Correa’s Price Controls Disguise Tariff Tax Hike

(Mauricio Torres)
Ecuadorian President Correa should come clean with his constituents and say outright that he believes the tariffs are fiscally necessary, rather than distract attention with divisive rhetoric. (Mauricio Torres)

EspañolBy David Wolverton

With the precipitous fall in oil prices that started during the latter half of 2014, many oil-producing countries are experiencing fiscal challenges. Ecuador is no exception, as oil revenue accounts for almost 40 percent of public revenues, not to mention a solid chunk of forex earnings.

In the first semester of 2015, the government of President Rafael Correa has been taking measures to counter the effects of the fiscal pinch. Some of these measures, such as curtailing the 2015 budget by 4 percent, have been necessary (and some might argue, insufficient). Other measures, on the contrary, are controversial and carry undertones of populist rhetoric that seeks to pit social classes against each other.

Such is the case with Correa’s government announcing various import tariffs as high as 45 percent for approximately 2,600 goods that include everything from fresh fruit, vegetables, consumer electronics, and certain raw materials needed for industry and manufacturing.

At face value, Correa’s stated agenda is to retain liquidity and reduce the growing current-account deficit the country has generated as a result of the oil slump. Yet Correa knew full well that the message would not be popular with the Ecuadorian public, and has thus decided to take advantage of the opportunity to pit social classes against each other via a populist message that only the “pelucones” (a discourteous term he frequently uses to describe the upper and middle classes) will pay for these higher tariffs, as they are the primary culprits in generating high demand for foreign luxuries.

Furthermore, in an effort to appease the voting public, he has promised strict enforcement action against those companies that “take advantage” of the situation to “speculate” and raise prices. As any businessman knows, inventory replacement costs are an important variable in determining market prices. As the cost of new inventory increases, businesses must make pricing decisions that take into account estimated changes in consumer demand, cash flow variances, and the resulting impact on budgets and balance sheets.

Removing the opportunity for businesses to act fluidly as a natural response to these changes has resulted in companies being forced to assume greater risk and greater cost, all while buying the president time before the general public begin to feel the full effect of the new tariffs put in place. (Due to shipment and customs clearing time frames, most products imported after March 11 can take anywhere from 30 to 90 days to hit store shelves.) Essentially, the government would like the private sector to absorb the major economic brunt of his policy choices in an attempt to curry favor with the general public.

Correa is a master of crowd psychology, and from early on understood that if the effects of the massively unpopular measure were delayed for a time, any effort to formalize a voice of opposition to this would fizzle out. It was clear from the beginning that his approach was one of boiling the frog slowly, versus tossing it directly into the boiling water: allowing for acclimation is the best way to avoid visceral reactions.

Since the government’s unrolling of new tariffs in March 2015, the Ministry of the Interior (which is responsible for Ecuador’s National Police) has employed police intendants to undertake continuous audits of private enterprise to ensure there isn’t market “speculation.”

Under the threat of forced closures, fees, fines, and additional penalties, companies across major industries have been expressly prohibited from altering their prices by any amount unless they have purchase invoices dated past the March 11 tariff pronouncement, proving that their inventories have been subjected to the new tariffs and are the same products for sale in the place of inspection.

These companies receive formal minutes of the inspections, and must provide sales receipts dated pre-March 11 and post-March 11 for specific imported goods to compare prices against the purchase invoices. If any price changes are found to exist without merit, the company can be subjected to penalties and closures of their stores.

It is this author’s belief that the Ecuadorian government, and President Correa specifically, should come clean with the Ecuadorian people. He should state very clearly that he understands the import tariffs are indeed unpopular, yet necessary as a short-term measure to help reduce the current-account deficit.

He should then allow businesses the freedom and opportunity to act as needed concerning a changing economic reality, rather than forcing them to bear the burden of his policy choices alone. Furthermore, he must stop trying to drive a wedge between businesses that are the motors of wealth creation and the general public.

He can do this by putting all citizens on the same level playing field: corporate and individual, alike. No citizen, individual or corporate, should be afforded unique advantages or be subjected to particular disadvantages in a bid to curry favor with another class of individuals.

Follow @WolvertonDavid.

Subscribe free to our daily newsletter
Sign up here to get the latest news, updates and special reports delivered directly to your inbox.
You can unsubscribe at any time