In comments, reader Cad points out that Ecuador’s oil policy has a downside: the same fixed-price policy that lets the country take all of a price windfall exposes the government to large losses in the event of a price crash.
Evaluating the size of the problem means constructing a counterfactual: how much income would the government be taking in under a different fiscal regime? As of this moment, I do not yet have the data to construct that counterfactual.
We do, however, have the data to get a general idea of how the oil price crash has affected Ecuadorean public finance. Now, it should be noted that Ecuador is much more oil-dependent than Mexico. In addition, it does not have its own currency. As a result, an oil price crash will hurt Ecuador through channels other than public finance. That said, public finance is still the main channel; it is also the main way in which Ecuador’s policy of paying companies a fixed price to extract the oil will hurt the country should oil prices crash.
This post is not going to evaluate the cost of Ecuadorean resource nationalism. It is just going to lay down the fiscal context for such an evaluation.
So how is Ecuador doing? So far, surprisingly well considering that (unlike Mexico) the country has neither hedged oil income nor imposes any significant domestic petroleum taxes. Here are the basic figures for government revenue, in current dollars:
Oil income has plunged since 2012, but the government has made up for it via other taxes. (Of course, those taxes do impose a burden on the domestic economy, so it is not a free lunch.) Oil revenue is down 63% since 2012 (a fall of $3.8 billion), replaced by a 43% hike in income taxes (raising an additional $1.4 billion), an 18% increase in VAT ($1.1 billion), a 30% rise in tariffs ($0.8 billion), and a whopping 92% increase in other nickle-and-dime taxes ($1.4 billion).
This is painful, but it is responsible. It also explains much of why President Correa causes such outrage among a certain class of Ecuadoreans: taxes on wealthy people really have increased quite substantially during his administration, especially in the last three years. His opponents are not responding to his rhetoric. They are responding to real economic pain that he has imposed upon them, although it is worth noting that even now income taxes in Ecuador raise revenue equal to only about 5% of GDP, up only a single percentage point since 2012 and two percentage points since Correa took office in 2007.
On the spending side, the decline in oil income has cut the country’s ability to borrow. (In comments, Federico and I discussed this point in July 2015) Nominal public spending fell by 10% in 2015, with most of those cuts falling on fixed capital investment. (I.e., roads, bridges, railroads, buildings, sewers, etcetera.) This chart shows the basic outline:
In short, the adjustment to lower oil prices in Ecuador has been hard but not catastrophic. It is not immediately obvious what other course the government should have taken; in fact, if you take 2012 as a starting point, the situation has been well managed.
Of course, it is not unreasonable to take 2007 as a starting point. Perhaps Ecuador should have spent less during the boom, but that is at best unclear: the country’s physical infrastructure was in woeful shape and has improved substantially. Its Human Development Index went from 0.698 in 2005 to 0.732 in 2013. The improvement is not stunning, but it is not terrible. (It is roughly the same proportional rise as in Mexico.) Perhaps Ecuador could have achieved that without the run-up in public spending, but that is not clear.
What is clear is that Ecuador is not Venezuela.
Which brings us back to Cad’s implicit question: could Ecuador have avoided the 63% fall in oil revenue after 2012? We will take that up in another post; but first, any comments?