ECONOMIC OUTREACH: USFQ SCHOLARS SLAM EX-COLLEAGUE

C O N F I D E N T I A L QUITO 000542

SIPDIS

SIPDIS

TREASURY FOR SGOOCH

E.O. 12958: DECL: 03/07/2017
TAGS: ECON EFIN ETRD PGOV PINR SCUL EC
SUBJECT: ECONOMIC OUTREACH: USFQ SCHOLARS SLAM EX-COLLEAGUE
CORREA

REF: A. A) QUITO 91


B. B) QUITO 248

C. C) QUITO 364

D. D) QUITO 321

E. E) QUITO 290

Classified By: Deputy Chief of Mission Jefferson Brown for Reasons 1.4(
b) and (d)


1. (C) Summary: In a February 28 meeting with EconOffs,
academics from the business school at the University San
Francisco of Quito (USFQ) engaged in a playful and energetic
discussion about the economic policies of their ex-colleague
President Rafael Correa. Most expressed concern about what
they view as counterproductive reform plans and some
expressed alarm at Correa's loosening of fiscal discipline,
saying that it could plunge Ecuador into crisis within
eighteen months. All agreed that the Correa administration
is inexperienced in economic management and that every
element of its economic policy is geared toward securing
support for Correa's positions in the national constituent
assembly to re-write the constitution. End summary.

USFQ ) ECUADOR'S ELITE PRIVATE UNIVERSITY
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2. (U) As part of our ongoing outreach efforts to Ecuador's
economics academics (reftels A and B),EconOffs met on
February 28 with several professors from USFQ's College of
Administration, including Dean Dr. Juan Montufar, Economics
professors Estuardo Gordillo and former Ecuadorian Minister
of Economy Dr. Magdalena Barreiro, Finance professor Roberto
Salem, and Marketing professors Nicolas Vasconez and Thomas
Gura.


3. (U) USFQ is Ecuador's premier private university and is
widely seen as a college for "elites". Dr. Montufar said in
opening that the College of Administration "must be
apolitical", but admitted that many current and former
professors have served in public office, including the
College's currently most famous ex-professor President Rafael
Correa. Dr. Montufar said, possibly by way of explanation of
his former colleague's leftist economic views, that USFQ
"does not monitor" its classes' content, and that professors
enjoyed wide latitude in teaching their subject matter.

COUNTERPRODUCTIVE REFORM PLANS
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4. (C) Economics professor Gordillo started the discussion by
saying that it was "too early" to make predictions about what
the government might do, but that some elements of President
Correa's economic platform were "very worrisome." He said
that "there was no signature on the FTA" (referring to the
abortive U.S.-Ecuador free trade negotiations) and that the
government apparently expected, perhaps prematurely, that the
ATPDEA trade preferences would continue. Gordillo discussed
several elements of Correa's tax reform plan, saying that the
proposed reduction in the value-added tax (VAT) from 12% to
10% was intended to "activate domestic demand." Gordillo
said that the administration's talk of a new tax on assets
was creating worries in the business community, which has
prompted a reduction in bank deposits. He said that banks
were also concerned about talk of a forced repatriation of
funds, interest rate controls, mandated minimums for bank
lending, and the possibility that the government might force
banks to "assign funds to productive sectors." Gordillo said
that banks are professionally managed now (unlike before the
1990s banking crisis),and that in the current atmosphere
banks have stopped extending financing. He also said that
any financial sector reform will hinder banks' access to
financing from international lenders.


5. (C) Barreiro, who served under Correa before replacing him
as Economy Minister during the Palacio government, was the
most vocal in the group and said that Correa believes the
solution to Ecuador's economic problems is to change the
nation's consumption patterns, but whatever increase in
domestic demand that might result from the VAT decrease would
result in either inflation or increased imports, not in
increased sales by Ecuadorian producers. The academics

agreed that Ecuadorian producers have taken a "wait-and-see"
attitude toward Correa's policies and have effectively
stopped investing. Agricultural producers, for example, led
by the flower industry, had been steadily increasing their
investment in Ecuador over the past several years, but this
trend had slowed in the wake of Correa's election, according
to the academics. Marketing professor Gura added that since
"so much power rests in the hands of a few monopolies," a
"wait-and-see" attitude by Ecuadorian business "puts the
brakes on the whole economy." Dr. Barreiro added that one of
Ecuador's strongest economic indicators was that income from
other sectors has been growing as oilQncome falls, but that
this healthy trend will reverse if investment slows in
non-oil sectors. The academics all predicted a shrinking of
private participation in every sector and more government
interference.

WORRIES ABOUT FISCAL POLICY
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6. (C) Dr. Barreiro launched an in-depth analysis of Correa's
fiscal policies, saying that his government's budget had both
overestimated government revenues by $600 - $800 million and
underestimated spending by $300 million. She also said that
Correa's fiscal policy was geared exclusively to ensure that
Correa "wins" in the national constituent assembly (CA) up
for approval by referendum on April 15, by increasing
government handouts (reftel c). Dr. Barreiro said that the
Correa government budget was already violating several
regulations on fiscal policy, such as the law that mandates
that current expenditure must by financed by current
earnings. She predicted that in order to support his
spending, Correa would have to raid petroleum reserve funds
like the Special Account for Social and Productive
Reactivation (CEREPS) and the Savings and Contingency Fund
(FAC),which he would accomplish by "declaring emergencies,"
as he recently did when he promised more funds to develop
Ecuador's highway system. She said that the Ecuadorian
Congress would provide complicity in this effort, and that
using these funds to finance current spending would
"dismantle the fundamental reason for the funds' existence."


7. (C) Dr. Barreiro said that it would be easy enough for
Correa to "liberate" the funds from their protective
earmarks, but that his government "does not have the capacity
to assign" the funds to productive investments, and therefore
the funds would be used only to finance current spending.
She worried about the sustainability of Correa's fiscal
program, saying that it would bankrupt the government in
12-18 months, just long enough for Correa to prepare the
ground for the CA, which would take 1.5-2 years to pass.
Then, she said, the next government would likelyQ left to
deal with the problem. Barreiro said that Ecuador's current
economic fundamentals are strong enough that "Correa can
commit plenty of errors" in the next two years, "with
Congress' help." She said that "a big mouth and a lot of
money" can take you a long way in Ecuadorian politics. She
said that in two years the theme of the external debt
conversation will change from "unwillingness to pay" to
"inability to pay."

TAKING ON PETROECUADOR
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8. (C) The academics agreed that the Correa may be able to
make some headway in improving Ecuador's oil infrastructure,
but that "it will take time." The Esmeraldas refinery, for
instance, would require $3.2 billion in improvements over the
next three years, according to Barreiro. They said that
"breaking Social Christian Party control" of Petroecuador
would be a great achievement, but that the achievement "would
not visible." The academics agreed that new Petroecuador
chief Carlos Pareja showed promise and was "not going to
commit stupidities." The academics also agreed that new
Energy Minister Acosta "is very honest," and were surprised
that the Minister who originally "seemed like the
government,s most communist" now seems "the most
reasonable." Their assessment echoes Post's initial
impression of Acosta (reftel d).

POLITICS WITH "GREEN EYES"
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9. (C) The academics agreed that the government is comprised
of "a group of people without political experience", and that
"they don,t know how to implement their own rhetoric."
Marketing Professor Vasconez expressed concern at Correa's
relationship with Chavez, about which, he opined, "the U.S.
wasn,t doing much." He said he is worried about the
fundamentals that underpin dollarization, saying that Correa
is "taking the same steps" that Chavez took in Venezuela. On
the other hand, he said, "Morales hasn,t found it so easy"
to replicate Chavez' politics in Bolivia. Barreiro
interjected that Correa is much more charismatic than
Morales. "He has green eyes," she said, referring to his
handsome, non-indigenous appearance. Barreiro said that
"Correa does not just want to be president of Ecuador; he
wants to be a Latin American leader like Chavez for another
20-30 years."


10. (C) Barreiro projected that Correa would likely remain
popular for the next year, but wondered "how long Correa will
be able to present himself as Ecuador's redeemer." The
academics cautioned that Correa, by referring to "land
reform," "social property," "debt moratorium" and "worker
participation," would generated unreasonable expectations he
could not meet. They also speculated about the respective
influences of Correa's cabinet members. With the exception
of Dr. Montufar, there was consensus that Agriculture
Minister Carlos Vallejo and Presidential Economic Coordinator
Mauricio Davalos were "the most worrisome," especially in
regard to their positions on microcredit. Barreiro said they
want to increase the size of rural microcredit loans (from
$5,000 to $500,000),which would benefit large agricultural
producers (such as Vallejo and Davalos) and "cause moral
hazard problems." The academics all agreed that economy
Minister Ricardo Patino is one of the cabinet's most powerful
(reftel E),saying "he has Correa,s ear."

COMMENT
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11. (C) The give-and-take between President Correa's former
colleagues at USFQ offered us the most alarmist view we have
yet heard from academics of Correa's economic program and
prospects. That is not surprising, however, as USFQ tends
toward a more center-right and business-oriented perspective.
Their conclusion was that while Correa believes his
increased spending will spur domestic demand, his proposed
tax, banking, and economic policies will damage Ecuador's
fiscal stance and investment climate and cause an economic
contraction. Because the negative effects of Correa's
program will not be felt within the next year, Correa's
economic errors will not affect his currently high popularity
(around 80% by most recent polls). We note that Correa's
economic policy actions to date have been more moderate and
responsible than his proposals, but the USFQ team clearly
believes that Correa will sacrifice medium-term economic
stability for short-term political expediency. End comment.
JEWELL