Economic Liberalization , Adjustment , Distribution and Poverty in Ecuador

1 Paper prepared for UNDP/IDB/World Bank/CEPAL project " Balance of Payments Liberalization, Distribution and Poverty in Latin America " and originally presented at project seminar in Rio de Janeiro, other seminar participants, as well as to Geske Dijkstra and an anonymous referee for helpful comments on a previous draft. The Institute of Social Studies is Europe's longest-established centre of higher education and research in development studies. Postgraduate teaching programmes range from six-week diploma courses to the PhD programme. Research at ISS is fundamental in the sense of laying a scientific basis for the formulation of appropriate development policies. The academic work of ISS is disseminated in the form of books, journal articles, teaching texts, monographs and working papers. The Working Paper series provides a forum for work in progress which seeks to elicit comments and generate discussion. The series includes the research of staff, PhD participants and visiting fellows, and outstanding research papers by graduate students. ABSTRACT As most of the rest of Latin America, Ecuador engaged in major economic reforms in the 1990s, involving a freeing of its external trade and capital account regime as well as drastic domestic financial reforms. The liberalization process in Ecuador took place in an environment of strong external shocks, declining oil prices and the El Niño events among them. Trade liberalization got underway in 1990-92 under the flag of the Andean Pact, with capital market liberalization and a privatization scheme following soon after. Fiscal policy was tight until 1996, and then relaxed. The effects of the package involved some structural adjustment with productivity growth in the traded goods sector. Most efficiency gains are achieved though in the traditional export sectors (including oil). Nevertheless, the more eventful aspects of economic performance during the 1990s is linked to external shocks and macroeconomic policies. Greater price stabilization was achieved in the first half of the 1990s, with some demand expansion and employment growth after 1996 due to the fiscal stimulus. The real exchange rate appreciated steadily after 1990. Part of the fiscal imbalance was due to combined adverse effects of declining terms of trade and exchange appreciation on public receipts from the oil sector. In real terms, the fiscal balance was positive in the late 1990s, but negative in nominal terms because of the price shifts. Effective demand was led by exports, with direct foreign investment helping build capacity in the oil sector. Despite liberalization and …