By William K. Black
(Cross posted at Benzinga.com)
Ecuador’s President Rafael Correa has the special ability to drive our most elite media nuts. Failures are self-refuting. It is the successful that drive their opponents to distraction, and much of the media can barely contain its eagerness to write that Correa has failed. In 2009, The Economist practically licked its lips in eager anticipation of what it hoped would be Correa’s (and Ecuador’s) failure due to the “country’s acute financial problems.”
“Mr Correa appears to be uncorrupt. The giant increase in public spending he has overseen (it rose by 71% last year) has resulted in new schools and hospitals. Testing of teachers, with pay linked to results, has been introduced. When talking to an educated audience, Mr Correa stresses the need to improve the country’s economic competitiveness.
All this has led some American diplomats to hope that Mr Correa can be detached from the orbit of Mr Chávez. But his anti-Americanism is visceral. His father spent time in an American prison for transporting drugs and committed suicide after returning to Ecuador.”
The problem is that Correa, and Ecuador, refuse to fail. Indeed, the most popular elected head of state in the Americas is Correa – by a considerable margin. Correa was never in Chavez’s “orbit.” Correa has long been an independent intellectual leader of progressive movements in Latin America.
Study: Venezuela’s Chavez 4th Most Popular President in the Americas
“The study, by Mexican polling firm Consulta Mitofsky… measured the approval ratings of 20 leaders in the Americas by compiling public opinion polls from their respective countries, Ecuadorian president Rafael Correa is the most popular president in the Americas with an “outstanding” approval rating of 80%.
“Rafael Correa repeats his first place with 80% (a point less than his previous evaluation), maintaining the approval with which his presidency began almost five years ago,” the ‘Approval of Leaders: America and the World’ report stated.”
On December 9, 2012, I wrote an article entitled: “Why is the failed Monti a ‘technocrat’ and the successful Correa a ‘left-leaning economist’?” The article detailed the New York Times’ exceptional bias against Correa.
This column discusses The Economist’s increasingly snide disparagement of Correa as its Editors despair that he is likely to be re-elected by a broad margin. The February 9, 2013 article is entitled “Ecuador’s election: The man with the mighty microphone.” The article begins with these sentences:
“NEW highways and motorways snake across Ecuador, lined with billboards reminding drivers how bad the Andean country’s potholed road network was until Rafael Correa was first elected as president six years ago. The towns and villages boast new schools and health clinics. The minimum wage has risen well above inflation, and some 2m poorer people (in a population of 14.5m) get monthly cash transfers.”
So, in a Nation that desperately needed unemployment and poverty reduction, had a critical shortage of safe roads, and severe needs in health and education, Correa’s budgetary priorities have been superb and the programs are producing real roads and clinics, not simply opportunities for expanded corruption. The article, however, actually begins with its theme: “Having mixed the good, the bad and the ugly during six years in power, Rafael Correa is heading for another term.” The Economist claims that Correa is a loser on two-out-of-three criteria, but the people of Ecuador will accept the “bad” and the “ugly” in order to obtain the occasional “good.” But how has Correa attained, and maintained, the highest job satisfaction rating of any President in the Americas while being “bad” and “ugly”? The journal doesn’t say, but the implication is that there must be something very wrong with Ecuadorians if they give such a flawed leader such high praise.
The most obvious question is what substantive errors Correa has made. Ecuador is not involved in any war. The key issues it faces arise from the intersection of economics and social services. Correa has a doctorate in economics and he is free of the theoclassical economic dogmas that have driven our recurrent, intensifying financial crises so this should be an area of great strength. Here is how the article introduces Correa’s economic expertise.
“In his campaign advertisements Mr Correa, a good-looking, smooth-tongued 49-year-old economist, presents himself as the man who turned his country round, after several years of political instability and economic humiliation, which included the collapse of the currency and its replacement by the American dollar in 2000. He rails against the IMF, bankers and privatisations. ‘Ecuador is no longer for sale,’ he cries. ‘The country of despair has become one of hope’.
It is a seductive message which, according to opinion polls, seems certain to give him a comfortable victory.”
At every opportunity, the magazine opted for snark over substance. Correa is “good-looking” and “smooth-tongued” and he “rails” against his opponents and presents a “seductive” message to the voters. The substance of his economic views and his success in predicting economic results of his policies are ignored by a magazine that claims to be devoted to economics and the views of economists.
It turns out that the magazine’s stated reasons for despising Correa arise from his views about journalists he believes write falsehoods. What we have here is guild solidarity – journalists hate political leaders who sue journalists for libel, even if they forgive the liability after having a court find that the journalists had libeled the President.
I’m a typical American lawyer with reverence for the First Amendment who strongly supports the broad “public figure” protection provided by the U.S. constitution to journalists. The Economist is a U.K. publication subject to far stricter libel rules in its home Nation and many other countries such as Ecuador.
The magazine also criticizes Ecuadorian democracy.
“His use of the presidential veto to rewrite laws has limited the power of the legislature, where his party was in a minority. Changes to voting districts and rules for assigning seats mean that the government should gain an absolute majority in congress in the election, according to Juan Carlos Donoso, of Quito’s San Francisco university. A judicial reform let Mr Correa pack the courts with friendly judges. Of almost 1,000 corruption investigations launched since 2007, only a score have led to convictions, according to a report based on official sources in El Comercio, a Quito newspaper. But voters are more worried about rising crime: a presidential candidate suffered an ‘express kidnapping’.”
Given that Correa’s party enjoys the support of over half the voters according to the polls, the fact that his party stands to gain a majority represents normal democracy. Judicial reform was also strongly supported by Ecuadorians and it has nothing to do with corruption convictions. Of course, the magazine never claims it does – it simply implies it by juxtaposing the two sentences.
The magazine finally discusses the results of Correa’s economic policies in this passage.
“Apart from bullying, Mr Correa owes his success to a mixture of luck, opportunism and skill. The biggest stroke of luck was the surge in the price of Ecuador’s oil exports. Mr Correa raised the government’s share of oil and other taxes as well. The result is that government revenues have almost tripled since 2006, with oil accounting for about half of the rise. Opportunistically, Mr Correa scrapped previous fiscal rules that required part of windfall revenues to be saved, and defaulted on $3.2 billion in foreign bonds.
He has lavished all this cash on public spending. The public-sector payroll has risen by a quarter; the cabinet has swollen to 40 members; and the mandarins use 34,500 official cars. But Mr Correa has also shown political skill in ramping up social spending in a country where provision was inadequate and poverty reached 64% in 2000 (it is now 27%). Many Ecuadoreans sense that the oil wealth has at last trickled down to them. And Mr Correa has largely eschewed the expropriations of private companies and the smothering economic controls practised by Mr Chávez.”
Again, the magazine’s writers cannot write a single sentence straight when the subject is Correa. The only positive economic policy they discuss is buried and twisted into an act of “political skill” rather than sound and humane policy. The transition clause introducing the paragraph mislabels democracy (the magazine despairs that Correa’s party will obtain a majority of the seats in Ecuador’s parliament because the party enjoys the support of a majority of Ecuadorians) as “bullying.”
The concluding clause of the transition sentence dismisses Correa’s success as the product of “luck” and “opportunism” (with a grudging concession at the end that there was also “skill”). The magazine, of course, denies Correa any skill as an economist or as a moral leader. It concedes only that he showed “political skill” – and makes even that sound like a continuation of “opportunism.”
Correa’s supposed “luck” is that commodity prices increased, particularly for oil. Note that the article concedes, but downplays, the fact that much of the revenue gain came from Correa negotiating a superior agreement with private oil producers. A broad range of commodity prices have increased substantially in recent years. Over a hundred nations that export commodities have benefitted. I wondered whether the magazine typically begins the discussion of these nations’ economic results by ascribing them to “luck.” I checked two examples in the magazine’s coverage. The first is Texas, a state whose governor would be prominent in the list of leaders who have had the “luck” to benefit from much higher oil prices. I reviewed the first four articles by The Economist about Texas’ economy that my search engine identified. The first article was published on July 9, 2009 under the title “California v Texas: America’s future.”
The magazine made clear the terrible state and the wonderful state.
“Indeed, high taxes, coupled with intrusive regulation of business and greenery taken to silly extremes, have gradually strangled what was once America’s most dynamic state economy. Chief Executive magazine, to take just one example, has ranked California the very worst state to do business in for each of the past four years.
By contrast, Texas was the best state in that poll.”
Texas has one of the least educated and lowest paid workforces in the U.S., so if it is the model of America’s future we are in a state of dramatic decline. Texas was lucky, not skilled, in avoiding the mortgage crisis. California was an epicenter of the mortgage crisis. This was due to federal, not state policies.
The magazine denounces California, claiming that: “No state has … such a gerrymandered legislature.” The magazine has a problem with democracy, in California or Ecuador, when it leads to results it opposes on ideological grounds. California has a Democratic Party majority in its legislature because a majority of Californians vote for that Party’s candidates. Texas is infamous for gerrymandering the districts of the U.S. House of Representatives.
The article goes on to claim that Texas has “coped well with the recession” but concedes that:
“It has not invested enough in education, and many experts rightly worry about a “lost generation” of mostly Hispanic Texans with insufficient skills for the demands of the knowledge economy. Now immigration is likely to reconvert Texas from Republican red to Democratic blue; Latinos may justly demand a bigger, more “Californian” state to educate them and provide them with decent health care. But Texas could then end up with the same over-empowered public-sector unions who have helped wreck government in California.”
Surprise, the magazine claims that great risks to Texas are minorities and unions – the villains that “wreck[ed] government in California.” The magazine thinks of government as “the beast” – “Perhaps the rejection of tax increases [by California voters] will ‘starve the beast’ and promote structural reform.”
What the 2009 article does not mention is the primary reason why Texas “coped well with the recession” – oil prices rose sharply. The factor that gets first mention in the magazine’s description of Correa’s purported “luck” is not mentioned in discussing Texas.
On March 24, 2011, the magazine published an article about Texas’ declining fortunes.
“In addition to the [$27 billion state budget] shortfall, unemployment in Texas, which was well below the national average for most of the recession, has nearly caught up. In January 2011 it was at 8.3%; the national figure was 9%. High unemployment has contributed to low sales-tax receipts, which make up almost two-thirds of tax revenue. These travails have drawn some Schadenfreude. During the recession, Texans were quick to point to the struggles in states like California, and to brag about the comparative advantage of Texas’s low-tax, low-services model. For their part critics have long seen Texas’s approach to public policy as harsh and short-sighted. They accuse the state of chasing growth at the expense of health, education, and infrastructure.”
As the 2009 article made clear, it was not simply Texans who bragged – it was The Economist that bragged that Texas was a success because it followed the theoclassical economics model – government, regulations, care for the environment, minorities, and unions bad. Low wages and poor education were good. Even the magazine admitted that: “concerns about poor access to health care, creaky infrastructure, and a strained education pipeline are genuine.” This article mentioned oil prices, but without any suggestion that Texas was “lucky.”
“The comptroller’s office argues that Texas has now turned the corner. Export earnings were up 27% in 2010, for example. And strong crude prices will help; the Energy Information Administration forecasts that oil will average $93 a barrel in 2011, compared with an average of $79 for 2010…. Mr Perry maintains that Texas can keep on attracting jobs. In his state-of-the-state speech on February 8th he made a point of welcoming executives from LegalZoom, a legal-documents company from Los Angeles that opened a regional office in Austin last year, nudged by generous incentives from the state and city.”
Note how Governor Perry intended to attract jobs – by paying corporations to relocate to Texas through “generous [tax] incentives from the state and city.” This “race to the bottom” of business taxation is at best zero sum (Texas’ success must come at another state’s expense), but is actually negative sum given the magazine’s concession that the Texas model leads to low skills and low wages. Note that the magazine did not call Perry’s behavior “opportunistic.” The article ends by showing that the Texas theoclassical economics model has proven self-destructive:
“But encouraging home-grown success in the future will require that Texas invest adequate resources in its human capital. And those resources are, at the moment, in short supply.
Texas will be able to close its budget gap this year only through brutal cuts, now being negotiated. The recommendations from the Legislative Budget Board, which advises the state legislature on appropriations, portend a difficult few years, especially for sick people, old people, and students. The suggested cuts to the primary programme that funds school districts, for example, would put the state $9.3 billion below the amount required by its own education code. If there is any correlation between state spending on public education and the performance of its schools, those are cuts Texas can ill afford.”
The Texas model that the magazine promotes ended up amplifying its greatest and most harmful weaknesses. It causes severe underinvestment in education, health, and infrastructure – even during an oil price boom.
The magazine soon returned to Texas’ budget policies. On May 26, 2011, it published “The Texas budget: Closing the gap.” The article’s summary phrase was: “Texas’s legislature reaches for the axe.”
“How to close a $27 billion shortfall? With a bit of luck, some creative accounting, and harsh cuts. [S]ales-tax and oil receipts have proved higher than expected, a sign of the improving economy….”
By “creative,” the magazine means “false” accounting. Even with the false accounting, the state deficit remained large. The Texas model does not permit tax increases (except increased regressive sales taxes). The magazine admits that the Texas model will again prove self-destructive.
“The bulk of the reductions come from cuts. Democrats are dismayed, as are some moderate Republicans. School districts may even try to sue the state for more money. Cuts to higher education will limit the financial aid available to tens of thousands of students.
These consequences and controversies could have been predicted. The root cause of the current shortfall is structural rather than cyclical. Texas has no personal-income or capital-gains taxes, instead relying heavily on the sales tax, the property tax and various business taxes. Efforts to raise any of these taxes or to create new revenue streams are so unpopular that they are rarely even mentioned in Austin.
All this fiscal toughness is doing the governor, Rick Perry, no harm. His ten-year oversight of the state’s long boom, interrupted by only a mild recession, has led to calls for him to join the contest for the Republican nomination.”
The school districts may sue because the cuts violate state law guaranteeing (a very low) minimum funding. Texas’ leading development disability – low skills – is to be made worse. The magazine now admits that the budget problem is inherent (“structural”) to the Texas model. It is revealing that these inherent flaws in the Texas model were viewed as enhancing Governor Perry’s political attractiveness.
The magazine’s May 26, 2011 article does use the word “luck” with reference to the price of oil, but note that Perry’s “luck” is very different than “luck” the magazine ascribes to Correa. Correa is supposed to be lucky that oil prices are high, but Perry’s luck is that oil prices are higher than his administration forecast in its budget. In essence, Perry is twice-lucky. The magazine also has a very different view about the implications of the “luck” it ascribes to Perry and Correa. In Perry’s case, his luck implies – despite his pushing an inherently flawed development model – that he is a fine candidate for the presidency of the U.S. In Correa’s case, his luck implies – despite the success of his policies – that he is undeserving of high office.
Contrary to the magazine’s expectations, Perry’s campaign for the Republican nomination for President revealed the Governor’s limitations to America – and Texans.
“Perry’s approval rating after his failed presidential bid has fallen to 40 percent, a 10-point drop from a year ago and slightly less than Obama’s 43 percent statewide approval rating, according to the poll. More than half of the people who responded to a statewide survey don’t want Perry, the longest-serving governor in Texas history, to run for another term in 2014.
Perry’s campaign for president – during which he made a series of public gaffs and debate flubs that turned him into a national punch line – embarrassed some Texans. Forty-five percent of those polled said the campaign actually hurt the state’s image.
‘He should have never been in the race,’ said Traci Humphrey, a 33-year-old Republican from Dallas, who wasn’t a poll respondent. ‘I think it made us look like idiots, how he conducted himself. His overall image is not good for Texas.’”
Meanwhile, California’s budget is now in surplus.
The magazine, however, has found it impossible to withdraw its support for the Texas model. On November 30, 2012, it published an article with the bland title “Economics: Business cycles” that had the far livelier summary phrase: “Let’s all be Texas.”
“In the year to October, the state of California added more jobs than any other state, including 20,000 more than Texas. Los Angeles added just under 80,000; good news, but there is a ways to go to claw back all of the lost ground.
One can sum up the performance at the poles of the distribution pretty simply. The top [10 states in percentage job gains] represents energy, brains, and Texas; the bottom, housing and manufacturing.”
Except that the top pole is made up of two very different patterns of job gains – and counting “energy” and “Texas” as unrelated categories makes no sense. Texas is a low skill, low-pay job state. The “brains” states represent high skill, high-pay jobs. They are not equivalent.
Texas has more job gains because low-skill employers love to hire workers at very low pay, particularly undocumented workers. Texas also was not an epicenter of the mortgage crisis (which has nothing to do with the Texas model). Texas is a huge beneficiary of the rise in energy prices. The 2012 article makes this bare admission: “Energy has something to do with it, of course.” “Luck” apparently has nothing to do with it.
“I think it’s worth emphasising Texas’ extraordinary population growth, and the way in which that growth kept the state’s economy in a positive output growth equilibrium. Some might complain that not every state can duplicate Texas’ success in this fashion; not everyone can prosper by attracting migrants from other parts of the country. That’s true. But in a world in which millions of skilled foreigners would love to become American residents, every state can be a little Texas.”
Texas is not a star in attracting “millions of skilled foreigners.” California, New York, and Massachusetts are the great successes in attracting skilled foreigners. Texas’ success is attracting millions of less skilled foreigners. The federal government controls immigration policies, not the states. There is a nation that was until very recently a huge source of emigrants – Ecuador. Under Correa’s programs, however, Ecuador now has net in-migration.
I also checked how the magazine treated Norway’s success in its February 2, 2013 article “Norway: The rich cousin.” The summary phrase shows how differently the magazine treats the concept of oil prices and “luck”: “Oil makes Norway different from the rest of the region, but only up to a point.”
“NORWAY IS THE odd man out in the Nordics. While its neighbours are flirting with free markets, Norway is embracing state capitalism. Its national oil champion, Statoil, is the largest company in the region. The Norwegian state owns large stakes in Telenor, the country’s biggest telephone operator, Norsk Hydro, its biggest aluminium producer, Yara, its biggest fertiliser- maker, and DnBNor, its biggest bank. It holds 37% of the Oslo stockmarket, but it also controls some non-listed giants such as Statkraft, a power-generator, which if listed would be the third-biggest company on the stockmarket.
The simple explanation for Norway’s penchant for state capitalism is oil. When it was discovered in the North Sea in late 1969 it transformed the country’s economy. Today Norway is the world’s eighth-largest oil exporter. Petroleum accounts for 30% of the government’s revenues as well as a quarter of the country’s value added.
Norway has been able to cling onto more of its old social democratic habits than its neighbours. The oil boom led to a boom in public spending: since the 1970s the number of people employed in education has doubled and that in health and social services has quadrupled. The public sector continues to account for 52% of Norway’s GDP.”
In Norway’s case, the magazine makes no suggestion of “luck” and describes a model of economic development far closer to Correa’s approach in Ecuador.
So what are Correa’s key economic policies?
In the opening three sentences, the magazine described several of Correa’s economic policies. His key investments are in education, health, and infrastructure. All of this is in the context of seeking to create jobs and reduce poverty among the neediest Ecuadorians.
Even The Economist should find it difficult to oppose Correa’s economic policies and priorities. Consider this statement of optimal “Public Expenditure Priorities.”
Public Expenditure Priorities
“But there are three major expenditure categories on which views are strongly held: subsidies, education and health, and public investment.
Subsidies, especially indiscriminate subsidies (including subsidies to cover the losses of state enterprises) are regarded as prime candidates for reduction or preferably elimination.
Education and health, in contrast, are regarded as quintessentially proper objects of government expenditure (Balassa et al. 1986, chapter 4). They have the character of investment (in human capital) as well as consumption. Moreover, they tend to help the disadvantaged.
Just how much help expenditures on education and health in fact provide to the disadvantaged depends on their composition as well as their level. Primary education is vastly more relevant than university education, and primary health care (especially preventive treatment) more beneficial to the poor than hospitals in the capital city stuffed with all the latest high-tech medical gadgets. This is not to say that there is no need for universities or state-of-the-art hospitals: developing countries need to train and retain an educated elite as well as to raise the standards of the masses and the poorest. But it is to assert that many in Washington believe that expenditures need to be redirected toward education and health in general, and most especially in a way that will benefit the disadvantaged.”
The other area of public expenditure that Washington regards as productive is public infrastructure investment. There is of course a view that the public sector tends to be too large (see the section on privatization below). However, that view coexists with the view that spending on infrastructure that is properly within the public sector needs to be large….”
I am quoting from the “Washington Consensus.” The passage is taken from the second of the ten principles of the Washington Consensus. John Williamson drafted and labeled the Consensus and published it under the title “What Washington Means by Policy Reform.”
If a document and a viewpoint as conservative as the Washington Consensus promoted Correa’s priorities it is hard to imagine how The Economist could fail to praise Correa’s “public expenditure priorities.” The magazine, of course, came “to bury [Correa], not to praise him.” In a passage that is too clever by half, the authors try to create the impression that Correa is simply involved in wasteful programs.
“The public-sector payroll has risen by a quarter; the cabinet has swollen to 40 members; and the mandarins use 34,500 official cars. But Mr Correa has also shown political skill in ramping up social spending in a country where provision was inadequate and poverty reached 64% in 2000 (it is now 27%). Many Ecuadoreans sense that the oil wealth has at last trickled down to them. And Mr Correa has largely eschewed the expropriations of private companies and the smothering economic controls practised by Mr Chávez.”
The concessions at the end are important (and the authors’ deliberately “bury the lead” to minimize their importance. First, poverty has declined dramatically in Ecuador, largely as a result of government programs. There are roughly five million fewer Ecuadorians in poverty at today’s poverty levels compared to the level in 2000. That is an immense achievement. Second, Correa is not a Chavez-clone. Correa follows his own development policies and his priorities are supported even by the author of the Washington Consensus. In U.S. political terms, the leader who comes to mind when one considers Correa’s investment policies is the father of the interstate highway system and a strong proponent of the GI Bill and Veterans Administration health care – President Eisenhower.
The public-sector payroll has risen – which is the very good thing because the educational, health, and infrastructure advances are successful public sector endeavors. The magazine plainly means to imply, without any logic, that it must be a bad thing. Who cares if the cabinet has 40 members? The magazine authors do not even try to explain how this harms the Nation in any meaningful measure. The phrase “the mandarins use 34,500 official cars.” A “mandarin” is a “high government official.” The 34,500 figure the magazine uses as the total number of “official cars” has nothing to do with “mandarins.” I do not know the source or accuracy of the figure, but I do know the size of Ecuador’s high government officials and it is small. Ecuador’s railroad capacity was largely destroyed in floods and there are no subways. Even senior officials often take buses to work. The police, firefighters, and military have thousands of official cars. In my experience, Ecuadorian government officials and visitors of all levels jam into officials cars (vans that carry up to seven passengers) to be able to travel to meetings in Quito. The government parking garages I saw were never filled with limos or luxury vehicles. Quito is a large city and walking to a meeting is rarely an option. The building inspectors, weights and measures inspectors, and oil safety inspectors all need official cars. Ecuadorian corporations also have official cars. They own them for the same reason the government does – it increases efficiency. But again, why are we talking about cars rather that the areas that government spending actually goes under Correa’s direction – education, health, and infrastructure?
The authors minimize their discussion of education, health, and infrastructure because the facts are so bad for their dogmas. They concede, as they must, that before Correa changed priorities such expenditures were “inadequate and poverty reached 64%.” Think for a moment about what it means for a Nation to have a poverty rate of 64%. Then consider again the magazine’s effort to attack Correa’s actions in making poverty reduction a national priority.
“Opportunistically, Mr Correa scrapped previous fiscal rules that required part of windfall revenues to be saved, and defaulted on $3.2 billion in foreign bonds.”
“Opportunistically” does not have quite the negative connotations of “opportunism” – which is what the magazine explicitly charged Correa engaged in when it claimed his success resulted from a “mixture of luck, opportunism, and skill.” The magazine’s two purported examples of “opportunism” refute the charge. The typical definition of “opportunism” is: “One who takes advantage of any opportunity to achieve an end, often with no regard for principles or consequences.” The purpose of the “savings” was to fund priority needs and Correa unquestionably funded precisely those needs. His actions met the highest principles of his Catholic faith and his moral commitment to those in poverty. The consequences of his actions – and the consequences of failing to act – were precisely what drove his decision. His actions were also highly successful.
Correa’s repudiation of part of Ecuador’s debt was the opposite of “opportunism.” First, it is common for nations to default on debt when they are in a debt-trap that would lock them in deep poverty. Scores of nations that found themselves in debt-traps defaulted on their debts in modern times. Second, businesses frequently renegotiate debt, using the threat of default to induce the creditor to renegotiate. Such deals are so common that they are described with a “term of art” – troubled debt restructuring (TDRs) and have special accounting provisions. Troubled corporate debtors view demanding a TDR as something they have a fiduciary duty to try to attain. Corporate borrowers (and The Economist) do not view TDRs as even posing an ethical issue. It is only when individuals or nations owe money that corporate creditors claim that it would be unethical for the borrower to seek a TDR. Under Correa’s leadership, Ecuador repurchased nearly all of this debt, at a substantial discount, so it effectively created a TDR and escaped a debt trap that could have locked it in budgetary crises and poverty. Third, Ecuador’s debt commission concluded that two specific debt issuances had been illegal – and refused to honor only those two issuances. (The CEPR 2012 study cited below summarizes the rationale for this repudiation of illegal debt.)
This brings us to the magazine’s efforts to minimize the positive aspects of even its grudging admission of Correa’s “skill” in making education, health, and infrastructure his priorities.
“But Mr Correa has also shown political skill in ramping up social spending in a country where provision was inadequate and poverty reached 64% in 2000 (it is now 27%). Many Ecuadoreans sense that the oil wealth has at last trickled down to them.”
“Damning with faint praise” is a well-known journalistic convention for attacking a government official even when the facts contradict the charge. Correa is denied any credit as an economist or moral leader for making education, health, and infrastructure his spending priorities and reducing unemployment and poverty key outcome priorities. In a discussion that immediately follows the magazine’s claim that Correa is an “opportunist,” this passage is written to suggest to the reader that Correa’s priorities are simply efforts to curry political favor.
The sentence about “oil wealth” is also constructed to deny Correa (and the Ecuadorian people) appropriate credit for their decisions. Correa strongly opposes any “trickle down” strategy. “Trickle down” is the policy of the right that often leads to the “flow upward” from the poor and working class to the wealthiest. The increases in spending on education, health, and infrastructure under Correa are not a “trickle.” The magazine is supposed to display expertise in economics, including data. There are data available on Correa’s budget priorities and on the accomplishments. Why do the authors present data on cars and the number of cabinet members, but provide no data on education, health, or infrastructure? The answer is clear – presenting the relevant data would turn the magazine’s attacks on Correa into an ode to his success and it would explain why Correa is the most popular elected leader in the Americas. The Ecuadorian people have not been fooled by Correa’s promises – they see the results and they have “voted with their feet” to make their future in Ecuador.
Dr. Jayati Ghosh, a famous Indian economist with particular expertise in development, provided some of those data in an article written slightly over a year ago. Her article shows the advantages of data over biased smears. It turns out that The Economist’s claim that “luck” caused Correa to have far greater resources to fund useful investments is false. It also turns out that Correa’s funding of investments that even the author of the Washington Consensus believed were essential is unmatched in the Americas.
“Consider just some economic changes brought about in the past four years, beginning with the renegotiation of oil contracts with multinational companies. Ecuador is an oil exporter, but had benefited relatively little from this because of the high shares of oil sales that went to foreign oil companies. A new law in July 2010 dramatically changed the terms, increasing the government’s share from 13% to 87% of gross oil revenues.
Seven of the 16 foreign oil companies decided to pull out, and their fields were taken over by state-run companies. But the others stayed on and, as a result, state revenues increased by $870m (£563m) in 2011.
Second, and possibly even more impressively, the government managed a dramatic increase in direct tax receipts. In fact, this has been even more important in revenue terms than oil receipts. Direct taxes (mainly corporation taxes) increased from around 35% of total taxes in 2006 to more than 40% in 2011. This was largely because of better enforcement, since the nexus between big business and the public tax administration was broken.
Third, these increased government revenues were put to good use in infrastructure investment and social spending. Ecuador now has the highest proportion of public investment to GDP (10%) in Latin America and the Caribbean. In addition, social spending has doubled since 2006. This has enabled real progress towards the constitutional goals of free education at all levels, and access to free healthcare for all citizens. Significant increases in public housing have followed the constitution’s affirmation of the right of all citizens to dignified housing with proper amenities.”
Other experts confirm Ghosh’s data and note that Correa has even funded a limited safety net for those in greatest need – the unemployed and the disabled.
“In all, 5 million of Ecuador’s total population of 14 million have personally benefited in some measure from government largesse, researchers at the FLACSO graduate school calculate. Under Correa, the state has built homes for 30,000 families, plowed $8.5 billion into education and $5.3 billion into health care. It has rebuilt or improved nearly 3,400 miles (5,500 kilometers) of roads, nearly two-thirds of Ecuador’s highway system, spending $4.5 billion.
Other programs have zeroed in on helping individuals and families.
The government says the program for the disabled, a flagship Correa initiative, has benefited 300,000 people. They receive medical attention, welfare payments and equipment including wheelchairs. Some have even been given housing. Public wheelchair access is improving.
Another popular program provides a $35 monthly boost to 1.6 million poor people, chiefly homemakers with no other formal income.
[Correa] has been hounded by none of the accusations of corruption that drove previous presidents from office.”
A Reuters report demonstrates how to present both a representative example and broader data concerning Correa’s budget priorities.
ZUMBAHUA, Ecuador (Reuters) – “Once a forgotten cluster of mud houses amid windswept peaks, the Ecuadorean village of Zumbahua today boasts a state-of-the-art schoolhouse with large projection touch screens, Internet access in every classroom and lessons in three languages.
Indigenous Kichwa Indians who once stuffed savings under their mattresses now have a bank in town and a free Internet cafe – all paid for by the state.
The treacherous muddy road to the village is being widened and paved, and residents are particularly proud of their local school.
“Education has improved dramatically … The students know how to work with computers better than kids from the city,” headmaster Vicente Caiza said.
Zumbahua is one example of how Ecuadoreans from the Andes mountains to the Amazon jungle have benefited from heavy government spending that will almost certainly win socialist President Rafael Correa a new term in next month’s presidential election.
Buoyed by strong oil revenue, record tax collection and steady economic growth, Correa has won broad popular support by expanding access to healthcare, doubling state spending on education and turning rough dirt paths into proper paved roads.
Correa lived in Zumbahua for a year in the 1980s when he volunteered with a Roman Catholic organization. He worked at the local barley mill and provided occasional religious instruction.
Most residents then lived hand-to-mouth, but the town is more affluent now and the school shows how much the area has changed. The some 1,000 students from Zumbahua and surrounding villages receive free books and uniforms, and teachers have been trained to use the Internet and computers to teach in Spanish, English and the local Kichwa language.
“We can’t turn a blind eye to reality … They need to learn to use the technology because if they don’t they will never be able to travel,” said teacher Jakeline Chicaiza.
Correa’s government says it has revamped about 5,000 schools and built 18 hospitals and 250 health centers across the nation.”
Correa doubled spending on education – and made sure that the most marginalized people in Ecuador were included in the improvements. Correa is unusual in understanding the primary indigenous language. Ecuador revamped roughly 5,000 schools and built 18 hospitals and 250 health centers. These data help the reader understand why Correa is the most popular leader in the Americas and demonstrate his far superior grasp of economics compared to theoclassical economists and their dogmas that The Economist venerates.
An ironic source of praise for Correa has been the U.S. and Canadian expat communities.
“Almost certain to be re-elected to a second full term, Correa has pledged to continue the extensive agenda of public welfare and infrastructure projects already under way. These include expansion and reconstruction of the country’s highway and bridge system, construction of new hospitals and hiring more doctors to support the country’s Social Security health care system, and a top-to-bottom overhaul of public education. In all, spending on public projects has increased 300% since Correa was first elected.
Correa says he is working to reverse years of neglect of the country’s public services and infrastructure.
He frequently invokes Alexander von Humboldt, the early 19th-century Prussian explorer and naturalist who described Ecuador as a “beggar sitting on a bag of gold.” Ecuador must use its resources, he insists, to improve the lives of its citizens. With his background in economics, Correa knows that because those resources, especially oil and gas, are finite, the country needs to build a future based on an educated, healthy, and prosperous citizenry.
The government’s public projects, in fact, are funded primarily by oil money. After Correa restructured contracts with oil producers in 2007 and 2008, he dedicated billions of dollars to public works. Other public funds are the result of increased revenues generated by higher levels of tax collection. Although his critics say he is spending too much, Correa points to a healthy national balance sheet that shows a growing GDP and a low level of debt.
Among the public projects currently under development or on the drawing board are:
- Cuenca’s new light-rail system that begins construction in February. The European-designed system will transport 120,000 passengers a day when it’s completed in early 2015.
- A new national research complex, dubbed the “city of knowledge,” under construction east of Quito. Based on the North Carolina Research Triangle concept, Correa expects the center to attract scientists and researchers from around the world.
- A three-fold expansion of the nation’s Social Security health-care system, including the addition of new facilities, equipment, and doctors. Expats under the age of 60, by the way, have the option to buy in to the Social Security insurance program for less than US$70 per month.
- The reconstruction of the nation’s railway system that was abandoned by previous governments following El Niño-produced landslides that destroyed most of the tracks 15 years ago. The first leg of the rebuilt system opened in December between Ambato and Riobamba and tracks are currently being extended to Quito.
- A new national education university, just north of Cuenca, designed to provide world-class training to school administrators, policy makers and teachers, from primary school through the university graduate levels. The government has begun to recruit educators from other countries and announced in October the hiring of more than 100 Ph.D.-level professors from Spain.
In addition to the headline-catching projects, increased public spending has shown results in other areas as well: In 2012, Ecuador achieved the lowest poverty and illiteracy rates among all nations of South America’s Andean region; national and local police departments have added thousands of new officers; and hundreds of top Ecuadorian students are now receiving a free education, at government expense, at the world’s top universities, including Harvard, Oxford, Stanford, London School of Economics, and the Sorbonne.”
What Ecuadoreans understand, however, that many Americans do not is what the starting point was in health care before Correa was elected.
“The government funds 47 percent of outpatient and hospital services in the nation, in addition to the nation’s largest hospitals for referrals. But according to World Health Organization (WHO) standards, there should be between 8 and 10 hospital beds available per thousand people. The number of available beds in the Ecuadorian hospital system in 2011 was only 1.7 per thousand; many hospitals remain at full capacity.”
Ecuador’s starting position in health care was better than many of its peers, but far below the standards of wealthy nations. Ecuador still needs decades of increased investment in health care to reach an appropriate level, but CEPR provides data on the substantial progress made under Correa.
“Given the expansion of the Bono de Desarrollo Humano, we would expect to see an increase in vaccination rates in the short term, translating into lower child mortality in the long term.
Vaccination rates have, in fact, soared. Total vaccines given across the country were fairly flat from 2007 to 2008, falling from 2.6 to 2.5 million, but then jumped to 3.3 and then 3.6 million in 2009 and 2010, respectively. It will bear watching child mortality rates for the 2010 to 2015 time period to see the size of the impact on overall child health.
Ecuador has already achieved remarkable progress in child health. To adequately analyze this progress, it is important to give context because of the diminishing returns that inevitably come as countries reach lower mortality rates. Table 5 provides this context by comparing Ecuador’s reduction in mortality to that of countries with similar levels of GDP and mortality in 2000, the year the table begins. Ecuador began the period slightly ahead of its peers: mortality rates were 2 to 3 percent lower in Ecuador than in the overall group. But these gaps have continued to widen, both in absolute and relative terms. By 2000 [sic, should read “2010”], Ecuador’s infant and child mortality rates had fallen to nine and 12 percent, respectively, below the group average.”
There are also data available, including faux data, on highways and roads. The CIA detests Correa. The CIA’s purportedly most current data on Ecuador’s roads are a prize example of faux data.
Total: 965 km
Country comparison to the world: 90
Narrow gauge: 965 km, 1.067-m gauge (2008)
total: 43,670 km
country comparison to the world: 84
paved: 6,472 km
unpaved: 37,198 km (2006)
Investment (gross fixed): 24.6% of GDP (2012 est.)
Country comparison to the world: 53
Compare those figures with the 2006 version of the CIA’s World Factbook.
Railways: total 966 km
Roadways: total: 43,197 km
paved: 7,287 km
unpaved: 35,910 km (2003)
Investment (gross fixed): 22.4% of GDP (2005)
According to the CIA, the total length of paved roads in Ecuador has decreased by over 10% under Correa despite a major road construction program. The CIA data on paved roads are not accurate. (Note that Correa is also directing major efforts to upgrade bridges, construct new airports, and rebuild the railway trackage destroyed by epic floods.) Recall the data I quoted above: “[Ecuador] has rebuilt or improved nearly 3,400 miles (5,500 kilometers) of roads, nearly two-thirds of Ecuador’s highway system, spending $4.5 billion.” But the CIA’s data make it appear that the opposite has happened under Correa.
Another article provides specifics on the cities the major roads service.
“Correa Announces Construction of Superhighways Around Ecuador
QUITO – Ecuadorian President Rafael Correa announced Saturday that he will undertake the construction of “superhighways” in several regions of the country to get car and truck traffic moving more efficiently.
In his habitual Saturday report, Correa said that his government plans to invest some $5 billion in the 1,300 kilometers (800 miles) of superhighways that will connect a number of the country’s main cities and productive areas.
Correa plans to finish the project in 2014, and spoke of widening the 45-kilometer (28-mile) Panamerican international highway that crosses his country from north to south through the Andes.
He said that one goal is to widen several highways already existing on the new routes, which will save time and money in the transit of people and goods around the country.
He said that these highways are the Machala-Guayaquil-Quevedo, the Guayaquil-La Cadena, the Manta-Quevedo-Santo Domingo, the Esmeraldas-Santo Domingo-Aloag, the Machala-Cuenca, and the Panamerican between the international Rumichaca bridge on the border with Colombia and the city of Riobamba in the country’s central Andean region.
According to the head of state, these “superhighways” will also reduce the danger of accidents.”
Even The Economist, in another attack piece on Correa, conceded that: “The country is full of new or repaired roads, bridges and health clinics.”
A slightly less hostile article puts the highway construction program in historical context and provides data on the magnitude of Correa’s development investments.
“BY Olga Imbaquingo, Research Fellow at the Council on Hemispheric Affairs
– Posted on October 18, 2012
* The Andean country is experiencing an economic boom, exemplified by a bonanza in public works, such as the construction of modern highways and updated hospitals—unthinkable in an earlier epoch.
[T]he country has constructed modern roads and updated other infrastructure as part of an annual public works program involving $1 billion USD annually. This program includes reforms and investment in education and newly equipped hospitals erected as part of President Correa’s administration’s efforts for sweeping reform. According to current presidential candidate Alberto Acosta, former minister of the department of Energy and Mines and challenger of Correa in the next presidential election, public investment in education rose from 2.59 to 5.59 percent of GDP between 2006 and 2011. Health expenditure has also increased from 1.24 to 2.17 percent of GDP during that time. Acosta highlights that “Correa’s government emphasizes its social engagement. Comparing the social investment with the GDP, the improvement is undeniable.” 
Equally surprising is that these advancements came after a period of undeniable political instability in the convulsive decade between 1996 and 2006, which experienced a total of seven presidents.”
A Correa supporter provided these data on infrastructure construction.
“Figures indicating Correa’s positive administration since his first electoral win in 2006: unemployment has dropped by close to 5%, the lowest rate in recent history; extreme poverty has fallen from 16.9-9.4%; 9,000 kilometers of highways and expressways and more than 70 bridges have been constructed; the minimum wage has increased by around 50%; in the midst of the global crisis and with a dollar economy, the country had a positive GDP growth in 2012.”
Because Correa’s policies prevented Ecuador from falling into recession even in 2008 when its largest trading partner (the U.S.) suffered a severe recession, Ecuador’s GDP had shown continued growth. With productive investments growing significantly as a percentage of GDP and Ecuador’s GDP avoiding a lengthy recession and growing far faster than U.S. and EU GDP the increase in absolute dollars spend on development investments has been particularly large. Correa’s ability to bring Ecuador out of recession so quickly is directly related to his program of productive investments. A May 2012 CEPR study (“Ecuador Economy Since 2007”) explains the link:
“Outside observers could be forgiven for expecting Ecuador to suffer terribly during and after the recent global crisis. Two of the country’s largest sources of foreign earnings, petroleum exports and remittances from abroad, crashed during the global recession. Furthermore, lacking its own currency, the government’s options for responding were limited. But instead of a deep, protracted recession, Ecuador lost only 1.3 percent of GDP during three quarters of contraction. After four additional quarters the economy returned to the pre-recession level of output, and two years after the recession started, it reached its 20-year growth trend.
How did Ecuador emerge so soon and with relatively little damage from the recession? The government acted creatively to work around the challenges of spurring growth in a dollarized economy, while expanding social spending:
• It implemented fiscal stimulus by extending widespread housing assistance programs to low income households, nearly doubling the amount of housing finance in three years. It also expanded its main cash transfer program, the Bono de Desarrollo Humano, by nearly one-fourth, through outreach to eligible families who were not already enrolled. By using existing private-sector financial institutions for the distribution of funds in each of these programs, it limited the bureaucracy and time needed for implementation.”
• In terms of monetary policy, it kept interest rates low and expanded liquidity by requiring banks to keep at least 45 percent of their reserves in Ecuador.
• It accelerated an existing plan to increase education funding, more than doubling it as a percent of GDP between 2006 and 2009.
As a result, poverty and unemployment fell below their pre-recession levels, while school enrollment rose:
• Poverty fell from a recession peak of 36.0 to 28.6 percent; prior to the recession, its lowest level had been 35.0 percent. Urban poverty fell from 25.5 to 17.4 percent, an improvement on its pre-recession record low of 22.0 percent.
• Unemployment fell from 9.1 to 4.9 percent. This is its lowest level on record since the series began in early 2007. The lowest level it reached in the last boom was 6.4 percent.
• School enrollment has risen dramatically, especially in the pre-primary level as enrollment is now mandatory at age five. But even at the secondary school level, gross enrollment jumped by over 10 percentage points in two years, from 69.0 percent in 2007 to 80.4 percent in 2009.”
CEPR provides further data on the scope of Correa’s investment program.
Government Social Spending
“Between 2006 and 2009, social spending nearly doubled as a percent of GDP (Figure 12). In fact, government spending on education did double – from 2.6 to 5.2 percent of GDP – and spending on social welfare6 more than doubled – from 0.7 to 1.8 percent of GDP.”
The result of Correa’s investment policies has been a sharp fall in poverty. The CIA data also documents a sharp fall in inequality under Correa. The BBC’s profile of Correa acknowledges that:
“Much of his popularity can be attributed to the government’s public spending, including on roads, bridges, schools and hospitals.
Cash transfers have boosted the incomes of the poorest Ecuadoreans, and poverty levels have dropped from some 38% in 2006 to 29% today, according to the World Bank.”
The Economist’s data-lite attack on Correa then switches to implying (but never actually asserting) that Ecuador faces a debt crisis.
“Mr Correa says that he plans to carry on governing in the same way. But can he? The state has an outstanding debt of at least $3.4 billion with China, to be repaid from oil output.”
“But can he?” That is a “question” (it’s actually supposed to serve as an implicit statement to the reader that Correa will be unable to repay the loan to China) that the magazine does not feel is worthy of an answer. More precisely, if the authors answered their question honestly they would have had to write: “Yes, Ecuador can repay the debt to China. Ecuador has a minimal deficit and strong export revenues.
Purporting to ask questions crafted to imply a criticism of a government official to the reader is an old and unprincipled journalistic practice. It served as a warning that the article would end on a rapidly descending level of journalistic ethics. The last two sentences of the article are sad.
“At the top of Mr Correa’s agenda is a new presidential security force and a new penal code with even tougher provisions against libel. But as long as the good economic times last, most Ecuadoreans will not worry too much about their president’s uglier side.”
Two sentences, two falsehoods, and two insults – the authors attack Correa and Ecuadorean voters. What does the phrase “Mr Correa’s agenda” mean? It cannot mean his actual “top” priorities – improving education, health care, and infrastructure. It cannot mean Correa’s platform. Correa is an expert economist, a former academic, and a serious believer in Catholicism and public engagement. In U.S. terms, he is a policy wonk who gives substantive talks about public policy that last for hours. Hundreds of people participated in drafting his party’s platform. There are a total of 35 policy proposals, developed over the course of 254 pages. The names of the participants in the drafting the Alianza Pais Party platform are listed on 16 pages (in small print).
The platform develops, in far greater detail, exactly the priorities Correa has followed and I have been discussing. “Agenda” is a wonderful word for ascribing to a journalist’s opponent straw man positions that can be easily denounced. Even the CIA concedes that Correa has cut military spending from 2% of GDP to under 1% of GDP.
It is fitting that The Economist ends with an insult directed to Ecuadoreans. In this framing, the authors suggest imply that the Ecuadorean people are bought off by the prospect of escaping poverty, having their children become better educated and escape poverty, being able to receive and offer their families competent, affordable medicines and improved medical and dental care, and being able to use far safer roads, bridges, and railroads. They will accept even an “ugly” authoritarian “bully” who cripples freedom of expression, the rule of law, and democracy as long as oil prices and spending on social programs remain high. Alternatively, it could be that the Ecuadorean people are neither stupid nor indifferent to their rights and that they support Correa because they agree with his policies and view the oligarchs and their media supporters as dishonest and authoritarian.
Correa’s leadership has proven that he is a vastly superior economist, national leader, and moral champion of those most in need than anyone The Economist can muster to attack him. The magazine has revealed that it is written by journalists who parrot theoclassical economic dogmas falsified decades ago and who refuse to play it straight when the data contradict their biases. The irony is that by running an article that champions the magazine’s biases The Economist has confirmed Correa’s view that the oligarch’s media apologists routinely tell falsehoods when they attack Correa’s economic policies because they have no credible substantive criticisms of those policies. What is there to criticize about producing one of the mildest recessions and fastest recoveries from recession, increasing growth, and reducing unemployment, poverty and inequality by making investments that have significantly improved Ecuadorean’s education, health, and infrastructure?
The Economist’s latest hit piece on Correa illustrates its adoption of the old joke about trial tactics that lawyers tell:
“When I’m strong on the facts, I pound the facts. When I’m strong on the law, I pound the law. When I’m weak on the facts and the law, I pound the table.”
A trial lawyer, however, is supposed to be a zealous advocate for her client. A financial journalist is supposed to be true to the data and the analytics.
Bill Black is the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. He spent years working on regulatory policy and fraud prevention as Executive Director of the Institute for Fraud Prevention, Litigation Director of the Federal Home Loan Bank Board and Deputy Director of the National Commission on Financial Institution Reform, Recovery and Enforcement, among other positions.
Bill writes a column for Benzinga every Monday. His other academic articles, congressional testimony, and musings about the financial crisis can be found at his Social Science Research Network author page and at the blog New Economic Perspectives.
Follow him on Twitter: @williamkblack