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Ecuador Table of Contents

Ecuador

Trade and Balance of Payments

The health of the Ecuadorian economy was dependent on foreign trade. But this dependence left the country vulnerable to the vagaries of international commerce, especially the unpredictability of prices for Ecuadorian export goods.

The improved performance of the economy during the 1970s was the result mainly of the rapid acceleration of Ecuador's oil exports beginning in 1972 and a sharp increase in international petroleum prices starting in 1974. In 1971 crude petroleum exports made up less than 1 percent of total exports and were valued at US$1.2 million. The volume of petroleum exports expanded dramatically in 1972 and 1973; by 1974 petroleum made up almost 65 percent of the country's commodity exports and was valued at US$792 million. Although domestic consumption of petroleum derivatives rose steadily and the volume of Ecuadorian oil exports moderated during the remainder of the 1970s, the spectacular rise in the early 1980s of the crude oil price, which reached a peak of US$34.50 in 1981, resulted in sharp increases in petroleum export revenue. The rapid decline in international oil prices that began in 1986 and the 1987 suspension of crude petroleum production in the aftermath of a destructive earthquake produced a 50-percent drop in the value of Ecuadorian crude petroleum exports in 1986-87 (see table 15, Appendix).

Ecuador's substantial income from crude oil exports had positive and negative effects on the economy. During the 1960s, foreign-exchange reserves averaged about US$25 million. Because of the oil boom, the balance-of-payments situation improved during the mid- to late 1970s. Net foreign-exchange earnings, for example, had reached US$230 million by the end of 1973 and more than US$350 million in 1974. This improvement in foreign exchange had a positive impact on the economy, but that gain was partially wiped out by the relaxation of import restrictions, which allowed the import volume to go up almost 50 percent in 1974. Growing oil export revenue also encouraged the government to subsidize commodities such as gasoline and food items, expand public-sector employment, increase government-sponsored social benefits, and finance the growing budget deficit through foreign borrowing. Austerity measures were implemented in the mid-1980s to reduce the cost of subsidized goods, but by the end of the decade the government had failed to adequately tackle its growing budget deficits or its foreign debt payment problems.

In 1970 fish, timber, and other agricultural products, mainly bananas, coffee, cacao, and sugar, had accounted for almost 90 percent of foreign-exchange earnings. But the dramatic increase in petroleum production that began in 1972 profoundly altered the country's long-term export structure. First, petroleum displaced agricultural products as the country's major export commodity, and, second, the overall value of exports grew tenfold between 1970 and 1980, from US$235 million in 1970 to US$2.52 billion in 1980. Between 1974 and 1981, gains in export earnings were mainly the result of favorable international prices for Ecuadorian commodities, including farm products. The value of commodity exports leveled off during the first half of the 1980s and then declined moderately to US$2.19 billion in 1986, reflecting the fall of international crude petroleum prices. The value of commodity exports remained stable during 1987, 1988, and 1989--US$2.0 billion, US$2.2 billion, and US$2.3 billion, respectively. In 1989 petroleum accounted for about 50 percent of export revenues. In the same year, the value of shrimp exports amounted to US$348 million; banana exports, US$316 million; coffee, US$191 million; and raw cacao, US$73 million.

Also during the 1970s, imports rose by an average of 11 percent per annum, and the value of imports grew steadily between 1970, when it stood at US$249.6 million, and 1981, when it stood at US$2.36 billion. The value of imports declined after 1981, falling to US$1.6 billion in 1986. Although the value of imports had multiplied sixfold since 1970, the structure of imports changed only in minor details. Capital goods for industry, for example, represented 15.4 percent of total imports in 1970; by 1975 capital goods were averaging about 22 percent of total imports, and they would remain at that level until 1987. The growth in imports of capital goods was consistent with increases in manufacturing output. Imports of durable consumer goods averaged about 15 percent of total imports during the early 1980s, compared with an average of slightly less than 5 percent during the 1970s, when the process of import substitution (see Glossary) for consumer goods was moderately more successful than in the 1980s. In 1986, however, as the government's import restrictions and devaluations of the sucre took effect, only 7.7 percent of imports would come under the category of durable consumer goods (see table 16, Appendix).

In 1987, 61 percent of exports went to the United States, and 30 percent of imports came from the United States, making that country Ecuador's main trading partner. Wheat, assorted machinery, transport equipment, and chemicals were the principal United States exports to Ecuador in 1987. Shrimp, petroleum, bananas, coffee, and cacao were the principal United States imports from Ecuador in the same year. Other major trading partners included the European Community, other Latin American and Caribbean countries, and Japan (see table 17, Appendix).

Ecuador's current-account balance varied, registering an average yearly deficit of US$100 million during the 1970s. Financing the current-account deficits was not difficult as long as Ecuador enjoyed continuing improvements in its terms of trade (see Glossary). By 1977 it was clear that the balance of payments was being supported by high oil receipts and external borrowing. The gradual decline of international crude petroleum prices beginning in 1982, coupled with a poor export performance during 1982-83, made it more difficult for the government to secure external financing from foreign commercial banks. Export earnings fell by about 8 percent in 1982, and despite a moderate reduction in the volume of imports, the current-account deficit passed the US$1 billion mark, which in 1982 represented 9 percent of GDP.

To deal with the balance-of-payments crisis, in 1982 the government, in cooperation with an IMF fiscal austerity program, devalued the sucre for the first time since 1971. Another sharp devaluation occurred in 1983, when the government also introduced new exchange controls, prohibited or limited the importation of some items, and reduced fuel and export subsidies. During late 1982 and early 1983, crop production and exports dropped sharply because of the devastating effects of El Niño, but they returned to 1980 levels by mid-1984. Meanwhile, the government began negotiations to reschedule the external debt. The austerity plan, although painful, helped Ecuador to virtually eliminate its current-account deficit by the end of 1983. Ecuador's current-account deficit was offset by a virtually identical surplus in 1985.

In 1986 the international price of crude petroleum dropped sharply to an average of US$15.35 from the previous year's average of US$27.16. The result was a decline in foreign-exchange earnings and a return to chronic current-account deficits during the 1986-89 period. In 1987, the year of the US$700 million oil revenue loss, the current-account deficit reached -US$1.13 billion. The currentaccount deficit improved in 1988 when it stood at -US$597 million; in 1989 the deficit decreased slightly to about -US$500 million (see table 18, Appendix). Nevertheless, despite these improvements, the prospects for Ecuador's balance of payments, as for its economy as a whole, were uncertain.

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Relatively few book-length studies exist on the Ecuadorian economy. The most comprehensive introduction to the subject can be found in David W. Schodt's Ecuador: An Andean Enigma. Luis Mendoza's Geo-Economía del Ecuador offers an excellent, although dated, examination of national economic issues. Specific economic data may be drawn from the Economist Intelligence Unit's quarterly Country Profile: Ecuador and the annual reports of Ecuador's Central Bank. (For further information and complete citations, see Bibliography.)

Data as of 1989


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Ecuador Table of Contents