1. General Policy Framework
The Ecuadorian economy grew 2.3 percent in 1990, below the population growth rate but an improvement over 1989 when growth was 0.6 percent. Growth in 1991 is expected to be around 2.5 percent. The balance of payments performance in 1990 was strong as net international reserves increased three-fold to $603 million. In 1991, reserves have fluctuated around $550 million (three months of imports). In 1990 both growth and reserves were boosted by higher oil revenues because of the Gulf crisis. On the down side, inflation has remained at around 50 percent as the effort to bring it down lost momentum. In addition, Ecuador has accumulated over $1.6 billion of arrears to commercial banks since early 1987.
Government spending patterns have been uneven in the past three years, with periods of fiscal austerity alternating with increased spending. In recent years the government has run small public sector deficits or surpluses, but the uneven spending cycles have contributed to inflation. Deficits are usually financed by foreign borrowing, limited sales of government securities, and accumulation of arrears. The Central Bank has not financed the government deficit in recent years, although it has indirectly financed some parastatals through loans from national development banks.
Monetary creation on the part of the Central Bank has been a major source of inflation. The Central Bank has incurred significant losses in recent years because of a wide variety of subsidies that it offers, and has printed money to cover the losses. For 1991, the money supply increased at the rate of 50 to 60 percent, higher than inflation. Since the Central Bank cannot control its own sources of monetary growth, it has pressured private sector banks, with limited success, to limit private sector credit expansion.
2. Exchange Rate Policies
Ecuador has two functioning exchange rates, the intervention and free-market rates. Public sector transactions, as well as private sector imports and exports, are conducted at the intervention rate, which is set by the Government. Exporters are required to surrender their foreign exchange earnings to the Central Bank for sucres. Foreign exchange is allocated to importers on a weekly basis; usually there is sufficient foreign exchange available so importers do not need to resort to the free market. Residual transactions are conducted in the free market. Foreign currency is readily available in the free market, and there are no restrictions on the movement of foreign currencies into or out of Ecuador.
There is a weekly mini-devaluation of the intervention rate against the U.S. dollar, with an occasional larger devaluation (usually three to six percent) to make up for any slippage. This policy has, for the most part, kept the sucre competitive, although there has been some real appreciation against the dollar in the last two years. The spread between the intervention and free rates in late 1991 has been less than five percent. At times in the past year the spread has widened to 10-15 percent. This policy has kept the sucre relatively competitive.
3. Structural Policies
Since taking office the Borja government has made a number of structural reforms, introducing several changes each year. The most current reforms are particularly notable because many observers did not expect the Borja government to undertake many initiatives in the second half of its term. Even with these reforms, domestic and foreign investment probably will be limited in the upcoming year, since more needs to be done to liberalize the economy and encourage investment. In addition, political uncertainties created by the upcoming 1992 presidential elections most likely will inhibit investment.
The most notable reforms have been in the area of trade. Maximum tariffs and trade dispersion have been reduced and most non-tariff surcharges have been eliminated. Ecuador agreed to enter Andean free trade in July 1992, six months behind the other members of the Andean Pact. Other major reforms include a new tax law, an in-bond industry law, liberalized foreign investment regulations, and a revised mining law.
A bill that will make Ecuador's highly restrictive labor code somewhat more flexible is now before Congress. The administration has drafted a number of other important reforms and plans to submit them to Congress before the end of 1991. The draft laws would simplify procedures for exporters, reduce loss-making demands on the Central Bank, unify the public sector budget and provide the basis for a more modern capital market.
4. Debt Management Policies
Ecuador and the International Monetary Fund negotiated a stand-by agreement in December 1991 to cover the following year. The previous stand-by expired in February 1991. Ecuador rescheduled 1991 and 1992 interest and amortization payments to the Paris Club in early 1992. Ecuador's previous rescheduling agreement with the Paris Club expired in 1990.
Ecuador stopped servicing its debt to the commercial banks in 1987, and began paying about 30 percent of interest due in June 1989. It began discussions with commerical bank creditors in August 1989, but they have been unable to reach agreement.
At the end of 1990, total outstanding external debt was 11.8 billion dollars, with accumulated interest arrears accounting for 1.6 billion dollars. Over half the debt, 6.8 billion dollars, and almost all the arrears, are owed to commercial banks.
5. Significant Barriers to U.S. Exports
For 1991, tariffs for most products ranged from two to 35 percent. Some agricultural inputs enter duty free, while automobiles carry a 50 percent tariff, although the importation of cars and light trucks is prohibited. Tariffs should be reduced in 1992, as part of either Ecuador's three year program to reduce tariffs or the Andean Pact's efforts to establish a common external tariff for the Pact members. Ecuador's tariff schedule is based on the GATT's Harmonized System of Nomenclature, although Ecuador is not a member of the GATT. Most non-tariff fees on imports have been eliminated; there are plans to eliminate the remaining fees, which total three percent.
All imports must have a prior import license, which is issued by the Central Bank. Licenses are usually made available for all goods, although obtaining them can be a bureaucratic hassle. All foreign exchange transactions for imports and exports must take place through the Central Bank at the intervention rate.
Foreign ownership of banking is limited to 49 percent, although three banks with 100 percent foreign ownership (including one U.S.-owned bank) are allowed to operate. The operations of these banks are somewhat more restricted than those of local banks. Foreign airlines (including one U.S. cargo and two U.S. passenger carriers) operate in Ecuador, but the government limits their operations to protect the state-owned airline.
In 1991 Ecuador's foreign investment regime was liberalized. Foreigners may invest in most sectors without prior governmental approval. Foreign investment is prohibited in the media and limited to 49 percent of bank shares. Foreign investment in public services must obtain prior governmental approval. Cargo preference laws require use of Ecuadorian flag vessels where available. Ecuador has lagged in implementing Andean Pact decisions favoring freer competition in air and maritime services. The government has been slow, and sometimes reluctant to resolve investment disputes.
Government procurement practices do not usually discriminate against U.S. or other foreign suppliers. However, bidding for government contracts can be cumbersome and time-consuming. Many bidders object to the requirement for a bank-issued guarantee to ensure execution of the contract. Shipments to Ecuadorian government agencies must be made via Ecuadorian flag vessel or airlines.
Customs procedures can be difficult but are not usually used to discriminate against U.S. products.
6. Export Subsidies Policies
The government subsidizes exporters through an exchange rate program known as the "Advanced Sale of Foreign Exchange." Under the program, exporters sell dollars (usually borrowed) to the Central Bank in anticipation of earning those dollars at a later date through exports. The dollars are converted at the intervention rate prevailing at that time. When the exportation actually takes place, the Central Bank compensates for any depreciation of the sucre against the dollar that has taken place since the dollars were sold to the Central Bank.
This complex procedure provides exporters with local currency working capital at dollar interest rates. Since local interest rates exceed 50 percent, and dollars can be borrowed for about 15 percent, the indirect subsidy is large. The government has reduced the program by limiting the advance sales of dollars to 60 days before exporting; previously it had been 270 days. There are no other direct subsidies or preferential interest rates for exporters.
7. Protection of U.S. Intellectual Property
Ecuador is not a member of the World Intellectual Property Organization but does accord protection to foreign-registered property. However, intellectual property rights protection, as governed by Decision 85 of the Andean Pact, is inadequate. Among other limitations, pharmaceutical products cannot be patented, although the manufacturing process of these products is protected. In addition the patent system requires local manufacturing of the patented process or local use of the patented process when the patent is to be renewed five years after patent registration. The Andean Pact adopted Decision 311, which replaces Decision 85, at the December 1991 summit. Illegal registration of patents and trademarks is a problem, since the government lacks the resources to effectively monitor and control such registrations.
Copyright infringement is common, and audio and video recordings as well as computer software are pirated. A proposed reform of the copyright law that would improve protection and enforcement against piracy has been bogged down in the congressional approval process.
8. Worker Rights
a. Right of Association
Under the Ecuadorian Constitution and Labor Code, most workers enjoy liberal rights to form trade unions. Ecuador has ratified the International Labor Organization's (ILO) Convention 87 on freedom of association and protection of the right to organize. Workplaces with 30 or fewer employees are not required to permit unions, and most government ministry workers are not permitted to form labor unions. However, unions are permitted in parastatal enterprises. Approximately 12 to 15 percent of the work force is organized. In 1990, the Government approved a maquila (in-bond) processing law. Since the maquila law permits management to contract workers temporarily, formation of trade unions will be difficult in practice, although the maquila law does not prohibit unions. Employees of state-owned enterprises such as hospitals and public utilities may not strike, although in 1991 medical workers, doctors and provinical workers struck.
b. Right to Organize and Bargain Collectively
Ecuador has a highly segmented labor market, with a minority of workers in skilled, usually unionized positions, and the vast majority, about 60 percent of the economically active population, either unemployed or underemployed in the so-called informal economy. Most rural labor is not organized. The Ecuador Labor Code requires that all private employers with 15 or more workers belonging to a union must negotiate collectively when the union so requests. The Labor Code prohibits discrimination against unions and management is required to grant meeting space and time off for union activities. In 1990, the ILO stated that the Labor Code inadequately protected against antiunion discrimination, which often takes place at the time of hiring. The Labor Code provides for resolution of labor conflicts through an arbitration and conciliation board comprised of one representative of the Ministry of Labor, two from the union and two from management.
c. Prohibition of Forced or Compulsory Labor
Compulsory labor is prohibited by both the Constitution and the Labor Code and is not practiced.
d. Minimum Age for Employment of Children
Persons less than 14 years old are prohibited by law from working except in special circumstances such as apprentice- ships. Those between the ages of 14 to 18 are required to have the permission of parents or guardian to work. In practice, these standards are not enforced. In rural areas most children leave school at about 10 years of age to contribute to household income as farm laborers. In the city many children under age 14 work in family-owned businesses and in the informal sector.
e. Acceptable Conditions of Work
The Labor Code provides for a 40-hour work week, 15-day annual vacation, minimum wage and other variable employer benefits such as uniforms and training opportunities. The vast majority of organized workers in the parastatals and formal private sector enterprises earn substantially more than the minimum wage and receive significantly better benefits. The minimum wage is the operative wage in many informal sector activities. Employers are responsible for maintaining safe and clean working conditions. The Social Security Institute is responsible for enforcement, which is adequate in the formal sector.
f. Worker Rights in Sectors with U.S. Investment
The economic sectors with U.S. investment include petroleum, chemicals and related products, and food and related products. U.S. investors in these sectors are primarily large, multinational companies which tend to respect the generous Ecuadorian Labor Code to the letter. The Embassy is aware of no strikes or serious labor problems in any U.S. subsidiary during 1991. U.S. companies with 15 or more employees are subject to the same rules and regulations on labor and employment practices governing basic worker rights (right to association, collective bargaining, etc.) as Ecuadorian companies.
Source: National Trade Data Bank, Agency: U.S. Department of State