Failures of the Fiscal Sector: An Analysis of Fiscal Inadequacies Practiced over the Ecuadorian Economy over the Last Two Decades
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Over the last two decades, Ecuador has been suffering from the lack of a well-structured economic system. As a result, high rates of inflation, as measured by the consumer price index, have evolved into a chronic problem and urgent issue since the late 1970s. Needless to say, inflation has increased poverty levels inside the country over the same period of time. According to Dornbusch and Fischer, A persistent increase of the money supply ultimately leads to increased inflation. But that still leaves the question of what determines the money growth rate. A frequent argument is that the money growth is the result of government budget deficits. (16, p. 653) Thus, a direct link between the government's inadequate treatment of monetary and fiscal variables and an increase on the level of prices can be established. In this context, the present research study examines the impact that government budget deficits have had inside the Ecuadorian economy. In other words, an attempt will be made to analyze how the deficit crisis has hindered the achievement of economic and social growth inside the nation. In order to address this issue, this study has been divided into five sections. Section I introduces some basic macroeconomic concepts, defines a fiscal budget, and explains why a budget deficit triggers inflationary pressures inside the economic structure of a nation. Furthermore, it analyzes how these deficits are financed by third world nations. It should be noted that the origins of the present Ecuadorian economic crisis can be found within the oil boom of the 1970s, a period of time that was characterized by an extreme liberal management of fiscal accounts. In this context, Section II presents a brief summary of the boom and interprets its economic implications. Additionally, it examines how the government's intervention over the behavior of monetary variables contributed to put a strain on the budget. Section III takes a look at the 1980s, a decade in which fiscal authorities used money creation, in order to fund the budget deficit. In this context, an analysis of how this approach, has contributed to increase domestic inflation levels is made. Subsequently, Section IV analyzes how the deficit crisis has been handled by government authorities. Over the years, different political regimes have adopted restrictive fiscal policies in order to reduce the size of the budget's imbalance. This section therefore, investigates whether these policies have been able to generate economic and social growth. Finally, Section v provides a summary and conclusion by analyzing the different social costs of inflation.