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Figure 12. Rise in Consumer Prices, 1980-89

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Figure 13. Real Gross Domestic Product (GDP) Growth Rate, 1980-89

In the early 1980s, the economy faltered as the international price of petroleum began a gradual decline and the country lost some foreign markets for its traditional agricultural products. Dramatic climatic changes caused by El Niño during 1982-83 produced coastal floods, torrential rains, and severe drought, which were highly damaging to crops and to the transportation and marketing infrastructures (see Return to Democratic Rule, 1979-84 , ch. 1 Climate , ch. 2). The economy also began to feel the pinch of the country's growing external debt, which amounted to US$8.4 billion in 1984. Debt servicing in that year absorbed approximately 60 percent of the country's export earnings. Foreign sources of credit began to dry up as early as 1982, leaving the national government and hundreds of state-owned companies short of capital. Inflationary pressures mounted during the early 1980s consumer prices, which rose 14 percent in 1980, increased by 25 percent in 1982 and by 53 percent in 1983 (see fig. 12).

In March 1983, the government, with an eye toward rescheduling the external debt, introduced several austerity measures, including a second devaluation of the sucre in two years, this time a 21- percent devaluation of the sucre (S/, for the value of the sucre-- see Glossary), a 16-percent rise in the commercial interest rate, and a deceleration of government spending. The government's stabilization program, which included new exchange controls and the reduction of fuel and export subsidies, was unpopular domestically, but it enabled Ecuador to successfully negotiate a new debt repayment schedule with the International Monetary Fund (IMF--see Glossary), which also proved willing to grant Ecuador an additional US$107 million in financial assistance. The government, after several months of negotiation, also concluded multiyear rescheduling agreements with foreign private banks in December 1984 and with the Paris Club (a financial consortium of Western banks and governments) in April 1985. By successfully refinancing nearly all of the public-sector debt, the government narrowly avoided defaulting on payments, and, for the period 1985-89, the external debt-service ratio was reduced from 60 percent of export earnings to a manageable 30 percent. From 1985 until the beginning of 1987, Ecuador paid only the interest on its external debt (see External Debt , this ch.).

The Ecuadorian economy recovered during 1984, partly as a result of temporary stability in the international price of crude oil and partly because of a reb 1000 bound in the agricultural sector. By late 1984, the balance-of-payments current account, which had reflected a US$58 million deficit in 1983, had a US$19 million credit, and the trade surplus reached US$1 billion. The real GDP growth rate was 4 percent, nearly a 7-percent increase over 1983. These improvements in the economy, combined with wage restraints and a tight national government budget, made it possible to reduce the inflation rate in 1984 to 25 percent for the next two years, the inflation rate was contained at about 24 percent.

In 1985 Ecuador withdrew for one year from the Organization of Petroleum Exporting Countries (OPEC) in order to free itself from that organization's export quotas and thus increase oil export revenue. In 1984 petroleum had accounted for about 70 percent of all commodity exports and about 50 percent of the central government's revenues. In 1985 Ecuador earned over US$1.8 billion in revenue from petroleum exports, two-thirds of Ecuador's export revenue that year. But a sharp decline in international oil prices in 1986 resulted in a US$1.1-billion drop in petroleum export revenue. The balance-of-payments current account, which registered a surplus of US$149 million in 1985, showed a US$613-million deficit for 1986. Foreign-exchange reserves declined to US$145 million by mid-1986, and real GDP growth for 1986 came to only 1.7 percent, compared with 3.8 percent in 1985 (see fig. 13). To meet the economic crisis, in January 1987 the government suspended debt repayments to all private lending institutions and imposed a 25- percent surcharge on many imported items.

Febres Cordero had entered office promising prosperity and neoliberal economic reforms featuring governmental efficiency, a free-enterprise approach in managing the economy, and a free-market exchange system that would promote economic deregulation. To fulfill these promises, Febres Cordero removed government price controls, devalued the currency, and eliminated most import quotas. In addition, he reduced import tariffs on industrial raw materials by one-half and invited new foreign investment into the country. Although GDP growth had bounced back from a negative 2.8 percent in 1983 to a healthy 4.0 percent in 1984 and 3.8 percent in 1985, the sharp drop in petroleum export revenue in 1986 and the resulting increase in the fiscal deficit, 81 percent of which was financed through foreign borrowing, brought the nation to the brink of an economic crisis. In 1986 GDP growth fell to 1.7 percent, unemployment went up, and per capita income fell to its lowest level since 1978.

In March 1987, an earthquake destroyed about forty kilometers of the Trans-Ecuadorian Pipeline and its pumping stations, causing a nearly six-month suspension in crude petroleum production and the loss of an additional US$700 million in export revenue. Meanwhile, revenue from other exports--cocoa, coffee, and shrimp--did not increase and failed to compensate for the decline in oil income. The Ecuadorian government acquired a World Bank (see Glossary) loan of US$80 million to help finance the reconstruction of the damaged pipeline, but repairs cost the government a total of US$150 million. GDP fell to -5.2 percent in 1987, inflation inched up to 32.5 percent, and the trade deficit stood at US$33 million. The government responded to its financial emergency by raising domestic gasoline prices by 80 percent and bus and taxi fares by 14 percent. To help make up for the oil revenue shortfall, a consortium of international banks loaned Ecuador an additional US$220 million, bringing public-sector external debt at the end of 1987 to about US$9.6 billion, one of the world's highest on a per-capita basis. (Ecuador's GDP for 1987 was US$10.6 billion.)

During Febres Cordero's last two years in office, his economic team concentrated on implementing monetary reforms, renegotiating the external debt, and encouraging foreign investment. Its efforts were only partially successful. e46 The govovernment failed to hold wages down, and, despite efforts to curtail government spending, public- sector expenditures increased dramatically in 1987 and in the first half of 1988. Ecuador's halting experiment with neoliberal economic measures unofficially came to a close on March 3, 1988, when Febres Cordero announced the end of the free-market foreign-exchange system (see Monetary and Exchange Rate Policies , this ch.). Two months later, on May 8, 1988, Febres Cordero's longtime rival, Rodrigo Borja of the Social Democratic party, the center-left Democratic Left (Izquierda Democrática--ID), was elected president with 46 percent of the vote (see Political Parties , ch. 4).

In contrast to Febres Cordero, Borja advocated an expanded state role in the national economy. During the campaign, he promised to promote industrialization and nontraditional exports and stressed the importance of agrarian reform. Borja, however, inherited a rapidly worsening economy as he assumed office on August 10, 1988 within a month he announced a national economic austerity program that included a sharp devaluation of the sucre, tax increases, new import restrictions, a reduction in public- sector spending, a 100-percent increase in fuel prices, and a 40- percent boost in electricity rates for private households. Borja also opened new negotiations with foreign creditors to whom Ecuador was in arrears for almost US$1 billion. The president, however, refused to lift the suspension of foreign debt payments, imposed by Febres Cordero in 1988, until April 1989 (see External Sector , this ch.).

Borja's austerity policies and the resulting climb in the unemployment rate to 13 percent by the end of 1988, the highest in ten years, spawned strikes by labor unions, public employees, and students. The government, however, continued its anti-inflationary program. Despite government cost-cutting efforts, inflation reached 86 percent in 1988, the highest in the country's history. On the positive side of the economic ledger, GDP expanded by 8 percent in 1988, as petroleum exports returned to pre-earthquake levels.

In an attempt to blunt criticism of his policies, Borja introduced a new package of economic liberalization measures in 1989, including a relaxation of import restrictions, a further devaluation of the official exchange rate to prod exports, and a loosening of banking controls to stimulate the manufacturing sector. About 62 percent of the import items that had been barred since mid-1988 were to be allowed into the country beginning in 1990.

Data as of 1989