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JAY: For those of you who don't know, Ecuador is the third-largest producer of oil in Latin America and it's a major part of its revenues. So talk—first of all, talk a little bit about what they did to change the royalty structure in Ecuador.
GHOSH: Interesting things, how Ecuador has been able to take on large multinational capital and in a sense get away with it. It's an oil producer. Oil accounts for about 60 percent of the export revenues, and on average over the past ten years about one-third of the government's revenues. Now, what they discovered—in fact, the story is really that it emerged in the process when they discovered that one of the foreign oil companies was actually misusing its rights to drill by putting in horizontal pipes to drill from other areas as well. Now, this allowed them to open up all the oil contracts. Before 2009, Ecuador, the government, was getting about 13 percent on average of the total oil revenues, and the companies, the foreign companies, were getting 87 percent. They passed a law in July 2010 that completely reversed the terms. So now the government gets on average 87 percent, and the companies get 13 percent. It's actually extraordinary that they managed to do this. Six—there are 18 oil companies operating in Ecuador. Six of them said that this is unacceptable and they left. And the government basically said, well, goodbye and good luck. They took over the oil fields of the companies that had left. But 12 of the companies decided to stay, which means that it was still profitable for them. And now, as a result, the Ecuador government gets a massive benefit from any increase in oil prices.
JAY: Now, the other big issue was what the taxation—they've actually started collecting taxes from the local elite, which is also quite unique in Latin America.
GHOSH: Absolutely. What is actually most surprising is that despite the fact that oil prices have been so high and despite the fact that they changed the terms of these oil contracts, in fact, tax revenues have increased faster than oil revenues for Ecuador's government. And that is really a tribute to the massive tax enforcement drive that they undertook from 2007 onwards.
It's interesting that this has not been accompanied by a rise in the tax rates. Tax rates remain stable. And, in fact, now corporation taxes are going to be brought down from 25 percent to 22 percent. But what they did was simply enforce the law. And the head of the Internal Revenue Service says that this was done, really, by just breaking what used to be a very cozy nexus between big business and the tax administration. So they demanded much more information, they got everything computerized, and they calculated exactly what would be the actual tax payable. And then they enforced—they just brought the stick. They said, well, if you don't pay up, if you don't pay your arrears, if you don't pay your dues, we're closing down your offices. They did this with three or four companies, and then the rest all started paying up.
JAY: Now, usually these countries are told that if you do this, there'll be capital flight, everybody will leave. But that doesn't seem to be what happened.
GHOSH: Absolutely not. In fact, the opposite has happened. Because these increased revenues of the state have been used in very significant increases in public investment, the public investment to GDP ratio in Ecuador is now the highest in Latin America. It's 10 percent. And that has actually brought forth more private investment, because when you actually spend on infrastructure, you make it more profitable to have more private investment as well. So the investment ratio has gone up to 26 percent, it's one of the higher ratios, again, in the region, and you have no evidence of capital flight. In fact, there's been a big inflow of capital in the last year.
JAY: Yeah, I saw, in fact—just today as we do the interview, there's an article on Bloomberg that for the first time in a while, Ecuador's issuing some bonds, 2015 bonds, and the yield is actually down, the price of the bonds is up, and the bonds are quite in demand. So I guess bond owners or buyers are voting with their dollars that they think this Ecuadorian experiment seems to be stable and working. Talk a little bit about what's being done with the money.
GHOSH: Well, this is in a sense the kind of ideal that all of us would like to push our governments towards: tax the rich, take money from foreign corporations and your own domestic corporations, and use it for the people. So they've raised public investment, and that means a lot of infrastructure that really does matter for the people. So the money went into roads and bridges, transport connectivity, things that actually matter for the people. But also they have doubled social spending in the aggregate as a share of GDP. So that is also now 10 percent of GDP.