Order Code RS21687
Updated March 16, 2005
CRS Report for Congress
Received through the CRS Web
Ecuador: Political and Economic Situation
and U.S. Relations
Clare Ribando
Analyst in Latin American Affairs
Foreign Affairs, Defense, and Trade Division
Summary
In January 2003, Lucio Gutierrez of the Patriotic Society Party (PSP), a former
army Colonel who was part of the junta that toppled the government of Jamil Mahuad
in January 2000, became the country’s sixth president in seven years. Early in his
presidency, President Gutierrez abandoned his populist rhetoric and adopted some
market-friendly economic reforms in order to secure support from the International
Monetary Fund (IMF). His power was severely limited, however, by opposition parties
that dominated the Congress, indigenous protests, and allegations of corruption. Despite
his party’s poor performance in the October 17, 2004 municipal elections, President
Gutierrez has found new congressional allies who have helped him stave off
impeachment proceedings. In December 2004, Gutierrez replaced the country’s high
court judges with his political allies, a move which has been sharply criticized by the
international community. Ecuador continues to cooperate with the U.S. counter-
narcotics program and has mobilized its military and police forces to help control
spillover effects from the conflict in Colombia. Ecuador and the United States possess
a significant trade relationship that has been enhanced since 1992 by the Andean Trade
Preference Act. The two countries are currently negotiating, along with Colombia and
Peru, for an Andean Free Trade Agreement. This report will be updated periodically.
Background
Slightly smaller than Nevada, Ecuador has a population of just under 13 million
people. Since independence from Spain in 1830, Ecuador lost 61% of its total land area
as a result of border conflicts with Brazil, Colombia, and Peru. Despite its small size,
Ecuador’s location on the Pacific Coast between Colombia and Peru, two major drug
producing countries, makes it of strategic importance to the United States. Ecuador is the
12th largest oil supplier to the United States, and the 3rd largest supplier (behind Mexico
and Venezuela) in Latin America. Ecuador is both geographically and ethnically diverse,
and has a relatively long (albeit unstable) experience with democratic rule. The
population is ethnically mixed: 55% mestizo (mixed Indian and Spanish descent), 25%
indigenous, 10% Caucasian, and 10% African. Some 56% of the population and more
Congressional Research Service ˜ The Library of Congress

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than 80% of indigenous Ecuadorians live in poverty.1 Although Ecuador returned to
civilian rule in 1979, the political and economic situation there has often been unstable.
Political stability in Ecuador is threatened by such forces as poverty, corruption, and
political fragmentation, in addition to the difficulty of balancing popular demands and
fiscal reforms.
Political Context
Ecuador was once considered a relatively stable country located in the conflicted
Andean region. In recent years, however, Ecuador has weathered a number of serious
governmental and economic crises. The last two popularly elected presidents did not
complete their terms. Abdala Bucaram was removed from office constitutionally in 1997,
after being declared mentally unfit by the National Congress and allegedly
misappropriating $90 million worth of public funds. Jamil Mahuad was ousted by a coup
in 2000, after a prolonged economic crisis. The current President, Lucio Gutierrez, was
an unknown army Colonel until his involvement in the 2000 coup that ousted Mahuad.
President Gutierrez, elected with 55% of the vote on a leftist platform with the support
of poor and indigenous voters, is now confronting a political crisis of his own. His PSP
party lost the support of the Pachakutik indigenous party in August 2003, and holds only
6 seats in the 100-member Congress. In October 2004, Gutierrez’s approval rating
hovered at just 15%, his party performed poorly in the municipal elections, and he was
facing possible impeachment proceedings.2 By November 2004, Gutierrez had formed
a new coalition with support from Bucaram’s Roldosista Party (PRE) and Alvaro Noboa’s
National Action Institutional Renewal Party (PRIAN). He has been under criticism
recently for using that narrow legislative coalition to pack Ecuador’s courts with his
political allies.3
There are historical antecedents for the instability that has recently plagued
Ecuadorian democracy. Since 1830, regionalism and personalism have defined
Ecuadorian political culture. Throughout the country’s history, Quito, the colonial capital,
and Guayaquil, the industrial port, have battled for urban dominance. Superimposed
against this regional divide are the ethnic and class divisions that have encouraged
political parties to develop as electoral machines for competing segments of the elite.
Following the return to democracy in 1979, party splits, bureaucratic ineptitude and
rampant corruption proliferated. Important reform measures — civil service reform, tax
laws, banking regulation — stalled in a Congress dominated by fragmented parties and
vocal opponents with vested interests to protect. As the economic situation has
deteriorated since the 1980s, voters have reacted by blaming incumbents for their troubles
and by periodically backing populist, anti-party candidates. This trend, coupled with the
country’s economic problems and rampant corruption, has led to inconsistent economic
1 “Ecuador: Indigenous Groups Break with President,” NACLA Report on the Americas, New
York: Mar/Apr 2003; Suhas Parendeka, Rob Vox, and Donald Winkler, “Ecuador: Crisis, Poverty
and Social Protection,” in Crisis and Dollarization in Ecuador: Stability, Growth and Social
Equity, Paul Beckerman and Andrés Solimano, eds.. Washington: The World Bank.
2 “Ecuador’s Congress May Pursue Gutierrez’s Impeachment,” Dow Jones International News,
October 25, 2004.
3 Michael Shifter, “President Makes Mockery of Rule of Law,” Miami Herald, January 3, 2005.

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and political policies from one administration to the next, and to the inability of elected
presidents to complete their terms. Ecuador has had six presidents in the past seven years.
Ecuador’s dependence on oil exports and remittances (cash transfers sent from
citizens living abroad), vulnerability to natural disasters, high levels of foreign debt, and
central location within the volatile Andean region have made it extremely vulnerable to
exogenous shocks. The country’s inefficient policy-making process, a system in which
a plethora of competing economic and political interests compete for political spoils, has
tended to delay or inhibit the success of policy initiatives and failed to shield the country
from external shocks.4
Role of the Indigenous. Ecuador’s indigenous population resides primarily in
the country’s highland and Amazonian regions. Indigenous peoples have historically been
among the most disadvantaged, under-represented groups in Ecuador. Since the
indigenous people began organizing politically in 1990, however, they have built two of
the most powerful indigenous organizations in Latin America: the Confederation of
Indigenous Nationalities of Ecuador (CONAIE) and the Pachakutik political party. While
Pachakutik currently holds 10% of the seats in the Congress, indigenous groups have
gained more notoriety for their mass protests than for their electoral successes. The
participation of Pachakutik in the Gutierrez government, which included two cabinet
appointments, marked the first time in the country’s history that an indigenous-based
political party participated in a governing coalition. Some observers argue that the short-
lived duration of that coalition has weakened the movement’s popularity, noting the
declining attendance at recent indigenous protests.5 Although the indigenous movement
is currently divided and may not pose a threat to the Gutierrez government, some
indigenous groups have stepped up protests against foreign oil companies on behalf of
environmental and economic objectives.6
Corruption. According to Transparency International, Ecuador is perceived as the
second most corrupt nation in Latin America after Paraguay, with a level of corruption
rivaling that of the Democratic Republic of the Congo, Iraq, Sierra Leone, and Uganda.
In 2003, a series of arms trafficking scandals threatened to undermine the generally
positive reputation of one of the country’s most respected political institutions, the
Ecuadorian military.7 During the campaign, President Gutierrez promised to fight
governmental corruption, but has thus far been criticized for nepotism and failing to
secure the extradition of corrupt Ecuadorian bankers residing in the United States.
Ecuador’s Congress is investigating ongoing allegations that drug traffickers contributed
to the Gutierrez presidential campaign.8
4 Mejia-Acosta, Andres, Caridid Araujo, Anibal Perez Linan, Sebastian M. Saiegh, and Simon
Pachano. “Political Institutions, Policymaking Processes, and Policy Outcomes in Ecuador,”
FLACSO-Inter-American Development Bank, August 2004.
5 “Pachakutik Support on the Wane,” Latin American Regional Report, August 3, 2004.
6 “Ecuador Risk: Risk Overview,” Economist Intelligence Unit, December 20, 2004.
7 “Arms Scandal Seen Hurting Ecuador Military’s Image,” Reuters, October 25, 2003.
8 “Failure of ‘Uprising’ Extends Respite for Gutierrez ,” Latin American Weekly Report, June 15,
2004.

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Human Rights. The State Department Human Rights report on Ecuador covering
2004 states that “the Government generally respected the human rights of its citizens;
however, there were problems in some areas.” The report cited 21 killings by security
forces in 2003, up from 11 in 2003. Despite progress in reducing the number of
extrajudicial killings and the use of unwanted legal force, many perpetrators continue to
go unpunished as a result of lax sentencing in police and military courts. Some 70% of
inmates have not been formally sentenced. The Inter-American Commission on Human
Rights recently expressed concerns about the fragility of the rule of law in Ecuador, and
the escalating violence there against union and indigenous leaders.9 Although the
Constitution prohibits trafficking in persons, there are no penal laws to enforce that
prohibition. In June 2004, the U.S. State Department placed Ecuador on the Tier 3 list
of countries not taking adequate measures to combat trafficking in persons. Ecuador was
able to avoid U.S. sanctions, however, by taking significant counter-trafficking actions
by September 2004.
Economic Situation
In 1999-2000, Ecuador suffered a disastrous economic crisis, the country’s worst in
more than seventy years, characterized by numerous bank failures, hyperinflation, double-
digit unemployment and an eventual currency collapse. The Ecuadorian financial crisis
revealed the deleterious effects that external shocks can have on a weak and poorly
regulated economy that is overly dependent on a few export commodities with volatile
prices. From 1993-1997, Ecuador’s three major exports — oil, shrimp, and bananas —
experienced an unprecedented boom. In 1998, El Niño rains caused an estimated $2.6
billion worth of crop damage; white spot disease hit the shrimp industry; and oil prices
plunged. These problems were exacerbated by the scarcity of credit available following
the East Asian, Russian, and Brazilian financial crises. Massive exchange rate
depreciation and declining GDP meant that the government could no longer afford to bail
out private investors or failing banks incapable of repaying their dollar-denominated
debts. By late 1999, the public debt to GDP ratio was over 100% and the Mahuad
administration was faced with a full-scale economic, political, and social crisis.10
In a last ditch effort to stop hyperinflation and prevent a complete currency collapse,
then-president Mahuad abandoned the country’s domestic currency in favor of the U.S.
dollar. Dollarization was also a calculated political maneuver, though ultimately
unsuccessful, to preserve the Mahuad administration. Mahuad’s successor, Gustavo
Noboa, followed through on the dollarization plan. As a result, inflation subsided and,
boosted by high oil prices, the economy grew by 5.1% in 2001 and 3.4% in 2002. The
Noboa government then created a stabilization fund using excess oil revenue and
improved the country’s tax system. However, rather than agreeing to a renewal of a
stand-by agreement with the IMF, which would have required privatizing the electricity
and telecommunications industries, Noboa responded to popular demands for increased
government spending.
9 “IAHCR Analyzes Human Rights Situation in Ecuador,” Press Release. March 11, 2005.
Available at [http://www.cidh.org/Comunicados/English/2005/8.05.htm]
10 Beckerman and Solimano, Crisis and Dollarization in Ecuador, The World Bank, 2002.

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President Gutierrez began his administration by appointing a pro-market finance
minister who was able to help him secure the $205 million IMF stand-by agreement that
had eluded the Noboa administration. In order to comply with IMF requirements, the
Gutierrez government attempted to restrict public spending, increase taxes, remove
subsidies, and promote private investment in the oil sector. These efforts spawned
sustained popular protests that culminated in the resignation of Mauricio Pozo, the
economy minister, in June 2004. Although the economy grew some 6.3% in 2004 as a
result of high oil prices, remittance flows, and a weak U.S. dollar, which has made its
exports more competitive, a lack of fiscal discipline has postponed the renewal of a new
(and much needed) IMF stand-by agreement. Ecuador’s sovereign bonds have been
identified as the riskiest investment in Latin America.11
Relations with the United States
Ecuador’s relations with the United States are generally good, although the limited
U.S. assistance Ecuador has received in comparison to other Andean nations has been a
contentious issue. Ecuador is located at the epicenter of the most conflicted region in the
Western Hemisphere, and cooperates with the United States in the containment of
Colombian guerrillas and the fight against illicit narcotics. The U.S. government is
concerned about Ecuador’s high level of corruption, endemic poverty, weak political
system, and burdensome foreign debt. Ecuador is also the largest source of illegal
immigrants to the United States in South America. In addition to the problem of illegal
migration, some of which is caused by alien smuggling, a 2002 International Labor
Organization report found that some 5,200 Ecuadorian children were internally trafficked
for prostitution.12 Ecuador was placed on the State Department’s 2004 Tier 3 List of
countries that had not adequately combated trafficking in persons, but avoided U.S.
sanctions by making progress on that issue between June and September 2004. The Bush
Administration is currently negotiating an Andean Free Trade Agreement with Ecuador,
Colombia, and Peru.
Counter-narcotics Cooperation. Ecuador, a major transport country for
cocaine and heroin, has worked closely with the United States in its counter-narcotics
efforts. In November 1999, the United States signed a 10-year agreement with Ecuador
for the creation of a forward operating location (FOL) at Manta, an air force base along
the Pacific Coast. Since that time, U.S. detection and monitoring operations have seized
more than 250 tons of cocaine. In 2004, Ecuador issued a new national drug strategy and
has increased the number of police and military posted along its northern border with
Colombia. Ecuador received an estimated $25.8 million in U.S. assistance for FY2005,
and $20 million has been requested in FY2006 for law enforcement, border security, and
alternative development as part of the Andean Counterdrug Initiative (ACI).13
11 “Long-term Bets on Ecuador Seen Hinging on Reforms,” Reuters News, September 1, 2004.
12 U.S. Department of State, Country Reports on Human Rights Practices 2004: Ecuador,
February 2004.
13 See CRS Report RL32337, Andean Counterdrug Initiative (ACI) and Related Funding
Programs: FY2005 Assistance, by Connie Veillette.

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U.S. Aid. The United States is the largest bilateral donor in Ecuador, allocating an
estimated $42 million in total assistance to Ecuador in FY2005. The Administration has
requested $52 million in assistance to Ecuador for FY2006. Four USAID goals for
Ecuador are the bolstering of democracy, poverty reduction, environmental protection,
and border security. On July 1, 2003, the Bush administration cut off certain forms of
military aid to Ecuador for not signing an Article 98 agreement, exempting U.S. service
members from the jurisdiction of the International Criminal Court. This decision cost the
Ecuadorian government $13 million in Economic Support Funds (ESF) and $1.3 million
in military aid in FY2005. If Congress again applies the Nethercutt amendment, Ecuador
could lose another $7 million in ESF and $750,000 in military aid in FY2006.14
Trade. The United States is Ecuador’s main trading partner. The United States
exported $1.7 billion in goods to Ecuador in 2004, with machinery, plastics, and paper
products the leading items. In the same year, the United States imported $4.2 billion in
Ecuadorian goods, primarily oil, bananas, and shrimp. Petroecuador, the state-owned oil
company, accounts for 55% of the country’s oil production and is not slated for
privatization. In total, approximately 45% of Ecuadorian exports go to the United States.
Since joining the World Trade Organization (WTO) in 1996, Ecuador has lowered its
average tariff rate from 30% to 13%, but a number of non-tariff trade barriers, such as
denying import permits and tough sanitary controls, impede U.S. access to the Ecuadorian
market.
Since 1992, Ecuador has been a beneficiary of the Andean Trade Preference Act
(ATPA). Although petroleum continues to dominate its export market, other goods, such
as seafood and cut flowers, have benefitted from the program. The ATPA was
reauthorized and expanded to become the Andean Trade Promotion and Drug Eradication
Act (ATPDEA), Title XXXI of the Trade Act of 2002, signed into law by President Bush
on August 6, 2002 (P.L. 107-210, H.R. 3009). The law extended the preferential trade
program until December 31, 2006, and expanded it to include several additional
categories of exports of importance to Ecuador, such as certain textiles, petroleum, and
pouched tuna. Eight rounds of negotiations for a new free trade agreement (FTA)
between Ecuador, Colombia, Peru and the United States have been held since May 2004.15
In October 2004, the Subcommittee on the Western Hemisphere of the House
International Relations Committee held a hearing on unresolved trade disputes involving
U.S. companies and the governments of Ecuador and Peru that could threaten support for
the Andean FTA. Negotiators hope to sign an agreement by May 2005, prior to the
expiration of President Bush’s current trade promotion authority (TPA). At this time, it
seems unlikely that the May 2005 deadline will be met.
14 The Nethercutt amendment to the FY2005 Consolidated Appropriations Act (H.R. 4818/P.L.
108-447) bars Economic Support Funds (ESF) assistance to countries that have not signed an
Article 98 agreement.
15 For more information on the proposed Andean Free Trade Agreement, see CRS Report
RL32770, Andean-U.S. Free Trade Agreement Negotiations, by Lenore Sek.

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