Financial crisis cycle: good business for bakers but high cost to society

Government as safeguard of financial sector is a repeated history, since 1977 there have been 4 main crisis in the region (Latin America), the first one was in 1981, then 1991, 1999 and finally 2008, most of them were due to credit defaults. Since the big crisis at the end of 20’s, governments give huge resources to financial sector in order to avoid worst scenarios but at the end unemployment is high and bank’s owners are in the same lucrative strategy, they take society contributions (taxes) to afford their losses.  This note shows how private banks take advantage of financial crisis through higher credits after meltdown in Colombia, they work as following: first default credit comes due to high interest rates and inappropriate debt management, then governments (central banks)  give solvency though huge money packages afforded through taxes and low lending rates through central banks (rates close to zero) but financial institutions charge higher primes to consumer and medium size firms, then interest rate goes up again and crisis come again, finally unemployment is high through whole path. The main conclusion is: what is Basel III doing to avoid this perverse cycle?, does this institution take into account the global unemployment  disease in her accounts?, my impression is it does not. Moreover, Colombia Balance of Payments Crisis is probably coming at the end of the next seven years.

Author: Humberto Bernal,  

Economist,

e-mail: zhumber@gmail.com

Twitter: @Humberto_Bernal

It can be download @ PDF

The last financial crisis as many others brought high private external debt in Colombia as figure 1 shows, after 1981 private no financial institution increased their external debt, same situations were in 1991, 1999 and 2008. This last crisis brought an exponential increase in this type of credit. Before 2008 crisis, private credit showed an average annual growth rate of 5.7% and after 2008 crisis this average was 13.1%, then local firms took advantages to improve their infrastructure and capital due to “low interest rates”  but financial sector model could stop this productive process again. Figure 2 shows the external interest rates moving, for instance LIBOR rate (red line) showed a decline after each crisis, then after couple of years this rate increases to face the following crisis. 

Figure 1. Medium and long term external private debt for no financial institutions in Colombia 1970 - 2012

(US$million)

Source: Central Bank Colombia.

Figure 2. Interest rate charge to private debt and LIBOR* rate

(%)

*LIBOR 6 months.

Source: Central Bank Colombia.

One tends to think that local firms can take external debt at LIBOR rate but it is not the case, Local firms are charged with a prime (Interest rate charged menus LIBOR rate) of 3.23% in 2012, if one calculates this prime since 1995, one concludes that local firms are facing a higher prime as years go, it went from 0.65% in 1995 to 3.23% in 2012. Therefore one can conclude that external financial sector is affording her losses through central banks low interest rates and high lending rates, although these lending rates face a low value compared with interest rates before crisis. This problem is not abroad only, local banks in Colombia are charging high interest rates while Colombia Central Bank decreases her reference lending rate, it is 3.25% in 2013 and lending rate is about 11.94% in 2013!!!. 

The volume of private no financial external credit in Colombia is about US$18.1 million in 2012 that means 4.9% of her GDP in 2012 as figure 3 shows. Although this external credit shows a lower share in GDP, the issue is that Colombia exports depends on mineral commodities and she exports low volume of added value goods, then after 7 years when crude oil finishes, Colombia could face a Balance of Payment Crisis.

Figure 3. Medium and long term external private debt for no financial institutions in Colombia 

1970 - 2012

(Share of GDP %)

Source: Central Bank Colombia.

Banana Republic part IV: Gold production in Colombia in XX century and beginning of XXI century

Global gold production reached 171,300 tonnes through human history, Colombia added 1.1% to this stock but Colombians have not enjoyed this production as it must, Colombia exported 98.7% of her total gold production and there is no productive project from this extraction for Colombians, the main firms that extract gold are from abroad and they work as as enclave economies. This note shows a  summary about gold production in Colombia.

Author: Humberto Bernal,  

Economist,

e-mail: zhumber@gmail.com

Twitter: Humberto_Bernal

It can be download @ PDF

World gold production is about 171,300 tonnes through human history. Since 1900 to 2012 the World gold production is about 147,000 tonnes (see U.S. Geological Survey) and Colombia gave 1,629 tonnes since beginning of XX century as figure 1 shows, it means 1.1% of total gold production in the World. Nowadays, the main countries that produce gold are China, Australia and the United Sates, the last country has given about 10.0% of total gold stock in the World. Although conquerors did many expeditions to find El Dorado in South America (they though that a secret region in Colombia was full of gold),  there was an unsuccessful expedition. 

Figure 1. Gold production in Colombia, stock since 1917 to 2012

(tonnes)

Source: Minerals UK Archives; Poveda (2005). Historia de Colombia and Central Bank of Colombia.

Colombia has faced three Gold Waves (Gold Rushes) since Colombia independence, Colombia proclaimed independence between 1810-1819 and the first gold wave came in 1860 when most of Latin American countries took economic openness as main target, foreigners thought that Colombia was full of gold but the reality was that Colombia counted with few tonnes of gold but enough to develop industrial projects, this last fact was not developed unfortunately. The main firms came from the United Kingdom, France, Germany and the United States, there were about 75 firms working in gold and silver extraction between 1860 to 1914 in regions called Antioquia, Choco, Cundinamarca and Tolima. Unfortunately, there was few mining firms belonging to local entrepreneurs, one of them was Empresa Minera del Zancudo. This wave finished at the beginning of XX century due to many civil wars through 1880 to 1903; the segregation due separation of Panama and government fines due to wrong decisions against foreign firms.  

The second Gold Wave came in 1923 as figure 2 shows. This wave is due high economic activity in Colombia and Latin America. Through 20‘s, Colombia had the Crude Oil Rush and high foreign investment (it was mainly loans for Real Estate activities, the United States payment of 25 million due to separation of Panama and FDI into crude oil activity), these period is called “The Dance of the Millions”. Colombia enjoyed this Gold Rush until War World II (WWII) when most of foreign capitals were taken to finance the war, of course there were firms extracting gold through war period, at the beginning of 1939 there were 46 mining firms extracting metals and 40 at the end of 1945. 

Figure 2. Gold production waves  1913 to 2011

(Data smoothing)

Source: Minerals UK Archives; Poveda (2005). Historia de Colombia; Central Bank of Colombia and U.S. Geological Survey. Own calculation through data filters. Stata 12.1.

The last Gold Wave started in 1973 and it can be explained by Coal and Nickel extraction, by that time there were discoveries of huge amount of coal and nickel in Colombia, then Colombia was the focal point abroad due to her mining activity, moreover Colombia promoted FDI into these sectors under her new Law (Decree 444 of 1967), since then the local gold production has faced a positive growth. Nowadays Colombia counts with 11 firms that extract gold, most of them are from Canada. 

Colombian gold production is mostly exported, the volume exported reached 98.7% of total gold extracted since 1913 to 2012, it means that Colombia does not produce high added products made of gold. Gold is taken by Colombians to make jewelry and to increase her Central Bank reserves. Gold price has faced a positive trend in the last 10 years as figure 3 shows, this high value can be explained by 2008 crisis, nevertheless its value can be overvalued and its price can go down in the next years, it depends on how World Economic Activity goes.    

Colombia has extracted 1,629 tonnes since beginning of XX century, it can be evaluated in US$89.4 billion in 2012 that means 24.0% of her Gross Domestic Product (GDP) in 2012. The FDI into mining sector since beginning of XX century is accounted in US$24.5 billion in 2011 (23.0% of total FDI as stock in Colombia in 2011), it looks a profitable business which does not give high real value added to Colombians. Government has not broadcasted projects financed by gold firms and the uses of  gold’s royalties, it will great that government promotes firms that uses gold as inputs to produce high added value goods in Colombia, this type of projects will bring unemployment down.

Figure 3. Gold price 1917 - 2012

(Real price base year: 2011, Troy Ounce*)

Troy Ounce = 31.103 grams.
Source:Historical Gold Prices to Present. http://www.kitco.com. Own calculations.

Colombia economic growth for 2013, is this year the beginning of meltdown?

The first quarter of 2013 is gone and Colombia economic activity started with slow speed: for instance high unemployment rate (11.8% in february of 2013), and low consumer expectation through lower expending in 2013 according to broadcast information. Nevertheless, there are indicators that can pull up Colombia economy in 2013, for instance the coffee short and long run programs to improve productivity and the crude oil production, although the last one brings an unfair economic growth, it makes its poor work. Government has to use her spending efficiently to avoid the beginning of Colombia meltdown, the GDP growth rate is forecasted by local and foreign agencies and the average is a 4.0% in 2013 but this average was 4.6% in 2012 and the real figure was 4.0%, then I decided to make my own forecast and the result was a GDP growth rate of 2.5% in 2013 if government does not do anything to reduce unemployment rate and to improve coffee productivity and industrial sector competitiveness. However, under efficiently spending, my best scenario is a GDP growth rate of 3.5% in 2013. 

Author: Humberto Bernal,  

Economist,

e-mail: zhumber@gmail.com

Twitter: @Humberto_Bernal

It can be download @ PDF

The first quarter of 2013 is gone, local and foreign agencies made their forecast about local economic growth and they are conservative, the average Gross Domestic Product (GDP) growth rate is 4.0% in 2013. I used to take the average of these forecast to make my GDP growth rate forecast but last time theses forecasts were far from the reality, for instance it was expected that Colombia had been growing at 4.6% in 2012 but the real economic growth rate was 4.0% in 2012. Therefore, I decided to make my own forecast and compared with other agencies. The econometric model used was a time series model called VEC where I take into account previous values of GDP in Colombia and USA, Colombian crude oil and coffee production, the local Stock Exchange Index called IGBC and local unemployment rate. Figure 1 shows the observed and forecasted values, one can see that they are well fitted values (the blue line is the observed data and the red line is the forecasted). It is important to highlight that the model takes into account all information from time series, it means trend, cycles and seasonality.

Figure 1. Colombia GDP and its forecast 1977-2013

(quarterly data, Col$billion at 2005 prices)

Source: Bureau of Statistics (DANE and DNP). Own calculations. Stata 12.1.

From this model, the conclusions after many statistical positive tests are: Colombia GDP growth forecast is 2.5% at the end of 2013 if crude oil production increased in 9.0% in 2013, coffee production shows a decline of 24.9%, the local Stock Exchange shows an increase of 7.5%, unemployment rate is 12.7% at the end of 2013 and USA GDP growth rate is 1.1% in 2013. This values can change, of course, through government proper investment in coffee sector (through long and short run productive programs), better young job opportunities for reducing unemployment rate and  exogenous better growth rate from the United States. Table 1 shows both scenarios, the forecasted scenario I (without proper government intervention), this scenario shows the variables values and the growth rates. The scenario II shows the variables growth rates just, under this last scenario (proper government intervention) Colombia GDP forecast is 3.5% at the end of 2013. Therefore if Colombia wants to reach a 3.5% GDP growth rate, she has to invest in order to reduce unemployment, pays attention to coffee and industrial sector through short and long run  productive programs. The bonus  that Colombia can get is an economic growth rate of 2.0% of the United States in 2013. 

Table 1. Colombia economic variables Forecasts at the end of 2013

(under quarterly data since 1977, VEC time sires model)

Variable	Value end of 2013 (scenario I)	Growth I  (scenario I)	Growth II (scenario II)
Crude Oil (Average barrels per day)	1,012,173	9.0%	9.0%
Coffee (Annual sacks of 60kg)	5,617,496	-24.9%	0%
IGBC (Index)	12,133	7.5%	7.5%
Unemployment (Rate %)	12.7%		10.0%
GDP USA (US$billion of 2000)	55,485	1.1%	2.0%
GDP Colombia 2013 (Col$billion of 2005)	484,468	2.5%	3.5%

Source: Bureau of Statistics (DANE and DNP). Own calculations. Stata 12.1.

Forecasted GDP growth rate by local and foreign agencies

As usual, I did the summary of GDP growth rates from main agencies around the World and local ones, in this case I added my forecast. Figure 2 and Table 2 shows the results. The highest forecast is done by DNP (local government agency) with a GDP growth rate of 4.8% in 2013, although they are working with information from june of 2012 (they have to update her forecast), then there are a group of foreign and local agencies that forecast between 4.0% and 4.4% most of them are foreigners and finally the lowest forecast were done by World Bank and me with 3.8% and 2.5% respectively. The main result from this forecast is Colombia will face a similar forecast compared to 2012, the average is a GDP growth rate of 4.0% in 2013 but this forecast shows high probability to be lower due to recent information concerned with decreasing economic growth rate in local industrial sector, although coffee production and crude oil production showed a high production at the beginning of 2013. Finally the region GDP growth rate forecasted is about 3.7% in 2013 and the World GDP growth rate forecasted is 2.9% in 2013.

Figure 2. Colombia GDP growth rate forecasts for 2013

(Foreign and local agencies)

Source: Collecting from agency.

Table 2. GDP growth rate forecast for 2013

(Foreign and local agencies, %)

Agency	World	Latin America	Colombia	Data of publication
DNP			4.8	June 2012
IMF	3.5	3.6	4.4	October 2012 - January 2013
Euromonitor	3.5	4.0	4.3	January 2013
The Economist	2.2	3.6	4.3	April 2013
ANIF			4.0	April 1013
Colombia Central Bank			4.0	March 2013
Fedesarrollo			3.8 - 4.0	January 2013
World Bank	2.4	3.5	3.8	January 2013
Humberto’s			2.5	April 2013
Average	2.9	3.7	4.0	Sample
Standard Deviation	0.7	0.2	0.6	Sample

Source: Collecting from agency.

The Industrial Agenda for Colombia or other Industrial Agenda in Colombia

Many public servants broadcast the positive features of Colombia, they recite those facts learned at secondary school: Colombia is border by two oceans and her global position is unmatched around the World. They also broadcast facts such as  the low salary payment for workers and “good” indicators about the assessment of internal war to improve FDI inflows and economic activity. Nowadays Colombia government is going to set up a New Agenda for Industrial development. I try to point out some issues that this agenda has to deal in order to get a fair industrial development. 1. Work hard to get a country in pace. 2. Locals and foreigners investors have to invest in new projects that add real value to the economy through industrial sector, it is time to finish the foreign investment type of enclave (banana, crude oil, coal, flowers, beer, etc...), Colombia has to look for real development projects. 3. Financial sector (private and public) have to work to develop industrial sector through fair interest rates. 4. It is time to change the management models of Department of Trade and Industry; and exports and FDI promoting agencies, they have to work to improve industrial sector. In this note I work on some of these issues.

Author: Humberto Bernal,  

Economist,

e-mail: zhumber@gmail.com

Twitter: @Humberto_Bernal

It can be download @ PDF

Nowadays the globalization as positive fact is going to everywhere through economic, political and cultural issues. From economic subject, the most important issue is the Free Trade Agreements (FTAs) that take into account zero tariffs, fair labor market, environmental issues and Foreign Direct Investment (FDI) protection. Therefore, there are tools to reach high economic development if countries work hard on it. The last economic globalization (one can count about 3 since1850) started at the end of 1980 decade and Colombia took it at the beginning of 1990’s, since them Colombia has showed short steeps toward fair economic development. This low development can be explained by ignorance about proper uses of globalization tools, internal war conflict that has taken lot of human lives (more than 500 thousand), lot of public resources to fight against terrorism (6% of GDP and not less of 15% of government budget), lack of good government economic decisions and excessive bureaucratic decisions. This note shows the backward motion of industrial sector in Colombia due to above facts. Promptly, this negative motion can be explained by lack of local private and public investment in new project, poor work in promoting local products abroad and average work in attracting FDI inflows for new industrial products. The lack of candid work let getting poor economic growth till point to face a negative grow rates into industrial sector in 2012 when most of countries in the region enjoy a fair economic rates such as Peru, Brazil and Chile.

Lack of investment in local projects

Colombia main economic sectors since beginning of XX century are agriculture and mining sector through sugar, banana and coffee production, extracting activities such coal, gold, emeralds and crude oil are important also as figure 1 shows.  Therefore, Colombia depends on first line products, it is good as society invest the surplus from these activities in added value activities but it is not the case, the surplus from these activities are managed as enclave economy. To argue this point, one can see figure 1, this figure shows the industrial added value as percentage of Gross Domestic Product (GDP) in Colombia. Colombia had a positive trend in industrial percentage between 1925 to 1974, then this percentage started to show a decline till reaching 11.9% in 2012. But it was not lack of proper surplus investment just. There are other issues such as the internal war and lack of government and businessman’s economic projections. Most of public servants started to work in favor of cocaine cartels until point to get a president charged by getting economic resources from cocaine cartels to promoting his presidential campaign in the 90’s. The businessmen who wanted to work under legality were placed aside by terrorist attacks such as bombs, kidnappings, murders and so, then the new businessmen pop up, they worked in the illegality and it brought underdevelopment to Colombia. 

Figure 1. GDP by sector 1925-2012

(%)

Source: Bureau of Statistics Colombia (DANE, DNP) and GRECO (Central Bank of Colombia).

Nowadays, Colombia is starting to get the right path through international help and few local governments work. However, I have to point out a new issue called bureaucracy (corruption) that shows average results to take Colombia to the right economic development deserved. This pool of bureaucrats work in order of their own benefits through high salaries afforded by taxes while people who want to work for social benefit are taken out of the system, it can be called corruption that will bring higher cost in Colombia development. 

This new problem called corruption or average results from government bodies are evidenced through few department chiefs in jail, few mayors of main cities in jail,  lot of bureaucrats who fire good employees without justification and so. These facts are showing results in economic activity, for instance the industrial sector shares in low percentage in economy activity, it was 11.9% of GDP in 2012; the industrial sector missed share in total merchandise exported as figure 2 shows, it went from 42.4% of total merchandise exported in 2001 to 18.7% in 2012; coal, gold and crude oil extraction shares in big percentage in total economy activity, these extractive activities are taken as enclave economies due to most of royalties were taken without economic cost-benefits analysis.

Figure 2. Colombian exports  by sector 1908-2012

(%, just merchandises)

Source: Bureau of Statistics Colombia (DANE, DNP) and GRECO (Central Bank of Colombia).

The  FDI in Colombia, poor promoting agencies work

Most of FDI inflows has came to crude oil and mining sectors since the beginning of XX century (first were mining activities: gold, silver and emeralds, then crude oil and finally coal and ferronickel), the total FDI as stock in mining and crude oil sector reached 47.0% of total FDI as stock in 2012, there was 35% in agriculture, wholesale and retails sales, unfortunately the FDI as stock in industrial sector was 18% in 2012 with a negative trend as figure 3 shows (blue area). Therefore Colombia is not intensive in producing industrial products, this fact is caused by poor infrastructure, lack of economic environment to develop industrial projects (it means high rates of homicide, kidnappings and murders). Moreover the lack of proper FDI promotion pushes down industrial FDI inflows, this fact is due to bureaucracy that characterises FDI and exports promoting government agencies, these agencies do not have a proper program to attract productive FDI into Colombia, for instance people who work abroad have lack of awareness about Colombia development and those who work in local offices in Colombia do not pay attention about industrial activities where foreigners can invest new capital and profits.

Figure 3. FDI as stock by sector 1900-2012

(%)

Source: Bureau of Statistics Colombia (DANE, DNP) and Central Bank of Colombia and literature about FDI in Colombia.

Figure 4 shows the foreign enterprises profits in Colombia at prices of year 2011, from this amount just 30% is reinvested in Colombia and the 70% is taken to source countries. Moreover, most of these profits come from crude oil and mining sector (35-40% of total profits) and this extractive foreign firms take 98% of their profits to their source country, what sad indicator!! for police-makers in Colombia. Moreover, promoting agencies and Department of Trade and Industry in Colombia broadcast the “positive“ achievements on FDI results and the industrial activity but the reality is the other way around: Colombia reached FDI inflows of US$15,822.9 million at current prices in 2012, this amount can be classed as table 1 shows. The poor indicator come from new FDI investment projects into Colombia (other than crude oil and mining extraction), it was US$3,217.6 million!!!, it is too low compared with  other countries in the region. 

Figure 4. FDI profits 1946-2012

(US$million, prices of 2011)

Source: Bureau of Statistics Colombia (DANE, DNP) and Central Bank of Colombia and literature about FDI in Colombia.

Finally, the results from industrial sector both local and foreign enterprises was a negative growth rate of 0.7 in 2012. My opinion, it is time to rethinking the management of Government entities such as Department of Trade and Industry and FDI and export promoting agencies.

Table 1. FDI inflows in Colombia 2012

(US$million, current prices)

Type of FDI	Amount US$ million at current prices
Profits reinvested (not repatriated)*	4,988.8
New projects in crude oil and mining sector	7,616.5
New projects other sectors	3,217.6
Total FDI inflow	15,822.9

Total foreign profits were US$15,888.4 at current prices.

Source: Central Bank of Colombia.

Women prostitutes :between own decision and obligatory option, Colombia case

Colombia as many other countries deals with women prostitution. Prostitution is a women own decision but in some cases socioeconomic environment push them to work on it. This note deals this issue and highlight potential solution to reduce prostitution for those women who do not want to do it. For instance, an universal free health system and the right to get a pension ( at least take prostitutes inside health programs and pension system) are the basic rights. There are other socioeconomic variables to work on such as more opportunities to afford secondary school and high education; less families under poverty line; better income distribution; and low violence indicators through professional Police department. Colombia had 52,967 prostitutes in 1975 and 9,744 in 2010, it means a decline annual growth rate of 4.9%. However, prostitution decision increases as economic crisis appears, from economic view means a countercyclical relation between prostitution decision and economic growth, from society view means lack of government decisions and opportunities to get out them of poverty state, mainly for young prostitutes (older than 17).

Colombian Police Department does great job collecting data about this issue, hopefully they will go through prostitution census on 2011 and 2012 

Author: Humberto Bernal,  

Economist,

e-mail: zhumber@gmail.com

It can be download @ PDF

Prostitution comes since 18th century B.C, this activity born before other economic issues such as unemployment, income distribution and economic growth, then the question is why do prostitutes do it?. My hypothesis is these adult women (older that 17) work in this profession because there are not other opportunities available for them such as be lawyers, bankers, economists, chefs and so. Afford these studies carry spending on transport, food, rent and in most of cases the payment for education service. In addition, some of these women (not all) enjoy her job and the payment is high (in Colombia this payment goes from US$15 to US$1,000). This note deals with prostitution in Colombia, the data come from colombian Police Journal Review Criminality and from colombian Bureau of Statistics (DANE), the data was picked up from tolerance zones in Colombia.

Prostitution is legal in Colombia but regulated, it means there are special places where prostitutes can work, these places are called tolerance zones. Figure 1 shows the number of prostitutes in Colombia since 1965, one can take this data as prostitutes that say they work on it, it can be women who work in the “balck marke” (those who prefer not say their profession, they are mostly escorts). The number of prostitutes showed a negative trend, from 52,967 women who worked in 1976, nowadays there are 9,744 approximately, it means a decreasing annual rate of 4.9% between 1976 and 2010. 

Figure 1. Prostitution in Colombia 1965 2010

(number of women)

Source: Colombian Police Data. (Criminalidad Review. 2008. Vol 50, Issue I, and following Volumes).

This negative trend can be explained by better secondary education coverture, higher income per capita payed in other professions, better country security and government programs to get out families from poverty state, nevertheless these economic indicators are poor still to give real opportunities for those young women who want to leave this activity. Table 1 shows the effect from socioeconomic variables on woman decision to follow prostitution activity (Place of birth of prostitutes). One can summarize this table as more coverture in secondary education (1.0% better), then prostitution decision shows a reduction about 3.46%; as more people (families) are in poverty (1.0% more), there is an increase of prostitution decision about 2.29%; as Gross Domestic Product per capita (taken out oil and mining production) increases (1.0% more), then prostitution decision declines about 0.32%, this last result is low due to income distribution in colombia is high (about GINI=0.54), it means there is a big slice of GDP taken by few wealthily rich people. 

Table 1. Why prostitutes do it?, economist view

(panel data by regions in Colombia 2008-2010)

	Place of birth	Place of work
Secondary education	-3,46%	-0,80%
Poverty line	2,29%	1,66%
GDP no oil (PPP) per capita	-0,32%	0,54%
Homicide rate	-0,86%
GINI		0,94%
Hausman test	P-value = 0,002 Model: Fixed effects	P-value = 0,058 Model: Random effects

 Source: Colombian Police Data. (Criminalidad Review. 2008. Vol 50, Issue I, and following Volumes). 

Own calculations STATA 12.1.

Where do prostitutes do it?. Prostitutes work where there is poor education, bad income distribution and good payment. Table 1 shows the main socioeconomic variable that prostitutes take into account to decide the place to work (Place of work). They go where secondary education coverture is low, for instance if a place shows an increase about 1.0% in secondary education coverture, prostitution activity shows a reduction about 0.80% (the other way around is true also, when secondary education decreases); if place shows an increase in poverty line in 1.0%, the prostitution activity arises in 1.66%; moreover if GDP per capita increases, prostitution activity increases about 0.54%, this result is due to high concentration in income distribution; finally if income distribution worse, prostitutes activity increases about 0.94%. The main places where prostitutes work in Colombia are showed in figure 2. One can see that main region are Risaralda with 19.2% of total prostitutes in Colombia in 2010, Valle (14.8%), Antioquia (10.1%), Caldas (7.1%) and Bogotá (7.0%), these regions show high GINI coefficients, high poverty, high violence and poor education.

Figure 2. Prostitution according to place of work 2010

(regions in Colombia, total prostitutes: 9,744)

Source: Colombian Police Data. (Criminalidad Review. 2008. Vol 50, Issue I, and following Volumes).

Prostitution cycle and economic activity (GDP cycle)

Prostitution can be taken as economic leader indicator. As it was pointed, prostitution showed a declined trend since 1976 and young women decide to take this activity when income is difficult to get, therefore there are periods when prostitution decision activity (women who decided work on it) increases and periods when it decreases. Figure 3 shows the prostitution cycle (blue line) and GDP cycle (red line), one can say that these series are countercyclical (correlation coefficient is -0.26), it mean as economy is in crisis (meltdown scenario), then women under “poor condition” decide to take prostitution as an option to life on (increases prostitution cases). These correlation is valid in Colombia, for instance 1982, 1999, 2009 economic crisis brought more prostitutes. Therefore under poor secondary education, high poverty line indicator and high income distribution coefficient GINI, then Colombia will had women who take prostitution as obligatory option to life on.

Figure 3. Prostitution cycle and GDP cycle Colombia 1971-2010

 (annual data)

Source: Colombian Police Data. (Criminalidad Review. 2008. Vol 50, Issue I, and following Volumes). 
Own calculations STATA 12.1. Though Hodrick-Prescot filter.

Banana Republic part III: free housings and manufacture sector negative growth in Colombia, calling the sad ending of Dutch Disease

Colombia is passing through her second Dutch Disease, the first one was in 1960-1980, the second one started in 2003 and it will come to the end in 2021, the happy or sad ending depends on government decisions taken today. Nowadays, these decisions are in doubt to get the happy ending, government is spending without economic productivity criteria until point to give free housings to lower income people, economic subsides for coffee growers and signing FTAs without real economic cost and benefits analysis, these actions can be called populism without economic criteria. These type of decisions are given the sad results, Colombia showed an illusory GDP growth of 4.0% where the main sectors that contributed to these growth were crude oil and mining sector; financial sector; and nontradable goods. Unfortunately manufacture sector (tradable goods sector) contributed in a negative figure of 0.1%.  If things goes same, we can say Colombia is still in the group of Banana Republics.

Author: Humberto Bernal,  

Economist,

e-mail: zhumber@gmail.com

It can be download @ PDF

The end of Colombian high economic growth is close to the end. The last year (2012) Colombia had a high economic growth, her Gross Domestic Product (GDP) showed a growth of 4.0%. The news and government broadcasted and celebrated this achievement. Of course, for many citizens this economic growth is enough to say Colombia is through the right path. However, the fact is the other way around, when one checks the main components of GDP growth, one realized that this economic growth is an illusion from crude oil and coal production. This illusion can be called Dutch Disease, Colombia showed a negative growth in manufacture sector, a positive growth in mining sector (including crude oil), positive growth in real estate sector and other nontradable goods as figure 1 shows. Then, those sectors that work hart to export will have hard times due to cheaper products imported through Free trade Agreements (FTAs) and US dollar cheaper. 

Figure 1. Colombia GDP growth by sector 2012

(%)

Source: Bureau of Statistics (DANE).

What does Colombia expect from this Dutch Disease?. The Colombia’s GDP cycle is starting her downturn path as figure 2 shows (red dashed line), then Colombia can have a lower growth at the end of 2013, it can be around 3.5% and 3.8%. Nowadays colombians do not have to worry about economic crisis, there are lot of resources from crude oil and mining sector to spend, government is doing her job through spending on real estate sector until point to give free housings for population in lowest income line. Therefore, there is income to spent as in a huge party where hosts do not pay attention to the hangover. After eight years (2021), when crude oil comes to the end, Colombia society will be really sick, the tradable goods sector will be lagging, Colombia will face a huge current account deficit and the external debt will take the few reserves that Colombia has.

Figure 2. Colombia GDP cycle 1977-2013

(quarterly data )

Source: Bureau of Statistics (DANE). Own calculations. STATA.

How can Colombia avoid this economic meltdown?. Colombia government has to spent crude oil and mining resources in a cleaver way. The spending that lets go out from this crisis is in real estate that improve productivity for those tradable goods; making easier the purchase of new technology for tradable goods sector  (not free), for intense making agreements with high technology agencies from abroad and local ones to teach local factories how to improve their productivity; and spending that improves employees productivity such as public transport such as railways and Metros.

Unfortunately Colombia is not importing capital to improve her productivity, Colombia imports just 13.3% of high quality capital, the other products are cheap raw inputs and final consumption goods such as TVs, laptops and so. Figure 3 shows the main merchandise that Colombia imported in 2012 as one can see, the volume of capital goods to improve productivity were few, 13.9% of total imports (merchandise only).

Figure 3. Colombia imports 2012

(% of total imports, just merchandise)

Source: ONU Data.