For Latin America, Ending Subsidies Is Easier Said Than Done

Cheap wine in Argentina and tortillas and tuition in Mexico, free land in Brazil, discounted gasoline in Venezuela, subsidized electricity everywhere: Such lavish government programs are gradually being dismantled across Latin America.

But it should come as no surprise that it’s politically unpopular to do so. Nor is it a coincidence that tiny Ecuador, a place where subsidies to consumers continue to hold sway, was in the news last week as the continent’s latest economic disaster area.

Ecuador, which has gone broke partly because it kept underwriting the cost to consumers of gasoline and electricity, announced it can’t make a $95-million interest payment on foreign debt due this Tuesday, raising the specter of default on $6 billion of obligations.

To be sure, oil exporter Ecuador suffers from problems other than subsidies, including depressed oil prices, the ravages of El Nino and excessive borrowing. But subsidies may account for as much as one-quarter of its government red ink.

“At the end of the day, subsidies are an important part of Ecuador’s deficit that the government has to deal with,” said Albert Fishlow, a former UC Berkeley economist now with New York investment firm Violy, Byorum & Partners.

Even as most Latin American countries turn toward free and open markets, populist pork-barreling in the form of consumer subsidies continues to plague the Latin American nations that can least afford them.

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Government subsidies are among the last vestiges of the state-controlled economic models that once dominated Latin America.

Although they were sold as a vote-getting boon to the disadvantaged, subsidies more often than not filled the pockets of the middle class or the wealthy, economists say.

Subsidies also add to a nation’s budget deficits, whip up inflation, and distort a country’s economy by hyping demand for goods and services that bear little correlation to real costs of production, said Shane Hunt, a Boston University economist.

Moreover, most studies show that subsidies tend to benefit the wealthy, because they participate more in the economy.

“The problem is that governments are not perfect, and what happens when subsidies are privately captured, the poor end up at the end of the queue. It’s the rich who use more water and the poor who don’t have adequate piping in their houses. It’s a form of regressive spending,” said Nancy Birdsall, a former Inter-American Development Bank executive who is now senior associate at the Carnegie Endowment for International Peace in Washington. Such consequences are why the International Monetary Fund and other global banks have persuaded--or even forced--developing nations to do away with subsidies. Often, the IMF makes subsidy elimination a condition of financial assistance.

And most Latin countries have taken heed. Argentina, which once spent half its federal budget subsidizing various goods and services ranging from wine to railroads, has largely left them behind, said Mauro Guillen, an economist at the Wharton School in Philadelphia. .

“The programs were populist in origin. In Argentina, it all began with Gen. [Juan] Peron wanting to make it easy for the working class to enjoy certain things,” Guillen said. But the subsidies ended up contributing to Argentina’s economic meltdown in the 1980s. “And they made lousy wine.”

Mexico too has eliminated dozens of subsidies since the late 1980s. Earlier this year, the government of President Ernesto Zedillo did away with a controversial tortilla subsidy and closed down the state-owned Conasupo retail chain that sold basic foodstuffs at discounted prices but that had become riddled with corruption.

But some subsidies, especially those enjoyed by well-organized, politically vocal urban groups, die hard. When the Ecuadorean government attempted to reduce its gasoline subsidy this summer, striking taxi and truck drivers brought the nation’s transportation system to a standstill and forced President Jamil Mahuad to back down.

Only last year, Mahuad had succeeded in cutting electricity and cooking gas subsidies, and in doing so saved his government $318 million, or nearly one-quarter of the country’s budget deficit. But the gasoline price freeze that Mahuad agreed to in July could end up adding $100 million in red ink during the next 18 months, on top of about $120 million in electricity and gas subsidies the government is still shouldering.

“Ecuadoreans have grown up with the idea that cheap gas is a birthright,” said Boston University’s Hunt. “Isn’t it ironic that the two most messed up countries in Latin America, Ecuador and Venezuela, received the blessings of petroleum riches?”

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Riots greeted Venezuelan President Carlos Andres Perez’s attempts several years ago to eliminate gasoline subsidies there, Birdsall said. The subsidies were subsequently reinstated and remain in place to this day.

Mexico still subsidizes the cost of water in the capital. Electricity in Mexico’s rural areas is subsidized by as much as 60%, said Hector Olea, president of Mexico’s Energy Regulatory Commission, but the government is trying to reduce that.

Attempts to raise tuition at Mexico City’s National Autonomous University--which, thanks to subsidies, is now virtually free--have sparked a debate on education spending there--and sent 270,000 students out on strike.

The IMF and World Bank have generally opposed free university tuition in Latin America because it shortchanges poor rural schoolchildren who may never reach college and yet must make do with a substandard public grammar school education. Middle-class and wealthy parents, meanwhile, can afford to send their children to private schools.

“Everyone tries to wrap the moral flag around themselves in arguing for subsidies for themselves while ignoring the fact that someone is paying,” said Richard Feinberg, a UC San Diego professor and a former Latin America advisor in the Clinton White House.

Although Brazil has eliminated many subsidies through privatization of state-owned industries, it still spends $800 million a year to help landless poor people buy farms, and shells out tens of million of dollars in an alcohol-fuel program for cars, said Fabio Giambiagi, economist at Brazil’s National Development Bank.

However admirable the goals of social equity and cleaner air, both Brazilian programs have come under fire for being politically influenced and inequitable. United Nations economist Carlos Guanziroli said that wealthy absentee landowners benefit as much if not more than the poor from the land subsidies.

If you must have a subsidy, experts advise, keep it simple.

“The more complications, the more jobs in the bureaucracy, the more opportunity for corruption,” said Hunt.

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News assistant Jose Diaz in The Times’ Mexico City bureau contributed to this report.