Friday, 12 Oct 2012
Overseas Business Risk - Ecuador
Information on key security and political risks which UK businesses may face when operating in Ecuador
Political and Economic
Ecuador is strategically located in the South American cone, at the north and north-west it borders with Colombia, at the south it borders with Peru, and at the east it has an important access to the Pacific coast. The country benefits with a wide range of geographic regions, plus an insular region in the Pacific Ocean (Galapagos Islands). The three main geographic regions are: the coast, which comprises of a low-lying land in the western part of the country including the Pacific coastline; the highlands, which is the high-altitude belt that runs from the north to the south along the centre of the country and this region is characterized its mountainous terrain called the Andes; the Amazon rainforest is the third region which can be found in the eastern part of the country and it constitutes almost half of country’s total surface area. Due to this wide range and large differences between the geographic regions, Ecuador benefits from rich and various natural resources.
Democracy was restored to Ecuador in 1979, and under a new constitution, Jaime Roldós Aguilera came to power. The current President is Rafael Correa, and he was elected for four years in office in 2006.
He took office on January 15 2007, pledging to introduce in Ecuador the so-called Socialism of the 21st century. Correa promoted a new Constitution passed in February 2009 through a referendum, which provides an expansion of the legislative power to the constituent assembly; provided greater recognition to the indigenous, afro-Americans, mestizos and other ethnicities within Ecuador; and it also increased state intervention in sectors qualified as strategic such as energy, mining, telecommunications and banking. His Government is regarded as having been characterized by continuous political campaigning, the replacement of liberal economic practices with socialist ones increasing subsidies and the tightening of government control of the economy.
In the year 2009, Correa was re-elected for a second term. During his 2009 administration, he proposed to undertake another referendum to be held on 7 May 2011, which consisted of ten questions. The ballot questions included whether to:
limit banking operations by financial services companies;.
forbid media company ownership of non-media companies; Verify the data of your business partner, make due diligence checks.
restructure the judicial system; When making purchases use secure payment instruments. When selling, secure the payment before delivery of the products.
prohibit casinos and gambling; and
limit bullfighting and cockfighting.
The final results showed nine questions passing, as one question, limiting bullfighting and cockfighting was decided at the municipal level. While the President’s popularity is still strong and the opposition remains fragmented, his margin of victory in the referendum was smaller than predicted (on average 6%) taken by some as a fading in President’s popularity. Correa’s initial small majority in the National Assembly from 2009 has melted to a 52-vote bloc out of 124 legislators, demanding ad-hoc support from smaller parties and independents. In August 2011, at the midway point of the legislature’s term, it will have to hold internal elections on the composition of committees, as well as the congressional leadership.
Questions from the referendum that require changes to the Constitution went into effect immediately. Four issues however required the Congress to write new laws – penalizing “unjustified” wealth and failure to affiliate employees to the social security service; regulating the media; and closing for-profit gambling. Many in the opposition hope that, given the new correlation of forces, they will be able to wrest control of the legislative sector committees from Correa’s Alianza Pais.
The political and institutional crisis of September 2010, when police officers staged a mutiny against the President, underlined the chronic political instability that prevails. Therefore, it is uncertain what will happen in the next Presidential elections, which will take place during the last monthly quarter of 2012.
On the foreign trade front Correa's Government has sought to incentivize new commercial relations with countries such as China, Iran, Venezuela, and other Latin American countries, among others, in order to diversify the countries that export and import with Ecuador. Negotiations for a free trade agreement between Colombia, Ecuador, Peru and the EU began in January 2009, but Ecuador suspended its participation in July 2009. Negotiations for a multiparty trade agreement (MTA) with Colombia and Peru were concluded on April 2011. Also, Ecuador has announced its interest to participate in Mercosur, and it has encouraged the strengthening of international political and economic bodies such as CELAC, CAN, ALBA, UNASUR, among others. Despite this new trade foreign policy, it has not closed the doors to the traditional and already established trading partners, such as the U.S. The Andean Trade Promotion and Drug-Eradication Act (ATPDEA), a trade preference system by which the United States grants duty-free access to a wide range of exports from Bolivia, Colombia and Peru, was renovated on February 2011. Moreover, lately, Correa’s government has been seeking to promote bilateral trade agreements with the U.S.A. and the E.U. The Minister of Foreign Relations has announced the interest of negotiating a bilateral trade agreement with the U.S., and the current government is under negotiations to sign an agreement with the E.U.
Ecuador has long historic links with the UK, considering that these go back to the first attempt to gain independence from the Spanish in Quito on 10 August 1809 chronicled by William Bennet Stevenson, an Englishman acting as Secretary to Count Ruiz de Castilla, the leader of the Revolt. In 2009, President Correa made an academic visit to the UK and he gave speeches in Oxford Union, Chatham House and in the London School of Economic. He also visited the House of Lords and had a meeting with the Speaker, Baroness Hyman.
The UK works closely with Ecuador on the international arena on human rights, sustainable development, counter proliferation and trade as well as in the G20 assembly where both countries work closely on several issues. More specifically, on the area of human rights, the UK has funded a number of small projects. Currently, it is funding a project that seeks to develop awareness of international human rights standards in prison administration with a view to support the implementation of the prevention national mechanism in Ecuador. It is also important to mention that Ecuadorian troops have been deployed on UN peacekeeping missions in Haiti, thus working together with British troops.
On the economic front, dollarization has brought macroeconomic stability since it was introduced in 2000 and offers scope for stronger long-term growth through increased investment, but its sustainability needs to be consolidated by fiscal and microeconomic reforms. Dollarization dampened inflation until 2006 when it began to pick up again, accelerating in 2008 to just under 9%. Inflation has since decreased because of the global economic slowdown.
The Ecuadorian economy is the eight largest economy of Latin America. From 2005 to 2011, real GDP growth averaged approximately 5%, reaching its lowest peak in 2009 with a 0.5% due to the worldwide economic recession and reaching its highest in 2011 with a growth of 7.8%. The GDP duplicated between 1999 and 2007, reaching 65,490 millions of dollars according to the Central Ecuadorian Bank. Until 2008, inflation to the consumer was situated around 1,14% and the monthly rate of unemployment was maintained at an average of 6 and 8% since December 2007. However, growth is likely to curb downwards in 2012 but it is still estimated to be around 4%.
Ecuador’s economy is heavily dependent on exporting resources such as petroleum, fish, shrimp, timber, gold, bananas, flowers, coffee, cacao, guayusa, sugar, tropical fruits, palm oil, palm hearts, rice, roses and corn. It is important to mention that petroleum represents almost 40% of the total exports. : The country’s greatest national exports are crude oil, technology, military and police materials, etc. The main British exports to Ecuador include beverages (mainly whisky) pharmaceuticals, transport equipment, chemical materials/products, and Professional scientific equipment.
Since 2007, Ecuador after recovering from an economic crisis, politicians saw the need to undergo several economic political reforms, which have helped the Ecuadorian economy to move towards a more sustainable, considerable and focused development and thus reach a higher financial, political, and social stability. Several tax reforms have been put into place, there is a greater focus and priority given by the Ecuadorian government to the development of strategic sectors, construction and the development of key sectors has been a government policy, clearer commercial policies have been put into place, investment on labor, and development of the internal Ecuadorian market and its industry have been few of the several policies undertaken by the government.
In 2012, the World Bank´s Doing Business project ranked Ecuador 130 out of 183 countries, after rating regulatory costs and analyzing specific regulations that enhance or constrain investment, productivity and growth.
Human Rights and Business in Ecuador
Ecuador is one of the 183 members of the International Labour Organization (ILO). Since the strengthening of the Ministry of Labor Relations within Ecuador, labor rights have been greatly respected by government agencies and private entities. This Ministry has established clear norms and regulations for the labor force. In Ecuador, there are no cases of any type of bonded labor, indentured labor or any type of slavery.
Number 9, article 35 of the Constitution guarantees the right of the workers to organize, without any previous authorization. Number 10 of the Constitution states that the government recognize and guarantees the right of the workers of striking. In Ecuador, there are several labor unions such as the Ecuadorian Confederation of Workers, which was created in 1944 and the UGTE, the trade union of constructors and agricultural workers among others.
Reports we have received indicate that human rights abuses have declined in Ecuador. There is less child labor in the industrial and agricultural sectors (e.g.) use of child labor has reduced in the flower sector in Cayambe and Pedro Moncayo and in the banana plantations of the provinces of Guabo, Passage, among other provinces located in the Amazon.
Women are represented in many high profile positions in Ecuador, including in politics, the civil service and commerce. However, large disparities remain between men and women in Ecuador in terms of access to higher level education and participation in the economy.
More information on political risk, including political demonstrations is available in FCO Travel Advice.
Bribery and Corruption
Bribery is illegal. It is an offence for British nationals or someone who is ordinarily resident in the UK, a body incorporated in the UK or a Scottish partnership, to bribe anywhere in the world.
In addition, a commercial organisation carrying on a business in the UK can be liable for the conduct of a person who is neither a UK national or resident in the UK or a body incorporated or formed in the UK. In this case it does not matter whether the acts or omissions which form part of the offence take place in the UK or elsewhere.
The 2011, Transparency International’s corruption perception index. (CPI) graduation grades Ecuador 2.7 out of 10 points in corruption level.
Corruption is perceived as pervasive, and is blamed for a decade of steady decline in state oil production. Anti-corruption statutes are not enforced, and demands for petty bribes and theft of public property are common among officials.
Visit the Business Anti-Corruption portal page providing advice and guidance about corruption in Ecuador and some basic effective procedures you can establish to protect your company from them.
Read the information provided on our Bribery and corruption page.
Terrorism threat is low however protests and demonstrations are frequent in Ecuador. Protests often involve roadblocks and may result in serious disruption to travel and have the potential to turn violent. At short notice, the government may declare a state of emergency – including curfews – in provinces affected by protest action. We advise to pay close attention to your personal security and monitor the media for information about possible new safety or security risks.
Local laws expressly prohibit political activity by foreign nationals while they are in Ecuador. This includes participation in protests or demonstrations. Such activity may result in detention or deportation.
You should monitor the media and avoid areas where protests or demonstrations may occur in the lead up to and following these elections.
Read the information provided on our Terrorism threat page
Protective Security Advice
From 21 October 2008, the Ecuadorian National Police introduced an emergency operations plan to deal with increased levels of criminal activity throughout Ecuador. In tourist areas, the Ecuadorian Government has increased police patrols. Theft and pickpocketing are common, especially in areas frequented by tourists. Visitors should be alert and aware of their belongings. Ensure passports and travel documents are secure at all times. Serious crime, including assaults and armed robberies has been reported on city buses and on long distance and international buses. Express kidnapping in taxis has been the new way of assaulting foreigners and local citizens, and that is why it is recommended you only take taxis that are called by the hotel or yourself. When travelling on public transport, we recommend that you do not store anything under your seat or overhead storage. Luggage theft is also common at airports, bus terminals, internet cafes and other transit places. The routes between the cities of Guayaquil and Cuenca and between Guayaquil and Riobamba are particularly affected by crime. Violent crime, including murder, kidnapping and armed assault, has been reported, particularly in Guayas province and in the cities of Guayaquil, Quito and Cuenca. This risk is heightened when travelling alone or after dark. Criminal activity is high in the provinces along the northern border with Colombia particularly Esmeraldas, Sucumbios and Orellana and the cities with the highest per capita crime rates are Esmeraldas, Milagro, Quevedo and Machala.
Assaults on vehicles (particularly commercial) are more common in the southern coastal provinces of Guayas and Manabi with Los Rios and El Oro also showing high levels. When doing business we suggest ensuring your transaction through a letter of credit.
Read the information provided on our Protective security advice page
The rule of law is weak, and intellectual property rights are not enforced. Court delays are significant, judgments are unpredictable and inconsistent, and the judicial system is subject to corruption. Expropriation is possible, and squatters may seize agricultural land. In 2006, the Government amended the hydrocarbons law to modify the terms of oil production-sharing contracts. In 2007, President Correa increased the state's share of extraordinary petroleum revenues under this amendment to 99 percent, and in December 2007, a new tax law set the state's share of extraordinary petroleum revenues at 70 percent for contracts signed after the law goes into effect.
Read the information provided on our Intellectual Property page.
Ecuador crime rates are low if compared with other neighbouring country statistics. However care must be always taken as crime rates are constantly rising. When doing business we advise to consult with the various overseas market introduction services available at post. Ecuador's National Police announced the creation of a new unit to battle organised crime, which will replace the controversial Special Investigations Unit, or UIES, that had been financed by the United States Embassy in Quito until recently. The new unit will be in charge of consolidating intelligence operations that for 23 years have been carried out by the UIES. The new unit will have the mission of tackling international drug trade, economic crime, people trafficking and terrorism.
Read the information provided on our Organised crime page.