The London School of Economics and Political Science The Political Economy of Financing Late Development: Credit, Capital and Industrialisation; Colombia 1940–67 Carlos Andrés Brando A thesis submitted to the Department of Economic History of the London School of Economics for the degree of Doctor of Philosophy, London, September 2012 Declaration I certify that the thesis I have presented for examination for the MPhil/PhD degree of the London School of Economics and Political Science is solely my own work other than where I have clearly indicated that it is the work of others (in which case the extent of any work carried out jointly by me and any other person is clearly identified in it). e copyright of this thesis rests with the author. Quotation from it is permitted, provided that full acknowledgement is made. is thesis may not be reproduced without the prior written consent of the author. I warrant that this authorization does not, to the best of my belief, infringe the rights of any third party. I declare that my thesis consists of words. Abstract Accounts of economic development during mid-twentieth century have been dominated by import-substituting industrialisation (ISI) and/or state-led industrialisation frameworks. is literature attaches considerable importance to such policy areas critical to manufac- turing as: trade and tariffs, foreign exchange and the promotion of credit. According to this view, industrialisation became an official goal and in many developing economies governments committed to it seriously. Focusing on Colombia, this dissertation chal- lenges conventional wisdom. It demonstrates that the Colombian state did not provide financial aid, or implement deliberate trade-protectionist support, for industrialists to the degree hitherto argued. A distinct political-economy configuration, in which small-scale agriculturalists, particularly coffee exporters, wielded significant power within the state, meant that the type of distortive pro-ISI macro policies pursued in other Latin American economies were eschewed. Industrialisation proceeded apace in Colombia, but this was chiefly a market- or private-led phenomenon. e methodology employed to substantiate this claim is not comparative, yet fre- quent references are made to other Latin American nations to serve as benchmarks and counterpoints. New archival material, both quantitative and qualitative, is combined in novel ways to substantiate the original, revisionist interpretations advanced in the thesis. Policy-makers, targeting the twin challenges of managing external-account pressures and sustaining fiscal revenue, rather than promoting inward-looking development, best explain moderate levels of tariffs and slight overvaluation of the currency observed in Colombian trade policy. e heretofore untold history of the Institute for Industrial Development, a direct supplier of venture capital, shows a government agency with major organisational weaknesses, incapable of fulfilling its legal mandate, least of conforming to the major role attached by the literature as key agent for industrialisation. Findings regard- ing credit demonstrate that neither ordinary nor subsidised credit flowed to manufacturing to the extent previously thought. Patterns of legislated credit, sector-targeted banking and privileged access to the Central Bank, all show that agrarian ventures, not industrialists, were the recipients of subsidised official financing. A growing incompatibility between the financial requirements of advanced industrialisation and the clientelistic nature of the domestic polity that had to cater for the needs of agrarian groups, prevented policy elites from adopting a pro-manufacturing stance in financial and credit policies, even had they so wished. A mis viejos, obviamente: Maritza Salamanca & Pascual Brando Acknowledgements I take delight in expressing my gratitude to the persons and institutions that supported this research project. First and foremost, Professor Colin M. Lewis provided unbeatable supervision. His advice was sharp and generous, and took many forms — chapter drafts bursting with multi-coloured scribbles at every page-turn only gradually became my favourite. Colin remained cool, calm and clever when I did not. e department of Economic History is a unique place to conduct research and I have been privileged to become part of this community during these years. Constructive criticism from staff helped in shaping the argument further. For this I thank Stephen Broadberry, Janet Hunter, Tirthankar Roy and Max Schulze. Alejandra Irigoín went beyond duty with professional guidance. To her I am most grateful. Linda Sampson helped with necessary administrative procedures at critical moments. Outside the LSE a number of scholars made valuable suggestions. I am thankful to all of them. Christopher Abel and Albert Berry kindly shared primary material that made it into the final document. James Wilson, Silvia Sacchetti, Marcelo Rougier, Salomón Kalmanovitz, Edwin Rivera, Miguel Urrutia, Carlos Dávila, Eduardo Sáenz-Rovner, Decsi Arévalo and Stefano Battilosi enticed me to enquire further. Stefan Bauchowitz offered excellent editorial advice. Franciso Piedrahita, Julio Manuel Ayerbe, Luis Morales Gómez and Dora Salgado made space in their agendas to attend my calls for contacts, appointments and interviews. e Ronald Coase Institute organised and sponsored two meetings (Moscow and Los Angeles) in which valuable exchanges made me revise and rethink substantial parts of the argument. I am indebted to Mary Shirley, Alex and Lee Benham, Sebastian Galiani, Philip Keefer and John Nye. Friends at the LSE and beyond made the research experience (and non-PhD life) even more interesting. For many moments of laughter, wit and support I thank: Alejandro Bedoya, Mariana Brando, Padraig Brown, Alejandro Castañeda, Juliana Chávez, Ting- Ting Chang, Martín Cordovez, Clemencia Corradine, Rolando De la Guardia, Cristián Ducoing, Xavier Durán, Maria Paula Echeverri, Vincent Fardeau, Fabian Garavito, Nicolas Grinberg, Manuel Iturralde, Daniel Jiménez, Ulas Karakoc, Heinrich and Johan Kramarski, Nicolas Letts, Daniel Linsker, Beatriz Mejía, Julia Mensink, Andrés Palacio, Rodrigo Paris, Esteban Piedrahita, Juliana Postarini, David Rothwell, Jorge Salgado, Lorenzo Sargentti, Leo Shiu, George St. Clair, Felipe Tamega, Jaime Torres, Coskun Tuncer, Monica Unda, Leo Weller, Lales and the LSE team. Paula, Peter and Steve at George the IV eased the transition from work to home. Lastly and most importantly, gracias totales to my indulgent parents for their en- thusiasm and encouragement to go abroad, study further and adventure more. And to Federico, Luisa — and the youngest member of the family — Alejandra, who also cheered along the way. Finally, to Christine Kahmann, who learnt more about Latin America’s industrialisation than she ever wanted to know, loving thanks for her editorial skills and for making daily life in London so good. Contents Introduction 13 1 Relevant Literature Review 21 Late-Industrialisation and the State....................... Finance and Economic Development...................... Conclusions................................... 2 Colombia Since 1850: Endowments, Economics and Politics 59 Basics: Geography and Transportation ..................... Further Obstacles to Growth.......................... Trade and Growth ............................... From Coffee to Industry: Origins, ‘Take-Off’ and Development . e State and Politics.............................. Conclusions................................... 3 Colombia in Latin America: Import Substitution and the State 98 Colombia’s ‘Broad Distinctness’......................... ISI: Definitions, Features and Literature .................... Alleged Commercial Protectionism....................... Exchange Rate and Inflation .......................... Conclusions................................... 4 The Institute of Industrial Development: Its History as Direct Industrial Promoter 151 Historiography on IFI ............................. IFI: Mission, Modus Operandi and Finances.................. Towards a Preliminary Assessment of IFI.................... Pattern of Investment: Funding......................... Pattern of Investment: Autonomy........................ Case Study: Valle & Cauca Coal Plant ..................... Government Intervention on IFI’s Decision-Making: Historical Evidence . Conclusions................................... 5 Industrial Credit, the State, and the Financial System 198 Credit to Industry: the Colombia Literature .................. Credit to Industry: e Voice of the Sector and Beyond . C e Institutional Financial Framework..................... e Sectoral Allocation of Credit........................ Conclusions................................... 6 The Political Economy of Banking-Credit Allocation 241 Interests and Preferences of Elected Politicians . e Political Nature of Economic Policy .................... e Central Bank................................ Power of Credit Demandeurs and Suppliers................... Public Banking for Clientelistic Politics..................... Supply Meets Demand............................. Exploring the Road Not Taken: What If .................... Conclusions................................... 7 Conclusions 296 Bibliography 304 A Appendix 337 List of Figures . Colombia: Evolution of Main Exports, –........... . Coffee Exports, –....................... . GDP Composition: Structural Change Underway – . . Colombia: Evolution of Tariff Rates & Fiscal Yields, –