Photo: EFE/Newscom

Photo: EFE/Newscom

Press coverage of the just-concluded testimony phase of a racketeering trial in a New York federal court provides an excellent recent illustration of the behind-the-scenes maneuvering by President Rafael Correa of Ecuador and his government that has created disillusionment and a climate of mistrust among international investors.

Two years ago a court in Ecuador levied a colossal $19 billion fine (recently reduced to $9.5 billion) on Chevron over pollution in Lago Agrio, a town in the Amazon Basin, allegedly caused in the 1970s and 1980s by Texaco (which was bought by Chevron in 2001). As CNN notes:

Chevron accuses the Lago Agrio plaintiffs’ team of having won the huge Ecuadorian judgment through bribery, extortion, fraud, witness tampering, obstruction of justice, and money laundering.

But testifying at the trial in New York last month, the Ecuadorian judge who imposed that massive fine “seemed startlingly unfamiliar with the contents of the opinion he claims to have authored. He was unable to account for key data, reasoning, case citations, and terms he used in it.”

Notwithstanding the facts that a previous Ecuadorian government reached a final settlement with Texaco in 1998 and that in September 2013 an international arbitration tribunal in The Hague issued a partial award in favor of Chevron and found the U.S. oil company isn’t liable for collective environmental damage claims in Ecuador, Correa has mounted a very high-profile public relations effort in support of collection of the $9.5 billion judgment against Chevron.

In October 2013, Correa went to Lago Agrio and ostentatiously dipped his hand into a tar pit for the cameras. He failed to mention, though, that for the past fifteen years, the cleanup of the site has been the responsibility of Petroecuador, a state-owned oil company. Very little cleanup has been done.

Recently The Economist exposed Correa’s cynical motives for attacking Chevron; in September he authorized “drilling for oil in the Yasuní National Park in the Amazon rainforest,” an even more ecologically sensitive site. As the article reports, Correa needs more revenues from oil production to finance his government’s anti-poverty programs to continue to curry favor with low-income voters—those who suffer most from his misguided policies.

Ecuador has one of the lowest rankings in the 2013 Index of Economic Freedom, published jointly by The Heritage Foundation and The Wall Street Journal; the country’s score has dropped steadily over the past two decades. Why? Independent measurements of its poor investment climate and weak rule of law explain in large part Ecuador’s downgrade to “repressed” status. As the Index notes, the judicial system remains vulnerable to political interference, with corruption further exacerbating institutional shortcomings.

A verdict in the Chevron trial in New York is expected early next year, not long after the debut of the 2014 Index of Economic Freedom. Given the track record of the Correa government, we doubt there will be a dramatic improvement in Ecuador’s score.