July 31, 2006

Uribe’s New Economic Reforms Benefit Corporations, Not Colombians

by Garry Leech

The Uribe administration recently announced its intention to implement three reforms that will lead to millions of dollars in additional profits for multinational corporations while promising increased economic hardships for Colombia’s poor majority. In a devastating one-two-three punch, the Uribe government first announced that it intends to partially-privatize the state-owned oil company Ecopetrol and then declared its intentions to slash corporate income taxes while simultaneously increasing the Value Added Tax (VAT) on food basics such as rice, potatoes and chicken.

On July 25, President Uribe announced that the government would sell a 20 percent share in Ecopetrol, despite having promised not to do so during his first term in office. While Uribe did not privatize the company during his first four years, he did restructure Ecopetrol in 2003 in order to meet conditions attached to a $2.1 billion loan from the International Monetary Fund (IMF). The Uribe administration then implemented reforms the following year that no longer required foreign oil companies to enter into partnership with Ecopetrol. While the state oil company had to begin competing with foreign firms for production contracts, it still remained 100 percent state owned.

The proposed sale of a 20 percent stake in Ecopetrol is likely the first step in the complete privatization of the national oil company. The sale of Ecopetrol is just the latest in a series of sales of state assets by the Uribe administration, following on the heels of the privatization of the state telecommunications company Telecom and the state mining company Minercol. However, the partial-privatization of Ecopetrol is not an attempt by the Uribe government to unload a financial burden. To the contrary, Ecopetrol is a significant revenue generator for the government. In 2005, the state-owned oil company earned a record net profit of $1.29 billion after supplying the state’s coffers with $3.23 billion in revenues.

According to Alberto Bernal, associate director at investment banking firm Bear Stearns, the Colombian government will likely earn just over $1 billion from the sale. The one-time payoff, however, will amount to far less than the 20 percent share of future profits that the government will forfeit due to the partial-privatization. Consequently, at a time when high global oil prices have made Ecopetrol a significant financial asset, the Uribe administration intends to hand over this revenue generator to the private sector.

The government is justifying the proposed sale by claiming that it is necessary to prevent the country from becoming a net importer of oil. This argument is fundamentally flawed because previous restructuring and the proposed privatization have ensured that Colombia will purchase increasing amounts of its own oil at global market prices from foreign companies operating in the country. Therefore, whether or not the country remains a net exporter or not is irrelevant from a financial perspective if the government is forced to pay global prices for oil regardless of whether it is produced domestically or overseas.

Three days after revealing its plans to partially privatize Ecopetrol, the Uribe administration announced another reform that would result in a further cut in government revenues. On July 29, the Uribe administration presented Congress with a proposal to reduce the corporate income tax rate to 32 percent from 38.5 percent, which will increase corporate profits while reducing government revenues. The corporate income tax cut will make Colombia an even more attractive destination for investment and exploitation by foreign companies, including those who might be interested in purchasing a 20 percent share of the national oil company.

Included in the corporate tax cut proposal was the government’s plan for offsetting the inevitable loss in revenue. The Uribe administration has called for an expansion of the country’s regressive taxation regime. More specifically, the government has proposed applying a 10 percent Value Added Tax (VAT) to basic food items including rice, potatoes and chicken. According to Polo Democrático Senator Jorge Robledo, the overall tax reform “favors big capital, while expanding the tax base, and considerably increases taxes on a family basket of goods for the lowest-income social sectors.”

While the Uribe administration’s proposal calls for a reimbursement of VAT taxes paid by the poorest sectors, it does not explain how this will be implemented. Such a reimbursement plan is unrealistic given the number of impoverished Colombians who are internally displaced persons or informal sector workers, many of whom no longer have legal documents and are fearful of interacting with the government. Consequently, it is unlikely that many poor Colombians will ever engage in whatever bureacratic process is required for them to obtain their tax reimbursement.

The reimbursement proposal also does not address the fact that many poor Colombians who literally live hand to mouth have no disposable income and yet will be required to come up with the money to pay the VAT up front. Ultimately, Uribe’s proposed tax reforms will only impose more hardships on much of the country’s poor majority while reducing the tax burden of rich corporations.

President Uribe has introduced a plethora of neoliberal reforms since assuming office in 2002. As a result, Colombia has become a favorite of Wall Street investers and multinational corporations, particularly given the fact that many other South American nations are moving away from neoliberalism by reclaiming sovereign control over their economies and natural resources. With these latest reforms, the Bush administration’s closest ally in South America has once again made evident his commitment to serving the interests of global capital at the expense of the welfare of Colombia’s poor majority.

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