Colombia’s growing troubles are a warning to all of Latin America of the bad times ahead

May 10, 2021 | 4 comments

By Mac Margolis

When Colombians voted in a 42-year-old development wonk as president in 2018, they knew it was a leap of faith. But what Ivan Duque lacked in political adroitness (he’d served a single term as a senator), the argument went, he would finesse as an internationally accredited emerging market technocrat.

Thirty-two months on, Duque has done neither guild any favors. Shunned by adversaries and allies, with his approval ratings testing new lows, Duque is facing a torpid economy, unchecked Covid-19 and public whiplash not seen in Colombia or in much of Latin America since before the pandemic.

Colombia President Ivan Duque

Duque recently withdrew a signature tax reform he had crafted for months and sent to congress days earlier. The plan incited national outrage, sending waves of protesters into the streets and forcing the finance minister to resign. Mobile phone video from the turmoil in Bogota showed the depth of public fury and official despair, as security forces in battle kit answered demonstrators with disproportionate force. At least two dozen people have died in the protests, which convulsed cities across the country of 50 million, apparently aggravated by grievances that spilled well beyond the initial tax revolt.

It’s not just Colombia. In 2019, Ecuador’s struggling lame-duck president Lenin Moreno moved to lift regressive fuel subsidies and was chased out of the palace, and nearly from power. The same year, riots in Chile over a 4 cent public transport fare increase provoked a nationwide convulsion, forcing besieged President Sebastian Pinera to stand down and reboot. The story was much the same across the region, as fiscally strapped governments seeking to scrape more revenue from societies already raw over lousy services lit up Latin America’s plazas and boulevards.

While the coronavirus outbreak paused the public outrage, as citizens struggled with more immediate threats to health and livelihood, the prospects of a prolonged post-pandemic emergency have brought that anger back into the open. “Colombia is a trailer of what’s to come,” said Kings College London political analyst Andres Mejia Acosta.

Before giving into electoral temptation, Duque spent a career poring over the chronic impediment to Latin American productivity and sustainable growth, first as a consultant for the Andean Development Corporation and then at the Inter-American Development Bank. Once in office, he vowed to catapult Colombia into the 21st century with the “orange economy,” the theory that fostering human capital and intelligence will unleash the country’s true creative potential.

Along came the pandemic, which put those plans on pause and Colombia’s economy in urgent care. Like its neighbors, the Duque government laudably spent aggressively on emergency aid for Colombia’s poor and jobless. Now he must wrestle with how to pay off the spiking debts and deficits, and so rescue Colombia’s traditionally sturdy credit ratings without sacrificing the already ailing body politic. After a bruising 2020, the national poverty rate has spiked, from 35.7% in 2019 to 42.5%, pushing some 3.5 million more Colombians into penury.

Duque had a plan. Tasking an international panel of experts, he meant to yank Colombia out of the fiscal death spiral and mend historic inequities and a broken tax system. He proposed to broaden the tax base, doubling the number of taxpayers from 3.5 million to 7 million by 2025, and eliminate costly exemptions for producers of goods, such as milk, meat and eggs, which sacrificed fiscal revenues for perks to Colombians above the poverty line. The reform also ratcheted up green taxes on carbon emissions and polluting cars. In a nod to modernization, the bill spared exemptions for companies in the orange economy. The result looked solid and plausibly fairer on paper; it even had an appealing brand name, the Sustainable Solidarity Law.

Suddenly called upon to pony up, a large segment of Colombia’s heretofore tax-exempt middle class — those earning less than $690 a month, half the current taxable income threshold — wasn’t charmed. While hardly indigent, these modest wage earners have been hit hard by the pandemic and its economic blowback. “Even the non-poor are having trouble making ends meet,” said Giancarlo Morelli, Colombia analyst for the Economist Intelligence Unit. The relatively benign tax touch for businesses and higher earners, most of whose generous exemptions remained, didn’t help the government’s case.

Bad optics, terrible timing, botched communications — all this conspired to sabotage what might have been a salutary reform. It doesn’t take a policy guru to point out the social justice of raising taxes on gas guzzlers — most car owners are not poor — or to explain the benefits of ending general rebates on milk and eggs and then returning some of the savings to the poor through cash transfer programs. “There are policies that make perfect sense technocratically but are politically disastrous,” said Felipe Hernandez of Bloomberg Economics. “Even if you tell people they’ll get some money back, new taxes meet resistance.”

Yes, the fury in Colombia may feel unexpected. Regarded as a model of market-minded growth, the country has consistently attracted foreign money and kept its investment grade rating through trying times. Yet as the country’s dollar bonds tumble into junk territory, the aura has dimmed. Up close, Colombia’s performance is less impressive. Fiscal health is wan, as public expenditures chronically threaten to outpace revenue. The result is a patchwork of fix-it reforms, none of which finishes the job. “Instead of fiscal consolidation, we have taxes chasing expenses, which continue to rise,” says Hernandez. “Since the 1990s, Colombians have come to expect a new tax reform every couple of years.”

The enduring pandemic has put a hard stop to such improvisations; Colombia’s government has neither the fiscal space for more emergency social spending nor the street cred to demand more levies from already stretched taxpayers. The conundrum is not just Colombia’s nor the failing Duque’s alone. “Even if you put the best retail politician on the case, he or she would struggle in Latin America today,” said Carnegie Endowment distinguished fellow Moises Naim. He should know. Naim served as minister under former Venezuelan president Carlos Andres Perez, who was elected in a landslide in 1988, only to befall a national uprising over badly managed fuel price increases, followed by corruption charges and two coup attempts, that eventually pushed Perez from power.

One of the ways out of the trap is for Colombia and its neighbors to tackle one of the region’s most persistent problems, the vast informal economy, where some 140 million Latin Americans, or 40% of the workforce (60% in Colombia), lives day by day, on paltry wages, in unproductive jobs, with no social protection and beyond the reach of the taxman. Duque spent years puzzling over that problem as a wonk in a Beltway cubicle. Past due to put that knowledge to work.

Credit: Bloomberg