15 December 2014
During the 1990s, inequality in Ecuador increased because of a natural disaster and deep economic and financial crisis, as well as the impact of liberalization of the trade and financial sectors on labour markets
Falling income equality in Ecuador during the 2000s partly coincides with the rise to power of a 'new leftist' government in 2007, but the trend was already set early in the decade
The recent drop in inequality is mainly associated with a recovery from the country's deep economic crisis, although the new leftist regime's social transfer policies helped reduce inequality further
The lack of dynamic structural change in the economy make sustained reductions in labour income inequality unlikely over time
Ecuador experienced notable increases in income inequality during the 1990s, a development which by and large has been undone during the 2000s. Although active social transfer policies by successive governments played a role in reducing inequality, the rise and fall in inequality seem to have been associated for the most part with swings in macroeconomic conditions, not government policies.
The legacy of the 1990s
In the early 1990s, the trade and financial sectors were liberalized in Ecuador and high inflation was controlled through macroeconomic stabilization policies. On balance, there was a mild increase in inequality during the first half of the decade. The market reforms failed to induce strong employment growth in the formal sector, and those jobs that were created mainly benefited skilled workers. The slack in the labour market was absorbed in traditional agriculture and the informal urban sector. This increased the wage gap between formal and informal workers as well as between skilled and unskilled workers. However, lower inflation and aggregate real wage increases somewhat dampened the effect that this might have had on inequality.
The influences mitigating inequality disappeared in the second half of the 1990s, when the impact of the macroeconomic stabilization policies faded, and trade was liberalized. A series of external shocks, including heavy floods and falling oil prices, put the economy into a tailspin that ended in a full-blown banking and economic crisis in 1999. The economic downturn, increasing inflation, sharply falling real wages and accelerated exchange rate depreciation all pushed workers into unemployment and, in particular, into underemployment in informal sectors; this increased...