Comment The music that greets you at www.rafaelcorrea.com is upbeat and encouraging - if you like the written content. But the new Ecuadorian president probably won't put you in such a dancing mood if you're an oil company executive.
This Monday, January 15, Dr. Rafael Correa took his place at the helm of Latin America's fifth-largest oil producer. Ecuador, situated on the continent's Pacific coast, is the second-largest South American supplier of crude oil to the United States, according to the US Department of Energy.
Rafael Correa is no Hugo Chavez. He obtained his PhD in economics from the University of Illinois, and has voiced his discomfort with the Venezuelan leader's characterization of George W. Bush as a sulfur-smelling devil. However, Correa has also made clear his displeasure with his country's relationship to the Yankee oil industry.
On his Spanish-language website, Correa attacks the neo-liberal business bent of Ecuador's leaders at the turn of the millennium. The platform upon which he was elected includes attacks and promises of prosecution for former president Jamil Mahuad. Mahuad, who now makes a living in consulting and lecture tours, was the great dollarizer of Ecuador's economy in 1999 and 2000.
Amid great political turbulence, Mahuad declared that the US dollar would become the official currency of his sovereign country. Though many countries, including Argentina, have decided to peg their currency to the greenback to gain a measure of stability on a rocky road to recovery from economic collapse, only Panama, El Salvador and Ecuador have made the jump to circulating images of dead US presidents in the markets and banks of their countries.
Dollars and Debt, or Dollarless Doom?
In Ecuador's case, inflation in excess of 60% sparked the decision to dollarize. Critics allege, however, that the national interest was not tops in Mahuad's mind when he took the step to trash his national banknotes. Correa accuses Mahuad and his associates of plundering millions from supposedly halted national banks between the dollarization announcement and the actual switchover.
Ecuador's indigenous population vehemently opposed the dollarization move, which set a conversion rate of 25,000 sucres (the old currency) for each dollar. The exchange rate had been 7,000 to the dollar, so the Mahuad equivalency greatly diluted sucre-denominated savings.
A march of 15,000 on the Defense Ministry resulted in a meeting of Indian and peasant leaders with the military brass, and in the end the groups combined forces to force Mahuad's resignation. Mahuad was eventually replaced by his vice-president, Gustavo Noboa. During Noboa's tenure, the International Monetary Fund became heavily involved in restructuring the Ecuadorian economy, removing fuel prices and raising the ire of the country's poor.
Now, in 2007 we see the inauguration of Dr. Correa, Ecuador's eighth president in ten years. Correa speaks Quechua, the country's predominant autochthonous language, which has given him a huge dose of respect among the indigenous population while his economic professorship gives him credence in the technical arena of debt restructuring.
And debt restructuring is one of Correa's primary goals, along with the recomposition of the country's political system. He wants a popular vote to establish a new constituent assembly, which would in turn establish a constitution that marginalizes the powers of traditional political parties. This is not as totalitarian a shift as an outsider might think, as Ecuadorians have very little faith in their politicians.
Some 6% of citizens trusted their elected officials to do right by the populace around the time of the dollarization. The flipside of that disapproval is the likely approval of a new constituent assembly to put power more firmly in the hands of Correa and his voter base.
As petroleum can help fuel debt relief, Correa inherits a country that was already tilting towards socialist measures to that end.
In late 2005, the Minister of Economy and Finance, Diego Borja, announced that the Hydrocarbons Law would be reformed, allowing the government to recover 50% of the revenues generated by private, mostly foreign-owned oil companies.
Last May, the government confiscated the Ecuadorian property of Occidental Petroleum, an American company that produced 100,000 barrels per day there, or some 14% of the country's total.
Ecuador, with 4.6 billion barrels of proven crude reserves, is an important source of oil for the Western Hemisphere and the United States especially. Correa and others see a reappropriation of oil revenues as an optimal way to restructure the country's public debt along nationalistic lines.
His cabinet has expressed the intention to discuss debt renegotiation with Argentina, which initiated its own process after the 2001 economic collapse.
Apples, Oranges, and Oil
Argentina restructured 100 billion dollars of its debt, but Ecuador only has 10 billion dollars in total debt. Critics also point out that Ecuador is spending far less on interest for its debt repayment plans than are Colombia and Brazil, which have not taken such a hawkish stance towards their external obligations.
When it comes to energy resources, leverage can be as good as revenue in the minds of many political leaders. They are, however, playing with fire. Bolivia and Venezuela, among other countries renegotiating production sharing agreements these days, will find it hard to keep the money flowing as their foreign-based expertise dries up along with drill holes and wells. National pride is one thing, but foolish pride is quite another.
Let's hope that Dr. Correa can exercise his academic mind to balance the needs of the people with a pragmatic business sense. Then the burden on Ecuador will truly be reduced, and everyone can dance to his music together.
Regards,
Sam Hopkins
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