Economic groups in Ecuador strengthened under Correa

By Luis Fierro Carrión

Twitter: @Luis_Fierro_Eco

            The main economic groups in Ecuador strengthened during the decade of the government of Rafael Correa, according to information from the Internal Revenue Service (SRI).

            The income of the 27 main economic groups increased from 28.4% of Ecuador's gross value added in 2013, to 29.6% in 2017, as stated in my article “Strengthening of Economic Groups in Ecuador in the last decade”, published in Revista Economía of the Central University of Ecuador (No. 114, https://doi.org/10.29166/economia.v71i114.2222).

            This concentration of capital continued its course, despite the rhetoric of "21st century socialism", "citizen revolution" and "supremacy of work over capital" employed by the Correa government.

            Taking a longer time perspective, 22 economic groups for which continuous SRI information is available from 2007, doubled their income between 2007 and 2017, as their income went from $ 11,007 million in 2007 to $ 21,919 million in 2017.     

            Those economic groups that benefited from the economic policy adopted by the government expanded, which favored the expansion of domestic consumption, the increase in public spending, imports, the real wages of workers, the wage mass of public employees (both through hiring more employees and the increase in their average remuneration) and the construction of infrastructure.

While a Superintendency of Market Power Control was created, and legislation was passed leading to the separation of financial institutions from productive companies and the media, such policies did not stop the process of consolidation of the economic groups. The recession that began in 2014 had a concentrating effect, as some small and medium-sized enterprises went bankrupt and larger companies expanded their market share. It might be that with the deeper recession of 2020, as a result of the COVID-19 pandemic, the total sales volume of major economic groups may fall, but a concentration could once again occur, given that many small and medium-sized enterprises are failing.

      According to the SRI, the total collected by the State from these groups reached $3,092 million, equivalent on average to 10.8% of their revenue.   It should be noted that the term "income" for the SRI represents gross income (e.g. sales), and not net income or profits.

      Considering the total collected, the groups that contributed a higher percentage of their income to the State were: Banco Bolivariano (79.6%); Banco Internacional (63.5%); ProduBanco (56.8%); and Banco Guayaquil (41.4%).

      At the other end, among the 25 largest groups, the ones that contributed the least to the State were: Holding DINE (Directorate of Army Industries, 1.5 %); La Fabril (2.7 %); PRONACA (2.9 %); OCP Ecuador (which includes Andes Petroleum and Repsol,  3.5 %); and the Alvaro Noboa group (3.6 %).

      The 25 groups include: 1,236 national companies, 391 foreign companies, 17 financial institutions, 11 media companies and 172 natural persons, for a total of 1,809 members. Of the total members of the 25 groups, 124 members were domiciled in tax havens (as defined by the SRI) and 62 were offshore companies that appeared published in the "Panama Papers".

      The 25 groups owed back taxes for $333 million (at the end of 2017), of which the main debtors were the groups: Exportadora Bananera Noboa ($161 million); ARCA Ecuador ($46 million); Eljuri ($43 million); and Reybanpac ($29 million).

Several of the groups were among the main beneficiaries of the pardons of  interests, fines and surcharges for tax debts made in 2015 (Correa's government) and 2018 (Moreno’s government); the main ones were: OCP/Andes  ($787 million),  Banco Pichincha ($131 million), CONECEL/Claro ($100 million), Alvaro Noboa ($76 million)  and Eljuri  ($19 million) (according to studies by Wilma Andrade, Alberto Acosta and John Cajas cited in my article).

In some cases, the groups were involved in tax and judicial lawsuits, as well as seizures, diminishing their economic power. The most emblematic case is that of the Noboa Banana Export group (Alvaro Noboa), which faced several legal proceedings and seizures, so its revenue fell by -4.6% between 2007 and 2017. A more extreme situation is that of the Isaias group, whose main companies were seized (the SRI stopped reporting on this group in 2008).  In other cases, the groups went bankrupt: Tosi / Banco Territorial Group (SRI stopped reporting in 2013); Ortega Group (dropped to 238th place).

      Among the 22 groups analyzed for the period 2007-2017, the ones that grew the fastest were:

        a)     KFC (Anhalzer-Serrano), grew 360% over the period.

        b)     Cerveceria Nacional (DINADEC), growth of 316 %.

        c)      Herdoíza Crespo Construcciones (+291%) benefited together with other construction companies from the large public investment in this area.

        d)     Holding DINE (+232%), expanded into other areas (Hotel Marriott, real estate)

        e) PRONACA (219%) benefited from the expansion of domestic consumption, as well a

a)                       Going further back, in  my  book The Financial Groups in Ecuador  (Fierro, CEDEP, 1991), the antecedents in 1986 of the main economic groups  identified by the SRI for the period 2007-2017, were 20 groups that accounted for 16.1% of the assets, 20.7% of sales and 18.1% of the capital of all companies.

Faced with the failure of the government’s proposal for companies and persons with higher income to contribute to the COVID-19 health emergency, some analysts have suggested that a wealth tax be re-instituted, as was done after the Manabí and Esmeraldas earthquake in 2016.  That tax grossed only about $200 million, in part because many wealthy people do not report their net assets.

The portal "Periodismo de Investigacion" reported on the 200 largest net assets declared. 5,196 people reported a wealth of more than $1 million, with a total equity of $16 billion. However, the article mentions that an estimated 280 Ecuadorians have taken out $30 billion abroad.

Among the 200 largest net wealth holders in Ecuador are some of the main shareholders of economic groups, such as Isabel Noboa, Luis Bakker (PRONACA), Marcelo Herdoiza (Herdoiza Crespo Construcciones) and the Hidalgo Barahona family (Hidalgo & Hidalgo). Of note, the list does not include some entrepreneurs who have benefited from contracts with the State, such as Enrique Cadena, Conto Patiño Martínez, Diego Sánchez (Seguros Sucre), Tomislav Topic, or the Eljuri family.

(*) An abbreviated version of this article was published in Spanish by “Diario El Universo” on June 5, 2020.

https://www.eluniverso.com/opinion/2020/06/05/nota/7861404/fortalecidos-grupos-economicos

The author is an economist graduated from the Catholic University of Ecuador (PUCE), with graduate degrees from the University of Oregon and the University of Texas at Austin. He was a staff member of the IDB from 1997 to 2013, and Representative of Ecuador to the IMF in 2006. Advisor on climate finance and development issues. These are his personal opinions.