Daily Archives: November 2, 2011

Economic subsidies and/or nation’s survival?

Bolivia has to understand whether subsidies are good for our economy and development over the long run. If we engage in populist /easy-going economic policies such as subsidies in the form of low gasoline prices for example and bonuses paid to specific clusters (i.e. bonus to children from public schools only; bonus to the elderly, regardless their ethnic or economic status). Those recipients of subsidies may “feel” they are better of over the short run. However, that public financing is not sustainable over the years; and at some point in time those subsidies will have to disappear (remember hyperinflation).

El Dia reports today that current Bolivian government is beginning to talk again on the need to revise the subsidies to diesel and gasoline; as it would mean a cost of $700 million dollars for 2012. Last year the government tried to raise the price of gasoline by 73% and gas or diesel by 80%, which generated huge violent demonstrations against the government, until those price increases were abolished and went back to the old subsidized prices.

http://eldia.com.bo/index.php?c=Portada&articulo=La-subvencion-costara-mas-de-$us-700-millones-el-2012&cat=1&pla=3&id_articulo=77558

In the past, prices were raised very slowly so the citizens had the certainty that those prices were going up, and engaged in substitution on some goods and or simply cutting back on luxury items. Salary increases somehow also made possible to adapt and cope with inflation and price competitiveness (otherwise smuggling of our goods across our borders, driving prices even higher due to speculation).

What the government of Bolivia intends to do is good, we need to revise our subsidies and we need to stop offering an unrealistic economy, just to justify economic and political policies. For one, Bolivia is no longer a viable exporter of hydrocarbons, both Brazil and Argentina have surpassed us and Venezuela in terms of reserves. Our capacity to capture foreign investment is practically null.

If it is good to revise oil and gas subsidies, it is not good to raise salaries just to keep the society stable (short run). Government just said they will raise salaries for 2012 up to existing inflation rates (which also misrepresent reality of household basket of goods as they included some items that are not day-to-day purchases, like microwaves).

La Razon points out the government estimated inflation for this year at 6%. Whether that is met or not, education and health sectors are asking for increases above 10%. The weakest links along the private sector will have to face layoffs and even bankrupcy if the government imposes higher salary increase, even at 6%. On the other hand, unions and other organizations have learned over the last five years that it there is turmoil, government will have to promise more at a risk of compromising our survival (long run).

The chart above shows figures from 2000 to 2011 for minimum national salaries (yellow bars, in Bolivianos) and salary increase (red line, in percentage). Source: Ministry of Labor.

http://www.la-razon.com/version.php?ArticleId=140432&EditionId=2703

In the long run we’re all death, we’ve been taught, however for the survival of Bolivia we must be competitive, efficient and effective. We could be death over the long run but a country like ours certainly not!