Banana Republic part II: Colombia case in Latin American context

Latin America and Caribbean countries faces high economic growth rates, those countries that reached rates over 6.0% in 2011 were Panama, Argentina, Ecuador, Paraguay and Peru. Chile and Colombia were in the upper-middle position of 41 countries, both of them reached a economic growth of 5.9% in 2011. However, Colombia will face a strong backward economic growth in 2012, it is expected that this country faces a GDP growth of 3.8% while Chile and Peru will face an economic growth of 5.4% and 6.2% in 2012. Therefore, it is natural to ask why will Colombia face this strong backward situation?, one can give an answer that concerns 5 facts: 1. Colombia faces a Dutch disease due to mismanagement in public resources (royalties to reach economies of scale are few); 2. High government intervention in nominal exchange rate and protectionism through high tariff for those cheap products such as Chinese hats, these interventions let getting diseconomies of scale (lazy sectors for investing in technology); 3. high unemployment rate that pushes down economic growth, Colombia faces an unemployment rate of 9.2% in 2012 (november); 4. Low FDI inflows compared with other countries in the region, this fact does not let a proper dynamic to improve technology; and most of FDI in Colombia goes to mining sector compared to other countries such as Chile and Peru, FDI in mining sector in Colombia does not add high value added, instead Peru and Chile export mining products with high value added, again it is due to local government mismanagement, fortunately in 2014 Colombia will face presidential elections to put on the table these facts which increase the unfair income distribution.

Author: Humberto Bernal,  

Economist,

e-mail: zhumber@gmail.com

It can be download @ click

Latin America and Caribbean (41 countries according to World Bank) showed an annual growth of 4.7% in 2011 and it is expected to reach a 3.2% in 2012, those countries which pulled up the economy in 2011 were Panama, Argentina, Ecuador, Paraguay and Peru with rates over 6.0%, therefore Latin America faces an important economic growth that has to be well managed in order to reach a fair income distribution. Most of Latin American countries are aware of it and work hard to reach this target such as Peru. In the case of Chile and Colombia, both countries faced an annual economic growth of 5.9% in 2011. Forecasts for 2012 for most of these countries show a small contraction compared with those of 2011, for instance Chile is expected to face a growth of 5.4% and Peru 6.2% but other countries such Colombia faces a huge contraction, this country is expected to face a economic growth of 3.8% in 2012 when it was 5.9% in 2011 what sad. Therefore it is natural to ask why will Colombia face a smaller economic growth than Chile and Peru when they were similar in 2011?. One is tend to say that this high economic contraction is due to:

Table 1. Main economy indicators by country 2011 and 2012

Indicator	Chile	Colombia	Peru
GDP growth*	5.9	5.9	6.8
Mining exports (% of total exports)*	59.3	64.8	51.3
Industry GDP (% total GDP)*	39	37	36
Unemployment (%)**	6.2	9.2	5.9
GINI*	0.521	0.548	0.481
Corruption rank**	20	94	83
Poverty line (% total people)*	15.1	34.1	31.3
Homicide rate per thousand people*	3.2	31.0	10.3
Average GDP Growth 1960-2011	4.3	4.3	3.7

*2011

**2012

Source: World Bank, Trademap and Transparency International.

Colombia faces strong dependency of mining sector which lets a lagged industry sector, it is called the Dutch disease. Colombia has strong dependency in mining sector, for instance while Peru faced a share of 51.3% of these sector in her total exports  in 2011 and Chile faced 59.3%, Colombia faced 64.8%, moreover Chile and Peru exports mining products with high value added, for instance cables made of silver and gold and so, meanwhile Colombia exports mining products with few added value, for instance just crude oil and coal ashes.

The industry sector in Colombia is lagged and protected due to diseconomies of scale. Chile and Peru show an industrial sector which search for economies of scale, for instance while Lima (Peru) and Santiago de Chile (Chile) have an underground (metro), Bogota (Colombia) faces high government corruption, this city does not have a developed urban transport which contribute to economies of scale. Other example is while Peru gives the welcome to Free Trade Agreements and Chinese Foreign Direct Investment, Colombia rises tariffs for those cheap products from China, for instance tariff on cheap hats that increase the local consumer welfare. Other example is the frequently government intervention on nominal exchange rate to protect those lazy sectors which face diseconomies of scale due to lack of investment in technology. Therefore Colombia is working hard to be far away from those countries that understand the economic model for growing.

Colombia faces high unemployment rate. The unemployment rate faced by Colombia was 9.2% in 2012 (november) while Chile and Peru faced a unemployment rate of 6.2% and 5.9% in 2012 (november). It is other issue that local government flaw, due to it Colombia faces strong unfair income distribution and she will face a strong gap in economic growth compared with main Latino America economies such as Argentina, Chile and Peru.

High income inequality and lot of people in poverty. Colombia faces high inequality income distribution as table 1 shows with a GINI index of 0.548, this fact lets increasing people in poverty, Colombia faced a poverty rate of 34.1%  of total population in 2011 while Chile faced 15.1%, moreover this unfair income distribution lets increasing internal conflict that is evidenced by high homicide rate, for instance while Chile and Peru faced a rate of 3.2 and 10.3 per thousand of people in 2011, Colombia faced  a rate of 31.0.  

Figure 1. Foreign Direct Investment inflows as share of GDP by country 1971-2011

(%)

Source: World Bank (UNCTAD).

Colombia faces low FDI inflows compared with FDI inflows in Chile and Peru. Local government broadcast the huge FDI that came to Colombia in 2010-2012 but they do not realize that this volume was short compared with those flows in Chile and Peru. Figure 1 shows the FDI inflows for Colombia, Chile and Peru, while Chile and Peru got 7.0% and 4.7% of FDI inflows as a share of GDP in 2011, Colombia reached just 4.0%, moreover FDI inflows in Colombia contributes to Dutch disease and unfair income distribution, figure 2 shows the FDI stock in Chile, Colombia and Peru at the end of 2011, the main conclusion is Colombia work hard in promoting mining sector with 47% of total FDI as stock, while Chile and Peru are aware on reaching a balanced FDI inflows to get a strong development, these countries faced a share of 34% and 27% in total FDI as stock respectively. For instance Public Utilities (water, gas, transportation services,...) in Chile and Peru showed high FDI inflows, similar scenario in Transport and Telecommunications sector, these sectors are the clue to start reaching economies of scale and spillovers between economic sectors.

Figure 2. Foreign Direct Investment as stock  by sector and economy at the end of 2011 

(%)

Total FDI stock Chile: US$82,021 million.
Source: Foreign Investment Committee Chile).


Total FDI stock Colombia: US$100,199 million.
Source: Bureau of Statistics (DNP and Central Bank).


Total FDI stock Peru: US$22,019 million.
Source: Investment Promotion Agency (Proiversión).