Ecuador: Inefficiencies begging to be disrupted

When my family left Canada to live in Ecuador in 1993, my father described the Mercado de la Bahia market in Guayaquil as “chaos.” La Bahia has appeared on the U.S. government’s list of notorious black markets since the Office of the United States Trade Representative started issuing the report in 2006.

I remember individual stalls stocking anything from jeans and T-shirts to household chemicals. The stalls, crowded against one another under tarp-like roofs of stretched black plastic, took over 20 blocks in the city’s downtown core.

The 2014 Notorious Markets List notes that in La Bahia, “the occasional administrative enforcement efforts focus mainly on protecting domestic IPR [intellectual property rights] and are insufficient to address the overall problem.” Americans perceive this as threatening the economic interests of intellectual rights holders, especially American commercial interests.

The Ecuadorian government, however, doesn’t see La Bahia and the broader bustling market for unlicensed goods in Ecuador as that “problem” identified by the Americans. Ecuador decriminalized copyright violations in 2014 and even drafted a bill to encourage the spread of “open knowledge” to comply with a national plan to create a “social knowledge economy.”

That breath will be $5

“Capitalism tries to privatize and commercialize everything,” economist René Ramirez wrote on his blog in February 2014. Ramirez is Ecuador’s Secretary for Higher Education, Science, Technology and Innovation; his department is behind the social knowledge economy legislation. “If it could commercialize air, it would….” he continued.

“Knowledge is an infinite resource, which could be distributed very widely if not for institutionally imposed barriers….It’s obvious industrialized countries seek these commercialized systems of knowledge and technology because they’re the owners of the highest value knowledge….We in the South are left with the role of being consumers of this science, creation and innovation coming from the North.”

Ramirez believes government on the Left, as his claims to be, should be engaged in constructing free and open knowledge systems.

Ecuador’s efforts to reinterpret intellectual property within its border stems from the principles laid out in the 2008 Constitution, the most well-known legislation passed by current president, Rafael Correa.

That constitution radically changed Ecuadorian institutions and legislation. It granted rights to nature, which led in part to a complete shutdown of the
country’s mining industry exploration in 2008. Correa’s government has since developed legislation to reboot the mining industry, and in 2013, it passed a bill that streamlined the process for foreign investment in the mining sector.

“They realize their policies are not working and they change them,” says Andres Vergara, a financial analyst at a stock market firm in Quito. He says the Correa government’s legislative trajectory is typical for populist governments in the region.

Reflecting some lack of confidence in the conditions in the country, and despite the 2013 mining law reform, that same year, Canada-based Kinross Gold pulled out of Fruta del Norte, a large gold-silver project. It sold the land concession for $240 million, a fraction of the $1.2 billion it had paid in 2008.

The government’s heavy-handed involvement since 2008 in all aspects of life in Ecuador has also been reflected in total overhauls of the judicial, education and healthcare systems, as well as labour law.

“Investment into state projects is a good bet,” Vergara says. “Even if the project doesn’t work out, the investment has a lot of guarantees. When it comes to state projects, the state is reliable.”

For example, in December 2015, Ecuador paid $650 million for total payment of its 2015 global bonds, marking the first time in its history the country repaid its foreign debt on time. The move was meant to restore investor confidence and lower future borrowing costs, according to the government. A month later, it also agreed to pay $980 million to the U.S. oil company Occidental for a 2006 assets seizure after the International Centre for Settlement of Investment Disputes ruled in Occidental’s favour.

Most of the investments entering Ecuador are now going to state projects, such as hydroelectric dams and the Pacific Oil refinery project, because it’s one way for foreign investors to feel confident despite the various shifting legislative regimes.

Borderline Marxist

“Foreign direct investment is more complicated,” Vergara says. “At least there’s no risk of devaluation for the currency and single-digit inflation since dollarization,” which happened in 2001.

Ecuadorian labour laws, he adds, “are borderline Marxist. We have a situation where half of the population is underemployed,” because it costs too much for small and medium-size companies to hire full-time workers and pay for pensions and benefits in addition to salaries.

“The government is currently relaxing the rules [of the Labour Code] because it’s too expensive to hire fulltime workers,” Vergara says. Legislation passed in March allows private companies to reduce workers’ hours from 40 hours to 30 hours per week for six months if they can prove they’re undergoing austerity measures. Parental leave will also be extended for both mothers and fathers, and the state will fund more social services for young workers earning less than twice the minimum wage and increase unemployment benefits for those laid off in 2016.

For hiring foreign workers, the process is even more complex. In 2013, I applied to work at a private Ecuadorian newspaper. I anticipated problems with the visa process and so had accepted a job offer from a state-owned paper, hoping to avoid some of the constraints on private media companies the government has enacted.

Even with a job offer in hand, it took six months to negotiate a work visa. The process involved many trips to the Ministry of Labour, where I was assisted by a Ministry lawyer.

At different parts of the process, I had to present blood tests verifying my HIV status, fire department inspection papers of the company I wished to work for, salary information for all its existing employees, certificates verifying all of my previous work experience and at least 300 hours of training hours in my field—all translated and certified by notaries and government-approved translators. Even the translators needed to attend a government oaths commissioner to verify the legality of their work.

I heard anecdotally during the process that Ecuador had granted fewer than 1,000 work permits to foreign workers that year, and was honestly surprised that many people had bothered to go through the process.

Eventually the Foreign Minister did intervene and my permit was approved, but only because he’s a personal friend of my supervisor at the paper. If I’d been offered a job by a private media company instead, those connections wouldn’t have existed and the story would have ended differently. I wouldn’t have received the work permit without the Foreign Minister’s intervention, and he wouldn’t have intervened to help a private media company.

Media and banking are the two sectors the Correa government has taken the most interest in constraining in post-2008 legislation. Vergara says the Correa government’s regulation of the banking sector has had a negative impact on business in the country.

Banks are obligated by law to offer credit to the state before private investors, and the state pays lower interest rates, which “takes away muscle from the financial sector.” The 2008 Constitution merged the Central Bank with the executive branch, significantly decreasing the Central Bank’s level of autonomy. Since 2008, the executive branch’s political agenda has directly influenced monetary policy.

The U.S. State Department puts out a yearly Investment Client Statement for firms considering investing in Ecuador. The 2015 guide reads as follows: “The [Government of Ecuador] is openly hostile towards private banks and financial institutions, considering them enemies of President Correa’s Citizen’s Revolution. Between 2012 and 2013, the financial sector was the target of numerous new restrictions. By 2012, most banks had sold off their brokerage firms, mutual funds and insurance companies to comply with constitutional changes following a May 2010 referendum. The amendment to Article 312 of the Constitution required banks and their senior managers and shareholders with more than 6% equity in financial entities to divest entirely from any interest in all non-financial companies by July 13, 2012. These provisions were incorporated into the Anti-Monopoly Law passed in September 2011.”

Uncertain environment

For this reason, financial and speculative markets aren’t a wise investment in Ecuador.

Vergara considers that the safest investment foreigners could make in Ecuador, besides state-promoted projects, is in established Ecuadorian companies. For example, Coca- Cola just bought controlling shares in Ecuadorian beverage company Tony. The top 500 companies on the Ecuadorian stock exchange rarely change from year to year, Vergara says, and investors can expect profits of 12% or more. “There’s good return over equity in the local market.”

New entrants into Ecuador, however, won’t find an impartial judiciary, says Matthew Carpenter-Arevalo, a Canadian entrepreneur based in Quito who advises companies wishing to set up shop in Latin America.

Biased judges create “an environment of uncertainty,” says Carpenter-Arevalo. “I invested my savings in my business and I’m left to wonder, if something goes wrong, will I be treated fairly by the law? Also, as a foreigner, I fear speaking out will lead to my visa getting cancelled or my business being harassed. As a result, I take risks—as do all investors and entrepreneurs—because you can’t be sure you’ll be treated fairly if you have to appear before the law.”

The World Justice Project’s Rule of Law Index rates Ecuador 77th out of 102 countries on its most recent global index.

Nevertheless, “innovating in Ecuador can be extremely rewarding because there’s so much inefficiency begging to be disrupted,” says Carpenter-Arevalo.

While the U.S. may consider La Bahia a threat to its commercial interests, it also represents the bustling appetite Chávez for consumer goods in the growing Ecuadorian middle class and the opportunities for success for those willing to play by local rules. In recent years, Guayaquil has attempted to control the sprawl of the informal market by building covered stalls where merchants can locate their wares. It’s still the place where Guayaquilenos/as buy $5 “Levi” jeans, street-refurbished cellphones of dubious origin and dollar DVDs of the latest releases. But kittycorner to the informal vendors, large chains have also opened up storefronts, and the same people who skirt the copyright industry to stock their music collections will buy a refrigerator or a TV at the registered storefront down the street.

A final caution about Ecuador is that one’s fate can change rapidly. Today, my only way to visit La Bahia is via Google Street View. My journalism career in Ecuador ended abruptly in 2014 after I published a journalistic article in Newsweek pointing out inconsistencies in government oil policy on paper and in practice, and a human rights disaster in the Amazon region of Ecuador unfolding as a result of the inconsistencies. After President Correa went on TV to call me a liar, my work visa was not renewed and my bank account was flagged. I left the country and have seen many others who landed on Correa’s bad side suffer my same fate or worse.

Copyright © 2016 Transcontinental Media G.P. This article first appeared in the Fall 2016 edition of Corporate Risk Canada magazine

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