Thursday, October 02, 2008

Ecuador Approves New Constitution with Major Economic Implications

Equador's poor bank on referendum, BBC News
Gobierno analiza eliminar tratados economicos “perjudiciales”, El Comercio
Correa celebra una ‘paliza’ en urnas, El Universal
Triunfo importante que no es un cheque en blanco, El Comercio
Voters expected to approve Correa-backed Constitution, The Washington Post, 9/29/08, p. A21

On September 28th, Ecuadorians gave President Rafael Correa permission to introduce a new constitution. The 64 percent approval vote easily satisfied the majority vote required for constitutional reforms, and Correa called the referendum a “crushing victory.” The 444 article constitution will be the twentieth constitution in the country. The new constitution is considerably leftist and is designed to benefit the “hardworking majority” and eradicate the “corrupted political class in Ecuador.” It shifts a significant amount of power from the legislature, which has traditionally been ruled by the Ecuadorian business class, to the executive. The constitution places strict regulations on credit and monetary policy, and increases governmental reach into the banking and financial sectors. The constitution is also designed to alleviate poverty in indigenous communities, promote regional integration in Latin America, and augment civil and labor rights of certain groups, such as workers in the informal sector and stay-at-home mothers.

Critics argue that this reform would give President Correa too much authority over the country’s economy, which may discourage both internal and foreign investment. They also criticize President Correa for being a puppet of Venezuelan President Hugo Chavez. Many of his critics come from inside Ecuador, principally in the business community, centered in the major Pacific coastal city of Guayaquil.
From a distance, the transition certainly looks like the one Venezuela initiated only a few years ago. However, the reforms are not nearly as radical as those enacted in Venezuela’s constitutional referendum.
Despite criticisms, President Correa, who is a US-trained economist, has been credited with instilling in his people the hope of living the “good life.” Correa promises that the “good life” will be available to all through his project entitled “Socialism of the 21st Century.”

The “Socialism of the 21st Century” project began when Correa reviewed approximately twenty economic investment and mutual protection treaties that he argues have infringed on Equador’s sovereignty and have benefited certain investors that considered Ecuador’s foreign debt as “good business.” Ecuador has massive amounts of debt, and Correa calls some of this debt “illegitimate.” Last year, Correa formed the commission to audit the country's public debt issued between 1976 and 2006, with the aim of determining which bond series should be considered illegitimate and illegal. The commission states it already found illegalities in debt contracted between 1976 and 1979, when a military government ran the nation. Correa has made it clear that Ecuador plans to prioritize social spending over paying off its foreign debt, especially if the current global economic crisis worsens. On Monday, Correa reiterated his promise to continue social spending programs despite an international financial crisis and that he will cut debt service payments if needed.

Critics warn Ecuador that if it refuses to pay its external debt, it will face an imminent loss of financing sources. Even wealthier Latin American countries that support Ecuador’s leftist shift, such as Venezuela, Chile and Brazil, may not be able to extend aid to Ecuador given the need for caution in the global financial crisis.

Finally, in questions of oil, Correa, who has been a long-standing critic of foreign investors in general, stated that the natural resource belongs to Ecuador and that the country makes decisions concerning oil matters. These vague comments create some hesitation among the oil companies already in Equador, and they may twice before investing more money in Equador’s oil sector. When it was suggested the oil companies might even shift their interests elsewhere, Correa responded that he “would not allow them to leave.”

Questions:
1) Should international institutions be permitted to intervene and defend creditors if Ecuador refuses to pay certain debts? Why or why not? How could this work?
2) How would you have voted on this referendum if (a) you lived in a poor indigenous community or (b) if you were one of the few members of the Ecuadorian middle class?

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