Commentary: Wealthy get subsidies in Latin America

Here's an interesting proposal for cash-strapped Latin American countries: Take advantage of the world financial crisis to put an end to massive subsidies to the rich, and use that money to help the poor.

I first heard this idea a few months ago in an interview with Marcelo Giugale, a senior World Bank economist specializing in Latin America poverty reduction strategies. Since then, Giugale has been touring the region spreading his seemingly simple but politically radioactive message.

It goes more or less like this: For decades, most Latin American countries have maintained "universal subsidies"' for gasoline, electricity, water, college education and many other services that are handed out to all their citizens, regardless of their capacity to pay.

In Venezuela, gasoline sells for 12 cents a gallon – cheaper than a liter of bottled water – regardless of whether you are poor or a millionaire. About 44 percent of the $12 billion spent by Venezuela in oil subsidies every year goes to the richest 20 percent of the population. The subsidy amounts to two times what the government spends in its social programs, according to World Bank estimates.

In Mexico, the government spends $7.6 billion a year in subsidies that allow college students at state-owned universities to get a free education, regardless of their capacity to pay. Fifty-one percent of that money goes to the richest 20 percent of the Mexican population, the World Bank figures show.

Most of these subsidies were adopted more than half a century ago. They have helped millions of Latin American poor rise to the middle class, and to stay in it. That has made it politically difficult for governments to dismantle them.

But now, things have changed dramatically, Giugale says.

Thanks to technological improvements, governments can use meters at people's homes to find out whether residents are using water to bathe, or to fill up their swimming pools. And the quality of household surveys has improved, allowing governments to know who can afford to pay for public services.

Because government budgets are strained, this means that poor children are deprived of vaccines, books or even food so that rich adults can pay less for a car ride, a hot Jacuzzi or a college degree, he said.

"The global crisis is a unique opportunity to stop this distributional madness, and to focalize these subsidies," Giugale said. "Who, today, can be against charging the wealthy for the real cost of the electricity they consume?"

Asked how governments could target their subsidies, Giugale said that in the cases of water, electricity or natural gas, you set a subsidized-consumption average for a household's basic needs, and eliminate subsidies for whatever use exceeds the average. If you want to fill up your swimming pool, you pay a full price for your extra water consumption.

In the case of gasoline, you can subsidize public transportation, and reduce subsidies to cars, or planes. In the case of college tuition, you guarantee education for all, but force those from higher-income families to pay, either while they are in school or after graduation.

Overall, Latin Americans spend between 5 and 10 percent of their gross domestic product in subsidies, and a good rule of thumb is that at least a third of those subsidies goes to the richest 20 percent of the population, Giugale said.

"That amounts to triple the conditional cash transfers to the poor that have been fashionable in the region in recent years,"Giugale said. "The unfolding global crisis, with all its associated pressures for public action, is an excellent time to end this practice."

My opinion: Many middle-class Latin Americans reading these lines will say it's easy for a World Bank economist sitting in Washington, D.C., or for a journalist living in Miami to advocate cutting subsidies in Latin America.

I agree – and so does Giugale – that there is nothing wrong with subsidies. But when a sizable part of these subsidies is captured by the richest 5 percent of the population, in countries with high poverty rates, it's morally wrong, and economically senseless.

When I visited China and India, I could not help thinking that if communist – and socialist-ruled countries ask their college students to pay tuition unless they can prove that they can't, there should be no ideological obstacles for Latin American countries to do the same.

The current crisis could be a great excuse to cut their subsidies to the rich, and spend more money for the poor.


Andres Oppenheimer is a Latin America correspondent for the Miami Herald, 1 Herald Plaza, Miami, Fla. 33132; e-mail: aoppenheimer@miamiherald.com.