Ecuador at the cross-roads, for an integral audit of public indebtedness

Chapter 2 : Legal and institutional issues concerning illegitimate debt

15 August 2007 by Virginie de Romanet


A. The context
B. Ecuador’s illegitimate debt
C. The non-respect of legal provisions
D. Textbook cases

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 A. THE CONTEXT [1]

As in all developing countries, Ecuador’s external debt has exploded over the last few decades, rising from 241 million USD in 1970 to 16 995 million USD in June 2006. External debt per inhabitant has increased from 36 USD in 1970 to 1 460 USD in 2005.
How have things reached such a pass? Like so many other countries, Ecuador endured a long period of dictatorship, from 1968 to 1979. The regime was responsible for a very significant increase in the debt, and used illegitimate means, as we shall see. In nine years (1970-1979), the debt rose from 241 million USD to 2 554 million dollars [2]. During this same period, the public external debt multiplied by 8 while private external debt, which accounted for a quarter of the country’s total external debt in 1980, multiplied by 37 [3].

After the return to democratic rule, the external debt continued its upward spiral, from 2 554 million USD in 1979 to 10 669 million USD in 1988. The reason for this is simple: when the debt crisis hit Ecuador at the end of 1982, the rise in interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
(usury) forced the State to borrow in order to face this brutal and unexpected increase. The deadly spiral continued, greatly benefiting the creditors who have thus had the means to hold Ecuador in their grip until now.

Sucretization



This mechanism for converting private debt into public debt was used in 1983 and 1984. The private debts taken over by the State during Ecuador’s “sucretization” significantly increased the public portion of the country’s debt. In addition, these debts were illegitimate.

Using sucretization, the Ecuadorian oligarchy and its international allies arranged matters so that the private debt owed to international creditors - at that time 1 628 million USD - was be taken over by the State, or in other words, by the people. This was done at an average exchange rate of 63.55 sucres to the dollar, which vastly increased the amounts to be repaid compared with the current exchange rate of the 1970s, which was 25 sucres to the dollar.

Between 1988 and 1992, when the debt was holding the State hostage to national and international bankers who could impose whatever economic measures they pleased, a series of legal and institutional changes of a neo-liberal tendency were introduced to reduce the scope and functions of the State. Collective services and strategic businesses were transferred to the private sector, or in other words, to multinationals. Public policy was decided in Washington by the IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.

http://imf.org
and the World Bank World Bank
WB
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

that dictated the letters of intent formally written by the government authorities in Quito. The fiscal policy drawn up by the IMF was designed primarily to ensure servicing of the debt. In a move to increase State revenues - not for development but for ensuring repayments at any price - the IMF imposed a civil service wage-freeze in 2002-2003 and the laying off of 30 000 employees in the public sector [4].
When financial crises occur, the IMF steps in with stand-by credits to bail out creditors, especially those who make risky investments knowing that the State will then be obliged to repay the debt, even if it was originally owed by a private company. The IMF in fact organizes a massive transfer of capital from the people of the country concerned towards rich creditors.

Through the intermediary of the debt mechanism, Ecuador has become an exporter of capital. Between 1982 and 2006, Ecuador paid creditors 119 826 million USD in principal and interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. , whereas it received new loans to a value of 106 268 million dollars. This works out as a negative net transfer of 13,558 million dollars, whereas in the same period, the debt went from 6,663 million USD in 1982 to 16,698 million USD in June 2006. Thus we see that the entire Ecuadorian economy was being brutally squeezed to extract the substrate that would allow the country to pay back an illegitimate debt, regardless of the country’s social indicators.

After the exchange of Brady bonds for Global bonds halfway through the year 2000, the external debt went down from 16 282 million USD to 13 565 million dollars. Yet by 2002, the level of indebtedness had returned to the same level. In fact, despite a 10% decline in external public debt, external private debt considerably increased, rising from 2 229 million USD in 2000 to 6 568 million USD in August 2006 [5].
In addition, the absence of external public credits brought no real reduction in the public debt because this absence was compensated by an increase in the internal debt, primarily in bonds, with higher costs of repayment, since these short-term credits carried higher interest rates than those of the external debt [6].

Between 1980 and 2000, Ecuador’s real gross domestic product GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
(GDP) increased 2% per year, which is insufficient in relation to its demography. In fact, GDP per inhabitant fell by 0.5% per year and has been more or less stable since 2000. However, behind this figure is an increasingly uneven distribution of wealth, with the rich taking an ever growing share Share A unit of ownership interest in a corporation or financial asset, representing one part of the total capital stock. Its owner (a shareholder) is entitled to receive an equal distribution of any profits distributed (a dividend) and to attend shareholder meetings. .

In 2004, debt servicing represented 148% of oil tax revenues, and in 2006, 200%. If this trend continues, Ecuador will have exhausted its oil reserves in 25 years without investing any of this wealth for its own economic, social and environmental development. In addition, the damage caused by oil operations in the north-east of the country is estimated to have cost 50 times the amount of the national debt. During 30 years of intensive oil drilling, deforestation has destroyed huge areas of forests, the majority of rivers and underground water reserves have been polluted and the indigenous peoples of the region have lost their native habitats and territory.

 B. ECUADOR’S ILLEGITIMATE DEBT

Several factors contribute to the definition of Ecuador’s debt as being contrary to the interests of the Nation, and therefore illegitimate. The first of these is not specific to Ecuador but is at the heart of North-South relations. It is the system of unequal exchange, which means that third world countries export their raw materials and are obliged to import highly priced manufactured and processed products from the North. In this unequal relationship, the countries of the South have not been able to develop processing industries because the Northern countries have hung of to their monopoly of these very high added-value industries.

During the dictatorship period, State intervention in the economy appeared to grow, contrary to the neo-liberal policies forcibly imposed in the Southern Cone dictatorships (Argentina, Chile, Uruguay) and in Brazil. In Ecuador, the economic policy pursued by successive governments during the dictatorship contained clearly defined development objectives for the oil industry, with a view to increasing State revenues [7]. However, the State, in spite of its increased powers, still remained merely an appendage of the private sector [8]. Unfortunately, the very big increase in GDP (more than 11%) between 1972 and 1979 did not get used to put an end to the existing power structures [9] and to bring about progressive changes, as Velasco Alvarado’s military government in Peru had tried to do between 1968 and 1975, by nationalizing the oil sector and key sectors of the economy, carrying out a land reform, and implementing exchange and foreign trade controls.

After the return to democratic rule, Ecuador entered a process of currency devaluation Devaluation A lowering of the exchange rate of one currency as regards others. . This is surprising in the sense that a bill had been drafted in 1979 to revalue Ecuador’s currency from 25 sucres to the US dollar to 20 sucres to the dollar. Finally, this bill was forgotten, and never heard of again, and a reverse process took place in 1980. After a decade with a stable exchange rate of 25 sucres to the dollar, the rate went from 30.56 sucres to the dollar in 1980 to 98.69 sucres to the dollar in 1984.

Following the return to democracy, the Executive had full control over the monetary plan and was not accountable to Parliament, since Article 55 of the 1979 Constitution stipulated that “the form for establishing the international exchange rate of the monetary unit – sucre – is fixed and modified by the president of the Republic [10]. “ Article 78 goes on to state that “the ability to authorize and to contract loans is the responsibility of the president of the Republic [11] “. Consequently, the financial circles, which until 2006 controlled the President’s decisions, had full control over loan policy and exchange parity conditions.

On 14 May 1980, the Monetary Council authorized dollar debts for local projects, which opened the way to speculative loans. Payment in US dollars was bound by the exchange rate in force on the date of payment, and as we have just seen, this rate was to become more and more unfavourable to borrowers as the devaluation process continued over the next decades.
The National Development Council (CONADE), created by Article 89 of the Constitution, had no organic law or statutes of its own during this key period from May 1980 to May 1985, and thus had no control over aggressive indebtedness. While the 1980-1984 development plan included 41 fundamental projects that should have brought change to the country, there was no sign in 1984 that any of these projects had been completed. It is clear that the real power was wielded by the Monetary Council and that the National Development Council was merely a façade designed to make the impoverished majority believe that the situation was going to get better.

This indebtedness, and the enforcement, from the beginning of the 1980s, of structural adjustment Structural Adjustment Economic policies imposed by the IMF in exchange of new loans or the rescheduling of old loans.

Structural Adjustments policies were enforced in the early 1980 to qualify countries for new loans or for debt rescheduling by the IMF and the World Bank. The requested kind of adjustment aims at ensuring that the country can again service its external debt. Structural adjustment usually combines the following elements : devaluation of the national currency (in order to bring down the prices of exported goods and attract strong currencies), rise in interest rates (in order to attract international capital), reduction of public expenditure (’streamlining’ of public services staff, reduction of budgets devoted to education and the health sector, etc.), massive privatisations, reduction of public subsidies to some companies or products, freezing of salaries (to avoid inflation as a consequence of deflation). These SAPs have not only substantially contributed to higher and higher levels of indebtedness in the affected countries ; they have simultaneously led to higher prices (because of a high VAT rate and of the free market prices) and to a dramatic fall in the income of local populations (as a consequence of rising unemployment and of the dismantling of public services, among other factors).

IMF : http://www.worldbank.org/
programmes designed to reduce spending on social sectors and allocate these savings to servicing the debt, were an infringement of national right. Article 71 of the 1979 Constitution stipulates that the budget should allocate major resources to public services and the execution of economic and social programmes, including 30% for education and the eradication of illiteracy [12].
Article 37 refers to the supremacy of the Constitution. It states that other standards of a lower hierarchy must comply with the supreme law. International agreements and treaties that are in contradiction with the Constitution or that alter its rules have no validity.

It was in compliance with the spirit of this Constitution that, at the end of April 2007, President Correa expelled the World Bank representative, Eduardo Somensatto, as a reprisal for a World Bank decision of 2005 when Rafael Correa was Finance Minister under the Palacio government.
_ The World Bank had blocked a promised loan of 100 million USD as a reaction to reforms by FEIREP, the oil stabilization fund, which planned to use oil revenues to prioritize social policy rather than repayment of the debt. Correa chose to resign in protest against this interference from the international institution.
_ Correa gave the World Bank representative 48 hours to justify the decision taken in 2005. When no explanation was forthcoming, he expelled him. The President of Ecuador declared that the World Bank’s suspension of the loan constituted a total lack of respect for the sovereignty of the country. This decision reflects the determination of the new president and a genuine desire for change.

In addition to contravening the interests of the nation, certain measures have violated national right. The Monetary Council’s agreement on 14 May 1980 to allow dollar indebtedness for local spending is in violation of Article 7 of the monetary regime law which states: “All type of payment obligations that must take place in Ecuador must be carried out in sucres“. This violation obviously benefited the local banking and brokerage sector.
On 18 July 1985, a bill for reforming the monetary regime law was rushed through and published in the official register on 22 August 1985. Article 1, which replaced Article 7 of the previous regime, stipulated that “obligations must be paid in sucres, making the conversion in line with the market exchange rate corresponding to the currency concerned and at the rate of the day on the date for payment“.
The fact is that for a period of 5 years and 3 months this difference in exchange rates had been applied, without any legal basis for it, which is totally illegal. When the operation in question is not part of an international treaty, it is the country’s own financial law and the measures permitted by that law that govern external borrowing. On principle it is not therefore permissible to apply foreign legislation. The rules fixed by Article 7 of the monetary regime law - payment in sucres at a fixed rate of interest - should have been applied.

Various sectors engaged in dollar debts for local projects. This was the case for the local banking and brokerage sector and for international banking and offshore sectors. It was also the case for clients of the local banking and brokerage sector, who received loans in US dollars either for local expenses and non-financial purposes, or for financial speculation. It was the case, too, for the Central Bank Central Bank The establishment which in a given State is in charge of issuing bank notes and controlling the volume of currency and credit. In France, it is the Banque de France which assumes this role under the auspices of the European Central Bank (see ECB) while in the UK it is the Bank of England.

ECB : http://www.bankofengland.co.uk/Pages/home.aspx
of Ecuador, which generated internal credits in sucres through the local banking and brokerage sector.

 D. TEXTBOOK CASES

Odious loans to the dictatorship

The regimes governing Ecuador between 1968 and 1979 were dictatorial regimes that indebted the country very considerably, as we have said at the beginning of this chapter.
During the oil boom of the 1970s, the private sector contracted very heavy dollar debts with foreign creditors. This period, and in particular the years 1976-1979, when the external debt exploded (multiplying by 5 in three years) was called the period of “aggressive indebtedness”. The share of private debt significantly increased, with very unfavourable terms: 75% of these debts had to be paid in less than a year, and 83% had been contracted at variable rates. Given the international context (the rise in interest rates, lower oil prices, etc.), the resulting over-indebtedness was bound to become intolerable.

Unacceptable loans

Sucretization

The circles wielding economic and political power in Ecuador urged the government to intervene financially to ensure their rescue, while the IMF and the World Bank, pursuing international banking interests, put pressure on the State to guarantee payment of this private debt. The State therefore took over the private debt by exchanging dollar bonds for bonds in sucres, with parity and interest-rate fixed at the signing of the contract. The result was that the private parties did not have to bear the cost of increased interest-rates and the devaluation of the sucre.
Through the sucretization process, the government transferred the greater part of the external private debt to the State. Thus the whole of Ecuadorian society paid for the private borrowers who had indebted themselves excessively.

The sucretization process involved 1 682.5 million USD of private sector debts.
The local banking and brokerage sector took over the debt and sucretized without proper control from the Central Bank.
On the basis of the exchange rate alone, it is estimated that the State subsidized the private sector for an amount equivalent to 1 300 million dollars. The majority of the loans had been contracted at an average exchange rate of 25 sucres to the dollars, while the State take-over of these loans was made at an average rate of 63.55 sucres to the dollar.

This mechanism was reserved for an elite: 3% of the sucretized entities, representing only 95 beneficiaries, benefited from 75% of the total amount sucretized.
In addition, this debt transfer was made in an indiscriminate manner, without supervision or controls. No mechanism was set up to check if the debts concerned were paid or not. The accounts of the Central Bank of Ecuador reported only the registering of debts negotiated on the free market, and not their repayment. The State therefore assumed fictitious debts. Since the declared objective of sucretization was to avoid the bankruptcy of companies that made up the country’s productive infrastructure, it is surprising to find, in the list of beneficiaries, the names of Ecuador’s elite clubs, like the Quito Tenis y Golf Club, or the Club de la Banque du Pacifique. It is clear that sucretization did not serve the interests of the nation, but rather those of the big international and local banks and the economic and political elite of the country. How, in these circumstances, can the people of Ecuador, through their government, be justifiably called on to repay this debt?

One can go even further and ask why the private sector indebted itself in dollars. Were there not enough sucres available in the local banking sector? The reality is that the local banks’ credit in sucres, from domestic savings accounts, was more than sufficient to finance operations and fixed investments in the productive and professional sectors and even in the international tourism sector.
These dollar credits were exaction credits against the country, the Central Bank and the productive sector with a view to alienating oil for the benefit of the local banking and brokerage sector.
So it was that hundreds of millions of USD were incorporated into the sucretization process without being inventoried.
This laid the foundations for a thrust towards direct foreign investment [13], a system different from the mixed companies existing up to then, and applied particularly vigorously in the oil sector. The Oil Law was reformed to favour service provider contracts, opening the door wide to the private sector on the pretext that the State had insufficient resources (thanks to the cost of debt servicing), and therefore could not bid for these contracts. This led to the weakening of the national oil company (CEPE), which subsequently became PETROECUADOR, with subsidiaries in exploration, drilling, transport, refining and marketing that had the profile of companies ripe for privatization. Because of trade union opposition, it was not easy for those seeking privatization to achieve their ends, which is why PETROECUADOR was deliberately under-financed.

To conclude on sucretization: Making a society responsible for the private debts of the rich is illegal, unjust and immoral. For this reason, this State-borne debt must be declared null and void. Such an act is criminal in many of the creditor countries, which makes it possible to simply demand the invalidity of this debt and the application of the corresponding legal codes.

The Brady Plan

It was on the initiative of the United States that the Brady Plan was implemented at the end of the 1980s in several developing countries defaulting on their debt repayments. The plan was to reduce the debt service Debt service The sum of the interests and the amortization of the capital borrowed. burden by reducing the principal due. However, it was more a question of rescuing creditors from a largely unrecoverable debt whose value on the Ecuadorian market was not more than 10% of its face value. The issue of Brady bonds by Ecuador in 1994 can therefore be considered as a legitimization process for the whole of the commercial debt - a profoundly illegitimate act
It is useful to recall the shady circumstances in which this exchange took place. The government of Ecuador had suspended repayment of the external commercial debt in January 1987. This suspension of payment, which lasted almost five years, would have allowed Ecuador to ask for prescription of these debts in the courts of New York State and London. But in December 1992, just a short time before the eventual prescription date, an executive decree was published in which the Ecuadorian State confirmed its status as debtor to the banks and renounced its lawsuit. This decision proves once again the collusion of certain members of the government with the big banks, and a disregard for the national interest. Certain newspapers at the time reported that the then Finance Minister, Mario Ribadeneira, himself held securities for an amount of 300 million USD
So we see that while part of the debt could have simply been left unpaid, those in power chose to ignore this opportunity and thus opened the way to an exchange of debt bonds for Brady bonds. In reality, the Brady Plan merely postponed repayment problems, since high interest rates again made debt repayment unsustainable, forcing Ecuador to suspend payments during 1999. This was the most serious crisis in the country’s recent history.

Global bonds

Between 1980 and 2000 the exchange rate went from 25 sucres to the dollar to
25 000 sucres to the dollar.
In response to this situation, on 10 January 2000 the sucre was replaced by the US dollar. This was dollarization. It was formalized by a law dated 13 March 2000 entitled “Act for economic transformation of Ecuador” organized by the local banking and brokerage sector. By this act Ecuador was deprived of any room for financial manoeuvring.
Ecuador then proceeded to negotiate the exchange of Brady bonds and Eurobonds (bonds issued in 1997 for an amount of 500 million USD with a 5 and 7 year term of maturity) for Global bonds in 2000 for a total amount of 5 570 million dollars. These Global bonds fall into two categories:
- Global bonds 12 concern 1 250 million USD, repayable over 12 years at an annual fixed rate of 12%.
- Global bonds 30 concern 4 500 million USD repayable over 30 years at an interest rate of 4% in 2001, increasing by 1% per year to reach 9% in 2006, then from 2007 to 2030 at an annual rate of 10%.
The conditions of this exchange, which will be dealt with in Chapter 5, were once again very costly for the Ecuadorian State. In view of the various irregularities committed throughout the process leading to the issue of these bonds, this debt should be qualified as illegitimate, and for several reasons: it has not served the national interest, its management has been dictated by the interests of a very few, which in its turn leads to the conclusion that these were unbalanced agreements with unacceptable conditions.

Debts [14] contracted for projects in the mining, agricultural and fishing sectors

An example of such debts concerns a project for mining development and environmental control called Prodeminca, implemented in 1993-1994. This project was financed for an amount of 14 million USD by the World Bank and 10 million USD by Sweden and Great Britain. Its purpose was to promote private investment in mining development.
The Prodeminca project involved some modifications in mining legislation. Two laws (Trole I and II) created conditions for the plunder of resources by multinationals (exemption from the 3% of investments or net production paid back to the State, reduction of the role of the Minister of the Environment, the possibility of mining in protected areas).
Another part of the project envisaged the production of geochemical maps relative to authorized mining prospection in protected areas. Despite an appeal made before the Inspection Panel appointed by the World Bank, the latter did not carry out the compulsory ecological impact study. Sale of these maps to companies has been authorized, and several companies now have concessions in protected areas.

Another 1994 sectorial programme in the field of agriculture and fishing (Programa sectorial agropecuario - PSA), financed by the Inter-American Development Bank (IDB), resulted in modifications to agricultural legislation and the dismantling of the Ministry of Agriculture.

This programme led to the enactment in 1994 of a new law called the “agricultural development law” which made land a commodity and no longer a right, and which jeopardized any possibility of new land reform. Obviously, this reform benefits the big farmers of cash crops for export, who buy up a large part of the land to the detriment of small farmers.

The Inter-American Development Bank also provided 15.2 million USD to finance another land development programme designed to regularize and administer rural land (the PRAT Project) and which will enable the creation of a land property register. This programme has led to the expulsion of indigenous farmers who occupied this land without being in possession of a property title.
In addition, Ecuador began privatizing irrigation water, until then a public commodity, through a 20 million dollar technical assistance loan from the irrigation sub-sector (PAT Project) financed by the World Bank. The introduction of a tariff and concession system based on productivity once again worked in favour of the big farming operations and to the detriment of small farmers.

All these credits have undermined Ecuador’s food sovereignty by depriving small and medium farmers of their access to basis resources like earth, water and seed. Agricultural production no longer meets the needs of the country’s people, but those of the importing countries, a factor which has a big impact on the poverty level.

Inappropriate loans

The Jaime Róldos Aguilera multipurpose project

This project, which had been gestating since the 1950s, was driven by the IDA (International Development Agency) and the Inter-American Agricultural Cooperative Service. Preparatory studies were carried out by the Study Commission for the Development of the Guayas River Basin (CEDEGE).
This project, undertaken for a total cost of 1 638 million USD, 80% of it financed by external credits, included the construction of a dam, the provision of water to the town of Guayaquil, the Marcel Laniado hydroelectric plant, the irrigation project for the Daule valley basin, water transfer to the Santa Elena peninsula, and drinking water and sewerage services for the peninsula.
In 1980, before construction started, the feasibility study by the IDB showed that the project had a negative net value of 50 million dollars. Despite this, it granted the credit. In 2001, the University of Guayaquil made a new study of the project, which was already well under way, and found a negative net value of 130 million dollars. In other studies, Acción ecológica discovered that the University of Guayaquil had only taken into account the benefits of water transfer and not its costs.
Out of the colossal sum of 1 638 million dollars, only 3% was allocated to environmental management and remedial measures for social and environmental damage. Social and environmental damage meant, among other things, dispossessing the peninsula’s communities of 25 000 hectares of their lands and methane production. If this damage is included in the financial investment, the total cost of the project would then amount to 4 billion dollars [15].
The project’s beneficiaries were the financiers, the builders and the operators. The water transfer objectives were not met since when water is taken from one side to provide for the other, on the one hand the land floods and on the other hand it dries up. The project has not met its fixed objectives. Although the project was supposed to irrigate nearly 44 000 hectares of the Santa Elena peninsula, in fact it had only irrigated a little under 6 000 hectares.

Unacceptable conditions

CEM

A telling example of unacceptable conditions is the CEM (Centros Educativos Matrices) Project, involving the World Bank (a loan of over 100 million dollars) and the IDB which provided significant funding during the government of Rodrigo Borja (1988-1992). This was a project aimed at creating central schools and satellite schools. For this project, a great deal was invested in infrastructure but nothing at all in education.
An important factor hindering progress in education is the loss of Unesco’s influence for the greater benefit of the World Bank. The Bank sets itself up as the world’s leading advisor on education. Even more than money, it is ideas that the Bank lends, or rather imposes on countries. These loans are dangerous because they lead to fundamental changes that a country cannot easily put into reverse at a future time. Examples include concepts of decentralization, assessment and payment by merit. The World Bank, and the IDB in its wake, always impose the same formulas, whatever the country – financier formulas that are totally alien to the terrain and its realities. Loans are conditioned by the implementation of certain reforms favourable to international investors and multinationals, in the sphere of education as in others.
In the CEM Project, the WB and the IDB demanded the creation of executive units for easier control. With these two autonomous executive units - EB-PRODEC (WB) and PROMECEB (IDB) - the WB and the IDB could bypass the Ministry of Education, while employing a more disciplined staff because salaries were 10 times higher than those of the Ministry of Education civil servants. This of course was a way of undermining the Ministry. While a project manager in the Ministry of Education earned between 300 and 600 dollars, his counterpart in an executive unit earned 6 500 dollars. Projects undertaken in this context are vectors of education merchandising driven by the international financial institutions.

Conditions violating internal law

The IMF and the World Bank seek to convert interventionist and regulatory States into minimal States. To achieve this, they have invented the notion of “good governance”, which allows them to stress the notion of democracy while the real objective is to develop a government’s capacity to implement measures imposed by the IMF and the WB. A “good government” can in this way neutralize social resistance without affecting the course of neo-liberal reform. It is easy to see the fundamental difference between a genuinely democratic State and a State in which the government sacrifices the population to the adoption of structural adjustment measures.

To increase the export capacity of borrower countries, and thus guarantee the payment of the external debt, the IMF forced debtor countries to devalue their currencies (in violation of what is stipulated in the constitutive document of the IMF). These devaluations have accelerated inflation Inflation The cumulated rise of prices as a whole (e.g. a rise in the price of petroleum, eventually leading to a rise in salaries, then to the rise of other prices, etc.). Inflation implies a fall in the value of money since, as time goes by, larger sums are required to purchase particular items. This is the reason why corporate-driven policies seek to keep inflation down. and reduced salaries. This means that the IMF’s adjustment policies were themselves responsible for severely destabilizing the borrowing countries.

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This collective work was carried out in July 2007 at the request of AFRODAD (www.afrodad.org) by a team at the CADTM composed of Benoît Bouchat, Virginie de Romanet, Stéphanie Jacquemont, Cécile Lamarque and Eric Toussaint.

It was revised by Myriam Bourgy, Damien Millet and Renaud Vivien.

The English translation was done by Elizabeth Anne, Vicki Briault, Judith Harris and Christine Pagnoulle.

Footnotes

[1The majority of facts contained in this study were taken from the reports of CEIDEX, the Special External Debt Audit Commission set up in March 2006 by the President of the Republic, Palacio, and which worked from July to December 2006.

[3Arias Palacios, H. “Impacto económico, social y ambiental de la deuda soberna del Ecuador y estrategias de desendeudamiento” (The economic, social and environmental impact of Ecuador’s debt and strategies for getting out of debt), CEIDEX 3rd volume, August 2006.

[4Idem, p.55

[5Idem, p.33

[6Idem p.34

[7Benalcazar, E., “Deuda externa privada con la banca privada internacionalizada”, (Private external debt with the private bank internationalized), p.11, CEIDEX, 2nd volume, December 2006.

[8Idem, p.17

[9Ibid

[10Idem, p.20

[11Ibid

[12Pinto F., “Evolución de la normativa jurídica aplicable al endeudamiento público y su correspondencia con el marco constitucional, convenios y tratados internacionales y más estipulaciones legales”, December 2006.

[13Idem, p.48-49

[14“Casos que vinculan la deuda externa con la generación de deudas sociales y ecológicas”, Various authors, CEIDEX, 5th volume, December 2006.

[15Idem

Virginie de Romanet

est membre du CADTM Belgique

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