Ecuador and the Political Limits of Austerity

by Thomas Dolzall, Defense Analyst, Forecast International.

Flag of Ecuador. Image: Wikipedia

After two weeks of widespread public protest and intense street clashes that resulted in the deaths of eight protesters and the arson of several government facilities, Ecuador’s indigenous communities and its sitting government – headed by President Lenin Moreno – have forged a tentative compromise deal. The deal is designed to avert further violence and integrate indigenous communities more closely into the central government’s economic decision-making process.

The proximate origin of the protest movement lay in the Moreno administration’s decision to end public fuel subsidies as one component of its new fiscal austerity program, designated by the legislature as Decree 883. The government intended for Decree 883 to be a first step toward redressing the long-strained condition of the country’s public finances, generating new sources of revenue, and  facilitating the restructuring of the national economy in anticipation of the dispersal of a $4.2 billion loan from the International Monetary Fund (IMF). The Moreno administration had concluded negotiations for the IMF loan in February 2019. Alongside the aforementioned hike in fuel costs, the administration’s austerity drive also involved wide-ranging cuts throughout the annual budget, privatization measures, and the dismissal of many public employees.

However, as a result of the end to fuel subsidies, the price of gasoline and diesel increased significantly for consumers across the country – by 120 percent in some locations. Although Ecuador has made significant strides toward reducing poverty levels over the past decade, the financial condition of much of the country’s rural population remains tenuous compared to those living in its urban centers, and the level of income inequality remains stark.  In response, Ecuador’s rural indigenous communities, among the most economically vulnerable in the country and thereby the most susceptible to the financial impacts of sudden price changes, rapidly mobilized protest activity across the country before consolidating their efforts in the capital city of Quito.

Although the protest movement was initially peaceful, the confrontation between state police and security forces and the widening protest movement soon escalated into violence in the streets of the capital as police moved to dislodge protesters from major transportation arteries. Indigenous activists and some human rights organizations accused  Ecuador’s police forces of launching a heavy-handed initial response to the protests, but these efforts failed to disperse the protest movement, which by then had grown in excess of 20,000 people. These events set the stage for a further intensification of violence in Quito and spurred the emergence of a more radical character to elements of the anti-government movement.

President Moreno initially took a rigid position in response to the protests. He dismissed calls to reverse the subsidy cuts and, after declaring a state of emergency and imposing a curfew across the country, deployed armed forces to Quito. Additionally, Moreno alleged former President Rafael Correa and his political allies had instigated the wave of economic disruption for their own political ends.  Correa denied the charges but  criticized the government’s response to the protests and made jabs at Moreno over social media.

Over the coming week, the situation in the capital continued to deteriorate, and the economic costs of the chaos heightened. On October 8, the Moreno government decided to vacate an increasingly hostile Quito.

Although many indigenous leaders publicly decried the most destructive protest acts, blaming many of them on unidentified infiltrators, physical clashes grew more severe.  Likewise, there was a significant increase in the scale of property damage and looting by masked assailants. The death toll among protesters continued to climb, and elements of the protest movement proceeded to sack several government buildings and burn an armored vehicle of the Ecuadorian Army. Acts of intimidation and physical battery against journalists were reported to have been committed by both unidentified protesters and security forces during the crisis’s final stages.

With no resolution to the crisis  materializing and the protest movement only growing in strength, the Moreno government began making tentative overtures for talks with indigenous leaders and calling for an end to the violence on the streets. Although the protests would continue for several more days, on October 14, the leaders of the indigenous movement and the Moreno government announced the conclusion of a deal that would see protesters disperse from the streets and return home in exchange for the repeal of Decree 883 and establishment of a new decision-making mechanism for economic policy that would more closely accommodate rural and indigenous voices and better reflect their concerns.

Although the immediate crisis has now receded, with both sides publicly committed to working together toward the formation of a mutually agreeable policy program for the national economy, the process of resolving the divergent, and in some areas potentially incompatible, interests of the two negotiating parties has the potential to be nearly as arduous as the weeks that preceded it.  It remains highly uncertain as to what extent each side will be willing to bend and make concessions to the other on key issues.

The Ecuadorian crisis has served as one potent encapsulation of the lingering divide between Latin American electorates and their political systems and the political salience of austerity measures in a region that has been hard hit by economic downturns in the past five years.  Countries such as Ecuador and Argentina have become trapped in vicious cycles of meager or negative economic growth, which combined with increasingly severe budget deficits and indebtedness have made it  challenging to negotiate new loans with international lenders.

Seeking a path out of this prolonged economic standstill, many leaders in Latin America have turned to austerity and privatization as a means of  spurring macroeconomic growth by reducing deficits and gaining access to the resources of international lending bodies such as the IMF. Many Latin American governments have also turned to China as a source of lending. Regional governments have benefited from its less restrictive lending processes and the openness of Chinese institutions to pursuing large-scale development programs, but the lack of transparency and inconsistent level of local buy-in to these deals have often become points of contention on the domestic political stage.

For Latin America’s predominantly poor or lower middle class population, the attendant cuts to public services and subsidies under austerity are often perceived as merely one more hardship after years of dismal economic conditions, and major economic development projects are often seen as primarily benefiting the economy in its abstract rather than the people of the country. In a region marked by significant levels of high-level and petty corruption in officialdom, the public anger directed toward belt-tightening demands is often doubly potent.

For small businesses and poor populations, cuts to public services and subsidies have often produced drastic increases in the price of necessities that many already struggle to afford, and rural and indigenous populations have often responded with resistance to major development programs perceived to have been pursued without significant local consultation.

Proponents of austerity argue that these measures are unquestionably painful but nonetheless necessary recalibrations of unsustainable public spending levels, and needed to spur lasting recovery and real growth. But critics contend that such programs rarely deliver on their economic promises and only increase the social and economic stratification of societies that are already marked by significant income inequality. Over the past several decades, successive administrations across the region have seesawed between pursuing stringent austerity and robust spending, often with murky results.

Nevertheless, the Ecuadorian crisis may represent a significant turning point as regional governments and lenders alike are compelled to seek middle-ground solutions that better balance public needs and expectations with the exigencies of economic competition. Within the past several months alone, the governments of Argentina, Chile and Haiti have been roiled by waves of protest undertaken by publics dissatisfied with dramatically rising prices, high levels of corruption and wide-ranging cuts to public spending,  making the current political status quo increasingly untenable for incumbent governments.

For lending organizations such as the IMF, the trio of crises in Argentina, Ecuador and Haiti may likewise require a shift in policy orientation. The relationship of the IMF to regional governments and their electorates has already long been contentious, and its place as a focal point of public anger in the recent crises will likely serve as a reminder that economic policies cannot be extricated from their political consequences and of the potential volatility of introducing major economic reorganizations from above without significant public buy-in. In initial public statements regarding Ecuador, officials from the IMF have expressed support for the government’s decision to more closely consult indigenous interests in the coming decision-making process, possibly suggesting a greater willingness for flexibility on its own behalf.

Governments across the region will increasingly need to more closely accommodate public demands if they wish to maintain their mandate and satisfy an increasingly vocal public. As in Ecuador, the process of finding solutions amenable to negotiating parties with highly distinct perspectives on public spending and the mechanisms of growth will likely be fraught and prolonged, but nevertheless necessary in order to secure lasting social stability.

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