Ecuador's Protectionist Response to Global Crisis Helps Some, Worries Others

A worker at the Grupo Superior cookie and pasta factory near Quito carefully lays newly made spaghetti to dry. The firm is expected to reap a windfall.
A worker at the Grupo Superior cookie and pasta factory near Quito carefully lays newly made spaghetti to dry. The firm is expected to reap a windfall. (By Juan Forero -- The Washington Post)
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By Juan Forero
Washington Post Foreign Service
Thursday, March 26, 2009

QUITO, Ecuador -- The world economy is in a free fall, and the prospects for tiny, oil-producing Ecuador are bleak. But at Grupo Superior, workers in hairnets and white smocks churn out growing orders of pasta and animal crackers, and the company plans to expand from three factories to four.

The rosy future for the mill is a product of new protectionist measures enacted by Ecuador's government that are raising eyebrows far beyond Latin America -- stiff import restrictions, including tariffs on pastas and cookies, that some economists say may be the toughest anywhere in response to the global crisis.

The restrictions are President Rafael Correa's answer to an economic pinch that is eating through Ecuadoran reserves.

"This is a policy we have not seen in Latin America in 40 years," said Mauricio Pozo, an economic consultant and former finance minister. "This is not a way to resolve the problem."

The policy contrasts with those of Brazil, Chile, Mexico and other countries in the region, which are shoring up key industries with tax breaks while increasing spending on infrastructure projects to spur growth.

Correa is entering unchartered waters for Ecuador, which, despite the government's on-again, off-again battles with foreign oil operators, has what is considered to be one of the region's more open economies. But some business people here are cautiously optimistic about the government's response. They, after all, stand to benefit.

"There's always winners and losers," said Juan Vergara, general manager of Grupo Superior, which is based in Quito, the capital. "We are one of the winners because we compete with a lot of companies that are not Ecuadoran."

Facing a crushing $3.5 billion trade deficit this year, Correa, a populist U.S.-educated economist who is closely allied with Venezuelan President Hugo Chávez, enacted sweeping restrictions in January to slow imports and help Ecuadoran producers. His administration had been alarmed as oil, Ecuador's main export, plunged from $120 a barrel last June to less than $40 six months later, while the value of imports rose 36 percent from 2007 to 2008.

"What is the objective? To dampen demand for imported good and to increase consumption of domestic goods," said Diego Borja, minister of economic policy. "It was a difficult measure, but necessary and indispensable. We know that there are costs to getting out of a crisis."

Borja said that because Ecuador's currency is the U.S. dollar, the country has been particularly exposed as imports rose in relation to exports. Unable to print money, or devalue to help Ecuadoran companies that export, the government decided to levy tariffs that reach 35 percent, decrease import volume as much as 35 percent and implement a range of surcharges. In all, 627 products fall under the new measures, including furniture, cellphones, electronic parts, shoes, alcohol and food products such as cookies and pastas. The government said the restrictions would reduce imports this year by nearly $1.5 billion compared with 2008.

Without the restrictions, officials here say, Ecuador could run out of money -- leading to economic collapse and political instability. "We depend on dollars," Borja said. "If we don't have a revenue of dollars, then we have a very, very big problem."

Critics say the government's profligate spending left policymakers with few options.

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