Austerity and Disorder In the Andes

September 25, 2007

"Now," says Carmen Delgado, "there's nothing left." After 30 years as a home-based piece worker, Carmen finally managed to raise enough capital to set up her own small textile business in Pelileo, a small town located in the highlands of Ecuador. But this past March, the economic meltdown in her native Ecuador forced her to close shop and dismiss the ten workers she employed to manufacture denim jeans and jackets.

The World Bank singled out Pelileo—home to Carmen's workshop and about 600 others—in a 1995 report as an exemplary case of rural diversification that had reduced poverty levels in this densely populated area of minifundistas, peasant farmers whose plots are too small to support a family. But today, like most other enterprises in Ecuador, the artisan workshops of Pelileo, which in 1998 employed about 60% of the town's labor force, are practically paralyzed. Many, like Carmen's, were still closed in mid-May, while others were producing at perhaps 20% of capacity. The technical and other services provided to jeans producers like Carmen since 1994 by an internationally funded nongovernmental agency could not stem the destructive tides of broader national and international political and economic forces.

The immediate trigger of Ecuador's economic debacle was the series of measures announced by the government of President Jamil Mahuad on March 11 to deal with a growing budget deficit, to slow down rising inflation rates, and to shore up the private banking system. Perhaps most controversial were the price hikes—of up to 160%—of the various gasolines sold by the state-owned PetroEcuador. Mahuad also proposed an increase in the sales tax from 10 to 15% and ordered a partial freeze on the withdrawal of funds deposited in private and institutional checking and savings accounts. To give them time to "restructure," the banks were closed on March 8, a few days before the announcement of the new measures. Rather than resolving the country's mounting economic crisis, Mahuad's policies led instead to economic paralysis and widespread protest.

The underlying causes of Ecuador's economic crash lie in the country's highly fragmented, personalized and corrupt political system. The weakness of the central state, combined with myopic social and economic elites, have conspired to favor private interests over the public good. Inaugurated in August 1998, President Mahuad succeeded the interim government of Fabián Alarcón, now under arrest on charges of corruption. Alarcón, in turn, had replaced the flamboyantly chaotic and corrupt administration of populist Abdalá Bucaram—popularly referred to as "El Loco"—who was forced out of office in February 1997 by nation-wide protests. Likewise, Bucaram's ascendancy had been facilitated by widespread corruption in the administration of his predecessor, the conservative Sixto Durán Ballén (1992-1996). His vice-president, Alberto Dahik, fled the country rather than face the charges laid against him.

Mahuad, the former mayor of Quito and a member of the centrist Popular Democratic party, won the second round of last year's presidential elections by the narrowest of margins. He did so with the support of the misnamed Social Christian Party, the right-wing vehicle of the financial and export elites of the coastal city of Guayaquil, which set the Mahuad Administration's economic agenda. Under the sway of the coastal elites, the government eliminated income taxes and replaced them with a 1% tax on financial transactions at a time when public revenues from petroleum exports were declining. With these measures, the President and his elite supporters not only aggravated the fiscal crisis of the state, but they also abandoned all pretense of redistribution in this once oil-rich country, where social inequalities have been exacerbated over the past two decades of neoliberal adjustment and half the population ekes out an existence below the poverty line. The financial-transaction tax quickly led to a 30% drop in dollar deposits and a 17% drop in sucre deposits in the national banking system, creating the conditions for a massive banking crisis.

After a week-long hiatus, the banks re-opened on March 15. But the country came to a grinding halt for another week as taxi and bus drivers, along with indigenous organizations, led massive, but for the most part, peaceful protests against the government's new economic policies. The drivers blocked all major intersections in the cities while indigenous organizations blocked the highways. In early February, primary and secondary school teachers walked off their jobs to protest the fact that they—along with police, physicians working in the public-health system, professors of state-run universities, and most other public employees—had not been paid since the beginning of the year.

Faced with massive nation-wide protest, President Mahuad backed down. He was forced to abandon his working alliance with the Social Christians, whose votes in the unicameral Congress, combined with those of the President's Popular Democracy Party, had assured a working majority for the government. To form a new majority bloc, Mahuad and his party began to negotiate with a shaky coalition of small parties ranging from the center to the left, among them the Democratic Left Party, led by former president Rodrigo Borja (1988-92). To resolve the fiscal crisis, they proposed a number of measures, including the reintroduction of the income tax that had been eliminated at the behest of the Social Christians; smaller increases in gasoline prices and in the sales tax; a renegotiation of the foreign debt (which currently absorbs 40-45% of the government budget); new taxes on luxury cars and yachts; and tighter regulation of the financial system. It remains to be seen whether the new majority remains united behind the government and whether its proposals are coherently implemented.

As for the state of the financial system, the March 8-12 bank holiday failed to save the country's largest bank, the Guayaquil-based Banco del Progreso, where 720,000 of Ecuador's 12 million people had deposited their money. It closed its doors on March 22. While the country's economic problems and the drain of capital from the banking system provoked by the 1% tax on transactions contributed to the bank's collapse, scandalous mismanagement and corruption were the decisive factors. Among other things, the bank had provided loans to "ghost" enterprises registered in the name of its principal share holders. Even the then-U.S. ambassador to Ecuador, Leslie Anderson, told the Miami Herald that the bankers had "robbed millions." The ambassador's declarations—including his description of their behavior as "repugnant"—were not reported by the major electronic or print media, which are controlled by the same groups that own the banks.

But the closing of Progreso, which left thousands of anxious depositors crowding the streets in front of its branch offices across the country, was ably manipulated by the Guayaquil-based Social Christians. They managed to divert the coastal population's widespread resentment and frustration—exacerbated by another season of heavy rains which destroyed roads and bridges and flooded farm land—against the central government and away from their own misdeeds. With former president and current mayor of Guayaquil León Febres Cordero in the lead, the Social Christians blamed the bank's collapse on "centralism," "big government" and political favoritism toward banks based in the highland capital of Quito. Manipulating long-standing regional conflicts between the coast and the highlands, Febres Cordero rallied demonstrators from the balcony of the mayor's office in Guayaquil and, within hours of Progreso's closure, pressured President Mahuad to mount a salvage operation that may or may not work. The government rescue package mounted last fall to rescue just one of the eight banks that had collapsed in 1997 and 1998—Filanbanco, also owned by prominent members of the Guayaquil elite—totaled some $700 million, an amount equivalent to the entire public-education budget for the year. Despite the near bankruptcy, Filanbanco's principal owner then found enough money to set up the country's largest brewery.

The government bailout of the Banco del Progreso, however, did not mollify the Guayaquil-based elites; on the contrary, they became even more vociferous, launching a verbal crusade against "tax mania"—their term for the reintroduction of rather modest income taxes. They also demanded the privatization of just about all public services, along with the elimination of "unnecessary" ministries and public agencies. While railing against the "gilded state bureaucracy," they blatantly ignored the costs of the bank bailouts and the highly damaging impacts of the 1998 fiscal reforms on which they had insisted. They also failed to acknowledge the fact that while half of Progreso's deposits came from Quito and other highland cities, 98% of its loans were disbursed in Guayaquil.

In the name of internationally supported decentralization programs that promise to bring government closer to the people, the coastal elites also began to demand greater autonomy for Ecuador's 21 provinces, including the power to set and collect taxes. Their crusade is yielding results. Prominent business leaders in Quito and elsewhere—who, despite regional differences, share the market-friendly preferences of their coastal counterparts—have declared their support for some or all of the coastal elite's demands. Meanwhile, the country's leading intellectuals and think tanks have entered the fray, plugging their own proposals for devolving greater power to local governments. Human rights advocates, however, fear that decentralization measures will simply increase the arbitrary power of undemocratic and repressive local elites and political bosses.

In Pelileo, only the larger jean producers have been directly affected by the bank failures and the partial freeze on withdrawals; the smallest rarely use bank services. But all are reeling from the impact of the March measures, which caused sharp increases in the cost of denim fabric and other inputs as well as a dramatic decline in the purchasing power of their lower- and middle-income customers. They have also been harmed by years of IMF, World Bank and U.S.-ordained liberalization and adjustment policies that, among other things, have resulted in growing imports of used clothing from North America. Two years ago, Carmen was selling some 2,000 pairs of jeans per month at a tidy profit. When she closed her workshop in March, she was earning $0.30-0.35 per pair and sales had trickled down to a few hundred. She cannot compete with used clothing: her production costs (wages, fabric, electricity) are triple the price of the used jeans (and other clothing) that, thanks to neoliberal-mandated openings, have inundated the local market.

Indeed, the purchasing power of Ecuadoreans has been declining steadily over the last couple of years after recovering briefly in the mid-1990s from the lows of the previous decade. As elsewhere in Latin America, the "modernization" of the state has included the dismissal of tens of thousands of public sector employees who now crowd the saturated service sector. The new downsized state—weak, corrupt and ensnared by elites without national vision—was not even capable of mounting a reconstruction effort during the winter of 1998 when El Niño flooded the coastal regions on a scale comparable to the destruction wreaked by Hurricane Mitch in Central America. As employment and incomes plummeted on the coast, the Guayaquil merchants who had previously purchased a significant part of the jean production in Pelileo have not been seen in weeks.

There are other ominous signs of social and political disintegration in Ecuador. In January, a crime wave in Guayaquil led to the declaration of a state of emergency in the province of Guayas. The free hand and increased resources provided to the military and police have curtailed civil liberties and resulted in hundreds of arbitrary arrests and serious human rights abuses, including torture and deaths. "Social-cleansing" death squads have also appeared in Guayaquil; most of the 62 assassinations of "delinquents" in the first three weeks of May in that city were attributed to such squads.

Political and social violence is not unique to Guayaquil, however. According to official sources, crime of all kinds has increased; house break-ins shot up by 26% during 1997-1998 alone. Organized crime—drug and arms trafficking in particular—has proliferated while rural communities, confronted by growing insecurity and a nonfunctional judicial system, have begun to take justice into their own hands by burning or lynching suspected thieves.

In November of last year, a well-known labor leader, Saúl Cañar, disappeared in Quito; his tortured body was found a few days later. On February 17, the country's only prominent black politician, Congressman Jaime Hurtado, was assassinated in broad daylight a few blocks from the national legislature. Three accomplices to the crime, who were captured within a surprising 48 hours, asserted that Carlos Castaño, the head of Colombia's right-wing paramilitary forces, was behind the assassination. But Castaño denied the charge and said that 59 Ecuadoreans had been trained in paramilitary tactics in Colombia. Suspicion has turned to the possible local authors of the crime.

Cañar and Hurtado, a lawyer and the leader of a vocal left-wing party which represented the striking public school teachers, were both defending peasants and agricultural workers involved in land and labor conflicts with large estate owners in the coastal province of Los Ríos. Some now fear a return to the egregious abuses of the Social Christian Febres Cordero presidency (1984-1988) when, according to the records of Ecuador's Ecumenical Commission for Human Rights, at least 122 people died while in police custody.

The crisis in Ecuador will likely worsen. To its credit, the IMF is apparently insisting on the reintroduction of the income tax to increase government revenue and reduce the fiscal deficit. The Fund, concerned about the future stability of the country's financial institutions, has also opposed the corruption that has characterized the bank bailouts. But the IMF is also insisting on the reduction of public spending in a country where public services—education, health, road infrastructure, agricultural extension and other programs—have been devastated by years of cutbacks.

The ironies abound. While many international advisors as well as local analysts attribute rising poverty to rapid population growth, Dr. Julia Sánchez, the physician who runs the public-health center of a rural hamlet in the very poor highland province of Bolívar, cannot obtain fresh supplies of the contraceptives local peasant women have begun to use. Although she had not been paid for two months, earlier this year, Dr. Sánchez was using her own money to buy alcohol for cleaning wounds.

As elsewhere in the world, it is the economic reforms insisted upon by the IMF and World Bank over the past two decades that have strengthened the hand of the country's speculative and corrupt financial groups. In fact, they set the basic direction of economic policy not only during Mahuad's first seven months in office but since at least 1992. The road to the bank failures of the past two years—and to the widely predicted failures of the future—was at least partly paved by financial system deregulation laws dating back to 1994 which eased the spread of practices like loans to shareholders' "ghost" enterprises.

It is difficult to contemplate any possibilities of social progress in a country in which the import-export houses that now control the financial system and most of the country's agricultural land will have their already exaggerated economic power enhanced through IMF and World Bank-mandated privatizations of public enterprises. As the declaration of the state of emergency in Guayas makes clear, the elites' first reaction to the social disorder induced by their own policies has been to spend scarce public resources beefing up police and military forces.

Rather, what Ecuador needs is strengthened public institutions, increased spending on public health and education, protection for the kinds of labor-intensive small enterprises that are now closing their doors in Pelileo and elsewhere, and agrarian reform. It also desperately needs employment-generating infrastructure-reconstruction programs that could provide a source of income for the half of the population that now, to quote another Pelileo producer, is hardly in a position to buy clothing since "they cannot put food on the table."

Liisa North is professor of political science and a Fellow of the Center for Research on Latin America and the Caribbean at York University in Toronto, Canada. She is currently a research associate at the Latin American Faculty of Social Sciences (FLACSO) in Quito.

Tags: Ecuador, austerity, neoliberalism, social protest, militarization

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