Economic crisis since 1900 in Colombia: great success but large mistakes also

Colombia had faced 13 economic crisis since 1900 where five had strong local government  guiltiness. The average crisis takes 3.5 years to reach the bottom and 9 years is the time space between the beginning of each crisis. Government sometimes took right decisions to overcome crisis such as President Reyes in 1904 and President Olaya in 1930, in contras President Pastrana 1970 through Andean Pact was a big mistake. The last crisis started in 2009, it happens by side of the third Dutch Disease faced by Colombia and  internal war conflict. History will witness if the economic policies to face 2009 crisis were right or not, it appears that economic policies taken in last two years have been not enough to sort it, most of these policies tend to increases the Dutch disease problem, for instance economic incentives to invest in real estate and no tradable goods. 

Author: Humberto Bernal,  

Economist,

e-mail: zhumber@gmail.com

Twitter: Humberto_Bernal

It can be download @ PDF

This note deals with Colombian economic crisis since 1900. Data comes from International Historical Statistics and Maddison World Data 1900-1904, Central Bank (GRECO) 1905-1959, World Bank 1960-1999 and Colombia Bureau of Statistics (DANE) 2000-2012. Each body broadcast data at constant prices. The real growth rate was the instrument to chain the data.

Figure 1. Colombian GDP per capita cycle and economic crisis since 1900

Colombia has faced 13 economic crisis since 1900, it means an average of nine years from the beginning of a crisis to the beginning of the following one, of course there were short crisis such as 1948 and 1991 in approximately 2 and 1 years respectively. The first economic crisis in the XX century was caused by the Thousand Day’s War. This internal war started in 1899 and finished in 1902, there was huge monetary supply from private banks to afford government war spending, on this time there was not Central Bank, it was set up in 1923. This crisis brought high inflation, people faced a real income loss in about 6.8% in 1903. This crisis had a duration of 5 years (from the peak to the bottom). To overcome the crisis Mr. Reyes, president of Colombia, took right decisions concerned with government spending in real estate, protectionism through tariff to finished goods and free trade to raw materials. There was a critical point in Colombia economic development by this time, the Foreign Direct Investment (FDI) was close to null due to discrimination against foreigners, this discrimination came from loss of  Panama and other foreign issues before XX century.

The following crisis started in 1912. It was caused by poor economic policies such as high tariffs for imported raw goods, high taxes to local products and lack of industrial incentives to produce local products. Department of Economics recorded these decisions and pointed critics about them. This crisis took 3 years to finish on 1915. However, the 1918 crisis arrived due to the World War I. At the beginning of this crisis, there was low supply of imported raw materials to produce final goods that were traded locally but industry could deal it and quickly went out. By 1919 Colombia could replace few imported raw materials through local production and it helped to go out of this crisis. This crisis was pushed by  international crisis in 1920, it was due to international markets, mainly in Wall Street, the main product exported by Colombia was the coffee beans, they faced a low international price that meant low foreign currency income which pushed down the demand of imported raw materials to produce final goods. To get out of this crisis, Mr. Ospina, president of Colombia, worked hard to get the compensation of losing Panama, it was US$25 million payed through 20’s. There were other facts that helped to recover the economy in the short run such as high external credit to local governments, few FDI inflows in crude oil sector and industrial sector in fridges and textiles. 

However, this type of recovery polices brought the First Dutch Disease in Colombia, it took place from 1920 to 1945 approximately. Government spent huge economic resources in real estate, the crude oil sector started to export, huge external credit and the increase of the coffee price after 1925 to 1929 reevaluated the local currency, it changed the economic model of industrialization began in 1904. 

The 1929 crisis was caused by international crisis again, coffee prices went down and credit obligations did not wait. Colombia faced a Balance of Payments crisis but thought the right tariff to imported final goods and the creation of government office to supervise the Balance of Payments, then Colombia could put the end to this crisis. Colombia presented external credit default, it was the only one in XX century.

The decade of 40 started with a crisis, it was due to the World War II. Again Colombia was shorter in raw materials to produce local goods, nevertheless colombian industry had experience due to crisis faced before, therefore this crisis brought local industrial development, the environment was the right, Colombia had advances in transport, infrastructure was proper to  transport final goods, the market size (population) was the proper one to business men got profits and  high volume of FDI into industrial sector took place between 1940 to 1970 (before Andean Pact of 1969-1970).

However, in 1948 political issues between local parties brought an economic crisis and the murder of Jorge Eliécer Gaitán a political leader from Liberal party (a really democrat activist). The following two years, the FDI inflows faced negative figures, there was local and foreign migrations and credit restriction through private banks.

Crisis of 1954 and 1963 were caused by poor economic polices that tried to take advantages of international market through  currency devaluation and recurrent policies intervention through exchange rate currency. Colombia faced a boom in coffee sector that helped to mitigate this crisis but the foreign income were spent in final goods mainly. At the end of the 50’s started the Second Dutch Disease in Colombia due to coffee boom, it finished in the 80’s. 

The 1973 crisis was due to World crude oil crisis, Colombia got high economic resources from crude oil but the low international price hit the economy, this crisis was overcome through new crude oil prices policies and FDI incentives. Moreover, by that time Colombia faced high grade of smuggling of foreign products and the internal political and narcotic conflict began, Colombia was internationally accepted as narcotic producer. From this point one has to work on economic policies under high internal conflict and high cocaine production.

The 1981 crisis was due to high external credit in Colombia and Latin America, private banks faced insolvency and short run capital flew out. Government sorted out this issue thought private banks nationalization. Government took 25% of private banks’ assets, the total number of bank taken were 14. The 1991 crisis was due to economic openness, Colombia realized that Andean Pact set up in 1970 was a big mistake that brought industrial underdevelopment, therefore she changed her economic model according to Washington Consensus. In 1991 Colombia wrote the new Constitution were private foreign capital are welcome in most of economic sectors and low tariff to imported products highlighted. Colombia imported through spending her crude oil profits but she did not exported high value products . Low prices of imported products replaced local ones and unemployment came and crisis also. This crisis was overcome through government spending in  real estate and spending in security (approximately 3.6% of colombian GDP in 1992-4).

The 1999 crisis was due to Asian crisis in 1997 and Argentine debt default crisis in 1999, it was a financial global crisis. Colombia  faced this crisis through local mortgages defaults, local people did not have enough money to pay this type of credits, it can be the worts crisis faced in Colombia ever. To overcome this crisis government decided to change the price of mortgages, now this price is tied to inflation instead to market interest rate. Moreover, government took resources from insurance payed by society through taxes.

The final crisis is 2009. This crisis is active still, it came from default mortgages in the United States and debt crisis in Europe. Colombia faces this crisis under the Third Dutch Disease, this disease is due to high crude oil and coal production that started in 2003. Local real estate shows an increase and industry shows negative growth rates still. Moreover through local currency appreciation, Colombian economy is highly depended of crude oil prices and coal prices, if they show a deep droop, Colombia will carry on in this crisis. Government tries to fix this issue through low interest rates in mortgages but products program for exported good is poor.

Table 1. Colombian economic crisis since 1900

Beginning	End	Duration	Reason	Observations
1900	1905	5	Internal war
1912	1915	3	Wrong economic policies
1918-1920	1922	4	WWI and World financial crisis	1920 - started the first Dutch Disease
1928	1933	5	World Financial Crisis
1940	1944	4	WWII	1945 finished t the first Dutch Disease
1948	1950	2	Political violence
1954	1959	5	Wrong economic policies
1963	1966	3	Wrong economic policies	1960 - started  the second Dutch Disease
1973	1977	4	Crude oil prices
1981	1986	5	Latin america external Debt Crisis	1989 - finished t the second Dutch Disease
1991	1992	1	Economy openness
1999	2003	4	Asian and Argentina crisis; and local mortgages crisis	2003 started the third Dutch Disease
2009	still		Global financial crisis	still in the third Dutch Disease