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Ecuador at the cross-roads, for an integral audit of public indebtedness
Chapter 4 : The socio-economic impact of the debt
by Stéphanie Jacquemont
15 August 2007

Chapter 4 : The socio-economic impact of the debt

A. An unsustainable debt burden imposed by the creditors
B. Economic policies imposed by the creditors
C. The social and economic consequences

  • Increasing poverty, rising inequalities and worsening living conditions
  • Mass emigration
  • Destruction of the environment
  • Non respect of commitments

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There have been encouraging signs since 2007 indicating that Ecuador wants to restructure its economy, especially its policies on debt, so that - at long last - the economy can actually serve the Ecuadorians.
This about-turn comes after years of taking the country into massive debt under economic policies which have enriched a minority and impoverished the majority of the Ecuadorians and lead the country into its present state.


Looking at the ratios which are most commonly used to analyse the debt of a country, leads to the conclusion that Ecuador’s debt has reached unsustainable levels. For years, debt servicing has taken up the major part of the country’s revenues. And the debt is relentlessly rising as the country continually borrows more to service existing debts.
Over the period 1970-2006, the external debt as a whole (private and public debts) rose consistently. Various minor rescheduling agreements never managed to stop its spectacular rise from 241 million USD in 1970 to 16 995 million USD in 2006.
This external debt has exceeded 40% of the GDP for the last two years, but actually the average over the whole 1970-2006 period was close to 61% of the GDP, which is 2.72 times the average export earnings. In fact, Ecuador is being bled dry, since by comparing the difference between the amounts received from foreign lenders and the amounts these lenders have received in repayment, we can see that the net transfer on debt is extremely negative for Ecuador. Over the period 1970-2006, more than 13.5 billion USD left Ecuador to fill the coffers of the various creditors as part of the external debt mechanism [1]. It is clear that the debt has become a tool of domination and a means of looting the debtor countries. It has been created by and for the creditors.

Source : Leonardo Vicuña Izquierdo and the Central Bank of Ecuador

Concentrating on the public part of the external debt shows that the net transfer on this part alone is just as negative. Between 1982 and June 2006, 13 558 million USD were transferred to foreign creditors [2]. Between 1982 and 2006, the State paid back 11 957 million USD to the multilateral organisations: the World Bank (WB), the Inter-American Development Bank (IDB), the Andean Development Corporation (CAF), the International Monetary Fund (IMF) and others. At the same time the country received 10 920 million USD in new loans [3]. This means there was a negative net transfer of 1 037 million USD in favour of these organisations, while at the same time, the total debt stock actually went up. The figures make it difficult to believe that these organisations are really acting in the interests of the debtor countries as they would have us believe. It also has to be pointed out that concessional loans concern only a small part (14%) of the total 980 million USD debt [4] owed to the Paris Club member countries.

Servicing the external public debt has taken up a considerable part of the country’s export revenues (an average 48% over the period 1970-2006). Since the year 2000, the weight of the external public debt compared to the GDP or export revenue has somewhat decreased, as can be seen in the following table:

YearExt Public Debt (USD millions)Ext Public Debt : GDP (%)Ext Public Debt : Export revenue (%)
1976 635.8 11.96 50.56
1986 8977.5 85.38 410.72
1996 12628 59.38 259.16
2000 11335.4 71.14 230.09
2001 11372.8 53.52 243.09
2002 11388.1 45.74 226.13
2003 11493.2 40.14 184.70
2004 11061.6 33.89 142.68
2005 10851 29.74 107.44
2006 10215.3 24.98 80.26
Source : Leonardo Vicuña Izquierdo and the Central Bank of Ecuador

However, it’s not a simple as that, because in fact one of the reasons the external public debt went down was because the capital of the commercial debt was reduced in the year 2000 at the time the Brady Bonds were exchanged for Global bonds (see Chapter 5). However, the high interest rates of the Global bonds will cause the debt to increase rapidly over the next few years. Furthermore, the GDP was artificially inflated by “dollarisation”, which gives the impression that the weight of the debt has gone down and that the situation is improving, whereas in fact it is not. Finally, this slight improvement of external debt indicators should not be allowed to hide other facts – namely the sharp rise in private foreign debts (the private part of the external debt went up from 16% to 37% between 2000 and 2005 [5]); and also the ongoing increase in the internal public debt. Basically, what has happened is that the State has replaced the long term external debt by short term internal debts at higher interest rates while at the same time the private actors are taking out heavy external debts. Obviously, this is not a healthy situation and it does not free the State from external pressures. As was seen at the time of the “sucretisation” (see Chapter 2), a state may nationalise the private part of the debt under pressure from the creditors, and become obliged to repay the foreign banks at a high rate in order to avoid the collapse of companies and the whole economy. Furthermore, the fact that the internal debt is at high interest rates over the short and medium term could create problems of creditworthiness for the State.

Source : Leonardo Vicuña Izquierdo and the Central Bank of Ecuador

Thus, although the external public debt is going down, public debt servicing, which concerns both internal and external debts, has risen steadily in absolute terms between 2000 and 2005, rising from 1 680 to 2 828 million USD (i.e. 35.7% of the central government’s budget in 2005!) [6].
This change in the composition of Ecuador’s public debt, with the relative weight of the external debt becoming lower does not improve the sustainability of this debt since the servicing of the external debt remains a large item on the budget, while the amount needed to service the internal debt is going up.
Moreover, this new scenario does not mean that the external creditors will take the pressure off. On the contrary there will be no change in the pressure put on countries to repay the external creditors, which means the latter will continue to push for policies whose sole aim is to repay the creditors at any price, and with total disregard for the fundamental human rights of the population.


The debt mechanism is a means of both looting and dominating debtor countries and Ecuador is a text-book example. Not only does debt servicing take up considerable resources, but the debt is also used as a means of imposing policies which make the country increasingly dependant. Measures are imposed which aim to enable the country to pay the creditors, to attract international investors and to stop auto-centred development so that the country remains connected to the world market and dependent on foreign capital.

Thus the IMF, by means of a series of letters of intention signed with Ecuador (9 since 1983) and its structural adjustment plans, and the World Bank, by means of aid strategies, have imposed the neo-liberal policies of the Washington Consensus. These policies – set up to maintain macro-economic stability - are clearly designed to benefit the creditor countries :

-  fiscal discipline required from the State to free up sufficient public funds for the country to fulfil its obligations as debtor. This fiscal discipline means less State spending, hence budget reductions, privatisations etc. Thus, in 2003-2004, the IMF imposed policies which meant public sector workers had their wages frozen, 30 000 civil servants were made redundant, pensions were frozen, etc., as primary expenditure was not to increase by more than 3.5%. As for the tax reforms imposed, they were made up of the most unjust means of taxation since most of the tax revenue came from VAT, which hits the poor hardest. In 2006, 50% of tax revenue came from VAT, while only 28% [7] came from income tax and tax on profits. In the same way, the steady price increase of public services, meant to generate revenue for the State, also impacts the poorer households more severely.
- opening up the market, financial market liberalisation and privatisations enable foreign companies to freely invest in the country. This competition is supposed to increase economic efficiency, but is in fact a source of instability. The free movement of capital encourages speculation -short term investments are free to enter and leave the country-and when longer term foreign investments are made, the profits generated are repatriated. Finally, privatisation and the free market have brought foreign companies and their products onto the market and ousted local producers who were unable to compete.
2.- export incentives should provide the hard currency necessary to pay the debt, and at the same time ensure that the countries of the North have access to resources such as oil, agricultural products (shrimps, coffee, cocoa, etc.). Therefore in 2002, the IMF had the FEIREP created (Fondo de Estabilización, Inversión y Reducción del Endeudamiento Público - Stabilisation, Investment and Public Debt Reduction Fund) When the fund was created with the oil revenues, the law stipulated that 70% of the money was to be allocated to servicing the debt and buying up Global bonds to keep their rate high. Furthermore, there were successive devaluations which were intended to boost exports. However this type of growth - turned towards satisfying external needs - does not enable the local production system to grow nor to satisfy local needs. It is usually primary products which are required for export, and this involves both overexploiting the natural resources (oil, forests, etc) and wreaking havoc on the environment. Moreover, local demand is met by imported products which the free market makes available at prices so low that the national companies cannot compete with them. Devaluation, which aims to boost exports, makes the cost of imports and servicing the debt much higher.

These policies of the monetary funds are clearly a failure. Economic growth has remained extremely limited, and the GDP per capita even went down between 1985 and 2000, dropping from 1279.7 to 1259.9 in constant (2000) US dollars [8].
Although the situation seems to be improving since 2001 (the GDP per capita in 2005 was 1535 USD) it is above all because of the increase in both oil production and the price of oil. However, not all of the oil revenue goes to the State, since a large part remains with the foreign companies. If oil exports are excluded, it can been seen that the balance of trade was consistently negative between 2000 and May 2006 [9]. All of these policies imposed by the IMF have created structural imbalance and chronic instability which culminated in the 1999 crisis.
The debt is not only responsible for policies being put in place whose sole aim is to ensure debt servicing, but it also deprives the country of resources that normally should be invested in the development of the national economy. The budget is completely imbalanced and social spending is ridiculously low compared to the amounts spent on debt repayment.
The State budget is far too dependant on internal and external borrowing and the fact that oil revenue is so central to the budget is not good since oil prices are so volatile. Tax revenues are too small and unfair - due to the policies imposed by the international financial institutions (IFI) which impose reductions in progressive taxes such as the taxation of income and profits, while at the same time demanding an increase in the most regressive of taxes, namely VAT, which is proportionally much harder on the poorer people.

These unbalanced resources are complemented by unbalanced expenditures - servicing the external public debt over the period 1980-2005 took up on average 66% of the central government’s budget. [10]. As Hugo Arias Palacios so clearly sums it up, servicing the debt is a “leech endlessly sucking the financial resources and a straightjacket for the budget” [11]
The percentage of the budget which went into servicing the public debt between 1995 and 2006 was always consistently higher than that of education, culture, health and communal development.

Budget spending (in USD millions)

YearSpending (including amortisation and interest)Education and cultureHealth and communal developmentDebt servicing
2000 4034.7 416.4 146.9 1680.3
2001 5488.5 492.8 188.6 1827.9
2002 5505.7 694.3 259 2019.9
2003 6187.7 675.7 309.9 1950.7
2004 7323 858.3 371.3 2652.4
2005 791.7 946 422.9 2827.6
2006 9022 967.2 469.8 3837.3
Source : BCE, Boletín Estadístico Mensual, February 2007

The ratios calculated by the IDO [12] highlight a very worrying situation – for example, in 2001, the budget for debt servicing was almost 10 times higher than that for education and 6 times higher than the health budget. Other figures, which come from UNICEF as quoted by Alberto Acosta, [13] show that the total 15.7 billion USD spent on debt servicing between 1990 and 1999 is equivalent to 135 years of governmental health spending!
This lack of social spending means that the State is actually in breach of its own constitution which guarantees the respect of human rights and makes this the highest duty of the State (art. 16 of the Constitution).
For the health sector, the Constitution says that “the health budget will increase each year in the same proportion as the current revenue of the central government’s budget. There will be no reductions in health spending
This was not respected by the Mahuad government in 1999, when the current revenues increased by 40.66% between 1998 and 1999, whereas health spending increased by only 22.18%. The result was that the Centro de Derechos Económicos y Sociales [14] (Centre for Economic and Social Rights) made a legal appeal on the grounds that this was unconstitutional.
The situation is the same for education and the eradication of illiteracy, which, according to article 71 of the Constitution, should receive 30% of the current revenue of the State. In 2006, the budget for Education and Culture was 967.2 million USD, i.e. barely 25% of the current revenue.
Furthermore, the State has sidestepped its duties by manipulating the accounts. Simply underestimating the oil revenues in the budget by fixing a price far lower than that expected, meant that the excedent could be added to funds such as the FEIREP. On the 31 January 2003, the government also decided that only 10% of the budget allocated to education and health were to be included in the State’s general budget, and thus the remaining 90% were not under scrutiny from parliament [15].


It is clear that the neo-liberal remedies of the creditors have not worked. The various injections of loans have kept the “patient” just sufficiently alive to be able service these loans. And the creditors are continuing to “bleed” Ecuador. The reduction in the Education, Health, Social Services and Agriculture budgets has seriously undermined the living conditions of the majority of Ecuadorians, and the State has systematically favoured enriching a small and already rich minority. The policies put in place during the 1999 crisis are a good example. While 1140 million USD [16] was being invested to save a small number of banks, peoples’ savings were frozen and nurses, doctors, teachers etc. were not paid their salaries!

Increasing poverty, rising inequalities and worsening living conditions

The result of these policies has been an increase in poverty and extreme poverty and the accumulation of wealth in the hands of an oligarchy. Over the period 1970-2005 poverty considerably increased. In 1970, 40% of the population was living below the poverty threshold, whereas this figure had reached 61% by 2005 [17]. Poverty considerably worsened during the 1999 crisis. Between 1995 and 2000, the number of poor rose from 3.9 million (i.e. 34%) to 9.1 million (i.e. 71% of the population), while extreme poverty doubled, and concerned 31% of the population in 2000. However, the rich have consistently become richer. In 1990, the richest 20% of the inhabitants received 52% of the revenues whereas 10 years later they monopolised 61% of the revenues. People in rural areas and especially smallholders are becoming poorer as they are most affected by the open market, increases in the cost of inputs, the privatisation of land etc.
According to a 2003 FAO report the poverty is creating problems of malnutrition, since although the food available in the country should be enough to cover the requirements of the inhabitants, the inequality in revenues means the poor cannot afford sufficient food [18].

This increasing poverty also affects access to health and education. Job insecurity, the increase in unemployment and the reduction in salaries leads to more and more children dropping out of the school system in order to help support their families. The low education budget means that access to education and the quality of education offered are deteriorating. Schooling lasts on average 6 years for the nation as a whole, but only 3.9 years in rural areas [19]. The rate of secondary school attendance was only 52% in 2004 [20]. 25% of the population is functionally illiterate.
The data concerning public health are also worrying. At the level of the country as a whole 50% of the children suffer from chronic under-nourishment (70% in mountainous areas), 72% of babies under 1 and 40% of pregnant women are anaemic, only 7 out of 10 Ecuadorians have access to basic health care, and each year some 50 000 Ecuadorians who need hospital care do not get it [21].

Even the IMF agrees that insufficient means are invested in social services. In its June 1999 report entitled “Ecuador: Social Protection and the Economic Crisis” it said that “the social conditions – the level and distribution of revenues, health care and education – in Ecuador are below the Latin-American average.” [22]

Mass emigration

There has been a mass exodus from Ecuador for several years, especially just after the 1999 crisis when it was estimated that some 700 000 to 800 000 people fled the country i.e. more than 10% of the economically active inhabitants. This has obviously artificially lowered the unemployment figures. Most of the emigrants are educated people, and their leaving deprives Ecuador of a qualified workforce. It should be noted that these emigrants participate in the national economy through the money they send back. In the year 2000, this incoming money was estimated at 10% of the GDP, which in fact helped to maintain consumption within the country and thus filled the gap left by the State, who invested very little in social spending in order to service the debt. In 2000 and 2001, it is estimated that the amount sent to the country by Ecuadorian expatriates (1364 and 1430 million USD respectively) was greater than the revenue from exporting bananas, shrimps, coffee and cocoa (1167 and 1136 million USD in 2000 and 2001) [23]. Thus it can be seen that emigration acts as a safety valve which has helped the social situation from deteriorating farther. But it also has negative effects such as inflation, increasing imports (part of the money received from the migrants - 17% according to the IDB – is used to buy non-essential foreign-made consumer goods) and induces a dependence on external resources to satisfy internal needs. In fact, emigration enables the State to withdraw somewhat from social questions, since it softens the catastrophic effects (poverty, unemployment) generated by the crisis and the payment of an unsustainable debt.

Destruction of the environment

On top of the social debt supported by the Ecuadorian people, there is the environmental debt which must be considered too. The Ecuadorian external debt was used to finance projects with total disregard for the impact of those projects on the environment. The development of exports, imposed by IMF demands, leads to the overexploitation of natural resources, large scale production which totally destroys the natural ecosystems, threatening the traditional way of life of thousands of Ecuadorians and reducing their source of income.
Take for example oil, which has been over-exploited in recent years in order to be able to service the debt. This has in no way contributed to national development – quite the opposite in fact, since the cost of damage caused by oil extraction in the north-east of the country is 50 times as high as the value of the debt. The damage is of several kinds – deforestation, pollution of the waterways, soil erosion, resettlement of the local inhabitants, etc.
Another outstanding example of ecological damage is the production of shrimps, 90% of which are destined for export. This activity was enthusiastically encouraged by the IMF (increasing exports) and loans from various multilateral organisations were used to develop production. Shrimp farming has involved the destruction of the mangrove swamps (70% of which has disappeared today), a rich ecosystem which was a source of revenue for the local inhabitants, a natural barrier against both floods and salinity of the soil. Shrimp farming was even developed in areas where aquaculture was actually forbidden by law! Environmental defence movements such as Acción ecológica claim that Ecuador is owed an ecological debt much greater than the debt which is demanded from the State.

Non respect of commitments

The disastrous socio-economic consequences of servicing the debt beg the question of it legitimacy and the respect of a series of rights guaranteed by the Constitution and by various international texts which were signed by Ecuador. As has already been pointed out, by devoting more resources to servicing the debt than to education, health services and the reduction of poverty, the State is guilty of not respecting rights which are supposed to be guaranteed by the Constitution and the rules for budgets contained therein. It should be remembered that, according to the Constitution, defending human rights, creating sustainable economic growth, ensuring balanced equitable development for the benefit of all, eradicating poverty and promoting economic progress are all fundamental duties of the State. In fact, the Constitution holds the State the guarantor of rights included in international declarations, treaties and conventions.
Thus, by signing the ICESCR - the International Covenant on Economic, Social and Cultural Rights in 1966, the Ecuadorian state agreed to guarantee the right of all persons to “an adequate standard of living for himself and his family, including adequate food, clothing and housing, and to the continuous improvement of living conditions.” the right to “be free from hunger” », the right to “the enjoyment of the highest attainable standard of physical and mental health” and the right to education and social security. All of these rights have been flouted because servicing the debt was given priority. Interpreting the obligations of this treaty, the UN Economic and Social Council declared “a member state in which a large number of individuals are deprived of basic foods, primary health care, decent clothing or housing or elementary education is not fulfilling its obligations as laid down by this Covenant”.

Ecuador also ratified the UN’s December 1986 Declaration on the Right to Development1. In its introduction this Declaration states that “development is a comprehensive economic, social, cultural and political process, which aims at the constant improvement of the well-being of the entire population and of all individuals.This right to development supposes “the right of peoples to self-determination », and also «the right of peoples to exercise, (…) full and complete sovereignty over all their natural wealth and resources”. The State, who is the main actor in the implementation of this declaration, is to ensure that “appropriate economic and social reforms should be carried out with a view to eradicating all social injustices.”(article 8), while the development is to be founded “on the basis of their (the population’s) active, free and meaningful participation in development and in the fair distribution of benefits resulting thereof”.

Because of the debt and its repayment, the people of Ecuador have been deprived of their right to freely choose their mode of development, and also of sovereignty over their natural wealth. The IFI impose their conditions and – often with the complicity of the State – sell off the resources, make debt servicing a priority, carry out policies which benefit only a minority and neglect their duty to the majority of the citizens - in such a way that, when economic growth does occur, it deepens the inequalities. This is why the debt, and all the accompanying measures (structural adjustments, stranglehold on natural resources, etc.) seriously hinder the people’s right to development.
Finally, Ecuador pledged to achieve the Millennium Development Goals [24]. Yet if nothing is done to reverse the existing trend, and if the State continues to devote more money to servicing the debt than to satisfying its citizens’ most fundamental needs, we can share Hugo Arias’s [25] fears that most of the Millennium Development Goals (to reduce by half the 1990 percentage of people living in extreme poverty, to ensure that children have an education up to the age of 10, to reduce by half the number of people without access to drinking water compared to the number in 1990…) – which it should be noted are far more modest than the ICESCR, or the Declaration on the Right to Development – will not be reached by 2015.

Considering all the direct and indirect negative effects brought about by the debt, repaying it is unlawful, unjust and immoral. In the holy name of debt repayment and access to international credit, fundamental laws of the State are flouted, as are the economic, social and cultural rights of the majority of Ecuadorians. It is intolerable that these rights should be ignored, subordinated to the wishes and whims of the creditors of a mainly illegitimate debt.

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This collective work was carried out in July 2007 at the request of AFRODAD ( by a team at the CADTM composed of Benoît Bouchat, Virginie de Romanet, Stéphanie Jacquemont, Cécile Lamarque and Eric Toussaint.

It was revised by Myriam Bourgy, Damien Millet and Renaud Vivien.

The English translation was done by Elizabeth Anne, Vicki Briault, Judith Harris and Christine Pagnoulle.

Footnotes :

[1Leonardo Vicuña Izquierdo, Apéndice estadístico, p.15. CEIDEX, Tercer volumen

[2Hugo Arias Palacios, Impacto económicoand medium , social y ambiental de la deuda soberana del Ecuador y estrategias de desendeudamiento, p.46. CEIDEX, Tercer volumen

[3Hugo Arias Palacios, op. cit., p.39

[4Ibid, p.42

[5Ibid, p.33

[6Leonardo Vicuña Izquierdo, op. cit., p.31

[8Hugo Arias Palacios, op. cit., p.61

[9Ibid, p.63

[10Leonardo Vicuña Izquierdo, op.cit., p.29

[11Hugo Arias Palacios, op. cit., p.53

[13Alberto Acosta, “Deuda externa y migración: una relación incestuosa (I )”, 09/09/2002,

[14Centro de Derechos Económicos y Sociales, Un continente contra la deuda: perspectivas y enfoques para la acción. Quito: CDES, 2000. Annexe 3. The outcome of this affair was disappointing. In June 2000, the case was rejected by the constitutional court which declared itself incompetent in matters of budget, since there was no actual law which covered this point. It also declared that it was no longer relevant to make a decision concerning the 1999 budget, since this was no longer in effect.

[16Centro de Derechos Económicos y Sociales, op. cit., p.283

[17Norma Mena, Endeudamiento, ajuste estructural, calidad de vida y migración, p.13. CEIDEX, Tercer volumen

[19Hugo Arias Palacios, op. cit., p. 66


[21Hugo Arias Palacios, op. cit., p. 66-67

[22Centro de Derechos Económicos y Sociales, op. cit., p.418

[24These goals aim, by 2015, to reduce extreme poverty and hunger; to ensure primary education for all; to promote the equality and autonomy of women; to reduce infant mortality; to improve maternal health; to combat HIV/AIDS, paludism and other diseases; to ensure a sustainable environment; to set up a world partnership for development.

[25Op. cit., p.97-102

Stéphanie Jacquemont