Neo-liberalism in Ecuador - Term Paper Example

Neoliberal development policy in Latin America: The case of Ecuador Introduction Neo-liberalism is a set of policies that is used in the economy. These set of rules have become widespread during the last twenty-five years. Neo stands for a new kind of liberalism that is operational. The policies of neo-liberalism are under implementation throughout the world because of several powerful financial institutions imposing such as the international monetary fund, inter-America development bank and the World Bank (World Bank 2003, pp. 1-23). Latin America under the context of neoliberal policies Several countries from Latin America have failed to overcome the crisis in economy created by the Mexican debt of nineteen eighty-two even after adopting adjustments in structures and policies of promotional exports that were inspired by the “Washington consensus”. The early nineties marked a period of optimistic expectations that the recovery would take place. Despite this, the regional increase of the quantum of export and integration of into a global economy in large-scale made growth in the economy to remain evasive. The growth rate of the regional per capita in the year became 0.43 percent from the year 1980 and 2005. Moreover, this was aggravated by the recent financial crisis in Ecuador. Basing on the prices of raw materials, the recovery is still insufficient to create changes on the pattern. According to “Washington consensus”, the economic growth must be generated from the exports and its effect on trickling down must lead to the social development. The economic performance of several Latin America countries has been disappointing for the last twenty-five years or so. The years have been marked by stagnation in economy and increase in crisis vulnerability have been made worse with the increase in poverty, increased social inequality and deterioration in the environment (Molyneux 2008, pp.775–797). Crisis, dollarization and poverty in Ecuador Ecuador is among the Latin American countries that are among the less developed with 1.461USD per capita income by the year 2001. This was relative below the average income per capita in the region. Viewing it closer, it reveals Ecuador’s poor performance in the economy even with the regional context that is weak. During the last decades, several countries in Latin America hade export expansion, but relatively small income growth only few country had high economic growth. Ecuador’s primary products composed of bananas, oils, Coffee, shrimps and flowers represent the country’s major exports. The factors that have historically influenced the country such as social, ethnic and regional disparities remain pervasive. The economy of Ecuador is experiencing along economic stagnation after its economy growth and social improvement was experienced in the nineteen fifties from the sale of bananas. Recent economic performance of Ecuador is characterised by a flat trajectory that has been aggravated by recent crisis in the country. In addition to the country going through a long-stagnant economy and limited growth in diversification and export, the country’s economy has been affected by severe foreign debts. By the year 2003, Ecuador’s total foreign debt for both private and public sectors reached a total of sixteen billion dollars (North & Cameron 2000, pp.1751–1766). External constraints, crisis and stagnation Despite the country trying to adjust structures and promotional exports, as well as expansion policies in the early nineteen eighties, the country failed to make a comeback in its growth of economy and diversification export. The implementation process of the economic reforms has been done slowly and had many conflicts, lacks consistency and leads to social conflict and instability in politics frequently. Nevertheless, despite the poor reforms and conflicts as a result of politics, the policies of liberalization that were adopted in the early nineteen nineties have been in place consistently. These includes policies of protectionists and subsidies dismantling, liberalization of the market, adoption of floating interest and exchange rates, partial labor market deregulation, control of the spending of the public and fiscal deficits. From the crisis to dollarization Sequence of drastic events had a role to play in Ecuador’s dramatic social and economic crisis. It also plays a role in deepening and prolonging the effects of a stagnant economy. The first shock came from the severe flood that was an experience along the country’s coastal region. The effects of the flood were immense in both the social and economic sectors. The second devastating shock came in the mid of oil prices falling drastically (Chang 2003, pp. 10-15). The fragile situation that was facing Ecuador became a collapse because of the crisis in the international finance in the late nineties. The effect in the Latin American region happened suddenly causing a massive withdrawal of short-term capital from the region. Ecuador’s public sector in 1994 was weakened by the reforms that were market friendly was not able to prevent any spread of the financial crisis that eventually led to bankruptcy and transfer of several private banks to state. All the measures that were imposed including the freezing of private deposits and savings in mass number and substantial transfers to the local banks was not successful in saving them. Scarcity of foreign exchange and speculation in the midst of the crisis fuelled the devaluation of the national currency rapidly. To prevent the country from going through hyperinflation, the government of Ecuador decided to eliminate the country’s national currency and adopt the use if the US dollar officially in the start of the millennium. Despite the fact that the change of the government was because of social unrest and conflict from politics, the government that followed fully endorsed the use of the dollar as the country’s long-term option as a strategy. During the last half a decade, public policies promoted social and economic recovery within the dollarization framework. The main aims were the stabilization of the economy and foreign investment promotion mainly in the oil sector. The government pursued a more efficient tax collecting methods that proved efficient I improving fiscal austerity and fiscal revenue (Ruckert 2006, pp.4–67). Economic effect of dollarization Ecuador was the first the Latin America country to cancel its currency officially and shift to the use of American dollars as its national currency. Several advocates have been arguing that the policy that was implemented will have positive effects in the end through adjustment of domestic inflation and interest rates to the international levels thus reducing the cost of transaction contributing to stability to the micro-economy. The creation of the new environment will bring favor to the capital investments and leads to the promotion of the sustainable growth in the future of the country (Friedman 1962, pp. 7–17). On the other hand, it has been argued that the adoptions of the exchange rates that are fixed are likely to be harmful to economies that are small open and reduced basket for the primary exports. The negative shocks that were experienced in the past will lead to a reduction in employment rates and wages, in addition to increasing vulnerabilities externally. It is obvious that the time has elapsed in Ecuador since dollarization for empirical assessment that is adequate in the impacts on both social and economy. In spite the scrapping of the national currency in Ecuador and the adoption of dollars, the rate of inflation remains high. The real exchange rate of the country became undervalues because of the increase in the prices if the non-transable services and goods making the country lose its competitiveness in the international market. Ecuador’s problem is serious because of its compromised ability to compete in the global market. The effect of the country’s undervalued rates of exchange is evident from its dramatic expansion of its imports that became cheaper (Buchanan 2013, pp.19–25). Conclusion Since 1982, Ecuador has been affected by a long-standing stagnation in its economy. The dominant products are oil, accounts for the country’s major exports. Sequences of devastating circumstances led to the collapse if the banking system is triggering social and economic crisis. To avoid hyperinflation that was looming in the country, the government of Ecuador decided to adopt the use of the United States currency as their national currency in the early millennium. The theoretical assessment of risks of dollarization and advantages in an economy that is small open with primary exports remains controversial. Empirically, the convergence of the rates of interest and inflation has been slow and costly to the internal levels, and these affect the competitiveness of the export. Even though the performance of Ecuador’s private export remains poor, the economy of the country somewhat recovered from fresh investment policy on the exploitation of oil and new pipeline construction. Ecuador’s social and economic disappointment since 1982 has been linked to its structural complex factors, which probably might affect the country in the coming years, under the strategies that are currently in use. The question that is critical for the future of Ecuador is the long-term potential impact of dollarization in the development prospect of the country. References Buchanan, K.S., 2013. Contested discourses, knowledge, and socio-environmental conflict in Ecuador. Environmental Science and Policy, 30, pp.19–25. Friedman, M., 1962. Capitalism and Freedom: The Relation Between Economic Freedom and Political Freedom. In Capitalism and Freedom. pp. 7–17. H-J. Chang 2003, Kicking Away the Ladder: Neoliberals Rewrite History, Monthly Review 54(8), pp. 10-15. Molyneux, M., 2008. The “Neoliberal Turn” and the New Social Policy in Latin America: How Neoliberal, How New? Development and Change, 39, pp.775–797. North, L.L. & Cameron, J.D., 2000. Grassroots-based rural development strategies: Ecuador in comparative perspective. World Development, 28, pp.1751–1766. Ruckert, A., 2006. Towards an inclusive-neoliberal regime of development: From the Washington to the Post-Washington consensus. Labour, Capital and Society, 39, pp.4–67. World Bank. 2003. MENA Development Report, Better Governance for Development in the Middle East and North Africa: Enhancing Inclusiveness and Accountability, Overview pp. 1-23. [Available from World Bank Website]  Read More