Ecuador's Balancing Act: Palacio, The People & IMF

Ecuador's Balancing Act: Palacio, the People and the IMF

• Newly appointed Ecuadorian President Alfredo Palacio announces that he wants to create a government more relevant to Ecuador’s suffering citizenry. A huge component of this plan is investment in social programs, which he hopes to fund by diverting oil revenue normally used to service the country’s external debt.

• Economically risky, this move does not comply with IMF “surveillance” programs, but Palacio, pressed by popular demands and the bitter lessons of numerous former presidents, will likely be ousted like his predecessors if he does not invest more funds in social programs.

• Another threat comes from ex-President Lucio Gutiérrez, who already has sought to undermine Palacio’s presidency, calling the regime “illegitimate” and “immoral” in recent appearances in Washington.

• The IMF, which has had a deeply flawed track record in Latin America, must revise its guidelines to become more socially conscious if it wants to see unqualified success resulting from its initiatives, with even its long-term survival possibly at stake.

Since former President Lucio Gutiérrez’s mid-April removal from office, Ecuador has been a nation in limbo, with its population eager to know if their new constitutionally-sanctioned former vice president and now president, Alfredo Palacio, will act upon his populist promises. In a speech to the public on June 16, 2005, Palacio emphasized the importance of social investment, declaring that he would divert funds formerly designated to service foreign debt obligations toward health and education programs. This agenda stands in stark contrast to Guitiérrez’s fiscally conservative policies. The recently ousted president had campaigned on a platform of social reform, but once in office he proved himself a staunch subscriber to the IMF mandates rather than the campaign pledges he made to those who had elected him which he subsequently had repudiated. Guitiérrez’s duplicity became the mainspring for his eventual downfall, after his popularity had precipitously declined after coming into office in January 2003.

So Far, So Good
Palacio has thus far been able to avoid such a dramatic descent. In fact, after completing his first unnerving month in office, a nationwide poll showed that 62 percent of Ecuadorians rated the leader’s performance as “good or very good,” over twenty percentage points higher than a similar poll on Gutiérrez staged in February. Palacio has retained this popularity perhaps because he demonstrated early in his tenure that he intends to fulfill his inaugural promises.

On Monday, May 30, Minister of the Economy Rafael Correa announced that the country would no longer abide by the IMF surveillance programs that Gutiérrez had signed, a proposition that the Ecuadorian Congress has since ratified almost unanimously. These now repudiated pledges had focused on macroeconomic indicators and assigned ninety percent of Ecuador’s oil revenue to debt repayment, rendering the country incapable of providing sufficient funds for social initiatives. This new proposal, embodied in Palacio’s more far-reaching initiative called the Political and Institutional Restructuring of the State, represents a glint of hope for even the most skeptical of Ecuadorians, who are all too accustomed to chiefs-of-state who cave under Western economic imperatives rather than resolutely act on behalf of their country’s poor, who constitute 45 percent of Ecuadorian society.

But Wait, There’s a Catch…
While hopes are high, this new policy of noncompliance does not represent an automatic cure for Ecuador’s many social ills. In fact, it is not even certain that Palacio is actually acting in the country’s best long-term interests. Ecuador, like other developing countries, seeks the IMF’s stamp of approval in order to attract foreign investment as well as to obtain the all-important creditworthy rating essential for being issued loans by international lending organizations like the World Bank as well as private international banks. Without IMF endorsement, Ecuador could easily spiral into default, even bringing on the failure of its dollarized currency to be followed by a deafening fiscal crisis, giving way to a catastrophic economic collapse. Even if the country were able to temporarily evade this macroeconomic catch-22 dilemma by staying afloat on the basis of its current high oil premium (petroleum is currently Ecuador’s primary export); the fact that the economy is so dependent on oil revenues means that a domestic market collapse could be invited if the global market contracts and petroleum prices precipitously drop.

On Friday, June 3, Ecuador’s central bank expressed skepticism at Palacio’s plans, stating that they are financially risky for fiscal sustainability and the dollarization system. The report questioned Palacio’s assertions about the social benefits of diverting money from the oil fund.

At the same time, Gutiérrez has been a very vocal presence—some would say, even a whining presence, in opposition to Palacio, albeit for different reasons than the central bank. In the week of June 13-17, Gutiérrez made a trip to the United States with the purpose of defending his own presidency and denouncing the Palacio administration. In comments on June 16, 2005, Gutiérrez called the Palacio regime “illegitimate” and “immoral,” stating that he never formally filed his resignation before his ouster and was therefore overthrown unconstitutionally. Gutiérrez has lobbied the Organization of American States (OAS) to pressure Ecuador for his return and for early elections. If Gutiérrez’s efforts are successful, Palacio’s fledging efforts could be thwarted, leaving Ecuador once more forcing an uncertain future.

Palacio’s Balancing Act
Though Gutiérrez has vehemently campaigned against the Palacio government, the latter’s primary concerns remain the IMF and the Ecuadorian public. Simultaneously achieving the approval of these two interest groups would constitute a monumental balancing act for Palacio. Choosing not to side with the IMF is certainly an economic gamble that could result in an eventual financial crisis, but Ecuadorians have shown, as they did with Gutierrez, that they can and will hold their government accountable when they feel they are not being heard. In a country riddled with dismal economic and social indicators, the citizenry passionately believes that social programs must take budgetary priority over debt payments, and they know very well that full cooperation with the IMF has to mean neglect of their desperate social needs.

IMF Track Record: Not so Impressive
Ecuadorians are right to be skeptical of the IMF surveillance programs, which have had, to say the least, a mixed record in Latin America. Increased poverty and macroeconomic volatility often has been the general trend upon implementation of one of these programs. According to a 2001 estimate by the UN Economic Commission for Latin America, 45 percent of Latin Americans now live below the poverty line, as opposed to 41 percent in 1980, before the IMF initiatives began. In spite of its very spotty record in the region, the IMF continues to focus aggressively on Latin America, enforcing its characteristically dogmatic neoliberal reforms regardless of their often lamentable outcome in the field.

If Ecuador is to embark on the path of the economic and social development that has evaded it for so long, serious reform must be in order. Versatility in the IMF’s approach to the hemisphere must become its cardinal feature, including in Ecuador. If the IMF wants its policies to be acceptable to the populous, it must allow more room for social spending and citizen input. Until then, the pattern of political instability and economic turmoil that Ecuador has so fully experienced in recent months, will not easily be altered. Gutiérrez’s ouster marks the third consecutive occasion where an Ecuadorian president was unable to finish his term. Palacio is likely to follow suit if he fails to find a way to fund viable social programs while still appeasing foreign creditors and investors. Hopefully, a self-respecting strategy can be found and Palacio will prove himself to be adaptable enough to make use of it.

This analysis was prepared by COHA Research Associate Alicia Asper.

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