More taxpayers... from everywhere?

Politicians and bureaucrats design together objective tax rules that are enforced in the same way across the nation, but still there is some room for discretionary enforcement of the tax system: the effort of tax officials can be addressed more to some sectors or specific regions, and the public propaganda against tax fraud can be also focused.

So the expansion of the tax base, in number of taxpayers, is basically a
partisan-driven policy.

In the period examined here (1997-2005) Peru lived two different regimes: from 1997 to 2000, a weak authoritarian regime ruled by Alberto Fujimori, who felt in an spiral of corruption scandals in 2000, and the opposition leader Alejandro Toledo was elected in 2001.

The Peruvian tax base collapsed in 2000, in the midst of sudden corruption scandals: I observed the same for Spain during 1993-1995, but in a slower way. In Perú, the tax base also quickly grew after 2000, as the incumbent changed. In Spain, taxpayers gained inmediate confidence in their tax administration the month after the Conservative took the power instead of the Socialists. In both cases, the opposition party leaded a campaign focused in corruption scandals.



In general terms, the Fujimori regime during the 1990s was a period of undoubtless macroeconomic stability, but the long-term impact of Fujimori's neoliberal economic policies is debated. Studies by INEI, the national statistics bureau, suggest that they carried high social costs; they acerbated the already high rates of poverty that plagued Peru at the start of his presidency and led to a deep recession from which the economy has yet to recover. [5] [6] Fujimori's supporters, however, disagree with this assessment, because studies from APOYO (a peruvian research center) has shown that the extreme poverty has fallen to half in the Fujimori period. (Source: Wikipedia)

Alejandro Toledo leaded the corruption charges against the Fujimori regime, and he was elected in 2001. At the beginning of his mandate, he had a 58% of approval, but the mandate was plagued of political turmoil and strikes, and a poll in February 2005 gave him just a 10% of approval, compared to a 88% of disapproval. He has become the more unpopular president in Latin America history, much more than Alán García - who collapsed the economy a 40% at the end of 1980's.

Many people joined its party Perú Posible looking for a job, despite the leitmotiv of the incumbent was to break with a past of clientelism and corruption. Protests and internal dissent forced Toledo to began a process of positioning partisan members into the public service. But nor the macroeconomic bonanza neither the strategies to play the patronage card and to gain consent have stopped the revolts:

"In June 2002, the southern city of Arequipa was paralysed for a week by strikes and riots in protest of the privatisation of two regional electricity generating plants, the largest civil unrest in Peru for fifty years. The government had underestimated local resistance and was forced in the end to rescind the privatisations. The affair sent a clear message to the Toledo administration that its policies are highly unpopular. Despite macroeconomic growth (4,9% for 2002), Peru remains very poor indeed, with more than fifty percent of the population living in poverty, and fifteen percent in extreme poverty." Source: Wikipedia

Coming back to the original point. The incumbent basically keep the tax base by department at the same level during the Fujimori mandate, it collapsed in 2000, and it grew steadily during 2001-2005. The level of collapse was different by departments, and there is also a lot of variation in the number of new taxpayers' growth. Why?

Tax Incidence in Peru (II)

Tax incidence on taxpayers may differ across regions but, are taxpayers equally spread accross the country?

The table below shows how only 5 departments (and 1 strange case) are over the average level of taxpayers/population (12%).

But, surprisingly, another 8 departments with around one million of inhabitants have an extremely narrow tax base (Cusco, Lambayeque, La Libertad, Junín, Piura, Ancash, Puno and Cajamarca). It is easy to identify two groups: those around Cusco, in the Andean dorsal, which are montainous and with rural economies; and those in the North coast, from Lima to the Ecuador's border, these are undertaxed populations.

Among the departments "over the line", let apart Lima, the rest of departments (Arequipa, Moquegua and Tacna) are all overtaxed and near the Chilean border (all this region is known for their mining wealths).

So Lima's contribution to the national burden comes to barely a 90% of total revenues. Lima's taxpayers represent 58% of total tax base. But Lima's population represents 32% of total Peruvians. Why?

Lima 90% of total tax revenue 58% of total taxpayers 32% of total population

There are two forces that causes this distribution of the tax system:

a) Inequality. The assets are unequally distributed. Those in the Metropolitan area posseses much more resources ($/capita), but also corporations and other taxable agents have their fiscal address in Lima. That's the explanation for the 90%.

b) The Poor don't pay. Tax systems around the world avoid to tax poor people, for ethical (poor should receive, not pay) and technical reasons (a Cost-Benefits Calculus: monitor the poor is more expensive than the quantity to extract them).

The problem is that we are assuming that the proportion Rich/Poor out-of-Lima is higher than in Lima, and it is not necessarily true.

Tax Incidence in Peru (I)

I supposed that Peruvian politicians had been influenced for decades by wealthy groups to favor them in fiscal terms. For example, local industry would be in some way protected despite the international pressures to open borders. Some transactions would be undertaxed, as well as some kinds of personal or corporate revenue.

But I also suspected that governments would increase their tax revenue despite their allies when they run severe fiscal shocks , for example, the 1988 Peruvian economy collapsing at an annual average of -33%.

Before that, I need a national spectrum of the Peruvian tax state. Below you can find a map that I made using official data from the SUNAT (Peru's tax agency).

Source: Real Own Elaboration :-)

In clear terms, a citizen of Lima department paid 13.600 Nuevos Soles during 1997 in taxes. This citizen only paid 12.500 NS at the end of 2004. Meanwhile, a citizen in Arequipa, the second city of Peru, industrial, paid a 43% in taxes compared to a Limeño 1997, or just 32% in taxes in 2004.

The most striking point is that a 33% of those departments were taxing less than 10% per capita of the level taxed in Lima. The few coastal departments, where there exist some industry, better communications and the bourgeoisie lives, have a modest, but significant, level of tax incidence.

Surprisingly, economic growth and national macroeconomic development in the last years of 1990's and early 2000's didn't translate into a deeper presence of the tax state into the hinterland. Barely elsewhere tax incidence fell comparing to Lima's per capita tax revenues: tax incidence continued falling in 17 of 23 departments compared to Lima (1997-2005). In 2 departments it kept constant, and in 3 it grew.

There are many hypothetical reasons for these numbers, that I summarize here:

• Changes in trade taxes could affect mainly to export-led regional economies, or those which import a lot from abroad.
• Economic and demographic transitions (in eight years): rural to urban migration, economic and industrial transformation, arrival of foreign corporations -privatisation- to the capital.
• Broadening of the tax base: from 1,6 milion of taxpayers in 1997 to barely 3 milions in 2005. These new pockets of taxpayers could enter regionally biased in the tax system.
• Tax capacity out of Lima progressively damaged, or vice versa, Tax capacity in Lima improved.

In any case, Lima department concentrates 89% of total tax revenue in 2004. So, the question changes:

a) is Lima the real core of the Peruvian tax system because a 90% of the wealth is concentrated here, or...

b) is this in that way just because Peru doesn't have tax capacity for monitoring and taxing its citizens in far, less developed departments, or...

c) it doesn't have real political incentives for taxing indigenous' business and economic activities? (there is a long story of peasant revolts in those Andean provinces from XVIIth century to the last months).

Readings (I)

I have reading for a while Blood and Debt. The argument of the book is quite convincing, namely the war wasn't a state-building driven force in Latin America because a set of of variables reduced intercountry wars. More detail on the complexities of the argument tomorrow...

The readings for next week are quite varied and interesting:

Caballero, Gonzalo (2001). Los fundamentos institucionales del "milágro económico" español. 1950-2000. Teoría y evidencia.
This awarded and recent thesis could be interesting to see parallelisms between the development of the State in Spain and in Latin America, from the 1950's onwards.

Goldman Sachs (2004). Growth and Development: The Path to 2050.
The George Soros Foundation and a set of mainstream economists are behind this work plenty of policy recommendations. It's the mainstream answer to the failure of the Washington Consensus, a new Trento Concilium with a summary of the economic and policy evidence of the last ten years. Interesting.

Lowenthal, Abraham et alter (1986). Armies and Politics in Latin America.
A classic on the role of the military in Latin American Politics. A must read.

Balcells, Laia. (2004) Trade Openness and Preferences for Redistribution. Can we Support the Compensation Hypothesis?
A promising work by my colleague that questions much of the conventional wisdom on trade openness and state growth.

Stern, Steve J. (1987). Resistance, Rebellion, and Consciousness in the Andean Peasant World. 18th to 20th Centuries.
A seminal work on the topic of participation of the excluded masses in the political arena. A must read to explain tax strategies.

Eckstein, Susan. (1989). Power and Popular Protest.
In line with the last book.

Grugel, Jean (1995). Politics and Development in the Caribbean Basin.
A guide for an outsider. The same for Politics in Jamaica (Payne) or The Democratic Revolution in Latin America, by Howard Wiarda.

Rodriguez, José A. y Ámgel Fernandez Prieto (2003). Fiscalidad y Planificación Fiscal Internacional.
This book have a program to simulate international variations in taxes. It can be useful to experiment with the topic of tax competition.

Wright, Angus and Wendy Wolford. (2003). To inherit the Earth. The landless Movement and the Struggle for a New Brazil.
Someone recommended me this book for a different approach to those sectors out the legal market.

Also a list of 33 papers have been added to my readings list. The authors include classics on politics and elections, tax analysis, country and regional narrative stories and research works on the development strategies from 1950 onwards. They cover a good part of the field.

Stand on the Shoulders of Giants: 142,000 entries for Latin America

There are many ways in life to take decisions. But right decisions require of special care and reflexion: who can be a best director than Adam Przeworski for a Latin American political economy topic? No one.

If you put the word "Latin America" in Google Scholar, his seminal book Democracy and the Market appears in first place. More than four hundred respectable authors cited him in their works. Apart from being an excellent person, he is one of the best of the world in his field. It would be a privilegue to be accepted by Adam, and I have the intuition that he will accept.

Stand on the shoulders of giants to reach a higher sky.

Diarios de Motocicleta

Ernesto Guevara, a young idealist student in Medicine, and Alberto Granado, a biochemist whose taste for the pleasures of life overcomes the idealism of his brother-friend, embarked on a thousand-of-miles travel across the core of South America.

They left their bourgeois lives in the acomodate Buenos Aires of the 1950's to face the miseries and exploitation of the weak, in any form and number, in any country, city, farm, mine or jungle they found. The marginalization of those who can not defense themselves is overrepresented in the case of the Peruvian camp of lepers. Those who are severe ill are separated from the rest, also marginated from the rest of the world in the jungle. But they are doublely separated by the Amazon shores from the less sick persons, underlying the "no-limits" of injustices.

The main problem in the film is that Guevara adopts a role similar to Jesus. He traveled accross mountain and deserts, in misery, meeting poor people that increased his compassive nature for the Human being. He tried to sane the ill, to give love to those that felt alone, to be honest all the time, to keep him loyal to his principles until the end. He becomes a mesianic figure in the middle of the film, and it can be quite irrealistic. Fanatism is not unveiled, meanwhile politics appears as a secondary topic in the script.

But this film is noteworthy for many reasons, especially those more anthropological related to the way humans react to injustices: according to their resources and skills. Indirectly, one can conclude that only those individuals who accumulate the abilities and resources to overcome situations of injustice, would do it. By contrast, the majoritarian rest will remain silent, trying to find alternative paths of survival inside the system.

Consent is a strategy not only for those privileged by the social equilibrium, but also for those unable to construct an alternative and fight for it.

Those dirigents willing to change the nature and dimensions of the government they rule would find surprising allies among those who apparently express consent, while the case of those who will oppose for sure to changes of the status quo are quite more easy to identify -through an analysis of those who lose privileges.

Blood and Debt: War an the Nation-State in Latin America

I discovered this book some months ago, but I finally found it yesterday at March library.
Miguel Angel Centeno did an enormous work of five years for concluding his opera magna about state-building in the Latin American region. The book, for me, is a marvelous starting point to construct my entire doctoral thesis, so you can imagine the way of happiness I'm living these days while I'm devouring the pages of Blood and Debt: War and the Nation-State in Latin America.

Despite the fact that the book asks to the role of wars in configuring the Latin American states, or, in absence of them, giving an explanation to the weak form of the Latin American present countries. The war, Centeno Says, is a chance, not the motor, of the growth and strenght of the modern State. Only if there exist a class alliance between dirigents and some powerful class, war is taken as an opportunity to gain some efficiency changes that endures in the after-war. Think on female voting, direct taxation, social policies and other forms of State growth. But interstatal war also need the capability to support a prolongued war, and for this the state has enormous fiscal needs, that should be present before the war in some developed form of centralized bureaucracy. War doesn't give the gift of State growth per se. It needs of institutional prerequisites.

In fact, the author suggest that most of the peaceful periods in the region-in terms of continental peace, not civil wars- are more consequence of inability to engage total wars or to assume the political costs of prolongued wars -just boundary clashes had taken place in recent history. Comparatively to other regions, the Latin American region is barely unarmed, and scarcely prepared to engage in wars against neighbours.

I will continue on that tomorrow... :)

Nationalism and prospects for political change in China

Mario Esteban worked on Chine for three years, and complete his Ph.D. thesis a year ago, about the mechanisms the Chinese Communist Party chose to hold the control of the emerging superpower, specially after the Tiannanmen Crisis.

His argument is in some way well constructed. He argues that Chinese elites chose to woe nationalism to focus the attention on the path of incredible growth and development of the last years. Racial arguments and cultural superiority compound the bulk of the nationalist discourse. But, in general, it is a moderated nationalist ideology, investors-friendly and easy-to-hear for the emerging middle class in the coast.

At the same time, a reivindicative, aggressive nationalist discourse emerged from the factions in the CCP who are outside the technocratic government (he clearly distinguished between the regime and the goverment, despite the fact that in authoritarian environments, this kind of distinction is not so obvious for the citizens). In any case, the second kind of nationalism is somehow imperalistic, and it is constructed against the 'other' (Japan and EEUU, basically). It does let to compare goverment actual performance with an ideal defense of the interest of China, and let to formulate criticisms 'inside the system'.

Because, despite the fact that individual criticism is tolerated and attended in China, any form of organization to articulate criticism is condemned and repressed. But, in general, the author seems to deal with China as if the country was a Western one, with all kind of Human rights protections.

The big argument is good, but the author focuses his attention in the apparent stable legitimacy of the regime, when the real question is if the Chinese goverment, and regime, would survive to an economic crisis that has to occur in a near future.

Modern Political Science says us that the survival of authoritarian regimes is severely damaged when things go down (Przeworski and Limongi), and, also, that the apparent different discourses in the nationalist topic seem merely argumentative forms of the real cleavage: the growing differences, and inequality, between the rural world and a capitalist, dinamic pole of development in the coast.

The paper can be found here...

Another President Resigns

The Bolivian president Carlos Mesa resigned today, after a strong opposition in some big cities and announced road cuts and demos for today. Twelve months after the fall of Sanchez de Lozada, angry oppositors forced the fall of the Bolivian president for similar reasons: the rejection to the control of privatised corporations by foreign enterprises(the French Suez in water supply).

One of the best students of IMF receipts during the nineties is now at the edge of civil unrest. The macroeconomic picture continues being quite appropiate (low inflation, continued growth, an effort in debt reduction, fiscal responsability, etc), but the numbers are defied by the potential advent of a crude social war.

Fixed Assets: When Politicians Have the Upper Hand

Historically, many Latin American gov's have taken most of public revenues from fixed assets like petroleum, gas, minerals or other natural resources. Venezuela is the archetypical case, with about three fourth of public revenues coming from Petróleos de Venezuela. The answer is easy: stones don't vote.

After the crisis that overthrowed Sanchez de Lozada from the Bolivian presidency, the new cabinet is enlisting a law to frame the explotation of their inmense gas resources -second biggest in the continent- by some foreing companies. A recent analysis in Financial Times (March 3) depicts well the case:

But production has been frozen since then while companies waited to see the results of Congress's deliberations. Whatever the details on taxes and royalties, the bill likely to be approved is unlikely to persuade foreign gas producers to invest more in the country.

The most modest proposal in the lower house is for the maintenance of royalties at 18 per cent and introduction of a new tax of 32 per cent. The most radical aims to increase royalties to 50 per cent on top of existing taxes.

Big investors are saying they will not comment until they see the final bill, but they are privately concerned about the proposal. Analysts say small fields could be closed and investment frozen in larger fields, although none of the bigger companies is likely to pull out.

Taxing natural resources has become an extremely popular source of revenue everywhere, as well as a big source of fiscal irresponsibleness and revenue insecurity for the Ministros de Hacienda or de Fazenda in all those countries.

Because stones don't vote.

Losing my Religion: Last Latinobarometer

Latin Americans are losing the confidence in their democracies. The last Latinobarómetro showed that the third wave of democracies are losing adepts everywhere, but the authoritarian regimes are not more preferable instead. Scepticism is spreading everywhere, not because people feel that democratic politicians steal more or less than the previous caciques, but because the expectations are clearly blurred daily by a crude reality.

Citizens in those countries are growingly disatisfied with the results of their democracies. Their states seem unable to produce redistribution, despite the fact that the median voter is a really poor voter, and he would demand that kind of policy. Growth is not translated in compensatory policies. Banks and big corporations control a wider segment of the economy, while the rich remain safe inside their "domos" -walled wealthy districts-...

All the negative shocks derived from globalization (more trade & capital freedom) are damaging the confidence in the system. Think on Argentina 2001. But these crises seem reversables.




No one escapes to the downfall of the confidence in public institutions. But the demo-sceptics grow quickly where poverty is higher, as anyone would predict.

Lula's Samba: Expropiate the rich while you smile to Standard&Poor's

In 2002, Lula's fiscal policy beated any optimistic expectation gaining a 4,6% of budget surplus. A wave of international analysts have quickly gained confidence in the Brazilian administration to overcome the huge debt of the country... as quick as they have lost it some years before. Brazil country-risk premium is falling now to levels before the debt crisis, but the new tax policies implemented by the .gov are gaining strong opposition in the streets, and specially in the federal congress.

Lula's administration tries to shift the weight of the tax burden from salaried employees to farmers, professionals and self-employed, but the House has the key to put working that revolutionary new legislation.

Growing Inequality in Latin America?

According to the article in the Economist, the Latam region show deviant figures in the evolution of inequality. Some major countries living political shocks performed badly in combatting injustices (Argentina, Peru, Venezuela), but the Brazilian giant reduced something its traditional gap between riches and the poorest, thanks to the investment in education during Cardoso presidencies. But reductions are really ridiculous, compared to the increases among the bad students. Another decade lost...

The Economist's article is somehow optimistic. Despite the numbers invite clearly to pessimism, the researchers at the World Bank seem to have the intuition of being at one step of closing the Pandora's box forever, and the key has a magical name: institutional reform.

"The key to reducing inequality in Latin America is institutional reform," said Guillermo Perry, the Bank's Chief Economist for Latin America and the Caribbean, and co-author of the study. "To overcome the inequality that undermines their efforts to get out of poverty, poor people must gain influence within political and social institutions, including educational, health and public services institutions. To enable them to achieve such influence, the institutions must be truly open, transparent, democratic, participatory - and strong."

That's the magical receipts that the WB uses to spell, with less results than Mr.Potter in his first year course at Howgarts. Economists tend to conclude in such utopias. So it would be easy to do it better...

The 'Inequality in Latin America and the Caribbean: Breaking with History?' document can be read and downloaded from the World Bank online library.

A New Ithaka: Changing the destination of my research

After my encounter with Przeworski, it was clear to me that I lacked from a good intuition in my early research proposal. The big question was not about the way tax systems were developed in Latin America -economist did a good econometric job locating explanatory variables- but about those cases that are deviant from the expectations. Brazil tax more than any model would predict, and Bolivia tax a ridiculous segment of its economy, contrary to the econometric calculus.

Why does the rich segment accept to finance the state in some countries, but not in others?

In extremely unequal countries, their massive appropiation of the wealth resources makes them afraid from the dispossessed masses throughout the democratic mechanisms. The median voter is a poor voter, but democracies did very little to reduce inequality.

Neither development nor democracy has served to reduce inequality much. Crucially, access to land and to education was very unequal in most Latin American countries in the late 19th century, when the economic returns to these resources were very high. Subsequently, authoritarian politics tended to lock in inequalities.

The Economist (Sunday, 6th march 05): "A Stubborn Curse" (register)

So a big shift in the research took place that january. From the neutral, empirical research of variables that accounted for variations in the taxes collected by developing countries, to a more analytical focus in the agents and strategies that are behind those apparently natural changes.