by JAYATI GHOSH
President Rafael Correa of Ecuador. PHOTO/RODRIGO BUENDIA/AFP/Getty Images/Global Post
The small Latin American country demonstrates how to maximise revenues and use the same in the social sector and for building public infrastructure.
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Until recently, Ecuador was very much a banana republic exporting primary products (oil and agricultural products) and people (migrants to the United States) but still running balance of payments deficits and prone to instability in a context of economic inequality, widespread poverty and backwardness. Dollarisation of the economy curbed the hyperinflation but did not resolve any of the systemic problems, and the economy continued to lurch from crisis to crisis combined with rapid political changeovers. From 2007, however, the government led by Rafael Correa has attempted to change many of these features, and the extent of its success in a relatively short time is remarkable.
One of the most impressive changes has been in the area of tax collection. Ecuador is an oil exporter (only of crude oil, however, since it does not have domestic processing facilities), and any increase in public revenues is commonly attributed to the increase in global oil prices. That has indeed been important, not least because the Correa government has successfully renegotiated the terms of its contracts with multinational oil companies.
Thus, whereas in the past the government received only an average of 13 per cent of the gross sales value of the oil, it now gets as much as 87 per cent. Despite this major switch, more than half of the foreign oil companies continue to operate in the country, which is a sign of the massive surplus profits that were accruing to them earlier. In any case, this has meant that the government has been able to benefit much more substantially from higher global oil prices. Incidentally, while this led to substantially increased hydrocarbon royalties for the state, it also meant lower tax revenues from this source.
But what is extraordinary is that, despite this very large increase, the public exchequer has actually reduced its dependence on oil during the Correa regime. The share of oil revenues in total government revenues has come down from 30.4 per cent in the period 2001-05 to only 26.1 per cent in 2006-10 – in other words, non-oil revenues now account for nearly three-quarters of government revenues.
This is mainly because of a massive effort towards efficient tax collection, which has caused tax revenues to more than double in five years. Total tax collection rose from $4.67 million in 2006 to $9.56 million in 2011. As a result, direct taxes – mainly corporation taxes – account for more than 40 per cent of the government’s revenue collection, up from around 35 per cent.
This is hugely important because it shows that this is something all governments can do, if only there is the political will to do so. Remarkably, the government did this without any adverse effects on either the rate of investment (which kept increasing over the period and is now a healthy 26 per cent of GDP) or the aggregate growth rate (expected to be as high as 8 per cent in 2011). So the usual arguments against such a drive – that it will affect “investor confidence” and therefore investment – have clearly not been relevant.
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