Updated: Aug 27, 2019
Latin American countries have long been subject to foreign powers' investment and abuse- first, the European colonial empires, then the US through the Washington Consensus, and now the Chinese debt trap. The Ecuadorian government has to react quickly if they do not want to get stuck in another cycle of neocolonial rule.
China has recently begun using neocolonial economic tools with developing countries. As China has become more wealthy and an increasing skepticism of Western financial institutions, developing countries like the Maldives, Djibouti, and Ecuador have taken enormous loans from China to carry out infrastructure projects. While it is not uncommon for large countries to make loans, this arrangement is particularly troubling because China is fulfilling these loans without requiring the debtor nation to prepare a repayment plan. In particular, Ecuador received Chinese loans to create the Coca Codo Sinclair Dam, which sits near a volcano, for which they are now repaying with 90% of their oil since they do not have the money to do so. Previously, Europe and America have been the biggest culprits of neocolonial lending by using the IMF and World Bank to keep developing countries in a debt and poverty trap; now, China has become so wealthy that it is now using its own financial institutions such as the Asian Export-Import Bank to accomplish the same international power. In order to solve these structural problems, it is necessary to address how countries develop “correctly” as models for structural change. This is not easy as even history works against those developing countries.
Ecuador, as most countries in Central and South America, was once a Spanish colony used for the extraction of resources and only developed insofar as it promoted that goal. This led Ecuador to be dependent on commodity exports like oil since other industries were not prioritized as in developed nations. So while Ecuador’s economy has diversified somewhat, they still cannot afford to pay back billions in loans to other countries. Commodity prices fluctuate often and typically sell for low prices, and since Ecuador’s economy is mostly comprised of primary commodity exports, they cannot develop a surplus budget. In other words, without capital that can compete with other countries, they can never accrue enough money to build their national economy and pay off their loans.
Additionally, neocolonialism from the West had created an earlier dependency on loans. Economically, ideologically, and socially, the Washington Consensus was implemented in many South American countries, including Ecuador, as a means of promoting economic development. However, its growth has not skyrocketed as was theorized. This is because Ecuador lacks economic stability and strength because it does not have strong manufacturing or capital industries. The conditionality of the Structural Adjustment Policies (SAP’s) required Ecuador to privatize what industry and liberalize its financial policy, thereby allowing developed countries access to the Ecuadorian market. This gave foreign businesses a market opportunity that would enrich their companies, but did not offer any advantage to Ecuadorian businesses that tended to be small and noncompetitive due in large part to their colonial past and neocolonial present. This economic arrangement led to lackluster growth. Likewise, corruption and incompetence have severely undermined their development.
Ecuadorian officials were told repeatedly that constructing the Coca Codo Sinclair dam was ill-conceived because being near a volcano means it will be unstable. However, Ecuadorian officials, it is now known, took bribes from the Chinese to sign off on the construction. In exchange, Ecuador agreed to stop recognizing Taiwan as a sovereign country, which is in line with China’s rhetoric. This is now at the expense of the Ecuadorian people who are reliant on the poorly constructed dam that provides intermittent electricity to their houses. Their electric bills are going up and the dam is now nearly insolvent. One million people were displaced because of eminent domain laws, and inadequate safety measures, combined with the crumbling infrastructure of the new dam, has led to the death of over 100 workers. Ecuador now owes China 80 billion dollars with nothing to show for it since people are being hurt more than helped while China gets richer. In fact, the Ecuadorian Attorney General resigned abruptly after he went to China to investigate their dealings with the Ecuadorian government, which further proves how corruption in Ecuador is holding Ecuador back from the growth it needs to develop and pay off its debts.
Chinese officials have also been implicated in this corruption scandal. Ironically, former socialist president Rafael Correa did not trust investment from the West since he did not trust their intentions, yet here China is doing the same thing to hurt Ecuador for their own benefit. He admired China for developing quickly as a socialist nation, but he did not realize they developed along the same lines as Europe and North America did. This revelation has recently caused the Ecuadorian government to speak out against China’s corrupt dealings with them, however the damage has already been done. And unfortunately it part of the same colonial practices that have been inflicted upon Ecuadorian people for centuries.
The solution to this poverty trap cycle has no precedent in the past few decades. Ecuador needs to cut down on how many loans it takes and make sure their infrastructure projects pay off the loans they do use for those projects. While taking those actions, Ecuador needs to analyze what assets the country has, protect crucial industries that will help the economy develop, and find out exactly how these assets can be transformed into products for those industries. Once the industries are competitive, the economy can be deregulated to foreign markets for further expansion. Additionally, Ecuadorian delegates should advocate for reform in the WTO that will allow provide short-term protection from international competition and a bigger emphasis on debt forgiveness rather than austerity measures. If that is not given, a focus on debt forgiveness programs and foreign aid rather than loans and a coalition with other Latin American countries can be formed to create new financial institutions which would allow Ecuador, as well as the other Latin nations, to leave the WTO and pursue national developmental goals. In theory, this will allow them to use their land and money to their own benefit rather than the benefit of other countries as has been the case for several centuries now. It will also break the cycle of loans and debt. Furthermore, with around 17 million people, Ecuador does not have a huge labor force, meaning that it would be good to attract foreign labor. Luckily, Ecuador is rich in natural resources, which is good for national industry and could provide the start up capital to attract laborers. Lastly, competent leaders with integrity must be put in place to accomplish this huge objective without being corrupted, so Ecuador is not further bankrupted for the benefit of the corrupt elites in power. The responsibility of finding those leaders is laid on the people who must be educated for enhanced human capital in order to vote effectively for their country during this transition. Once all of these changes are fully realized, Ecuador will be on the right, yet excruciatingly gradual, path to development and out of the debt cycle with neocolonial countries.
Ecuadorians have seen this situation before.