IN QUITO, the capital of Ecuador, a fancy meal for two can be had for less than $20, a taxi ride across town costs about $2, and a bottle of the excellent local rum $3. The country is a tourist paradise, especially for holders of the elsewhere battered dollar.
The government is hoping that more than tourists will come to the Andes, and to achieve this goal, it has passed a new law allowing U.S. and other foreign companies to set up shop importing duty-free all that they need to produce goods for re-export. The big draw is Ecuador's extremely cheap labor. At less than U.S. $40 per month, the Ecuadorian minimum wage is roughly equals a day's pay for unskilled industrial work in the United States.
Wages in Ecuador are so low because of constant devaluations of the currency as the government seeks to keep the country's exports competitive. This being so, why is it that foreign companies have not flocked there already to lower their production costs? Distance is not the answer, because even more remote places such as China, Malaysia and Singapore are abuzz with U.S. and European corporations seeking low-cost and diligent labor. Nor is the low level of education of the Ecuadorian labor force a reason, because most industrial operations sent abroad consist of unskilled tasks anyway.
The answer lies in a labor code that would be the envy of North American trade unionists. In Ecuador, it is more difficult to fire a worker once hired than in the United States. A dismissed worker is entitled to a complex panoply of rights culminating in a lump-sum payment equal to half of all wages accrued during total past employment.
Although commendable in its intentions, effects of this progressive legislation have been exactly the opposite of those envisioned: Domestic and foreign companies have balked at hiring more employees, preferring instead either not to invest or to invest in labor-saving technology. Hence, the paradox of a modern industry sector that employs at best 20 percent of the labor force and that sits atop a sea of unemployed and sub-employed workers.
The painful lesson learned by Ecuador and by other Latin American countries is that it is not possible to distribute wealth that does not yet exist. Currency devaluations are, in part, a response to high costs of production resulting from the rigid labor code. Demands by the protected and well-organized sector of the labor force are met by the government with devaluations to keep exports competitive and with money printing to pay its own employees. The resulting loss of value of the currency erodes labor gains which leads to a new round of strikes and protests. This cycle has led to the present unenviable situation in which real wages hit bottom without the country becoming any more competitive internationally.
Meanwhile, the 60 to 80 percent of workers excluded from protected employment survive as best they can in the "informal sector," composed of street vendors, clandestine sweat-shop workers, and odd-jobbers of all kinds. Companies operating in this economic environment routinely bypass their own highly-protected labor force by subcontracting production and marketing tasks to informal entrepreneurs.
This process of "informalization" wreaks havoc with government statistics and planning because there is no way of knowing what portion of the real economy is operating underground.
The new Ecuadorian export law includes, along with tariff exemptions, a weakening of the permanent employment clause to allow exporters a freer hand in adjusting to market conditions. Thus the government seeks to stimulate employment and to bring it above ground, reducing the number of workers bereft of any kind of protection.
Predictably, the new law faces stiff opposition from trade unions and politicians bent on making political hay out of its apparent anti-labor stance. The administration of President Borja has acted courageously in implementing it despite heavy resistance, knowing full well that the protection of the few comes at the cost of continuous impoverishment of the many. Under present global conditions, heavily indebted Third World countries such as Ecuador have few other options than to seek re-entry into the world economy as producers of raw materials and low-cost manufacturers.
The new international division of labor that underlies this situation features growing competition between the advanced countries racing for both new technology and more flexible production arrangements. Having lost its global hegemony to stiff competition from Japan and a resurgent Europe, the United States must look for new opportunities in order to maintain its competitiveness -- and economic position.
In a world increasingly divided into regional trading blocks, such opportunities are better sought nearby. The countries of Latin American represent both natural production sites in the short run and markets for U.S. technology in the medium term as their own economies recover. The initiative undertaken by the Ecuadorian government is in the best interest of both countries and should be strongly supported.
The free-trade agreement proposed by the Bush administration for most Latin American nations is far-sighted, but more is needed. Trade should be liberalized without delay for countries which, like Ecuador, are willing to leave nationalistic qualms behind and step decisively into the new global economy.
*Mr. Portes teaches sociology and international relations at the Johns Hopkins University.