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.

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.

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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.

To the exasperation of the governments, an unknown but large quantity of this cheap subsidized fuel ends up on the black market of neighboring countries. And, to complicate matters further in Bolivia, since Morales expropriated the gas industry in 2005, Bolivia now finds itself in the awkward position of spending 2 percent of its GDP softening prices on its own best source of revenue.

To complicate matters still more, the subsidies actually serve to empower groups that can topple a regime if it tries to alter the policy. The subsidies’ biggest fans are powerful working-class interest groups, namely farmers and taxi and bus drivers, who compensate for their small numbers with rigid organization and impressively coercive tactics. Busses can be parked across highways. Farmers can stop delivering food. No society can withstand such measures for long.

Make cuts with caution

In the parallel universe of late-1990s Ecuador, President Jamil Mahuad was eventually ousted in a coup in 2000, triggered in part over this issue of fuel subsidies. His successor, Gustavo Noboa, also tried to roll back the fuel subsidies, briefly, before finally abandoning the issue. Since then, any talk of changes to Ecuadorian fuel subsidies has remained off the table.

Bolivia doesn’t have the leisure, or, more accurately, the money, to leave the subsidies off the table. Still, yanking away the subsidies abruptly is political suicide, and it was surprising, if not downright bizarre, that Morales thought otherwise.

This December, Bolivian protests – this time from coca farmers, who employed the old vehicle-across-highway blockade maneuver – threatened to shut down the country. Morales, a former coca farmer himself, and a non-suit wearing populist with twice the folksy swagger of George W. Bush, was not about to let himself get painted as a cruel capitalist and advancer of IMF-type agendas, so he backed off.

Which is too bad for Bolivia. Unlike Ecuador, Bolivia can’t even pretend to afford the subsidies. Bolivia can’t afford much, actually. It’s the poorest country in South America. And it will remain deeply impoverished as long as so much of its revenue goes to pay for cheap taxi rides and hot showers, rather than schools, infrastructure, and medical care. What Morales should have done last month, and hopefully will do eventually, is begin the gradual process of stepping down the subsidies.

Likewise, the new US congress and incoming state legislators, facing a daunting mountain of debt, should proceed with caution. Republicans eager to hack their way to a balanced budget are going to find themselves on the less popular side of this issue if those cuts should move from talking points to reality. American voters were excited about the concept of reducing government spending, but that concept remained comfortably abstract during the election.

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Once Americans see their own local firefighters, police officers, and teachers being laid off, it's fair to say that their current love affair with austerity, and the politicians who champion it, will end abruptly.

Peter Mountford’s debut novel, A Young Man’s Guide to Late Capitalism, which is set in Bolivia, will be published by Houghton Mifflin Harcourt this April.

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