COUNTRY BRIEFING

FROM THE ECONOMIST INTELLIGENCE UNIT

Ecuador’s constituent assembly, charged with writing a new constitution, has extended its original six-month mandate by two months, to the end of July. The assembly is controlled by supporters of the president, Rafael Correa, and, following the dissolution of the Congress late last year, has assumed legislative powers. It therefore spent much time passing laws to help consolidate the leftist government's rule, leaving insufficient time to draft the hundreds of articles needed to complete the constitutional revamp. The deadline extension could result in a deterioration of support for the body, although the president’s personal popularity remains high.

The public approval rating for the assembly, which began its work last November, has already fallen substantially, to 37%, according to a recent Cedatos-Gallup poll released on May 26th. Many Ecuadoreans believe the assembly is failing to address their day-to-day problems, such as unemployment and rising inflation. Indeed, it was recently bogged down in disagreements over issues such as abortion, religion and gay rights.

Part of the problem is that the governing party, Alianza País (AP), is an eclectic mix of both radical and moderate left-wing groups with little in common aside from allegiance to Mr Correa. This has made it difficult to reach consensus on some major political and economic issues. But the assembly's near-limitless powers have also proved more of a hindrance than a help. Rather than focussing on the job at hand, it devoted its first three months to passing bills, not to the constitutional rewrite. The new deadline will buy some time, but the danger is that the remaining constitutional articles will nonetheless be rushed through.

Once ready, the draft constitution can be expected to incorporate economic policy issues that will substantially increase the government's intervention in the economy and its control of strategic sectors—in line with Mr Correa’s goal to create “21st century socialism”. It will include new regulations for the oil, mining and other key sectors. The Correa government already has overturned contracts with foreign oil companies, revoked mining concessions and threatened telecoms companies, developments that have scared away private investors. On the political front the constitution will draw new rules of the game concerning political processes and institutions, including allowing consecutive presidential re-election.

The government hopes to keep to a tight timetable to complete the rewrite and then submit it to a national ratification referendum. The new deadline for presenting the draft is July 29th, and the referendum could be set for late September or October, according to the minister of the interior, Fernando Bustamante. The constitution will most probably call for fresh general elections, which might be scheduled for as soon as December or January of 2009.

Insufficient support

However, the project thus far does not yet seem to have sufficient popular support to ensure ratification. Although 82% of all Ecuadoreans back in April 2007 voted in favour of organising a constituent assembly, the Cedatos poll indicates that only 41% of respondents currently say they would vote for the new charter. Thirty-one percent say they would vote against it, while almost 30% of respondents remained undecided.

Government officials suggest that the poll is not reliable, but also admit that many respondents may see the assembly as just another Congress. Ecuador’s lawmakers, as well as its traditional political parties, have long suffered from a lack of credibility among the population. Party indiscipline, fragmentation and corruption undermined the effectiveness of the legislature. Relations between the legislature and the executive branch tended to be very tense, and this led to a decade of acute political instability, including the toppling of several governments.

Mr Correa, by contrast, is a charismatic newcomer whose popularity rating remains high. He should eventually be able to muster up enough backing for the constitution’s passage. His approval ratings are boosted by his administration’s increase in social spending, thanks to high prices for Ecuador’s oil exports. His image as a fighter was recently bolstered by his toughness towards Colombia, with which Ecuador broke diplomatic relations after a March 1st incursion by Colombia troops on a base camp in Ecuador occupied by guerrillas from the Fuerzas Armadas Revolucionarias de Colombia (FARC).

At the same time, opposition parties have been decimated by the Correa onslaught, and the suspension of Congress makes it impossible for them to offer more than token opposition to the government's plans.

Now only is the new constitution likely to be overwhelmingly affirmed in the public referendum. In the subsequent new general elections, the president's Alianza País (AP) party also stands a strong chance of winning a clear majority, given that the opposition is deeply divided and unpopular. And Mr Correa will likely be returned to a new term in office.

Lagging economy

But the constitutional overhaul is no guarantee that political instability will end, and over the medium term dissatisfaction with Mr Correa could well rise. This could be the result of the onset of an economic recession, a worsening of inflation or the government’s inability to fulfil its many social-spending pledges.

The economy is already in a relatively poor state. GDP growth in May year on year was just 2.5%, the lowest rate in Latin America. Inflation is also rising, hitting 8.4% year on year in the second quarter.

Since Ecuador is an oil-rich nation, this poor growth performance is all the more baffling. But the country has not made the most of the oil bonanza, as insufficient refining capacity leaves the government dependent on increasingly expensive imports to meet surging domestic demand for fuel. Further, the uncertain business environment has discouraged investment. Incoming foreign direct investment in 2007 slipped badly (down to US$179m from US$271m in 2006), according to central bank figures.

Meanwhile, the government’s spending of savings held in several oil funds (intended for a rainy day, when oil prices drop) will only increase the economy’s vulnerability to a crash. Defending itself, the government claims that ramping up spending is necessary given Ecuador’s high poverty levels. It also says that foreign investors have long ravaged the country’s natural resources.

However, the public sector remains too weak and inefficient to drive up economic growth in the absence of private investment. If the new constitution codifies the Correa government’s intention to increase state control over key sectors of the economy, private investors will be further turned off.

Ecuador is certainly in need of reforms to address weak institutions and its chronic political instability. Whether the new constitution provides these, and marks a real turning point in its troubled history, remains uncertain.