Ecuador's historic referendum reignites Latin America's debate on extractivism and economic growth

Illustration by Connectas

This is an extract of an article written by Suhelis Tejero on Connectas and republished by Global Voices under a media partnership.

Ecuador's turbulent elections held on August 20, 2023 weren't only the first step towards electing President Guillermo Lasso's successor. They also marked an unprecedented move towards protecting two of the country's regions, which are both environmental reserves and sources of raw materials capable of boosting the country's struggling economy.

In response to two different questions, 59 percent of the Ecuadorian population voted to halt oil operations in the Yasuní National Park, while 68 percent voted to halt all mining in the Chocó Andino biosphere reserve, whether it be small, medium, or large-scale. After a decade-long fight to save its ecological reserves, this is a victory for environmental movements. However, where will this measure leave the country's finances once implemented?

Within the next year, Ecuador must halt hydrocarbon extraction in the Yasuní area. In the meantime, it must also find ways of replacing the USD 1.2 billion, — or 7 percent of its total revenue — which the exploitation of oil blocks provides. What makes matters worse is that this isn't exactly an ideal time to make this happen.

Ecuador is currently experiencing financial hardship. Its recovery from the economic downturn caused by the 2020 pandemic hasn't been sustained and its economic activity has been slowing down since the third quarter of 2021. While the recent measure to halt oil exploitation in the Yasuní area may be good for the environment, it could potentially make matters worse for Ecuador's social and financial landscape.

#Ecuador has set a global precedent in the climate debate

In a historic referendum, Ecuadorians voted to halt the exploitation of an oil reserve within one of the world's most biodiverse areas: The #Yasuní National Park. /pw-ft

— DW Español (@dw_espanol) August 22, 2023

Ever since former president Rafael Correa failed to get the international community to contribute USD 3.6 billion of funding towards helping Ecuador forgo oil exploitation, he has advocated the extraction of oil from the Yasuní reserve. Within days of finding out the referendum results, Correa criticized this decision. “Losing an industry worth USD 1.2 billion each year would have a crushing impact, especially on the areas in which it operates,” he said. 

According to oil expert, Luis Oliveros, it will be extremely difficult for Ecuador to diversify its revenue matrix in such a short space of time. This could ultimately result in a deeper economic decline and higher inflation. “What happened in Venezuela could also happen in Ecuador. This is further complicated by the fact Ecuador has a dollarized economy and it will therefore cost more to branch out and compete. Dollarization is a major constraint,” he noted.

The dilemma that Ecuador is currently facing between the environment and economic growth has reignited Latin America's ongoing debate on extractivism and the region's need to transition away from its heavy dependence on raw materials. According to data from the Economic Commission for Latin America and the Caribbean (ECLAC), raw materials accounted for 53.8 percent of the region's exports in 2021. The bigger issue here is that South American countries “have now intensified their export specialization in raw materials.”

The further south you look in Latin America, the worse the situation becomes. Almost all South American countries have bought into extractivism and the abundant money that comes with high commodity price cycles. Paraguay, Ecuador, and Venezuela's economies are all heavily dependent on commodities. A new member will soon join this South American club: Guyana, a poor country with major inequalities, but enviable oil reserves. Although Guyana is set to become a hydrocarbon powerhouse, it will ultimately have a concerning dependence on these hydrocarbons.

Mexico is the country with the best track record in terms of diversifying its economy, with raw materials now only accounting for 11 percent of its total exports. The sheer size of Mexico's market and its geographical proximity to the United States have enabled this country to end its dependence on commodities.

Although the dilemma between environmental protection and economic growth is relatively new, the need to diversify the subcontinent's economies has long been debated. International organizations, like the UN Economic Commission for Latin America and the Caribbean (ECLAC), the Inter-American Development Bank, and the World Bank, amongst others, have repeatedly stressed the pressing need to break the vicious circle of having wealth when commodity prices are high and poverty when they fall.

A compelling incentive

A study conducted by Hans-Jürgen Burchardt, political scientist and director of the Latin American Research Center at the University of Kassel in Germany, found that the easy revenue made from extractivism is an extremely compelling incentive, even though its benefits don't filter down to the people. In recent decades, several academic studies have warned that this revenue, albeit compelling, is often outweighed by the tremendous environmental and social costs of raw material exploitation.

“The case for economic benefits is only possible when the Environmental Cost Accounting is severely distorted, thus disregarding the economic costs caused by the negative impact of extractivism,” Eduardo Gudynas, from the Latin American Center on Social Ecology, notes in his paper “To the Last Drop: Narratives Sustaining Extractivism.”

In his study, Gudynas warned that communities end up paying the price of extractivism. “The export of hydrocarbons is therefore always good business, since it's cheap and there's no rigorous accounting whereby the economic costs are subtracted from these benefits (…) There are political narratives that consistently separate these costs from extractivism and thereby ignore them,” he points out.

In this regard, the Dominican Republic's former Minister of Energy and Mines, Antonio Isa Conde, believes that environmentally, economically, and socially sustainable exploitation of non-renewable resources is indeed possible. For several years, this Caribbean island, whose revenue depends on tourism, has sought to take greater advantage of its natural resources through gold mining at Latin America's largest mine and by seeking out potential gas reserves in the Caribbean Basin. “It's possible to develop the extractive industry, but only under specific conditions. If this can't be done for technical or environmental reasons, it's best to leave these resources where they are,” Isa Conde told CONNECTAS.

However, he was also critical in analyzing this issue. “There's an anti-mining obsession that shows signs of mistrust in the authorities,” he said. The subcontinent's negative experiences with non-renewable resource exploitation haven't exactly made it easy for the government to convince people about what's become known as ‘green extractivism.’ This is a form of exploitation that seeks to reduce its environmental impact.

The rest of the article can be read on Connectas

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