Economic stability and political reform improve quality of life, encourage investor security

During this past year Ecuador has found itself in the midst of its greatest ever economic transformation. Owing to a number of crucial factors — the closedown of the banking sector in 1999, the overthrow of President Jamil Mahuad in 2000 and the initiation of dollarization — the country has not only stabilized its economy, it is renovating and reinventing its image in order to more powerfully engage in the process of globalization. It has also made great progress in strengthening its democracy and legal structure and eradicating corruption. These changes have been essential not only to improve the quality of life for the people of Ecuador, but also to attract foreign investment.

For the last two decades, Ecuador’s political scene, marked by instability, had greatly hindered economic growth. When Gustavo Noboa became president in 2000, he committed investments that had been lingering for decades to projects such as the Heavy Crude Oil Pipeline (OCP), dollarized the economy and reduced inflation. Today, Ecuador is expected to have 5% economic growth during the next few years, projected to be the highest in South America.

Why invest in Ecuador
The atmosphere in Ecuador after dollarization is one of optimism, supported by the estimated 5% economic growth rate by the year 2002. Rich in natural resources, Ecuador has opportunities for growth in every sector. Fernando Navarro, President of the Chamber of Commerce of Quito, emphasizes Ecuador’s geographic hub-like location and development friendly biodiversity to potential foreign investors. “Now that Ecuador is dollarized, we are able to offer investment opportunities that are more stable and not subject to devaluation,” he says.

Multinational corporations have already established operations in Ecuador for projected long-term periods. Petroleum companies, for example, are investing billions of dollars in the construction of the new Heavy Crude Oil Pipeline and toward expanding infrastructures to accommodate increase in production. Lloyds TSB Bank and Citibank have consolidated their operations in Ecuador. Moreover, Ecuadorian companies, too, are expanding operations.

Nobis, a company that through Fundacion Luis Noboa is implementing many social projects, including ones for development of low-income housing, education and training programs, is spending millions of dollars to expand operations in real estate (constructing, for example, a new Holiday Inn and new office building in Guayaquil), in sugar production and in its dairy products subsidiary. “We have faith in our country and are committed to its development… Ecuador is a country filled with opportunities that can produce significant profits from investments,” says Isabel Noboa, President of Nobis.

For companies such as Nabisco, SmithKline Beecham, Colgate/Palmolive, McDonalds, Repsol, Starkist and Bristol Myers Squib, Parque Comercial California in Ecuador has been a secure venue for establishing their operations. “In Parque California we provide a US product at a somewhat below US rate. That is why our 148 warehouses are completely full,” explains Thomas Thompson, the park’s general manager. He believes that since purchasing power has improved, owing to democratization resulting from dollarization, importers who survived the 1999 crisis will do well during the next five years. He plans to create a second park to meet current demand.

When asked “Why invest in Ecuador?” Rolf Stern, President of the auditing firm BDO Stern says, “Because it is a new Ecuador. It is an Ecuador of development. If the past four to five years were of recession, collapses, devaluation and inflation, the new Ecuador will be one of no devaluation, lesser inflation, real growth, a wealthier public sector and more direction from the private sector.”

Challenges
One of Ecuador’s greatest challenges is reinforcing judicial independence. In the past, the country’s legal system suffered an image of being bureaucratic and corrupt. However, pressures from productive sectors and emerging global trends are forcing a purging of the system’s burdensome measures. Recently, for example, it implemented a new penal code. “Our legal structure has changed a lot in the last 30 years,” says Atty. Jose Maria Perez, partner at Perez, Bustamante & Ponce. “Our Constitution contemplates all modern concerns including the decentralization of government, the importance of protecting the environment, human rights, protection to foreign investment and respect of contractual agreements, among others.” He explains that excessive legislation and corruption affect the functioning of the legal system as well as procedures involved in concessions and investments. He emphasized, however, that in his 41 years of practice and dealing with important foreign investment contracts, particularly in the petroleum sector, his firm has been able to manage successful negotiations without yielding to corrupt forces throughout the system.

With its goal of reestablishing the trust of the international arena, Ecuador is paying particular attention to promotion of legitimate business practices. As foreign investors turn to lawful sources for advice, they in turn will help eradicate corruption. According to Atty. Alejandro Ponce, partner at Quevedo & Ponce, legislation that meets the standards of globalization and internationalization of trading practices has recently been enacted to affirm the country’s commitment to creating a transparent investment panorama. Some important laws that have been passed are the Law of Modernization of the State, the Budgets Law, the Stock Market Law, the Financial Institutions Law, the Insurance Company Law and the Intellectual Property Rights Law.

Mr. Ponce considers the Intellectual Property Rights Law one of the most complete ever signed by any country. It was needed because issues regarding second-use patents of pharmaceutical products had created legal battles between multinational companies and regional and local pharmaceutical companies. According to Juana Ramos, Executive Director of the Association of Pharmaceutical Laboratories of Ecuador (ALAFAR), “some of these multimillion dollar corporations were abusing rights by inventing new patent uses for already-existing products, rather than patenting new inventions.” ALAFAR presented its case to the Andean Community Court, which ruled in favor of the Association. Fundacion Ecuador, an organization formed by business leaders concerned with the socio-economic development of the country, has been an important force in the implementation of many of these new laws.

Atty. Juan Carlos Arizaga of Barrera, Molina & Arizaga indicates that Ecuador has set up attractive regulations for foreign investors that allow for equal rights of entry, no discrimination and the remittances of 100% of profits and capital. He disagrees, however, with the need for more legislation, saying that too many laws already exist, making the legal structure confusing. He believes that Ecuador needs more generic laws to complement specific norms and regulations that can be adapted to future events.

“We are all focused on improving the legal environment for investment,” says Robert Moss, President of the Ecuadorian-American Chamber of Commerce in Quito. “In conjunction with other Chambers and Associations, we have been, with success, promoting the derogation of obsolete laws that have been a source for corruption in the country.” He explains that through arbitration the Chambers are serving as mediators for local and international disputes as well as for opposing political and social groups, aiding in reforms within the legal system.

Ecuador’s newly-dollarized economy has also raised some social issues requiring examination and reform. As higher costs evolve and only the most competitive and productive companies survive, some companies fail and others must downsize their operations and manpower. As a result, significant attention must be given to education and training that stresses efficiency, productivity and specialized skills. According to President Pedro Aguayo, Fundacion Ecuador is collaborating with the Inter-American Development Bank to develop a program that fosters motivation and teaches skills primarily to public sector employees. The program hopes to reverse bureaucratic perceptions among the labor force by providing them with tools to comfortably incorporate them in today’s business climate. “We don’t perceive economic development without integrating social development,” explained Joaquin Zevallos, president of the Chamber of Commerce of Guayaquil, which he describes as the commercial motor of Ecuador. He is implementing projects such as the development of community centers to resolve disputes and housing programs for the less fortunate.

As business leaders from all sectors continue to develop mechanisms to increase productivity and implement new technology to create more efficient production processes, Ecuador is steadily becoming more secure in its dollarized economy. Moreover, as foreign investors continue to explore the country’s many business opportunities, Ecuador appears to be well on its way to meeting the demands of globalized competition.