Effects of the International Conflict in the Ecuadorian Economy

Effects of the International Conflict in the Ecuadorian Economy [1]
October 31^st, 2001

By David R. Lee [2]
The Cornell University, NY, USA and the SICA/MAG Project

The last September 11 panorama has affected not only the U.S. economy but also all the globalized economies. In the Ecuadorian case, impacts have had not only a non-economic shape but a personal shape, i.e., now people is always afraid of their environment and to travel due to security matters. It’s necessary to distinguish between the short- and long-term effects in the international trade impacts and global economy, and those directly related and not related with the September’s damages; an important distinction when public and private policies arise. In the short- and med-term, the U.S. recession will be sharpen, an aspect already foreseen. Unfortunately it’s likely that the whole world is in the same way. Effects related with a recession will be directly felt for a longer period of time. According to the IMF figures, the growth forecasted by the U.S. before the terrorist attack was of 2.5% for the year 2001, the lower one in ten years. The U.S. immediate effects have been the following:

Direct impact due to the New York and Washington terrorist attacks (more than one hundred billion dollars in New York).

Increase of unemployment levels.

Decrease in the consumers’ confidence levels.

Reduction in the corporative incomes and corporative investment.

But the U.S. basic economy structure is strong enough and has solid basis: low structural inflation, high business creation indexes and capital investments, and sound public finances, among others. Therefore, this economy will recover itself, maybe in more than 2, 3 or 4 quarters of what was foreseen (second or third quarter of the next year) before September, 2002. But other economies could take more time to be recovered, basically because they are not strong enough.

According to the Goldman Sachs Investment Bank, the year 2001 Latin American forecasts were very low: 1.3%, and the region will have many problems in order to have a positive economic recovery.

Lower demand of pleasure and business trips; fuels’ demand continue to decrease, thus, contributing to lower oil prices.

Lower consumers confidence indexes and reduction of expenses in luxurious goods, trips and entertainment; probably resulting in a lower demand for flowers, shrimps, mangoes and other non-basic commodities. The banana, coffee, cacao and other products’ exports consequences could be immediate, but at a med- and long-term consequences on these commodities shall be lower.

Corporative revenues and capital investment decrease will redound to lesser interests in the direct investment in third countries, probably Ecuador included.

The tourist industry, important revenues sources in Latin America and the Caribbean, will continue being affected by a lower economic capacity and an increase in the travel risk perception. Some advantages could be:

The dollar devaluation in front of other currencies and the corresponding higher competitivity in the European and Asiatic markets. This could be a sound opportunity in order to open new markets for Ecuadorian products.

Reduction of the international interest rates will result in a reduction of the foreign debt costs of the country.

In order to attack these problems (economy diversification, aggressive exports promotion, investment and infrastructure, new markets search, etc., not all of them caused by the September terrorist attack), in most cases conventional policies and strategies shall be searched at a macro-economic, institutional and sectorial levels. The three most important long-term effects to bear in mind when facing the short-term problems are: Firs, the U.S. and Ecuadorian economies will recovered themselves, as well as the rest of the world economies, however, some structural changes are foreseen due to the last September events.

Some U.S. speculations are basically related with firms of that country which are important for the whole world, Ecuador included. The reasons of these structural changes include:

Higher demand of security services, specially for business, but also for governments.

Increase of insurance demand and insurance policy costs for firms. During the last weeks increases in policies costs of about 50%-100% have been seen. Such costs, as well as security costs, will be charged to consumers.

Increases in the cost for having higher stocks, through caution measures in order to avoid the risk to stop.

Increase in certain services costs, like security, employees hiring, mail services, etc.

Finally, a lower satisfaction among employees due to the implementation of higher security measures, the “annoyance factor” could result in a lower productivity, or lower productivity increase.

Therefore, the cost for making business and the fixed costs level will increase, productivity and competitivity for companies where risk management and avoiding risks are very important, will decrease. But not everything is so bad.

Demand for services like security and insurance will increase, thus, creating new positions and companies, like the environmental services case due to this kind of regulations. However, for most of the individual companies, an increase in the making-business cost could be dangerous, and productivity reduction costs could be real. With changes (direct and indirect) or not in the Ecuadorian companies, it is clear that many changes will be seen in the international business world.

Depending how these changes affect the companies costs structures, many changes will be seen in the competitive advantages of making business in the international economy. A very important matter for Ecuador is the most strict regulations topic to food imports established by the U.S., where food contamination aspects have been taken into account as a possible target of terrorists attacks.

Therefore, it will be necessary that the corresponding North American entities like the USDA and the APHIS, as well as authorities of other countries find out the way to improve the security measures before an event of this kind complicates the food international trade. Second, in the long-term another problem, related with present events, is the future of foreign trade negotiations. Here, effects became equal and it’s difficult to find out the exact results. On one hand, in the short-term, there is a growing determination to continue as if nothing had happened (also in the free trade negotiations in the WTO, CAN and ALCA).

Opinions against continuing with efforts in order to reduce the international trade barriers, specially of food products, have arise, which at present involves potential risks; it is necessary, however, to realize that the world has enjoy of a great economic growth related with the fact to stop running towards trade during the last 50 years. Thus, we cannot allow terrorism to avoid progress and growth of international trade. If trade barriers increased as well as protectionism, it will be impossible to accomplish all the objectives proposed by the United Nations’ Millennium

Declaration: to reduce poverty to half for the year 2015, reduce the number of people without access to fresh water, increase access of poor people to education, and stop the AID’s dispersion. A positive management of the Declaration of Managua by the Under-secretaries related with the ALCA have been demonstrated. Also the U.S. Congress continues working in the approval of the Tariff Preferences Agreement for the Andean countries, which will still benefit Ecuador and its Andean neighbors. The U.S. Commercial Representative has also support the idea to continue working in the free trade matter.

The terrorists attacks problems could delay (specially the U.S. government) one, two or three years the chance to move forward towards other international trade sides, specially because the attention and efforts of politicians and mass media will be basically focusing the terrorism control; thus, these topics will have priority over the international trade ones. On the other hand, the U.S. government will keep on exchanging politics will and will incur diplomatic costs with other countries in order to make progress in the terrorism control, resulting in a lack of will and politics ability and no negotiation flexibility so as to reach to trade exchanges because the U.S. will have exhausted its politic capital towards the terrorism control. Although efforts are successful, one have to bear in mind that free trade doesn’t replace progress in other sides.

Those who oppose to trade liberalization has forgot other important changes: sound and stable governments, laws, institutions and a legal frame that support the private sector and, at the same time, protect the consumers’ rights, basic infrastructure investment, education and health, qualified labor force, etc., all of them necessary complements for trade liberalization and for constructing competitive economies in the XXI century. It’s clear that in many countries, trade liberalization and privatization haven’t been enough elements in order to warrant a sustainable trade. Third, in the long-term, all the countries, specially the U.S., will have to face inequity fundamental problems worldwide, which could be the main factor of the terrorism.

Taking about the economic roots of the terrorism in the U.S. at present is not too popular, in view of the military offensive in progress. In the long-term the U.S. must go towards specific aspects, such as:

The conflict between Palestinians and Israelites.

Lack of democracy in the Middle East and other places frequently unfeeling of their people needs.

Growing inequality between rich and poor countries.

The U.S., as a rich country, must face poor countries, which wonder the reason of their poverty, which are the historical conditions that took them to have that kind of life, and the mechanisms they should take into account in order to leave that situation. But they must do it in a deep way, facing basic economic conditions that support and strength the outbreaks of all kind of violence, terrorism included. After the cold war, the U.S. during ten years has focused its attention to internal matters in an isolated, non-integrated way, leaving out the rest of the world, ignoring their concerns. But on September 11 this has changed. A positive consequence for the U.S. since that date, is the awaken of that country to a globalization and free trade reality, upon large economic benefits, but also upon the responsibility to help to reach the sustainable, equalitarian development and growth that could give the poor people a new hope.

[1] The author’s comments and opinions, are personal points of view and in any way reflect the position of the U.S. government, nor the institution’s to where the author belongs to.

[2] Professor, Department of Agricultural, Resource, and Managerial Economics, and Director of the International Relationships Program, Cornell University, 248 Warren Hall, Ithaca, NY 14850.

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