Economic Development

Economic development is the process that influences growth and restructuring of an economy to enhance economic wellbeing. Rather than being a simplistic process, economic development typically is a range of influences aimed at achieving objectives like creating jobs and wealth and improving the quality of life. It incorporates co-ordinated initiatives targeted at expanding infrastructure and increasing the volume and/or quality of goods and services produced by a country. Economic development brings many benefits such as: increased employment, viable businesses, enhanced standards of living and a pleasant working environment.

According to Franklin development strategy economic development is achieved by "growing the workforce and by increasing the productivity of existing resources or in jargon phrase "working smarter not harder""1. Indicators that affect Economic Development There are diverse indicators that affect economic, one of them is Low GNP per capita, and this is the most common method of comparing living standards. However many LDC's have had a realistic growth in their GNP rate, but the potential benefits that come with this growth is canceled due to the extreme increase in population.

Another indicator is poverty, which can be seen in most of the third world economies. The third biggest indicator is the unequal distribution; this is a major factor in the persistence of poverty, unemployment and unequal income distribution. External debt hindering economic development. If the burden, reflected in high payments of capital plus interest of the external debt in the physical account is too high, the situation will be unsustainable in the medium term.

If a country wants to develop its economy through a high social expenditure (social projects), it should allocate less payments to the external debt. To the extent that these external resources take away the capability of the country to allocate resources to social projects then clearly the country is not in a position to develop economically. Unless the country decreases the amount of its payment on its external debt, the amount of it will definitely hinder its economic development. 

1 The theory behind this investigation involves finding out how a third world country obtains resources from abroad, how these sources generate the origin of external debt, and the problems that they entail. The country has to allocate resource from its budget to pay their debt, resources that otherwise could be used or should be used to increase and improve services that the government could provide to the poor like: health, education, transportation, housing , but also crucial sectors of the country, oil, agricultural and telecommunications among others.

2. 2 The information used in this investigation was obtained from visits made to the central bank of Ecuador, Ministry of Finance, University Library, public brochures and statistics, personal interviews with government officials. After carrying out a critical analysis on the information compiled, and paying close attention to levels, structure and characteristics of external debt, the investigation will try to determine if the country has used external debt in a manner that has jeopardized economic development.


Economic Origin of External Debt Necessities: The external debt is not a new generated problem, it's just that in the last couple of years, it underwent and impressive growth, consequently it is interesting to know, from a net economic point of view, how the necessity of a third world country in obtaining resources from abroad originates, which is one of the definite direct causes to the origin of the external debt and the problems that it entails. Any country in need of finance has three possible options:

a) To adopt internal political and economical measures, in order to reduce its financial necessities b) Find the external finance required c) Combine both possibilities. The choice that each country has between adjusting or financing seems to be a decision that has direct consequences upon its economy. To adjust means the reduction of standards of life, and financing means the postponement and deferral within time of the internal sacrifice. In most of the developing countries, the internal savings are not sufficient to cover the required levels of investment.

On the other hand, the originating incomes of exports are not enough to pay the expenses of foreign currencies that demand the necessities of imports. In consequence, complementary resources are a necessity in an effort to reach an appropriate rate of resource formation as well as a high rhythm of economic growth. Definition and types of debt The acceleration of economic development in the majority of Latin-American countries, which started in the beginning of 1960, has been accompanied by a rising need of external resources, generally to cover a deficit in the current account.

This is considered adequate in the current stage of development; nevertheless, these same countries have had a pronounced growth in their external indebtedness. While these financial transactions imply debt and no donations, there will be necessary obligations that will affect the payment pattern and the currency income in the future. When the resources have been obtained by external loans, the obligation to fulfill the reimbursement and to attend the service of the debt, the received funds have a price in form of interests, commissions or dividends, which must be paid in agreement with the conditions the credit establishes.

There are two types of debt in a country: Internal and external. The public internal debt consists of the request of loans from the government to the residents of the country, which turns them into the title holders corresponding to the pending obligations that the state has with them, but these same creditors are contributors to the government, and then it can be said that "the country has a debt with itself". The external debt is constituted by the liabilities a country maintains externally, with an original maturity or a prorogation of a year or more, payable in foreign currency.

We should clarify that the external national debt does not include: the obligations with maturities of less than a year, the credits contracted with option as far as reimbursement currency, the debt of the private sector without the guaranty of the official sector, operations of "purchases" and "repurchases" with the International Monetary Fund, nor the "swap" transactions between central backs, operations that really are not loans. EMPIRICAL FRAMEWORK

Brief History of Ecuador's external debt The crisis starts with the military government in 1976, when the oil income starts to be insufficient and the country opts to go for external indebtedness in a very aggressive form. Future governments continued to increase the country's external indebtedness. The problem worsens in 1982, when the service of the debt succeeds one hundred percent of export earnings and therefore the country was not in a position to continue servicing the debt.

In the forthcoming three decades, Ecuador has paid approximately 88. 935 million dollars, five times the current stock of the debt, resources that have not been used for projects to promote economic development. In 1983, the president signs the first letter of intent with the International Monetary Fund. By July of 2000 the country had signed fourteen Letters of Intent. These agreements with the IMF imposed severe structural adjustments and reform. In 1999 the economy suffered the strongest crisis of the decade.

If this wasn't enough, the president declares the dolarization2, trying to make of this the solution to all evils that Ecuador historically had. However, the dolarization instead of propping up the economic system, produced the opposite effect The structure, Characteristics and incidents on the Ecuadorian economy and debt: Ecuador's total external debt is of 14. 446 million (April 2004), of this 11,216 million corresponds to the external debt and 3. 230 corresponds to the internal debt.

The public external debt has remained the same until the present moment, although it can change due to the series of commitments that the present government is acquiring; an alarming fact is the external growth of private external debt prevailed from 4,209 million of dollars, ascending in a year to 5,187 million dollars, debt destined mainly, to finance transactions and economic activities as consumption, investment, commerce and imports of the private sector.

During 1976-1980, the debt was superior to the gross internal product. This situation is repeated in 1999, the year of the economic crisis, although, in the later years the amounts of the debt is inferior to the gross internal product. Its load continues to be extreme, and the government destined good part of the general budget of the State for its payment.