WELCOME TO ECUADOR CHAIRMAN THOMAS DELEGATION

UNCLAS SECTION 01 OF 03 QUITO 001531

SIPDIS

SENSITIVE

DEPT PASS TO H AND USTR BENNETT HARMAN

E.O. 12958: N/A
TAGS: ETRD ECON OVIP EFIN PREL EC
SUBJECT: WELCOME TO ECUADOR CHAIRMAN THOMAS DELEGATION

Welcome to Ecuador!
--------------


1. (U) Chairman Thomas and other Ways and Means Committee
Members, we look forward to your visit to Ecuador.
Unfortunately, I will have to miss your visit as I move on to
my next assignment; however, you will be in the very capable
hands of our mission in Ecuador. Your full agenda will
include a meeting with President Alfredo Palacio, who took
the reins from former President Lucio Gutierrez, when he was
ousted on April 20th. Unfortunately, that is nothing new in
Ecuador. The last three elected presidents have failed to
complete their terms in office. Indeed, in the last 105
years, Ecuador has had 49 governments and 19 constitutions.

Palacio Separating Himself from Gutierrez
--------------


2. (SBU) Palacio was Vice President to Gutierrez, but was
never really on the inside of the Gutierrez administration.
Credible rumors abound about Palacio playing a part in the
early departure of Gutierrez, but many breathed a collective
sigh of relief when Gutierrez departed the scene. Once
again, Ecuadorians believed that a scandal-ridden
administration had been replaced by a caretaker government
that would certainly last the remaining 20 months of
Gutierrez's term. In reality many of the middle class just
never liked Gutierrez, generally viewed as an interloper from
the hinterlands of Tena. However, Palacio, a medical doctor,
is more inclined to the pomp and circumstance of the office
than to the day-to-day running of the country. He has
publicly commented that he has more important things to do
(referring to his medical practice) than being president.
Thus, it is by no means certain that he will last for the
duration of the Gutierrez's un-expired term. Threats from
Gutierrez to return are not helping matters.


3. (SBU) In economic policy, Palacio has taken a divergent
and unsettling path from his predecessor. Financial markets
were pleasantly surprised by Gutierrez's commitment to sound
fiscal policies; though, like most Ecuadorian governments,
structural economic reforms remained elusive. In contrast,
Palacio's Minister of Economy and Finance Rafael Correa at
first threatened to halt debt payments to multilateral
financial institutions unless they made new disbursements to
Ecuador. While Correa has backed off from such statements,
the new administration sponsored legislation that will cut
Ecuador's debt reduction payments at least in half.


4. (SBU) Correa is from the old, old school of economics. He
believes that the state, not the private sector, should
create jobs, increase production and, apparently, control
much of the nation's wealth. Correa is the architect of the
recent legislation to shift oil revenues from debt reduction
to current and capital spending. His ideas for spending
include providing $40-50 million dollars to the banana
sector, much of which is controlled by Ecuador's richest man
and perennial presidential candidate Alvaro Noboa. Correa
has also proposed to invest social security reserves in state
oil company PetroEcuador, which has seen its production
consistently decline over the past decade, the bulk of it due
to corruption, mismanagement and inefficiency. Talk of
private investment in the oil sector has all but disappeared.
Many think that Correa, who is quite charismatic, has
visions of becoming Ecuador's next president. He was against
dollarization and no fan of an FTA either. We have asked
President Palacio's office to include Minister Correa in
Palacio's meeting with you.


5. (SBU) Palacio is most interested in establishing a
national health care system and he is critical of
intellectual property protections for pharmaceutical drugs.
His support of an FTA has been lukewarm, at best. In private
he says that he is for the FTA, but he has not publicly
advocated on its behalf. However, he has backed off on his
earlier statements to submit the FTA to a national
referendum.

FTA - Hope for the Future
--------------


6. (SBU) Palacio's close friend and Minister of Trade Oswaldo
Molestina is one of the brighter lights in his cabinet. A
low-key, serious man, Molestina does not seek the limelight
and appears sincere about his desire to reach an FTA with the
United States. The tenth round of the FTA negotiations held
in Guayaquil June 6-10 was Molestina's first foray into the
negotiations, and Ecuador received high marks for its
preparation and participation in the round. Though he is now
Ecuador's lead negotiator, Molestina wisely kept on former
lead negotiator Cristian Espinosa has his technical advisor
on the FTA. A commission of private sector representatives
has also been appointed to advise Molestina. You should meet
with all of them on July 6.


7. (U) Agricultural issues and intellectual property rights
are the two toughest topics to resolve. Molestina will
likely raise those issues with you and may ask for assistance
to improve Ecuadorian competitiveness.


8. (SBU) On our side of the ledger, we are concerned about
labor rights in Ecuador, particularly the right to organize,
and a number of commercial disputes. Ecuador has an
antiquated labor code and a reform of the code would allow
both labor and business to benefit. The new Minister of
Labor recently told us that both sides have expressed a
willingness to look at labor code reform, a promising
development.


9. (U) You will hear first-hand about the numerous commercial
disputes in the country when you have lunch with the US
Business Executive Committee of the Ecuadorian-American
Chamber of Commerce. Perhaps the most immediate threat is to
Occidental Petroleum (Oxy). Procurador General Jose Maria
Borja (Solicitor General equivalent) stated last year that
there were grounds to void Oxy's contract and seize its
considerable assets in Ecuador. Borja launched an
investigation of Oxy after it won a $75 million international
arbitration award against the government of Ecuador. Thus
far, we have successfully held off the contract nullification
and expropriation of Oxy, but the matter is still before
state-owned PetroEcuador and the Minister of Energy to
decide. We have warned the government that there will be
dire consequences if it attempts to expropriate Oxy's assets.


10. (U) You are also likely to hear from EDC/Noble Energy
about their Machala Power plant, payment arrears and subsidy
problems. Chevron Texaco, fighting a multi-billion dollar
lawsuit in the northern part of Ecuador, will also send a
representative. Gallo Winery, Interagua/Bechtel and Latin
America Telecom are among the other companies with commercial
dispute problems in Ecuador. Molestina is trying to
establish and ombudsman type office to work solely on
resolving commercial disputes.


11. (SBU) A large segment of the Ecuadorian public still
lacks sufficient information about an FTA. We have engaged
in an education campaign and the government of Ecuador has
been even more active. Still, old prejudices die hard and in
the end, Ecuador may not sign an FTA until Peru and Colombia
are on board.

ATPDEA Another Incentive
--------------


11. (U) Ecuador has benefited greatly from the Andean Trade
Promotion and Drug Eradication Act (ATPDEA). Two of the
greatest beneficiaries are the flower and tuna industries.
Those two sectors are among the strongest advocates of the
FTA, because they realize what they have to lose when ATPDEA
benefits expire at the end of 2006. You are almost certain
to hear during your meeting with Molestina about Ecuadorian
desires to have in any FTA at least the benefits they now
receive under ATPDEA and a request to include similar
benefits for canned tuna.

FTA - An Opportunity to Increase Stability
--------------


12. (SBU) Political and economic stability in this country
are nearly as rare as the blue-footed boobies of Ecuador's
Galapagos Islands. While we advocate free trade for the
obvious benefits it brings, we are also quick to point out
that an FTA alone will not be enough. Structural reforms,
better health and education, and a responsible, honest and
transparent government are all key ingredients to sustainable
development, a just society and a higher standard of living.


13. (SBU) An FTA institutionalizes reforms that can lead to
greater stability, by adding certainty to trade. Those
benefits can be hard to measure. Many socio-economic
observers argue that had Ecuador not been dollarized it would
have seen even more turmoil in recent years. Dollarization,
though not for everyone, has eliminated some of the
uncertainty of economic policies that change as frequently,
or more often, than governments here. Increased economic
certainty and opportunity inevitably lead to increased
political stability. We gain from greater regional
stability, better treatment of Americans doing business here
and by creating better opportunities for all Americans. We
welcome your visit here as another excellent opportunity to
demonstrate the benefits of free trade and a vibrant
democracy.
Kenney