Discussion Paper

Ecuador’s fiscal policies in the context of the citizens’ revolution: a ‘virtuous cycle’ and its limits

Schützhofer, Timm B.
Discussion Paper (15/2016)

Bonn: German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE)

ISBN: 978-3-96021-004-7
Price: 6 €

Resource-dependent countries are considered to have major difficulties in developing strong taxation systems and sound fiscal policies. Both theoretical assumptions and empirical studies hint at a negative relation between resource revenues and the ability to tax. However, Ecuador has increased tax revenues in times of relatively high resource revenues. Contrary to what is expected based on rentier state theory, I argue that in Ecuador, increasing resource revenues have played a positive role in facilitating higher and more progressive taxes. This is because the state has become more autonomous of business elites.
The research I have conducted shows that while oil-revenues have not been the initial cause for the Correa government’s motivation to increase taxes  not least on economic elites  these revenues have indeed been an important factor in the government’s medium-term success. The increased fiscal space has strengthened the its ability to invest while increased public investments have had a positive impact on the perception of state capacity (Wolff, 2016). A key question is whose perception of state capacities has become more positive? In a standard fiscal contract model, the focus must be on high-income earners who pay most of the direct taxes. Taxpayers accept higher taxes as government activities are perceived as beneficial to them. In this regard, the World Economic Forum’s (WEF) Executive Opinion Survey shows better results. However, these results cannot be considered as enabling factors for fiscal policy changes, but rather as resulting from them. The main point is an improved perception of state capacities among the general population, which has politically legitimated the more decisive role for the public sector in the country’s development strategy.
In this paper, I analyse a number of different phases in fiscal policy-making in the context of Ecuador’s Citizens’ Revolution. In doing so, I examine overlapping phases of what I have denominated the ‘virtuous cycle’ from Correa’s first election in 2006 to his second re-election in 2013. In short, the appropriation of an increasing share of oil revenues has facilitated the improvement of state-society relations and thus the government’s ability to enforce tax payments. A promising result of my analysis is that mobilising oil-rents for investments can be politically rewarding and help to sustain increasing tax collection levels. Overall, the analysis shows that a negative impact of resource-revenues on taxation is not an automatism. Finally, I also consider the current difficulties in continuing down the path towards the improvement of Ecuador’s taxation system in times of a much lower oil price.