Ecuador - Current economic position and prospects (Vol. 1 of 3) : Main report

1972/74 T 4 42 . ;, 7 DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL FINANCE CORPORATION INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No.14a-EC CURRENT ECONOMIC PO,SITION AND PROSPECTS OF ECUADOR (in three volumes) VOLUME I THE MAIN REPORT June 1, 1973 Latin America and the Caribbean Regional Office This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.  CURRENCY EQUIVALENTS Current Unit = Sucre (S/) S/l.oo = us$o.oo4 US$1 .00 S/25.00 S/i million = us$4o,ooo GLOSSARY OF ABBREVIATIONS BEV - Ecuadorian Housing Bank BNF - National Development Bank CENDES - Industrial Development Center CEPE - Ecuadorian State Petroleum Corporation CFN - National Finance Corporation CIDA - Inter American Center for Agricultural Development COFTEC - Development Finance Company EEQ - Electric Company of Quito ENPROVIT - State Enterprise regulating trade in key commodities ENTEL - National Telephone Company EMELEC - Electricity Company of Ecuador IEOS - Ecuadorian Institute of Sanitary Works IERAC - Ecuadorian Institute of Agrarian Reform and Colonization IESS - Social Security Institute INECEL - Ecuadorian Institute for Electrification INERHI - Ecuadorian Institute for Water Resources INIAP - National Institute for Agricultural Research IPPF - International Planned Parenthood Federation GOVERNMENT OF ECUADOR FISCAL YEAR January 1 to December 31  This report is based on the findings of an economic mission which visited Ecuador in March-April 1972 and subsequent staff visits and discussions with the Government authorities. The mission was composed of Messrs. R. Echeverrla (Chief of Mission), G. Novak (General Economist), S. Malik (General Economist), P. Dax (General Economist), A. Parra (Petroleum Specialist- Consultant), S. Lerner (Industrial Economist- Consultant), R. Kahil (Fiscal Economist- Consultant), N. Nowak (Tax Administration Specialist-Consultant), W. Kupper (Power Specialist), and Miss. B. Protas (Secretary). This report also draws from the findings of an IBRD Agricultural Sector Review Mission which visited Ecuador in the fall of 1970. The petroleum prospects reflect the situa- tion as of February 1973.   CUTPRENT ECONO'"IC POSITTON ANTD LONC-TFPY PROSPFCTS OF ECITADOR TABLF OF CONTENTS VOLLWE I Page No. COUNTRY DATA SUPONARY AND CONCLUSIONS .......................................... i-vi I. INTPODUTCTION .......................................... 1 II. GROWTF AND STRUCTURAL CHANCE ........................... 4 A. Recent Growth Performance ......................... 4 Sectoral Origin of Growjth ....................... 4 Major UJses of Resources ......................... 5 The Problem of Mleasuring Growth .... ............. 9 B. Population, Employment an(d Income Distribution 9..... 9 III. DEVETLOPMENT PROSPECTS AND POLICIES ...................... 12 A. Introdtiction ....................................... 12 B. Agriculture ....................................... 12 C. Tfanufacturing . ................. .................... 27 D). Petroleum ....... ............ ...................... 35 E. Issues and Public Investm,ent Possibilities in Other Sectors ................................ 39 Fisheries ............. . .......................... 39 Transport ....................................... 40 Telecommunications .............................. 44 Electric Poler .................................. 45 Eduication ....................................... 47 Iealth and Sanitation ........................... 49 Hoiusing ......................................... 50 F. Overall Investment Requirements ................... 51 Private Investrent .............................. 52 Public Investrent ................................ 53 IV. FINANCING OF DFVFLOPMIENT ............................... 58 A. Private Sector Financing .......................... 58 B. Public Sector Financing ........................... 61 Public Revenues ................................. 63 Public Expenditures ............................. 73 Financing of Public Investment .................. 75  TABLE OF CONTENTS - CONT'D. Page N). V. FXTEUNAL TRADE AND FINAN9CES .......................... '30 A. Pecent Trends ............ 30 B. Future Prospects .8 Fxport Possibilities ...... .................... S,8 Import Reouirements ...... ..................... 92 External Capital and External Debt .... ........ )3 111APS VOLJfE II STATTSTICAL APPFNnIX VOLUTIE III ANNEXES A17NEX A - Technical Note on National Accounts ANYFX B - Technical Note on Basic Statistics ANN'EX C - The Petroleum Sector ANNTEX D - Long-Term MTacro-Economic Projection Wodel  Page 1 of 2 pages COUNTRY DATA - ECUADOR AREA 2/ POPUIATIONa/ DENSITY 271,000 ke- 6.5 million (mid-1972) 24 per kmr-/ Rate of Growth: 3 4% (froml960 to 1971) 200 per ksof arable land a/ b/ POPULATION CHARACTERISTICS (19707 hEALTH (1968) Crude Birth Rate (per 1,000) 48 Population per physician 2,770 Crude Death Rate (per 1,000) IL Population per hospital bed 450 Infant Mortality (per 1,000 live births) 87 a/ 0/ INCOME DISTRIBUTION (1970T DISTRIBUTION OF LAND OWNERSHIP (1968 C % of national income, lowest quintile 2.7 7. owned by top 10% si owners 76 highest quintile 73.2 7% owned by smallest 30% of owners 1 h/ d/ ACCESS TO PIPED WATER (1969) ACCESS TO ELECTRICITY (1962) % of population - urban 92 % of dwellings 32 - rural 9 e/ NUTRITION - EDUCATION f/ Calorie intake as % of requirements (1964-66) 74 Adult literacy rate % (1962) 68 Per capita protein intake, grams (1962) 48 Primary school enrollment 7 (1967) 76g 1/ GNP PER CAPITA in 1970 : US $290 GROSS NATIONAL PRODUCT IN 1971 ANNUAL RATE OF GROWTH (%. constant prices) US 9 Mln. 74 1960-65 1965-70 1971 GNP at Market Prices 1,606 100.0 4.6 5.5 7.0 Gross Domestic Investment 371 23.1 2.5 12.6 19.6 Gross National Saving 141 8.0 0.5 4.7 -28.0 Current Account Balance -230 -14.3 Exports of Goods, NFS 257 16.0 2.9 3.2 7.2 Imports of Goods, NFS 466 29.0 5.1 9.8 36.8 OUTPUT, IABOR FORCE AND PRODUCTIVITY IN 1971 Value Added Labor Force V. A. Per Worker US 7Mln. 7, Mln. us U S % 3/ Agriculture 432 28.5 1.1 55.0 393 14.2 Industry 4,05 26.7 0.4 20.0 1,012 36.7 Services 5/ 678 44.8 0,5 25.0 1,356 49.1 Unallocated . . - - Total/Average 1,515 100.0 2.0 100.0 2,761 100.0 GOVERNMEINT PINANCI 6/ Public Sector Central Government (S/ Mln.) % of GDP ( S/ Mln.) / of GDP 19 71e 1971 a 1965-71 - r 1971 196-71 Current Receipts 7,091 17.2 14.4 4,864 11.8 9.3 Current Expenditure 5,988 14.5 12.3 6269 10.6 8.5 Current Surplus 1,103 2.7 2.1 495 1.2 0.8 Capital Expenditures 2,594 6.3 5.1 1,410 3.4 2.5 External Assistance (net) 563 1.4 1.5 .. .. e Staff Estimate not available not applicable  Page 2 of 2 pages COUNTRY DATA - ECUADOR MONEY, CREDIT and PRICES 1965 1969 1970 1971 (Million S/ outstanding end period) Money and Quaai Money 5,446 9,660 11,539 12,619 Bank Credit to Public Sector 541 1,365 1,810 2,583 Bank Credit to Private Sector 4,106 6,388 7,527 8,321 (Percentages or Index Numbers) Money and Quasi Money as % of GDP 26.2 31.7 32.8 30.6 General Price Index (1963 = 100D)/ 107.2 127.2 135.7 148.8 Annual percentage changes in: General Price Index 3.9 4.7 6.7 9.8 Bank credit to Public Sector 362.4 66.4 32.6 42.7 Bank credit to Private Sector 1.7 9.7 17.8 10.5 BAlANCE OF PAYMENTS MERCHANDISE EXPORTS (AVERAGE 1965-71) 1969 1970 1971 US $ Mln % (Milliona US $) Exports of Goods, NFS 220 256 257 Banana 107.5 52.3 Inports of Goods, NFS 330 361 466 Coffee 36.8 17.9 Resource Gap (deficit = -) lTdM -105 Cacao 24.6 12.0 Sugar 9.0 4.4 Interest Payments (net) - 8 - 10 - 11 All other commodities 27.6 13.4 Workers' Renittances .. .. .. Total 205.6 150,0 Other Factor Payments (net) - 20 - 24 - 24 Net Transfers 12 14 13 EXTERNAL DENT, DECEMBER 31, 1971 Balance on Current Account -126 -125 -230 US $ ml. Direct Foreign Investment 75 90 157 Net MLT Borrowing 16 31 23 Public Debt, incl. guaranteed 390.1 Disbursements 30 47 46 Non-Guaranteed Private Debt Anortization 14 16 24 Total outstanding & Disbursed Subtotal 91 121 1,180 9/ Capital Grants. 8 - 4 4 DEBT SERVICE RATIO for 197 r Other Capital (net) - - - % Other items n.e.i 40 - I is Increase in Reserves (+) 5 2 - 30 Public Debt, incl. guaranteed 12.0 Non-Guarsnteed Private Debt Gross Reserves (end year) 65 83 63 Total outstanding & Disbursed Net Reserves (red year) 58 56 27 RATE OF EXCHANGE IBRD/IDA LENDING, (March 31, 1973XMillion US 5): Through - 1970 (August 16) IBRD IDA US $ 1.00 = S/ 18.18 1.00 =US $ 0.055 Outstanding & Disbursed 35.7 14.8 Undisbursed 8.2 18.7 Since - 1970 (August 17) Outstanding inel. Undisbursed 43,9 33.5 US $ 1.00= S/ 25.25 1.00 = US $ 0.04 1/ Ratio of Debt Service to Eiports of Goods and Nos-Factor Services. 2/ Annual Growth ratio relates to period 1966-71. 3/ Contains agriculture, livestock, forestry, fishing and htnting. 4/ Includes nanufacturifg, mining, public utilities and co-struction. 5/ Includes trade, transportation asd public and private services. 6/ Exeludes Social Security Institute GDP deflator. 8/ SDR's allocation. 9/ Ratio of debt service to -eports of goods and non-factor services. Sources: a/ Natitnal Planning and Coordination Board, Ecuador; b/ PAHO-Healtb Conditions in the Americas 1966-68, September 1970; c/ Ecuador: Encuesta Agropecuaria Naciomal, 1968; d/ UN Statistical Yearboak, 1971; e/ UN. Demographic Yearbook, 1970 and FAO, Production Yearbook, 1970; f/ UNESCO, Statistical Yearbook, 1970; I/ UIN, Statistical Bulletin for Latis America, 1970 Latin AmerIca and tre:Caribbean May 1, 1973  SUMMARY AND CONCLUSIONS i. The development potential of Ecuador's considerable natural resources has not materialized significantly in the past. Economic growth in the last 20 years has been modest - about 5 percent per annum - and has stemmed almost exclusively from the expansion of agricultural export crops: first cacao; then coffee and more recently bananas. Although Ecuador was at one time the largest world exporter of cacao and bananas, the benefits of this growth have been largely concentrated, and the low purchasing power of large segments of the population inhibited the development of a domestic market which would stimulate the growth of manufacturing and the creation of new jobs. Unemployment and underemployment seem to have been increasing, and the average standard of living of the large majority of the population remain low. ii. The major obstacles to the mobilization of Ecuador's development potential have been the low and fluctuating capacity to import, the limited savings capacity of the economy, the strong regionalism combined with a rigid social structure, and protracted political instability. iii. Ecuador is currently confronted with a great opportunity and challenge to achieve a faster and more balanced economic growth. Higher levels of foreign exchange earnings from petroleum exports should enable the economy to finance higher import levels of intermediate and capital goods and thus achieve much faster rates of growth of output and per capita income than in the past. Substantial tax revenues from petroleum should strengthen public finances thereby enabling the Government to support a high level of current expenditures and an increased public investment program, without resorting to excessive borrowing. iv. Although in terms of its contribution to aggregate growth petroleum should play a leading role during the next several vears, its direct effect on the standard of living of the population will be small. The spreading of the petroleum-generated wealth and opportunities over significant segments of the population will be one of the major problems facing the Ecuadorian authorities in the 1970's. The other major problem will be to expand and diversify the productive base of the country so that when the expansion of the petroleum sector eventually levels off, other sources of growth will permit the country to continue self-sustained development. An appropriate development strategy for the 1970's will necessarily have to focus on the expansion potential of the petroleum sector and its possible contribution to output, foreign exchange earnings and public revenues, and on the use of these additional resources to expand output in industry and agriculture and to broaden the social and economic opportunities open to the mass of the population. v. With 55 percent of the active population employed in agriculture, Ecuador still has a predominantly agrarian economy. In spite of its rich natural endowment, suited for a great variety of agricultural production, livestock and forestry, agriculture has expanded at a slower rate than the overall economy. The relatively slow growth of export crops in the recent past and their limited prospects for further expansion can be attributed to  - ii - a large extent to rigidities in external demand beyond the control of Ecuador. The most sluggish components of agricultural output have been, however, production for the domestic market. As a result, agriculture has been unable to keep up with rising urban demand for food and raw materials, and has not increased the income levels of subsistence farmers sufficiently to bring a significant number of them into the market economy. Apart from welfare consi- derations, so long as the bulk of rural population remains in small-scale subsistence farming, the agricultural sector can not generate a significant demand for industrial products. While market signals have in the past lel to efficient allocation of resources in export agriculture, neither market forces nor Government efforts to stimulate agricultural production for the domestic market met with much success because of inherent rigidities in the productive structure. Among these rigidities are the unequal distribution of land, primitive systems of land tenure, inefficient marketing mechanisms, lack of credit, and the paucity of technical improvements. The removal of these obstacles to agricultural development for the domestic market will require the Government's active involvement in the formulation and implementation of comprehensive agricultural policies and appropriate public investment in these areas. vi. The contribution of manufacturing to output, export diversification, employment and income distribution has thus far been limited and its devel.op- ment potential has remained largely untapped. The main constraints to a nore vigorous expansion of manufacturing have been the small size of the domestic market; high production costs and limited entrepreneurial interest in oenetrat- ing external markets; insufficient human, physical and financial infrastructure; and the absence of a sound national industrialization policy combined with coordinated government action to stimulate and regulate manufacturing expan- sion. W4hile manufacturing output has increased rapidly in recent years, its contribution to total output and employment is still quite small. vii. While profitable opportunities arising from an expansion of domestic incomes and demand as well as from regional integration may be expected to provide an impetus to industrial growth, over the longer term it is unlikely that domestic and regional markets alone will generate sufficient momentun. to substitute for petroleum induced growth, and increasing emphasis will have to be given to the promotion of industries oriented to broader markets. To open up these markets to Ecuadorian manufacturers will require an integrated and Government supported industrial production and export program, based on research, development and promotion; the program will also have to provide adequate guidance and incentives to attract both native and foreign financial, technical and managerial resources. viii. In view of the anticipated higher levels of economic activity induced by the production of petroleum (Chapter III, Section D), the substan- tial development potential in other productive sectors (Chapter III, Sections B, C and E), the improved financial position of the private and public sectors (Chapter IV) and the favorable prospects for the external sector (Chapter V), GDP growth targets of the order of 10 percent for the whole economy anc 8 percent for the non-petroleum segment appear to be feasible in the period 1973-77, provided that sound economic policies are followed. These levels of growth would result in an average per capita income 30 percent higher ia  - iii - 1977 than at present and, hopefully, in a better distribution of income. To meet these growth targets, gross domestic fixed investment would have to increase by almost 10 percent annually during 1973-77, yielding a cummulative volume of investment 75 percent larger than in the previous five year period. While the bulk of investment in this period will be in the petroleum sector, both public and private non-petroleum investments will have to be considerably larger than in the past. It will be of utmost importance for the realization of projected petroleum investments - and of the overall growth targets of the economy - that reasonable incentives and stability of rules are maintained. This is especially important because of the early stage of development of the petroleum sector in Ecuador. An analysis of the public investment require- ments in the various sectors and the technical and managerial capabilities at present available in Ecuador indicates that public fixed investment growth rates of about 9 percent in 1972, 19 percent in 1973 and almost 22 percent in 1974 will be required if the projects currently in the pipeline proceed as scheduled. Somewhat lower rates of growth in public investment in subsequent years should suffice and be consistent with the overall growth targets of the economy. There remains the danger, however, that political pressures will lead to excessive increases in current expenditures, and that the absorptive capacity of the public sector will not increase as we expect, which would reduce the level of public investment. Indeed, if the capacity of the public sector to prepare and execute high priority investment projects does not increase as suggested in this report, it might well be advisable to develop petroleum resources at a slower pace than could be technically feasible to avoid wasting them in superfluous expenditures. ix. The effects of petroleum activity will be of such magnitude that the economv should not suffer from a savings constraint, provided that both the private and public sectors do not permit their consumption to exceed reasonable and adequate limits. In these circumstances, gross domestic savings could be expected to grow from the present 10 percent of CDP to over 20 per- cent in 1977. Over the period 1972-77, national savings could cover about 74 percent of domestic investment, compared with 56 percent in 1966-71. A pressing issue would be the removal of the institutional and technical bottlenecks that might obstruct the achievement of the private and public investment requirements and a more equitable distribution of the benefits of the development process. In order to fully utilize its own resources as well as possible loans and credits from abroad, the Government will have to expand substantially the capacity of the public sector for identifying, preparing and executing development projects. However, this expansion will tax heavily the present very limited human resources of the public sector and will require a massive training and organizational effort which will necessitate the Government's full and immediate support. This, and the need to keep current nondevelopment expenditures under tight control, are the preconditions for obtaining lasting benefits from the petroleum boom. x. In the recent past, the management of the Ecuadorian economy has been hampered by recurrent fiscal crises leading to inflationary financing from the Central Bank and to balance-of-payments difficulties. The underlying cause of these deficiencies in fiscal management has been the weakness of the economic policy tools available to the fiscal authorities. Almost 50 percent of the public sector revenues have been earmarked and accrued  - iv - autonatically to various autonomous institutions and agencies in the rest of the public sector. The Central Government has lacked the mechanisrs anid the power to influence and coordinate the growth and allocation of thcse agencies' current and capital expenditures to conform with the priorities and availabilitv of financial resources of the public sector. The prEsent- Government is taking", steps to increase control over budgetary allocations, to improve the level of knowledge and control of the finances of the rest of the public sector, to make periodic evaluations of the expenditures of the various components of the public sector, to centralize and increase control of external public borrowing, and to relate budgetary appropriations to the objectives and priorities in the forthcoming National Development Plan. All these chianges would contribute to creating an administrative system better suited for adequate financial and developmental policies. Witbout these measures, the likelihiood of the Government carrying otut a balanced investment program that w,ould permit a sound allocation of the public revenues and foreign exchange generated by the petroleum sector are dim, since witl'out a minimum control of revenues and expenditures no satisfactorv allocation of cuirrent and capital expenditures can be expected. xi. Total ptublic investment, fixed and financial, for 1973-77 is estimated as S/25.5 billion in 1071 prices. In addition, the public sector will require S/3.4 billion to cover amortization payments on existing external debt. Thus, total resouirces needed are estimated at S/29.3 hillion. )uring this period, aggregate public savings are expected to amount to S/21.6 billion, providedl tihe authorities restrain current expenditures to an annual re;il growth rate not in excess of 10 percent, which should be ample to achieve the several obiectives postulated in this report, including activities aired at increasing employment. Besides, some S/2.1 billion of gross official capital are expected from the existing pipeline of undisbursed loans, and S/8.6 billion enuivalent would be disbursed from new loans for prospectiv2 projects in which external multilateral and bilateral financial agencics are likely to ex}hibit an active interest. Thus, a gross inflow of external capital of S/10.7 billion equivalent (TUS$428 million, or an average of US%86 million per year) would he forthcoming. Since amortization payments on the new debt are estimated at S/1.9 billion during the period, a total net inflow of external capital of S/5.4 billion would take place. This would be consistent with a much needed increase in foreign exchange reserves to the enuivalent of three to four months irport requirements by the erd oft the period. N-oreover, the continuing participation of external development financing agencies night well be essential to achieve the recuired levels of public investments in terms of identification, preparation and executien o high priority projects which would help to meet the Government's objectives; in the field of grow^th and improved income distribution. It should be noted that to help implement these objectives, official lending agencies are likely to find themselves associated wzith sectors and projects where the foreign exchange component is very small, and may find it necessary to finance a portion of local currency expenditures to achieve a meaningful level of involvement. xii. In the past few years, rapidly increasing import requirements, coupled with stagnating trends in maior exports, have resulted in seriotus balance of Payments difficulties, expanded external borrowings and depletion  -v - of foreign exchange reserves. Ecuador's capacity to import and thus to sustain economic growth and consumption will be substantially enlarged during this decade as a result of petroleum exports. Petroleum will be the single most important export item in 1973, and by 1976 it will earn more foreign exchange than all other commodities combined. The emergence of petroleum as Ecuador's major export, however, entails some risk of future distortions. By strengthening the balance of payments, petroleum exports may hide unfavor- able developments in price-cost relationships and in the competitive position of the country's traditional and non-traditional exports, which from an employ- ment point of view will remain far more important than petroleum. Thus, Ecuador's future exchange rate policy will have to be geared explicitly to taking into account not only the overall balance-of-payments situation, but also the international competitiveness of the main employment-generating activities. xiii. Relatively high levels of imports will be required to sustain the rates of growth of the economy envisaged for the 1970's. Consumer goods imports are expected to grow at a faster rate than in the past, partly as a result of higher government consumption and more socially oriented investment expenditures, and partly because of increased overall levels of economic activity. High growth of non-petroleum intermediate and capital goods imports will reflect the accelerated levels of economic activity in general and of manufacturing and construction in particular, as well as the import requirements emerging from the increased public investment program. Direct investments by foreign petroleum companies in exploration, drilling and pipeline construction - with an import component estimated at about 70 percent - are expected to continue, peaking in 1976 and declining thereafter. xiv. Balance-of-payments equilibrium will require gross capital inflows totalling US$911 million in the period 1973-77, compared with a total of US$675 million in 1967-71. Direct foreign investment is expected to be the main source of external capital and is estimated to cover almost two thirds (US8595 million) of the gross requirements. Most of these foreign investments (US$426 million) would be destined to the petroleum sector. Gross public capital inflows are estimated to provide the balance and would yield US$467 million, or an average of around US$93 million annually. 1/ Within this total suppliers credits are estimated to furnish some US$24 million annually (slightly higher than the levels disbursed in the past several years), and the remainder would come from external development financing agencies. Because of the large amortization and interest payments falling due in the period, the net transfer of external resources over the period would be much smaller, of the order of IUS$110 million. These levels of external financing would permit the accumu- lation of international reserves which will peak at the equivalent of almost 4 months of imports by 1977. This pattern of financing would also lead to an improvement in the structure of the public external debt. The average terms of gross public capital inflow are assumed at 22 years maturity, 5.5 percent rate of interest and 3.5 years grace, better than in the past; these 1/ Balance-of-payments financial flows are expressed in current US dollars, while the dollar equivalents mentioned in para. xi above are expressed in constant 1971 prices. This explains the small discrepancy in the figures.  -vi- averages result from the expected terms of different sources of external finance which may be available. With tlhese terms and on the basis of the foreseen large expansion in exports, the debt service ratio is expected to-) fall from 15 percent of exports of goods and services in 1972 to a little over 10 percent in 1977. At the same time, the capacity to import will be expanding at a high rate. xv. In spite of petroleum prospects, Ecuador will continue being for some time a less developed country in Latin America. Although the governmient has decided to tackle some of the problems and obstacles that have traditionally inhibited the development of the country, such as the low saving capacity of the public sector and its limited power to orient economic activity, the sluggish growth of the agricultural sector, and the insufficient development of non-traditional exports, to overcome these problems will require significant changes in the economic and administrative structure of the country which can only be brought about gradually. During this transition period Ecuador should continue receiving a part of its external financing on concessionary terms. With respect to the longer run, the terms of borrowing should depend on the prospects for further development of the petroleum sector, on the changes that take place in the productive structure, and on the degree of success achieved by the five-year development plan recently approved by the government.  I. INTRODUCTION 1. Ecuador is one of the smallest and, despite its considerable natural resources, one of the less developed countries in Latin America. Among the ten major South American countries it ranks ninth in territory (above Uruguay), eighth in GFP and GNP per capita (above Paraguay and Bolivia), and seventh in population (above Paraguay, IJruguav and Bolivia). 2. Its rich natural resources consist largely of a wide variety of climates, soils and topographv, which provide the productive base for nu- merous agricultural crops, livestocl< and forestry. The Coastal Region with its rainy tropical climate and fertile soils is suited for most tropical and semitropical products, as well as for beef cattle. The Sierra Region with its diverse latitudes is suited for most temperate crops and livestock raising. The Oriente Region, largely unexplored and undeveloped, is believed to have an important agricultural potential, and it has recently attained economic preeminence through the discovery of considerable petroleum deposits. Moreover, lying at the confluence of the warm Equatorial Current and the cold Hurmboldt Current, the Ecuadorian sea is rich in marine resources. 3. The development potential of Ecuador's natural resources, however, has not materialized significantly. Economic growth in the last 20 years has been modest - about 5 percent per annum - and has stemmed almost exclu- sively from the expansion of agricultural export crops: first cacao; then coffee and more recently bananas. Although Ecuador became in its time the largest world exporter of cacao and bananas, the benefits of this growth have been highly concentrated, and large segments of the population have remained at the subsistence level. Their low purchasing power inhibited the development of a domestic market which would stimulate the growth of manufactutring. As a result, the creation of new jobs appears to have lagged behind entrants into the labor force. Transport and power infrastructure are still insufficient, and health, education and housing facilities are very limited. 4. The major obstacles to the realization of Ecuador's development potential have been the low and fluctuating capacity to import, the limited savings capacitv of the economy, the strong regionalism combined with a rigid social structure, and protracted political instability. 5. Foreign exchange earnings have been dependent on a few tropical agricultural products, highly vulnerable to fluctuations in demand and prices in export markets. Their stagnating trend, combined with increased import demand generated by rising incomes and a rapidly growing population resulted in mounting pressures on the balance of payments. Before the oil discoveries, these pressures had emerged as an insurmountable obstacle to higher rates of growth. 6. Secondly, the relatively low savings ratio, coupled with the high population growth rate, has kept Ecuador in the vicious circle of low saving and low investment. With an incremental capital output ratio of 2.8 and a population growth rate of 3.4 percent, almost 10 percent of CDP has had to be invested just to avoid a reduction in the existing levels of per capita income; i.e., about two-thirds of the total savings effort expected in 1972  - 2 - will have to he dissipated in maintaining the standard of living of tl'a popu- lation. This pressure has been particularly strong at the government level, which had to provide the infrastructure and social services for the incre,ised population. UnowFever, the tax systeri, eroded by evasion and mujltiple exemr- tions, has not been generating sufficient resources to meet these needs, -nd has ledl to the postponement of infrastructural works necessary to achi ave higher levels of output and income. Thlus, the limited saving capacity of the economv and thle insufficient mobilization of financial resources hbj the puiblic sector have acted as another limiting factor to Ecuador's devel]pmnt. 7. Thirdly, sharp geographic contrasts, limited communications and different ethnic origin of thle population in the Sierra an(d the Coast, hare resulted in the development of different economic structures with conflict- ing social, political and economic interests. Economic activity in both regions is predominlantl'i agrarian, buit on the Coast it is orientecl touri3rd Vlantatior agricultuire for ex,port markets, andi to import and export tr3de; in the Sierra it rests on haciendas producing for local markets and on smr1l1 subsistence farms. Coast xl mercantile irterest lave sunported Jiberalization of foreign trade - currently the major source of tax revenues - ard increase in money wages of the low paid tenant laborers of the Sierra, with the objec- tive of generating a market for imported consumer goods. This has been ir direct conflict with the Sierra hacienda agriculture and manufacturing inter- ests, based on production for the domestic market with the use of cheap labor; these groups have generally opposed social legislation and the lowering of protective tariffs. This cleavage has been snearheaded by the city of Quito in the Sierra, the site of government and the political center of the country, and the coastal city of Guayaquil, the economic and financial center. It has taken place within the framework of a rigidly stratified society where wealth, Drestige, religion, language and ethnic origin have differentiated a small economic and political elite in both regions, from the large Inidian and mestizo populations. 1/ It is worth noting, however, that in the last few years a growing process of internal integration has taken place, stimulated by the development of transport and communications, and the acceleratec! migration from the Sierra region to the Coast. 8. The strungle for economic and' political precdominance has beer largelly confinesl to tl'e unper classes of the two regi ons, focusing only marginally on tlhe nressing social and economic problems or the great mcss of the population. As . result of this excessive preoccupation with regio- al as against national objectives, Ecuador's history has been characterize-l by a higk* degree of political instability, where the strife for personral pow-er has generate(d frequent changes in government, and the slow pace cf 1/' Although there are no official statistics of the ethnic compositicn of the population, estimates of the white population range between 1C and 15 percent; those for Indians vary between one-third and one-half of total population; and the rest is taken up by mestizos and a very smaLl segment of negroes and mulattoes. Spanish is the official language, but most of the Indians continue speaking Quechua, in some cases with total exclusion of Spanish.  - 3 - social progress has led to recurrent civic unrest. Political changes have been responsible for lack of administrative stability reaching down to relatively low levels of government, and have limited the horizons of policy makers to the resolution of pressing current problems, precluding the adoption of policies aiming at achieving a faster and more balanced economic growth over the longer term. 9. Ecuador is currently, confronted with a great opportunity and chal- lenge to achieve a faster and more balanced economic development. The pre- vious major constraints - especially balance-of-payments difficulties and limited public sector savings - could be overcome as a consequence of dis- covery of petroleum if appropriate policies are purstued to control consump- tion growth in both the public and the private sectors. The new Government which care to office in early 1972 has recognized the substantially improved prospects for economic and social development and has prepared a Development Plan for 1973-77 which takes up the challenge posed by petroleum opportunities. This plan has as its objective not only to accelerate economic growth, but also to cope with problems of social welfare which have been neglected by the pattern of previotus growth.  - 4 - II. GROWTH AND STRUCTUJRAL CHANGE A. Recent Growth Performance Sectorial Origin of Growth 10. Ecuador's economic growth appears 1/ to have accelerated from an aver- age annual rate of 5 percent in the 1950's and most of the 1960's to 6 per- cent in 1969, 8 percent in 1970, and 7 percent in 1971. The major forces behind this acceleration have been the substantial investments by fore:Lgn companies in the petroleum sector, coupled with a continued expansion of the manufacturing sector and construction activities, and the recovery of banana production. 11. Over the last two decades, the structure of the economy has wit- nessed a slow shift of activity from the agricultural to the nonagricultural sectors. Agriculture's contribution to GDP is now around 29 percent, down from the 38 percent average of the 1950's. Within the growing nonagricultural activities, the services-producing sectors (including trade and governnent) have been the major contributors to long-term GDP growth. 12. Although overall agricultural growth trends have been less than satisfactory, there have been important changes in the composition of o'utput. The most remarkable one has been the rise in importance of bananas as cn export crop from less than 30 percent of total commodity exports in the early 1950's to over 50 percent in the late 1960's. Having earmarked a part of bananas export taxes for subsidizing a systematic spraying of banana planta- tions, and being virtually immune from storms, Ecuador has become the most reliable supplier of bananas. Further expansion of production, however, has been hampered by Ecuador's locational disadvantage vis-a-vis other producing areas. The contribution of the agricultural sector to export earnings has remained relatively constant (about 85 - 90 percent of the total) since the increase in banana exports has been offset by a relative decline in earnings from cocoa and coffee. 13. Next to agriculture, the manufacturing sector provides the highest contribution to GDP, with some 16-17 percent over the last two decades. Factory manufacturing, stimulated by government incentive and financial sup- port, has grown at 10 percent or more in recent years. However, the apparent relative stagnation of small scale and handicraft industries has pulled down the average growth rate for the manufacturing sector to around 5 percernt in the late 1960's. The overall real growth rate is probably underestimated because of excessive deflation (see Annex A for further details). Within t:he manufacturing sector, food, textiles and chemicals have made a major contribu- tion to growth. Ecuador started most of its metal processing, engineering, and other advanced manufacturing industries in the last five to ten years. 1/ See paragraphs 23 and 24 on problems for measuring economic growth in Ecuador.  - 5 - Being still in their infancy, they are small in size and their contribution to total manufacturing growth is relatively minor. 14. Construction has also made an important contribution to the total GDP growth. Starting with a 3 percent share in 1950, construction grew at a rate of 9 percent in the 1950's. Growth slowed in the early 1960's but further rapid growth in recent years expanded its share to 6 percent of GDP in 1971. Growing at an estimated 25 percent in 1970 and 17 percent in 1971, its contribution to growth rivaled that of manufacturing. Construction of roads and completion of the petroleum pipeline played an important role in the recent acceleration of its growth. Housinga construction (estimated from building permits) apparently also increased but at a slower pace. 15. In response to a strong demand for electricity, the public utili- ties sector (electric power, water supply, and sanitation) experienced the highest growth rate among the major productive sectors (15 percent per year in the 1950's). Although this growth slowed in the 1960's, the share in GD? expanded from 1.0 percent in 1960 to 1.8 percent in 1971. Being still relatively small, the public utilities sector has contributed less than 3 percent to total GDP growth. 16. Value added by the mining sector has fluctuated around 2 percent of GDP over the last 20 years. With the discovery of petroleum in the Coastal provinces in the 1950's, prospects for rapid growth in this sector appeared bright, but subsequent experience proved disappointing. After the initial moderate expansion of petroleum extraction, production actually de- clined in the 1960's. Output of non-fuel minerals also stagnated. The pre- sent petroleum activities in the Oriente region are being reflected mainly in the construction, transport and services sectors. With the recent ini- tiation of petroletum production, this sector will, however, grow greatly in importance in the future. 17. Within the services sector, trade has been the largest group in the past, although recently it has been exceeded by private services. To- gether these activities accounted for one-fifth of total GDP in the 1950's, but they have grown faster than the rest of the economy, expanding their combined share to almost one-fourth of GDP in recent years. The national account estimates for private services and trade are quite weak. Together *with public administration and defense, private services are derived as a residual from the total GDP. Therefore, growth estimates of these sectors as well as the apparent acceleration of GDP growth in recent years could well be spurious. Major Uses of Resources 18. Consumption constitutes the major use of resources. Growing faster than the GDP, consumption expanded its share in GDP from 83 percent in 1950 to 90 percent in 1971. On the average, consumption increases absorbed four- fifths of the GDP growth in the 1950's. With import deficits mounting in the  Table 9: INDUSTRIAL mRIGIN OF GDP GROWTH: TRENDS CCNTRIBUTION AND STRUCTJRE, SEERCTED PERIOD AND CALENDAR YEARS 1950-71 (Percent) Sectors and Industries 1950 1951- 1969- 1965- 1967 1968 1969 1970 1971 1959 1964 1969 Average Annual Rates of Growth in Percent (GDP at Constant Fector Cost) /1 GD? a: factor cost .. 4.7 4.5 4.9 4.8 5.0 6.3 8.8 7.6 Agricultural sector .. 3.4 4.4 2.2 0.9 - 0.9 5.2 6.2 1.7 Nonagricultural sector .. 5.5 4.6 6.3 6.8 7.6 6.8 9.9 10.2 Commodity producing .. 5.4 6.o 5.9 8.8 5.0 8.9 10.2 9.5 Mining and quarrying .. 4.3 5.7 5.3 6.4 6.4 5.1 0.9 4.4 Manufacturing .. 4.3 6.3 4.7 7.0 4.4 8.1 7.1 7.5 Construction .. 9.3 4.i 9.5 18.8 5.9 12.4 25.3 19.L Electricity /2 .. 15.9 8.8 9.1 4.8 11.7 15.0 10.7 9.5 Services producing 5.6 3.8 6.5 5.7 9.2 5.6 9.8 10.8 Transportation /3 5.9 1.7 2.9 0.5 5.3 5s4 8., 6.5 Trade /4 .. 6.9 3.5 4.8 6.9 6.5 7.4 5.8 10.7 Banking /5 .. 14.0 6.2 4.7 5.9 3.7 14.4 15.5 12.5 Ownersnip of dwellings .. 4.0 3.1 3.7 3.5 3.1 5.8 5.0 5.8 Serviees .. 4.8 3.2 12.2 14.2 15.5 5.6 10.3 9.9 Public adm. and defense .. 5.4 6.6 6.o - 4.3 16.7 - 0.5 18.4 17.6 Contribution to Growth, by Tndustrial Origin (Percent of GDP Increment) /6 Agricultural sector ,. 27.9 35.8 15.2 6.5 - 9.1 25.9 21.8 6.6 Nonagricultural sector .. 72.1 64.2 84.8 93.5 109.1 74.1 78.2 93.4 Commodity producing .. 21..? 30.5 29.8 44.7 26.9 35.4 30.3 32.1 Mlining ard aoarrying .. 2.0 2.8 2.4 2.9 2.8 1.1 0.2 1.1 Manufacturing .. 14.2 21,8 16.6 24.6 14.7 21.6 13.9 16.7 Construction .. 5.9 3.5 8.1 15.8 5.7 9.0 i4.1 12.1 Electricity /2 .. 2.6 2.4 2.7 1.5 3.7 3.7 2.1 2.2 Services producing .. 47.4 33.7 55.0 48.8 82.2 38.7 47.9 61.3 Transportation /3 4.1 1.7 2.3 o.4 4.1 3.1 3.4 3.1 Trade /4 16.1 8.3 10.7 i4.9 14.5 12.5 7.2 14.8 Barking /5 .. 4.9 3.7 2.8 5.5 2.5 6.4 4_ 952 O-iwerehip of dwellings .. 6.4 4.8 5.0 4.6 4.2 5.7 3.5 4.5 Services 9.3 6.4 25.7 31.8 53.7 11.2 14.2 16.5 Public adm. and defense .. 6.6 8.8 8.5 - 6.4 23.6 - 0.5 14.5 17.2 Relative Shares oI' the Industrial Structure (Percent of GDP) /7 Agricultural sector 38.8 37.9 56.9 32.7 33.1 91.2 30.9 50.2 28.5 Nonagrieultural sector 61.2 62.1 53.1 67.5 66.9 68.8 69.1 69.8 71.5 Comnodity producing 21.5 21.7 23.4 25.1 2.53 25.4 25.9 26.5 26.7 Mining and cuarrying 2.3 2.1 2.5 2.2 2.2 2.2 2.2 2.0 1.9 Manufacturing 16.0 15.4 15.9 17.0 17.0 18.9 17.1 16.9 16.9 Constriction 2.7 3.2 3.9 4.4 4.6 4.7 4.9 5.7 6.1 Electricity /2 0.5 1.0 1.3 1.5 1.5 1.6 1.7 1.7 1.6 Services producing 39.7 40.4 99.7 42.2 41.6 43.4 43.2 45.5 s -4.8 Trans-ortation /3 4.8 4.9 4.i 3.7 35.6 3.6 .6 3.6 3.6 Trade /4 10.3 11.4 11.1 10.7 10.6 io.8 10.9 10.6 +10.8 Posiing /5 1.4 1.9 2.8 2.8 2.8 2.8 3.0 3.1 3.5 Ownership of dwellings 8.1 7.5 6.8 6.5 6.3 6.2 6.2 i.0 5.9 Servicees 9.3 8.9 8.7 11.7 11.7 12.7 12.6 12.7 +13.0 Public adr. and defense 5.8 5.8 6.2 7.