Ecuador: Selected Issues and Statistical Annex

The crisis in the banking sector was one of the major contributing factors that led Ecuador to abandon its own currency and introduce the U.S. dollar as legal tender. However, to illustrate the weak growth performance of the country, it is necessary to examine the structural weaknesses in the labor market, the tax system, and the trade system. These weaknesses resulted in the increase in poverty and inequality. This paper provides a brief summary of recent economic developments and statistical data on economic indices of Ecuador.

Abstract

The crisis in the banking sector was one of the major contributing factors that led Ecuador to abandon its own currency and introduce the U.S. dollar as legal tender. However, to illustrate the weak growth performance of the country, it is necessary to examine the structural weaknesses in the labor market, the tax system, and the trade system. These weaknesses resulted in the increase in poverty and inequality. This paper provides a brief summary of recent economic developments and statistical data on economic indices of Ecuador.

VII. Poverty and Social Safety Nets 67

111. Already before the current economic crisis, Ecuador was a country with a high degree of poverty. According to the results of the Living Standard Measurement Surveys carried out by the government in the middle of this decade, approximately one-third of the population could be considered poor, and around 10-12 percent of the population lived in extreme poverty (Table VII.1).68 Poverty is concentrated especially in rural areas, where approximately two-thirds of all poor people live. Regions with the largest presence of indigenous people, in particular the rural areas of the Amazon, also seem to be among the poorest; in such regions access to basic services is limited and social indicators are consistently below the national average. However, the largest absolute number of poor people can be found in the mountainous and coastal zones.

Table VII. 1.

Ecuador: Rates of Poverty and Indigence

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Sources: Central Bank of Ecuador; unpublished INEC information; and Fund staff estimates.

Percentage of population in households with estimated monthly per capita income lower than half the amount required to purchase a subsistence basket of goods as defined by the IDB (1995). In 1998 the cutoff was S/. 92,487.

Percentage of population in households in which total consumption is less than half the cost of the INEC “basic basket.”

Defined as double the income of the indigence threshold.

Defined as double the consumption (in cash terms) of the indigence threshold.

A. Impact of the Economic Crisis

112. The economic crisis has resulted in a dramatic deterioration of poverty indicators in 1998-99. The share of the population living in poverty has increased—from around ⅓ percent in 1995 to around 40 percent in 1999, with almost two-thirds of the rural population in coastal and mountainous regions living in poverty. The share of the population living in extreme poverty increased to around 15 percent including almost one-third of the rural population, up from around 20 percent prior to the onset of the crisis. The increase in extreme poverty appears to have been the strongest in the eastern or Amazon region.

113. In the countryside, virtually all of the increase in poverty coincides with an increase in extreme poverty. By contrast, in the cities, the increase in poverty has not been accompanied by a similar increase in extreme poverty (Table VII. 1), but rather to the impoverishment of those groups that were already vulnerable to poverty in 1998. One important reason behind this is the large number of households vulnerable to poverty, such that even a relatively small decline in incomes and consumption would shift them below the poverty threshold (Figure VII. 1).

Figure VII. 1.
Figure VII. 1.

Ecuador: Distribution of Monthly Per Capita Consumption in 1998 and 1999

(By Population Decile)

Citation: IMF Staff Country Reports 2000, 125; 10.5089/9781451811773.002.A007

Sources: BCE, INEC and Fund staff estimates.

114. The deterioration in poverty indicators has come about through several different channels; the most important of which probably has been the impact of the crisis on the real economy. The economic crisis resulted in a sharp decline in output, incomes, and employment, in addition to inflationary pressures generated in part by devaluations. Government calculations suggest that, between mid-1998 and mid-1999, primary incomes increased by 10 percent and minimum wages by 39 percent—both well below the inflation rate of about 55 percent for the same period. During the same period, the overall employment rate in the largest cities fell from 91.5 percent to 84.4 percent, and there was a significant shift of employment out of the formal sector and into the informal sector. In addition, there seems to have been an increase in participation rates and in employment of seniors, partly in response to the deterioration in the real value of pensions. Although the information base does not allow for verifying this, it is also quite likely that child labor has increased during the crisis.

115. The resurgence of poverty in the coastal zone, on the other hand, is in large part the direct result of the effect of El Niño on the cultivation of rice and maize. In addition, El Niño destroyed a substantial part of the infrastructure in this zone, left several thousand families homeless, and increased the incidence of diseases such as malaria, dengue fever, and cholera. This combination of factors also resulted in a major nutritional deficiency and a rise in infant mortality, despite government efforts to mitigate these effects.

B. Current Instruments of Social Protection

116. The current system of social protection is based on cash transfers, infrastructure programs, price subsidies, and other social protection measures.

117. Cash transfers through the bono solidario. This “bond” was introduced in September 1998 to mitigate the impact on poor people of the elimination of the subsidies on gas, fuels, and electric power. It consists of a money transfer targeted to poor mothers with children under 18 years of age and seniors over 65 years of age. The amount of the transfer was initially set at S/. 100,000 a month for mothers and S/. 50,000 a month for seniors. In April 1999, these amounts were increased to S/. 150,000 and S/. 75,000 a month, respectively, and coverage was extended to include the disabled, with the same benefits as for seniors. These nominal amounts are to be adjusted only on a discretionary basis, at unspecified intervals. To gain access to the transfer, the beneficiary household must have a monthly income of less than S/. 1 million and its members cannot be employed in the formal sector, be affiliated with the social security system, or have a vehicle or bank loans.

118. Infrastructure programs, mainly through the emergency social investment fund (FISE) and the solidarity fund. The emergency social investment fund was created in 1993 for the purpose of implementing infrastructure programs that would benefit the most vulnerable segments of the population during emergencies, including through generating employment via labor-intensive projects. FISE channels resources from the IDB, World Bank, and the CAF to these projects, which require a local counterpart of 10 percent. The solidarity fund was created in August 1998. This fund is capitalized with the resources from the privatization of public enterprises and from public works concessions. The constitution establishes that the yield from the fund’s assets must be used solely for social expenditure. In the course of 1999, 25 percent of the fund’s income must be allocated for reconstruction on infrastructure affected by El Niño; 15 percent is earmarked for the free maternity program, and the rest is to be used as the local counterpart for social projects financed by multilateral lending.

119. Price subsidies on cooking gas and electricity. Traditionally, the government has granted subsidies to consumers of these and some other commodities (mainly fuels and other utilities). As the principal, and, in some cases, the only producer or importer of these goods and services, the government has granted these subsidies by fixing consumer prices below the opportunity cost—sometimes even below the cost of production—of producing these goods and services. In September 1998, the government decreed an increase of more than 400 percent in the price of cooking gas, thereby eliminating the existing subsidy. However, the new price was fixed in sucres and the subsidy quickly reappeared as the price of petroleum increased and the exchange rate depreciated. On May 25, 2000, the government introduced price increases of 65-92 percent for diesel and gasoline and of 90-333 percent for other derivatives. This sharply lowered the subsidy on fuels: from an average of 35 cents per gallon to an average of 8 cents per gallon or 13 percent. But it left unchanged the subsidy on cooking gas, which currently retail for US$1 per 15 kg cylinder, compared to an import cost of US$3.14 and an average retail price in neighboring countries (Bolivia, Colombia, and Peru) of US$4.19. The government has also implemented several increases in electricity prices; in September 1998, in January 1999, and, most recently, in May 2000, when prices were raised by an average of 70 percent in one step combined with 4 percent monthly adjustments thereafter.69 This latest increase would allow electricity companies to cover their own operating costs, but prices would still be significantly below long-term marginal cost.

120. Other programs. A great number of other programs have been established over the years to address various aspects of social welfare, including nutrition, health, education, and child care. In the nutrition area, the main program is the school meal program of the ministry of education, which supplies breakfast for children attending public schools in poor areas. This program has recently been supplemented with a school lunch program. As regards health, the mother/infant care program of the ministry of health seeks to reach pregnant mothers and children up to two years of age. The program offers free medical consultations as well as food supplements. In addition, current legislation stipulates that childbirth must be free for all Ecuadoran women. The ministry also carries out periodic vaccination and epidemic control campaigns throughout the country, which are fundamental for the prevention of epidemics. The ministry of social welfare and NGOs also have programs for the integrated care of children under six years of age, currently covering some 100,000 children.

C. Assessment of the Current System

121. Despite the fairly large number of social protection programs and the substantial resources devoted to them (4.7 percent of GDP budgeted for 1999 including 1.2 percent of GDP for the bono solidario), they have not been able to prevent a sharp increase in poverty during the crisis, mainly because of inadequate targeting, substantial regressivity, overlapping functions, and poor oversight and control.

122. The targeting of the bono solidario is inadequate. Although this program has been quite successful in providing relief to a large segment of the poor population, it is also highly likely that more than a quarter of the current recipients should not be eligible for the cash transfer. Eligibility is determined on the basis of self-selection and self-reporting of income, providing an important incentive for underreporting. Of all beneficiaries, 47 percent report that both the beneficiary and the spouse have a permanent job, and an additional 40 percent report that at least one of the spouses has a permanent job. Also, comparing the incomes reported by beneficiaries of the bond with incomes reported in the 1998 Living Standards Measurement Survey, it appears that the incomes declared by beneficiaries of the bono are 33 percent less than those of the target group.

123. The system of price subsidies is regressive. According to the 1995 Living Standards Measurement Survey, the richest 20 percent of the population consumed approximately 35 percent of electricity. By contrast, the poorest 20 percent of the population consumed only 10 percent of electricity (see next chapter). Consumption of cooking gas was far more equally distributed; however, the very poorest segments of the population, living in remote rural areas, typically use firewood rather than gas. An additional source of regressivity arises from the distribution of the bono solidario, where payments are made through the banking system. Since this system, and the branch network, is far better developed in cities and urban areas than in rural areas, the distribution tends to favor the urban population, in a situation where the incidence of poverty is greater in rural areas. The coverage of these bonds is, therefore, well below target in rural areas (Table VII.2).

Table VII. 2.

Ecuador: Urban Rural Breakdown of Beneficiaries of the Bono Solidario and of Poor Segment of the Population, 1999

(In percent of total population)

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Source: INEC; and Fund staff estimates.

124. Other shortcomings, such as overlapping functions and poor oversight and control, have been a problem with the infrastructure programs and other social programs. The solidarity fund, in particular, has come under criticism for lack of transparency in how resources are allocated and the discretional powers enjoyed by its executives.

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Prepared by Erik Offerdal, on the basis of FAD technical assistance.

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Poverty defined as households with an income below the value of a defined consumption basket. Extreme poverty defined as income below half the value of this consumption basket.

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Also, the direct subsidy to small consumers (below 150 kwh/month) was replaced with a system of cross-subsidies between large and small consumers.