Order Code RS21687
Updated May 2, 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
On April 20, 2005, President Lucio Gutierrez of the Patriotic Society Party (PSP)
was removed from office by Ecuador’s Congress following weeks of popular protests.
The protests were not led by an organized opposition movement, nor were they
motivated by an economic crisis. Instead, Ecuadorians rejected Gutierrez’s December
2004 replacement of the majority of the judges on the country’s three highest courts with
his political allies, an illegal move that had been sharply criticized by the international
community. They expressed extreme mistrust of Gutierrez, and a generalized frustration
with the country’s ruling political class. Gutierrez, a former army Colonel who was part
of the junta that toppled the government of Jamil Mahuad in January 2000, has sought
asylum in Brazil. Succeeding him as President is his former vice president, Alfredo
Palacios, a physician and political independent. Palacios is the country’s seventh
president in nine years. Ecuador’s economy is strong, but its political institutions are
in ruins. President Palacios will have to oversee the selection of new constitutional and
electoral courts, which were dissolved on April 27, 2005. He aims to work closely with
the United States, especially on military and counter-narcotics matters, but has yet to
express whether or not Ecuador will continue negotiating for a U.S.- 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. Lucio Gutierrez is Ecuador’s third consecutive
popularly elected president that did not complete his term. 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.
There are historical antecedents for the instability that has 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 (such as Lucio Gutierrez). This trend, coupled
with the country’s economic problems and rampant corruption, has led to inconsistent
economic and political policies from one administration to the next, and to the inability
of elected presidents to complete their terms.
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.2
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 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.

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The Gutierrez Administration. Inaugurated in January 2003, President Gutierrez
abandoned his populist record and adopted some market-friendly 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 was able to stave off impeachment
proceedings in November 2004 by forming an alliance with Bucaram’s Roldodista Party
(PRE) and Alvaro Noboa’s National Action Institutional Renewal Party (PRIAN). In
December 2004, Gutierrez used that support to pack three of the country’s highest courts
with political allies. Gutierrez garnered the PRE’s backing for his government by
guaranteeing that corruption charges against Bucaram would be dropped and that he
would then be free to return to Ecuador, which he did on April 2, 2005. Gutierrez’s move
was denounced by the United Nations and the Inter-American Commission of Human
Rights (IAHCR) among others.3 Most analysts have identified this attempt to subvert the
rule of law as the action that precipitated Gutierrez’s ouster. The Bush Administration and
the Organization of American States (OAS), though opposed to Gutierrez’s recent actions,
have expressed some concerns about the constitutionality of his removal and
replacement.4
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.5 Although former President Bucaram has since returned to Panama,
the March 31, 2005 supreme court decision to drop charges pending against him and other
former Ecuadorian leaders accused of corruption has probably added to the perception that
Ecuador is rife with official corruption.6
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. The IAHCR recently expressed concerns about the
fragility of the rule of law in Ecuador, and the escalating violence there against union and
indigenous leaders.7 Although the Constitution prohibits trafficking in persons, there are
no penal laws to enforce that prohibition. A 2002 International Labor Organization (ILO)
report found that some 5,200 Ecuadorian children were internally trafficked for
prostitution. In June 2004, the U.S. State Department placed Ecuador on the Tier 3 list of
3 Sandra Edwards, “Outside the Rule of Law: Ecuador’s Courts in Crisis,” Washington Office on
Latin America, April 2005.
4 “‘Constitutional Coup’ by Congress Ousts Gutierrez on Wave of Popular Protests,” Latin News
Weekly Report, April 26, 2005.
5 “Arms Scandal Seen Hurting Ecuador Military’s Image,” Reuters, October 25, 2003.
6 “Ecuador’s Gutierrez Delivers on December Deal: Bucaram is Allowed to Return,” Latin News
Weekly Report, April 5, 2005.
7 “IAHCR Analyzes Human Rights Situation in Ecuador,” Press Release. March 11, 2005.
Available at [http://www.cidh.org/Comunicados/English/2005/8.05.htm]

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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.
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 1990,
however, they have organized 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 and
the fact that its leadership is currently divided.
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.8
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.
8 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.9
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 Bush Administration is
currently negotiating an Andean Free Trade Agreement with Ecuador, Colombia, and
Peru. 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
response to the recent crisis there, Secretary of State Condoleezza Rice has stressed that
“the key is that the Ecuadorian people understand that the OAS, the United States, [and]
all the members of the OAS support a constitutional path” in Ecuador.10
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).11
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,
9 “Long-term Bets on Ecuador Seen Hinging on Reforms,” Reuters News, September 1, 2004.
10 “U.S. Participates in Democracy-Strengthening Mission to Ecuador,” U.S. State Department
Press Releases, April 26, 2005.
11 See CRS Report RL32337, Andean Counterdrug Initiative (ACI) and Related Funding
Programs: FY2005 Assistance, by Connie Veillette.

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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 FY2006.12
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. Nine rounds of negotiations for a new free trade agreement (FTA) between
Ecuador, Colombia, Peru and the United States have been held since May 2004.13 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. Lingering concerns about those pending disputes were reiterated by the
Subcommittee Chairman, Representative Dan Burton, at an April 13, 2005 hearing on
U.S. trade agreements with Latin America. At this time, the Palacios government has not
expressed whether it will continue negotiations for an Andean FTA.
12 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.
13 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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