Banana Republic VII: how could Colombia be in OECD group?, please be standing on the ground

Colombian government wants to be part of OECD but society actions says not yet. Colombia is a violent Country with more than 5 million of displaced people and a homicide rate of 31.4 per 100 thousand of inhabitants. Of course, there are Colombians living in municipalities named Genova, Ginevra, Málaga, Milan, Monterrey and San Francisco located in Colombia not in Europe or North America, they are really homonyms, for instance Ginevra (Colombia) faces 338 displaced people between 1998 to 2012, a homicide rate of 24.6, and 23.3% of her population are in poverty. To be part of OECD, colombia society has to work hard instead to show off. To be part of this group means a fair society in Human Rights guarantee and fair income distribution with low unemployment rate. This note also points some mexican indicators that highlight a similar path that Colombia has walked on, unfortunately Mexico can be other Colombia, I point some clue indicators to work on.   

Author: Humberto Bernal,  

Economist,

e-mail: zhumber@gmail.com

Twitter: Humberto_Bernal

It can be download @ PDF.

Last week Colombian government broadcast the intention to be part of Organisation for Economic Co-operation and Development (OECD) group. To be part of this group requires hard work on socioeconomic indicators such as homicide rate, displaced people, government corruption and dependency of primary products. From my point of view, to be part of this group is just a dream as government broadcast. Of course, government said a realizable dream in short run (next years) and from my point of view is a realizable dream but in long run. To be standing on the ground, there are socioeconomic indicators that do not let get the social assets to be part of this group. The main indicator is displaced persons in Colombia due to internal conflict. Table 1 shows the number of people displaced in municipalities with homonyms names in Europe, for instance the municipality Genova located in the region Quindío in Colombia faced a homicide rate of 82.0 per 100 thousand of people in 2011, a displaced people of 812 since 1998, and 22.3% of population faced lack of primary goods. Of course, these indicators are far way of Genova (Italy) that belongs to OECD. Other municipality is Ginevra (Valle) with a homicide rate of 82.0, displaced people of 338, and poverty UNB rate of 11.4%, of course these indicators are far way of Ginevra (Switzerland) does. There are other municipalities that have poor indicators to ask for Colombia be part of OECD such as Málaga located in Santander-Colombia (not in Spain Europe), Milan in  Caquetá-Colombia (not in Italy), Monterrey in Casanare (not in Mexico), San Fransico in Cundinamarca (not in the United States) and Sevilla in Valle (not in Spain). The only similitude between these municipalities in Colombia and OECD members is the name (they are really homonyms).

Table 1. Main indicators for homonyms regions in Colombia

Municipality	Region	Homicide rate*	Internally displaced persons	Poverty UBN**
Genova	Quindío	82.0	812	22.3
Ginevra+	Valle	24.6	338	11.4
Málaga	Santander	5.4	671	14.7
Milan	Caquetá	34.4	7,712	42.9
Monterrey	Casanare	14.3	1,174	26.3
San Francisco#	Cundinamarca (Putumayo)	No information	69 (209)	20.6 (17.9)
Sevilla	Valle	93.0	1,893	16.1

* Rate per 100 thousands of inhabitants 

** UBN: Unsatisfied Basic Needs Method.

+ in spanish the spelling is Ginebra.
# There are three municipalities named San Francisco in Colombia, table shows two, the other does not have information on displaced people.
Source: Municipality Association (Federación Colombiana de Municipios). Own Calculations Stata 12.1.

Colombia has 5,405,629 displaced people in 2012 due to internal war conflict. Figure  1 shows displaced people by municipality since 1998, the colors point the number of displaced people, for instance there are municipalities that have more than 10,000 displaced people (red color!), the municipality that faces the highest value of displaced people is Buenaventura located in Valle del Cauca (near to Pacific Ocean) with 66,928 cases. There are other municipalities that face close values such as Carmen de Bolivar, Santa Marta and Tierralta, they are located close to Atlantic Ocean.

Figure 1. Internal displaced persons in Colombia 1998-2012

(Number of displaced people)

Source: Municipality Association (Federación Colombiana de Municipios). Own Calculations Stata 12.1.

The conclusion: we are in a country that faces a internal war conflict, we are not in Europe Country where violation Human Rights are punished with jail sentence. Colombian government has to be standing on the ground and work hard in the next years to put the end to this conflict and make sure to guarantee Human Rights to all Colombian citizens. 

The main indicators to be part of OECD group

The OECD is an economic group of 34 countries that works on economic indicators that goes with economic development through international trade and fair progress. Figure 2 shows OECD countries by population, the total population is about 1,2 billions of people out of 7 billions in the World.

Figure 2. Population in OECD group

(lMillion of people)

Source: World Bank Data.

Homicide rate

The OECD members showed a homicide rate between 0.6 per thousand of inhabitants and 22.7 in 2010, the minimum value was reached by Norway and the maximum value was reached by Mexico. Mexico is a special case due to drug trafficking cartels are taken violence as medium to reach their objectives such as export cocaine to United States and Europe. Mexico faced a homicide rate of 8.1 in 2007 with a declining trend until 2007, after this year trend changed. The band without Mexico is a homicide rate between 0.6 and 5.2, the last figure is faced by Estonia. On the other hand, Colombia faced a homicide rate of 33.4 in 2010 and 31.4 in 2011, before this year Colombia had faced high rates, She is one of most violent countries in the World, she took 16th place out of 207 countries in 2011.

GINI Index 

GINI index for OECD countries is between 0.230 and 0.521, the minimum value is showed by Sweden while the maximum value is showed by Chile. Colombia shows a GINI index of 0.539 in 2012, this indicator is hard to reduce in Colombia due to internal war conflict that pushes people from their lands as it was pointed above. 

Internally displaced people

Internally displaced people in OEDC countries is close to null, Turkey and Mexico are the only countries that started to face this social big problem. Until 2010 Turkey had faced 1,201,000 displaced people while Mexico had faced 120,000 displaced people. Displaced people in Mexico could be explained by drug trafficking cartels violence. On the other hand, Colombia has faced 5,405,629 cases of displaced people since 1985 (these numbers are those resisted but they can be more). Colombia is the mayor country that faced displaced people, after Colombia are Iraq, Sudan and Uganda with a band between 1,000,000 and 4,000,000 of displaced people.

Military expenditure as share of GDP

The OECD countries face a military spending between 0.5% and 7.4% of Gross Domestic Product (GDP) in 2010. The minimum value was faced by Mexico with 0.5% of her GDP and the maximum value was faced by Israel with 7.4% of her GDP. Colombia faced a military spending of 3.8% in 2010 and 4.2% in 2012, this indicator is one that achieves  the expectative to be in OECD group from my point of view, although there are few problems with Human Rights inside the military procedures.

School enrollment, tertiary (% gross)

The School enrollment tertiary gives information about youth that must be in tertiary education, for instance Mexico faced a rate of 28.0% of people in tertiary education, it means for each 100 of people that must be in tertiary education, there are 28 enrolled. The OECD group showed a band between 28% and 103.1% in 2010, the minimum value was faced by Mexico and the maximum by South Korea. The last country shows a really high rate, it is a case to deep study that can be replicated by other countries. Colombia faced an enrollment rate of 39.1%, unfortunately it is lower than the average figure from OECD countries.

Manufactures exports

Manufactures export (% of merchandise exports) is an indicator that shows the high value added by a country for World Society. The OECD countries shows a band between 12.7% and 93.3% in 2010, the minimum value was faced by Chile and the maximum value was face by Israel. Colombia had an index of 22.5% in 2010. Chile as Colombia suffer of primary good trade problem (Enclave economies), Chile exports lot of copper and silver while Colombia exports huge volumes of crude oil, coal and ferronickel. Although Chile is working on adding value to these primary commodities to export finished goods but Colombia faced management corruption in royalties uses.

Net migration

Net migration can measure the desire of be part of birth country. The number of people (net migration) is positive, it means poor desire of be part of the country. For instance, Spain faced an annual net migration of 2,250,005 cases in 2010, it can be explained by her economic crisis and high unemployment rate. The OECD group faced a band between -1,805,238 and 2,250,005 in 2010, the minimum value was faced by Mexico and the maximum by Spain. Colombia faced a net migration of -120,000 in 2010, it means many people found Colombia as a good place to set up a business and family. This indicator gives positive points to Colombia to be part of OECD group due to people find Colombia safer.

Unemployment rate

There is other indicator to take into account, it is unemployment rate but the idea is to calculate the long run unemployment rate to each country in OECD group and Colombia. the World Bank gives information to do it through Long-term unemployment indicator. In Colombia case the long run unemployment rates is 10.0%, it is too high to be in OECD group.

Table 2. Main economic indicator to be part of OECD group

(last information available)

	OECD			Colombia
Indicator	Minimum	Maximum	Average		Checklist
Homicide rate (100,000 inhabitants)	0.6	22.7	1.7*	33.4	X
GINI Index (0-1 index)	0.230	0.521	0.333	0.539	X
Internally displaced persons (number of people)	0	1,201,000	0**	5,405,629	X
Military expenditure  (% of GDP)	0.5	7.4	1.8	4.2	OK
School enrollment, tertiary  (% gross)	28%	103.1%	69.5%	39.1%	X
Manufactures exports  (% of merchandise exports)	12.7%	93.3%	67.4%	22.5%	X
Net migration (number of people)	-1,805,238	2,250,005	421,467	-120,000	OK

*Without Mexico. Without Mexico and Turkey.
Source: World Bank Data, CIA World Factbook and Colombia Bureau of Statistics.

Annex: can Mexico be other Colombia?

Through this information one realizes that Mexico is going to Colombia negative path, for instance the number of displaced people showed an increase from few  people 2009 to more than 100 thousand in 2010, the school enrollment rate is the lowest in OECD countries as the military spending. Mexico is on critical point, she can face same indicators as Colombia if mexican government does not pay attention. From my point of view, Mexico has to invest in Human Rights guarantee, education and military spending. Moreover, Mexico is facing immigration of people who do not have employment, they come back to home country due to Global Crisis in developed countries, therefore, in my opinion, Mexico has to set up an employment program to reduce her unemployment rate that is about 5.3%, it is fair to point that Mexico had an unemployment rate of 2.5% in 2001, after this year the trend has been positive. 

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

Banana Republic part VI: Royalties from natural resources in a poor country called Macondo

Macondo is Colombia’s nickname due to Gabriel García Márquez’s book called  One Hundred Years of Solitude. A very short summary of this book is a municipality that repeats same mistakes aging and again under political conflict. This note deals with royalties to municipalities from natural resources in Colombia. Royalties distribution is unfair, there were municipalities that got US2,240 per capita in 2011 with a population of 8,524 such as Castilla La Nueva in Meta while other municipalities such as Villa Rica in Cauca got US0.32 per capita in 2011 with a population of 15,413, there were other municipalities that got nothing from royalties. This fact comes from many years ago, data is available from 2007 to 2011 and broadcast a GINI in royalties distribution in not less than 0.810. Moreover, 80.8% of municipalities are in fiscal problems according to Fiscal Grade made by Central Government. Finally, according to media royalties are taken by illegal armed groups to make terrorism. Therefore, Society wait for proper royalties distribution that takes into account population density in each municipality, productive projects and penalization due to high homicide rates and presence of illegal groups in municipalities. One can say that in the first year of this Central Government, the royalties management was poor, nevertheless  Central Government passed the Law 1530 at the beginning of 2012 that works on some issues above but they forgot the issue of financing illegal groups and violence through royalties. This issue is so important in Peace Process that Colombia works on, royalties spending through municipalities budget have to be supervised in detail and penalized if it is due.

Author: Humberto Bernal,  

Economist,

e-mail: zhumber@gmail.com

Twitter: Humberto_Bernal

It can be download @ PDF

Colombia produces about 12 commodities that give her royalties, the most important are crude oil, gas, coal and ferronickel. These royalties shared in 1.3% of Colombia Gross Domestic Product in 2011. Previous notes I pointed the unfair rates charged to these extractive firms, for instance an ideal government taking from crude oil extraction is 65% of total firms’ income, it includes royalties and all type of taxes, but nowadays it is about 55% due to low charges according to Law benefits. The royalties collection is one side of the coin, the other side is the distribution. Royalties distribution is done by government agencies, they collect the royalties and then distribute them. Royalties distribution is unfair through whole Colombia, Colombia can be divided in 33 Regions (Departamentos, included Bogotá) and 1,123 municipalities (Municipios). Royalties to regions were 45.9% of total royalties collected in 2011; 38.8% went to municipalities in 2011; and 17.3% went to Central Government Royalties Fund and other government bodies such as Environmental Corporations. This note shows the inequality royalties distribution in municipalities and its unproductive uses.

The annual royalties per capita distribution in municipalities in 2007 is showed in figure 1. The distribution is unfair, there were municipalities that did not get any revenue from royalties such as Guarne in Antioquia (first municipality and then Region) with a population of 41,146; Linares in Nariño with a population of 11,461; and Villa Rica in Cauca with population of 14,853. The total municipalities with royalties revenue less than US429 per capita in 2007 were 1,084 out of 1,123. Moreover there were 26 municipalities that there was not information, most of them did not get any revenue from royalties. Municipalities that got more than US1,000 per capita were Cantagallo in Bolivar with a population of 8,069 and Castilla La Nueva in Meta with a population of 7,543 in 2007. 

Figure 1. Royalties distribution in Colombia by municipality 2007

(US per capita)

Source: Bureau of Statistic (DNP). Own calculations Stata 12.1.

According to Central Government, they are working to make a fair royalties distribution in Colombia, they passed the Law 1530 last year (2012) where pointed the four main targets: saving for the future, equity, working in competitiveness, and  no corruption. Although the Law was passed in 2012, it is fair to point the state of royalties distribution in the first year of this Central Government. Figure 2 shows the royalties distribution in municipalities in 2011, as one realizes, the state was worst than 2007, there is more concentration in few municipalities such as those pointed above and Orocue in Casanare with a population of 8,121, Puerto Gaitan in Meta with a population of 18,089 and Tauramena in Casanare with a population of 19,614 in 2011. Therefore one can conclude from this figures the unsuccessful royalties distribution in the first year of this Central Government.

Figure 2. Royalties distribution in Colombia by municipality 2011

(US per capita)

Source: Bureau of Statistic (DNP). Own calculations Stata 12.1.

Royalties distribution in municipalities has been unfair since data is collected and before, data is available from 2007. A proper measure of this unfair distribution is the Lorenz Curve and GINI coefficient for royalties distribution between municipalities. Figure 3 shows the results, as one can see, the Lorenz Curve is far away from equity line (45^o). One can add the GINI coefficient in order to see the concentration grade, for instance in 2007 the GINI coefficient was 0.817, it means as this coefficient is far from zero, the royalties distribution between municipalities is worst (unfair). This coefficient has not been less than 0.817, in 2011 it was 0.830 that means no change in royalties distribution.

Figure 3. Royalties distribution concentration in Colombia 2007-2011

(Lorenz curve and GINI* coefficient)

*GINI coefficient for royalties distribution: 0 fair distribution; 1 unfair distribution.
Source: Bureau of Statistic (DNP). Own calculations Stata 12.1.

Structural problem to reach a fair income distribution and political conflict solution

The Law 1530 of 2012 works on making royalties spending productive but there are two issues to take into account. The first one is the lack of awareness from municipalities government heads to use royalties revenues in a proper productive projects. Central Government broadcast an indicator called Fiscal Grade (Indicador de desempeño Fiscal) that gives information about proper uses of public revenues, it goes from 0 to 100 where 100 is taken as great job. However results were poor in 2011, there were 216 municipalities out of 1,123 that got a grade above of 73.5, it means that 19.2% of total municipalities can make a proper job with royalties, the remaining 80.8% was in a critical fiscal situation or close to reach it, the royalties can go to debt financing, figure 4 shows these results. Therefore, royalties distribution has to go with a proper productivity projects according to population density and high fiscal grade.

Figure 4. Fiscal grade in Colombia by municipality 2011

(coefficient* 0-100)

*Grade indicator: 0 critical fiscal state; 100 great job in fiscal management).
Source: Bureau of Statistic (DNP). Own calculations Stata 12.1.

The last issue is the real destination of royalties. Sometimes royalties go to illegal armed groups, with approval of municipality government head, this illegal groups take royalties to afford their terrorism, therefore royalties distribution has to be penalized in municipalities where homicide rate is high and presence of illegal armed groups are as Semana publication broadcast.

Spain crisis: Under Euro there are alternatives, under Peseta is postpone the same solution that under Euro but more expensive

Spain faces a huge crisis, there are voices that call for a Peseta currency again but it is not the solution from my point of view, it can work hardly in the short run but Spain could face a worse situation latter, these voices call for competitiveness under currency devaluation under Peseta currency but it could bring inflation latter and crisis again. Spain beak point was in 2003 when her saving rate faced a decline from 23.8% as a share of her GDP to 18.2% in 2011, moreover financial crisis and her huge debt contributed to her nowadays situation. This note shows how Spain can get out of this crisis, she has to work hard on improving her private saving, public saving and foreign saving under crisis. To reach better savings rates, old and new international organizations have to work on it. For example, social security such as spanish pensions and health services have to be supported by World Bank, Intentional Monetary Found (IMF) and other international organization through a very long run credit. These organization were created to work on these type of situations. A new Eurozone Committee has to be created to work on long run productive economic projects, it means it is no enough with European Central Bank (ECB), this committee has to develop long run projects when crisis come to avoid high unemployment rates, projects have to be targeted according to each Eurozone member, today is Spain, tomorrow other member can be. 

Author: Humberto Bernal,  

Economist,

e-mail: zhumber@gmail.com

Twitter: Humberto_Bernal

It can be download @ PDF

Spain pass through a deep economic crisis, her unemployment rate is about 26% that means 6 millions of citizens, this country has 47 million of citizens. Many proposes has come to avoid a social disaster in this country, for instance some people say that Spain has to leave the Monetary Union (Eurozone) and come back to Peseta note. This proposal goes to get global competitiveness through real depreciation under Peseta exchange rate devaluation. However, this proposal is a short run solution, Spain could face high inflation due to this devaluation and expansive monetary policy to pull her economy but this country could probably face a crisis again. On the other hand, there is other proposal that says Spain has to reduce her public debt that reaches 85.3% of her GDP. This proposal goes for austerity economy where unemployment from government projects will increase due to lack of spending. This note shows the break point of spain crisis and some ideas to reduce unemployment under Euro currency. 

From macroeconomic theory one knows that the sum of the three savings is equal to total investment, these savings are private local saving, government saving and foreign saving, $S^{Private}_{t}+S^{Public}_{t}+S^{Foreign}_{t} \equiv{I_{t}}$ . This identity is so important due to relation between unemployment and investment, figure 1 show the clear “negative” relation between these two variables in Spain between 1976 and 2011, as investment increases, then unemployment rate shows a reduction. Therefore, it is straight that European Central Bank (ECB) and Spain government have to work hard on increasing the investment into Spain (local investment and foreign Investment). 

Figure 1.Unemployment rate and investment  as share of GDP in Spain 1976-2011

(%)

Source: World Bank data and International Historical Statistics Europe Palgrave. Own Calculations.

Some facts that have to take into account to increase this investment is the increasing of these three savings pointed above. Figure 2 shows the private saving in Spain from 1976 to 2011, as one can see the break point in this crisis started in 2003 when private saving started to decline in deep. This Private saving decline brought an indirect unemployment increase in about 1.5% per saving (% GDP) point missed. Now, Society has to improve her private saving under economic crisis, its sound rare but is it possible under well coordinate economic polices between ECB and Spain government, for instance long run infrastructure projects from European Long Run Infrastructure Projects Committee. It means, it is not enough count with just a ECB, it is time to think in a eurozone infrastructure committee that works in big project for each country that improve economic productivity in all Eurozone countries, then when crisis come, projects are ready to make. These projects can mitigate economic crisis such Spain faces today, tomorrow it can be faced by Italy, Germany or some of 17 countries. Through multiplicative effect from these long run projects people can increase their saving to pull up other activities in Spain. Support for this committee has to come from all countries public savings and through liquidity from ECB. However, time is not enough to spanish, other instruments have to be working at same time.

Figure 2. Private saving as share of GDP 1976-2011

(%)

Source: World Bank data and International Historical Statistics Europe Palgrave. Own Calculations.

Unfortunately spanish government faces a high public debt as a share of her GDP, it is 85.3% and her central government budget balance as percentage of her GDP is on deficit as figure 3 shows. Nevertheless in the last two years it showed better results. Spanish government could increase her external credit to pay social security duties such as pensions and health, this resources can come from World Bank, IMF and similar organization, in my opinion these organization have to work to solve this issues and it is time to give support to elderly and unhealthy spanish. Then spanish government can generate a budget surplus to improve local investment through low interest rates, in other words spanish government and international organization have to work hard to generate public saving, then private investment can increase.

Figure 3. Central government budget balance as share of GDP 1976-2011

(%)

Source: World Bank data and International Historical Statistics Europe Palgrave. Own Calculations.

The last saving is foreign one. Foreign saving come from external credit (external credit taken by spanish) and from Foreign Direct Investment. The first one is huge, private and public debt is about 147% of her GDP, then spanish government has to work hard in attracting FDI. FDI inflow is about 2.1% of her GDP, Spain has faced positive FDI inflows that means long run investment and lower unemployment rate but government has to pay attention of type of FDI is coming in, it can bring employment or unemployment see Letto-Gillies (2012) part V, The question is the type of FDI is coming to Spain (productive or extractive). From my point of view, it is not a big issue if current account is in deficit, the issue is how Spain is financing it as figure 4 shows. FDI as productive investment tool is welcome, and it will bring low unemployment rate if it is well focused. Government has to work on promoting local investment and foreign investment through media and highlighting the priority of it.

Figure 4. Current account  as share of GDP 1976-2011

(%)

Source: World Bank data and International Historical Statistics Europe Palgrave. Own Calculations.

The last topic in this note is the relation of unemployment, investment and inflation in Spain from 1976 to 2011. If investment increase in a percentage point as a share of GDP, then the unemployment rate shows a decline of 1.5% and if inflation rate increase in a percentage point, then the unemployment rate show a decline of 0.6% points as table 1 shows. This information highlights that investment has to be a target point in Spain and they have space to reached due to a low inflation, it was 2.4% in 2012 with declined trend since 1976. The best way to work on policies above is under Euro currency, the other way around is  postpone the problem for latter under Peseta currency. 

Table 1. Unemployment rate model 1976-2011

(%)

Variable	Coefficient
Investment (% GDP)	-1.54
Inflation rate (%)	-0.61
Constant	57.21
R2	0.91

Unemployment rate is explained by investment rate and inflation rate under OLS model. The model is significative under conventional levels.

Source: World Bank data and International Historical Statistics Europe Palgrave. Own Calculations Stata 12.1.

Banana Republic part V: The cost of internal war conflict and the benefits of ending conflict in Colombia

Colombians are looking forward to the end of internal war conflict, we hope that Cuba meetings come with proper ending, the Peace signature. The cost of this war is high: direct deaths (fighters from all sides and civil into the conflict) are 50.110 since 1970 and indirect deaths are 708,917 since 1970 (it can be called violence virus), they come from annual homicide rate. Moreover, pure cocaine production increased to reach 345 tonnes in 2011 and its profits goes to terrorism. There are other social cost such as lack of fair democratic participation (where all sector must be included) to get a proper society, without this scenario government institutions and private sector can abuse of citizens through lack of fair income distribution, lack of eduction and discrimination due to points of view as one can see today. Many people ask for the economic benefits from ending this conflict, this values are calculated through econometric time series model VEC and they are an additional increase of 0.8% in GDP growth rate after a year of ending conflict, an additional decline of unemployment rate in 3.5% after two years of ending conflict and declining trend in cocaine production. However, unemployment and cocaine production are issues that require hard work to get a success ending of conflict, if there are proper programs to avoid demobilized guerrillas unemployment, process can be called as successful. Cocaine production can be taken as illegal work place for demobilized guerrillas, this commodity must be dealt through United Nation department Legal Monopoly Production Around the World and Controlled Consumption (UN-LMPCOCA), it can not be management by local governments due to corruption, international organizations must manage cocaine production.

Author: Humberto Bernal,  

Economist,

e-mail: zhumber@gmail.com

Twitter: Humberto_Bernal

It can be download @ PDF

The internal armed conflict in Colombia has a long history, it can be said this political conflict started since her independence in 1811-1819 and it has taken power through international issues such as IWW, IIWW, Could War and local issues such as many politician deaths and cocaine production. One can say that the internal conflict has deep political issues concerned with unfair income distribution and discrimination. This problem could has be solved many year ago but cocaine production was taken by guerrillas and other illegal armed groups to support their terrorist attacks. In guerrillas FARC case the number of fighters rose from 900 in 1970 to 21,995 in 2002 and 8,500 in 2012 as figure 1 shows. The number of guerrillas FARC come down after 2002 when Colombia got support from international community due to Human Rights violations concerned with many deaths. 

Figure 1. Guerrillas FARC 1970-2012

(number of fighters)

Source: Otero, Diego. 2007, 2010, Department of Defense Colombia 2013.

This note shows the cost of Colombian internal war and the potential benefits due to successful pace process, the period taken into account starts in 1970 when guerrilla began to take power to face legal Colombian Armer Forces, the maximum armed conflict came at the beginning of XXI century when guerrillas got lot of money resources from cocaine trade but it came down through high local defense resources and international support but the cost was many deaths of people with low education.  

Cost of the internal war

Colombia has been one of most violent countries in the World, her homicide rate came from 10.9 per hundred thousand of inhabitants to 89.0 in 1994 and 35.9 in 2011. Total deaths since 1970 rose to 708,917 cases where those from the war conflict were 50,110 as figure 2 shows, this deaths means 7.1% of total deaths since 1970. However, deaths due to no direct intervention in conflict can be taken as indirect deaths due to society grew up watching violet pictures and bloody news, moreover the unfair income distribution and poor education bring violent scenarios, there is low cover in secondary education and it is discriminatory in tertiary education, in the last case students can be taken out from programs due to their points of view. There are tertiary education programs that work on how to pull out student instead to how to keep all student to reach a better society. From my point of view, Colombia must work in tertiary education reform where any type student (high grade student and low grade students) must be the target as an input to fair society.

Figure 2. Conflict deaths 1970-2012

(annual number of cops, militaries, guerrillas, paramilitaries and civil in the conflict)

Source: Otero, Diego. 2007, 2010, Department of Defense Colombia 2013.

Kidnappings and boom attacks are costs of this irrational war, in the first case people  kidnapped rose from 49 annual cases in 1970 to 3,706 annual cases in 2000 and 305 anual cases in 2012, the total number of people kidnapped are 50,345 since 1970 (some of them are dead, other were released due to payment, political agreements or Armed Forces intervention). The booms attack are long listed, in crude pipeline attacks cases come from 11 per year in 1987 to 151 per year in 2012.

The cocaine production is a source to guerrillas economic support  as one can see in figure 2 and 3, as cocaine production increases, then the number of guerrillas FARC rises also. The volume of pure cocaine rose from 1 annual metric tonne in 1970 to 695 annual tonnes in 2000 and 345 annual tonnes in 2011. 

Figure 3. Pure cocaine annual production in Colombia

1970-2011

(annual tonnes)

Source: Castillo, F. 1987; Pizarro, E. 2004; Henderson,J. 2012; United Nations. Coca survey issues from 2003 to 2011.

Benefits from the end of Colombian Conflict

These days many people ask what economic benefits come from the end of conflict, of course  we know that the first benefit is the stop of too many deaths. The benefits are evaluated taking into account the Gross Domestic Product (GDP) real growth, unemployment rate and cocaine production decline.

Colombia shows a long run GDP growth of 4.0%, she is a developing country that grows due to primary products production. According to time series model called VEC, the end of the conflict brings an  additional increasing GDP growth rate in 0.8% in the next five years after conflict finishes and 0.6% after this five years as figure 4 shows. Therefore, if the forecast of economic growth in 2014 is 4.0%, one can expect that this growth will face an increase to reach 4.8% due to the end of the conflict. The end of the conflict brings a permanent positive effect in GDP growth, it means this additional growth does not disappears as time goes.  

Figure 4. increasing in GDP growth due to end of conflict 2014-2042

(annual variation %)

Source: Own calculations Stata 12.1.

However this increase in economic growth is subject to real labor opportunities to demobilized guerrillas. The real opportunities must come with fair salary. According to this econometric model, the unemployment rate can increase in 1.9% after the end of the conflict but through proper government and private sector programs, the unemployment rate can come down in 3.5% after the end as figure 5 shows, it means a unemployment rate of 7.0% due to ending conflict. If the conflict comes to her end at the end of 2013, unemployment can goes down in 2016 and after 2022 the unemployment rate variation due to end of conflict  starts to disappears. Figure 5 shows unemployment rate variation due to the end of conflict, the movement highlights the hard work of colombia society must do in labor market to get success post ending conflict. 

Figure 5. decreasing in unemployment rate due to end of conflict 2014-2042

(annual variation %)

Source: Own calculations Stata 12.1.

The last benefit is the reduction of cocaine production. This econometric model, after proper statistical proves, shows that cocaine production can decline in about 1.4% the year after ending conflict and a declined trend for years after as figure 6 shows. Cocaine production will be difficult to eradicate, and it can bring a new issue concerned to new cocaine cartels and violence again. From my point of view a proper legalization of cocaine production through monopoly management according to international agency linked with United Nations (UN) can solve this costly problem to colombians.

Figure 6. Decreasing in cocaine production due to end of conflict 2014-2042

(annual variation %)

Source: Own calculations Stata 12.1.