BUSINESS DEFEAT: President Rafael Correa celebrates Sunday's referendum victory with supporters. The new constitution creates more problems for foreign investors, Latin Business Chronicle editors say. (Photo: Ecuador President's Office)
The approval of Ecuador's socialist constitution will spur more expropriations, state interventionism -- and misery.
BY CHRONICLE EDITORS
A clear majority - 66 to 70 percent - of Ecuadorians voted yesterday to approve a new constitution which they hope will reduce poverty. However, instead, the new socialist constitution will result in the opposite - more poverty and misery in the Andean nation, Latin America's eighth-largest economy.
"The 2008 constitution, the 20th in the history of Ecuador as an independent nation, [paves] the way for a feared tighter grip by the president of economic policies, natural resources and overall 'strategic sectors,' " Global Insight says in an analysis today.
The vote culminated another dramatic week in Ecuador, which saw government troops seize properties worth $800 million belonging to Brazilian construction giant Odebrecht and threaten to default on a $200 million loan to Brazil. Meanwhile two officials of Odebrecht, whose Ecuador properties include a small regional airport, two hydroelectric plants and a rural irrigation project, had to seek refuge in the home of Brazil's ambassador in Quito to avoid arrest.
ATTACKS FOREIGN INVESTORS
The latest action against the Brazilian multinational comes after the authoritarian government of President Rafael Correa issued arrest orders against two Chevron lawyers, threatened to expel America Movil's wireless unit Porta and unilaterally hiked government oil royalties. All in all, clearly sending a loud signal that foreign investors are not welcome.
As a result, five leading business groups last week asked congressional leaders to consider not renewing the U.S. trade preferences that Ecuador currently enjoys. The Andean Trade Promotion and Drug Eradication Act (ATPDEA) gives Ecuadorian exporters duty-free access to the U.S. market for some 5,000 products. It is set to expire at the end of the year unless congress votes to extend it.
"There are serious concerns within the U.S. business community about breaches of the basic rule of law that are occurring in Ecuador and Bolivia. We urge Congress and the Administration to reconsider how the ATPDEA should apply, if at all, to these countries given their actions," said a letter to congressional leaders from the Business Roundtable, the Emergency Committee for American Trade, the National Association of Manufacturers, the National Foreign Trade Council and the U.S. Chamber of Commerce.
BIGGER STATE ROLE
Meanwhile, the new constitution is bound to create further problems for foreign investors, which already have been reducing their investments in Ecuador in recent years. It specifically states that the
government will have a key role in the production of goods; the control, regulation and administration of any sectors that are deemed strategic and the construction of new infrastructure and the maintenance of existing infrastructure, points out Credit Suisse analyst Carola Sandy. It also spells out more regulation of the oil sector than the previous constitution, she adds.
That means more inefficiency. Already, the state oil and telecom companies are widely known for being among the most inefficient in the country, unable to keep up with private-sector equivalents locally or regionally.
The new constitution also creates further uncertainty about Ecuador's foreign debt, which has been threatened by defaults ever since Correa became president in January 2007. “The new constitution says that the government should “refute” any debt that is deemed illegitimate,” Sandy says in an analysis today. “Our base case view is that President Correa will keep servicing the external debt so long as he maintains a wide margin in the polls for the upcoming January presidential elections. However, he mentioned on Friday … that the government might file an international lawsuit to deal with the debt that was recently deemed illegitimate debt (although it is unclear where the government would filethe lawsuit, on what grounds and who would be the defendants).”
There’s also concern about whether Correa will change Ecuador’s dollarized system or not since he has been a vocal critic of dollarization. However, some experts believe there won’t be any change for now. “We expect Ecuador to remain a dollarized economy,” Sandy says.
In addition to the economic nationalism, the new constitution will also mean increased powers for Correa, who has already moved to stifle opposition legislators and independent media. It grants him the right to run for re-election in January or February and remain in power through 2017. And that means more problems for foreign investors as well as more misery for Ecuador.
Post Your Comments
You can write a comment on this article by clicking here.
From: Kevin, NYC Wow, are you full of propaganda. Why don't you reveal to your readers that Odebecht built a power plant that has not been operational for the past three months due to shoddy construction and cheap materials. The Brazilian company's actions are costing Ecuador millions of dollars and a lack of electricity to its citizens. If you had your way, you would go back to the days when American companies could come in and exploit, pollute and stomp all over Ecuador's legal system in the name of profits. Foreign investment is certainly welcome in Ecuador, except there will be a fair playing field now.
From: Geoff, Canada I guess that after you got to play writing in your sandbox, you forgot the part about honest, accurate, well-researched, high integrity, objective reporting. Garbage journalism like this only makes you look foolish and without credence.
From: Si hasta el final, Ecuador Your comments represent what few people in Ecuador, the rich, are doing in order to confound others and distorsionate the real story.
Obama's First 100 Days Disappoint