Ecuador’s Poisoned Legacy

An indispensable measure—elimination of fuel subsidies that benefited the rich at the expense of the poor—has served as a pretext for violent riots in Ecuador and a coup attempt by radical left-wing groups acting under the umbrella of indigenous organizations that have little trouble finding solidarity in the media, civic groups, and governments of western liberal democracies.

Although among the protesters were people with legitimate claims and peaceful citizens exercising their free expression, several groups demanding the overthrow of President Lenin Moreno were acting with the explicit support of Ecuador’s former president, Rafael Correa, a corrupt demagogue who is now a fugitive from justice, and Venezuelan ruler Nicolás Maduro, who encouraged the violent attacks on private property, government buildings, and innocent citizens from his palace in Caracas. The direct assault on liberal democracy under the guise of economic protests became clear when the more radical groups took control of Ecuador’s National Assembly and the Comptroller’s Office, from which documents related to the corruption of the previous government were stolen before they set fire to the building.

All of this serves to highlight one of the major challenges facing the countries that have shaken off the populist left-wing governments of “21st Century Socialism,” the expression used by late Venezuelan ruler Hugo Chávez to refer to what looked at the time like a hemisphere-wide trend towards authoritarian socialism.

We have already seen the failure of Argentina’s Mauricio Macri to reverse the legacy of the Peronista government led by his predecessor, Cristina Kirchner—with the result that the very same Peronistas who ruined the economy and made a mockery of democratic institutions look set to return to power in the upcoming election.

The violence following the massive uprising in Ecuador against Moreno’s attempts to scrap fuel subsidies and bring some rationality to that market after years of Correa’s patronage and demagogy has now forced him to reverse the measure and start negotiating to find alternative ways to rein in public spending. The outcome is in doubt since the remedy proposed by the various groups facing the government, including the CONAIE, a powerful organization that purports to speak for the indigenous population, is more public spending and more taxes on the rich (who were already heavily burdened and often persecuted by the previous government).

The Ecuadorian state cannot fund its crazy expenditures. Hence, Moreno’s government turned to international organizations a few months ago, including the IMF, to obtain more than US$10 billion and subsequently borrowed another $2 billion. During the oil boom, the previous authoritarian government managed to temporarily finance its statist delirium. (Six out of every 10 dollars “invested” in the country came from the government.) Public spending amounted to 40 percent of GDP, a huge portion compared to other developing countries, but since those operating in the informal economy do not pay taxes, the weight that fell on the legal private sector accounted for 65 percent of GDP. The scheme depended on the government, an oil producer, continuing to receive petrodollars. (Even so, clientelism kept Correa’s accounts in the red.)

Once oil prices fell, the naked truth came out. Hence, Moreno, Correa’s successor, tried to eliminate absurdities, such as fuel subsidies for which his government could no longer pay, that benefited the transport industry, were often responsible for the rise of the value-added tax and facilitated a smuggling industry with the open complicity of the government-owned refinery. Alongside the scrapping of fuel subsidies, Moreno eliminated certain tariffs and reduced some taxes in order to unleash an economy that had choked under the weight of Correa’s demagogy (Ecuador is one of the few countries in the hemisphere experiencing a shrinking economy this year). Since the protests have forced a reversal, everything, including these important measures, is up in the air.

Overcoming the populist heritage, together with the fight against corruption and the overthrow of the few remaining dictatorships, is the great issue of the western hemisphere today. Ecuador proves it.

Alvaro Vargas Llosa is a Senior Fellow at the Independent Institute. His Independent books include Global Crossings, Liberty for Latin America, and The Che Guevara Myth.
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