Can Ecuador Learn Something from Peru?
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Image source: Rafael Correa via Cancillería del Ecuador https://www.flickr.com/photos/dgcomsoc/
It seems that 2006 was a long time ago — the year when Rafael Correa was not yet president of Ecuador. Nevertheless, there was an Ecuador before him: a troubled country that had seven presidents in only 10 years. With elections just around the corner, what economic model will mostly benefit Ecuadorians?
Correa is the favorite politician of those that defend the ideals of 21st Century socialism. Unlike Hugo Chavez or Daniel Ortega, most say Rafael Correa is a true statesman who implemented a successful development model in Ecuador. But is this really so?
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This question becomes relevant as Ecuadorians approach the second round of presidential elections in April and will have to choose between Lenín Moreno of the ruling party or his opponent Guillermo Lasso. The decision Ecuadorians face is crucial because it could change the country’s economic and development model.
To evaluate “Correa’s model” I propose to compare some of Ecuador’s macro indicators with Peru’s, a country that followed a completely different model and course.
After its reforms in 1992, Peru became distinguished for planting a model of economic liberalization y less government intervention in economic matters. Although Ollanta Humala, a sympathizer of 21st Century socialism, won the presidential elections in 2011 the Peruvian model did not change.
The most important indicator can be found in the growth of per capita income of both countries. The next graph shows the growth of per capita income adjusted for purchasing power parity since 2007—the year Correa assumed the presidency
In 2007, Ecuador’s per capita income was $8,366; Peru’s was $8,148. Ecuador started off with a slight advantage. By 2015 Peru’s per capita income had grown to $12,259, while Ecuador’s to $11,474. This means that in the same period of time Peru increased its per capita income by 54%, while Ecuador’s only increased 37%.
It is argued that economic growth is not a good indicator for well-being. Yet what defines the success of an economic model is its capacity to lift people out of poverty. Let’s see how the poverty situation in both countries has changed since Correa became president.
In 2007 poverty was higher in Peru. Although poverty has since declined in both countries, it has done so in a greater proportion in Peru. Since then, Ecuador’s poverty rate has fallen by 37%, while Peru’s fell by 49%. This reflects how the Peruvian model has been a more effective in solving poverty than Correa’s model.
It seems that the results are very similar in both cases, but there are other variables that should also be taken into account. That is, Ecuador’s “development model” comes at a price. Correa’s government was dependent on oil revenues, but with the fall in oil prices in mid-2014 the country became indebted.
When Correa took office in 2007, Ecuador’s public debt represented 27% of GDP; by 2016 it reached 34%. Peru has been more prudent with its public finances and has reduced the public debt as a percentage of GDP since 2007, from 28% to 25% in 2016.
But there is something more that should be taken into account: the financial cost of debt. Although the public debt levels don’t seem to be that great, the interest rate that both countries must pay to finance themselves is.
Let us look at other indicators: the EMBI+ rate represents the difference in percentage points that the cost of the country’s sovereign debt has compared to US sovereign debt bonds, which are considered risk-free. Ecuador’s EMBI+ rate is 587 points, while Peru’s is 125 points. This means that Correa’s Ecuador is not only more indebted than Peru, but it also pays a more expensive debt by 4.6 percentage points.
On April 2, Ecuadorians will decide if they want to continue with Correa’s model or adopt a more “Peruvian” one. Data seems to show that Ecuadorians have much to learn from the Peruvian model, and depending on what happens in the second round of presidential elections, this can mean a significant turning point.
Edgar is a practicing attorney with a law degree from Universidad Francisco Marroquín. He has a master’s in Austrian school economics from Universidad Rey Juan Carlos. He is executive director of the Centro de Estudios Económico-Sociales (CEES) and a professor of economics at Universidad Francisco Marroquín. Edgar is also a current events analyst at the local television network Canal Antigua and an associate at the Rivera law firm in Guatemala City