COUNTRY BRIEFING

FROM THE ECONOMIST INTELLIGENCE UNIT

Ecuador’s constituent assembly finalised a draft constitution on July 25th, and the government is preparing to put the document to a popular vote on September 28th. The administration of President Rafael Correa, who is determined to increase his control over the economy and the country’s democratic institutions, has taken several controversial steps designed to increase popular support for his reform proposals.

A new poll conducted on August 2nd by SP Investigación y Estudios shows that 47% of respondents would vote “yes” in the constitutional referendum, up from the 37% who said they supported the reforms in June. This is a significant increase in backing for the draft charter, but it still falls a bit short of the minimum 50% needed for approval. And other polls show the level of support to be somewhat lower than this one. Nonetheless, the momentum seems to be in the government’s favour.

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The increase in support for the reforms is probably related to Mr Correa’s recent decision to seize hundreds of companies linked to the Isaías family, owners of Filanbanco, which, then Ecuador’s largest bank, collapsed in 1998. This triggered a financial meltdown, during which many thousands of Ecuadoreans lost their deposits, the economy nearly collapsed and Ecuador gave up its national currency in favour of the dollar.

On June 8th the government took over three TV networks and almost 200 businesses owned by a powerful business group headed by the Isaías family. The main owners, brothers Roberto and William Isaías, had fled to the US in 2000. They are accused of fraud and of owing US$661m to the state’s Deposit Guarantee Agency and to other creditors and depositors. Seizure of the companies, and their eventual sale, is designed to help pay off this debt.

On July 10th, the government threatened to expropriate even more companies owned by economic interests implicated in the financial crisis. The constituent assembly, which is government controlled and is acting as a legislature, ordered an investigation of companies owned by former shareholders of all the nearly failed banks.

Then, on August 4th, authorities announced that they would take over the Isaías family group’s stock shares in 58 companies. The shares will be sold to raise funds with which to reimburse depositors who lost money in the Filanbanco collapse.

The takeover of the companies starting in June has proved very popular among Ecuadoreans who lost their savings during the financial crisis, and in general with supporters of Mr Correa’s vision of change. However, control of the media outlets has worried media watchdog groups both inside and outside of the country. They fear that control of these outlets—the government has put the head of Ecuador's government television station, Enrique Arosemena Robles, in charge of the three networks—will limit press freedom, although the government denies the charge. However, ownership could certainly help the government’s pre-referendum campaign, by making it easier to place advertising and ensure favourable coverage as a means to promote a “yes” vote.

Wider powers

The draft constitution seeks to grant the executive branch wider powers via a variety of changes. President Correa would be able to run for two more consecutive four-year terms. He would also be able to dissolve any future National Assembly, and the legislature also would be able to unseat the president, but in both cases new general elections would have to held. The judiciary would be restructured. The independence of the central bank would end, and the executive would be given the authority to set interest rates and other elements of monetary and credit policy. Mr Correa has been a critic of Ecuador’s dollarisation, and this potentially would open the way to ending it.

Further, the state would have greater control and regulation over strategic sectors such as oil, mining and telecommunications, and could tighten restrictions on monopolies. The state would be allowed to take over idle or very large farmland to redistribute it to small producers.

One of Mr Correa’s prime motives in revamping the constitution is to end Ecuador’s chronic political instability. Yet critics say the reforms would not change some of the root causes of the constant conflict between the executive and legislative branches that has led to the impeachment and ouster of several presidents in recent years. For instance, the new constitutions would not alter the electoral system of compulsory voting and proportional representation in the legislature, which has contributed to the fragmentation of that body and the lack of stable coalitions.

Conflicts would continue

Mr Correa’s opponents, who include Ecuador’s traditional political parties, assert that he has dictatorial tendencies, and that the new constitution would facilitate and legitimise a more authoritarian government. Their resistance to Mr Correa’s policies is unlikely to end whichever way the referendum vote goes.

Further, if the new constitution is approved, political uncertainty will persist in the short term as new elections are likely to be organised. That will take at least six months. In the intervening period the constituent assembly will continue to function as the legislature, probably in the form of a reduced chamber of about 40 members.

If the no vote triumphs, on the other hand, the old suspended congress will return, albeit in the modified shape brought about by the dismissal of 57 elected opposition deputies by the electoral tribunal, and their replacement by more biddable alternates. The government is banking on voters rejecting the possible return of those legislators and the traditional political parties, which are widely discredited, by ratifying the new constitution.

In the event of a no victory, an additional element of uncertainty arises from Mr Correa’s oft-repeated threat to resign if the voters do not give him their full confidence. But that is most unlikely to happen: past experience suggests that his supporters will take to the streets to demand that he stays in office, whatever the outcome of the vote.

Such events may not be needed, however, if the opinion polls continue to move in Mr Correa’s favour. Yet this would not terminate Ecuador’s long stretch of institutional instability and periodic new constitutions. The main impact of a “yes” victory would be to consolidate Mr Correa’s grip on the levers of power, and make it more difficult—but not impossible—for any institution or individual to challenge him.