Ecuador moves to cut interest rates for poor

Banks and microlenders say Ecuador's leftist president may hurt most those he wants to help with 'financial justice' law.

from the July 6, 2007 edition

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Few here have more than an elementary school education, but the loans have enabled Lozán to send her daughter to college. "That's why I work," she says, explaining that she hopes her daughter will get a good job, and eventually help the family financially.

In a gritty neighborhood on the outskirts of Ecuador's commercial capital, Guayaquil, Alejandra Ojalá says microloans helped her triple the size of her convenience store business, enabling her to send her three children to a decent private school with a pool, state-of-the-art English lab, and karate classes.

Government officials say that the new law would help the poor by helping create more jobs by lowering interest rates. "For the first time, the rate of interest will be a regulator of the economy," says Luis Maldonado Lince, one of two presidential representatives to the junta bancaria, a government body that would help set interest rates if the law passes. "Finally, we can finance our growth based on the actual production," says Mr. Lince, arguing that private banks in Ecuador have long charged interest rates far too high for the pace of economic growth.

Lince dismisses the claim that the new law would undermine the free market. The law is very important, he says, because it sets the tone for a more just financial system. "When Correa talks about 21st-century socialism, he's talking about humanism, rescuing capitalism from the claws of neoliberalism, and giving the people their due."

But many analysts say Correa's background as an economics professor and lack of practical business experience could lead to gross mismanagement. "It seems like Correa doesn't understand the banking system," says Ramiro Crespo, the president of Analytica Securities, a Quito-based financial analysis group. "I'd assume someone with a doctorate in economics wouldn't be that naive about the market. We're going back to the 1970s and '80s where these things were already tried. I think this is very worrying."

Correa's move is prompting fresh concerns among critics that he is following in the footsteps of Mr. Chávez, who has increased state-ownership of Venezuela's lucrative oil industry.

But Adrian Bonilla, the director of the Ecuador branch of the Latin American Faculty of Social Sciences, says that Correa is no Chávez. Chávez has basically left the banking system alone, while Correa wants only to regulate – not seize – the means of production, says Mr. Bonilla. "Correa and Chávez share the same rhetoric, but Correa doesn't have the resources," he says, adding that Correa doesn't share Chávez's anti-US views.

Meanwhile, Correa's government is rolling out its own plan to spend $30 million to provide 70,000 Ecuadoreans with small loans this year alone. The loans of up to $5,000 will be at 5 percent, which is nearly 25 percent lower than the average actual interest rate most private microfinance groups offer the poor.

FINCA's Ponce says that this plan is not sustainable. "With 5 percent interest rates, the government will have to heavily subsidize the microloans," he says. "Maybe Venezuela can handle that [budgetary drain], but not Ecuador."

Still, Bonilla points out that Correa's antipoverty message remains popular. His approval rating is still above 65 percent, according to recent polls.

"I agree with everything Correa has said and done so far," says university student Diego Maldonadoin in Quito. "All presidents before Correa have been slow to do things for the poor. That's why people leave the country."

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