Political parties in South America relied on will of the people to implement major economic reforms, analysis shows

The success and legacy of major economic reforms in Ecuador and El Salvador has depended on the will of the people, analysis shows.

The strength of political party ideology and support of unions, workers and the financial sector has hugely influenced decision-making.

In both countries, administrations led by left-wing parties tightened capital flow management, while their right-wing successors took the opposite approach. The extent of this depended on how much popular support the party had.

In Ecuador extensive protests and strikes prevented left-wing governments extensively liberalising the economy and meant successor right wing governments had to take a more gradual approach.

In El Salvador left wing governments went unchallenged as they implementing economic reforms. Successive right-wing administrations faced little resistance to implementing a radical agenda that included even the adoption of bitcoin as legal tender alongside the United States dollar.

Dr Pedro Perfeito da Silva, from the University of Exeter, examined economic policies in Ecuador and El Salvador since the late 2000s.

In Ecuador, the strength of the bottom-up pressure against marketization led the Correa administration to reshape the country’s relationship with capital flows, deploying encompassing outflow controls and restrictive macroprudential regulations. During the following presidencies of Lenín Moreno, Guillermo Lasso, and Daniel Noboa pressure from indigenous movements and labour unions slowed down the adoption of neoliberal policies, contributing to watering down the deregulation of capital flows.

In El Salvador the fragility of the bottom-up resistance against reforms led the presidencies of Mauricio Funes and Salvador Cerén to embrace a moderate left-wing agenda, taking far less intrusive initiatives to mitigate the negative effects of capital mobility. This weakness of popular organizations also explains why Nayib Bukele’s authoritarian neoliberalism and his adoption of Bitcoin as legal tender have faced few obstacles.

Dr Perfeito da Silva said: “The case of Ecuador shows that states can still challenge global financial markets. If even a country that does not issue its currency can impose capital account restrictions, this calls into question the inevitability of neoliberal financial policies in advanced economies.

“As observed in El Salvador, dollar-centred, rule-based globalization may not be the end of the road as domestic elites turn peripheral countries into laboratories for the riskiest financial innovations.

“The experience of Ecuador also demonstrates macroeconomics is not condemned to depoliticization. Even something highly technical like capital controls can become an issue of mass politics when social movements consider them a necessary condition for achieving their demands.”

Moves from the early 1990s in Ecuador’s led to the removal of capital controls, the deregulation of the banking sector, and the constitutional approval of central bank autonomy. This culminated in the late 1990s banking crisis and a massive currency devaluation.

The administration led by Jamil Mahuad adopted the US dollar as the sole legal tender in January 2000. This continues to be divisive in the country.

As a result of this Ecuador experienced a political stalemate. Indigenous movements and labour unions were not strong enough to revert dollarization but toppled three presidents in one decade.

The Correa government’s restrictions to capital mobility met expected business resistance but the countervailing force from indigenous organizations and labour unions kept the government committed to this agenda.

The deterioration of the economy meant Lenín Moreno struggled to defeat the right-wing opposition in the 2017 presidential election, winning the second round by a narrow margin. His proposals for economic reform were withdrawn following massive protests.

In El Salvador the right wing Nationalist Republican Alliance reforms included the deregulation of the banking sector, capital account liberalization, and the concession of vast incentives to foreign investors. In January 2001 the US dollar was adopted as the sole legal tender.

Popular organizations did not offer a strong resistance as protests were cancelled due to a devastating earthquake only 13 days after the start of dollarization. El Salvador did not experience any general strikes during the two decades of the ARENA administration.