Thursday, October 05, 2006

The Americas

Will Ecuador Join the Axis of Outcasts?
October 6, 2006
What do you get when you cross a Venezuelan Bolivarian with an Argentine Peronist? Answer: a power-hungry demagogue who doesn't believe in paying debts.

That would be funnier if just such a hybrid -- Rafael Correa -- hadn't recently popped up as Ecuador's leading presidential candidate for the Oct. 15 election. Polls out this week show that Mr. Correa has surged from a distant third place only one month ago to first place, 10 percentage points ahead of his closest competitor. He is shy of what he needs for victory in the first round of balloting, and 40% of the electorate remains undecided. But Ecuadoran democrats have good reason to fear his growing popularity.

The 43-year-old Mr. Correa, who has a Ph.D. in economics from the University of Illinois, has railed against the cost of servicing Ecuador's foreign debt, the dollarized economy and free-trade talks with Washington. If he makes it to the seat of power in Quito, he has made it clear that Ecuador will join the Latin American axis of outcasts -- Venezuela, Cuba, Bolivia and Argentina -- and make the U.S. an official enemy. A Correa presidency would be a negative for Colombia too, which would have to deal with hostile states on two borders along with home-grown narcoterrorism.

Yet what is most troubling is Mr. Correa's pledge to raze the political system and rebuild it to ensure his long-term agenda. If that sounds familiar, it may be because it is precisely what Venezuelan President Hugo Chávez promised to do when he took office in 1999. Since then Mr. Chávez has demolished any independence in the country's institutions, seized control of the economy, militarized the government and run the private sector into the ground. He says he plans to remain in power until 2021. If some Ecuadorans are frightened by Mr. Correa, it's because he has made so clear his intention to follow Mr. Chávez's path to unchecked power.

The candidate's appeal is easy enough to understand. In a country where more than 45% of the population still lives below the poverty line, many voters are out to punish the established political class. Their anger is rational. When Ecuador dollarized in 2000, the country experienced stability for the first time in decades. But, bowing to special interests, politicians stopped there, failing to modernize the financial system and further open and deregulate the economy. The end of inflation has been a boon to the poor, but with mediocre economic growth rising expectations have not been met. Along comes the charismatic Mr. Correa, billed as an "outsider" to the political system and threatening to trash the capitalists. At least some voters are enthralled.

As it turns out, though, Mr. Correa has had his hand in Ecuadoran politics more than he wants to admit. He did, after all, hold the job of minister of the economy for a short time last year until his resignation was accepted when he visited Mr. Chávez in Caracas without the permission of President Alfredo Palacios. During his tenure there was a rapid deterioration in the country's relationship with foreign investors and the international financial institutions. He also raised salaries for public-sector employees, surely helping his poll numbers in bureaucracy-bloated Quito. After he left his post in the ministry, his replacement followed through on the Correa plan to expropriate Occidental Petroleum's Ecuadoran assets.

Dollarization, which brought inflation down to 3.1% last year from persistent double-digit levels in the 1990s, is so popular -- 70% of Ecuadorans love it -- that Mr. Correa has had to tone down his hostility. Whereas he used to say that dollarization ruined the economy, he now claims to be agnostic about it. Yet all his other policies, which are designed to choke off foreign investment, close down international commerce and increase government spending, will ensure that in the end dollarization cannot survive. Once he reclaims control of money creation, devaluations, inflation, exchange controls and price controls won't be far behind. As the owner of the country's largest source of hard-currency revenues -- oil -- the government will have little trouble destroying the private sector and controlling dissent. This is a page out of his Venezuelan guru's playbook, as is his promise to hold a constituent assembly to rewrite the constitution.

On the campaign trail Mr. Correa has become a caricature of his more experienced teacher. After Mr. Chávez made a fool of himself at the United Nations two weeks ago in a rant calling President Bush the devil, Mr. Correa rushed to outdo him. In a nationally televised interview in Ecuador a week later the presidential candidate said that Mr. Chávez had insulted Satan.

University of Illinois professor Werner Baer, who was on the committee to approve Mr. Correa's doctorate, told the Associated Press last month that Mr. Correa's anti-Americanism is probably just a ploy to help him get votes, not the way in which he would govern. But Prof. Baer might be underestimating his former student's ambition. Markets are not nearly as sanguine. When the polls showing Mr. Correa's 10-point lead came out on Tuesday, investors dumped Ecuadoran bonds and the country's risk premium shot up.

The immediate concern is his pledge, if elected, to break contracts with foreign bondholders and demand a negotiated restructuring. In August Mr. Correa took a trip to Buenos Aires to meet with the dean of deadbeats, Argentine President Néstor Kirchner. If you're planning to stiff creditors, Mr. Kirchner is the go-to guy.

There is some speculation that Mr. Correa's campaign is peaking. If he doesn't get 50% plus one, or 40% with a 10% spread over the second-place finisher, on Oct. 15, there will be a second round. In that event, the more sensible, less interventionist Álvaro Noboa, a wealthy businessman from Guayaquil who defends dollarization, free-trade agreements and good relations with the U.S. and is now polling in a statistical tie for second place, could upset him. That's because, despite all the blather from the left about anti-Americanism in Latin America, a majority of voters may be more worried about Venezuelan imperialism and the return of inflation than a Yankee invasion.

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