Comments on ARTURO C. PORZECANSKI The very interesting essay by Juan Carlos Echeverry-Garzón and Verónica Navas-Ospina calls for taking a comprehensive, longer-term view of a nation’s fiscal affairs and specifically for taking contingent public sector assets and liabilities into consideration rather than focusing, as usual, merely on the balance between year-on-year revenues and expenditures. It calls for a broader understanding of fiscal policy, particularly for the need to rally support in the legislature and the judiciary for whatever measures are necessary to improve public finances over a long period of time. This leads the authors to pursue what might be termed a balance-sheet rather than income-statement approach to public finances—a focus on stocks of assets and liabilities rather than on annual incomes and outlays—in order to help policymakers realize that they cannot ignore certain long-term fiscal issues. For example, cutting a budget deficit via a reduction of investment outlays is a decision that might make sense in the short run but that surely can prove disastrous in the long run. And yet many a budget deficit has been narrowed through such penny-wise, pound-foolish policies. To illustrate their approach, Echeverry-Garzón and Navas-Ospina then go through a painstaking calculation of the assets and liabilities of the Colombian public sector as of the end of 1997. In so doing, they discover that both have been understated but that, on balance, liabilities are greater than assets. Thus, the net worth of the Colombian government is not a positive sum equivalent to 62 percent of GDP but, rather, a negative sum equivalent to 70 percent of GDP. The authors estimate that while assets are closer to 162 percent of GDP rather than 140 percent of GDP, liabilities are 232 percent of GDP instead of 78 percent of GDP. The biggest difference is accounted for by pension liabilities, which apparently were hugely underestimated in previous government studies. The authors then review various fiscal reforms now under way, or presented for congressional approval, to deal with a fiscal situation that is unhealthy both in the short term and over a longer time horizon. For example, the taxable base eligible for value-added tax (VAT) is being widened, gasoline prices are being raised, oil association contracts are being modified (to encourage more investment), the revenue-sharing scheme between the central government and the states is being modified, and regional pension plans are being set up. The situation is complicated because the fiscal reforms require the acquiescence of various levels of government and of the judiciary. This excellent essay could be improved in several ways. First, a bit more background on Colombia’s fiscal woes could be helpful for most readers. For example, where and why did the Colombian government go wrong? After all, the public sector in Colombia was known in Latin America for its tradition of conservative fiscal management. The country avoided the hyperinflation of all of its neighbors by preventing the kind of reckless fiscal and monetary expansions that landed the others in hyperinflationary trouble. So why has Colombia been running fiscal deficits in recent years and compromised its long-term fiscal solvency? The deterioration is particularly unfortunate and puzzling considering that the country has nearly doubled its production of oil in recent years and that fiscal revenues have expanded mightily for this reason. Second, readers could use some additional information on how the assets and liabilities were reestimated to yield such strikingly different results, particularly in terms of liabilities. While the authors illustrate the work carried out by focusing on the eventual cost of the pacification process, this particular contingent liability is dwarfed by the reestimation of pension liabilities, which leads to a shocking result. Pension liabilities are by far the single biggest “black hole” in Colombian public finances, yet precious little information is given by the authors on how they computed the dimensions of this hole. Another item that could use some explanation is the quantification of contingent liabilities related to the banking system. Several banks are now in trouble in Colombia, and they are being helped out by the government. International experience suggests that the cost of these bank depositor bailouts is usually much greater than early estimates, and thus the cost estimated here (the equivalent of about 1.5 percent of GDP) could well be dwarfed by the eventual reality. Third, readers could benefit from some discussion on the political realities that confront Colombia in its quest for short-term fiscal balance and long-term fiscal solvency. For instance, what are the prospects for domestic pacification, a revised federal-state revenue-sharing compact, or social security reform? What is a realistic timetable for agreement and implementation of needed fiscal policy changes? Fourth and finally, the authors could usefully expand on the relevance and implications of their stock-versus-flow approach to public finances. For example, if it is true that Colombia’s public sector has a negative net worth of 70 percent of GDP rather than a positive net worth of 62 percent of GDP, what should be done about the path and degree of annual fiscal adjustment? Does this discovery mean that the fiscal targets for the next few years ought to be tightened, such that budgetary balance would be achieved more quickly than now contemplated? Should the government aim for fiscal surpluses in the not-too-distant future? Consider also the unstated implications for the priority and timing of structural reforms. Should privatization opportunities be pursued more aggressively? What about the granting of more government concessions to private investment in infrastructure? And when it comes to dealing with the hefty pension liabilities, does this suggest a more aggressive manpower downsizing policy, or a more aggressive pension reform initiative? Would it be advisable to renegotiate the pension benefits accorded to civil servants? In sum, the link between the long-term stock approach and the short-term flow approach to public finances needs to be established. Until then, the kind of comprehensive reckoning of fiscal assets and liabilities that Echeverry-Garzón and Navas-Ospina have derived will be of limited practical use—a darned shame considering the terrific research work carried out. |