Historically, the economy of Ecuador has based its performance on the agricultural sector and particularly on the exports of a few commodities: cocoa, coffee and bananas. The industry has been largely oriented to servicing the domestic market.
In the early 1970s the discovery of large oil deposits in the Amazon Region brought economic growth, improved the living standards and transformed Ecuador’s economy from an agrarian one, dependant on the exports of agricultural commodities, to one reliant on the exports of petroleum. In 1973 petroleum exports rose to first place and by the 1980s accounted for about half of the total export earnings. The oil “boom” was accompanied by a sharp increase in Government spending and employment, which were financed principally by oil revenues and external borrowing.
After a period of economic prosperity, brought on by the new oil wealth, Ecuador experienced a slowdown in economic growth that challenged its economic development process. In the 1980s the Ecuadorian economy was exposed to a series of external shocks: the foreign debt crisis that affected all developing countries throughout this period, the 1986 sharp decline in world oil prices which reduced oil revenues by half and the March 1987 earthquake that damaged a large stretch of Ecuador’s sole oil pipeline, originating the suspension for several months of crude oil and supply for refining.
During the late 1980s the Government adopted policies of liberalization and diversification of the economy with the objective to attenuate the future negative consequences brought on by the decline of the price of a single product. An increase in the oil export prices allowed Ecuador to recover partially. From 1988 to 1992, in a context of increasing oil export prices and reductions in Government spending in real terms, the Ecuadorian Government took measures to stabilize the economy. Despite Government’s policies, inflation grew rapidly averaging 59,7% annually.
In 1992 the Government adopted a Macroeconomic Stabilization Plan, supported by the International Monetary Fund. Inflation decreased from 60,2% in 1992 to 31% in 1993 and 25,4% in 1994, international reserves increased from a low US$ 224 million in August 1992 to US$ 1,2 billion in December 1993 and US$ 1,7 billion in December 1994. The consolidated non-financial public sector deficit decreased from 1,2% of GDP for 1992 to 0,1% for 1993 and 0,2% for 1994, and the GDP grew by 2% in 1993 and 4,3% in 1994.
In 1995, several adverse situations, including the military confrontation with Peru, known as the Cenepa Conflict, the resignation of the Vice-president, who had wide influence in the economic matters and the energetic crisis caused by the insufficiency of rains in the zone of hydroelectric generation, conspired against the Ecuadorian efforts of stabilization.
In 1996, the populist leader Abdalá Bucaram was elected President. His Government announces the "Convertibility Plan", publicized as a solution to face inflation and to correct macroeconomic imbalances. The unconventional plan and his personal unorthodox style gained him much publicity, but was also a cause for severe conflicts with the Congress and the labour, business and professional organizations. In February 1997, the Congress unseated Bucaram and appointed Interim President Fabián Alarcón.
In 1998, Jamil Mahuad was elected President. In October 1998 the Peace Agreements of Brasilia were signed with Peru, ending one of the longest territorial disputes in the continent.
The poor performance in the economy during 1997 and 1998, culminated in a severe economic and financial crisis in 1999. The worst economic crisis in Ecuadorian history was the result of a highly expansionary monetary policy mixed with unsustainable fiscal deficit, aggravated by a very negative context. In 1997 the climate phenomenon of El Nińo, destroyed much of the infrastructure, a substantial fall in the international oil prices and the international emergent markets instability during 1997 and 1998. In 1999, the GDP contracted 7,3%, a mandatory banking holiday and freezing of deposits resulted in 60% of bank assets in administration of the state, annual inflation reached 60,7% and the national currency collapsed with a 196,6% depreciation. In January 2000, a decision to adopt the US dollar and replace the local currency was taken, as a drastic way to avoid hyperinflation and to put an end to the rapid depreciation of the sucre, subsequent protests led to the removal of President Mahuad and Vice president Gustavo Noboa stepped into the Presidency by Constitutional Decree.
President Noboa confirmed and implemented Dollarization, entered into negotiations with the IMF and carried out a series of reforms that transformed the nation on the bases of productivity, competitiveness, transparency and democracy.
In our days, President Gutierrez continues to keep a very serious control of the economic variables and, as a result, by the middle of 2004, Ecuador has the lowest inflation rate in History (2.8%)