LATIN AMERICA’S ECONOMIC DARLING NO MORE: A HYPOTHESIS ON THE DETERIORATION OF THE COLOMBIAN ECONOMY

ROBERTO STEINER, UNIVERSIDAD DE LOS ANDES

“COLOMBIA IN CONTEXT”

CENTER FOR LATIN AMERICAN STUDIES

UC BERKELEY, March 2, 2001

Both in historical as well as from a comparative perspective, the Colombian economy is in very bad shape. Why? Where are we heading to? This presentation is divided into 3 parts:

Stylized facts, showing the under-performance of the economy

Some explanations to such a bad performance

What do I expect for the medium to long term?

LATIN AMERICA’S ECONOMIC DARLING NO MORE

Growth sharply declined

Per capita GDP lagged those of other regional economies

Private investment collapsed

Unemployment got completely out of hand

Income distribution is now as bad as it used to be

Credit ratings plummeted and spreads soared

On the positive side, inflation declined significantly

A MENU OF POSSIBLE EXPLANATIONS

1. According to several in my profession, the usual suspects are

Too much “neo-liberalism”

  1. Trade liberalization
  2. Financial liberalization
  3. Capital inflows

An obsession with reducing inflation

2. According to former president Samper and his associates

The above, plus

The demise of the drug cartels

3. According to the central bank and several finance ministers

Loose fiscal policy and excessive private expenditure

Exogenous shocks (financing and commodity prices)

4. According to almost everybody

The political conflict (boosted by the drug trade)

MY INTERPRETATION: SOME OF THE ABOVE, IN A DIFFERENT FRAMEWORK

Inconsistency between the 1990 economic reforms and the 1991 Constitution

  1. A structural reform program to enhance the private sector
  2. A constitution that, essentially, mandates fiscal chaos
  3. A Constitutional Court that meddles with fiscal policy

In a sense, a reform program that did not go far enough

  1. Yes in trade, in the financial sector and in the private provision of public goods (with some backtracking)
  2. Not enough in labor
  3. Weak in pensions (catering to special interests)
  4. Terrible in the fiscal (or how not to decentralize)

Why? Political economy issues are critical

  1. The “crisis” hypothesis
  2. No economic crisis
  3. Huge political and institutional problems
  4. Compensation mechanisms became critical
  5. Lack of sustainable support was evident

Costly mistakes in fiscal and in monetary/exchange rate policies

  1. Samper’s use of the budget to garner political support
  2. The difficulties of sustaining a peg (mea culpa)
  3. Banks are always weaker than you think

WHAT SHOULD WE EXPECT IN THE MEDIUM-TERM?

After hitting rock-bottom, the future is not very rosy. Why?

We still don’t understand why unemployment exploded

Much needed structural reforms are highly unpopular

If there is peace, it will come at an economic price

If there is no peace, the costs might be even higher

References

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