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Shielding the Recession


The rapid fall of industrial production and sales in the first months of  2009 has cracked the media shield behind which the Colombian government attempted to hide the reality of economic recession in Colombia.

In reality industry was in decline since May 2008. By the second semester of 2008 the economy had completed two consecutive trimesters of decline and was therefore formally in recession. The construction figures tell the tale. The area approved for construction declined by 11.7% in 2008 relative to 2007; in January 2009 the decline was 29.7% relative to January 2008. The housing construction figure was even more dramatic: a 42.6% decline from January 2008-2009.

By the time the Ministry of Housing declared that Colombia was "shielded from the international crisis", the crisis had already reached the country. During 2008 the stock market lost 29% of its value and were 32% cheaper than they had been at the peak of the bull market.

There was no way the Colombian economy could have escaped the international crisis. In January 2009 remittances from Colombians living abroad and exports were 16% and 13.2% lower than the previous year. During 2008 the devaluation of the dollar (and consequent reevaluation of the peso) put the brakes on industrial and agricultural exports, especially of cut flowers, a commodity business that was in crisis long before the rest of the economy. The quick collapse of demand in the US and Europe aggravated the situation. The industry hoped the situation would change with the reevaluation of the dollar (and devaluation of the peso). Instead the international recession collapsed export prices for nickel, coal, oil, which pulled the rug out from under Colombia’s flagship agrofuels program, sustained by state subsidies and prices set by decree.

On the other hand, the Colombian recession is not solely or even principally attributable to the international crisis. There is an internal business cycle with its own dynamics that entered into its descending phase. Certain domestic facts and policies have drawn and sharpened the characteristics of the Colombian crisis.

First, relatively high interest rates, always higher than international rates, spurred savings and foreign investment, helped the transnationals to purchase Colombian banks and other Colombian businesses, and enabled the Colombian government to sell bonds to support its budget. These interest rates ended up strangling industry, agriculture, and commerce.

Second, the government set out on a policy of high fuel prices. When the policy began the international price of fuel was high and, along with the surging economy, concealed the policy.

There were two goals to the high prices of gasoline and diesel: the fiscal logic of exporting goods at a higher price, a new tax that was disguised as the ‘suppression of subsidies’. In reality there was no subsidy at all: the cost of production in Colombia is less than 25% of the sale price. Ethanol is even more expensive, twice the international price, in order to sustain the massive investment in agrofuels and sugarcane and palm plantations of the massive plantations that bring a higher income than the Latin American average, that in the case of sugarcane are indigenous territories disputed by the plantation owners and in the case of palm serve to legitimize the displacement or servitude of the campesinos in territories dominated by the paramilitaries and their financiers.

The fall of the international price of fuel in 2009 revealed the politics of fuel price in Colombia. The result was a domestic price that was both intolerable for the economy and imperative to sustain the governent budget at a time when President Uribe hopes for re-election and needs a minimum budget to surround his electoral campaign with some achievements. Truck drivers, hopeless because of impossibly high fuel prices and seeing their operations in free-fall, have declared a national strike.

High interest rates, the high price of gas, and the agrofuels policy all contributed to inflation, such that the Colombian recession, far from being accompanied by a fall in prices like the US and Europe are experiencing, is a typical case of stagflation.

Third, the illegal economy was another source for the economic boom. The Ralito accords with the paramilitaries were followed with the laundering of dollars and euros that helped to inflate the Treasury bonanza, the official budget, and the "health" of the overall economy. "Pyramids" and Ponzi schemes multiplied across the country without any controls, serving simultaneously to launder more hot money, finance drug operations, multiply the amount of money in circulation, raise overall sales, and give the economy the illusion of health.

When the recession began, the pyramids that were not linked to narcotrafficking collapsed immediately. Alarm bells rang about the proliferation of these schemes. The government, so disengaged from the issue, after failing for so long to fulfill its duty to monitor the capture of savings, was forced to act. The closing of the pyramids coincided with the rapid rise of the dollar and unleashed the phenomenon referred to by Keynesians as the "liquidity preference": those who had earlier overturned the system by placing their savings into pyramid schemes now wanted only cash, in dollars.

The paramilitaries, in their peace process, could no longer hide that they were continuing their narcotrafficking operations. The old paramilitary leaders were extradited to the US and the process collapsed. The mafia also showed a "liquidity preference" and a new generation of paramilitaries arrived on the scene.

Once the Pandora’s box of the crisis was open, the Colombian authorities proclaimed emergency treatment. The Bank of the Republic lowered interest rates, but it was too late. The effect was neutralized by the preference for dollars.

Foreign investment during the first 80 days of 2009 was 27% lower than the same period in 2008. The government’s own figures say that the loss was 15-20%. The result was a turn to external debt, which had been shrinking just as the internal debt, in pesos, was growing at a scandalous pace so long as dollars were cheap and Colombian interest rates high. Dollars were now back to being strong and the external debt was growing, starting with an issue of one billion dollars of external debt. What the government started, the IMF would finish, as Colombia opened an IMF "preventive" line-of-credit of more than $10 billion dollars, in case of urgent need.

The return of Colombia to the arms of the IMF follows the G-20 meeting that pulled that institution out of the cemetery to return to its old work. Colombia is the fifth country to seek the poisoned medicine cooked up in London. Mexico, the Ukraine, Poland, and Costa Rica preceded it, although just before Latvia, Hungary, Iceland, Rumania, Serbia, and the Czech Republic had to turn urgently to the IMF.

As in other parts of the world, public works have been announced. Even though unemployment never went below 10% even during the boom, the fact that unemployment has now gone over 14% at the beginning of the year threatens political instability. If it goes still higher, Uribe can forget about re-election.

The oft-repeated fall of some narcotrafficking dons may temporarily increase the price of illegally exported cocaine. Another poison drug will forge new dons that will benefit from the increased prices and the elimination of competitors.

The government longs for the approval of the US and Canada that would come from the free trade agreements. It longs to capture investments by making perks and concessions available to investors. But increasing imports at a time when North American products have dropped in price would be a hard blow to Colombian domestic production.

Even now there are other ways out of the crisis, ways the majority of Latin America is trying to follow. Colombia could focus on the internal market, develop state plans for massive construction of social housing, with state credit institutions, approve an agrarian reform to take advantage of 5 million hectares of agricultural land now sitting idle under speculative control, revitalize the Andean community, and recover, as other Latin American countries are trying to do, its natural resources. To open the way for this path we need peace.

 Hector Mondragon is a Colombian economist and activist.

 Translated by Justin Podur

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