Social outcomes and access to basic services in Ecuador have improved slowly but continuously since 1990, while monetary poverty has increased. The illiteracy rate fell from 11.7 to 10.8 percent, and the number of years of education of the average adult increased from 6.7 to 7.6 between 1990 and 1999. Similarly, the infant mortality rate and the population mortality rate dropped from 30 to 18 per thousand births, and from 5.0 to 4.5 per thousand respectively, during the same period. In contrast, as this report shows, poverty rates have increased from 40 to 45 percent between 1990 and 2001.

As a result, and in response to a explicit demand from the Government of Ecuador, the focus of this report is on monetary poverty and its determinants. In particular, the report pays special attention to the relationship between poverty and the productive sectors, both from a macroeconomic and a microeconomic point of view, and both in urban and rural areas. In following this approach, the report not only complements the previous Ecuador Poverty Assessment (World Bank, 2000), which focused mainly on poverty and social services, but also provides important insights regarding the relationship between economic growth, productivity and employment generation on the one hand, and poverty reduction on the other.

Poor growth and economic instability have crippled Ecuador's capacity to reduce poverty. This report argues that economic growth depends closely on productivity growth, which in turn depends on the quality of inputs (labor and capital), institutions and policies. This connection between productivity and economic growth has become even more relevant in recent years, after Ecuador decided to adopt the US dollar as the national currency, hence forgoing the option of using exchange rate policy to generate temporary increases in competitiveness and growth. Although the decision to dollarize undoubtedly improved the investment climate, reassured potential investors and potentially increased the capacity of the economy to create employment and reduce poverty, sustained increases in productivity will be required to maintain positive growth rates and declining poverty rates in the future.

Moreover, at the household level, the dollarization has had mixed effects: hyperinflation caused by the 1999 crisis subdued, but lifetime savings were often swept away before that happened; the cost of the average consumption basket declined but, given the differences in consumption patterns between the poor and the non-poor, this benefited mostly the latter; positive growth resumed, but employment creation has been low. These developments have taken place in the aftermath of a crisis that dramatically affected the rural Costa and urban areas across the country. As a consequence, the nature and distribution of poverty have changed and so have the challenges that the Government of Ecuador faces regarding its strategy for the social sectors and for poverty reduction.

The main goal of this report is to provide policy recommendations based on rigorous analysis that will help Ecuador and its government face these challenges. The rest of the report is structured as follows. Chapter 1 examines the effect of GDP per capita growth and GDP per capita volatility, the 1999 crisis and the 2000 dollarization on poverty. Chapters 2 describes the changes in the nature and distribution of poverty in 1990-2001, and analyzes the determinants of these changes. Chapters 3 and 4 focus on the productive sectors in urban and rural areas respectively, and discuss policies aimed at increasing productivity and employment generation. Finally, Chapter 5 examines the relationship between social outcomes and social expenditure, paying special attention to the distribution social expenditure across households and geographic areas.