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___ . _ ._ .J ,./9 r e q'tjlthE Public Disclosure Authorized Public Disclosure Authorized CourtingTurmoil AL andDeferring Prosperity ColombiaBetween V 1960and 1990 Public Disclosure Authorized 'I $~~~~ I~~~~ JORGE GARCIA GARCIA SISIRA JAYASURIYA Public Disclosure Authorized W 0 R L D B A N K COMPARATIVE MACROECONOMIC STUDIES CourtingTurmoil andDeferring Prosperity: ColombiaBetween 1960 and1990 I CourtingTurmoil andDeferring Prosperity: ColombiaBetween 1960 and1999 JO R GE GAR C I A GAR C I A S I S I R A J A Y A S U R I Y A THE WORLD BANK, WASHINGTON, D.C. © 1997 The International Bank for Reconstruction and Development / The World Bank 1818 H Street, N.W., Washington, D.C. 20433 All rights reserved Manufactured in the United States of America First printing May 1997 The World Bank Comparative Macroeconomic Studies series emerges from a research project that reviewed the macroeconomic experiences of eighteen developing countries over a period roughly from 1965 to 1990. The findings, interpretations, and conclusions expressed in this publication are those of the authors and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to the members of its Board of Executive Directors or the countries they represent. The material in this publication is copyrighted. Requests for permission to reproduce portions of it should be sent to the Office of the Publisher at the address shown in the copyright notice above. The World Bank encourages dissemination of its work and will normally give permission promptly and, when the reproduction is for noncommercial purposes, without asking a fee. Permission to copy portions for classroom use is granted through the Copyright Clearance Center, Inc., Suite 910, 222 Rosewood Dr., Danvers, Massachusetts 01923, U.S.A. The complete backlist of publications from the World Bank is shown in the annual Index of Publications, which contains an alphabetical title list and indexes of subjects, authors, and countries and regions. The latest edition is available free of charge from Distribution Unit, Office of the Publisher, The World Bank, 1818 H Street, N.W., Washington, D.C. 20433, U.S.A., or from Publications, The World Bank, 66, avenue d'Iena, 75116 Paris, France. Cover design by Sam Ferro. Jorge Garcia Garcfa is a Senior Economist in the World Bank's Resident Mission in Jakarta, Indonesia. Sisira Jayasuriya is a professor at Latrobe University in Australia. Library of Congress Cataloging-in-Publication Data Garcia Garcia, Jorge, 1945- Courting turmoil and deferring prosperity : Colombia between 1960 and 1990 / Jorge Garcia Garcia, Sisira Jayasuriya. p. cm. - (World Bank comparative macroeconomic studies) Includes bibliographical references and index. ISBN 0-8213-2656-2 1. Colombia-Economic conditions-1970- 2. Colombia-Economic conditions-1918-1970. 3. Colombia-Economic policy. I. Jayasuriya, S. K. II. Title. III. Series. HC197.G33 1997 338.9861'009045-dc2l 97-1458 CIP Contents Foreword vii Acknowledgments ix Acronyms and Abbreviations x Data notes x Introduction xi Chapter 1. Political and Policy History I The Development of Modern Colombia I The Return to Civilian Rule 7 Sustained Growth and Higher Inflation: 1970-75 11 The Coffee Boom: 1975-79 12 The End of the Coffee Boom and the Onset of Recession: 1980-83 14 The "Orthodox" Adjustment Strategy: 1984-85 15 Overview 16 Chapter 2. A Profile of the Economy 19 The Land and Its Geography 19 Population, Growth, Economic Structure and Trade 20 Agricultural Sector 22 Manufacturing Sector 24 Employment, Unionization and Real Wages 25 Capital Markets 27 Savings, Investment, Balance of Payments and External Debt 31 Fiscal Policy, Monetary Policy and Inflation 33 Exchange Rate Regime and the Real Exchange Rate 36 Chapter 3. Crises and Policy Responses 41 The Current Account Crisis of 1966 41 Adjustment and Growth to the Coffee Boom: 1967-1975 50 The Coffee Boom: 1975-79 52 Reversal of Policy: The National Integration Plan 56 v vi Courting Turmoil and Deferring Prosperity: Colombia Between 1960 and 1990 The End of the Export Boom 57 Adjustment: 1985-86 63 Chapter 4. Crisis Management and Long-Term Growth 71 External Developments and Domestic Fluctuations: 1950-86 72 Rate of Investment 75 Efficiency of Investment 75 The 1966/67 Episode and Its Long-Term Impact 79 The 1976-86 Period and Long-Term Impact 81 Chapter 5. Conclusions 85 Why Did Policymakers Behave as They Did? 85 Did Macroeconomic Policies Accelerate or Retard Growth? 87 What Lessons Can Be Drawn from Colombia's Experience? 90 Chapter 5 Appendix. The Determinants of Productivity Change 93 Appendix 1. Estimating the Public Sector Deficit and Its Financing 103 Appendix 2. Sources of Growth of the Money Base 107 Appendix 3. The Investment Function 110 Appendix 4. Rates of Return to Physical Capital and the Efficiency of Public Investments 112 Rate of Return to Physical Capital: 1950-86 112 Efficiency of Public Expenditure 113 Bibliography 119 Statistical Appendix 129 Index 170 Foreword This volume by Jorge Garcia Garcfa and Sisira Jayasuriya is one product of a World Bank research project that has reviewed the macroeconomic experiences of eighteen developing countries since the mid-1960s. This period encompassed two oil shocks, two world recessions, a sharp rise in world interest rates, the debt crisis, and changes in exchange rate regimes. Many countries encountered severe crises, though their responses varied greatly, and often the crises were essentially home-grown or, at least, the result of unwise domestic policies combined with external shocks. The objective of the project was to glean instructive lessons by analyzing the stabilization and adjustment policies pursued by these countries and assessing the outcomes. The authors of each country studied were asked to deal with a common set of questions concerning the nature of shocks; their origin and degree of seri- ousness; the fiscal, monetary and trade policies adopted in hopes of preventing permanent harm to the economy; and the results of the policies. While no single, rigid structure was imposed on the studies, they were conducted within the frame- work of the open-economy macroeconomic model to ensure consistency in gen- eralizing about results. The intensive study of many episodes generated ideas and suggested relation- ships showing the causes and effects behind policies, the nature of shocks and cri- ses, and governmental responses to them. The major findings of the project are presented in a synthesis volume by I.M.D. Little, Richard N. Cooper, W. Max Corden, and Sarath Rajapatirana, Boom, Crisis, and Adjustment: The Macroeco- nomic Experience of Developing Countries, published by Oxford University Press for the World Bank. Within the set of study countries, Colombia provided an almost unparalleled example of steady long-term economic growth, despite its exports having been dominated by coffee, a commodity with high price volatility, and its political en- vironment plagued by persistent civil strife and traumatic violence. The unusual stability of its growth performance was in no way due to an absence of serious shocks to the economy. On the contrary, as this book details, a number of major domestic and external shocks have confronted the Colombian economy since the early-1960s. Historically, given the central role of coffee in Colombian exports, the major external shocks have been associated with the relatively frequent and sharp fluctuations in world coffee prices, and this was also the case during the study period; in addition, the growing importance of illicit drugs has introduced a vii viii Courting Turmoil and Deferring Prosperity: Colombia Between 1960 and 1990 new and volatile factor into the economy in more recent years. This period was not only one of major economic shocks; it also witnessed major policy changes, in- cluding a long-term shift in the country's development strategy from an essentially inward oriented strategy, based on industrialization through import substitution, to an outward oriented export-led strategy. How and why Colombia managed to avoid any major, prolonged economic crisis during such a period is a major issue addressed in this study. However, the analysis presented here goes beyond this issue and differs from most existing lit- erature on the Colombian economy in two important ways: first, it evaluates policy responses to shocks not only in terms of their success in achieving short-run sta- bilization, but also in terms of their impact on long-run growth; second, it explores the intimate links between economic policies and the specific, historically evolved, political and social ideologies, institutions, and structures in Colombia that conditioned government policymaking. The role of prudent macroeconomic policies for crisis avoidance is highlight- ed. The links between fiscal policy, trade policy orientation, nominal exchange rate, and the real exchange rate are analyzed to show that a lack of appreciation of these links has hindered the growth of a dynamic export sector and long-term growth. Successive Colombian governments, however, have shown a remarkable capacity for adopting flexible responses to evolving macroeconomic imbalances and to implement necessary stabilization measures before they developed into full-blown crises. Gradualism and moderation, rather than sharp swings, have characterized the broad thrust of government policy. It is argued that this was made possible by the domination of the political system by two elite-based polit- ical parties that, with