2024-08-12 19:40:04
Ecuador has wasted almost 25 years without reforming its financial system to open up competition and boost the country’s economy. Less burdensome regulation and more freedom are needed.
“Far from discussing what is important, in Ecuador we see political disputes and a lack of consensus on what needs to be done and what is appropriate, pertinent and urgent. Thus, the years go by and economic recovery is delayed or postponed while other economies move forward. Ecuador is like a kind of train carriage that does not move.”
With these words, Joselo Andrade, economist and executive director of the Ecuadorian Institute of Political Economy (IEEP)explained that the country continues to waste time and fail to agree on the actions it should promote so that people have quality employment and are more prosperous.
One of those actions, according to the IEEP, is a comprehensive reform for the modernization of the financial system. Since 2020, there has been a bill to achieve this objective and it is being updated.
“If we do not do what needs to be done urgently, we will continue to complain about the lack of employmentof the lack of reactivation and the lack of security. If, on the contrary, we adopt a law that allows us to attract foreign banking“We will have a reactivation of the productive sector, more work and the liquidity that companies need. In addition, we will reduce the cost of financing, which will make us more competitive and attract more investments,” Andrade said.
According to the former Minister of Economy, Mauricio Pozooil, mining, the financial sector and large infrastructure works are the areas where they can be found investors interested in injecting capital into a Ecuadorian economy which does not escape the trap of low growth.
What are the keys to modernizing the financial system?
One of the main objectives of the bill worked on by the IEEP is the internationalization of Ecuadorian financial sectorThat is, attracting more foreign banks so that the capital that Ecuadorians need to make this a free and economically prosperous country can come.
One of the main obstacles to achieving this goal is that Ecuador has a regulatory environment that discourages and even hinders the arrival of foreign investment.
“What we propose is to have a much simpler regulatory environment that facilitates the entry of foreign banks. We need to encourage competition so that, ultimately, we have much lower interest rates that allow the productive apparatus to be more competitive,” said Andrade.
Currently, there are a group of banks in Ecuador with a limited stock of money, and this means that many projects cannot find financing.
Specifically, the project that the IEEP has worked on has three key points:
1 Simplify the existing regulatory environment.
2 Allow the financial sector the freedom to make its own decisions.
3 Not regulating the interest rate, that is, eliminating political control and making interest rates the result of market dynamics.
Andrade stressed that the starting point was the reform of the financial system that was carried out in Panama in the 1970s.
“This reform allowed the formation of an international financial center with a great deal of capacity and which has boosted Panama’s growth for nearly 40 years,” said the executive director of IEEP.
Regulations and politicians cause higher interest rates
The interest rate is the result of certain economic conditions that exist in a country. In the case of Ecuador, these conditions are not only related to the amount of money in the economy; but also to a regulatory environment (imposed by politics) that make the activity of the financial sector not only difficult, but “almost impossible”.
The result is a banking system that provides loans almost exclusively to less risky clients, leaving aside the majority who could undertake and produce if they had access to financing.
“The setting of the interest rate is nothing more than the intervention of the political market in an environment that should be technical and where competition should prevail. So, if we distance political management from financial management, we will have results that are in line with the dynamic reality of the market and Ecuador will prosper,” Andrade added.
Interest rates must vary freely in order to act as coordinators of economic activity, that is, to indicate where investments should be directed and what the preferences of the private sector are.
Ecuador has lost almost 25 years of development without financial reform
The director of the IEEP stressed that the dollarization (2000) should have been followed by a package of reforms to put Ecuador economically on track. Among these reforms is that of the financial system.
“Dollarization gave Ecuador an advantage over neighboring economies. We don’t have devaluation risk “because we manage the dollar. However, we did not carry out the reform that was needed and, even today, almost 25 years after we became dollarized, we are still waiting,” said Andrade.
According to the IEEP, the cultural barriers They have also slowed down necessary reforms.
“We want lower interest rates and what we expect is that the Ecuadorian State will make a law that regulates the financial system and forces banks to lower interest rates. This causes that, instead of obtaining lower interest rates, the possibilities of placing credits in the country are limited.” productive sector“Andrade said.
Thus, reforms are hampered by a mixture of ignorance and lack of consensus. In Ecuador, it has not even been possible to agree on a minimum agenda of four or five points to reactivate the economy.
“Economic recovery has never been on the agenda of politicians. Instead, they devote themselves to absurd things such as legislating on the psychological problems of chickens,” Andrade said. (JS)
“The Ecuadorian State should provide security, guarantee property rights and respect for contracts; as well as justice. Unfortunately, it does not do so and, nevertheless, it is involved in everything (with regulations and public entities) and even competes unfairly by doing banking.”
Joselo Andrade, economist and executive director of the Ecuadorian Institute of Political Economy (IEEP).
By: LA HORA Newspaper