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Colombia - ECONOMY
DESPITE GROWING POLITICAL and drug-related violence, Colombia's economy retained its essentially capitalist, free-market orientation in the 1980s. The nation's strong public sector continued its commitment to liberalized trade and investment relations with foreign countries, and it worked toward development of a national economic program that would eradicate extreme poverty. This was accomplished, in part, by joint efforts involving both private business concerns and government agencies. The government continued to depend on entrepreneurial efforts and private capital (both foreign and domestic) as the sources of economic growth and limited its domestic role to coordinating fiscal and monetary policy, providing for public sector and infrastructure development, and establishing a political environment conducive to investment and industrial development.
Colombia's economic growth in the late 1980s resulted from the prudent development and use of the nation's economic endowments, as well as the existence of highly favorable external circumstances. The country enjoyed an abundance of natural resources and land, a skilled work force, healthy levels of investment and savings, and modern agricultural, manufacturing, construction, and service sectors. Rebounding international markets and the 1986 coffee boom also had an important effect on Colombia's growth in the late 1980s.
Colombia's collective economic attributes defined a middleincome developing country that had a strong and diverse resource base, as well as assorted production capabilities grounded in industry, manufacturing, agriculture, and various services. Services (including finance, transport, communications, trade, and public administration) accounted for almost 51 percent of the gross domestic product in 1987, agriculture almost 21 percent, industry over 25 percent, and mining and energy about 3 percent. In 1988 analysts contended that the Colombian economy could grow at an annual rate of 4 to 5 percent until at least the early 1990s, limited only by the ability of entrepreneurs, planners, and policy makers to employ the country's vast resources. Because of its high levels of foreign exchange earnings from coffee, petroleum, and mining, Colombia also was expected to remain among the more solvent of the Third World debtor states.
Despite the economic situation's many positive aspects, three fundamental problems remained in the late 1980s. First, despite sustained growth levels similar to those of other middleand upper-middle-income developing countries, Colombia had a highly skewed distribution of income and a relatively low per capita income. Indeed, in the late 1980s the economy appeared to become even more concentrated with the rewards of production remaining predominantly in the hands of a minority. Second, Colombia experienced chronic inflation and unemployment throughout the 1980s. Despite growth in manufacturing and mining, as well as continued support from more traditional sectors such as agriculture, the economy seemed unable to absorb enough workers to push unemployment below 10 percent.
Finally, the infamous drug trade, which was partially responsible for Colombia's economic growth during the 1970s and 1980s, caused numerous socioeconomic problems, not the least of which was that the political and economic power of narcotics traffickers rivaled that of the national government. Among other effects, the drug trade skewed income patterns in certain areas associated with cocaine and marijuana trafficking, which exacerbated inflation because of a steady influx of United States dollars, and disproportionately expanded the financial, real estate, and construction industries because of their capacity to absorb laundered money. The drug trade also spread corruption and violence through much of society, particularly the public sector, exacerbating economic and social problems.
Colombia first became an exporting region in the sixteenth century, under the Spanish system of mercantilism. Spanish imperial rule defined much of Colombia's social and economic development. The colony became an exporter of raw materials, particularly precious metals, to the mother country. With its colonial status came a highly structured socioeconomic system based on slavery, indentured servitude, and limited foreign contact. Colombia's modern economy, based on coffee and other agricultural exports, did not emerge until well after independence (1810), when local entrepreneurs were free to capitalize on world markets other than Spain.
Although colonialism fostered minimal domestic economic growth, small entrepreneurial efforts began to take shape, so that by the nineteenth century, well-defined economic enterprises were under way. The economy at that time was based primarily on mining, agriculture, and cattle raising, with contributions also made by local artisans and merchants.
Socioeconomic changes proceeded slowly; the economy existed essentially as a loosely related group of regional producers rather than as a national entity. Land and wealth were still the privilege of a minority. Forced labor continued in the mines, and various exploitative labor arrangements existed on the haciendas, such as sharecropping, renting, and low-wage labor. In each case, those owning the land benefited excessively, whereas those working the land remained impoverished.
The late nineteenth century witnessed the development of tobacco and coffee export industries, which greatly enlarged the merchant class and led to population expansion and the growth of cities. Wealth was concentrated in agriculture and commerce, two sectors that focused on opening channels to world markets, a process that continued slowly but steadily throughout the nineteenth century.
Following the War of a Thousand Days (1899-1902), Colombia experienced a coffee boom that catapulted the country into the modern period, bringing the attendant benefits of transportation (railroads) and communications infrastructure and the first major attempts at manufacturing. The period 1905-15 has been described as the most significant growth phase in Colombian history, characterized by an expansion of exports and government revenues, as well as an overall rise in the gross domestic product (GDP). Coffee contributed most to trade, growing from only 7 percent of total exports in the 1870s to nearly 75 percent by the mid-1920s. Unprecedented amounts of foreign capital found their way into both private investment and public works during this period as a result of the strong performance of coffee and other exports.
Despite the outward signs of growth, serious flaws remained in the Colombian economic system. The benefits of economic growth accrued disproportionately to the export sector, cities, and manufacturing groups, with perhaps as much as 70 percent of the population receiving little or no benefit from this period of expansion. Skewed income patterns would continue throughout the twentieth century, as manufacturing and services developed and became significant parts of the national economy.
The rapid growth and development of the economy in the early twentieth century helped prepare Colombia for the economic problems that accompanied the Great Depression of 1929. Colombia continued to produce raw materials, and although coffee prices collapsed during the depression, output continued to expand. Nonetheless, social and economic improvements remained uneven. Wages for agricultural laborers remained low, whereas other workers, notably urban employees, received large salary increases.
The expansion of the coffee industry laid the groundwork for national economic integration after World War II. During the course of the postwar expansion, Colombia underwent a distinct transformation. Before the 1950s, because of the steep terrain and a relatively primitive transportation network, Colombia's manufacturing sector was dominated by local industries that were only loosely linked to other regional businesses. National development proceeded from improved transportation facilities, financed directly and indirectly by the coffee industry. Greater economic integration soon became evident with the heavier concentration of industry and population in the six largest cities. Coffee's success, therefore, was ultimately responsible for a reliable transportation network that hastened urbanization and industrialization.
In addition to coffee production, economic expansion of both the noncoffee industrial sector and the service sector was accomplished in two distinct stages. From 1950 until 1967, Colombia followed a well-defined program of import substitution industrialization, with most manufacturing start-ups directed toward domestic consumption that previously had been satisfied by imports. After 1967 planners in both government and industry shifted the economic strategy to export promotion, emphasizing nontraditional exports, such as clothing and other manufactured consumables, in addition to processed coffee.
From 1967 to 1980, the Colombian economy, and particularly the coffee industry, experienced sustained growth. GDP grew at an average annual rate of over 5 percent during this period, supported by an expanded labor force, increased labor productivity, and accelerated investment. Strong export earnings and a large increase in foreign exchange reserves were the most noticeable results of this economic expansion.
Despite the successes of the 1970s, the national economy began to flounder in the early 1980s. This was largely because the global recession that began in 1981 caused demand in external markets to fall precipitously.
The combination of domestic economic achievements in the 1970s and generous foreign aid, however, placed Colombia in a relatively favorable position to ride out the global recession, especially in comparison with other Latin American states. Drawing down foreign exchange reserves (20 percent in 1982 and 50 percent in 1983) to compensate for both trade and national account imbalances minimized the financial and social consequences of the recession. In contrast, other Latin American nations, facing similar deficits, borrowed heavily from both private financial and multilateral development institutions, which forced them to restrict government spending severely. In addition to the large foreign reserves, external assistance in the form of grants and concessional loans further relieved stress on Colombia's international and domestic finances. Throughout most of the 1980s, Colombia ranked among the leading recipients of World Bank loans, as well as direct assistance from the United States. Although this aid allowed Colombia to maintain a relatively higher rate of GDP growth than the rest of Latin America, aggregate production remained depressed.
By the late 1980s, Colombia's short-term economic outlook had become more promising, in large part because of an unusual confluence of circumstances that occurred in 1986. That year, a coffee production boom in Colombia coincided with a poor harvest in Brazil and rising international prices. The overall effect was a stronger national economy, which benefited most sectors and classes. GDP grew by 4.5 percent in 1987, thanks in part to a particularly strong contribution by the construction industry. For the near future, analysts predicted continued growth and stability. Nevertheless, Colombian planners advocated diversification of the economy to reduce its dependence on coffee, so that future downswings in the industry would not have equally severe consequences.
Following the global economic downturn of the early 1980s, Colombia's economy began to grow at a respectable level in 1984. Economic growth occurred in all sectors, with the volatility of the coffee market determining the relative strength of each. During the 1980-85 period, for example, generally low commodity prices forced domestic public and private consumption to lead the economic expansion, admittedly at a low level. By contrast, during the 1986 boom, coffee earnings rose more than 60 percent, which encouraged increased saving and improved public finances.
Nontraditional exports--including textiles, coal, oil, and noncoffee agricultural products--also contributed to economic growth. Output by this group rose by an average of 10 percent during the 1983-86 period and, depending on the relative contribution of the coffee industry, was responsible for a large portion of GDP. In 1987 nontraditional export revenues exceeded earnings from coffee, with oil earnings reaching US$1.1 billion, an increase of 66 percent over the previous year.
By the late 1980s, per capita income--another telling measure of growth--had improved only slightly for the past three decades and remained at a level below that of most of Colombia's neighbors. Per capita income in 1986 was approximately US$1,330, which placed Colombia tenth among the nineteen Latin American countries. Real change in per capita GDP had consistently lagged behind change in aggregate GDP by two percentage points since 1982 and was actually negative for 1982 and 1983.
Despite indications of solid performance in aggregate terms, individual social and economic indicators suggested that Colombia was still a society of numerous disparities. Colombia in reality did not distribute the fruits of economic production more equitably in 1986 than it had fifty years earlier. In the 1980s, as much as 70 percent of income went to only 20 percent of the population, and three-quarters of all Colombians were classified as members of the lower class and the masses. Furthermore, per capita income in agrarian areas was only half the national average.
Although workers made gains in the 1970s, improvements in income distribution that occurred at that time were lost during the 1980s. Despite government efforts to improve education, health services, and aggregate output, Colombia may have actually experienced a widening of the income gap. Inequalities inherent in fast growth strategies (such as capital-intensive industrialization), continued rural-to-urban migration (which swelled the urban labor market), and the effects of the global recession were cited as the major reasons for the downturn.
In the 1980s, ownership of land, financial resources, and productive assets remained highly skewed. One percent of all shareholders controlled 50 to 80 percent of all stock issued. Debt was also distributed unevenly; only 1 percent of all debtors held 50 percent of all outstanding loans. Furthermore, industrial and agricultural wealth tended to overlap, so that most financial and economic assets were concentrated in the same hands.
Other indicators of social well-being, such as literacy and education, closely followed income patterns. Government estimates in 1987 suggested that although the nationwide illiteracy rate was only 12 percent, it ranged from a low of 5.7 percent of those at the upper-income level to nearly 30 percent of those in the lowerincome bracket. Illiteracy was most common in rural areas.
High inflation and unemployment also confronted Colombia in the late 1980s. Although Colombia was able to avoid the hyperinflation characteristic of Argentina and Brazil in the 1980s, persistent annual increases in the consumer price index (CPI) of 20 to 25 percent had been evident since the mid-1970s.
Higher coffee revenues in the 1970s caused rapid increases in demand and costs, which boosted inflation. This occurred at a time when the Third World was also experiencing rising oil prices. As the economy entered the 1981-85 recession, accelerated deficit spending by the government continued to fuel inflation. By the early 1980s, Colombia had entered a period of rising prices combined with economic stagnation. The rapid growth of the money supply and frequent devaluations of the peso also fed inflation in the 1980s.
The annual inflation rate dipped below 20 percent in 1983 for the first time in more than a decade, only to surge upward again in 1985. In 1986 government efforts to control public debt and funnel windfall proceeds from that year's coffee boom into the public sector may have eased inflationary pressures, but the CPI nevertheless rose by 21 percent.
Inflation was estimated at 25 percent in 1987, fueled by price increases in domestically produced items, including housing, food, and clothing. In the case of food prices, shortfalls in domestic production shot prices upward, increasing dependence on more expensive foreign foodstuffs. A price-indexed minimum wage and market adjustments throughout the wage structure also contributed to inflation. In 1987 the minimum wage rose by 24 percent, nearly equaling the price increases for the year.
The large number of United States dollars that entered Colombia illegally because of the drug trade also contributed to inflationary pressures by raising the overall level of demand. Estimates varied as to the relative importance of the drug trade, but most observers believed that it may have accounted for as much as 25 to 30 percent of total inflation in the 1980s.
Government efforts to ameliorate the effects of inflation proved relatively unsuccessful because of the combined effects of wage indexing, drug money, and volatile prices, which prompted economists to forecast inflation rates above 20 percent into the 1990s. Furthermore, it appeared that the government was reconciled to this level of inflation and would likely give priority to other economic problems.
Rising unemployment was also part of the economic malaise of the early 1980s. Although the economic boom of the 1970s had caused some researchers to conclude that unemployment would not be a serious problem in the 1980s, the Colombian unemployment rate rose steadily from 8.4 percent in 1981 to 14.9 percent by June 1986. The trend was finally reversed in 1987, as all sectors of the economy began to expand following the 1986 coffee boom. Unemployment fell to 12 percent in 1987, the lowest level since 1982, and continued to decline in early 1988. Although a welcome sign, this reduction reconfirmed Colombia's continued dependence on coffee.
Unemployment was driven by numerous variables besides the level of economic output. These determinants included demographic changes, migration patterns, education and experience levels, the relative costs of labor and capital, wage rates, and the segmentation of the labor market. Collectively, these factors pointed to a fundamental change in the nature of employment since the turn of the century.
Colombia's demographic makeup changed substantially after the 1940s. Although birth rates declined steadily (the population grew only 2 percent in 1986), the labor force expanded rapidly. By 1985 the size of the economically active population had reached 11.3 million people, or 38 percent of the population. This represented an average annual growth rate of 3.9 percent from 1973 to 1985, with women and youths accounting for most of the increase.
By 1985 one-third of the labor force consisted of women, many of whom were housewives who had recently entered the job market because of the attractive wages. Studies suggested that this addition to the work force accounted for much of the increase in family income among the very poor.
The rise in the number of adolescent workers constituted the other significant demographic development. Because there was an influx of relatively uneducated and unskilled young workers into the labor market, many youths found it impossible to gain employment. The unemployment rate was highest in the fifteen to nineteen age-group, reaching 30 percent by 1986. Planners hoped that this situation would correct itself as demographic trends changed in the 1990s and as government efforts to keep young people in school longer began to have an effect.
Internal migration trends also affected the urban labor market. By the late 1980s, Colombia had become a predominantly urban society, with over two-thirds of the population residing in cities. In contrast, as recently as the 1950s the population had been concentrated principally in rural areas.
Shifts in employment activity over time made these rural-to- urban migration patterns evident. As the country became more urbanized, it also became less dependent on the agricultural sector for employment. In 1938 nearly 60 percent of the population worked in agriculture and resided in rural areas. By 1984, however, only a third of the labor force was engaged in agricultural activity; most workers were employed in services, commerce, manufacturing, and construction.
Wage levels and type of employment also depended on education. Improvements in education occurred at all levels after 1951, when 42 percent of the labor force was uneducated and only 50 percent and 7 percent, respectively, had finished primary and secondary school. By 1978 only 16 percent of the work force was considered uneducated; 55 percent had finished primary school, and 24 percent had graduated from a secondary program. Most of the urban unemployed, however, continued to be rural migrants and others having little or no formal education.
Local business costs also affected employment levels. In a broad sense, Colombian capital and labor could be easily substituted for each other; consequently, the manufacturing sector inclined toward a capital-intensive export strategy in the late 1960s. As a result, fewer workers were employed in this sector than might have been the case had a more labor-intensive approach been taken.
The cost of labor was relatively high in Colombia. This resulted, in part, from social legislation and demands made by unions, including minimum wage requirements and nonwage compensation such as severance and vacation pay, pensions, and disability allowances. Some economists also argued that government subsidies designed to encourage investment actually placed the marginal and relative costs of capital at below-market rates and at levels significantly lower than the cost of labor for many businesses. This situation appeared unlikely to change without some type of government initiative.
Of increasing interest in the labor market was the level of segmentation, which could be conceptually represented by dividing the work force into two categories--the formal and informal sectors. The formal sector, or traditional labor market, is easily identified in national employment data. The informal sector, by contrast, is a segregated portion of the employment market characterized by a lack of formal record keeping and by small enterprises that employ little capital and only a few, if any, usually undereducated employees. Many economists believed that the informal sector constituted as much as half of the labor force in the 1980s, including many peasants and other workers engaged in drug production and trafficking. The informal sector played an important role in absorbing unskilled workers who would otherwise have remained unemployed; the nature of this sector, however, dictated that wages remain well below those of the formal sector, and other nonwage compensation, such as paid leave or insurance, was unavailable to the workers. Those engaged in the drug business were the exception. They usually earned wages or salaries in excess of what their skills would bring in the formal employment market.
In 1987 government estimates indicated an expansion of the informal sector in major urban centers, probably as a result of high unemployment. The size and profitability of the informal sector, therefore, appeared to be inversely related to the prospects of the formal labor market.
The labor movement, although rich in history, has been criticized by analysts for its inability to develop effective representation for the Colombian worker. Scholars have variously described organized labor as weak, nonradical, nonoppositional, and as virtually co-opted by the national government. Although prominent at times, unions lacked the strong adversarial presence characteristic of organized workers' groups in other Latin American countries. Historically, Colombia's worker groups formed unions to attain political goals but failed to coalesce into enduring collective bargaining units. Nevertheless, the labor movement did express itself clearly through strikes, sit-ins, and other forms of work stoppage and contributed directly to the long-term development of society by bringing workers into the political process.
The first workers' group was formed in 1857. Known as the Bogotá Artisans Society (Sociedad de Artesanos de Bogotá), it represented a reaction to liberal economic reforms bent on opening the Colombian economy to free trade. It functioned primarily as a medium for local artisans to vent their political displeasure over the new competitiveness of the economy, rather than as a forum for grievances concerning workers' rights.
Societies that followed in the nineteenth century were similarly nonconfrontational and served as foci for achieving mutually beneficial goals--such as establishing joint savings and insurance schemes--rather than as means of presenting collective bargaining demands. Although some attempts were made to improve wages and working conditions, a genuine workers' movement did not emerge until the end of World War I.
The earliest episodes of violent confrontation between workers and management centered on the foreign enclave industries of oil and banana exportation. The most noted job action occurred at the United Fruit Company's Santa Marta complex, where in November 1928 railroad, banana, port, and field workers went on strike to force changes in wages, hours, and nonwage compensation. This attempt to win resolution of grievances unsuccessfully aired ten years earlier was marked by the violent deaths of about 1,000 people, as the government intervened repressively on the side of the United Fruit Company. The banana and oil industries elected to retrench, however, rather than face continued worker unrest. Colombia's labor issues thereafter were fought over more vigorously in the domestically owned coffee industry and eventually in the urban industrial sector.
In 1930 the Liberal Party (Partido Liberal--PL) was elected for the first time in decades. Its victory was directly associated with the Conservative Party (Partido Conservador--PC) government's handling of the United Fruit Company strike. This political transition was one of the most important in Colombian history. It signaled the end of a government policy designed to repress labor's efforts and the beginning of the PL's pragmatic and conciliatory philosophy of selectively meeting labor's demands to bring its political leadership, including members of the Communist Party of Colombia (Partido Comunista de Colombia--PCC), into the Liberal fold.
During the 1930s and early 1940s, coffee workers enjoyed numerous small successes. They gained control over small parcels of land for their own cultivation, improved labor contracts on large estates, and received legal permission to organize. These victories were won through both individual and collective efforts. The perceived successes of the coffee workers, however, were a disincentive to their greater participation in the national labor movement, which diminished the long-term political power of the unions. Nonetheless, the urban work force was determined to establish an institutionalized labor movement and set about integrating some of the unions that had already formed.
The 1930s and 1940s saw the growth of unions nationwide; labor supported the PL, which, in turn, created an environment conducive to labor's participation in politics. Labor interests were partially consolidated in 1935 with the creation of the Confederation of Colombian Workers (Confederación de Trabajadores Colombianos--CTC), which represented the first successful attempt at uniting smaller unions from various professions into a collective political organization. The CTC was leftist by definition, but the reformist policies of the Liberal government allowed for a lengthy and mutually beneficial relationship. What labor failed to realize, however, was that by aligning itself with a single political party, it would suffer the consequence of the inevitable change of power.
The heyday of the labor movement was clearly over by the mid- 1940s. Expressly anticommunist, postwar conservatism turned on the labor movement, and the split and eventual fall of the PL in the 1946 elections eliminated labor's influence on national government. The rising PC also provided a means to express the ruling class's growing fear of what it perceived as an increasingly radical labor movement. Soon, even the moderate middle sectors of society turned away from the movement. The CTC's new impotence was made evident by a string of unsuccessful strikes in the mid-1940s.
Taking advantage of the weakened state of the CTC, the Roman Catholic Church established the Union of Colombian Workers (Unión de Trabajadores Colombianos--UTC) in June 1946. It immediately attracted many members--some from the ranks of the CTC and others from small unions, particularly industry groups--that had not been enticed to join the leftist CTC. Both industrialists and the Conservative government supported the UTC, largely because it did not represent a threat to the political and economic elite. The subsequent period of labor repression and co-optation by the government served to eliminate radical elements of the movement while taming the less militant segments. During the period known as la violencia (1948-66), organized union labor was effectively dead; it had no means of articulating its interests, and the chaotic nature of society at that time delayed further coalition for at least ten years.
The near anarchy that followed the 1948 assassination of Jorge Eliécer Gaitán, a member of Congress who had long been a champion of the disadvantaged, had a different although equally demoralizing effect on rural workers. The plight of smallholder coffee farmers worsened rapidly, and many of them fled the countryside in the face of widespread violence. This served to consolidate landholdings in rural areas, as well as drive large numbers of unskilled rural laborers into the hands of the UTC. Collectively, labor emerged from the 1950s demoralized and virtually without political power. The UTC, which at this point commanded the majority of organized labor and the diminished rural groups, had no political means of effecting even the slightest changes and was without an advocate in national government.
After 1960 two more labor federations surfaced: the Trade Union Confederation of Colombian Workers (Confederación Sindical de Trabajadores de Colombia--CSTC), formally recognized by the government in 1964, and the General Confederation of Workers (Confederación General de Trabajadores--CGT), created in 1975. The CSTC, which was aligned with the Colombian Communists, and the CGT, which was affiliated with the Christian Social Democratic Party (Partido Social Democrática Cristiano--PSDC), accounted for a combined total of 20 percent of the unionized work force. Neither union had a strong political role, however, under the National Front, which served to unify all significant political interest groups within a shared two-party structure from 1958 to 1974. There was no apparent need to incorporate labor as a political ally. Additionally, during the National Front period the CTC and UTC faced numerous internal problems, which caused many individual unions to withdraw from the larger federations.
Regardless of political setbacks, the labor movement was not totally ineffective. Various groups engineered successful strikes in the 1970s and 1980s. Bolstered by leftist leadership, the weakened status of the CTC and the UTC, and the economic austerity measures of the government of Belisario Betancur Cuartas (1982-86), labor groups coalesced in 1986 in a fashion reminiscent of the 1930s. A majority of the independent unions and those affiliated with the CSTC joined forces in September 1986 to form the United Workers Central Organization (Central Unitaria de Trabajadores-- CUT). Analysts estimated that this body included 75 percent of the organized work force, the majority of whom were no longer willing to accept an acquiescent platform. The CUT also emerged as a major voice against organized violence and served as a catalyst for uniting other labor elements. It was not, however, timid about organizing strikes, and key industries reacted to CUT initiatives by meeting many of its demands rather than face prolonged confrontation.
By the late 1980s, the confederated labor movement appeared to be playing a larger role in representing workers' rights, as well as focusing on major political issues. Although it seemed unlikely that a collaborative effort similar to the one struck with the Liberal administrations of the 1930s would again be possible, the CUT was reshaping organized labor into a stronger bargaining movement.
The early months of 1988 were rife with strikes by workers in the banana, banking, cement, public service, and other industries. The most common demands centered on protection for union leaders, who were the targets of right-wing assassins, and cost-of-living adjustments in wages. Despite their growing hostility toward management, the CUT and other union groups refrained from openly defiant stands against the government. Nevertheless, observers believed that the extent to which the government would tolerate a more active labor movement depended on whether or not the unions seriously threatened the economic and political interests of the elite, as well as the degree to which they contributed to the persistent problem of organized violence in the country.
The economy in the late 1980s was predominantly a capitalistoriented free-market system, requiring a minimum of state interference in its overall operation. Nonetheless, the president had the authority to take corrective action on a number of levels, as well as the constitutionally guaranteed right to determine the general direction of economic and social development.
Historically, government intervention in the economy took the form of preferential treatment for a particular sector, such as the creation of protective barriers to promote import substitution industrialization, and cooperative ventures undertaken with the private sector, chiefly to develop energy resources. The government also supported the promotion of exports through financial guarantees and the management of exchange rates, price supports, and fiscal and monetary policies. The government generally did not subscribe to a heavy regulatory policy but did manage some enterprises either directly or as joint ventures with private firms. Since 1950 one of the most visible examples of government intervention had been the sector-specific economic development planning advocated by particular administrations.
The Constitution of 1886 and its subsequent amendments provide the legal justification for strong executive authority. Although Congress is granted powers to establish guidelines for economic development, legislative control of economic policy faded during the dictatorship of Gustavo Rojas Pinilla (1953-57). The National Front governments that followed further consolidated economic planning within the executive office, an effort that culminated in the Social Development Plan of 1961-70.
Executive dominance of economic policy making was further reinforced by the 1968 amendments to the Constitution, which limit congressional authority to various checks on executive programs. These amendments charge the president with general control over economic policy, which may be altered only with a two-thirds vote of Congress. This power extends to public and private investment initiatives, the allocation of public resources, and tax policy. Any congressional changes in budgetary matters are referred to the finance minister for final arbitration. Congress retains authority to approve the president's development plan, however. In the event that Congress does not act on this plan, the president may proceed by decree. Nonetheless, congressional efforts to control economic policy have, at times, impeded implementation of economic plans. In 1974, for example, Congress refused to act on the "Four Strategies" plan of President Misael Pastrana Borrero (1970-74), forcing the executive branch to act by decree to implement what were technically illegal policies. Congress immediately challenged the president on legal grounds, with subsequent rulings by the Supreme Court again favoring executive supremacy. This allowed carefully structured programs to be planned, funded, and implemented virtually without congressional approval. Congress, however, continued to find ways to frustrate executive policy.
Congressional authority to influence executive economic policy making carried over to the administration of Alfonso López Michelsen (1974-78), as legislators attempted to loosen the grip of the executive branch's strong hand. López Michelsen's plan, dubbed "To Close the Gap," was designed to increase funding for more equitable social development by altering the tax code. Congress again refused to act, which contributed to the plan's eventual failure. Although López Michelsen went so far as to declare a state of economic emergency, he never succeeded in implementing a comprehensive economic reform package.
The constitutional Reform of 1979 slightly reduced executive control of the economy. President Julio César Turbay Ayala (1978- 82) had only recently been inaugurated, and his long career in the legislature convinced him of the need to curb executive authority over the economy. Furthermore, efforts to regain any control of economic policy would receive the support of both Liberal and Conservative legislators.
The 1979 reform authorized congressional intervention under specified circumstances and called for the president to submit a national development plan to Congress for its approval. If Congress failed to act on the plan within 100 days, however, the president could proceed without further delay. Although the executive branch basically retained power over economic planning, the mechanisms for a coordinated legislative response were in place.
Executive goals for national economic development were clearly defined in the next three administrations. The Turbay and Betancur administrations chose to emphasize development of energy resources and transportation networks, as well as overall economic stability. This trend, however, was altered in 1986 when a new president, Virgilio Barco Vargas, stressed economic reform.
Barco outlined his major economic development goals in the Social Economic Plan, 1987-90. The administration turned its attention to the social needs of the poor, embarking on a program designed to direct public funds to the basic health, education, and welfare needs of the lower class. The overall strategy consisted of three plans to manage broad social issues. The Plan for the Eradication of Absolute Poverty concentrated on social and health improvements, including the upgrading or installation of sewage, water, power, health, and education facilities. The plan also outlined a strategy to reduce the vast housing shortage affecting every Colombian city. The National Rehabilitation Plan focused on development of smaller regional urban centers, and the Plan for Comprehensive Peasant Development concentrated on improving market and production capabilities for some 4 million smallholder farmers.
Planners counted on continued annual economic growth of 5 percent to provide the revenue necessary for the overall plan's implementation. Given sufficient resources, they assumed that prudent management of macroeconomic policy would allow the goals to be met. Two years into his administration, economic indicators pointed to the success of Barco's plan. Despite some partisan resistance in Congress, coordinated fiscal and monetary policies were implemented that directed economic and financial resources toward desired ends. The combined objectives of macroeconomic policy and the development plan seemed closely linked, so that success of the first implied completion of the second.
To realize the ambitious goals of his economic program, Barco initiated coordinated fiscal and monetary policies that he hoped would influence major macroeconomic variables, including GDP, interest rates, and price levels. His primary goals included reducing real interest rates to encourage business investment and economic expansion, stabilizing the inflation rate at 20 to 25 percent, and redirecting public resources to help the poor.
The administration embarked upon a restrictive fiscal scheme designed to reduce deficit spending. Whereas the previous administration's annual deficits averaged nearly 5 percent of GDP, the Barco plan called for reducing deficit spending to less than 3 percent of GDP. To meet his spending goals, Barco counted on solid growth of GDP as well as a new budget approach that would redirect funds away from infrastructure to social programs. The tax burden was also shifted slightly from businesses to individuals. Planners had anticipated that the combined effects would allow the administration to meet spending levels within deficit guidelines, but by early 1988 it appeared that the deficits would exceed initial estimates.
One of the first steps taken by the Barco administration to implement the deficit reduction policy was to alter the tax structure. Principal changes included reducing the corporate tax rate to 30 percent of revenues, eliminating double taxation, phasing out tax deductions related to inflation adjustments, and increasing personal income taxes. The government assumed that an energized business sector would bring growth to other areas of the economy.
The Barco administration outlined a strict budget to curtail deficits. Preliminary estimates of the 1988 budget indicated that income tax and indirect taxes, such as customs, gasoline, and sales duties, would be the primary revenue sources. Additional income, constituting 20 to 30 percent of total revenue, would be earned from capital receipts, including long-term debt, and various nontax income. Expenditure targets were more difficult to meet; approximately 57 percent of all expenses were absorbed by operational expenditures of the government with 29 percent allocated to foreign and domestic debt service and 14 percent to public investment. This deviated from initial budget projections, which had indicated slightly higher allocations to debt service and public investment. Seventy-five percent of the deficit was to be financed from domestic sources; the remainder was to be financed from foreign borrowing.
Although expenses exceeded budget projections, revenues often failed to meet expectations as well. For example, President Barco inherited a budget of dwindling revenues, reflecting in part the reduction in gross tax receipts consistent with the economic downturn earlier in the 1980s. Colombia's public finances depended on coffee taxes, including a value-added tax on coffee exports, customs duties, and profits from central bank exchange operations, all of which suffered in the mid-1980s. In 1986, however, receipts rebounded sharply because of the coffee boom, which yielded greater import receipts based on additional sales abroad. Publicly managed enterprises that operated at a loss also contributed to budget deficits. Improving management and budgetary control in these organizations was outlined as another specific way to reduce public costs.
Like the budget process, public investment was seen by the Barco administration as an important means by which to re-order priorities. In the early 1980s, for example, at least 55 percent of all public investment funds had gone to physical infrastructure, with the sole exception of 1982, when 43 percent of public investment was so allocated. Money was concentrated in power, transportation, and communications projects, in that order. Social infrastructure, including water, education, and health projects, absorbed 7 to 13 percent of public investment during these years, with 10 to 25 percent going to the productive sector, primarily to expand agriculture and mining. Any remaining funds went unallocated until the next fiscal year.
By contrast, the Barco government planned to change the composition of public investment by increasing the allotment to the social sector while reducing funds previously directed toward physical infrastructure projects. This was consistent with his administration's long-term goal of alleviating poverty so that social discontent and widespread violence might be defused. By early 1988, however, the fiscal deficit exceeded earlier estimates, which forced the government to reduce some of the planned increases in social programs in order to meet other obligations, such as interest payments on the national debt.
The Barco government also adjusted monetary policies to meet program goals. Monetary policy was coordinated under the Monetary Board (Junta Monetaria), which by the 1980s had responsibility for policy development; specific directives were carried out by the Bank of the Republic (Banco de la República). As the central bank, the Bank of the Republic issued currency, sold or purchased securities in the open market, set reserve requirements for the banking system, and acted as the "lender of last resort." In 1986 the government also controlled Colombia's money through numerous public sector saving institutions responsible for funneling credit to specialized projects such as housing and agricultural development.
The government implemented monetary policy by traditional methods, such as adjusting lending rates to banks, controlling monetary growth, setting reserve requirements, and determining exchange rate policy in the belief that, under certain circumstances, inflation and interest rates could be controlled. The Barco government, however, demonstrated a clear preference for allowing the money supply and interest rates to float relatively freely, provided that prices remained within certain broad limits.
Government bodies sometimes have intervened in money markets, however, in an attempt to influence price levels. Fearing that the money supply's relatively quick expansion in 1987 would be too inflationary, the government chose to raise reserve requirements. By early 1988, this tactic was considered inadequate, and the central bank turned to open market operations to reduce the money supply.
Managing exchange rates was another form of monetary control, and it too contributed to economic expansion. The Barco administration continued with the "crawling peg" devaluation system begun in 1967. This policy succeeded in keeping prices of Colombian goods attractively low in the external market. It also drove the prices of imported goods up, improving the trade balance and foreign exchange reserves.
By early 1988, the Barco administration's moderate approach toward economic management appeared to be working. A cautious fiscal policy combined with a free monetary policy seemed to help real interest rates fall from about 10 percent in 1985 to a little over 5 percent in 1987. Private investment grew during this same period from slightly less than 8 percent to over 10 percent of GDP, with aggregate economic growth reaching an average of approximately 5 percent for the two-year period. Inflation remained within the prescribed 20 to 25 percent range.
Colombia, however, was a relatively small economy by world standards, and its interest rates tended to follow those of the major world economies. Because global interest rates also fell during the late 1980s, it was likely that any success attributed to Colombia's macroeconomic policies in meeting stabilization and growth goals was assisted, at least in part, by similar trends in the international economy.
Agriculture has been an important part of the Colombian economy since colonial times. With the establishment of the tobacco and coffee industries in the nineteenth century, agriculture's role in economic development was assured. Since then, agriculture has provided food both for domestic consumption and as a source of export revenue.
Its historical significance notwithstanding, agriculture began to grow more slowly than the rest of the economy by 1960. Although GDP grew at an average annual rate of 5.5 percent from 1960 to 1982, agricultural output increased by only 4.1 percent, indicating, among other things, the increasing importance of manufacturing and service sectors.
Although agricultural production increased only slightly after 1982, the sector continued as the foundation of the economy, accounting for nearly 21 percent of GDP in 1987 and nearly 68 percent of all export revenue in 1986. Numerous factors--including low world commodity prices, increasing input costs, poor weather, inadequate investment, and greater regional competition for export markets--contributed to sluggish agricultural development in the 1980s.
Colombia is known for its mountainous terrain, but the country's diverse topography and climate allow the cultivation of a variety of crops. From the Caribbean lowlands where banana plantations are prominent, to the Andean highlands, which favor coffee production, Colombians have been able to produce a variety of agricultural products. These production efforts, however, required only a small fraction of the total land area available for farming. Of Colombia's nearly 115 million hectares, 13 percent of the total was considered arable, and only 27 percent of that amount was under cultivation. About 20 percent of all cultivated land was dedicated to coffee.
Cattle-raising areas stretched from the Andean highlands into the eastern plains. These areas constituted nearly 17 percent of Colombia's total land. Forty percent of the land on which cattle were raised also supported some type of short-term or subsistence agriculture. Forests covered 68 percent of the country; 15 percent of this land also was considered arable.
Land tenure patterns had remained remarkably unchanged since the initiation of agrarian reform efforts in the 1930s. In 1961 the government created the national land reform agency, Incora. Despite success in retitling land during its first ten years of operation, Incora had a minimal impact on land distribution. Problems such as inadequate provision of investment credit and agricultural inputs further impeded Incora's efforts.
Because of the earnest but unsuccessful efforts of several administrations to implement a comprehensive land reform program, landholding remained highly concentrated. The national agricultural census of 1971--the most recent as of mid-1988--indicated that the largest 10 percent of all farms, including ranches, encompassed 80 percent of the farmland.
Both public and private funds contributed to investments used to provide agricultural infrastructure, inputs, and technology. After 1970 there was a distinct trend toward a gradual reduction of public expenditures and a compensating increase in private investment. The private sector, considered well managed and capable of expanding agricultural output, was responsible for more than 90 percent of current expenditures and assumed most of the responsibility for research, training, credit, processing, and marketing activities.
Producer groups were the major force behind private sector coordination of agricultural policies and programs. The larger producer organizations provided research and statistical support, lobbying programs, and other services to influence agricultural policy. Fedecafe, the largest and most powerful agricultural organization, represented some 300,000 coffee producers in the mid1980s . Fedecafe exceeded normal association boundaries by inviting public officials to hold seats on the board of directors, receiving public funds, and taking on projects normally associated with the public sector, such as developing infrastructure, promoting balanced economic growth, and setting government coffee policies.
Other significant agricultural producer associations included the Federation of Rice Growers (Federación Nacional de Arroceros-- Fedearroz), the National Federation of Oil Palm Growers (Federación de Cultivadores de Palma Africana--Fedepalma), the Colombian Association of Flower Producers (Asociación Colombiana de Productores de Flores--Ascolflores), and the Colombian Association of Seed Producers (Asociación Colombiana de Productores de Semillas--Acosemilla). These organizations individually represented between 55 and 100 percent of their respective constituencies.
Colombia produced a variety of crops for both export and domestic consumption; in the late 1980s, many had yields above regional and international levels because of the technological advances in production. Improvements in fertilizer, seeds, and machinery were particularly effective in enhancing yields for export crops such as coffee, rice, sugarcane, and potatoes.
Many domestically consumed crops did not perform as well as export crops, however, largely because they were produced on small plots using traditional farming techniques and were cultivated without the benefit of modern agricultural inputs. Colombia lacked the market incentives to provide these improved inputs for many consumable crops, a situation that contributed to lower output and a higher agricultural import bill.
Coffee remained Colombia's primary export crop throughout the 1980s. The entire industry, including processing and transporting, accounted for about 8 percent of GDP, contributed 12 percent of government revenues, and generated approximately 50 percent of foreign exchange. Coffee provided a livelihood for more than 300,000 farmers, and over 2 million jobs were linked to some stage of coffee production.
Despite stagnating or slightly declining output during the mid1980s , Colombia ranked second in world production of coffee, surpassed only by Brazil. Known for the mild arabica coffee grown in the temperate central highlands, the Colombian coffee crop often commanded above-average prices in the market place. Because coffee is a tree crop grown on rough, steep terrain, harvesting remained a labor-intensive process, and most coffee farms were still small, occupying an average of fewer than six hectares of land.
Bananas were second to coffee in economic importance. Concentrated on the southern Caribbean coast around the Golfo de Urabá, production took place on both large plantations for export and small plots for domestic consumption. Banana production grew at relatively high rates in the early 1970s, only to slow later because of the reduced competitiveness of Colombian banana prices. Production again rose in the mid-1980s as domestic prices moved toward lower international levels.
Cut flowers, including carnations, chrysanthemums, dahlias, and roses, became a significant export crop in the late 1970s and in 1986 earned US$155 million in revenue. Singled out as the definitive example of Colombia's diversification strategy, the Colombian flower industry became the second largest in the world, surpassed only by that of the Netherlands. The principal markets were the United States, which purchased more than 80 percent of Colombia's flowers, and Western Europe.
In 1987 there were more than 250 farms dedicated to producing cut flowers; the average size was about eight hectares. Because producing cut flowers was a labor-intensive process and amenable to the temperate mountain valley areas surrounding Bogotá and Medellín, the cut flower industry operated year round, providing jobs to more than 70,000 workers. Related industries, such as air transport and packaging, also benefited from the development of cut flower exports.
Other important export crops included sugarcane and cotton. Sugarcane was grown on large estates in valleys and other lowerlying areas, principally in southwestern Colombia's department of Cauca. Production remained relatively steady throughout the 1980s, taking advantage of the area's temperate climate and even pattern of rainfall. The sugarcane industry was regarded as well managed and produced yields well above regional and world standards.
Cotton production developed, among other reasons, to provide the textile industry with raw materials. Both large and small cotton farms were found along the economically expanding Caribbean coast. After a substantial drop in the early 1980s, production surged again in the late 1980s because of increased land cultivation and improved yields. An additional 65,000 hectares of cotton--representing a two-thirds increase in total land cultivation--were sown in 1987 in anticipation of higher international prices.
Food production for domestic consumption represented the other major agricultural endeavor and included staple crops such as rice, beans, cassava, potatoes, barley, corn, and wheat. Although Colombia had long sought self-sufficiency in food production, certain cereals, particularly corn and barley, were produced inefficiently and were not competitive with imports. Despite government intervention to improve the yields of these crops, planners doubted that production inefficiencies could be eliminated by the early 1990s.
Corn, a staple of the Colombian diet and the most widely grown subsistence crop in the 1980s, flourished on steep slopes as well as on level ground. Although wheat and barley were also adaptable to highland areas, production costs often exceeded market prices, causing output to vary greatly from year to year. Other foods grown for consumption included tubers (such as potatoes and cassava) and beans, which were often planted together in subsistence or smallfarm operations. Dietary requirements also were met with numerous types of indigenous fruits.
A discussion of the agricultural sector would be incomplete without mention of illegal crop production. In the late 1980s, cannabis flourished in Colombia's fertile northeastern mountain areas, and coca was grown in the more secluded portions of the Amazon Basin. The production of marijuana and cocaine from these plants had long been associated with the Colombian economy.
The United States Department of State estimated that approximately 13,000 hectares of land were devoted to cannabis production in 1986, an increase of 62 percent over the previous year. The average yield per hectare was 1.1 tons, or potentially 14,100 tons nationwide. Despite government attempts to eradicate marijuana cultivation, growers continued to produce it in vast quantities, moving into areas not traditionally associated with cannabis production, such as Antioquia in central Colombia and areas near the Panamanian border.
Like Bolivia and Peru, Colombia was a major cultivator of coca. Total land area devoted to coca production increased 60 percent from 1983 to 1986, reaching 25,000 hectares. Cultivation occurred largely in secluded areas and employed small quantities of land, usually less than two hectares per parcel, which made detection difficult. Each hectare could produce an estimated 1.6 kilograms of cocaine base. Total annual production in 1986 was estimated at twenty-seven tons.
Colombia's reputation as a global drug center rested primarily on its capacity to process coca into cocaine and distribute it worldwide, rather than on production of the coca leaf itself. In the 1980s, Colombia processed and shipped an estimated 75 percent of all South American cocaine destined for the United States, most of which was transported by ship and airplane from Colombia to Florida.
The Colombian cattle industry expanded in the late 1980s from producing meat and dairy products to supporting a growing leather business. There were more than 150,000 cattle ranches, two-thirds of which were under 250 hectares in size. They were located in the Caribbean coast departments of Bolívar, Córdoba, Magdalena, and Atlántico, as well as in the eastern plains departments of Boyacá and Meta and the intendancy of Arauca.
In the 1980s, Colombia ranked fourth among Latin American countries in cattle raising, with an average annual herd size of 20 to 24 million cattle. This placed Colombia behind Brazil, Argentina, and Mexico, which had herds of 95 million, 54 million, and 33 million, respectively. Herd size had been relatively stable since 1970.
Fifteen percent of the cattle were raised for dairy purposes and the remainder for meat. Beef production stagnated and then declined slightly through the 1980s. Total beef output fell from 627,000 tons in 1983 to 620,000 tons in 1985 because of declining prices and lower profit margins. Milk output reached nearly 3 million liters in 1985.
In contrast to beef production, the leather industry grew rapidly in the late 1980s. Leather output rose by 26 percent in 1986; more than 300 enterprises, each employing at least ten workers, consumed nearly 1,400 tons of cattle hides valued at US$9.2 million. In 1986 the total value of finished goods--luggage, footwear, and other accessories--reached US$87.2 million.
Poultry and sheep constituted the largest share of Colombia's livestock business. Poultry was the fastest growing nonbeef sector. The total number of chickens grew from 68 million in 1980 to 85 million in 1985, largely because of modernization completed in the late 1970s. From 1976 until 1985, sheep herds grew from approximately 2 million to 2.7 million; the wool produced was considered of inferior quality, however, and generally was not used in the textile industry, except for local consumption.
Numerous types of tropical forests covered Colombia; most, however, remained unexploited for commercial use. In the late 1980s, commercially viable forest tracts may have covered as much as 78 million hectares, with between 500,000 and 1 million hectares logged each year. Although more than 1,000 types of tree grew in Colombia, only 30 types had commercial value. Replanting occurred infrequently, and in the late 1980s only one hectare in ten received any type of restoration treatment, largely because of poor government regulation of the logging industry.
Colombia produced wood in the late 1980s for construction and crafts and also supplied fuel wood and wood pulp for heating and printing. Lumber production was, however, a minor industry in Colombia, limited in part by the country's terrain.
The vast Amazon region of southeastern Colombia was one of the most heavily wooded areas in the country. Large-scale logging had not yet been very successful, however, because of the low value attached to most tropical woods and because usable trees grew among less valuable ones. Nonetheless, because of the development of new processes to make cardboard and other stiff paper products from some tropical trees, such as the cecropia, loggers became more interested in opening new areas of the Amazon for logging in the late 1980s. Once initially logged, these areas could then be replanted with a single type of tree for future exploitation.
Colombia still supported only a fledgling fishing industry despite long coastlines on two oceans and extensive inland river and lake networks. In 1984 approximately 100,000 tons of fish were caught, more than half from freshwater inland sources. The fishing industry constituted less than 1 percent of GDP and did not meet the domestic demand for fish. Commercial fishing for export was restricted to small businesses pursuing shrimp and oysters. Most canned commercial fish, such as tuna and sardines, were consumed domestically.
Despite its lack of development, ocean fishing represented one of the most promising industries in Colombia. The government targeted Buenaventura, a large port on the Pacific coast, for expanded facilities to support both domestic and foreign fishing vessels. Planned development included the addition of docks, refrigerated storage facilities, and canning and oil-processing plants. The potential ocean catch was estimated to be as large as 240,000 tons, or ten times the amount of fish caught in 1986.
Mining in Colombia began in the 1500s. Although significant in the colonial economy, it never commanded a large portion of Colombia's GDP in modern times. With the discovery and exploitation of large coal reserves, however, the role of mining in the national economy expanded in the late 1980s. Precious metal and stone mining was still carried out in the late 1980s. Gold was the most important metal in terms of short-term revenues. Other important metals included platinum and silver, which were extracted in much smaller quantities. Colombia also produced 95 percent of the world's emeralds.
Other metals common to Colombia included nickel, small amounts of iron ore, copper, and bauxite. Nickel deposits, estimated at 25 million tons, were exploited through a joint venture program between the government and a subsidiary of Shell Oil Company. Nonmetallic mining produced salt, limestone, sulfur, gypsum, dolomite, barite, feldspar, clay, magnetite, mica, talcum, and marble. Despite the variety of minerals available for exploitation, Colombia still had to import substances such as iron, copper, and aluminum to meet its industrial needs.
Government efforts to expand mining in Colombia were needed to encourage private sector investment. In the late 1980s, much of Colombia remained inadequately charted, and reserve estimates were considered only marginally reliable. The government set a policy of developing infrastructure (roads, electricity, and communications), providing technical assistance, and encouraging sound credit and legal policies to minimize problems with land titling. Through joint ventures and the promotion of small mining companies, government officials believed that the mining sector could contribute more to national employment, income, and wealth.
In the late 1980s, much of Colombia's mining future rested with coal deposits. Estimates of reserves ranged from 16 to 40 billion tons in 1987, considered indisputably the largest in Latin America. Coal reserves existed throughout much of the country, from the Andean highlands to the Caribbean coast. Only 20 percent of the known coal reserves, however, had been surveyed by 1987.
Among the many areas where coal was found were the Caribbean lowlands department of La Guajira and the Andean highlands departments of Cundinamarca, Santander, and Antioquia. Although all these areas produced coal in 1987, most Colombian coal was extracted from the El Cerrejón field in La Guajira Department.
El Cerrejón was discovered in 1882, explored in 1950, and brought on line for production in 1985. The project was divided into the northern, central, and southern zones; the northern zone was given priority for production because of its estimated 3 billion tons of high-grade recoverable reserves. El Cerrejón was organized as a joint venture between the Colombian government and a subsidiary of Exxon known as International Resources.
To promote the exploitation of Colombia's vast coal reserves, Carbocol was created in 1976. Formed as a commercial company of the state, Carbocol was placed under the Ministry of Mines and Energy and initially capitalized with US$10.6 million. Carbocol sold shares to other government agencies; majority ownership rested with the Export Promotion Fund (Fondo de Promoción de Exportaciones-- Proexpo) and the Colombian Petroleum Enterprise (Empresa Colombiana de Petróleos--Ecopetrol). Investment in Carbocol grew rapidly in its first decade of operation, reaching US$347 million by 1985.
Carbocol managed all facets of the coal business from exploration and mining to marketing and sales, both locally and abroad. Carbocol's primary goal--to make Colombian coal a permanent competitive commodity in the international market--proved difficult because of low international prices for coal in the 1980s. Nonetheless, Carbocol continued to assist the coal industry by attempting to reduce production costs, developing strategies to expand exports, and creating opportunities for both domestic and foreign capital investment in the industry.
In the late 1980s, Colombia's coal was consumed both at home (40 percent of mined coal) and abroad (60 percent). The generation of electricity accounted for about a third of domestic coal use, but this use was not expected to grow, given the completion of hydroelectric projects. Industrial use, which accounted for twothirds of the domestic consumption of coal, was the most likely area for internal growth. Low international prices threatened further development of the industry because it could not attract long-term investment funds. Nevertheless, industry analysts expected this situation to change in the 1990s because of an anticipated increase in international demand for coal, allowing a competitive return on investment for Colombian coal projects.
In the short term, however, financial problems required that the coal industry solicit support from government agencies operating the oil industry. Ecopetrol's convertible assets permitted government planners to sell shares of El Cerrejón to Ecopetrol in order to inject money into the cash-poor project. This allowed the government to retain half-ownership of the industry rather than lose control of the coal program by selling equity shares to private investors.
Colombia achieved oil self-sufficiency for the first time in the early 1970s, only to require imports again by 1976. Despite low international prices during most of the 1980s, Colombia continued with exploration and reattained self-sufficiency in 1986. At that time, analysts believed that known reserves would provide for selfsufficiency until 1994. The government sought to extend this period by encouraging joint ventures between public agencies and private drilling companies. Estimates of total reserves as of late 1986 ranged as high as 1.9 million barrels. Analysts believed that the eastern plains (llanos) held 59 percent of these reserves and that 38 percent was located in the department of Magdalena in northern Colombia. The intendancy of Putumayo in southwestern Colombia and the department of Norte de Santander in northeastern Colombia were thought to hold the remaining 3 percent.
Through 1987 crude oil production increased each year in the 1980s, reaching 400,000 barrels per day by 1987. The largest field, Cravo Norte, produced 150,000 barrels per day in 1986 and accounted for most of the increased output for that year, allowing Colombia to become an oil exporter again. Secondary recovery methods in the older oil fields, some of which dated back to 1918, enhanced production. Crude exports reached 16.5 million barrels in 1986; industry analysts speculated that they would triple in 1987.
In 1986 there were 3,658 oil wells in Colombia, 2,770 of which were producing. Although the majority belonged to Ecopetrol, many of the newer projects were joint ventures with private foreign firms. The quality of oil varied from very heavy, sludge-like crude, used only for asphalt and related products, to very light, high-quality crude that was easily refined into gasoline and other fuel products.
Colombia had four refineries producing for domestic and export markets. In 1987 two refineries--located in Barrancabermeja and Cartagena--accounted for virtually all of Colombia's crude oil distillation capacity of 226,000 barrels per day (bpd). The Barrancabermeja plant was new and was considered among the most sophisticated and productive refineries in the world, capable of processing 150,000 bpd. The Cartagena plant had a refining capacity of 70,000 bpd. Two other refineries--the Norte de Santander and Putumayo refineries--had a combined capacity of only 6,000 bpd.
Besides production and refinery capacity, Colombia boasted more than 8,300 kilometers of oil pipeline in 1987. This network connected producing areas in the eastern plains, including Cravo Norte, to the Barrancabermeja refinery. After the pipeline network suffered continued attack from guerrilla groups in the late 1980s, Ecopetrol assumed control of all pipeline operations.
Oil fields also produced natural gas, which was used to help Colombia meet its goal of energy self-sufficiency. Reserves were estimated at 1.3 trillion cubic meters in 1986, most of which was located in La Guajira Department. A total of 4.1 billion cubic meters was marketed in 1986, primarily as an alternative energy source to oil.
Colombia's industrial sector--including manufacturing, assembly, and construction--was mostly developed after World War I using resources accumulated by the coffee and tobacco industries in the nineteenth century. Industry grew slowly but steadily up to the 1970s, then declined until the mid-1980s. Initial manufacturing efforts followed the import substitution industrialization model prevalent throughout Latin America during the Great Depression. Production focused on meeting domestic demand previously met by imports and emphasized consumer rather than capital goods. Because it delayed intensive industrialization until the 1950s and was a relatively open society politically and economically, Colombia did not suffer as severely from the negative protectionist effects usually associated with the import substitution strategy of national development.
By the late 1960s, however, protectionist policies had caused balance of payments problems, forcing policy makers to opt for an export promotion strategy. Industry responded by developing both consumer and capital goods industries, although emphasis was still placed on consumer goods. Particularly from 1967 to 1975, the success of the industrial sector resulted from the combined efforts of entrepreneurs and government planners. Private business leaders accepted the export promotion strategy as a way to expand output, and government officials devised a comprehensive plan to help Colombia compete in external markets.
Two policy decisions critical to the development of an exportoriented industrial sector were the creation of Proexpo and the adoption of a "crawling peg" exchange rate system. In the first case, Proexpo effectively marketed Colombian exports to the outside world. The second strategy proved even more effective at making Colombian exports more attractive. By constantly devaluing the peso against major traded currencies, the government ensured competitive prices for Colombian goods abroad.
The result of this coordinated economic strategy was a substantial increase in industrial output, which peaked in 1976 at 24.2 percent of GDP. The success of the export strategy was evident in the value of manufactured goods sent abroad, which rose from 8 percent of total exports in 1967 to 28 percent in 1975. Although it appeared that this coordinated approach had changed the nature of Colombia's economy, its success was questioned when growth halted in the late 1970s and early 1980s. The downturn once again demonstrated Colombia's dependence on the international coffee market.
From 1976 to 1983, Colombia went through a phase of deindustrialization in which manufactured output fell to 21 percent of GDP, the equivalent in real terms of production in 1970. Manufactured exports as a percentage of total exports also fell dramatically, attaining only a 15 percent share of total exports in 1983. Many variables--including the dependence on domestic demand and production of consumer goods, failure to diversify, insufficient investment, and public sector (tax) policies-- contributed to the decline. The crucial factors, however, were the appreciating exchange rate and the reallocation of economic resources to the agricultural sector that occurred during the coffee boom.
In the late 1970s, Colombia experienced what some analysts refer to as "Dutch disease," in which a boom in the primary export market adversely affects other sectors of the economy. Production and export of coffee reacted to market incentives in the late 1970s, nearly doubling output and sales from 1967 levels. The export boom generated a large increase in foreign exchange, which had the effect of increasing the value of the peso and the price of domestic goods. This caused Colombian manufactured products to become less competitive in world markets, a decline that lasted until 1984.
Recognizing the problems brought on by "Dutch disease," the government took direct action to mitigate adverse effects when the next coffee boom began in 1986. A windfall tax on coffee receipts restrained domestic spending and purchases of exports. Domestic price increases that would have accompanied an influx of foreign cash failed to materialize. The fact that "Dutch disease" did not recur and the manufacturing sector expanded in 1987 indicated the apparent success of the government's strategy.
In 1984 the industrial sector experienced real growth for the first time since 1980. Although analysts expected production to grow slowly following the coffee boom of the late 1970s and the subsequent global recession, government programs supporting a coordinated industrial policy once again emphasized diversification and growth through exports, which brought renewed life to Colombia's industry in the late 1980s.
In 1987 manufacturing grew more than 7 percent; it constituted 21.7 percent of GDP and employed about 35 percent of the urban labor force. Output still favored consumer goods, which composed 50 percent of total production. Intermediate and capital goods represented 37 percent and 13 percent of manufactured products, respectively. Despite increased industrial output, Colombia still imported many industrial goods because of its inability to produce competitively many manufactured items it needed to sustain economic growth. This suggested that a number of areas might be ripe for industrial expansion, particularly if Colombia could increase its capital goods production.
Colombia's industrial core developed around four urban areas: Bogotá, Medellín, Cali, and Barranquilla. More peripheral industrial centers emerged in the departments of Boyacá, Magdalena, Nariño, and Santander. These areas became more dependent on exportbased production and were the sites of numerous small and mediumsized firms that sprouted in the late 1970s.
The industrial sector in the late 1980s had a broad structure consisting of large conglomerates engaged in massive projects for the production of oil, food, ceramic products, building materials, beverages, clothing, machines, and tools, as well as smaller cottage industries competitive in the manufacture of wooden furniture, leather goods, and footwear. Although labor productivity and profits tended to be higher in the larger industries, the small and medium-sized factories continued to play an important role in industrial development. In 1986 they accounted for 36 percent of manufacturing production and employed 51 percent of the industrial labor force.
Food, beverages, textiles, and chemicals contributed the largest shares of GDP from the manufacturing sector. Total value added by this group constituted 52 percent of manufactured output. After consumable products, chemicals were the most important industrial products in the mid-1980s. In addition to pure chemical products, such as acids and petrochemicals, Colombia produced numerous chemical derivatives, such as fertilizers, insecticides, detergents, and paint, used in other sectors of the economy. Colombia also ventured into automotive assembly and had plants affiliated with Mazda, Chrysler, and Renault, as well as motorcycle firms attached to Japanese multinational companies such as Yamaha, Suzuki, Honda, and Kawasaki.
The manufacturing sector also supported the relatively small but vital construction industry. Colombia produced metal, cement, wood products, plastic, and steel in increasing amounts in the late 1980s. Construction itself accounted for nearly 4 percent of GDP and 6 percent of the work force. Public sector emphasis on transportation infrastructure and low-income housing encouraged construction in the early 1980s; the Barco administration decided to continue this emphasis in 1987.
Financial services, a large and important component of the service sector, included private financial institutions that facilitated business and individual loans, as well as public institutions that directed funds to socially desirable activities that might not meet the credit requirements of private banks. The government played a major role in the financial sector because of the unwillingness of banks to make long-term loan commitments to riskier programs, such as coal development, and because of the necessity for periodic public intervention to stabilize financial markets. Although the banking system grew in the 1960s and 1970s and was considered relatively modern, it entered a period of deep crisis in 1982, which forced the government to redefine the basic structure of the private financial system.
One problem was the banking sector's concentration of ownership in the hands of a few large conglomerates. This reduced competition and made lending a precariously balanced game in which funds were shuttled among the larger institutions.
The economic downturn of the early 1980s also threatened the profitability of banking. Colombian financial institutions came under increasing pressure as the 1981 recession induced retrenchment of the manufacturing sector. This, in turn, caused a sharp rise in loan defaults. Real interest rates at the time averaged 10 to 12 percent, which exacerbated the payment problems of indebted companies. The number of loans considered unlikely to be collected as a percentage of the lending portfolio increased from 5.6 percent in 1982 to 11.3 percent in 1984. Foreign interests in Colombian banks also began to withdraw capital rather than deposit it, which further drained reserves necessary to meet regulatory requirements. Subsequent bank failures and nationalizations resulted in a decline in public confidence and led to massive government intervention.
In an effort to increase liquidity, the government reduced reserve requirements for certain types of deposits and shifted public funds into the financial system. In 1985 the government created the Financial Institutions Guarantee Fund (Fondo de Garantías de Instituciones Financieras) as the authority responsible for intervening in or recapitalizing, if necessary, financial institutions on the brink of bankruptcy. Despite these efforts, the government was forced to nationalize banks as they approached insolvency. Eighty percent of the Colombian financial industry had come under government control through this mean by the mid-1980s.
Notwithstanding increased government supervision, a large infusion of public capital, and improved economic conditions, the remaining private financial institutions continued to flounder in the late 1980s. Because of high inflation and unstable real interest rates, most depositors placed their money in readily accessible accounts such as checking accounts or short-term certificates of deposit. This constrained lending strategies, because larger portions of loan portfolios now had to be constructed with short-term arrangements in mind. Much of the longterm credit for mortgages and business investment had to be secured through the central bank or any one of the many government-operated development funds.
By 1988 the financial sector's problems appeared to go beyond a difficulty with short-term liquidity. Ownership remained highly concentrated, and inflation continued to increase the cost of transactions. An inadequate capital base, gross management inefficiencies, and high operating costs were other persistent problems. Loan defaults also occurred at alarming rates. To compensate, the government provided credit directly through public financial institutions financed with public funds or by forced investment from businesses and pension funds. These financial entities included the Institute of Industrial Development (Instituto de Fomento Industrial--IFI), the Land Credit Institute, and the Agrarian Bank; they served the long-term credit needs of industry, urban housing, agriculture, and other special interest groups.
Despite continuing doubts about the soundness of Colombia's banks, there were some signs that the financial sector was becoming more stable in 1988. Market interest rates began to fall, and the government used forced investment less frequently to attract lending funds. In addition, financial authorities planned to strengthen both the financial sector and the stock market by selling shares of the expropriated banks to small and medium-sized investors.
In 1988 the government announced plans to reprivatize the banking sector, beginning with the sale of the Bank of Bogotá (Banco de Bogotá). The government authorized the central bank to extend credits to the public that could be used to purchase shares of the expropriated bank. Restrictions were placed on the sale of the bank to avoid the ownership and management problems that had contributed to the institution's failure. Specifically, none of the previous owners were permitted to purchase bank shares, and no individual or family could acquire more than 3 percent or 10 percent, respectively, of any one bank. Authorities hoped that these measures would lead to other bank sales and return stability to a sector that was vital to the development of the national economy.
Tourism, normally a vital component of the service sector-- particularly for a country as diverse culturally, geographically, and historically as Colombia--did not contribute significantly to economic growth. Although Colombia had attractive, modern hotels in the capital city and other major metropolitan centers and offered natural attractions such as the Caribbean coastline, remote jungles, and steep mountain ranges, persistent reports of kidnappings, assassinations, drug-related violence, and guerrilla activities diminished tourist interest in Colombia, even though foreigners generally were not the targets of this violence. The government did not actively pursue tourism.
The cost of Colombia's poor image was made evident by statistics. In 1978 more than 826,000 tourists contributed US$328.5 million to Colombia's foreign exchange earnings. By 1984 tourist arrivals had dropped to about 715,000 and had rendered only US$231 million in foreign exchange. The prospects for expanded tourist receipts, despite enormous potential, were dismal under the social conditions prevailing in the late 1980s. Analysts did not expect violence to subside, and as a result they did not believe that tourism would recover significantly.
In the late 1980s, because its economy remained highly dependent on the outside world, Colombia conducted its foreign economic relations on several levels. In addition to the dynamic trade links long established with the developed world, Colombia also sought foreign investment and economic assistance. To achieve these goals, Colombia gradually opened its economy to the outside world, particularly after 1967, in order to integrate foreign markets, technology, and capital with its diversifying and expanding economic efforts at home.
In the pursuit of economic liberalization, Colombia forged strong bilateral relations with both developing and industrialized countries. Colombia maintained trade relations with numerous industrialized nations, including the United States, Japan, the Federal Republic of Germany (West Germany), the Netherlands, Canada, and Britain. Economic arrangements with developing countries, by contrast, were important but constituted a much smaller portion of Colombia's trade.
In addition to bilateral trade agreements, Colombia also participated in several organizations dedicated to improving trade among regional members. As one of the original signatories to the Latin American Integration Association (Asociación Latinoamericana de Integración--Aladi), formerly the Latin American Free Trade Association (LAFTA), Colombia supported early attempts to develop a common market in Latin America. Although no more than 8 percent of trade among its members could be attributed to Aladi, integration efforts were an important aspect of both political and economic relations in Colombia and Latin America. Colombia was also a signatory, in 1969, to the Cartagena Agreement, which established the Andean Common Market (Ancom), also known as the Andean Group (Grupo Andino). Formed as a reaction to LAFTA's poor performance, the Andean Group was particularly important to Colombia because most of the nation's subregional trade in Latin American was with its northern neighbors.
The Andean Group was created to encourage greater economic cooperation within the region; although problems arose among member countries, it continued to operate with the full support of its constituency in the late 1980s. Commerce orchestrated by Andean Group agreements, however, amounted to no more than 5 percent of the combined trade of the group's members at that time. Colombia was the group's largest trading partner.
In addition to regional trade groups, Colombia was a member of all United Nations (UN) organizations, including the General Agreement on Tariffs and Trade (GATT) and the Economic Commission for Latin America and the Caribbean (ECLAC). Moreover, Colombia participated in concessional trade arrangements, such as the Generalized System of Preferences (GSP) offered by the United States.
As a leading exporter of coffee, Colombia supported the provisions for coffee trade outlined in the International Coffee Agreement (ICA). Originally struck in the early 1960s, the agreement had nearly seventy-five signatories by the mid-1980s, one-third of which were importing countries. The goals of the agreement included stabilizing world coffee prices and ensuring that a steady supply was available to consuming nations. In an international environment emphasizing free trade, however, the provisions for fixed prices and export quotas came under attack in the late 1980s. By the end of 1987, importing countries led by the United States had decided against extending the agreement, preferring to let international markets set the prices and quantities of coffee sold in the world. Despite this setback, the exporting countries argued that the ICA had been beneficial to all parties for twenty-five years and lobbied for the agreement's resurrection.
Colombia also offered free-trade zones and continued to expand them after they were introduced in 1964. Numerous parts of the country provided facilities for transshipment, assembly, packaging, or sampling of goods. Goods that were then sold in Colombian markets were treated as normal imports, whereas those that continued on to markets outside Colombia traveled free of any government duty or regulation. To encourage foreign participation, these zones also provided exchange rate incentives, allowed free repatriation of profits for the foreign investors, and granted preferential rates on utility use. In 1988 free-trade zones were operated as autonomous organizations under the stewardship of the Ministry of Economic Development. They were located in Barranquilla, Buenaventura, Cartagena, Cúcuta, Palmasca, and Santa Marta.
In addition to trade, Colombia nurtured foreign investment. The Andean Group's adoption of Decision 220 in 1987 further loosened foreign investment regulations, allowing greater freedom for the repatriation of profits, a higher percentage of foreign ownership, and investment in a wider variety of firms. In 1986 there were more than 700 foreign firms operating in Colombia, totaling US$2.7 billion in investment. Approximately 85 percent were concentrated in mining and manufacturing. Government efforts were directed toward attracting capital for export industries that would maximize the use of local materials and labor. Additionally, the government was courting foreign banks as potential investors in the restructured financial sector and hoped to bring in more capital for the highly promising petroleum industry.
The United States accounted for two-thirds of all foreign investment in 1986; it was followed by Western Europe with 21 percent, the Caribbean and Latin America with 9 percent, Canada with 2 percent, and the rest of the world with 1 percent. United States interests included manufacturing, such as affiliates of General Motors, International Business Machines, Union Carbide, and Goodyear; pulp and paper producers, such as W.R. Grace and International Paper; and food-processing companies, such as Borden and R.J. Reynolds, in addition to mining and petroleum companies.
In the 1980s, Colombia continued to be a major recipient of foreign economic aid and assistance. In 1949 it became the first Latin American country to receive a World Bank mission dedicated to analyzing its foreign assistance needs for development. As a member of the World Bank group of lending agencies, as well as the IDB, Colombia had consistently received financing for the development of infrastructure, public services, and other areas often neglected by capital allocated on purely economic grounds. Nearly 40 percent of Colombia's outstanding public debt in 1986 was in the form of longterm credits from the World Bank and IDB, totaling US$3.8 billion.
Bilateral aid and concessional loans also played an important role in financing Colombia's economic development. In 1986 total outstanding loans to government development agencies, such as the United States Agency for International Development and the United States Export-Import Bank, amounted to US$2.4 billion. Approximately 50 percent was owed to the United States, 18 percent to Japan, 9 percent to West Germany, and 23 percent to numerous other donors. Since the 1940s, Colombia had consistently ranked among the top Latin American countries in terms of subsidies provided by the United States; total value of development assistance, food aid, and other economic support was US$1.5 billion as of 1987. Most of that assistance had been terminated by 1978, however. Since that time, Colombia had not received significant amounts of development assistance from the United States.Foreign Trade
Colombia's foreign trade regime underwent numerous changes after it began to flourish around the turn of the century. Following a period of high coffee exports that continued through the 1920s, Colombia enacted strict foreign exchange provisions and instituted a restrictive trade program to stimulate economic growth during the Great Depression, when global markets dried up. This was a common response by Latin American nations during the Great Depression; in Colombia's case, the extent to which these controls were loosened or tightened depended largely on the prevailing price of coffee and the country's willingness to expand coffee exports for higher returns.
In the aftermath of the Great Depression and World War II, Colombia employed protectionist trade policies in full force as part of an import substitution industrialization strategy. From 1950 to 1967, Colombia implemented a sophisticated system of exchange rate controls, tariffs, quotas, and licensing designed to shelter the fledgling industrial sector from foreign competition, a technique that was still espoused by a minority of industrialists in the 1980s. This policy served to restrict the importation of manufactured goods that competed with Colombian-made products; however, the undervalued peso penalized the agricultural sector by reducing coffee revenues. Because Colombia required expensive capital goods to build its industrial base, cheap coffee, which was the main source of funds for the purchase of foreign goods, eventually induced serious balance of payments problems.
Besides financial problems, import substitution industrialization caused inefficiencies in Colombia's manufacturing sector, inhibited the efficient allocation of resources, employed fewer workers than export industries, and further skewed the distribution of income. Collectively, these difficulties forced Colombia to change its economic course; policymakers shifted from import substitution industrialization to export promotion with the reforms of 1967. The economy was redirected toward producing for export markets in order to solve the problems created under import substitution industrialization. Because opening the economy to international markets fostered greater competition from abroad, economic planners expected a more efficient manufacturing sector to emerge as it responded to stronger market forces. A crucial element of this strategy was the adoption of a "crawling peg" exchange rate system.
The results of the market-oriented policies were quickly realized: export manufacturing became the fastest growing sector, which, in turn, encouraged employment growth, the diversification of markets and products, and the overall expansion of the economy in the 1970s. This continued until the late 1970s, when the expansion in coffee production devastated manufacturing by reallocating resources to the agricultural sector and by overvaluing the peso.
The fall in manufacturing exports, the subsequent decline in coffee prices, and the global recession of the early 1980s once again caused balance of payments problems for the government, which reinstated import controls in 1983 to prevent the draining of foreign exchange reserves. The economy did not begin to recover until 1984, when policies were adopted that were aimed at reemphasizing international competitiveness and a diversified export structure. The more open trade polices were approached timidly at first for fear that the manufacturing sector would not recover at a sufficient rate, rekindling trade imbalances and capital flight. Between 1984 and 1986, however, nontraditional exports grew at a healthy pace.
Despite the existence of a few remaining import controls in 1987, policymakers, business leaders, and international consultants agreed that the economy's growth was linked to increased international competitiveness in industry, mining, and agriculture. Programs were in place in 1988 under the Barco government to phase out the final deterrents to free trade, and Colombia approached the 1990s with a firm commitment to open international economic relations.
In the late 1980s, Colombia's exports were still based on natural resources, with coffee and petroleum the two largest foreign exchange earners. Crude and refined petroleum products represented 12 percent of total exports in 1986; the Colombian Foreign Trade Institute (Instituto Colombiano de Comercio Exterior--Incomex) reported that petroleum and its derivatives were the fastest growing export commodities in 1987.
In addition to legal exports, the shipment of marijuana and processed cocaine abroad had an important effect on Colombian trade. Colombia was the largest supplier of illegal drugs in Latin America in the 1980s, although estimates of the value of these drugs varied tremendously. From 1981 to 1986, annual receipts from the drug trade ranged from US$1 billion to US$4 billion. The actual amount of money that was laundered back into the economy each year, however, was much lower; estimates varied from US$200,000 to more than US$1 billion. Regardless of the precise dollar figure, most analysts agreed that drug money had a significant effect on foreign exchange reserves. Many believed that narcotics accounted for as much as the equivalent of 50 percent of officially recorded exports. Although the drug trade was highly lucrative, the government made significant efforts to restrain the production and export of this dangerous contraband.
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