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Letter from La Paz

I was going to write something about the Bolivian situation today. Instead, my good friend Daniel Bustillos beat me to the punch. I met Daniel when he was studying for his MBA in the US; his father was then Bolivia's political ambassador in Washington during the current president's first presidential term (1993-97). We've been good friends ever since. Below is an email he sent me from La Paz.

The government launched a tax reform that imposed 12.5% on income (only formal workers under payroll). Another feature was that you could no longer obtain tax credit on invoices (the ones you get every time you buy something). The purpose of this reform was to lower the fiscal deficit and achieve resources that were needed as a counterpart with the IMF in order to disburse some grants that would support the economic plan that included the creation of work (mostly low skilled workers) that would benefit the major part of the working age population. Under the actual tax code (it has to be somehow modified) many, if not all workers, evade income tax by getting fake invoices. The tax reform would levy high taxes on higher brackets and exempt them in lower brackets, thus directly collecting them so as to secure their collection. It was a harsh measure, well thought in economic terms. The intention was good but they (the government) overlooked some political and major economic concerns.

Basically the reform did not pass because:

• The bulk of the population, even though they were not going to be affected (because they either work under informal commerce or they are not under payroll), did not understand the nature and consequences of the reform. And the government failed to publicize and explain in detail both things.

• On one hand they [the government] were preaching a need for cuts on expenses, but on the other hand, when they took power, they created more ministries and [bureaucratic] expenses.

• There is an overall continental economic downturn and -- particularly in Bolivia -- wages were already affected by slightly higher inflation indexes to mitigate side effects of the situation in Argentina and Brazil (to a lesser extent). This reform meant lower wages, with no immediate advantages in a very difficult economic scenario.

• They did not stress some other reforms targeted to increase collections, such as the fight against counterfeiting, increasing the number of tax payers (including people that have large volumes of economic activity but evade taxes), etc. Some people really affected by this reform felt that they were the ones that traditionally supported the country and they were being further punished with more taxes.

• Populist parties for the last ten years were constantly seeking to increase their power of negotiation (weakened since the return to democracy) by organizing road blocks and strikes. Also, the lack of better economic achievements (as perceived by the bulk of the population) in the last decade resulted in a general discomfort that resulted in a turmoil triggered by the reform and instigated by new leaders that do not fully understand the rule of democracy.

• To make matters worse, there was a police strike that took advantage of the situation and asked for higher wages and some other social benefits that were legitimate. Nevertheless, I have to condemn the opportunism of their actions and the delay in reestablishing social order. As a result, in a somewhat confusing action, the military tried to protect the main square and some public buildings that were being attacked by hordes of people agitated by scum and some school boys that didn't know what they were protesting for but did profit from the situation by assaulting and robbing stores and malls.
  

Well, I gave you some facts. You know I sympathize with this government. But I have to admit there were some mistakes on their [protesters] part and the behavior of the protesters. There should have been more information, previous public discussion, and a tolerable level of income tax should have been determined. Besides, once the turmoil was taking place, the immediate use of police or military force had to take place The situation was so chaotic and dangerous that in some places (as you have seen) people destroyed private property and even trespassed homes in poor neighborhoods (El Alto): the population had to be protected.

Critics say that this is the result of arrogance on part of the government that thought could it enforce reforms easily without much consensus in the legislature (and in the streets). I have also heard that the president was, from the beginning, surrounded by a crew of newcomers that built a fence around him and made it difficult for other people (traditional advisors), and for him, to reach [the people] and be reached.

Populist parties asked for the president's resignation, which is not foreseeable. Besides, other countries and organizations already presented their support for democracy. From this starting point an economic recovery will be somewhat more difficult; things could worsen with other political leaders (populist), since they do not abide by the rule of law -- which is per se dangerous -- even though they are diputados (legislators). They have some radical proposals that are not economically viable and they encourage segregation (Indian-White, Camba-Kolla) which is dangerous to our country integrity and efforts of unity, They would only increase violence and poverty.

Fortunately, things are going back to normal, but the authority of the government and the security of the population has been hurt. Structural problems in education, youth orientation, police, and the military came afloat as a result. It seems that from now on the priority will be security, so economic policy and other reforms should go slow. As a good sign, the government reduced [the number of] its ministries (also ministers were changed) and cut wages in the public sector; a similar attitude is expected in the legislative and judiciary powers, but who knows.

Posted by Miguel at 01:39 PM

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