The Lexus and the Olive Tree

In his introduction to The Lexus and the Olive Tree Freidman states that "[t]he world is 10 years old. It was born when the Berlin Wall fell in 1989. The Cold War system was replaced by a new, very greased, interconnected system called globalization." He is right, as evidenced first by the growth of portable computers and other electronic products, we have six portable and notebook computers in a house of four people, each connected through a wireless high-speed network to the other and the world not to mention cell phones (we all have one or more), beepers, fax machines (even my grand parents have one) and PDA's. In addition we have seen the fall of communism (or the liberalization as in China) in all parts of the world except Cuba and North Korea. This new world, where as Lawrence Grossman former president of NBC notes, we have all become broadcasters, has a new set of rules for individuals and nations. In this paper I will detail the rules of globalization as noted by Freidman as well as the challenges that Ecuador has faced as a global economy, the polices that Ecuador has pursued in facing these challenges, and lastly my interpretation of Freidman's reaction to these policies.

Freidman defines globalization as "the overarching international system shaping the domestic relations of virtually every country... [it] involves the inexorable integration of markets, nation-states and technologies to a degree never witnessed before... enabling individuals, corporations and nation-states to reach around the world farther, faster, deeper, and cheaper than ever before...." This contrasts to the Cold War system, dominated by two super powers, its black and white politics with the clash between capitalism and communism, real and imaginary trade barriers and every country was in one of three camps, the communist camp, the Western camp and the neutral camp, the ability of third world countries to play Russia against the United States or vice versa to support deficit spending programs and other social programs. In other words, during the Cold War the world was defined by division, the throw weight of nuclear missiles, and the knowledge that we knew that two people were in charge. Now the world it is defined by the "electronic herd", that group of faceless stock, bond and currency traders as well as you and me moving their money around looking for the best economic return and the financial "supermarkets" of Wall Street, London and Hong Kong.

So now that we have defined what globalization means in the theoretical sense, I am going to look at the practical implications of this globalization on Ecuador

Ecuador in located on the northwest of South America, bordering Columbia, Peru and the Pacific Ocean, it is slightly smaller than Nevada. Its estimated population as of July 2003 is 13.7 million people, with a approximately 70% (2001) of its population below the poverty line. In 2002 the country's inflation rate was approximately 12.5% and its unemployment rate was 7.7% combined with widespread underemployment . The breakdown of the labor force by occupation is agriculture 30%, industry 25% and services 45%. In the post World War II era Ecuador has continued to undergo significant political turmoil, establishing a constitutional government with Galo Plaza serving as President in 1948. This was followed by a four-man military junta, which was anti communist seizing power in July 1963, claiming that they would the country to constitutional rule when the promised socio economic reforms had been completed. This military Junta was succeeded by direct military rule from 1972 to 1979 under Rodriquez Lara and lastly returned to democratic rule in 1979.

Prior to the 1970's Ecuador's primary exports were bananas and other agricultural products like coffee and sugar and its primary trading partner was the United States, accounting for over 50% of its exports. In the late 1960's petroleum fields were discovered in the eastern part of the country and Ecuador became a world producer of oil. Largely because of its petroleum exports Ecuador's trade surplus grew to $350 million in 1974 from $43 million in 1972. In addition, Real Gross Domestic Product increase by an average of 9 percent per year through the 1970's and the country's external debt grew from $324 million to $4.5 billion.

Ecuador's foreign relations have traditionally been in the Western camp, as defined earlier, however it membership in the Organization of Petroleum Exporting Countries (OPEC) since the 1970's gave the country greater latitude to set foreign relation goals and it was more active in its relations with Russia, Europe, Cuba and other Third World countries than other South American countries.

As a result of a depressed oil market in 1997 and 1998, the effects of El Nino with its heavy flooding and the government's failure to cut spending or bolster revenues worsened the country's fiscal deficit and increased unemployment and underemployment rates. By the beginning of 1999 Ecuador's foreign debt which totaled just under $16 Billion, it became the first country to default on interest payments on "Brady bonds", these are dollar denominated debts named after an American Treasury secretary, Nicholas Brady, who helped to supervise Latin America's debt restructuring in the late 1980s, the debts are secured by American Treasury bonds, and rock the global financial markets. In order to reopen the capital markets the country approached the International Monetary Fund for a loan of $400 million which would also open up $1 Billion of borrowings from the World Bank and the InterAmerican Development Bank. What all this means is that like it or not Ecuador is now subject organizations like the IMF the World Trade Organization and the Group of Eight Industrialized Nations (G8) whose goals are to implement "free-market capitalism" with its policies of low inflation, price stability, a balanced budget less government, open markets without tariffs, privatizing state owned enterprises and removing foreign investment restrictions as compared to Olive Tree policies of government social programs and price subsidies (an IMF Report issued in September 2003 notes that Ecuador imports gas for $.77 per gallon but sells it for $.19 per gallon costing the government approximately $202 million per year), bloated government and import restrictions.

The challenges that confront Ecuador, a country which has never had strong political institutions as both noted above and reinforced by the bloodless coup d'etat in January 2000 which was precipitated by President Mahuad's plan to dollarize the currency, and supported by the United States, is to find a way to implement the demands of the IMF as detailed below and mollify the various political groups.