Ecuador is like a forest that is on fire and Lenin Moreno is like the trapped person who knows the escape route, but decides to go another way. Last week, the Ecuadorian government announced a series of economic measures to rescue the Ecuadorian economy from recession.
The plan includes a reduction in the size of the state, incentives for private initiative, and reduction of subsidies. However, there is also talk of increasing government spending through loans. So, is this plan coherent?
First, it is necessary to recognize the positive aspects of these measures. When Moreno’s presidency began, there were 40 ministries and secretariats; in the following months that number was reduced to 27. With this new decree, it is expected to be further reduced to 20, entailing an estimated reduction of 1,500 jobs in the public sector.
The reduction of the state bureaucracies is a good sign; for years, the government of Rafael Correa was criticized for excessive public spending for the maintenance of these ministries, and finally, someone is serious about reducing the size of government. In addition, the Moreno administration is seeking to eliminate sole suppliers in public state purchases, through transparent competition to hire the companies offering the lowest bids, so that these prices are equal to or lower than prevailing market prices.
Also, the administration is seeking to attract foreign investment, thanks to the Law of Productive Development. In turn, the Common Contracting System will be prioritized, and not the Special Regime; In this way, privileges and monopolies will be eliminated in many areas within the state infrastructure. Finally, efforts are being made to repatriate the money involved in corruption cases, which is very important due to the strong message that it sends to the Ecuadorian people: justice and rule of law have returned.
These announced economic measures are projected to account for an annual savings of approximately USD $1 billion dollars. However, there is also discussion of a credit to the tune of USD $1.3 billion dollars for the generation of employment, and the increase of the human development bonus by around USD $124 million.
The problem with credits is that they are counterproductive measures. Many times unproductive or inefficient projects are subsidized which, at the end of the day, translates into a very high default rate. If we put both proposals on the balance, it turns out that we are spending more than we are saving!
The government of Lenin Moreno should be applauded for carrying out a proper diagnosis of the disease, but the operation that has been called for is not he appropriate one. They are attacking structural problems that do not finish laying the foundations for growth.
These economic measures seem to be a plan, with little coherence, which will only further the current uncertainty in the country. It is true that Moreno inherited a mountain of debt from his predecessor, and precisely for that same reason Moreno should not be proposing partial solutions. The amount that would be “saved” does not represent a significant change for the better. Even if the plan is a step in the right direction, it remains a “half measure.”
With this government plan of action, the economic growth of the country will not be promoted. This is due to the fact that the measures are purely fiscal in order to maintain public spending and assure that state finances do not collapse. What we are seeing is a necessary fiscal adjustment to regain balance within state finances.
But do not fall into the error of thinking that these measures are economic reactivation. To reach that growth and put out the fire, it is necessary to attract more private investment, open many more commercial doors, and efficiently reduce both the tax burden and public spending.