Colombia's Economy: Past and Present

History

In the latter half of the 20^th century, with the emergence of cocaine as a major international commodity, probably no other country in the world has suffered the slings and arrows of outrageous economic fortune as much as Colombia. A country rich in natural resources, Colombia nonetheless suffered from gave economic inequalities among its population from the very beginning, with people of Mestizo and indigenous heritage, who while constituting a majority, experiencing the most marginalization in terms of low-wages and few opportunities for upward advancement.

This conflict between a mostly poor majority and a limited affluent minority had always been an ongoing source of political conflict and economic instability, but it took the new cocaine market to bring Colombia to the verge of financial and social chaos in the last few decades. From the late 1960’s onward, when a new global demand for illegal recreational drugs emerged, geographical factors made Colombia the producer of the highest quality marijuana and cocaine in the world, and cocaine, especially, accounted for 25% of all foreign, albeit criminal, revenue.

This new wealth was a boon for the already affluent who were eager to money launder these ill-gotten gains into real estate, construction, and other investment ventures, which provided well-paying jobs, and there were more marginal benefits for the middle-class and to a lesser extent, the poor, but it also wreaked havoc on the overall economy. The influx of mostly American dollars accelerated inflation, and more grievously, resulted in decades-long extreme violence that profoundly damaged Colombia’s infrastructure. Drug cartels not only had the firepower to wage war on law enforcement and society, they also financed left and right-wing terrorist groups. The unstable climate, which included guerrilla attacks and paramilitary attacks on petroleum drilling operations, discouraged foreign investment.

Despite this, Colombia’s economy was remarkably stable and productive in comparison to that of its Latin neighbors. This was in part because of its wealth of organic (cacao, coffee, bananas, sugarcane, palm oil, cotton, tobacco, potatoes, beans, grains, fruit, and flowers) and mineral (petroleum, coal, natural gas, iron ore, copper, gold, nickel, platinum, and emerald) resources, and in part because of its commitment to a free and open market, and there was steady growth; during the 1980’s Colombia was the only Latin country not to default on its international loans.

During the 1970’s, in an ambitious attempt to improve the quality of life for Colombia’s vast poor while maintaining a strong economy, President Alfonso López initiated a development plan centered on exports, farming, regional growth, and manufacturing, while a later president, Julio César Turbay, invested public resources in Colombia’s energy and mining sector and improving communication and transportation services, while decentralizing the economy and increasing public works.

However, by 1982, an economic crisis, in part brought on by the growing social disorder wrought by the drug trade, forced President Belisario Betancur to issue decrees revising banking and fiscal guidelines before the Virgilio Barco administration attempted, as with the López administration to reduce unemployment while promoting economic growth.

In 1990, President César Gaviria Trujillo reduced tariffs, deregulated many private markets, and privatized state-owned industries, which included airports, seaports, power plants, banks, and even highways as a means of drawing foreign investors. Gaviria actively sought the cooperation of his neighboring states in developing regional trading blocs, and forcefully advocated a hemispheric free trade zone, with Colombia joining the Latin American Integration Association (LAIA), a joint free-trade agreement with Chile and the G-3, which apart from Colombia included Mexico and Venezuela.

With tariffs lowered, Colombia imported soybeans, wheat, and corn from the United States, while continuing to export flowers, coffee, and petroleum, its three most valued goods. Jobs were lost in certain sectors, but this also kept the food prices low, and the economy grew at a rate of 4.5%.

A later president, Ernesto Samper, inaugurated more progressive social policies to improve the lot of the poor, but higher public spending expanded the fiscal deficit, which decelerated growth into a recession while unemployment rose to 20%. The following president, Andrés Pastrana Arango devalued the peso and accepted a $2.7 billion International Monetary Fund loan contingent on greater fiduciary restraint and a restructuring of spending policies. By the end of 1999 Colombia’s total foreign debt was $34.5 billion, and credit rating organizations ranked the country as a poor risk investment.

The influx of borrowed money, the new austerity policies, and the competitive price of its exports, particularly petroleum, that was a consequence of the devaluation of the peso reversed the downward trend of Colombia’s economy in the late 90’s, and in 2000 the U.S. loaned the country $1.3 billion in military aid against the drug cartels and leftist rebels, but right-wing, left-wing, and criminal violence still prevailed in 40% of the country.

It was against this background of fear that Alvaro Uribe was elected president in 2002 promising to restore peace and security. In his first term, defense spending, which included 10,000 new law enforcement officers and 16,000 “peasant soldiers,” nearly tripled. American troops were also sent in to guard the country’s largest pipeline. The following year, with loans from the World Bank, the Inter-American Development, and the Andean Development Corporation, social spending was increased, but this necessitated cutting pensions and other social programs in order to moderate the deficit.

These reforms have been enthusiastically praised by financial institutions, particularly his 2004 to shrink the public-sector deficit to less than 2.5% of the Gross Domestic Product, or GDP. He was ultimately able to bring it down to 1.5%. By 2003, GDP growth reached as high as 4%, and has continued going up ever since. This, along with increased security, has improved investor and business confidence.

On the downside, a vast number of Colombians still live in extreme poverty – 11 million live on less than a dollar a day. Meanwhile, working conditions, particularly in sectors such as mining, are highly difficult and dangerous, and right-wing paramilitaries have been reported to routinely assassinate men and women who attempt to form worker’s unions. And while the powerful Medellin and Cali cartels have experienced significant losses in the last twenty years, the very law of supply-and-demand which drives both the world economy as well as Colombia’s economy has also keep the very lucrative cocaine trade active, which in turn continues to fund any attempt to subvert Colombian security.

However, overall foreign investment in this South American nation reached record proportions of $5 billion in 2007. Consumer spending among the middle-and-upper classes, aided by improved credit conditions, rising employment, and improved security have also contributed to a more optimistic picture of Colombia’s economic future.