There is huge poverty in Ecuador. Employee earnings are low – $200 per month is a typical wage. But productivity is also low.
We’ve been watching a team of about 20 workers build a small two-story building. Even homes here have a concrete skeleton – it is cheap and durable, and wood is expensive.
To build with concrete, you simply create a form and then pour the concrete to create the shape you want. You embed some steel into the concrete to give it tensile strength.
Once the columns are poured, the second floor starts with delivery of a load of bamboo ‘logs’. They are sawed into suitable lengths to support the floor which will soon be poured. These poles are meticulously assembled, and the second-floor formwork is built.
It’s a lot of work – especially since only hand-tools are used. The jobsite doesn’t have electricity.
Labor is cheap enough to send someone into the jungle to chop down the bamboo, to have workers cut them to size with hand-saws, and to assemble them into a skeleton strong enough to hold the weight of the concrete.
When it comes time to pour the concrete, there won’t be a cement truck. A few bags of cement will be mixed with water in a small gasoline-powered mixer, and then hauled up by hand in buckets.
This will be a 1,500 square foot building, two stories high with no basement. It won’t be ready anytime soon. And the quality of the finished product is greatly below what we would consider acceptable.
In fairness, the quality of work on this project looks pretty good, and the project is moving forward. We see many projects that were obviously staffed with the lowest-paid untrained workers available – and the results are as expected.
We pay construction workers more per day than these guys make in a month. But we can, because our productivity is higher. During the summer, I watched a team this size assemble an apartment building across from my office, a high tower with a 50,000 sf floorplate. Every 4-5 days they would add another floor, and they were including plumbing stacks, electrical conduit and ductwork as they went.
Construction workers in Ecuador work as hard as our guys. Our productivity is higher because we back our workers up with investment, technology, and training.
These guys are the working poor. It’s hard to imagine how they survive on their wages. But unless productivity goes up, they are being paid as much as they are worth.
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There is a lot of construction going on in Manta (and everywhere else we have been in Ecuador). We are told that most of this construction is funded by Ecuadorians who are working abroad, and building their retirement castles using their hard-currency earnings.
Of the 13 million Ecuadorians, about 2 million work in Europe or North America – the largest number are in Spain. Their remittances form the largest single source of Ecuador’s revenue.
The major exodus was in 1998-1999, when a combination events destroyed the economy. Low oil prices (in 1998, oil was under $7 a barrel) and a fisheries-destroying El Nino event eliminated jobs. Hyper-inflation, a one-year bank holiday (where many banks didn’t reopen), and conversion to US dollars wiped out savings. It was quite horrible.
So the Ecuadorians scattered, looking for work. So many left, in fact, that a labor shortage developed on the farms and in the lowest-paid jobs in Ecuador. Laborers from Peru and Columbia (even poorer countries) poured into Ecuador.
Things are getting better. The horror of inflation has receded, now that the Banco Central is only responsible for running a few museums. But no one here trusts the banks with their savings anymore.
A home is an excellent form of savings, and construction is an excellent way to recycle earnings back into the Ecuador economy.
An interesting side effect: more small building projects sit ‘abandoned’ than you could imagine. They run out of steam and stop half constructed, nothing more than a concrete skeleton. But if you think of these homes as savings accounts, it may not be a disaster – simply a hiccup in the earnings of an overseas worker. When he next has some free cash, he will build a bit more of his retirement home.
(There is a different story for the huge number of occupied, but clearly unfinished homes. It is common to build a bigger concrete skeleton than you can afford, finish and occupy the bottom floor, and leave the remainder to the children to build sometime in the future.)
Borrowing is expensive, the going rate for a home mortgage here is about 20%. It’s not because of inflation or macro liquidity – the currency is the US dollar.
But there is a hesitancy to lend. The legal framework for contracts and property has been corroded by years of corruption and shoddy practice. Investors have little certainty of getting their money back. Inconvenient contracts can be simply ignored, and every rule can be broken with a suitable backhand. Everyone we talk to has a story of someone losing their business or life’s savings to corruption, malfeasance, political cronyism, or populist opportunism.
There is little expectation of relief from the courts. Judges are sponsored and appointed by political parties, and are beholden to the politicians and their wealthy supporters.
There is also a tax problem – people here are not used to paying taxes (especially the rich). If we use VISA to pay for a hotel or service, there is often a 10% surcharge on the bill to cover the extra costs.
So businessmen operate on a cash basis. Families save in the ‘Mattress Bank’.
But the result of low savings and high borrowing rates is a shortage of capital, that strangles local businesses and keeps the job growth rate low. And that’s a shame, because that’s how productivity is improved and how people climb out of poverty.
The new President promises action on corruption and tax avoidance (and has made some movement on both). But he doesn’t understand contracts. In recent weeks, he has threatened oil companies with expropriation if they didn’t invest to his satisfaction, and has ripped up a contract with a Brazilian company.
So people work hard, but unproductively, in continuing poverty.
