There’s a fascinating election process going on in Ecuador right now, which monetary and data minded FT Alphaville readers might want to pay attention to.
While last Sunday’s vote in the oil-exporter country resulted in no candidate achieving the all-important 40 per cent threshold necessary to win (so there will be a run-off election in April) political commentators say Andrés Arauz has now emerged as a potential front-runner.
Arauz, who is only 36, is an intriguing character. He is most frequently described as a leftwing economist and populist who rejects free-market orthodoxy. But there’s much more to him than just that.
Arauz served as Minister of Knowledge and Human Talent during the leftwing presidency of Rafael Correa between 2015 and 2017. He was named a director of Ecuador’s central bank at the age of 24 and became a cabinet minister at 30. On the international stage he is best known for being an advocate of complementary digital monetary systems, which he believes are a viable pathway for Ecuador to wean itself off its US dollar dependency.
Ecuador’s national currency, the sucre, was replaced with the dollar in January 2000 in a bid to regulate runaway inflation and stabilise the country’s economy.
Twenty years on, the dollarisation experiment has received mixed reviews. Many western economists have welcomed its stabilising effects on inflation but note the policy alone was not enough to prevent further Ecuadorian indebtedness.
It was on Aruaz’s watch that Ecuador famously dabbled with its own experimental digital currency, one of the first in the world, which was launched by the Correa government in 2015. The project was shut down by Correa’s successor, Lenin Moreno, in December 2017 on the basis that it did not attract enough users or volume. Moreno himself, a former Correa loyalist, upset many left-leaning Ecuadorians by spending much of his presidency reversing the policies of the Correa government, which had been in power since 2007. His presidency was largely seen as a betrayal of his former allegiance to the Correa government.
The friction came to a head when Moreno expelled WikiLeaks founder Julian Assange from Ecuador’s UK embassy in 2017, after protecting him for seven years. Moreno also stripped Assange off his Ecuadorian citizenship, opening the pathway to Assange’s potential US extradition. Critics have argued the Assange expulsion may have been an attempt by Moreno to ingratiate himself with US interests so as to influence terms on a new IMF deal.
As noted in the FT, Ecuador signed a $6.5bn lending agreement with the IMF and renegotiated the terms of its $17.4bn of sovereign debt with bondholders in 2020.
Correa was later sentenced by the Moreno government to eight years in jail for corruption. It is believed that if Arauz wins the election in April he may move to overturn the verdict and in so doing open the door to Correa’s political return.
In the immediate future Arauz has not given up on the CBDC vision or on closer co-operation between the country’s central bank and finance ministry.
In January, 2019 Arauz published this paper outlining how central bank digital currencies (CBDCs) could be used as tools to help countries who fare badly under the yoke of the international dollarised system to acquire monetary sovereignty.
In the paper Arauz is particularly critical of the SWIFT money-messaging system, which he sees as US-controlled and thus privy to US-surveillance capitalism intrusion, even though it is formally Brussels-based.
There is some nuance in his critique of surveillance capitalism however. It’s not that surveillance capitalism is bad per se in Aruaz’s opinion, it is that it is suboptimal if deployed by the United States government and/or the US corporate sector, which de facto operates as a proxy for the former to subjugate foreign states. He’s more comfortable for surveillance capitalism techniques to be deployed by a domestic government or domestic corporates (within the scope of domestic privacy laws) in their own right.
More pertinently, Arauz sees US efforts to reduce emerging markets’ use of physical cash as part of a broader strategy to increase its grip over emerging market populations through data control. In the same way that a US intelligence operation might use compromising information about foreign entities to helped turn them into controllable assets, Arauz looks at US control of the dollar transactional system as empowering mass data-mining techniques in a bid to subjugate ever larger emerging market populations.
If it’s free you’re the product. And if it’s free and given out by the US system, you’re a US product. [Though, it should be noted, Arauz has already committed to seeking additional financing from Chinese banking institutions and there’s scant mention of what it means if it’s free and given out by China.]
Nonetheless, as Arauz wrote in 2019:
Critics might argue that Ecuador’s fiscal and monetary problems result from decades worth of poor economic management, corruption and political instability. They might also argue Correa’s welfare spending only exacerbated an already precarious and fragile state, that’s always been partial to destabilisation by military-supported coup d’etats. Last, they might point out that the country is already in selective default, and that Arauz’s criticism of IMF-imposed austerity and other conditionality ignores the realpolitik of how better to stabilise an oil-rich South American country for the purposes of making it investable.
A four-year repo deal with Goldman Sachs and Credit Suisse worth a collective $1bn struck against $2.5bn worth of Ecuadorian bonds, meanwhile, was liquidated in April 2020. This came after a collapse in oil prices saw the value of Ecuadorian bonds fall below a critical threshold that would otherwise have triggered even higher payments. Arauz played a key role in publicising the existence of the deal, arguing its low profile might otherwise echo the repo deals extended to Greece by Goldman Sachs in 2003 in a bid to prevent the debt from showing up in public finances.
But while Arauz may have launched his presidential campaign on a promise to unwind the “bad” IMF deal that the Moreno government signed up to with the IMF while also introducing capital controls and a wealth tax, in recent weeks he has softened the anti-IMF rhetoric a tad.
Whether that has anything to do with the IMF being increasingly on board with the idea of CBDCs is unclear. What is certain is that the IMF has been looking closely at the legal limitations for CBDC issuance across the world, noting not all countries have the legislation in place to make them possible. At the same time ECB boss and former IMF head Christine Lagarde has been making ever louder remarks about the need to properly regulate market-originated cryptocurrencies like Bitcoin, which many view as CBDC challengers in their own right.
Arauz himself noted in 2019 that the IMF had acknowledged there were both positives and negatives associated with sovereign issued CBDCs. And while he has said on the record he doesn’t see dollarisation ending soon, in part due to its ongoing popularity with many Ecuadorians who worry about the central bank turning to the printing presses to finance debt, it seems more than likely that creative monetary experimentation, especially of the CBDC sort, will be forthcoming if he does win the election in April.
Arauz’s pledge to handout $1,000 to the 1m families most impact by the Covid crisis, which struck Ecuador particularly badly, could also be used as a mechanism to help get CBDC adoption off the ground.
What such experimentation may prove (or disprove) about the viability CBDCs system will be fascinating to watch either way.
Related links:Ecuador presidential election heads to second round - FT Time for an SDR injection? - FT Alphaville