THE ORACLE OF CHANGE

Ecuador 2013 | ECONOMY | FOCUS: PRODUCTIVE MATRIX POLICY

To increase productivity and reduce the country's dependency on imports, the Ecuadorean government is preparing an aggressive overhaul to Ecuador's economic productivity matrix over the next several years.

Public investment policy in Ecuador is set to change in the coming years, according to the Undersecretary for Development Planning, Ana Maria Larrea, who claims the government is putting a special emphasis on overhauling the country's strategies for production.

In September 2012, strong indications from the Ecuadorean Secretary of Planning suggested that the state would be looking to focus on five strategic industries, largely dependent on the incentives received. The five industries under consideration from the government are copper, steel, shipbuilding, refineries, and petrochemicals, particularly fertilizers. In the country's plan for economic transformation, Ecuador hopes to incentivize these industries in order to diversify Ecuador's production and to cut back on the country's reliance on imports, instead using locally produced steel and other raw materials. Officials say these five industries will be the biggest driving engines of growth to transform the Ecuadorean production matrix and consolidate the country's path of development to conform with the National Plan for Good Living 2009-2013 against poverty and inequality. President Rafael Correa expects this will add value to the products and services currently in the Ecuadorean market, while also adding new products to the system.

ECUADOR TODAY

The country is currently experiencing a rise in productivity, macroeconomic growth, and labor output, while also seeing a reduced rate of unemployment and poverty—factors which the government hopes to capitalize on by introducing more changes to the productive matrix. Speaking about the matrix transformation policy in September 2012, Coordinating Minister for Production Santiago Leon said, “change does not mean setting aside what exists now, but rather expanding the productive matrix and improving its composition."

The Ecuadorean economy today is based mostly on exports of oil, bananas, shrimp, gold, and other agricultural goods. Ecuador's estimated GDP for 2012 was nearly $134.7 billion, signifying growth of about 4.4%. In 2012, Ecuador's economic production could be broken down roughly as 58% services, 36% industry, and 8%agricultural products. Previously, oil made up about one-third of public sector earnings and accounted for 40% of export revenues. With such a large portion of this GDP coming from imports and exports, President Correa sees this as a demonstration of an “underused" opportunity for foreign trade and aims to improve the balance with import substitution and the generation of more value-added products.

LONG ENGAGEMENT

However, such bold changes to the economy will not happen overnight. Officials estimate that the economic overhaul will be a complex process that could take at least 20 years to move the country's economy from non-renewable resources to one based on human capacity and technological developments. Thus, Ecuador is developing a 40-year plan broken up into multiple phases.

The opening strategy includes a strategic replacement of specific imports and acquiring technology from other countries in order to improve the agricultural export balance. This will also introduce several new industries, such as steel, metallurgy, refineries, biofuels, petrochemicals, and shipbuilding to the system, helping with market diversification. The second strategy set up aims to generate more added value for products in industries such as plastics, rubber, and petroleum. And the third stage is further selective import substitutions, with which Leon says, “we will ultimately see increased exports of high quality items, such as cocoa, traditional products, and energy."

EXPORTS

The government is hopeful that changing the approach to productivity will improve the country's export situation. At present, around 80% of Ecuador's exports are of primary materials. President Correa has said that the economy is struggling under a structural conflict caused by “production-import elasticity," which occurs when the goods produced in Ecuador generate consistent imports. Thus, the more that Ecuador produces, the more that Ecuador needs to import. “If that structural error is not corrected we will have balance of trade problems," said President Correa, noting that changing the productive matrix is something that should have happened years ago, not just from governmental efforts, but also through encouragement by academia, regional governments, and private enterprises.

GOVERNMENT SUPPORT

In a speech given at the Universidad Técnica del Norte, President Correa also highlighted all of the governmental efforts to promote economic and productive diversification through investment in education, technology, energy, and roads. Further investments in mining and energy are also expected in the new policy change.

President Correa emphasized that poverty was the greatest threat to the nation's development and stressed that economic diversity and changing the productivity matrix was key to resolving those issues, saying that La Revolución Ciudadana (The Citizens' Revolution) project has helped over a million Ecuadoreans break out of the cycle of poverty. He also stressed the importance of continuing to improve quality, human capacity, and knowledge, in terms of further developing the economy and domestic production.

ENERGY

A decline in oil drilling is anticipated to coincide with this economic transformation, likely to play a role in the overall transformation. To make up for this, and bridge the already-present gap in energy demand, the President has also announced plans for investment in and the construction of eight new hydroelectric projects, such as the Coco Coda Sinclair project. With these new hydroelectric plants coming on board, the Ecuadorean government is expecting an energy surplus by 2016, and changing the productive matrix policy is seen as key to taking advantage of this fact. The hope is that that Ecuador can soon become an exporter of energy, which, in turn, will allow for further development and economic growth.

Also included in the new productivity policy are plans for better management of financial resources and incentives, such as public bank loans for the specified strategic sectors. There will also be a growing emphasis on banking and consumption, with the government hoping that it will spur participation in stock market financing with tax incentives and procurement preferences. Coordinating Minister Leon estimates that the value-added from the production matrix overhaul will “easily add up to $50 billion." With investments from foreign companies already pouring in, the future looks bright for Ecuador and its bold plans to transform its economy.