The world economy is in a free fall, and the prospects for tiny, oil-producing Ecuador are bleak. But at Grupo Superior, workers in hairnets and white smocks churn out growing orders of pasta and animal crackers, and the company plans to expand from three factories to four.
The rosy future for the mill is a product of new protectionist measures enacted by Ecuador's government that are raising eyebrows far beyond Latin America -- stiff import restrictions, including tariffs on pastas and cookies, that some economists say may be the toughest anywhere in response to the global crisis.
The restrictions are President Rafael Correa's answer to an economic pinch that is eating through Ecuadoran reserves.
"This is a policy we have not seen in Latin America in 40 years," said Mauricio Pozo, an economic consultant and former finance minister. "This is not a way to resolve the problem."
The policy contrasts with those of Brazil, Chile, Mexico and other countries in the region, which are shoring up key industries with tax breaks while increasing spending on infrastructure projects to spur growth.
Correa is entering unchartered waters for Ecuador, which, despite the government's on-again, off-again battles with foreign oil operators, has what is considered to be one of the region's more open economies. But some business people here are cautiously optimistic about the government's response. They, after all, stand to benefit.
"There's always winners and losers," said Juan Vergara, general manager of Grupo Superior, which is based in Quito, the capital. "We are one of the winners because we compete with a lot of companies that are not Ecuadoran."
Facing a crushing $3.5 billion trade deficit this year, Correa, a populist U.S.-educated economist who is closely allied with Venezuelan President Hugo Chávez, enacted sweeping restrictions in January to slow imports and help Ecuadoran producers. His administration had been alarmed as oil, Ecuador's main export, plunged from $120 a barrel last June to less than $40 six months later, while the value of imports rose 36 percent from 2007 to 2008.
"What is the objective? To dampen demand for imported good and to increase consumption of domestic goods," said Diego Borja, minister of economic policy. "It was a difficult measure, but necessary and indispensable. We know that there are costs to getting out of a crisis."
Borja said that because Ecuador's currency is the U.S. dollar, the country has been particularly exposed as imports rose in relation to exports. Unable to print money, or devalue to help Ecuadoran companies that export, the government decided to levy tariffs that reach 35 percent, decrease import volume as much as 35 percent and implement a range of surcharges. In all, 627 products fall under the new measures, including furniture, cellphones, electronic parts, shoes, alcohol and food products such as cookies and pastas. The government said the restrictions would reduce imports this year by nearly $1.5 billion compared with 2008.
Without the restrictions, officials say, Ecuador could run out of money -- leading to economic collapse and political instability. "We depend on dollars," Borja said. "If we don't have a revenue of dollars, then we have a very, very big problem."
Critics say the government's profligate spending left policymakers with few options.
When he took office, Correa pledged to redirect government resources to help the poor. All manner of subsidies have been created to help low-income families and small businesses. The poverty rate has dipped, Borja said, from 40 to 32 percent.
That has given Correa a popularity rating that has topped 70 percent in some polls. Public support helped his government win approval of a new constitution in a September referendum. Now, Correa is running for a second term in elections next month, and polls show him far ahead of his rivals.
But economists say that the modest economic growth Ecuador has experienced in recent years -- 2.5 percent in 2007 and 4.4 percent last year -- hardly justifies a doubling of spending since 2006. The government, perhaps overestimating how long an oil-fueled bonanza would last, may also have hamstrung itself by drafting a constitution that expands health care and guarantees a free education up to the third year of college.
"Correa thought this growth would last a lot longer than it actually did, and so he spent a lot to help him consolidate his government," said Ramiro Crespo, president of Analytica Securities, an investment bank in Quito. "But the price fell very hard and much faster than he expected."
The government is betting a worldwide economic recovery will lead to higher oil prices in a matter of months, allowing the administration to continue generous social spending.
"They were optimistic that the crisis would last only until the end of 2009, but it seems more likely that the crisis will last until 2010," Crespo said.
Ecuador's revenue is shrinking. Oil exports are expected to fall by nearly 50 percent this year from last, to $6.5 billion. Remittances, the money 3 million Ecuadorans abroad send home, is projected to contract to $2.3 billion this year, nearly $800 million less than in 2007. Loans will also be hard to come by, as Correa's government had declared itself in default on payment of sovereign debt it considered unjust.
Pablo Lucio Paredes, an economist at Quito's San Francisco University, said the government is burning through its foreign reserves, which fell from $6 billion in September to just over $3 billion last month. Since the government has vowed to continue funding social programs and subsidies, he said, those reserves could fall to a level that generates a crisis of confidence among investors.
He said that Correa's restrictions will also do little to stimulate exports and that the economy will shrink, hurting workers.
Andy Wright, whose family-owned Corporacion Favorita has been a landmark in Quito for 56 years, said he, too, worried about the impact of the trade restrictions. The company he helps run includes elegant supermarkets stocked with imports, as well as sprawling Wal-Mart-type stores. It has 5,500 employees and 10,000 stockholders.
So when word spread that the government was planning to implement tariffs as high as 150 percent, Wright said he and several other businessmen met with Correa to ask for lower barriers. The government softened its position, though its restrictions are still tougher than what the business community had hoped for.
He said his firm would "rather buy from Ecuadoran companies who give jobs to Ecuadoran people, who are going to actually consume our products." But he said he worries that other countries trading with Ecuador could take punitive measures. "To grow, we have to export, but to export we have to be open to imports," he said.
Vergara, the general manager and son of the founder of Grupo Superior, sees opportunity. The company has grown relatively large and prosperous over its 60 years.
He said lower-middle-class and working-class consumers will veer away from the higher-priced imports and purchase less-expensive Ecuadoran-made products. "Those tariffs mean higher prices, and consumers will go for similar products at lower prices," he said. "And this is where I am."
Credit: Juan Forero, Washington Post foreign news web service