Ecuador’s poisoned loans from the World Bank and the IMF

Part 1 of the Series Série : Ecuador: Progress and limits of resistance to the policies of the World Bank, the IMF and other creditors

Ecuador provides an example of a government which officially decided to investigate the process of indebtedness so as to identify illegitimate debt and suspend its repayment. The fact that the government suspended payment of a large part of its commercial debt, only to buy it back at a lower price, showed that it meant more than mere denunciation. Indeed it undertook the unilateral restructuration of part of its external debt and thus won a moral victory over its private creditors, who were mainly banks. In 2007 at the beginning of Rafael Correa’s presidency, the government of Ecuador clashed with the World Bank. In this series of three articles, we first analyse the loans granted by the World Bank and the IMF. In the second part, we recount the government’s actions mainly regarding the debt audit and the resulting suspension of payment. Finally in part 3, we discuss the limitations of Rafael Correa’s government’s actions, and briefly evoke the policies of his successor Lenin Moreno.

From 1983, the IMF imposed its programme on Ecuador, aiming for macro-economic stability in the short term so that the country could once again be in a position to repay its debts. The programme took the form of the signature of a “letter of intent” between the indebted country and the IMF, demanding anti-social policies such as fiscal / budget austerity, devaluation of the currency, price liberalization, etc. Between 1983 and 2003, Ecuador signed 13 letters of intent. Successive governments of Ecuador, until the election of Rafael Correa in November 2006, did not hesitate to sign these documents, despite the mainly negative impact that the measures they prescribed had on the majority of the population. Since 2017, President Lenin Moreno has returned to the fold of the IMF and the World Bank, triggering massive popular mobilization, especially in October 2019.

The radical neoliberal U-turn was accentuated in the 1990s when the Washington Consensus was enshrined (see Box) and the Ecuadorian economy entered the global economy, particularly when Sixto Durán Ballen was President of the Republic, from 1992. That coincided with the World Bank’s agenda, as the latter strongly increased its activity and influence in Ecuador from the late 1980s, early 1990s. In Ecuador as in many developing countries, the Bank conceded loans tied to measures aiming to open up markets, reduce the State’s role in managing the economy and increase the power of private banks to regulate monetary flows.

What is the Washington Consensus?

It began with a theory propounded in 1989 by the British economist John Williamson, then teaching in the United States, on the measures included in the structural adjustment policies imposed on Developing Countries (DC) by the IMF since the debt crisis of 1982. The consensus is comprised of a set of ten measures, of which some are shock measures with immediate effect and others structural reforms:

1. strict fiscal policy discipline;
2. reduction of public spending judged insufficiently viable, such as social spending, subsidies of basic necessities and redirection toward sectors offering a high return on investments;
3. tax reform, broadening the tax base and reducing marginal tax rates, designed to affect poorer households hardest;
4. liberalization of interest rates;
5. competitive exchange rates;
6. liberalization of foreign trade;
7. liberalization of foreign direct investment;
8. privatization of State companies;
9. deregulation of markets (by abolishing the barriers to importing or exporting goods);
10. protection of private property, including intellectual property.

Ostensibly the Washington Consensus agenda aims to reduce poverty through economic growth, the free interplay of market forces, free trade and the least possible State intervention.

Deep down, the hidden agenda of the Washington Consensus is a policy aiming both to guarantee the continued leadership of the United States at the global level and also to rid capitalism of the limits imposed on it after the Second World War. Those limits were the combined result of powerful social mobilizations in the South and in the North, of the move towards emancipation of certain colonized peoples and of attempts to break free of capitalism. The Washington Consensus has also led to the intensification of the productivist-extractivist model.

In recent decades, within the framework of the Consensus, the World Bank and the IMF have reinforced their ability to put pressure on a great many countries by taking advantage of the situation created by the debt crisis. The World Bank has developed its subsidiaries (the International Finance Corporation–IFC, the Multilateral Investment Guarantee Agency – MIGA, the International Centre for Settlement of Investment Disputes – ICSID) thus weaving an ever-tighter web.

For example, the World Bank grants a loan on condition that the system of water sanitation and distribution be privatized. As a result, the State enterprise is sold off to a private consortium which happens to include among its members the IFC, a subsidiary of the World Bank.

When the population affected by the privatization revolts against the sharp increase of tariffs and the fall in the quality of services provided, the public authorities challenge the predatory transnational company and the settlement of the dispute is entrusted to the ICSID, which becomes both judge and defendant.

We have thus reached a situation where the World Bank Group is present at every level: 1) imposing and financing privatization (the World Bank); 2) investing in the privatized company (IFC); 3) guaranteeing the company (MIGA); 4) settling disputes (ICSID).

The collaboration between the World Bank and the IMF is also a fundamental element in bringing maximum pressure to bear on governments.

One basic difference distinguishes the agenda proclaimed by the Washington Consensus from its hidden version.

The hidden agenda, the one that is actually implemented, aims to force all public and private spheres of all human societies into the logic of making maximum profit within the capitalist framework. The implementation of this hidden agenda entails the reproduction of poverty (and not its reduction) and the increase of inequalities. It entails the stagnation or even the degradation of living conditions for the vast majority of the world’s population, combined with an ever more intense concentration of wealth. It also entails the continued degradation of the environment, which endangers the very future of humanity.

One of the many paradoxes of the hidden agenda is that, pretexting the end of State dictatorship and the liberation of market forces, governments allied to transnational corporations use the coercive action of public multilateral institutions (World Bank-IMF-WTO) to impose their model on the peoples of the world.

However the Washington Consensus should not be understood as a power-mechanism and a project which only concern the government of Washington alongside the World Bank/IMF duo. The European Commission, most European governments, the Japanese government all embrace the Washington Consensus and have translated it into their respective languages, draft constitutions and political programmes.

The World Bank shares with the political class that supports it, responsibility for the fraudulent and illegitimate indebtedness incurred, flying in the face of fundamental human rights and State sovereignty.

Ecuador’s debt towards the World Bank (IBRD)

Between 1990 and July 2007, the World Bank (IBRD) paid 1.44 billion dollars to Ecuador while over the same period, the Ecuadorian government paid back to that same institution 2.51 billion dollars. In other words, over the period 1990-July 2007, the World Bank made a profit of 1.07 billion dollars on the backs of the people of Ecuador. The World Bank has been repaid many times over.

By 30 November 2007, Ecuador’s total public debt towards the World Bank Group reached 704.4 million dollars.

Had Ecuador decided, in 2008, to repudiate its entire debt towards the World Bank (i.e. 704.4 million dollars), as recommended by the Debt Audit Commission (see below), that decision would have enabled the country to save over a billion dollars (adding the interest no longer to be paid to the capital to be refunded). Such a sum would have enabled the funding of breakfast and lunch for 1.28 million schoolchildren,⁽¹⁾ for 15 years. Or the amount saved would have covered five years of health insurance for the country’s poor and destitute populations.⁽²⁾

The nefarious role of the World Bank in terms of financial deregulation

The World Bank’s intervention in defining the economic and social policies applied in Ecuador was intensive and permanent until 2006 and now, after an interruption of several years during Rafael Correa’s mandate, it is back with a vengeance. Several important loans from the World Bank that Ecuador must pay back until 2025 and beyond were clearly aimed to support changes in the country’s laws. These reforms fostered, when they did not actually trigger, several financial crises throughout the 1990s, including the major banking crisis of 1999, with its terrible consequences for the economy and the country’s population.⁽³⁾ The World Bank’s intervention was clearly damaging and in short constituted a dol, a French term meaning fraud by deceit, against the country.

The World Bank’s responsibility in the explosion of that big financial crisis goes back to1993-1994, when, as part of a process to “modernize” the State, it granted loans intended to fund legal reforms aimed at complete deregulation of the banking sector, leading to the total collapse of the banks in 1999.

• The 1993 Law Modernizing the State, Privatizations and Management of Public Services by Private Initiative (Ley de Modernización del Estado, Privatizaciones y Prestación de Servicios Públicos por parte de la iniciativa privada) opened up domains hitherto reserved for State management to private sector participation as well as merging or eliminating public institutions. The Law increased the attributions of the National Council for Modernization (CONAM, Consejo Nacional de Modernización), an entity whose function was to implement the privatization of public services, particularly in the oil, electricity and water sectors.
• The Law of Monetary Regulation and the State Bank (Ley de Regimen monetario y Banco de Estado) reinforced the independence of the Central Bank and instigated the free determination of interest rates and free access to the currency market.
• The 1993 Law of Promotion of Investments (Ley de Promocion de Inversiones) eliminated control of capital flows.
• The 1994 General Law of the Institutions of the Financial System (Ley General de Instituciones del Sistema financiero) made far-reaching transformations in the liberalization of banking activities – offshore offices, the multiplication of financial entities, loans from the Central Bank to private banks (causing inflation to explode) etc. – and limiting the capacity and attributions of banking supervision.

These legal provisions led to the creation in Ecuador’s Central Bank of a single account for all the institutions to receive transfers from the Ministry of Economy and Finance. This resulted in the use of private banking networks and the reduction of the number of Central Bank accounts held by public institutions. It fulfilled the Ecuadorian government’s commitment, in the letter of intent it had signed with the IMF in 1990, to prepare, under the auspices of the World Bank, a global reform of the finances of town councils, provincial councils and other government bodies to reduce the amounts transferred from central government and supposedly to improve spending decisions at the local level and, through a fairer and more transparent system, be more accountable for participation in public revenue.

(CC – Wikimedia)

As Piedad Mancero, who was a member of the Ecuador Debt Audit Commission in 2007, explains:

It wasn’t long before the consequences made themselves felt: an inordinate number of finance companies, the first crisis in 1995, currency speculation, banks failing in 1998-1999.(…) It was obvious: the Central Bank’s resources allocated to such loans came from Treasury issues that generated galloping inflation of the mass of currency in circulation, uncontrollable inflationary pressure and speculative demand for currency, which contributed to the great financial crisis of 1999 and the over-hasty adoption of dollarization in January 2000⁽⁴⁾

Lastly, in 1998, the Law of the Capital Market (Ley de Mercado de Capitales) and the Law of Reorganization of Economic Matters (Ley de Reordenamiento en Materia Economico) completed the World Bank’s destructive work. The Agency for Guaranteeing Deposits (Agencia de Garantía de Depósitos), AGD, was created: it guarantees all deposits, offshore and onshore, without restriction, and made it possible for the Central Bank to grant loans to banks in difficulty and to acquire AGD bonds.(5) Officially created to prevent the crisis spreading and to protect small savers, the AGD was actually set up to further the interests of proprietors and the large borrowers from private banks, especially the banks Filanbanco and FINAGRO.⁽⁶⁾

The financial crisis had disastrous consequences for all Ecuadorians. The AGD estimated the total cost of the crisis at 8,072 million dollars, or the equivalent of 83% of the general State budget in 2007, or the equivalent of twenty years of health insurance for the entire population. Those State resources, thus used and abused, could not be invested in education, health, job creation, etc. Worse still, the State had to contract more debt to finance the bank bail-outs! Poverty levels rose spectacularly, and 1 million Ecuadorians were forced to emigrate between 1999 and 2005.⁽⁷⁾

The World Bank’s responsibility in the Ecuadorian crisis is flagrantly obvious, in view of its active intervention to make the country’s government adopt the neoliberal reforms of the legal framework that led to the crisis of the late 1990s.

Financial deregulation causes the same devastating effects in the North as in the South

It is important to see the connection between the measures imposed on Ecuador, that led straight to the crisis of 1999, and the effects of the neoliberal policies also applied in the countries of the North, particularly the United States which has been through several financial crises: one in 2001 and another in 2007-2008. Deregulation to benefit the financial world, in the context of the Washington Consensus, which fulfilled the expectations of the White House and Wall Street (as was denounced repeatedly by Joseph Stiglitz, 2001 laureate of the Nobel prize for Economics), was imposed both in the North and the South, and has produced the same catastrophic effects.

This deregulation was a definitive break from the measures taken in the wake of the crises of 1929 and the 1930s in the United States. Let it be remembered that the crisis of last century had been preceded by a wave of deregulation and speculation. As a reaction, during F.D. Roosevelt’s presidency, came the banking law of 1933, known as the Glass-Steagall Act, which prohibited the simultaneous exercise of several financial professions and led to the complete separation of commercial and investment banks. In 1999, during the Clinton presidency, the law was abrogated under pressure from the big banks. Thus the same orientation has been applied in Ecuador and in the USA.

At the heart of the factors explaining the U.S. subprimes housing crisis of 2007, can be found the radical banking deregulation that began in the 1980s and was completed under the Clinton Administration in the late 1990s, in a context of increasing speculation on the finance markets and the multiplication of financial derivative products and finance institutions that escape public control (such as hedge funds(8) for example).

The World Bank has supported the national financial forces in Ecuador that consider themselves the masters of the country and who exploit the State and the government to reach their selfish ends. The World Bank has intervened to destabilize governments that have tried to apply social and economic policies aimed at bringing about more social justice and sovereignty to stand up to the United States.

Such was the case in 2005 when the World Bank intervened against measures taken by Rafael Correa, then Minister of the Economy in the government of President Alfredo Palacio (see below).

The structural adjustment loans granted by the World Bank

From the early 1990s, the World Bank awarded loans⁽⁹⁾ in key economic and social sectors. The main axes were the reforms of the legal framework to reduce State intervention, privatization of public companies, increasing flexibility of the labour market, financial deregulation and liberalization.

The series of loans awarded by the World Bank–structural adjustment loans (3819-EC/BM- structural adjustment), debt reduction and modernization of the State (3820-EC ; 3821-EC- Technical assistance for the reform of public enterprises; 3 822-0-EC-Technical assistance for the modernisation of the State)–were all conceived to reduce the State’s room for manœuvre, clear the way for private actors (especially in the telecommunications and electricity sectors) and ensure that Ecuador paid its debt to commercial creditors through the finance guarantees of the Brady Plan (see Box).

The Brady Plan

Throughout the 1980s, the Plan Brady (named for the U.S. Secretary of the Treasury of the time) meant restructuration of the debt of the main indebted countries with exchange of old loans, incurring loss in terms of nominal value or interest, for new securities with longer maturity terms and repayment guaranteed by the international monetary authorities. Participant countries were Argentina, Brazil, Bulgaria, Costa Rica, Republic of Côte d’Ivoire, the Dominican Republic, Ecuador, Jordan, Mexico, Nigeria, Panama, Peru, the Philippines, Poland, Russia, Uruguay, Venezuela and Vietnam. At the time, Nicholas Brady had announced that the volume of debt would be reduced by 30%. In fact, when there was any reduction, it was far less; in several significant cases debt even increased, see below). The new securities (Brady bonds) guaranteed a fixed interest rate of about 6%, which was highly favourable to the banks. This also ensured the pursuance of austerity policies under the control of the IMF and the World Bank.

The World Bank granted loans to Ecuador so that the latter could align its fiscal and commercial policies to those required by neoliberal globalization and redirect its productive activities towards export, to the detriment of the local market. The first loan (3609-Private sector development) to promote these changes was disbursed in 1993,⁽¹⁰⁾, followed in 1998 by a loan destined to support the export capacity of the private sector and remove obstacles to trade by instigating commercial policies in line with decisions made by the WTO and putting a signature to new trade agreements⁽¹¹⁾ (4346- External trade and integration- 21 million dollars).

By promoting the intensive production of commodities destined for the export market (bananas, shrimp, flowers), these loans have had disastrous, and in some cases irreversible, environmental consequences. One striking example is shrimp farming, of which 90% of production is destined for export: it has led to the destruction of the mangrove forest biome (70% has been destroyed), a rich ecosystem from which local communities made their living, and forming a natural barrier against flooding and salinization of the soil. The activity has even been developed n zones where the law prohibited the construction of fish-farming pools.

To complete the ecological disaster, the World Bank has directly financed devastating projects in the domains of agriculture and management of natural resources (mineral and water resources, etc.). A good example would be⁽¹²⁾ the PRODEMINCA project, in 1994, (3655-Technical assistance for environment) which included the introduction of a new Mining Code and reforms favourable to investors. Two laws (Trole I and II) created conditions facilitating the pillage of resources by multinationals by undermining the role of the Ministry of the Environment and permitting mining activities in protected areas.

To complete the ecological disaster, the World Bank has directly financed devastating projects in the domains of agriculture and the management of natural resources

The World Bank also elaborated a project regarding indigenous peoples (Loan 4277-O-EC- Development Project of the Indigenous and Black Peoples of Ecuador). The project aimed to favour private investments, reduce the role of the State and modify the legal framework. Not only is the country indebted, but the indigenous communities themselves are also indebted. The project attempted, perhaps even managed, to increase the dependence of indigenous and peasant communities on the seed, herbicides and pesticides supplied by transnational firms. This project had racist and discriminatory characteristics regarding indigenous peoples and Afro-descendants. Moreover, as was denounced by Ecuadorian social movements, it contained a hidden agenda aimed at weakening the powerful indigenous movement, especially the Confederation of Indigenous Nations of Ecuador.

These loans entailed many extremely negative consequences for the majority of the Ecuadorian population. Such was the particular case of the dramatic reduction of access to public services. Loan 3285 of 1991 for a sum of 104 million dollars to finance decentralization caused a reduction of the amounts awarded to territorial communities. The project enabled the IFI to have more control over the State budget and to bring pressure to bear, to increase the part destined for debt repayments. The conditions tied to Loan 3821 of 10 February 1995 also provided for the reduction of electricity subsidies and the future privatization of the State company INECEL.

In the same vein, public sector employees came under constant attack. The project Technical Assistance for the Modernization of the State led to a workforce reduction of 10,000 posts in the Civil Service. Redundancies represented a cost to the State of 396.3 million dollars.⁽¹³⁾ Thus the government incurred another 20 million dollars for the project of restructuration of the public sector with the particular aim of reducing costs, and it cost them 20 times more in workforce reduction!

In parallel to that, Loan 7174 awarded in 2003 for structural adjustment and fiscal consolidation served to implement the emergency austerity decree made by President Gutierrez at the end of January 2003 with price-hikes of 21% for petrol and 3% for diesel. The measure brought an increase in transport costs and thus, more widely, in the general cost of living since goods have to be transported.

As for education, Loan 3425 “The first social development project in education and training” reduced funding in the education sector, bringing it from 18% of the budget before the loan, to 5.8 % by the year 2000. The difference, of course, was assigned to servicing the debt and to setting up policies favourable to creditors and the Ecuadorian ruling class.

These loans tied to conditionalities designed to introduce the aggressive antisocial policies of the Washington Consensus have brought about an increase of poverty and extreme poverty while increasing the concentration of wealth in the hands of an oligarchy. From 1970 to 2005, poverty significantly increased. In 1970, 40% of the population lived below the poverty threshold, and by 2005, this percentage had reached 61%.⁽¹⁴⁾ Impoverishment was particularly acute during the crisis of 1999. Between 1995 and 2000, the numbers of the poor rose from 3.9 million (i.e. 34% of the population) to 9.1 million (i.e. 71%) while extreme poverty doubled, affecting 31% of the population by 2000. Meanwhile, the rich became ever richer. In 1990, the richest 20% were taking 52% of the revenue; 10 years later, they were monopolizing 61% of the wealth.⁽¹⁵⁾ Poverty particularly affects the inhabitants of rural areas and small farmers, hit by the opening up of markets, the increase in the cost of inputs, the instigation of a system of private land-owning, etc.

According to an FAO report (the UN Food and Agricultural Organization) dating back to 2003, poverty is responsible for problems of malnutrition observed in the country. Although there was enough food to cover the needs of the population, inequality of revenue meant that the poorest could not afford to eat properly.

This increase in poverty also has repercussions on access to healthcare and education. Job insecurity, increased unemployment, the spread of informal and precarious work and lower salaries mean that more and more children and adolescents are forced to drop out of the education system to help feed their families.

To help Ecuador “emerge” from its crisis, the World Bank brought its “solutions”: pursue and even reinforce the orientations that led to the crisis! (7024-0-EC- Structural adjustment, 7174-0-EC-Technical assistance for the modernization of the State, 4567-0 EC-Technical assistance in the financial sector).

The population took to the streets on a massive scale on several occasions to demonstrate their discontent, leading to the fall of several presidents during the 1990s and early 2000s, and confounding some of the World Bank’s objectives, in particular attempts at privatization. Three right-wing presidents were hounded out of office between 1997 and 2005 through mass mobilization of the population: Abdalá Bucaram in February 1997, Jamil Mahuad in January 2000 and Lucio Gutierrez in April 2005. It was the mobilizations of indigenous peoples that were decisive in leading to Abdalá Bucaram’s resignation in 1997 and Jamil Mahuad’s in 2000. In those mobilizations, the CONAIE (Confederation of Indigenous Nations of Ecuador – Confederación de Nacionalidades Indígenas del Ecuador) played a very important role. When Lucio Gutierrez stood down, it was mainly due to urban mobilizations. Among the many evident signs of opposition to neoliberal policies one might also add the failure of the 1995 referendum that had aimed notably to privatize the Social Security system.⁽¹⁶⁾
Translated by Vicki Briault, Christine Pagnoulle and Snake Arbusto

Footnotes

1. The author’s calculations are based on the document of the Comisión Investigadora De La Crisis Económica Financiera. Síntesis De Los Resultados De La Investigación. July 2007, p. 45.
2. Idem.
3. See Matthieu Le Quang interviewed by Violaine Delteil, “Entre buen vivir et neo-extractivisme : les quadratures de la politique economique equatorienne” (Between good living and neo-extractivism: how Ecuadorian economic policy squares up) in Revue de la Régulation, 1^st semester 2019, https://journals.openedition.org [consulted 30 December 2020] (In French only).
4. Piedad Mancero, El debilitamiento institucional en la decada de los 90. Investigación y análisis del prestamo BIRF -3822 -EC/Proyecto de modernización del Estado.
5. This last section of the law contravenes Article 265 of the Constitution. The article stipulates that the Central Bank may not acquire bonds issued by State institutions nor award loans to private institutions except short-term loans of liquidities. The adoption of this law was in fact made possible by the Transitional Disposition 42 of the 1998 Constitution, authorizing the Central Bank, over a period of two years, to make loans to banks in crisis. This Transitional Disposition of the Constitution contradicts Article 265 of the same Constitution.
6. Report of the Commission of Inquiry into the Financial Economic Crisis (Comisión Investigadora de la Crisis económica financiera), June 2007.
7. Report of the Commission of Inquiry into the Financial Economic Crisis (Comisión Investigadora de la Crisis económica financiera), June 2007.
8. HEDGE FUNDS: Hedge funds, not a form of protection as the name may imply, are non-listed speculative investment funds that seek high returns and make abundant use of derivatives, especially options, often with leverage. The main hedge funds are independent of banks, though banks often endow themselves with hedge funds. They belong to the category shadow banking.
9. Structural Adjustment Loans, Sectorial Adjustment Loans, or Poverty Reduction and Growth Facilities, PRGF.
10. A series of conditionalities was planned: for example, the continued liberalization of interest rates, the creation of a favourable climate for foreign investments, the liberalization of trade and new labour laws.
11. For this, the project provided for a reorganization of the Ministry of Trade, Industry and Fisheries (MICIP in Spanish) and the creation of a new public-private body to promote exports, the Corporation for the Promotion of Exports and Investment (CORPEI). The project financed the “training” of MICIP officials and representatives of the private sector in negotiating international trade agreements. Moreover the World Bank insisted on reducing the staff of the MICIP from 400 to 190 officials. The government had previously adopted a code of good conduct for the adoption and implementation of the norms of a WTO agreement relating to technical barriers to trade.
12. The World Bank financed a considerable number of other projects that harm the environment and/or jeopardize food sovereignty and natural resources: projects of Asistencia Tecnica al Subsector Riego PAT (Loans 3730), PROMSA (Loan 4075-O-EC), PRAGUAS I et II (Loans 7035-O-EC, 7401-O-EC), Control de Inundaciones Cuenca Bajas Río Guayas (Loans 3276), among others.
13. Piedad Mancero, El debilitamiento institucional en la decada de los 90. Investigación y análisis del prestamo BIRF -3822 -EC/Proyecto de modernización del Estado.
14. Norma Mena, “Endeudamiento, ajuste estructural, calidad de vida y migración”, p.13. CEIDEX, Tercer volumen
15. Alberto Acosta, “Deuda externa y migración: una relación incestuosa (I)”, 09/09/2002, http://www.lainsignia.org/2002/septiembre/dial_001.htm
16. See the questions here: es.wikipedia.org