In a shift supported and welcomed in Washington, Latin America has been moving to the right in the last year or so. Three of South America’s largest economies—Brazil, Argentina, and Peru—now have right-wing presidents with close ties to Washington and its foreign policy. The standard “Washington Consensus” narrative, while ignoring any US role in the region, sees the left governments that were elected in South America over the past couple decades as having ridden a commodities boom to populist victories, with handouts to the poor and unsustainable spending. When that boom collapsed, the story goes, so did the finances of left governments and therefore their political fortunes.
But this is a highly exaggerated and self-serving narrative. Ecuador is a good example of how a left government achieved success over the past decade through positive and creative changes in economic policy, as well as financial, institutional, and regulatory reform.
The details are also worth looking at because Ecuador’s experience shows that much of the rhetoric about how “globalization” restricts the choices of governments to those that please international investors is also exaggerated. It turns out that even a relatively small, middle-income developing country can adopt workable alternative policy options—if people can elect a government that is independent and responsible enough to use them.
The results for the decade of left government in Ecuador (2007-16) include a 38 percent reduction in poverty and a 47 percent reduction in extreme poverty. Social spending as a percentage of GDP doubled, including large increases in spending on education and healthcare. Educational enrollment increased sharply for ages 17 and under, and spending on higher education as a percent of GDP became the highest in Latin America. Average annual growth of income per capita was much higher than in the prior 26 years (1.5 versus 0.6 percent), and inequality was considerably reduced.
Public investment as a percent of GDP more than doubled, and the results were widely appreciated in new roads, hospitals, schools, and access to electricity.
Rafael Correa was elected president of Ecuador in 2006 and took office in January of 2007. A former economy minister who was trained in the United States, he set out to fix some of the structural and institutional problems that had kept Ecuador from advancing. Policy was handicapped by the fact that Ecuador had adopted the US dollar as its currency in 2000. This meant that the government couldn’t influence its exchange rate and was limited in how much it could use monetary policy. And it reduced the Central Bank’s ability to act as a lender of last resort to the banking system.
This meant that the government had to be more efficient and creative, and exert more control over the financial system. In 2008, a new constitution was approved in a referendum, and the central bank—which was previously “independent” and mandated to focus on low inflation—was now made part of the government’s economic team. This was very important in coordinating economic policy. The conventional wisdom among most economists—and a pillar of neoliberalism—is that central banks should be independent of elected officials. In practice, this usually means that they are unaccountable to the public, but not so independent of powerful financial interests.