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December 10, 2004
Grim prospect for a supply-side war
In several forums, CIP has argued that before the United States makes a larger commitment to Colombia, we should first see greater sacrifice from the wealthiest 10 percent of Colombians. In particular, the richest Colombians must pay more taxes. In one of the world’s most unequal countries, only the top income brackets have the resources Colombia’s government needs in order to end the war, establish the rule of law, and make neglected conflict zones economically viable.
As you might imagine, Colombia’s business community disagrees strongly with us. Using arguments reminiscent of the domestic U.S. debate over the Bush tax cuts, they contend that taking more from the wealthiest will stifle investment and retard economic growth. The best way to raise money for Colombia’s defense and governance needs, our opponents argue, is to demand less sacrifice and eliminate trade barriers, which will spur economic growth, which will lead to higher tax revenues.
Those who support this idea of a “supply side war” in Colombia have been pointing to the country’s rosy macroeconomic prospects. GDP growth was expected to exceed 4 percent this year, allowing Colombia to whittle away at its very high deficit. This forecast growth rate still lags behind Latin America as a whole, which is expected to grow 4.7 percent this year, according to the World Bank. (Colombia’s largest newspaper, El Tiempo, meanwhile, estimates that 5 percent growth is in fact needed to guarantee a lasting drop in unemployment.)
However, this week’s news indicates that even 4 percent growth isn’t likely. Due to “a decline in consumer demand,” GDP grew only 2.43 percent during the third quarter of 2004, compared with a year earlier. This rate, the lowest since mid-2003 and less than 1 percent above population growth, was far lower than expected. The news, according to an El Tiempo editorial, hit “like a bucket of cold water.”
Less growth means projected tax revenue will be less, which means that Colombia will have to borrow more even to meet its existing commitments. The Treasury Ministry foresees spending cuts and a need to go back to Congress in March for more money – deficit spending, though the deficit is already too high – to cover expenses.
This bad economic news makes it even less likely that Colombia is going to have the resources it needs for courts, schools, hospitals and roads – or for helicopters, planes and special-forces units, for that matter. While U.S. aid can help, the current rate of $700-750 million a year – whether mostly military or mostly economic – is just a drop in the bucket.
Which takes us back to our original conclusion. There’s no such thing as a supply-side war. Fighting a war – as well as “nation-building” in areas where the state has never been – is essentially a socialistic exercise. It requires a government to take a big share of resources out of the economy and redirect them toward an important national goal: in this case, ending the conflict and guaranteeing that it doesn’t flare up again.
That is going to have to be done with mostly Colombian resources. Which means, again, that the wealthiest Colombians are going to have to pay more taxes.
Posted by isacson at December 10, 2004 06:02 PM
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Comments
I don't disagree that all Colombians, especially the wealthiest, need to support their country. However, with Europe consuming half the cocaine coming from Colombia, they should be providing more economic assistance. Specifically Europe should provide non-military assistance to things like the reintegration of former combatants. Agree or disagree with the demobilization process, every combatant leaving the fight is a good thing for Colombia and the only way to keep them out of the conflict is to give them the training and assistance necessary to lead a normal life in civil society.
Posted by: Anonymous at December 11, 2004 11:00 AM
I also don't fundamentally disagree with the fact that the wealthiest should pay a higher proportion of taxes.
However, I'd like to point out that the Colombian economic situation also depends on two other aspects that haven't been addressed too much here: tax evasion and corruption.
-Tax evasion, not only among the wealthy but also among the less fortunate, is high.
-Corruption ends up eating away valuable resources.
IMHO, simply raising higher taxes for the top 10% or 5% of Colombians isn't going to do much good if only the same limited number of already paying citizens are actually going to meet their obligations.
In that sense, I see as a good sign that the Colombian government, due to the failure of their late "Tributary" reform bill, is going to make a big effort against tax evasion. Hopefully something useful results from that.
And a lot remains to be done against corruption, obviously, despite some recent advances.
Posted by: jcg at December 13, 2004 12:07 PM
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