Introduction

In recent years, following decades of neo-liberal policies, Latin America has made a significant contribution in developing and testing new ideas that challenge the current economic mainstream paradigm (Villalba, 2013). In this respect, the case of Ecuador is definitely one of the most interesting.

Until 2007, Ecuador experienced a long period of serious political, economic and social instability. The failure of the policies inspired by the Washington Consensus (Williamson, 1990) produced a substantial foreign debt (Acosta, 2003) and an unsustainable inflationary pressure and had justified the adoption of the US dollar as the national currency by the Mahuad Government in 2000 (Bardomiano, 2014). Over the following years, the protracted economic crisis and privatization policies led to popular uprisings (Yashar, 2005) which only ended in 2005 with the destitution of the incumbent President, Lucio Gutiérrez, and the beginning of the so-called Revolución Ciudadana. The Ecuadorian political movement (Revolución Ciudadana) has repeatedly expressed its willingness to mark a clear discontinuity with the neo-liberal agenda and is pursuing a process of long-term change in the country. The first step of this process was the rewriting of the Constitution (República del Ecuador, 2008). The innovations that were introduced by the Constituent Assembly represented an historic turning point that marked the centrality of Buen Vivir in Ecuadorian politics (Acosta and Martínez, 2009). The most innovative aspect of this new Constitution was the establishment of the rights of nature as priority for political economic choices in accordance with the Sumak Kawsay philosophy (Estermann, 2006). This priority ratified the incompatibility between the anthropocentric vision of the neoliberal development model and the political idea behind the constitutional work (Gudynas, 2009). Consequently, this incompatibility represented a break with the mainstream paradigm generating the opportunity to experience a model that goes beyond the concept of development (Monni and Pallottino, 2015a, b, c; Vanhulst and Beling, 2014).

However, in spite of the initial concrete attempts to overcome the concept of development for the economic management of the country, in recent years the Ecuadorian Buen Vivir has experienced a change in its perspective (Vanhulst and Beling, 2014 ) which has resulted in a considerable increase in the exploitation of natural resources – an effort which has led some scholars to refer to this as a phase of ‘neo-extractivism’ (Acosta and Martínez, 2009; Bebbington, 2009; Acosta, 2011;   Gudynas, 2012). This shift was justified by the need to boost economic growth in order to meet the basic needs of the population (SENPLADES, 2009, 2013). Paradoxically, according to the Government, the goal of building a fully sustainable society will have to pass through a first step that increases revenues from the mining sector (SENPLADES, 2009), ‘The government is aiming to abandon extractivism by taking advantage of extractivism itself’ (SENPLADES, 2013: 82). Figure 1 shows the tangible effect of this ambition related in particular to the exploitation of crude oil reserves. Due to this shift, the transformation process pursued in the Revolución Ciudadana no longer concentrates on constructing an alternative model to the one based on development, but rather focuses on improving the same model by increasing levels of environmental sustainability and social inclusion (Villalba, 2013). In addition, embracing the expansion of the extractive industry as a driver of development in the country – aside from it being a symptom of change in the Ecuadorian political project at the philosophical level – risks being counterproductive to the country’s growth.

Figure 1
figure 1

Source: Our Elaboration of JODI (2015) data

Neo-extractivism in Ecuador (kb/d)

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In light of the consequences that would have been generated by the complete application of the concept of Buen Vivir (Acosta and Martínez, 2009), we tried to understand whether the need for economic growth can fully justify the Ecuadorian neo-extractive (Acosta, 2011) drift, basing our analysis on the Resource Curse Hypothesis (RCH) literature. Following this literature, we analyzed the main factors, which determine whether or not the exploitation of natural resources constitutes an advantage for Ecuador’s economic development.

The aim of this study is therefore to examine the possible negative effects of the exploitation of natural resources in order to assess the wisdom of the political decisions that have ruled out the possibility of constructing an alternative model to the one based on development.

The resource curse hypothesis: the case of Ecuador

Paradoxically, throughout history, abundant marketable natural resources have often been associated with low levels of economic growth for the countries that possessed them (van der Ploeg, 2011). Numerous studies have assessed the empirical validity of this hypothesis and have tried to understand the reasons for this relationship often referred to as the Resource Curse. Sachs and Warner (1995) were among the first who reached the conclusion that, even if the presence of natural resources often coincides with low growth rates, this is not in itself an obstacle to growth. The presence of a number of exceptions (e.g., Botswana, Norway) shows that additional conditions are required for the resource curse to occur. Based on this finding, the most recent literature has identified five main different explanations for the RCH: (i) the effects of the Dutch disease (Van Wijnbergen, 1984; Ismail, 2010; Kuralbayeva and Stefanski, 2010), (ii) the misallocation of revenue deriving from the exploitation of resources (Atkinson and Hamilton, 2003; Neumayer, 2004; Costantini and Monni, 2008a; van der Ploeg and Venables, 2010), (iii) an increase in rent-seeking behavior (Baland and Francois, 2000; Ross, 2001; Mehlum et al., 2006; Vicente, 2010), (iv) the level of investment in human capital (Gylfason, 2001; Birdsall et al., 2001; Papyrakis and Gerlagh, 2004) and; (v) the level of institutional quality (Boschini et al., 2003; Isham et al., 2003; Mehlum et al., 2006; van der Ploeg, 2011).

In its planning, the Correa government welcomed new income flows from the extractive industry as a driver of development for the country and subsequent redeployment of production (SENPLADES, 2009, 2013). When assessing the economic effectiveness of this decision, we took into account the above-mentioned explanations for the RCH.

Dutch disease

Understanding whether an economic system has truly been affected by the Dutch disease is a particularly complicated task. What is important to consider in this context, is the role at the theoretical level that the effects of Dutch disease may have in an analysis of the Ecuadorian government’s economic planning. The construction of a society based on a fully sustainable economic system is the final objective of government planning (SENPLADES, 2009, 2013). This planning concept is based on the assumption that an initial primary export phase must precede redeployment of the production system (Ramirez Gallegos, 2010). The idea is that by increasing public spending, made possible by the income generated from the extractive industry, there will be an increase in domestic aggregate demand and a subsequent development of the industrial sector that will enable natural resources exports to be gradually replaced (SENPLADES, 2009, 2013). This step, which is deemed necessary to achieve improved sustainability and long-term growth (SENPLADES, 2009; Ramirez Gallegos, 2010), could be jeopardized by the possible effects of Dutch disease. If that were to happen, it would be clear that the government’s strategy would be unsuccessful in the long run, both in environmental and growth terms. As such, it would be relevant, according to the literature, to analyze fluctuations in the real exchange rate to see whether an increase in revenues from natural resources is affecting the country’s competitiveness in the manufacturing sector. However, these data are of little significance since Ecuador’s official currency is the US dollar. To overcome this problem, we examined the Consumer Price Index (Figure 2). The index is clearly influenced by exports and provides a useful indication of Ecuador’s competitiveness. As we can see, the nearly 30 points increase since 2007 represents a worrying sign, which seems to have been further reflected in a loss of the manufacturing sector’s impact on GDP in terms of value added (Figure 3). This negative picture is confirmed by trade balance data (Figure 4) and the rate of participation of industrialized products in the country’s total exports (Figure 5).

Figure 2
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Source: World Bank (2014)

Consumer Price Index (2010 = 100)

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Figure 3
figure 3

Source: World Bank (2014)

Manufacturing, value added (% GDP)

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Figure 4
figure 4

Source: Our elaboration of Central Bank of Ecuador (2013) data

Total oil, non-oil trade balance (millions of USD) and average price of oil per barrel (USD)

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Figure 5
figure 5

Source: Central Bank of Ecuador (2013)

Exports of primary and industrialized products, Ecuador (mln of USD)

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We can see how the trade balance for non-oil products (Figure 4) has constantly been in deficit and how this deficit has constantly increased. The stable pattern of the manufacturing sector is suggested by the rate of participation of industrialized products in total exports (Figure 5) which has remained virtually constant since 2000. These trends are all the more significant if we consider that from 2007, the Ecuadorian Committee for Foreign Trade has imposed limits on the import of manufactured goods (machinery/automotive, electrical appliances, electronics, food, food derivatives) on several occasions with a view to levelling the effects of the decrease in competition on the manufacturing industry. Furthermore, the net result of the dollarization of the Ecuadorian economy since 2000 has resulted in acceptable levels of inflation even though there have been inevitable repercussions due to the loss of monetary sovereignty.

The examined trends show a deviation between the intermediate targets set by the government (redeployment of production and replacement of exports) and the partial results obtained. Even if this deviation cannot be definitely attributed to the effects of Dutch disease, it rules out the possibility of sustainable development for the country capable of overcoming the RCH and puts achieving the final objective of government planning, i.e., the building of a fully inclusive, sustainable society, at risk.

Misallocation of revenue

In order to identify the factors that have a negative impact on the growth of resource-rich countries, Atkinson and Hamilton (2003) carried out an empirical study that showed how the unsustainable management of income deriving from the exploitation of natural resources is directly related to low rates of economic growth. More specifically, sustainable management of income deriving from the exploitation of natural resources is identified by a policy of investment in alternative activities that can generate additional sources of wealth so that the losses caused by the depletion of non-renewable resources are compensated for by this new income (Solow, 1986). Studies have shown that countries with high income deriving from the extractive industry have problems when applying a sustainable policy (Atkinson and Hamilton, 2003). Investment of this income in activities that aim to increase the human capital required for a more advanced state of service-based long-term development is usually insufficient. Therefore, the theory of misallocation of revenue is closely linked to the effects of Dutch disease which accounts for the tendency to concentrate investment in the primary sector (van der Ploeg, 2011). Atkinson and Hamilton (2003) have shown how one of the possible explanations for the RCH lies in this failure to reinvest resources used to meet public expenditure in terms of consumption. In this respect, the Adjusted Net Savings (ANS) indicator (World Bank, 2011), also known as Genuine Savings (GS), has been taken into account. It has been empirically shown that a negative level of GS leads to low rates of growth in the long term in countries which have experienced the resource curse, whereas a positive level has been found in countries that have been able to avoid it. Based on these results and on the fact that the GS indicator is the first real sign of a misallocation of revenue from the exploitation of resources (Costantini and Monni, 2008a, b), we can now compare the Ecuadorian government figures in order to examine the partial results of the political and economic decisions in more detail as well as future growth prospects for the country. By analyzing the sustainable development index figures (Figure 6), we can see that it has experienced a negative trend since 2000. It is interesting to note that at the start of the Revolución Ciudadana (2007), the indicator increased significantly until implementation of the development plans in 2009, confirming the government’s wish to focus on the extractive industry in order to boost the country’s economic growth.

Figure 6
figure 6

Source: World Bank (2011)

Ecuador Adjusted Net Saving, excluding particulate emission damage (currentUS$)

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The drop in sustainability values since 2009 is all the more significant if we consider that the indicator is positively affected by an increase in the price of natural resources (the price of oil fell down from 2008 to 2009 and increased sharply from 2009 to 2011 (Figure 4)). In addition, Gelb et al. (1988) found that a further sign of misallocation of revenue is given by the loss of international competitiveness. In this regard, the increase in CPI (Gelb et al., 1988) (Figure 2), previously analyzed, helps to confirm the reliability of the ANS trend data. In light of the findings examined here, the strongly negative values recorded in recent years for the ANS indicator show that the increase in the extractive industry may well be counterproductive in the long run.

Rent-seeking

Another explanation for the resource curse provided for in economics literature is related to rent-seeking behavior. Mehlum et al. (2006) explain how revenue from natural resources becomes a curse, by slowing down growth and reducing income, if the economic and entrepreneurial efforts which usually focus on creating wealth in the production sector are directed toward rent-seeking activities. The literature focusing on the rent-seeking issue recognizes that institutions play an important role, both as a constraint on the tendency to appropriate income and in the analysis of the effects of this tendency in countries with considerable natural resource endowments. Using the regression analysis carried out by Sachs and Warner (1995) of growth performance on natural resource endowment as a basis, Mehlum et al. (2006) included an institutional quality variable in the econometric estimation to empirically show how rent-seeking and the resource curse do not occur in countries with a high level of institutional quality. Further analyses have shown how, generally speaking, countries with extractive industry-based economies suffer a negative effect at the institutional level. Following the discovery of oil in the Democratic Republic of São Tomé and Príncipe, Vicente (2010) examined the impact of a sudden increase in natural resource endowment on the level of corruption of the government in the country. By analyzing the trends provided by the World Bank on the level of corruption and comparing the data with those of nearby Cape Verde, the empirical evidence in Vicente’s work shows how the levels of corruption in the two countries were low before the discovery of oil and how, thereafter, the levels of corruption in the Democratic Republic of São Tomé and Príncipe increased significantly (unlike those of Cape Verde). In line with Vicente, Ross (2001) showed how a boom in lumber prices in Southeast Asia compromised governance in the same way in the Philippines, Indonesia and Malaysia, observing an increase in the corruption level and a higher degree of political power concentration.

For Ecuador, which is economically dependent on the extraction of raw materials, we will try to understand whether the increase in oil exports in recent years, with its intrinsic risks, has led to repercussions at the political level and in international relations.

From a general point of view, the data (Transparency International, 2014) show an high level of the Corruption Perception Index in Ecuador that seems to confirm the findings arising from the literature. This data assume further value especially if connected to the recent international agreements reached between the Ecuadorian and Chinese governments.

According to documents examined by Reuters (2013), China has close to a monopoly control of crude oil exports from Ecuador. In November 2013, PetroEcuador, the state-owned oil company, signed an agreement with the Chinese state-owned company, PetroChina, in which Ecuador promised to sell over 90 percent of its oil production to the Chinese giant until 2020. An article published by Reuters (2013) reconstructs the history that led to this agreement which is relevant to our analysis. The first step which is vital to an understanding of subsequent events consisted in a restructuring of foreign debt by the Ecuadorian government in 2008. This led to a loss in credibility at the international level with the evident difficulty in accessing international capital markets. PetroChina offered a lifeline in July 2009 and deposited $1 billion in the coffers of the Ecuadorian government with an agreement that they would be repaid over a two-year period at an interest rate of 7.25 percent with a concession of 96,000 barrels of crude oil per day to the Chinese company. That same year, which also coincided with the official launch of the Yasunì initiative, the Ecuadorian Ministry of Economic Policy, in a private presentation to Correa’s staff, reviewed by Reuters, pledged to ‘make the utmost effort to support PetroChina and AndesPetroleum in the exploration of the ITT oilfield’.1 From official documents of a subsequent opening of a $1 billion credit line from the China Development Bank in 2010, the Correa government gave PetroChina permission to resell the Ecuadorian crude oil in any market (Reuters, 2013). In recent years, numerous credit lines have been opened, and by 2013 China had extended credit worth approximately $6.2 billion to Ecuador which covers roughly 61 percent of its financing needs. Intense exchanges between the two countries do not only regard crude oil. In March 2012, President Correa announced a 25-year contract with the Chinese company Ecuacorriente to work on the largest mine in Ecuador as part of the Mirador project which will bring approximately 52 percent of revenue into state coffers (Reuters, 2012). An analysis of this information and considerations made regarding a theoretical study of rent-seeking should make us reflect on the future of the Ecuadorian economy, especially regarding sustainable development, one of the government’s objectives. Worries in this direction have also been expressed by EP PetroEcuador which, according to Reuters (2013), in an official bulletin in March 2011 warned the government that PetroChina’s claim to Ecuador’s oil supply could prevent the country from signing more favorable contracts. If we bring all the points of our discussion together beginning with the theoretical discussions on appropriation of revenue from the extractive industry which, according to many scholars, reduces the growth performance of a country since it represents a waste of production capital, then the need for liquidity stated several times by Correa has paved the way, first of all, to huge inflows of finance from China and second, according to Reuters (2013), an almost monopolistic control of Ecuador’s oil exports by Chinese oil companies. To date (Reuters, 2013), China controls 90 percent of Ecuador’s oil exports and almost all of this is resold by Chinese companies on international markets. According to the Reuters report (2013), PetroEcuador had little choice in signing the contract given the huge amount of credit held by China. It is not difficult to imagine the same context in the Mirador project agreement which should make us reflect on what Ecuador would have obtained had it autonomously negotiated the sale of crude oil on the international market and had it exploited the largest mine in the country in the same way. PetroChina and PetroEcuador have declined to issue statements regarding the terms of the agreement.

In conclusion, we are not at present able to assess whether the risks associated with an extractive industry-based economy outlined in the literature are materializing in the bargaining capacity of the Ecuadorian government but, nonetheless, high level of corruption index certainly does not seem to alleviate these doubts. It is clear that even if the concessions to the Chinese companies are linked to significant financing, there is a loss not only in terms of sovereignty for Ecuador but, above all, in terms of revenue.

Human capital

A study by Gylfason (2001) shows how investments in human capital are directly related to the economic growth of countries rich in natural resources and how these investments are a key factor in ensuring that these resources are not transformed into a disadvantage for the country. To do this, he analyzed the relationship between three indicators of the intensity of investment in the education sector (percentage of public spending on education, duration of schooling and percentage of secondary school enrollment) in various countries and showed the direct relationship they have on economic growth and the negative effect that an extractive industry has on them. Using Gylfason’s (2001) analysis, we examined the performance of these indicators in order to assess whether, at a theoretical level, the exploitation of natural resources has a negative or positive impact on economic growth in the long run. In actual fact, as shown in Figures 7, 8 and 9, although the data analyzed so far give rise to a call for concern as far as the resource curse is concerned, in this case, the efforts of the Ecuadorian government should be viewed more positively.

Figure 7
figure 7

Source: UNDP (2013)

Expected years of schooling in Ecuador

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Figure 8
figure 8

Source: World Bank (2013)

Public spending on education – percentage of total government expenditure in Ecuador

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Figure 9
figure 9

Source: World Bank (2013)

Gross secondary school enrollment ratio in Ecuador1

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We can see that the largest increases in terms of years of schooling (Figure 7), percentage of public spending (Figure 8) and gross secondary school enrollment ratio (Figure 9) coincide with the start of the Revolución Ciudadana (2007). The most significant increase can be seen in the gross secondary school enrollment ratio which on the basis of Gylfason’s (2001) analysis is the indicator that is most widely used at the international level to measure the relationship between performance in the education sector and economic growth. In order to test whether the efforts of the Ecuadorian government in terms of human capital have resulted in a solid increase in quality of education, we chose to analyze the trend of the Survival Rate Grade 5 Index (World Bank, 2014) (Figure 10). As we can see, the index shows a large increase under Correa’s government, reinforcing our previous findings. In fact, in relation to major South American countries, Ecuador is now aligned with the highest regional levels, while it used to be one of the worst performers. In this respect, we can therefore conclude that the data are encouraging for the future of the country.

Figure 10
figure 10

Source: World Bank (2014)

Survival Rate Grade 5, total (% cohort)

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Institutions

The role of institutions is of paramount importance in all the explanations for the RCH that have been examined. The extensive amount of literature on the subject is essentially divided into two groups: one shows how the indirect effects of natural resource abundance on economic growth, through a negative influence on institutional quality, are greater than the direct effects on economic growth (Isham et al., 2003; van der Ploeg, 2011) and the other group sees the level of institutional quality as a factor that can transform natural resources into a disadvantage or an advantage for a country (Boschini et al., 2003; Mehlum et al., 2006; van der Ploeg, 2011).

Since our analysis is based on a change in government policies and our aim is to highlight the risks associated with the exploitation of natural resources in Ecuador, we have decided to refer to the second group as a theoretical basis for the analysis. We will therefore compare the level of institutional quality in Ecuador with the evidence provided in a study by Boschini et al. (2003) in an attempt to understand whether the Ecuadorian economy is at risk, bearing in mind that natural resources are the main source of wealth for the country.

In his work, Boschini et al. (2003) shows how natural resources have been an advantage for countries with a high level of institutional quality (Botswana, Chile, Norway, Canada, etc.), whereas they have been a curse for countries with low institutional quality (Venezuela, Nigeria, DR Congo). Due to insufficient data, our analysis will use different indicators of institutional quality from those used in Boschini’s study, since further tests show that ‘it seems unlikely that the results are sensitive to the measures of institutional quality adopted’ (Boschini et al., 2003: 24). The indicators of institutional quality examined belong to the Worldwide Governance Indicators Report (2015) and show the percentage of countries worldwide, for various indicators, that are above or below the level of the country being examined. The average level of institutional quality measured in Ecuador in the last 20 years, distributed among the various indicators2, stands at around 20 percent (i.e., 80 percent of the countries worldwide are above the level recorded in Ecuador).

This is also confirmed by the WJP Rule of Law Index (The World Justice Project, 2014) as shown in Table 1, which shows that Ecuador is ranked among the last places in the classification based on how the rule of law is experienced, both at global and regional level.

Table 1 Rule of law, Ecuador, Region Latin America and the Caribbean
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At the same time, the hypothesis of the negative influence of the exploitation of natural resources on institution quality (Isham et al., 2003) seems to be confirmed by the latest trend of institutional levels analyzed.

In light of analysis by Boschini et al. (2003) and Mehlum et al. (2006), we can conclude, considering the data examined on institutional quality, that the Ecuador development project may well run the risk of being exposed to the ‘resourcecurse’3.

Conclusions

One of the reasons behind the success of Buen Vivir in the scientific community and with practitioners is that it represents an alternative to development tout court (Vanhulst and Beling, 2014) and a response to the failures of the neo-liberal policies experienced. In recent years, despite new perspectives of the Ecuadorian project, the Revolución Ciudadana has conducted a so-called neo-extractivist policy in order to give a boost to economic growth so as to satisfy the basic needs of the population. This article may help to answer whether such economic choices can be fully justified in light of the great repercussions on the environment as well as the sacrifice to pursuing an alternative route to development. The idea of exploiting the mining sector to support economic growth belongs to the mainstream model and, as we have seen in our reflection, involves substantial harmful risk. In order to test the actual risks, we analyzed the indicators that are relevant to whether the resource curve will occur or not. In this regard, the ANS indicator suffered an alarming collapse in 2009–2011 with strongly negative values. At the same time, the trade balance for non-oil products is constantly in deficit and this deficit constantly increases also as a result of a substantial loss in competitiveness of the sector. This is confirmed by the rate of participation of industrialized products in total exports which has remained virtually constant since 2000 and by a further loss of the manufacturing sector’s share of GDP, in terms of added value. In addition, in terms of institutional quality, Ecuador is ranked among the last in the world based on how the rule of law is experienced, both at the national and regional levels. This evidence is also associated with the low levels of all institutional quality indicators taken into consideration. On the contrary, the largest increases in terms of human capital, more specifically years of schooling, the percentage of public spending and the gross secondary school enrollment ratio, coincide with the start of the Revolución Ciudadana (2007) and it has resulted in a solid increase in the quality of the education index.

On account of these results, data on the ANS indicator and levels of institutional quality have shown how Ecuador does not possess the conditions that the Resource Curse Hypothesis considers necessary to protect itself from possible negative effects caused by an increase in the exploitation of natural resources. The period of time analyzed also shows how the desire for a change in the productivity matrix (a solution provided by Ecuadorian government in order to reduce the dependence on oil extraction SENPLADES, 2009, 2013) to achieve more solid growth and greater economic sustainability may be jeopardized by the increased attractiveness of income from the extractive industry. Although data on investments in human capital are very encouraging and guarantee future institutional development (in contrast with the negative effect generated by the exploitation of natural resources), the analysis of trade relations with China demonstrates that even in the short term, the negative effects of an increase in the extractive industry can already be seen. In conclusion, the shift in perspective adopted by the Ecuadorian government, which gives priority to economic growth rather than the principles of Sumak Kawsay, represents not only a failure to comply with the ancestral principles of Buen Vivir, but seems paradoxically turn out to be counterproductive, above all, in terms of economic growth.

Notes

  1. 1

    The official document, in its entirety, can be consulted at the following link: http://www.theguardian.com/environment/interactive/2014/feb/19/china-development-bank-credit-proposal-oil-drilling-ecuador1.

  2. 2

    The Worldwide Governance Indicators dataset are available at: www.govindicators.org. The analyzed data refer to the time series 1996–2014. The indicators for evaluating countries are the following: Voice and Accountability; Political Stability and Absence of Violence/Terrorism; Government Effectiveness; Regulatory Quality; Rule of Law; Control of Corruption.

  3. 3

    An additional risk factor is established in the work of Andersen and Aslaksen (2008) which demonstrates that presidential democracies, such as in Ecuador, are more likely to experience the RCH.