Ecuador: Oil, Investment and the Amazon

The decision to auction of exploration blocks in Ecuador’s southern Amazon, while extremely controversial from an environmental and social justice perspective, illustrates a sober assessment of Ecuador’s short-term economic needs by Correa. During the early part of his presidency, Correa acted aggressively against foreign oil companies, pursuing Texaco and Chevron officials for environmental damage in the Amazon, raising taxes and royalty fees and taking control of Occidental Petroleum’s operations in Ecuador. While politically popular, and producing a brief windfall of additional revenues for the government, these moves also discouraged investment in the country, particularly in the vital oil sector. Oil production peaked in 2006, a year before Correa took office, and then fell by 9.4 percent over the first three years of his presidency. As the government depends heavily on oil to finance its budget and aggressive anti-poverty programs, maintaining or increasing production is very important. In this context, the auction serves two purposes: one is directly increasing investment in the oil sector to increase production while the other is signaling, in a way similar to the talks with the EU, that Ecuador is open to investment from private companies, in the oil sector and the broader economy.

Strictly looking at the move from the perspective of the oil sector, the decision to allow for oil exploration seems perhaps more cynical than pragmatic. As environmental and human rights groups opposed to oil exploitation in the region have pointed out, the areas in question seem unlikely to produce significant amounts of oil—perhaps as few as one in three wells will even produce—especially considering the effect it would have on the local communities and the forest’s ecosystem. It seems likely that the direct economic benefit from whatever oil can be extracted from those blocks is a secondary factor in the decision (though debts owed to China may also play a role). For a president who has made a point of appealing to indigenous groups and who presided over the framing of a constitution that has significant environmental protections built in, a relatively small increase in oil revenues hardly seems worth it.

However, when viewed as part of a broader economic strategy, the move makes much more sense. As previously mentioned, the Ecuadorian government likely squeezed foreign oil companies too hard at the beginning of his presidency, and production suffered as a result. Moreover, whatever oil will be extracted from the blocks up for auction will require a high degree of technical competency; the kind state owned oil companies—like Petroecuador—typically lack. In this context, it’s perfectly logical for Correa to pursue oil exploration, and to allow foreign companies to do it. In doing it this way, Correa has maximized his chances of the explorations blocks yielding real results—and the revenues that follow—while also extending an olive branch to foreign investors everywhere. It may not work, but it maximizes the extraction potential of the region while indicating that Ecuador trusts foreign investment, even in the oil sector, even in the most important ecosystem in the world, which also happens to enjoy constitutionally guaranteed protections.

Looked at holistically, there are some significant downsides to this sort of move, but from a purely economic position, the benefits—both political and economic—seem likely to outweigh those negatives for Correa.

Ecuador: An enigma of the New Left

Over the last decade and a half, a dominant political and economic theme has been the so-called “Rise of the Left.” Largely, this has been portrayed in a sort of binary framework along the lines of Jorge Castañeda’s “good left” and “bad left” where the good left works within existing democratic and market frameworks and the bad left subverts democratic and market processes in favor of populist and authoritarian rule. The reality is obviously much more nuanced than that. Chile’s left is still much different than the left that is governing in Brazil or Uruguay. Similarly, within the “bad left” there is tremendous variation across countries. This is particularly true when it comes to economic policy, where policy making varies dramatically across different countries.

Within this framework, I think Ecuador is particularly interesting. While it is typically grouped with the bad left on both its democratic and economic record, it differs dramatically from those countries in many ways in its political economy. Over the next few days, I will be doing a series of posts examining Ecuador’s political economy during Rafael Correa’s presidency. I will argue that it is built largely on a pragmatic foundation, as evidenced by recent overtures for a free trade agreement with the European Union, an auction of exploration blocks in the Amazon to private companies, and Ecuador’s continued dollarization. Beyond that, I will argue that Correa can be opportunistic in taking advantage of situations like the state of world financial markets to default and joining the Alianza Bolivariana para los pueblos de Nuestra América (ALBA), while having a much larger role for the state within the domestic economy.

Lo maduro tiende a pudrir

It’s been a dispiriting few days for Venezuela’s democrats. The opposition’s chances of sufficiently proving the illegitimacy of the election are diminishing by the day as the government pulls a successful bait and switch. More ominously, the shallow veneer that remained of a functioning institutional democracy is quickly disappearing. Opposition representatives in the Asamblea Nacional (AN) have already been stripped of their right to speak on the floor for not recognizing Nicolás Maduro’s victory by Diosdado Cabello, and yesterday, several prominent members were apparently physically assaulted by chavista representatives, allegedly while Cabello watched laughing.

If that is what really happened (and I believe it probably did), it represents the effective dissolution of the AN, which was the last branch of government not completely controlled by chavistas. With both opposition and government rallies planned for today, it’s increasingly likely that the Maduro take on chavismo will be more violent and openly authoritarian than the original version.

That said, I don’t believe this is a tenable situation for the Maduro government, despite having the support half the country and the full machinery of the state on its side. Most importantly because Venezuela’s political realm, for all its faults, has been roughly democratic for the last 54 years. Punto Fijo may have been corrupt and elite-centric, but opposition was still possible (just look at Hugo Chávez). Similarly, for all of his authoritarian leanings, Chávez still permitted a real opposition to exist against him. Whatever steps he took to debilitate the opposition, it was still there and still had a voice, albeit a small one. After so many years of more or less freedom of expression, I don’t believe the broad polity will accept a traditional authoritarian government for long. Moreover, I am extremely dubious that the military has the stomach for any major violent repression.

Beyond that, Maduro has to contend with Venezuela’s crumbling economy. Increased production in the US and elsewhere, coupled with slowing growth in China, weak growth in the US and Japan and a severe recession in Europe is pushing down the price of oil. Considering the damage already inflicted on the economy by 14 years of chavismo, the Venezuelan economy is fragile and unlikely to be able to weather a sustained period of slightly lower oil prices (an economist friend thinks as high as $70/bbs, I think perhaps even higher). Few governments successfully weather major economic downturns, and a weak, incompetent one like Maduro’s is especially unlikely to do so, especially because the entire political economy of chavismo has left him virtually no room to maneuver.

When I wrote before the election about why it could be better for the opposition if Maduro won, I did not expect such a rapid shift toward blatant dictatorship. While disturbing, it may prove his undoing, particularly if the Venezuelan economy slides into recession. Sadly, this still means things probably will have to get worse there before they get better.