Escape the income trap, live well

Kaattje writes*

As with many Latin American countries, Ecuador has failed to progress after reaching middle-income status decades ago. Low productivity growth and a failure to move up the “value chain” are typical features of the ‘middle-income-trap’. As with other countries with natural resources, Ecuador’s growth-strategy relies on extracting and exporting raw materials (mainly petroleum but also bananas and coffee) rather than on diversifying production. GDP-growth depends on high prices for primary commodities, leaving the economy vulnerable to price-volatility. The norm of low-skilled and low-value added activities limits job creation and overall labour-productivity.

Escaping the middle-income trap requires structural change. Resources and labour must be reallocated in ways that diversify the productive matrix and upgrade production. Plummeting petroleum-demand in recent years, falling commodity-prices, as well as Ecuador’s sub-soil reserves being inherently finite increase the pressure to diversify the economy. The government’s current industrial policy, however, continues to focus on extractive practices, expanding oil-extraction and investing in large-scale mining. This view does not contribute to development and conflicts with the state’s constitutional commitment to ‘Buen Vivir’, or striving for social  well-being while preserving nature and harmony among citizens who are treated equally. Such conceptualizations, originating in indigenous communities, create a demand for escaping the middle-income trap without causing substantial environmental damage.

Sustainable tourism has emerged as an alternative to extractive activities. Eco-tourism can contribute to Ecuador’s economic diversification while respecting its ‘Buen Vivir’ goals. Ecuador is home to 17 different ecosystems and the most diverse biological hotspot of the western hemisphere.

The eco-tourism experience depends on the degree of environmental protection, as future revenue depends on avoiding natural depletion. One challenge is the subjective understanding of ‘green’ tourism, which leads to self-regulated notions of environmental stewardship and raises questions on “greenwashed” experiences.

Three objectives must be balanced to minimize tourism’s potential costs to sustainable welfare: nature conservation, local participation, and economic feasibility. Past experiences in Latin America have shown the importance of using ecotourism revenues to maintain the natural resource base and the importance of host-community empowerment. Local definition and management of eco-tourism allows communities to turn their natural and cultural heritage into an economic asset while also ensuring its protection. Costa Rica‘s experience is helpful: the country advanced to one of the leading eco-tourism destinations worldwide on its way out of the middle-income trap, coming from an export-profile similar to Ecuador’s. Past eco-tourism stories also highlight how the effective advancement of sustainable well-being means balancing among (sometimes competing) economic, environmental and social interests.

Bottom Line: After being stuck in the middle-income-trap for over 60 years, it is time for Ecuador to move past its dependency on resource-extraction, to focus on sustainable development under ‘Buen Vivir.’

* Please help my Economic Growth & Development students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

Author: David Zetland

I'm a political-economist from California who now lives in Amsterdam.

6 thoughts on “Escape the income trap, live well”

  1. I’m currently writing on the same topic on sustainable tourism in the case of Pakistan. It has a lot of potentials for sustainable tourism and has many natural tourism sites. I find it very interesting to write about such a topic as it will give a lot of creative ideas for other students and researchers worldwide.

    1. Thanks for the comment!
      In case of Ecuador sustainable tourism seems particularly suited: it could not only be a way to diversify the economy away from extractive practices but also operationalize the values of Buen Vivir that are paid lip-service to in the Constitution and by major politicians. I don’t know about Pakistan, but in case of Ecuador, Eco-Tourism stands and falls with community-led implementation. ‘Buen Vivir’ concepts of well-being originate in indigenous populations within Ecuador , while Indigenous movements and their push against marginalization also have been a key-driver of political conversation in recent months and the 2021 election. Furthering Eco-tourism can only be a fruitful way to fulfill local demands for ‘Buen Vivir’ if neither its environmental, nor its social/ communitarian component are neglected. Local host communities are the ones that suffer most directly from environmental degradation through expansive tourism – both in terms of (air) pollution etc. and in terms of the decreasing appeal of their economic asset (nature) as a tourist-attraction. Therefore, past experiences show that community-managed projects are more likely to keep tourism eco-friendly, while creating a local source of income.
      How is the implementation of sustainable tourism handled in Pakistan?

  2. Thank you for this interesting read! I find the middle income trap incredibly interesting, especially in states looking to be competitive whilst adhering to their sustainable orientation. Both endogenous and exogenous growth theories do not seem to apply to the middle income trap. I think the idea of eco-tourism being Ecuador’s niche in the global market is innovative considering that middle income states have been incapable of competing in high-value added markets in the wealthy economies, and low-income countries for standardised products. An argument by some scholars is that foreign direct investments actually worsen the chances of states escaping the middle income trap since it causes the economy to have deeper cleavages. If Ecuador’s commitment to buen vivir implies harmony with citizens as well, do you think Ecuador should shift its open FDI policy to be closed in order to ensure fair distributional impacts?

    1. Dear Hanadi,
      thank you for your interest in the topic, I find it fascinating too!
      What is crucial to understand when looking at Ecuador is that it’s strategy to escape the Middle Income Trap is one of so called neo-extractivism: extractive practices (oil exploration, mining) are expanded to generate revenues that can then fund structural changes towards economic diversification and allow to move away from the dependency on natural resource-exports in the long run. So to speak, Buen Vivir is the ultimate goal. Your argument about FDI is very interesting. The argument is very prominent that reliance on FDI inflows should be kept small as they can easily be withdrawn and lead to capital flight. Ecuador actually has had difficulty to attract foreign financing since 2008 as it lacks credibility internationally, trying to restructure its foreign debts. China stepped in and offered huge flows of finance. This resulted in China holding great amounts of credit and Chinese companies controlling large parts of Ecuador’s oil exports: PetroChina’s claim to oil supplies from Ecuador is particularly notable, as the agreement basically trades financial loans at relatively high interest rates for a particular number of barrels of crude oil per day going to this Chinese companies. This seriously limits Ecuador’s self-determination and calls into question whether it’s Development strategy of moving past the reliance on extracting natural resources is even feasible. The government tries to frame that as part of its underlying development strategy and has substantially increased public spending, particularly on education, to support the argument that reinvesting the revenues from exploiting and exporting natural resources is the key to increased well-being levels. However, Buen Vivir is fundamentally at odds with the expansion of extractive practices and the reliance on financial flows from China seems to solidify this divide.

  3. Dear Kaatje,
    Ecuador’s ‘neo-extractivist’ approach to overcome the Middle-Income Trap sounds very interesting to me. Do you think this will be a good way of financing the social transition? If I understand you correctly, it means that they will maintain (or even increase) the extraction of oil etc. and use those revenues to invest in the diversification of their economy. A major role in overcoming the MIT are investments in education and Research and Development. There is of course the question of how these investments can be financed. I have the following concern regarding financing based on the revenues from existing industries such as petroleum, coffee, and bananas: What/ who will guarantee that the increased profits from these means of production will actually be invested in education, infrastructure, or R&D? In other words, this economic shift needs to be accompanied by political institutions which arrange the redistribution of those incomes to other industries. Let me know if you have any thoughts on this!

    1. Dear Paula!
      Very good question. Indeed, Ecuador’s development strategy is temporary expansion of resource extraction to generate revenue that is reinvested in economic diversification. The only problem is that Ecuador seems stuck (for over 10 years) in this first step of expanding extractive practices, mainly reinvesting the revenues in the mining sector in addition to their reliance on oil – so far they fail to move away from extractivism. However, what has indeed happened is increased public spending on education, but as long as no alternative employment opportunities in higher value added practices are created, this is not enough to escape the middle income trap. You were asking about who can ensure that effective reinvestment in a sustainable economy will actually happen. The 2008 constitutionalization of this development strategy that has a society based on Buen Vivir as an end goal gives social and indigenous movements (for example people adversely affected by extractive practices) a lever to DEMAND steps to be taken in this direction. And indeed, in the 2021 elections “Buen Vivir” has been a key driver of political discussion. As long as commodity prices boomed and demand from emerging (Asian) markets grew, there was this “development illusion” present within society that extractive practices are the indisputable route to development. This is changing. People begin to see the effects of enclave economies without major economic linkages to the wider economy that create few jobs. Pressure on the new government increases to take transitional steps and operationalize Buen Vivir. Community-led Ecotourism is particularly interesting as it combines the environmentalist and communitarian values of Buen Vivir while allowing to diversify the economy. I doubt that Eco-tourism alone can replace the revenues from oil-extraction, especially as tourism in general typically has a longer ramp up phase until revenue is generated. Notably though, the environmental and social externality-costs from extractive practices speak in favor of eco-tourism. Even though it is not the sole solution, it is a step towards transition to a more sustainable economy and there are too few of these steps taken at the moment.

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