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Ecuador Paga el Precio del Progreso
Bobbin / August 1996

By Larry Luxner

QUITO, Ecuador -- Visitors eager to set foot on the Equator -- one of this country's biggest tourist attractions -- generally take a taxi from downtown Quito and head north about 15 miles along the Pan-American Highway to the famed Equatorial Monument, located at latitude 0°0'0" in the picturesque village of Mitad del Mundo.

What they don't notice is the huge Maresa auto plant right off the highway, where 300 factory workers literally a stone's throw from the Equator turn out Mazda 323 cars and B-2000 trucks for the local market, and increasingly for export to neighboring Colombia.

In fact, Ecuador's membership in the five-nation Andean Pact -- renamed the Andean Community in March -- has been a godsend for the country's struggling automotive sector. Last year, Maresa and Ecuador's other three assembly plants produced only 26,500 vehicles, down from 33,869 in 1994. This year, they expect to produce just 23,000.

On the other hand, the Andean Pact and the gradual opening of Ecuador's economy to the outside world has practically crippled Ecuador's once-vibrant textile industry.

Nestor Cruz Sánchez, owner of Textiles San Eduardo in Quito, estimates that 80% of Ecuador's informal textile industry has gone belly-up, and that 30% of established small and medium-size firms now face bankruptcy or liquidation.

"I was totally against opening the market because we are a small country, and our people aren't nationalists," said Sánchez. "They'll buy anything but Ecuadoran products. Our quality isn't the best, because of low import prices, and because the people don't demand it."

Eduardo Dousdebés, chief of the textile sector at Quito's Cámara de la Pequeña Industria de Pichincha, is also head of the Asociación de Pequeños Industriales Textiles del Ecuador (APITEX), which represents 600 companies producing half of Ecuador's textiles.

"When the Andean Pact market opened up four years ago, the Ecuadoran producer wasn't prepared for competition," he said in a recent interview in Quito. "Dumping is our biggest problem. I've seen T-shirts imported from Asia and Panama for as low as 2 cents each. How can we compete with that?"

Indeed, Ecuador's apparel and textile sector is in very serious trouble. Industry leaders warn that illegal dumping from Asia -- combined with a flood of used U.S. clothing and frequent electricity cuts that force manufacturers to either shut their factories or run expensive diesel generators -- is slowly killing off the industry and endangering the jobs of 24,000 people who work in the sector. And while Ecuador's acceptance earlier this year into the Geneva-based World Trade Organization is generally seen as positive, it also means the country must let in used clothing -- something it never did before.

"We must compete with an invasion of products that don't meet quality standards established throughout the world," says Hernán León Guarderas, executive director of the Ecuadoran Federation of Exporters (FEDEXPOR). "Many of these products come in with-out labels. It's clearly dumping, since they sell under cost. Ecuador is part of the WTO, and has to permit the importation of used clothing. Before, we could have prohibited it."

Patricio Izurieta Mora-Bowen, assistant secretary for economic affairs at the Ministry of Foreign Relations, says Ecuador has been "very successful selling textiles and finished goods to Colombia and other members of the Andean Pact," but that cheap imports which wouldn't have been allowed in years past are now hurting the industry.

"A lot of products are coming from China or second markets and affecting local industry," he told us. "We have raised our tariffs up to 60% on some items. This is a safeguard we have used under the WTO. When you fight dumping, it's not being protectionist. This used clothing comes into Ecuador in bulk, most of it from the Far East via Panama. They are priced much cheaper than the real cost of production. But we have not taken any measures yet. We are studying the situation. I have not heard of any big company that has gone out of business because of competition."

Yet many smaller ones have -- and it's not just because of Asian dumping. Every-one from banana exporters to coffee farmers blame 1995's lackluster performance on an unlucky combination of war, political scandal, power blackouts and low prices for the country's chief exports.

Early last year, Ecuador and Peru fought a month-long, unnecessary skirmish that cost an estimated $1.5 billion and scared investors away from both countries. The war began over disputes arising from the 1942 Rio Protocol, which ended the last battle over a sparsely inhabited tract of Amazon jungle territory.

Then came electricity cuts of up to nine hours a day, triggered by the lack of rains that normally keep the nation's hydroelectric plants functioning. The big factories all have diesel generators, but buying the fuel to run the generators is expensive -- even in a country that exports more than $1 billion worth of crude oil a year.

Later in the year, a power struggle erupted in the Galápagos Islands -- 625 miles west of mainland Ecuador -- during which locals threatened to kidnap foreign tourists unless their demands for greater autonomy were met. No one was ever kidnapped, but the incident did hurt the $250 million tourist industry and helped to erode Ecuador's image in the international business arena -- not to mention an embezzlement scandal that tainted the administration of President Sixto Durán-Ballén and forced his once-respected vice-president, Alberto Dahik, to flee to Costa Rica, where he was given political asylum.

To top it off, inflation is galloping along at 22%, and the national currency, the sucre, now trades at 3,050 to the dollar. That further saps purchasing power from Ecuador's 11 million inhabitants, whose per-capita income stands at around $1,500.

Says Juan José Pons, president of FEDEXPOR: "Even though the total value of exports rose from $3.84 billion in 1994 to $4.1 billion in 1995, there was no profit because exchange controls caused the cost structure to eat up any possibility of profitability."

According to government figures, Ecuador's chief exports last year were crude oil ($1.27 billion); bananas and plantains ($772.2 million); cultivated shrimp ($630.1 million); coffee ($167.9 million); petroleum derivatives ($123.5 million); cacao ($70.1 million) and cut flowers ($64.3 million). Apparel and textiles, which came to $30 million last year, represent less than 2% of Ecuador's total exports by value and didn't even make the top 10.

Says FEDEXPOR's León: "Ecuador doesn't have a coordinated export strategy. The private sector has long urged the government to adopt a new policy and a foreign trade law." Adds Marcelo Pinto, president of the Asociación de Industriales Textiles del Ecuador: "Disloyal competition, the importation of used clothing, the inefficiency of Customs are the elements which must be attacked, so that the Ecuadoran textile industry can grow and the national economy can improve."

For the moment, however, exorbitant interest rates make it hard to borrow money for new investments, and relief from Ecuador's chronic power blackouts seems far away.

In 1994, the latest year for which complete statistics are available, textile exports came to $51 million, up from $37 million in 1993; some 450 million sucres were invested in this industry in 1994. According to government statistics, the textile sector employs 28,800 people, which represents 9.3% of Ecuador's economically active population.

Despite all the negative news, Ecuador has managed to increase exports of high-end apparel. The J. Petermann Company's Christmas 1995 catalogue, for instance, features turtleneck sweater jackets for $65, sheep cardigans from the village of Peguche for $75, women's woolen vests for $65 and Otavalo mountain shirts for $29.

Yet for most of the apparel industry, that's the exception rather than the rule.

Sánchez, who has been in business since 1977, runs a 2,000-square-meter factory with 23 employees. Under a small maquila arrangement with Globe Import Manufacturing in Miami, his Textiles San Eduardo receives raw yarn in cones, and transforms the yarns into colored threads for T-shirts and polo shirts, half of which are exported back to the United States.

"Last year was the worst year in textiles for Ecuador," said Sánchez, 49, whose workers earn an average $180 a month. "Since 1967, when I began working in the industry, I've never seen it so bad. The industry is disappearing."

On May 19, Jaime Nebot of the Partido Social Cristiano was the front-runner in Ecuador's presidential elections, with exit polls indicating he had captured 27.1% of the vote. Nebot's strongest rival, populist Abdala Bucaram of the Partido Roldosista, racked up 25.6%, followed by independent candidate Freddy Ehlers (21%) and six lesser rivals. At press time, Nebot and Bucaram were to compete in a July 7 runoff election very likely to be won by Nebot, a 50-year-old lawyer and former governor of Guayas province, which includes Guayaquíl, Ecuador's biggest city.

Not surprisingly, Ecuador's troubled economy was a major campaign issue. Even though the inflation rate has slowed since last year, roughly 42% of all citizens are either jobless or underemployed. Nebot, ex-governor of Guayas province, says he advocates "humanist capitalism" and private investment through the selloff of Ecuador's oil, electricity, energy and telecom sectors.

"Basically, I believe in a state that governs a great deal but administers little," Nebot recently told the Quito newspaper Hoy, "in a state that spends better and invests better, that decentralizes, and that permits the participation of private enterprise in activities that are now performed by the state, which does them badly."

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