IV. POLITICAL ENVIRONMENT - Bilateral Relationship with the United States Ecuador and the United States enjoy an excellent relationship based on shared democratic values and economic interests. President Sixto Duran Ballen, Vice President Alberto Dahik, and many other government and business leaders have been educated in the United States. Since Ecuador led the way for Latin America's return to democracy in 1979, the U.S. has supported Ecuadorian efforts to strengthen the country's democratic institutions and improve governance. The bilateral relationship with the current administration has been excellent. Ecuador is a transit country for cocaine smuggling and money laundering by criminal organizations based in Colombia and Peru, but has so far avoided large-scale drug-related violence and corruption. The Ecuadorian government is a full participant in the international campaign against drug trafficking. In addition to counter-narcotics assistance to the Ecuadorian armed forces and national police, the U.S. has provided Ecuador with alternative trade opportunities under the Andean Trade Preferences Act. The U.S. is Ecuador's largest trading partner, providing the major market for its top exports and serving as the major foreign supplier of both consumer and capital goods. American oil companies have been leading players in the development of Ecuador's petroleum industry. Ecuador's economic reform program is helping to further expand trade and investment ties and has received strong support from the United States. Increasing Ecuadorian concern for their environment and U.S. interest in preserving the country's tremendous biodiversity have created another area for bilateral cooperation. - Major Political Issues Affecting the Business Climate The Duran Ballen administration's macroeconomic stabilization program and state modernization legislative initiatives are the major political issues affecting the Ecuadorian business climate. Inflation reduction, the recent commercial debt settlement, trade liberalization, the selling of state shares in private businesses, partial privatization of state enterprises, and increasing the security of rural property rights should improve trade and investment opportunities in the coming years. However, most of these economic accomplishments have come with political costs. Fiscal austerity has slowed growth and increased unemployment. The linkage of fuel prices to the world market is widely, if erroneously, criticized as inflationary. Many Ecuadorians do not understand why the country must repay its foreign creditors. Import-substitution industries are seeking relief from the increasing foreign competition. Public sector unions and some elements in the military oppose privatization of state companies. Indigenous peasants fear free market agrarian policies may pose a threat to their economic and cultural survival. The fact that 24 percent of votes cast in the May 1994 Congressional elections were blank or spoiled suggests that some voters are dissatisfied with current political options. If the modernization program fails to raise the hopes of average Ecuadorians that their living standards will improve in the future, the 1996 election might produce a shift back towards state intervention in the economy that could result in some deterioration in the business climate. Nevertheless, the general consensus among the elite on the need for economic modernization should last long enough for economic success to strengthen popular support for reform. - Ecuador's Political System Following two decades of political instability and reformist military rule, civilian government was reinstituted in Ecuador in 1979. Since then the country has enjoyed four consecutive free elections and peaceful transfers of power. A pattern has emerged in which administrations of the center-left alternate with those of the center-right as the electorate searches for leaders that will bring about necessary economic changes at minimal social cost. Although Ecuador's political elite is highly factionalized along regional, ideological, and personal lines, a strong desire for consensus on major issues often leads to compromises. Structural reforms are difficult to legislate and implement, but widespread recognition of the need for change has resulted in an evolutionary, if sometimes frustrating, reform process. Meanwhile, Ecuador's essential conservatism has enabled it to enjoy a high degree of social stability, especially compared with the drug and terrorist-related turmoil in neighboring Colombia and Peru. The Ecuadorian constitution grants wide powers to an executive president who serves a single four year term and cannot be reelected. The unicameral Congress is elected on a party list basis, with limitations on reelection. Although it has little control over most of the public sector budget, Congress can block presidential legislative initiatives and has the power to remove cabinet ministers from office. Although there is currently a center-right majority in Congress that generally favors economic reform and modernization, party rivalries make it difficult to pass legislation. A wide variety of independent agencies and state-owned companies receive little oversight from either the government or Congress. The Ecuadorian armed forces are partly self-funded through a network of military-owned enterprises and a dedicated share of petroleum revenues. The military services respect civilian authority, but enjoy a large degree of autonomy over their own affairs. In the more remote areas of the country, the military often provides the only effective government presence. The National Police is under the jurisdiction of the Ministry of Government. The judiciary is independent but the legal system suffers from inefficient and non-transparent procedures. Provincial and municipal governments are locally elected, but are dependent on the central government for funding and are not always effective at delivering services. The Social Christian Party (PSC) is the country's largest political grouping, having won 26 percent of the valid vote in the May 1994 mid-term elections to control 32 percent of the seats in Congress. Former president and PSC stalwart Leon Febres Cordero is the popular mayor of the port city of Guayaquil, Ecuador's largest city, and the PSC controls several other provincial and municipal governments as well. PSC leader Jaime Nebot placed second in the 1992 presidential election to Sixto Duran Ballen, himself a former PSC member. The party supplements its dominant position on the coast with a strong, well-financed country-wide organization. Ideologically, the PSC is a pro-business party with a strong populist streak. Although the party generally supports economic reform and liberalization, in many cases it also favors subsidies to business and broad-focus government social programs. Febres Cordero's 1984-1988 administration failed to follow-through on promises of economic liberalization and structural reform. The Social Christians are expected to dominate the 1994-1996 Congress, but must walk a fine line between cooperating with the government's sometimes unpopular modernization program and positioning Nebot to win the 1996 presidential election. President Sixto Duran Ballen, an American-educated architect who previously served as Minister of Public Works and mayor of Quito, is devoted to public works in the cause of development, but is restrained by his fiscal conservativism. He was elected on a modernization platform pledging to increase the efficiency and reduce the size of the Ecuadorian state. Vice President Alberto Dahik's Conservative Party (PCE), together with Duran Ballen's fading Republican Unity Party (PUR), took only 9 percent of the 1994 vote to control 12 percent of Congress. The PCE is Ecuador's oldest political party and has deep roots in the Sierra highlands. Today the Conservatives espouse a "neoliberal" agenda that combines free market ideology with a technocratic management style. Dahik is an outspoken advocate of transparency in government. Other moderate to conservative deputies hold another 8 percent of the seats in Congress and can be expected to generally support the government. On the center-left, Democratic Left (ID) and Popular Democracy (DP) are Ecuador's Sierra-based social democratic parties. Together they won 18.5 percent of the 1994 vote to capture 18 percent of Congress. During the 1988-1992 administration of Rodrigo Borja, the ID defended a broad economic role for the state, but failed to improve public services or state enterprise efficiency. On the other hand, Borja presided over a dramatic liberalization in the foreign trade regime and made tentative steps toward domestic economic reform. The ID has built one of Ecuador's strongest national political organizations, but under current leader Raul Baca it has lost electoral ground. Since the presidency of Osvaldo Hurtado ended in 1984, the Christian democratic DP has been moving toward the pragmatic center. Banker and former DP Quito mayor Rodrigo Paz is the leading center-left candidate to oppose Social Christian Jaime Nebot for the presidency in 1996, but he must increase his support on the coast if he is to defeat Nebot. Populist leaders such as former Guayaquil mayor Abdala Bucaram and former Air Force General Frank Vargas appeal for votes with charismatic personalities, nationalistic slogans, attacks on wealthy "oligarchies", and promises of state assistance to the poor. Although Bucaram was a viable presidential contender in 1988, his Ecuadorian Roldocista Party (PRE) has suffered in recent years from scandals surrounding its administration of Guayaquil. Nevertheless, the PRE received 17 of the 1994 vote to control 14 percent of Congress. Famous for leading a failed rebellion against the military high command in 1986, Frank Vargas now leads the nominally left-wing Ecuadorian Popular Revolutionary Alliance (APRE) and was the surprise winner of the 1994 election in the Quito area. APRE received 6.5 percent of the vote nationally to control under 3 percent of the seats in Congress. The Popular Democratic Movement (MPD), a party with Maoist communist roots, is the leading force on the far left, having increased its vote to 9 percent in 1994 to win 10 percent of Congress. In alliance with public sector unions such as the UNE teachers union and the Social Security Institute (IESS) workers, MPD leaders Juan Jose Castelo and Maria Eugenia Lima militantly oppose the government's modernization program, particularly privatization of state companies. The MPD also supports demands for indigenous community autonomy and radical land reform by the CONAIE peasant movement led by Luis Macas. Through its successful participation in elections, the MPD has drifted away from a commitment to comprehensive social revolution, although it is still hostile to private business. The old Socialist Party (PSE) led by Leon Roldos and other left-wing parties only won 5 percent of the vote and retain less than 3 percent of the seats in Congress. Minor subversive groups, such as a few associates of Colombian guerrilla organizations and the tiny "Red Sun" insurgency that publicly disbanded in June 1994, enjoy no popular support and pose little threat to the country's security.