By: Abelardo Pachano Bertero

The timing of the report is undeniable. It precisely addresses the issues that are the core of the dilemmas which entails the loss of wealth with increasing unemployment rates and the problems of competence for wage and salary, costs, an aging population, the loss of force of the European economies. Added to all the above, we have to mention the destabilizing fiscal deficit; the debt reappearance as a sword of Damocles, the fragility of financial markets and their intermediaries; the environmental damage as well as the long horizon for the return of all the roads which these economies require to maintain their global poise and not lose the leading role they have achieved and is threatened by the presence of several emerging economies that are climbing in their participation within the global economy.

The first answer links all these problems with the reaction capacity which the European Union might have. According to the group, it is positive, but demands decisions to be taken together, united, knowing that the challenges are complex but if not confronted, the damage will be even bigger. Therefore, the needs of accepting that the current political project must be renewed, expanded, reach a consensus, and should involve all the sectors of the society and members of the EU, without exception.

The analysis clearly shows that the crisis appears “as a break point in the history of a new global reality that has been shaping for over two decades. It appears that there will be winners and losers in this global field, and if the European Union doesn’t want to be among the last ones, as it’s happening, it has to react now; define reform strategies for the horizon of the next twenty years, join forces, mobilize resources and move to action. Ultimately, overcome the introspection looking out towards the new global reality”. The above quote from the presentation of the report puts the record straight. It fulfills with the first duty which corresponds to the political leaders to publicize the existence of the problem so it can be addressed and resolved by their communities. Then, enters the issues in detail, sees the complexity and seeks to draw attention to them so that in this way the solution is adequate and timely. It worries a lot the poor functioning of financial markets, lack of control and regulation in many of them and the states responsibility in their stabilization. They also feel that protectionism may affect negatively the way of conduction of the economic policies for which it’s essential to sustain strongly, decisions against cyclical force to avoid exacerbation of social harm in a framework of commitments to recognize the independence of the countries, the maintenance of the common currency, stability as a standard to ensure future sustained growth.

All the above must be part of an extended plan of reforms of short and medium term in which there should be considered amnesties reductions, differences and imbalances between the different members of the EU. More controls, better coordination, sustained compromises and desire of collaboration are the elements that make up the matrix of these European challenges. In this spectrum fits the strengthening of political leadership community organizations, improvement and strengthening of its funding sources that can support in a consistent way without depending on the governments will. The best fiscal coordination with closer supervision to prevent derivations above the limits considered acceptable and tolerated by international markets.

Improving education to be able having a better prepared and more competitive human capital in a world of knowledge, research and the development of new products and services is the program’s core. We must catch up the detected backwardness with a reform involving all levels of education. The States must drive research programs and dedicate a higher percentage of resources for this purpose.

The energetic dependence is another sensitive issue of the Reflection Group’s proposals. The EU must find mechanisms to ensure the provision of their needs establish parameters of safe nuclear energy and give full support to the renewable ones.

The labor market requires deep conceptual changes. We have also to take into account the existence of common currency that forces unifying productivity and sustain tax and close price policies. The technological advances demands new labor relations to achieve their maximum utilization. It’s necessary to introduce the concept of “flexi security” in the market, and of course, improving productivity is the ultimate goal.

Aging population is a severe headache. The EU migration policies must update their comprehensive educational training plans to meet the additional requirements, estimates at nearly 100 million people in the next 40 years. Retirements plans must be reformed to make them consistent with the new life expectancy, the funding needs of pension schemes and physical viability. How many problems does this topic bring with it!

With 500 million consumers the EU has a huge but feasible challenge. It’s probably the biggest market in the world and in consequence it turns into a magnet which everybody wants to exploit. For China it’s the trading partner that gives higher returns. Now it’s turn for the European Governments to create a proper environment for their products to be competitive, generating good and well paid jobs and simultaneously sustain leadership in shaping the world’s future.

This is how the community organizations that seek to transcend look at the problems analyzing them without false modesty. They look at the weaknesses and threats and seek to counter them with a deepening of the strengths and opportunities. As harsh as the measures could be, if needed, they are confronted. Finally after having overcome the pain, they fully reap the wishing well.

In times of crisis, opportunities appear. Nobody changes when things are going well and challenges aren’t appreciated. But true leaders know how to do under these circumstances. This is learned by knowing the history, respect it as it is, without altering it; carrying values, strengthening democratic freedoms and building more democracy.

The message is clear. Those who engage in this type of reform can achieve the goals. Those who ignore them are condemned to go adrift.

Collaboration MSMEs Magazine
July 21, 2010

* This article was published by Mipymes Magazine July – August 2010.

By: Econ. Jaime Carrera

Budget for 2010

Despite the unanticipated revenue stream, the high oil prices and acceptable tax returns for the payment of the 2009 floating debt and the lack of credits to finance the deficit , in the first half of 2010, the government had to stop the public spending, mainly the investment..Until the end of the year it will be forced to keep the tendency and therefore reduce the deficit. A possible scenario is shown in graphic 1.

In the first semester, the oil average price was above $70 per barrel, up $65 considered in the budget. As shown in graphic 1, there were also joined more than $400 million by the safeguard tariffs imposed by additional oil income and Central Bank’s profits resulting from gold revaluation. It’s expected that for the second semester additional $400 million will come in for income tax advances. However these last wouldn’t be enough to cover the expenditure estimates approved in the State’s Budget.

In the first semester the total expenditure was executed in a 39%, with a higher adjustment in public investment. Restriction despite revenue streams mentioned above. The IEES values weren’t paid for 40% of pension payments and the items of goods and services were implemented only in 26%. Salaries consumed about 60% of current expenditure. Capital and investment spending largely limited itself to meet the Sectional Government’s transfers to social spending which was estimated as investment.

Because of credit lack and State inefficiency, until the end of 2010, is expected to continue the restriction that total spending could run on 80% of the initial estimate. Capital expenditure adjustments will be higher, about 30%, affecting the attainment of growth targets.

Since the Estate won’t have the dollars to enable meeting the expenditure requirements, it would be forced to reduce its potential deficit of about $ 3.800 million, 7% of GDP, to around $ 1.077 million at year- end, 2% of GDP; even so, it will have to get new credits. In the first semester, the Estate sold $ 550 million in bonds to the IEES and the ADC borrowed $ 250 million. It should be noted that in 2010, nearly $ 500 million of Petro china’s loan capital will be cancelled and about $ 42 million in interests. It’s possible finding another process in credit by $ 1.000 million with a Chinese bank to cover the financing gap.
Low growth, old fashioned fault

In more than 300 years of colonial period the economic growth was insignificant. The economic activity was reduced to extraction of metals and spices, while in the West, inventions and innovations spread out that lead to the industrial revolution. Since the beginning of the Republic until the end of XIX century, stagnation of the colonial era continued.

During 1900-1920 economy thrived, thanks to cocoa’s high prices, which allowed several advances in road construction and other areas. In the following two decades, the Ecuadorian economy suffered a deep recession by cocoa’s falling prices and its production; this happened around 1900. Since 1942, economy began its recovery because of new coffee, rice, rubber, wood, etc exportations. However, in those years, Ecuador ranked lowest in exports.

In the decades of the 50’s and 60’s, GDP grew at an annual average rate of 4.7%, thanks to banana production. In the 70’s with the rise of the oil boom, GDP grew by just over 9% on average. In the decades of the 80’s and 90’s, with low oil prices, economy grew around 2%, just to cover the population growth. During 2000-2006, GDP grew by 5% annual average with more oil and rising prices. During 2007-2009, at the climax of a new oil boom, GDP increased 3.2% annual average, and for 2010 it’s estimated for the economy to grow by 2.5% (see Table 2)

Foreign Reputation, ¡Reputation, reputation, reputation!

The Foreign Direct Investment (FDI) reached a maximum GDP’s 3% by 2003 (Table 3). With the exception of 2008, since 2006 it didn’t reach 1% of GDP. In the first three-month period of 2010, FDI shows a negative balance of $ 155 million, because the transport and storage sector has been divested, that is, payments of domestic subsidiaries to their foreign matrix, were higher than the received expenditures. (See Table 4). One part of the Foreign Direct Investment is authorized by the Superintendence of Companies to domestic companies and branches of foreign companies, whose first quarter sum was just $ 71 million. Another part is directly registered by the Central Bank in national accounts.

Of the $71 million of FDI approved by the Superintendence of Companies, only 726 thousand dollars were used in the constitution of new companies; $ 69.7 million were company’s capital increase. From capital increases, only $11.6 million were made in cash; $ 23, 7 million through debts compensation; $ 31.8 million was attributable to reinvested earnings.

The FDI is fundamental for the country’s development and promotion to its growth; however, there is aversion to be part of the club of countries that attract. The ranking of the 25 most attractive countries for FDI 2010 Confidence Index of Foreign Direct Investment from AT Kearney is led by China; Brazil is ranked 4 and Chile 22. Populism is regarded as a deterrent of FDI, the bad karma reputation of Ecuador, which with pain can exclaim the lines of Iago, in Shakespeare’s Othello: ¡Reputation, reputation, reputation! And all that remains for me is the beast”.
Public finance, growth and investment, poor relationship with prospects

Public finances are unsustainable in the medium and long term; they turn unfeasible the economic model sustained by the expansion of public spending and investment to sustain its growth. A State Model, moreover dogmatic in assessing its prevalence in economic activity, leaving the private sector a subordination accessory role. In this environment, the prospects are poor to drive domestic and foreign investment decisions. The harmful combination of a public investment with little chance to be sustained, and even worse, to increase, plus an almost zero horizon of confidence for private investment, as a logical consequence will have little opportunity to maintain in the future high growth rates of the economy. The incapacity of using minds to create wealth has cultural roots of more than 500 years and has become secular, protected by populism encouraged under the natural resources.

To reduce poverty, generate employment and improve welfare, Ecuador requires supporting for decades, economic growth rates above 6% annually, which is possible with a radical change in the State Model and inherent economic leadership. Countries that have strengthened this direction remain efficient states that as fair arbiters in the control and regulation facilitate and not obstruct the private sector, with which they consolidate the responsibility for economy’s growth and generating employment, providing it with an atmosphere of confidence to invest and do business. All the above must be done through the unrestricted respect for property and the rule of law, stability and economic freedom, fiscal responsibility, integration to global capital and world trade.

Table 1
DESIGNING CENTRAL GOVERNMENT BUDGET OPERATIONS, 2010
$ Millions
                                                              Codified    In                             Total
Concept                                   Start     or              June    July-Dec      2010
                                                                                           Projection

TOTAL REVENUE                 12.483   13.091        6.318      6.433        12.751
Tax Revenue                           7.624     7.622        3.880      3.908          7.788
Rent (1)                                    2.543     2.543        1.094      1.449          2.543
IVA                                           3.121     3.121        1.563      1.558          3.121
ICE                                             519         519          247          240             487
Customs                                     836         836          387          449             836
Others (2)                                   605         603          589          212             801
Oil Income (3)                         3.170      3.793       1.816       1.977          3.793
Non-tax Revenues                      639         607          273          334             607
Common Transfers (4)               546         548          282             73             335
Others, Self-management          504         521            87           141             228
TOTAL EXPENDITURE        15.191    16.938       6.355        7.473        13.828
Common Expenditure           8.689      9.404       3.862        4.751          8.613
Wages                                     4.901      5.200       2.278        2.922          5.200
Products and Services               820         903          301           433             734
Common Transfers                  2.332      2.622      1.056           987          2.043
IEES, ISSFA, ISSPOL                803         803         124           106             230
Human Development Bond        656         646         316            324            640
Energy Subsidy                          256         256             0            256            256
Entities                                       417         417         368              49            417
Others                                        200         500         248            252            500
Interests                                     636         679         227            409            636
Internal                                       250         293          90             203            293
External                                      386         386         137            206            343
Capital Spending                   6.502      7.534      2.493         2.722         5.215
Autonomous Governments     1.723      1.766         975             791         1.766
Public Enterprises                      604         386           69             317            386
Common Expenditure
 & others (5)                            1.700      1.700         456          1.244         1.700
Others                                     2.475      3.682         993             370         1.363
DEFICIT/SURPLUS              -2.708     -3.847          -37         -1.040        -1.077
(1) Includes: $ 400.000 in advance of income tax in July and September
(2)  Includes: up to $ 145 million fee May safeguarding and $ 118 million for oil imports.
(3)  Includes: presale oil, Petro china, and $ 179 million through May.
(4)  Includes: $ 125 million Central Bank profits.
(5)  Includes: Social Sectors programs and others are as an investment.
Source: Ministry of Finance. OPF.

Table 2
         GDP Growth

                                   Year                                          % Variation
                                            
                                   2.000                                                 4.1
                                   2.001                                                 4.7
                                   2.202                                                 3.4
                                   2.003                                                 3.2
                                   2.004                                                 8.8
                                   2.005                                                 5.7
                                   2.006                                                 4.7
                                   2.007                                                 2.0
                                   2.008                                                 7.2
                                   2.009                                                 0.3
                                   2.010*                                                2.5

Source: Central Bank
• IMF Estimate

Table 3
Direct Foreign Investment

                                    Year                                           GDP %

                                    2003                                              3.0
                                    2.004                                             2.5
                                    2.005                                             1.3
                                    2.006                                             0.6
                                    2.007                                             0.4
                                    2.008                                             1.8
                                    2.009                                             0.6
                                    2.010*                                           -0.3

Source: Central Bank
*First Quarter

Table 4
Direct Foreign Investments. Sectors
2010 First Quarter

Sector                                          $ Million
Mining                                                59.7
Manufacturing                                    30.8
Commerce                                         15.4
Transport & Storage                        -280.8
Other Sectors                                     19.8
Total                                                -155.1

Source: Central Bank

* This article was published by Mipymes Magazine July – August 2010.

More importantly is the fact that world GDP (or more precisely GWP) is expected to growth 2.5 per cent in 2010. That is up from the 1.9 per cent growth forecast in April. It also comes on the heels of other upgrades, most recently that of the Wall St Journal, which forecast 2.4 per cent growth for the G8 in June.The exact figures are not as important right now as the increasingly strong evidence of bottoming out processes in play across regions and markets. The IMF believes that the bailouts and stimulus packages have been key to this process, and hence to expected improvements in 2010. However the recovery will continue to be weak into 2011, and could easily be derailed.

The biggest concern is that financial markets continue to be ‘impaired’. In April it suggested that global write-downs would end up losing financial institutions more than $4 trillion. It now suggests the figure will be lower, but does not say how low. Because the recovery looks so weak, the fund also wants to emphasise the need to keep the current stimulus policies in place. It has also encouraged countries to have clear exit strategies so as not to roil intenational sovereign funding markets.

It has highlighted the fact the recovery will be led by emerging markets, with the developed nations not having stable recoveries until the second half of 2010. The US will register full year growth, but the Euro zone will register a contraction for the year, with Germany in particular registering -0.6 per cent. It is particularly worried about the large account deficit countries such as the US not having sufficient domestic demand as job losses mount and consumer seek to rebuild savings levels. It is therefore important for surplus countries, particularly China, to continue to build their domestic demand levels.

Country/ Region   2009 Forecast  2010 Forecast
World     -1.4     2.5
Advanced economies   -3.8     0.6
United States    -2.6     0.8
Euro area   - 4.8     -0.3
Germany    -6.2     -0.6
France     -3.0     0.4
Japan     -6.0     1.7
United Kingdom   -4.2     0.2
Canada    -2.3     1.6
Other advanced economies  -3.9     1.0
Emerging and developing
economies    1.5     4.7
Africa     1.8     4.1
Central and eastern Europe  -5.0     1.0
Russia     -6.5     1.5
China     7.5     8.5
India     5.4     6.5
ASEAN     -0.3     3.7
Middle East    2.0     3.7
Brazil     -1.3     2.5

elections for the presidency of the Chamber of Small Industries of Guayas (CAPIG) and was elected …

 For 13 million people, the 9 of January of the 2000 is an historical date. That day, the ex- President of Ecuador, Jamil Mahuad, announced to the inhabitants his decision to implant a program of economic dollarization. Since that very moment, the entire world turned his eyes to this small South American country. Analyses, studies and information from different sites of the planet, began to speak about the perspective of the nation with the new model. Also from that date in Latin America it was begun to debate the possibility that in the region a unique currency is restored (the American dollar), in the style of the “euro” in the European Union.

 With the approval of the Fundamental Law for the Economic Transformation of Ecuador, denominated “trolebús” (in reference to Mahuad, that previously was Mayor of Quito and started that vehicle as transport alternative), the new President, Gustavo Noboa Bejarano (he assumed the power in February of the 2000), ratified and started the dollarization process.

 From the beginning of the Republic in 1830, Ecuador has experienced diverse exchange systems. Currency seizures, gradual devaluations,  macrodevaluations, exchange bands or dirty flotation and the free flotation of the dollar, are some of them.

 To the margin of the schemes that applied the governments in turn, the informal dollarization of the economy was a fact. Transactions of goods and services were made taking in account the American currency like reference.

 Its incidence in the diverse private and public activities was deepened as a result of the approval of the Institutions Law of the Finance System  and State Bank in 1995, during the government of Sixto Durán-Ballén. It also brought the possibility of opening banking accounts in dollars and the operations in that currency became daily in the life of the Ecuadorians. Only the wages, were not paid in dollars.

 Ecuador in less than ten years has changed from a little “dolarizada” economy to a highly one.

Facing this situation, in September of 1998, Joyce de Ginatta, Chairman of the Camera of the Small Industry, proposed to the government the alternative of the dollarization to face this catastrophe of the economy and to prevent that the wages of the workers continued to be pulverized.

During 9 months she had carried a black crepe in her clothes as symbol of mourning by the bad economic management of the government. From that day she uses the national flag instead.  With her proposal she tried to mitigate the citizen desperation. Exaggerated increases during the same day in the price of the dollar, the freezing of the bank deposits, the flight of capitals abroad, the distrust in the administration of Jamil Mahuad, were the causes of that mood in the Ecuadorians.

The daily devaluation of the “sucre” maintained the inhabitants disturbed. In spite of the interventions of the Central bank and to the drainage of the International Monetary Reserve, the “sucre” was depreciated in 355,53%, since Mahuad assumed the power. Meaning to say that the wages to the 9 of January of the 2000, had been reduced to the third part of which they were worth in dollars in August of 1998.

To start the dollarization process in  Ecuador was not only a necessity according to what was happening in the interior of the country but also with the international tendency.  As a result of the use of the “euro” the conformation of a new world-wide financial architecture began. The global trend of the markets helps to support  the new structure. In Asia, the Japanese yen, in Europe, the euro and in America, the dollar governs the destinies of the inhabitants and the commercial and financial transactions of natural and legal societies. From the announcement of the dollarization the exchange market became stable and the rise of the dollar stopped. The tranquillity returned to the inhabitants, who began to adapt to the new model. A sample of the creativity and effort of the civil society is the commercialization of the conversion tables , that have been helpful for the community. Banks, industries, commerce and the common citizen are the clients of this lucrative business.

 _______________________________________________________________

DETAILS OF THE DOLLARIZATION ASPECTS TO TAKE INTO ACCOUNT

CONDITIONERS OF THE SUCCESS

DETAILS OF the DOLLARIZATION

The dollarization is an exchange scheme that replaces the national currency by the dollar in a certain lapse.

It is a system more rigid than the convertibility to stop the domestic inflation. By that reason it is convenient to adjust the financial system drastically, with the sacrifices and challenges that this entail. The dollarization brings positive effects, among them:

- The Central Bank no longer will be able to emit tickets (bills) without endorsement. In the case of Ecuador it will emit fractional currency solely.

- The Central Bank loses the capacity to handle the internal monetary policy and it must adapt to the one of the Federal Reserve of the United States. For those who have criticized the injurious results of the monetary policies of the emitting institute, this is fabulous. 

- The currency reserves of the Central bank disappear because these are transferred to the public, and therefore it is an irreversible process, since in the future nobody would wish to exchange by the legal currency. It is a way without return. 

- The Central bank no longer must sacrifice the international monetary reserve to restrain the exchange pressures.

- It simplifies and it facilitates the commercial relations with a common currency.

- It reduces the interest rates, although they do not get to be as low as those of the United States, by the factor risk-country.

- Settle down clear rules of the game for the foreign trade. The exporters no longer will base their activity in the exchange differential by the constant devaluation of the currency but in the efficiency and productivity to reduce costs. Before, we exported just misery. Now productivity will be exported instead.

- In the same way, the producers will receive what it corresponds to them with which the double chain of misery will be avoided: producers with insignificant income and the citizen who cannot acquire goods by the deterioration of his buying capacity.

- Will begin to copy the rules of the game of the first world to obtain the quality of life that they have.

 ________________________________________________________ 

ASPECTS TO TAKE INTO ACCOUNT

•  The dollarization is a way to be put under the control of the American standards and who does not fulfill them, will not obtain capital and foreign investment easily.

•  The Central Bank no longer will be able to grant credits to help or to save  banks in problems.

•   Loss of the “señoreaje”. This it is equivalent to the interests that the Central bank obtains to coin and to distribute the currency.

•  Exhibition to exogenous risks infected by the commercial partners who are not under the dollarization process. 

•  No nation, not even if it is under the dollarization, is totally immune to the possible world-wide financial crises.

_____________________________________________________________ 

CONDITIONERS OF THE SUCCESS

For the success of the dollarization several conditioners are required:

•To apply structural reforms to evolve of a speculative economy to another productive one.

•To fortify the banking system.

•To impose the fiscal austerity.

•To improve the controls and the banking supervision.

•To coordinate the internal fiscal policy with the American monetary policy.

•To increase the levels of productivity and efficiency.

•To promote the legal reforms to allow the entrance from new banks to the country .

•To implant the culture of the cents.

•Discipline in the handling of the money.