Colombia’s Crisis Is a Warning
(Bloomberg Opinion) -- Over the last two weeks, protests against a tax reform proposed by the Colombian government have left dozens of people dead, injured hundreds more, and brought much of the country to a standstill. At least 15 people have been killed in Cali, Colombia’s third-largest city, where more than 10,000 troops and police officers are fighting rioters who’ve barricaded the main highway, burned buses and attacked police stations. The violence threatens the stability of South America’s second-most-populous democracy and a key partner in the U.S.’s war against drug trafficking. It also underscores the urgent need to help Latin America return to growth and bring the pandemic under control.
The coronavirus has devastated Colombia’s economy, which had been the fastest-growing in South America. In response to the outbreak, President Ivan Duque imposed a strict national lockdown while introducing a program of direct aid payments to 3 million poor households, including 1 million without bank accounts. Those measures have largely failed to alleviate the country’s suffering. Its economy contracted by 6.8% in 2020, pushing some 2.8 million more Colombians into extreme poverty. The share of the population considered to be middle-class has shrunk to 25.4%, the lowest in a decade.
The reform bill sent to Congress last month would have made the monthly income subsidy of about $44 permanent and offered it to an additional 1.7 million Colombians. To offset the costs and preserve Colombia’s credit rating, however, Duque aimed to increase tax revenue — which is among the lowest as a percentage of gross domestic product of any OECD nation — by requiring more middle-class households to pay income taxes. The plan also expanded levies on carbon emissions and eliminated exemptions to the value-added tax that largely benefited the affluent. An array of trade unions, students, farmers and truckers took to the streets in protest, clashing violently with police, blocking highways, and causing nationwide gasoline shortages.
In response, Duque has withdrawn his original plan and accepted the resignation of his finance minister. Yet that’s done little to placate the protesters, who’ve been further inflamed by the lethal response of the security forces. With presidential elections set for next year, disaffection with Duque is boosting leftist opposition leader Gustavo Petro, an ex-guerrilla who has expressed admiration for the late Venezuelan strongman Hugo Chávez.
Colombia’s turmoil reflects a wider crisis. Throughout Latin America, low vaccination rates and a surge in Covid variants have prolonged the pandemic and forced governments to maintain high levels of public spending, even as tax revenue has plummeted and growth remains sluggish. That has in turn worsened fears about the region’s unsustainable debt load, and forced governments to choose between cutting off much-needed aid or risking a painful backlash from investors.
So what can be done?
The first step is to recognize that a pandemic is no time for belt-tightening. Addressing widening budget deficits, as Duque tried to do, surely makes sense in the long term. But at the moment, it only risks fanning anti-government frustration and strengthening the populist revolt. Duque is right to scale back some of his proposed tax increases and meet with protest leaders — but he shouldn’t capitulate to all of their demands, which have grown to include calls for a universal basic income and a halt to coca eradication.
The U.S. and other rich nations could help to make this choice easier by promoting the region’s economic recovery and accelerating the distribution of vaccines to the hardest-hit countries. At its meeting next month, the board of the International Monetary Fund should approve the issue of special drawing rights to assist struggling nations. Over the longer term, economic assistance should focus on helping governments fight tax evasion and improve living standards for workers in the informal economy.
The unrest in Colombia is a reminder of the economic pain afflicting tens of millions across Latin America — and a warning about its potential consequences. It’s in the interests of the U.S. and its partners to help the region’s economies start growing again.
Editorials are written by the Bloomberg Opinion editorial board.
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