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  • The Invisible Hand

Why has Socialism Worked in Ecuador but not in Venezuela?

Conservatives will happily hold Venezuela as an example of the disasters of socialism, yet they will rarely mention Ecuador.

Both Ecuador and Venezuela have moved towards socialism in recent decades. In Venezuela, this has created a humanitarian crisis yet in Ecuador there has been a significant improvement in living standards and a decline in poverty. This is largely due to irresponsible governance by an autocratic regime rather than the fundamental policies.

Nicholas Maduro, President of Venezuela

Since 2008, policies in Ecuador have been successful in reducing crime, poverty and economic inequality. The government has adopted Buen Vivir as its economic ideology which means it prioritises wellbeing and sustainability rather than economic growth. This has involved greater spending on education and healthcare, a national minimum wage. Between 2006-2009, government social spending increased from 2.6% of GDP to 5.2% of GDP betwwen 2006 and 2009.

The result of this is that well-being in Ecuador is higher than in Italy according to the NEF and life expectancy is 75.4 years, 11 years high than in Namibia which has approximately the same GDP per capita. Furthermore, Bloomberg ranks Ecuador as the 13th most efficient healthcare system. Despite this, sensible and prudent governance means that government debt is only 45% of GDP. Many other countries could only dream of some of Ecuador’s economic statistics; unemployment of only 4.6%, economic growth of 2.7% and inflation of 0.4%. Ecuador is a good example of how GDP fails to accurately capture the livings standards of a country.

Ecuador does face some challenges. Investment so far has relied on oil exports which makes up 40% of export earnings which has endangered sustainability and poses a threat to indigenous people. Like Venezuela, there are also accusations of an autocratic style of government with irrespect of free press. However, it would be crass for us to judge South American politics on western standards and compared to Venezuela, Ecuador is relatively moderate. Ecuador remains on a path to growth which seems to be sustainable.

Venezuela has followed a similar socialist plan beginning in 1999 with the election of Hugo Chavez who promised to spread the wealth of Venezuela. Chavez nationalised industry and FDI was forced out as assets were confiscated. This socialism was more radical than in Ecuador. This worked out fine initially as high oil prices gave Chavez the opportunity to spend lavishly on social programs.

Poverty initially declined and the number of students in primary education increased from 87% in 1999 to 93.9% in 2009. However, no money was saved for any future economic turmoil which came when oil prices crashed in 2013. Chavez’s successor, Nicholas Maduro, was unwilling to accept cuts to social programs and increased the minimum wage by 6000% in 2018 despite economic pressures. Eventually Venezuela’s government was forced to print money to fund its programs and hyperinflation was created.

The main differences between the two socialist governments is that Ecuador’s economy was diversified and they were less dedicated to their social protections so they were prepared to only provide what they could afford. Ecuador never had the same reliance on oil which would eventually bring Venezuela’s economy to their knees, therefore, they whethered the 2013 oil price crash and living standards were maintained. The key lesson of this is for a government to not drastically over extend themselves and create a diversified economy.

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