Monday, February 10, 2014

China and structural change in Latin America: the case of Ecuador

Via Geoff Goodwin, PhD candidate at the Institute of the Americas (UCL), I got to read this article on Ecuador's relationship with China.  Ecuador is a rather extreme case of financial dependence from China: the volume of debt is quite large (more than US$4.6 billion equal to 39% of total public debt) and, more uniquely, part of it is guaranteed by Ecuador's oil reserves.  The article raises a couple of important questions:

a. Given that the interest rate that China is offering is higher than, say, CAF's, why does Ecuador continue promoting it? Is it really getting technological transfer and support for strategic projects?  Or is it that China puts less conditions but, at the same time, imposes higher guarantees?  If it is the latter, this experiment could finish quite poorly...

b. The type of activities Ecuador is aiming to promote are quite interesting: pharmaceuticals, shipbuilding, metal production, pharmaceuticals and other heavy industries.  On the one hand, it is great to see governments with an ambitious agenda.  On the other, however, is this really the best sectors to promote?  Given its location and size, are these sectors were Ecuador will be successful?  Who is making decisions and how are these decisions being made?  Would more basic, labour intensive consumption good make more sense?  And how is the government approaching these questions?  For those of us that are proponents of industrial policy, these are key questions to distinguish between a promising strategy and a set of "white elephant projects" that will not go anywhere.  Do any of you know answers these questions based on the Ecuadorean experience?

5 comments:

Geoff Goodwin said...

There are a number of factors that have influenced the Correa government’s decision to turn to China for funding and investment. The restructuring of Ecuador’s overseas debt in 2008 effectively locked the country out of international bond markets. Over the last few years, the government has touted the idea of issuing bonds (international investors have short memories…) but is seemingly reluctant to follow that route because of the “disciplining” effect of international markets. International/regional financial/development institutions (e.g. IDB) have provided some funding but the government has treaded carefully and taken a critical stance towards the IMF and World Bank (part of its political strategy to distance itself from previous regimes). Within this context, China has emerged as the principal source of overseas funding for Ecuador in the last 4-5 years. The relationship has enabled the government to pursue its alternative economic agenda. The principal price it pays for this is higher interest rates. The question remains, however, of the degree of influence the loans have given China over economic decisions in Ecuador. While the loans do not seem to have explicit conditions attached, they seem to have provided Chinese firms with preferential access to the mining and oil sectors. It is within these sectors Chinese investment has been concentrated over the last 4-5 years. To date, the extent of technological transfer outside of extractive industries seems to have been very limited and the relationship with China appears to have embedded the primary export model.

Yes, the government’s agenda is ambitious. The question of how the government has selected these industries and the role the private sector has performed in the process (and is expected to perform in the future) is an interesting one. There is some logic in developing higher value added industries on the back of natural resources (e.g. oil derivatives, metal production) and also nurturing industries with relatively low barriers to entry. But the question of the growth potential of these industries remains. One of the principal problems Ecuador faces, of course, is the size of its domestic market (in terms of population and purchasing power). If the industrial policy is to work then Ecuadorian companies will need to be able to compete internationally (or regionally). The government has provided support for some products/industries through trade protection but there are limits on how far it can go under current conditions. The EU-Ecuador trade deal, which is likely to be agreed later this year, will further complicate matters. On a wider level, is there a basic contradiction between the government’s attempt to diversify the productive structure by promoting new industries while deepening Ecuador’s dependency on non-renewable natural resources by increasing the extraction of oil and mineral deposits?

Mary Arrieta said...

This dynamic implies an important compromise of resources, which does not seem long-term effective. The country would be leveraging instead of motorising the economy with more competitive industries, who knows for how long. Besides, we all know about the historical impact on development profile of external debt in the region...

Geoff Goodwin said...

This article gives an indication of the trade component of the Correa government's industrial policy and the role of the private sector:

http://www.elcomercio.com/negocios/Restricciones-importaciones-compromisos-acuerdo-empresas-empresarios-Inen_0_1085891414.html

Geoff Goodwin said...

Following the comments I made above about Ecuador-China relations, this report in The Guardian provides an indication of the links between overseas debt, foreign direct investment, and economic decision making:

http://www.theguardian.com/environment/2014/feb/19/ecuador-oil-china-yasuni

Geoff Goodwin said...

I should note that the Ecuadorian government dispute the veracity of the document The Guardian used as a basis for the article about Yasuni.

You can read the Correa government's response here: http://www.elciudadano.gob.ec/wp-content/uploads/2014/02/Respuesta-The-Guardian-ing.pdf

It is interesting reading as it would appear the Chinese government attempted to link development of Yasuni to the provision of the loan. As such, the document provides insight into the negotiation process and the links between overseas debt and economic policies.