Ecuador Proves No Match for Covid-19by robert looney
bob looney teaches economics at the Naval Postgraduate School in California.
Published May 28, 2020
Ecuador, you may not have noticed, has been reeling for some time under unstable, corrupt governments. But nothing prepared the long-suffering country for the arrival of an astonishingly fierce attack by Covid-19. One big question now is whether a similar fate awaits badly governed developing countries elsewhere.
The official numbers (through the third week of May) are middling by global standards: 36,000 cases with some 3,000 deaths in a country of 17 million. But a better measure, comparing total deaths in the time of Covid-19 with averages from previous years, sheds ghastly light on the actual magnitude of the tragedy. In Ecuador’s coastal Guayas province (population: 3 million) some 5,700 excess deaths were reported in the first two weeks of April alone, with most of the toll in the port city of Guayaquil. The best guess now is that Ecuador’s per capita coronavirus death rate is the highest in Latin America.
The devastation stems in part from epidemiological bad luck: infected Ecuadorans returning home from Spain and Italy in early March apparently served as super-spreaders at a variety of social events. But with a government plainly not up to the challenge, the future looks grim. With more bodies piling up (literally) and deep recession looming, yet another period of political unrest threatens to erupt ahead of next year's elections.
Before the (Latest) Fall
In late 2019, Ecuador was still trying to clean up the financial mess left by the former self-proclaimed Socialist president, Rafael Correa (who presided from 2007 to 2017). During Correa’s decade of misrule, government debt rose from 29 percent of GDP to 45 percent. In the final three years of the Correa administration alone, spending nearly doubled the government deficit as a share of GDP to a whopping 8.2 percent. Correa was sentenced to prison this year for accepting bribes in office — but by then he was ensconced in exile in Belgium.
Correa’s successor and former ally on the populist left, Lenin Moreno, made a pragmatic right turn with the goal of rekindling economic growth — and, more immediately, meeting IMF loan conditions. This led to austerity measures and charges that Moreno had abandoned the poor, with Correa fanning the flames of dissent from afar. The health system bore the brunt of the cutbacks, reversing substantial populist-minded increases made by the Correa administration.
The government’s spending on health care fell from $306 million in 2017 to $130 million in 2019. Most notably — and ominously in view of what was about to happen — the Moreno government canceled an agreement with Cuba to provide medical personnel, which led to the exodus of nearly 4,000 Cuban doctors in November 2019.
What, Me Worry?
When Covid-19 struck, not only was Ecuador broke and its health system decimated, but neither the central government in Quito nor the governor of Guayas was quick to understand the gravity of the threat. Flights from Europe continued to arrive long after the disasters in Italy and Spain should have provided fair warning. Equally disastrous, the provincial government allowed a major soccer game to be played in a packed Guayaquil stadium days after the first Ecuadoran Covid-19 case had been identified.
Infected Ecuadorans returning home from Spain and Italy in early March apparently served as super-spreaders at a variety of social events. But with a government plainly not up to the challenge, the future looks grim.
When the central government finally initiated lockdown measures and limits on travel in mid-March, the restriction proved difficult to enforce, at least in part because of the size of the underground economy on which the poor depended for survival. In an effort to bolster the initiative, the government offered low-income workers a monthly payment of $60 — which amounted to only about a quarter of what they had typically been earning. Lacking savings to make up the difference, the poor had little option but to continue working. And initially there were plenty of opportunities for work in Guayaquil: the band literally played on, as the wealthy proceeded with their weddings and golf tournaments until the police finally intervened.
On April 26, with the virus still raging, President Moreno announced that the economy could begin opening up under a ”traffic light” process in which localities were color-coded by their success in containing infections. As in the U.S., however, responsibility for manning the traffic lights was left to regional governments, which were left to decide when and how to reopen. This transparent attempt to sidestep accountability appears to have failed, as recent polls suggest that only around one-fifth of Ecuadoreans have confidence in Morena’s ability to manage the crisis.
Picking Up the Pieces
By the time the reopening began, the pandemic had cost Ecuador about $4.7 billion (an official figure, to be taken with a grain of hydroxychloroquine), forcing the Morena government to announce further public spending cuts and openly ponder tax increases. That amounts to the opposite of a countercyclical fiscal policy in which government spending fills in the purchasing power lost in the economic downturn. But lacking credibility with lenders, Ecuador’s been left to cope on its own.
The Economic Commission for Latin America forecasts a 6.5 percent contraction in real 2020 GDP, compared to 5.3 percent for the region as a whole. That figure seems conservative. For one thing, international tourism, on which the economy is highly dependent, is expected to be especially hard hit. For another, the global recession will slam Ecuador’s commodity exports — crude oil is, or rather was, numero uno on its export earnings list. With the world market price of oil now well below Ecuador’s cost of production, the industry is on life support.
Ecuador’s unusual use of the U.S. dollar as its national currency (the IMC has a good explanation of “dollarization”) is an added liability. Today’s very strong dollar makes Ecuador's exports less competitive at a time they need all the help they can get, while dollarization makes it impossible to devalue without chaotic abandonment of the current monetary system.
In response to the crisis, the IMF and World Bank both provided Ecuador with modest emergency financial support that came with few conditions. Though a much larger permanent loan facility is needed to pay for imports through the hard times ahead, meeting the tougher requirements for such a program carries considerable political risk.
In March, Morena opted to pay off a major bond obligation to avoid default while taking advantage of a grace period on other loans, despite pressure from the legislature to loosen fiscal policy and suspend all external debt payments. With the still-popular former president stirring the pot from abroad, a disorderly default that compounds both the public health and financial effects of the COVID crisis remains a possibility.
Given Ecuador’s increasingly dire fiscal problems, the country will most likely require not only new loans but also debt relief and forgiveness in order to sustain political and social stability. Before Covid-19, debt relief was not on the table because the country's per capita income — $10,400 in 2018 when calculated in terms of purchasing power — was deemed to be too high to qualify. How the Covid-19 crisis and the collapse of oil prices will affect this calculation remains to be seen.
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It’s never easy to rouse popular interest in the plight of developing countries, especially when their problems are, in part, self-induced. And with Covid-19 and economic free-fall around the world turning hearts and minds inward, it’s probably impossible.
But there will likely be a high price to pay for this indifference. Part of that price will be measured in terms of the personal misery that endures long after the pandemic has retreated. However, the failure to produce an effective collective effort to mitigate the damage will also be felt in terms of global political instability and unwelcome mass migration. Not to claim the high moral ground here, but it does appear that, once again, we will reap what we sow.