Month: February 2016

Retirees: A guaranteed market

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I read in La Razon that the government of Evo Morales is thinking about expanding the subsidies for senior citizens in Bolivia (“Renta Dignidad”) by Bs. 50 (approximately $7). However, this increment will not be offered in cash but in kind (consumption goods). In fact, the policy will be designed in such a way that the consumption goods offered in the subsidy are exclusively national or “made in Bolivia.”

Evo Morales claims that such policy kills two birds with one stone. First, it strengthens the internal demand and, second, it provides a guaranteed market for national products.

Let’s point out the obvious problems with this policy:

  1. The government of Evo Morales has been loudly arguing that the apparent success of the Bolivian economy in recent years and its apparent strength against adverse international conditions resides on the strength of its internal demand. But that is only a political slogan. The truth is completely different. The supposedly strong internal demand has been always fueled by policies identical to this one for senior citizens. The government collects important revenues from natural gas exports, which it then redistributes to different groups of the population (subject, of course, to massive amounts of inefficiencies and corruption), who then turn to local markets demanding product and services. In other words, the internal demand has absolutely no intrinsic or “internal” strength. The minute the government stops collecting large revenues from natural gas exports, the minute the internal demand will stop on its tracks. The Bolivian economy does not have a strong internal demand because it does not have a strong internal supply. It all comes from the redistribution of natural gas exports (and, of course, drug trafficking money laundry).
  2. Imposing local groups to buy national products is a tremendous mistake. Of course it guarantees a “market” for national products but that is precisely what you don’t want to offer to any industry, national or foreign. With guaranteed markets there is no competition and, therefore, there is absolutely no incentives to improve products, reduce prices, etc.
  3. Economists have long shown that cash transfers produce always better results because individual consumers have the ability to maximize their idiosyncratic preferences.

 

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