Economic liberalization, adjustment, distribution and poverty in Ecuador, 1988-98

As most of the rest of Latin America, Ecuador engaged in major economic reforms in the 1990s, involving a freeing of its external trade and capital account regime
as well as drastic domestic financial reforms. The liberalization process in Ecuador
took place in an environment of strong external shocks, declining oil prices and the El
Niño events among them. Trade liberalization got underway in 1990-92 under the flag
of the Andean Pact, with capital market liberalization and a privatization scheme following soon after. Fiscal policy was tight until 1996, and then relaxed.
The effects of the package involved some structural adjustment with productivity growth in the traded goods sector. Most efficiency gains are achieved though in the
traditional export sectors (including oil). Nevertheless, the more eventful aspects of
economic performance during the 1990s is linked to external shocks and macroeconomic policies. Greater price stabilization was achieved in the first half of the 1990s,
with some demand expansion and employment growth after 1996 due to the fiscal
stimulus. The real exchange rate appreciated steadily after 1990. Part of the fiscal imbalance was due to combined adverse effects of declining terms of trade and exchange
appreciation on public receipts from the oil sector. In real terms, the fiscal balance was
positive in the late 1990s, but negative in nominal terms because of the price shifts.
Effective demand was led by exports, with direct foreign investment helping
build capacity in the oil sector. Despite liberalization and appreciation, the import share
of GDP did not go up.
Productivity increased in sectors with relatively high output/labour ratios (oil,
manufacturing) and fell elsewhere (especially other services. Informal employment
rates rose in urban areas as the skill-intensity of production in traded goods went up.
These changes were sharper in the early 1990s as intra-Andean group exports increased
with Ecuador gaining competitive edge in particular manufactured intermediate goods
and luxury consumption goods.
The share of wage earners in the labour force declined, while self-employment
income as a proportion of value-added went up. Similar to patterns found elsewhere in
Latin America, there was a trend toward greater wage inequality. Urban poverty, however, declined during the period 1992-97, perhaps because of changes in macro policy.
Unfortunately, this trend was to be short-lived. By the end of 1998, external vulnerability and reduced fiscal discipline had pushed the external and public sector deficits
to unprecedented heights. A currency crisis, a banking crisis, and a surge in inflation
followed in 1999 (in part because the financial sector was liberalized when it was virtually bankrupt and could only live off continued borrowing from the central bank). As
this paper shows, the liberalization episode did not budge the Ecuadorian economy
from its historical position of being an unstable raw material exporter.