The nation of Colombia is a complex and divided society. Its long-
established democratic tradition continues in the midst of a clientelistic web
of social relationships that shape political and economic policy. The affects
of globalization and economic liberalization on Colombia were different than
most Latin American countries, primarily due to Colombia's early open trade
policies in the 1970's and its late liberalization of trade and public sector
in the early 1990's. Despite early economic success after the liberalization,
which included reduction of import tariffs, privatization of many publicly
owned banks and firms, and a freeing of capital for the use of foreign
investors, Colombia is now facing stagnation, high unemployment, and a
significant amount of inflation.
This paper will discuss and profile the sectors of economic activity,
political structure, and the structure of the financial system in Colombia.
These foundational elements are essential in understanding the parameters
within which economic change, forced by globalization, must occur.
Sectors of Economic Activity
The main sectors of legal economic activity in Colombia are agriculture
(coffee, fresh flowers, bananas, and livestock), manufacturing (clothing,
transportation equipment, petroleum derivatives, industrial chemicals, and
coffee milling), energy and mining (oil, coal, and emeralds), and finance.
Coffee is the largest export, comprising14.9 percent of total exports, but
recent violence and crop damage have hindered growth during the past year.
Other exports include petroleum (26.8 percent) and coal. Colombian imports
have considerably increased in the past eight years . Chemicals, machinery
and transport equipment, and iron and steel are among the largest imports.
The coffee sector has been essential in the development of the present-day
economic and politic environment found in Colombia; it is one of the oldest
economic sectors. Since the 1920's, the Coffee Federation of Colombia (FNC)
has been representing the interests of the coffee producers to the national
government. The relations between this association and state have always been
strong, allowing the FNC to play a large role in the economic policy formation
of Colombia during the last seventy years. The production of coffee in
Colombia has been locally controlled and the land used has been broadly
distributed. The general distribution of the land has allowed for the
emergence of regional elite who oversee the production and distribution of the
coffee farming and milling. This elite developed mechanisms that allowed for
internal and external interaction, cooperation, and political representation.
The fact that coffee is not capital intensive, after the original planting,
diversified the economic interests of those who grew it. Hence, the FNC was a
multi-sectoral association because its members invested their profits in many
different sectors of society, such as commerce, real estate, industry,
shipping, and finance.
Due to primacy of the coffee sector and the inelasticity of its price, the
Colombian government had to decide how to handle the fluctuation in world
demand. One way that they did this was through export diversification. This
emphasis on exportation ensured that Colombia did not solely utilize import-
substituting industrialization in their economic policy. Instead of
protectionist measures, Colombia reformed their exchange rate to best serve
exportation. The coffee growers were in favor of this reevaluation and did not
hinder its progress. This was an uncommon occurrence in Latin America at the
time. Mahon argues that the devaluation of the peso, along with other
factors, deterred significant capital flight in 1981-2, which in turn helped
the economic environment maintain a level of stability that other Latin
American countries did not experience.
Oil, another export, was not discovered in Colombia until the 1980's.
Because of this, they did not experience the same rapid economic growth and
inflation that other oil producing countries did, namely Venezuela. This was
another factor that stabilized the Colombian economy.
The state-run oil company, Ecopetrol, works with private companies, a large
majority of whom are foreign, to discover new oil fields and extract the oil
from the fields. Despite recent privatization, in 1995 private companies
could only invest 50 percent into a given project, Ecopetrol would own the
other fifty- percent. This arrangement was under government review (at press
time) based on a desire to lure new investment into Colombia. A new proposed
plan on the subject argued that if Ecopetrol did not want to invest its 50
percent, the private company could "invest more than the traditional 50
percent" In addition to oil, Colombia also exports coal and other minerals.
Business associations for each of these groups exists, in addition to coffee
based associations. One of the stones mined in Colombia is emerald. The
emerald industry can be used to illustrate the lack of government influence in
particular areas of the economy. While emeralds earned $180 million in 1996,
it has been estimated that the "real value of Colombia's green gold" is $1.5
billion a year. The main reason for this discrepancy is the producers'
desire to avoid taxes that must be paid in the export market. Even if the
quote is an over estimate, the difference between what is actually accounted
for an what is quoted is so large ($1.3 billion) that this undocumented
production and profits would cause some level of economic impact. This black-
market trade, along with the narcotic business, pose difficult problems for
anyone trying to bring about economic reform in Colombia. The difficulty in
accounting for such a lucrative informal economy in the economic indicators
can skew the analysis by inaccurately reporting the level of imports, exports,
labor capital, etc. in the economy.
Colombian imports, over the past five years, have mainly consisted of raw
materials and intermediary goods, although the demand is increasing for
capital goods. The outlook for import and export trade will be impacted by the
recent devaluation of the peso by decreasing import levels slightly, but
overall they are expected to increase and further exacerbate the trade
deficit, estimated at $2,080.3 billion for 1996.
Colombia's major trading partner is the United States, with 40.9 percent of
Colombian imports and 39.8 percent of Colombian exports being traded between
the two countries. In addition to U. S. trade, Colombia is also part of
numerous trade agreements, including the Andean Group and the Group of Three,
which includes Colombia, Venezuela, and Mexico. These trade agreements were
set up to benefit all countries involved by establishing tariff levels and
exchange policies. This intra-regional trade pattern supports the hypothesis
put forth by Stallings in her book, Global Change, Regional Response. The
Colombian model appears to support the premise that international
globalization has led to regional integration of trade although this is not a
new occurrence in Colombia. The bulk of Colombian exports have always gone to
the United States and Latin America.
The "Openness" of the National Economy
As of 1991, the national economy has become increasingly open to foreign
trade. A new constitution was instated to provide economic liberalization and
included in this was openness to foreign trade and capital. Tariffs on
imports of capital goods, in addition to import surcharges were reduced. In
1995, 31 percent of the GDP was from trade. The past eight years have also
seen an increase in privatization and foreign investment. Before 1990, a
large number of firms, including banks, industries, telecommunications, etc.
were publicly owned and there was very little foreign involvement in the
Colombian economy. With new foreign investment law in 1991, no
differentiation is made between foreign investors and Colombian nationals.
There has also been a significant relaxation in the permitted amount of
capital remittances, dependent on the amount of foreign currency available,
and foreign investors receive equal access to local credit. All of these
elements prompted a high level of foreign investment. In 1995, FDI accounted
for .04 percent of GDP, compared with .008 percent in 1986.
Political Structure
The political structure in Colombia is very complex and clientelistic. The
foundation of clientelism extends back beyond the FNC and its strong political
influences, but this is far enough back in history, the 1920's, to realize the
it has played a key role in the development of Colombia as a country and as an
economy. The national regime has long been considered democratic but it can
be suggested that this democracy does not extend far below the upper class.
The Colombian social structure is not based on equality, as the clientelistic
nature assures that primarily those with the right connections will advance,
whether that is socially, politically, or economically. This political
structure translates into a situation where, no matter how hard an individual
works, if he does not know the right people, he will not be afforded the same
opportunities in life. When studying Colombia, it is difficult, but
imperative, to separate two ever-present human realities: one group with
access to opportunities and stability; and the rest of the society who lack
access to economic opportunity or prosperity.
International economic literature points to the Colombia's economic stability
of the past twenty-five years, Colombia has never had to restructure its
external debt, and yet the stability of society has not achieved the same
level of success. While the central government has power over the economy and
hence, certain social factors, there are parts of the country that are ruled
under virtual martial law. The guerrillas and drug lords mandate obedience
for protection, and at times, these regimes even provide societal services
like road repair.
Overall, the formal government can be typified by the Japanese type of
capitalism described by Barbara Stallings in her book, Global Change, Regional
Response. This type of regime is described as "an economy functioning on the
basis of robust long-term labor commitments of resources and loyalties and
supported by densely integrated primary social structures, which provide large
firms with lasting commitments to work, as well as high legitimacy for
authority". The long-term commitments, originating with the coffee growers,
have now spread into other sectors of society. There are powerful business
associations in finance, mining, and industry (ANDI), to name a few.
While the discretion of the state and the central bank is not as free since
the liberalization of the early 1990's and especially since the marketization
of the financial sector since 1995, the majority of recent history has been
effected by the interplay between business and government. Since those
holding economic and political power were an elite group, there was an
extensive network of social relationships in society. This coincides with the
Japanese model, as does the legitimacy of the state that has existed in
Colombia. Through the different business association, a vertical trust and
reciprocity developed and was used to sustain the power and control of the
state. Rosemary Thorp and Francisco Durand describe the effectiveness of the
Colombian political system,
Combining professional top-level policy management with a high level of trust
and credibility has produced the possibility of policies that are relatively
autonomous from immediate interests that yet do not damage relations of trust
and confidence or security of access.
The effectiveness of this clientelistic political system is evident in the
apparent economic stability of Colombia during the 1980's when most Latin
American economies and political regimes were disintegrating, but a word of
caution is required at this point. The political unrest, outside of the elite
has been anything but successful. There have been massive human rights
violations, murders, and inequality.
The political regime's inability to control forces outside of the formal
economy has been intensified by the economic liberalization process of recent
years. It appears that minimal structural change has taken place in the
Colombian political sphere. The national political structure has maintained
its reliance on clients and the networks they provide, but the loss of public
institutions and the increase in foreign investment have undermined the
traditional social formation. It has been suggested that Colombia's move away
from the Coffee industry as its main export has left the political arena
exposed to the weaknesses that have always been a part of the system,
weaknesses like ineffective social policy, investment planning, and industrial
policy. This exposure is caused by reduction of influence manipulated by the
FNC and the increasing power of other sectors, such as finance and
manufacturing who have not previously utilized the same clientelistic
relationships.
Financial Sector
The financial sector of Colombian society has undergone the same process of
liberalization and privatization as the rest of the economy. Since 1923, the
financial system has been centered around the commercial banking system, which
has as its central focus the El Banco de la Republica (the central bank) . Up
until the past two or three years, there was no significant allocator of funds
outside of the commercial banking sector. The banking system has always been
fragmented into different types of organizations such as banks, finance
corporations , savings and housing corporations, at the same time, high
concentration exists due to joint ownership . Generally, financial
transactions occur between the public sector and the external sector, or the
private sector and the financial system. The financial system that serves the
private interests has been characterized as inefficient and oligopolistic.
The privatization of public banks has given private investors the opportunity
to purchase these banks, and subsequently, to form conglomerations. A massive
consolidation movement has taken place in the last two to three years, in
response to the threat of foreign investment in the banking system. These
consolidations were undertaken to bring about more competitiveness and
efficiency in the banking sector, specifically the private, domestic sector,
but it is yet to be seen if this will occur.
The leading player in the finance industry is the Sarmiento group, which owns
more than 25 percent of the sector by assets. They own three banks (whose
combined assets are worth more than the largest bank in the system), three
financial corporations, two savings and loans, and three brokerage firms.
Despite an overall recession in the banking economy, the banks owned by
Sarmiento have been lucrative. "The bank's past-due loans have been kept
consistently under four percent of total loans during the past five years,
significantly below the system-wide average". In addition to Sarmiento, two
Spanish banks, Banco Bilboa Vizcaya and Banco Santander have recently acquired
forty and fifty-five percent, respectively, of two of the largest banks in
Colombia. The final large domestic player is Sindicato Antioqueno that merged
with the Gilinsky group to create the country's largest bank, which will hold
16.5 % of the banking systems assets.
The private banks in the Colombian financial system appear to be healthy and
prospering. Part of this success is due to the buy out of unsuccessful firms
by the larger, more powerful conglomerations. In the public sector, there is
one institution that has not been decentralized that is a prime example of
inefficiency and clientelism. "Although La Caja Agraria (Agrarian Bank) is
frequently used a source of patronage-by politicians and corrupt public
officials, the government has still chosen to recapitalize the institution".
The profits of the banking sector are adversely affected by this institution.
Data indicates that when the Caja Agraria is incorporated in the figures, the
profits of the banking sector were 51,970 million pesos, but by excluding it,
the profits escalate to 81,333 million. This is an example of the political
process of clientelism at work in the economic structure.
The Colombian Central Bank, Banco de la Republica, has been structured to be
an autonomous entity. The state does not have explicit control on its
policies but it often intervenes on behalf of certain sectors of the economy,
such as exports. Such intervention occurs in the form of controlling interest
rates, the amount of reserves that banks must maintain, or regulating its own
lending policies. It can not be considered a neutral entity.
Like most developing countries, Colombia's capital markets have been fairly
inactive. Major reforms have occurred in the past two years to develop a more
powerful system. In the past, the market has generally been used only
minimally by firms, and usually in controlled fashion; a small number of firms
doing most of the actually trading. In 1995, the value traded on the market
was 1.6 percent of GDP, and there were 190 listed domestic companies. A
concerted effort was made in 1997 to develop a secondary market to increase
the liquidity of investments. Mark-to market valuation and investment ratings
were standardized and made transparent in an effort to improve the information
structure available to traders. "By August 1997, the number of funds (in the
market) had risen to 205, with a total of $703 million under management,"
An analytical synthesis of the financial system must be two-fold due to the
transitory nature of the structure over the past five to ten years. Before
1991, and some would argue well after, the domestic financial institutions of
Colombia were characterized by government credit, subsidies, and policy
formation. The value of the peso was kept low in order to benefit coffee
exporters and other export oriented manufacturing, while the Institute of
Industrial Development (Instituto de Fomento Industrial-IFI) directly
influenced which developing industries would receive government funding. The
government has used IFI to develop major sectors such as iron and steel,
chemicals, car assembly, metalworking, textiles, paper and agro-industries.
These actions coincide with the credit-based, price-administered financial
system described by John Zysman. The Colombian State can be said to be an
"economic player". The methods used are those described above, such as
exchange rate control, business associations that influence government
behavior, state owned banks who have the power to intervene in industry, and
governments ability to effect the structure of sectors through its policies,
if not directly.
In the 1990's, Colombian financial institutions are moving toward a
competitive market base, but the transition has not been easy. The banks have
been privatized, allowing the state has less control, but no political or
economic precedent exists for this type of financial structure. While most
commercial banks and lending institutions are attempting to be competitive,
there are still vestiges of the clientelistic, intervening state, such as the
Caja Agaria. At the same time, the Central Bank is still intervening in the
economy with currency devaluations, shifting reserve requirements, and the
like. The government and the financial institution are attempting to allow
the market to control economic policies by moving toward stocks and bonds as
the predominant source of industrial funds, but the process has been slow and
incomplete.
The financial situation in Colombia is further impairing this structural
alteration. The current account deficit (1997) is 5.9 percent of GDP. This
deficit is mainly caused by a trade imbalance. In addition to the trade
imbalance, the external debt, both public and private, was $28,497 billion in
1996. Economic growth is slow and the interest rates are high, caused by the
need to finance the government deficit. Major restructuring is needed if any
change will be possible in the near future, yet it is at this point that
conflict arises. The government wishes to proceed with its liberalization and
yet feels forced to intervene to stabilize reserves and inflation.
The current economic struggles have caused politicians and citizens to
question recent changes that have been made in the economy. While continued
structural reform must take place in order to sustain economic stability and
growth, difficulties lie in how to execute such changes in a society with
shifting political systems and social unrest.
Globalization has had a profound effect on Colombia as a nation but it has
not been the prototypical case. Export diversification and vertical
clientelistic trust networks allowed Colombia to prosper economically and
policy constraints hindered the dramatic inflow of capital in the late 1970's.
While economic austerity programs and reform were need throughout the 1980's,
Colombia was never forced to restructure its loans or default in payment. The
1990's saw a dramatic switch in the economic and political policies as the
country attempted to liberalize its trade relations and privatize much of the
state owned business. This economic alteration upset the clientelistic
networks and business associations that had been in place for decades causing
a certain level of instability and turmoil in political as well as economic
terms.
Liberalization stimulated economic growth in the first few years of the decade
but as more time passes and less income is being received for institutions
that were privatized, Colombia is being forced to deal with a trade deficit,
external debt, and considerable social unrest. The transition to a capital-
based market economy has been incomplete at best and has left the economy half
way between a clientelistic credit-based system and transparent market-based
system. This has serious practical and political implications that will have
to be dealt with in the coming months and years.
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