UN DESA | DPAD | Development Policy Analysis Division
Capacity Development and Advisory Services
Macroeconomic policy, external shocks and social protection
Ecuador must be ready to react to external conditions
The external shocks with the largest impacts on the Ecuadorian economy, particularly on the poor and vulnerable, are a fall in export prices, a decrease in capital flows, less access to international financing, and a drop in international remittances. A fall in export prices results in a large drop in GDP due to significant upstream and downstream linkages of export industries. Generally, the effects of the external shocks are short lived and the economy tends towards the baseline very quickly. However, these shocks create large distortions to the labor markets and wage incomes, which in turn affect poverty and income distribution. The net effect is significant: informal sector wages fall by 18 percentage points and poverty rates increase by nearly 9 percentage points.
Lower export prices can have large effects on the Ecuadorian economy
Social policies are effective, but are redistributive
Subsidies and conditional transfer policies have an important positive effect on the economy and can be effective in mitigating the impact of external shocks on poverty. In the case of a simulated fall in export prices, transfers policies can mitigate the impact on poverty rates by as much as 3.4 percentage points (that is, from an increase of 8.6 points to an increase of 5.2 points). However, these policies decrease income and consumption levels in non-poor households due to the need to financing the greater fiscal expenditures through higher taxes.