Professor vs. professor: Austerity in Ecuador

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By Leif Olson

November 11, 2019

Protests in Ecuador came to an end on October 13 as the government was forced to reverse IMF-imposed austerity measures. For days, protesters clashed with police in Quito Park, the epicenter of the protest. Indigenous Ecuadorians took to the streets after fuel subsidies were removed pursuant to the austerity agreement. After 10 days of protest, the subsidies were reinstated and the government agreed to renegotiate austerity, formally extricating itself from the IMF decree.

The SAIS Observer reached out to two professors and several students for their opinions on austerity in Ecuador and what role, if any, the IMF should play going forward.

Professor Benjamin Gedan, senior adviser to the Woodrow Wilson Center’s Latin American Program, said, “Implementing austerity is always a political challenge, and it is even more difficult when budget cuts are abrupt and seen as imposed by the IMF.” The riots were not a reaction to austerity in general, according to Gedan, who added, “Austerity is most likely to provoke a negative public response when a fiscal adjustment disproportionately affects the poor, as with across-the-board increases in the cost of public utilities, such as public transportation”.

However difficult, austerity might be a necessary evil. Gedan continued, “It is hard to argue with the IMF’s diagnosis, albeit a cliché: Ecuador, like many governments in Latin America, should reduce public spending to lower the risk of the type of debt crisis Argentina is suffering.” While Gedan said Ecuador’s debt levels are “reasonable,” its economy is set to contract and “will be more vulnerable to swings in oil prices”.

Professor and head of SAIS’s Latin American Studies Program, Monica De Bolle, responded, “Ecuador needs the IMF just like Greece needed the ECB: It needs the dollars that it currently lacks. Addressing its fiscal problems under these circumstances inevitably requires not only austerity, but more austerity than would otherwise have been the case had Ecuador not chosen to formally dollarize its economy.” Indeed, De Bolle sees dollarization as a central problem in Ecuador, saying, “Ecuador adopted the U.S. dollar as its formal currency in 2000 during a severe financial crisis. Almost a decade later, it has been suffering from shortfalls in dollar flows associated with the behavior of oil prices, the need to adjust its fiscal deficit, and the need to address ongoing structural problems.”

While arriving at the same conclusion, Gedan and De Bolle gave different explanations as to why Ecuador needs austerity and austerity’s sociopolitical implications.

SAIS students had similar opinions on the riots and the IMF’s decree. Allison McNeil, a second year LASP concentrator said, “Ecuador needs to cut public spending. There’s a lot of bloat in the public sector which could be cut. However, ending the fuel subsidies which primarily impacts the poor and indigenous, is not the way to go about it.” She presented an alternative, saying, “The IMF should work with Ecuador to reform other policies to combat inequality and then tackle issues of austerity”.

Anastasia Austin, a second year LASP concentrator echoed this sentiment, saying, “In the long term, fuel subsidies are neither sustainable nor justifiable, but in the short term they are essential to the economy”.

Cody Etlin, also a second year LASP concentrator, expressed concerns that the protests might signal a larger political shift in Ecuador and the region. “These socioeconomic grievances may very well represent a swing in the region’s political pendulum towards left-wing populism, reminiscent of the ‘pink tide’ governments of the early 2000s. The Chilean crisis and the return of Argentine Peronists to power attest to this momentous political shift,” he said.

Whether due to inequality, gas prices or dollarization, Ecuador’s economic future remains uncertain. Time will tell if the new deal between the government and the people will accomplish the twin goals of socioeconomic welfare and fiscal restraint.