COMMENTS ABOUT THE MACROECONOMIC SITUATION IN ECUADOR
Enrique Lasprilla R
Quito, May 27, 2000
INFLATION AND UNEMPLOYMENT DURING THE LAST TWO YEARS
Ecuador has been experiencing growing rates of inflation and unemployment, and a decreasing tendency of real salary, from 1998 up to now, situation that contradict the economic theory that suggest an inverse relationship between inflation and salary rates and unemployment, which correspond to the Phillips curve. The tendencies mentioned jointly with the high rates of inflation and unemployment that population is bearing, correspond to the phenomenon of stagflation, proper of inflationary stagnation. The sum of the rate of inflation plus the rate of unemployment for any given period of time, equals the malaise Okun’ s Index, which has been increasing dangerously, according with official statistics.
Under these circumstances the national inflation continues augmenting rapidly. During the first four months of the present year it has surmount the 42%, and the expectation of annual inflation is near 90%, that is to say, an amount higher than the goal fixed in the agreement signed in the letter of intention between the National Government and the FMI for year 2000 (73.1%) The main item that raised its prices during the month of April, more than 10%, was food. (3.9%) followed by transportation (2.6%). For example, beef without bones augmented in 23.7%, and in equal magnitude fresh cheese, pasteurized milk, 21.8%, goose-flesh 11.9%, rice 11.6%. The results are of such magnitude that didn’t like to the top people of the Government, and provoked the resignation of the Director of the National Institute of Statistics (INEC).
It seems difficult to stop this process in the short run for different reasons: in general terms, the economic agents tend to reach international prices of goods produced, in the near future; in the second place in National Budget of the State and in the Letter of Intention signed by the Government and the FMI are foreseen strong increases of gasoline, gas, and so on. In the same way, it is foreseen, the elimination of general subsidies, particularly those provided by public institutions, like electricity, telephones, drinkable water, etc., which will provoke a new inflationary wave; and in the third place, it is suspected that the Government will follow a gradual scheme to increase prices and eliminate general subsidies; this conclusion can be easily derived from the economic and social decisions taken by the Government on May 25; so it won’t be easy to speed down the inflationary inertia. Apparently, this presidential decision caused the Ministry of Finance’s resignation.
On the other side, the indexes of juncture labor market, of the Central Bank, show that unemployment and underemployment in the main cities of the country, that is to say, Quito, Guayaquil and Cuenca, have increased in a sustained manner, since March 1998 to August 1999, as a result of the severe economic crisis that is affecting the country, plus the policy of reduction of the State’s size; from September to December, 1999, these rates diminished due to seasonal variations, but in the initial months of the year 2000, the rates of unemployment and underemployment raised again.
In general terms, the unemployment problem has been more acute in Guayaquil during the mentioned period, followed by Quito; the minor levels of unemployment have occurred in Cuenca city, being in general, less than the national average. Nevertheless, this city registered the highest levels of underemployment, during 1998, surpassing in general terms the national levels; the rates of Guayaquil, followed in importance. During 1999, and the beginning of year 2000, the rates of underemployment changed because the indexes of Guayaquil alternated with those of Cuenca, in order of importance. The underemployment index for Quito, have been systematically less than those of the other two cities.
In consequence, the National Government has a very difficult challenge to overcome these two big problems: inflation and unemployment; in this sense our Government has a disadvantage in relation with other neighboring countries because, they at least have controlled the inflation.
The basic questions posed are: What is the Government doing to reduce meaningfully the inflation rates? And what has to do the Government to solve the unemployment problem? In reference to the inflation control, the Government with help of the Congress, through the approval of the Economic Transformation Law, confirmed the devaluation of the Sucre at an exchange rate of S/. 25000 x 1 US$, implanted the dollarization process, and took out from the Central Bank the function of issuing Sucres bills; besides, it is designing and applying mechanisms to avoid evasion of taxes, and is centering its efforts to collecting value-added tax, capital circulation tax, customs duties, and re establishing the income tax; in this way the Government is trying to control the inflationary process.
Additionally, with the devaluation process, salaries in real terms were reduced meaningfully, during year 1999, and the first five months of the present year. Government has also maintained a rigid control of salaries, in spite of pressures coming from the labor and other social organizations; such Government position changed suddenly, and on May 25, Just two days ago, announced an increase of salaries for the public sector that ranges from 70% for the lowest scale of employees to 21% for the highest. Besides it decided to increase some focalized subsidies like the bond of solidarity, the bond for the elderly, the bond for hosing, pensions for retired persons, etc. .
Notwithstanding, the Government has not been successful in its efforts for controlling inflation, not only due to the policy measures mentioned above, but because the surplus of production caused by the reduction in internal demand is going to foreign markets, like Colombia, Peru, USA, and Europe. Besides, the decision taken on May 25, of increasing the prices of different kind of fuels, raises in salaries for public employees and of focalized subsidies for poor people, and is not addressed to increase production. It is expected that price stability will be reached when exportable goods have international prices, situation that it’s unlikely that occurs during the present year. Perhaps that will be possible during year 2000.
In other direction of thinking, the Government has made very little, or nothing, in order to reduce the levels of unemployment and underemployment. On the contrary, it’s known that one of the assumptions of the letter of intention is the reduction of salaries of the Central Government Consolidated, from about 892.2 US$ millions in 1999, to 523.7 US$ millions for year 2000, which would lead to a reduction of 26000 employees in the public sector. Besides, are not counted the requirements of jobs that should be created to cover the increase of labor supply due to natural growth of population .An then emerges a question: If the State is no more one of the main employers in the country, who will replace it in the future?
The experience about employment generation in Ecuador and Latin America, during the ninety’s decade shows that employment generation would be produced in informal activities, since the modern sector of the economy has not given signals of being able to absorb the growing surpluses of labor, since it’s a sector addressed to improve productivity, helped with technological innovations, in order to be in good shape for competing in the globalize economy that we are living. The agricultural and the domestic sector, even less. Instead, a part of the population is emigrating to other countries, like USA, Spain, and other European countries, Chile, etc., looking for new job opportunities.
The Government and the private sector have not given signals of having available an strategy which allows to reach an important economic recovery, so the economy could grow up again, so with such growth the employment and inflation rates diminish in a significant magnitude. It’s foreseeable that the Government will be able to do very little in the short and medium run to solve the unemployment and underemployment problems in Ecuador.
It’s possible to predict that in the medium and long run, inflation will be controlled if the present economic policies are successful, but with high levels of unemployment, higher than 20%, which means a greater deterioration of living conditions of population.