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. - --- MAP posted-by: Terry Liittschwager