Should bankrupt government programs be privatized

Privatizations as the key to the development of Ecuador?

Background and Effects of Politics - A Report by Simone Burkhart

1 Introduction

A wave of privatizations swept Latin America, but also North America, Europe and the states of the former Eastern Bloc in the past decades. Such privatization programs were an expression of a general tendency for economies to become more market-oriented. After the collapse of socialism and the associated failure of the idea of ​​a planned economy, the neoliberal market model was also propagated as a strategy for developing countries, which promised growth and prosperity - a development model that was relatively undisputed among scientists until recent years.

Ecuador joined the trend of greater emphasis on the market relatively late, namely only in the mid-1990s, with extensive plans to privatize state-owned companies, including in the telecommunications, electricity and infrastructure sectors. In Ecuador, as in other countries, the process of privatization is not without controversy, but has led and continues to lead to fierce ideological debates about the role of the state and the capabilities of the market. Proponents promise a number of privatization blessings - such as increasing the efficiency of former state-owned enterprises, attracting foreign investors, favorable development in the labor market, long-term development prospects and economic competitiveness, to name but a few. Trusting in the forces of the market, they are calling for "an aggressive privatization plan with which the state transfers its role as producer to the private sector in the shortest possible time". Others are skeptical of these visions and point out that what in theory promises prosperity and economic development cannot simply be applied to a developing country like Ecuador. There is also strong criticism of the manner in which the privatization process is carried out in Ecuador, which could serve to "write a manual that teaches how not to privatize". In the following, after a brief outline of the history and economic development of Ecuador, the theoretical background of this debate will be discussed and, using the example of the process of privatization in Ecuador, the advantages and disadvantages as well as the consequences of privatization for Ecuador will be highlighted.

2. The political and economic development of Ecuador

Ecuador looks back on decades of political and economic instability. After a military dictatorship, the country was transformed into a democracy in the late 1970s, but to date neither political stability nor economic development has been achieved. Economically, Ecuador is unilaterally oriented towards the export of oil, bananas, shrimp and flowers as well as primary agricultural products. 18% of total exports are petroleum, 25% bananas and 6% seafood. The oil sector alone generates 28% of government revenue. This naturally makes the country fragile and vulnerable to fluctuations in world market prices. A high level of foreign debt, natural disasters, rampant corruption in politics and the economy and a lack of political concepts have prevented the country from developing in recent years.

In the 1970s, the discovery of oil deposits in the Amazon brought a period of economic boom with annual growth rates of 9%. A policy of industrialization through import substitution was pursued. Government spending rose sharply, and a number of state-owned companies were founded. The capital required for this was obtained through extensive borrowing abroad.

In the 80s, Ecuador - like all of Latin America - was hit by the debt crisis, which plunged the country into a severe economic crisis, comparable to the global economic crisis of the 30s in Europe and North America. Given that Ecuador was (and still is) one of the most indebted countries, the country has been particularly hard hit. When oil prices fell drastically from 1986 and an earthquake hit the country in 1987 and destroyed the only oil pipeline, the situation worsened.

Between 1988 and 1992 attempts were made to stabilize the economy through gradual reforms. The state began to withdraw from the economy and cut its spending. Rising oil prices eased the situation somewhat and economic growth began to slow. However, inflation rose to a rate of 60
% annually.

President Sixto Duran Ballen, who was elected to office in 1992, launched an extensive stabilization plan with the support of the IMF. In addition to macroeconomic stabilization measures, the state should withdraw from economic activity and the private sector should be strengthened. A number of legislative changes came into force with the aim of reforming the financial, energy, telecommunications and agricultural sectors, cutting red tape and cutting government spending. Ecuador became a member of the WTO. In 1995 a war broke out as a result of a long simmering border conflict with Peru. Not only the effects of the war and the associated increased defense spending burdened Ecuador, but also corruption scandals and a severe banking crisis hit the country.

President Duran Bucaram, newly elected in 1996, once a critic of liberal reforms, tried, once elected, to push through liberal reforms as well. His political credibility was so destroyed by blackmail and corruption scandals that mass demonstrations in 1997 forced his resignation. His successor Fabian Alcarcon had to struggle with a new oil price crisis and the El Nino climate phenomenon. Since new elections had already been announced in 1998, Alcarcon had no time to develop a long-term economic program. However, peace negotiations with Peru began under his presidency, which resulted in a peace treaty under his successor Jamil Mahuad.

In 1999 one of the most drastic economic and financial crises in the history of Ecuador rocked the country. This was caused by falling oil prices, the financial crisis in Asia and Brazil and renewed devastation caused by "El Nino" together with home-made problems such as inability to act and disagreement about economic reforms at the political level. The crisis hit Ecuador so hard by the catastrophic handling of the financial crisis that began in 1994 and exemplifies poor reform implementation and poor crisis management. From 1994 onwards the banking system was liberalized comprehensively without a functioning banking supervisory authority being created. The banks subsequently granted uncontrolled loans, often to people or companies that were close to these banks. When several banks threatened to become insolvent as a result of this practice, the central bank expanded the money supply in an uncontrolled manner in order to grant loans to commercial banks threatened with bankruptcy. Since this did not eliminate the causes of the crisis, but only delayed and exacerbated them, the acute crisis arose in March 1999. Bank balances were frozen, de facto expropriation of savers while lending continued. A sum of US $ 6 billion was made available to capitalize the banks (more than half through the freezing of bank accounts and thus at the expense of savers). The associated emission drove inflation to 52% and drastically devalued the sucre, the national currency of the time. The economic and social consequences were shown in a negative growth of 7.3%, the impoverishment of large sections of the population, while the concentration of income in the upper social classes increased.

The president's plans to dollarize the country and controversial price increases in public transport and household gas led to an uprising by the indígina movement in January 2000. The largely peaceful protest, accompanied by roadblocks and political turmoil, ultimately resulted in the overthrow of the president, the Withdrawing some price increases and committing the government to enter into a dialogue with the Indígina movement on contentious issues. Vice-President Gustavo Noboa, who took over the presidency, pursued his predecessor's dollarization plans, and so the dollar was introduced as the new official currency against the vehement opposition of the population. The economic parameters for 2001 show a stabilization and a slight recovery of the Ecuadorian economy at a low level. The conclusion of negotiations with an international consortium in February 2001 for the construction of a new oil pipeline in the Amazon region has a stabilizing effect. The consortium announced an investment of US $ 1.1 billion over a period of two years. A total investment volume of US $ 2 billion is expected from additional investments, which corresponds to around 13% of GDP. Difficult negotiations with the IMF on stabilization and debt repayment are imminent in the near future. The reforms demanded seem politically difficult to implement and socially highly problematic.

3. Background of privatization: neoliberal development theory and the "Washington Consensus"

The reform recommendations for developing and transition countries of the last decade are often summarized under the catchphrase "Washington Consensus". The economist John Williamson coined the term in 1990. The "Washington Consensus" comprises 10 policy recommendations for market-oriented economic reforms that primarily focus on liberalization in trade and the economy and on downsizing the state. An ideologization of the term set in, which is even condemned by Williamson (1999) as market fundamentalism of the method "let's bash the state, the markets will resolve everything". However, it was precisely this interpretation that served as the starting point for the reform programs with the support of the IMF in Latin America and Eastern Europe at the beginning of the 1990s. The reformers paid particular attention to privatization, deregulation and trade liberalization. The lack of these reform packages became apparent as early as 1994 when the hoped-for and predicted success did not materialize in many reform states in Latin America and Eastern Europe. The Asian crisis at the end of the 1990s once again brought the reform concepts into disrepute. While advocates of the rigid, market-oriented version blame a half-hearted and inadequate implementation of the reforms for its failure, more and more scholars have identified the weakness and neglect of institutions as the main reason for the unsatisfactory results. There is a lack of functioning market control mechanisms, ranging from monopoly control and adequate control of the financial markets to a functioning tax and legal system, not to mention social benefits for the population. Moises Naim (2000) states: "It became apparent that stronger, more effective institutions were urgently needed to complement macroeconomic policy changes". Still other scholars call for a general rethinking of the neoliberal concepts, as these would have turned out to be useless to sustainably and successfully advance the development in states of the Third World or transition states of the Eastern Bloc.

4. Privatization in Ecuador

4.1. Timeline and current situation of the privatization process
Privatization is generally understood to mean the transformation of state property or state control over the public sector (areas such as telecommunications, infrastructure, extraction of raw materials, etc.) into the private sector. In view of the fact that Ecuador was relatively late in embarking on a privatization program, it is often referred to as a "latecomer".

Chile is often cited as a "pioneer" of privatization, which began with a large wave of privatization as early as 1973, before the neoliberal reforms in Great Britain under Thatcher and in the USA under Reagan. In Latin America this was followed by Venezuela (1981), Mexico (1983), Jamaica (1985), Costa Rica, Colombia (1986), Peru, Bolivia, Brazil (1988), Argentina (1989) and Paraguay (1990).

In Ecuador, under the government of President Sixto Duran Ballen (1992-96), efforts by the state began to reduce the share of the public sector in the economy. The "Law for the Modernization of the State" formed the legal basis for this. It was adopted by the National Congress in December 1993. Two main objectives are enshrined in this law: First, the restructuring of the administration of the state through a more efficient, rational and decentralized administration. Second, the privatization of inefficient state-owned companies. The 5th chapter of the law states that private and mixed companies can provide services in the sectors of drinking water supply, irrigation, remediation, electricity supply, telecommunications, road construction, ports, airports, rail network, postal services and similar sectors. The exploitation of non-renewable resources is left to the state, and these resources are state property. The state can delegate the exploitation of these resources to state, private or mixed companies. Furthermore, the law on the modernization of the state provides for the creation of the state modernization authority CONAM, whose task is the administrative supervision, coordination and implementation of the law. CONAM is therefore also subject to the privatization of state-owned companies.

The cement plant "Cemento Nacional" was privatized in 1993 as the first large state-owned company. In 1994 two private telephone service providers (Bellsouth and CONECEL) were approved. In 1996 "Ecuatoriana de Aviacion", the national airline, was privatized. Between 1992 and 1995, the state transferred a part of the shares of 14 companies with state participation to the private sector. J. Mahuad tried during his presidency from 1998-2000 to push through a quick plan with extensive privatizations. This project largely failed due to the implementation of necessary structural reforms and resistance in Congress. With the onset of the severe economic crisis in 1999 at the latest, some privatization projects were put on hold again.

Following the 1993 reform program, on March 13, 2000, the Noboa government passed a new reform program to overcome the economic crisis, the "Fundamental Law on Economic Transformation in Ecuador". The core of the law is the dollarization of the country, far-reaching structural reforms in the labor market and in the oil sector (private companies are allowed to produce oil and gas and to build pipelines) and renewed privatizations. The priorities of the privatizations following from the law are the areas of telecommunications (Andinatel and Pacifictel), electricity (INECEL) and the ports of Esmeraldas and Puerto Bolivar, which are to be transferred into private hands towards the end of this year, as well as the port of Guayaquil at the beginning of the next Year.

Examples of the "stop-and-go" policy of privatization in recent years can be found in the telecommunications and electricity sectors. In 1995 a law on telephone privatization was passed, which provided for the sale of 35% of the shares in the state communications company "EMETEL" for US $ 800 million. EMETEL was split into two companies: Andinatel and Pacifictel, each of which supplies different regions. These shares were transferred to a solidarity fund under state control. The sale of the shares of both companies to private hands failed twice: in November 1997 and in April 1998 because of opposition in Congress. After some new privatization proposals were discussed (for example the sale of 51% instead of 31% of the shares), the government announced in January 2001 that the plans for an immediate privatization would be abandoned and an international investor would be sought instead. Privatization is expected to improve this largely underdeveloped service: only 6 out of 100 people currently have a telephone connection, with the telephone lines concentrated in the two largest cities in the country.

In 1996, Congress passed a law to privatize the electricity sector. Since then there have been a few small private hydropower plants and a private provider in Guayaquil, Ecuador's largest city. However, the energy supply is largely ensured by the state-owned company INECEL. Initially, INECEL's privatization was planned to be completed in 1998, which failed. A new attempt is to be made in September this year. 51% of INECEL's shares are due to be auctioned on September 28th. But the privatization project brings some public dispute. The accusation of the opponents of privatization: Companies are only interested in profits, not in supplying the population. Experience shows that everything that has been privatized leads to poorer and more expensive care. There are still fears of unemployment and price increases. The tenor is that water and light are too important areas for the population to be privatized.INECEL is estimated to be worth US $ 7 billion, while the government has set a price of US $ 1.206 billion.

The hesitant process of privatization in comparison to other countries has often been criticized: between 1994 and 1996 privatizations reached a volume of 147 million US $. This puts Ecuador at the bottom end of the scale in a regional comparison. During the same period, for example, Peru and Venezuela privatized state-owned companies valued at US $ 5.98 billion and US $ 2.13 billion, respectively. On the other hand, there were never large-scale state-owned companies in Ecuador. In 1991 there were 72 state-owned companies with a state share of 100%, 42 mixed companies with a state share of over 50% and 53 companies with a state share of less than 50%. In total, there were only 167 companies that were eligible for privatization. If one compares these figures with Chile, where in the first wave of privatization alone (between 1973 and 1978) 259 companies and 103 state-owned companies were privatized, or with Mexico, where there were over 1,200 state-owned companies, the different proportions become clear.

4.2. Benefits of privatization
As already mentioned, the extensive wave of privatization in the developing countries of the 1990s is mostly based on the neoliberal development model. This is also the case in Ecuador, where both the 1993 and 2001 reform packages were drawn up with the support of the IMF. The basic ideology behind these measures is a drastic reduction in the role of the state, due to a general skepticism towards the institution of the state: "At the end of this century, few institutions in Latin America had less prestige than the state. The general perception generalizes that the state is too incompetent, corrupt and immobile due to its political restrictions to be an instrument that can be trusted to achieve collective goals. " (Moises Naim, former Venezuelan minister)

The state, it is believed, has reached morbid proportions, inhibiting the country's economic development through its involvement in the economic sector, suppressing private initiative, inefficient state-owned companies burdening the budget and exacerbating the problem of indebtedness. As a way out of the crisis of the state and the economy, the neoliberal development model suggests a drastic reduction in the state. The optimal state is a small state that concentrates on guaranteeing internal and external security and providing basic services such as education or health. Otherwise, however, the state should withdraw from economic activity and monitor compliance with the economic order by creating a legal framework.

4.2.1. Increased efficiency, reduced corruption
The starting point of the privatization idea is that the state is not capable of an efficient use of scarce resources. State-owned companies operate in an environment of security, are often state monopolies and have no incentives to make optimal use of the resources available to them. Only the market can create the necessary incentive structures to increase efficiency. This in turn serves the general public, because the state budget is freed from expenditures for inefficient companies and subsidies, and can spend resources that are freed up for purposes such as education or poverty reduction. If state monopolies are broken up and free market competition is created, this not only leads to a better allocation of resources, but also to increased production, better adaptation of production to the needs of customers and cheaper prices for the benefit of consumers. Since the companies are exposed to national and international competition after privatization, the (long-term) competitiveness of the companies is also strengthened. Furthermore, the state would be freed from the potential for corruption. A small state is easier to control and corruption is easier to punish. In addition, the links between state and politics, which in the past were repeatedly affected by corruption, are loosening. If subsidies go away, another source of constant corruption and embezzlement will be wiped out. Household gas, for example, was drastically subsidized, the most important energy source, especially for households in the lower income brackets. In 1998 the price of gas was ten times lower than in neighboring Peru and Colombia, which allowed smuggling to flourish and the state's money to seep away.

4.2.2. Budget discharge
A rationalization and reduction of public spending brought about by privatization and accompanying it could help to reduce the budget deficit. On the one hand, this results from the fact that the state no longer has to provide funds to unproductive companies, i.e. is freed from the burden of subsidies. Furthermore, the state can count on tax revenues as well as (one-off) privatization proceeds, and thus reorganize its budget. Ironically, the Ecuadorian budget was in surplus from 1989 (3% of GDP in 1992, 2% of GDP in 1993) but fell into deficit after the privatization program was launched (0.9% of GDP in 1995 and 3.0% in 1997) .

4.2.3. Reduction of foreign debt
Another pressing problem could be at least partially solved with privatization: the enormous debt burden of most countries in South and Latin America. Ecuador is one of the most heavily indebted countries in the region. Since 1980, Ecuador's external debt has increased from US $ 3.53 billion to US $ 13.75 billion in 1999. This means that external debt is roughly the same as the total GDP of Ecuador, which was US $ 13.77 billion in 1999. The total debt (internal and external debt) in 1999 was US $ 18.95 billion. 40% of the state budget is used to pay off debts, while 30% of the state income goes back to borrowing. Some of the proceeds from the privatization proceeds could be used to repay debt.

4.2.4. Modernization through privatization?
In addition to the immense poverty, underdevelopment of key sectors such as supplying the population with electricity, drinking water, adequate infrastructure in the areas of road construction, telecommunications, health care and others is the most difficult problem in Ecuador on the way to a "modern state". A few figures are intended to illustrate the extent of the modernization efforts required: 42% of the population have no access to drinking water, 60% do not have access to sewage systems. 56% are not connected to any garbage disposal, 20% have to get by without electricity. In rural areas these numbers are far more alarming: 70% (drinking water), 91% (sewage), 92% (waste disposal), 46% (electricity) have no access to the infrastructure mentioned here. Only 18% of the total population and 4% of the rural population have a telephone connection. The electricity supply has repeatedly suffered from bottlenecks in recent years. Areas of traffic, ship and flight infrastructure are in urgent need of modernization.

The Quito Chamber of Commerce prepared a study in 1998 that lists the investment deficits in the country's infrastructure in the sectors of water, sewage and health care, telecommunications, electricity, transport, shipping and aviation as well as in the social sector and shows possible financing options. The calculation resulted in a necessary investment volume of the astronomical sum of 22.41 billion US $, which is more than one and a half times the GDP of the year 2000 and is higher than the total debt of the state. For the financing of necessary investments, further indebtedness of the state or an involvement of the state is excluded, financing through internal savings is also not up for discussion due to the low internal savings rate of Ecuador. The only possible way out to meet investment needs is to attract foreign direct investment (FDI) through extensive privatization measures and / or concessions. If foreign companies are given the opportunity to acquire former state-owned companies, they can use their often significantly higher capital resources to reorganize the company and to increase the supply performance / production and improve quality with extensive new investments. Thus, FDI could become the engine of a country's development through technology transfers, provided a country breaks its barriers to foreign investment. Liberalization in this sense took place in Ecuador through changes in the law that guarantee foreign investors the same rights as national investors between 1991 and 1993. Some still existing restrictions (for national and international investors) still exist for the oil sector, mining, electricity, telecommunications and the fishing industry.

4.2.5. Privatization and employment
In addition to unemployment, underemployment is widespread in Ecuador. 9% of the population willing to work was unemployed in 2000, over 65.9% underemployed. Only 25.1% had a regular employment contract that gave access to social security benefits. The situation has worsened in recent years with the dismantling of protection against dismissal, curtailment of trade union rights and the economic crisis. The neoliberal theory assumes that there is usually overemployment in state-owned companies, which is reduced in the event of privatization. In the long term, however, companies will expand more rapidly due to increased efficiency. In addition, new companies in the same sector are founded in competitive markets. These two factors should lead to an increased demand for work in the long term and thus to a reduction in unemployment.

4.3. Criticism of the privatization strategy based on the experiences of Ecuador
Even among neoliberal reform supporters, the view is increasingly gaining ground that a reform concept that is solely market-oriented cannot bring the corresponding success. Without a functioning state that controls or smashes monopolies through institutions, ensures a functioning legal system regulates the market and intervenes in the event of market failure, reforms fall short. So while a trend reversal towards a greater focus on institutions can be seen in neoliberal theory (although recipes for a successful institutional reform are still lacking), the role of the state remains one of the critical approaches for most critics of neoliberalism. For them it is fatal to see the state as an antagonist to the economy; rather, the state should take on a more active role in the country's development. In view of the fact that most developing countries have a government quota well below the level of developed countries, they consider the claim that the government is too bloated and too involved in the economy to be a dangerously misjudgment. According to the World Bank, Ecuador's government quota was only 12.4% of GDP in 1997, compared with rates between 40 and 54% in the industrialized countries of Western Europe, while in the USA the government quota is lower at 30%, but still significantly higher than most of Latin America's countries. It is not the size of the state that is of decisive importance, it is rather the quality of the state that counts. In a state in which there is no effective market and monopoly control, in which the judiciary functions only reasonably, in which the financial markets are not adequately protected by lax banking supervision, in which corruption is rampant, reforms could not take effect. Another important role is played by the participation and security of the lower classes of the population. Very few of the reform programs in Latin America contained effective concepts for protecting the population from the consequences of reform, such as unemployment, price increases for basic products and poverty. Macropolitical stabilization alone was often pursued, but the establishment of a functioning social network was not addressed. So it is not surprising that a large part of the population of Ecuador was skeptical of the reform concepts of the government and tried again and again through mass protests and tries to bring them down.

Confidence in the market alone seems to be finding fewer and fewer followers in science. As Rodik (2000) states: "So we enter the 21 century with a better understanding of the complementary between markets and the state a greater appreciation of the virtues of the mixed economy. That is the good news. The bad news is that the operational implications of this for the design of development strategy are not that clear. " And further: "Every well-functioning market economy is a mix of state and market, laissez faire and intervention."

Furthermore, the practice of privatizations in Ecuador will be examined in more detail, their results analyzed and reasons for their often suboptimal results will be looked for. For this purpose, the advantages mentioned in the last chapter are taken up and checked for their suitability in practice.

4.3.1. Gap between theory and practice?
The privatization process should be open, transparent and comprehensible in accordance with the requirements of the State Modernization Act. According to the critics, he was hasty and half-baked in practice. Instead of fighting corruption, corruption and nepotism would have intensified. The privatization process of “Cemento Nacional”, the state-owned cement company, was accompanied, for example, by scandals: The sale was preceded by a low and subjective valuation. The notification of potential interested parties and the information of the population were inadequate, according to the critics. In addition, the purchase price actually paid was below the originally negotiated. After privatization, cement production was practically in private monopoly hands, prevented the establishment of competing companies and caused the prices for cement and its derived products to rise. The results of the privatization of the state airline Ecuatoriana are not much happier: since its sale it has lost prestige, passengers and flight routes.

4.3.2. Privatization and improved efficiency
While one can theoretically prove the increase in efficiency through privatization, it is not always to be found in reality. Developing countries like Ecuador are rarely characterized by a system of functioning markets. Instead, monopoly and oligopoly structures predominate in Ecuador: "In agriculture, industry, the service sector and banks, there is a minimal number of companies that control the sector. These companies have economic and even family relationships and form monopoly groups. In all of these Groups are integrated into banks and encompass the entirety of the sectors - industry, services, agribusiness, communications - and in this sense act like financial groups. " (Fundacion Jose Peralta: 1999 p. 237)

In recent years monopoly groups have combined a steadily increasing accumulation of capital and wealth. The largest and most influential monopoly group is known as the NOBOA group after the founder of the empire Luis Noboa, which owes its rapid development to the boom in the banana exports it controls. After Luis Noboa's death, his fortune was divided into three parts within his family. The group's net worth was estimated at $ 1.200 billion in 1997, which is 5% of Ecuador's GDP. In total, over 100 companies belong to this group, which employs 20,000 people. The "Fundacion Jose Peralta" (1999) lists a further 13 economic and financial empires. In 1996 six monopoly groups accounted for 62% of export currencies. These groups are not only connected in themselves, but also maintain political connections. Alvaro Noboa, one of the heirs to NOBOA's fortune and the richest man in Ecuador, was a candidate for the presidency in 1998, and was only barely defeated by his challenger. He is considered a possible candidate for the upcoming elections in 2002 and was and is heavily involved in the politics of the largest city in Ecuador, Guayaquil, and the coastal region.

So one cannot speak of a balanced competitive market in Ecuador, rather the market is characterized by monopoly and oligopoly structures. A financially strong middle class that can compete in the market does not exist in Ecuador. There was thus a risk that former state monopolies could be converted directly into private monopolies. This danger was compounded above all by the fact that a privatization strategy was adopted that encouraged this process: instead of selling shares in state-owned companies to broad sections of the population, the blocks of shares were sold to a single company or to a group of vendors. Within this scheme, so the charge of Gruzman (1998: p. 201), goods of the state of enormous value were sold for the benefit of economically concentrated groups. This only exacerbated the strong market distortion that prevails in Ecuador, at the expense of small and medium-sized companies. Even if competition had been promoted and there had been functioning monopoly control, the privatization of public services such as electricity or sewage supply would remain a special case. These services are almost without exception natural monopolies.

The market therefore only imperfectly regulates the provision of these goods; appropriate regulation and control by the state are required. According to economic theory, monopoly structures are never efficient. They use their monopoly to siphon off profits. That is why a privatization of the kind in Ecuador did not lead to the benefit of the consumers but, on the contrary, to their damage, as the prices of goods and services did not fall, but rose. According to the opponents of privatization, a state-owned company does not have the pursuit of profit as its primary focus, but securing supplies. For this reason, if there are legitimate concerns about market failure, the existence of monopoly structures or natural monopolies, a lack of competition or extremely unevenly distributed income, state-owned companies should not be transferred to private hands.

Furthermore, opponents of market fundamentalism doubt the dogma that a state-owned company is practically always inefficient on its own, whereas the market creates efficiency. Empirically, according to Alberto Acosta (1998: 108), it is difficult to verify that state-owned companies operate more inefficiently than private companies. In order to test this thesis, it is necessary to compare markets of the same structure with one another. In short: what applies to competitive markets with functioning monopoly control cannot simply be transferred to a market like the Ecuador, which has a high level of market concentration. Most studies show that the efficiency of a private company is a function of competition: the higher the competition, the more efficiently private companies work. In these cases they are preferable to state-owned companies. But competition alone does not create efficiency. An efficient company needs a functioning and resource-saving administration and management. Most companies in Ecuador, however, lack the administrative and technological know-how for efficient management. For most companies, it is more profitable to seek protection from the state. Tax breaks or subsidies are one way of doing this. In the environment of widespread corruption in business and the state, the chances of success are definitely there. Modernization and the associated increase in efficiency require a change in mentality towards an emphasis on personal responsibility and initiative, an adequate level of education of the population, effective fight against corruption and functioning markets, something - so many critics - that does not happen overnight through a privatization program.

4.3.2. Privatization and budget consolidation / debt reduction
In order to rehabilitate the budget and reduce debts, substantial sums of money would have to flow from privatization proceeds. However, if state-owned companies are outdated and have a high need for modernization, it is an illusion to assume that sufficient income can be generated for effective debt reduction or that the state budget can be restructured in the long term. The proceeds of the privatizations from 1994 to 1996 would have reduced the foreign debt by just 1% if they had flowed completely into the debt repayment. If one visualises the example of the privatization of the state-owned enterprises of the former GDR, it is significant that the Treuhandanstalt went with a deficit as a closing balance from the sales. In addition, sales proceeds from privatizations are one-time income. Including these in the state budget without reducing expenditure later will burden the budget in the future and only postpone the problems to a later time.

4.3.3. Privatization and Modernization / Foreign Direct Investment
The idea of ​​achieving an urgently needed modernization of the state through foreign direct investment (FDI) has been a long time coming in Ecuador with positive results. Although the state has removed major investment obstacles and foreign companies can in principle acquire companies to be privatized, the result in Ecuador is unsatisfactory. In the context of globalization and the location discussion, it is not enough for a country to remove legal obstacles from the way. Long-term profit prospects, political stability and the macroeconomic environment are necessary prerequisites for investment decisions. In the context of political instability and the permanent economic crisis in Ecuador, FDI flows at most into the profitable oil sector. "In the short and medium term, I think prospects for more privatizations are very bad in Ecuador, and also in some other Latin American countries such as Venezuela and Colombia. It's not just the opposition to privatization. People are not investing down here anymore. When you've got strong opposition and [an] economic crisis what foreign investor is going to say, 'Okay, I want to buy a company there.'? " notes the Ecuadorian economist Gustavo Arteta in the Washington Post (1999).

4.3.4. Privatization and poverty
There are worlds between privatization, as it was promised and ultimately privatized. Above all, privatization should also benefit the lower strata of the population through better supply services, lower prices and a revitalization of the economy as a whole. The opposite has been lamented by critics: instead of distributing revenue from the "bottom up" and pursuing a sensible redistribution policy, privatization distributed resources to the most influential and wealthy groups in the country, according to Alberto Acosta (1998).

Poverty and income inequalities have increased rapidly in recent years: between 1995 and 2000 the number of poor rose from 3.9 to 8.4 million (a percentage increase from 34% to 71%). Extreme poverty increased from 12% to 35% of the population over the same period. The situation of the children is drastic: 75% of them live in poverty. At the same time, social spending per capita decreased by 22% for education and by 26% for health. As poverty increased, so did the differences between rich and poor: in 1990, 20% of the poorest still accounted for 4.6% of the income, while the richest 20% had 52% of the income. In 1995 20% of the poorest had 4.1%, in 1999 only 2.46% of the income, while the share of the richest rose to 54.9% and 61.2%.

The reasons for this development are complex and certainly not the (sole) result of privatization. However, privatization measures have not been able to compensate for these developments and the way they were carried out tended to exacerbate the situation. Estache, Gomez-Lobo, and Leipziger (2000) come in their study "Utility Privatization and the Needs of the Poor in Latin America: Have We Learned Enough to Get It Right?" to the conclusion that poor households do not necessarily have to be among the losers of a reform. There have been many examples of privatizations that benefit lower social classes. A prerequisite for this is that, if possible, competition is created. One of the conclusions seems to be decisive with regard to the experiences in Ecuador: "Essentially what is needed is political commitment to doing the right thing. If policy is weak before privatization, it is going to be weak after privatization as well. Privatization is no substitute for responsible policy on redistribution. "

5. Final remarks

It seems symptomatic of Ecuador's economic policy that individual reform measures such as privatizations in the mid-1990s and currently dollarization are seen as key to the country's development. As the great Ecuadorian daily El Universo wrote in 1990: "The state-owned enterprise, unwieldy and unprofitable, can be transformed into a thriving enterprise overnight by using the 'magic word': this miracle word is 'privatization'." The experience of Ecuador shows that neoliberal market-oriented reforms do not work if no institutional reforms accompany the process and the state is unable to create an economic framework in which competition prevails. It also appears important that measures to provide social security for the population accompany the reform processes.

What are the lessons for the development of the country from the obviously not very happy experience with privatization in Ecuador? Simply orienting yourself towards the market and reforming it is not enough. Institutional renewal must go hand in hand, the state must function. The extent to which the state interferes in the economy is again an ideological question; economically there are both functioning models with a lot of state participation (such as the northern European welfare states) and the counter-example with very little state participation (the liberal capitalism of the United States). But ignoring the role of the state in the reform concepts seems to have been one of the most serious mistakes in the implementation of the reform concepts of the 1990s. Williamson (1999) also states: "The impact of privatization depends, in my view, very much on how it is done: the sort of insider / voucher privatization that happened in Russia allows the plunder of state assets for the benefit of an elite, but a well-conducted privatization with competitive bidding can raise efficiency and improve the public finances, with benefits to all, including the poor. " Unfortunately, the results of the privatization strategy of Russia, which Williamson lamented, are very similar to those of Ecuador.

The question remains for a better strategy. After increasing criticism of neoliberalism, the market-oriented concept was expanded to include the demand for functioning institutions. Indeed, the most successful countries in implementing neoliberal reforms were those that still had functioning institutions or where the memory of such was still present (as in Poland). Unfortunately, so far there is a lack of useful practical policy concepts on how to implement promising liberal reform concepts in the case of insufficiently functioning institutions and / or a corrupt state.

Many advise against attempting further shock therapies, especially in underdeveloped countries with high market concentration: "The Experience with development in the last half century reveals [a] striking fact: the best performing countries are those that liberalize partly and gradually. All these countries [ the East Asian Countries and India] unleashed the energies of their private sector, but did so in a cautious, controlled manner. " Here, too, the paths lead again to a functioning state that tries to steer the forces of the market in certain paths and controls the financial sector, especially in the first phases of the reform processes.

Other development concepts give the state a more active role in the development of the country. According to Alberto Acosta (1998), the state should seek active cooperation with the private sector, but not with the financially strong oligopoly elite, as has happened in Ecuador in recent years. Instead of continuing the discussion about efficiency and competitiveness, it would be more advisable to focus on creating an internal market. This process should be accompanied by greater participation by civil society, something that most Anglo-American reform concepts ignore and which neoliberalists describe as a waste of time and counterproductive.

Whichever path Ecuador takes, the challenges are enormous, the resignation in the population is great after many failed attempts at reform. Poverty, corruption and underdevelopment seem overwhelming. In general, there seems to be a consensus that the practice of recent years can no longer be continued. From one day to the next no far-reaching successes can be expected, the hope remains that the country will find its way in the long term.


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Elaborated by Simone Burkhart ([email protected]) as part of an internship at the Friedrich-Ebert Foundation / ILDIS (Instituto Latinoamericano de Investigaciones Sociales) in Quito / Ecuador in July / September 2001.

In addition to ILDIS, we would like to thank the institutes FLASCO, CORDES and CONAM for their support.