Pubdate: Fri, 07 Nov 2003
Source: Wall Street Journal (US)
Copyright: 2003 Dow Jones & Company, Inc.
Contact:  http://www.wsj.com/
Details: http://www.mapinc.org/media/487
Author: Mary Anastasia O'grady
Bookmark: http://www.mapinc.org/coke.htm (Cocaine)

URIBE IS COPING WITH  INSURGENTS, BUT NOT CONGRESS

Bogota, Colombia -- Plan Colombia, the U.S. effort to quash cocaine 
production here in the Andes, will cost American taxpayers about $3 billion 
over its three- year life ending in 2004.

But that's only about 20% of what it will cost Colombia over the same 
period to fight its narco-funded rebels, flush with cash thanks to the 
toxic mix of high global demand and a limited curtailment of supply by "the 
war on drugs."

Yet the cost of the war is only part of what's weighing down Colombia these 
days. As problematic -- in spending terms -- is the burden of unsustainable 
entitlement programs enshrined as "rights" in the 1991 constitution. With 
military spending, Colombians at least get improved security, but the 
return on "social" spending is nil.

Indeed the civil service bureaucracy and its militant unions are a drain on 
the productive economy. The reason Colombia's left so hates President 
Alvaro Uribe has as much to do with his refusal to view the government 
payroll as a patronage machine as with the sympathy of many leftists for 
the murderous insurgents.

They also resent Mr. Uribe's wide popularity. Thanks in part to their 
efforts, he is now facing a budgetary crisis. With sub-par growth and high 
expenses, the country's fiscal deficit is widening. Fearing what could be a 
4% of GDP deficit this year and blocked by the left from cutting spending 
to narrow it, Mr. Uribe has proposed sharp tax increases.

This should alarm U.S. leadership. Colombia is its best ally in the region 
and may be its best hope for a successful democracy. But unless global 
demand for cocaine drops, robbing the enemy of its purse, and the economic 
advice funneled to Mr. Uribe switches to a more pro-growth stance, 
Washington is going to have another Latin American crisis on its hands.

Plan Colombia is, in effect, the U.S. contribution to a much larger bill 
for Columbia's war on drugs. It should also be noted that many of the costs 
that the U.S. covers go to American corporations that build helicopters, 
spray coca crops, act as consultants and otherwise become "suppliers" to 
the effort.

After President Uribe came to power 15 months ago, the military effort 
began to yield results, not in altering total narcotics supply in the U.S., 
but in weakening the narcotrafficking rebels. U.S. demand for cocaine may 
also be slipping, which if true, may have hit rebel revenue. In any case, 
captures of the guerrillas and other drug traffickers are up and 
kidnappings of innocent civilians by the rebels are down.

Yet as Mr. Uribe has often noted, a peaceful, prosperous democracy requires 
more than a military solution. It needs growth well above the anemic 2% to 
3% a year that Colombia has now come to expect.

That's why the defeat of the government's Oct. 25 referendum, designed to 
give the administration power to cut a runaway national budget, is so 
troubling. Mr. Uribe's tax increase proposals are part of an effort to meet 
deficit targets imposed by the International Monetary Fund. This dangerous 
strategy will be as devastating for Colombia as it was for Argentina.

The referendum failed not because the population voted against it but 
because in order to legitimize the elections seven million voters had to 
turn up. In fact, Mr. Uribe's proposals, 15 in all, were reportedly 
approved by and large but voter turnout only reached about six million.

Analysts point to several factors to explain why the highly popular 
president didn't win this important vote. First, Colombian voter turnout, 
even when a personality is featured on the ballot, is generally lackluster. 
Second, the referendum questions were complicated. Third, and perhaps most 
importantly, public-sector unions may have used scare tactics to influence 
voters. Since arriving here earlier this week I have heard anecdotes that 
suggest that activist teachers told some parents that voting for the 
referendum would cost their children entry into the classroom.

These details are important because the referendum defeat was hardly the 
popular rejection of the president that his enemies portray. What is true 
however is that if he raises taxes, he will hand his adversaries a victory.

It probably is no coincidence that details of the Uribe tax increase 
proposals began to emerge around the time an IMF emissary hit town this 
week. On Tuesday, the government announced that it would raise the 
valued-added tax on all products -- save a basket of necessities -- to 17%. 
This is an effective increase of up to 10 percentage points on some 
products. The government will also slap new taxes on pensions and there may 
be new asset taxes. To his credit Mr. Uribe continues looking for allowable 
cuts. His Plan B includes an effort to rein in federal transfers to 
municipalities, something that got out of control in Argentina and heavily 
contributed to its collapse.

Yet, despite this one redeeming feature, Plan B is a Frankenstein monster 
that if brought to life will strangle the economy. The trouble with the 
plan, and indeed the whole conventional approach to fiscal balance that the 
president is now pursuing, is that taxes damp legal economic activity and 
push many economic actors underground. Contrary to Beltway wisdom and IMF 
theology, but consistent with common sense, if a government wants more 
revenue, it should encourage economic activity by lowering taxes. Under 
Plan B, it is doubtful that revenues will go up but it is almost certain 
that the economy will take a hit.

A far better approach would be a bold tax overhaul. In an Oct. 23 report, 
before the referendum failed, the Economist Intelligence Unit explained the 
problem with current tax policy: "Colombia applies some of the highest tax 
rates in the Americas for both corporations and individuals. This is 
reflected in its D-grade for tax policy risk. A high level of distortion 
arises from differential rates and exemption, complicating business 
planning. Failure to curb public spending encouraged the previous 
government to increase the tax burden while the influence of vested 
interests has been evident in the creation of new discriminatory taxes."

There is no doubt that such a major tax reform would put Mr. Uribe and 
Colombia's struggling classical liberals in the fight of their lives 
against a populist, free-spending congress. But the president is a bold, 
popular leader and now is no time to retreat.
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MAP posted-by: Terry Liittschwager