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Colombia Environmental Export Market Plan
Chapter 4 - Economic Overview

While many Latin American countries were going through economic crises in the 1980s and 1990s, Colombia experienced average growth rates of 3.5 percent and was able to diversify its productive capacity. Gross domestic product (GDP) has expanded every year for more than 25 years. This success, particularly during the South American “lost decade” of the 1980s, is attributed to the government's prudent macroeconomic management policies, which continued until 1994.

Between 1990 and 1994, President Cesar Gaviria Trujillo launched a far-reaching economic liberalization program to enhance economic growth, modernize local industry, and most important, open the nation's economy to international trade and investment. The government pursued prudent fiscal, exchange rate, and monetary policies and implemented sweeping changes in the areas of finance, labor, exchange rates, and trade. These measures were largely responsible for the sustained economic growth enjoyed by Colombia during this period: 3.8 percent average GDP growth during 1990-93, 5.8 percent in 1994, and 5.4 percent in 1995.

In the laws supporting the liberalization of Colombia's economy (apertura), virtually all economic sectors were opened to foreign investment. The only activities closed to foreign direct investment are defense and national security, disposal of imported hazardous wastes, and real estate (the latter restriction to control money laundering). Colombia established a special entity - Coinvertir - to assist foreigners in making investments in the country. Foreign investment showed strong growth in the first half of 1996, and the trend is expected to continue, despite the current unstable political situation in the country. Colombia received $756 million in nonpetroleum-related foreign investment in 1995.

Major foreign investment projects under way include the $6 billion development of the Cusiana and Cupiagua oil fields, development of coal fields in the north of the country, and the recently concluded licensing for establishment of cellular telephone service. The United States accounted for 51.2 percent of the $6.5 billion stock of nonpetroleum foreign direct investment in Colombia at the end of 1995.

After 1995, the Samper administration faced a strong economic recession generated by several factors, including the following:
  • the decision by the United States not to “certify” Colombia as fully cooperating with the United States (or taking adequate steps on its own) to meet the objectives of the 1988 United Nations Convention on drugs, which led to market instability;
  • the capture of the Cali Cartel's drug lords, which led to a decrease in the influx of U.S. dollars in the Colombian economy;
  • high interest rates, which were the result of high government spending and tight economic policy;
  • real appreciation in exchange rates; and
  • a loss of business confidence because of the political crisis stemming from allegations that President Samper had solicited contributions from drug traffickers during the 1994 campaign.

    The slowdown has been felt especially in the labor-intensive industries, including manufacturing and the important coffee industry.

    Instability and economic uncertainty followed in 1996. Real GDP growth for the year fell to 2.1 percent, less than half the 1995 level, and one of the lowest in Latin America.
    Table 13: General Economic Indicators
    Population (Million)
    Real GDP per capita ($US)
    Real GDP ($US billion)
    Real GDP (Million 1975 pesos)
    780, 312
    GDP Growth Rate (%)
    Consumer Price Change, year-end (%)
    Total External Debt ($) year-end
    Average Exchange Rate (Pesos/$)

    By year-end, unemployment climbed to 11.5 percent, its highest level in almost 10 years. Inflation for 1996 registered 21.6 percent, 4.6 points higher than the Central Bank's stated goal; lending rates remained over 40 percent. The fiscal deficit of the Colombian Central Government climbed to over 4 percent of GDP.

    By May of the following year the situation looked no better. Real GDP actually decreased by 1.2 percent in the first quarter of 1997, with even the normally robust petroleum sector registering a decrease. As of April, unemployment had increased to 12.7 percent with no signs of slowing down. When visiting Colombia on a review in May, the International Monetary Fund (IMF) publicly predicted that, barring effective government intervention, things could get much worse.

    Further strain has come from guerrilla violence, drug wars, austerity measures implemented to control inflation, and lowered levels of private investment resulting from uncertainty over the short-term success of economic policies.

    The government has used revenue raised through the privatization of state enterprises to help constrain the deficit and debt. There also have been attempts to tax the foreign sector, typically by targeting imported products and services. Exports continue to fuel Colombia's growth, and much progress has been made in diversifying exports away from coffee - and particularly toward oil and coal. Growth in the petroleum and mining sectors and in nontraditional exports helped compensate for the decline in world coffee prices.

    The most recent key economic indicators show that economic growth (except in production of coca leaf) has fallen, unemployment and interest rates have risen, and government spending is displacing the private sector. Unemployment has almost doubled since 1994, going from 7.6 to 14.5 percent. The private sector shrank its number of employees by 6.6 percent in 1997 while the government expanded by 10.9 percent. Real minimum wages have fallen by 2.5 percent; the average industrial wage continues to grow in real terms but has fallen from an annual growth rate of 4 percent to just under 3 percent.

    Industrial growth has fallen from 5.1 percent in 1994 to 2.5 percent in 1997, and commercial sales have fallen from 6.3 percent growth to 1.6 percent in the same period. Bankruptcies have tripled. Foreign investment has increased but Colombian private investment has fallen (down 30 percent in 1996).

    The size of government has increased substantially, from almost 28 percent of GDP in 1994 to over 36 percent in 1997. The central government deficit has increased from 1.4 percent to 3.8 percent in 1997 and is predicted to exceed 5 percent in 1998. The state-run electric and oil companies have gone from contributing 0.5 and 0.3 percent, respectively, to GDP, to running deficits of 0.1 and 0.3 percent, respectively, of GDP.

    Real interest rates have also risen, as has the difference between savings and lending rates (margins). Real interest rates went from 17.9 percent in 1994 to 20.3 percent in 1998. Margins increased from 11.1 to 11.9 percent.

    The peso has revalued in real terms as a result of continued rampant inflation, currently running over 20 percent. Exports are expanding at a slower rate: In 1994 exports grew 17.8 percent, compared with 9.4 percent growth in 1997. Foreign reserves have risen in absolute terms, but using the common measure (number of months of imports) they have fallen from 5.7 months to 5.4.

    The current financial crisis has caused concern in many quarters. During a routine visit in 1998, IMF authorities found that the nation's economy was not in need of outside rescue, but that the new government must take strong measures to curb inflation (18 percent in July 1998), public spending, taxes, and the health of the financial sector. The current fiscal deficit is approaching 5 percent of the gross national product. According to the IMF, this level could prove unmanageable, leading to severe foreign exchange problems. A program of “shock therapy,” of which IMF representatives spoke, could include freezing salaries, eliminating subsidies, raising interest rates, and implementing job cuts at the government level. Such a program would bring social and political hardship to an already difficult economic situation.

    According to IMF, solutions to the fiscal deficit could include reducing redundant spending and reforming the Social Security Law because oil workers, the military, and public education teachers enjoy special and costly fringe benefits. Government workers’ salaries also must be kept within a strict budget, while Colombia's tax structure needs to be revised and streamlined.

    All of this should be read, however, in the context of a nation that has enjoyed a particularly healthy and stable economy for the last half-century. Foreign investment is not down, and Andres Pastrana, the new president, had the support of the business community during the 1998 elections.

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