US embassy cable - 05QUITO1531

UNCLAS SECTION 01 OF 03 QUITO 001531 
 
SIPDIS 
 
SENSITIVE 
 
DEPT PASS TO H AND USTR BENNETT HARMAN 
 
E.O. 12958: N/A 
TAGS: ETRD, ECON, OVIP, EFIN, PREL, EC 
SUBJECT: WELCOME TO ECUADOR CHAIRMAN THOMAS DELEGATION 
 
Welcome to Ecuador! 
------------------- 
 
1. (U) Chairman Thomas and other Ways and Means Committee 
Members, we look forward to your visit to Ecuador. 
Unfortunately, I will have to miss your visit as I move on to 
my next assignment; however, you will be in the very capable 
hands of our mission in Ecuador.  Your full agenda will 
include a meeting with President Alfredo Palacio, who took 
the reins from former President Lucio Gutierrez, when he was 
ousted on April 20th.  Unfortunately, that is nothing new in 
Ecuador.  The last three elected presidents have failed to 
complete their terms in office.  Indeed, in the last 105 
years, Ecuador has had 49 governments and 19 constitutions. 
 
Palacio Separating Himself from Gutierrez 
----------------------------------------- 
 
2. (SBU) Palacio was Vice President to Gutierrez, but was 
never really on the inside of the Gutierrez administration. 
Credible rumors abound about Palacio playing a part in the 
early departure of Gutierrez, but many breathed a collective 
sigh of relief when Gutierrez departed the scene.  Once 
again, Ecuadorians believed that a scandal-ridden 
administration had been replaced by a caretaker government 
that would certainly last the remaining 20 months of 
Gutierrez's term.  In reality many of the middle class just 
never liked Gutierrez, generally viewed as an interloper from 
the hinterlands of Tena.  However, Palacio, a medical doctor, 
is more inclined to the pomp and circumstance of the office 
than to the day-to-day running of the country.  He has 
publicly commented that he has more important things to do 
(referring to his medical practice) than being president. 
Thus, it is by no means certain that he will last for the 
duration of the Gutierrez's un-expired term.  Threats from 
Gutierrez to return are not helping matters. 
 
3. (SBU) In economic policy, Palacio has taken a divergent 
and unsettling path from his predecessor.  Financial markets 
were pleasantly surprised by Gutierrez's commitment to sound 
fiscal policies; though, like most Ecuadorian governments, 
structural economic reforms remained elusive. In contrast, 
Palacio's Minister of Economy and Finance Rafael Correa at 
first threatened to halt debt payments to multilateral 
financial institutions unless they made new disbursements to 
Ecuador.  While Correa has backed off from such statements, 
the new administration sponsored legislation that will cut 
Ecuador's debt reduction payments at least in half. 
 
4. (SBU) Correa is from the old, old school of economics.  He 
believes that the state, not the private sector, should 
create jobs, increase production and, apparently, control 
much of the nation's wealth.  Correa is the architect of the 
recent legislation to shift oil revenues from debt reduction 
to current and capital spending.  His ideas for spending 
include providing $40-50 million dollars to the banana 
sector, much of which is controlled by Ecuador's richest man 
and perennial presidential candidate Alvaro Noboa.  Correa 
has also proposed to invest social security reserves in state 
oil company PetroEcuador, which has seen its production 
consistently decline over the past decade, the bulk of it due 
to corruption, mismanagement and inefficiency.  Talk of 
private investment in the oil sector has all but disappeared. 
 Many think that Correa, who is quite charismatic, has 
visions of becoming Ecuador's next president.  He was against 
dollarization and no fan of an FTA either.  We have asked 
President Palacio's office to include Minister Correa in 
Palacio's meeting with you. 
 
5. (SBU) Palacio is most interested in establishing a 
national health care system and he is critical of 
intellectual property protections for pharmaceutical drugs. 
His support of an FTA has been lukewarm, at best.  In private 
he says that he is for the FTA, but he has not publicly 
advocated on its behalf.  However, he has backed off on his 
earlier statements to submit the FTA to a national 
referendum. 
 
FTA - Hope for the Future 
------------------------- 
 
6. (SBU) Palacio's close friend and Minister of Trade Oswaldo 
Molestina is one of the brighter lights in his cabinet.  A 
low-key, serious man, Molestina does not seek the limelight 
and appears sincere about his desire to reach an FTA with the 
United States.  The tenth round of the FTA negotiations held 
in Guayaquil June 6-10 was Molestina's first foray into the 
negotiations, and Ecuador received high marks for its 
preparation and participation in the round.  Though he is now 
Ecuador's lead negotiator, Molestina wisely kept on former 
lead negotiator Cristian Espinosa has his technical advisor 
on the FTA.  A commission of private sector representatives 
has also been appointed to advise Molestina.  You should meet 
with all of them on July 6. 
 
7. (U) Agricultural issues and intellectual property rights 
are the two toughest topics to resolve.  Molestina will 
likely raise those issues with you and may ask for assistance 
to improve Ecuadorian competitiveness. 
 
8. (SBU) On our side of the ledger, we are concerned about 
labor rights in Ecuador, particularly the right to organize, 
and a number of commercial disputes.  Ecuador has an 
antiquated labor code and a reform of the code would allow 
both labor and business to benefit.  The new Minister of 
Labor recently told us that both sides have expressed a 
willingness to look at labor code reform, a promising 
development. 
 
9. (U) You will hear first-hand about the numerous commercial 
disputes in the country when you have lunch with the US 
Business Executive Committee of the Ecuadorian-American 
Chamber of Commerce.  Perhaps the most immediate threat is to 
Occidental Petroleum (Oxy).  Procurador General Jose Maria 
Borja (Solicitor General equivalent) stated last year that 
there were grounds to void Oxy's contract and seize its 
considerable assets in Ecuador.  Borja launched an 
investigation of Oxy after it won a $75 million international 
arbitration award against the government of Ecuador.  Thus 
far, we have successfully held off the contract nullification 
and expropriation of Oxy, but the matter is still before 
state-owned PetroEcuador and the Minister of Energy to 
decide.  We have warned the government that there will be 
dire consequences if it attempts to expropriate Oxy's assets. 
 
10. (U) You are also likely to hear from EDC/Noble Energy 
about their Machala Power plant, payment arrears and subsidy 
problems.  Chevron Texaco, fighting a multi-billion dollar 
lawsuit in the northern part of Ecuador, will also send a 
representative.  Gallo Winery, Interagua/Bechtel and Latin 
America Telecom are among the other companies with commercial 
dispute problems in Ecuador.  Molestina is trying to 
establish and ombudsman type office to work solely on 
resolving commercial disputes. 
 
11. (SBU) A large segment of the Ecuadorian public still 
lacks sufficient information about an FTA.  We have engaged 
in an education campaign and the government of Ecuador has 
been even more active.  Still, old prejudices die hard and in 
the end, Ecuador may not sign an FTA until Peru and Colombia 
are on board. 
 
ATPDEA Another Incentive 
------------------------ 
 
11. (U) Ecuador has benefited greatly from the Andean Trade 
Promotion and Drug Eradication Act (ATPDEA).  Two of the 
greatest beneficiaries are the flower and tuna industries. 
Those two sectors are among the strongest advocates of the 
FTA, because they realize what they have to lose when ATPDEA 
benefits expire at the end of 2006.  You are almost certain 
to hear during your meeting with Molestina about Ecuadorian 
desires to have in any FTA at least the benefits they now 
receive under ATPDEA and a request to include similar 
benefits for canned tuna. 
 
FTA - An Opportunity to Increase Stability 
------------------------------------------ 
 
12. (SBU) Political and economic stability in this country 
are nearly as rare as the blue-footed boobies of Ecuador's 
Galapagos Islands.  While we advocate free trade for the 
obvious benefits it brings, we are also quick to point out 
that an FTA alone will not be enough.  Structural reforms, 
better health and education, and a responsible, honest and 
transparent government are all key ingredients to sustainable 
development, a just society and a higher standard of living. 
 
13. (SBU) An FTA institutionalizes reforms that can lead to 
greater stability, by adding certainty to trade.  Those 
benefits can be hard to measure.  Many socio-economic 
observers argue that had Ecuador not been dollarized it would 
have seen even more turmoil in recent years. Dollarization, 
though not for everyone, has eliminated some of the 
uncertainty of economic policies that change as frequently, 
or more often, than governments here.  Increased economic 
certainty and opportunity inevitably lead to increased 
political stability.  We gain from greater regional 
stability, better treatment of Americans doing business here 
and by creating better opportunities for all Americans.  We 
welcome your visit here as another excellent opportunity to 
demonstrate the benefits of free trade and a vibrant 
democracy. 
Kenney