Populism in Ecuador: Rafael Correa
This is the third post in our series of case studies on the five iconic cases of populism in 21st-century Latin America. See also:
Ecuador’s Uniqueness
Ecuador stands out as a unique case of left-leaning populism constrained by the discipline of a formally dollarized economy.1 When Rafael Correa assumed the presidency in 2007, he brought a bold populist agenda, becoming a salient figure of the pink tide (21st-century socialism) in Latin America. Yet, unlike many of his regional peers, Correa faced a unique limitation: Ecuador had adopted the U.S. dollar as its official currency in January of 2000. While dollarization didn’t stop him from reforming the constitution or expanding the state’s role in the economy, it did place meaningful guardrails around how far his populism could go (Cachanosky, Salter, and Savanti, 2022). Dollarization reduces the “degrees of freedom” to finance a deficit by removing (in principle) the option to monetize deficits.
Yet, dollarization is not the only thing that makes populism in Ecuador a unique case. Another interesting characteristic is that Correa is well-trained in economics, earning a PhD from the University of Illinois at Urbana-Champaign in 2001.
Correa’s Populist Macro-Policies
Correa inherited a fiscal surplus (2.13% of GDP) thanks, in part, to his policies during his prior position as Minister of Economy under President Alfredo Palacio. But the surplus was short-lived. By 2009, the government had already slipped into deficit, and by the time Correa left office in 2017, Ecuador was running a 5.8% fiscal deficit.
As early as April 2007, Correa delivered on his anti-imperialist rhetoric, cutting off his ties with the IMF by paying off its outstanding debt. In need of new funds, Correa turned to anti-market and anti-investor rhetoric, intending to drive down the price of Ecuador’s sovereign bonds. Once they hit rock bottom, the plan was to buy them back with help from Venezuela. Correa also explored alternative financial sources. After Ecuador defaulted in 2008, Correa turned to China for financing, offering future oil exports as collateral. This opaque debt deal helped justify the later nationalization of Ecuador’s oil sector.
Lacking the option to print money due to being officially dollarized, Correa leaned heavily on tax hikes and debt accumulation. In 2008, he introduced a tax on capital outflows, initially set at 0.5% and eventually raised to 5% by 2011. By 2012, this single tax was generating 10% of all government revenue. Correa also imposed a windfall tax on the oil and mining sectors and levied a tax on foreign-held assets (Clark and García, 2019, p. 236). Meanwhile, public debt as a share of GDP climbed steeply from 28.8% in 2006 to 44.6% by the end of his presidency.
Perhaps the most notable episode came with the failed launch, in 2014, of a central bank digital currency—the dinero electrónico (DE)—a global first at the time (see Arauz, Garrat, and Ramos, 2021). But the rollout flopped as the demand for the DE was nonexistent.
The timing of DE was not accidental, as it took place when Ecuador's risk premium was increasing. Behind the political narrative, DE was an attempt by the Treasury to use bank reserves deposited in the central bank. If the public starts to use DE, then the central bank could lend (cheap or even free) those reserves to the Treasury. To put it simply, behind DE was an attempt to seize bank deposits held as reserves in Ecuador’s central bank.
Media Intimidation
Correa also became famous for going against the media. As early as 2009, his government suspended Teleamazonas for 72 hours under the accusation of spreading false information. Teleamazonas became known for not complying with government directives. In 2011, Correa famously sued an editorial writer and the directors of El Universo newspaper. The editorial writer, Emilio Palacio, fled the country, finding asylum in the United States. According to V-Dem, media self-censorship increased during Correa’s presidential term.
The Downturn and the Dollarization Belt
For much of his presidency, Correa enjoyed the economic wind behind his back. High oil prices and the macroeconomic stability of dollarization allowed for growth despite his policies (as it occurred with other populist regimes in the region), at least until 2014. But as global commodity prices dropped and populist spending caught up with him, cracks began to show. Dollarization, which had once enabled Correa’s policies, now forced an uncomfortable dose of austerity. A devastating earthquake in 2016 only made things worse.
By 2015, protests were becoming more common. In 2009, a nationwide mining protest took place, one that the police used force to disband. In 2010, the National Police went on strike, and Correa declared a state of emergency. El País reports that the army freed Correa from the police force while he was held at the hospital. Later, in 2012, a large Indian advocacy group protested against Correa’s land and water policies.
Years of stagnation, mounting debt, and regulatory overreach had taken their toll. With Correa barred from seeking reelection, he tapped his former vice president, Lenín Moreno, to run as the PAIS Alliance candidate. Moreno won. But once in office, he shocked observers by abandoning Correa’s political and economic agenda, signaling the intention to put an end to Ecuador’s left-populist experiment. Moreno even went after Correa, trying to prosecute him. More did not run for a second term, and he was expelled from Correa’s political party (PAIS Alliance) in March 2021. Such a turn on his political allies can be read as a credible signal (burning bridges with Correa) to potential investors that, under his presidency, their property rights will be protected to a larger extent than under Correa’s administration.
The Four Stages of Ecuador’s Populism
Taking Moreno’s election as the end of Correa’s populism, then, Ecuador’s populist experience can be divided into the following four stages.
For a more detailed discussion of Ecuador’s dollarization, see Ocampo and Cachanosky (2022), Beckerman and Solimano, 2002), Mahuad Witt, (2021), and Jácome and Lönmberg, 2010).