Order Code RS21687
Updated May 21, 2008
Ecuador: Political and Economic Situation
and U.S. Relations
Clare Ribando Seelke
Analyst in Latin American Affairs
Foreign Affairs, Defense, and Trade Division
Summary
Ecuador, a small, oil-producing country in the Andean region of South America,
has experienced ten years of political and economic instability. On January 15, 2007,
Rafael Correa, a left-leaning, U.S.-trained economist, was inaugurated to a four-year
presidential term, becoming the country’s eighth president in ten years. President Correa
has fulfilled his campaign pledge to call a constituent assembly to reform the country’s
constitution. The assembly, which is controlled by representatives from Correa’s party,
has until the end of July 2008 to draft a new constitution. Many Ecuadorians approved
of Correa’s condemnation of Colombia’s unauthorized March 2008 raid of a
Revolutionary Armed Forces of Colombia (FARC) camp in Ecuador. They also support
his decision not to renew the current U.S. lease on the air force base at Manta when it
expires in 2009, a decision which has strained U.S.-Ecuadorian relations. U.S. officials
have expressed concerns about President Correa’s ties with Hugo Chávez of Venezuela
and his stated polices on trade and energy matters. Despite those concerns, Congress
enacted legislation in February 2008 to extend U.S. trade preferences for Ecuador
through December 2008. For more information, see CRS Report RS22548, ATPA
Renewal: Background and Issues. This report will be updated.
Background
Slightly smaller than Nevada, Ecuador has a population of 13.8 million people.
Since independence from Spain in 1830, Ecuador has 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 two major drug- producing countries
(Colombia and Peru) increases its strategic importance to the United States. Ecuador is
both geographically and ethnically diverse, and has a relatively long, albeit unstable,
experience with democratic rule. Some 40% of Ecuadorians live in poverty and another
13% live in extreme poverty.1
1 United Nations Economic Commission for Latin America and the Caribbean, Social Panorama
(continued...)

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Political Context
Ecuador was once considered a relatively stable country, at least in comparison to
its Andean neighbors. In the past decade, however, Ecuador has weathered a number of
serious political and economic crises. The three last popularly elected presidents of
Ecuador did not complete their terms. In 1997, Abdala Bucaram was removed from office
after being declared mentally unfit by the legislature and allegedly misappropriating $90
million in public funds. In 2000, Jamil Mahuad was ousted by a coup after a prolonged
economic crisis led by a junta that included then-army Colonel Lucio Gutierrez. In April
2005, Lucio Gutierrez was removed from office by Ecuador’s congress after weeks of
popular protests. Ecuadorians rejected Gutierrez’s attempt to replace judges on the
country’s three highest courts with his political allies, a move that was also sharply
criticized by the international community.2
There are historical antecedents for the instability that has recently plagued
Ecuadorian democracy. Since 1830, regionalism and personalism have defined
Ecuadorian political culture. 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 corruption proliferated. 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 (similar to
Correa). This trend has led to inconsistent economic and political policies from one
administration to the next, and to the inability of presidents to complete their terms.
The Correa Presidency
Rafael Correa, a left-leaning, U.S.-trained economist, was inaugurated to a four-year
term as President of Ecuador on January 15, 2007. When Correa created his own
coalition and decided to run for president in 2006, few analysts predicted that he would
be competitive in a field of well-known candidates that included Alvaro Noboa,
Ecuador’s richest man. Most analysts were surprised by his second place finish in the
first round of voting held in October 2006. Contrary to many analysts’ predictions,
Correa won the November run-off election with 57% of the vote as compared to Noboa’s
43%. Some observers maintain that voters embraced his campaign pledge to enact
dramatic political reform.3 Correa succeeded Alfredo Palacio who had served as president
since taking over for Lucio Gutierrez in April 2005. His only previous government
experience was a four-month stint as Palacio’s finance minister in 2005.

Sixteen months into his four-year term, President Correa continues to enjoy high
approval ratings. Those ratings have been boosted by his efforts to reform the country’s
1 (...continued)
of Latin America, 2007.
2 International Crisis Group (ICG), “Ecuador: Overcoming Instability?” August 7, 2007.
3 Catherine M. Conaghan, “Ecuador’s Gamble: Can Correa Govern?” Current History, February
2007.

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political system, increase social spending, and reassert government control over Ecuador’s
economy and territory. Many Ecuadorians approved of Correa’s condemnation of
Colombia’s unauthorized March 2008 raid of a FARC guerrilla camp in Ecuador. They
also support his decision not to renew the current U.S. lease on the air force base at Manta
when it expires in 2009, a decision which has caused strain in U.S.-Ecuadorian relations.
Correa’s populist policies have concerned many analysts and foreign investors. Foreign
direct investment in Ecuador fell from an estimated $270.7 million in 2006 to roughly
$179 million in 2007.4
Constituent Assembly. President Correa is fulfilling his campaign pledge to
carry out constitutional reform. On April 15, 2007, 82% of Ecuadorians approved a
referendum to convene a constituent assembly with the power to rewrite the country’s
constitution and dismiss its current elected officials, despite protests from the opposition-
led congress. Some have questioned the legality of the events leading up to the
referendum, which culminated in Ecuador’s Electoral Court expelling (with Correa’s
backing) 57 legislators who had opposed giving the constituent assembly power to
dissolve the Congress.5
Elections for the new Constituent Assembly were held in September 2007. With the
traditional parties in disarray, Correa’s newly-formed “Alianza Pais” (Country Alliance)
party captured 80 of 130 seats in the constituent assembly elections. Convened on
November 29, the assembly immediately closed the Ecuadorian Congress and assumed
its legislative functions. On January 8, 2008, Ecuador’s Constitutional Court ruled that
the assembly’s decisions may not be challenged. The assembly spent the first three
months of its mandate passing legislation, including a major tax reform package, before
turning to constitutional debates in March. Progress since that time has been slow, with
the assembly getting bogged down in debates about how and whether to reform
constitutional clauses on abortion, religion, and gay rights. The assembly recently voted
to extend its mandate until July 2008. Some fear that Correa may be using his continued
popularity to unduly manipulate the assembly process to his favor.6
Energy Policy. Oil is extremely important to Ecuador’s economy, accounting for
more than 50% of exports. High oil prices fueled an economic growth rate of 4.2% in
2006, but declining production levels resulted in growth of only about 1.5% in 2007.
Production by Petroecuador, the state-owned oil company, has fallen by 50% in the last
ten years, and a lack of capital has forced the company into a deep financial crisis. In
recent years, Petroecuador has lost some $200 million annually in production due to
protests and other community-related problems.7
President Correa is seeking to increase state control over the energy sector. In
October 2007, he issued a decree that increased the Ecuadorian state’s share of windfall
4 Alonso Soto, “Ecuador Foreign Investment Tumbles, Outlook Murky,” Reuters, April 24, 2008.
5 Mary Anastasia O’Grady, “Sharp Left Turn in Ecuador,” Wall Street Journal, April 9, 2007.
6 “Country Report: Ecuador,” Economist Intelligence Unit (EIU), May 2008; “Going
Nowhere,”Economist, May 10, 2008.
7 “Oil Sector Protests Become Norm in Ecuador,”Platts Oilgram Price Report, March 26, 2007;
“Ecuador Says State Oil Company in Crisis,” EFE, November 29, 2007.

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oil revenues from 50% to 99%, unless companies were willing to switch from production
sharing agreements to new service contracts controlled by Petroecuador. Five foreign oil
companies entered into negotiations with the Ecuadorian government and were about to
agree to switch to service contracts within a two-year period when President Correa
shortened the proposed transition period to just six months. Most companies have yet to
respond to the revised position of the Ecuadorian government.8 Private companies have
long experienced problems investing in the Ecuadorian oil industry, stemming from the
country’s chronic instability and tendency for conflicts with private producers. President
Correa supports the prior government’s 2006 termination of its contract with the U.S. firm
Occidental Petroleum (Oxy) over an alleged breach of contract, a controversial move that
is currently in dispute settlement. In November 2007, the Ecuadorian government
initiated new legal proceedings against Occidental and City Oriente, another U.S.-owned
oil company, for allegedly failing to pay their windfall oil taxes.
Ecuador-Colombia-Venezuela Border Crisis. On March 1, 2008, the
Colombian military bombed a FARC camp in Ecuador, killing at least 25 people, among
them, Raúl Reyes, the terrorist group’s second highest commander. In a subsequent raid
on the camp, Colombian forces captured laptop computers, which Interpol has verified
as belonging to Reyes.9 Files in those laptops allege that the government of Hugo Chávez
of Venezuela was planning to provide millions of dollars in assistance to the FARC for
weapons purchases and that President Correa received campaign donations from the
FARC in 2006. Both Chávez and Correa vigorously reject these claims.10
Colombia’s unauthorized incursion caused a major diplomatic crisis between
Colombia, Ecuador and Venezuela. President Correa responded to the raid by breaking
diplomatic ties with Colombia and sending additional troops to the Ecuador-Colombia
border. In a show of solidarity with Ecuador, President Chávez broke ties with Colombia
and sent troops to Venezuela’s border with Colombia. Some feared that the Ecuador-
Colombia-Venezuela crisis might escalate into a military conflict, but those concerns were
allayed after a Rio Group summit held in the Dominican Republic on March 7.11 At the
Rio summit, President Uribe publicly apologized for the incursion and vowed that it
would never happen again. President Chávez appeared to accept the apology and called
for an end to the crisis, but President Correa remained angered by the incident. The Rio
Group issued a resolution that rejected Colombia’s incursion of Ecuadorian territory, but
acknowledged Uribe’s apology.12
8 “Ecuador: Contract Conflicts,” EIU Business Latin America, May 5, 2008.
9 Simon Romero, “Files Released by Colombia Point to Venezuelan Bid to Arm Rebels,” New
York Times, March 30, 2008.
10 “Interpol Confirms Link Between FARC, Chávez,” Miami Herald, May 15, 2008.
11 Established in 1986, the Rio Group is an organization composed of the heads of state of the
governments of Latin America and the Caribbean.
12 “How Diplomacy Silenced the Drums of War in Less Than a Week,” Latin American Security
and Strategic Review, March 2008; Francis Robles, “Ecuador Rages, Colombia and Venezuela
Make Up,” Latinnews Daily, March 14, 2008; “Leaders Defuse South American Crisis,” Miami
Herald, March 8, 2008.

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The Rio Group summit was followed by a March 17-18 OAS Meeting of
Consultation of Ministers of Foreign Affairs in Washington D.C. At that meeting, an
OAS mission headed by OAS Secretary General José Miguel Insulza that visited Ecuador
and Colombia reported that it found contradictory reports from Colombian and
Ecuadorian officials on when and how the raid occurred, but did not attempt to reconcile
the discrepancies. On March 18, after extended debate, the OAS adopted a resolution
rejecting, but not condemning, the bombing raid and called for the restoration of
diplomatic ties between Ecuador and Colombia.13
Ecuador has yet to restore diplomatic relations with Colombia, and recent events do
not bode well for the immediate future of Ecuador-Colombia relations. When Colombia
announced that one of those killed in the raid was an Ecuadorian citizen with possible ties
to the FARC, President Correa reacted angrily, and his government asked the OAS to
investigate. His defense minister later admitted that Ecuadorian intelligence forces had
previously investigated this individual’s possible ties to the FARC.14 Correa later
dismissed his pro-U.S. defense minister as well as several other top military officials
whom he accused of sharing intelligence with both Colombia and the United States
without his approval. President Correa has protested against what he says is a Colombian
government media campaign that alleges his government has ties to the FARC. The
border crisis may have served to reinforce the pre-existing ties between the Correa
government in Ecuador and the Chávez government in Venezuela.
Relations with the United States
Ecuador’s relations with the United States have traditionally been close, although
recent events have strained bilateral relations. Although the United States has concluded
free trade agreements (FTAs) with Peru and Colombia, negotiations for a bilateral free
trade agreement with Ecuador have been suspended indefinitely in the wake of the dispute
with the U.S. firm Occidental Petroleum. U.S. officials have expressed concerns about
Correa’s populist tendencies, his ties with Hugo Chávez of Venezuela, and his state-
centered economic policies. Some analysts have urged the U.S. government not to
antagonize Correa, but to use pragmatic, low-profile means to urge him to maintain open-
market and democratic policies, such as maintaining U.S. trade preferences for Ecuador.
Others are more skeptical, questioning why the United States should keep extending trade
benefits for a country that has taken hostile actions against U.S. companies and has
refused to negotiate a free trade agreement.
Ecuador, a major transport country for cocaine and heroin, has worked closely with
the United States on counter-narcotics efforts, but positions taken by the Correa
government may not bode well for the future of U.S.-Ecuadorian counternarcotics
cooperation. 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, for U.S. aerial counter-drug detection and monitoring operations.
13 Report of the Organization of American States (OAS) Commission That Visited Ecuador and
Colombia, Washington D.C., March 17, 2008; Resolution of the Twenty-Fifth Meeting of
Consultation of Ministers of Foreign Affairs, Washington D.C., March 17, 2008.
14 Jeanneth Valdivieso, “Ecuador: FARC Raid Death Harms Relations,” Associated Press, March
24, 2008; “Slain Ecuadorian Linked to FARC,” Latinnews Daily, March 28, 2008.

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The United States reportedly spent some $60 million to build those FOL facilities.
President Correa has confirmed that his government will not renew the lease on the U.S.
air base at Manta when it expires in 2009. Some press reports indicate that the United
States may be considering trying to relocate its counterdrug facilities to a location in Peru
or Colombia.15 President Correa has also expressed reservations about any Ecuadorian
involvement in Plan Colombia and publicly opposed the Colombian army’s incursions
into Ecuadorian territory.

U.S. Aid. The United States is the largest bilateral donor in Ecuador. Principal
goals for U.S. assistance to Ecuador are bolstering democracy, reducing poverty,
protecting the environment, and securing the northern border with Colombia. Ecuador
received $25.2 million in aid in FY2007, including $17.3 million in counternarcotics
assistance. In FY2008, Ecuador received roughly $32 million in U.S. aid, including $9.1
million in counternarcotics assistance. The FY2009 request for Ecuador was for $32.5
million, with $13.4 million in counternarcotics assistance.
Trade. The United States is Ecuador’s main trading partner, with some 45% of
Ecuadorian exports going to the United States. Machinery and plastics are the leading
U.S. exports to Ecuador, while oil, bananas, and shrimp account for the bulk of U.S.
imports from Ecuador. Since joining the World Trade Organization (WTO) in 1996,
Ecuador has lowered its average tariff rate from 30% to 13%, but a number of nontariff
trade barriers impede U.S. access to the Ecuadorian market.
Since 1992, Ecuador, along with Peru, Colombia, and Bolivia, has been a beneficiary
of the Andean Trade Preference Act (ATPA), which provides trade preferences for
Andean countries in exchange for counternarcotics cooperation. Although oil continues
to dominate Ecuador’s export market, other goods, such as seafood and cut flowers, have
benefitted from the program. The ATPA was reauthorized and expanded by the Andean
Trade Promotion and Drug Eradication Act (ATPDEA), Title XXXI of the Trade Act of
2002, (P.L. 107-210). ATPDEA extended the preferential trade program until December
31, 2006, and expanded benefits to include certain textiles, petroleum, and pouched tuna.
Congress has approved short term extensions of ATPDEA benefits, with the most recent
extension scheduled to expire on December 31, 2008. Ecuadorian officials estimate that
some $5.6 billion in U.S. trade and 350,000 jobs could be lost without ATPDEA.16
While Colombia and Peru have concluded free trade agreements (FTAs) with the
United States, the Ecuadorian government opposes completing negotiations for an FTA
with the United States and is not willing to restart negotiations as a condition to continue
receiving U.S. trade preferences under the ATPDEA. Some Members of Congress favor
continuing ATPDEA benefits regardless of a country’s position on FTAs, while others
oppose extending benefits for Bolivia and Ecuador.
15 Simon Romero, “Ecuador’s Leader Purges Military and Moves to Expel American Base,” New
York Times, April 21, 2008.
16 “Andean Trade Reprieve,” EIU-Business Latin America, July 9, 2007. See CRS Report
RS22548, ATPA Renewal: Background and Issues, by M. Angeles Villarreal.

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