European Report on Development 5

“Financing and other means of implementation in the post-2015 context”

Ecuador Country Illustration Workshop

15.05.2014

SESSION 1

1.1  Importance of the European Report on Development – Rene Bosman (EU)

Changes worldwide happen rapidly and so do the needs of the countries. Globalized challenges like climate change, the global financial crisis, environmental degradation, and social inequalities demand a new paradigm of cooperation between countries and between the public and the private sector. In addition to the increasing differences among developing countries and the persistent inequalities in the region, aid, and public funding are more limited than ever.

Since resources are limited, aid needs to be highly efficient and focalized. In this scenario, Mr. Bosman highlighted the importance of the European Union leadership and the need to further analyze the next steps after 2015. He also stated that in spite of the enormous challenges the development agenda poses, the EU Agenda for Change is an excellent framework to sustain further and more coordinated work regarding aid and international cooperation. In this sense, the UE will support efforts to improve and strengthen regional integration and global markets, enhance sustainable agriculture and energy, develop innovative financial instruments and coherent financial policies, among others.

The European Report on Development (ERD) seeks to stimulate debate and research in order to face the above-mentioned challenges. Mr. Bosman indicated that the ERD has a renewed importance in the definition of the post-2015 agenda since it represents an opportunity for discussion and global agreement on development goals and priorities. The ERD 5 focuses on the question of how to better finance and mobilize financial resources and how to combine them with non-financial means in order to facilitate the implementation of a transforming post-2015 agenda. This year´s report will include case studies from 6 countries: Bangladesh, Ecuador, Indonesia, Mauritius, Moldova, and Tanzania.

According to Mr. Bosman one of the main challenges after 2015, is the articulation of a more transforming development agenda able to adapt to a rapidly changing world. In order to do it the collective global action needs to be intensified and will require the adoption of more collaborative approaches between the public and private sector, the academia and the civil society.

In terms of development and cooperation, the EU has identified for Ecuador a series of strengths that include the existence of a national development strategy (Plan Nacional del Buen Vivir), and a clear commitment towards social investment and environmental awareness. Weaknesses include a high rate of informal employment, high dependence on oil revenues and distrust towards foreign investors. In contrast, opportunities for the country are various and include its rich biodiversity and the exploration of other means of cooperation such as scientific and technological cooperation.

1.2  ERD 2014 Perspectives – James Mackie (ECDPM)

In the second session of the day, Mr. James Mackie presented the objectives and structure of this year’s ERD. He highlighted the importance of the process conducted over 15 months that included 25 researchers working on the main report, background papers, and the active participation of EU and UN development officials. This year’s research question focuses on how financial resources can be most effectively mobilized and how they can be combined with non-financial means of implementation in order to effectively support a transformative post-2015 agenda.

Mr. Mackie portrayed the dynamics and factors shaping the availability and use of financial resources. Among the factors that mobilize financial flows are for example specific monetary conditions, availability of skills and infrastructure, trade regimes, etc. In this framework, resources can either be domestic public (such as tax revenues), domestic private (lending, bond and equity markets), international public (aid/ODA and OOF), or international private (remittances, bank lending, FDI).

Besides the availability of resources, there are factors that determine the effectiveness of finance such as institutions and capabilities, national and international policies on trade, finance, etc. These factors converge into enablers for economic, social, and environmental transformation. In this sense, this year’s ERD seeks to examine the trends of different available financial flows and the types of changes that are required in the current development context in order to ensure the optimal use of these resources.

In order to find examples and new ideas on how to facilitate sustainable development transformations, the ERD includes country illustrations that describe social, environmental, and economic changes in six countries (Moldova, Ecuador, Tanzania, Indonesia, Bangladesh and Mauritius). The country illustrations aim to describe finance options used, what role has finance played in fostering transformation in these countries, how have non-financial means of implementation helped and what are their future challenges.

Mr. Mackie highlighted the importance and weight of domestic revenues such as taxes and remittances in comparison to ODA and OOF. He also stated that it is important to understand the shifts that developing countries have experienced in matters of financing in order to articulate a renewed development agenda and ensure the improved used of financial resources. In this respect, he indicated the need to improve coordination among development actors in order to avoid governance failures that constrain the effective mobilization and use of finance.

Finance alone cannot ensure progress but it can support sustainable development transformations through enablers (factors of production, innovation, governance, global linkages). The effects reached by these actions will facilitate transformations at the economic (productivity and jobs), social (poverty reduction, equity), and environmental level. The finance structure to achieve these goals cannot be addressed through ODA solely. These transformations require the exploration of new aid instruments, the effective use of domestic resources like taxes and the identification of opportunities (private investment, non financial MOI, etc.).

SESSION 2

2.1 Country Illustration Progress – Ecuador

Andrea Ordóñez and Iván Borja presented the progress of the country illustration for Ecuador that focuses on social transformations. The report seeks to observe how financial and non-financial factors have shaped social l changes in the last decade in Ecuador.

From year 2000 on, Ecuador experienced an important transformation in the social sector mainly caused by an increased interest from the government to invest in social policy. The adoption of the new constitution in 2008 set the groundwork for improved and more inclusive policies focused on ending poverty and reducing inequality. Mr. Borja indicated that a very positive economic framework also facilitated the implementation of social programs and investments. In fact, economic figures have showed an important improvement in the last decade: Ecuador has shifted from a negative PIB in year 2000 (caused by the 1999 financial and economic crisis) to a sustained positive growth rate maintained over the years. This economic shift has located Ecuador as a middle-income country.

According to Mr. Borja, oil revenues and taxation have become the main sources of social investment financing in the country, showing that Ecuador is still an economy mainly based on its natural resources. In this scenario one of the main challenges the country faces is related to environmental degradation and sustainability of the current economic model. In spite of the challenges, economic growth has allowed for better public services (i.e. water, sanitation, health) and improved living conditions for the population. As a consequence social indicators like literacy, life expectancy, infant and maternal mortality rates, have also showed positive shifts in the last decade.

One of the aspects that has allowed for social transformation to take place is the strengthening of the state capacity to design and implement social programs and policies. Stronger and more coordinated public institutions sustain these policies at a political level and facilitate broader access for the population. In addition to the legal framework, it is important to analyze how these changes have been financed over the years in Ecuador.

Ms. Ordóñez highlighted the role finance has had in the development of the social sector in the country. She indicated that the main source of financing is domestic revenues (mainly tax and oil revenues), showing the increasing importance of the oil industry in Ecuador and the improved State’s capacity to manage tributes. These domestic resources are nowadays more representative than those from the ODA and other sources of financing.

As stated, social expenditure has been financed by revenues coming from the extractive industries; in this framework, high oil prices had an important role to play but they were accompanied by other adjustments in the sector like the renegotiation of oil contracts to increase State’s shares in oil revenues, renegotiation of the external debt, and the dissolution of oil funds allowed the State to redirect these cash flows into social investment.

Regarding private international funds, remittances are the most representative share even in comparison to foreign direct investment (including oil investment). Remittances have been considered to be an important source of development, but studies conducted in Ecuador have showed a limited connection between remittances and poverty reduction. In fact, remittances might even potentiate inequities.

Social transformations in the last decade in Ecuador took place due to increased state capacity to redirect resources to social sectors and to design and implement social policies. Tax and oil revenues have financed these changes but they are not sustainable in time. In this sense, one of the main challenges for Ecuador will be to find alternative ways to finance social transformations over time.

2.2 Panel Discussion

Tatiana Villacrés (Ministry of Public Health)

Tatiana Villacrés talked about the health related transformations Ecuador has experienced in the last decade and how these transformations shape the social sector nowadays. She also addressed the political and economic aspects that have allowed for these changes to take place.

According to Ms. Villacrés, Ecuador is going through a phase of demographic transformation that represents not only health related challenges but also pressure on the country’s social structure. In the last 30 years, life expectancy has increased from 67.5 to 75.0 years in 2010 with perspectives to reach 77 years in 2015. Additionally, fecundity rates have decreased from an average of 7 children per women in the 1950s to 2.3 children per woman in 2012. All these changes will definitely demand adjustments in the social policies to be adopted in the following years including measures related to social security and insurance.

Regarding financing in the health sector, Ms. Villacrés highlighted the important growth the sector has seen in the last decade and the prominent role the public sector has played in this process. She indicated that the cornerstone of this transformation has been the 2008 Constitution and the political framework that allowed the establishment of a network of public and private health providers and a stronger and more stable budget. Currently, the assigned budget reaches $2.200 million, mostly coming from fiscal resources (taxes).

Enhanced health care in the country has additionally been sustained by other effective policies such as improved garbage collection services, access to drinking water and sanitation, and higher access to other basic services. These policies have had direct implications on health indicators such as the reduction of maternal and infant mortality rates. In spite of these positive changes, last year’s national health survey highlighted the challenges the country still has in matters of health. For example, nutritional patterns have changed in the country in the last 30 years showing an important mitigation of infant malnutrition but showing increasing rates of obesity among children under 5 years old.

According to Ms. Villacrés, the challenges the country has to face are related to the health sector’s financial sustainability. She indicated that in terms of gratuity of services, the country still has the need to evaluate what is the best and most sustainable way to implement this principle. She considers that an important question to be answered is how to assign limited resources to unlimited needs.

Daniela Araujo (Strategic Planning Manager, Banco del Estado)

According to Ms. Araujo, the implementation of a national planning strategy (Plan Nacional del Buen Vivir) is one of the main changes Ecuador has experienced in the last decade. Based on this strategy, the State has defined targeted institutional and inter-institutional goals aimed at constructing a fair society able to ensure equal opportunities for all its citizens. Additionally, stable budgets have sustained these goals and allowed for investment in priority areas (education, health, etc.) to take place.

For instance, the current public budget for education is $3.300 million (it was 1000 million in 2006), and from this budget approximately $400 million are specifically used for investment. The goal is to ensure universal access to education for all citizens and the goal is almost fulfilled (97%). The question now is how to finance the next steps in order to reach the objective. As in education, other social sectors have identified what is required to reach higher standards in terms of quantity (access and coverage) and quality; the challenge is to identify the means to ensure availability of resources and its optimal and most effective use.

Ms. Araujo also indicated that social transformation is linked to the political stability the country has experienced in the last years. This stability has allowed for better-designed policies and more control over its implementation. Regarding challenges the government has, Ms. Araujo identified the limited availability of qualified human resources in the public and private sector.

Lenin Parreño (Development Bank of Latin America-CAF, PUCE)

In order to understand Ecuador’s social and economic transformation, Mr. Parreño highlighted several aspects to explain it. He mentioned:

·         Inflation and government stability. When economic stability is equal to inflation, governments tend to last longer. After the economic crisis, inflation reached 40% but then with the dollarization it stabilized and economic growth did too. After 2001, stable inflation and rampant economic growth lead to a period of political stability.

·         Inflation and poverty. Before 2001 poverty and inflation rates were alarmingly high. Dollarization allowed for poverty and unemployment to descend and stabilize mainly due to the adoption of redistribution policies. Regarding employment, it is important to observe that in spite of improved rates, underemployment figures are not always duly considered and they represent a structural problem of the economy. Currently, 45% of the population work less than 8 hours a day and their working conditions do not allow them to access social benefits.

·         GDP growth and high oil prices. Historically, there is a clear relationship between oil prices, investment, employment and economic growth in Ecuador. When prices are high, economic performance is positive as a consequence. The country has not been able to change this dynamic in the last 40 years. In this scenario it is important to evaluate the scenario without high oil prices.

·         Regional performance. Ecuador’s positive economic performance has a direct connection with the region’s (Latin America and the United States) positive growth.

Mr. Parreño also mentioned that the sources of income in the country have changed in the last years. Foreign direct investment between 2002 and 2004 was approximately 4% from the GDP. Currently, this item represents less than 1% of the GDP. In this scenario, private flows of investment have been replaced by public financing. Regarding sources of income for the country, he mentioned:

·         Remittances. Remittances increased from 800 million in 2000 to 2.400 million in 2004 stimulating consumption and production. Briefly after dollarization, remittances represented 4% of GDP, currently the represent less than 2%.

·         Oil prices. The drastic increase in the oil prices represents an important source of income for the country. Oil prices went from $18 per barrel in 2002 to $95 in 2014.  Additionally, the renegotiation of contracts represented more than $3.000 million for the State and allowed the expansion of the public sector.

·         Public debt with China. Currently, China represents the main source of income for the State with an average annual disbursement of $1500 million displacing the multilateral sector to a secondary place ($400 million per year).

·         Non-oil exports. These types of exports have increased in the last 30 years (from 20% to almost 80% in 2014) and show the innovation capacity from the Ecuadorian productive sector.

                             

In terms of challenges and opportunities, Mr. Parreño indicated that the country needs to identify alternative ways to finance development. Ecuador is a country with an important growth potential but it needs to address the matter of financial sustainability. Economic policies need to overcome the country’s dependency on oil and strengthen the productive sector. In this sense, the country is focusing on changing the production matrix. Similar experiences in other countries have showed that this is a long term process with investments of 30% of the GDP. Currently, Ecuador has an investment of 26%; the remaining 4% does still need to be covered. In order to face the challenges, the government is taking steps towards opening up to foreign investment. Additionally, the development of the productive sector is crucial and requires investment in human resources and innovation.

SESSION 3

3.1 General Remarks – James Mackie

To open the afternoon session, Mr. Mackie summarized the main points from the morning session.

·         The ERD seeks to focus on the debate of what comes after the MDGs. With limited available resources it is important to focus on the quality of the expenditure rather than on quantity. In this scenario, it is primordial to identify other sources of financing besides ODA and different types of policies to address a broader development agenda.

·         This year´s ERD focused on 6 case studies addressing different topics. The case of Ecuador focuses on the important social transformation the country has experienced in the last decade. Oil revenues and taxes have mainly sustained this social transformation. Sustainability of expenditure is one of the challenges the country faces these days.

·         Political stability has allowed Correa´s government to strengthen the social sector and redistribute oil and tax revenues into areas such as education and health. This shows the importance of the political context when it comes to social transformation.

·         Among the revenues sustaining the social transformation in the country is taxation (VAT mainly) and is mainly sustained in Ecuador´s middles class. The question is whether the country can maintain the situation in the long term. In this sense, the role of the private sector is also important and it is related to its capability to generate employment and innovation.

·         There are lessons to be learned about how the government has redirected oil and tax revenues into social transformation and how it has adopted policies to sustain these changes. The question remains related to how to keep financing social change and sustain long term coverage for broader public.

3.2 Panel Discussion

Fernando Pachano (UNDP)

Mr. Pachano talked about Ecuador´s advancements and efforts towards the fulfilment of the MDGs. Mr. Pachano indicated that UNDP’s follow up to the country’s advancements serves as a baseline to think about the next steps after 2015. Official evaluations (carried out by Senplades) indicates that all the proposed MDGs could be accomplished by 2015. Goals such as poverty, inequality and infant mortality reduction, malaria and tuberculosis control, increased water and sanitation access, have already been accomplished. Universalization of primary education and information technologies enhancement are closed to be accomplished. Areas that are still in progress include universal access to sexual and reproductive health, reduction of adolescent pregnancy, employment and gender disparities.

Mr. Pachano also talked about Ecuador’s position regarding the formulation and content of the MDGs. While the government has acknowledged the goals and has worked towards its achievement, it has also maintained a position of positive criticism towards them. The government highlights the fact that the conception of the MDGs was not an entirely democratic process and therefore the construction of a participative post 2015 agenda will require the active involvement of all countries, especially those from the global south. Mr. Pachano indicated that Ecuador has taken the MDGs as a reference for social standards since the national development strategy (Plan Nacional del Buen Vivir) sets higher standards than those posed by the MDGs.

He also mentioned the important economic growth the region has seen in the last decade and how Ecuador has been a part of this transformation. Ecuador has achieved economic growth and inequality reduction above the regional average. Public investment in the social sector has had a positive impact on the human development index. In the last 7 years, the country has moved 10 points up in the regional ranking and has been catalogued as one of the countries with better performance in Latin America.

According to Mr. Pachano, Ecuador as other countries in the region that experimented changes, have elements in common such as strong governments focused on making important investments in education and health. Additionally, they are focused on developing industrial capabilities and change their production matrix in order to boost economy and enhance innovation. Rule of law, governance, institutional capabilities, and democracy are key aspects to foster financial sustainability in Ecuador and on other countries in the region.

Regarding financial sustainability, there are coordinated efforts lead by the UN to identify elements and priorities for the global agenda post 2015. It is clear that the MDGs are going to be the start point for the next steps but coordinated efforts such as the Monterrey Consensus need to be taken into consideration in order to ensure the compliance of agreements and adoption of further actions. In this sense, key topics are for example the optimal use of national funds and domestic resources for development, strengthening of tax and contribution systems, and the continuous fight against illicit capital flight and tax heavens.

In order to achieve financial sustainability, it is important to identify other means of financing outside the public sector. Public-private partnerships present a suitable opportunity for investment in key areas such as infrastructure, agriculture, energy, and ICTs. There is also the need to successfully leverage remittances for development purposes through reduced transaction costs in a framework of cooperation. Global financial governance needs to be urgently modified in order to increase the participation of the countries from the global south in the definition and implementation of suitable and sustainable financing schemes.

Mauricio León (Vicepresidency of Ecuador)

Mr. Mauricio León talked about the aspects that allowed economic and social transformations to take place. He considered that the roots of this change are set on the Constitution of 2008 where the vision of a transformative State and a new social pact (buen vivir) was consolidated. The national strategy for development (PNBV) establishes two main strategies: the transformation of the productive matrix and the erradication of poverty.

The financial strategy behind this new vision was mainly focused on canalizing domestic savings into public investment and structural conditions to ensure future development. The financing strategy had 7 axes:

1)      Oil funds. Resources coming from the oil industry were infused into the general State through the dissolution of oil funds. This meassure certainly helped the country face the world financial crisis in 2008.

2)      Oil revenues. The State gained access to high oil revenues through the renegotiation of contracts. The first sectorial reform took place in 2006 through the stablishment of a new participation scheme for oil companies (50%-50%) that increased Ecuador’s participation in oil revenues. Later, during Correa’s government the participation share changed to 70%-30% in favor of the State.

3)      Tax reforms and elimination of fiscal pre-allocations. The government adopted a series of succesful policies and reforms to improve the State’s capacity to collect taxes. Taxes represented and still represent an important income for the public sector and have allowed certain flexibility for investment in the social sector.

4)      Movilization of domestic resources for public investment. Domestic indebtedness increased in the last years with the active participation of public institutions such a social security financial institution (Bies) that has financed high-yield investments in strategic sectors such as infrastructure, real state, etc.

5)      Central Bank’ liquidity. In order to ensure that financial resources would stay in Ecuador, the government implemented meassures such as the regulation of interest rates for the financial system and increased rates to prevent currency outflows.

6)      Repurchase of ‘Global’ Bonds. The purchase reduced the external debt stock and represented an important income for the country.

7)      Loans and oil forecasted sales to China.

The current strategy has been sustainable for the last 7 years and has replaced the World Bank’s and the Monetary Fund’s credits. However, there are limitations and challenges that still need to be addressed in order to ensure financial sustainability.  An important challenge is the lack of a structural change in the economy. Ecuador’s economy is based on natural resources and in order to be flexible, it needs a shift towards the generation of services based on knowledge and innovation.

University San Francisco de Quito