Before Republicans start budget-slashing, take a lesson from Bolivia
The history of South American countries like Bolivia and Ecuador shows that abrupt austerity measures to pull back government subsidies equate with political suicide and civil unrest. America's budget-slashing Congress should take note.
The cliché tells us that Band-Aids are best ripped off quickly. This has a pleasantly simple ring to it, but, as anyone who’s ever showered wearing a bandage knows, it’s not actually true. Soak the Band-Aid in warm water, and you can pull it off slowly and painlessly. It seems there’s a similar myth about swiftly tearing off wasteful government subsidies. There’s an analogous truth, too: They’re best phased out slowly.Skip to next paragraph
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Evo Morales, Bolivia’s much loved and much hated leader, needs to learn this lesson soon so that he can avoid getting ousted (revolution-prone Bolivia has averaged slightly more than one president per year for the last 186 years). Others, at the International Monetary Fund (IMF) and elsewhere, should take note, as well. Even the United States’ new budget-slashing Congress might consider paying attention.
Mr. Morales, ironically enough, rose to prominence amid the so-called Bolivian Gas War (a series of riots over the government’s natural gas policies between 2003 and 2005). Soon after coming into power on the heels of two ousted presidents, he put gas largely under state control, in an effort to redistribute the great wealth of the country’s gas fields. But at the end of 2010, Morales didn’t need pressure from the IMF to institute an economic austerity plan when he tried to abruptly and completely remove all Bolivian subsidies on fuel. This resulted in a weeklong, more than 70 percent spike in prices for gasoline and natural gas in the country, which, in turn, led to violent protests.
By Jan. 1, a panicked Morales reinstated the subsidy, no doubt overcome with déjà vu and the prospect of being ejected from his office over the very same issue that helped him force out both President Gonzalo Sánchez de Lozada, in 2003, and President Carlos Mesa, in 2005.
Subsidies are unsustainable
This approach – also seen in Ecuador in the late 1990s – of yanking away a treasured entitlement and then, in what appears to be a desperate bid to remain in power, abruptly re-instating it, only undermines the long-term plan to remove the subsidy, because it serves to embolden the forces that oppose these necessary changes. The subsidies are unsustainably expensive. In Bolivia, they account for 2 percent of GDP. Ecuador continues to have an eerily similar problem with fuel subsidies, though it is currently wealthy enough to absorb the losses. It devotes a whopping 7 percent of its GDP to its enormously popular but wasteful fuel, electricity, agricultural, and housing subsidies and a monthly stipend for over a million poor Ecuadorians.
Anyone tempted to think this is merely a South American problem should note that the United States, with its tax breaks for interest on mortgage payments, has a de facto housing subsidy, itself. Despite its fiscal irresponsibility, this tax policy is also too politically valuable to die.
All countries, apparently, have their vices.
But as a result of Bolivia and Ecuador’s fuel subsidies, the streets of both La Paz and Quito are crammed with automobiles, the air in both cities is redolent of diesel exhaust, and because of their cheap gasoline, the two cities boast incongruously vibrant taxi industries, especially considering the meager average wages of the cities’ denizens.