This Country Program Evaluation assesses the relevance and effectiveness of the World Bank Group’s support to Ecuador from fiscal year (FY)08 to FY22. The evolution of the Bank Group’s support is set within the context of a gradual and deliberate restoration of a partnership after a near-total break in relations between the World Bank and the government of Ecuador at the start of the evaluation period. The evaluation covers the Bank Group’s support over three strategy periods—the Interim Strategy Note for FY14–15, the Country Engagement Note for FY16–17, and the Country Partnership Framework for FY19–23—and the period of six years (FY08–13) during which the Bank Group had no formal strategy. The evaluation examines the Bank Group’s strategy along two interconnected fronts: (i) gradually reestablishing a constructive partnership with the government after a break in relations and (ii) supporting the country’s rebalancing to a fiscally sustainable, private sector–led growth model—one that could ensure protection of the vulnerable over the transition.

Economic Context

Ecuador is rich in natural resources, but its economy is highly vulnerable to shocks. An oil producer, Ecuador’s economic performance and public finances have been driven by oil price developments. The abundance of oil has discouraged investment in economic diversification (Orozco Espinel 2019), intensifying the country’s vulnerability to oil price shocks. Government spending has largely been procyclical, reducing the space to counter the impacts when oil prices have fallen. Ecuador is also particularly vulnerable to severe natural disasters, including floods, landslides, droughts, volcanic eruptions, and earthquakes. A majority of the population lives in the mountainous and coastal areas most vulnerable to recurring disasters. Creating greater resilience to its ongoing natural disaster risks is thus a continuing priority to safeguard Ecuador’s development.

Ecuador’s development agenda over the evaluation period is characterized by two distinct phases. Between 2007 and mid-2017, the country followed a development model that enhanced the role of the state in the economy and promoted greater equity through social spending. Under Ecuador’s Plan Nacional para el Buen Vivir (National Plan for Good Living), the government of Ecuador undertook large infrastructure projects targeting traditionally underresourced populations and more than doubled social spending. Poverty and equity indicators improved markedly over the early years of the Plan Nacional para el Buen Vivir, and Ecuador’s progress in poverty reduction put it among the best performers in the region. Beginning in mid-2017, with sharply lower oil prices contributing to growth stagnation in addition to fiscal and balance of payments pressures, a new government shifted its policy agenda to a different development model—one that sought to reduce the state’s role in the economy, put the country on a more sustainable fiscal path, and enhance private sector–led growth, while also ensuring better protection of the vulnerable.

External conditions changed markedly over the two development periods. From 2007 to 2014, Ecuador’s economy benefited from record high oil prices, boosting economic growth and public revenues and enabling a rapid expansion of social programs and public investment. After 2014, oil prices fell sharply, putting fiscal sustainability and the social and economic gains in jeopardy. COVID-19 brought a collapse of global demand, reducing oil prices further and severely affecting Ecuador’s economic performance and macroeconomic conditions.

Socioeconomic fragmentation has made it hard for Ecuador to implement difficult fiscal reforms. Because of the economic and fiscal cycles created by the management of oil resources, Ecuador has confronted numerous episodes of fiscal crisis. Attempts to deal with these crises through reforms to restore fiscal sustainability have often been met by widespread social opposition and in several cases a change in government. Over the decade before the start of the evaluation period, Ecuador had eight presidents, none of whom remained in office for a full term. Intense socioeconomic fragmentation is reflected by distinct and often opposing views about the route of development that Ecuador should follow (Jácome 2004), resulting in political instability.

Ecuador has recently been characterized by political and economic uncertainty. The prior president, Guillermo Lasso, left office early in 2023 in the face of political paralysis and on the verge of impeachment. The new president, Daniel Noboa, who will serve the remainder of Lasso’s term to 2025, is confronting both a slowing economy and rising insecurity from criminal violence.

World Bank Group Strategy Adapted to Reestablish Engagement

Several actions early in Rafael Correa’s presidency disrupted the partnership between the World Bank and the government of Ecuador. At the start of the Correa administration, the government closed or canceled ongoing Bank Group lending operations (save one) and expelled the World Bank’s country representative. The expulsion was the culmination of an earlier confrontation with the World Bank in 2005 over the cancellation of a structural adjustment loan, when Correa was the minister of finance.

The World Bank’s reengagement strategy evolved to reflect expanding objectives. The World Bank’s main objective from 2007 to mid-2011 was to preserve its presence in Ecuador and prevent a more permanent disengagement, under the premise that the World Bank could eventually find opportunities to support areas of the government development plan on which there was shared vision. Between FY12 and FY13, the World Bank took proactive steps to rebuild dialogue with the government of Ecuador and scope partnerships, using nonlending technical assistance to respond to requests across different sectors and levels of government. Beginning in FY14, the World Bank demonstrated value by reestablishing operations in Ecuador, lending directly to subnational governments, with a central government guarantee, for infrastructure improvements (transport and water). The World Bank approved the Interim Strategy Note for FY14–15, which aimed to “consolidate progress in the dialogue in a few key areas and have flexibility to respond to evolving requests for support” (World Bank 2013). In addition, starting in FY16, and with a deterioration in Ecuador’s macroeconomic environment and a renewed openness of the government of Ecuador to World Bank borrowing, the World Bank reestablished lending operations to the central government. The World Bank also prepared for its own medium-term engagement under a new policy environment with a ramp-up in analytic work.1

A new government taking office in 2017 sought comprehensive support from the World Bank to navigate a new development model. Seeking to reduce the state’s footprint on the economy to restore fiscal sustainability and create space for the private sector to expand, the government of Ecuador reached out to the World Bank and the International Monetary Fund for both financing and guidance on fiscal consolidation. Bank Group support toward the government’s reform agenda was developed under a Country Partnership Framework for FY19–23, which provided assistance along three main fronts: (i) supporting growth by addressing macroeconomic imbalances, removing barriers to private sector activity, and enabling the financial sector to better intermediate the allocation of resources to productive use; (ii) boosting human capital and social protection; and (iii) enhancing institutional and environmental sustainability by bolstering the ability for the public sector to make effective decisions based on solid evidence (World Bank 2019a). In 2019, the World Bank resumed policy-based lending in Ecuador for the first time since 2006, representing the culmination of the World Bank’s restored relationship with the government of Ecuador and based on the analytic foundations that had been developed previously.

Rebuilding Partnerships with the Government of Ecuador as a Priority

The World Bank was effective in partnership rebuilding in an environment of circumscribed dialogue. It was effective in rebuilding its partnership with the government of Ecuador by creating greater opportunities for dialogue, building goodwill, and demonstrating the World Bank’s value in politically acceptable ways. The World Bank drew on formal and informal channels to restart a productive dialogue with government ministries, including by disseminating existing World Bank global or regional reports in the country. The World Bank significantly increased its finance to support extensive nonlending technical assistance to line ministries and subnational authorities as a way to build dialogue and provide technical support to the administration’s development programs. Operationally, the World Bank’s reengagement at the municipal level allowed the World Bank to demonstrate comparative advantage as a strategic partner in terms of technical rigor, operational effectiveness, and financial benefits, and it also allowed the World Bank to overcome the impasse in dialogue at the national level.

However, the World Bank’s reengagement strategy prioritized partnership rebuilding over project design. The World Bank’s rapid project preparation came at the expense of project readiness. Municipal infrastructure projects were prepared rapidly to meet government requests, including the Quito Metro project, prepared in five months, and the Manta Public Services Improvement Project, approved in less than six months from the Concept Note review. In some cases, rapid preparation came at the expense of quality engineering designs, which resulted in substantial revisions to the projects during implementation.

The World Bank’s partnership rebuilding was slowed by the lack of a clear and consistent approach to working with the government of Ecuador. The World Bank was slow to define a strategy for working with the government, and it took six years to approve the strategy. Interviews with World Bank country management suggest that there was an internal disagreement about the reengagement over the first several years. It would be only after 2012, coinciding with a change in World Bank senior management (at the regional and top leadership levels), that the World Bank would formally support renewed lending to Ecuador and a deepened partnership with the national government.

The Bank Group’s reengagement strategy limited accountability for development outcomes. Neither of the World Bank’s approved strategies over the period (for FY14–15 and FY16–17) included a results framework articulating higher-level development outcomes by which to measure progress. Although Bank Group short-term strategies do not require results frameworks, there are examples of Interim Strategy Notes and Country Engagement Notes elsewhere that have included both expected outcomes and results matrices, helping establish a clear line of sight between the Bank Group’s support and higher-level goals. The inclusion of results indicators would have also better allowed the Bank Group to take midcourse corrective actions where results lagged.

The World Bank’s support over the reengagement was developmentally relevant. The World Bank gradually defined an agenda that supported the national development plan in politically less sensitive sectors and that fit within established priorities for public service delivery and improved access to resources. Early support toward social protection and nutrition was relevant to the national development agenda. The World Bank’s support to municipal infrastructure was relevant to improved public service delivery in the context of evolving responsibilities at the local level.

World Bank projects implemented over the reengagement period were generally effective. Most closed projects have been rated moderately satisfactory for project outcomes, and projects near closure are also expected to achieve their objectives. The Quito Metro project, for example, resulted in the construction and eventual operation of a universally accessible underground line, and several project development objectives related to capacity, reduced transport times, and accessibility have been achieved. Implementation Status and Results Reports for other open municipal infrastructure projects also suggest substantial progress toward outcome indicators.

However, the World Bank did not adequately account for low institutional capacity, resulting in project implementation delays of 50 percent. Municipal infrastructure projects experienced implementation delays, on average 50 percent over the original time frame. Most delays were linked to capacity issues stemming from the lack of experience among subnational governments in implementing World Bank operations. Projects were also affected by a high degree of subnational government turnover, which had an impact on project priorities.

The World Bank missed opportunities to mitigate known institutional capacity risks. At the strategy phase, the World Bank excluded specific mitigation measures for known implementation capacity constraints. Over the implementation phase, the World Bank failed to use additional financing requests to address emerging implementation issues. For example, when the World Bank approved additional financing for the Quito Metro project, it might have included stipulations to ensure that the metro authority approved a private operator promptly, but it did not—stalling the metro’s operation for years. Furthermore, the Bank Group did not adequately leverage the expertise of the International Finance Corporation (IFC) to guide the Quito Metro authority. The risks involved in a delayed metro operation were high, with all of the intended benefits dependent on the metro being fully operational. Even without IFC’s direct investment in the eventual operator or a formal advisory transaction, a limited informal engagement by IFC to advise and share knowledge and experience might have helped move the process forward.

Support for the Transition to a Private Sector–Led Growth Model

The Bank Group supported Ecuador’s transition to a private sector–led growth model on two fronts: improving market competitiveness and increasing private investment in high-potential growth sectors. The World Bank provided early technical assistance over the FY07–17 period to identify core constraints to private sector competitiveness and growth. With a change in administration in 2017, the World Bank shifted its support from purely technical knowledge to policy-based finance targeting public sector efficiency and fiscal sustainability and the removal of key regulatory and financial sector barriers to private sector development. IFC’s support included both early advisory work at the municipal level to assist with regulatory simplification and advisory support and investment finance to banks and agribusiness firms. IFC’s support to banks aimed to expand access to credit to small and medium enterprises and enable exporter access to international markets, and its investments in the agribusiness sector sought to expand market position and access to global markets.

The Bank Group’s support was relevant to development needs and to the partnership with the government of Ecuador. Over the 2007–17 period, the World Bank’s focus on advisory services and analytics helped it fill important information gaps that could inform the World Bank’s future engagement and built relationships with different stakeholders. A further ramp-up in analytic work starting in 2017 informed the government’s comprehensive reform agenda, including fiscal reforms, trade and regulatory reforms, and financial sector reforms, supported by World Bank policy-based lending programs. For its part, IFC’s support to financial institutions provided finance to underserved small and medium enterprises, whereas its support to agribusiness firms addressed a deficit in loan tenors unavailable on the domestic market.

The Bank Group’s support for Ecuador’s economic transition yielded important achievements. Following a change in government in 2017, the World Bank provided substantial support to the new government of Ecuador through analytic work, which would inform a comprehensive reform agenda. The World Bank–supported government actions to increase interest rate flexibility, reduce barriers to digital financial services, and increase bank liquidity through the Inclusive and Sustainable Growth development policy operation series contributed to an expansion of credit to the private sector. World Bank support to facilitate enterprise creation contributed to an increase in business registration and increased tax revenues. The World Bank–supported tariff reforms reduced tariffs on capital and intermediate inputs in agriculture and technology, representing a notable step toward the longer-term outcome of improved international competitiveness of domestic exporters. World Bank support for budgetary reforms improved budget processes, reduced fiscal risks, and contributed to improved fiscal sustainability.

However, World Bank–supported energy and minimum wage reforms were reversed by the government. In the case of the energy subsidy reform, the government undertook reforms contrary to the World Bank’s recommendations for incremental adjustments, leading to large oil price increases, which triggered violent protests and a subsequent reversal. In the case of the minimum wage reform, the World Bank had supported a revision to the formal minimum wage setting process, providing an objective, productivity-based formula for setting minimum wages when tripartite negotiations (among unions, employers, and the government) failed. However, the reform was reversed by executive action in 2021, and the use of the minimum wage formula resumed only recently with a new administration.

In both cases, the World Bank failed to communicate effectively across stakeholders to ensure sufficient buy-in for reforms. The World Bank had recommended a more gradual process for the fuel subsidy reform based on prior incidence analysis,2 recommending an initial removal of subsidies only on premium gasoline (not on industrial diesel or cooking gas). However, the World Bank failed to communicate and convince the government of Ecuador regarding the recommendation for incremental reforms, and in a reported desire to use a narrow political window of opportunity, the government implemented a more ambitious program that resulted in widespread social protest (and ultimately reform reversal).3 The World Bank also did not build sufficient consensus internally for the use of the proposed minimum wage formula, by championing its importance and providing adequate technical assistance and communication with the three agencies tasked with its implementation—the Ministry of Labor, the Chamber of Industries and Production, and labor unions. The lack of internal consensus hindered the reform’s uptake, though the agenda was resumed starting in 2023. Both agendas required a significantly enhanced communication strategy across stakeholders to build public support and acceptance for reforms.

The World Bank’s Contribution to Social Protection Built on Substantial Analytics

From 2008 to 2018, World Bank support to social protection consisted exclusively of advisory services and analytics and nonlending technical assistance to improve the design and implementation of Ecuador’s safety net system. The World Bank generated over 20 diagnostic knowledge products to address the main challenges facing Ecuador’s social safety net—namely, errors of inclusion, exclusion, and duplication in targeting—and weak compliance with the program’s health and education conditionalities. The latter was of particular concern, given persistently high rates of malnutrition and other risk factors among vulnerable groups. These shortfalls were traceable in large part to a service delivery system that was poorly aligned with transfers and a data collection strategy that lacked cohesion and accountability.

Operational support conducted after 2018 was grounded in the substantial analytic work conducted previously. From 2019 onward, the World Bank resumed lending support through (i) the Social Safety Net Project, which provided direct support on targeting and service delivery, and (ii) two development policy operation series, both of which supported regulatory reforms that underpinned the implementation goals of the Social Safety Net Project. In line with the World Bank’s work on private sector development, the analytic work for social protection conducted before 2018 provided a robust, evidence-based foundation for the design of these operations, building credibility with government of Ecuador counterparts and ensuring a high level of relevance with respect to country needs. Notably, despite their impact, many of these diagnostics were low profile and focused exclusively on data generation and bilateral knowledge exchange with technical counterparts. They were disseminated with minimal publicity in an effort to reduce World Bank visibility.

World Bank support can be linked to documented improvements in targeting and service delivery. Between 2019 and 2023, there were several measurable improvements in the targeting accuracy of Ecuador’s primary cash transfers and improvements in data harmonization and coordination of service delivery with receipt of transfers. This progress can be largely attributed to strengthened performance of the Social Registry, which can, in turn, be partially attributed to World Bank support. The support can also be linked to enactment and implementation of Ecuador’s current National Nutrition Strategy, including improvements in the government of Ecuador’s approach to nutrition surveillance and early childhood development.

The World Bank did not adequately scope its operational support to capacity issues. Although the Social Safety Net Project identified low institutional capacity as a substantial risk and included credible mitigating measures, selected components of this operation have faced multiple implementation delays. These delays have been related to weak understanding of World Bank protocol, attributable to high staff turnover and low experience and indicative of insufficient training on procurement and financial management on the part of the World Bank, including for disbursement-linked indicators.

Lessons

The findings draw forth the following lessons, which may be of relevance to future Bank Group engagements in Ecuador and future Bank Group engagements after a hiatus in dialogue.

• First, rebuilding a constructive partnership after a break in dialogue may require the World Bank to take a significant step back in terms of its own visibility. The World Bank provided effective support tailored to the needs of the government without lending and without traditional dissemination activities of analytic work. In cases where the dialogue is severely circumscribed, providing low-profile technical assistance may deliver a means to build goodwill and demonstrate value.
• Second, even over periods where dialogue is limited, the World Bank can use the space it is given to build analytic work that can help the Bank Group respond faster and more effectively when conditions for a fuller engagement materialize. That also means that the World Bank should be proactive in planning financing for such potential activities, including devoting sufficient World Bank finance to analytic work.
• Although reengagement incentivizes the World Bank to be especially responsive to government requests for support, the World Bank needs to balance responsiveness with due diligence in project preparation, including potential implementation challenges. Projects that are prepared quickly but are not underpinned by quality design studies may need to be redesigned or restructured, ultimately delaying social benefits.
• After a significant lapse in World Bank operations, in situations where government authorities have limited project implementation experience or in cases where turnover in implementing authorities results in lost institutional capital, the World Bank needs to ensure that sufficient institutional capacity building is planned to mitigate risks. The World Bank should also use milestones in the project process (such as additional financing requests) to ensure that key processes in implementation take place and that projects can adapt accordingly.
• The prolonged use of Bank Group strategies without results frameworks limits both internal accountability and information that can be used to help adapt strategies to promote performance. Even in circumstances where the World Bank cannot adequately predict a five-year agenda of support, the World Bank should stipulate higher-level outcomes achievable over the course of the short-term strategy and promote an adequate line of sight between Bank Group support and higher-level achievements.
• Particularly in the context of a lack of social cohesion about economic reforms, the World Bank needs to make explicit preparations that can ensure broad-based ownership and understanding of the reform agenda—considering not only those tasked with adopting the reforms and those involved in the reform implementation but also those most affected by the reforms. Better and continuous communication across government, implementing agencies, and stakeholders around the rationale for and processes of significant reforms can provide strengthened guardrails against reversal.