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Resources > Global Issues > Ecuador and Oil > Background on Oil... > Debt and Development

Debt and Development

For Ecuador, the existence of billions of dollars’ worth of oil under its soil has turned out to be more of a curse than a blessing. Oil development has done much damage - not only to the environment, but also to the economy of Ecuador. In the country’s thirty-year history of oil production, a few people became richer, while most became poorer. From a manageable sum of $217 million in 1970, by 2001 Ecuador’s debt had skyrocketed to $13 billion.

In response to the environmental and economic disaster caused by oil development, the activists of Ecuador, from the human rights lawyers in Quito to the grassroots advocates in the Amazon villages, have formulated concrete plans for alternative, sustainable development that can reduce Ecuador’s oil-induced debt without sacrificing the environment. In fact, they may even repair it.

During the oil boom period of the 1970s, Ecuador’s government financed state enterprises and a growing bureaucracy by reckless borrowing. But in the early 1980s, with oil prices dropping, multi-lateral banks stopped lending to faltering oil-producing countries like Ecuador. Ecuador’s public spending in the early 1980s had grown to 20 times larger than in 1970, yet the freeze on loans forced the government to reduce its budget by half. Ecuador’s growth rate plummeted, and inflation doubled.

Economic and social rights require governments and other powerful actors to ensure that people have access to basic needs such as food, health care, and housing, and that people have a voice in decisions affecting their well-being. These rights also provide a legal framework to hold public officials accountable for development policies and priorities. Center for Economic and Social Rights, New York

Today, Ecuador’s debt is the highest per capita of any country in Latin America. The income that the Ecuadorian government receives from oil barely matches the requirements of its debt service. This leaves few funds that can be allocated for social infrastructure and sustainable development. As the debt has increased and corruption has flourished, so the percentage of those living under the poverty line has risen.

In response to this crisis, towards the end of the 1990s the Ecuadorian government initiated plans to expand production of oil. More than half of Ecuador’s potential oil fields remain unexplored, but the government lacks the resources for increased oil development. The greatest immediate constraint on production is transport capacity. The main (SOTE) pipeline is capable of carrying 400,000 barrels per day. This puts a cap on the production of oil, and it prompted the government to initiate construction of the new (OCP) pipeline. As noted above, construction began in 2001, despite strong opposition.

Ecuador’s President, Gustavo Noboa, argues that only increased oil development will carry the country out of its present economic crisis, and that this can only take place through construction of the pipeline. This is disputable. By the government’s own calculation, proven reserves of oil will be depleted in eleven years. The US government predicts a much shorter term of six years.

Chris Jochnick, board member of CDES, has written that the income from oil in this remaining period will amount to less than one fifth of the present national debt. Environmentalists have pointed out the folly of investing vast funds into an infrastructure that will be obsolete so soon.

The debt continues to compound itself, and there is no evidence that Ecuador, regardless of how much oil it allows foreign oil companies to take out of the ground, will ever be able to pay off its debt. Current IMF projections warn that only four years from now the annual debt payment, today at $1.7 billion, will have jumped to over $2.3 billion.

Alternatives to Debt and Destruction: Debt for Nature

There are several major plans for sustainable alternative development in the Amazon. One of the largest would involve a "debt-for-nature" plan that could reduce Ecuador’s debt payment by as much as $1 billion annually while redirecting funds into positive forms of development.

Of Ecuador’s debt, approximately one half is owed to private holders of "Brady Bonds," and the rest to foreign governments and multi-lateral lending institutions. The debt reduction plan focuses on this public portion of the debt. In return for the cancellation of this debt, the Ecuadorian government would put some of the forgiven portion of its debt into a social investment fund. It would require only a small part of these funds to double the government’s expenditure for public services.

The social investment fund is directed towards alleviating the conditions of the poorest people of Ecuador. Citizen participation would be guaranteed under these programs. Another part of the money would be invested in ecotourism, reforestation and conservation in the Amazon.

It is estimated that under this plan, debt service costs could be reduced by more than $1 billion per year. The creation of a social infrastructure, including schools and clinics, through use of a social investment fund would enhance human resources needed to further develop the economy in a healthy way.

It is an attractive proposition for Ecuador – particularly as the income from expanded drilling will not become available for five to seven years from now, while the benefits from debt cancellation would begin immediately.

Carbon Credits

Another promising possible alternative source of income for Ecuador could come in the form of carbon emission trade credits. Under this arrangement, which was broadly accepted by the Kyoto treaty on global warming, less-developed countries could sell "pollution rights" to countries that already have developed industrial economies. Ecuador would receive payment for each hectare of land that it promised to leave undeveloped.

The Center for Economic and Social Rights conservatively calculates that if pollution rights to two million hectares of jungle were sold, the revenue over a twenty-year period -- the life of an oil concession lease -- could be as much as $4 billion.

Local Sustainable Development Programs

Most sources of income are more sustainable than oil, and generate more economic activity for the communities of the Amazon. Many of the grassroots organizations of the Oriente have been working on plans for sustainable development in their community and region.

The main components of local development plans are infrastructure and educational development, ecotourism, and management of natural resources. These forms of development support local production that returns resources to the community, rather than just extracting them for consumption abroad.

Infrastructure development includes construction and improvement of airstrips in strategically-placed remote communities, as well as improvement of the river travel system. Communications can be improved by increasing the number of local radio stations in jungle communities. Resources are also needed in order to refurbish the Oriente’s educational system from the bottom up. This includes improvement of school buildings, development of vocational programs, teacher training in native languages, and construction of a library system.

The preservation of traditional skills can contribute to alternative production. It envisions training and improved marketing of local handicrafts ("artesania"). The ecotourism industry, already under development in parts of the Oriente, could provide jobs to many Ecuadorians by satisfying the curiosity of thousands of tourists without destroying the jungle. In OPIP’s master plan, there would be tourist zones and "untouchable zones," set aside as "biodiversity reserves."

FINAE wishes to conserve the forest by planting peanuts and beans for consumption and sale, and expanding fishing and animal husbandry. Traditional crops such as yucca, bananas, and other fruits are also components of this plan.

In contrast to these sustainable economic programs, traditional oil development creates more debt, has a short life-span, and will leave the environment of the Amazon devastated.

The programs outlined above, together with debt reduction, could replace most oil development, protect and repair the environment, preserve native cultures, and strengthen the economy of Ecuador.

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