Ecuador - The economy

W.H.-15a RESTRICTED rThis report is restricted to use within the Banlk.| INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT THE ECONOMY OF ECUADOR January 21, 1954 )epartment of Operations Western Hemisphere  TABLE OF CONTENTS Page No. BASIC DATA GRAPHS SUMMLARY AND CONCLUSIONS i DOMESTIC POSITION AND PROSPECTS 1 I. Production and Income 1 The Two Economies 1 The Predominance of Agriculture 2 Mining and Industry 4 Total Output and Income 5 II. Domestic Finance 6 Prices 6 Money and Credit 6 Public Finance - The Budget 7 EXTERNAL POSITION AND PROSPECTS :1 I. Recent Developments 11 General .2 Foreign Exchange Reserves 23 The Exchange System 13 Import and Export Licensing 13 Exchange Rates 13 II. Balance of Payments Prospects i1 General 1 Earnings 14 Bananas 4 Cacao 5 Coffee 15 Other Products 36 Future Payments 1 6 Direction of Trade 17 Summary of Payments and Earnings 1 7 DEVELOPMENT PROSPECTS AND CREDIXJORTHINESS 1 7  STATISTICAL APPENDIX Table 1. External Public Debt Table 2. Forecast Service on External Public Debt Table 3. Exports Table 4. Imports Table 5. Distribution of Land in the Sierra Table 6. Foreign Exchange Reserves Table 7. Exports, Imports, Terms of Trade, and Capacity to Import Table 8. Production, Export and Refining of Petroleum Table 9. Estimate of Gaaoline Consumption Table 10. Sources of Changes in Money Supply Table 11. Expenditures of the Central Government Table 12. Holding of Domestic Bonds Table 13. Investment of Central Government and Public Entities MAPS Communications Agricultural Production  BASIC DATA Area 150,000 square miles Population (1950 census) 3.2 million Output (GNP) 1952 6,400 million sucres u. s. $4oo million $94 per capita (1952) Trade (1952) (in US $ million) Exports 106.6 Imports 66.1 Balance 40.5 Balance of Payments (Suiplus T or Deficit -) $12.3 Foreign Exchange Reserves Central Bank As of Dec. 31, 1952 In US $ million 39.4 As % of 1952 imports 59.6% Public Revenues (1952) (in million sucres) Total (Central Government, Autonomous Agencies, Municipalities, Provincial Councils) 1,421,0 Central Government 454.6 Expenditures (Central Government) 455.6 Internal Debt As of May 31, 1953 (in millron sucres) Total 150.8 Held by: Central Bank 68.4 Institutions and Individuals 82.4 As % of National Income 3% External Debt As of MaY 31, 1953 In US $ million 38.3 As % of National Income 9.6%  ECUADOR CENTRAL BANK CREDIT (MILLIONS OF SUCRES) ASOF 0 100 200 300 400 500 600 DEC. 31 TO GOENENT ITO BANKS AND OFFICIAL ENTITIESfS I Z [ ir~~TO PUBLIC 1946 1947 1948 1949 1950 1951 1952 (A O IF OCT 51 5 1954 MONEY SUPPLY AND COST OF LIVING (INDEX, 1948 = 100) ZOO YEARLY 200 150 -150 MONEY SUPPLY_ 100 - - 100 -FOOD PRICES (Quito) 50 I I 1 11 50 1946 1947 1948 1949 1950 1951 1952 1953 1954 11120/53 (Aug.) Nob B25 I BRD - Economic Staff  ECUADOR REVENUES AND EXPENDITURES OF THE CENTRAL GOVERNMENT (MILLIONS OF SUCRES) 600 600 YEAR LY 400 400 EXPENDITURES 200 200 0 '40 '41 '42 '43 '44 '45 '46 '47 '48 '49 '50 '51 '52 '53 TOTAL PUBLIC REVENUES (BILLIONS OF SUCRES) 0 .5 1.0 1.5 2.0 I940 19 41 1942 1943 .... .,,, . 1944 1945 ... 1946 = ... 1947 H 1947 l. ~~~~...3..............r:.:- 1948 ........... 1949 ..................... 1950 H-I- ..s..... / ..:. 1951 W.iui 3 X/// t............. v SOCIAL SECURITY 1952 ' 1 N 1953 r t MUNICIPALITIES SOUTHERN RAILROAD 1953 _ J V< PROVINCIAL COUNCILS GOVERNMENT GOVERNMENT ANTONOMOUS ENTITIES (ORDINARY (EXTRAORDINARY BUDGET) BUDGET) 11/20/53 No. 826 I BRD- Economic Staff  ECUADOR TOTAL EXTERNAL TRADE (MILLIONS OF U.S. DOLLARS) 150 YEAR Lr 100 100 50 .afi _ =~~ ~~ 50 ,, ~~~~~~~KIMPORTS 0 - I I I l0 I I '37-'39 '47 '48 '49 '50 '51 '52 '53 '54 AVERAGE NOTE: Exports are the Foreign Exchange Receipts of the Centrol Bank EXPORTS OF PRINCIPAL COMMODITIES (MILLIONS OF U.S. DOLLARS) 25 FrARLY I I T I I I I I I2 20 CAC2O 20 10-5 15 I0 1 5 5 ~-~~;BANANAS 0 0 11 '40 '41 '42 '43 '44 '45 '46 '47 '48 '49 '50 '51 '52 '53 PERCENTAGE DISTRIBUTION OF EXPORTS BY PRINCIPAL COMMODITIES 1917 1945 1952 ~~ 41% BNANA CCO 850%/ I 1/20/52 No. 827R IBRD- Economic Staff  ECUADOR BALANCE OF PAYMENTS ON CURRENT ACCOUNT (MILLIONS OF U.S. DOLLARS) 0 20 40 60 80 tOO 120 1946 leEXPORTS RECEIPTS PAYMENTS I > INV LES 1947 IMPORTS RECEIPTS PAYMENTS 1948 RECEIPTS PAYMENTS 1949 RECEIPTS PAYMENTS 1950 RECEIPTS PAYMENTS 1951' RECEIPTS PAYMENTS 1952 RECEIPTS PAYMENTS 1953 RECEIPTS PAYMENTS EXTERNAL PUBLIC DEBT SERVICE (MILLIONS OF U. S. DOLLARS) 4 4 - QUITO SAN LORENZO flY. 3 3 '~' *~ EXSTING DEBT6 o 0 1953 1955 1960 1965 1970 1975 1980 11/20/53 No.828 IBRO - Economic Staff  - i - SULY2ARY AND CONCLUSIONS DOhESTIC POSITION A3lD FPROSPMTS General 1. E:cuador is slightly smaller in area than the State of California. Its population.was 3., million in 1952. The country lies across the Equator between the Pacific Ocean to the west and the Amazonian jungle to the east. The high ranges of the Andes, extending from Colombia to the north through Peru to the south divide the country into three entirely distinct regions: the eastern part ItEl Oriente" is covered with dense tropical jungle and almost uninhabited. The population has settled in the two remaining regions, the Andean highlands referred to as the "Sierra" and the lovw-lying coastal plains the "0Costa't. Two Ec onomies 2, The chiaracteristic feature of the economr of Scuador is tne division of the country into these two sharply contrasting sectors: the Sierra and the Costa. The climate of the Sierra is teiaperate; but the region: is overpopulated and land is scarce; except for some fertile valleys, the soil is barren and eroded4 In the Costa the climate is tropical; and there is lack of labor to cultivate this great expanse of fertile land, most of it still untouched. The difficulty of cormaunications has hanpered interchange between the two regions. Diseases fornerly widespread on the coast, and the resistance of the Andean Lndian to change hame also pre- vented migration from the dense population centers of the Sierra, to the Costa. The Predominance of Agriculture 3. In both regions agriculture is the dominant activity. The Sierra produces for domestic consumption. Somne valleys are fertile and devoted to the production of cereals, vegetables, fruit and to dairy cattle. Here farms are, as a rule, efficiently run, but on the high plateaus and in the dry valleys, cultivation is inefficient and yi-elds are low thouoii much could be done to inprove this situation through the dissemination of better knowledge. 4. On the rich soil of the Costa, plantations have specialized in tropical products for exports: banana, cacao, coffee, rice. Cotton is also grovwn for the domestic market. Uuch of the land remains untouched due to the difficulty of communication but, as soon as roads are opened, possibilities for expansion will be high. 5. Mining and industry still play a minor role. Coal, sulphurr, kaolin are being, produced on a small scale in the Sierra. It thriving pharmaceutical industry has started in Quito. Petroleun is exploited on th-e coast, but increasing fuel consui.ption is likely to turn Ecuador into a net importing country unless production can be expanded. The  - ii - once flourishing handicraft industry of Panama hats is on ti decline. Cement production has increased; the establishment of a newv plant in the Sierra should satisfy the grovring demand for some years to come. Electric nower, still lacking in many regions, will have to be expanded to cope with the growing demand. Production and Income 6. With the rapid development of the Costa, the economy has expanded rapidly in the last years, but incom.e per capita is still one of the lowest in South America. Mioreover it is unevenly distributed, and about one-third of the total population lives on a subsistence level. This growth in income and output in the last years has been stimulated by external factors such as the high prices for Ecuadorian products in the world markets. Public finance and monetary policies followved by the Ecuadorian Government have aided this grovrth. Domestic Finance 7. Following a period of inflation fed by chronic budget deficits, prices have remained relatively stable since 19L88 In early 1953 a temporary scarcity caused by the floods pushed prices upwards; they have nowf declined to tihe level of mid-1952. This stability has been maintained oring to the cautious credit policy of the Central PanIk which has kept money supply wvithin the limits required for monetary stability and growth. In 1953, however, there are signs of reneewed financial pressures. There was a sizeable increase in money supply in the period January - August. A furthler expansion of credit to the Central Govrernment is expected before the end of the year to cover in art a sizeable bud-;et deficit. Once again budget deficits ,ill be the elentent of instability. 8. The characteristic feature of Public Finance in Ecuador is thae dispersior. of public revenues anong a great number of separate entities. In 19_51 the Central Government received only 3b% of total revenues, the rest being distributed between the Mdunicipal and Provincial Councils, and the Autonomous Entities. The fiscal system rests heavily upon indirect taxes, most of them derived from customs duties. A reform now under way will bring some improvement tbcughf it will not remedy the basic weakness of the system. 9. In 1950, 33% of government expenditures were allocated to general administration purposes, 24% to social services, 21% to defense and 9% only to development; total public expenditures for development have been much higher, however, since large investments have been financed outside the budget by means of special taxes allocated to specific projects. In 1950 and 1952, capital expenditures of the Central Government amounted only to 20% of total public investment, wvhich rose from 4.2% of total output in 1950 to 6.8% in 1952. EXTiRYNAL POSITION AINTD TPROSPECTS 10. Ecuador's balance of payments has follmoed a pattern common to  - iii - many South American countries since the start of the Korean war. Both exports and imports have increased steadily, leaving however a positive trade balance, in part offset by increasing payments on account of imvisibles, Capital movements have played only a minor role. 11. Prospects for export earnings are good, and shifting from a one crop exporter (cacao), Ecuador has shown a surprising ability to diversify its economy. Today production and exports are well-balanced between the three leading crops; cacao, coffee, bananas, which account for 75% of the total value of exports, and substantial increase in the export of these commodities can be expected with the opening of new land. The remaining 25% is made up of a variety of products among which rice and panama hats occupy the leading positions. 12. Import requirements vrill continue to grow but there are good possibilities of replacing some imports by increasing domestic production, particularly in the case of cereals. Though the present exchange system does not make use of quantitative restrictLons, imports have been kept within reasonable limits through the use of differential exchange rates, ad valorem duties and requirement of advanced excharnge deposits. 13. Ecuador's Balance of Payments should not show much stringency in the near future when dollar earnings should cover fully dollar payments. The possible danger would rather stem from the indirect effects upon the Balance of Payments of the government's domestic policy, as new pressures will develop from the heavy investments of the development program. t.EVELOPIAEIT PROSPECTS ANlD CRSDITWORTHINESS 14. Although public investments have been stepped up in the last two years, Ecuadbr still lacks basic fac-lities such as roads and electricity, vwhich are necessary for further development of its unutilized resources. Programs of the government for the immediate future appear ambitious. If carried out, this program would strain availaable external and dormiestic resources. The country is ready to absorb foreign capital; but investment in Ecuador should be a step by step operation in accordance with a program prepared by a coordinating body. 15. The total external debt service will average US $4.2 million in the period 1955-59 with a peak of US 'h.4 million in 1956. Average annual service represents 3.5% of expected annual foreign exchange earnings. The two IBRD loans nmo under active consideration for roads in the Province of Guayas and expansion of electric powper in Quito would raise annual average service during the period 1954-59 tb us $5.3 million and shift the peak of annual service payments to US $6.0 million in 1959. The annual payments would still be less than 5.0% of the expected annual average value of exports. Thus, there would still be room for further borrowing, particularly for projects of an export generating or iraport saving type. The size of this additional margin will depend upon the domestic policies to be followed by the government.  DOMESTIC POSITION AND PROSPECTS I. Production and Income 1. Two main features characterize the economy of Ecuador: the exist- ence of two distinct economies corresponding to two widely different and separate regions; the predominance of agriculture over other activities in botn regions. The Two Economies 2. Lying astride the Equator, between the Pacific Ocean on the west and the Amazonian jungle on the east, Ecuador is slightly smaller in area than the State of California, and contains only half of its population. The Andes divide the country into three separate zones. The eastern part, "El Oriente," is sparsely inhabited by Amazonian Indians, living in a wild state completely outside the economy. The Andean highlands, the "Sierra," and the lowlying coastal plains, the "Costa, " are the only populated and economically active regions. 3. The Sierra and the Costa contrast sharply. Owing to the altitude, the Sierra enjoys a temperate climate but, except in the floors of the Inter- Andean valleys, land is eroded and often barren; arable land is scarce and patches of cultivated soil hang on the steep slopes of the ranges. The region is overpopulated, containing two thirds of the total population; it produces only for the domestic market, and wages are low. The Costa, on the other hand, looks towards the outside world and produces tropical products for export. Only narrow belts of land have been opened up along the means of communication, leaving large expanses of fertile land still untouched. There labor is lacking and the level of wages is higher. 4. Physical differences have also influenced the human outlook; the Sierra with the capital Quito is traditional, while the Costa with Guayaquil as the main commercial center is more active and enterprising. The economic consequences have sometimes been damaging. A narrow regionalism has not infrequently led to a dispersion of resources, with investments of a local character and of low productivity. 5. Sociological, institutional and physical factors have obstructed interchange and migration between the two regions. The culture of the Andean Indian resists change. Although able to assimilate new techniques, the Indian clings to tradition, to ancient customs and, above all, to the land. A feudal land tenure system strengthens the attachment of the peasant to the soil and makes migration extremely difficult. Physical obstacles have also been great. For a long time the Costa was almost uninhabited. Until 1913, when the Panama Canal was opened, Ecuador was remote from European and Eastern-American markets and European migration. Moreover, disease, especially the malaria and yellow fever, formerly widesp-read on the coast, effectively blocked human settlement. Only recently has it been brought successfully under control. The difficulty of inland communication still remains as an obstacle, Ecuador has approximately 3,900 km of main roads,  - 2 - but there are no all-weather roads between the Sierra and the Costa. The railroad from Quito to Guayaquil is the only effective land transportation linking the two regions. The Predominance of Agriculture 6. Both. in the Sierra and in the Costa, agriculture is the dominant activity. ILining and industry play only a minor role. The two regions have, however, specialized in very different types of agricultural produc- tion: the Sierra produces wheat, barley, potatoes and dairy products. The economy of the coast at present rests upon the three main export crops tf cacao, coffee and bananas.. IMoreover, while agricultural production in the Sierra has remained almost stagnant, the Costa is expanding and diversifying its production. The Costa 7. Formerly Ecuador was the prototype of a one-crop economy, depend- ing almost entirely upon the production and export of cacao. Cacao produc- tion has fluctuated widely. In the 1915-17 period, Ecuador produced annually 50,000 tons of cacao; the appearance of plant diseases in 1917-ai marked the beginning of a period of steady decline to the low mark of 10,000 tons in 1940 (20% of the record production of l9l5-17). In the thirties the whole economy experienced chronic depression. The trend was reversed in 19b1 and cacao production has now reached 50% of the record levels of 1915-17, for a total value of about US ~18 million. 8. Coffee is a relatively new product in terms of its importance both in domesticproduction and in exports. It has been developed under the stimulus of high world prices during the war and post-war years. Coffee production in the last three years has been equal in value to that of cacao, namely between US $18 and US $20 million annually. 9. The increase in banana production has been striking. In the period 1935-39, Ecuador shipped a yearly average of 1.2 million stems, all to the United States. In 1952, exports reached 16.5 million stems and the value of production surpassed that of cacao or coffee. Ecuador is now the world's leading supplier of bananas, and bananas are for the first time Ecuador's chief export. Until recently the main production center had been the Province of Guayas, but production is now expanding in the Province of Esmeraldas. Roads would bring new areas into production and avoid losses incurred when transportation is at a standstill during the rainy season. 10. Rice, which is also cultivated in the Costa, has been one of its most important agricultural products. Rice is basic in the diet of maly Ecuadorians, but has not been important as a foreign exchange earner except in the abnormal circumstances of shortages of the period 1946-1948. Rice production suffers from inherently high costs which makes it difficult for the product to move on the world market. Production for domestic consumption  - 3 - could, however, be increased, and roads will permit the opening of new lands to be planted, particularly in the Guayas Province. 11. Cotton and sugar cane are the next most important products. Pro- duction of cotton has now caught up with domestic consumption. Efforts are being made to improve production by means of technical advice, import of new seeds, and introduction of new varieties. Given the favorable climatic and soil conditions which the region enjoys, production could undoubtedly be increased to keep up with the growing local demand. Sugar cane is used for the production of white sugar, brown sugar, and Itaguardiente, ' a kind of local rum consumed in large quantities by the Indian population. Pro- duction has been able to satisfy local consumption and has kept pace with a growing demand. 12. In the Costa there is the beginning of what could be a thriving beef cattle industry. The Province of Esmeraldas appears as the most suit- able. Tropical diseases continue to plague some regions, but the crossing of breeds has improved the resistance of the animal to disease. A veteri- nary service hias been set up, and a four-year plan of the Ministry of Economy provides 40 million sucres for the development of the cattle industry and imports of new breeds. 13. Potentialities for agriculture in the Costa are high. The use of resources is still limited and inefficient and could be improved consider- ably by establishing a long-term agricultural policy in which emphasis should be first placed on the improvement of crop yields from cacao, coffee, bananas, and rice rather than on the introduction of new crops. It is urgent to re- organize agricultural credit; agricultural loans at present average eight to nine months, while cacao and coffee trees require four to five years to come into production, and the lack of long-term credit is, therefore, an obstacle to their cultivation. There is also a need for a program of agri- cultural education, with extension services and experimental stations. There is still a lack of labor in many parts of the Costa, and the govern- ment has taken some measures to stimulate immigration, such as granting land under favorable terms. A number of foreign planters have already settled in this region. The lack of communications is still the strongest obstacle. It also hampers migratory movements from the Sierra which is overpopulated and where erosion threatens. There the agricultural problem is the greatest. The Sierra 14. Agriculture in the Sierra is waging a fight against nature. Erosion slowly reduces the available land, while the population increases steadily. There are three different types of land in use. On the steep mnQuntain slopes the Indian peasant tills small patches of land for subsistence consumption. B3oth in the high plateaus and in the lower valleys, land is concentrated in the hands of large landowners. There are less than 24,000 landowners in the whole region, and out of them about 1% possess 65% of all arable land, while 82% of the smallest proprietors own only 5% of the total area. (Table 5 in Appendix.)  - 4 - 15. A temperate climate permits a variety of culture, among which cereals occupy the first place. The valleys and the plateaus offer sharp contrasts. In the valleys productivity is high. They provide rich grazing land and some of the best dairy cattle in South America are raised there. On the plateaus, productivity is low. 16. The problem of agriculture in the Sierra will require long-range policies, involving migration from the area and some improvement in the land tenure system. Experience has shown, however, that some immediate improvements can be brought about with better education and better techniques such as rotation of crops instead of leaving the land idle, and the use of better seeds. In some regions small scale industrialization might bring some relief, but prospects for the near future are limited. Mining and Industry 17. In contrast with Peru, mining plays only a minor role in the economy of Ecuador. Exploration in the Sierra has hardly started, and it is too early to make any predictions as to the future of mining in this region. At the present time, several minerals are being exploited on a small scale: gold, silver, copper, lead, sulphur and coal. Coal of a rather poor calorific content is extracted in the region of Biblian in7The Sierra. Total production was expected to reach 50 tons daily. Sulphur was exploited in the region of Tixan; total production averaged 30,000 tons a year. Kaolin is found in the provinccs of Canar and atzuay. It is of high quality aniT7Tuity and will - provido the raw material for the new cement plant in Riobamba now under construction. 18. Petroleum is now produced and refined on the Costa in the Province of Manabi. Reserves there have been estimated in 1950 to amount to 4 million cubic meters, representing only 10 years of production at the present rate. Hopes of discovering new petroleum fields had been stirred when the Shell Company undertook intensive exploration work in the Amazonian jungle. In 1950 the Shell Company withdrew, returning its concession to the Ecuadorian Government. There are now two companies operating in Ecuador: the Anglo- Ecuadorian and the Manabi Exploration Company. The recent purchase of controlling stocks of the Ianabi Exploration Company by the Pantepec Oil Company may be a sign of renewed activity. Production of crude petroleum has increased slowly but steadily; in recent years Scuador has been export- ing an average of 140,000 tons of crude annually. While refined output has been increasing, the country still imports refined products. Official gaso- line price policies, which do not permit the companies to sell their refined products at a profit, have deterred a more rapid expansion of refining capacity. 19. Industrial production statistics are lacking in many sectors. Existing data, however, reflect a rather rapid growth in many industries. Cement production has increased 55% between 1950 and 1952, replacing imports, while consumption increased 35% in the same period. In addition to the plant at Guayaquil, a new plant is being built at Riobamba in the Sierra, with an  annual capacity of 50,000 tons. Total production will still be insufficient to cover the country's requirements which are estimated to reach 160,000 tons in 1950. The pharmaceutical industries have expanded steadily, almost entirely in Quito. Though raw materials have to be imported, cheap labor has permitted the industry to prosper. The local market is limited and most of the production is exported. The value of exports has almost reached the US $1 million mark. The textile industr has developed in a favorable environment: existence of raw materials, abundant and cheap labor force, unsatisfied demand. At present, the industry covers over 60% of domestic consumption. It is localized in the Sierra where cheap and abundant labor has determined a type of industry with low capital investment and, by the same token, low productivity. 20. The handicraft industry of Panama hats is going through a struc- tural crisis which affects various sections of the country, the region of Montecristi in the Costa and the Province of Azuay in the Sierra. In the period 1944-46 exports averaged annually 4.6 million units, earning 22.7% of the total value of exports and occupying 80,000 to 100,000 workers. Decline started in 1947 with a fall of foreign demand and in 1952 exports dropped to 3 million hats, only 3.2% of the total value of exports. Some temporary measures have been taken, such as exchange advantages allowing exporters to sell foreign exchange in the free market. The crisis is most severe in the Sierra; there the long-term solution requires establishment of new employments. In the Costa alternative opportunities already exist. 21. The food industries have developed relatively slowly. The main local industries are flour mills, breweries, oil and fat factories. Pro- duction is still insufficient to satisfy domestic demand. 22. The future development of industry may be hampered by lack of electric power. In 1953 the rate of consumption of electricity in Ecuador was one of the lowest in South America: 58 KWH per year per capita. At the present rate of increase in consumption, capacity would have to be doubled by 1960 to satisfy demand. Total Output and Income 23. The economy has expanded rapidly in recent years. Total output entering into the money economy was valued at the equivalent of US $343 million in 1950; in 1952 it was estimated at US $400 million. In spite of this rapid increase, Ecuador has still one of the lowest levels of income in South America: US 094 per capita in 1952. Moreover, it is unevenly distributed between regions. The subsistence farmers in the Sierra, esti- mated at one million,have an average annual per capita income in money of $30; the remaining one million inhabitants of the Sierra have an average income of $80 per capita; in the Costa the average income is estimated at 4150 for a population of 1.4 million.  - 6 - 24. The expansion of production and income to the record levels of 1952 has been influenced in great part by external factors. In 1952 the value of exports represented 27% of the total output and a great part of the increase in total income has been due to the increase of prices for export products in the world market; this increase has averaged 18% between 1950 and 1952. This sensitivity of the country's income to world demand and prices has deep effects upon the whole econonm. The Costa derives its income from the sale of tropical products on foreign markets and buys the food and the manufactured products which the Sierra produces for domestic consumption. As income in the Costa expands or contracts, its fluctuations are transmitted to the Sierra through variations of demand for its products. Though very distinct, the two economies are complementary and highly inter- dependent. 25. Nevertheless, external factors account only in part for recent economic growth. Public finance and monetary policy have played an impor- tant role in providing a favorable environment for balanced growth. Total gross investment, which had been low in the past, has increased from 97 of gross product in 1950 to 12% in 1952. Moreover, development has taken place with price stability. II. Domestic Finance 26. Prices: For many years Ecuador was plagued with inflation, but since 1948otns-iderable price stability has been achieved. The Consumer Price Index for the working class in Quito shows increases of 4.7% in 1950, 7.7% in 1951, and 1.5% in 1952. In 1953 the price of many items increased as a result of temporary scarcity brought about by torrential rains which disrupted communications between the Costa and the Sierra, but by November prices had fallen again to the level of the corresponding month of 1952. This stability was maintained partly by cautious credit policies of the Central Bank, and partly by the Government keeping its annual budgets in balance at least until 1952. In 1953, however, there are again some signs of disequilibrium. The year 1952 closed with a budget deficit, and the deficit will be greater in 1953. There have been added pressures upon the Central Bank, and the rate of expansion of bank credit in the first part of the year has been unprecedented. Money and Credit 27. Since 1948 and until 1953, the Central Bank has followed a com- pensatory monetary policy to maintain money supply within the limits required for monetary stability and growth. (Appendix - Table 10.) Whenever a balance of payments deficit exerted a contractionary effect upon income and money supply, the Central Bank would ease credit. This happened in 1948, 1949 and 1951. In 1950, on the contrary, there was a contraction of the Central Bank credit as a balance of payment surplus exerted an expansionary effect. In 1952 money supply expanded by 23% to a year-end total of. 1,038 million sucres. The factors of expansion were the balance of payments surplus and  - 7 - the credit extended by the commercial and development banks to finance in- creasing production. It must be remembered that 1952 was a year of high economic activity. Commercial banks increased loans and investments by 19%; nonetheless their excess reserves increased. The development banks increased loans and investments by 10%, and also improved their liquidity. The Central Bank continued a cautious policy; it reduced its own credit to the public, but increased its rediscounts to other banks. In October 1952, however, an extraordinary advance of 30 million sucres was granted to the government to finance its budget deficit. 28. In the first six months of 1953, there was a further increase in money supply of 8%. It was accounted for by domestic factors since there was a deficit in the balance of payments (Table 10 - Appendix). The main cause of increase has been the expansion of credit from the Central Bank to the government, official entities and development banks. For the period January-August 1953, Central Bank credit to the public expanded by 50%; most of the credit was granted as emergency relief following the inter- ruption of traffic caused by the floods. Credit to other banks increased h2% and credit to the government and official entities 68%. Private banks contributed to the expansion at the expense of a decline in their excess reserves. Credit of development banks has in turn risen sharply on account of emergency relief and of medium-term credits for the promotion of agri- culture. 29. In spite of this rather considerable expansion of credit, the domestic inflationary impact will be limited, since only part of the increase has been added to the flow of domestic expenditures. Much has leaked abroad in the form of emergency imports of foods and capital goods with consequent balance of payments deficit. The danger spot, however, remains tne sharply rising expenditures of the Central Government. The 30 million sucres advance from the Central Bank to the Treasury last October was followed by further advances of 60.7 million sucres during the first half of 1953 to enable the government to cover its current expenditures. A sizeable budget deficit is expected this year, and the Central Government budget remains the tcrmunin zcmer.ft of :;onetary instability. Public Finance - The Budget Revenues 30. Total public revenues in Ecuador represent about 20% of National Income. These revenues, however, are widely dispersed among a considerable number of separate entities. In 1951 the Central Government received only 34% of total public revenues) while autonomous entities received 46% of the total, municipal councils 18%, and provincial councils 2%. The autonomous  - 8 - entities include more than 45 separate bodies such as the National Red Cross, several universities, the National Railroad Administration, some cathedrals and churches, etc. 31. This dispersion of revenues results in a complex and rigid system of allocated taxes; it rests heavily upon indirect taxes derived largely from customs duties. In recent years, taxes contributed 80% of total revenues, and indirect taxes 80% of total taxes. A fixed percentage of eachi specific tax is allocated to a particular entity; the tax on coffee for instance serves eleven different purposes. A reform is now under way. A new customs tariff prepared by UN experts has already been enacted, and will be in effect from January 1, 1954; a project of income tax reform is now being completed. This reform, however useful it may be, is not a remedy for the basic weakness of the fiscal system, which remains the dispersion of public revenues away from the Central Government. However, it will pave the way for future improvements to overcome the resistance of strong local interests.  -9 Expenditures 32. Between 1941 and 1952 total expenditures of the Central Government increased four times in nominal terms, but changed little in real terms; expenditures for services may have increased somewhat since salaries of civil servants have not kept pace with the cost of living. 33. In 1950 expenditures of the Central Government were distributed by purpose, as follows: Expenditures of the Central Government in 1950 Purpose In million sucres % of the total General Administration 127.7 33.0 Social Services 98.5 25.4 Defense 82.9 21.4 Develcpment 34.9 9.0 Tax Collection 23.2 5.9 Public Debt Service 21.2 5.4 Total 388.4 100.0 These data, however, do not reflect the total amount of official expenditures for development, which are financed by borrowing from abroad for the construc- tion of specific projects, or by the creation of new taxes dedicated to special funds or to the support of new autonormous entities (Gomite de Vialidad de Guayas, Admiristration of the Railroad Quito-San Lorenzo, etc.) An important case of the latter procedure is the additional tax of 60 centavos per gallon placed on gasoline in the spring of 1953 to finance an extra-budgetary national roads plan. The national budget for 1954 provides 22 million sucres for roads; but the Ministry of Public Works estimates that in addition the new gasoline tax will yield an average of about 57 million sucres annually during the next ten years, equivalent to almost U.S. $L million arnually. 34. The Central Goverrnent has an 'toperationallt budget (formerly called ordinary) and a !capital