Security, violence and fiscal policies in Latin America

Security is not only a public safety problem, but also a real economic problem. How can conditions improve in Latin America?

03/10/2018

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Eduardo Salido,

Public Affairs and Policy Manager, Telefónica

Violence is a central theme in Latin American popular music. Films and paintings portray well-known tragedies affecting Latin American societies. Art imitates life according to the 2017 Latinobarómetro since Argentinians, Mexicans and Panamanians declare public safety their number one problem. It is second on the list of citizen concerns in Colombia and Venezuela, just behind supply issues in Venezuela and the peace process in Colombia. Violence, crime and insecurity are the region’s main issues ahead of unemployment, economic problems or inequality.

According to data from the Brazilian think tank Igarapé Institute, 33% of all homicides in the world take place in the region, which is home to just 8% of the world’s population. Of the 20 countries with the highest homicide rates, 17 are in Latin America, where 43 out of the world’s 50 most violent cities are located. For every 100 000 inhabitants in Latin America, 21 are murdered, while the world average is seven. In the last decade, the homicide rate in Latin America increased 3.7%, while the population grew 1.1%.¹

Security is not only a public safety problem,² but also a real economic problem. Macroeconomic data (see Figure 1) confirm that violence cost 3.5% of GDP between 2010 and 2014, which represents an average of USD 300³ per year for each Latin American, double the cost of the world’s most developed regions.

Figure 1: Average cost of crime

Existing public policies aiming to tackle violence have not worked as hoped. So, in the design of new fiscal and regulatory policies, policy makers should develop the tools that effectively tackle violence and mitigate its impact on the economy.

On the regulatory front, we have seen different proposals and policies, including one to give the private sector centre-stage in terms of security. In recent years, initiatives to intercept communications in the telecommunications sector, where operators may be required to disconnect or restrict access to their networks for instance, have become common in different Latin American countries. The orders may block services and content or restrict data bandwidth, degrading the quality of services. Not only mobile network operators suffer financial losses due to the suspension of services and damage to their reputation, but also local personnel may face pressure from authorities and suffer a backlash from consumers and other relevant stakeholders.

In some countries, fiscal policy has been an important element of the initiatives to tackle security problems. For instance, two new taxes were created in El Salvador in 2015: (1) the Special Contribution for Citizen Safety and Coexistence,⁴ a specific tax that imposes a 5% levy on mobile services, and (2) the Special Contribution to Major Contributors for the Citizen Security Plan⁵ that applies a 5% rate on net revenues of companies with incomes greater than USD 500 000. This increased the fiscal burden of companies in general and those particularly in the telecommunications sector to 33%,⁶ when average fiscal pressure in El Salvador barely reaches 18%.⁷

These examples illustrate a need to establish a more coherent fiscal policy that seeks to broaden the base of contributors to face complex challenges like security in the region. The search for “special” contributors through the creation of specific taxes distorts consumption and investment decisions, generating further inefficiencies in the economy that may render the security challenge even more complex to tackle in the long-term.

There is no doubt that these issues require institutions with adequate resources that can administer justice and carry out public policies that face security and violence challenges effectively and efficiently. While the average fiscal pressure exceeds 34% for OECD countries, it currently averages 22.7% of GDP in Latin America.⁸ ⁹ At the same time, the Latin American telecommunications sector supports a tax burden 51%¹⁰ higher than the average of all industries in the region. This asymmetry is not seen elsewhere. Globally, the sector contributes only 11% more than the average of the economy overall.¹¹ These distorting sector-specific taxes are nevertheless a recurrent source of public revenue affecting both the industry and consumers.

So, what are the alternatives?

In the design of new fiscal policies, states should seek to expand the contributor base through general taxes that integrate all economic players, avoiding industry-specific levies and also integrating new market entrants into the fiscal base. Many new actors are often not locally established and do not have the same obligations as businesses with a local presence might have. This asymmetry is significant in the current environment. It implies a fiscal gap, potentially eroding the state’s ability to tackle these complex issues. In this sense, a study by the Chilean think tank CLAPES concludes that Latin American states fail to capture nearly USD 1.9 billion annually in direct and indirect taxes.¹²

This implies important challenges for the region’s governments, which recognise digitalisation’s potential to promote economic growth. Broadband increases productivity and competitiveness, promotes the creation of companies, increases foreign investment, and encourages the creation of employment and wage improvements.¹³ ¹⁴

¹^{Igarapé Institute. Citizen security in Latin America: Facts and Figures}^{https://igarape.org.br/wp-content/uploads/2018/04/Citizen-Security-in-Latin-America-Facts-and-Figures.pdf}

² ^{Latino Barómetro 2016}

³^{Igarapé Institute. Citizen security in Latin America: Facts and Figures}^{https://igarape.org.br/wp-content/uploads/2018/04/Citizen-Security-in-Latin-America-Facts-and-Figures.pdf}

⁴ ^{https://www.asamblea.gob.sv/decretos/details/195}

⁵ ^{https://www.asamblea.gob.sv/decretos/details/194}

⁶^{Inclusión Digital y tributación en el sector móvil de El Salvador.}^{https://www.gsma.com/latinamerica/wp-content/uploads/2017/05/GSMA_El-Salvador-Spanish_WEB.pdf}

⁷^{Revenue Statistics in Latin America and the Caribbean, 2018.}^{http://www.oecd.org/tax/tax-policy/revenue-statistics-latin-america-caribbean-brochure.pdf}

⁸^{Revenue Statistics in Latin America and the Caribbean, 2018.}^{http://www.oecd.org/tax/tax-policy/revenue-statistics-latin-america-caribbean-brochure.pdf}^{In Guatemala fiscal pressure is 12.6% and in Mexico 17.2% according to OECD. Guatemala and Mexico are 2 of the countries with higher violence and crime rates in the region.}

⁹^{Revenue Statistics in Latin America and the Caribbean, 2018.}^{http://www.oecd.org/tax/tax-policy/revenue-statistics-latin-america-caribbean-brochure.pdf}

¹⁰^{Distribución de retornos y beneficios generados por el sector de las telecomunicaciones en América Latina, Raul Katz 2017.}

¹¹^{ASIET, October 2017.}

¹²^{It is an estimation of the fiscal effects that taxing the sales of four ICT-based companies with direct and indirect taxes (income and VAT) would have: Uber (transport), Netflix (cinema, television), Spotify (music), and Apple Store (music and software). The exercise, for illustrative purposes, is done with data up to 2016 for ten Latin American economies (pages 27 and 28 of the study).}

¹³^{Mobile broadband has a substantial impact in countries with limited deployment of fixed infrastructure, as in Central America. The World Bank (2009) and Czernich et al. (2011) find that an increase of 10% in broadband penetration is associated with GDP growth of between 1 and 1.5 percentage points in countries with low and average per capita incomes. Specific studies for Latin America have found similar results}

¹⁴^{An increase of 10% in broadband penetration contributes 0.16% to GDP growth (Katz 2009); and ICT assets account for 18% of the growth of added value in Latin American countries (Katz 2015)}

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