Sunday, June 4, 2023

Colombia: On the Path to Development

Foreign investors are moving into new mining, energy, infrastructure and agricultural projects.

First comes stability, followed by growth and then modernity. This is the path followed by most developing countries. Stability can manifest itself in many ways, such as price stability or civil order. Brazil, for example, never suffered the degree of civil unrest that plagued many other developing countries.

However, it had a very hard time securing price and exchange rate stability. Years of hyperinflation during the late 1980s and early 1990s created enormous hardship for the Brazilian economy.

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A large portion of the population was pushed into abject poverty. However, everything changed once Finance Minister Fernando Henrique Cardoso introduced the Real Plan, which established a tight trading band for the currency and was able to reign in the runaway inflation rate. Chile also underwent a process of stabilization during the 1970, after the overthrow of the Allende Administration.

The country suffered years of repression, as the military established its control over the political apparatus. Once the process was complete, the country embarked on a series of structural reforms that pushed the economy into overdrive during the 1980s and early 1990s. It then moved into a period of modernization, updating the nation’s infrastructure and institutions. It adopted a vibrant political system that allowed the representation of the left and right.

Colombia is no different. After 60 years of civil war, the government finally adopted the political will and resources to bring the conflict to an end. It then moved into the second phase of the development process towards the end of the Uribe Administration, and it is now starting to contemplate what lies ahead.

The Colombian economy grew 5.9 percent y/y in 2011, an impressive growth rate considering that most of the planet was retrenching. After decades of low investment, due to the bloody civil disorder, billions of dollars are flowing into the country. Foreign investors are moving into new mining, energy, infrastructure and agricultural projects. The hotels of Bogota are brimming with Asian business men and western investment bankers cutting deals. Likewise, the Colombian consumer has also been on the move.

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Up to recently, Colombians would not dare to flaunt their wealth for fear of being kidnapped or robbed. Every family kept a stash of ransom money at the ready, or funds needed to flee the country if necessary.

With the perception that the civil conflict has come to an end, households are throwing caution to the wind. Moreover, consumer credit is flying, with people taking out loans for cars and vacation. Generous mortgage terms are inducing families to upgrade their homes to more modern dwellings. All of this is boosting the level of economic activity. The construction sector has been on a rampage for more than 6 years, and it does not show any sign of abating. This is why inflation continues to be a problem. The inflation rate, which reached 3.7 percent y/y at the end of 2011, is on the high end of the central bank’s 2 percent to 4 percent target band. Not surprisingly, the monetary authorities were forced to raise interest rates in February.

A severe winter only made matters worse, since it pushed up food prices. The tightening of monetary policy and strong capital inflows helped explain the recent appreciation of the Colombian peso. The Colombian peso has the dubious distinction of being the best performing currency in the world. Despite an improvement in the trade accounts, the country still posted a current account deficit of 3 percent of GDP in 2011. Unfortunately, the outlook remains the same for this year. Strong capital inflows and a growing import bill of capital and consumer goods are ensuring a moderate shortfall in the external accounts.

While most analysts are focusing on the growth aspects of the Colombian development story, policymakers are looking at what lies ahead. The military has been redeploying its forces, removing many of them from former hotspots and replacing them with more mobile units that can cover large areas. There is a movement afoot to begin to using unmanned drones. The concept is not bad, given the enormous territory that needs to be patrolled and the hostility of the terrain.

There are also calls for the negotiation of a permanent cease-fire, in order to bring a political solution to the armed conflict. Last of all, President Santos joined a chorus of other Latin American leaders arguing for the possibility of legalizing the drug industry in order to take it out of the hands of subversive groups. These, and other initiatives, will help modernize Colombia by bringing an end to the civil war and allowing the country to move up the developmental ladder.

By Walter Molano, head of research at BCP Securities.

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