Kabir's Econ Blog

February 1, 2010

Ecuador Barrier to economic growth/development

Filed under: Uncategorized — kabir1892 @ 3:41 am

Poverty : poverty and inequality are holding back development.


-Hard to reduce

-low incomes, investment, savings, investment, production, demand, malnutrition

Institutional and political factors:

-ineffective taxation structure

-lack of property rights

-political intability


-unequal distribution of income

-formal and informal markets

-lack of infastructure

International trade barriers:

-overdependence on primary products

-the terms of trade have deteriorated over a long period of time for the developing countries

-low income elasticity of demand for primary products

-violently fluctuating prices of primary goods

-increased trade between developed countries

-consequences of an adverse terms of trade

-consequences of a narrow range of exports

-protectionism in international trade

International financial barriers -indebtedness:

-The developing world and debt (increased interest ratess, increased value, recession in the developed world, net capital)

-solving det

-non convertible currencies

-capital flight (how can it be tackled?)

Social and cultural factors:



-gender issues


In 1996 there was a large inequality in income distribution. 20% of the wealthiest people earned half the nations total income. On the other hand, the bottom 20% had only 5% of the total. During 1999 when the economic crisis hit, the middle class fell below the poverty line due to currency devaluation and inflation. Statistics in 2000 show that half of the ecuadorians were below the poverty line. The poverty rate was 35%.

The Ecuador’s constitution looked over this problem in 1998 and emphasized programs on the poor such as free health care and governments subsidies. However, public welfare spending had little impact on poverty. Public health care became free but the quality of medical services were inadequate. The design of Ecuador’s education system causes similar problems for economically disadvantaged citizens because the government subsidizes university education at the expense of elementary and secondary schools. Wealthy families can afford to send their children to the best private schools, while poorer families must settle for the variable quality of public education and disruption caused by frequent teacher strikes. Access to education is also divided along rural/urban lines, with public expenditure favoring urban schools and neglecting vocational and manual skills training.



The HPI-1 value of 7.9% for Ecuador, ranks 38th among 135 countries for which the index has been calculated.

The HPI-1 measures severe deprivation in health by the proportion of people who are not expected to survive to age 40. Education is measured by the adult illiteracy rate. And a decent standard of living is measured by the unweighted average of people not using an improved water source and the proportion of children under age 5 who are underweight for their age.

Institutional and political factors:

Taxation structure: http://www.pwc.com/en_US/us/hr-international-assignment-services/assets/ecuador-folio.pdf#5

1) Ecuador currently taxes its resident citizens and foreigners on their Ecuadorian-source income. Ecuadorian-

source income is defined as any income derived from activities executed in Ecuador, regardless of where the

income is received. It also includes income obtained abroad by Ecuador-resident individuals and corporations,

whether local or foreign.

The tax year

2) The tax year runs from January 1st to December 31st.

Methods of calculating tax

3) Income taxes for individuals is levied on a progressive scale at rates which vary from 0% to 35%. For a

schedule of the rates of tax please refer to Appendix A.

Husband and wife

4 )Husband and wife are required to file separate income tax returns for the income derived from employment, a

profession or a business. Joint income or income that cannot be definitely attributed to one spouse in particular

must be split equally and added to the spouses’ respective tax returns.


5) Individuals staying in Ecuador for a period longer than 6 months or with resident visas are subject to income tax

on any earnings and are not entitled to exclusion of income for periods of temporary absence from Ecuador.


6) Nonresidents are subject to tax on their Ecuador-source income regardless of their domicile or place of

residence. Nonresidents residing in Ecuador for a short period of time (less than six months) are subject to a flat

25% income tax on income received from local sources, which is withheld at source. Payments made to foreigners

occasionally working in Ecuador, when not charged to an Ecuadorian company or local branch of a foreign entity; do not give rise to income tax.

property rights:  A large portion of Ecuador’s economy is based on the petroleum industry. In the past, the revenues from oil exports have been more concentrated in the hands of the Spanish-dominated elite, resulting in group-based inequality.  Ecuador is also the largest exporter of bananas in the world.  In 2007 President Rafael Correa drafted a new constitution that would distribute more political power to poorer people and attempt to tacklepolitical instability.  The new left-leaning administration has rejected several trade pacts and other diplomatic ties with the United States as well as with its Colombian neighbors.

Corruption: Since 1982, however, the international price of oil has decreased and Ecuador has suffered an economic downfall. Part of that downfall stems from the economic debt amassed by the ineptitude and corruption of Ecuador’s military leaders. The debt falls harshly on the backs of Ecuador’s most needy citizens who have to deal with a decrease in basic services such as education and health. A fin de siecle banking scandal further decimated the economy as private accounts simply vanished with the failed banks. In an effort to stabilize the economy and halt the slide of the plummeting sucre (Ecuadorian money), Ecuador decided to adopt the dollar as its the official currency in 2001.

distribution of income:  In Ecuador, the income distribution is one of the worst in the Andean region. 80% of the income share of GDP is about 20% of the population. The government of Ecuador used 1.6 billion dollars to bail out banks since they were corrupt and mismanaged.

Due to economic and banking crisis that occurred in Ecuador, the problems became worse in 1999. Economic activity decreased by 7-8%, causing the currency to depreciate by 195%. Per capita income in dollars increased by 32% during that year. In addition, unemployment increased from 9% to 17%, and underemployment from 49% to 55%.

Infrastructure: Ecuador is well-served by an accessible transport system and profits from an extensive infrastructure of roads and an uncommonly efficient bus system that make travel to almost any region possible. The country has 43,197 kilometers (26,843 miles) of highways, of which 8,165 kilometers (5,074 miles) are paved. Three national airlines—Saeta, Tame, and Ecuatoriana—provide flight services within Ecuador and from the international airports in Quito and Guayaquil to select locations outside the country. Because the vast changes in altitude and terrain in Ecuador can make road travel slow and difficult, tourists and Ecuadorians alike frequently utilize in-country flights. Taxis and buses provide nonstop city transport for very reasonable fares, and a newly constructed trolley line in Quito delivers passengers to the center of the city. The trans-Ecuadorian railway, which extends for 812 kilometers (505 miles), needs renovation and is used for freight purposes.

Besides excellent transport for commuters and travelers, its seaports equip Ecuador for international commerce. The largest is at Guayaquil, the main port for oil exports is at Esmereldas, and there are other major ports at Manta and Machala. While the extensive road infrastructure and port system contribute to productive domestic and international trade practices, productivity is hindered by aging vehicles and oil pipelines.

International trade barriers: The export of primary goods and the import of capital and manufactured products have historically characterized Ecuador’s trade. While petroleum remains Ecuador’s most important export and economic force, an increasing diversity in export products (most notably the recent dramatic rise in the export of cut flowers; in just a few yearsEcuador has become the leading supplier of cut flowers to the United States) is reducing the historical volatility of Ecuador’s export revenues and is helping to stabilize its economy.

The United States, European Union countries, Columbia, Chile, and Japan are Ecuador’s primary trading partners. In 1998, the United States exported USD 1.6 billion worth of goods to Ecuador, or about 30% of Ecuador’s total imports, and received nearly 40% of Ecuador’s exports, making it the country’s leading import and export partner. Colombia, Japan, Mexico, Venezuela, Spain, Germany, Brazil, and Chile together supplied approximately a 40% share of the Ecuadorian import market and likewise, were the destinations of almost 40% of Ecuador’s exports.

Ecuador’s active membership in global trade organizations and its participation in a number of regional free trade zones confirm the nation’s trend toward liberalization and its commitment to open trade. Ecuador is a member of the World Trade Organization (“WTO”), the Andean Community, and the Latin American Integration Association (“ALADI”). In addition,Ecuador has concluded bilateral free trade agreements with Bolivia, Chile, Colombia, and Venezuela, is negotiating a trade agreement with Mexico, is engaged in trade talks with the Mercosur nations of Brazil, Argentina, Paraguay, and Uruguay, and fully supports the establishment of a free trade area for the Americas.

Ecuador’s application of free market principals, including the lowering oftrade barriers, its participation in numerous international tradeorganizations, and a firm commitment to diversification of its economy and reform of its financial institutions, are helping to restore a favorable balance of trade and generally better the nation’s economy.

International financial barriers: The commission recommended that

Ecuador default on $3.9 billion in foreign commercial debts–Global
Bonds 2012, 2015 and 2030–the result of debts restructured in 2000
after the country’s 1999 default.

Although Ecuador currently has the capacity to pay, dropping oil
prices and squeezed credit markets are putting President Rafael
Correa’s plans to boost spending on education and health care in
jeopardy. Correa has pledged to prioritize the “social debt” over debt
to foreign creditors.

Commercial debt, or debt to private banks, made up 44% of Ecuador’s
interest payments in 2007, considerably more than the 27% paid to
multilateral institutions such as the International Monetary Fund
(IMF). But the report also lambasted multilateral debt, saying that
many IMF and World Bank loans were used to advance the interests of
transnational corporations. Ecuador’s military dictatorship
(1974-1979) was the first government to lead the country into

The commission found that usurious interest rates were applied for
many bonds and that past Ecuadorian governments illegally took other
loans on. Debt restructurings consistently forced Ecuador to take on
more foreign debt to pay outstanding debt, and often at much higher
interest rates. The commission also charged that the U.S. Federal
Reserve’s late 1970’s interest rate hikes constituted a “unilateral”
increase in global rates, compounding Ecuador’s indebtedness.

Social and cultural factors:

Religion: Predominantly Roman Catholic. It varies according to their social class.

Culture: Ecuador is a multicultural, multiethnic nation–state that many consider multinational. It has one of the highest representations of indigenous cultures in South America and two distinct Afro–Ecuadorian cultures.

The elites and those in the upper–middle classes are oriented toward education, personal achievement, and the modern consumerism of Euro–North America.

People in the upper and upper–middle classes generally identify by skin color as blanco (“white”), to distinguish themselves from those whom they regard as “below” them.

Black people, represented by their leaders as Afro–Ecuadorians, (afroecuatorianos) , speak Spanish and range through the middle to lower classes.

Overall, there is a large gap between the rich and the poor.

Gender Issues:

Women make up a considerable portion of the workforce and are particularly visible in banking and finance, university teaching and research, and NGOs. They play a prominent role in indigenous and Afro–Ecuadorian mobilizations and movements. They hold high government positions in the national and regional judicial system, the national congress, and the executive branch.

Gender roles also vary amongst classes and ethnicities. Sometimes women are considered equal to men while there are some that are male dominant.

Gender, class and ethnicity are all things to consider in the Ecuador society.


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