Ecuador’s Automotive Fuel Subsidy Crisis: A (Brief) Behavioral Science Perspective

To understand the behavioral dynamics at play, it’s important to first look back at how these subsidies all started in the first place. In the 1970s, Ecuador discovered significant oil reserves in the Amazon, leading to a huge oil boom. The government attempted to share the benefits of this newfound resource with all Ecuadorian citizens by implementing subsidies that made fuel more affordable. Among these subsidies, the following three automotive fuels have generated debate and sometimes even turmoil (as we’ll discuss in a second). 

• Super: A high-octane fuel used by a smaller percentage of the population for higher-performance vehicles.
• Extra: A mid-range fuel that balances cost and performance and is the most commonly used fuel in Ecuador.
• Ecopais: An ethanol-blended fuel that is better for the environment and costs less than Extra.

As you can imagine, after five decades of living the good life with fuel being well below international market prices, subsidies have become a deeply ingrained aspect of our economy and society; they are no longer seen as a benefit or perk but as an acquired right. Consequently, whenever a standing president attempts to remove these subsidies, fierce public unrest is unleashed. Recently, we have witnessed three such attempts, each being met with varying levels of national outrage.

First, the subsidy for Super—the fuel that is used by only a small portion of the population and, hence, places the smallest burden on the government—was completely eliminated in January 2019. Given how few people fill up their tanks with Super, this removal sparked minimal reaction.

In contrast, an attempt to restructure the Extra and Ecopais subsidies in October 2019 (yes, just months before COVID-19 hit) resulted in a nationwide “practice” run of the pandemic. As violent rioting erupted across the country after President Moreno announced his plans, a full lockdown was ordered, forcing us all to hide away in our homes for 11 days. During this time, it is estimated that the country lost approximately US$821 million due to disruptions in economic activities, damages to infrastructure, and the impact on various sectors such as transport, commerce, and tourism.³ At the end of the day, President Moreno had to walk back on his decision. We were pretty much back to square one—except we then had to face the pandemic with an economy down by US$821 million. 

We had another ride on the merry-go-round in June 2022, with an 18-day-long national strike after the next president, President Lasso, announced his intent to reduce the remaining subsidies, this time resulting in losses of more than US$1,104 million.⁴ As a consequence, the government had to take a step back and decrease the amount by which the subsidy was initially reduced.

As I write this in 2024, we are currently living through the government’s latest announcement to gradually eliminate the subsidies for Extra and Ecopais. For now, President Noboa’s strategies seem to be working out well (at least there is no rioting yet! Here is hoping it stays that way!). Nevertheless, in the following section, we’ll explore some strategies rooted in behavioral science to generate effective and efficient solutions that could hopefully help us avoid yet another lockdown.

Many cognitive biases might encourage us to resist subsidy eliminations—but today, we will delve into only a few: loss aversion, anchoring bias, and the framing effect.

Loss Aversion

Loss aversion refers to our tendency to perceive a loss as twice as powerful as an equivalent gain. Removing a 50-year standing benefit like fuel subsidies becomes particularly difficult when people perceive their removal as a significant loss—one that likely outweighs any potential benefits that a government might try to compensate for. Think about it: if the impact of losing is double that of gaining, then a government seeking to eliminate a subsidy of US$26 cents per gallon (which is what happened back in June 2024 in Ecuador for the Ecopais and Extra fuels5) would have to offer around a 50-cent compensation to make up for it. This, of course, would not be helpful for the Ecuadorian economy!

In this scenario, hyperbolic discounting may also play a part, as Ecuadorians might prefer immediate rewards (in this case, the subsidy) over later rewards, even if they are more substantial, such as the greater benefits to social good.

Interestingly, loss aversion can also make us more likely to “stick to the way things are," even if the results are detrimental to us. (As goes the saying, “Better the devil you know than the devil you don't"—or, as we say in Ecuador, “Mejor malo conocido que bueno por conocer.”) This is called the status quo bias: our preference to keep things the same, resulting in resistance to change. The fuel subsidies have become ingrained in the Ecuadorian economic landscape; attempts to remove them may feel like large breaks from the status quo, leading to resistance, even if the increase in fuel prices benefits all of Ecuadorian society in the long run.

Anchoring Bias

Ecuadorians might also be affected by anchoring bias. Anchoring occurs when individuals rely on the initial information they were exposed to when making decisions. This often happens during sales events, for example, where products are initially priced higher (the anchor) in such a way that any discounted prices appear more attractive (no, the store is not showing you the “regular” price just for kicks!). This leads us to perceive the discounted price as significantly lower than the higher anchor price, influencing our purchasing decisions.

In the case of subsidies, anchoring bias comes into play—but in reverse. We Ecuadorians have seen an artificially lower price of fuel for decades, and we have anchored our perception of the cost of fuel to the subsidized price. When someone attempts to remove a subsidy, the new price (which is, actually, the real price) seems disproportionately and unacceptably high!

Framing Effect

The framing effect refers to how presenting information in different ways can alter our perceptions—and therefore our decisions. For example, during the hypothetical sales event mentioned above, a store would usually strategically frame discounts as "40% off" rather than “60% remaining," right? This makes the discount appear more significant and attractive, influencing your perception of value and subsequent decision to purchase… even though both phrasings are actually the same price!

When it comes to the fuel subsidies in Ecuador, the government has rarely explicitly framed them as a “discount” or a “temporary benefit” that can be removed at any point. When you drive into a gas station in Ecuador, you don’t see the “real” price of gas or a “discount” applied to it to emphasize the impact of the subsidy. Instead, you just see the subsidized price, and nothing else. In fact, when I was a youngster, I only became aware of the subsidies when I traveled abroad and noticed gas prices in other countries were much higher! 

The absence of a “discount” framing has given way to an implicit interpretation where Ecuadorians may have come to view subsidies as a benefit that is “owed” to us (or even a "right," by some). This has generated a psychological barrier that makes it difficult for people to accept a change, even if it is an economic necessity for the country as a whole!

Although we cannot do anything about how the subsidies have been framed historically (if only we could go back 50 years and advise the government on their messaging!), we can come up with behavioral science-based strategies that can help with subsidy elimination today. Plus, I’d like to think that if we reframe this narrative now, it’s not too late to help the government shape how future generations of Ecuadorians perceive these changes, making the transition smoother and more sustainable over time.

There are several strategies that the Ecuadorian government has previously used or is planning to use to address the challenge of subsidy removal—many of which are commendable and 

might even be successful (hopefully this isn’t wishful thinking!). Although I would love to get into it in more detail, today we will be focussing on a behavioral science perspective.

While I cannot say adding a behavioral science approach is the magic cure for social unrest, it may help the government develop more effective and efficient strategies to, slowly but surely, offload the weight of subsidies without dire unexpected social consequences. More specifically, this perspective can help mitigate the cognitive biases we discussed earlier, such as the framing effect and loss aversion, which often play a critical role in how people react to policy changes.

Gradual Subsidy Reduction with Public Awareness Campaigns

Imagine you hire me as your personal trainer (stay with me here for a second). If you are someone who does not regularly exercise and I suddenly have you start doing 40-minute intense HIIT workouts, I will likely encounter quite a lot of resistance from you! Instead, if I ask you to start working out gradually, starting with 10 minutes a day for a month, then 15 minutes, then 20, and so on, I will probably encounter less resistance. However, this incremental build-up will only truly work with ongoing encouragement and information about your progress and how this fits into your overall fitness goals.

Our workout analogy demonstrates how awareness is critical in accompanying any sort of gradual implementation. After all, no one is going to want to take the first step if they don’t know where the last one leads them! This helps to explain why past subsidy reductions have failed. Although past governments made the right move in trying to implement slow and deliberate reductions over time, these efforts usually lacked a key missing piece: adequate public awareness campaigns.

For gradual implementation to truly work, it must be coupled with campaigns that clearly explain each step's rationale and benefits, mitigating the negative impact of many cognitive biases, including:

1. Loss Aversion: Incremental changes to the subsidy can reduce the perceived immediate loss, making each step feel less significant and, hence, easier to accept. By providing clear explanations of the benefits each step can bring, people are more likely to see the positive outcomes of the implemented change, helping counteract our natural tendency to focus on losses.
2. Status Quo Bias: Gradual changes are less disruptive to life as people know it and allow time for people to adjust to their new reality. Informing Ecuadorians about each step and the plan of steps to follow, as well as their benefits, can help us not only understand the need for change but also reduce resistance by making the process feel more controlled and predictable.
3. Hyperbolic Discounting: By highlighting the long-term benefits of subsidy removal in each step, public awareness campaigns can help us Ecuadorians shift our focus from the immediate costs to the future gains that we all might have. This helps counteract our tendency to prioritize short-term benefits over long-term ones.

Framing For Success

As mentioned above, framing is everything! When advocating for subsidy removal, an effective framing can make all the difference in shifting the public’s perception and reducing resistance.

A simple yet potentially impactful approach would be to start making the “original” price of fuel more evident to all. While it might take some time for this strategy to show its benefits, it is a good first step to start shifting Ecuadorians’ vision of the price we pay for fuel from a “regular” price (i.e., expected and the “rightful price to pay”) to a “discounted” price (i.e., not owed to us!).

However, framing can go beyond this simple approach. After all, if you buy a product that always has a 20% discount, you might still resist change when the 20% discount is eliminated, even if it was framed as a sale in the first place! These small changes to how the subsidy reduction is presented to the public can help reduce resistance by focusing on two cognitive elements:

• Hyperbolic Discounting: Highlighting the immediate, concrete benefits of improved public services (e.g., “every two gallons of Ecopais that the government doesn’t subsidize buys breakfast for three children in our public schools"—which is a real estimate!6, 7) may help reduce the focus on short-term losses.
• Anchoring Bias: By presenting examples of successful subsidy reductions in other countries (e.g., Brazil, where the government minimized public opposition by using a gradual approach to reform subsidies8), the government can establish a reference point that shifts expectations and helps us visualize potential benefits.

Leveraging Alternative Incentives for Additional Benefits

The unfortunate reality is that when a subsidy is eliminated, we will all lose money out of our pockets, and there is nothing the government can do about that. However, the government can do something about our perception of this loss to reduce resistance. Among other strategies to “cushion the blow," the current government plans to implement a monthly cash compensation program for individuals who run commercial transportation. This approach not only helps with perception by directly addressing concerns about increased costs but also impacts real costs by ensuring that the expense of running commercial vehicles does not rise sharply. As a result, this can prevent fuel cost changes from being passed down to the end users.

What makes these incentives truly resonate with us is that they take into account the following two biases:

• Loss Aversion: By offering cashback, the government can help reduce people’s perceived loss resulting from the subsidy elimination. This strategy seeks to help people shift their focus from the loss of the subsidy to the “gain” from the cashback.
• Hyperbolic Discounting: Receiving immediate financial rewards can help counter the tendency to focus more on the short-term pain of losing the subsidy than the long-term benefits of the changes being made.

But why not take this a step further? The government might, for example, use this “cashback” program as an opportunity to also encourage a more formalized economy in Ecuador (a problem the country currently faces, where the government misses the opportunity to collect on taxes) and ensure the compensation goes to those whom the government is truly targeting. 

Currently, the cashback strategy plans to provide actual cash compensation to those who qualify and register to receive the benefit. Instead, the government can offer compensation in tax credits. This approach can strengthen people’s commitment to a formalized economy as they see the direct benefits of participating in it. Why might this work?

• Status quo bias: By making the tax credit program the default option (i.e., having people be automatically enrolled in the “tax credit” compensation and not “cash” compensation), individuals are automatically enrolled and would need to actively opt out if they prefer cash instead. People are more likely to stick with the default option presented to them than switch to the alternative.
• Behavioral Commitment: Making the compensation “tax credit dependent” (instead of cash) can encourage long-term commitment to formal economic activities.
• Hyperbolic discounting: Just as with the “cashback” strategy, providing immediate financial relief can help individuals see short-term benefits that can drive acceptance of long-term subsidy policy changes. Additionally, the structured nature of tax credits might help individuals focus more on their future financial well-being, shifting focus from immediate subsidy-elimination-generated losses to long-term gains. Double benefit!

Ecuador’s fuel subsidy (and its elimination) presents a significant challenge that we have struggled with for far too long. By leveraging insights from behavioral science, we can enhance current strategies to not only meet our country’s economic needs but also resonate more effectively with Ecuadorian’s psychological and social realities. 

While some of the strategies mentioned above are things we have not tried before, others are just a behavioral-science-based refinement of currently used strategies. By integrating principles such as framing, gradual adjustment, and tailored incentives that align with human behavior, Ecuador may be able to increase acceptance (or, at least, reduce resistance!) to subsidy elimination and avoid the immeasurable losses that have been part of our recent history.