Correanomics Spells Disaster

BY CHRONICLE EDITORS

For years, foreign investors in Ecuador had to put up with the challenge of political instability in the form of frequent changes of presidents and cabinet members. That was bad enough. Now, however, they also have to face another - even worse - challenge: A president who is hostile to foreign investors.

Last week, Ecuadorian President Rafael Correa told America Movil and Telefonica that they could either accept his new concession terms or leave. The new terms include an increase of the concession price from $52 million paid 15 years ago to $700 million and a reduction of the maximum prices the operators can charge from 50 cents to 22 percent.

"If they want to pay, great, and if they don't, well we wish them good luck,'' Correa said, according to Bloomberg.”We won't beg any company to stay in the country. We're asking a fair price for the country.''

CLUELESS

Clearly, Mr. Correa - despite his doctorate in economics from University of Illinois at Urbana-Champaign - has no clue about how the market works.  It is not up to a politician to decide the details of what works or not for a private company. In this case, America Movil and Telefonica have developed a business model that works for them, i.e. enables them to make a profit while operating their business in Ecuador. To be imposing new unilateral restrictions like Correa is doing is dangerous for both the companies affected and Ecuador.

The new requirements could very well result in America Movil and Telefonica leaving Ecuador when their concession ends in the fall. And who would gain from that?

Certainly not the millions of Ecuadorians who have signed for wireless subscriptions in recent years. The number of wireless subscribers in Ecuador has exploded from 859,200 in 2001 to 8.5 million in 2006, according to the International Telecommunications Union (ITU).

Certainly not the thousands of Ecuadorians employed directly and indirectly by the two telecom operators.

MORE STATE INEFFICIENCY?

And certainly not the government of Ecuador, which is currently benefiting from the taxes paid by the two telecom operators. If they leave Ecuador, as Mr. Correa appears to want, their operations will have to be taken over by the state, resulting in increased expenses and worsening service. Ecuador's existing state-run telecoms have a dismal history of inefficiency and corruption. 

If there's one sector that requires private versus state ownership it's technology. It's a sector that is intensely dependent on constant innovation and investments - two ingredients state companies in Latin America are not known for.

The latest threats come after Correa has imposed tax hikes on foreign oil companies and other actions that are threatening foreign investment in Ecuador.

Amazingly enough, Correa taught economics at San Francisco de Quito, a prestigious private university in Ecuador for twelve years. As any of his students from those days will tell him, his economic policies as president are nothing but a recipe for disaster. 

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