On March 6, 2015, the government suddenly announced increases of up to 45% in customs duties on 2,800 imported products.
Why the rush? Where is the crisis? Simple: the government deficit was $5 billion in 2014 and is an estimated $8-9 billion for 2015.
Ecuador is caught in the pincer of two international developments beyond its control:
(1) The price of oil recently has fallen drastically. In June 2014 Brent crude was valued at $115 a barrel; in January 2015, $49. About a third of Ecuador´s revenues are furnished by petroleum, its most important export.
(2) Also during 2014, the dollar, which is Ecuador´s currency, strengthened 12% against a basket of world currencies (including 18% against the euro). The rise makes Ecuador´s exports more costly and hence less competitive in world markets.
I suspect Ecuador´s increase in customs duties will prove in the long run to be at best ineffective -- the proverbial drop in the bucket -- at worse spark a generalized inflation which could wreak havoc on thousands of households and businesses. We will know soon if Ecuador´s increase in duties will spark something else: a trade war.
Our position: hikes in customs charges should be the last -- not first -- resort. The intention behind them -- protect national industries -- is good. Unfortunately, only in a perfect world do intentions = consequences.
What, then, is the first resort?
Clearly, we are speaking of a permanent -- not stop-gap -- measure. If it exists for Ecuador it also exists for all nations economically dependent on nonrenewable natural resources such as oil.
That solution is a constitutionally-mandated and regulated permanent state fund financed by a severance tax on extracted natural resources. The fund would not sit idle as rainy-day money in a New York or Zurich bank; a portion of it would be used annually to help pay for recurring necessities, e.g., public education (see below).
Such permanent funds already exist. You will find an excellent analysis of New Mexico´s here. The bottom line:
"New Mexico consistently ranks low in every indicator of the economic welfare of its citizens, including health and education. There is one ranking, however, where New Mexico scores surprisingly high: New Mexico holds the third largest endowment in the nation,' after Harvard University and the University of Texas.2 The endowment, which is the combined total of the Land Grant and Severance Tax Permanent Funds (Permanent Funds), now holds more than $13 billion.3 How can a state that is so poor be so rich?
The answer lies in New Mexico's rankings in natural resources production. In 2006, New Mexico ranked third in the United States for copper mining4 and eleventh in coal mining. Additionally, the state is third in natural gas production6 and fourth in crude oil reserves.7 Rather than squandering the taxes and lease income that the state collects through this mineral wealth, New Mexico has entrusted the collected tax and lease revenue to the New Mexico State Investment Council (NMSIC) through the Permanent Funds.8 NMSIC invests this revenue in order to ´optimize the Funds to insure that future generations receive the same benefits as current beneficiaries.´9 Through NMSIC's strategically diversified portfolio, the Land Grant Permanent Fund has grown at an average rate of 10.9 percent. Similarly, the Severance Tax Permanent Fund grew 11.2 percent in fiscal year 2006 (FY06).10
The Permanent Funds represent an attempt to replace nonrenewable natural resources, which are depleted over time, with a permanent supply of money that grows ever larger. As New Mexico's Permanent Funds and similar funds elsewhere illustrate, such funds are successful when they both financially bolster the state's economy through strategic spending and continue to grow at a sustainable rate at least equal to the rate of inflation. Through careful investment, the Permanent Funds work to accomplish dual goals: first, to convert New Mexico's depleting natural resources into a source of wealth that is sustainable well into the future, and second, to serve the community today through the disbursement of funds.
New Mexico has mandated disbursement of funds for the benefit of the state's public schools. Indeed, the Permanent Funds distributed approximately $407 million in FY06 to public educational institutions statewide. 2 The figure represents the conservative distribution of between 4.7 percent and 5.8 percent of the five-year average market value of the Permanent Funds."
How much money are we looking at for Ecuador? Major differences mean that any New Mexico-Ecuador comparison allows for only a ballpark guess:
In 2012, tax revenues for New Mexico totaled $5 billion; for Ecuador, $15 billion. If Ecuador would have had a Permanent Fund the proportional size of New Mexico´s, the fund could have dispersed three times $407 million or over $1 billion in 2006 alone. Assuming actual spending levels, that would be $1 billion-plus not dispersed -- saved -- from other revenue sources.
Conclusion: adding up such savings over the years, it can be reasonably contended that Ecuador today would have no deficit if it had a permanent fund -- and without cutting its previous spending by a single penny. That means what is happening right now would not be happening, viz., Ecuador is turning to China for debt financing.
The political opposition to Ecuador President Rafael Correa is jumping on his custom duty increase as the outcome of a failure to set aside money during good times for unforeseen emergencies, i.e., the fall in the price of oil and the rise of the dollar. Dr. Correa The Economist, they charge, did not economize.
Ecuador´s nonrenewable resources are far from being depleted, which means the creation of a permanent fund financed by a severance tax is not only possible but practical. Based on experience elsewhere, such a fund would be of extraordinary economic benefit for the entire country.
Politically advantageous, too, for whoever proposes it.