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  • Your Escape Plan

The Road to Economic Prosperity

  • BY EA Editors
  • April 22, 2012
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When one considers the breadth and scope of infrastructure progress in Ecuador (covered in a separate report), under the President Correa Administration, it is truly, mind-boggling.  Progress jammed into 5 years, unprecedented in the previous 50 years combined!  It is impossible to look at this staggering success and not beg the question, “How?”  Exactly where did President Correa find the largesse for the largest public works investment in that nation’s history?  What factors created this road to economic prosperity ?  The answers to those questions are both intriguing and diverse.

At the top of the list, one cannot ignore the strong economic impact of ever rising oil prices.  Some write this off to “dumb luck” on the part of Correa.  No doubt that the oil market events were fortuitous, but it is what Correa did with the revenue that was the defining moment.  This is not Ecuador’s first oil bonanza and, yet, other administrations squandered much of it, with little to show in terms of benefiting the Ecuadorian populace, or stimulating economic growth.  That Correa carefully earmarked oil revenues for targeted public works projects, which enhanced the nation’s infrastructure, created skilled and unskilled labor jobs and helped other economic sectors improve their efficiencies, such as the agricultural sector being able to bring products to market more quickly and cost-effectively due to an improved road/bridge network, is what defined the success of economic program backed by the oil revenue funds.  At the end of the day, possibly for the first time in the history of Ecuador, the oil revenue largesse was shared with the public at large and not deposited in either the pockets of local politicos or gifted to exorbitant “loan-shark level” debt payments, to foreign governments, which served only to enslave the nation of Ecuador in a never-ending debt spiral.

This latter point takes center stage, when one considers another key component to the recent economic success of Ecuador.  When President Correa took office, not only was Ecuador heavily indebted, but the terms of that debt were wholly inconsistent with current market realities.  In what amounted to one of the greatest “feats of magic” by perhaps any global leader, President Correa oversaw a now you see them…now you don’t…now you see them, again…bond debt miracle.

Inheriting a bond debt crisis, literally weighing down any hope of Ecuador’s economic expansion and sucking up much of the substantial revenue from oil, Correa faced a grim choice: follow the lead of the USA and much of Western Europe, in denying the economic crisis or swallow the very bitter pill of taking decisive action.  Fortunately, for Ecuador, its citizens and subsequent investors in this nation, Correa opted for “action”, even if the action has been heavily criticized.

Correa had Ecuador default on its bond debt.  The national equivalent of having the head of household, default on credit card payments, filing bankruptcy, in an effort to reorganize finances.  The move was lambasted in the Wester Press, where assurances were given that Ecuador would be hard-pressed to find future funding in the bond markets for decades to come.  A mere 12-months later, President Correa had used the private sector to recapitalize his bond debt, at significantly more favorable current interest rates, freeing up considerable Ecuadorian economic capital for investment.  Better a momentary black-eye, than succumbing to a knock-out sucker punch.  This de facto, if unauthorized, debt restructuring was an economic boon to Ecuador, breaking the chains of endless financial servitude, at the hands of corrupt prior political leaders.  It is interesting to note that the latter portion of the story, the successful and rapid recapitalization of debt, seldom sees the light of day, when the subject is discussed in the Western press.

A third major component which has paved the road to economic prosperity for Ecuador is the introduction of – dare I say it – an efficient tax collection process.  Note, we are not talking “tax increases” as the media often incorrectly hints.  We are talking the collection of corporate tax debt, some of which remained uncollected for over a decade.  The most extreme example saw an Ecuadorian corporation owe more than $300 million in unpaid back taxes, from just the period covering 2005-2012.  Note, the quoted figure was the not the basis from which the tax revenue amount is derived, but rather the actual amount of unpaid taxes owed!

Hundreds and hundreds of similar, even if not as extreme, examples of corporate failure to comply with tax laws could be cited across the country of Ecuador.  Former politicians simply looked the other way, so long as campaign contributions remained strong and invitations flowed to all the “high-brow” social functions.  The rich got richer, as infrastructure collapsed and national poverty increased, choking off any vestige of a middle class.

Furthermore, Ecuador forged strong partnerships with Asian and MIddle Eastern countries to cooperate on a host of public works projects, for the benefit of the citizens of Ecuador.  The search for capital began, when the USA and Western Europe turned their backs on Ecuador, after the closure of a USA military base in the city of Manta, Ecuador and the subsequent bond default.  In an effort to generate more revenue for his ambitious infrastructure program, President Correa sought global partners and various Asian and Middle Eastern countries step forth to partner and assist.  The result is a series of completed and “in the pipeline” projects, aimed at further advancing Ecuador’s infrastructure and creating sustainable economic development.

Finally, Correa created an environment which supported the development and expansion of new business enterprises, especially small and mid-sized companies.  From stream-lining and better organizing the corporate licensing process to providing industry-specific incentives for job creation, Correa sought to not only create a broader capitalist sentiment throughout the populace, but also to create a certain patriotic attachment to buying home grown and home made products.  While the result of some of these policies did generate a certain amount of protectionist measures, ultimately it helped spur the more rapid evolution of corporations and greatly reduced the nation’s unemployment rate, while simultaneously creating a bevy of better paying jobs.  The entire impetus, as a whole, has dramatically spurred on the creation of a burgeoning middle-class in Ecuador, which while still relatively in its infancy, has arisen in a nation known for little distinction other than the extremes of the “haves” and the “have nots”.

In summary, revenue from rising oil prices, the difficult decision to default and then recapitalize the bond debt, the creation of an efficient tax revenue collection system, partnerships with Asian and Middle Eastern companies, as well as economic incentives for business and job creation, all created the impetus for the rising tied of economic prosperity, which not only launched Ecuador’s fledgling middle-class, but also allowed President Correa to move forward with his ambitious and much welcomed infrastructure development campaign.  The end result has been a more prosperous, economically more stable Ecuador, creating a value investor’s paradise for those willing to place smart money bets.

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