Ecuador shows how tax justice promotes sustainable development

We missed this comment when it was published by The Guardian last month (and hat tip to Michael Melville for drawing it to our attention), so here's a fascinating insight into how Ecuador - the classic banana republic - has re-cast its tax system to achieve pro-poor and sustainable development.

As Jayati Ghosh reports, a key part in the turnaround lies with the determination of President Rafael Correa (pictured) to capture a larger share of the rents from oil extraction, rather than allowing oil multinationals to walk away with super-high profits:

"Consider just some economic changes brought about in the past four years, beginning with the renegotiation of oil contracts with multinational companies. Ecuador is an oil exporter, but had benefited relatively little from this because of the high shares of oil sales that went to foreign oil companies. A new law in July 2010 dramatically changed the terms, increasing the government's share from 13% to 87% of gross oil revenues."

The successful renegotiations were an extraordinary achievement, not least since the negotiating team faced instransigent foreign operators who were eventually bid a polite adios. Companies including China's CNPC, Brazil's Petrobras, Korea's Canada Grande and the U.S. Bellwether, were amongst those who refused to accept the revised terms and were ushered to the exit. And, other developing countries please note, despite this departure of foreign "wealth-creators", the remarkable thing is that the country's public finances have strengthened and the President's approval ratings are in the region of 70 per cent. This is a powerful demonstration of how countries can free themselves from state capture by powerful foreign corporations

But the reforms went further than renegotiating oil contracts. President Correa's economics team set out to restore public finances by strengthening revenue collection while also increasing tax progressivity. This has largely focused on increasing direct tax collection through better enforcement, especially of corporate tax payments (remember this was a banana republic where rich people and powerful corporates felt themselves above paying tax). As Ghosh reports:

"Second, and possibly even more impressively, the government managed a dramatic increase in direct tax receipts. In fact, this has been even more important in revenue terms than oil receipts. Direct taxes (mainly corporation taxes) increased from around 35% of total taxes in 2006 to more than 40% in 2011. This was largely because of better enforcement, since the nexus between big business and the public tax administration was broken."

And it gets better still. While some countries - the United Kingdom being a sad example - frittered away their hydrocarbon wealth in tax breaks for powerful corporate interests and a 40 year orgy of consumerism, the Ecuadorian government has invested the additional public income in infrastructure and human capital:

"Third, these increased government revenues were put to good use in infrastructure investment and social spending. Ecuador now has the highest proportion of public investment to GDP (10%) in Latin America and the Caribbean. In addition, social spending has doubled since 2006. This has enabled real progress towards the constitutional goals of free education at all levels, and access to free healthcare for all citizens. Significant increases in public housing have followed the constitution's affirmation of the right of all citizens to dignified housing with proper amenities."

This blogger has warm memories of visiting Ecuador in the 1980s and these reforms sound too good to be true (especially for those of us living in a Europe currently gripped both by freezing temperatures and unimaginative austerity programmes which demonstrate that our politicians have learnt nothing from the Latin America experience of financial crises). As Ghosh herself concludes:

". . . what is happening in Ecuador provides inspiration and even guidance. The rest of the world has much to learn from this ongoing radical experiment."

Read the full article here.