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. (By Juan Forero -- The Washington Post)
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When he took office, Correa pledged to redirect government resources to help the poor. All manner of subsidies have been created to help low-income families and small businesses. The poverty rate has dipped, Borja said, from 40 to 32 percent.

That has given Correa a popularity rating that has topped 70 percent in some polls. Public support helped his government win approval of a new constitution in a September referendum. Now, Correa is running for a second term in elections next month, and polls show him far ahead of his rivals.

But economists say that the modest economic growth Ecuador has experienced in recent years -- 2.5 percent in 2007 and 4.4 percent last year -- hardly justifies a doubling of spending since 2006. The government, perhaps overestimating how long an oil-fueled bonanza would last, may also have hamstrung itself by drafting a constitution that expands health care and guarantees a free education up to the third year of college.

"Correa thought this growth would last a lot longer than it actually did, and so he spent a lot to help him consolidate his government," said Ramiro Crespo, president of Analytica Securities, an investment bank in Quito. "But the price fell very hard and much faster than he expected."

The government is betting a worldwide economic recovery will lead to higher oil prices in a matter of months, allowing the administration to continue generous social spending.

"They were optimistic that the crisis would last only until the end of 2009, but it seems more likely that the crisis will last until 2010," Crespo said.

Ecuador's revenue is shrinking. Oil exports are expected to fall by nearly 50 percent this year from last, to $6.5 billion. Remittances, the money 3 million Ecuadorans abroad send home, is projected to contract to $2.3 billion this year, nearly $800 million less than in 2007. Loans will also be hard to come by, as Correa's government had declared itself in default on payment of sovereign debt it considered unjust.

Pablo Lucio Paredes, an economist at Quito's San Francisco University, said the government is burning through its foreign reserves, which fell from $6 billion in September to just over $3 billion last month. Since the government has vowed to continue funding social programs and subsidies, he said, those reserves could fall to a level that generates a crisis of confidence among investors.

He said that Correa's restrictions will also do little to stimulate exports and that the economy will shrink, hurting workers.

Andy Wright, whose family-owned Corporacion Favorita has been a landmark in Quito for 56 years, said he, too, worried about the impact of the trade restrictions. The company he helps run includes elegant supermarkets stocked with imports, as well as sprawling Wal-Mart-type stores. It has 5,500 employees and 10,000 stockholders.

So when word spread that the government was planning to implement tariffs as high as 150 percent, Wright said he and several other businessmen met with Correa to ask for lower barriers. The government softened its position, though its restrictions are still tougher than what the business community had hoped for.

He said his firm would "rather buy from Ecuadoran companies who give jobs to Ecuadoran people, who are going to actually consume our products." But he said he worries that other countries trading with Ecuador could take punitive measures. "To grow, we have to export, but to export we have to be open to imports," he said.

Vergara, the general manager and son of the founder of Grupo Superior, sees opportunity. The company has grown relatively large and prosperous over its 60 years. He said lower-middle-class and working-class consumers will veer away from the higher-priced imports and purchase less-expensive Ecuadoran-made products. "Those tariffs mean higher prices, and consumers will go for similar products at lower prices," he said. "And this is where I am."