Latin America is one of the richest regions in the world. It possesses the Amazon rainforest which produces tons of fresh air. It hosts thousands of animal and wildlife species. The region’s soil is one of the most fertile in the world and the extension of land available to plant and harvest crops is paramount.
Despite Latina America’s wealth of resources, political failure to take advantage of such resources to promote true development led to the adoption of two dangerous policies instead: indebtedness and foreign investment slavery.
From the poorest and war-ravaged countries to the most stable ones – politically-speaking – have been subjected to the continuous burden of perpetual debt and high taxation generation after generation. Those two policies have failed, which is why most if not all nations in Latin America are all but bankrupt today.
You would think that after decades of underdevelopement and growing extreme poverty, politicians and populations would strive for real policies that promoted growth, wealth creation and entrepreneurship, but the opposite is true.
A question resounds these days with a thunder in the main capitals of Latin America and the world:
How to alleviate the mess in public accounts?
With interest rates on the floor and debt markets still splashing in liquidity, it has not been difficult for the majority of governments in the bloc seek more indebtedness to finance the bulk of the historically irresponsible spending policies.
The so-called COVID pandemic has handed a new reason to make the States grow larger in Latin America. It has also served as a justification to get into more debt as more government officials in countries like Colombia, Mexico and Costa Rica, seek funding from the IMF as they prepare the population for new tax hikes.
The rise in commodity prices opens an unexpected window of optimism, but the economic recovery will be one of the slowest in the world, experts say, far behind the rest of emerging countries.
Those same experts warn that most countries will continue to see more deficits and more public debt than ever imagined: it is already around 80% of GDP as a whole, not so far from that of rich countries.
If before 2020 failed governments were already seeking new sources of financing for their irresponsible economic policies, after covid-19 politicians and pundits are pushing for more indebtedness.
The virus, many argue, has finished upsetting the balance between public income and spending in the region, but those problems existed much earlier than COVID.
International organizations are not shy when recommending the acquisition of more debt and the imposition of more and higher taxes. While the region as whole collects an average of 23% of GDP, members of the Organization for Economic Cooperation and Development (OECD) collect 34%.
The successive rounds of tax increases undertaken in the past decade in several leading Latin American countries, such as Mexico or Colombia, have increased collection by seven percentage points since 1990 and have partially closed what international organizations like the OECD argue is a gap. These organizations insist that much work needs to be done to increase the incomes of states.
On the one hand, the crisis unleashed by lockdowns enacted by governments themselves have demonstrated the importance of decisions made by the States when the economic house of cards collapses. In 2019 and 2020, their decisions were catastrophic and now they want to increase taxes and subject their people to more debt as a way to ‘fix’ their abhorrent mistakes.
Economic lunatics still see government as the must-have breadwinner for informal workers and families in trouble, and as a support for companies that see their income evaporate overnight.
“The preponderant role of the State during the crisis has become very clear, and one of the great lessons it leaves us is that the countries that have been able to respond best have been those with greater collection capacity and a better social protection system,” says Nestor Castaneda, Professor of Latin American Political Economy at University College London.
“We are facing a unique possibility of linking fiscal reforms to everything that the public sector has done and continues to do during the crisis,” says Diego Sánchez-Ancochea, from Oxford. “But social discontent in the region is such that it is going to demand a redoubled of political pedagogy.”
So-called experts such as Castaneda and Sanchez still believe that an almighty State is the solution to take Latin America out of the sewer where it has been over decades. They continue to ignore the long list of failures, economic, fiscal and political in nature, that have been accumulating for at least two generations.
How to return confidence to the public?
Most tradicional economists and so-called experts insist in saying that more debt acquisition is necessary to do appeasing the public. The International Monetary Fund (IMF) has shown its most social side, they say. We all know what the IMF did in Portugal and Greece, and that is exactly what awaits for Latin America.
In case you still have any doubts that increasing debt and higher taxation are futile, you must know that, according to the OECD, Cuba of all places is the country with the highest collection of taxes as a percentage of its GDP, at 42%. Not only that, the top ten countries with the highest taxation to GDP ratio are some of the most economically ravaged in the region. (See below)
Colombia has been the first Latin American country to launch new taxes, but social protests forced President Iván Duque to drop his initial proposal, which happened —among other things— by imposing a VAT tax of 19% on public services in the upper half of the Colombian system and by forcing all taxpayers to pay taxes.
Bogotá proposed to collect the equivalent of 2% of GDP in a series of new taxes to alleviate debt pressures and preserve its credit rating.
The Colombian government made an effort to highlight the social components of the reform, which also contemplated that the so-called was Solidarity Income, created to mitigate the pandemic, would become a permanent basic income much the same as a Universal Basic Income scheme. The proposal received wide support among analysts and academics, but was rejected by the Colombian population.
Risk rating agencies, the same entities that told that fractional reserve banking and Wall Street toxic assets were a great investment idea, are now weighing on the debt, tax hikes matter.
In short, their warnings continue to cause earthquakes. And their latest round of alerts exude an intense aroma of concern about the health of Latin American treasuries.
The last one bears the signature of Fitch, which just three weeks ago warned that, without profound reforms that expanded tax collection – bluntly: tax increases – the return of economic growth will not be enough to repair the bloc’s public finances.
“To stabilize and eventually reduce the burden of public debt requires structural measures and not just cyclical improvements,” wrote its analysts. With a good number of countries in the bloc one step away from the junk bond, fiscal reforms are also imperative in the eyes of the S&P, Moody’s, Fitch and company.
Brazil, by far the most populous nation in the bloc and also the hardest hit by the health crisis, has been debating a tax reform long before COVID-19 swept everything away.
Jair Bolsonaro hoped to have it up and running last year, but the virus took a radical turn in his priorities.
The always turbulent Brazilian political arena doesn’t help either. The Minister of Economy, Paulo Guedes is for eliminating exemptions whereas most experts call for higher taxes.
Back in North America, the Mexican economy plummeted 8.5% last year, the biggest drop since the Great Depression, and official forecasts point to a comeback of around 5% in 2021. However, in the first quarter growth was minimal —only 0.4% —and the pensions and the rescue of the state oil company Pemex multiply the outflows of public money.
With these premises, the president has already assumed that after the midterm elections in June he will have to take action on the matter.
What is still unknown, at the moment, is the scope of the new legal framework. “Yes, a tax reform is required in this matter,” López Obrador recently recognized in reference to the recomposition of the finances of the different Mexican regions.
His Secretary of the Treasury, Arturo Herrera, has been trying to convince the president for months, but he maintains his refusal to raise taxes, especially those on fuel, to avoid future gasoline hits.
Latin America reached the so-called pandemic with the vitola of being the most unequal region in the world, and such a reality is due precisely to its taxing policy, where the poorest and the disappearing middle class are always the ones who bear the responsibility to keep the State alive.
Wrongfully placed policies such as lockdowns and banning ‘non-essential’ activities has made extreme poverty skyrocket to the highest levels in two decades.
But there is something even more worrisome, due to its structural nature: according to OECD data, taxes and social transfers barely reduce the Gini coefficient – the most popular measure of inequality – by three percentage points, compared to more than 15 points of the European Union average. In silver: taxation barely corrects the course, which is why it is simply not the answer.
It cannot be the middle and lower classes that pay the bill, especially now. “We come from a great concentration of income and wealth at the top, and we should seek a contribution from the richest: once or permanently ”, says Nora Lustig, professor at Tulane University, President Emeritus of the Economic Association of Latin America and the Caribbean, and one of the most prominent economists in the region.
“It is a great opportunity, but it will not be easy to take advantage of it: these sectors have many ways of minimizing their tax burden thanks to the mobility of capital.” Along the same lines, Martín Rama, chief economist of the World Bank for the region, sees a “clash” of difficult solutions “between the ideal and the possible”.
What most of these alleged experts agree on is that more taxation is necessary, as supposed to the adoption of policies that promote investment and organic job creation. That ability to promote the creation of new jobs depends of reopening the economies, which in every single case we have seen, is the only way to recover. In the US, both Florida and Texas have experienced it.
However, it is common to hear and read bureaucrats and economists calling for ‘solidarity taxes’. That means to install a new immoral system of stealing wealth from people instead of promoting policies what will create it.
It seems we are heading back to 2008-09 when massive debt was incurred in by governments, high taxes were imposed and austerity was the rule of the lands.