LATIN AMERICA POLICY JOURNAL

Innovation, Development and Politics: Latin America a Vibrant Region

An HKS student publication LATIN AMERICA Policy Journal

Fifth Edition 2016 Sponsors

Support The Journal The Latin America Policy Journal is a student-run journal published annually at the John F. Kennedy School of Government at Harvard University.

Donations The Latin America Policy Journal is funded entirely through subscriptions and contributions. The John F. Kennedy School of Government at Harvard University provides only in-kind assistance. We would like to thank the following organizations and individuals who have made our publication possible:

Benefactors: $500 and above Kennedy School Student Government (KSSG) Ash Center for Democratic Governance and Innovation Mossavar-Rahmani Center for Business and Government (M-RCBG)

Supporters: $100 and above David Rockefeller Center for Latin American Studies (DRCLAS) Carr Center for Human Rights Policy Joan Shorenstein Center on Media, Politics and Public Policy Malcolm Weiner Center for Social Policy

Copyright All views expressed in the Latin America Policy Journal are those of the authors or the interviewees only and do not represent the views of Harvard University, the John F. Kennedy School of Government at Harvard University, the staff of the Latin America Policy Journal or any associates of the Journal. All errors are authors’. ©2016 by the President and Fellows of Harvard College. All rights reserved. Except as otherwise specified, no article or portion herein is to be reproduced or adapted to other works without the expressed written consent of the editors of the Latin America Policy Journal.

ii Latin America Policy Journal Staff

Latin America Policy Journal 2015–2016 Fifth Edition

Editor-in-Chief Editors Richard Medina Gómez Haydeeliz Carrasco Jessica Grisanti Johanna López Daniel Stagno

Acknowledgements The LAPJ would like to recognize those that supported us in this venture:

Martha Foley Erin T. Buck Professor Richard Parker Andrea Hayes Harvard Kennedy School Student Amanda Beaujon Government Victoria Pizzini HKS Latin American Caucus Daniela Serrano Will Pfeffer Felipe Vallejo Jennifer Nash Agustín Porres Yadira Rivera Ana Serrano Christopher Kintzing Juan Riesco Nilagia McCoy

Fifth Edition | 2016 iii Table of Contents

Innovation, Development and Politics: Latin America a Vibrant Region

Editor’s Remarks 2 Section 1. Commentaries

Not only one Central America 4 By Laura Chinchilla

Why is Colombia Going to Sign the Peace Agreement this Time? 11 By Ernesto Samper Pizano

Argentina´s transition trilemma 16 By Eduardo Levy Yeyati

Section 2. Articles

Drug Policy Innovations in Latin America 20 By Zara Snapp

Quality of exports as an additional tool for policymakers: 30 The case of Colombia By Lenin H. Balza and Alfredo Guerra

Development Banking and Counter-Cyclical Policies in Brazil 42 By Luiz Pinto

Beyond Autopilot: How To Make The Aerospace 50 Cluster Of Querétaro Take Off By Rodrigo Quintana, Liliana Olarte, Juanmanuel García-Sánchez, Pedro Rangel and José Lyra Netto

iv Latin America Policy Journal Innovation, in the DNA of Medellin 60 By Ruta N

New Insights about Wage Inequality in Colombia 63 By Andrés Gómez-Lievano, Eduardo Lora and Juan Tellez

The case of oil income management in Venezuela: 76 industry investment versus social expenditure By Diego Guerrero and Armando Romero

Colombia: growth after the commodities boom? 88 By Liliana Olarte, Rodrigo Quintana, Lenin H. Balza and Juan Espinosa Balbuena

Reform Policies and Support Programs to the Agricultural 103 Sector in Latin America: Trade Liberalization, Market Volatility and Climate Change By Diego Arias

Between Dialogue and Killing: A Reading on the Process of 116 “Truce” in El Salvador from Anthropological Categories By Luís Enrique Amaya and Juan José Martínez

Political Rewards from Progresa-Oportunidades: Only Gratitude? 125 By Arthur Bauer

Section 3. Artwork

Ecuador pictures 137 By Juan Carlos Paredes (Juank Paredes).

Latin America photo session 140 By Claudia Carbajal Morelos, Tansaya Kunaratskul and Sandro Parodi Editor’s Remarks

Latin America is one of the most vibrant regions in the world. Political changes across the area, innovative ways to address social problems, and improvements in social development indicators are some of the characteristics of the region today. During the convulsive “lost decade” of the 1980s, the area began its transition towards prosperity. Most of the remaining dictators left power, and the Peace Agreements of Esquipulas allowed the end of formal internal conflicts and the beginning of a national reconciliation process within Central America. In the next decade, regional economies started a formal integration process with the world. However, events like the Mexican crisis of 1994 (known as “Tequila Crisis”) and the Argentinian crisis at the end of the decade reduced regional growth prospects. After 2000, Latin America saw a political shift towards socialism. Left-wing governments canalized growing demands for higher standards of living. The commodities price boom observed during most of the decade helped them reduce inequality and poverty. However, after commodity prices dropped, it seems that there was an uprising shift towards right-wing Governments. Nowadays, there are several interesting processes happening in Latin Amer- ica. Colombia peace talks between the government and guerrillas, regional integration in Central America, gang violence in El Salvador, Argentinian new government, Brazilian corruption scandal and independent justice system, political changes in Venezuela, and United States–Cuba relations are some of those topics. The preceding list, far from being exhaustive, is just a modest effort to present some changes that Latin American countries have faced since 1980. In the fifth volume of the Latin America Policy Journal (LAPJ), we are pleased to set the table for a broad discussion about some of these topics. Ernesto Samper, former president of Colombia and current general secretary of the Unión de Naciones Sudamericanas, gives us his views on the ongoing peace negotiations in Colombia and the benefits of achieving a peace agreement. Laura Chinchilla, former president of Costa Rica and political science profes- sor at Georgetown University, analyzes the current situation, challenges, and opportunities of Central American nations. Professor Eduardo Levy Yeyati at the John F. Kennedy School of Government at Harvard University, a prestigious Argentinian economist, discusses the main challenges that President Mauricio Macri and the new Argentinian government are facing.

2 Latin America Policy Journal On the innovation front, Zara Snapp, a drug policy expert, makes a review of the newest drug policies that LatAm governments, especially Uruguay, are currently designing and implementing. In Colombia, Corporation Ruta N describes how the city of Medellin became a regional benchmark for innova- tion. And for Queretaro, Mexico, a five-researcher team discusses the benefits of the public policies that could be implemented to develop an aerospace cluster in this Mexican state. Moreover, regarding development, Diego Arias analyzes public policies and programs that can help to improve agriculture in the region, and Luiz Pinto discusses the importance of development banking and its policy implications in Brazil. Finally, the LAPJ team would like to express our sincere gratitude to the Ash Center for Democratic Governance and Innovation, the Kennedy School Student Government, the Mossavar-Rahmani Center for Business and Gov- ernment, the David Rockefeller Center for Latin American Studies, the Carr Center for Human Rights Policy, the Shorenstein Center on Media, Politics and Public Policy, and the Malcolm Weiner Center for Social Policy for their generous financial support to make this edition possible.

RICHARD MEDINA GÓMEZ

Fifth Edition | 2016 3 Commentary

Not Only One Central America

By: Laura Chinchilla Miranda

Laura Chinchilla Instituto Tecnologico de Monterrey. Miranda was Also, she is active on global agenda the first female issues by being part of various president of Costa forums, such as the Club de Madrid, Rica from 2010 to the Inter-American Dialogue, and 2014. One of her the Latin America Presidential Laura Chinchilla major achievements Commission. She is a political as president was the steady decline scientist who graduated from the in major crime rates in Costa Rica. Universidad de Costa Rica and Prior becoming president, she holds a master in public policy from 1 consolidated a successful political Georgetown University. career holding important public After I finished secondary schooling at positions such as: minister of public eighteen years old, I decided to take security (1996–1998); elected a life-changing trip through Central member of the national congress America. It was the end of the 1960s, (2002–2006), where she chaired the and several countries in the region committee on legal affairs and the were immersed in dreadful civil wars. I embarked on this trip because I wanted committee on narcotics; and both to understand first-hand what I had vice-president of Costa Rica and heard was happening in neighboring the minister of justice (2006–2010). countries to Costa Rica, experiencing Former President Chinchilla is realities so different from the peace currently a visiting professor for and democracy that I enjoyed in my homeland. What I witnessed upset me Georgetown University and the tremendously. I could not be convinced

4 Latin America Policy Journal by any argument of the reasons behind the Central American Common Mar- so much pain, violence, and sadness. ket (1960). Thanks to this platform, The civil war’s desolating scenes con- Central American countries today trasted sharply with the natural beauty enjoy the benefits of free trade and of these countries, with the warmth of tariff harmonization in almost 100 its people, and with a mother’s hope for percent of their tradable products. Also, a better future for her children. That this commercial platform has been Central America, hit by the chaos and strengthened and has expanded its turbulence, spoke eloquently about the scope to other regions—such is the case lost opportunities of a region which had of the Dominican Republic–Central experienced unparalleled progress in America Free Trade Agreement with terms of economic integration. This the United States (DR-CAFTA)2 and region was also destined to become the European Union–Central America an outstanding logistics platform for Association Agreement (EU-CAAA).3 global trade and investment due to its In effect, due to the network of trade geographical location—located in the agreements and close commercial waist of America and bathed by the relationships with the United States, waters of two great oceans. Central American countries have been Forty years after my encounter with able to maintain a relatively positive the region, and thirty years after the economic growth, which is today fu- signing of the First Esquipulas I Peace eled by falling oil prices (since the Agreement (1986), Central America economy is a net importer). is once again facing challenges tied However, beyond some shared com- to its past. However, at the same time, monalities across countries, we could the region faces more opportunities to say that today there are three Central embrace a better future. Therefore, Americas: the “Northern Triangle,” the big question is: why isn’t Central also called the G3, composed of Gua- America taking advantage of these temala, Honduras, and El Salvador; opportunities? Or, more specifically, the “Southern,” composed of Costa why are there some countries in the Rica and Panama; and “Nicaragua’s region taking more advantage of these Central America.” opportunities relative to others? The largest opportunity shared by The Northern Triangle (G3) Central American countries today is The Northern Triangle (G3) is the linked to the solid commercial plat- region’s most integrated block. On form that they have articulated for a positive note, Guatemala, Hondu- both interregional and intraregional ras, and El Salvador share customs commerce, having the precedent of and very harmonious commercial

Fifth Edition | 2016 5 systems, as well as having greater ease levels of insecurity and violence due of migration, vehicular traffic, and to drug trafficking, but it also directly capital movements. However, G3 impacts their economies. According to countries also share serious problems, a recent study,8 remittances from the the most recent being the crisis of un- United States to Central America have accompanied migrant children to the continued to grow after the financial United States. The harrowing images crisis of 2009, with the Northern Tri- of tens of thousands of children fleeing angle countries as the main recipients. their countries led to the “Plan of the In 2014, remittances to the region Alliance for Prosperity of the North- reached US$15.8 billion, with the ern Triangle,”4 propelled by the G3 largest increases registered in Hon- governments and with collaboration duras (8.8 percent) and Guatemala of the United States, whose congress (8.6 percent). recently approved US$750 million in Besides G3 countries’ violence support of this initiative. situation, what is equally distressing The humanitarian crisis reflected is their weak institutional capability in the migrant children is not circum- despite significant recent progress in stantial but is rather the consequence rule of law and individual rights’ pro- of poverty, violence, and sustained tection. An example of this weakness corruption that have characterized was the overthrow of former President these countries since the end of their Manuel Zelaya in Honduras in 2009. civil wars. First, it is estimated that In addition, drug trafficking and cor- poverty affects about 57 percent of the ruption have seriously undermined population of these three countries, the institutional integrity at the highest and the number of people who have government levels. This is confirmed decided to emigrate is five times the by recent allegations of corruption and average of the other countries in the illicit enrichment against presidents region.5 Second, according to the and other public officers in Guatemala, United Nations Office against Drugs Honduras, and El Salvador. Neverthe- and Crime,6 El Salvador, Guatema- less, some hopeful signs seem to arise la and Honduras have among the amid much controversy, such as the highest homicide rates in the world. strong citizen mobilization against Furthermore, Honduras is the world’s impunity and corruption, and the most violent country, with a national independence of media and public homicide rate of 103.9 per 100,000 justice administration. inhabitants.7 Lastly, the proximity of In sum, the situation of the North- the G3 countries to Mexico and the ern Triangle is somewhat paradoxical. United States undoubtedly affects their On the one hand, their integration

6 Latin America Policy Journal benefits these countries in some having exhibited the region’s highest socioeconomic aspects, but at the average growth in the last decade. Both same time it ties them to the same countries are the most integrated to the problems of crime, illegal migration, global markets of goods and services. and corruption. Also, their proximity According to figures from the Eco- to major markets such as Mexico and nomic Commission for Latin America the United States favors them in terms and the Caribbean, Costa Rica and of trade and investment but harms Panama remain the main recipients of them in terms of illegal drug flows, foreign direct investment in the region migration, and trafficking. Also, their (45 percent and 20 percent for 2014, economies remain extremely depen- respectively)9. Costa Rica, which has dent on income from remittances from signed numerous trade agreements, migrants abroad. Even though these also started to join the Pacific Alliance countries’ most pressing problems will in 2014, where Panama is already a not disappear easily, their integrationist member. In addition, Costa Rica also initiatives through platforms such as started the process to join the Orga- the “Plan of the Alliance for Prosperity nization for Economic Cooperation of the Northern Triangle” becomes and Development. a positive factor strengthening their The insecurity and crime situa- individual capacities by joining efforts tion are also more contained in these to address collective problems. The two countries—8.5 homicides per integration of policies and resources 100,000 inhabitants in Costa Rica will remain crucial for the Northern and 19.3 in Panama—compared to Triangle countries and their econo- Northern Triangle countries.10 Social mies, not only at the government level indicators are also better in these two but also from the business sector and countries: the poverty rate is slightly civil society. Furthermore, interna- above 20 percent in both countries, tional cooperation has also joined as and the human development index a strong leading actor to support the ranks high for both countries—0.780 civil societies’ efforts towards reform. in Panama and 0.766 in Costa Rica as of 2014.11 Their democratic insti- South Central America tutions also show better performance, On the other side, we have the South although they are not exempt from Central America—Costa Rica and Pan- difficulties in governance and political ama—which has more sophisticated, agreements (particularly in the case of service-oriented economies. In partic- Costa Rica) or cases of corruption (as ular, Panama has shown economic evidenced by recent allegations against dynamism for several consecutive years, former senior government officials

Fifth Edition | 2016 7 in Panama). Lastly, both nations es. According to the Carter Center,13 make significant investments in mar- in the 2008 municipal elections: two itime logistics: Panama is expected political parties’ legal statuses were to finalize the expansion of its canal canceled, the attorney general took to by 2016, and Costa Rica is building a court the opposition candidate in the major container port on the Caribbean middle of the electoral process, cre- coast. These projects are expected to dentials to national electoral observers have a major impact on the develop- were denied, media was repressed ment of these two countries and on legally and economically, and there the overall region. was significant violence and intimida- tion practiced against the opposition’s Nicaragua public electoral events. Meanwhile, Lastly, there is Nicaragua. Nicaragua in the 2011 general elections, which is a country that exhibits a high rate were preceded by a supreme court’s of growth and low insecurity indi- questionable decision that allowed the cators—the homicide rate is 13 per candidacy of President Ortega, there 100,000 inhabitants—but at the same were important reservations emitted time it is the country that presents the by observer missions. Specifically, the region’s worst future prospects due OAS Mission of Electoral Accompa- to its weakened democratic institu- niment14 warned of serious problems tions. In effect, under recent President such as difficulties in carrying out its Daniel Ortega’s government, rule of activities, a ban on non-governmental law, political freedoms, and universal organizations to participate in elec- suffrage have been seriously under- tion observation, and late delivery of mined. There is currently no real accreditations to 9000 observers from separation of powers, no judiciary the opposition table, among others. In independence, no freedom of expres- the case of the Electoral Observation sion, nor adequate protection of civil Mission to the European Union, rights. According to the 2014 Annual the trial was categorical, saying in Report of the Special Rapporteur for its final report that, “the November Freedom of Expression of the OAS,12 6th elections have been a setback in there remain problems in access to the democratic quality of Nicaraguan public information, especially for the electoral process due to the lack of opposition media groups. transparency and neutrality that have Nicaragua’s 2008 municipal elec- been administered by the Supreme tions and 2011 general elections were Electoral Council (CSE).”15 Given cause for alarm due to the less trans- all the factors explained above, it is parent and irregular electoral process- foreseeable that Nicaragua’s future

8 Latin America Policy Journal is the most threatened of all in the joined given the high economic cost Central American region. of these institutions and the abuse committed by former public officials Final reflections aiming to evade legal charges. For Despite the differences between the all of the above, in the quest of its six nations of Central America that betterment, Central America should we have set in this space, there is no not aspire to a mechanism of perfect doubt that the future of each country political integration but to one that is inextricably linked to the future of respects the particularities of each the others. While the region’s past nation, while banishing permanently challenge was peace against politi- undemocratic or corrupt practices co-military internal conflicts, its future within their governments and within challenges relate to defeating organized their integration mechanisms. Only crime, violence, and corruption. In then will the region establish the nec- effect, despite continuous initiatives, essary and exceptional conditions to the Central American countries and achieve the desired levels of peace the international community have and development. not yet succeeded in implementing an effective and sustainable regional strategy to confront these scourges. The Endnotes “Plan of the Alliance for Prosperity of 1 http://politics.georgetown.edu/ the Northern Triangle” is a step in the laura-chinchilla/ 2 DR-CAFTA Free Trade Agreement (2004) right direction as well as the Central was signed between Guatemala, El Salvador, 16 America Security Strategy. Moving Honduras, Nicaragua, Costa Rica and the forward in both cases will take many Dominican Republic with the United States. more economic resources and political 3 The EU-CAAA Free Trade Agreement (2010) will to defeat the serious problems that was signed between Guatemala, El Salvador, still prevail in the region. Honduras, Nicaragua, Costa Rica and Panama with the European Union. Lastly, Central American countries 4 The “Plan of the Alliance for Prosperity of the also share a space for political dialogue Northern Triangle” was signed in 2015 between and policy coordination in the SICA. the governments of Guatemala, El Salvador However, in practice this system has and Honduras with the aim of channeling failed to establish itself as a proper resources and actions towards human capital integration policy body, given the dys- development, productive sector, citizen security and institutional strengthening. See: “Triángulo functionality of some of its organs, such Norte: Construyendo confianza, creando opor- as the Central American Parliament tunidades.” (2015). Accessed at: https://www. and the Central American Court of un.int/honduras/sites/www.un.int/files/ Justice, to which Costa Rica has not Honduras/1-acciones_estrategicas_del_

Fifth Edition | 2016 9 plan_de_la_alianza_para_la_prosperi- Observaciones Electorales, Serie Américas, no. dad_del_triangulo_norte_folleto_07a- 68. bril20151.pdf 15 “Informe Final Elecciones Generales y Parla- 5 Ibid. P.3. cen 2011,” Misión de Observación Electoral de 6 Oficina de las Naciones Unidas Contra la la Unión Europea, p.3 Droga y el Delito (2012). “Delincuencia 16 The Central America Security Strategy (ESCA) Transnacional Organizada en Centroamérica y emerged in the XXIX Regular Meeting of el Caribe: Una Evaluación de las Amenazas” Heads of State and Government of the Central 7 “Global Status Report on Violence Prevention American Integration System (SICA) in 2006, 2014,” World Health Organization. and was renovated at the Heads of State SICA 8 Maldonado, R. and Hayem, M. (2015). “Re- Summit in 2012. mittances to Latin America and the Caribbean Set a New Record High in 2014,” Multilateral Investment Fund, Inter-American Develop- ment Bank. Washington, D.C. 9 Comisión Económica para América Latina y el Caribe (2015). “La Inversión Extranjera Directa en América Latina y el Caribe” (2015).” CEPAL, Santiago de Chile. 10 Homicide rates (per 100,000 inhabitants) in the Northern Triangle reach 43.9 in El Salvador, 103.9 in Honduras and 39.9 in Guatemala according to the “Global Status Report on Violence Prevention 2014,” World Health Organization. 11 Human Development Index in the Northern Triangle reaches 00.666 in El Salvador, 0.631 in Nicaragua, 0.627 in Guatemala and 0.606 in Honduras, according to “Informe sobre Desarrollo Humano 2015: Trabajo al Servicio del Desarrollo Humano.” Programa de las Naciones Unidas para el Desarrollo (PNUD). 12 “Informe anual de la Relatoría Especial para la Libertad de Expresión: Informe Anual de la Comisión Interamericana de Derechos Humanos” (2014), vol.2 / Edison Lanza, Relator Especial para la Libertad de Expresión. 13 http://www.cartercenter.org/news/pr/ nicaragua_102308.html 14 “Informe final de la Misión de Acompañamien- to Electoral de la OEA sobre las Elecciones Generales Celebradas en la República de Nica- ragua el 6 de noviembre de 2011, Departamento para la Cooperación y Observación Electoral.

10 Latin America Policy Journal Commentary

Why Is Colombia Going to Sign the Peace Agreement This Time?

By Ernesto Samper Pizano

Ernesto Samper Pizano, secretary It is not the first time the Colombian general of the Union of South government has attempted to engage American Nations, former president in political talks with the Revolutionary Armed Forces of Colombia (FARC) of the Republic of Colombia in order to put an end to the armed (1994–1998). He began his career conflict which has afflicted the country as a member of the Parliament of for over fifty years. Previous govern- Cundinamarca (1982–1984), city ments of the President Juan Manual councilman of Bogotá (1982–1986) Santos had tried to achieve a peace agreement with the FARC. I myself and member of the Senate of had my chance. As president from Colombia (1986–1990). He has 1994 to 1998, I started conversations held different executive offices, with some guerrilla groups that, un- among which are the following: fortunately, and due to circumstances not worth mentioning here, did not ambassador to the Assembly of the count with the same perspective as United Nations (1983), ambassador the negotiations now taking place in for Colombia in Spain (1991–1992), Havana, Cuba. minister of economical development in Colombia(1990–1991), and Why Are the Parties Going to Agree Now though coordinator of encounters of Former They Haven’t Before? Latin American Presidents for a There are several reasons that might Global Agenda (2000–2005). explain the present scenario. First and foremost, the guerrillas are finally

Fifth Edition | 2016 11 convinced that they will not take power armed conflict has faced stagnation; through armed or violent means. none of the sides of the conflict has During Andrés Pastrana’s adminis- achieved considerable progress. In fact, tration (1998–2002), when the FARC this period has experienced the dete- decided to switch from guerrilla warfare rioration of humanitarian conditions. to a permanent state of war, conquering On the one hand, the FARC intensi- territories and combining different fied kidnappings, both as a source of forms of fighting, it was naïve to expect funding and in order to gain political them to give up arms on principle. leverage in eventual negotiations. On Indeed, the FARC had had the op- the other hand, the armed forces were portunity to end the conflict during responsible for the so-called “false the end of the Cold War. By that time, positives,” in which poor young people Fidel Castro had stated that the military were taken to war zones, executed, confrontation was no longer valid or and dressed in guerrilla uniform to legitimate enough to reach power. Not be recognized as casualties in combat. only did the FARC ignore this warning, The ethical deterioration of the but they also declared themselves as conflict reinforced the national and the single standard-bearer of the Latin international understanding that the American revolutionary cause. only solution would come from hu- It should also be acknowledged manitarian agreements, according to that the “democratic security policy,” the Geneva Protocols, and with the put into practice by President Alvaro support of international actors. In Uribe Velez (2002–2010), has played a 2012, that was exactly the approach key role in motivating the government adopted by President Santos. to negotiate. Uribe’s administration Unfortunately, at first agreements in forced the FARC to the defensive Havana failed to address humanitarian thanks to the “Plan Colombia,” which standards, which would contribute proved to be a quite efficient strategy to a less painful end to this conflict. to exterminate the guerrillas—at the With the argument that the parties’ cost of human rights. As a matter of best interests were “to end and not to fact, it would have been preferable if humanize the war,” the government President Uribe had contributed to and the guerrillas ignored the fact the peace by controlling the FARC’s that international humanitarian law is advances at the beginning of his term, the key to saving lives and protecting instead of fighting his own minister of innocent civilians while the conflict- defense, Juan Manuel Santos. ing parties are unable to come to a Moreover, it is important to high- peaceful solution. light that since the mid-1980s the However, it is worth mentioning

12 Latin America Policy Journal that this current negotiation process guarantee the legitimacy of the pro- has been substantially different from cess and to ensure the support of the previous ones. In the past, the parties United States. The substitution of illicit had started debating the agenda to- crops and abandoning drug trafficking gether with negotiations themselves, activities are the expected policies to all under media and public eyes. In be adopted in Havana agreements. Havana, in contrast, the government and the guerrillas had, for months, held Political Participation several preparatory meetings to firstly A novelty to the Havana process is the agree on the five main issues of the discussion on institutional mechanisms agenda: land policy, drug trafficking, to allow the guerrillas to give up the political participation, reparation to armed violence for the electoral com- the victims, and demilitarization. petition, in equal conditions as other political forces. The FARC intends not Land Policy only to attend elections—they claim to Land policy debate stems from protests become an alternative to the current of liberal guerrillas in the 1950s—pre- political statement and to have access cursors of the FARC—who demanded to the media, special peace districts, rural reform against excessive concen- and campaign funds. tration of rural property. For as long as the Colombian armed conflict has Reparation to the Victims lasted, there have been alarming rates The reparation to seven million people, of land accumulation in the hands of victims of the violence in recent years, big landowners, paramilitaries, and is another essential chapter in the even guerrillas. The concentration is negotiation process, which affirms its equivalent to 2.5 times the number of legitimacy. In past attempts, the sur- hectares distributed in the land reform render of arms was the most important since the 1960s. issue; hence, the recognition of victims’ situations used to be merely secondary. Drug Trafficking It seemed as if victims simply did The money from the illicit drug-traf- not matter. Nonetheless, this time in ficking trade has financed various forms Havana, ethics has been restored. The of violence in Colombia in recent so-called “transitional justice” should decades. It has supported guerrillas, allow the Colombian society, affected paramilitary groups, and even profes- by serious human rights violations, to sional killers on drug cartels’ services. recover from conflict thanks to the The FARC must be committed to re-establishment of truth, justice, and stopping this illegal activity so as to reparation. It is morally vital to the

Fifth Edition | 2016 13 negotiation process to address the It was proposed to reach a bilateral victims, to apply justice to aggressors, and definitive cease-fire by 23 March and to guarantee the violence shall not 2016. And the deadline has already be repeated in the future. been missed. This issue affects the credibility of the process. It represents Demilitarization the inability to reach a final agreement The last point of the agenda refers to or announce a partial agreement, the operational part of the agreement: compromising transparency. In issues the final and bilateral cease-fire, the as sensitive as the negotiation of such demobilization of troops, the surrender painful and prolonged conflict, as in of arms, and the reintegration of the matters of love, it is not beneficial to guerrillas into society. The parties put deadlines or ultimatums. should agree on silencing their guns The choice of the place of the and on the final demobilization. This negotiations, Cuba, was successful and issue is still under negotiation and pre- made it possible for the process to move venting the talks from being finalized. forward. Cubans have a long experi- The “modus operandi,” timing and ence in discreetly and efficiently han- place of the negotiation, agreed with dling these type of talks. Furthermore, anticipation between the government the process counts on the presence of and the guerrillas, has positively in- the Norwegians, who are observers. fluenced in the success of the talks so Moving the negotiations away from far. This has to do with the decision Colombia lessens the chances of the to not leave the table of negotiations process—especially its setbacks—being until reaching a full agreement: “noth- subjected to media debates. It prevents ing will be agreed until everything the “Caguan Syndrome,” or widespread is agreed.” They pledged that there of public rejection that occurred during would not be partial understandings Andrés Pastrana’s administration when and that the issues negotiated could the President tried to push a peace be reviewed until the day of the final process by demilitarizing an area of signature of the “Pact for Peace.” 40,000 square kilometers in the Caguan Timing has been managed so that on the eastern plains of Colombia. there is no room for frustration in the The place became the FARC’s head- course of the negotiations. Unfortunate- quarters, where they established drug ly, the initial agreement that the term processing laboratories, training bas- of negotiation would be given by the es, resting areas, and shelters to keep process itself was not fulfilled when the hostages. government demanded in September It is likely that this present peace 2015 that the FARC give a final date. process will reach a good end since,

14 Latin America Policy Journal on the government side, the “ones foresees this difficult step from conflict that are needed” have been finally to post-conflict, in which we are able to participating. In the past, political solve differences without arms. It will solutions to the conflict were pursued take us several generations to build a rec- only by representatives of civil society, onciled, fair, and democratic country. leftist academics, progressive bishops, As it has been agreed in Havana this or political leaders. The protagonists time, unlike during other processes, the in the current process, on behalf of the parties are taking action and necessary government, are representatives of the steps to reach a sustained agreement establishment: direct spokespeople of in which they can fearlessly substitute the president; active military; represen- their weapons for democracy. In the tatives of business associations; and, past, we have never accomplished at prudent but effective distance, the that much. Today it seems that we United States. Peace has been built can actually do it. by opposing sides, the real actors of the conflict. Images of generals of the Colombian Armed Forces and guerrilla command- ers in the same room—people who were fighting each other a few months ago—have strongly grown optimism about the chances of a positive outcome of this process. It is possible, however, that this concise form of represen- tation could eventually undermine the legitimacy and credibility of the negotiations. Therefore, it would be necessary to develop an effort to educate the population and share the results with those who are not in Havana. If the agreements are achieved, as most Colombians hope, we will achieve a “negative peace.” That is to say, there will be the absence of military confrontation between the parties. Then, and only then, the process of reconciliation will begin, with pardon, truth, and responsibilities. The process

Fifth Edition | 2016 15 Commentary

Argentina’s Transition Trilemma

By Eduardo Levy Yeyati

Eduardo Levy Yeyati, visiting professor senior research associate at the of public policy and faculty affiliate Inter-American Development Bank, at Harvard’s Center for International and chief economist of the Central Development, is a professor of Bank of Argentina (2002). He holds economics at the Business School a PhD in economics from the of Universidad Torcuato Di Tella University of Pennsylvania and a BA in Buenos Aires and a research in engineering from Universidad de associate at its Center for Financial Buenos Aires. Research (which he directed from With inflation persistently high, the 1999 to 2007). He is also president of economy in recession, and wage nego- the Argentina’s Production Council, tiations around the corner, observers of director at the Argentina’s Bank of Argentina’s transition—as well as, more importantly, investors—are hedging Investment and International Trade, their bets. President Mauricio Macri president of the Center for Public came into office in December 2015 Policy (CIPPEC, the top Argentinean with few good choices and, while he is so think tank) and managing director far making the best of them, the verdict of Elypsis, a macrofinance research will be out only in the second semester. When Macri delivered his speech to firm. He has served as head of Latin launch the 2016 session of Congress American research and emerging on 1 March 2016, he devoted most of markets strategy at Barclays Capital the time to the “legacy”—a buzzword (2007 to 2010), financial sector advisor that, in the Argentinean context, refers for Latin America and the Caribbean to the economic mess bequeathed to him by his predecessor, Cristina at the World Bank (2006 to 2007), Fernandez de Kirchner.

16 Latin America Policy Journal The government has good reasons inflation, it would have been higher to warn voters about the legacy. Ar- than the 26 percent that people saw. gentina’s economy has stagnated for And the pass-through from the devalua- the last four years and is now probably tion, while higher than in neighboring (since reliable official data is hard to countries, still amounted to only 20 get) contracting. However, it closed percent (the inflation rate rose by 10 2015 roughly 1 percent higher, thanks percent even as the currency devalued to strong consumption fueled by arti- by about 50 percent). That’s about ficially low interest rates (courtesy of half the pass-through associated with financial repression) and an unsus- the 20 percent devaluation that took tainable fiscal impulse (the primary place under Kirchner in January 2014. fiscal deficit was about 5.3 percent of But, for the general public, Macri’s GDP in 2015, up from 4.4 percent in first one-hundred days may be seen 2014). In turn, formal employment in as having brought back stagflation, the private sector has been stagnant or this time seasoned with a weaker labor decreasing and the public sector ran market and a rising inflation that may out of resources to pick up the slack lead to a real wage cut. Convincing (as it did until very recently); indeed, voters that this present is the differed layoffs in the public sector have been consequence of past mistakes is always in the headlines for weeks, against a hard, but it is worth a try. more silent backdrop of job losses in the private sector. Finally, Argentina’s The Trilemma inflation, in the two-digits realm since The Kirchner legacy is indeed com- 2007, dropped from 37 percent in 2014 plex, encompassing important long- to 26 percent in 2015 (this, according to term factors such as a run-down infra- private estimates, since official figures structure, a fat and ineffective public are highly suspect). The reasons: frozen sector, and lagging public education. tariffs, a brief recession in late 2014 But its short-term policy implications and early 2015, and an exchange rate could be reduced to a simple trilemma: anchor that brought the real effective correct the exchange rate, reduce exchange rate to pre-2001 crisis levels, inflation, and grow. deepening the misalignment at the Choose any pair of objectives and origin of the capital outflows of the you will see how they conspire against late 2000s and the resulting capital the third one. Take the first two, for and exchange rate controls. example. The exchange rate depre- True, inflation has always been ciation needed to lift controls and inertial and high; moreover, had tariffs revive foreign investment inevitably and the exchange rate moved with translates into higher inflation; in

Fifth Edition | 2016 17 turn, to contain inflation the central exchange rate pressures. Focusing on bank should tighten monetary policy the individual goals, orthodox critics (raise interest rates) to cool demand, could claim that the government fell deliberately inducing a recession. If, short on all fronts—although, at 15 instead, the government chooses to pesos per dollar, the exchange rate prioritize growth (a smart choice given adjustment is near its target. the strategic importance of mid-term Where the government has ex- elections in hibited a well-received gradualist’s October 2017), then the options are sensitivity more openly is on the fiscal a reversion to the damaging exchange front, the apparent residual variable rate anchor and capital restrictions put of the trilemma. By leaving the large in place by Kirchner or an inflation fiscal deficit untouched, in the hope rate higher than the one experienced that the rapid settlement with Argen- during her tenure (which is, in fact, tina’s holdout creditors will re-open the most likely scenario). its access to international finance, the Faced with this conundrum, the government seems to recognize that government appears to have chosen its political fate is intimately linked an interior solution: do a bit of each, to its capacity to rekindle growth and gradually. The elimination of the create jobs, to get in good shape to “cepo” (the local slang for the foreign the critical 2017 mid-term elections. exchange restrictions) was immediate Despite all the media enthusiasm as promised, but selective. In effect, and international endorsements, it is only retail demand and current (but still too early to call the final score not past) trade and dividend flows of Argentina’s trilemma transition were allowed free access to foreign game. Even after sorting out the legacy, exchange. Predictably, this led to a important challenges will remain to sudden but rather smooth correction realize the country’s large economic of the dollar from 9.70 to 15.00 pesos potential. But so far the government over two months. Also predictably, has struck a good balance between this correction pushed up monthly economic and political constraints inflation, from about 2 percent in to navigate the transition, eluding the November to close to a monthly 4 technocratic allure of shock therapies percent in the first three months of the that may be politically costly and trying new government, and will probably stay to preserve the political capital needed high in March 2016. Simultaneously, to fight the main event: the quest for the new Central Bank governor raised a sustainable road to development. the interest rate by 9 percent, from 29 percent to 38 percent, to counter

18 Latin America Policy Journal the shorenstein center analyzes the power of media, in all its forms, and its impact on public policy and politics. Through research, teaching, high‑profile events and engagement, the Center plays a leading role in the discussion about media and politics in the 21st century. Digital technology pushes the impact of the Center far beyond Cambridge.

teaching. Faculty members teach and conduct research on political communication, public opinion, new media and the intersection of press, politics and policy.

students. The fellowships. Center offers Kennedy Outstanding journalists School students access to and scholars spend a internships, positions as semester at the Center research assistants and researching and writing a scholarships. paper, and participating in Harvard activities.

public programs. Weekly events with distinguished scholars and practitioners attract students, faculty and members of the community. goldsmith awards research. Studies in political include research on journalism. The Twitter and presidential Goldsmith Awards include campaigns, press a prize for investigative coverage of the economy reporting, two book prizes and the influence of and a career award. conservative media. shorensteincenter.org | @ShorensteinCtr Article

Drug Policy Innovations in Latin America By Zara Snapp

Zara Snapp was born in Mexico, reform, democracy, and governance raised in the United States, and programs. Zara is the author of currently lives in Mexico City. As Dictionary of Drugs, published a member of the Secretariat of the by Ediciones B in 2015 in Mexico. Global Commission on Drug Policy, Zara focuses on communications, Abstract Latin America, and international Over the last decade, a paradigm shift drug policy reform. She has a has been underway in Latin American bachelor’s degree in political science as countries adopt a human rights based from the University of Colorado perspective to drug policies and address at Denver and a master’s in public the consequences of the war on drugs policy from the John F. Kennedy in a more efficient way. This paper will explore how the international drug School of Government at Harvard control system defines reforms imple- University (2010), where she was mented by some countries in the region, a Truman scholar and Public demonstrating that drug policy reform Service fellow. She has worked for can be a key step towards increasing diverse organizations such as the institutional strength and dismantling Kellogg Foundation, the National the power of criminal organizations. Democratic Institute, the Denver Tent City Initiative, and Mi Casa In the last twenty years, violence in Resource Center on issues of Latin America has reached staggering comprehensive sexuality education, levels. Although Latin America and the Caribbean are only 8 percent housing and homelessness, judicial of the global population, the region

20 Latin America Policy Journal accounts for 33 percent of the global reform—including decriminalization, homicides.1 The highly integrated excarceration, and legally regulated corruption in government and com- markets—can be a key step towards munity institutions has resulted in reducing the power of organized crime weak rule of law and public institutions and violence, while increasing insti- unable to withstand pressure from tutional strength and attacking levels organized criminal groups.2 Although of impunity. diverse factors contribute to violence Countries across the region have and institutional fragility, a key aspect taken concrete steps towards reducing has been and continues to be that the power of organized crime through the majority of coca-based products, separating the cannabis market from including cocaine, is produced by other illegal substances, implement- three countries—Colombia, Peru and ing medical cannabis programs, and Bolivia—as well as Mexico being the creating thresholds of specific amounts second largest producer of illegal poppy of drugs permitted for personal use. and a high producer of cannabis.3 These policy reforms demonstrate a With the United States as the commitment to exploring new ways world’s largest consumer of cocaine,4 of addressing the issue of drugs, often consumption in Brazil steadily rising,5 without directly challenging the inter- and Europe coming in as a close third, national drug control system. demand is clearly not diminishing, and To contextualize these changes, it without it decreasing in the United is important to understand the regime States and Europe, it is unlikely that that governs international and national Latin America will reduce its produc- drug laws. Beginning with the Single tion. The geopolitical reality of the Convention on Narcotic Drugs in region means that a shift in policies 1961, as amended by the 1972 Pro- is needed to address the actuality on tocol,6 the international drug control the ground, rather than assuming that system has established three primary the current strategy of attacking supply legal instruments (1961, 1971, 1988) and demand reduction is sufficient. which seek to eradicate cannabis, Therefore, new policy innovations are coca, and poppy plants globally in required to address the issues of drug order to combat the “evil” menace of producing countries and prioritize drugs. The 1961 Convention created policies that increase institutional four lists or “schedules” of controlled capacity, rather than destabilizing them substances which provided a process through corrupt, inefficient policies. through which new substances could Latin America has witnessed a grow- be scheduled without needing to mod- ing understanding that drug policy ify or change the existing treaty. The

Fifth Edition | 2016 21 Convention currently contains more obligation of governments to establish than one-hundred different substances a system of control that ensures the that are categorized according to the adequate availability of controlled sub- control under which they are sub- stances for medical and scientific pur- jected.7 Although the deadline for poses, while simultaneously preventing gradually eradicating opium poppy abuse, diversion and trafficking,” thus was 1979 and the deadline for coca prohibiting any non-medical use, such and cannabis in 1989, many within as we have seen in regulated, cannabis the international community continue markets in Colorado, Washington, believing that a drug-free world is Alaska and Oregon.10 For this reason, possible. Others, including the author, countries with medical cannabis or would argue that it is neither possible medical heroin assisted therapy are nor preferable to live in a world without not breaching the Conventions, but plants, which have traditional, cultural, regulated, legal markets of non-med- medical, and therapeutic purposes. ical use could be viewed as breaking Within ten years, the internation- international law. al community determined that the Along with failing to reduce con- Single Convention would not be sumption, production and trafficking sufficient to address these issues, and over the past fifty years, in 2008 the the 1971 Convention on Psychotropic United Nations recognized several Substances was drafted.8 The 1988 supposedly “unintended consequenc- Vienna Convention on Illicit Traffic es” of the current prohibitionist drug in Narcotic Drugs and Psychotropic control system including: the creation Substances delineated responsibilities of a large criminal market, ruled by for states to impose criminal sanctions violence; the displacement of produc- to combat all aspects related to illegal tion and transit to new areas, termed production, possession, and traffic of the “balloon effect;” the diversion of drugs, as the criminal market became government resources from health to more globalized. This Convention law enforcement; the displacement of established the strategy of the “war on use towards new, often riskier drugs; drugs” and, for the first time, classified and the stigmatization and margin- drug users as possible criminals. Mex- alization of people who use drugs.11 ico, along with other producing Latin Even with this acknowledgement, the American countries, advocated for this majority of the world has not signifi- change in order to create greater shared cantly changed its strategy, and as a responsibility between consumer and result, we see countries without the producer states.9 capacity to confront externalities such The conventions provide the “dual as increased violence and corruption.

22 Latin America Policy Journal For many countries it is nearly impos- Case of Uruguay sible to combat the global illicit drug In 2013, the president of Uruguay, Jose market, with an estimated value of Mujica, began reviewing ways of regu- US$435 billion per year.12 lating the production, distribution and Latin America has played a signif- use of cannabis. Following an extended icant role in the global drug policy legislative debate, passing first through debate, with Mexico, Colombia and the House of Representatives and later Guatemala calling on the United through the Senate, the bill was signed Nations secretary general to hold a into law on 24 December 2013.14 The special session on drugs to review and initiative regulates both the medical evaluate the current strategy.13 The and non-medical cannabis market, United Nations General Assembly promoting information, education, and Special Session on drugs will take prevention, while also respecting the place from 19 April to 21 April 2016 in rights of users. By approving this law, New York City. Although it would only Uruguay became the first country in seem that incremental changes would the world to regulate the market from be on the table, the true shift comes seed to sale, using a strict regulatory from individual countries beginning model. Within international forums, to explore or already implementing Uruguay has defended this decision drug policy reforms. A new paradigm saying they are giving precedence to is beginning to emerge in which the their international human rights ob- human rights and health of people who ligations, over drug control measures. use drugs and the larger community are The Institute for Regulation and taken into account. Harm reduction Control of Cannabis was subsequently as a concrete evidence-based practice created for monitoring the process, for both drug use and drug policy is providing licenses, and evaluating beginning to take shape and Latin advances in the law. The Uruguay- America has been leading that charge. an government decided to begin the While being disproportionately implementation of the non-medical affected by the current militarized market first, since they knew that the war on drugs strategy, Latin America majority of users belonged to that cat- is also emerging as one of the most egory. To ensure that the legal market progressive regions regarding drug undermines the illegal market, the policy innovations. Having been deeply government has decided to set a fixed affected by the negative consequences price depending on the potency and of this strategy, countries have begun variety of the plant. Penalties for buying implementing policy changes with or selling cannabis on the black market generally positive results. have increased with the approval of the

Fifth Edition | 2016 23 law, since the government has created decriminalized the possession of gan- safe and secure pathways to access. ja—which is marijuana with higher Only residents of Uruguay are allowed levels of THC—up to 56 grams and to participate in the cannabis market established a cannabis licensing au- and the limit is 40 grams per month. thority to regulate the cultivation, sale, Users have three ways of accessing and distribution for medical, scientific, the plant: Cultivating up to six plants and therapeutic purposes, opening in their home for personal use, with- the door to a legal medical marijuana out producing more than 480 grams industry in Jamaica.16 per year and by registering with the The possession of 2 ounces or less government; joining a cannabis social of ganja is no longer an offense that club, which has between fifteen and results in an arrest or going to court forty-five members and up to nine- and does not imply having a criminal ty-nine plants (proportional to the record. However, possession can lead number of members); or purchasing to a fine of $500 Jamaican dollars at government-run pharmacies. (approximately one US dollar) and Cultivation for personal use has possession of over 2 ounces remains a grown over the last year and several criminal offense in which offenders can cannabis clubs are operating with be arrested, charged, and tried in court, members taking on greater roles in pol- with a possible fine, imprisonment, itics. Licenses were recently approved or both. It is important to mention for the state-regulated cultivation, but that these rules do no apply for the have not begun to be sold in pharma- possession of the drug for religious cies. It is estimated that 4,400 people purposes as a sacrament in adherence are cultivating and seventeen clubs are to the Rastafarian faith, for medical currently operating.15 By separating or therapeutic purposes as prescribed the cannabis market from other illicit by a registered medical doctor, or for drugs, the government seeks to protect scientific research.17 Since the bill the rights of cannabis users. was passed in early 2015, there have been 14,000 fewer arrests for cannabis, Case of Jamaica which directly impacts the lives of those In 2015, a series of amendments of who would have been incarcerated or laws partially decriminalized cannabis given a criminal record.18 and paved the way for a legal, med- ical marijuana market in Jamaica, Case of Colombia a country where the drug has long During the twentieth-century, drug been culturally entrenched. The bill policies in Colombia were heavily to amend the Dangerous Drugs Act influenced by the international drug

24 Latin America Policy Journal control system and their relationship Case of Ecuador with the United States. Although little Ecuador has one of the most severe concrete progress has been made to drug laws of all the countries. The Law date, the prevailing tendency today on Narcotic Drugs and Psychotropic seems to shift towards less repression Substances has created an ongoing and more protection of the weakest situation that violates both human sectors in the drug economy: growers and civil rights. The law establishes and consumers. Drug use in Colombia that someone carrying a few grams is prohibited by the constitution, and of marijuana could potentially end there are laws banning it in certain up serving a twelve-year sentence, specific circumstances, but it does not including several categories under represent a criminal offense, rather which someone may be accused, such possession of a specific quantity for as possession, smuggling, or trafficking, personal use is permitted and is not but people are often sentenced under a crime. The thresholds for personal more than one category—which is, in use must not exceed 20 grams for fact, unconstitutional.21 cannabis, 5 grams for hashish, and 1 During 2014, in a progressive gram for cocaine.19 move, Ecuador released thousands In 2015, President Juan Manuel San- of jailed drug “mules”, as part of a new tos, signed a decree that fully legalized policy that sees them as victims, not medical cannabis, allowing Colombia just criminals. Under the country’s to join the long list of countries that are new criminal law, a person caught at the forefront of drug policy reform. with fewer than 50 grams of drugs Even though a 1986 law previously can receive up to six months in allowed the manufacture, export, and prison, and a person smuggling up to sale of cannabis for medical and scien- 2 kilos may receive up to three years. tific purposes, until last year the practice Only those moving more than 5 kilos was not formally regulated. The new would receive a heftier sentence of policy will make it easier to buy and as many as thirteen years in prison.22 sell the plant for medical reasons. Under For the thousands of people released the decree, growers will be able to from prison, primarily women, it apply for licenses from the National gave them a new opportunity in life. Narcotics Council, while those seeking However, last year, the country decid- to manufacture cannabis-based drugs ed to modify the criminal code and will apply for permits from the Health toughen penalties once again, back- Ministry, which will grant permits tracking the criminal justice reforms. to export to countries where they are The modification increased penalties allowed.20 for small-scale drug sellers from two-

Fifth Edition | 2016 25 to-six months to one-to-three years, 40 milligrams of methamphetamine. and for medium-scale trafficking from If a person is found carrying above one-to-three years to three-to-five the permitted threshold, they can be years.23 At a time when the United punished as a small-scale trafficker, States and countries in Latin America and if the amount is 1000 times higher, are taking meaningful steps towards then the person can be imprisoned as a criminal justice reform, Ecuador a high-scale trafficker.25 The current unfortunately went one step forward legislation has led to criticism because, and two steps back. even though possession—within these quantities—and consumption is not a Case of Mexico criminal offense, growing, buying, or Without a doubt, the Mexican expe- selling drugs is illegal and punishable rience is indicative of failed policies and thus leads to legal ambiguities. towards drugs. Implementing a frontal For example, between 2009 and combat against drug trafficking has 2013, 140,860 people were detained resulted in more than 160,000 people at the federal level for consumption killed.24 Given its punitive laws, the of drugs.26 economical and security situation In 2015, a civil society organization is in decline, although Mexico has presented an appeal to the Supreme attempted to address the issue ineffi- Court to request permission to cul- ciently. In 2009, the legislative body tivate and transport marijuana for approved a series of reforms to the non-medical purposes, establishing General Health Act and the Federal that the current legislation violates the Criminal Code. These reforms estab- human right to make personal decisions. lished a table showing the maximum Using the argumentation of the permitted quantity for personal and constitutional right to the “free immediate use. It is not a crime to use development of the person,” the psychoactive substances in Mexico, but Supreme Court ruled to allow culti- the possession of a drug for the purpose vation and consumption of the plant of using it is classified as a crime. Even for those four people.27 The decision so, possession does not carry a prison created precedent and has provoked sentence so long as the quantity does a national and legislative debate on not exceed the limits established by the rights of adults to use substanc- the table. The limits are as follow: two es in their development as people. grams of opium, 50 grams of heroin, While the decision is a decisive step for- 5 grams of cannabis, a 0.5 grams of ward, it does not create jurisprudence cocaine, 0.015 milligrams of LSD, 40 for cannabis regulation. Four more milligrams of MDA or MDMA, and cases, using the same argumentation,

26 Latin America Policy Journal would need to have positive ruling from regulation—not because drugs are the Supreme Court for law-makers without risk, but because of the pos- to be forced to legislate, something sible risks they pose.28 United Nations which could happen over the next two agencies such as the UN Development years. In the meantime, legislators are Program, the UN University, and the drafting a bill that will hopefully undo UN Office of the High Commissioner the current contradictions between on Human Rights have written scathing the judicial ruling and the current reports that indicate that the current General Health Act. strategy has not worked and in many cases has stifled development, violated Conclusion human rights, and denied access to The efforts undertaken thus far demon- health services. strate the capacity of societies to over- The approach implemented over come the stigma related to drug use the past one hundred years has failed. and begin to address not only some of It is time for a new paradigm shift. the potential harms of them, but also Latin America and the Caribbean the harms that have been perpetrated are leading the way by implementing in communities in the name of drug policies that over time will reduce the control. Moving away from prohibition, power of organized crime and increase we find countries actively debating the human security and development for need for legal regulation as a means their communities. to take resources away from organized crime, free up government resources to prioritize high-impact crimes, and Endnotes build institutional capacity to confront 1 Igarapé Institute, Homicide Monitor, the true issues of inequity, corruption, 2015, available at: https://igarape.org.br/en/ homicide-monitor/ and economic vulnerability. 2 Transparency International, The Americas: how The world is shifting. There is 2015 was a warning to the corrupt, 27 January now an overwhelming agreement 2016, available at: http://wp.me/pxeWx-4pA among intellectuals and academics 3 Central Intelligence Agency, The World that punitive policies have not and Factbook. 2013. https://www.cia.gov/library/pub- will not reduce either consumption or lications/the-world-factbook/fields/2086.html 4 United Nations Office on Drugs and Crime, production of currently illicit plants. World Drug Report 2015, p. 53, 2015, available Former presidents, heads of state, at: https://www.unodc.org/documents/wdr2015/ and high-level personalities, such as WDR15_Cocaine.pdf former UN Secretary General Kofi 5 Ibid p. 54 Annan, have spoken out about these 6 United Nations, Single Convention on Narcot- failed policies, advocating for a legal ic Drugs, 1961, available at: https://www.unodc.

Fifth Edition | 2016 27 org/pdf/convention_1961_en.pdf nal-puede-crear-pequeno-polo-de-desarro-arti- 7 United Nations, The International Drug Control culo-618536 Conventions, Schedules of the Single Conven- 16 Transnational Institute, Statement by minister tion on Narcotic Drugs of 1961 as amended by the of justice on the dangerous drugs (amendment) 1972 Protocol, September 25, 2013, available at: bill for post cabinet press briefing, available at: https://www.unodc.org/documents/commissions/ http://www.druglawreform.info/images/stories/ CND/Int_Drug_Control_Conventions/1961_ documents/Statement-to-Press-Briefing-Ganja- Schedules/ST-CND-1-Add1_E.pdf Law-Reform-21-01-2015.pdf 8 United Nations, Convention on Psychotropic 17 Transnational Institute, Drugs and Democracy, Substances, 1971, available at: https://www. Jamaica, available at: http://www.druglaw- unodc.org/pdf/convention_1971_en.pdf reform.info/component/flexicontent/items/ 9 United Nations, Convention Against Illicit item/5537-jamaica Traffic in Narcotic Drugs and Psychotropic 18 Jamaica Gleaner. 14,000 Fewer Persons Substances, 1988, available at: https://www. Arrested On Ganja Changes Since Changes To unodc.org/pdf/convention_1988_en.pdf Law – Bunting. January 26, 2016. http://jamai- 10 Ensuring balance in national policies on con- ca-gleaner.com/article/news/20160126/14000- trolled substances: guidance for availability and fewer-persons-arrested-ganja-changes-changes- accessibility of controlled medicines. Geneva: law-bunting World Health Organization; 2011, available 19 ACNUR, Ley 30 de 1986, Estatuto Nacional de at: http://www.who.int/medicines/areas/quali- Estupefacientes, available at: http://www.acnur. ty_safety /guide_nocp_sanend/en/index.html, org/t3/fileadmin/Documentos/BDL/2008/6460. accessed December 22, 2015 pdf?view=1 11 United Nations Office on Drugs and Crime, 20 Presidencia de la República, Colombia, World Drug Report 2008, 2008, available Noticias, Cecember 23, 2015, available at: at: https://www.unodc.org/documents/wdr/ http://es.presidencia.gov.co/noticia/Noticia/ WDR_2008/WDR_2008_eng_web.pdf Presidente-de-la-Republica-firmo-decreto-so- 12 CNBC. Global drugs trade ‘as strong as ever’ as bre-uso-de-cannabis-con-fines-medicos-y-cien- fight fails. August 13, 2013. http://www.cnbc.com/ tificos id/100957882 21 Transnational Institute, Systems overload: 13 Washington Office on Latin America, Latin drug laws and prisons in Latin America, 2011, American Leaders Bring Drug Policy Debate available at: http://druglawreform.info/images/ to the United Nations, 30 September 2013, stories/documents/Systems_Overload/TNI-Sys- avaliable at: http://www.wola.org/commentary/ tems_Overload-def.pdf pag 52 latin_american_leaders_bring_drug_poli- 22 Global Post, Ecuador is freeing thousands cy_debate_to_the_united_nations of convicted drug mules, October 6, 2014, 14 CBC News, Marijuana legal in Uruguay as available at: http://www.globalpost.com/ President Mujica signs law, December 24, 2013, dispatch/news/regions/americas/141003/ available at: http://www.cbc.ca/news/world/ ecuador-releases-drug-mules-victims marijuana-legal-in-uruguay-as-president-muji- 23 Drug Policy Alliance, Ecuador Backtracks on ca-signs-law-1.2476025 Criminal Justice Reforms, Increases Penalties 15 El Espectador, Marihuana medicinal for Drug Selling, 10 February 2015, available puede crear pequeño polo de desarrollo en at: http://www.drugpolicy.org/news/2015/10/ Uruguay, Feb. 24, 2016. http://www.elespect- ecuador-backtracks-criminal-justice-reforms-in- ador.com/noticias/salud/marihuana-medici- creases-penalties-drug-selling

28 Latin America Policy Journal 24 Breslow, Jason, The Staggering Death Toll in Mexico’s Drug War.July 27, 2015 http://www.pbs.org/wgbh/frontline/article/ the-staggering-death-toll-of-mexicos-drug-war/ 25 Ley General de Salud, Congreso de la Repúbli- ca, November 12, 2015, México 26 Colectivo de Estudios Drogas y Derechos (CEDD). Usuarios de drogas y las respuestas estatales en América Latina. http://www. drogasyderecho.org/index.php/es/?op- tion=com_content&view=article&id=19&- catid=8&Itemid=141 27 Zaldívar, Arturo, Amparo 237/2014, available at: http://www.sitioswwweb.com/miguel/Ampa- ro_en_Revisio__769_n_237-2014.pdf 28 Global Commission on Drug Policy, War on Drugs, June 2011, available at: http://www. globalcommissionondrugs.org/wp-content/ themes/gcdp_v1/pdf/Global_Commission_Re- port_English.pdf

Fifth Edition | 2016 29 Article

Quality of Exports as an Additional Tool for Policymakers: The Case of Colombia

By Lenin Balza & Alfredo Guerra

Lenin H. Balza is an economist at Alfredo Guerra is a research fellow the Infrastructure and Environment at the Center for International Department at the Inter-American Development at Harvard University. Development Bank (IDB). In the past, he was a consultant Previously, he worked as a research at ODH Consulting Group fellow at the Energy Division of the in Caracas, where he advised IDB, as a junior research economist Henrique Capriles during his tenure at Santander Investment Group, as governor and his presidential and as a consultant at the Andean campaigns on several policy topics. Development Corporation (CAF). His background also includes Lenin holds a master’s degree in research on the political economy economic development (MPA/ID) of electoral systems, and he was at the John F. Kennedy School of a professor of microeconomics Government at Harvard University. at Universidad Católica Andrés He also holds a bachelor’s degree Bello. Alfredo holds a master’s in economics from Universidad degree in public administration and Central de Venezuela and has done international development from post-graduate studies in economics Harvard University and a bachelor’s from Torcuato Di Tella University. degree in economics from Lenin’s areas of interest and research Universidad Católica Andrés Bello include development strategies, in Caracas, Venezuela. Alfredo’s energy economics, and economic primary research interests lie in development in resource-rich countries. economic development, cultural

30 Latin America Policy Journal economics, political economy 1. Evolution of Industrial Policy in of natural resources and reforms, Recent Decades and Quality as an history economics, and applied Additional Tool Kit for Policymakers As industrial policy in Latin America microeconomics. has changed its focus over the last half a century, many have been the Abstract lessons drawn from previous experi- Industrial policy in Latin America ences. Although Latin America and and the Caribbean has experienced the Caribbean have a not-so-stellar relationship with industrial policies, as dramatic shifts in the way it is being evidenced by its considerable failure conceived. From import substitution to during the import-substitution era, the emphasis on outward-oriented growth reality remains undeniable: almost policies, many have been the efforts every country, if not all, that have in the region to obtain productivity industrialized in the last half century improvements and to promote growth have done so with government assis- and development. Later contributions tance and under well implemented industrial policies.1, 2 Yet, industrial have incorporated the notion of knowl- policy remains one of the most chal- edge and productive capabilities into lenging tools for policymakers when the discussion, and more recently the trying to promote successful productive quality of what countries export as a transformation. new dimension through which to look While many health prevention at the composition of economies. This or vaccination policies have a clear paper seeks to develop a framework for objective and a well-defined path to implementation, the same is not true practitioners and policymakers through in industrial policy, where most of the which targeted policies to key sectors effort lies in the “discovery” of produc- (based on productive capabilities, tive capabilities and the internalization complexity, and quality of exports) of positive externalities of upgrading can provide a useful guide to inform the quality of sectors or of jumping into policy. The first section analyzes the new sectors in the economy.3 quality of exports and its role as a tool The literature on this topic has been aiming to provide answers to for industrial policy. Section 2 develops many of these issues. The analysis a framework by looking at the case of of economic complexityprovided a Colombia, and section 3 concludes. framework of not only how “complex” of knowledge-intensive each exported

Fifth Edition | 2016 31 product is,4 but also of how dense is the Figure 1: Scatterplot between log(GDPPC) 15 years space around a product you already forward and present quality level. produce, and what products are easier for you to start exporting, given what of what you export? Naturally, it is you already know how to do.5 This last essential to have a clear definition of component has to do with the “latent” quality for the purposes of our study. competiveness a country enjoys based Broadly speaking, quality of export is on how many of the capabilities needed defined as any tangible or intangible to start exporting a product you already attribute of a good that increases all have, this was regarded as the “Implicit consumers’ valuation of it.11 In general, Comparative Advantage” a country for practical purposes most studies has on a product it does not already have approached the measurement export competitively.6 of quality of exports by a price index On a similar note, the quality of of export unit values. But the truth is exported goods can provide a similar that unit values may vary for many contribution to this discussion. In fact, reasons other than quality. More re- both theoretical and empirical work cently, studies began controlling for has been done highlighting the role potential confounding factors of this of the quality of export in shaping measurement. Among them, the study development outcomes. For instance, of Henn, Papageorgiou & Spatafora export quality has been linked to eco- controlled for the “likelihood” that nomic activity, firms’ export success, certain countries will trade between countries’ skill premium, and direction themselves through a trade gravi- of trade.7, 8, 9, 10 tational model, where factors such But what do we mean by the quality as geographic proximity, common

32 Latin America Policy Journal language, among others make some countries more likely to engage in trade between themselves than with others.12 A simple descriptive exercise using the dataset from Henn, Papageor- giou, and Spatafora’s study shows the relationship between higher level of quality of products and future levels of Figure 2: Evolution of national-level of quality of 13 income per capita (see Figure 1). At exports in Colombia (1962–2010) a more analytical level, by understand- ing the quality of products, we can see reach given the existing capabilities whether there is a room for growth by and quality of the things the country supporting firms on an intensive mar- already knows how to produce. gin. Namely, by helping existing firms Nevertheless, the political com- upgrade the quality of the products, ponent of these policies should not they make as a driver for future growth. be underestimated. In the particular Alternatively, another channel through case of vertical industrial policies, which quality operates is the “extensive there is the ever-present risk of end- margin,” through which countries are ing up strengthening well-established more likely to start exporting products that and often inefficient firms instead they do not export today when they are of promoting the upgrading efforts close to a dense network of high-quality of newcomers in key sectors. This products.14 concern further strengthens the case This approach to industrial policy for developing a technically correct is particularly useful in cases where and unambiguous framework to select market failures are keeping firms and how to adequately support specific entrepreneurs from jumping into sec- economic sectors and the developing tors that would otherwise bring an op- of missing sectors in the economy. timal financial decision to these actors. It may be the case that information 2. Framework for Leveraging Quality asymmetries are present or is simply of Exports as an Additional Tool for that the externalities of their decisions Policymakers: The Case of Colombia are not being internalized by busi- As we understand the quality of exports nesses. It is in this instances where a as an additional tool for policymakers, technically sound framework to detect a challenge remains in how we can unexploited “latent capabilities” in the effectively incorporate the extensive country can bridge the gap between literature of quality of exports as a existing products and sectors within practical lever for developing countries

Fifth Edition | 2016 33 who are seeking to understand how overall export quality in Colombia. to optimize their scarce resources The figure reveals that, on average, in a way that would maximize their the quality of Colombian exports impact on the economy. We will share have been following a downward this analysis for the case of Colombia. trend. Despite decade-to-decade variations, aggregate export quality How is Colombia doing in terms of in Colombia was reduced in more the average quality of its exports? than 20 percent over the last fifty It is pivotal then to begin by years. Nonetheless, this downward appropriately diagnosing the state trend might be driven not by absolute of Colombia’s country-level quality declines in the quality of its exports of exportsand then thinking of how but of losing ground relative to oth- such analysis can inform a better ers in the world, it is important to policy formulation to achieve an understand what might be driving effective productive transformation this results and what its economic policy in a country.15 implications may be. When doing the diagnostic anal- As a matter of fact, aggregate qual- ysis, we find that Colombia’s coun- try-level quality of exports have been Figure 3: Evolution of 1-digit sector quality of exports declining overtime. Figure 2 display in Colombia (1962–2010)

34 Latin America Policy Journal ity of internationally traded goods over time in comparison to each figure tends to hide great hetero- other. This analysis suggests that Co- geneity among sectors within the lombia was one of the countries with economy. Given the exceptional detail higher quality of exports up until of the data we have access to, it is 1980, but has dramatically fallen possible to break down the nation- since then. al-level quality of exports into a much Figure 4 displays the aggregate more detailed assessment of how quality of internationally traded Colombia is doing at the Standard goods distribution by Latin American International Trade Classification and Caribbean countries through (SITC) 1-digit aggregation level and time. It shows that most Latin in key sectors we deem of interest. American Countries improved their Perhaps not surprisingly, we find relative export quality above Colombia significant variance and large differ- during the 1963–2010 period. In ences in the way the quality of exports other words, neighboring countries in each sector has evolved over time.16 left Colombia behind. Lastly, we can also take advan- tage of the availability of this data Figure 4: Evolution of national-level of quality of for other countries of interest to Co- exports in Colombia in comparison to Latin America lombia and see how they have evolved (1962–2010)

Fifth Edition | 2016 35 How is Colombia’s product-level of Figure 5: Distribution of product-level quality of quality doing at the sector level? exports by 1-digit sector in Colombia (2010), high- To develop the granularity of our lighting key “garment” products study, we can then see how is Co- lombia’s quality of specific products projectors, sound recorders etc.” doing within the range of quality in However, many of those products each sector. This exercise can allow are being exported competitively and us to then identify sectors where sig- comprise a small portion of Colombia’s nificant changes have materialized in total basket of exports. To account for recent years as a way of understanding this potential confounding factor, we instances where quality upgrading can then take a look at the top products occurred and study what conditions in terms of quality in which Colombia were in place that make such changes has a “Revealed Comparative Advan- possible. tage” (RCA>0.1).17 By doing so, we An initial exercise toward this end is then find that: looking at the top products in quality This list can then be a good starting that Colombia exports and understand point to analyze how the quality of these what patterns emerge. By doing that particular products have evolved over exercise, we find that several agricultur- time, in comparison to other relevant al products top the list, but also other countries. By analyzing this list, it more complex manufactured products becomes evident that some patterns make the cut, such as “Cine. Cameras, emerge. More specifically, five of those

36 Latin America Policy Journal products with high quality belong to Case Study of Leonisa the garments sector and three others A heavily studied case in Colombia is reflect inputs related to said sector. that of the lingerie company “Leoni- By zooming into the garments sa.”19 Their success story provides sector, we see from Figure 5 that five support to the findings from research of the products listed above are near studies on how the export of quality the top of their respective sectors. matters for growth. On one hand, Similarly, when we evaluate their businesses who improve the quality evolution in terms of quality through of their own activities are said to be time, we can appreciate that they “climbing up the tree,” making refer- have increased their level of quality ence to how monkeys (as businesses) significantly through the last five can improve the quality of what they decades. do as they climb further up on the tree This analysis can then allow us to of their industry.20 Similarly, Leonisa understand on the time dimension, is also a story about “jumping out,” when this upgrade in quality occurred, making reference to instances where which in turn will inform the instances businesses venture out into new un- where we should look for qualitative explored sectors (monkeys jumping data that can complement the story into nearby trees). behind these changes that we see on Leonisa was a lingerie company this dataset. who used to compete with low-val- ue lingerie businesses in China and How Does This Diagnosis elsewhere, until their owners decid- Translate into the Colombian ed to invest heavily into upgrading Policy Context? their company’s machinery. Although Once we have identified Colombia’s the equipment were twenty times position in the spectrum of quality of as costly as Leonisa’s, the president exports and the evolution of quality in went ahead and made the investment specific sectors and products through (therefore, starting to climb the lingerie time, we can then try to understand quality ladder in Colombia). The what was behind those changes over effect was undeniable; they passed time and being able to formulate poli- from competing with China to compet- cies accordingly. After all, most coun- ing with French and Italian products. tries that have developed economically This represented a case of a business and pursued a successful structural that upgrading the quality their prod- change during the last fifty years, have uct (by climbing the tree). done so in hand with well-developed As this was happening, Leoni- industrial policies.18 sa later on jumped into the nearby

Fifth Edition | 2016 37 “bathing suits” sector. As they did It is for this reason that technical so, they also became a reputed correctness is essential to properly brand name in this sector, therefore identify the sectors that would generate successfully jumping to a sector the largest benefits for the economy. A with arguably similar capabilities potential framework among these lines requirements, and they did so could be for policymakers to focus on: maintaining a high level of quality. • Products with highest implied Recent research indeed seems to comparative advantage (given by suggest that jumps to nearby sectors those products with the densest are more likely when the quality of forest around them). exports of a sector is higher, partic- • Products with the highest Opportu- ularly for certain sectors and levels nity Gain (given by those products of proximity. Nevertheless, more re- that will translate into higher returns search is needed to better understand if they are competitively exported, what happens to the level of quality as measured by Hausmann et al. of exports of the sector businesses (2011). jump into. • Products with the highest quality of export frontier (given by those Technical, Political, and products where more room for Administrative Considerations growth in quality is available). As one moves the discussion from In addition, having a theoretical research into policy formulation, it backing for why to promote certain is essential to be fully aware of the sectors (on the intensive or extensive context in which policymakers will margin) will help optimize scarce operate when it comes to industrial resources from a government while policy. Very often, governments dedi- providing a clear rule to select sec- cate tremendous amounts of resources tors, which can also reduce the room into developing resources deemed for rent-seekers to interfere with “key for the nation’s development,” these policies. In a context where However, many times the way those implementing vertical industrial sectors are selected has more to do with policies aimed at helping companies perceptions that facts. Often times the upgrade the quality of their prod- sectors that are being promoted are far ucts, the room for political capture from what they currently know how to could be high, for which reason clear do (large distance) and are perhaps in rules on how such policies must be areas with low density around them implemented are pivotal. Similarly, (don’t have many other sectors to jump other considerations must be made afterward). in terms of choosing the most appro-

38 Latin America Policy Journal priate institutional arrangement to provide another dimension through implement these policies. In the case which to understand the industrial of Colombia, it is more likely that composition of a nation. a centrally-implemented industrial As a result, the notion of translating policy of this sort might be more this knowledge into better-informed resistant to political capture than industrial policies can allow govern- if local governments were to resist ments to become smarter in the way pressure from large corporations they spend their resources when trying among their constituencies. to grow their industries. Based on It is also important to be cognizant previous work focused on Colombia,22 of the administrative capacity on the it becomes clear that targeting sectors policymakers in each context. These and businesses through the lenses of considerations might translate into complexity and quality can become narrowing the number of industries a promising avenue for future policy chosen to be promoted, or focusing formulation in Latin America. on specific desirable industries that Lastly, as new and more detailed require the least intervention from datasets become available of the the government. Lastly, another di- subnational composition of industries mension to consider is the amount of in each country, new opportunities effort these policies should require. will arise that will allow us to better Namely, should policymakers aim at understand the spatial considerations a “big push” to promote a massive of divergence in quality of products jump to a sector (or group thereof) or and services within a same country should policy efforts be more passive and set of national institutions. These in the sense, that certain conditions exercises with more granular detail must be in place for upgrades in then represent promising avenues to quality or jumps into nearby sectors further enrich the debate on how to to happen.21 improve evidence-based industrial policies in the region. 3.Conclusions Even though the literature on the implications of changes in quality of exports for future growth is very recent, its initial findings suggest a promising avenue for policymakers. Not only are increases in quality of exports associated with higher future exports and likelier jumps into nearby sectors, but also

Fifth Edition | 2016 39 Appendix Table 2

M., 2014, Implied Comparative Advantage. Endnotes Working paper. Center for International 1 Inter- American Development Bank, 2014, Development. Harvard University. “Rethinking Productive Development” 7 Grossman, G. M., Helpman, E., 1991, “Quality Inter-American Development Bank. Crespi, G., ladders in the theory of growth,” Review of Fernandez-Arias, E., Stein, E., eds. Economic Studies, 58(1), pp. 43–61. 2 Rodrik, Dani, 2004. “Industrial Policy for the 8 Hummels, D., and P. Klenow, 2005, “The Vari- Twenty-First Century.” Discussion Paper Series ety and Quality of a Nation’s Exports,” American No. 4767. Economic Review, Vol. 95, pp. 704–723. 3 Balza, L., Guerra, A. (forthcoming). “Better 9 Verhoogen, Eric, 2008,“Trade, Quality is better: Quality of exports.” Mimeo Harvard Upgrading, and Wage Inequality in the Mexican University. Manufacturing Sector,” Quarterly Journal of 4 Hausmann, R., Hidalgo, C., 2011, “The network Economics, 123, 489–530. structure of economic output,” Journal of 10 Hallak, J. C., 2006, “Product quality and the Economic Growth, 16, 309-342 direction of trade,” Journal of International 5 Hausmann, R., Hidalgo, C., Bustos, S., Economics, Vol. 68, pp. 238–65. Coscia, M., Chung, S., Jimenez, J., Simoes, 11 Hallak, J. C., and P. Schott, 2011, “Estimating A., Yildirim,M., 2011, “The Atlas of Economic Cross-country Differences in Product Quality,” Complexity,” Puritan Press. Quarterly Journal of Economics, Vol. 126, pp. 6 Hausmann, R., Hidalgo, C., Stock, D., Yildirim, 417–74.

40 Latin America Policy Journal 12 Henn, Christian, Papageorgiou, Chris and Nikola Spatafora, 2013, “Export Quality in Developing Countries,” IMFWorking Paper 13/108. 13 Ibid 14 Bahar, D., Rosenow, S., Stein, E., Wagner, R. (forthcoming) “Quality upgrading and the dynamics of export diversification.” Mimeo 15 This measure is derived by computing an export-value-weighted average of quality for all the exports in Colombia. 16 Is important to note that sectors like the “crude materials” sector, in the case of Colombia, might bias our national-level quality of exports indicator, given that this measure is developed as a weighted average of all product export’s quality. 17 At this stage, we are using a more generous threshold for “competitive exports” than the one suggested by Hausmann et al (2011) of an RCA>1 just to account for the quality dimen- sion with a broader set of products. Namely, there may be sectors whose quality might be on the rise but whose Revealed Comparative Advantage might not still be above 1. Based on previously mentioned research on quality of exports, given the relationship between quality growth and future exports, it would not be appro- priate to exclude such sectors from our analysis. 18 As note by Rodrik, Dani, 2004. “Industrial Policy for the Twenty-First Century.” Discussion Paper Series No. 4767. 19 For instance, in IDB (2014). 20 In the traditional jargon from Hausmann et al. (2011) 21 Murphy, K., Andrei Shleifer and Robert W. Vishny, 1989, Journal of Political Economy Vol. 97, No. 5, pp. 1003-1026 22 Balza, L., Guerra, A. (forthcoming). “Better is better: Quality of exports.” Mimeo Harvard University.

Fifth Edition | 2016 41 Article

Development Banking and Counter-Cyclical Policies in Brazil

By Luiz Pinto

Luiz Pinto is the This article tackles the challenges and executive director limitations of the Brazilian long-term of BRICS financing system following the 2008 Overseas. He global credit crunch, when disburse- holds a PhD in ments from the state-owned Brazilian international National Development Bank (BNDES) boomed due to major yet unsustainable Luiz Pinto political economy changes on its capital structure. The and is a visiting scholar at the article concludes that the Brazilian de- School of International and Public velopment finance needs to be reformed Affairs at Columbia University, in order to increase its efficiency and New York. Previously, he led several contribute to macroeconomic stability. economic initiatives for the Brazilian As it stands, the system spurs segmen- government in South America tation within the Brazilian financial and was a director of the board of markets, with subsidized long-term the South American Federation of interest rates pushing the free-market the Chambers of Commerce and equilibrium real interest rate upwards. Industry. The recent expansion of subsidized loans has reinforced this movement and intensified the tendency to benefit projects and investments with low social externalities. Thus, reforms may include

42 Latin America Policy Journal changes in the targeting of investment capital mobilization and investment projects and additional reliance on management, development banks were market funding and other sources of crucial to boost catch-up industrializa- private savings. tion and import substitution policies in Asia, Latin America, Africa and the Middle East. However, globalization, Long-Term Finance and macroeconomic stabilization, financial Development Banking In Brazil market integration and capital market Development finance is the art of development forged major changes in gathering funds to pay for multiyear development banks’ nature. payback capital-intensive undertak- The Brazilian National Devel- ings. According to the G30 (2013), opment Bank (BNDES) is one of these long-dated funds are deployed the largest development banks in the in different sorts of large-scale proj- world by both total assets and total ects, including real estate enterprises, loans. A cornerstone of the Brazilian infrastructure, education, research, “developmental state,” the BNDES and the acquisition of capital goods, funded the most important infrastruc- equipment, and software. They are ture and industrial projects of the important to create jobs, expand pro- 1950s, 1960s, and 1970s, nourishing a duction, and increase productivity. catching up process that consolidated a Firms based in emerging markets large base of diversified private groups. often face capital constraints and other Despite its protagonist role during the restrictions due to market failures such Brazilian state-capitalism “golden as financial incompleteness, capital years,” BNDES embraced economic markets pro-cyclicality, risk-aversion, reforms after the international debt and coordination problems. Hence, crisis exhausted import substitution emerging markets have to foster devel- policies and public savings in the opment finance through public policy. 1980s. Crowding in private investors Harnessing state-owned development banks became one of the most effective ways to provide long-term finance and boost industrialization after the Second World War. Global economic geography would probably be differ- ent if emerging market-based private groups and state-owned companies did not have the development banks’ Figure 1: Monthly rates of SELIC and TJLP ( percent), support. By fusing public policy with 2002-2015

Fifth Edition | 2016 43 and developing capital markets, the BNDES operated and managed the Brazilian National Privatization Pro- gram (PND) in the 1990s. Along with the macroeconomic sta- bilization, the PND created conditions Figure 2: Net Inflows from FAT and Total Disburse- for further modernization. Paradoxi- ments, 2000-2013 cally, although ownership restructur- ings diminished state participation much higher in Brazil than in other as a majority investor, it boosted its emerging and developing markets. As corporate influence as a minority share- of February 2016, while short-term holder. Positions were held through real interest rate is 3.58 percent in BNDES’ equity arm BNDES Partic- Brazil, other BRICS and MINT coun- ipações (BNDESPAR) and state-re- tries (Mexico, Indonesia, Nigeria and lated entities such as pension funds Turkey) benefit from far better rates, of state-owned companies. Thus, the including 3.11 percent for Indonesia, government was able to increase its 2.76 percent for China, 1.55 percent power centrality while major changes for South Africa, 1.4 percent for Ni- increased the performance of former geria, 1.14 percent for India, 1.12 state-owned companies, enhancing percent for Mexico, -1.9 percent for capital allocation and favoring the Russia, and -2.08 percent for Turkey.2 development and deepening of capital This is a major problem for a sus- and credit markets. tainable development of Brazilian capital markets. Monetary stability Development Banking in the and low rate risks increase the demand International Post-Crises Blues for long-term debts. Longer debt du- Despite structural reforms and rele- ration implies higher confidence and vant improvements in the macroeco- creditability, fostering the creation nomic setting during the 1990s and of benchmarks for debt markets and early 2000s, the Brazilian sovereign the widespread use of long-term com- yield curves in domestic currency mercial papers. In contrast, high and are persistently volatile and high; volatile real interest rates express how preventing private agents from bor- the stability of Brazilian institutional rowing long-term and blocking the architecture is still incomplete.3 development of a free market for long- Structural distortions such as the term credit at fixed interest rates in very short-term structure of debt stocks Brazilian Reais (BRL).1 and country-specific factors related to Moreover, real interest rates are credit market segmentation diminish

44 Latin America Policy Journal the monetary policy effectiveness. Being much lower and much less Having access to cheap funds based volatile than SELIC (see Figure 1), the on compulsory savings arrangements, TJLP is the cornerstone of long-term state-owned banks are able to supply financing in Brazil. Although it sup- credit at better-than-market terms, ports the provision of cheaper funding presenting less sensitivity to move- for entrepreneurs, it also lessens the ments of the overnight market rate power of monetary policy. Thus, along on federal debt repos (SELIC). with the subsidized loans from Banco The Federal Constitution estab- do Brasil and Caixa Economica Fed- lished in its article number 239 that eral for housing and agriculture, the at least 40 percent of compulsory BNDES disbursements push upwards pension savings (PIS-PASEP) unified the equilibrium real interest rate in under the Worker’s Assistance Fund the free market.4 (FAT) should be channeled to the However, the FAT – the only steady BNDES for development finance, external source of funds for the BNDES while the remaining 60 percent – is depleting, which poses challenges should finance the program for un- for the future expansion of BNDES’ employment insurance and salary operations. The annual average of bonuses. Funds directly allocated to total net inflows from FAT as a share the BNDES comprise the so-called of total disbursements decreased from FAT-Constitutional, a subordinated 14 percent in 2000-06 to 4.5 percent debt or quasi-equity in which no in 2007-14. Although net inflows from amortizations are made while interests FAT-Constitutional are keeping pace are paid semi-annually based on the with disbursements, secular trends Long-Term Interest Rates (TJLP). on Brazil’s labor market are ramping Interests are limited to 6 percent up FAT annual expenditures with per year for the TJLP liabilities. The unemployment insurance, pushing excess yield is capitalized and added to FAT-Special Deposits net balance the outstanding balance of FAT funds. to negative levels and reducing total Special Deposit FAT is comprised of additional resources channeled to the BNDES when revenues from FAT exceed annual expenditures required by the legislation, (i.e., when the remaining 60 percent of the savings from FAT exceeds the disbursements for unemployment insurance and salary bonuses). Figure 3: Total Assets, 2004-2014

Fifth Edition | 2016 45 “national champions,” and progressive changes on macroeconomic policies leading to the so-called “new economic matrix” of President Dilma Rousseff. New government bonds were issued Figure 4: BNDES Disbursements, 2004-2014 by the National Treasury to channel funds to the BNDES. Differences be- net inflows from FAT to the BNDES. tween government borrowing costs and FAT-Special Deposits net balance subsidized TJLP imply resource mo- deteriorated quickly, plummeting from bilization from the National Treasury a positive amount of BRL 20 billion in to the BNDES have a fiscal impact, 2000-06 to a negative amount of BRL affecting the gross national debt and 7.1 billion in 2007-14. (See Figure 2) crowding out private investment. On the other hand, net outflows From 2004 to 2014, BNDES’ total from FAT-Special Deposits started assets more than five-folded in BRL amidst a surge in total disbursements. (to BRL 834,756 million) and more The gap was nevertheless more than than six-folded in USD (to USD fulfilled by resource mobilization from 356,733 million). (See Figure 3) Sim- the National Treasury. From 2002 ilarly, in the same period BNDES through 2014, the National Treasury disbursements over four-folded in funded the BNDES with BRL 426 BRL (to BRL 187 billion) and over billion. Thus, BNDES capital struc- five-folded in USD (to USD 80 billion). ture changed accordingly, with the (See Figure 4) participation of the National Treasury Expansion in earmarked loans at- increasing from BRL 3.8 billion or tained remarkable success preventing 3.4 percent of total in 2001 to BRL a credit crunch and a recession in 450 billion or 54 percent of total in Brazil. However, the macro, industrial 2014. FAT relative participation in the and social views prevailing on the capital structure decreased from BRL government pushed for a continuing 69.4 billion or 61.5 percent of total to mobilization of funds even after the BRL 192.4 billion or 23 percent of economy fully recovered. Out of the total during the same period.5 BRL 413 billion raised by the National Reasons behind government Treasury to the BNDES since the support to the BNDES include an- beginning of the international financial ti-cyclical policies after the subprime crisis in 2007, BRL 283 billion or 66 meltdown of 2007 and credit crunch of percent was raised after 2009,6 when 2008, a renewal bet on industrial pol- the Brazilian economy rebounded icies “picking winners” and fostering strongly. While the new matrix of

46 Latin America Policy Journal Brazilian economic policies boosted gross income from loans registered government-driven credit expansion, a loss of BRL 1,649 million, being state-owned banks participation in the offset only by the BRL 11,271 million national credit market ramped-up. earned by returns on securities. It is (See Figure 5) worth noting that 72 percent of the BRL 160.8 billion held by the BNDES in securities is state-related, includ- ing BRL 62.9 billion in government and sovereign bonds and BRL 39.8 billion in shares from state-owned companies.7 If subsidies for its funding were eliminated, BNDES’ net interest margin would drop from 1.54 percent to -4.37 percent in 2013. In other Figure 5: Share of Credit Operations by Bank words, taxpayers spent over 4 cents for Ownership, 2002-2013 every dollar allocated by the BNDES during the year. During this period, the BNDES Subsidies are justified whenever surpassed Santander Bank and consoli- government driven loans fulfill market dated its position as the fifth largest bank failures, funding projects that cannot be by total assets and total loans in Brazil. funded by private markets but whose Holding a virtual monopolist position social benefits exceed their financial over long-term financing, BNDES chan- costs. This includes credit to capital nels subsidies from compulsory savings constrained firms and social intensive and Treasury transfers to its customers. sectors such as infrastructure, educa- BNDES’ net interest margin (NIM) tion, health, housing and agriculture. was 1.54 percent in 2014, 325 basis However, recent empirical analyses and points lower than the average of the eight econometric studies strongly support largest banks in Brazil, 183 basis points that BNDES’ operations do not maxi- lower than the average of the two biggest mize social welfare.8 BNDES channels state-owned banks (Banco do Brasil and 67 percent of its total disbursements Caixa Economica Federal) and 382 basis to large enterprises that can fund their points lower than the average of the five projects with other sources of capital.9 largest private banks (Itau Unibanco, Moreover, such trends have strength- Bradesco, Santander Brasil, Safra and ened after the international financial BTG Pactual). (See: Table 1) crisis and the surge on government Yet, BNDES had a net income of driven credit. Recently, larger, older BRL 8,150 million in 2013. However, and less risky firms benefited most

Fifth Edition | 2016 47 from government-sponsored loans. idence suggests that publicly listed Monopolistic firms have 18 percent firms are borrowing long-term to either higher chances of receiving loans reduce capital costs or even benefit from the BNDES than other firms from interest rate arbitrage profit.14 – chances were 11 percent higher Thus, Brazil clearly needs to reform before 2007. Additionally, BNDES its development banking system. The reduced its relative participation in national government can indeed un- social intensive sectors by 25 percent dermine macroeconomic stability if it after the international crisis.10 keeps using the BNDES to artificially Resources allocated to large “na- expand credit or to support para-fiscal tional champions” could still be jus- policies and accounting gimmicks. A tified if loans and equity capital had a slowdown on government-driven credit positive effect on firms’ performance, and smaller SELIC-TJLP spreads are investment or productivity, funding part of Brazil’s fiscal consolidation their riskier projects and boosting in- program. novation. But data shows no significant However, the BNDES needs deeper effect of BNDES loans and equity changes. Funding structure and implic- capital on firms’ profitability, market it subsidies imply disbursements should valuation,11 productivity,12 investment support projects with higher social and capital expenditures.13 There externalities. In this sense, targeting is simply no evidence that services and selecting policies may follow the provided by the BNDES stimulate trend created by leading development potential output growth. Rather, ev- finance institutions, increasing the

48 Latin America Policy Journal share of social intensive projects in 5 BNDES, Individual and Consolidated its portfolio. Priorities may include Financial Statements. Rio de Janeiro: BNDES, 2000/2014. micro-enterprises and start-ups, small 6 Ibid. and medium sized enterprises (SMEs), 7 Ibid. infrastructure, and international trade. 8 Various authors: Bonomo et al. (2014). Project monitoring and accountability “Macroeconomic and Financial Consequences should be enhanced, subjecting firms of the After Crisis Government-Driven Credit to performance targets conditional Expansion in Brazil,” Central Bank of Brazil Working Paper Nº 378 (2014); Lazzarini et al. on their allocated capital. Finally, (2015); “What Do State-Owned Development given the structural limits of com- Banks Do? Evidence from BNDES, 2002-09,” pulsory savings and macroeconomic World Development 66 (2015): 237-253. Mello restrictions to further Treasury trans- and Garcia (2012). “Bye, Bye Financial Repres- fers, the BNDES should improve its sion, Hello Financial Deepening: The anatomy governance and rely more on market of a financial boom,” The Quarterly Review of Economics and Finance 52(2) (2012): 135-153. funding and private sources of savings, Coelho, D. and Sousa, F.L. (2010) “Os Efeitos increasing market-based operations dos Financiamentos do BNDES sobre o De- and off-balance sheet activities such sempenho das Empresas Industriais Brasileiras” as syndications, co-financing, project in Estrutura Produtiva Avançada e Regional- finance and underwritings. mente Integrada: Desafios do Desenvolvimento Produtivo Brasileiro, Livro 5, Vol. 1, organized by De Negri, F. and Almeida, M., IPEA, Brasília. 9 BNDES, Annual Report. Rio de Janeiro: Endnotes BNDES, 2014. 1 Sotelino, F. (2014). “A Functional Financial 10 Bonomo et al. (2014). See Endnote VIII System for Brazil, When?,” paper presented in 11 Lazzarini et al. (2015). See Endnote VII the BRICS Lab Conference: BRICS, the road 12 Coelho, D. and Sousa (2010). See Endnote VIII ahead, Columbia University, New York, NY, 13 Bonomo et al. (2014) and Lazzarini et al. (2015). March 6, 2014. See Endnote VIII 2 Data: Trading Economics. 14 Bonomo et al. (2014). See Endnote VII. 3 Lopes, F. (2010). “A Estabilização Incompleta,” Macrometrica Working Paper (2010). 4 Various: Segura-Ubiergo, A. (2012). “The Puzzle of Brazil’s High Interest Rates,” IMF Working Paper Nº 12/62 (2012). Lopes, F. (2010). “A Esta- bilização Incompleta,” Macrometrica Working Paper (2010). Bacha, E. (2010); Além da tríade: há como reduzir os juros?,” Instituto de Estudos de Politica Economica Casa das Garças Working Paper Nº 17 (2010). Lara Resende, A. (2013). Os Limites do Possível: A economia além da conjuntura. São Paulo: Penguin, 2013.

Fifth Edition | 2016 49 Article

Beyond Autopilot: How to Make the Aerospace Cluster of Querétaro Take Off

By Rodrigo Quintana, Liliana Olarte, Juanmanuel García-Sánchez, Pedro Rangel, and José Lyra Netto

Abstract work developed by Michael Porter,1 we The aerospace cluster is a promising analyzed the value proposition of the one for Mexico. And it has not come cluster.2 We find that unless important about by surprise. With more than 200 policies are introduced, the aerospace firms in eighteen states, the development cluster in Querétaro risks emulating the of the aerospace cluster has been the maquiladora model in Mexico where product of an aggressive national and the main export of the country is a sub-national agenda as well as the service (keeping costs low) instead of supply chain dynamics of the global a product (a higher value added from manufacturing firms in the aerospace what it is imported). industry. The cluster in the state of Querétaro has become one of the most Introduction advanced in the country. Its trailblazer Mexico has one of the highest gross progress is thanks to policies oriented domestic product (GDP) per capita to attract foreign anchor firms and to in Latin America (driven by northern the provision of a comprehensive set of states) but suffers from low produc- training programs at the first Aeronautic tivity (pulled by the southern states). Querétaro, a state in central Mexico, University in the country – UNAQ. is trapped in the middle. It benefits Employing the Competitiveness Frame- from a safer environment, low corrup-

50 Latin America Policy Journal tion, and specialized education. It also of firms. We also suggest to (4) cut the hosts high-performing manufactur- red tape of contract enforcement; (5) ers spurred by an active government, expand airport capacity and reach to abundant natural resources and skilled reduce transportation costs; (6) com- labor. But it faces large transport costs plement the production capability of due to significant distances to the nearby states; and (7) include a design United States and ports; lower contract and development program in UNAQ’s enforcement and an industrial focus curriculum. on manufacturing rather than design. The aerospace cluster is promising Mexico’s Competitiveness for Mexico with more than 200 firms Overview in eighteen states. And Querétaro hosts Over the past three decades, the econ- one of the most advanced clusters omy of Mexico has risen steadily (at in the country. There the aerospace annual average of 2.4 percent) driv- exports have been growing particularly en by its ability to diversify its export for assembly operations. The cluster earnings away from oil.3 However, has a strong position in the engines its GDP growth is losing pace vis- sub-cluster while developing its de- à-vis other countries in the region fense sub-cluster. However, it faces (See Figure 1). And its productivity fierce competition from other local has reached a plateau despite being clusters. To being with, Baja California, the largest manufacturing exporter of Sonora, Chihuahua and Nuevo Leon Latin America. The combination of clusters are closer to the US border. high labor costs with low investments To offset this cost barrier, the current in research and development and in value proposition of Queretaro is to technology licensing and patenting, offer heavy subsidies to anchor firms; has rendered Mexico unable to move provide training at the Aeronautic beyond its current productivity level. University in the country; and keep labor costs low. While these measures lower pro- duction costs, these do not render the cluster competitive. To scale up its productivity, we recommend to: (1) brand the state as a talent hub to attract skilled labor; (2) condition subsidies on the development of local suppliers and (3) leverage the purchasing power of the state with the production capacity Figure 1: Annual rate of GDP growth

Fifth Edition | 2016 51 Its proximity to the US offers a services, manufacturing plays an im- privileged access to one of the largest portant role accounting for nearly 27 markets in the world. Mexico benefits percent of GDP (See Figure 2) for from the outsourcing efforts of Amer- various reasons. ican business and both direct and The state is located in the central indirect foreign investment. In this region. It has good access to Mexico line, the North America Free Trade City, both coasts, and is well connected Agreement (NAFTA) facilitated the with the north and south of the country. development of domestic suppliers Querétaro is also home to a variety of which evolved to produce quality, metallic and non-metallic products, low-cost components for domestic and including silver, copper, and opals. foreign firms, creating in turn a grow- Besides its natural abundance and priv- ing internal market. However, poor ileged location, the state has managed education and low R&D investment well its finances. In 2012, Standard & has limited specialized production Poor’s upgraded the classification of its and services. debt from BBB- to mxAA+.4 Querétaro enjoys good educational performance Querétaro’s Competitiveness relative to other states. And while the Overview country faces huge security challenges, Querétaro has caught up with the Querétaro is deemed as a safe place. country in terms of prosperity (GDP/ Querétaro also offers one of the capita) due to its sustained economic strongest innovation environments growth. Even though more than half in Mexico, ahead of the main com- of the GDP of the state comes from petitor states in terms of aerospace

Figure 2: Composition of GDP and value added per type of industry

52 Latin America Policy Journal clusters, such as Nuevo León, Baja Although Mexico is overall losing California, and Sonora. The state world market share on most clusters, is the second best performing out of the clusters of aerospace engines, and thirty-two states in number of patents.5 aerospace vehicles and defense have It also has high-ranking universities been growing over time (See Figure and research institutions Including 4). Also, despite representing only in the aeronautic sector (Aeronauti- 2 percent of the total exports in the cal University of Querétaro and its country in 2011, Querétaro represents connected research centers). nearly 15 percent of the aerospace Notwithstanding its well-oriented exports in Mexico in the same year.6 policies, Querétaro faces many prob- It is the fourth exporter of engines lems. First, enforcing contracts follows and the second exporter of aerospace a very bureaucratic procedure, takes vehicles and defense (See Figure 5) longer, and costs more than in most in the country. states (See Figure 3). Secondly, it has These exports have dramatically one of the lowest rates of paved roads grown over the past years. Between among Mexican states. Finally, the 2007 and 2008, the exports of aerospace availability of flights and destinations engines grew at a compound annual of its recently built airport is limited. growth rate (CAGR) of 13.7 percent These three barriers pose a challenge and aerospace vehicles grew at a CAGR to lift up aerospace exports. of 15.7 percent. This growth rate was way above the national trend of 3.7 The Aerospace Cluster in percent and 0.9 percent respectively. Querétaro According to State Governor Jose Calz-

Figure 3: Ease of doing business 2014h

Fifth Edition | 2016 53 were only two companies established in the cluster (General Electric and Turborreactores), by 2013 this number had grown to thirty-four.9 The manufacturing capabilities of the cluster comprise propulsion Figure 4: Change in Mexico’s World Export Market systems, airframe structures, sub- Share 2000-2010 assemblies and subsystems, engine ada, the aerospace sector in Querétaro components and landing gear systems is growing at annual rate of 15 percent (see below). Its long term vision is to compared to 10 percent nationwide. become a hub for complex machining Besides this aggressive growth, processes and maintenance, repair and the aerospace cluster in Querétaro operations (MRO) supported by the receives the largest amount of FDI following policies: at the national level according to the • FDI: aerospace companies get FDI.7 In terms of employment, the VAT returns within five days and aerospace industry employs over 4,800 do not pay income tax. workers with a 255 percent growth from • Logistic platform: large fixed-cost 2010 to 2012.8 While in 2005 there infrastructure such as the Aero-

Figure 5: Aerospace exports by State 2011

54 Latin America Policy Journal space Industrial Park and incen- ing parts while Nuevo Leon mainly tives to settle such as the acquisi- uses metal components. tion of machines and technologies. • Technological R&D: funding for Cluster’s Competitiveness Analysis research and development for the Limited linkages with domestic sup- aerospace industry. pliers in value chain. Global patterns • Support to local companies: suggest that Original Equipment subsidies up to 70 percent of the Manufacturers (OEMs) are moving costs for certification to SMEs to to vertically build their global supply become suppliers of multinational chains.12 But in Querétaro over 50 companies. percent of the main aerospace firms • Education focused on competencies: have brought along their own foreign training center for aerospace com- suppliers and less than 40 percent of panies from technical to post-grad- these plan to develop local suppliers.13 uate level in the National Aero- The reason for this is that it is easier nautics University. for foreign firms to relocate already certified companies to Querétaro rather Cluster’s Domestic Competition than having to train and certify local The most relevant clusters (Sonora, suppliers which are mainly spin-offs Chihuahua, Nuevo Leon and Baja of auto and metal firms. California) are closer to the Unit- Limited Push for R&D: Lack of ed States than Querétaro, forcing university curriculum on design. the latter to diversify its export des- OEMs are increasingly focusing on tinations to Canada and Europe. fuel-efficient products which has led The clusters compete in three areas. them to purchase composite products In value chain, Querétaro focuses that are lighter and less polluting.14 In more on complex machining and Querétaro, the development of com- maintenance, repair and operations posites is gaining popularity through (MRO) but competes with Nuevo the establishment of a lab that focuses Leon on advanced manufacturing and on testing the level of duration of MRO.10 In training, while Querétaro composite material. However, Bombar- funded the first aeronautic university dier, which manufactures 85 percent where two-thirds of Bombardier la- of composite materials in the state, bor force studied, Nuevo Leon offers recently discontinued a large part of customized training to firms.11 In this activity without having transferred manufacturing inputs, Bombardier its technology. Also, UNAQ lacks a in Querétaro employs composites to program on the design and develop- produce 85 percent of its manufactur- ment of composite materials.15

Fifth Edition | 2016 55 Airport infrastructure does not meet trend by offering its manufacturing growing needs. OEMs are outsourcing capabilities combined with relatively manufacturing in proximity to the cheaper production costs. However, United States to lower costs in lean unlike other Mexican states it offers times.16 But distance poses a cost dis- three important advantages. A safe advantage to Querétaro. While it costs and developed industrial environment USD$150 in tolls to ship a nine-axle (especially through the automotive truck from Querétaro to Reynosa–US cluster) connected with the capital customs (917 km and 9 hours), it only of Mexico. Second, a skilled labor costs USD$80 in toll from Chihuahua force trained locally through the to Ciudad Juarez–US customs (351 first aerospace university as well as over- km and 3.5 hours).17 On top of this, seas. Third, a higher involvement of the the state airport has limited capacity. state government allowing Querétaro Moreover, only 2.44 percent of the to offer distinct opportunities for in- exports exit through its airport while ternational companies. 44 percent leave via nearby airports Even though the labor force of in Toluca and D.F.18 the state is in better position than in other states, it is still unable to help Strategic Vision, Challenges, and the cluster move up the value chain. Recommendations for the cluster The reasons are multiple and represent the typical chicken and egg problem. a. Cluster’s Current Value Proposition First, there is very little demand for Mexico has structured a value proposal design or engineering jobs, since most mostly centered on manufacturing of the R&D activities are done in the activities at comparably cheaper pro- HQ of the anchor companies. Because duction costs. The manufacturing of there is little demand for labor, the aerospace components represents the university fails to prepare students for largest activities performed by aero- more R&D, design or engineering space companies in the country with type of jobs. And because there are 76.56 percent. The production costs of no jobs and no labor for engineering the country are 21 percent lower than jobs, there are very few linkages with in the United States achieved through local suppliers. a combination of cheap labor force and significant government benefits such as b. Recommendations at the infrastructure investments (building of National Level aerospace parks), tax breaks (no import Promote the government purchase tax for related inputs), among others.19 of locally-produced aircrafts. Given Querétaro follows the national the industry is a low-demand, high

56 Latin America Policy Journal mix business, the government could clusters in the US border in security leverage its purchasing power to spur issues. However, the government does local demand by guaranteeing the not have a marketing strategy to attract purchase of domestically produced jets talent from competing rivals nor from and helicopters for its defense fleet. So Mexico City. far the Mexican government purchases Improve contract enforcement in Brazilian and Russian aircrafts. Had Querétaro. Lack of contract enforce- the government ensured the purchase ment affects negatively the business of the Learjet 85 from Bombardier, the environment of the state, especially firm might not have discontinued its in an industry characterized for its production. low demand nature. The lack of en- forcement means that if one contract c. Recommendations at the State Level falls through, it is hard for a company Forge an alliance with other aero- to compensate by jumping to another space clusters within Mexico. While offer quickly. The government can most countries have one aerospace reduce this level of uncertainty by cluster (Brazil, France, Canada) or reducing procedures, cost and time between two and three in the case of to enforce contracts. relevant players (the United States), Expand airport capacity, destina- Mexico has over five agglomerations tions and create a performance-based nationally identified as clusters. Not tax credit to attract cargo companies to only that, these clusters compete with the airport. The state airport has not each other for the attraction of foreign only limited cargo providers but the companies instead of collaborating existing ones do not normally travel among themselves. For instance, the to the main destinations of the state product capabilities of Nuevo Leon exports. To attract these companies, and Querétaro complement each the state first must expand its airport other in the value chain. Yet little capacity. Then it should create a per- cooperation exists among them despite formance-based tax credit to lure cargo being connected through the same to export aerospace products that they corridor and shipping exports via the can also purchase locally to lower their same customs. operations. Launch a brand strategy to market the state as a main talent hub for inno- d. Recommendations at the Cluster vation. Querétaro has a large potential Level to attract talent given its close location Include courses on design and de- to Mexico City and education oppor- velopment of composite materials in tunities. It also outcompetes its rival UNAQ’s curriculum. The university

Fifth Edition | 2016 57 program so far focuses entirely on value proposal should aim at manu- manufacturing despite a growing facturing not just engines but rather interest for composite development interlinked structures in coordination both internationally and domestically. with others states that would facilitate The university can tap the expertise specialization and advancement within of Bombardier engineers to help craft the value-chain. In the long run Queréta- the courses and attract experts from ro should exploit its advantages of being the other clusters through the talent home to excellent education institutions, campaign. its location and safety standards to be- Condition FDI subsidies of state come an innovation hub in the Mexican agencies on the development of local aerospace industry. By becoming a hub suppliers. So far OEMs receive heavy Querétaro has the unique opportunity subsidies without leaving in place any of leading the transformation of the technology transfer or developing local national aerospace industry away from capacity to support their operations. the maquiladora model and towards an Therefore, helping the development industry that promotes locally seeded of local suppliers in exchange of the R&D and suppliers.20 subsidies can help the cluster improve their competitiveness in case OEMs Endnotes leave the country in the future. 1 Porter, M. (1998). On Competition. Havard Business School Press. 2 Porter, M. (2008). On Competition. Cluster’s Recommended Value Updated and Expanded Ed. Havard Proposition Business School Press. The current value proposition of the 3 Author’s own estimations using WDI aerospace cluster in Querétaro is an- indicators. chored around the manufacturing of 4 Standard & Poor’s (2012) Standard & components (mainly engine compo- Poor’s asigna su calificacion en escala global de BBB- y confirma la de escala nents) at lower production costs. Unless nacional de mxAA+ del municipio de important policies are introduced, the Querétaro, Mexico. Standard & Poor’s. aerospace cluster in Querétaro risks 5 IMCO (2014) Indice de Competitivi- emulating the maquiladora model of dad Estatal 2014. IMCO. the country in which the main export 6 Garcia-Sanchez, J., Lyra, J., Olarte, is a service (lower costs) instead of a L., Quintana, R., and Rangel, P. (2015). Aerospace Cluster in Quere- product (a higher value added). taro, Mexico. Final Project written for We recommend achieving a realistic Microeconomics for Competitiveness. intermediate goal before embarking in Harvard Business School: Boston, MA. the long term goal of producing higher Retrieved from http://www.isc.hbs.edu/ value added products. This intermediate resources/courses/moc-course-at-har-

58 Latin America Policy Journal vard/Documents/pdf/student-projects/ 20 Additional material consulted to elaborate the Queretaro_Aerospace_Cluster_2015.pdf article include: AMPIP (2010). An over- 7 Secretaria de Desarrollo Sustentable view of the Mexican industrial parks. (2010). La industria aeroespacial en el Mexican Association of Private Indus- estado de Querétaro. Gobierno del Esta- trial Parks. Center of Latin American do de Queretaro: Queretaro, Mexico. Issues (2012). The aerospace Industry 8 Ibid in Mexico: Baja California, Chihuahua, 9 Salinas, J (2014). Labor Relations and Sonora & Querétaro. The George the Development of the Aerospace Washington, University. Gobenceaux, C Industry in Mexico. University of Cali- (2013). Best practices in the aerospace fornia, Los Angeles. industry: an example to follow. Grupo 10 EY Global Markets. (2014). Megatrends INLAC. Gobenceaux, C (2013). The shaping the Mexican aerospace and aeronautic industry in Mexico: develop- defense sector. EY Knowledge. ment and potential. Mexican Federation 11 Ibid of the Aerospace Industry (FEMIA). 12 Ibid Porter, M (2003). The Economic Per- 13 Salinas, J (2014b). Mexico as an formance of Regions. Regional Studies, Aerospace Competitor? Lessons from 37.6&7, 549-578. PROMEXICO (2012) the Aerospace Cluster in Queretaro. Mapa de Ruta Tecnologico. Secretaria Universidad Autonoma de Querétaro: de Economia. Mexican Ministry of Queretaro, Mexico. Economy (2012). Industria Aeronautica 14 EY Global Markets. (2014). Megatrends en Mexico. Direccion General de shaping the Mexican aerospace and Industrias Pesadas y de Alta Tecnologia. defense sector. EY Knowledge. PROMEXICO (2012). The Aerospace 15 Ibid Sector. Secretaria de Economia. 16 Ibid PROMEXICO (2014). National Flight 17 Secretaria de Transporte y Teleco- Plan. The Mexican Aerospace Industry: municaciones (2015). Rutas punto a Route Map. Secretaria de Economia. a punto: Traza tu ruta. Mappir: Salinas, J (2013). La estrategia de Mexico, DF. Retrieve from http:// implantacion del sector aeronautico app.sct.gob.mx/sibuac_internet/ en el estado de Querétaro, Mexico. ControllerUI?action=cmdEscogeRuta Universidad Autonoma de Queretaro: 18 Garcia-Sanchez, J., Lyra, J., Olarte, Queretaro, Mexico. L., Quintana, R., and Rangel, P. Schwab, K (2014) The Global Compet- (2015). Aerospace Cluster in Quere- itiveness Report 2014-2015. The World taro, Mexico. Final Project written for Economic Forum. Microeconomics for Competitiveness. The World Bank (2014) Doing Business Harvard Business School: Boston, MA. in Mexico 2014. The World Bank. Retrieved from http://www.isc.hbs.edu/ Weiss, E & Rosenblatt, D (2010) Regional resources/courses/moc-course-at-har- Economic Growth in Mexico: Recent Evolution vard/Documents/pdf/student-projects/ and the Role of Governance. The World Queretaro_Aerospace_Cluster_2015.pdf Bank, Latin American and Caribbean Region, 19 KPMG (2012). Competitive Alterna- Agricultural and Rural Development Unit. tives Report. KPMG.

Fifth Edition | 2016 59 Article

Innovation, in the DNA of Medellin

By Ruta N Medellin

Ruta N is a corporation created to facilitate the economic development of the city of Medellin, Colombia, towards businesses intensive in science, technology, and innovation in an inclusive and sustainable way. Its main objective is to position Medellin as the most innovative city in Latin America by 2021.

60 Latin America Policy Journal In the last decade, Medellin made a Innovation for All decision that will mark its future: it One of the keys to the success of changed its economic vocation. The Ruta N lies in its ability to perme- city, known in the twentieth century as ate society and bring innovation to every corner of the city. Until a few the “Industrial Capital of Colombia,” years ago, the Corporation was in a decided to move from a traditional period of consolidation in which it industrial operation to a knowledge focused on solving the needs of the economy. Corporation Ruta N is ar- academic and business sectors, grow- ticulating these efforts and boosting a ing industries that spoke little about true ecosystem of world-class innovation. innovation. Recently, this entity began to speak to the public and to show them that they can be innovative in Medellin’s challenge was clear: move everyday life. from an industrial to a knowledge That is why, in addition to offering city in which the value of labor programs to train businessmen and is overpassed by that of ideas. entrepreneurs, funding for research After a long investigation, projects, support for the generation which included different players in of talent, technology watch, intel- business and academic sectors and lectual property, and market access, in cities like Boston, Barcelona, among other things, Ruta N has Singapore, and Madrid for referenc- been interested in generating a cul- es, the mayor of Medellin, with the ture of innovation in Medellin, a support of Public Enterprises of the cornerstone in the sophistication of city (EPM by its acronym in Spanish) knowledge ecosystems. and the telecommunications company UNE, created the Corporation Ruta Ruta N, Urban, Social and N, center for innovation and business Economic Transformation of Medellin, which aims to promote On a land that seven years ago was no business knowledge based on what is more than rubble, in front of the Uni- known as CT + i (science, technology, versity of Antioquia, the main center and innovation) to stimulate the econ- of thought in the region, now stands omy and help improve the quality of Complex Ruta N. It is an imposing life of citizens. architectural symbol that through Today, six years later, Medellin is a the strategy of business landing has benchmark for other cities looking to facilitated the establishment of 115 replicate their model and build true companies focused on health, en- innovation ecosystems. ergy, and CT+i, the three strategic

Fifth Edition | 2016 61 clusters that the city prioritized in the technology and innovation activities Science, Technology and Innovation reach 2 percent of GDP of the region. Plan. These companies, from nineteen In a city that carries entrepreneur- countries, have generated 1,786 skilled ship and innovation in the blood, Ruta jobs to date. This complex was the N has become a benchmark, the place beginning of what is now called the where that DNA is powered and where Medellinnovation District, an area of ideas move from paper to the market. 172 hectares that breathes innovation The citizens of Medellin look at and, hopefully, will generate 28,000 what they have done and project for jobs by 2021. what comes. The goal is not easy and But while the city is thinking in can even sound ambitious: that by prospective, the impact of Ruta N 2021, innovation will be the main is more than noticeable today. Only engine of economic development and in 2015, for example, the corpora- welfare of the city. Under the leader- tion accompanied more than 700 ship of Ruta N, and the partnership organizations, strengthening them on of university-enterprise-state, surely innovation skills. Ruta N also played we will achieve it. a key role in the development of 123 new innovative businesses and consolidated a network of wmart capital with 16 entities, including angel investors and investment funds, with assets of over COL$530 billion (about US$190 million), projecting Medellin as the hub of venture capital in Latin America.

The Innovative DNA These figures were possible not only because of Ruta N but thanks to the inherent innovation in the people of the city. You could say that it is genetic. This explains why more than 3,800 citizens and 2,000 organizations in the region signed the Great Pact for Innovation—Medellinnovation— which seeks to ensure that by 2018 investment in areas related to science,

62 Latin America Policy Journal Article

New Insights about Wage Inequality in Colombia

Andres Gomez-Lievano, Eduardo Lora, and Juan Tellez

Andres Gomez is a cities coordinate heterogeneous postdoctoral fellow and interdependent individuals in at the Growth large scale production processes. He Lab. He is currently holds a PhD in applied mathematics investigating the from Arizona State University as mechanisms well as a master’s degree in industrial Andres Gomez that explain the engineering and a BS in physics, both economic differences between from La Universidad de los Andes in cities in terms of their internal Bogota, Colombia. occupational and industrial mix. Juan Tellez is a He helped with the development Swiss National of atlases of economic complexity Science Foundation for Colombia, Mexico, and Peru. (SNSF) scholar Since his doctoral studies, he has and Growth Lab been part of the Cities, Scaling, fellow at the Center and Sustainability research group Juan Tellez for International at the Santa Fe Institute. There, he Development at Harvard Kennedy has been investigating the statistical School. He holds a master’s degree properties of urban aggregate output in economics (2005), a master of to extract information about how advanced studies in econometrics

Fifth Edition | 2016 63 (2008) and a PhD in econometrics Institute of Health and Medical (2014) from the University Research (2011–2013). of Geneva. He is currently Eduardo Lora is investigating the products and a senior fellow at countries’ capabilities that impact the Growth Lab. international trade, the inequality He has been chief between regions, industries, economist of the and their relationship, and the Inter-American influence of the informal sector on Eduardo Lora Development inclusive growth. He helped with Bank (2008–2012) and executive the development of the atlas of director of Fedesarrollo, Colombia economic complexity for Colombia. (1991–1996). He is vice-president His previous research focused of the Latin American and the on proposing new econometric Caribbean Economic Association methodologies that are useful in (LACEA) and editor of Vox.Lacea. the areas of development, health, org. He has a monthly column in the inequality, and social and public Colombian magazine Dinero. His policy. He was a research assistant academic and professional awards in the Applied Economics Lab of include the title of “Distinguished the University of Geneva (2006) Alumnus” of the London School and a teaching and research of Economics, where he obtained assistant in the Department of his MSc in economics in 1982. Economics of the University of He has published in numerous Geneva (2006–2012), for the academic journals and has been courses of Econometrics, Time the coordinator and main author of Series, Probability, Statistics, several books on Latin American and Mathematics. He was also development issues, most recently a Boninchi scholar and visiting More than Revenue: Taxation as researcher at McMaster University a Development Tool (2013), The in Canada (2010–2011) and he State of State Reform in Latin worked as a researcher in the French America (2008), and Beyond Facts:

64 Latin America Policy Journal Understanding Quality of Life der to take the required policy (2008). He is also the author of a measures to correct them if it is textbook of economic statistics that necessary. The Organization of Economic Co-operation and De- is now in its fourth edition (Técnicas velopment (OECD) showed that de Medición Económica, only in the poorest 10 percent of people Spanish). earn 9.6 times less than the income of the richest 10 percent in the OECD countries.1 The Credit Abstract Suisse Research Institute and The This paper presents a descriptive analysis Oxford Committee for Famine of wage inequality in Colombia by cities Relief (OXFAM) estimated that 48 percent of global wealth (net and industries and attempts to evaluate worth in financial and real assets) whether the inequality of cities relates is held by the richest 1 percent.2 to the inequality of industries. Using At current trends, it is expected the 2014 Colombian Social Security that in 2020 this proportion will data, we calculate the Gini coefficients increase to 54 percent. for cities and industries and draw com- In Latin America, income in- parisons between their distributions. equality has been decreasing since the year 2000 but levels remain Our results show that while cities are high compared to other regions of unequal in similar ways, industries the world.3 Colombia experienced differ widely in how unequal they can a period of growth from 2002 until be. Crucially, industrial composition 2012, and the 2013 Gini value of plays a significant role determining 53.5 was their lowest since 1995.4 city inequality. But even with this improvement, Colombia still occupies the 127th place out of 138 countries in terms 1. Introduction of income inequality, which shows Inequality has undoubtedly be- an enduring need for policies that come one of the crucial challenges address this issue. With the goal of the contemporary era. In gener- of generating significant advances al, the main purpose of studying toward a more equal society, the gov- the inequality phenomenon is to ernment has already implemented provide a picture of the distribution two programs: the 2014 to 2018 of income (or welfare) disparities National Development Plan (NDP), among several individuals, in or- “Todos por un nuevo país;” and the

Fifth Edition | 2016 65 2010 to 2014 NDP, “Prosperidad lyze the full population of formal para todos.” workers. Our study is the first to Nevertheless, government in- describe wage inequality using tervention has not always been the 2014 Colombian Social Se- welcomed. It has long been ar- curity data that contains all formal gued that efforts to achieve income workers in the country. While this equality may sacrifice economic dataset has a number of limitations, growth. This view has changed in particularly because in Colombia the last decade, where institutions only 30 percent of the working age such as the International Monetary population contributes to social Fund (IMF) and the World Eco- security, it has the advantage that nomic Forum (WEF) have stressed the share of labor income due to the key role of equality in order formal employment is approximate- to achieve growth. For example, ly 43 percent (as defined by the studies have found evidence that a total wages of workers with social more equal society fosters long term security over estimated total wages growth, and this factor is at least as in Colombia). As we show here, important as free trade, political access to this dataset is an oppor- institutions and macroeconomic tunity to investigate in full depth stability.5 Consequently, the reduc- the wages of all formal workers tion of inequality has become an across locations and economic important target for policymakers, activities. to the extent that they have started The literature at large has stud- to adopt the term inclusive growth. ied wage inequality in the context of Essentially, income is divided nations, considering effects due to into two sources: capital income differences in education and years of and labor income. Each contributes experience. But few studies have used differently to inequality.6 Income the fact that labor can be differentiated from capital is difficult to study in a variety of ways, and is expressed in detail because tax agencies do in a variety of economic activities. In not typically share these data for particular, industries differ in the types research purposes. However, labor of skills firms typically hire, therefore and capital income can be studied we expect different industries to display more generally using household different inequality patterns. What surveys.7 More recently, social effect does industrial composition security datasets have become in- have on the wage inequality of places? creasingly available to researchers, Our contribution lies in analyzing providing the opportunity to ana- wage inequality from this angle in

66 Latin America Policy Journal Colombia through the formal sector, contribute to it, such as education, describing the role that industries experience and gender. For example, have in determining the inequality some efforts have aimed to identify of different cities. the determinants of income inequal- The paper is organized as follows. ity focusing on regions and putting The next section presents a litera- emphasis on the level of education.14 ture review on inequality. Section 3 Additional studies have analyzed describes our database, explaining income distribution and the labor how the wage variable was calcu- market in Colombia, focusing on a lated. Section 4 is divided into two gender perspective, studying wages subsections; the first shows the results as well as capital gains.15 of our analysis of wage inequality by This paper is the first attempt to cities and the second subsection by in- draw a common picture, compar- dustries. Section 5 presents the model ing and establishing a relationship and the estimation results. The final between the income inequality dis- section draws conclusions and suggests tribution of cities and of industries further research steps. in Colombia. This could prove to be helpful and insightful for future 2. Literature Review policy-making. Colombia has mainly been focused on understanding inequality in 3. Data different regions.8, 9 We go beyond We use the Social Security database of regions and also analyze inequality Colombia as the source of our anal- by economic activity. In the United ysis on wages. This database consists States, this type of analysis has been of all the monthly contributions to more popular, thanks to a more the social security system that firms institutionalized interest in inequal- pay to their workers. Hence, our ity and public policy.10, 11 In Latin population of analysis is the set of America, some articles investigate formal workers who contributed to income inequality by industries in social security in 2014. Argentina and Mexico.12, 13 While Our database also reports the those mentioned papers consider unicipality in which each worker all sectors in their analysis, they lives and the industry in which he both focus on manufacturing. or she participates. Industries are Aside from a geographical study classifiedaccording to the International of the wage inequality in Colombia, Standard for Industrial Classification others perspectives have mostly been (ISIC Revision 3.0 classification, for centered in explaining the factors that which there are a total of 445 unique

Fifth Edition | 2016 67 four-digit industry codes. We use one percent, 0.1 percent and 0.01 per- methodology to delineate nineteen cent wages are, respectively, above metropolitan areas that consist of a COP$7,200,000, COP$19,350,000, collection of municipalities that are COP$40,000,000. The differences strongly connected in terms of com- in wages are summarized in a total muting patterns.16 This definitionis an Gini of 36.6. attempt to delineate labor markets. We consider forty-three additional 4. Descriptive Analysis municipalities as labor markets that Figure 1 shows the boxplots of the have populations above 50,000 and Gini coefficients for all cities and in- are 75 percent urban. Hence, our dustries. Both distributions differ in geographical units of analysis are several aspects. First, while both cities sixty-two cities. and industries have Gini coefficients In the year 2014, there were that are approximately symmetrical, 10,535,139 formal workers con- they are around 0.28 for cities and tributing to social security. Almost around 0.33 for industries, and this half of them show up with more difference is statistically significant than one job. Of all workers in our (t = −4.37). Second, the standard database, 92 percent live in cities. All deviation of the Gini for industries is our statistics are about these workers twice as for cities. And third, cities have living in our sixty-two cities. We ag- a tendency to have some outliers, gregate this data in a way such that, whereas industries have Gini more or for each worker-job, we calculate the less uniformly distributed (approxi- net wage earned in each year, we mately between 0.05 and 0.65). This divide by the total days of work that indicates that there is an important were reported in the social security proportion of significantly smaller system, and multiply by thirty to get Gini values for some cities. the average monthly wage of the Given that industries have much worker. The monthly mean wage higher Gini variability than cities, this was COP$1,063,638 in nominal leads us to two different scenarios: in- value. Interestingly, median wage dustries can be much more unequal was COP$616,000, corresponding to than cities but also much more equal. the Legal Monthly Minimum Wage It is interesting to note that the first (LMMW). Hence, wages in the quartile is almost the same for both formal sector are strongly clustered distributions, and then the second around the minimum wage and, in and third quartiles are higher for fact, only 40 percent of formal work- industries. The behavior is different, ers have a wage above it. The top 1 however, since there are no outliers

68 Latin America Policy Journal Gini Index 0.0 0.2 0.4 0.6 0.8 1.0 iisIndustries Cities

Figure 1: Boxplot of Gini (scaled between 0 and is not surprising. Bigger cities are 1) across cities and industries in Colombia in more unequal, and Gini indices 2014 (only formal employment). In the figure, cluster around the national value the points have been jittered in the horizontal (see Figure 1). direction to ease visualization. Table 1 and Table 2 show Gini for industries but there are some coefficients for the five least and most for cities. By taking the industries unequal cities in Colombia in 2014. boxplot as a benchmark, the most The city in Colombia that has the relevant fact that we can retain from most equal income distribution (in this figure is that cities and industries the formal sector) is Apartadó, and seem to have different inequality the most unequal distribution is patterns. It is safe to assume cities do Montelíbano. not appear to be disproportionately As we mentioned, we want to go concentrating industries that have beyond cities as the unit of analysis, similar inequalities (either on the and also study industries. Since high or low end of Gini coefficients). people do not just work in cities, but Instead, cities seem to be mixing the also in specific industries, under- inequality of industries. standing the relationship between the inequality in cities and industries 4.1 Inequality across Cities can provide insights about how to Most economic activity happens propose economic growth that can in cities, almost by definition. This be more inclusive. fact, presumably, makes cities very unequal places. Rich get richer, dif- 4.2 Inequality across Industries ferences generate segregation, and Table 3 shows the five least unequal the pattern repeats itself. The profile industries in Colombia for the year of inequality in Colombian cities 2014. The first four, which are the

Fifth Edition | 2016 69 Table 1: Least unequal cities in Colombia in 2014

Table 2: Most unequal cities in Colombia in 2014 most equal industries, belong to the equal industries in Colombia for manufacturing sector. The remaining the year 2014. This time the situation industry in this top five belongs to is different from the least unequal the wholesale and retail trade sector. industries, if we group them by sec- Notice that these aforementioned tors. Two of them belong to transport, industries have very low Gini co- storage and communications, two others efficients(less than 6). to mining and quarrying and one to Table 4 shows the five most un- financial intermediation. Notice that

Table 3: Least unequal industries in Colombia in 2014

70 Latin America Policy Journal Table 4: Most unequal industries in Colombia in 2014 no industry of these top five belongs r = 0.64, meaning that R2 = 0.41. to the manufacturing sector. It is important to emphasize that the industries’ Gini are national. 5. Do Economic Activities Affect This means that 40 percent of Urban Inequality? the variability in Gini across cities The observation that the variability of can be explained by the inequality industries’ Gini is much wider than within industries that are present the variability of cities’ Gini suggests in a place. It is worth noting that that cities may have an averaging the variation of city wage inequal- effect, reducing the inequalities ities that is not accounted for by that characterize each industry. the inequality of industries can We test this by constructing, for come from a range of other effects, each city, an average Gini from the including the inequalities between Gini of industries that are present, industries. weighted by the number of workers The converse analysis can be that are employed in each industry. done for industries. We calculate Hence, we have in this way an average of city Gini for each industry, according to , how many employees it has across cities, such that where Ec,i is the number of work- ers in city c employed in industry , i, and Ec is the total size of formal employment in city c. where Ei is the total size of formal Figure 2 plots the real Gini of employment in industry i. This cities against our prediction from weighted average Gini Yi only ex- an averaging of industries’ Gini, in plains 4 percent of the variation of the year 2014. The correlation is real Gini industries.

Fifth Edition | 2016 71 Figure 2: Plot of the Gini of cities (scaled are much more homogenous, sug- between 0 and 1) against weighted average of gesting that industries with differ- national industries’ Gini. ent income inequalities tend to be present together. This means that, 6. Conclusion geographically speaking, there is This paper aimed to provide two a tendency of places to average out contributions to the inequality industry inequality. Activities related literature in Colombia, with the to manufacturing tend to have the motivation of bringing out insight- lowest inequality, as opposed to ful elements to generate accurate financeand natural resource extraction, economic and social policies. First, which show the highest inequality we characterized the present state indices. These results, which point of inequality in the formal economy to specific industries, are a stepping in Colombia, using Gini indices for stone towards a more complete cities and industries. For this we characterization of inequality for used the 2014 Social Security data. policymakers, because it goes be- Second, we were able to elucidate yond analysis at the level of a whole information about how industry country, and recognizes the role inequality affects city inequality. of specific economic activities in Industries are very heteroge- generating income inequality in neous in terms of income inequality, different places. meaning that industries, despite Thus, we found evidence that in- sharing within Colombia similar dustrial composition matters to explain institutions, laws, and prices, differ inequality in a city. This perspective widely in the way they remunerate should therefore be included in further their workers. Cities, in contrast, research and policymaking analysis.

72 Latin America Policy Journal Further work should include a mea- Endnotes sure of inequality between industries. 1 OECD (2015). In It Together, Why One can start asking whether less Less Inequality Benefits All. OECD Publishing, Paris. URL: http://dx.doi. unequal industries can be fostered org/10.1787/9789264235120-en. without sacrificing productivity. This 2 Credit Suisse Research Institute (2014). Global opens the door to further novel ques- Wealth Databook 2014. Credit Suisse, Zurich. tions. For example, we know that 3 López-Calva, L. F. and N. Lustig (2010). De- industries differ in the products they clining Inequality in Latin America: A decade of produce and the skills they require and progress? Brookings Institution Press. SEDLAC. Socio-Economic Database for Latin cities differ in their size and economic America and the Caribbean (CEDLAS and the diversity. Consequently, what is the World Bank). effect of this interaction for income 4 World Development Indicators. The World inequality? What is the relationship Bank. of the within and between inequality 5 Berg, A. and J. D. Ostry (2011). Inequality and of industries with other traditional Unsustainable Growth: Two Sides on the Same Coin? IMF Staff discussion Note 11/08 factors such as education and gender? (Washington: International Monetary Fund). Future work will also consider 6 Piketty, T. (2014). Capital in the 21st century. informal workers, which is import- Cambridge: Harvard University. ant since inequality is a feature of 7 Pineda, J. and L. Acosta (2009). Distribución most economic activities, not just the del ingreso, género y mercado de trabajo en formal. This dimension needs more Colombia. Mercado Laboral Colombiano. Cuatro Estudios Comparativos. Organización analysis since part of the agenda for a Internacional del Trabajo, OIT, Bogotá, pp. more inclusive growth is to understand 13-57. the determinants of informality. 8 Bonilla, L. (2008). Diferencias regionales en la Studies that can probe which distribución del ingreso en Colombia. Docu- mechanisms make industries more, mentos de trabajo Sobre Economía Regional, or less, unequal can produce several No 108. Banco de la República, Centro de Estudios Económicos Regionales (CEER), insights for labor policies that address Cartagena. specific problems of income inequal- 9 Garza, N. (2008). La distribución del ingreso ity. Moreover, research that analyzes y las economías del caribe colombiano. inequality within a city and an industry Economía, gestión y desarrollo 6, 245–271 will provide understanding about an 10 Galbraith, J. and J. Hale (2014). The Evolution economic activity that is specific to of Economic Inequality in the United States, 1969-2012: Evidence from Data of Inter-indus- a place. We believe that this point of trial Earnings and Inter-regional Incomes. World view, emphasizing the differences be- Economic Review 3, 1–19. tween economic activities and places, 11 Moore, W. (2009). Income Inequality and once developed, will be of great use Industrial Composition. Public Administration to practitioners. Quarterly 33(4), 552–581.

Fifth Edition | 2016 73 12 Esquivel, G. and, C. G. (2011). The dynamics of income inequality in Mexico since Nafta. Economía 12(1), 155–188. 13 Marshall, A. (2010). Desigualdad Salarial en la Industria Argentina: Discusión de las Tenden- cias en 2003-2008. XLV Reunión anual de la Asociación Argentina de Economía Política, Buenos Aires. 14 Bonilla, L. (2009). Causas de las diferencias regionales en la distribución del ingreso en Co- lombia, un ejercicio de micro-descomposición. Documentos de trabajo Sobre Economía Regional, No 111. Banco de la República, Centro de Estudios Económicos Regionales (CEER), Cartagena. 15 Pineda, J. and L. Acosta (2009).Ibíd. 16 Duranton, G. (2013). Delineating metropolitan areas: Measuring spatial labor market networks through com- muting patters. Mimeographed, Wharton School, University of Pennsylvania.

74 Latin America Policy Journal MALCOLM WIENER CENTER FOR SOCIAL POLICY

The Malcolm Wiener Center is a vibrant intellectual community of faculty, masters and PhD students, researchers, and administrative staff striving to improve public policy and practice in the areas of health care, human services, criminal justice, inequality, education, and labor.

The work of the center draws on the worlds of scholarship, policy, and practice to address pressing questions by: l carrying out research on important policy issues affecting the lives of those most vulnerable and needy l providing professional education for those in the world of practice l educating the next generation of academics and policy scholars l ensuring that research and education are closely tied to and draw from politics and practice in the field l developing working partnerships with the broader policy community For more than two decades the Malcolm Wiener Center has been an influential voice in domestic policy through faculty work on community policing, welfare reform, youth violence, education, urban poverty, youth and the low-wage labor market, American Indian economic and social development, and medical error rates.

Our research portfolio is both broad and deep, spanning many academic disciplines, encompassing traditional research as well as executive sessions, case-based research and action research, and employing a variety of research methodologies. It is inspired by our focus on bettering the lives of our fellow citizens, particularly those who are most vulnerable and needy.

WEB SITE: www.hks.harvard.edu/centers/wiener Article

The Case of Oil Income Management in Venezuela: Industry Investment versus Social Expenditure

By Diego Guerrero and Armando Romero1

Diego Guerrero is a researcher Abstract at the International Center for This article explores a tradeoff be- Energy and the Environment of tween industry investment and social Instituto de Estudios Superiores expenditure in oil rent allocation in de Administración, and he is an Venezuela during the oil price boom analyst at ODH Consulting Group. from 2006 to 2014. We propose an He is a professor of public policy approach based on the clash between and development at Universidad capital-intensive industry needs and capital-deficient country needs in an Metropolitana. He holds a BA in institutional framework that restrains liberal studies from Universidad private sector involvement and enhances Metropolitana. NOC participation. Data suggest that Armando Romero is researcher policy makers favored discretional social at the International Center of expenditure, running into investment Energy and Environment of deficit and industry decay. Since capital Instituto de Estudios Superiores de deficiencies persisted, developmental goals and further oil specialization Administración. He holds a BA in were not accomplished. economics from the University of Carabobo, Venezuela.

76 Latin America Policy Journal Introduction in the hands of the State involve the This piece aims to briefly examine the disposal of public rents, which contours decision-making process of oil rent political and economic decisions. management in Venezuela during The capture of rents from natural the last decade. It describes the clash resources is a source of conflict among between the national oil industry the State and private agents. State investment needs and the country’s property of oil shapes the economic capital deficiencies, in the presence decision-making process of rent allo- of abundant resources and under an cation, which faces distributive and institutional framework that limits rent-seeking pressures; constituting a private sector involvement. fundamental challenge for developing First, we expose our approach to oil countries with weak institutions. The income management in Venezuela’s state faces immediate social demands institutional arrangement. Second, as well as government opportunities to we describe the magnitude and com- obtain political benefits from patron- position of recent oil investments, age, which elevates the opportunity comparing it with the original business cost of decision-making. Besides, the plan goals. Third, we identify rent investment requirements of a capi- redistribution schemes through social tal-intensive oil industry compete with programs, both budget and off-budget. the funding needs of a capital-deficient Finally, we contrast capital and social country. expenditures as a tradeoff between Venezuela exemplifies these dy- these rent allocation strategies. namics. State-ownership and private exploitation of resources was the orig- Oil rent allocation and inal rent management scheme since institutional framework: How to oil discovery; however the institutional manage rents? framework mutated over time. Na- The relationship between natural tionalization of the oil industry in resources and long-term economic 1975 fostered state participation on outcomes is widely explored in the income generation process through literature.2 Oil is an interesting case the newly born National Oil Com- due to high rents and volatile prices. pany (NOC), Petróleos de Venezuela Since the 1960s, petro-states have Sociedad Anónima (PDVSA). increased their share of oil business After a short liberalization cycle, the rents in most regions. This extended institutional framework was reverted in the State property of resources and a 2003. The government limited private rent distribution model around the sector involvement in oil investments, globe. Moreover, abundant resources created off-budget mechanisms and

Fifth Edition | 2016 77 gave the NOC and itself a discretionary ucts, and stands as a potential top mandate on rent distribution. Follow- investment receiver in upstream and ing these reforms, PDVSA has been downstream projects. Nonetheless, responsible for most capital expendi- declining production, financial deteri- ture in the industry. The NOC was oration among other operating trends also converted into an executioner of in the industry, combined with the central government international and ongoing macroeconomic crisis and social policies, managing the operation political instability have translated and financing of newly created social into some disappointing outcomes programs (such as housing, subsidized and challenges to attract investment food, etc.). in the aftermath of the price boom. As a consequence of this institutional Venezuela exports oil since 1917 arrangement, the policy preferences of and has developed an institutional the Central Government and the high framework that progressively increased barriers to private sector entry shape the state’s industry share. Resources the process of resource allocation over were nationalized and PDVSA (the two alternatives: industry investment NOC) was created in 1975 and 1976, and social expenditure. respectively. The NOC has played a key role on industry outcomes since New PDVSA, new policies the oil sector nationalization. Although Recent booming commodities prices the government directed energy policy improved external inflows to natural and appropriated rents, PDVSA man- resources exporters, mostly since 2004. aged the hydrocarbons business with Higher export revenues implied new some independence. The company external income transfers mainly to conducted investment and R&D in these States and, hence, additional the sector, while revenues were trans- pressures to manage rents into the ferred to the treasury for government domestic policy arena. Venezuelan to allocate rents. case is remarkable in this context: U.S. During the 1990s, a slump in oil Energy Information Administration prices prompted a new investment estimated a total of USD$582 billion cycle and policy-makers established in net oil exports revenue from 2005 an incentive scheme for International to 2014, i.e., USD$2.182 per capita Oil Companies (IOC) to develop annual average.3 abundant reservoirs. However, low Venezuela accounts for the largest rents and the subsequent drop in in- oil reserves in the world (17 percent come transfers inspired criticism from out of world total), 96 percent of its resources nationalists suggesting that exports are crude oil and oil prod- IOCs and PDVSA were appropriating

78 Latin America Policy Journal revenues instead of the population. cover PDVSA’s expenses in foreign Pressures for rent redistribution spurred currency, and as transfers to Fonden. major changes of the institutional Additionally, the NOC was re- framework during the first years of formed under the new revenue man- the XXI Century. agement framework implementation. The National Assembly (Venezue- The government replaced the company lan Parliament) approved in 2005 key Directive Board with managers ideo- reforms to the legal framework regu- logically/politically close to President lating the management of oil revenue. Hugo Chávez. The Endogenous Development Fund Following a national strike in 2003, (Fonden) was then created as a major control of the NOC was assured by tool to finance central government firing over 18,000 employees, mostly policies. The reforms passed by the managers in the financial and human Assembly had two objectives: first, to resources departments. Meanwhile, establish a non-disclosed methodology legislation regarding the exploitation for the Central Bank to assess the “suf- of 260 billion barrels of heavy and ficient” level of International Reserves extra-heavy proved oil reserves in the (IIRR). Second, to allow PDVSA to Orinoco Oil Belt (OOB) was amended. retain foreign currency after IIRR were Government share of oil rents was above the pre-established level. Finally, increased with additional royalties, excess reserves were assigned by the taxes and a new joint venture structure, NOC and the central government to which extend the NOC’s share in the

Figure 1. Social expenditure and oil industry investment, 2006–2014

Fifth Edition | 2016 79 OOB. Also, new fiscal and financial ers were aware of this situation. Two burdens were added to PDVSA, which investment plans named Oil Sowing became also responsible for most of Plan (OSP) shaped the business invest- investment in the sector.4 ment profile since 2006. Both plans Furthermore, a systematic approach added up to USD$334 billion in oil was implemented to maximize rents industry investment projects and other transferred to Fonden: every year unrelated businesses.5 OOB potential the oil price was underestimated by in heavy and extra-heavy crude produc- the Finance Ministry, diminishing tion backed both investment schemes. constitutionally enforced transfers to In the OSP, a quarter of total capital states and municipalities. Fonden is expenditures were initially planned managed by the President without to be allocated on this reservoir and pre-approval or budgetary control new mixed companies and associated from the Legislative branch, thus ex- projects were created, allowing private cess revenues that resulted from the sector participation. In spite of that, underestimation of prices generated PDVSA assumed more than 70 percent a large concentration of resources for of expenses, setting hard constraints discretionary management. on private contributions. These reforms shaped the allocation of Beginning in 2006, the first OSP rents to alternative purposes, including set out ambitious goals for oil and investments pertaining the oil industry. gas (O&G) development until 2012 The government allocated resources with over USD$77 billion in expected prioritizing social expenditure over investments. The business plan was oil investment, as illustrated in Figure announced in the midst of favorable 1. This allocation constrained the oil global economic context and proposed industry expansion and privileged to double O&G production, local the implementation of social policies and international refining capacity without check and balances. and hydrocarbon exports. In spite of good prospects, the plan failed to Oil industry investment scope and fulfill expected results. In 2012, the allocation: The oil sowing failure industry underperformed, oil output In a context of growing demand and and exports followed a declining trend, high prices, capital intensive oil indus- ending down 3 MBD (million barrels try needs high investments to achieve per day) and 2.6 MBD, respectively. long term growth. Low operational Refining capacity remained virtually costs of Venezuelan fields make the unchanged and gas production did case for attractive conditions for inves- not reach half of the targeted level. tors to fulfill capital needs. Policymak- In 2012, a second plan more than

80 Latin America Policy Journal Table 1. Oil sowing plans goals and achievements tripled the first scheme’s projections industry since PDVSA´s reform also of expected investment, setting total determined current trends in the oil disbursements near USD$257 bil- sector.7 Centralized procurement pro- lion; this program established more cedures, declining cash flows due to challenging goals until 2019.6 Many subsidized sales to Latin American and investment projects were expanded Caribbean nations, loan repayments and some others were created, non- to China, growing liabilities and in- oil business accounted for USD$15 creasing payroll have led to efficiency billion or 5 percent of total planned decay. Additionally, the investment expenditures of six years, according schedule has not been accomplished, to PDVSA’s management reports. As revealing a gap in resource allocation of the end of 2014, the plan didn’t with respect to targets. not show any advances on its targets. Since 2006, investment in the oil in- On the contrary, O&G production dustry has been slower than projected. continued to diminish and refining Despite high revenues, real investment capacity remained stagnant. underperformed planned investment. The main reason behind lack of Compared to reported projections from completion in business goals lies on 2009, the real investment from 2010 insufficient effective investment and to 2014 was on average USD$20.39 misallocation of resources. Efficiency billion lower per year. and managerial issues affecting the

Fifth Edition | 2016 81 Figure 2. PDVSA projected (bars) and real (line) tures. Accounting for these items, the investment, 2009–2019 size and scope of industry investment Moreover, taking into account over the last decade decreased.8 the total investment composition, In the midst of an historical the quality and destination of dis- opportunity, the oil sector failed bursements becomes relevant. As to accomplish expansion projects. investment grew approximately from In spite of competitive and attrac- USD$6 billion in 2003 to USD$25 tive investment conditions and an billion in 2014, investment targets windfall in process, total investment within the capital expenditure ag- effectively decreased as resources got gregate changed, pivoting to non- diverted toward social expenditure. As oil destinations. During this period, a consequence, the industry reduced exploration and production, refining, its production, capacity and exports. gas and other oil-related expenses increased sharply, most evidently in Social expenditure and new associated gas production and redistributive policies OOB exploration and production, Venezuelan law states that public accounting for USD$160 billion expenditure must be pre-approved in total investments. Nonetheless, each year by the National Assembly. approximately USD$30 billion were Nevertheless, PDVSA managed over apportioned to recently created USD$116.8 billion during the de- non-oil subsidiaries and other expendi- cade, without supervision by additional

82 Latin America Policy Journal Figure 3. Oil sector investment disbursements to Fonden managed directly by the composition, 2003–2004 Presidency; and (3) the NOC’s off-bud- get expenses to finance social programs. branches of the government during Figure 4 provides estimates of total the price boom. Several reforms were contributions using budgetary and implemented to increase the state’s off-budget mechanisms during the share of rents, as a Windfall Oil Price period from 2006 to 2014. The former Tax which increased government share totals USD$217 billion (65 percent). as prices were above USD$80 per On the other hand, net transfers to barrel. These rents represent contribu- Fonden sum up to USD$59.2 bil- tions to the government made by the lion (18 percent) and social develop- NOC to finance policies. Off-budget ment programs managed directly by expenditure by the NOC averaged the NOC aggregates to USD$57.6 25.2 percent of the official budget from billion (17 percent). 2006 to 2014. Both PDVSA, through Moreover, there are accountabil- subsidiaries, and Fonden financed the ity blackouts on off-budget contribu- Administration’s most popular social tions: while PDVSA’s financial state- programs, named Social Missions by ments report USD$116.8 billion, its former president Hugo Chávez. Total management reports estimated social contributions to the Executive followed expenditure in USD$221.7 billion.9 several strategies. This section addresses This difference can be explained three: (1) budgetary contributions such by USD$84 billion over-reported to as royalties, income tax and further social development programs, while taxes; (2) off-budget contributions transfers to Fonden seem overestimated

Fifth Edition | 2016 83 Figure 4. PDVSA´s contributions to the Republic tional alliances. The Executive used by USD$19 billion. the NOC to establish international However, the management report agreements with China and several provides useful insights. We observe Caribbean nations. The former re- nine categories for social expenditure fers to the Joint Chinese-Venezuelan programs.10 The distribution of these Fund. This fund allowed the country expenses is illustrated in Figure 5. Two to collect in advance income, compro- issues arise to assess these programs: mising the NOC to supply oil barrels the magnitude of expenditure and unavailability of information regarding the success or failure of its objectives. Social development expenditure features discretionary management and lacks accountability. This is rel- evant, considering than 51 percent of USD$221 billion were allocated into funds with unknown destination from 2006 to 2014. Meanwhile, social investment, including education and health programs, accounts for 24 per- cent of reported social expenditure. On the other hand, PDVSA played Figure 5. Social expenditure allocation, from an additional roles financing interna- 2006 to 2014

84 Latin America Policy Journal to the counterpart. The value of bar- and price controls, high inflation, rels shipped under this agreement is rising fiscal deficits and an overval- up to USD$74 billion during period ued currency can explain most of the from 2006 to 2014. The latter agree- economic deterioration the country ment is Petrocaribe, which includes faces. Meanwhile, poverty increased several Caribbean and Latin-American to 48 percent (10.8 percentage points countries. It establishes supply quotas since 2006).14 and a low cost long-term financing External revenues from oil price scheme. In the same period, Petroca- hikes were managed in a discretionary ribe adds up to USD$28.5 billion in manner by the Executive over more financed barrels.11 than a decade. Political patronage and Finally, the PDVSA financed pressures to redistribute rents were fol- Venezuelan public institutions and lowed by social development programs. companies by near USD$34.9 billion The Central Government pretended to during 2006 and 2014 through notes brand PDVSA’s expenditure as social and accounts receivable instruments.12 or human capital investment, yet no This includes financing facilities for conclusive evidence on the impact the Armed Forces, the national electric of such expenditure has been ever company, the national petrochemical presented. Moreover, the industry’s firm, the national steel company, etc. downward operational and financial All these direct and indirect finan- trends, combined with non-oil business cial contribution mechanisms increase expenses, harmed investments quality PDVSA’s opportunity cost of resource and scope. As a result, capital expen- allocation. Poor accountability and ditures were not disbursed as expected discretionary redistribution of resourc- and the oil industry underperformed es hinder industry investment while at all business plan goals. incentivizing the allocation of rents Pressures to distribute oil rents on to social programs. social expenditure posed two major issues to policy makers, which also Final remarks: industry investment planned to expand industry capacity versus social expenditures in ambitious plans. Industry require- Venezuela suffers a crisis after a sharp ments were neglected while rents were decline in oil prices, with roots trace- allocated into redistributive programs able before this event.13 The nation without any considerations for the currently faces a severe crunch of productivity of the NOC. Under this foreign exchange liquidity, mainly framework, capital deficiencies persist- due to low capacity to increase oil ed, denying both diversification and and non-oil exports. Foreign exchange oil specialization. In the wake of the

Fifth Edition | 2016 85 largest windfall of its modern history, biblioteca/readdoc.tpl.html&newsid_obj_ the country and its oil industry lost a id=5319&newsid_temas=111>. 9 According to PDVSA’s management and historical development opportunity. operational report, this difference is justified because the management report disregards accounting rules regarding the fiscal peri- Endnotes ods of expenses and assets value. Hence, 1 International Center for Energy and Envi- we estimate contributions from financial ronment, Instituto de Estudios Superiores statements. de Administración (CIEA-IESA). Phone: 10 Education policies include objectives such +582125554513. [email protected]. as to provide adults with high school edu- ve, [email protected]. cation, promote college education in newly 2 Vid. Karl, Terry L. The Paradox of Plenty: created Government universities and foster Oil Booms and Petro-States. England: Uni- sports. Health policies refer to establish versity of California Press, 1997; Kolstad, I. outpatient clinics on poor communities & Wiig, A. It’s the rent, stupid! The political and low-cost surgeries for visual disabilities. economy of the resource curse. Energy Social policies are those that provide low- Policy, vol. 37, pp. 5317-5325, 2009; and Ro- cost food supplies, pensions and benefits to dríguez, Luis Roberto and Rodríguez, Pedro old-age population, pregnant women and Luis. El petróleo como instrumento para mothers, low-cost painting to low-income el progreso: una nueva relación Ciudada- neighborhoods, and some not-specified no-Estado-Petróleo. Caracas: IESA, 2012. expenses. Energy policies include subsidies 3 U.S. Energy Information Adminis- to substitute light bulbs, enhance automo- tration. Opec Revenues Fact Sheet, bile gas infrastructure, and increase electric 2015. Available at . infrastructure. Agriculture was promoted 4 Corrales, Javier and Pendolf, Michael. through Agro-Venezuela Mission and Dragon in the tropics: Hugo Chávez and Agriculture Projects. Unknown policies are the Political Economy of Revolution in those where amounts allocated to previous Venezuela. Washington, D.C.: Brookings objectives cannot be inferred, although Institution Press, 2011. their goal is to support social, educational, 5 PDVSA Management Reports, various years. health and production. Fonden and China 6 PDVSA Management Report, 2012. Available at are expenses managed or directed towards http://www.pdvsa.com/index.php?tpl=interface. investment through these Funds. sp/design/biblioteca/readdoc.tpl.html&news- 11 Additionally, the Republic summed id_obj_id=10919&newsid_temas=111>. USD$77 billion in accounts receivable with 7 Vid. Monaldi, Francisco. The impact of PDVSA from 2010 to 2014. The purpose of the decline in oil prices on the economics, this debt is unclear. We are inclined to think politics and oil industry of Venezuela. New that some of this central government debt York: Columbia SIPA, 2015. represents Chinese Fund and Petro- 8 PDVSA Annual Management Reports, Caribe schemes. During 2011, PDVSA from 2007 to 2014. Available at

86 Latin America Policy Journal royalties. However, from 2012 onwards PDVSA suggest that part of these com- promises are accounts receivable. This is coherent with an expansion of the Republic debt to PDVSA near the value of financed barrels since 2010. Vid. PDVSA Financial Statements. 2014, 2013, 2012, 2011, 2010, 2009, 2008 and 2007. Available at . 12 Vid. PDVSA’s Financial Statements. 2014, 2013, 2012, 2011, 2010, 2009, 2008, 2007. Available at . 13 Vid. Hausmann, R. & Rodriguez, F. (eds). Venezuela before Chávez: Anatomy of an Economic Collapse. Pennsylvania, The Pennsylvania State University, 2014. 14 UCAB, USB & UCV. Encuesta sobre Condiciones de Vida Venezuela, 2014. Caracas: IIES-UCAB, 2014. Available at < http://www.rectorado.usb.ve/vida/sites/ default/files/pobreza.pdf>.

Fifth Edition | 2016 87 Article

Colombia: Growth after the Commodities Boom?

By Liliana Olarte, Rodrigo Quintana, Lenin H. Balza, and Juan Espinosa Balbuena

Liliana Olarte (MPA/ID 2015) is Colombia. Liliana holds a bachelor a consultant in the Development of industrial engineering and Effectiveness Unit of the Inter- a bachelor of economics from American Investment Corporation Universidad de Los Andes. (IIC) in Washington, DC, Rodrigo Quintana has been a since July 2015. She works on consultant in the Labor Markets the methodological design and Social Security Unit of the and implementation of impact Inter-American Development Bank evaluations on IIC’s projects. (IADB) in Brazil since September Additionally, she works with 2015. Before joining the IADB, investment officers contributing Rodrigo pursued a master’s in public to the design and structuring of administration and international IIC’s investment operations from a development at Harvard University, development perspective. Before where he worked on topics related completing the MPA/ID at Harvard to the insertion of vulnerable groups she worked at the World Bank in into the labor market, diagnostics Indonesia, the Inter-American of inclusive growth, cluster analysis, Development Bank in Washington, and agricultural productivity. DC, and the Center of Studies Rodrigo also worked in the social for Economic Development in protection units of the World

88 Latin America Policy Journal Food Programme in Pakistan and in the Unit of Economic Productivity Mozambique and of the World in the Mexican Secretariat of Bank in Washington, DC. He also Finance. He is working in the studied an undergraduate degree design of public policies to promote in economics and international productivity and growth. Before development at McGill University. completing the MPA/ID at Harvard Lenin H. Balza is an economist at he worked as a senior analyst the Infrastructure and Environment at Evercore Partners analyzing Department at the Inter-American monetary and fiscal policy. Juan Development Bank (IADB). holds a bachelor of economics from Previously, he workedas a research the Instituto Tecnologico Autonomo fellow at the Energy Division of de Mexico. the IADB, as a junior research economist at Santander Investment Abstract Group, and as a consultant at the From 2004 to 2014, Colombia’s aver- Andean Development Corporation. age GDP per capita growth rate was Lenin holds a master’s degree in 3.61 percent. If that rate were to be economic development (MPA/ID) maintained, Colombia would take at the John F. Kennedy School of 71 years to catch Norway’s current Government at Harvard University. GDP per capita, the 2nd highest in the world. Historically, the country’s growth He also holds a bachelor’s degree has been based on natural resources in economics from Universidad which represent nearly 80 percent of Central de Venezuela and has total exports. However, with commodity post-graduate studies in economics prices declining, the question is whether from Torcuato Di Tella University. natural resources will continue to be the Lenin’s areas of interest and research base to build upon. This paper analyzes includes development strategies, Colombia’s binding constraint to long- energy economics, and economic term growth, taking Norte de Santander, development in resource-rich a bordering state with Venezuela, as a countries.Juan Espinosa (MPA/ID case study. 2015) is a Mexican national working

Fifth Edition | 2016 89 Key Words: economic complexity, commodity exposure to the armed conflict, and boom, growth diagnostic, Colombia their geographical dependence on JEL Classification Numbers: F13, F14, F16 neighboring countries. Norte de Santander (NdS hereaf- Introduction ter), a bordering state with Venezuela, In Latin America, commodity exporters is the vivid mirror of Colombia. Its were blessed with the commodity economic path, housing the main boom price. And Colombia was not customs with Venezuela, resembles the the exception. Economic growth was behavior of the country in economic buoyant in the last decade hovering terms (see Figure 5). Unlike the rest, around 4.81 percent1 accompanied by a NdS faced a point of inflection in strong decline in poverty rates from 50 2008. After a robust surge in 2005 percent to 33 percent.2 Also, the terms propelled in part by a fictitious demand of trade of the country have improved from Venezuela following a scar- (see Figure 1), driving upward the city wave, its compound annual production of commodities such as oil growth rate deaccelerated from 4.5 (see Figure 2) and minerals. Taking percent to 2.6 percent when both advantage of the boom, Colombia countries broke commercial ties in has evolved to become one of the 2008 (see Figure 6). This decline most solid economies in the region. was mainly driven by a collapse in The macroeconomic fundamentals transportation, mining, construction attest to the government commitment and manufacturing (see Figure 7). to sound fiscal and monetary poli- As a result, the unemployment rate cies as well as the favorable internal went up 1.6 percentage points (pp) environment. while in Colombia it declined 1.4 pp However, not everything has been from 2008 to 2013. Also, in 2010, the as rosy. Figures at the national level informality rate increased by 7 pp while hide great heterogeneity within the it dropped by 3 pp in the country.3 country. The inequality thermom- Despite a strong past and resilient eters of the country - the Gini and present, the future for Colombia is Theil coefficients - have been very uncertain. With oil prices free falling irregular since 1995 (see Figure 3) leading South American economies with strong cross-regional variation close to a full stop, a question arises (see Figure 4). This variation may as to how to make growth sustainable be in part explained by a diverse ge- in Colombia. More specifically, with ography, different endowments that the Venezuelan economy on critical make them more or less vulnerable conditions, the question in NdS is to commodity booms, the differential how to make it grow post-Venezuela.

90 Latin America Policy Journal Methodology This paper presents the first effort to identify the binding constraint to growth for Colombia at the regional level, taking Norte de Santander, a bordering state with Venezuela, as a case study, employing the growth Figure 1 diagnostic approach that Hausmann, Rodrik and Velasco developed.4 This method follows a decision tree (see Figure 8) to identify the most plausible explanation for the lack of growth in a country. The branches of the tree, to be tracked from top to bottom and left to right, maps out the main drivers of growth, from finance and infrastructure to Figure 2 education and security. We follow this tree in the subsequent sections of this article although we only high- light the most salient issues. The full diagnostic report is available upon request. The first step is to determine where among the primary branches lies the main constraint. To this end, we found that after 2001 real in- Figure 3 terest rates are not correlated with investment. While the real interest rates oscillated from 4 to 14 percent, the total investment as a percent- age of GDP increased from 16 to 25 percent almost constantly (see Fig- ure 9). This evidence leads us to discard the high cost of international finance as the binding constraint to growth and, therefore, discard the Figure 4 right side of the decision tree.

Fifth Edition | 2016 91 The Colombian Conflict: A Long- Standing Obstacle to Economic, Political, and Social Stability One of the most cited reasons for the lack of growth of the country is the internal conflict unfolding since 1964. The country has endured a war between Figure 5 the government, paramilitary groups, guerrillas and drug landlords. The con- flict, however, has not been uniform. While some states have experienced little to no conflict, NdS experienced homicide rates, a proxy for conflict, which were among the highest in the country in 2006. Fortunately, this rate declined in 2013 converging to the national average (see Figure 10). President Juan Manuel Santos has Figure 6 stated that signing a peace agreement with guerrilla groups would allow the GDP to grow two percentage points more.5 But while in previous decades the conflict acted as a constraint to growth, it is currently not binding. To start, the severity of the conflict has sharply diminished over the years. In 1999, Colombia had the highest homicide rate in the region with a rate of 62.3 per Figure 7 100,000 inhabitants. By 2013, this rate halved to 30.8. Furthermore, changes Education and Employment: in the homicide rate do not seem to Significant Improvements be strongly correlated with changes in in Quantity with Gaps in Quality non-oil Foreign Direct Investment (FDI) When the internal conflict is not to (see Figure 11). Also, for NdS, it is also blame, education usually takes its unlikely to be the binding constraint to place. Education has traditionally been growth. Other departments with much cited as one of the reasons why the higher homicide rates have much higher country does not progress. Although per capita GDP (see Figure 12). it may be a constraint to growth, is it

92 Latin America Policy Journal binding? When measuring education Figure 8 by the average number of completed years, Colombia lies above the Latin level of PISA scores (see Figure 14). American average. Also, for its given This result would mean that the coun- level of years of education, there are try is already doing ‘a lot more than other countries with a much higher expected with what it has. However, level of GDP per capita, like Uruguay drawing conclusions about educational and Mexico (see Figure 13). In parallel, quality based on PISA scores can be the estimated returns to education misleading. Up to now, only OECD coefficient is around 0.12 for Colombia countries plus a handful of others take and 0.10 for Norte de Santander which PISA tests, making results potentially are not high relative to what is found biased due to the small sample size. in the literature.6 This bias together with the country’s However, when we analyze the poor growth performance given its quality of education, the results change. educational level (measured in years) Colombia had a poor performance suggests that education is unlikely to in the Programme for International be the binding constraint to growth Student Assessment (PISA) tests: the for Colombia and NdS. country ranked 62, 60 and 57 in Math, If education is not the culprit, could Science and Reading tests respectively, it be the labor market? Colombia’s la- out of a sample of 65 countries.7 Addi- bor force participation rates are among tionally, the country exhibits a slightly the highest in the region (see Figure higher GDP per capita for its given 15). Likewise, the labor force partici-

Fifth Edition | 2016 93 pation rate in NdS is convergent to the national average. Also, unemployment seems to be decreasing dramatically reaching 7.84 percent in 2014, one of the lowest points in many decades.8 In the case of NdS however, the unem- Figure 9 ployment rate is double the national rate at 14.2 percent.9 Nevertheless, we argue that this is a symptom that the economy in NdS lacks the capability to generate jobs rather than a constraint. High participation rates conceal high informality rates. As in many other Latin American countries, informality is high in Colombia (almost 50 per- cent). While informality is certainly a constraint for developing better jobs, Figure 10 worker productivity, and product di- versification, it is unlikely to be the binding constraint to long-term growth. Our results show that informality is apparently caused by the labor tax, and hence it is more likely to be a symptom of a bigger problem rather than a constraint (see Figure 16). This may not be the case for Norte the Santander whose informality rates Figure 11 are by far the highest in Colombia (see Figure 17). Unlike the rest of the country, which exhibited decreasing informality rates since 2009, the in- formality rate in NdS spiked in 2009 only declining as of 2014. However, like in Colombia, informality seems to be a symptom rather than a constraint. With the deteriorating economic and social context in Venezuela, informal activities such as illegal exchange Figure 12

94 Latin America Policy Journal rate and oil smuggling became more profitable and attracted more labor while exporting firms shut down after Venezuela and Colombia broke their commercial ties in 2008.

Poor Geography and Bad Figure 13 Infrastructure: A Speed Bump along the Way? One of the most popular cited reasons of why Colombia is not developed is its geography. Poor road accessibility translates into twice the freight costs from the interior of the country to the coast ($30 a ton) compared to freight costs from the coast to ports in Asia 10 Also, the rough geography Figure 14 ($15 a ton). and poor roads of Colombia place the country below the regional average of vehicles per km of roads (see Figure 18) and the second-fewest vehicles per person in South America.11 However, poor roads have not de- terred goods from being transported in good and bad times of GDP per capita growth (see Figure 19). Nor have they stopped GDP from growing Figure 15 when a natural shock—in this case, one of the largest floodings in 2008 in the last decades—deteriorated the road network significantly (see Figure 20). Even when correcting for com- mitting variables and reverse causality, exports do not seem to be determined by transport costs in Colombia when compared to other countries.12 So it does not appear to be the constraint Figure 16 at the national level.

Fifth Edition | 2016 95 When zoomed into Norte de Santander, neither the national av- erage of infrastructure index nor the transport costs seem to be associated strongly with GDP (see Figure 21) or exports (see Figure 22) respectively. Figure 17 Moreover, primary and secondary roads (see Figure 23) are improving and expanding, specially to connect NdS to the Atlántico. This enhance- ment is translated into relatively fewer commuting time and mild transport costs from Norte de Santander to ports in the Atlantic compared to large cities like Bogotá (see Table 1). This evidence leads us to believe Figure 18 that despite it being a challenge, ge- ography and infrastructure seem not to be a binding constraint for Colom- bia and Norte de Santander. Despite losing ground when Venezuela broke relations with Colombia, some firms in NdS started to divert their goods through the Atlantic Ocean. This fact suggests that infrastructure while playing a role since firms now incur in transport costs not faced before, does Figure 19 not seem to bind.

Production and Exports: Will Colombia’s Natural Resources Continue to Be a Base to Build Upon? Colombia, as many of its Latin Amer- ican peers, is recognized worldwide as a natural resource exporter. Oil has become its main export over time. In 1996, petroleum and related products Figure 20

96 Latin America Policy Journal represented around 34 percent of total exports, neck-to-neck with other natural resources representing 28.22 percent of total exports.13 By 2013 petroleum and related products became 56 per- cent of total exports, while the rest of Figure 21 natural resources only 21.18 percent. Manufactures, on the other hand, have always been unimportant. In 1996, these represented 26.44 percent of total exports, while in 2013 they lost ground to become only 15.43 percent of total exports (see Figure 24).14 Although Colombia is deemed an exporter of natural resources, it trades relatively more complex products— Figure 22 textiles, cars, machinery and electrical equipment—to its neighbors. For example, in 2007 exports of machin- ery and electronics accounted for 3 percent of total exports, out of which around 40 percent were exported to Venezuela (see Figure 25 and Table 2). However, commercial tensions with neighbors such as Ecuador and Venezuela have been commonplace. In 2008 Colombia broke trade ties Figure 23 with Venezuela for political reasons, permanently affecting the export of relatively more complex products. Before 2008, Venezuela was the sec- ond most important trading partner of Colombia after the US (see Figure 26). It was a key destination for textiles (53 percent of total exports), cars (78 percent) and machinery and electrical equipment (40 percent). Not surpris- Figure 24 ingly, after 2008, exports of textiles

Fifth Edition | 2016 97 Figure 25 and cars shrunk to 61 percent and The decline in exports was accom- 50 percent of their pre-2008 values panied by a collapse in the number respectively (see Table 2). of exporting firms, which contracted In 2004, before the GDP of NdS considerably in NdS from 2,028 to 461 started accelerating, the state was from 2008 to 2010 (see Figure 30). relatively competitive in footwear Exporting firms of textiles, footwear and and textiles; not so much in skins. skins were - unsurprisingly - affected, After commercial relations spiked especially in the latter where firms with Venezuela, NdS became the almost disappeared (see Figure 31). country’s largest footwear exporter, the second largest in skins the third Concluding Remarks largest in textiles. After relations be- On 11 December 2015, the price of tween Colombia and Venezuela broke WTI oil reached USD$37.93/barrel, in 2008, however, NdS lost market down nearly 40 percent from what relative to its closest competitors. it was a year ago.15 And it seems to In 2010, it was relegated in terms of be worsening. This situation poses export share of footwear and textiles a threat to the traditional source of and was not among the top exporting export income and public expenditure states in skins anymore. By 2013, it of Colombia. In light of declining oil was no longer among the top exporters prices, the Colombian government of textiles either and lost a position in has recently introduced important footwear (see Figures 27-29). budget cuts.

98 Latin America Policy Journal Table 1

This scenario, however, may serve It has been shown that a country’s as a unique opportunity for the country economic complexity index, is a strong to increase its non-energy and mining predictor for future GDP per capita related exports. Colombia has invested growth.16 Given that economic com- a lot on signing commercial agreements plexity index is driven by the relative with the idea that the country will complexity of a country’s exports, Co- enter the global value chain of large lombia’s long-term growth strategy companies. However, our hypothesis is should focus on acting on new export that the binding constraint to sustained opportunities and removing obstacles growth lies in the poor track record of to success. Up to now, however, this the country in coordinating efforts to does not seem to be the happening. thread value chains internally. First, Colombia’s tax system is asym-

Figure 26

Fifth Edition | 2016 99 metric and burdensome, hindering Figure 27 production capabilities: according and the National System for Competi- to Fedesarrollo, the manufacturing tivity and Innovation are clear examples. sector alone exhibits an effective tax But the country lacks a clear value rate that ranges between 61.9 percent proposition internally. While countries and 72.3 percent while mining exhibits as Mexico have built an aggressive pol- a tax rate ranging between 39.1 percent icy to create partnerships with foreign and 43.2 percent.17 The low-quality firms to grow local industries, which education system together with a high are in line with the value proposition and unattended informality rate act of the country, Colombia still navigates as deterrents to skill investment and without a north. On one hand, Mexico on-the-job training, essential pieces to has developed several aerospace clusters build capabilities and drive economic in various states emerging as spin-offs of complexity. Finally, Colombia has a its automotive industry and by joining subpar infrastructure system to tackle forces with the US, Canadian and the geographical hurdles to producing European firms. On the other hand, and export. Colombia has a generic national com- At the institutional level, Colom- petitiveness agenda, still heavily focused bia has introduced important efforts on non-strategic policies. to create and foster government and Following the national figures, Norte non-government agencies that aim at de Santander has also been limited by coordinating and creating a vision for high national taxes on firms as well as the production potential of the country. difficult geography/infrastructure. In The Private Competitiveness Council 2006, NdS levels of violence ranked way

100 Latin America Policy Journal above the national average and close Table 2 to the worst performing regions in the advantage (low transport costs to Ven- country. The situation has substantially ezuela). As explained before, some improved, but it is still worse than the of her key exports (skins, textiles, and national trend. This intermittent con- footwear) lost competitiveness to other straint may be problematic if Norte de states like Antioquia, Valle del Cauca Santander wishes to attract investment, and Bogota, which were closer to ports foster trade, and job creation. or main airports. There was a coordi- Furthermore, after Colombia broke nation failure because the capabilities its trade ties with Venezuela, geography of previously exporting firms were not started being a constraint for Norte de integrated into national chains to export Santander. The closing of the borders somewhere else. On the contrary, the implied that NdS became landlocked, exporting capacity of these firms was losing a huge part of its competitive permanently lost to non-tradable sectors

Figure 28

Fifth Edition | 2016 101 and/or informality while its production 6 Authors’ own calculations using The National capacity was left unscathed. Household Survey for 2010. 7 2012 test results. Source: Organization for While each of these constraints hin- Economic Co-operation and Development ders the growth trajectory of NdS in its (OECD). own way, the binding constraint, as we 8 Source: National Department of Statistics find it, is the coordination failure. Norte (DANE). de Santander first failed to diversify its 9 Source: National Department of Statistics export partners when there was a boom (DANE). 10 The Financial Times. 2013. Colombian and suffered the extreme consequences truckers face a long road. New York, U.S. of the permanent loss of Venezuela as a Retrieved from: http://www.ft.com/intl/ trading partner. Secondly, it also failed cms/s/0/3bf1061a-9dfe-11e2-9ccc-00144feabdc0. to take advantage of lowering transporta- html#axzz3LneMHh5Z tion costs to the Atlántico ports through 11 The Economist. 2013. Infrastructure in the construction of connecting roads Colombia: Taking the slow road. London, U.K. Retrieved from: http://www.economist.com/ that diminished travel time. Finally, it news/americas/21580497-ambitious-plan-strug- did not take advantage of the increasing gles-get-drawing-board-taking-slow-road growth of the United States as an exports 12 Inter-American Development Bank (IADB). partners of the products where NdS 2013. Too Far to Export: Domestic Transport had a competitive advantage vis-a-vis Costs and Regional Export Disparities in Latin others states that had similar or worse America and the Caribbean. Special report on integration and trade. IADB: Washington, D.C. export costs using the Atlántico ports. 13 See Figure 23. For 1996, other natural resources are composed of animals and vegetable oils Endnotes (0.20 percent), crude materials (except fuel) 1 Average GDP growth from 2004-2014, World (6.68 percent), coal and coke (9.62 percent), Development Indicators (WDI). Retrieved from food & live animals (11.72 percent). The World Bank: http://www.worldbank.org/ 14 In Figure 23, for 1996, manufactures are 2 Poverty Rate at the National Poverty Line from composed of beverages and tobacco (0.40 2001 to 2012, WDI. percent), machinery and transport (3.27 3 Sanchez Jabba, Andres. 2014. Crisis en la percent), chemicals and related (9.88 percent) frontera. Documento de trabajo sobre economia and manufactured goods (12.89 percent). regional. Banco Central de la Republica. Centro 15 Source: Bloomberg. de Estudios Economicos Regionales. ISSN 1692 16 Hausmann, Ricardo, Cesar Hidalgo, Sebastian 3715. Bogota, Colombia. Bustos, Michele Coscia, Sarah Chung, Juan 4 Hausmann, Ricardo, Dani Rodrik and Andres Jimenez, Alexander Simoes, Muhammed Yildi- Velasco. “Growth Diagnostics.” 2004. Revised rim. (2011). The Atlas of Economic Complexity. March 2005. Puritan Press: Cambridge MA. 5 Portafolio. (2014, May 21). Las propuestas de 17 Fedesarrollo. (2014). La Reforma Tributaria y su Juan Manuel Santos en materia económica. impacto sobre la Tasa Efectiva de Tributación de Portafolio. Retrieved 12 17, 2014, from www. las firmas en Colombia. Bogota: Fedesarrollo. portafolio.co

102 Latin America Policy Journal Article

Reform Policies and Support Programs to the Agricultural Sector in Latin America: Trade Liberalization, Market Volatility, and Climate Change

By Diego Arias

Diego Arias is a Abstract senior economist Organization for Economic Co-op- at the Department eration and Development (OECD) of Agriculture at countries are reducing total agricultural the World Bank. support, from price supports to fiscal He has a PhD support. Latin America and the Carib- Diego Arias in economics bean (LAC) is also making the same specialized in agro-environment change of price supports fiscal support given to the free trade agreements signed from the University of Valencia, (or signed) with the United States and a master’s degree in international other countries. These exogenous chang- development from Harvard es in the structure of support dictated University, and a master’s in business by trade liberalization must be taken administration from the University as an opportunity to introduce public of the Sacred Heart in Luxembourg. policies and implement programs to Prior to working at the World Bank, support the transition to maximize the he worked at the Inter-American benefits of future integration of LAC Development Bank as a natural agricultural sector to international resources economist and previously markets. Reviewing and measuring the as a project manager in the Andean price supports and taxes, especially pri- Corporation. vate property, should key for the actors involved in the design of public policies

Fifth Edition | 2016 103 to analyze and respond to the needs and opportunities of the sector element agri- culture in the region facing an increase in trade liberalization of their products. Although the priority of public spending on agriculture is investment in public Chart 1 goods and services, the Government will always have the need to be able to sector in rural areas of LAC, there support the most vulnerable population is an increase of 0.22 percent of the in response to catastrophic events or national GDP and 0.28 percent of price shocks. This contingent response the income of the poorest families, representing more than double the is increasingly common in a context expected increase 0.12 percent for the of increased volatility in international weight of the sector in GDP.2 prices and the number of natural di- LAC’s agricultural sector is also an sasters time. In LAC countries, such as important source of income and em- Mexico and Brazil, have already several ployment in the region. Employment years of experience with agricultural in the agricultural sector accounts risk management programs and recent for about 20 percent of total employ- ment in the region, with significant reforms in that area. A reform in the proportions of up to 50 percent in agricultural public spending is more countries with a relatively important important than ever given the current agricultural sector for the economy context of trade liberalization, volatility as Haiti and Guyana (see Chart 1). of international food markets, and Anderson and Valdés (2008) presented climate change. results of a global analysis where the 8 LAC countries in the global sample (Argentina, Brazil, Chile, Colombia, LAC’s agricultural sector is an import- Dominican Republic, Ecuador, Mex- ant source of economic growth and ico and Nicaragua) have a revealed poverty reduction for the countries of comparative advantage in agricultural the region. It is estimated that econom- production 2.2 on average, compared ic growth originating in agriculture is to the world average of 1.0.3 2.7 times more effective in reducing LAC’s potential to increase agricul- poverty than growth in other sectors of tural production relies heavily on its LAC.1 It is estimated that for every 1 natural resources, particularly land and percent growth in the natural resources water. Of the 445.6 million hectares

104 Latin America Policy Journal of potential arable land worldwide, the United States, with the European 28 percent they are in LAC; more Union, or are negotiating others at than any region except Sub-Saharan this moment. The agricultural and Africa.4 Access conditions increase this food products, for the most part, are potential for LAC, with 36 percent included in those agreements. of the 262.9 million hectares located Those who promote free trade fewer than six hours from the nearest agreements present argues that trade market. This potential is not limited liberalization of agrofood products to Brazil and the Southern Cone, produced or will produce the expect- but also to Central America and the ed benefits to consumers (obtaining Andean countries. The countries with lower prices) and farmers (by reaching the greatest potential for increasing signals international markets at the agricultural production in relation to farm level) because these benefits are the percentage of cultivable area are based on the assumption that the law Bolivia, Belize and Venezuela. The of one price applies. Moreover, there water resource is also abundant in is also already evidence that trade the LAC region, with one-third of the liberalization has not been a panacea 42,000 km3 available globally. LAC in terms of reducing poverty.6, 7 has the highest per capita renewable Tariffs on food product’s import water in developing regions.5 in LAC have declined over the last two decades and its value has increased Trade integration of the (see chart 2). Comparing LAC with Agricultural Sector in LAC the rest of the world the simple aver- Over the past two decades, global age tariff is 15 percent (very close to trade of food products has fallen as a the world average). The opening level percentage of total trade, but its value of the agricultural sector (measured has increased. According to the UN by the index of “marketability”) has Comtrade Database, LAC has been increased (see chart 3). This increase able to capture an increasing share of in the level of trade liberalization of the this growing market from 8 percent of international trade in the mid-1990s to 13 percent today. Agrofood exports represent 23 percent of LAC exports and 10 percent of international trade. One of the reasons for this expansion in the export of agrofood in LAC has been that several countries in the region have signed free trade agreements with Chart 2

Fifth Edition | 2016 105 agrofood sector has been accompanied Finally, agrofood markets are by by a reduction in the anti-agricultural nature more volatile than others. The bias of public policies in LAC. The first reason is that the food supply re- support of public policies and pro- sponds with a lag (takes several months grams to the food sector compared to to a producer to change the use of other sectors measured by the Ratio their land to other crops or raise other of Nominal Assistance (RNA) went animals). The second reason is that as from negative to positive from 1990 the demand for food is quite stable in (see Chart 4). the short term, an unexpected shock in production can cause a wide variation Increased Market Volatility of the in price. Finally, food production Agrofood depends on the weather, and there is This greater trade integration in the evidence that the number of natural agrofood sector and reducing anti-bias disasters worldwide climatic events sectoral policies and public programs have increased in recent decades (see has brought benefits for LAC regarding Chart 7). exports; but greater trade openness also exposes domestic agrofood mar- Public Policies and Programs to kets to price changes in international Support the Agricultural Sector markets. This may have implications Policies and programs support agricul- for LAC food consumers (particularly ture in Latin America have changed the poorest, who spend a greater per- significantly in recent decades, from centage of their income on food) and supporting producers through prices for (particularly smaller with difficulty (border measures such as tariffs and adapting to new market conditions) nontariff barriers) to a support based farmers. From 2007 to 2008 we have on fiscal transfers (subsidies and di- observed an increase in the volatility rect support). Charts 8 and 9 present of international prices of agricultural Colombia and Mexico as examples. and food products. This change in the type of support Looking at the evolution of the mainly benefited low-income consum- long-term price volatility of agrofood ers as it cheapened the domestic price measured by standard statistics, we can of food (the low-income families spend see that there is no evidence (see chart a higher percentage of their income 5) that volatility is increasing in real or on food in relation to higher-income nominal terms.8 Despite this, there is families); but it has also had important evidence that the volatility of the last consequences for farmers, since the decade has been greater than in the sector is now more integrated with previous two decades (see Chart 6). the international market, facing in-

106 Latin America Policy Journal ternational prices and their volatility. the countries where the agricultural This has forced many producers to sector has a greater weight in the total stop producing food and agricultural economy). Currently Latin America products that were not competitive, faces a challenge of how to reform and transform its production to more their public spending to the sector to competitive products. This reform make it more efficient and effective has been clearly seen in countries like in a context of greater integration with Mexico, Brazil, and in recent years in international markets and in a context the Andean and Central American of increased volatility of production and Caribbean countries. caused by climate change. But the change in policy has not been cheap for governments as they Policy Reforms and Public went from a situation of income Programs Promoting (through tariffs) to give this support Competitiveness in the Sector through subsidies and direct support, Although LAC countries (according to which represents an expense. In oth- estimates of the OECD) have a higher er words, the support of taxpayers total support of public policies and increased relative to the support of programs for the agricultural sector consumers. The efficiency and effec- as a percentage of total GDP than tiveness of public expenditure in the the average of OECD countries, the agricultural sector has become more agricultural sector as a percentage important, especially for countries of the GDP is lower in LAC than in with higher tax constraints (which are OECD countries, which shows that

Chart 3

Fifth Edition | 2016 107 the agricultural sector in the region Chart 4 has a greater weight in the global changes in the structure of support economy of the countries than in dictated by trade liberalization must OECD countries. be taken as an opportunity to intro- OECD countries are reducing duce public policies and implement total agricultural support, from price programs to support the transition to supports to fiscal support. LAC is also maximize the benefits of future inte- making the same change of price gration of LAC agricultural sector to supports to fiscal support because of international markets. Doing a review the free trade agreements signed (or and measure the price supports and signed) with the United States and taxes, especially to private property, other countries. These exogenous should be key for the actors involved

Chart 5

108 Latin America Policy Journal Chart 6 in the design of public policies to analyze and respond the needs and ernment will always have the need to opportunities of the sector element support the most vulnerable population agriculture in the region facing an in response to catastrophic events or increase in trade liberalization of their price shocks. This contingent response products. is increasingly common in a context of increased volatility in international Policy Reforms and Public prices and the number of natural di- Programs for Risk Management sasters time. There are countries, such Although the priority of public spend- as Mexico and Brazil, who already ing on agriculture is investment in have several years of experience with public goods and services, the Gov- agricultural risk management programs

Chart 7

Fifth Edition | 2016 109 Chart 8 and relatively recent reforms in their The agricultural insurance market has agricultural policies and programs, benefited from 1950 to the present have increased emphasis on risk premium subsidy, which has been management. between 35 percent and 60 percent of the total cost of crops approved by the Mexico Case Government of Mexico.10 According The subsidy for agricultural insurance to the OECD, in 2011 the PSE of premium (excluding the care compo- Mexico were USD$6.183 billion, of nent to natural disasters, or CADENA) which USD$72.4 million was the represented 1.2 percent in 2011 the subsidy for agricultural insurance pre- Producer Support Estimate (PSE) in mium. Other programs agricultural risk Mexico according to OECD estimates.9 management (such as hedging price

Chart 9

110 Latin America Policy Journal volatility of agricultural commodities) accounted for 16 percent of the PSE. Mexico has had a significant increase in support for agricultural programs risk management in recent years, both Chart 10 in relation to PSE and amount. This has been due to an explicit policy of and agricultural production, and an the Government to move the pro- increase in the subsidy of financial gram “reactive” management of ex instruments such as the agricultural post shocks to the agricultural sector, insurance and price hedging instru- programs to ex ante management and ments (futures and options). risk transfer. This increase has also been seen globally since these types Brazil Case of support to risk management fall Agricultural producers in Brazil have within the World Trade Organization seen a general increase in the level of green box.11 support received since 1995. Brazil Table 1 and Chart 10 show the went from taxing the agricultural sector importance of these subsidies in the to give support such sector. This was a PSE and in the Total Support Estimate shift from negative to positive support (TSE). Mexico’s agricultural sector is to the sector, with a marked increase in highly vulnerable to exogenous shocks, the volume produced based regarding such as the volatility of international subsidies based on input subsidies. market prices, weather events, and Also, the total level of support to the diseases and pests affecting animal agricultural sector went from negative and plant health. These risks have an to positive in the last decade. This impact on incentives to trade, invest- trend has been contrary to that of other ment, finance, and enter into contracts OECD countries where a decrease is within the agricultural sector. In recent observed PSE. This trend in Brazil has years the Government of Mexico has been due largely by the very low level tried to move their programs from a (negative) initial support compared to situation from reaction to prevention other countries. and mitigation of shocks, using in- Supports farmers are mainly linked novative instruments for transferring to the use of inputs and outputs. The certain difficult to handle domestically different types of subsidies and support catastrophic risks, such as interna- to producers in Brazil are: (1) sup- tional prices and climatic shocks. port for production (subsidies interest That is why there has been a reduc- rate credit marketing, storage costs, tion in traditional marketing support etc.), which accounts for 6 percent of

Fifth Edition | 2016 111 total subsidies; (2) support the use of Table 1 inputs (subsidy interest rate for loans creasingly important to support the sec- to agricultural capital and investment, tor. To maximize the economic return rural extension, agricultural insurance of the agricultural public spending, the premiums, donations in kind, etc.), evidence shows that the focus should which represents 92 percent of the be in investment in public goods and subsidies; and (3) support to the land services. Despite this evidence, we can (compensatory support Safra Warranty), observe an increase in spending to which represents 2 percent of the sub- respond to price shocks and weather sidies. Subsidies are divided as shown events. Facing the food crisis of 2007 in Chart 13 below. to 2008 and 2010, and the increased Brazilian farmers have a relatively frequency and intensity of extreme high level of support countercycli- weather events, several government cal compared with other developing try to stabilize the prices of agricul- countries and OECD. Policies and tural food and incomes of the most programs of compensation for price vulnerable farmers. We can conclude falls and natural disasters are more that the power to respond quickly to important in Brazil than in other coun- the social impact of rising cost of food tries. Only Japan, Russia and Canada or a natural disaster depends on the have support countercyclical higher fiscal resources available. than Brazil. Policies and programs to offset income small producers by climatic Final Thoughts events can have a positive impact on Given the gradual reduction of support the welfare of beneficiary families. In to the market prices of agricultural the case of CADENA, launched in products, public spending takes in- 2003 by the Government of Mexico,

112 Latin America Policy Journal Chart 11 there is a positive impact on welfare, measured by the reduction in mod- the countries in the region that have erate poverty. It is important to note similar programs. But despite the wide that although the situation of Mexico coverage and penetration of CADENA, may not be similar to other countries, program sustainability depends on the there are several programs weather Government’s commitment to this contingencies for farmers using agri- policy. Finally, despite the increase in cultural and weather insurance as an fiscal cost of the CADENA program, instrument to get sufficient resources in the mechanism of catastrophic insur- order to have an appropriate response. ance is an alternative cost-effective Brazil, Peru, and Argentina are among compared to the traditional way of

Chart 12

Fifth Edition | 2016 113 responding to natural disasters (direct support). LAC countries are focusing and increasing the number and coverage of public policies and programs regarding agricultural risk management to reduce the volatility of the sector. Several LAC countries, such as Mexico and Brazil, already have several years of experience with public policies and programs of agricultural risk management and also with recent changes in the structure of their agricultural support, increasing the emphasis on risk management. In order to remain competitive and increase their competitive position Chart 13 even further, the LAC countries are

Chart 14

114 Latin America Policy Journal being forced to increase the level of spectivas-agricolas-22184376.htm support in risk management. It is im- 9 Agency created by the Mexican Government with the goal of risks prevention to small and portant to learn from the experiences medium producers on the agriculture sector. of LAC, for the best design of public 10 Official ournalJ of the Federation. Reviewed on policies and programs that allow the December 24th of 2011. farmer to stabilize their incomes and 11 WTO agreement in Agriculture considers the industry maintain its position in the application of a 30 percent deductible a the global agrofood market. prerequisite for insurance subsidies to be eligible for the Green Box

Endnotes 1 World Bank (2008). World Development Report. Agriculture for Development. 2 World Bank (2005). Beyond the City: The Rural Contribution to Development. 3 Anderson y Valdés (2008). Distortions to Agricultural Incentives in America. Washington, DC. World Bank 4 Deininger, K., D. Byerlee, with J. Linsay, A. Norton, H. Selod, and M. Stickler (2011). Rising global Interest in Farmland: Can It Yield Sustainable and Equitable Benefits?” World Bank. 5 Bruinsma, J. (2009). “The Resource Outlook to 2050: By How Much Do Land, Water, and Crop Yields Need to Increase by 2050?” Expert Meeting on How to Feed the World in 2050. Food and Agriculture Organization of the Unit- ed NationsEconomic and Social Development Department 6 Winters, Paul; et al (2008). Rural Income Gen- erating Activities: A Cross Country Comparison. Background Paper. World Development Report. World Bank. 7 Giordano, Paolo; et al (2008). Agriculture in the Doha Development Agenda: An Opportunity for Latin America? GTAP Tenth Anniversary Conference “Assessing the Foundations of Global Economic Analysis,” Purdue University, West Lafayette, IN, USA in June 7-9, 2007 8 OECD-FAO (2010). Agricultural Outlook 2010-19. http://www.oecd.org/tad/ocde-fao-per-

Fifth Edition | 2016 115 Article

Between Dialogue and Killing: A Reading on the Process of “Truce” in El Salvador from Anthropological Categories

By Luís Enrique Amaya and Juan José Martínez

Luís Enrique Juan José Martínez Amaya is an d´Aubuisson is international a sociocultural consultant and anthropologist researcher in from Universidad the field of Nacional de El Luís Enrique Amaya Juan José Martínez public safety. As Salvador. He has academic background, both as an studied violence and gangs since undergraduate and as a graduate 2008. He has been a lecturer at alum, he majored in management Universidad Mónica Herrera and policies, programs, and projects has worked as a consultant for of citizen security (policy analysis several institutions such as Action on and policy-making process). He Armed Violence (England), Unicef, has experience in conducting Soleterre (Italy) and American processes of collective construction University (United States). A prolific of strategic and operational plans for writer, Juan José has authored Ver, public security at regional, national, oír y callar. Un año con la Mara and local levels. Salvatrucha 13 (Aura Ediciones 2013) and “Las mujeres que nadie amó. Historias de vida de mujeres de

116 Latin America Policy Journal las clases subalternas salvadoreñas,” From the perspective of security, an among other academic and press important element was added to that publications. complex situation: the arrival of mas- sive waves of deported gang, or maras, members. Those gangs were (1) the Abstract Mara Salvatrucha 13 (MS-13), which In this article, the core events that originated in Los Angeles, California, allowed the “truce” in El Salvador in the late 1970s by young Salvador- ans, many of them undocumented are described and briefly explained. immigrants, and 2) Barrio 18, with a There are three stages in this process: Chicano tradition, or Mexican origin, “pre-truce”, “truce” and “post-truce”. based in the same city since the early The stage of “truce” began in March 1940s. Both groups flourished in the 2012 with the government’s decision post-war El Salvador, adding young of moving thirty gang leaders to lower members of small local (neighborhood security level prisons. The “truce” process and student) gangs and even veterans of the past armed conflicto. opened opportunities, as homicides This mixture with local groups were reduced. The stage of “post-truce” transformed the original bands of has not yet been completed. After an deported gang members, making it abrupt closing of the process there was a a different organization. While they “boomerang effect” with more violence. maintained the same name as their This situation would force the social LA version, they started generating actors to search for other policy options autochthonous or criollos values, norms, and characteristic. Both the to address this social and criminal MS-13 and Barrio 18 have exhibited phenomenon. different developmental, educational, and expansionist processes, which Introduction have resulted in both gangs becoming At the beginning of the 1990s, an nationwide structures today. The state, exodus of people deported from the meanwhile, has also changed its way United States to El Salvador began to of understanding and confronting the develop. At that time, the country was maras phenomenon. As important characterized by the end of the civil facts, the state approach has moved war, the presence of a highly fragment- from ignorance or problem underesti- ed society, and the existence of a weak mation (and consequently neglecting) state (or a state in re-composition), at its beginning, through the strongly among other critical factors.1 repressive combat (through the “strong

Fifth Edition | 2016 117 hand” policies of the early 2000s), was placed in a hill of difficult ac- to the formalization of the “truce” cess. Instead, they decided to take filed in March 2012.2 In general, we revenge by attacking the families of can identify three phases: “pre-truce,” rival gang members. They stopped “truce,” and “post-truce.” a public transport microbus that was In this article, the core events that heading to Montreal, assuming that led to this “truce” are described and family members of MS-13 members briefly explained based on document were traveling there. They threatened reviews and conducting interviews the driver and forced him to go towards with key informants. Barrio 18 territory, where they set fire to the vehicle and prevented people from The Stage of “Pre-truce” coming out of it. Seventeen people Since the beginning of the 2000s, were killed, and several others were Barrio 18 has transitioned towards a seriously injured. This landmark event long process of rupture and internal was considered a “terrorist” act and separation into two major factions or began a sort of conflict, or pulse, be- subgroups: “Southerners” and “Revo- tween the Government of El Salvador lutionaries.”3 On 20 June 2010, gang (GOES) and maras.4 members of the Revolutionaries, the Months later, in September 2010, most fractious and violent faction in the state saw a coup effect and enacted recent years, were mourning a dead the Law on Prohibition of Maras, comrade who was nicknamed “Cray- Gangs, Groups, Associations, and Or- ola.” MS-13 had killed him a day be- ganizations of Criminal Nature, after fore, in front of his family at his house being approved by the president of the in the Colonia Jardin, a territory of the Republic of the time, Mauricio Funes.5 municipality of Mejicanos controlled At this point, it appears that the by Barrio 18, within the Metropolitan state itself was entering, once again, Area of San Salvador. in the scheme of violence or gangs. Gang members who attended the This had already happened in the past funeral decided to take revenge that when in October 2003 the Congress day. They knew that the murderers endorsed and approved the Anti-Gang of Crayola must have come from the Law, proposed by the then-president area of Montreal, a poor and populous of the Republic, Francisco Flores.6 In settlement where an MS-13 cell or fact, six months later, in April 2004, clica called “Guanacos Criminals the Constitutional Chamber of the Salvatrucha” dominates. Reaching the Supreme Court declared unconsti- “enemy” territory would be difficult tutional certain provisions of that law. for the Revolutionaries because it With this background, according

118 Latin America Policy Journal were accompanied by their social base. Both demonstrations were heading to the Legislative Assembly and its main demands were related to the improvement of prison conditions, compliance with the Prisons Act, and Figure 1 the withdrawal of the military as cus- to Roberto Valencia, who used the todians of the prisons. crime statistics of the Policía Nacional Interviewed sources close to the Civil and population estimates of the truce process, point out that there Department of Statistics and Census of was “no progress, “ that they were the Ministry of Economy, 2011 closed deadlocked in late 2011. This makes with one of the highest homicide rate sense. Both maras and the state were per 100,000 inhabitants to date (see showing their forces. The clearest Figure 1).7 expressions of this pulse are linked to the attacks on the prison system The Stage of “Truce” operators. On 6 September 2011, two From a historical point of view, the custodians of the Penal Center of San “truce” in fact did not bear on March Francisco Gotera were murdered. On 2012. In fact, years ago there had the thirteenth of the same month, been attempts of communication talks the Director of the Quezaltepeque between the maras in El Salvador, prison was gunned down. And on largely motivated by the widespread 3 December 2011, custodian of the perception among their members Zacatecoluca Maximum Security that the state was becoming “the new Criminal Center was assassinated.10 enemy.” It was raising some kind of The process of the truce began in psychosocial dynamics linked to the March of the following year. “construction of the enemy,” a com- The accepted version says that the mon and shared conviction.8 truce began formally on 8 March 2012 That conviction led to certain sym- by the decision of GOES to execute the bolic activities that were carried out transfer of gang leaders from a guarded in a relatively consensual manner. prison in the Zacatecoluca Criminal On 3 March 2010 there were two Center, the only maximum security marches, one composed of people facility operating in the country.11 In close to the MS-13 and the other by total, thirty gang members were moved supporters of Barrio 18.9 The marches to prisons with lower levels of security.12 were organized by relatives of gang Indeed, that was the “banderillazo” to members detained in prisons and start the truce.

Fifth Edition | 2016 119 valid gang group of representatives in order to make viable the agreement talks. That would help avoid having to talk to all gangs as a whole. This facilitated (1) the “political dialogue,” which occurred at a high level be- tween historical gang spokespersons, Figure 2 mediators, government representatives, and international officials, and (2) the An important byproduct of this “operating dialogue,” which happened process was verticalization of the gang at the municipal and community scales dynamics. Since its first steps, although between local gang leaders and munic- the maras attracted many young peo- ipality representatives, among others. ple, they never constituted perfectly Thus, as a sort of second phase articulated or monolithic structures. of the truce, the initiatives of the Each of the cells (clicas or canchas) “sanctuaries municipalities” was im- had shared the same story, claimed plemented, which then were renamed almost the same value system, and as “free of violence municipalities.”14 practiced a very strong antagonism To do this, initially eleven munic- against the rival gang. Additionally, ipalities were selected whose city cells’ members used and reproduced halls would promote programs and the same system of symbols, slang, and projects in order to help the process to codes of conduct and dress that allowed materialize in each locality. However, them to identify with other members. eventually this stagnated. However, they did not seem to have a In the opinion of the mayors of vertical structure—a committee that those municipalities, the problem would unite and orientate actions of laid in that they did not get on their the gang as a whole and, therefore, own, nor did the GOES transfer to would mark a collective agenda to them, the funds required to ensure the develop. In this sense, as T.W. Ward sustainability of their violence-preven- pointed out, most gangs are “highly tion projects, which resulted in them disorganized.”13 having to deal with expressions of That is why, in March 2012, one of dissatisfaction from maras members.15 the most sensitive aspects for dialogue Nevertheless, even the then gener- with spokesmen for such heteroge- al secretary of the Organization of neous organizations was the issue about American States, José Miguel Insulza, the “gang control.” The state, with reiterated its support for the truce in the help of mediators, had to make a July 2013.16

120 Latin America Policy Journal However, the truce process opened which would have forced the president opportunities for society, as the number of the Republic, Mauricio Funes, to of violent crimes, especially homicides, appoint a civilian for replacing the declined (see Figure 2).17 Minister of Justice and Public Secu- As shown, the projection of ho- rity, Major General David Munguia micides behavior was interrupted as Payés.19 Munguía Payés acknowledged a result of the truce. That ought to his authorship on the strategy of the have led to a window for the GOES to truce.20 Instead, in May 2013, Funes recover its territorial presence through appointed Ricardo Perdomo as Min- social programs in areas that were ister; Perdomo had served as director inaccessible.18 However, it appears of the State Intelligence Agency. that this opportunity was not seized With Munguía Payés’ substitution, as it should have been done. the teams that kept working the truce It is important to note that not all agreements began to weaken and, thus, gang members and not all cells agreed global conditions that had made the with the truce. For example, MS-13 strategy viable were undermined. For clica “Seven Eleven Locos Salvatru- example, the new minister replaced cha” was opposed to the process and, the general director of prisons of the therefore, its members were hardly time, Nelson Rauda, for allowing the pressed in the prison system. In the departure of two gang recognized words of a member of the MS-13 members to attend a religious event on during an interview with the authors 29 May 2015. Then Perdomo banned in the city of Mejicanos: prison mediators from entering the The truce gives us a f*ck. We ac- prisons, which was a blow to the pro- cept it because you have to accept cess since communication between it, but as long as we can we will the spokesmen of the maras and their continue doing business as usual. counterparts in the street became slow [...] Making deals and peace agree- and un-operational. ments with the chavalas [Barrio The abrupt closure of the truce 18 gang members] does not make heightened the confrontation with the any sense at all. state. In 2015, sixty-four police officers died.21 The state’s reaction included The Stage of “Post-truce” the Constitutional Chamber of the The “post-truce” has not yet been Supreme Court of Justice declaring completed. It started deteriorating in illegal the “negotiation” with gangs and the early months of 2013 when the named them as “terrorists” groups.22 Constitutional Chamber of the Su- By definition, gangs shape their preme Court of Justice issued a ruling identity through the maintenance of

Fifth Edition | 2016 121 state—basically, a possible radicalization of repressive measures. In short, they would be putting together the pieces of a puzzle to avoid the restoration of dialogue or recovery of the truce as an alternative solution of the violence Figure 3 problem caused by gangs. Therefore, a system of reciprocal assaults against the state will be forced to look for other rival groups with similar characteristics. policy options to address this social and Paraphrasing Wim Savenije, at least criminal phenomenon. in El Salvador, the day when a gang actually defeats the other, it will be immersed in a serious identity crisis.23 Endnotes However, with the repressive events 1 Amaya, Luís Enrique and Juan José Martínez. of the post-truce, the state, mainly (2013). “Los sistemas de poder, violencia e iden- tidad al interior de la Mara Salvatrucha 13: Una through instances of law enforcement, aproximación desde el sistema penitenciario” became a “legitimate” target for gang in Anuario de investigaciones 2011. Instituto de members. The circumstantial vertical- Ciencia, Tecnología e Innovación, Universidad ization that caused the truce broke, Francisco Gavidia. Retrieved on March 28th, which expanded the use of violence. 2016 from: http://www.ufg.edu.sv/icti/doc/ANU- In conclusion, according to esti- ARIO_2011.pdf 2 Aguilar, Jeannette. (2014). La situación de la mates of Valencia,24 supplemented seguridad y la justicia 2009-2014: entre expec- 25 by Edwin Segura, the “boomerang tativas de cambio, mano dura militar y treguas effect” predicted by Charles Max Katz pandilleras. Retrieved on March 28th, 2016 and Luís Enrique Amayais already a from: http://www.uca.edu.sv/iudop/wp-content/ reality: in 2015 the homicide rate per uploads/libro_la_situaci%C3%B3n_de_la_se- 100,000 inhabitants was the highest guridad.pdf 3 Amaya, Luís Enrique and Martínez, Juan José in the recent history of El Salvador (2015). Escisión al interior de la pandilla Barrio 26 (see Figure 3). 18 en El Salvador: Una mirada antropológica. As a prospective analysis, threats can Revista Policía y Seguridad Pública. Year 5, Vol. 1 be expected from two angles: (1) from Pag. 149-178. Page 151. Retrieved on March 28th, the perspective of the maras—more 2016 from: http://132.248.9.34/hevila/Revistapoli- confrontation with the state, increment ciayseguridadpublica/2015/vol1/4.pdf 4 Martínez, Carlos. (2013). Nosotros ardimos en la of “horizontality” in relations with- buseta. El Faro. Retrieved on March 28th, 2016 in these groups, violence extension, from: http://www.salanegra.elfaro.net/es/201310/ and probably a “natural” reduction of cronicas/13785/Nosotros-ardimos-en-la-buseta.htm homicidal violence in the long term; 5 Membreño, Tania and Liliana Fuentes. (2010). and (2) from the perspective of the Ley de Proscripción de Pandillas entra en vigor

122 Latin America Policy Journal desde hoy. La Prensa Gráfica. Retrieved on March 14 Arbaiza, Gerardo. (2012). “Municipios santu- 28th, 2016 from: http://www.laprensagrafica.com/ ario”, siguiente paso en la Tregua. Retrieved on el-salvador/judicial/142340-ley-de-proscripcion-de- March 28th, 2016 from: http://www.contrapunto. pandillas-entra-en-vigor-desde-hoy.html com.sv/gobierno/municipios-santuario-sigui- 6 Bonilla, Alexandra and Lauri García. (2003). ente-paso-en-la-tregua Ley Antimaras aprobada. El Salvador.com. 15 Santos, Jessel and Cristian Meléndez. (2013). Retrieved on March 28th, 2016 from: http:// Alcaldes: municipios “santuarios” estanca- archivo.elsalvador.com/noticias/2003/10/10/ dos. Retrieved on March 28th, 2016 from: nacional/nacio18.html http://www.laprensagrafica.com/2013/11/01/ 7 Valencia, Roberto. (2015). La Tregua redefinió el alcaldes-municipios-santuarios-estancados mapa de asesinatos de El Salvador. El Faro. Re- 16 Rodríguez, Carmen. (2013). OEA reitera apoyo trieved on March 28th, 2016 from: http://www. a tregua entre pandillas. La Página. Retrieved salanegra.elfaro.net/es/201503/cronicas/16490/ on March 28th, 2016 from: http://www. La-Tregua-redefini%C3%B3-el-mapa-de-asesin- lapagina.com.sv/nacionales/84759/2013/07/26/ atos-de-El-Salvador.htm OEA-reitera-apoyo-a-tregua-entre-pandillas 8 Martín-Baró, Ignacio. (1989). Sistema, Grupo y 17 Katz, Charles Max and Luís Enrique Amaya. Poder: Psicología Social desde Centroamérica (2015). La tregua entre pandillas como una (II). El Salvador. UCA Editores. (http://es.scribd. forma de intervención sobre la violencia: im- com/doc/218519029/Ignacio-Martin-Baro-Siste- plicaciones en políticas y prácticas. Fundación ma-grupo-y-poder-Psicologia-social-desde-cen- Nacional para el Desarrollo, San Salvador, El troamerica-II#scribd) Salvador. Retrieved on March 28th, 2016 from: 9 Arias, Mauro. (2010). Marcha de familiares y http://www.repo.funde.org/1042/ pandilleros. El Faro. Retrieved on March 28th, 18 Amaya, Luís Enrique. (2012). Oportunidades 2016 from: http://www.elfaro.net/es/201003/ y amenazas de la “tregua”. El Faro. Retrieved fotos/1283/Marcha-de-familiares-y-pandilleros. on March 28th, 2016 from: https://www.elfaro. htm net/es/201211/opinion/10313/Oportunidades-y- 10 Amaya, Luís Enrique and Juan José Martínez. amenazas-de-la-tregua.htm (2013). “Los sistemas de poder, violencia e iden- 19 Arauz, Sergio, Carlos Martínez, and José Luís tidad al interior de la Mara Salvatrucha 13: Una Sanz. (2013). Sala de lo Constitucional ordena aproximación desde el sistema penitenciario” salida de los generales que dirigen Seguridad in Anuario de investigaciones 2011. Instituto de y la Policía. El Faro. Retrieved on March 28th, Ciencia, Tecnología e Innovación, Universidad 2016 from: http://www.elfaro.net/es/201305/ Francisco Gavidia. Retrieved on March 28th, noticias/12113/Sala-de-lo-Constitucional-orde- 2016 from: http://www.ufg.edu.sv/icti/doc/ANU- na-salida-de-los-generales-que-dirigen-Seguri- ARIO_2011.pdf dad-y-la-Polic%C3%ADa.htm 11 Martínez, Óscar, Carlos Martínez, Sergio Arauz 20 Martínez, Carlos and José Luís Sanz. (2012). La and Efren Lemus. (2012). Gobierno negoció nueva verdad sobre la Tregua entre pandillas. con pandillas reducción de homicidios. EL Faro. El Faro. Retrieved on March 28th, 2016 from: Retrieved on March 28th, 2016 from: http:// http://www.salanegra.elfaro.net/es/201209/cron- www.elfaro.net/es/201203/noticias/7985/ icas/9612/La-nueva-verdad-sobre-la-Tregua- 12 Ibd. entre-pandillas.htm 13 Ward, T. W. (2012). Gangsters without borders: 21 ContraPunto. (2016). Policías asesinados An ethnography of a Salvadoran street gang. UK: en La Libertad y Ahuachapán. Retrieved Oxford University Press. on March 28th, 2016 from: http://www.

Fifth Edition | 2016 123 contrapunto.com.sv/sociedad/violencia/ policias-asesinados-en-la-libertad-y-ahuachapan 22 Rauda Zablah, Nelson. (2015). Sala de lo Constitucional declara ilegal negociación con pandillas y las nombra grupos terroristas. El Faro. Retrieved on March 28th, 2016 from: http://www.elfaro.net/es/201508/noticias/17307/ Sala-de-lo-Constitucional-declara-ilegal-ne- gociaci%C3%B3n-con-pandillas-y-las-nom- bra-grupos-terroristas.htm 23 Savenije, Wim. (2009). Maras y Barras. Pandillas y Violencia Juvenil en los Barrios Marginales de Centroamérica. El Salvador. FLACSO El Salvador. (http://insumisos.com/LecturasGratis/ maras%20y%20barras%20pandillas%20y%20 violencia%20juvenil%20en%20barrios%20 marginales%20de%20el%20salvador.pdf) 24 Valencia, Roberto. (2015). La Tregua redefinió el mapa de asesinatos de El Salvador. El Faro. Re- trieved on March 28th, 2016 from: http://www. salanegra.elfaro.net/es/201503/cronicas/16490/ La-Tregua-redefini%C3%B3-el-mapa-de-asesin- atos-de-El-Salvador.htm 25 Segura, Edwin. (2016). El Salvador con más homicidios en C. A. La Prensa Gráfica. Retrieved on March 28th, 2016 from: http:// www.laprensagrafica.com/2016/01/03/ el-salvador-con-mas-homicidios-en-c-a 26 Katz, Charles Max and Luís Enrique Amaya. (2015). La tregua entre pandillas como una forma de intervención sobre la violencia: im- plicaciones en políticas y prácticas. Fundación Nacional para el Desarrollo, San Salvador, El Salvador. Retrieved on March 28th, 2016 from: http://www.repo.funde.org/1042/

124 Latin America Policy Journal Article

Political Rewards from Progresa-Oportunidades: Only Gratitude?

By Arthur Bauer1

As an MPA-ID Arthur also conducted research student at the John during his first year under the F. Kennedy School supervision of Professor Rohini of Government at Pande and continued working on Harvard University this topic for his Second Year Policy (HKS), Arthur Analysis (SYPA) with Professor Arthur Bauer Bauer nurtured Michael Walton. a deep interest in Mexico’s Before joining HKS, Arthur was political-economy through regular an undergraduate student at Ecole interactions with his classmates Polytechnique and ENSAE Paris and more globally with the unique in France and worked remotely as a environment offered by HKS. consultant for the Poverty Reduction He specialized on the nowadays and Economic Management unit at famous Mexican conditional cash the World Bank. transfer and benefited from the experience of his classmates who Upon graduation, he will be working had been working for the Mexican at INSEE (the French institute of Ministry of Human Development statistics in France) and in close (SEDESOL). collaboration with the French Agency of Development (AFD) on education in Sub-Saharan Africa.

Fifth Edition | 2016 125 Abstract The Mexican Conditional Cash Despite innovative safeguards to reduce Transfer, Progresa-Oportunidades is political interference in the nowadays an interesting case in point as it ex- plicitly sought to reduce opportunities famous Mexican conditional cash for political interference. A federal transfer, local politicians received and autonomous agency was made important electoral rewards from its responsible for implementation and implementation. We ask whether true operations at the local level. Besides, reciprocity and gratitude only motivated Oportunidades’ National Coordinator, those rewards. Leveraging a natural Mr. Rogelio Gómez Hermosillo iden- experiment: the interaction between the tified mechanisms to reduce further political interference with the program. rotating structure of local elections and These mechanisms were blindaje elec- the timing of Progresa-Oportunidades’ toral and aimed, as of 2001, at limiting implementation we show how exogenous enrollment during election years both political incentives determined the at the national and local level. enrollment rate of beneficiaries. After Despite significant efforts to re- the implementation of blindaje elec- duce political interference, studies had toral, we use a close-election regression highlighted the recurrent existence of electoral rewards from Progresa and discontinuity design to show how local Opportunidades before and after Mr. incumbent’s alignment with the PAN Gómez Hermosillo’s reform.2 However, causally impacted enrollment rate’s these studies leave unanswered the responsiveness to political incentives. mechanisms that had generated those political returns. Introduction In this paper, we ask whether reci- Understanding what incentives shape procity, as suggested by Marco Mana- the implementation of redistributive corda, Edward Miguel, and Andrea programs by politicians and possibly Vigorito, is the sole explanation for bureaucrats is a question at the core of electoral rewards from conditional cash the political economy. In particular, transfer or whether political incentives in low-income countries where state have impacted Progresa-Oportuni- redistribution of resources may be an dades’ implementation and shaped important means of poverty reduction electoral rewards.3 and economic mobility, failures of the Our empirical test leverages a qua- state to implement effective redistrib- si-experiment: the interaction of the utive systems raise fairness and equity timing of expansion and the rotating questions. structure of municipal elections in

126 Latin America Policy Journal Mexico shaped an exogenous varia- Progresa-Oportunidades’ roll-out,5 tion in local political incentives. We Takahashi Yuriko revealed “electoral analyze how these political incentives geographic targeting before the 2000 affected the rate of enrollment of Pro- elections.”6 However, their work doesn’t gresa-Oportunidades beneficiaries. identify any causal relation between We show that local elections have political determinant and program boosted the implementation of Pro- implementation. gresa before blindaje electoral in rural Jonathan Fox documents the mech- areas, in particular when they were anisms through which this political more disputed. We identify Promotoras interference may have occurred. Mu- as the key actors who within the de-jure nicipal governments and local officials rules of operations and consistently may have played a role in this abuse, as with qualitative studies may have re- “most complaints about politicization sponded to political incentives and involved abuses by leaders of local created this political interference. program committees and municipal We further show that political de- officials.”7 Their role in the imple- terminants were particularly salient in mentation and administration of the municipalities governed by the national conditional cash transfer was certainly incumbent, after blindaje electoral. not negligible. Municipal governments We alleviate concerns of endogeneity provided a central logistical support, and omitted variables bias by focusing through a “Municipal Liaison officer” on municipalities where PAN had lost (Enlace), responsible for identifying shortly and those where it gained power geographical limits, helping with regis- through a disputed election. tering and re-certifying beneficiaries.8 Enlaces were municipal bureaucrats Political Interference and, given the long tradition of patron- in Progresa-Oportunidades age in Mexico, arguably responsive to political incentives and/or pressures. Literature Review They delegated power to Promotoras, Despite attempts to reduce political who de-facto were not elected but interference with Progresa at the local appointed by higher level of the admin- and state level, Mr. Gómez Hermosil- istration.9 Promotoras were in charge of lo “recognized electoral abuses of ensuring beneficiary compliance with the program” before his mandate.4 program requirement and sometimes In the academic literature, Alberto built clientelistic relations with the Díaz-Cayeros, Federico Estévez and community.10 Felipe Hevia de la Jara Beatriz Magaloni mention a possible further reports how they “imposed political ex-ante determination of unpaid work tasks, asked for money

Fifth Edition | 2016 127 and used the program for political spokeswomen (vocales) replaced each campaigning.”11 promotora, who de-facto used to be appointed by higher administrative lev- Channels for Political els. As a result, if political interference Interferences and Their Evolution were occurring through this channel with Blindaje Electoral before blindaje electoral, political in- As suggested in the previous para- terference should reduce after blindaje graph, we expect political determi- electoral implementation. nants to be particularly salient for the implementation of the program Empirical strategy when local governments get involved in its implementation or when there Leveraging the Rotating Structure is evidence for political involvement of Municipal Elections of program’s officials. Involvement of An extensive literature has documented program’s officials such as Promotoras, the impact of elections on economic who have been shown to respond to and social outcomes in Mexico. Given political incentives, may well work as the role of municipal and local officials a channel for political interference in program’s implementation and the in program implementation. Their particular appeal of social programs role is central throughout program’s for patronage systems, we analyze operations. the impact of political determinants To reduce political interference, at the municipal levels on program’s former President Vincente Fox implementation. (2000–2006) mandated Mr. Gómez Each year in Mexico one-third of Hermosillo, former founder and di- the municipalities holds elections. rector of Civic Alliance. This NGO’s Hence, for one-third of them the 1997 research had come to the conclusion expansion, following the 1996 pilot that in “close elections [. . .], bought or happened before municipal elections; conditioned votes could produce a mar- for one third, it happened during local gin of victory of those parties already elections; and for the remaining third, in control of local government.”12 As a it happened the year after. This rotating result, under his term, Oportunidades structure of municipal elections created strengthened institutional mechanisms an exogenous variation in the political to limit political interference. Blindaje incentives for the implementation of electoral changed the institutions that the program. regulate the operations; in particular, The rotating structure of elections the selection and appointment process allows us to analyze the dynamics of of key officials. A small group of elected the implementation. For each year

128 Latin America Policy Journal of the 1998 to 2000 period, we can toral results contained in the CIDAC compare municipalities with elections database, completed with data from and municipalities without election, Instituto Federal Electoral. We study separating political impacts of elections separately rural and semi-urban areas. from potential year-specific shocks. To account for time-varying policies Since the number of beneficiaries at regulating Progresa-Oportunidades’ one point in time in a specific mu- distribution, we analyze two periods nicipality is the result of a cumulative separately. As of 2001, blindaje elector- process of past enrollments, we must al indeed affected expansion in munic- rely on longitudinal datasets to analyze ipalities holding municipal elections, this period. limiting the period over which the Another concern we can alleviate impact of municipal elections is most with longitudinal data is the potential likely to be observed to 1997 to 2000. difference between municipalities We adopt a first difference ap- where initial implementation hap- proach. In particular, we are interested pened during elections years and mu- in capturing the relative increase in the nicipalities where initial implementa- number of beneficiaries, because the tion happened after or before elections. number of recipients observed in a spe- The former group of municipalities cific year is the result of a cumulative might simply be poorer inducing a spu- process. If the enrollment process was rious correlation between the political linear and only constrained by local incentives and the enrollment level. capacity, the first year after implemen- Following municipalities across time tation, the number of beneficiaries enables us to see how Progresa-Opor- should increase by 100 percent, the tunidades’ rate of enrollment varies year after by 50 percent more, then within a municipality when it holds by 33 percent and so on such that local elections, while controlling for all the enrollment rate of beneficiaries municipalities invariant characteristics wouldn’t be linear. Hence, the relative by including municipality-fixed-effects. drop in the growth rate matters more than the actual number of percentage Data and Specification points it drops by. The easiest way to We combine data on the number of deal with this nonlinearity is to focus beneficiary households per locality on the log of the growth rate as the under Vincente Fox’s and Ernesto dependent variable. Zedillo’s presidencies (1998–2004), We analyze how the enrollment rate obtained from the Secretaría de De- of beneficiaries varies during election sarrollo Social, or Ministry of human years. Our dependent variable (Ymt) is development (SEDESOL) with elec- simply the log of the ratio of number

Fifth Edition | 2016 129 of beneficiaries over two consecutive given municipality is invariant constant years (i.e., the growth rate plus one). characteristic of this municipality and is To prevent division by zero, we add therefore captured by the fixed effects. one to the denominator, so that this One might also be concerned ratio in the first year the program that the dependent variable is much was implemented in the municipality larger the year of the program’s imple- simply converges towards the number mentation. However, this should not of beneficiaries plus one. All in all we bias the results since we treat all the estimate the following equation: municipalities the same way and are simply concerned with the variation of this variable, within a municipality, during election years.

Where, Xmt is a vector includ- Heterogeneous Effects ing the constant and a control for The analysis of heterogeneous effect time-varying characteristics of mu- allows us to better characterize nicipality m, here the population of political determinants. municipality m in year t. Electionmt is an indicatrice (resp. a vector of By Level of Competition indicatrices) indicating whether year t First, we test whether political com- was an election year (resp. preceding or petition amplifies the impact of local following an election) in municipality elections. Indeed, disputed elections m. and account for time-invariant mu- should create even stronger political nicipal characteristics and year-specific incentives. We estimate equation (1) on shocks. Standard errors are clustered various sub-samples of municipalities at the year and state level. with different levels of political com- One might be concerned that the petition. We compare municipalities date at which the program started where past elections were disputed would impact the subsequent ratio. and those where margins of the past Indeed, in a given year, the munici- elections were large. We conduct the palities where the program has been analysis focusing first on municipal implemented for the longest time, elections and then on state elections even if the enrollment process was to facilitate comparison with the de- very regular and the amount of eligible scriptive work of Takahashi Yuriko.13 household unlimited, would have a lower growth rate of beneficiaries. By Party Affiliation However, the date at which the pro- Second, we analyze how align- gram starts being implemented in a ment with the federal incumbent

130 Latin America Policy Journal facilitated political interference, municipalities run by the national making political incentives more incumbent and the other ones, we salient. To empirical test this chan- adopt a close regression discontinuity nel, and account for the potential design and estimate the following endogenous differences between equation:

Where Incumbentmt is a dum- election years weren’t systematically my indicating whether the mayor is associated with higher enrollment rate. aligned with the federal incumbent, As a robustness check, we ex- i.e., belongs to the PRI before 2000 or clude municipalities that didn’t hold belongs to the PAN after 2000. Given any elections neither in 1999 nor in that Vicente Fox took power only as of 2000 (which are the two years for 1 December 2000, we consider that which we have observations on the PRI mayors in 2000 were still aligned. growth rate of beneficiaries, since Close(α)mt is a dummy indicating we have no disaggregated data on that the previous election was close in enrollment level before 1998). Results, municipality m and that one of the two reported in columns (4) to (6) confirm main candidates was affiliated with the the positive impact of elections on same party as the federal incumbent.14 enrollment years.

Results Heterogeneous Impact of the Elections Before and after Blindaje Electoral We first estimate equation (1) both By Level of Political Competition at early stage of Progresa’s expan- Panel estimates reported in the previous sion in rural areas (1998–2000) and sections may, however, be driven by during Oportunidades’ expansion year-group of municipalities specific (2001–2004). shocks. To alleviate this possibility, we Table 1 shows how the growth rate investigate heterogeneous impact of elec- of enrollment was systematically larger tions. In particular, if we are identifying on election years in rural areas before a political effect, it should be magnified blindaje electoral. On the contrary in in municipalities where incentives are both rural and semi-urban areas, after larger, namely where elections are more blindaje electoral was implemented, disputed in the year of reference.

Fifth Edition | 2016 131 Table 2 reports results from es- in disputed constituencies as randomly timating equation (1) on different determined. Table 3 presents results sub-samples of municipalities that with various thresholds to classify an vary along their levels of electoral election as disputed. competition. First, results confirm that before We can see that the level of po- blindaje electoral alignment of the litical competition in state elections mayor and the national incumbent, aggregated at the state level doesn’t namely the PRI, didn’t drive the im- seem to be a determinant of imple- pact of political determinant in the mentation’s effectiveness. We don’t program’s expansion. Second, in the see any differential impact of local post-blindaje period, municipalities elections in more disputed elections where elections were contested and the (with margin in past elections lower PAN won narrowly, political incentives than 5 percent) and in less disputed were more important for Oportuni- elections (with margin in past elections dades’ implementation than those larger than 20 percent). where it narrowly lost. On the contrary, the differential The latter suggests that alignment impact of local elections on the en- with the incumbent did matter for rollment rate is more important when Oportunidades’s implementation we consider margins in municipal during the post-blindaje period. This elections at the municipal level. More also suggests that the blindaje electoral specifically, local elections are stronger strategy was not completely successful incentives when political competition in preventing all political interference is more important. Equivalently, local in program’s operation. elections matter more for the efficiency of program’s implementation when Conclusion they are disputed than when they are Acknowledging that innovative safe- not. Columns (4) to (9) shows that guards limited political interference, this result doesn’t really depend on this paper identifies actors whose the threshold we consider to define behavior responded to political an election as disputed. incentives and at the same time affected the implementation of the By Party Affiliation program. In this paragraph we report differential Leveraging the rotating structure impact by alignment of the mayors with of municipal elections, it relies on a the national incumbent. As often in quasi-experiment that created exog- the literature, we consider alignment enous political incentives for local of mayors with the national incumbent actors. We show that enrollment of

132 Latin America Policy Journal new beneficiaries was significantly the mechanisms that left political higher during elections before the interference possible after blindaje blindaje electoral reform in 2001 electoral, and to help consolidate that increased barriers to political the Mexican democracy where alle- interference. Consistently with quali- gations of vote-buying still surround tative studies and anecdotal evidence some elections. this pattern was larger in more dis- puted municipalities, confirming the analysis does identify political determinants of the implementation. After 2001, we also find that alignment with the national in- cumbent led to a larger impact of elections on enrollment efficiency, suggesting that the blindaje electoral reform could not remove all political interference. All in all, our results suggest that beyond pure reciprocity or sole grat- itude, ex-ante political determinants in Progresa-Oportunidades’ distribu- tion may have driven voters’ decision to reward the incumbent. While there is no evidence for vote-buy- ing, there is anecdotical evidence of thread by Mayors, despite their limited influence on the program as well as evidence of the politicization of some program officials before the blindaje electoral reform. Given the historical context of patronage in Mexico, fear to lose access to the program may have therefore also motivated beneficiaries’ deci- sion to reward the incumbent, in addition to their gratitude. More research should, however, be car- ried to pin down more precisely

Fifth Edition | 2016 133 Table 1: Before and after blindajeTable 1 Before and after blindaje electoral electoral

Before blindaje After blindaje electoral Before blindaje electoral electoral (1) (2) (3) (4) (5) (6) semi-urban rural areas rural areas areas rural areas rural areas rural areas

Log. Rural pop. 1.015*** −0.262** 2.020* 2.020* 2.020* (0.158) (0.120) (1.188) (1.188) (1.188) Election year 0.596*** −0.048 5.939 0.375*** (0.188) (0.077) (4.181) (0.121) Log. Semi-urban pop −3.901 (19.153) One year before election −0.750*** (0.241) One year after election −0.750*** (0.241) Constante −8.698*** 3.648*** 148.236 −19.084* −18.709* −18.709* (1.683) (1.236) (175.270) (10.853) (10.939) (10.939) R-squared 0.560 0.291 0.271 0.518 0.518 0.518 Observations 3899 6903 4547 1966 1966 1966 Note: Dependent variable is the logarithm of the ratio over two consecutive years of the number of beneficiaries per municipality. There is one observation per municipalities for each of the 1999 and 2000 years in columns (1) and (4) to (6) and for each of the 2002,2003 and 2004 years in columns (2) and(3). Columns (4) to (6) exclude municipalities that didn’t hold elections neither in 1999 nor in 2000. Source: Administrative data obtained from SEDESOL dataset merged with "Base de datos electoral CIDAC", and census 1995, 2000 and 2005. Municipalities and year fixed-effects. Baselines are year 1999 for columns (1) and (4) to (6) and year 2002 for columns (2) and (3). Standard errors clustered at the state and year levels in parenthesis.

* p <0.1, ** p <0.05, *** p <0.01.

Source: Own calculations.

134 Latin America Policy Journal

Table 2: DifferentialTable 1effects: Differential effects for different levels of political competition for different levels of political competition

Margin Margin municipal state Before blindaje electoral elections elections (1) (2) (3) (4) (5) (6) (7) (8) (9) <5% >20% >25% <10% <5% <4% <6% >20% >15% Log. Rural pop 4.354*** 0.864*** 0.894*** 0.792*** 3.315*** 3.332*** 3.322*** 3.611*** 2.475* (0.174) (0.047) (0.056) (0.052) (0.430) (0.441) (0.418) (1.356) (1.265) Election year 0.352*** 0.604*** −0.199 0.624*** 0.564*** 0.480*** 0.567*** −0.085 0.122 (0.054) (0.192) (0.296) (0.184) (0.155) (0.161) (0.169) (0.128) (0.155) Constante −40.470*** −9.151*** −9.150*** −6.346*** −27.041*** −27.153*** −33.325*** −35.268*** −24.028** (1.597) (0.411) (0.448) (0.513) (3.416) (3.496) (4.448) (13.163) (12.049) R-squared 0.587 0.521 0.597 0.593 0.639 0.619 0.632 0.628 0.619 Observations 496 1329 700 1504 790 653 928 1459 1893

Note: Please see Table 1 "Margin state elections" refers to the state-wide margin in past elections of state governors. "Margin municipal elections" refers to the municipal-wide margin in past municipal elections.

* p <0.1, ** p <0.05, *** p <0.01.

Table 3: Differential impactTable by1: Differential impact by party affiliation party affiliation

Before blindaje electoral After blindaje electoral (1) (2) (3) (4) (5) (6) <5% <10% <15% <5% <10% <15%

Log. Rural pop 1.007*** 1.003*** 1.001*** (0.154) (0.151) (0.150) Election year 0.778*** 0.656** 0.451 0.097 0.112 0.099 (0.280) (0.311) (0.304) (0.123) (0.123) (0.118) Alignment 0.415** 0.388** 0.186 0.123 −0.041 −0.059 (0.170) (0.182) (0.173) (0.112) (0.156) (0.076) Close margin 0.197 0.114 −0.371* 0.106 −0.108 0.042 (0.148) (0.233) (0.197) (0.081) (0.158) (0.129) Election year * alignment −0.317** −0.237 −0.089 −0.355* −0.309 −0.252 (0.161) (0.187) (0.174) (0.206) (0.234) (0.266) Election year * close margin −0.060 0.282 0.590* −0.047 −0.105 −0.023 (0.282) (0.322) (0.333) (0.204) (0.130) (0.125) Alignment * close margin −0.447* −0.202 0.177 −0.484* 0.094 0.031 (0.254) (0.266) (0.216) (0.253) (0.274) (0.159) Election year * alignment * close margin 0.415 −0.000 −0.289 0.920** 0.467** 0.259 (0.261) (0.258) (0.230) (0.360) (0.231) (0.268) Log. Semi-urban pop. −0.233 −0.224 −0.220 (0.464) (0.464) (0.461) Constante −8.614*** −8.569*** −8.543*** 3.658 3.571 3.532 (1.635) (1.602) (1.596) (5.564) (5.601) (5.574) R-squared 0.562 0.562 0.563 0.335 0.334 0.334 Observations 3890 3890 3890 3285 3285 3285 Note: For dependent variable and source please see Table 1. Municipalities and year fixed effects, standard errors clustered at the state and year level in parenthesis.

Fifth Edition | 2016 135 * p <0.1, ** p <0.05, *** p <0.01.

Endnotes ci_arttext&pid=S1405-92742010000300008&l- 1 I am indebted to Professors Rohini Pande and ng=es&tlng=es. Michael Walton for their guidance as well as to 9 Fox, Jonathan, 2008. Accountability Politics: Florencia Leyson for numerous conversations Power and Voice in Rural Mexico. Oxford UK: and her help accessing the data. I would like to Oxford Scholarship Online, page 273. thank Soledad Artiz Prillaman, and Professors 10 Escobar Latapí, A. & González de la Rocha, Filipe Campante and Michael Kremer for M., 2005. Evaluación cualitativa de mediano helpful discussions. plazo del Programa Oportunidades en zonas 2 Rodríguez-Chamussy, L., 2015. Local electoral rurales . Dans: I. N. d. S. Publica/Ciesas, éd. rewards from centralized social programs: Are Evaluación externa de impacto del Programa Mayors Getting Credit?. IDB WORKING Oportunidades: Aspectos Economicos y PAPER SERIES No. WP-550. Sociales. Cuernavaca: s.n. 3 Manacorda, Marco, Edward Miguel, and Quoted by Jonatahn Fox (2008). Andrea Vigorito. 2011. “Government Transfers 11 Hevia de la Jara, Felipe (2007). ‘El Programa and Political Support.” American Economic Oportunidades y la construcción de ciudadanía. Journal: Applied Economics, 3(3): 1-28. Relaciones sociedad-Estado, participación 4 Paniagua, Fernando (2001). ‘Reconocen ma- ciudadana y contraloría social’, (p.387) Centro nipulacion con el Progresa’, Reforma, October de Investigación y Estudios Superiores en 6. as quoted in page 268 of Fox, Jonathan, 2008. Antropologia Social, Ph.D. thesis as quoted in Accountability Politics: Power and Voice in page 274 of Fox, Jonathan, 2008. Accountability Rural Mexico. Oxford UK: Oxford Scholarship Politics: Power and Voice in Rural Mexico. Online. Oxford UK: Oxford Scholarship Online. 5 Díaz-Cayeros, Alberto, Federico Estévez and 12 Global Exchange. 2006. Page 4. Electoral Beatriz Magaloni. 2012. «Strategies of Vote observations in Mexico 2006. Retrieved on Buying: Democracy, Clientelism and Poverty March 27th, 2016, from http://www.ine.mx/docs/ Relief in Mexico.» Retrieved on March 27th, Internet/IFE_Internacional_CAI/Informes_ 2016, from http://web.stanford.edu/~magaloni/ presentados_por_Visitantes_Extranjeros/Re- dox/2012strategiesvotebuying.pdf. porte_final_Global_Exchange__7_Punto_11. 6 Takahashi, Yuriko. 2007. “The Political Econ- pdf. omy of Poverty Alleviation: The Case of PRO- 13 Takahashi, Yuriko. 2007. “The Political Econ- GRESA in Mexico.” Journal of International omy of Poverty Alleviation: The Case of PRO- Cooperation Studies 14.3: 109-137 as quoted in GRESA in Mexico.” Journal of International page 268 of Fox, Jonathan, 2008. Accountability Cooperation Studies 14.3: 109-137 Retrieved on Politics: Power and Voice in Rural Mexico. March 27th, 2016, from http://www.lib.kobe-u. Oxford UK: Oxford Scholarship Online. ac.jp/repository/00520274.pdf. 7 Fox, Jonathan, 2008. Accountability Politics: 14 As a time-varying municipal characteristics, it Power and Voice in Rural Mexico. Oxford UK: is included in the vector Xmt in addition to the Oxford Scholarship Online. constant and the logarithm of population in 8 Hevia de la Jara, Felipe. (2010). Uso político municipality m and year t. de programas sociales y nuevos intermediarios institucionales: el Programa Progresa/Oportuni- dades en el sur de Veracruz. Desacatos, (34), 119-132. Retrieved on March 27th, 2016, from http://www.scielo.org.mx/scielo.php?script=s-

136 Latin America Policy Journal Artwork Galapagos Islands, Ecuador

By Juan Carlos Paredes (Juank Paredes) www.JuankParedes.com

Galapagos Sea Lion

Baby Sea Turtle

Fifth Edition | 2016 137 Iguana taking a bath in the sun

138 Latin America Policy Journal Lagartija de Lava

Galapagos Zayapa

Sunset in Galapagos (Photographer: Juan Carlos Paredes, JuankParedes.com)

Fifth Edition | 2016 139 Artwork Latin America photo session

By Claudia Carbajal Morelos, Tansaya Kunaratskul and Sandro Parodi

El Chalten, Mt. Fitz Roy, Patagonia, Argentina (Photographer: Tansaya Kunaratskul)

140 Latin America Policy Journal Perito Moreno, Patagonia, Argentina (Photographer: Tansaya Kunaratskul)

Barahona, Dominican Republic (Photographer: Sandro Parodi)

Fifth Edition | 2016 141 Boca Chica, Santo Domingo, Dominican Republic (Photographer: Sandro Parodi)

Picture taken from the appliance department of a nearby Sears store. Palacio de Bellas Artes, Mexico City, Mexico. (Photographer: Claudia Carbajal Morelos)

142 Latin America Policy Journal Machu Pichu, Peru (Photographer: Tansaya Kunaratskul)

Fifth Edition | 2016 143 GUIDELINES FOR SUBMISSIONS

The Latin America Policy Journal (LAPJ) at Harvard John F. Kennedy School of Government is now accepting submissions for its sixth edition, to be published in the spring of 2017. The LAPJ is a student-managed publication that collects perspectives from academics and practitioners on contingent policy issues and gives them a platform to engage in constructive dialogue with each other in the search for best practices and collective learning. The LAPJ aims to present Latin American perspectives about the region, to a Latin American and US audience. Our mission is to initiate respectful, thought-provoking debate between consolidated and emerging leaders across Latin American and their American counterparts. We envision a region where collaborative efforts between countries improve the quality and scope of policy making. The Latin America Policy Journal is inclusive, non-partisan, independent and opinionated.

WHAT TO SUBMIT POLITICS AND PUBLIC POLICY We are accepting pieces that fall within • Rule of law and democracy the following topics. • National/local elections • Political parties CASE STUDIES • Media • Strategies that work • Accountability, transparency and corruption • Examples of failure • Political integration • ECONOMIC DEVELOPMENT • Foreign relations • Macroeconomic stability in Latin America • Urban crime • Divergence or convergence of countries • Drug trafficking • Economic integration in Latin America • Natural resources INNOVATION AND • Product diversity and/or complexity ENTREPRENEURSHIP • Informality • Consumers’ solutions • Technology SOCIAL DEVELOPMENT • Social policy • Human development indicators • Education system We strongly encourage submissions • Healthcare access from writers of all backgrounds, • Pensions system including scholars, policy makers, civil • Inequality servants, journalists, advocates, students, • Poverty and organizers. • Indigenous communities We are accepting pieces with the following format:

144 Latin America Policy Journal ARTICLES SELECTION CRITERIA • Original and in accordance to the theme The best pieces will be chosen based on the of this publication following criteria: • 5-10 double-spaced pages (1,500-3,000 • Relevance of the topic to Latin America words) policy issues and timelines to current • All figures, tables, and charts must be policy debates. submitted as entirely separate files • Originality, sophistication, and style of • Must include an abstract of no more than argument(s). 100 words. • Contribution to scholarship and poli- COMMENTARIES, INTERVIEWS, cy-making on Latin American issues. OR SHORT ESSAYS All submissions must comply with the • 3-6 double-spaced pages (900-1,800 words) following in order to be considered: BOOK REVIEWS • Work must be original and unpublished • 3-6 double-spaced pages (900-1,800 words) • Citations should be formatted as end- • Include full citation for book, including notes according to the Chicago Manual publisher and year of publication of Style. Footnotes are no accepted. • Book reviews should critically assess recent • Include a cover letter with the author’s books that innovate beyond the frontier name, address, e-mail address, daytime of current thinking about Latin American phone number, brief biography (max. politics and policy. 300 words) and picture. • Send the consent form signed by the POETRY author. • Original and poems related to the topics • Authors are required to cooperate with outlined before. editing and fact checking, and to comply • 60 lines maximum. with Journal-mandated deadlines. • Authors who fail to meet these require- ARTWORK ments may not be published. • Original and unpublished visual artwork Submissions will be considered for the related to the topics outlined before. print version and/or online versions of the • High-resolution digital images (300dpi+) Latin America Policy Journal. in .JPG files. • A description of the image, title author, year and medium. PROCESS Articles will be published on a rolling basis OPINION EDITORIALS on the LAPJ’s website. (for website only) Please email your submission to lapj@hks. • 2-3 double-spaced pages (750-900 words) harvard.edu by December 15nd, 2016. • Original and unpublished The Latin America Policy Journal will be launched in April-May 2017. LANGUAGE: Articles can be submitted in English or Spanish. They will be professionally translated.

Fifth Edition | 2016 145