‘We came back from (Ecuador) and we were writing our recommendation. We thought Ecuador was a very stable country. There hadn’t been a revolution in 40 years... an Ecuadorian friend called to inform us a revolution had just broken out.’
—Melvyn N Klein, founding partner of the investment partnership GKH Partners, L P (Quote taken from Financial World, 21 October 1996)
Ecuador’s economy is one of the smallest in Latin America and heavily dependent on external markets. This has made it vulnerable in terms of trade (the relation between export and import prices) shocks. This vulnerability, as well as inadequate export diversification and structural reform in the public and financial sectors, has resulted in a poor economic performance since the early 1980s.
The late 1990s found the economy shaken to its knees, resulting in its worst depression in 70 years. The economy has shrunk substantially with hyperinflation and the government has had to take the drastic step of replacing the country’s currency, the sucre, with the US dollar. The middle class has virtually disappeared and those with the means have left the country in search of better opportunities.
Historically, much of Ecuador’s economic past had revolved around agriculture. For many decades, Ecuador’s largest export product was cocoa. Other agricultural products, primarily coffee and bananas, later increased in importance. Ecuador’s economic landscape changed significantly when oil was found and exported. Almost overnight, Ecuador became flushed with oil earnings.
Oil is still Ecuador’s largest export. This small nation is Latin America’s fourth largest oil exporter and sixth biggest producer of oil. It produces an average of 500,000 barrels of crude oil daily. In recent years, at least 40 per cent of the country’s budget has been derived from oil revenue. One third of the tax revenue is from petroleum.
The government tried to use the tremendous amount of new revenue coming from oil in the 1970s to finance the industrialisation of Ecuador. This resulted in a fiasco when interest rates were raised and oil prices fell. Import substitutions were used in an attempt to promote development by using high import taxes to discourage the cheaper, and thus more attractive, imports. This contributed to increased corruption and tax avoidance by such methods as double invoicing by many import companies. Guarantees of future oil revenue provided financing that established large state-owned industrial companies that were lethargic and bureaucratic. This plan didn’t produce results.
Oil is a critical factor in Ecuador’s economy. There is a long history of oil production in Ecuador, beginning in the first part of the 20th century along the coast of Ecuador. This was followed by major discoveries in the Amazon, beginning in 1917. It was in the late 1960s and the early 1970s that oil became a significant export product and gradually replaced Ecuador’s dependency on agricultural exports. Production began at about 78,000 BPD (BPD = barrels per day) and has increased to present-day levels of around 500,000 BPD. About 4.6 billion barrels of proven oil reserves remain.
Oil exports produced a brief period of high growth for the country in the 1970s. But El Niño in 1998 led to widespread crop devastation. Then a sharp decline in world oil prices drove Ecuador’s economy into a free-fall by 1999. This marked the beginning of the collapse of Ecuador’s banking sector, and it defaulted on its external loans later that year. The currency depreciated by 70 per cent throughout 1999, forcing a desperate government to replace its local sucres with US dollars in 2000. This move stabilised the currency, but was followed by protests and riots, the deposits of some Ecuadorians having depreciated by as much as 400 per cent.
Petroecuador (previously CEPE) is the state oil company and has begun to open up some concessions, operating joint ventures with many foreign firms. All oil is the property of Ecuador. The main pipeline in Ecuador is the Trans-Ecuadorian (SOTE), which starts in Lago Agrio and transports about 380,000 BPD of oil some 300 miles to a port north of Esmeraldas. It was built in the early 1970s and has experienced numerous problems. More recently, these have been attributed to sabotage. International experts believe that some of the problems with the pipeline are due to lack of maintenance and earthquakes. In 2004, a major landslide stopped the flow of oil and Ecuador lost nearly 50 per cent of its revenues for the year. In 2001, a new pipeline was conceived called Oleducto de Crudos Pesados (OCP) and it runs almost parallel to SOTE. It began production in 2003 and almost doubled Ecuador’s output. It was highly contested by a number of environmental and indigenous groups. This industry is susceptible to criticism due to the result of deforestation and pollution from the waste of oil products as well as to the effect on local cultures.
An environmental lawyer has blamed multinational oil companies for widespread skin, respiratory and other diseases; a rise in miscarriages; increased cancer rates for as many as 30,000 impoverished Indians and settlers; and widespread environmental damage. An Ecuadorian native has even launched a class-action lawsuit against Texaco (now Chevron) in the United States on behalf of Oriente residents. His allegation is that ‘they poisoned the rivers, killed the fish and made the people sick’.
The effect that oil pollution has had on human society has led to anti-government movements and uprisings in many areas. As a result of the damaging effect oil production has had on the Indians in Ecuador for the past 20 years, the Indians have resisted government oil exploration efforts, demanding rights to their ancestral lands.
Ecuador is king when it comes to bananas. It is the largest exporter of bananas in the world. Approximately one-third of Ecuador’s bananas are exported to the United States, one third to Europe and the rest to other countries, including Russia, Argentina, Chile and Japan.
Ecuador’s largest exporter is a national producer—Noboa, the world’s fourth largest banana company. While the big three US-based companies of Dole, Fresh Del Monte and Chiquita control nearly all exports in South American countries, Ecuador’s banana export industry is unique in its domination by national producers. Although Ecuadorian bananas have to cross the Panama Canal in order to reach the European market, Ecuador’s banana industry is not unionised, which keeps labour costs low.
Bananas for sale in the countryside between Guayaquil and Cuenca.
Most farms are medium-sized (about 120 acres in land area) and giant trading houses control the distribution. About 10 per cent of a population of approximately 13 million inhabitants is somehow connected to the banana industry. The mid-1990s saw a tremendous boom in sales, approaching a billion dollars a year. Everyone was planting bananas trying to make a quick dollar. A number of pesticides banned in foreign countries were permitted to be used in Ecuador.
Workers reported earning an average of US$ 56 per month, with few if any benefits. This compares to an average monthly wage of over US$ 500 in Panama, US$ 200 to US$ 300 in Colombia, US$ 200 in Costa Rica, US$ 150 to US$ 200 in Honduras and US$ 120 to US$ 150 on Guatemala’s Atlantic Coast. In other banana-exporting countries, banana workers, even some non-union workers, typically receive social benefits such as housing, health care, potable water, electricity and education for their children. In Costa Rica, even non-union banana workers get benefits left over from the time when unions were strong.
On many of these plantations, it is not uncommon to see warning signs telling workers that they must leave the fields when aerial spraying begins, and remain away for at least two hours after it stops. But at only one Ecuadorian plantation did workers report compliance with this norm, and only after the banana workers’ union put up a fight. Where there is worker housing on the plantations, the houses are often located in the middle of the fields and are thus exposed to spraying. Workers know that exposure to these chemicals is unhealthy but complain that no one has ever informed them of the adverse effects of exposure. Packing workers report that they, especially women, are exposed to chemicals used to disinfect and clean the bananas prior to packing. They reported that they were not provided with any sort of safety equipment.
Banana workers have little power under the current structure and have expressed extreme distrust in the ability or the will of government authorities to protect their rights to free association and freedom of expression.
In the absence of social criteria governing world trade, consumers can play a strong role to support the rights of banana workers. Efforts are underway to organise unions in Ecuador’s banana industry. Although this is a long-term project, it will need significant support from activists and consumers in countries like the United States that buy large quantities of Ecuadorian bananas.
Ecuadorian banana workers are not calling for a boycott; but consumers can express a preference for ‘sweat-free’ bananas to retailers. Likewise, we can pressure the Ecuadorian government to respect its citizens’ labour rights.
Shrimp is Ecuador’s third largest export after oil and bananas. Anyone visiting Ecuador will see and taste that shrimp is a staple and that some of the largest and best shrimps in the world are from Ecuador.
I first read about Ecuador’s newfound wealth in shrimp farming in 1981. An American from the United States had been successful in other countries and began the shrimp farming process in Ecuador, making fortunes for some but taking a toll on Ecuador’s beautiful mangrove forests. These forests have been decimated up and down the coast and significant intrusion has been made in the forests in northern Ecuador towards Esmeraldas. Ecuador is now the fourth largest producer of shrimp in the world and the largest in Latin America. There are at least 200,000 people with direct or indirect employment in the shrimp industry, and at least 105,000 hectares (259,460 acres) are dedicated to shrimp production.
The arrival of the lucrative commercial shrimp farms and the clearing of mangroves to construct aqua-culture ponds started in the 1980s. The net profits of the farms were so high that the idea caught on and spread rapidly along the coast. A one-hectare shrimp farm could earn a gross income of US$ 5,000 to US$ 15,000 per year. Once cut, however, the mangrove cannot fully recover for more than 100 years and many benefits to the ecosystem are lost. The waste water from the farms also pollute the surrounding area with antibiotics and chemicals used to prevent shrimp disease. There is growing conservation awareness among the local commercial farmers and foreign environmental organisations.
Ecuador is home to literally thousands of species of plants that decorate the cities and countryside. In the last 20 years, a significant business has developed in the export of its beautiful roses, and sales of orchids and exotic plants are on the rise, mostly to the United States, Russia and Europe. In 1997, flower exports represented about 70 per cent of non-traditional agricultural production.
Nestled in the deep valleys between the mountain ranges of the Andes, you will notice large flower plantations throughout the Sierra. Eighty per cent of the production of cut flowers come from the provinces of Cotopaxi, Pichincha (especially from Cayambe) and Imbabura. Ecuador is now producing over a billion roses a year and continues to produce good margins for the producers. Most of the Ecuadorian flower-growing companies are locally owned. It was in the late 1980s that many of the companies were started with an ever increasing world demand. In 1997 terms, each hectare required an investment of over US$ 250,000. Net prices for roses have been as high as US$ 0.25 in the last several years. In 2000, a check with a large grower in Cotopaxi revealed that its net sales price is often in the US$ 0.10–US$ 0.11 range. Approxiamately 400,000 boxes of roses are shipped to the US in the two weeks prior to Valentine’s Day.
There are substantial margins between the selling price from the grower and the retail price for the end client, primarily taking into consideration transportation, storage and marketing functions. Ecuador’s competitive advantage has been that of labour. Flower growing is labour intensive, with between 10 to 12 labourers required per hectare (2.4 acres) of roses, for example. The marketing of flowers is done through specialist marketing companies, a number of which are foreign-owned. Contracts are not often the norm and business is often conducted on trust.
While Colombians and their influence in Ecuador are often depicted in a negative light by the press, this is one industry in which they have had a significant and profitable impact. Colombia, a major flower grower and exporter in its own right, has provided much of the technical know-how for developing the Ecuadorian flower industry. Flowers have officially been considered by the government to be a nontraditional export compared to such products as bananas or petroleum. However, the impact on the economy has been substantial, especially in terms of offering employment opportunities in rural areas. Between 1990 and 1997, the number of flower producers jumped from 39 to 179 and from 286 to 1,549 hectares (706–3,827 acres). In 2005, there were over 300 flower companies. Production has also begun in the lower Sierra. Flower production along the coast presents opportunities, especially for orchids and other tropical varieties.
Roses being readied for export near Cotopaxi.
During the same period mentioned above, employment increased an average of 8 per cent per annum. Women make up 70 per cent of the labour pool for the flower industry and they are primarily involved in the areas of cultivation and harvesting. It is believed by most management that women are more adept at the growing of flowers, it being compared to child-rearing. Men are primarily involved in the maintenance, irrigation and fumigation processes. Younger workers are often preferred, with an average age of between 22 to 25 years old. These jobs are highly desirable in rural areas and in 1997-terms, paid about US$ 190 per month. Many new employees have been hired because of references from current levels using the palanca system, which is discussed in Chapter Four, Fitting into Society.
One of the major concerns of labourers is getting ill or injured due to pesticides and chemicals (currently 100 different pesticides are used). The Flower Label Programme, an organisation comprised of flower importers and buyers from Germany, provides certification (The Green Seal), which promotes environmental consciousness and the good health of employees. In 1997, there were only a small number of firms certified in Ecuador but many were awaiting approval. Maintenance and harvesting are risk areas and cuts are common. The main physical complaints from workers are colic, blurred vision and headaches. In November 2000, I visited a large plantation in Cotopaxi which clearly had responsible management. Workers seemed to be very well protected, and wore masks to full suits for fumigation. It was truly a first-class operation. This industry has a bright future in store for it.
I once spoke to a friend who said, “If Ecuador could get its act together there could be thousands of millionaires.” She was alluding to the economic potential of Ecuador’s fruits, flowers, artisan crafts and so on. While her statement may be somewhat true, Ecuador has some significant roadblocks to overcome before this Utopia can be reached. Some of these roadblocks include: the oligarchy present in much of Ecuador which wants to keep things as they are; low production numbers; a dependence on centralism by the government; the fragile nature of financial institutions; the lack of reinvestment or investment of capital (capital flight risk); and significant deforestation and environmental stress.
One thing about visiting or working in Ecuador is the amount of activity. It always looks bustling and as though there is a lot of commerce going on. But the truth of the matter is that most people are working hard just to survive. More than 50 per cent of the population live below the poverty line, leading lives of quiet desperation. The rural areas, for the most part, are more impoverished than the urban sector. In my interviews with numerous small businesspersons in October 2005, they indicated that everybody looks busy but no one is making money—just treading water.
Because of large migration patterns to cities such as Guayaquil and Quito, unemployment rates are usually higher. Men suffer a higher level of unemployment in the cities than women and the reverse is true in rural areas. During the 1990s, the official unemployment rate was 9 per cent. This has risen to 11 per cent in 2005. But the real rates are generally much higher.
The economic situation of both unemployment and underemployment has contributed greatly to what is called the ‘informal economy’, to which thousands belong. This is evident throughout the country. Several years ago, you could walk along any major street in Guayaquil and Quito and see hundreds of people camped out on pavements with blankets spread out or cardboard boxes displaying their wares. These wares for sale ranged from batteries to watches and everything in between. What was really amazing is that these so-called ambulantes were often parked right in front of a large shop selling the same type of items and no one seemed concerned about the so-called ‘illegal operators’. On almost every corner, you could also find small portable stands where the vendor sold different types of sweets and small items. However, both Quito and Guayaquil have basically eliminated the street vendor by moving him to shopping centres designed for small vendors. In Quito, there are 12 such centres. Vendors on the street can be arrested and fined in Quito and Guayaquil. While it looks better without the vendors lining the pavements, it certainly has been a cultural transition. The street vendors have always been an integral part of the culture.
For the most part, lower-class Ecuadorians live a substandard existence. I wanted to experience the vendors-life back in the 1990s and took to Ecuador some watches that I had bought at a liquidation sale. I took a blanket and walked down to 9 de Octubre in Guayaquil, parked my blanket and laid out the watches. I attracted a huge crowd who seemed more interested to see a foreigner on the street than the watches. I spent several hours there and imagined how difficult it must be to do this every day with no protection from the heat or bathrooms available. The lowest strata of society and members of all races who were just amazed that I was there at all, surrounded me. Luckily, traffic police, who often chase street vendors away unless they are paid a small bribe, did not approach me. I did manage to sell all the watches and moved on, grateful not to have to earn my living in such a manner.
This type of operation still exists in many of the smaller towns in Ecuador. The streets throng with these vendors, especially during the Christmas holidays. There are also thousands of ambulantes that sell juice or popcorn in the streets via pushcarts in the suburbs and smaller cities.
One of my most poignant memories of Ecuador is that of the popcorn-makers, who, with a small cart, roast up the delicacy on a small flame. There are also a number of vendors who cook food at home and visit shops and bars to hawk their food. Goods sold via vendors have often been obtained by legitimate means but a large number may have been stolen. There are also a number of people who have a full-time job and yet look for other sources of income. I have met many people who sell goods such as jewellery from their homes, operate beauty shops, sell imported clothing or who open up small shops selling small items such as soft drinks, toilet paper and necessities. There is not a block in Ecuador where you can’t find such a set-up. Just look for signs that read: Se Vende Colas.
Jobs are highly prized in Ecuador compared to the United States where most people feel it is relatively easy to find some type of employment. Individuals keep jobs for longer periods of time and when jobs are advertised, the competition can be very fierce.
Many accounting or CPA firms, especially for large companies, act as an intermediary when hiring employees. The CPA firm will usually place anonymous advertisements requesting that a resume be sent to a post box. A survey of such adverts might lead one to believe that there is age discrimination in Ecuador in terms of employment. Many advertisements will state that the applicant must be under a certain age (usually under 40 years old). Also, most requests for resumes require a photograph of the applicant.
Consensus management is not the norm in Ecuador. Management decisions often come from high up in an organisation (as previously mentioned in the palanca scenario above). While labour unions do have clout in Ecuador and it is hard to fire someone, most employees seem to fear their supervisors.
Ecuadorians as employees will often tell supervisors or managers what they want to hear, trying to avoid conflict. Ecuadorians are generally viewed as hard workers who show up on time, but more out of fear than punctuality. A foreign manager from Denmark, interviewed for this book, feels that Ecuadorian employees need lots of direction and guidance, even after having done a specific job for a length of time.
Managers will not generally socialise with subordinates, and if you’re a male with a female secretary it will be assumed by many employees that she is also your mistress. Foreign women managers must set a serious tone, especially with male subordinates. You’re already fighting a tough stereotype; Ecuadorian men think that most foreign women (especially from the United States) are available for sexual liaisons. It is important to understand as a manager that joking or laughing at one’s self should be minimised as you will not, then, be respected. It is important to remember that yelling or criticising employees in front of others will cause great embarrassment for the employee. Remaining calm and under control will yield better results with employees.
Here are some general guidelines that are important to successful negotiations while in Ecuador:
You really should speak Spanish at an acceptable level. If you don’t, you will need an interpreter or representative who speaks both languages. When using an interpreter, you should meet with him beforehand and discuss his preferences while conducting a negotiation. Make sure you are speaking more slowly than normal and do not use slang. You may have to go over highly technical terms together before your negotiations. You should also keep comments brief by pausing to allow the interpreter to convey the message. Speak to the recipient of your message and not to the interpreter.
You will be judged by your appearance. Be sure that your shoes shine and your fingernails are clean and manicured. You should dress appropriately, depending on the business you are visiting. Suits are the norm in Quito. You cannot go wrong with grey or navy blue. White shirts and ties make a good impression. If you have a limited wardrobe, I suggest mixing several grey and tan trousers with a navy blue sports jacket. White and light blue shirts should work well. It does not look good to show up in Quito dressed as if you’re going to a beach resort. Guayaquil is a little less formal. However, businessmen, especially from financial institutions, do wear suits. Lighter material is preferred to help beat the heat. Women should also dress conservatively in business attire suitable for conducting business in places such as San Francisco or New York.
Pleasantries and small talk are often good ways to start conversations. Avoid talking about Ecuador’s problems with Peru or Colombia. I like to focus on positive things about the region that I am in. While in Quito, for example, you might talk about the beautiful architecture. In Guayaquil, you can comment on the beautiful Malecón project along the Guayas River. Remember, regionalism is a very serious issue. I suggest that, during negotiations, you try to ascertain as quickly as possible where the other parties are from. That would help you make conversation.
Politeness is a sign of breeding to most Ecuadorians and it is almost impossible to be too polite. However, remember that their politeness is no indication which way they are leaning in a negotiation.
Negotiations take time and it may take you several trips to build up a relationship with a potential customer or partner. Once, I used a representative that had been in Ecuador for over 30 years and was well trusted. Even then, the customers for our product started off by purchasing small amounts. Assure Ecuadorians that their market is important to your firm and don’t group Ecuador with all the other Latin American countries.
Remain patient throughout all negotiations. Ecuadorians will try to exploit any show of temper. Assure them that you’re interested in both parties succeeding and that you are after long-term results.
Talk to non-competitive companies doing business in Ecuador for advice on dealing with Ecuadorians.
Don’t underestimate the influence that secretaries and support staff can have. They can make things very difficult for you, for example, by taking any opportunity to delay you. Being courteous and cheerful will reap rich dividends.
Remember, being direct or frank doesn’t normally produce good results. Keep things open-ended. Don’t show all your cards at once. Keep alternative plans that may be acceptable to both parties.
Most Ecuadorians will never say ‘no’ and will evade the final decision. They may also be trying to gain more in the negotiations by this method. Friderich Hassaurek commented in his book Four Years Among the Ecuadorians (a reprint of the 1867 book Four Years Among the Spanish-Americans) that Ecuadorians are very difficult to deal with in business. Often when agreements had been made, they would change things right at the end and demand more or change prices. I once contacted a Spanish school in Quito who was not really known on the Internet but had a website. I suggested that they place an advertisement. The lady proprietor stated how hard business was and that, if a small discount could be offered, she would place an advertisement. I told her that I would have to think about it. I told her that I would be back in a week to ask her again. The next week I approached her and agreed to the discount and she replied that she would love to do it in the future, not actually saying ‘no’. I was very polite and suggested that I would e-mail her in the future to see if she were ready. Ecuadorians love to haggle politely and never want to pay full price.
