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Pontifical Catholic University of Ecuador
School of Communication Linguistics and Literature
Department of International Business and Relations

ACADEMIC READING AND WRITING
RESEARCH PAPER

NAME: Daniela Velástegui

Ecuador’s economy has been affected by the international recession

Many people could think this is the first time the world is facing an economic crisis like this one.However, it is not true the global economy has always had positive and negative periods. It is easy to remember the Recession of the 30’s when the world market decreased 70%. Even though humanity has already faced several economic crises, financial institutions do not know how to react yet. First of all, it is necessary to keep in mind different aspects and facts that contributed to this enormousdifficulty. In spite of not being the responsible of the actual situation, Ecuador has suffered the consequences of the recession.

Although many factors provoked the American crisis, one of the most relevant is the irresponsibility of the banks to take risk and offer loans to everybody without doing a detailed study of their clients, and also the lack of regulation on these establishments.Especially the mortgage loans were the ones which more harm caused because in some cases the government sponsored enterprises, so the financial institutions considered they would not be in trouble. But the worst happened and almost all the economies had to affront an International Recession; perhaps worse than the Great Depression

It is important to know that Ecuador’s stock market is one of themost underdeveloped Latin American markets. Without including Paraguay, Uruguay and Venezuela because there is no data, the Ecuadorian ratio of stock market capitalization to GDP is the worst in Latin America. In 2008, this ratio was only 9%. In Quito and Guayaquil the stock markets are extremely limited, with few firms and low levels of liquidity. “In trade, Ecuador is highly dependent on US. Invalue terms, 45% of Ecuador exports went to the US and 20% of its imports came from there in 2008.” On the other hand, remittance inflows of Ecuador represent an important factor in its economy and have the highest percentage in Latin America. “In 2007, remittances as a percent of GDP were 6.9%. The main sources of remittances are the US (47%) and Spain (41%) followed by Italy (7.5%).”Unfortunately, Ecuadorian economy has confronted several difficulties and has been affected in the following ways: commodities prices have decreased, exports from the United States have been reduced and the level of remittances has diminished. All of these effects have impacted negatively all citizens. Although Ecuador has never had a good economy with these issues the government has been forced to makeradical decisions which are not likely the best ones.

FIGURE 1
FORECAST FOR REMITTANCE FLOWS TO DEVELOPING COUNTRIES, FOREIGN DIRECT INVESTMENT AND WORLD TRADE, 2009

Sources: World Bank, World Trade Organization, UN conference on Trade and Development

One of the facts that allowed Ecuador to enhance its economy in previous years was Remittance sending. Nevertheless, this revenue hasdramatically been affected due to the recession. It is essential to mention Ecuador has also faced the results not only of the American crisis but also the Spanish one. That is why the level of unemployed people from Ecuador has radically increased. Mainly, it happened due to the illusion of the real-estate sector; when Spain joined the European Union it started to modernize its infrastructure.Conversely, nobody took into account the increase of the interest rate and the reduction of the loans to families. This event had direct influence on Ecuadorians because most of them who live there work as bricklayers; therefore, they have no jobs now. Even though many thought this economic downturn will not impact developing countries’ economies, it was not true because those ones are based on...