Ecuador is a terrific place to live. Ecuador though can be a terrible place to create and run a business.
Unfortunately for new business creations, large or small, the government’s version of “21st Century” Socialism is a bureaucratic nightmare.
Now, you might well ask, “How do I know this?” I know it because I have been intimately involved in the start-up of a number of businesses in Ecuador in the past seven years.
The first was a partnership in an international franchise wherein we learned just how unenforceable contracts are in Ecuador. Customers sign one-year contracts to allow the franchise to withdraw their monthly membership fee directly from the customer’s bank account.
[color-box color=”green”]Problem #1: The one-year contract can be arbitrarily cancelled by the customer without recourse by the business owner.[/color-box]
[color-box color=”gray”]Problem #2: Employees cannot be fired after initial trial period of 90-days of employment (which has since been removed) without significant financial penalty to the business owner [/color-box]
The second company involved operating co-ownership of a boutique hotel. The business was booming until without notice the City of Cuenca began tearing up the street in front of the hotel entrance. For six months the street became a muddy series of holes so dangerous that one worker slipped one afternoon and fell into one of the holes. He completely disappeared and was dead by the time he could be dug out from under the tons of mud that fell on top of him.
[color-box color=”green”]Problem #1: The City has little or no regard for the consequences of their actions on small business owners along the routes of roads and sidewalks long in need of repair. Just ask any of the owners of businesses fronting on the current construction of the Tranvia.[/color-box]
[color-box color=”gray” ]Problem #2: There is no method of compensation, i.e.; reduction of taxes for the significant loss of revenue caused by city actions. The local bureaucracy is just as unfeeling and complicated as the national government.[/color-box]
To make the broad statement ‘doing business in Ecuador ain’t easy’ I felt compelled to move beyond my personal experience and research that statement to see if it was correct. With help from a friend who turned me on to a portion of an article from the “Doing Business” section of the World Bank Group, what follows is the result of that research.
The Doing Business “Economy Rankings” lists 190 countries in the world and their ease of doing business. Ecuador ranks #114. “A high ease of doing business ranking means the regulatory environment is more conducive to the starting and operation of a local firm.
The rankings are determined by sorting the aggregate scores on 10 topics, each consisting of several indicators, giving equal weight to each topic. The ranking for all economies are benchmarked to June 2016.
Dealing with 190 countries was a bigger universe than I felt was necessary to make my point. So, with help from DB, I narrowed the universe for comparison down to the ease of doing business in Latin America and the Caribbean. Now, out of 32 countries, Ecuador was ranked #19. Not much improvement, if any.
Rather than wade through all 32 countries listed, I will simply deal with our immediate neighbours, Colombia (Ranked #2) and Peru (Ranked #3). I will take the 10 Ranking Topics in DB’s order.
Starting A Business: Ecuador is ranked #27 of 32 countries while Colombia is #5 and Peru #15. On a global survey Ecuador is #165 of 189 countries. In Ecuador there are 13 distinct procedures that take an average of 55.5 days to complete.
Dealing with Construction Permits: Ecuador doesn’t fair any better when comparing to it’s neighbours here. It is ranked #11 while Colombia is #1 and Peru #4. It takes 15 procedures and 114 days on average from “Obtaining urban regulation report to obtaining a habitability permit and registering the building at the Property Registry.”
Getting Electricity: Both its neighbours are more efficient at this aspect of starting a business than Ecuador. Peru is #10, Colombia #13, and Ecuador slips to #20 of the total of 32 countries in the survey.
Registering Property: Peru #1 and Colombia #3 shine in this category. Even Ecuador has a strong showing in this category. At #4 Ecuador does better in this category than it does in any other. Without such a strong showing in this category Ecuador could have slipped more than a few places in the overall global rankings.
Getting Credit: Once again Ecuador slips behind its neighbours coming in at #17 while Colombia is #1 and Peru #6.
Protecting Minority Investors: Ecuador ranks #19 while Colombia continues at #1 and Peru stays at #6.
Paying Taxes: Both Colombia #20 and Ecuador #22 get hammered in this category while Peru is ranked #2.
Trading Across Borders: No clear winner here. Colombia #23, Ecuador #16 and Peru #14 fail to impress.
Enforcing Contracts: Peru at #7 separates itself from its neighbours with Ecuador at #15 while Colombia slips all the way to #31.
Resolving Insolvency: Ecuador drops all the way to #26 when it comes to dealing with businesses that become insolvent. Colombia is #3 and Peru at #10 also has problems with this issue.[/color-box]
The picture in this survey presenting Ecuador as a place to do business, is not particularly promising. Starting a business is very difficult, time- consuming, and the volume of paperwork is extremely frustrating.
The issue of obtaining adequate and consistent electric power is a problem for all three countries. Ecuador is working hard on this issue. At this time the country has six hydro-electric power plants under construction. When these plants are up and running the country should vault from #28, very near the bottom of the 32 Latin American and Caribbean countries rated, to the top five. There is a strong possibility Ecuador could become the #1 country in the area when it comes to excellent electric power availability and consistency.
When it comes to dealing with construction permits and enforcing contracts Ecuador does better than its neighbours. Unfortunately none of the three countries ranks in the top 25% on these issues. To me this means they all have room for substantial improvement. When it comes to enforcing contracts Colombia has real cause for concern ranking #29 out of 32 countries in the larger region.
The final four issues in the survey, getting credit, protecting minority interests, paying taxes, and resolving insolvency are all issues that Ecuador definitely needs to improve on if it is to continue to grow and become a more important player in the Southern Americas and Caribbean.
It seems clear that for the country to continue its recent and current growth it needs to limit government bureaucracy and regulatory growth. One only needs to look at Venezuela #32, Bolivia #29, Argentina #27, and Brazil #24 to realize that the ease and quality of doing business has a great impact on the quality of life for the ordinary citizen. All of those countries have real problems.
Ecuador’s 21st Century Democratic Socialism can have tremendous positive impacts on its people. You only have to study Norway, Sweden, Finland, and Denmark to see what can occur when the proper balance between capitalism and socialism is attained and maintained.
While doing business in Ecuador sure ain’t easy it has been a fascinating learning experience to say the least.