Wealth-to-Income Ratios, Capital Share of Income, and Public Debt in Ecuador

This paper presents new estimates of wealth-to-income ratios and capital’s share of income for Ecuador during the period 2007 – 2013. Our estimates rely on national balance sheets recently produced and published by the Ecuadorian Central Bank.

Following Piketty and Zucman (2014), we construct annual wealth and income series and we provide detailed information on the structure of wealth, investment and savings for the first time in this country. We make two main contributions. First, we show a decline of capital’s share of income which can be explained by the rise of the public sector and the relative decline of private wealth.  Second, we provide a detailed analysis of the evolution of public debt in Ecuador and we show the shift from the dependence on worldwide multilateral debt markets to a new bilateral dependence on China.

Public debt is an important topic in the analysis of wealth and is a recurrent issue since the Mexican debt crisis in 1982 until the recent Greek sovereign debt crisis. According to Piketty (2013), two main ways have been used to reduce public debt in highly indebted countries (with a debt-income ratio superior to 200%): i) inflation, e.g. after the World War II in France and Germany, and ii) the so-called austerity, e.g. a permanent budget surplus (UK during the 19th century). The first way was shorter than the second one which occurred during an entire century in UK. With low inflation in developed countries, a quick answer for debt reduction could be a third way: negotiations on debt rescheduling or debt reduction to avoid a debt default. This solution has been already used in developing countries. The case of Ecuador is interesting in this respect: first, it experienced default and debt restructuring in 2000, while the country was unable to pay debt; second, it unilaterally wiped out part of its external debt in 2009, while this debt was considered as illegitimate even if Ecuador was able to pay it. With detailed national accounts, it is possible to assess the consequences of this unilateral debt reduction. We show that Ecuador only changed the structure of the creditors (and conditionality on loans) but it didn’t change the level of indebtedness.

First we reveal the true level of government debt. We show that public debt declared by Ecuadorian ministry of finance (as in IMF’s World Economic Outlook) is on average 24% of national income, while financial liabilities in national accounts are 50% of national income over 2007-2013. Second we are able to accurately detail the rise of Chinese loans in national balance sheet while disentangling the part which is reimbursable in commodities. Consequently, thanks to national accounting, we provide a simple way to quantify the rise of Chinese lending in Latin American Countries while there is a challenge to precisely identify the weight of China in this region.