In April 2021, Ivan Duque’s administration presented a tax reform bill labeled “Law of Sustainable Solidarity” to Congress. The bill contemplated an increment of the VAT on basic goods in conjunction with an increase in the marginal tax rates on the income of the so-called Colombian middle class. The vast majority of whom earns monthly less than 4,000,000 Colombian pesos (around 1,065 U.S. dollars). Although the bill put on the table contained some crucial elements for discussion, such as implementing a “basic monthly income” of 21 U.S. dollars (by far less than the current minimum wage). It contained little or nothing to effectively tackle Colombia’s high social and income inequality (with an official GINI of 0.526 for 2019).
The tax reform bill was presented in the mid of a severe economic and social crisis that had worsened due to the pandemic and against which the Colombian government has done hitherto little beyond the orthodox recipes. This triggered a general strike and nationwide social mobilizations that have already lasted over more than two weeks without any clarity as to their resolution as yet. The current social protest can be considered a continuation of a general strike that erupted at the end of 2019 and got into a rest due to the pandemic.
Yet, many elements behind the social movement go beyond dissatisfaction with the tax reform bill. Since 2016 after the peace deal between the Colombian government and the FARC, which used to be the oldest and biggest guerrilla in Colombia, the government hasn’t implemented most of the elements contemplated in the peace agreement. Also, although Colombia has had macroeconomic stability for more than 20 years, an indicator such as the official unemployment rate has consistently been above 10%. The level of poverty before the COVID-19 shock was near 32%.
Thus, the following question arises, what does it mean to have macroeconomic stability to the population? A call to think outside the box on what the government can or can’t do must be considered under other lenses. In view of the worsening of the social, political, and economic crisis in Colombia and the need to develop economic policy alternatives to the government’s orthodox position, a group of citizens and academicians wrote the open letter below to respond to those who argue the TINA mantra and believe that there’s a consensus in economics to support tax reforms amidst the COVID-19 epidemic.
Unemployment rate and public spending by COVID-19, February 2021
Sources: OECD (2021); Elgin, Basbug and Yalaman (2021); own elaboration.
FOR A NEW MACROECONOMIC POLICY IN COLOMBIA
BOGOTA, MAY, 5th, 2021
In the media discussions about the tax reform, which the government had to withdraw this week due to the massive citizen protest, the idea was spread that there was consensus among the “economists” and that the country would be better off with this tax reform than without it. After its withdrawal, many say that the new proposal should take up the essentials of the previous bills again, although adding some compensatory measures, as they usually advise, to save face, for as long as we can remember.
Over the last four decades, it has been repeated incessantly and with blind faith that “there is no alternative.” Those of us who sign this letter believe that there are alternatives and that other economic and social policies are possible, such as those adopted by the countries that have best faced the current crisis, including the United States since the recent change of government. For this reason, we would like to make it clear to the public that there is no such consensus, that the vision questioned by the past financial crisis, discredited by the pandemic, and the lack of pluralism in the discipline exclude other interpretations of economic reality and, in particular, of public finances. Concerning the latter, the more realistic analyses have proposed measures other than tax cuts for the rich and fiscal austerity that have been adopted by governments more sensitive to the needs of citizens. To open the conversation and to let citizens know that there are other policy options, and to inform them of their views, we offer the following points for their consideration.
- The tax reform proposal, which despite the euphemisms is neither supportive nor sustainable, treats public finances as if they were the household’s finances or those of the neighborhood grocer. It argues that a country can go bankrupt as a business would go bankrupt, so the State must look for money as a family or a company must look for income. That would be true if the government only spent in dollars, euros, or other foreign currency, but it does not: it also spends in its national currency. Moreover, a country’s fiscal sustainability should not be a problem when it borrows its own currency. As has been known for decades, taxes do not finance the expenditures of a country with a fiat currency and a flexible exchange rate.
- The idea of money as something external to the credit system advocated by our most influential economists is what leads us to believe that the government needs to ask for financing. However, money is a debt and not an external object; there is no reason to continue considering currency as a scarce commodity like gold or silver. As Keynes said, “anything we can actually do we can afford.” The constraint is not financial but one of real resources.
- The tax reform bill disregarded the strong regressive income redistribution that has occurred in the last two decades from wages to profits, despite the fact that it was easily observable in the figures published by DANE (National Statistics Administrative Department) and the Banco de República (Colombia’s central bank). The most visible consequence of this redistribution has been the enrichment of a few and the continuous deterioration of the economic situation and the standard of living of most of the population.
- The lower share of wages in the economy’s income and the fall in the standard of living of the population, which worsened in the last year, are the result of the dismantling of the role of the State as the provider of public services and guarantor of economic and social rights promoted by recent governments, the concentration of property and wealth fostered by their policies and the higher profit margins imposed in particular by large companies in the various sectors of the economy.
- The reform project did not address the underlying problem since it did not touch the growing concentration of property and wealth, nor did it seek to modify the determinants of the income distribution. Therefore, it hardly affected the part of the income received by large landowners and capital owners. The supposed “solidarity” with the pandemic victims consisted of redistributing the remaining portion of the income. Redistributing the income of salaried workers, the self-employed, peasants, and small businesses among informal workers, the unemployed and marginal groups, transferring part of the already low income of the working class and the impoverished middle class to the already disadvantaged sectors.
- Contrary to the orientation of recent governments, the fiscal policy of this and future governments should reduce the margins of banking intermediation in the country, among the highest in the world, as well as the significant market power and the high degree of monopoly of large banks and business consortiums. It should also tax their enormous profits and shareholder dividends so that the government’s social expenditures help improve the distribution of after-tax income and the situation of the vast majority.
- The latest DANE report shows that the number of people in monetary poverty increased by more than three million people in 2020, which many commentators attribute to the pandemic. However, this is not the case as it was not a natural phenomenon, and the policies of previous governments aggravated its consequences. Austerity and sound finance policies, promoted and supported by the supposed consensus of economists, have damaged the economy by restricting effective demand. Poverty and unemployment are of great concern (especially for youth and women); as such are a product of austerity measures that hurt the majority of the population. Figure 1 contrasts the size of public spending to address COVID-19, an embarrassing 2.8% of GDP in Colombia, with unemployment rates in some OECD countries, as of February 2021.
- The policies adopted to face the pandemic affected women to a greater extent, as shown by IMF and World Bank studies. Colombia is no exception. DANE data indicate that the annual unemployment rate for women increased to 19.3% in March 2021. Monetary poverty also affected women more; according to this classification, today, 46.7% are poor, and 17.8% are in extreme poverty. Thus, fiscal policy must be rethought from a gender perspective to address this structural inequality.
- Public employment and universal basic income programs are the basis of a credible plan for the recovery and stabilization of an economy constrained by demand and low utilization of installed capacity. Labor flexibilization policies must be replaced by actions aimed at maintaining full employment in the economy. Agendas to improve workers’ rights and guaranteed employment policies in which the State acts as the employer of last resort should be the basis for reducing poverty and improving income distribution to promote economic reactivation. This should be accompanied by implementing universal and unconditional education and health policies, especially for the country’s youth.
- The most severe current problem is unemployment; it cannot be treated with the microeconomic instruments of the 19th century since it is a monetary and macroeconomic phenomenon and requires the 20th and 21st-century macroeconomics techniques. The State must act as an employer of last resort. Faced with a fall in effective demand caused by the collapse of private spending on consumer and investment goods, the only stabilizing agent is the State, resorting, for example, to a public employment buffer, which acts as an automatic stabilizer. Using DANE unemployment figures, we estimate a buffer model whose results show that unemployment could be reduced from 14.2% to 5.2% of the economically active population in four years. The first year starts with 547,997 female heads of household, and in the fourth year, there would be 2,191,989 female household heads in the system. The salary would be 800,000 Colombian pesos (around $217 U.S. dollars) per month, and the fiscal cost would increase from 0.49% of GDP in the first year to 1.5% in the fourth year. The multiplier effects of the buffer would lead to a 1.5% increase in GDP in the last year and an increase in tax revenues equal to 0.24% of GDP.
- For its part, the fear of losing credit ratings has more to do with panic-mongering to create panic, with no facts to back up that fear. As debt expert Daniel Munévar pointed out, “the bulk of our debt has fixed interest rates […], and there is no reason why they cannot continue to be so in the future if the government does its job well before international lenders, besides the fact that the Treasury has set a maximum limit on amortizations of 8% of the current total amount of debt. In other words, even if we lose investment grade, the increase in interest rates would eventually only affect new debt.” Thus, the domestic policy seems to be determined by the rating agencies, which, worth remembering, contributed to the 2007 global financial crisis through their bad practices. As Srinivas Raghavendra says, “The emerging politics of the present crisis is driven by the coercive power of the rating agencies over the institutions of the state through the delinking of the politics of deliberative democracy from the conduct of economic policy in general and fiscal policy in particular.”
- To think that income redistribution is achieved with greater “economic freedom” is to ignore the history of developed countries, which relied not only on the “market” but also on the use of State policies as a development tool: the country needs industrialization policies and progressive tax reforms. But in the crisis caused by the pandemic, individuals and MSMEs need immediate support to mitigate or remedy their loss of monetary income as well as clear measures to reduce the effects of conventional policies. However, this requires breaking free from dogmas that impede diligence and efficiency.
- Central bankers are not benevolent dictators, nor can they continue to promote the idea that monetary policy is a purely technical matter. As James Tobin put it, monetary policy is a political problem. Whatever they may say, the world’s most important central banks are acting as lenders of first resort to the central government, without in any way denying that the degrees of freedom to finance public spending via central banks must be conditional on the preservation of the central bank’s effective capacity to manage monetary policy in the event of inflationary dynamics.
- In a country with high dollarization of its external assets and liabilities in the context of a deep liberalization of its capital account, such as Colombia, it is necessary to accompany these unconventional monetary policies with measures to control capital flows, certainly in a balanced manner to avoid further destabilization of the exchange rate. These measures go in the right direction in an emergency, and it is pertinent to put them into practice.
To face a situation of public calamity such as the one suffered by 99% of the population, a tax reform is still an irrelevant alternative amid the pandemic and the economic crisis. Citizens should know that there are other ways of thinking and understanding the economy. Among economists, there is no consensus of the entire profession, as was not the Washington Consensus. Only a well-informed citizenry can press for governments to disregard outdated theories and policies contrary to the welfare they promise.
Gonzalo Cómbita Universidad Nacional de Colombia
Mery C. García Universidad Nacional de Colombia
Nohora García Universidad Nacional de Colombia
Alejandro Garay University of Missouri – Kansas City
Cesar Giraldo Giraldo Universidad Nacional de Colombia
Camilo Guevara Universidad Nacional de Colombia
Diego Guevara Universidad Nacional de Colombia
Forrest Hylton Universidad Nacional de Colombia, Medellín
Manuel Martinez Mantilla Universidade Estadual de Campinas, Brasil
Stanley Malinowitz Universidad Nacional de Colombia
Hernando Matallana Universidad Nacional de Colombia
Guillermo Maya Muñoz Universidad Nacional de Colombia, Medellín
Carolina Méndez Pontificia Universidad Javeriana, Bogotá
Laura Moisá Universidad Nacional de Colombia, Medellín
Andrés Felipe Mora Universidad Nacional de Colombia
Fernando A. Morales Universidad de Bio Bio, Chile
Álvaro M. Moreno Rivas Universidad Nacional de Colombia
Manuel Muñoz Conde Universidad Nacional de Colombia
Elizabeth Oviedo Universidad Cooperativa de Colombia
Vanessa Ramírez Quintana Universidad de Buenos Aires, Argentina
Liliana Elizabeth Ruiz Universidad Militar Nueva Granada
Flor Esther Salazar Universidad Nacional de Colombia
Rafael Orlando Suárez Universidad Nacional de Colombia
Carlos Suescún Universidad Nacional de Colombia
Luisa Fernanda Tovar Universidad Nacional de Colombia
Iván D. Velásquez Bemidji State University, Estados Unidos
Pablo Bortz Universidad Nacional de San Martín, Argentina
Sonia López Cerón Pontificia Universidad Javeriana
Juan David Parra Universidad del Norte
Florencia Médici CONICET/Universidad Nacional de Moreno, Argentina
Camila Niño Fernández Estonian Business School Helsinki
Martha Susana Jaimes New School for Social Research, Estados Unidos
Pedro Clavijo University of Utah, Estado Unidos
Carlos Mejía Universidad del Valle
David Cano Università degli Studi di Siena, Italia
Jairo Parada Universidad del Norte
Since its publication on May 5th on social media, the letter has been subscribed by 407 signatures of citizens and academics from Colombia and other countries. Sign the letter here.
Photo: BOGOTÁ, COLOMBIA – 5 MAY, 2021: A protester holds the Colombian flag in a peaceful protest in the framework of the national strike against Ivan Duque government