Ecuador - Development problems and prospects (Vol. 2 of 3) : Sectors and regions

Report No. 2373-EC dL COPY Development Problems and Prospects of Ecuador Special Report (In Three Volumes) Volume 11: Sectors and Regions June 18, 1979 Latin America and the Caribbean Region Country Programs I FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties Its contents may not ~otherwise be disclosed without World Bank authorization  CURRENCY EQUIVALENTS 1 Sucre = US$0.04 1 US$ 25 Sucres Fiscal Year: January 1 to December 31  FOR OFFICL USE ONLY \ ABBREVIATlONS AIPSE Asociacion Independiente del Pueblo.Shuar de Ecuador (Independent Association of Shuar People in Ecuador) ASA Agencia de Servicios Agropecuarios (Agency for Agriculture and Cattle Services) BCE Banco de Cooperativas del Ecuador (Ecuadorian Bank of Cooperatives) BEV Banco Ecuatoriano de la Vivienda (Ecuadorian Housing Bank) BNF Banco Nacional de Fomento (National Development Bank) CAME Conscripcion Agraria Militar Ecuatoriana (Ecuadorian Agrarian Draft) CEDEGE Comision de Estudios para el Desarrollo de la Cuenca del Rio Guayas (Studies Commission for the Development of the Guayas Basin) CENAPIA Centro Nacional de la Pequena Industria y Artesania (National Center for Small Industry and Artisans Industrial Development) CENDES Centro de Desarrollo Industrial (Center for Industrial Development) CEPCO City Ecuadorian Production Company CEPE Corporacion Estatal Ecuatoriana (Ecuadorian Petroleum Corporation) CEPECA Cautivo Empresa Petrolera Ecuatoriana (Cautivo Ecuadorian Petroleum Enterprise) CIP Centro Internacional de Informacion de Pre-inversion (International Center of Pre-investment Information) COFIEC Corporacion Financiera Ecuatoriana (Ecuadorian Development Finance Company) CREA Centro de Reconversion Economica de Azuay, Canar y Morona (Center for thp Economic Rehabilitation of Azuay, Canar and Morona) CRM Centro de Rehabilitacion de Manabi (Center for the Rehabilitation of Manabi) CV-CFN - Comision de Valores - Corporacion Financiera Nacional (National Finance Corporation) DECE Departamento Ecuatbriano de Construcciones Escolares (Ecuadorian Department of School Construction) DGH - Direccion General de Hidrocarburos (Department of Hydrocarbons) DINE Directorio Industrial de las Fuerzas Armadas (Industrial Directorate of Armed Forces) DNP Direccion Nacional del Personal (National Personnel Directorate) ECUFINSA Ecuatoriana Financiera, S.A. (Ecuadorian Financiera S.A.) EMAG Empresa Municipal de Alcantarillado de Guayaquil (Guayaquil Municipal Sewerage Company) ENPROVIT Empresa Nacional de Productos Vitales (National Vital Products Company) ENAC Empresa Nacional de Almacenamiento y Comercializacion de Productores Agropecuarios (Storage and Sale of Agricultural Products Company) ENDES Empresa Nacional de Semen (National Semen Company) FECOPAM Federacion de Cooperativas Agricolas y.de Mercadeo (Federation of Agricultural and Marketing Cooperatives) FINANSA Financiera Nacional S.A. (National-Fi-nanciera S.A.) FODEM Fondo de Desarrollo Municipal (National Municipal Development Fund) FODERUMA Fondo de Desarrollo del Sector Rural Marginal (Development Fund for the Rural Marginal Sector) FONADE Fondo Nacional de Desarrollo (National Development Fund) FONAPAR Fondo Nacional de Participacion (National Participation Fund) FONAPRE Fondo Nacional de Pre-inversion (National Pre-investment Fund) FOPEX Fondo de Promocion de Exportaciones (Export Promotion Fund) IEOS Instituto Ecuatoriano de Obras Sanitarias (Ecuadorian Institute of Sanitary Constructions) IERAC Instituto Ecuatoriano de Reforma Agraria y Colonizacion (Ecuadorian Institute for Agrarian Reform and Colonization) This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  IESS Instituto Ecuatoriano de Seguro Social (Ecuadorian Institute of Social Sccurity) IETEL Instituto Ecuatoriano de Telecomunicaciones (Ecuadorian Tele- communications Institute) INEC Instituto Nacional de Estadisticas y Censos (National Institute of Statistics and Census) INECEL Instituto Ecuatoriano de Electrificacion (National Electrification Institute) INERHI Instituto Ecuatoriano de Recursos Hidraulicos (Ecuadorian Institute of Hydraulic Resources) INCRAE Instituto Nacional de Colonizacion de la Region Amazonica Ecuato- riana (National Institute for the Colonizacion of the Ecuadorian Amazon Region). INIAP Instituto Nacional de Investigaciones Agropecuarias (Agricultural Research National Institute) JNV Junta Nacional de la Vivienda (National Board for Housing) J-UNAPLA Junta Nacional de Planificacion y Coordinacion (National Board for Planning and Coordination) MAG Ministerio de Agricultura (Ministry of Agriculture) MFF Mecanismo de Fondos Financieros (Financial Funds Mechanism) MICEI Ministerio de Industrias, Comercio e Integracion (Ministry of Industry, Commerce and Integration) MRNE Ministerio de Recursos Naturales y Energia (Ministry of Natural Resources and Energy) MOP Ministerio de Obras Publicas (Ministry of Public Works) MSP Ministerio de Salud Publ-ica (Ministry of Public Health) NIE Instituto Nacional de Energia (National Institute of Energy) OIPE Oficina Integrada de Planificacion de Esmeraldas (Integrated Bureau for Planning of Esmeraldas) PIDA Proyectos Integrados de Desarrollo Agropecuario (Integral Ag.ricultural Development Projects) PREDESUR Programa Regional para el Desarrollo del Sur de Ecuador (Regional Program for the Development of Ecuador's South) SECAP Servicio Ecuatoriano de Capacitacion Profesional (Ecuadorian Professional Training Institute) SPA Sector Publico Agricola (Agriculture Public Sector)  DEVELOPMENT PROBLEMS AND PROSPECTS OF ECUADOR SPECIAL REPORT TABLE OF CONTENTS VOLUME II - SECTORS AND REGIONS Page No. VIII. AGRICULTURE 1. Introduction ................... .................. 138 2. Sector Characteristics and Performance... 138 (i) Output and Foreign Trade . .139 (ii) Price Trends ..141 (iii) Management and Technology - Improvement in Resource Use . .142 (iv) Production and Productivity . 143 (v) Conclusio-n ..= ............................... 147 3. Agricultural Improvement Programs .... 148 (i) The Commodity-Based Programs . .149 (ii) Regional Development Programs. 152 (iii) Education and Research . .155 (iv) Conclusion ..156 4. Economic Incentives, Disincentives and Constraints .............. ...................... 157 (i) Agricultural Taxation .............. ....... 157 (ii) Prices and Subsidies . .158 (iii) Marketing .......... 162 (iv) Credit ................................... 163 (v) Rural Roads . .165 (vi) Conclusions ..166 5. Policy Assessment and Recommendations ... 166 (i) The Public Sector Organization and Policy Investments ........ . 167 (ii) Project Selection and Implementation by Regions .............175 (iii) Low-Income Population as Development Target. 180 (iv) Forestry and Fisheries Resource Use ...182 ./  Volume II Table of Contents (Continued) Page No. IX. THE ORIENTE REGION 1. Foreword ......................... . ............. 184 2. Organization and Policy Framework ............... 184 (i) Background . ... ........ . ... .... ....... ... 184 (ii) Institutional Framework .................... 184 (iii) Settlement Policy .............. ............ 186 3. The Oriente Region: Physical and Human Characteristics . . ...................... 187 (i) Natural Resource Endowment .................. 187 (ii) Access ..................................... 189 (iii) Population Characteristics ....... .......... 190 (iv) Some Aspects of Socio-Cultural Organization ........................... 191 (v) Settlement .............. 197 (vi) Agriculture . .. .... 200 4. Development-Activities . ................... 206 (i) Government Supported Projects .. ............ 206 (ii) Private Industry Projects ................. . 213 5. Recommendations and Outline of Projects for Potential Donor Financing ........................ 214 (i) Recommendations.. .............. .-.. 214 (ii) Projects for Potential Donor Financing ..... 215 K. INDUSTRY 1. Recent Trends ....... ............................. 219 (i) Growth Performance ..... ..................... 219 (ii) Industrial Structure ....................... 219 2. Government Policies .............................. . 225 (i) Investment Incentives, Tariff Protection and Export Promotion ..... ................ 226 (ii) Industrial Financing ................. .. 232 3. Development Prospects ... ........ 235 (i) Development Options and Government Strategy. 235 (ii) Development Policy Requirements .237 (iii) Government-Sponsored Industrial Development Projects . ... 246 4. Projected Industrial Growth, 1978-85 . ... 251  Volume II Table of Contents (Continued) Page No. XI. PETROLEUM 1. Introduction .................................... 254 2. General Framework ............................... 256 3. Petroleum Industry - Production .............. ... 261 4. Domestic and Foreign Markets - Demand ....* ..... 266 5. Pricing System .................................. 270 6. Taxes ........................................... 272 7. Conclusions and Recommendations ............. .... 275 XII. ORGANIZATION OF THE PUBLIC SECTOR 1. Summary of Recommendations .................. .... 280 2. Development Administration ............ ... 288 (i) Role of the Public Sector in the Economy ... 288 (ii) Adminis-trative Machinery ......... .......... 288 (iii) Personnel Policies ......................... 297 (iv) Budget Formulation and Implementation ...... 305 3. Setting National Priorities ................. .... 313 (i) The Planning Agency .............. .......... 313 (ii) The Experience of the 1973-77 Development Plan ................ ........ . 314 (iii) Development Priorities in Economic Decision-Making ..... ...................... 316 4. Project Administration and Processing ........... 320 (i) The National Projects System .............. 320 (ii) The Project Cycle in Ecuador ............... 326 (iii) Conclusions ................ ................ 333  Volume II Table of Contents (Continued) Page No. XIII. PUBLIC INVESTMENT 1. Major Public Sector Projects, 1979-83 .... ....... 335 2. A Projects-Specific Five-Year Public Investment Program, 1979-83 .............................. 345 3. Project Briefs .................................. 358 (i) Agriculture ................................ 359 (ii) Air Transport .............................. 410 (iii) Education .................................. 415 (iv) Electric Power ............................... 416 (v) Fisheries .................................. 430 (vi) Health ..................................... 437 (vii). Highways ................................... 438 (viii) Industry ................................... 458 (ix) Petroleum .................................. 474 (x) Preinvestment .............................. 489 (xi) Railways ................................... 491 (xii) Sea Transport .............................. 492 (xiii) Tourism .............. 501 (xiv) Urban Development .......................... 508 (xv) Water Supply/Sewerage ...................... 511  Text Tables Page No. 51 Industrial Structure, 1970; 1974; 1977 ............... 220 52 Relative Shares of Factory Industry and Small-Scale Industry in Industrial Value-Added, 1975 ........... 221 53 Wage Cost and Productivity per Employed, Ecuador and Colombia, 1970-75 .................................. 222 54 Industrial Returns, 1973-76 .............. 223 55 Foreign Trade in Industrial Goods, 1970-77 ........... 224 56 Average Returns for Incentive-Induced Industries, Ac- tual and in the absence of Duty Exemptions and Tariff Protection, 1974-75 ..... ... ..... 229 57 Fiscal Sacrifice resulting from Industrial Incentive Schemes, 1970-77 ..230 58 Industrial Exports to the Andean Cormon Market and Third Countries, 1972-77 ..245 59 Projected Growth of Industrial Value-Added, 1978 and 1985 .............................................. 253 60 Contribution of Petroleum to the Economy ............ 255 61 Recoverable Reserves 1972-88 ........... ............. 256 62 Crude and Refinery Production, 1970-77 .............. 258 63 Main Indicators of Petroleum Sector ................. 259 64 Production /a and Demand for Petroleum Products, 1977 264 65 Consumption of Petroleum Products by Sector in 1977, in Percentages ..267 66 Consumption of Petroleum Products by Sector in 1977 268 67- Exports of Crude Oil from Oriente by Destination 269 68 Structure of Petroleum Product Prices ........ .. . 271 69 Distribution of Petroleum Income Tax Revenues to Different Beneficiaries ..274 70 Example of a Portiont of the Reprogrammed Budget of the Ecuadorian Institute of Agrarian Reform and Colonization ..311 71 Distribution of Public Sector Fixed Investment by Sector (1972 Sucres) 1973-77, Planned and Actual 316 72 Public Sector Investment Projects: 1979-83 .......... 337/341 73 Public Sector Investment Program, 1979-83 .......... 347/357  i l~~~~~~~~~~~~  - 138 - VIII. AGRICULTURE 1. Introduction 400. Increasing emphasis has been placed on agricultural/rural develop- ment in recent years. Public outlays for agriculture have been sharply increased; a detailed study of socio-economic conditions and the natural resource base at local levels is about to be completed; the production - and income impact of the agrarian reform program has been evaluated; the organization and administration of public services to the rural sector have been redesigned; the inadequacy of the agricultural statistical base has been recognized; and the project preparation effort has been expanded and improved. These and related measures will provide the basis for more effective and efficient policy and programs in the rural sector in the years ahead if implementation rates can be improved and if the private sector is more con- structively integrated into the overall rural development effort. 401. Section 2 of this report outlines some of the more important features of the rural sector, and its recent performance trends. Section 3 summarises agricultural development programs carried out by the Government. Public policy as it affects the economic environment of farmers is discussed in Section 4. (Technical Annex II discusses the sector's institutional framework). Section 5 brings together a set of suggestions for the considera- tion of Government on possible ways of helping to solve some key problems faced in the rur-al sector. 2. Sector Characteristics and Performance 402. Although somewhat overshadowed by the rapid growth in the petroleum industry since 1972, agriculture continues to provide most of the nation's food and makes important contributions to foreign exchange earning and the demand for labor. The 1974 census data indicate that about 46 percent of the economically active population was in agriculture in that year. However, there has been little improvement in agricultural standards of living because of low productivity levels. Although average rural incomes have risen 1/, poverty is widespread and, underemployment rates are high. 1/ Estimates by the Ministry of Agriculture indicate that the average daily wage rate for farm labor rose from the S/ 15 - S/ 20 range in 1972-73 to the SI 50 1evel in 1974, to about SI 60 in 1975, and to the S/ 70 figure in 1976. However, no current profile of the income and living levels of the rural population is available. INEC (National Statistics and Census Office) has underway a sample survey of household incomes and expenditures; this will provide basic evidence on the scale and nature of the poverty problem. The only previous work of this sort was done in the 1960s.  - 139 - (i) Output and Foreign Trade - --Output 403. The Mission estimates that agriculture (including forestry and fisheries) accounted for 21.3 percent of GDP in 1977, down from 29.2 percent in 1970. 1/ 1970 1977 1970 1977 -S/ million -- Agriculture 9,471 31,279 29.2 21.3 Total GDP 34,289 153,811 100.0 100.0 404. The agricultural sector's contribution to GDP grew at an average annual rate of 5.0 percent in the 1970-77 period, with the subsector rates for crops - 4.1 percent; livestock, 6.0 percent; forestry, 10.1 percent; and fisheries, 13,4 percent. 2/ 405. Although: declining in relative importance,, in 1976 crops still accounted for almost half of the contribution of agriculture to GDP. The estimates of t-he Central Bank--and the National Planning Board (JUNAPLA) for the main subsectors for 1970 and 1976 were as follows: -1970 1976 1970 1976 ---SI million 3/--- Crops 5,437 6,219 57.4 47.4 Livestock 2,830 4,612 29.9 35.2 Forestry 928 1,548 9.8 11.8 Fisheries 252 703 2.7 5.4 406. Output growth rates for the main food crops varied substantialy in the 1970-76 period, as for example: rice, 15.3 percent; peas, -4.8 percent; beans, -3.4 percent; broad beans, -0.5 percent; soft maize, -11.4 percent; wheat, -2.4 percent; potatoes, -2.2 percent; cassava, 7.2 percent. This broadly negative picture underlies the current concern with the supply 1/ Most Government officials stress that the available statistical informa- tion on agriculture is subject to a wide margin of error. The data presented in the following paragraphs may not be more than broadly indicative. 2/ The JUNAPLA growth rate estimates for the 1972-76 period are 6.8 percent for the sector, 5.3 percent for livestock, and 9.2 percent for fisheries. 3/ In 1970 prices.  -140- outlook for domestically produced staple foods, particularly if the uptrend in rice production is seen in terms of its vulnerability to weather conditions. Exports 407. In 1972, before petroleum became an important export item, the agricultural sector accounted for over 75 percent of total commodity exports. Although agricultural exports have since risen notably (in current terms), petroleum has taken over first place on the export list. The export data, based in part on export permits, are: Exports of Agricultural Produce % of Total 1972 1974 1977 1977 ------US$ million (FOB)