Ecuador started to liberalise its trade in goods and services in 1990 and opened up its capital account in a short period of time. Simultaneously, between 1992 and 1995, a credible macroeconomic stabilisation programme was implemented alongside. This led initially to a modest recovery of economic growth and price stabilisation. However, a string of external and domestic economic and political shocks created a severe setback and in 1998-99 the economy plunged into a severe crisis.

Application of a methodology of “microsimulations” to these two episodes in Ecuadorian economic history allows us to analyse in detail which labour market factors are associated with most of the changes in income distribution (and poverty, for that matter). This way, one might be able the hypothesize better how different aspects of policy reforms may have impacted on observed distributional outcomes. The “counterfactual” created in the microsimulations is one of what poverty and income distribution would have looked like if the observed labour market shifts would not have taken place.

The results suggest that the observed rise in income inequality seems to be closely associated with the effects of trade liberalisation, which has led to greater demand for skilled workers and pushed unskilled workers into unemployment or (informal) selfemployed activities. This appears to have been counteracted somewhat by rising participation rates, falling unemployment and real wage increases during the period of stabilisation and growth (1990-95), facilitated by greater capital inflows. The macroeconomic downturn made these factors compound the rise in inequality, as much as explain the
steep rise in poverty.