Ecuador Country Brief

DEVELOPMENT PROGRESS

Available in: Spanish 
 
Development Progress | Challenges Ahead | World Bank Assistance | Project Achievements | Contact

Ecuador, officially the Republic of Ecuador , is a country in northwestern South America, bounded by Colombia on the north, by Peru on the east and south, and by the Pacific Ocean on the west. The country, which also includes the Galapagos Islands, is among the most biodiversity-rich countries in the world. The capital, Quito, and Guayaquil, the largest city, concentrate both political and economic control of the country. Ecuador’s population of 13 million is growing at a rate of 1.4 percent per year, and one of every four Ecuadorians is between 15 and 29 years old. The population is ethnically diverse and includes Amerindians, who account for approximately a quarter of the population, and a small Afro-Ecuadorian minority.

Ecuador’s positive economic growth and welfare improvements in the early 1990s were replaced by slow growth and deterioration in economic performance during the second half of the decade.  A succession of external shocks and natural disasters, combined with poor economic management, led to a severe economic crisis at the end of 1999.

The crisis and its dramatic effects on GDP and inflation triggered the adoption of the U.S. dollar in 2000 as a currency in the recovery. This measure helped control inflation and stabilize the economy and, as a result, positive, yet still sluggish, economic growth resumed from 2001 onwards. Ecuador’s GDP growth improved substantially from -6.3 percent in 1999 to 3.2 percent in 2005, and inflation fell from 29.2 percent to 4 percent in the same period. However, the post-dollarization recovery was fueled in part by a hike in oil prices. 

Political instability continues to hinder Ecuador’s progress on institutional reforms. Former Vice President Alfredo Palacio assumed the presidency on April 20, 2005, after Congress removed Lucio Gutiérrez amid escalating street protests precipitated by growing criticism of the then President’s Supreme Court appointments. Elections are scheduled for October 2006 and a new administration is expected to take office in January 2007.

Despite the economic crisis, Ecuador has achieved significant improvements in living conditions:

• Primary school enrollment has increased from 68.6 percent in 1982 to 93.1 percent in 2004.
• Life expectancy at birth rose from 69 years in 1990 to 74.5 years in 2004. (See graphic)
• The mortality rate for children under five fell from 57 per 1,000 in 1990 to 26 per 1,000 in 2004. (See graphic)

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CHALLENGES AHEAD

Poverty reduction remains Ecuador's main development challenge. Meeting it will require faster, labor-intensive output growth, inclusion of the poor (especially women) in the development process, and more effective targeting of social services.

Overall the short-run macroeconomic outlook for Ecuador is broadly positive. However, despite favorable external conditions, concerns remain about the weakening of the overall fiscal framework following recent policy and institutional changes, and the lack of progress in implementing structural reforms needed to address economic vulnerabilities. Creating jobs is a particular concern: between 2001 and 2004, youth unemployment increased from 14.8 percent to 21.6 percent of the total labor force.

The country’s high dependency on oil exports, which accounted for an average of 35 percent of GDP in 1997-2001, increases the economy’s vulnerability to external shocks, such as downturns in commodity prices. While the oil sector grew from -8.7 percent in 1999 to 1.4 percent in 2005, the non-oil sector in the same period went from -5.9 percent to 3.5 percent. Due to the rise in oil prices in the international markets, Ecuador’s fiscal revenues have been buoyant in the last two years. However, the economy will remain vulnerable unless significant measures are taken to improve the business climate and employment generation. Known oil reserves will be exhausted within 25 years and the country needs to save current resources in order to ensure the welfare of future generations.

Poverty and inequality remain major sources of concern for Ecuador. According to the Bank’s Poverty Assessment for Ecuador, poverty increased from 40 percent in 1990 to 45 percent in 2001, mainly as a consequence of the 1999 crisis. After 2001, macroeconomic stabilization reversed the increasing trend in poverty and between 2001 and 2004 the overall income poverty rate fell by almost 20 percent. While poverty rates declined in both urban and rural areas, in 2004 rural poverty levels were still more than double those of urban areas. Ecuador also suffers from dramatic inequality: the richest 10 percent of the population receives three times more income than the poorest 50 percent and sixty times more than the poorest 10 percent.

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WORLD BANK ASSISTANCE TO ECUADOR

The Bank's new assistance strategy will need to provide effective help to Ecuador in dealing with these crises. The Country Assistance Strategy (CAS)  for Ecuador for 2003-2007 has three broad objectives:

• To consolidate the macroeconomic framework and lay the foundations for diversified and sustainable economic growth;
• To increase opportunities and access to economic resources, while protecting the poor from the impacts of structural reform; and
• To help the authorities build an accountable and efficient government.

Specific targets for 2007 include reducing the proportion of the population living in poverty by 25 percent, and increasing spending on social programs from 7.7 to 12.5 percent of GDP.

Planned World Bank loans in the social sector will aim to reduce inequality. They include an initiative to raise primary school enrollment from 90 to 95 percent of the eligible population, and a plan to enable health providers to cut the infant mortality rate from 11.5 to 8.8 per 1,000 live births.

The Bank will also seek to improve the quality and targeting of Ecuador's existing social assistance programs, conducting assessments to ensure that those who need social support — including members of indigenous and Afro-Ecuadorian communities — receive it. In addition, the CAS proposes job creation programs during periods of economic crisis, and expansion of the number of families who receive assistance when economic conditions suddenly worsen.

Anti-poverty efforts in cities require a different approach from programs aimed at the countryside, the CAS concludes. In urban settings, where 60 percent of the population lives, poor families face overcrowded neighborhoods, crime, and unemployment. In rural Ecuador, the major problems center on unmet basic needs. One third of rural households, for example, do not have access to safe water or electricity.

Agriculture is the economic mainstay of the countryside and accounts for 11 percent of GDP. But the sector suffers from problems including low productivity, limited diversification, high vulnerability to natural disasters, insufficient quality control and irregular land titling. The CAS envisions a rural productivity and sustainable development project to address these and other problems.

To accomplish these social goals, the Bank's strategy calls for support for implementation of Ecuador's strategy of fiscal discipline and macroeconomic consolidation. This includes support for tax reform, to more equitably balance the burden carried by lower and middle-income taxpayers with that of high-income earners, while ensuring revenue flows that enable the government to reduce the size of the public debt. Another series of measures to strengthen the financial sector will widen credit availability by expanding the presence of savings cooperatives and micro-finance providers.

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PROJECT ACHIEVEMENTS

World Bank assistance to Ecuador since 1954 totals US$2.9 billion, with US$2.4 billion disbursed for more than 100 lending projects. Some of these initiatives are described below.

Poverty Reduction and Local Rural Development Project (PROLOCAL) .Strengthening local empowerment, improving quality of local services, and increasing access to productive assets to improve the well-being of poor households in selected micro-regions are major objectives of PROLOCAL.  The project targets 60,000 households where 80 percent of beneficiaries are poor. With local participation, 117 development plans have been designed to help the communities identify their priorities in health, education, environment and communication, as well as to coordinate their efforts to improve their living conditions. A total of 452 productive projects have been launched with technical and financial support from PROLOCAL, providing new jobs and income for more than 56,300 poor households. Capacity building is another achievement with 25,000 people trained in entrepreneurial skills.

Rural and Small Towns Water Supply and Sanitation Project  (PRAGUAS) has provided sustainable water and sanitation services to 420,000 poor people in rural communities and small towns. The project has contributed to the State’s modernization and decentralization process, increasing access and effective use, enhancing the sector, and improving policies. Community involvement and the use of cost-effective technologies, as well as a cross-cutting focus on gender and culture, are key aspects of the initiative. The first phase has benefited 50 municipal capitals. A second phase is aimed at including another 405,000 people in rural towns and providing water and sanitation services to at least 20 more municipal capitals. A third and final phase of the project will benefit more than one and a half million people.

Public Sector Financial Management Project (SIGEF) The development objective of SIGEF has been improving effectiveness and transparency in financial management in the general government sector; and contributing to better governance through greater transparency attained by the independent verification of the integrity of government financial reporting. The initiative finances the completion of the programming, testing, and implementation of the Integrated System of Management and Financial Information (SIGEF GLOBAL); completion of implementation support in Central Ministries for all modules, and the provincial offices of the line ministries. The project includes the expanding coverage of SIGEF throughout the public sector, including public universities and municipalities, amongst the support of project management, monitoring, supervision, and impact evaluation at the different levels of the system.

The Indigenous and Afro-Ecuadorian Peoples Development Project (PRODEPINE) helped to strengthen the capacity of 241 local indigenous and Afro-Ecuadorian organizations to participate in the formulation of state policies and in local development projects, and to provide services to their members. The project titled 253,076 hectares of land to the targeted populations. It provided co-funded grants for 654 rural investment subprojects that built classrooms, drinking water systems, irrigation systems, and greenhouses, among others, benefiting 62,644 families in 103 cantons. The project also supported the creation of two national councils (CODENPE and CODAE) to facilitate dialogue between indigenous and Afro-Ecuadorian peoples and the Government.  Following the success of this project, a Second Indigenous and Afro-Ecuadorian Peoples Project was launched in June 2004.

The Judicial Reform Project(PROJUSTICIA) introduced a case management system in 71 pilot courts in Quito, Guayaquil and Cuenca. The system helped the courts reduce the overall time to disposition of a case by around 33 percent, to 202 days, and purge an average of 41.5 percent of inactive cases.  The achievements of the pilot courts encouraged courts in seven other municipalities to implement similar changes with their own funds. The project also supported a Special Fund for Law and Justice which financed 40 activities with civil society organizations. Under this program, 61,369 people directly benefited from legal services and basic legal education, with another 184,107 indirect beneficiaries. The program directly targeted legal aid for poor women, providing comprehensive legal services to 20,194 women.

The  Agriculture Census and Information System Project improved the availability, consistency, and timeliness of agricultural information in Ecuador. The project boosted Ecuador’s capacity for policy analysis and formulation of sector strategies through commodity-specific Consultative Councils that hold regular dialogues on the most important agricultural commodities, such as bananas, coffee, cocoa, shrimps, flowers, palm oil, and rice. Under the project, a national agricultural sample census was designed, prepared and executed, producing high-quality data that was shared with 13,000 relevant users. The project also enabled the Ministry of Agriculture (MAG) to set up agricultural information and dissemination services, including an award-winning website (www.sica.gov.ec), a database with more than 5,000 subscribers, and weekly radio programs, in Spanish and Kichuwa, from 80 stations reaching 800,000 small producers.

The Agricultural Research Project introduced a competitive system to stimulate high-quality agricultural research which has been adopted by at least five public universities, and increased research quality and capacity in Ecuador’s national agricultural research institute (INIAP). The project also raised awareness in the private sector of the importance of “state of the art” technological research for competitiveness. About 115 principal researchers participated in the project from 43 institutions, both public and private, leading to 13 successful education and research partnerships. During the period of project implementation, national expenditure on agricultural research as a percentage of agricultural GDP increased from 0.09 percent in 1999 to 0.85 percent in 2004.

For more information on World Bank assistance to Ecuador, including lending breakdown and project reports, please see: Projects Database - Ecuador

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CONTACT

For more information on the World Bank's work in Ecuador, please visit our website (www.worldbank.org/ec) or contact:

Paola Vallejo
Public Information Associate
World Bank
Av 12 de Octubre y Cordero
Edificio World Trade Center
Torre B, Piso 13
Quito, Ecuador
Tel: (593-2) 2943 676
Fax: (593-2) 2943 601
E-mail: pvallejo@worldbank.org
 

Updated October 2007

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