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Ecuador Finds 'Peace Dividend' for Ending Peru Conflict
The Washington Diplomat / June 1999

By Larry Luxner

On May 6, Ecuadoran President Jamil Mahuad officially launched the U.S.-Ecuador Business Council, a new organization dedicated to improving the business relationship between Washington and Quito.

The Ecuadoran Embassy in Washington and 19 U.S. corporations are backing the effort, including energy giants Arco, Texaco, Enron and Occidental, as well as Continental Airlines, BellSouth, Philip Morris, Kellogg, Microsoft and Great Lakes Dredge & Dock.

The council is being chaired by Einaudi Luigi, former special U.S. envoy to the Peru-Ecuador peace talks; it also has the backing of Squire, Sanders & Dempsey, a leading Washington law firm with extensive Latin American lobbying interests.

Thomas Skilton, an attorney with Squire Sanders & Dempsey, says both Ecuador and Peru will likely enjoy more investment from U.S. oil companies, utilities and mining firms as a result of the recently signed peace treaty between the two nations.

"The cessation of hostilites and the settlement of the boundary dispute removes a level of uncertainty concerning stability in the region that is of paramount importance to investors," said Skilton. "Particularly with regard to Ecuador, which lags Peru in privatizing its state companies and opening up its economy -- I think entering into this treaty and pursuing it the way they did sends a signal that the new government is serious about getting its house in order."

Ivonne Abdel Baki, Ecuador's ambassador to the United States, says peace with Peru -- let alone trade and prosperity -- is a milestone she thought would never come to pass.

"Ever since I was a child, I was raised with the idea that Peru was our enemy," said Baki, who recently presented her credentials to President Clinton. "With peace, our economy will completely open up."

The accord signed in October awards Peru ownership of a disputed 49-mile stretch of jungle, while giving Ecuador unfettered access to the region through separate navigation and infrastructure agreements. It also calls for $3 billion of investment in highways, navigation, urban development, rural electrification, telecommunications and reforestation.

The Inter-American Development Bank and the Andean Development Corp. have each committed $500 million in seed money; the World Bank is likely to follow suit.

Under the Binational Development Plan, the development of Amazonia will likely be pat of a comprehensive package "in line with the favorable conditions given to Ecuador for the building of two ports and trade centers for warehousing, and commercialization of goods in transit."

According to a study by the Economist Intelligence Unit, "other possibilities of synergy may be found in oil pipeline interconnection that would increase Ecuador's oil exports through the North Peru Oil Pipeline, currently operating below capacity. Joint electricity, communications and road services form another area that could benefit from undertakings in the border area aimed at connecting the Ecuadoran and Peruvian grids."

Observers say the treaty will lead to a "peace dividend" for both countries in the form of greater bilateral trade flows, bilateral investment, defense spending cuts and lower risk premiums.

That's crucial for an impoverished country like Peru, 70% of whose 24 million people live below the poverty line. In 1998, Peru's Gross Domestic Product grew only 1% -- a dramatic drop from the 7.4% growth recorded the year before. Things are even worse in Ecuador, where 1997 per-capita income was only $1,392 -- making it one of the poorest countries in South America. Although Ecuador's overall GDP rose 1.0% in 1998, it fell 1.0% in per-capita terms, largely as a result of falling oil prices

In late April, the Mahuad government successfully pushed through legislation that will increase tax revenue, cut public spending and bring the deficit down from 7% to 3.9% of GDP. An agreement with the IMF in mid-1999 will lead to negotiations with the Paris Club and the securing of loans with multilateral development banks that will cover its financial needs for 1999.

Helping Ecuador's situation is a recovery in international oil prices from $9 a barrel to $13 a barrel. If the price holds for the rest of the year above the $11-a-barrel mark, it could provide significant additional revenues for Ecuador, to the tune of $65 million for every $1 per-barrel price increase.

"The end of the Ecuador-Peru conflict provides immediate opportunities for a very sharp increase in the flow of investment, goods and services," says Latin American analyst John Bowler of the EIU's London office. According to the EIU, Ecuador's exports to Peru averaged under $9 million a year from 1980 to 1987, then jumped to an average $125 million a year in 1988-94 before falling again to about $70 million in 1995-97.

"Ecuador, therefore, has plenty of room to expand its exports to Peru just to return to levels reached in the early 90s," Bowler stated. "In light of good long-term growth prospects for the Peruvian economy, Ecuador can reasonably expect to reach and exceed these levels in the medium term."

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