Ecuador Between East and West: A Comparative Study of the Economic Effects of Development Finance

Abstract

This study assesses and explains the differences in the economic effects of development finance from China and Western development institutions on Ecuador's economic outcomes. Ecuador's separation from Western development finance institutions in 2008 in ideological protest of their aid conditionality and subsequent turn to China permits clear empirical and qualitative comparative analysis. I first present a case study of the Western-financed Paute Hydroelectric Power Plant and the Chinese-financed Coca Codo Sinclair Hydroelectric Power Plant to illustrate the differences in implementation, environmental considerations, and domestic integration characteristic of Chinese and Western development projects. I then employ a two-way fixed effects panel regression to estimate the impact of annualized values of Chinese and Western development loans on Ecuador's industry-level value-added to GDP from 2001-2021. The study produces several key findings. First, Chinese-financed projects in Ecuador have contributed to environmental deterioration and a decline in long-term economic output. Second, Chinese infrastructure projects’ marginalization of Ecuadorian firms in the project implementation process may usurp economic value. Third, Western development financing is a better driver of Ecuador’s short- and long-term economic performance than Chinese financing.