populist promises during his successful 2002 presidential campaign.

However, both Bucaram and Gutiérrez quickly adopted policy paradigms in line with neoliberal orthodoxy upon taking office. This bait-and-switch was typical of Latin American heads of state during the Washington Consensus era: Neoliberal reforms were quite unpopular with the electorate, so campaigning against them was often a prerequisite to election. However, indebtedness to Western creditors, compounded by political pressure from Washington, left them with little choice but to create investment-friendly policies and to emphasize debt servicing over social service provision.

Ecuador was typical in this regard. Since the 1980s, the country had received dozens of loans from Washington-based international financial institutions – loans that included structural adjustment conditions, such as trade and financial liberalization, spending cuts and privatization of state-owned industries. Moreover, Ecuador relied on the United States for most of its foreign direct investment and depended on US-based importers to buy the bulk of its exports over this period. Indebtedness and economic dependency left Ecuador with little choice but to implement Washington Consensus-type domestic policies.

That Rafael Correa’s presidential campaign in 2006 promised a shift away from the Washington Consensus should have surprised no one familiar with bait-and-switch politics in Latin America. The surprise was that he, unlike Bucaram and Gutiérrez, actually followed through on these promises. Much to the chagrin of Washington, the Correa administration has raised taxes, increased social service provision, brought regulatory reforms to the public and private sector and written off much of the country’s external debt.

The question is, then, why has Correa been successful in following through on populist promises, while so many of his predecessors reneged on similar pledges? Correa’s supporters contend that he is unique among Ecuador’s presidents in terms of having the courage of his convictions. However, conviction alone is not likely to overcome the pressures of international capital. A more plausible explanation highlights the emergence of new economic partners, which effectively reduced Ecuador’s dependence on the United States, thereby allowing the country to implement policies that ran counter to the desires of Washington.

In particular, new trade, investment and credit lines from China and Venezuela have been key. Since 2011, China has provided Ecuador with billions of dollars in investments and loans, while overtaking the United States as the largest buyer of Ecuador’s oil, its key export product. Additional loans and investments have flowed in from Venezuela, which has also assisted Ecuador in efforts to improve its refining capacity. Through these new partnerships, Ecuador has diversified its credit sources and reduced its trade dependence on the United States, thereby leveraging its position in negotiations with Western creditors and reducing Washington’s political influence.

Ecuador’s newfound leverage with creditors and its political independence are evident in the Correa administration’s policies. The country has rejected the Washington Consensus by raising taxes and increasing social service provision, and negotiated debt settlements with Western creditors on highly favorable terms. It has also demonstrated its political independence from Washington through non-economic policies, such as ending the US government’s lease on a Malta air base and granting diplomatic asylum to Julian Assange.

Questions do remain about the sustainability of Ecuador’s new policy approach. The country is still highly dependent on oil exports, leaving it susceptible to the effects of oil price volatility in the short run and depletion in the long run. Likewise, Correa’s Ecuador is still highly reliant on foreign creditors. Indebtedness to China and Venezuela may compromise the country’s political independence just as indebtedness to US-based lenders did during the Washington Consensus era. This is compounded by the likelihood that Ecuador’s defiant approach to debt settlement has alienated Western lenders.

The key challenge for Ecuador going forward must be to find a sustainable and independent path to development. Doing so will require the country to diversify its domestic economy away from the extractive industries upon which it depends. Despite the Correa administration’s apparent progressivism, it has not made sufficient efforts in this direction. Nor has its newfound partnership with China aided in this respect, as most of China’s investments and loans have been directed toward Ecuador’s oil sector.

Ecuador is indeed an exciting country to watch, as its dynamic president navigates new ground in the midst of a changing international political economy. Going forward, if the Correa administration makes the right efforts and produces a sustainable and independent path toward development, Ecuador can indeed be the model for post-neoliberal success.

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