While European governments continue to impose policies aimed at making working people pay for a crisis they did not cause, the Ecuadorian government of Rafael Correa has taken a different course.
“Those who are earning too much will be giving more to the poorest of this country,” a November 1 Reuters dispatch quoted Correa as saying. He was announcing a new measure to raise taxes on banks to help fund social security payments.
Ecuador’s banking sector has registered US$349 million in after-tax profits, a November 8 El Telegrafo article said.
“The time has arrived to redistribute those profits,” said Correa.
Correa answers 'leftist' critics
Reuters reported that by lifting the tax rate on bank holdings abroad and applying a new tax on financial services, the government hopes to raise between $200 million and $300 million a year.
The proceeds will fund a rise in the “human development bonus payment” from $35 to $50 a month. About 1.2 million Ecuadorians receive the payment, mainly single mothers and the elderly.
Such a move ― in the opposite direction to the most of the rest of the world ― is largely explained by the fact the Correa government is a result of the kind of protests movements now developing in Europe.
In "an interview published in the September/October issue of New Left Review, Correa said the backdrop to his rise to power was “a citizens’ revolution, a revolt of indignant citizens” against bankers and politicians destroying the country.
“In that sense we anticipated the recent indignado movement in Europe by five or six years,” Correa said.
In 1999, a crisis engulfed Ecuador’s banking sector and the government of the day tried to make the people carry the cost. Then-president Jamil Mahuad was toppled by a popular uprising in 2000. The country’s indigenous movements, spearheading opposition to neoliberalism, played a leading role.
Ecuador’s economic crisis was soon coupled with a political crisis as peoples’ illusions in the traditional parties of government collapsed. “¡Que se vayan todos!” (Out with all of them!) became the rallying cry of Ecuador’s next popular insurrection, which in 2005 toppled president Lucio Gutierrez.
It was in this context that a relatively unknown leftist economist, Correa, was asked to serve as the finance minister for Gutierrez’s replacement, Alfredo Palacio.
Correa recalled: "In my short time at the Finance Ministry ― around a hundred days ― we showed that one didn't have to do the same as always: submission to the IMF and World Bank, paying off the external debt irrespective of the social debts still pending.
“This created a high level of expectations on the part of the public.”
Correa’s resignation due to differences with Palacio was greeted by protests. Perhaps for the first time in history, the protests were not against a finance minister, but in support.
With a group of close collaborators, Correa decided: “We couldn’t let the expectations that had been raised, the feeling that things could be done differently, end in disappointment.
“We travelled across the country and formed a political movement to secure the presidency. For we saw very clearly that in order to change Ecuador, we had to win political power.”
In 2006, Correa ran for president on a campaign that, he said, was “proposing a revolution, understood as a radical and rapid change in the existing structures of Ecuadorean society, in order to change the bourgeois state into a truly popular one”.
Correa won in a second round run-off.
Make the bankers pay
One of the first big challenges his government faced was the global economic crisis that hit in 2008.
The crisis was felt in Ecuador through the loss of foreign markets, falling oil prices (the country’s chief export), and a sharp drop in remittances from emigrants, which many Ecuadoreans depended.
Despite this, Ecuador's economy suffered far less than many others. Correa said this was due to "a combination of technical know-how and a vision of the common good ― acting on behalf of our citizens, not finance capital".
“For example,” he said, “we used to have an autonomous central bank, which is one of the great traps of neoliberalism, so that whichever government is in power, things carry on as before”.
“Thanks to the 2008 Constitution, it is no longer autonomous.”
This meant the government could take back its national reserves that were held in overseas banks. Together with new loans from China and obliging private banks to return savings to Ecuador, the government was able to ramp up public investment.
This helped lift Ecuador out of the crisis quicker than any other Latin American country.
The government also enacted other measures to ensure peoples’ needs came before profits. For example, new laws prohibit banks from penalising low-income, first-time home buyers who default on their loans.
The most ambitious move however, which demonstrate how much had begun to change in Ecuador, was the government’s decision to renegotiate its foreign debt.
Correa told NLR: "The cost of the external debt was one of the greatest obstacles to Ecuador's development. At one time, servicing the debt consumed 40 per cent of the budget, three times what was spent on the social sphere ― education, health and so on.
“The allocation of resources demonstrated who was in charge of the economy: bankers, creditors, international financial institutions.”
To turn this around, the government initiated the Committee for an Integral Audit of the Public Debt (CAIC).
“The Commission proved beyond any doubt what we already knew: the external debt was immoral, a robbery.
“For example, the 2012 and 2030 Global Bonds were sold on the secondary market at 30 per cent of their value, but we had to pay them at the full 100 per cent. When it looked at the contracts, the Commission also found a lot of corruption and conflicts of interest.
“So in December 2008 the CAIC ruled that this debt was immoral, and we declared a unilateral moratorium on those bonds.
This was at a moment when we were in a strong economic position ― oil prices were high, exports were growing ― which was deliberate. This meant that the value of the debt dropped, and we forced our creditors to negotiate and sell back their bonds in a Dutch auction.
“We managed to buy back our debt at 32–33 per cent of its value, which meant billions of dollars of savings for the Ecuadorean people, both in capital and in interest payments.
"This freed up a lot of resources which we could dedicate to the social sphere; now, the situation is reversed from what it was before ― we spend three times as much on education, health, housing as on debt service."
Human needs over greed
Correa said: “Now we are reducing inequality, and poverty with it, through a combination of four things.
Firstly, making the rich pay more taxes. We have instituted a much more progressive taxation system, and people now actually pay their taxes ― collection has doubled.
“These resources, together with oil revenues and the money saved by reducing the debt burden, can be devoted to education, health and so on.”
The second focus is giving people opportunities by providing free education and healthcare.
“Thirdly, governing the market and improving the labour system.”
Correa said: “The market is a reality that we cannot avoid; but believing the market should allocate everything is a different matter. The market needs to be governed by collective action.
“We are putting an end to forms of exploitation such as subcontracting. We are improving real wages ...
“Around 60–65 per cent of families could afford the basic basket at the start of our mandate, now we’ve reached 93 per cent, the highest in the country’s history.
“We’ve disproved orthodox economic theory, the idea that to generate employment one needs to lower real wages: here the real wage has risen substantially, and we have one of the lowest unemployment rates in the region―just under 5 per cent.
“We’ve also paid attention to the quality of employment, making sure businesses comply with labour laws. While raising wages for labour, we’ve reduced the remuneration for capital.”
The fourth measure, Correa explained, is “distributing adequately our social patrimony”.
Correa said: “We used to give away our oil: before the Palacio government, transnational companies would take the equivalent of 85 out of every 100 barrels and leave us with 15; now we have renegotiated the contracts, the proportions have been reversed.
“Another example: after the economic crisis of 1999–2000, many enterprises which were used as collateral for loans should have ended up in state hands; it was we who finally seized them. In the case of the Isaias Group, owned by the family of the same name, in 2008 we recovered around 200 enterprises.”
The result of these measures has been a marked lowering of poverty and inequality.
This helps explain why, six years after first being elected, Correa looks set to comfortably win presidential elections next March. Recent polls show Correa winning with between 55-60% of the vote.
In distant second is a banker, Guillermo Lasso, with about 15% support.
[Federico Fuentes is a Sydney-based Socialist Alliance activist. With Michael Fox and Roger Burbach, Fuentes is the co-author of the forthcoming book, Latin America's Turbulent Transitions: The Future of Twenty-First Century Socialism.]