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FROM ECUADOR… TO THE WORLD

Thanks to dollarization, the Ecuadorian economy has enjoyed financial stability during the last few years. However, the adoption to the dollar has also decreased the comparative advantage of Ecuadorian enterprises in the region, since the dollar has increased salaries and costs of production.

"Globalization should oblige Ecuador to be more attractive, as much for national investors as for foreign companies, starting with the fact that we have a dollarized economy which makes us less competitive than our neighbors" underlines Gustavo Romero of Romero Arteta Ponce Attorney at Law.

To be more competitive is exactly what the most dynamic companies in the country have had to do in order to survive. By renovating technologically, improving their management skills and planning on short and medium-term bases, certain Ecuadorian companies managed to decrease their fixed costs and use the strong dollar to expand into the regional market.

For Cesar Galarza Garces, General Manager of AYMASA / AEKIA S.A., the main error of many Ecuadorian businessmen was to keep thinking as they did when the country used the "Sucre", the currency which was used before dollarization.

"Now we must face the presence of the dollar as entrepreneurial leaders and innovating managers in order to go ahead", recommends Galarza Garces. His company made a successful turnaround after loosing a major contract with General Motors, and through aggressive business deals it signed on to assemble the Korean line of KIA cars and the Russian line of NIVAs. Up to now its production is of 3,200 vehicles per year, with a high capacity for growth.

"There are lots of opportunities for the growth of Ecuadorian enterprises, especially with the upcoming adoption of Andean or Pan-American free trade agreements. Our installations are recently renovated and ready for increased production", he revealed.

Before the FTAA (the Free Trade Agreement of the Americas, which is planned for adoption by 2005) takes effect, AYMESA is preparing to expand and invest strategically to develop regional vehicle assembly plants in the Andes. "We are also going to manage the operations of KIA in Colombia and we are proposing to manage KIA of Venezuela", Galarza Garces points out.

For Jorge Donoso Moran, General Manager of FLOPEC (Ecuadorian Oil Fleet), the secret to staying afloat in a context of dollarization was "to seek efficiency, to lower costs and to adopt a series of controls in the areas of maintenance, repairing and training".

Another strategy was also to diversify production and exports. For example, Ecuador's rose industry suffered a major setback with the adoption of the dollar. Its product is unequalled everywhere in the world: the altitude of the valley of Quito and the strong light of the Ecuadorian sun produces roses with long stems, very big buttons and intense colors. Yet in the context of dollarization, many costs such as transportation and labor increased drastically, leading to the collapse of numerous major rose producers. Companies like Diamond Roses had to reduce their costs and diversify its exports to survive.

"The strategy was to keep external control of costs without stopping expansion plans, while investing in the elements that were necessary to grow" said John Teran, President of Diamond Roses. The company successfully adapted to the dollarized market by exporting to new markets such as Russia and developing new partners for the international sales of its roses.

In spite of complaints by companies that the dollarized model did not allow them to compete, these companies have in fact demonstrated that with administrative efficiency, modern installations and constant capital they can survive in the market and expand their business to other countries, not only in the American continent but in all four corners of the world.

LEARNING FROM THE CRISIS

In a manner of speaking, business people in Ecuador had to go to school all over again. They had to learn the lessons from Ecuador's economic crisis of the 1990s, when credit lines ran out and half the financial sector went in hiding, and develop new business plans in order to thrive in the new economic environment.

"It was a tough lesson to be learned" remembers Roberto Gonzalez, Spanish banker and Executive Vice-President of the Banco del Pacifico, which represents one of the major banks of the country. He believes that the main lesson which the banking sector had to learn was "to maintain high levels of liquidity, which is necessary to overcome unexpected financial pressures".

Out of the 44 banks which operated in Ecuador befote 1999, now only 22 of them have survived. Following this forced consolidation process, today they benefit from "interesting profit margins" which are inexistent in other economies and does not pose the risk of many emerging economies, thanks to a dollarized economy and upcoming financial reforms.

Today, the high cost of financing new projects, with interest rates that circle the 20 per cent mark, has slowed local industry since there is little access to capital or credit to finance any new investment projects.

Although the government still has lots of homework to do in order to increase access to credit, the Spanish banker maintains that "Ecuador is a country that is worth the risk", since it can offer opportunities in sectors like tourism, petroleum, telecommunications and electricity.

"It's a diamond in the rough" he says from the meeting room of his head office, located in the centre of the City of Guayaquil, which is becoming the motor of the Ecuadorian economy.

The economic analyst Walter Spurrier believes that the government has two pending issues to resolve: "open up the petroleum sector to attract new investments and increase competition, while applying a policy of cost-reduction to take advantage of the dollarized economy"

Up to now, Spurrier agrees that the government has made notable efforts to balance its finances and reach a fiscal surplus, "but this is only the beginning" he warns. "Major economic reforms are still lacking".

Alberto Dassum, President of the Chamber of Industry of Guayas, agrees that the efforts of the government to stay on track with the IMF agreement is "a positive signal to investors".

Spurrier predicts that the industrial sector will shoulder the crisis if the government permits flexible labour practices and a decreases the cost of public services. In fact, he bets that the bankruptcy of bigger, inefficient and unproductive companies will open up the field for smaller, leaner and more modern companies to take the lead in this new marketplace.

Shrimp exporter Xavier Andrade, from the Exporklore company, cites his sector as one of the most affected, since the economic problems of the country coincided with the "white spot virus", which ravaged their catch and killed large quantities of Ecuadorian shrimp.

Andrade maintains that there were no secrets to survive: "decrease costs, improve genetics and apply new cultivation technologies." Like Diamond Roses, Andrade had to reassess his strengths and find new clients and new markets.

In fact, the white spot virus obliged shrimp producers to adopt new technologies early on in order to improve production. "In terms of technology we have an advantage and a lead of 2 to 3 years over the competition" asserts Andrade.

Today the sector anticipates increased participation by investors who are ready to develop these techniques and ensure that Ecuador remains as one of the main producers of shrimp in the world.

Dassum believes that the best way to attract investors to Ecuador is through the promotion of high-growth sectors like the fishing, electricity and manufacturing industries. According to him, the country should put aside the idea that dollarization is a straight jacket which makes life intolerable for exporters and producers. On the contrary, he says, the risk of asset devaluation disappears thanks to the dollar. "Ecuador can provide security in terms of investment; the dollar you invest today is the dollar that you can rely on. Perhaps you will have a higher cost of labour, but our fiscal stability is second to none" he maintains.

Joaquín Zevallos, the President of the Guayaquil Chamber of Commerce, represents the voice of 4000 affiliates. He actually agrees that the crisis was a blessing in disguise since the dollar offers foreign investors a security that they never had, and they can come to Ecuador "without suffering from high inflation or the cost of reinvestment".

This is an important chapter in the history of Ecuador. After the storm of the 1990s, the country has settled down and the industrial sector has taken a decisive step to modernise, open its markets and search for foreign investors. Now comes the time to move ahead which, according to Zevallos, is "the most important issue facing us today".