Analysis: The threads which bind Assange, Ecuador, the IMF and ‘monetary suicide’

CommonSpace editor Ben Wray looks at what connects Ecuador’s dollarisation with an IMF loan agreement in February and Julian Assange’s arrest on Thursday [12 April] - and how there could be lessons there for an independent Scotland

THE following report in the FT on 21 February of this year begins to provide a picture of Ecuador’s contemporary politics and economics, and thus the background which led to Wikileaks founder Julian Assange’s arrest by British police in Ecuador’s British embassy on Thursday, invited to do so by the Ecuadorian government.

“Ecuador has signed a $4.2bn programme with the IMF, signalling a final break by President Lenín Moreno with the policies of his leftist predecessor,” the report begins.

“The loan to the Opec country forms part of a larger $10bn package with other multilateral lenders to support Ecuador’s struggling economy, which is burdened by external debt that grew under former president Rafael Correa, in part due to oil-backed loans from China. 

“Mr Moreno, who came to power in 2017, has sought to curb public spending and buttress Ecuador’s external accounts with bond issues, although a long record of past defaults made terms onerous.”

The IMF of course is a Washington based institution and is notoriously dominated by US state interests. Whether the IMF loan agreement in February had any specific influence on President Moreno’s decision to end Assange’s asylum prematurely is not really what matters. What matters is the circumstances which led to Moreno’s rise to the presidency, and to become reliant on costly IMF loans to sustain an overly exposed Ecuadorian economy financially, because those are the circumstances which - by hook or by crook - led to Assange’s eviction and possible extradition to the United States on Thursday. 

READ MORE: Analysis: When it comes to the threat of US extradition, the #Assange case is simple

To understand this, one has to return to the year 2000, when the Ecuadorian Government responded to a crisis of its Sucre currency by adopting the Dollar. Ecuador’s economy is heavily reliant on exports of oil to the United States, while its largest source of imports comes from the superpower as well, so using the US’ currency informally - a policy known as dollarisation - appeared to be logical.

In the immediate term, the economy stabilised and began to grow again. In 2007 a left-wing economist, Rafael Correa, was elected President, and sought to massively expand public programmes to tackle poverty. Correa increased spending as a % of GDP by 20 per cent in five years, increasing government revenue by 17 per cent through redistributive tax policies.

It worked. Relative poverty fell 38 percent and extreme poverty 47 percent from 2007-2016, an enormous drop in poverty in the space of just nine years. The gini coefficient (the commonly used measure for income inequality) fell from 0.55 to 0.47, a fall in inequality at a time when most of the world was moving in the other direction.

“Because we are bad pupils of the IMF, things are going well in Ecuador,” Correa said.

However, when the global oil price fell in 2014, Ecuador hit difficult times, entering a serious recession in 2016, with GDP falling by 2.2 per cent. This was exacerbated by dollarisation, as while neighbouring countries like Columbia and Peru were able to devalue to boost exports, the dollar’s value rose 25 per cent between 2014-2016.

“Very few countries in the world have committed a monetary suicide like Ecuador, adopting a foreign currency that behaves exactly in the opposite way we want it to,” Former Ecuadorian President Rafael Correa

Correa said Ecuador lost $7.4 billion in export revenue in 2015 – equivalent to 7.4 per cent of GDP – due to dollarization. 

“Very few countries in the world have committed a monetary suicide like Ecuador, adopting a foreign currency that behaves exactly in the opposite way we want it to…Colombia devalued, Peru devalued, but we could not respond anything,” Correa said.

As revenues collapsed his administration responded by reining in fiscal policy, with government spending to GDP falling 5 per cent from 2014-2016, and the fall in the poverty rate stalling as a consequence. Still, the fiscal deficit rose to 8 per cent in 2016. Correa, who was always opposed to dollarisation, said he would not re-introduce the Sucre as it would “cause economic, social and political chaos”.

“We can't do anything but maintain the dollarisation, being very aware of the restrictions: it's like fighting in the ring of globalisation with a straitjacket,” Correa said, adding: “It would be much easier to be able to devalue a little the currency in order to foment exports, limit imports and correct the external imbalance. Provinces at the borders have lost a lot of economic dynamism because we could not respond and address the imbalances in the external sector, like the drop in oil prices. We have had to constantly juggle.”

READ MORE: Scotland the Dominion: Is The Irish Free State a good currency model for iScotland?

Part of that juggling was an increase in loans from China and thus rising external debt, which increased Ecuador’s susceptibility to global economic shocks.

Correa stepped down at the end of his third presidential term in 2017, with Lenin Moreno winning the presidency as the candidate for Correa’s PAIS Alliance in the 2017 elections.

However, after winning office Moreno radically shifted gear, beginning to pick apart Correa’s economic legacy piece by piece, in what The Economist has called a “path from populism to moderation”. 

This has culminated in an IMF loan agreement which, typically, enforces reductions in public spending and “liberalisation”.

“Austerity is never easy,” The Economist laments.” Further public-sector lay-offs, rises in regulated fuel prices and a planned reform to make labour contracts a bit more flexible may bring street protests. The government’s hopes of attracting foreign mining firms may be stymied by local protesters. Mr Moreno’s approval rating has fallen to 30 per cent, from 69 per cent in 2018.”

READ MORE: Robin Mcalpine: The four words that lose us independence - Ecuador, Lichtenstein, Montenegro, Panama

Moreno’s shift has also included much closer relations with the US, including buying arms from the country. On a visit in 2018 to the country in 2018, US Vice President Mike Pence raised the issue of Assange.

Correa, who had long since become a vocal critic of Moreno, responded to Assange’s arrest by saying that the President was the “greatest traitor in Ecuadorian and Latin American history”, adding that his actions were a “crime that humanity will never forget”.

Ecuador is one of four nation-states - along with Panama, Montenegro and Lichtenstein - which uses another state’s currency informally. The Growth Commission report has proposed that an independent Scotland could become the fifth such country, with a vote at SNP conference in just over two weeks time on whether to make advocacy of Sterlingisation official party policy.

Ecuador’s “monetary suicide” - and its subsequent impact on the country’s international affairs - should be a cautionary tale for SNP members ahead of that vote.

Picture courtesy of Cancilleria del Ecuador

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