20 Feb Subsidies: “Two Leave, More Arrive”
One of the most beloved characters in South American comics is Condorito, a character created by the brilliant Pepo, a remarkably talented mind born in Chile, a country that brings back great memories from my student days. Condorito magazine featured several secondary characters and settings that made it a unique read: a crocodile sticking out of a window, a painting where the sea “spills” into the living room, and the graffiti of a hanged man with the text “Muera el Roto Quezada”—all these details were a delight to us.
One of the most famous secondary jokes was the hotel “2 leave, 3 arrive,” implying that the quality of the establishment was so incredibly good that for every two guests who left, three new ones would arrive. Naturally, a small exercise in dynamic consistency would reveal that this situation is unsustainable, given the hotel’s limited capacity. However, the literary device was entirely valid, and many remember this anecdote with a smile.
Unfortunately, explosive situations like that of the “2 leave, 3 arrive” hotel are a headache in real life. One such case is the relationship between rising international oil prices and subsidies for diesel purchases—allow me to explain why.
Many consider Bolivia a fortunate country due to its abundance of natural resources. In the past, it was silver and tin; today, it is natural gas. Generally, we are very accustomed to selling grandmother’s jewels to afford daily expenses. So far, this has worked, and it seems it will continue to do so. For this reason, natural gas sales to Brazil (agreed upon, and I never tire of mentioning it, during the 1974–1999 period) currently generate substantial fiscal revenues. Conversely, the outlook for crude oil is not as promising: since Bolivia does not produce enough oil, diesel import volumes remain positive and, even worse, are increasing.
Our situation is, therefore, quite sui generis (one of a kind): we receive significant tax revenue from gas sales, yet we spend a substantial amount of dollars importing (and subsidizing) diesel. This raises a clear question: At the end of the day, do we win or lose when international oil prices rise? We gain because we earn revenue from natural gas exports, but we lose due to diesel import costs. Many friends ask me: What’s the net result?
Well, I did my homework. I present the following figure containing two towers: the first shows the amount of money (and the institutions receiving it) that enters the Bolivian state when the international oil price increases by $1 per barrel, while the second illustrates the amount the state spends on diesel imports in response to the same price increase.
Fortunately, the overall situation is highly favorable: nearly $45 million in gains versus $6 million in losses indicate that gas revenues more than offset diesel import costs. However, as in Condorito’s stories, there is a secondary character who does not fare so well.
This character is called the General Treasury of the Nation (TGN), the flagship institution of the central government in Bolivia. The TGN is responsible for national expenditure, which, of course, include subsidies for imported diesel. In this sense, while the TGN receives only a small percentage of gas revenues (see the black area in Tower 1 of the figure), it covers 100% of the diesel subsidy (see Tower 2). To paraphrase Condorito’s hotel: “One burden leaves, one arrives… and if we’re not careful, more than one will arrive.”
Thus, while Bolivians can breathe easy when international oil prices rise (since natural gas export prices also increase), the General Treasury of the Nation continues to suffer. To conclude, and following Condorito’s tradition, let me sum up my thoughts on this situation in one word: Plop.
S. Mauricio Medinaceli Monrroy
La Paz
February 20, 2011.
No Comments