21 Nov The construction workers, the BMW owner, and the price gasoline subsidy
Imagine it’s noon, and you’re comfortably seated in a city square. While enjoying an ice cream, you watch a group of construction workers playing soccer. After a stylish backheel goal, the match ends, and everyone heads off to buy their lunches and sodas from a street vendor. You turn your head and see a sleek black BMW slowly driving by. A young man blasts music at full volume, proudly showcasing his impressive car. You—recalling your economics lessons—think to yourself: “It’s curious how these construction workers help the BMW owner enjoy cheap gasoline; in other words, they’re subsidizing his gas.”
What’s going on here? When you (or anyone else) consume a Coca-Cola (or any other soda), you pay taxes (especially excise taxes). This means that part of the price paid to the bottling company goes directly into government revenues. On the other hand, the government uses these resources (and others) to subsidize the consumption of gasoline and diesel in the domestic market. And yes, that fantastic BMW’s gasoline is subsidized too.
Last week, I was talking to a friend, and I asked him: “Who funds the gasoline and diesel subsidies?” My friend replied, “The State.” I immediately retorted that it’s actually the taxpayers who fund the subsidies—including the construction workers who bought that Coca-Cola. Let’s not forget: are taxpayers (those of us who pay taxes) who finance the government’s expenditures.
The story of the construction workers and the BMW owner doesn’t seem very logical. You might ask yourself why things don’t change. Well, like everything in life, there’s another side to the coin. When gasoline and diesel subsidies are removed, prices almost inevitably rise across the board. Simply put, people panic, and prices go up, causing inflation. And everyone suffers—though some more than others. That’s why this issue of subsidies is a headache in Bolivia and around the world. I encourage you to check out the (sad) news from Kazakhstan on this topic.
So, what can be done? On the one hand, eliminating subsidies is highly likely to spark significant social conflict. On the other hand, maintaining subsidies leads to situations like the one I described earlier and, beyond that, reduces domestic oil production and increases fuel imports. Did you see this week’s news showing that the value of fuel imports was almost equal to the value of natural gas exports? Subsidies also negatively impact the environment by encouraging the consumption of fossil fuels. When energy is cheap, humans tend to misuse it. Remember hearing things like: “When I get home, I turn on the TV just to not feel alone,” “I leave the car running to keep the heater on,” “Did you know Pepe uses gas to heat his pool?” or “I bought a gorgeous 4,000 cc SUV today. No big deal… gas is cheap, after all.”
Paul Krugman, a renowned American economist known for his witty and sarcastic quotes, once said: “If something cannot go on forever, it will stop.” It’s an odd phrase, but I think it helps us understand that subsidies must eventually come to an end. The question, then, is: how do we want them to end? There are two possible paths: 1) abruptly, leading to a crisis, or 2) in a planned and orderly manner. If you, like me, prefer the second option, let me share some recommendations.
First, it must be done gradually. Eliminating the entire subsidy all at once doesn’t help—remember December 2010? Second, if you want to assist low-income families, you can remove the gasoline price subsidy while simultaneously implementing a direct subsidy for the poorest households, as El Salvador did. Third, dialogue, dialogue, and more dialogue—with neighborhood associations, transport unions, and all those who would be directly affected by the change.
Maintaining a subsidy is like putting off a visit to the dentist when a toothache is making life unbearable. You can survive on painkillers, but if the tooth isn’t treated, the only remaining solution will be extraction—possibly involving a lot of pain and tears. Wouldn’t it make more sense to treat the tooth, even if it hurts a bit at first?
To conclude, the General State Budget for 2022 estimates that the subsidy and incentive for hydrocarbons will amount to $689 million, a little over 400 bolivianos per year for every Bolivian citizen.
S. Mauricio Medinaceli M.
La Paz
February 3rd, 2022
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