Viewpoints on Energy, Geopolitics, and Civilization
Mac Margolis / Bloomberg: Austerity
Bites for Ecuador's President
Fueled by rage.
Ill-timed cuts to fuel subsidies amounted to a self-inflicted wound.
Ecuador's President Lenin Moreno knows something about indigenous politics. Before rising to the top office in 2017, he served two terms as vice president to Rafael Correa, the disruptive caudillo who tapped the frustrations of excluded indigenous communities to fuel his “Citizens Revolution” before they turned on him . Before that, Moreno saw two other presidents fall , in 1997 and 2000, after they clashed with the powerful Confederation of Indigenous Nationalities of Ecuador.
Now Moreno is the target of native wrath. How the usually astute leader failed to foresee the conflagration caused by his Oct. 1 announcement of cuts to fuel subsidies and other austerity measures is a mystery. So are his plans to escape it.
After 11 days of marches, vandalism, looting and clashes with security forces, indigenous-led crowds chased Moreno from the capital Quito to the coastal city of Guayaquil and back again. After appealing for a national dialogue, Moreno on Sunday announced a truce and promised to scrap the offending fuel decree for another negotiated measure. Indigenous leaders in turn agreed to call off their general strike, but tensions still smolder.
Moreno was right to order the dismantling of fuel subsidies. Ecuador's economy is slowing, unemployment is ticking upward and consumer confidence is low. Bankrolling cheap fuel costs Ecuador $1.4 billion a year, distorts prices across the economy, encourages waste and helps the wrong people.
An Andean-sized sierra of policy papers shows that garnishing taxes to keep fuel cheap may please the people, but doing so disproportionately benefits the wealthier classes. The International Monetary Fund found in a study of several developing countries that just 7% of the benefits from fossil fuel subsidies found their way to the poorest 20%.
Nonetheless energy populism is a classic sleight of hand by crowd-trolling Latin American demagogues and authoritarians: Ecuador's fuel subsidies date to the days of military rule . Although low-income earners may get relatively paltry benefits, they come to see cheap fuel as a modest compensation for their misfortune. That makes removing subsidies politically hazardous.
It's even worse if the national leaders do so at the behest of foreign bean-counters like the IMF, with whom the Moreno government signed a $4.2 billion Extended Fund Facility Arrangement early this year. The fund, typically, prescribed broad austerity measures, including a tax reform and changes to the rigid labor code, which discourages hiring, plus an overhaul of the money-hemorrhaging pension system.
Correcting those distortions would go a long way to restoring Ecuador's fiscal health after years of checkbook profligacy. Buoyed by climbing oil prices, Correa lavished money on public works and payroll, driving public debt from around 29% of gross domestic product in 2006 to more than 40% in 2017. He further undermined government accounts by loading up on foreign debt through oil-backed loans, relying on China as Western lenders wary of Ecuador's legacy of defaults kept their distance. Moreno inherited those debts just as oil prices slumped, then added some of his own.
Yet the sudden end to fuel perks triggered an insurrection. You wouldn't have guessed that from the wonks in Washington. In its July report, the IMF argued that scrapping subsidies would have “a relatively small impact” on the poor and that the savings (0.5% of gross domestic product this year) would “create additional space for compensation.” Moreno apparently was counting on just such a trade-off, and offered a $15 monthly family benefit and a government housing plan for the 5 million poorest Ecuadorans.
Monica de Bolle, of the Peterson Institute for International Economics, says that call gets the policy priority exactly backwards. “If you are going to scrap energy subsidies, you create compensations first. Then you transition out of the subsidy,” she told me. “Otherwise you impose an immediate burden on the lowest earners, because fuel prices are inelastic and prices will go up by the amount of the subsidy.” Ecuador's gasoline prices rose 25% last week while diesel better than doubled.
A recent Inter-American Development Bank study had flagged the danger, noting that many countries have tried and failed to remove fuel subsidies. The reason: “even if economically inefficient, subsidies are a visible and effective means to transfer some income to poor and vulnerable households.”
And yet the harsh measure announced by decree was vintage Moreno — a mostly mild-mannered politician nonetheless given to centralizing decision making and then springing fait accompli on a wary public. Recall that in April, Moreno abruptly ordered Wikileaks impresario Julian Assange to vacate the London embassy where he'd taken refuge seven years before. That, too, was the right decision: Assange had become the guest from hell . But the move made the Andean nation a target of nasty street protests and still rankles some citizen groups.
Likewise, the decree ending fuel subsidies came “suddenly, with no public discussion and little apparent preparation,” noted Andres Mejia Acosta, a political scientist and scholar of Latin American politics at Kings College London. “Moreno has a knack for latching onto ideas and then letting off a bombshell.”
Moreno's tempestuousness doubtless delighted his opponents. No one perhaps more than Correa, whom Moreno accused of ventilating discontent to force him to resign or call early elections. Although Correa is ineligible to run again for president, he cheerfully offered his services for any other posts.
Yet Correa's clout is limited. He left Ecuador for Belgium under a legal cloud and has since seen former aides and associates targeted by police or, like his former vice president, jailed for corruption. Even if Correa returns to politics, his abrasive legacy alienated allies and left a fractured opposition .
For all his impolitic ways, Moreno is working on fixing problems he didn't create. His spendthrift predecessor burned through the bounty of the commodities boom and called it a revolution. Moreno got stuck with the check and the riddle of how to break promises no one could keep. Restoring subsidies Ecuador can't afford won't solve the problem. Angry Ecuadorans must decide whether he deserves a chance to finish the job or, like three presidents press-ganged from office in the last three decades, be shown the door.
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Mac Margolis is a Bloomberg Opinion columnist covering Latin and South America. He was a reporter for Newsweek and is the author of “The Last New World: The Conquest of the Amazon Frontier.” Petroleumworld reprint this article in the interest of our readers.
Editor's Note: This article was originally published by Bloomberg, on Oct. 14, 2019. All comments posted and published on Petroleumworld, do not reflect either for or against the opinion expressed in the comment as an endorsement of Petroleumworld.
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