Colombia is a developing country that has faced a political war conflict since 1948. The social cost because of it is high, but during this presidential period Colombia has a real chance to finish this conflict. However, an international economic environment through low crude oil prices can take political and media attention because of it will bring a low economic growth for the next years in Colombia. Therefore, to reach a successful end of this political war conflict, a proper economic environment is needed. This note points the facts that let me think that there is an economic crisis in the current path for Colombia economy, so I give five advices to avoid or mitigate it. The first advice is government and private sector have to keep investing as the last 10 years. The second, the high Current Account deficit in Colombia has to be afforded with Foreign Direct Investment (FDI), so central government has to ask for supporting to make Colombia attractive; they have to talk to IMF, World Bank and developed economies who are increasing their money supply such as those in the European Union, China and Japan; these economies can invest in No Mineral sectors in Colombia. The third and fourth advices are a proper tax reform where gasoline prices goes down and public transport tickets also; these decline can pull up aggregate demand through low prices; it means taking advantage of low crude oil price as many economies are doing. The final advice, it is to increase the money supply (M1) to afford indirectly the pension and health system in Colombia, it can be through buying government debt in the local Stock Market.
Author: Humberto Bernal,
Economist,
e-mail: zhumber@gmail.com
Twitter: Humberto_Bernal
Colombian economy is under her third Dutch Disease and she is beginning her 14th economic crisis since 1900. However, if central government, foreign governments and international organisation take seriously this tread of economics crisis, Colombia could be a step forward to mitigate it and keeps its long run GDP growth of 4.0%. This note highlights indicators that give information about this crises and puts up economic instruments to overcome it.
Colombia depends of commodities prices and their volumes to afford her foreign expending. Colombia is a country that has global comparative advantage in producing commodities such as crude oil, coal, coffee, flowers, bananas, sugar and cocaine of course. This last commodity shared about 3.0% of total Colombian exports in 2013-14, so it makes cocaine takes the fourth place after crude oil, coal and coffee exports. Crude oil shared about 50.0% of total Colombian exports in 2014, coal shared about 11.0% and coffee shared about 4.6%. Therefore, if any of these commodities prices dropped in deep through semesters, Colombia could face a currency crisis (Balance of Payments Crises)(1). Unfortunately, this event began on the second semester of 2014, the crude oil price went from about US$100 per barrel to US$50 per barrel. It is clear that Colombian government has been supported her spending under using royalties and taxes from crude oil sales, so she missed about half of their royalties and taxes from this commodity; therefore, it means that Colombian government missed US$7.0 billion for 2015. Houston we are in problems!!!.
Colombia takes incomes from foreign sales to overcome local and international economic crises, but through this crises it is not the case. In the last international crisis, Colombia could growth because of crude oil price was going up and the volume of coal also. Figure 1 shows Colombia GDP cycle and one realises that through international crisis of 2007-9 pulled Colombian cycle up because local government took advantage of minerals markets. Moreover, Foreigners took Colombia as a place to invest in mineral and industrial sectors; FDI net inflows in minerals was about 40% in 2014 in Colombia and FDI net inflows in other sectors was about 60%; therefore, Colombians enjoyed this economic environment for five years. In addition, Colombians increased their household saving to reach 23% of GDP in 2014; the public saving increasing (public deficit went down) also.
Figure 1. Colombian Cycle, and aggregate savings
Colombia could be at the beginning of an economic crisis, and the instruments to sort out it are a well thinking economic policies. The first economic policy advice is government and private sector have to keep spending in physical capital and human capital as they have been doing since 2000; figure 2 shows that Colombian investment went from 15% of GDP in 2000 to 26% in 2014!. The second economic advice is local government, foreign governments such as the United States, United Kingdom, Germany, France, China, Japan, South Korea and others, and global organisations such as IMF and World Bank promote investment in different sectors of minerals in Colombia. The third economic policy advice is a tax reform where those who have high incomes pay this tax. The only purpose of a tax reform is improve income distribution through better education and better public services; a tax reform in terms of solution for an economic crisis is close to null because it takes saving from households and private firms to increase public saving as the bottom left chart shows. Moreover, tax reform brings negative impact on employment rate in the short run because people move from private sector to public sector (Crowding Out Effect). The fourth economic policy advice is to let gasoline price goes down; central government regulates gasoline price, but as the crude oil price started to go down, gasoline price does not show a significant reduction; Colombian government is taking revenues from this high price through taxes, but they do not realise that this high price is pushing down aggregate demand while in other countries are taking this low price as opportunity to increase monetary supply!. The final economic policy advice is to be flexible with monetary policy, it is time to take advance of low crude oil price that brings consumer prices index down; this monetary flexibility can go to support Colombian pension system and health system; however, under Central Bank rules, there are not a direct instrument to support these public services, so it must be through indirect instruments such as buying central government debt in the Stock Market as in other periods they did.
Finally, it must be clear that Colombia has to stop of getting external debt because it increases the likelihood of a Foreign Capital Sudden Stop, and it is more expensive due to Peso (Col$) devaluation. Moreover, under actual escenario, my forecast of GDP growth for 2015 is 3.3% while Colombia faced a GDP growth of 4.6% in 2014.
Figure 2. Colombian Investment, FDI net inflows, and its relations
Source: Department of Statistics (DANE), Colombian Central Bank and own calculations Stata 13.1.
(1). At the end of 2014, Colombia had International Reserves to pay 47% of it external debt (private and public debt) or 80% of her external public debt; therefore, if a Foreign Capital Sudden Stop happened, Colombia would face a currency crisis.
