CHAPTER 1Formal Name:Republic of Ecuador (Repblica del Ecuador).

Capital:Quito.

Ethnic Groups:Indians and mestizos, 40 % each; whites, 10 to 15 %; blacks, 5 %.Languages:Spanish (official) and Quichua (a Quechua dialect).Religion:Approximately 94 % Roman Catholic. Beginning in late 1960s, significant gains made by Protestant evangelical and Pentecostal churches.GEOGRAPHY

Size:Approximately 283,560 square kilometers.

Topography:Divided into three continental regions-the Costa, Sierra, and Oriente-and one insular region-the Galpagos Islands. Costa, located between Pacific Ocean and Andes Mountains, consists of coastal lowlands and mountains. Sierra composed of two major chains of Andes Mountains-Cordillera Occidental (Western Chain) and Cordillera Oriental (Eastern Chain)-and intermontane basin or plateau between the two chains. Cordillera Occidental contains Ecuador's highest peak, 6,267-meter Mount Chimborazo. Oriente consists of Andean piedmont and eastern lowlands. Galpagos are islands of varied size located 1,000 kilometers west of Ecuadorian coast.

Climate:Tropical climate throughout Costa, although variations in temperature and rainfall result from proximity to warm or cool ocean currents. Sierra climate ranges from tropical to frozen, depending on altitude; notable rainfall variations also occur. Tropical climate and abundant rainfall prevail in Oriente. Galpagos climate varies from tropical and desert-like at sea level to cold and wet at highest point.

SOCIETY

Population:Estimates of total population 15,223,680 in July 2012;

Age structure: 0-14 years:30.1% (male 2,301,840/female 2,209,971)

15-64 years:63.5% (male 4,699,548/female 4,831,521)

65 years and over:6.4% (male 463,481/female 500,982) (2011 est.)EDUCATIONEducation is free and compulsory from ages 6 to 15. Primary education is six years, then three years of basic secondary school and followed by a diversified secondary program. A two year vocational program is also offered. The academic year runs from October to July. The Central University of Ecuador dates from 1594. There are three Catholic universities, in Quito, Guayaquil, and Cuenca. The National Polytechnical School in Quito offers degrees in industrial science and mechanical engineering, while the Polytechnical School of the Littoral in Guayaquil provides training in naval and petroleum engineering and in the natural sciences. The adult literacy rate for 2004 was estimated at about 91%, with 92.3% for men and 89.7% for women.HEALTH

Health facilities are largely concentrated in the towns and are both too expensive and too distant to be used by most of the highland Amerindian population. Hospitals are operated by agencies of the national government, the municipalities, and private organizations or persons. As of 2004, there were an estimated 148 physicians, 157 nurses, and 17 dentists per 100,000 people. Health care expenditure was estimated at 6.95% of GDP in 2007 and 8.05% of GDP in 2010 as compared to USA where it represents about 15% of GDP which means that health sector should be improved. Malnutrition and infant mortality are the country's two basic health problems. In 2000, 71% of the population had access to safe drinking water and 59% had adequate sanitation. Birth rate is about 19.6 births/1,000 population (2012 est.)and compared to the world is ranked on the 90th place. Death rate is 5.01 deaths/1,000 population (July 2012 est.)and compared to the world is on to the 184th place. The urban population represents67% of total population (2010). Life expectancy at birth represents 75.94 years for women and 73 years for menfrom the total population of the country. As compared to the world is on the 83th place. This indicators presumes that the overall quality of the life is high.TRANSPORTATION AND COMMUNICATIONSEcuador is well-served by an accessible transport system and profits from an extensive infrastructure of roads and an uncommonly efficient bus system that makes travel to almost any region possible. The country has 43,197 kilometers of highways, of which 8,165 kilometers (5,074 miles) are paved. Three national airlinesSaeta, Tame, and Ecuatorianaprovide flight services within Ecuador and from the international airports in Quito and Guayaquil to select locations outside the country. Because the vast changes in altitude and terrain in Ecuador can make road travel slow and difficult, tourists and Ecuadorians alike frequently utilize in-country flights. The trans-Ecuadorian railway, which extends for 812 kilometers (505 miles), needs renovation and is used for freight purposes.

Telecommunication and electrical services in Ecuador are state-owned and operated. They are available to Ecuadorians at subsidized rates but perform at less-than-desirable levels. Despite the limited portion of the population that can afford modern communication devices, the communications industry is growing rapidly.

Quito, the second-highest capital in the world, has modern hotels and transportation. Tourism has experienced significant growth in Ecuador due to the natural attractions and architectural and historical sights. GOVERNMENT AND POLITICS

GovernmentThe Republic of Ecuador's political system is a representative democracy. The Government is divided into three branches: executive, legislative, and judicial. There is also an autonomous electoral agency called the "Tribunal Supremo Electoral". Ecuador is separated into 21 provinces each of which is further divided into administrative cantones and parroquias.

In 2008,President Rafael Correa dissolved the Congress and convened a special constitutional assembly, which wrote a new Ecuadorian Constitution. The proposed constitution went to referendum in September of 2008, and was approved by a wide margin.ExecutiveThe President of the Republic presides over the executive branch and represents the State. He is elected for a 4-year term by popular vote - one ballot for President and Vice-President. The President determines the number and functions of the ministries that comprise the executive branch and appoints the ministers of each bureau that he creates. He is also the Commander-in-Chief of the Armed Forces. The president as of January 15, 2007 isRafael Vicente Correa Delgado.ElectionsThe people of Ecuador directly elect the nation's President and Congressmen. Voting is a constitutional right for all Ecuadorian citizens and is compulsory for literate Ecuadorians between the ages of 18 and 65 years old residing in Ecuador. Voting is optional for the illiterate and for senior citizens over the age of 65. Also, active members of the military are not permitted to vote.NATIONAL SECURITY

The Ecuadorian Armed Forces are part of the public forces and have the stated mission of the preservation of the integrity and national sovereignty of the national territory. It also involves participation in the social and economic development of the country and the provision of assistance in the maintenance of internal order. Armed Forces: Included army, navy, and air force with total strength estimated at 49000 members. Country divided into four army theaters of operation (defense zones), three naval zones, and two air zones. Police is subordinate to Ministry of Government and Justice. Estimated 18,000 members organized into technical operations and support directorates and four operational units.

PROFOUND REGIONAL, ETHNIC, AND SOCIAL DIVISIONS The country's three main geographic regions, differing in their histories and economies, provided one of these divisions, and there were also ethnic and social differs within the regions. The Oriente (eastern region) traditionally was a neglected backwater, isolated geographically and culturally from the rest of the nation. Its population was limited to dispersed groups of indigenous tropicalforest Indians who lived by slash-and-burn agriculture or hunting and gathering. Beginning in the 1960s, however, the Oriente experienced colonization by land-poor peasants from the Sierra (Andean highlands) and exploration by oil companies. Both colonization and exploration had a devastating impact on the indigenous population.

The Sierra, the region of earliest European settlement, was ruled for most of its history by a narrow rural oligarchy and had very limited opportunities for economic security or social advancement.

The elite of the Costa (coastal region) also had its roots in agriculture and the control of land, but its attention focused primarily on export crop production and commerce. Ethnically more diverse than the Hispanic elite of the Sierra, the Costa upper class included successful immigrant families drawn over the years by the region's expanding economy. Most of Ecuador's blacks were the descendants of the small numbers of African slaves who came to work on the region's plantations.The twentieth century saw the rise of an Ecuadorian middle class whose interests were genuinely distinct from the narrowly based rural oligarchy. The middle class transformed and influenced further Ecuadorian politics.

MIGRATION AND URBANIZATION

Ecuador has had no large-scale immigration since the colonial period, and emigrants have generally outnumbered newcomers. Within Ecuador, the largest migration is from rural areas to the cities, as urban employment opportunities widen. There is also a growing movement from the overpopulated highlands to the virgin lands of the Oriente and the coast.

For most of Ecuador's history, the majority of the population lived in the Sierra. Most of the Sierra population was clustered in the more habitablevalleys. The capital city, Quito, is located in avalleyat the foot of Mount Pichincha. From 1950 to 1974, however, large numbers of land-poor Sierra peasants migrated to the Costa; as a result, the Costa grew substantially faster than the nation as a whole. By the mid-1970s, population figures for the Sierra and the Costa were roughly similar. Costeos(residents of the Costa)from the central region often migrated to Guayaquil and its hinterland following declines in export crop production.Serranos(residents of the Sierra) were often first "pulled" by the expanding coastal economy and then "pushed" by population pressure, agrarian reform, and modernization.

The cacao boom of the late nineteenth and early twentieth centuries had initiated a limited pattern of immigration to the Costa. Immigrants from Europe and Latin America generally arrived with capital to exploit the lucrative Costa commercial opportunities.

Beginning in the 1950s, large numbers of Ecuadorians also migrated from the countryside to the cities, a trend apparent in both the Costa and the Sierra. This migration changed life not only in the nation's two largest cities, Guayaquil and Quito, but also in intermediate-sized cities. The case in the Costa, where the annual growth rate of intermediate-sized cities decreased even that of Guayaquil. Expansion of second-level cities in the Costa resulted in part from export growth. CHAPTER 2Macroeconomic environment and economic development of Ecuador

Historically, Ecuadors economy has been characterized by a rivalry between the large-scale, export-oriented agricultural enterprises of the coastal region and the smaller farms and businesses of the Sierra. The discovery of new petroleum fields after 1967 transformed the country into a world producer of oil.

By taking into account the three levels of development (Factor-Driven, Efficiency-Driven and Innovation Driven) described by Professor Klaus Schwab, World Economic Forum Editor in the Global Competitiveness Report 2011-2012, Ecuador is quoted as an efficiency-driven economy. This stage is marked by countries which have efficient productive practices on large markets, which allow companies to exploit economy of scale and have low levels of unemployment.

The indicators presented below in this chapter are indicators of economic growth, to see how the economy of Ecuador has developed.

Gross Domestic Product (GDP)

GDP measures all the market values of all final goods and services produced by economic activity within the country during a year ( in our case).

In order to analyze the macroeconomic development of Ecuador, we took as a reference the year 2007, because in this year the President Rafael Correa was elected and was about to implement major political, economic and social change. Another reason for which we have chosen this year is the fact that 2007 is the ultimate year until the crisis began. In 2008 the crisis which started in United States showed up in Ecuador. We want to see how and if the crisis affected the total market value of the final goods and services (GDP) in that period.

As for the major changes in the economy of Ecuador we need to point the 2000 year when after a severe crisis, Ecuador abandoned its own currency and dollarized its economy. Their current currency ( sucre) was no longer accepted as a mean of payment.

We will compare 2007 with 2010 to see what changes appeared in the level of the GDP and other major indicators.

Tabel 1: Ecuadors GDP for 5 years

Source: http://data.worldbank.org/country/ecuador

If we take a look at the table from above, we can see that the value of GDP has increased from 45.50 billions dollars in 2007 to 57.97 billions dollars in 2010. We are tempted to assert that the crisis didnt have a negativ impact on the GDP. We used the following formula to see the evolution of GDP from 2007 to 2010:

We obtained an index for 2010 reported to 2007 of 127% which means that GDP has increased its value by 1.27 times or with 27%.

Computing this index for each year compared to a preceding one we can see that GDP has only incresead: I2008/2007=119%; I2010/2009 =111%. It is observed a slight decrease from 2008 to 2009 (I2009/2008= 96%) which can be correlated with the start up of the world economic crisis. The incresing trend can be observed form the chart presented in Annex 1.

Despite these increasing values, crisis from 2008 affected Ecuador: we start to see some of the effects of the crisis on prices.Some have gone down, and also has demand, particularly for products on the market in big quantities, like flowers, shrimp, cacao, bananas. said by Eduardo Egas Pena, Ecuadors deputy minister of foreign relations, commerce, and integration.

Looking at a ranking of countries by level of GDP, made by Professor Klaus Schwab, World Economic Forum Editor in the Global Competitiveness Report 2011-2012 (see Annex 2) , we can see that Ecuador is ranked 66 from 142 countries. In the same Report, Professor Klaus Schwab makes a ranking of countries by their GDP as a percentage of the wolrd GDP. In this case, Ecuador is ranked 62 from 142.

GDP per capita

GDP per capita measures the level of products and services produced within the country by a person.

The level of GDP per capita for year 2007 is 3.29 thousands dollars as compared with a value of 4.01 for 2010. The increasing in the level of GDP per capita with 22% (I2010/2007 =122%) means a growth in the economy of Ecuador correlated with a increase in productivity.

Table 2: GDP per capita for five years

Source: http://databank.worldbank.org/ddp/home.do?Step=3&id=4

Almost for all the period ( excepting the period from 2008 to 2009) , the index for GDP per capita is increasing as follows : I2008/2007 = 117%; I2009/2008 = 110% .

From 2008 to 2009, the value of index for GDP per capita is decreasing with 5% (I2009/2008 = 95%). This decreasing can be explained by the begining of the crisis in 2008.

In the Global Competitiveness Report 2011-2012 for the level of GDP per capita of 4.01 thousands dollars, Ecuador is ranked 87 from 142 countries.

Real growth rate of the GDP

The GDP growth rate is the most important indicator of the economic health and it measures how fast the economy is growing.

Table 3: Real Growth Rate of the GDP (%)

Country199920002001200220032004200520062007200820092010

Ecuador-80.84.33.32.55.84.74.126.50.43.2

Source: http://www.indexmundi.com/g/g.aspx?c=ec&v=66

The level of growth rate of GDP for 2007 is 2%. We can see a great increase in 2008, up to 6.5%. This means an increase in the number of businesses and of course, of jobs and personal income. But in 2008 the crisis provoked an abruptly decrease of the real growth rate at 0.4%. This means that in the economy will be no investments and a low level of employment rate, waiting for improvements. Therefore with a growth rate of only 0.4%, the community had less money to spend on purchases. If the growth rate would have been less than 0.4% and negative, then the economy had suffered a recession.

Another explanation of why the level of GDP in Ecuador contracted by 0.4% was the lower pretroleum prices. Although the non-petroleum revenue rose in 2009 due to the higher tax receipts, petroleum revenue has dropped significantly, mainly because of the falling prices. Despite the signs of economy recovery in the second half of the year, the fiscal accounts showed a deficit, the balance of payment current account deteriorated and unemployment rose in 2009 (we will see this in chapter 3 and 4) .

In 2010, the real growth rate of the GDP has a value of 3.2%. This was possible due to the stagnation of the oil prices.

GDP by origin ( economic sectors contribution to the GDP formation)

In the early 1990s, Ecuador began to follow the policy of import substitution. Although in the 1980s this policy was a failure in promoting equitable growth and development, in the 1990s was seen as a way to achieve higher economic growth and decrease the level of poverty by reducing trade barriers and encouraging export activities.

Ecuador's geographical location gives it an advantage in agricultural and agro-industrial production. Its agricultural exports include asparagus, bananas, broccoli, cacao, coffee, flowers, heart of palm, lentils, papaya, passion fruit, pineapple, plantain, mango, red beans, and tomatoes.

Table 4: The percentage of the GDP represented by agricultural sector

Source: http://databank.worldbank.org/ddp/home.do?Step=3&id=4

As we can see from the table above, in 2010, the agricultural sector was about 6.97 % of the GDP. This percentage is sustained by the largest export of bananas. Industry has a percentage of 35.9% of the GDP and services 57.7% of the GDP.

Ecuador is the world's second largest exporter of shrimp, which makes up 2 percent of the nation's overall GDP.

Mining industry

Ecuador has abundant deposits of gold, silver, lead and zinc but the country does not possess the financial resources needed to develop this industry. Mining accounts for only 0.5% of Ecuador's GDP, and much of this revenue is earned from black market sales. Despite this deficiency of lack of financial resources, the mining industry on Ecuador economy is an emerging industry and can grow and develop through the help of foreign investors.

Manufacturing

Due to the late industrialization in Ecuador than in other Latin American countries, manufacturing began to develop in the middle of 1960s. At the beginning, this small industrial sector consisted almost entirely of textile production, food processing and artisan activity. In the 1970s, due to the petroleum revenues, manufacturing had become the most dynamic sector of the economy.

Table 5: The percentages of the GDP represented by manufacturing industry

Source: http://databank.worldbank.org/ddp/home.do?Step=3&id=4

Analyzing the table above, and comparing the percentages with the ones from the agricultural sector we can see that the manufacturing industry represents more in the level of GDP. Also, it shows a constant trend as a percentage from GDP during these years.Tourism

Tourism plays an increasingly important role in the Ecudorian economy. With its four regions: the Andes mountains (Sierra), the Amazon rainforest, the Galapagos Islands and the Coast. The number of arrivals in Ecuador was 1,047,000 tourists in 2010 in comparison to 2000 when there was recorded only 103,893 arrivals.Services

Although trade in services has grown, year after year, in importance in the world economy, in Ecuador has decreased from 8.28 ( % of the GDP ) in 2007 to 7.73 (% of the GDP ) in 2010.

Table 6: Trade in services

Source: http://data.worldbank.org/country/ecuador

To see an evolution on the graph please find Annex 7. If the trade in services for Ecuador would have grown then the competition among businesses in the country had increased and the prices had gone down correlated with a high quality of services.

GDP by destination ( private and public consumption)

Table 7: Private consumption expenditures ( % of the GDP)

Source: : http://data.worldbank.org/country/ecuador Final consumption expenditure is the sum of households final consumption expenditures

( formerly private consumption) and general government final consumption expenditure .

Table 8: Final consumption expenditures

Source: : http://data.worldbank.org/country/ecuadorGross fixed capital formation (formerly gross domestic fixed investments) includes land improvements (ditches, drains, fences and so on), plant, machinery, and the equipment purchases. It also includes the construction of roads, railways, schools, offices, hospitals, private residential dwellings and commercial and industrial buildings.

Table 9: Gross fixed capital formation (% of the GDP)

Source: : http://data.worldbank.org/country/ecuadorTo analyze these data we need to see how the percentage of gross fixed capital formation annual increased or decreased.

Table 10: Gross fixed capital formation ( annual % of growth)

Source: : http://data.worldbank.org/country/ecuador

Negative values of the gross capital formation ( annual % growth) can mean disposals of fixed assets, which can be sold or surrendered in capital transfers or barter. Positive values signify the purchase of new assets, acquired through barter, received as capital transfers or acquired under a financial lease.

The index of Economic Freedom

The index of Economic Freedom measures the extent of the economic freedom of a country ( in our case Ecuador) around the world. It is based on the assessment of the independent experts for ten freedom criteria listed in the Annex 8.

Increased economic freedom is strongly associated with high GDP growth and better living standards. So, if we compare the real growth rate in 2008 of 6.5% to 55.2 index of economic freedom we can state the sentence from above.

Table 11: Values of economic freedom

Source: http://index-of-economic-freedom.findthedata.org/l/49/Ecuador

We can observe in table above the values of the index of economic freedom for Ecuador. If we have to take the last value ( over 2010), which is 49.3 we should include Ecuador under the interval of repressed economies (0-49.9). But if we take into consideration the interval between 2006 and 2009 we can include Ecuador on the mostly unfree economies interval (50-59.9). What we have said before means that Ecuador is a country in which the state ( the government) is highly involved in the economy. President Correa's economic priorities include higher social spending, increased government control over strategic sectors, and ensuring a greater share of natural resource revenues for the state. The governments economic policies continue to evolve, creating some uncertainty for the business community.

One of the main components of Index of Economic Freedom is Business Freedom. It is a quantitative measure of the ability to start, operate and close a business. Presently, Ecuador, performs poorly in business freedom. Burdensome regulations restrict businesses development.

Table 12: Values of business freedom for five years

Source: http://index-of-economic-freedom.findthedata.org/l/49/Ecuador

Comparing the low level of the business freedom to high level of Corruption Perception Index ( CPI- presented below) we can see why the investments in Ecuador are so poorly developed.

Another component of the Index of Economic Freedom is Investment Freedom. If we are to compare the investment climate in Ecuador to the investment climate from countries from Latin America we can assert that Ecuador has a favorable investment climate. The dollarized economy, combined with a stable economy culture and low wage levels, create many opportunities for foreign investors.

Table 13: Values of investment freedom for five years

Source: http://index-of-economic-freedom.findthedata.org/l/49/Ecuador

From comparing the values of investment freedom to values of gross fixed capital formation we can discover some obstacles in the investment climate of Ecuador. Those obstacles are related to infrastructure, telecommunications networks and roads and so on.

The fiscal freedom is a measure of the tax burden imposed by government.

Table 14: Values of fiscal freedom for five years

Source: http://index-of-economic-freedom.findthedata.org/l/49/Ecuador

We can observe from the table that Ecuador has high levels of fiscal freedom. It has moderate personal and corporate tax rates and overall tax revenue is not excessively high as a percentage of GDP.

Perceived Corruption Index

The Corruption Perception Index ranks countries and territories according to their perceived levels of public sector corruption. It is an aggregate indicator that combines different sources of information about corruption, making it possible to compare countries.

Table 15: Values of Corruption perception index for six years

Source: http://cpi.transparency.org/cpi2011/results/

After the values of 2010 and 2011 of the CPI, Ecuador is ranked with 120 from 182 countries. So, as we can see Ecuador is confronted with high level of corruption and weak government transparency. Overall, government transparency seems to have improved somehow in the past four years. This thing was possible due to the new president elected in 2007 ( Rafael Correa ) who brought political stability. Although the government transparency has improved, the level of corruption has increased up to 2.5 CPI in 2010 and 2.7 CPI in 2011.

The increasing level of CPI can reduce the volume and efficiency of investments and thus economic growth. It can reallocate the resources from potentially productive sectors to unproductive sectors. Bribes that are often the major part in any act of corruption can increase the cost of production which reflects in higher output prices.

Inflation rate

Table 16 : The level of inflation for five years

Source: http://data.worldbank.org/country/ecuadorCHAPTER 3

Human Development Index (HDI)

The HDI is a summary measure for assessing long-term progress in three basic dimensions of human

development: a long and healthy life, access to knowledge and a decent standard of living. Long and healthy life is measured by life expectancy. Access to knowledge is measured by mean years of adult education, which is the average number of years of education received in a life-time by people aged 25 years and older; and expected years of schooling for children of school-entrance age. Standard of living is measured by Gross National Income (GNI) per capita expressed in constant 2005 PPP$.

Ecuadors HDI value and rank

Ecuadors HDI value for 2011 is 0.720, positioning the country at 83 out of 187 countries and territories. Between 1980 and 2011, Ecuadors HDI value increased from 0.591 to 0.720, an increase of 22% or average annual increase of about 0.6%.

In the 2010 HDR(Human Development Reports), Ecuador was ranked 77 out of 169 countries. However, it is misleading to compare values and rankings with those of previously published reports, because the underlying data and methods have changed, as well as the number of countries included in the HDI.

Table 17 reviews Ecuadors progress in each of the HDI indicators. Between 1980 and 2011, Ecuadors life expectancy at birth increased by 12.7 years, mean years of schooling increased by 2.2 years and expected years of schooling increased by 2.3 years. Ecuadors GNI per capita increased by about 36.0 per cent between 1980 and 2011. This increase characterizes an improvement in the standards of living correlated with high level of life expectancy, as well as with an easier access to knowledge (see Annex 9).Table 17: Ecuadors HDI trends based on consistent time series data, new component indicators

and new methodology

Life expectancyat birthExpected yearsof schoolingMeans years ofschoolingGNI per capita(2005 PPP$)HDI value

198062.911.75.45,5880.591

199068.912.26.64,8710.636

200073.412.96.95,0050.668

200574.713.27.36,3800.695

201075.5147.67,4620.718

201175.6147.67,5890.72

Source: Human Development Report 2011, http://hdr.undp.org/en/reports/global/hdr2011/Assessing progress relative to other countries

Long-term progress can be usefully assessed relative to other countriesboth in terms of geographical location and HDI value. For instance, during the period between 1980 and 2011 Ecuador, Mexico and Jamaica experienced different degrees of progress toward increasing their HDIs (see Annex 10).

Ecuadors 2011 HDI of 0.720 is below the average of 0.741 for countries in the high human development group and below the average of 0.731 for countries in Latin America and the Caribbean. From Latin America and the Caribbean, countries which are close to Ecuador in 2011 HDI rank and population size are Bolivarian Republic of Venezuela and Peru which have HDIs ranked 73 and 80 respectively (see Table 18).Table 18: Ecuadors HDI indicators for 2011 relative to selected countries and groups

HDI valueHDI rankLifeexpectancyat birthExpectedyears ofschoolingMean yearsof schoolingGNI percapita(PPP US$)

Ecuador0.728375.6147.67,589

Bolivarian Republicof Venezuela0.7357374.414.27.610,656

Peru0.725807412.98.78,389

Latin America andthe Caribbean0.73174.413.67.810,119

High HDI0.74173.113.68.511,579

Source: Human Development Report 2011, http://hdr.undp.org/en/reports/global/hdr2011/Inequality-adjusted HDI (IHDI)

The HDI is an average measure of basic human development achievements in a country. Like all averages, the HDI masks inequality in the distribution of human development across the population at level. The 2010 HDR introduced the inequality adjusted HDI (IHDI), which takes into account inequality in all three dimensions of the HDI by discounting each dimensions average value according to its level of inequality. The HDI can be viewed as an index of 'potential' human development and IHDI as an index of actual human development. The loss in potential human development due to inequality is given by the difference between the HDI and the IHDI, and can be expressed as a percentage. Ecuadors HDI for 2011 is 0.720. However, when the value is discounted for inequality, the HDI falls to 0.535, a loss of 25.8 per cent due to inequality in the distribution of the dimension indices. Due to heterogeneous distribution of the population across the country level, as are indigenous, we have recorded a loss of 25.8% expressing the inequality between high and low developed population.Table 19: Ecuadors IHDI for 2011 relative to selected countries and groups

IHDI valueOverallLoss (%)Loss due toinequality in lifeexpectancy atbirth (%)Loss due toinequality ineducation (%)Loss due toinequality inincome (%)

Ecuador0.53525.814.122.138.8

Bolivarian Republic ofVenezuela0.5426.612.218.144.9

Peru0.55723.214.82430

Latin America and theCaribbean0.5426.113.423.239.3

High HDI0.5920.512.418.928.2

Source: Human Development Report 2011, http://hdr.undp.org/en/reports/global/hdr2011/Gender Inequality Index (GII)

The Gender Inequality Index (GII) reflects gender-based inequalities in three dimensions reproductive health, empowerment, and economic activity. Reproductive health is measured by maternal mortality and adolescent fertility rates; empowerment is measured by the share of parliamentary seats held by each gender and attainment at secondary and higher education by each gender; and economic activity is measured by the labor market participation rate for each gender. The GII shows the loss in human development due to inequality between female and male achievements in the three GII dimensions. Ecuador has a GII value of 0.469, ranking it 85 out of 146 countries in the 2011 index. In Ecuador, 32.3% of parliamentary seats are held by women, and 44.2% of adult women have reached a secondary or higher level of education compared to 45.8%of their male counterparts. For every 100,000 live births, 140 women die from pregnancy related causes; and the adolescent fertility rate is 82.8 births per 1000 live births. Female participation in the labor market is 47.1% compared to 77.7% for men.

Table 20: Ecuadors GII for 2011 relative to selected countries and groups

GIIvalueGIIRankMaternalmortalityratioAdolescentfertility rateFemaleseats inparliament(%)Population with atleast secondaryeducation (%)Labour forceparticipationrate (%)

FemaleMaleFemaleMale

Ecuador0.4698514082.832.344.245.847.177.7

BolivarianRepublic ofVenezuela0.447786889.91733.429.651.780.3

Peru0.415729854.727.557.676.158.276

Latin America andthe Caribbean0.4458073.718.750.552.251.779.9

High HDI0.4095151.613.56164.647.875

Source: Human Development Report 2011, http://hdr.undp.org/en/reports/global/hdr2011/Multidimensional Poverty Index (MPI)

The 2010 HDR introduced the Multidimensional Poverty Index (MPI), which identifies multiple deprivations in the same households in education, health and standard of living. The education and health dimensions are based on two indicators each, while the standard of living dimension is based on six indicators. A cut-off of 33.3 %, which is the equivalent of one-third of the weighted indicators, is used to distinguish between the poor and non poor. If the household deprivation score is 33.3% or greater, that household (and everyone in it) is multidimensionally poor. Households with a deprivation score greater than or equal to 20% but less than 33.3% are vulnerable to or at risk of becoming multidimensional poor. In Ecuador 2.2% of the population suffer multiple deprivations while an additional 2.1% are vulnerable to multiple deprivations. The intensity of deprivation in Ecuador, which is the average percentage of deprivation experienced by people in multidimensional poverty, is 41.6%.

The MPI, which is the share of the population that is multi-dimensionally poor, adjusted by the intensity of the deprivations, is 0.9%. Peru has an MPI of 8.6%.

Table 21 compares income poverty, measured by the percentage of the population living below PPP US$1.25 per day, and multidimensional deprivations in Ecuador. It shows that income poverty only tells part of the story. The multidimensional poverty headcount is 2.9% points lower than income poverty. This implies that individuals living below the income poverty line may have access to non-income resources. Table 21 also shows the percentage of Ecuadors population that lives in severe poverty (deprivation score is 50% or more) and that are vulnerable to poverty (deprivation score between 20 and 30%). Figures for Peru are also shown in the table for comparison.

Table 21: Ecuadors MPI for 2011

MPIvalueHeadcount(%)Intensity ofdeprivation(%)Populationvulnerable topoverty (%)Populationin severepoverty (%)Population belowincome povertyline (%)

Ecuador0.0092.241.62.10.65.1

Peru0.08619.943.216.965.9

Source: Human Development Report 2011, http://hdr.undp.org/en/reports/global/hdr2011/Unemployment rate:

Unemployed workers are those who are currently not working but are willing and able to work for pay, currently available to work, and have actively searched for work.

The National Institute of Statistics and Census (INEC in Spanish) released its quarterly report about unemployment in Ecuador, where the unemployment rate in 2010 is 7.6%, comparing to 2009 when it reached a level of 8.5%.

Table 22: Level of unemployment rate

2007200820092010

Unemployment, female (% of female labor force)7,69,68,4

Unemployment, male (% of male labor force)55,65,2

Unemployment, total (% of total labor force)6,17,36,57,6

Source: : http://data.worldbank.org/country/ecuadorUnemployment in Ecuador went from 6.1% in 2007 to 7.6% in the 2010. However, some economists and even casual observers believe that the number must be higher, in addition, to adding the number of Ecuadorians underemployed.

In light of the analysis made by Carlos Felipe Jaramillo [es], the World Bank Director for the Andean region, who said that this country has had a notable growth in the last three years because in 2007 its growth was around 2%, while in 2008 it rose significantly to 6.5%, but in 2009, due to the global crisis, the growth slowed. It was expected that the Ecuadorian economy was going to collapse, but that did not happen. However, the impact of the economic downturn has had its share of negative effects.

Some are blaming the drought in some parts of the country for contributing to this unemployment, but others point to the heavy rains in other regions and the overproduction of grains like rice that may have a particular effect on the rise of unemployment.

There are some explanations for employment problem in Ecuador. Byron Villacis, the INEC's director explains that unemployment is traditionally higher during the first quarter of each year due to the end of the school year in the Coastal region and is the result of strong winter Ecuador have endured, especially in towns of the Ecuadorian coast. The survey was taken in 127 urban Ecuadorian centers in the five provinces. It showed that: Unemployment fell substantially in cities like Machala, where it fell from 10.9% recorded between January and March 2009, to 8% in the same months in 2010. Also, in Guayaquil, the figures dropped from 14% to 12.3%, in Cuenca, from 4.9% to 3.7% and in Ambato, from 4.1% to 3.1%. Only in Quito it shows a slight increase of 7% to 7.1%.GINI index in Ecuador

The value for GINI index in Ecuador was 49.26 as of 2010. Over the past 23 years this indicator reached a maximum value of 60.13 in 1999 and a minimum value of 49.26 in 2010. Gini index measures the extent to which the distribution of income (or, in some cases, consumption expenditure) among individuals or households within an economy deviates from a perfectly equal distribution. A Gini index of 0 represents perfect equality, while an index of 100 implies perfect inequality.

Table 23: The values of GINI Index

YearValue

200056.6

200355.1

200554.1

200653.2

200754.3

200850.6

200949.4

201049.3

Source: World Bank, Development Research GroupAccording to the Annex11 where are presented the prices in Ecuador we observe a striking similarity with prices in Romania for all categories.

Population below poverty line:

The percentage of population below poverty line in 2010 is about 33.1%.National estimates of the percentage of the population falling below the poverty line are based on surveys of sub-groups, with the results weighted by the number of people in each group. Definitions of poverty vary considerably among nations. For example, rich nations generally employ more generous standards of poverty than poor nations.

Table 24: The values of poverty line in Ecuador

Country19992001200320052006200720082010

Ecuador504541380538.336.735.133.1

Source: www.indexmundi.comEcuador's population was burdened by an unequal distribution of wealth in the 1990s. In 1996 the wealthiest 20% of Ecuadorians earned half of the nation's total income, while the poorest 20% collected only 5%. The gap between rich and poor grew noticeably during the 1999 economic crisis, when much of the middle-class fell below the poverty line because of rampant currency devaluation and inflation. Figures released by international organizations in 2000 show that half of all Ecuadorians were living in poverty, a dramatic increase from just a few years earlier, when the poverty rate was estimated at 35%. Poverty is more pervasive in rural areas of Ecuador, affecting almost 70% of non-urban inhabitants (2000).

Because of the contraction of Ecuador's middle class, the division between the upper and lower classes has widened, allowing for little upward mobility among the nation's poor. Members of the elite are well established within their specialist fields as doctors, lawyers, politicians, or leading business entrepreneurs. The middle class embraces a wide range of professional and bluecollar workers, including teachers, bus and taxi drivers, service and retail employees, oil industry employees, small-business owners, and small-scale farmers. The largest segment of Ecuador's population includes peasants and subsistence farmers, informal sector vendors, agribusiness employees, temporary workers, and the unemployed. Most of these Ecuadorians are denied the education and connections to gain access to the small professional sector and are thus confined to low-paid jobs.

The design of Ecuador's education system causes similar problems for economically disadvantaged citizens because the government subsidizes university education at the expense of elementary and secondary schools. Wealthy families can afford to send their children to the best private schools, while poorer families must settle for the variable quality of public education and disruption caused by frequent teacher strikes. Access to education is also divided along rural/urban lines, with public expenditure favoring urban schools and neglecting vocational and manual skills training.CHAPTER 4

The health of the Ecuadorian economy is dependent on foreign trade. But this dependence leaves the country vulnerable to the vagaries of international commerce, especially the unpredictability of prices for Ecuadorian export goods. Ecuador has trade agreements with Peru and Colombia and is a member of the Andean Community (CAN). As a member of the WTO, Ecuador limits most of its tariff rates to 30% or less.

As a member of the Andean Community of Nations (CAN), Ecuador grants and receives exemptions from tariffs (i.e., reduced ad valorem tariffs and no application of the Andean Price Band System [APBS]) for products from the other CAN countries (Bolivia, Colombia, and Peru).

Historical overview

Because of the oil boom, the balance-of-payments situation improved during the mid- to late 1970s. Fish, timber, and other agricultural products, mainly bananas, coffee, cacao, and sugar, had accounted for almost 90% of foreign-exchange earnings. But the dramatic increase in petroleum production that began in 1972 profoundly altered the country's long-term export structure.

Austerity measures were implemented in the mid-1980s to reduce the cost of subsidized goods, but by the end of the decade the government had failed to adequately tackle its growing budget deficits or its foreign debt payment problems. Also, to deal with the balance-of-payments crisis, the government in cooperation with an IMF fiscal austerity program, devalued the sucre the national currency, introduced new exchange controls, prohibited or limited the importation of some items, and reduced fuel and export subsidies. In 1986 the international price of crude petroleum dropped sharply to an average of US$15.35 from the previous year's average of US$27.16. The result was a decline in foreign-exchange earnings and a return to chronic current-account deficits during the 1986 -1989 period.

In 1999/2000, Ecuador suffered a severe economic crisis, poverty increased significantly, the banking system collapsed, and Ecuador defaulted on its external debt. The political situation was unstable, hyperinflationary situation (around 80%) and a balance of payments crisis seemed eminent with a debt-to-exports ratio of 278%. In March 2000, the Congress approved a series of structural reforms that also provided for the adoption of the US dollar as legal tender. Dollarization stabilized the economy, and positive growth returned in the years that followed, helped by high oil prices, remittances, and increased non-traditional exports. From 2002-06 the economy grew an average of 5.2% per year, the highest five-year average in 25 years. After moderate growth in 2007, the economy reached a growth rate of 7.2% in 2008, in large part due to high global petroleum prices and increased public sector investment. President Rafael Correa, who took office in January 2007, as mentioned in chapters above, defaulted in December 2008 on Ecuador's sovereign debt, which, with a total face value of approximately US$3.2 billion, represented about 80% of Ecuador's private external debt. In May 2009, Ecuador bought back 91% of its "defaulted" bonds via an international auction. Economic policies under the Correa administration - including an announcement in late 2009 of its intention to terminate 13 bilateral investment treaties, including one with the United States - have generated economic uncertainty and discouraged private investment. The Ecuadorian economy contracted 0.4% growth rate in 2009 due to the global financial crisis and to the sharp decline in world oil prices and remittance flows. In January 2009, the government sought to decrease imports by imposing safeguards, which were removed in July 2010.

Growth picked up to a 3.7% rate in 2010, according to Ecuadorian government estimates.

Further, we will analyze how the new development model influenced the country position on the external level as well as all its economic relation with the outside partners and economies by computing a series of indicators.

In order to compute the GDP according to the destination of goods and services produced in an open economy, we use the following formula:

GDP = C + G + GFCF + CS + (X-M), where: C = Private Consumption; G = General Government Expenses; GFCF = Gross Fixed Capital Formation; CS = Central Stock Movement; (X-M) = Net Exports of Goods and Services of an open economy (Net exports = Exports Imports).

$28,962,310,000 + $5,195,881,000 + $10,129,080,000 + $924,296,000.00 + ($16,070,250,000 - $15,618,690,000) = $69,429,556,000

$39,281,070,000 + $6,807,254,000 + $14,587,510,000 + $589,111,000.00 + ($19,610,460,000 - $22,650,620,000) = $58,224,785,000

We can see that this indicator had decreased during this period due to the significant increase in the imports in 2010.

Next, we computed the indicators, on a yearly basis, which illustrate the static influence of the international economic flows on the country economy.

Relative size and importance of foreign trade on the national economy:

the average propensity to export (external performance rate of the economy):

23.15%

= 33.68%

We observe that the average propensity to export increased approximately with 10% which represents that the Ecuador capacity to export is growing and this influences in a positive way the economic performance of the country and the requirements for foreign capital aids or goods decrease.

the average propensity to import (import dependence rate):

=22.50%

=38.90%

Along with the increase in the average propensity to export, the average propensity to import had grown with more than 15% which represents that country is still dependent on the external goods. Also this increase is determined by the decrease in GDP for 2010 which means that a part of indicators growth is on the account of GDP changes.

the relative significance of foreign trade in goods and services:

100 = 45.64%

72.58%

It can be seen that the importance of foreign trade of goods and services had grown significantly and in 2010 it represents more than 70% of the GDP. It also describes that the importance of international trade in the overall economy increased and countrys economy has a really high degree of openness to trade.

the relative significance of foreign trade imbalance:

0.65%

100 = -5.22%

We have a positive trade balance in 2007 and then a negative one in 2010 that occurred due to the fact that imports were higher than exports.

The export of goods and services (% of GDP)

This indicator represents the value of all goods and other market services provided to the rest of the world. They include the value of merchandise, freight, insurance, transport, travel, royalties, license fees, and other services, such as communication, construction, financial, information, business, personal, and government services. They exclude compensation of employees and investment income (formerly called factor services) and transfer payments.export of goods and services for 2007 = 35%

export of goods and services for 2010 = 33%We can observe that this indicator also decreased. This 2% decrease that isnt really significant shows that the overall value of the goods and services provided to the rest of the world by Ecuador has a constant tendency during this period.

Influence of the foreign investments

Foreign direct investment are the net inflows of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in the Ecuadors economy by a foreign investor. It is the sum of equity capital, reinvestment of earnings, other long-term capital, and short-term capital as shown in the balance of payments. This series shows net inflows (new investment inflows less disinvestment) in the reporting economy from foreign investors. The government welcomes foreign investment and has substantially decreased regulatory barriers in recent years, though Ecuador's economy retains a considerable protectionist orientation.

Foreign direct investment for 2007: $194158526.9

Foreign direct investment for 2010: $167296320.4

We can notice a slight decrease of this indicator which presumes that direct investment into production in the Ecuador by a company located in another country is less in 2010 comparing to 2007.

Foreign direct investment, net inflows (as % of GDP) in Ecuador was 0.43% for 2007 and 0.29% as of 2010. Its highest value over the past 34 years was 3.89% in 1999, while its lowest value was -0.35% in 1976. The most important foreign investments during 2007 until 2010 belong to Panama, Spain, China, Canada, Mexico and others. The most attractive sectors for investments are: manufacturing, transport and communications, commerce, agriculture.

Portfolio investment excluding liabilities constituting foreign authorities reserves covers transactions in equity securities and debt securities.

Portfolio investments for 2007: ($118,274,400.00)

Portfolio investments for 2010: ($731,103,600.00)

The influence of the external sector

Marginal propensity of an economy to export/import goods and services is an indicator that expresses the dynamic influence of the international flows on the domestic economy:

and

= 100 = 31.60%

100 =100 = 62.76%

We can see that which supposes that the larger the value of marginal propensity to import the larger the required amount for foreign aid, in the form of goods and services from abroad.

Trade dependence index (openness index) is the value of the total trade as a percentage of GDP. It measures the importance of international trade in the overall economy and gives a degree to which an economy is open to trade.

TDI=

100 = 45.64%

72.58%

We can see that later than 2007 as Ecuador has taken substantial steps to liberalize and improve the predictability and transparency of its trade regime through autonomous, regional and multilateral initiatives, also decreased its trade restrictions and barriers on foreign exchange regimes, the total exports and imports increased, but also GDP slightly decreased which means a bigger share of trade transactions in the countrys value.

Trade share indicator tells us how important the trade share of a country is in a particular economic group or profile. Changes in the trade share over the time may indicate that economy in question is becoming more integrated. As for Ecuador we examine how integrated it is in the Andean Community of Nations (the customs union comprising the South American countries of Bolivia, Colombia, Ecuador and Peru).TS== 11%

14%

As we can see the trade share of Ecuador increased with 3% from 2007 to 2010 in the Andean Community of nations in the context of external economic relations.

As for the international performance and competitiveness level of the Ecuador we will analyze the following indicators:

Net trade performance Indicators

The normalized trade balance represents a record of companys trade with the rest of the world normalized with its own trade: Z =0,014

-0,072

We can observe that in 2007 the trade balance is normalized and it is close to 0 which means that approximately imports are financed by exports. However, in 2010 it is registered a deficit of the balance of trade and it is due to the increase in the value of imports.

Export/Import coverage tells us whether or not the countrys imports are fully paid for by the exports in a given year: C= 1,0289

0,8657

Economists expect that the trade balance will be zero in the long run, thus imports are financed by exports, but it may vary considerably over shorter periods. When this ratio is 1 it signals full coverage of imports with exports as we have in 2007. A ratio less than 1 expresses a trade deficit that was registered in 2010.

Competitiveness indicators

The real effective exchange rate is the nominal effective exchange rate (a measure of the value of a currency against a weighted average of several foreign currencies) divided by a price deflator or index of costs.

The real effective exchange rate for 2007: 92.24

The real effective exchange rate for 2010: 96.70It is noticed a small increase in the value of the countrys currency. This is also an indicator that the value an individualconsumer will pay for an imported good or service from country increased.

The value for Real effective exchange rate index (2005 = 100) in Ecuador was 96.70 as of 2010. Over the past 30 years this indicator reached a maximum value of 194.65 in 1981 and a minimum value of 67.74 in 2000.

Annex 9: The contribution of each component index to Ecuadors HDI since 1980.

Source: Human Development Report 2011, http://hdr.undp.org/en/reports/global/hdr2011/Annex 10: Trends in Ecuadors HDI 1980-2011

Source: Human Development Report 2011, http://hdr.undp.org/en/reports/global/hdr2011/Annex 11: Prices in EcuadorRestaurants

Meal, Inexpensive Restaurant3.31$

Combo Meal at McDonalds or Similar4.17$

Domestic Beer (0.5 liter draught)0.95$

Imported Beer (0.33 liter bottle)2.33$

Water (0.33 liter bottle)0.62$

Markets

Loaf of Fresh White Bread (500g)1.35$

Eggs (12)1.76$

Apples (1kg)1.83$

Bottle of Wine (Mid-Range)10.20$

Pack of Cigarettes (Marlboro)3.18$

Transportation

One-way Ticket (local transport)0.25$

Monthly Pass14.50$

Taxi 1km (Normal Tariff)1.33$

Gasoline (1 liter)0.62$

Volkswagen Golf 1.4 90 KW Trendline (Or Equivalent New Car)24,000.00$

Utilities (Monthly)

Basic (Electricity, Gas, Water, Garbage) for 85m2 Apartment34.76$

nternet (6 Mbps, Unlimited Data, Cable/ADSL)63.30$

Sports And Leisure

Fitness Club, Monthly Fee for 1 Adult31.88$

Tennis Court Rent (1 Hour on Weekend)8.58$

Clothing And Shoes

1 Pair of Levis 501 (Or Equivalent)64.25$

1 Summer Dress in a Chain Store (Zara, H&M, ...)50.33$

1 Pair of Nike Shoes106.43$

Rent Per Month

Apartment (1 bedroom) in City Centre416.11$

Apartment (1 bedroom) Outside of Centre285.00$

Apartment (3 bedrooms) in City Centre754.17$

Apartment (3 bedrooms) Outside of Centre507.78$

Buy Apartment Price

Price per Square Meter to Buy Apartment in City Centre923.59$

Price per Square Meter to Buy Apartment Outside of Centre664.56$

Salaries And Financing

Median Monthly Disposable Salary (After Tax)365.36$

Source: http://www.numbeo.com/cost-of-living/country_result.jsp?country=EcuadorThese data are based on 582 entries in the past 18 months from 68 different contributors.

Last update: May, 2012

Annex 12: The trend of poverty line in Ecuador

Source: www.indexmundi.com HYPERLINK "https://www.cia.gov/library/publications/the-world-factbook/rankorder/2102rank.html" \t "_blank" https://www.cia.gov/library/publications/the-world-factbook/rankorder/2102rank.html

HYPERLINK "http://www.nationsencyclopedia.com/economies/Americas/Ecuador-INFRASTRUCTURE-POWER-AND-COMMUNICATIONS.html" http://www.nationsencyclopedia.com/economies/Americas/Ecuador-INFRASTRUCTURE-POWER-AND-COMMUNICATIONS.html

HYPERLINK "http://www.washingtontimes.com/news/2008/nov/04/economic-crisis-starts-to-show-up-in-ecuador/?page=all"http://www.washingtontimes.com/news/2008/nov/04/economic-crisis-starts-to-show-up-in-ecuador/?page=all

HYPERLINK "http://www.indexmundi.com/ecuador/gdp_composition_by_sector.html"http://www.indexmundi.com/ecuador/gdp_composition_by_sector.html

Acosta, 2001

WTO Secretariat report on the trade policies and practices

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