September 28, 2021

Latam

ECUADOR: Unstoppable force (Lasso) meets immovable object (National Assembly)

BY Nicholas Watson

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( 5 mins)
  • President Guillermo Lasso’s so-called “mega-bill” of reforms faces a complex path in the National Assembly (AN).
  • The government has been talking openly about its “plan B” for a public referendum if/when the reforms reach a dead end in the legislature.
  • Lasso’s popularity could see him through any referendum but sustaining his political momentum beyond would become increasingly difficult.

President Guillermo Lasso on 24 September delivered his Creation of Opportunities initiative to the National Assembly (AN). The bill touches on several areas including hydrocarbons, capital market rules, and public-private partnerships but its main pillars are tax and labor reforms:

  • Sticking to his campaign pledge not to raise VAT, Lasso instead proposes eliminating VAT on a series of items (e.g. women’s sanitary products). Inheritance tax would also be scrapped. On the revenue-raising side, income tax for those earning more than USD 24,000 annually (around 3.5% of the population) would rise progressively, while the bill also proposes a temporary wealth tax for those with assets over USD 500,000 and a one-off levy for companies above a USD 1mn asset threshold that reported outsized profits during the pandemic. The aim is to raise the equivalent of 0.7% of GDP.
  • On the labor side, the bill would introduce a new labor code that would significantly ease hiring and firing, while introducing greater flexibility to working hours and on issues such as maternity leave. Crucially, the existing labor code, the core of which dates back to 1938, would remain in place, and employers would be sanctioned if they attempted to switch existing employees to the newer, more flexible system.

Legislative landscape

As previously discussed, Lasso’s National Agreement Bloc (BAN) only has 25 out of 137 seats in the legislature, of which only 12 seats belong to Lasso’s Creating Opportunities (CREO) party. The left-wing Correista Union for Hope (UNES) coalition has 47 seats, the indigenous Pachakutik (PK) party has 24, the Democratic Left (ID) party has 15, and the populist right-leaning Social Christian Party (PSC) has 14. Note that the PSC broke with CREO shortly after the recent elections. This clearly makes getting any legislation through the AN extremely difficult, as was made clear last week when the 2021 budget bill – in reality, a fairly innocuous adjustment – was blocked by a combination of the UNES, PK, and some of the ID (the PSC abstained).

Even getting this mega-bill to the plenary could be an achievement as the gatekeeper body to the AN – the Council for Legislative Administration (CAL) – could conceivably reject it on grounds that it breaches a rule that legislative bills can only have one subject matter. This is why Lasso has framed the bill as a jobs initiative above all. Lasso can only really count on two votes in the seven-member CAL, though another two could be won around, which would enable the bill to go to commissions. If the CAL admits the bill, the AN has until 23 October to vote on it or else Lasso can put it into action by decree. The CAL decision should come by the end of this week.

Chinks of light?

The situation in the AN may not be as bleak as the numbers above suggest. The PK is internally divided, while an expenses scandal involving one of its highest-profile members, Guadalupe Llori, who is AN president and sits on the CAL, could help pave the way for a deal with at least some of the PK. Talks with the party will take place on 4 October. The design of the tax reforms may also help Lasso win over the ID. Ultimately, any party rejecting what are essentially fairly modest and progressive tax proposals risks being seen as unconditional foes that put their antagonism towards Lasso ahead of the greater good.

The more problematic area could be the labor reforms, which critics say would create an unequal two-tier system. However, if more constructive opposition elements offer partial support on condition the mega-bill is split up, Lasso may not be interested because he needs to move quickly while the political glow of his successful Covid-19 vaccination campaign continues and his approval ratings remain high (and while public confidence in the National Assembly is low). Ultimately, building a 71-vote majority would require highly skilful maneuvering – as well as a spirit of compromise that it is far from clear exists among opposition parties.

Plan B

If that holds true, the political road appears headed inexorably towards a public referendum in which Lasso would essentially submit his proposals to a public vote. The law allows for referendums and there is plenty of precedent, most recently in 2018. Lasso himself earlier this month said a referendum was a case of when, not if. If a referendum can be organized this year, economic reactivation does not slip under a new Covid-19 outbreak, and Lasso’s approval ratings do not dip too much, a win is entirely feasible. That could deliver Lasso with the results he wants, just as the 2018 referendum did for Lenin Moreno (2017-2021).

Governability risks

However, a referendum victory would not necessarily clear a path to improved governability. In fact, a referendum could seal opposition parties’ enmity in the AN, creating gridlock for future bills. Moreover, gridlock would not necessarily be confined to the legislature as both UNES and PK see protests and social unrest as a continuation of politics by other means. Recent protests against new drilling at the Sacha oil field (Orellana province) show how the indigenous movement in particular has the ability to complicate plans to increase oil production – a key Lasso promise. Ultimately, the political dividends of Moreno’s 2018 referendum proved relatively short-lived and he never recovered his authority after the unrest of October 2019.

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