The conquest of Ecuador occurred in the early sixteenth century, and by 1535 Sebatian de Belancar had distributed encomiendas up through Otavalo.  In 1549, Sebastian de Belancar claimed the enormous encomienda of Otavalo, which was comprised of 1,500 to 2,000 Indians) for himself.  The encomiendas supported a non-resident Spanish population, and the Indians were forced to pay extremely high taxes, putting them into great debt.  By 1620, the tribute debts for the encomienda had reached 100,000 pesos.

    Indians were also assigned to work in obrajes making textiles, but the money earned through this work was not used to settle debts, rather it was a source of royal revenue.  In the early 17th century the Spanish Crown tried to increase the number of Indian workers in the textile industry.  At this point, it became mandatory for Indians to settle in Otavalo rather than commuting from neighboring areas.  But the industry faced an overwhelming problem: a lack of workers.  It happened that there was competing industry in Otavalo, and even after hiring 13 year-old Indians, there was not enough textile labor.  The debts increased.

    Because of these debts, Indians were pushed toward the idea of selling their land, as land was starting to be seen as a source of capital.  The Indians increasingly fought for land rights, but even after law suits they were not granted rights.  Because the Indians were infuriated by the exploitation of their land, they made it very difficult for the textile industry to have a stable labor population.  The industry suggested reforms in 1620 that would grant the Indians the land that had been acquired by the Spaniards.  This reform never happened.  The exploitation continued as Indian lands became alienated due to a great population decline.  The land once used by Indians for intensive agriculture was turned into land for raising livestock.  Indian communities were forced to turn to other forms of produce and labor.  They raised chicken and sheep for food.  The sheep also provided wool, which was used for trading and weaving.  This may explain why Otavalo is famous for its wool and textile production even today.