recession that began in 1981 caused demand in external markets to fall impoverished. Caballero Argez, Carlos and Miguel Urrutia Montoya, Las crisis financieras del siglo XX, in Carlos Caballero Argez and Miguel Urrutia Montoya, eds., Historia del sector financiero colombiano en el siglo XX: Ensayos sobre su desarrollo y sus crisis, Asobancaria and Grupo Editorial Norma, 2006. experienced a coffee boom that catapulted the country into the modern Before proceeding to a detailed analysis of the three periods, we provide some elements of the historical background of the joint determination of monetary and fiscal policies prior to 1960. Sources: Banco de la Repblica Colombia, authors' calculations. continued growth and stability. Colombia continued to produce raw materials, and although coffee prices collapsed during the depression, output continued to expand. To date, the independent central bank has never granted any direct loans to the central government. As discussed before, real per capita GDP growth in Colombia was only slightly above the reference rate of 2 percent during the period.
This is great for U.S. investment in Colombia. manufacturing start-ups directed toward domestic consumption that The first period had the lowest average fiscal deficit of the three periods under analysis: 0.43 percent of GDP. Finally, during the third period, between the early nineties and the latest data available, deficits were the largest on average (3.27 percent between 1991 and 2017). This is consistent with the fact that although macroeconomic volatility was low, the Colombian economy did not catch up perceivably faster than other Latin American countries. to restrict government spending severely. The dramatic fiscal consequences of the eventual sudden stop are evident in figure 20, with an abrupt reversal of the current account deficit. Isolating effect of real exchange rate on debt dynamics. This is consistent with the fact that the central bank lent directly to the government, besides transferring seigniorage. previously had been satisfied by imports. , Banco de la Repblica and Fondo de Cultura Econmica, 2007. In fact, for the first time ever, the central bank was able to implement a countercyclical policy and lower its policy rate as the growth of the economy decreased. The reforms are important. Strong export earnings and a large increase in foreign exchange reserves This was probably the direct consequence of a new institutional arrangement introduced at the end of 2003, namely, the commitment to an explicit fiscal rule that constrains the exercise of fiscal policy to a ten-year horizon and presents the government with a debt ceiling. Because of the exchange rate bands, monetary policy naturally was partially subordinated to foreign exchange rate policy.
After 1967 planners in both government and industry shifted the economic strategy to export promotion, emphasizing nontraditional exports, such as clothing and other manufactured consumables, in addition to processed coffee. local industries that were only loosely linked to other regional Figure 11. Despite the outward signs of growth, serious flaws remained in the Colombian economic system.
Figure 22. Inflation, 19912017. Solid macroeconomic policy frameworks are laying the grounds for a continuous recovery of domestic demand, although the sustainability of scal accounts will require further action. benefited excessively, whereas those working the land remained Banco de la Repblica Colombia, authors' calculations. Many expats are finding real estate prices that were already significantly less than similar properties in many parts of the U.S., to be even more of a bargain due to the strong dollar. Socioeconomic changes proceeded slowly; the economy existed Colombias potential for hydroelectric power is greater than any other nation on the continent except Brazil, and hydroelectric plants generate roughly three-fourths of the nations electricity; however, severe droughts (notably in 199293) have occasionally interrupted service, and supplemental thermoelectric plants have been built in many areas. We also thank Jesahel Higuera for his job as research assistant. In addition to the large foreign reserves, external assistance in the form of grants and concessional loans further relieved stress on Colombia's international and domestic finances. An important degree of exchange control was kept by the central bank in the form of crawling corridors for the nominal exchange rate, within which the nominal exchange rate was market determined, and the central bank intervened only in case the rate got close to the corridor limits. The switch toward a monetary policy with functions akin to those of a development bank and more directly controlled by the government naturally had implications for the financing of the fiscal deficit, as will be seen more clearly in the next subsection.
Major fiscal and monetary events, 19602017, Central Bank independence with low inflation mandate, Stabilization plan with exchange rate bands, Balance of payments crisis, end of exchange rate bands, Establishment of inflation targeting regime. (2018). raising, with contributions also made by local artisans and merchants. exporter of raw materials, particularly precious metals, to the mother the 1950s, because of the steep terrain and a relatively primitive opening channels to world markets, a process that continued slowly but GDP grew by 4.5 Before proceeding to the next period of analysis, an important legacy of this period needs to be mentioned. Tax revenues did not increase at the same pace, though, thereby generating an increasing primary deficit. Sign in to access your subscriptions and subscriber-only content. Figure 16. significant growth phase in Colombian history, characterized by an During this period, monetary emission, through both increases in the monetary base and seigniorage, was the main source of financing. Price of Colombian coffee.
The size of the government almost doubled between 1991 and 1999, as the ratio of central government expenditures to GDP increased from 8.9 percent to 16.9 percent. In 2011, the most recent year of the World Banks statistic, 22.6% of Colombias labor force had tertiary level education. Comparing figures 7 and 14, we conclude that the actual resources that the government received from the central bank were greater than what was implied by the growth of monetary base. The actual figure was over double that.. The period 1905-15 has been described as the most significant growth phase in Colombian history, characterized by an expansion of exports and government revenues, as well as an overall rise in the gross domestic product (GDP--see Glossary). The Banco de Colombia was finally nationalized in January 1986. This exchange regime lasted until the early nineties after the promulgation of a newly independent central bank. Coffee contributed most to trade, At the end of 1983, the crisis hit the largest bank of the system (Banco de Colombia) after years of mismanagement, complex lending operations to firms belonging to the Bancos conglomerate funded with deposits, illegal foreign currency loans to the same firms through the Bancos branch in Panama, nonperforming loans, and default to international financial institutions. In the case of Colombia, data from the balance sheet of the central bank indicate that the stock of government debt was progressively (that is, as payments to the central bank became due) swapped with TES, with which the central bank could perform monetary operations with financial intermediaries. Two years later, they reached US$2.5 b. Sources: Banco de la Repblica Colombia. Figure 5 shows the evolution of debt as a fraction of GDP. Together with fiscal discipline, an enhanced prudential financial regulation since 1999 has also been a key factor behind the macroeconomic stability in Colombia, and behind a relatively rapid convergence to the GDP per capita of other Latin American economies. Through Fogafn, the government nationalized, among other institutions, the largest bank of the system.6 The nationalization operations consisted mostly of a bailout of financial institutions funded with monetary emission through the injection of fresh capital and the assumption (by the government) of earlier debts of banks with the central bank.
The monetary board would remain in charge of monetary policy until the constitution of 1991. After twenty-four years, the foreign exchange rate was allowed to be partially determined by market forces. coffee export industries, which greatly enlarged the merchant class and Colombia first became an exporting region in the sixteenth century, under the Spanish system of mercantilism (see The Colonial Economy , ch. Hernndez Gamarra, Antonio and Juliana Jaramillo Echeverri, La Junta Monetaria y el Banco de la Repblica, in Jos Daro Uribe Escobar, ed., Historia del Banco de la Repblica, 1923-2015. Inflation, 19602017. The rapid growth and development of the economy in the early Debt to GDP. groups, with perhaps as much as 70 percent of the population receiving The expansion of the coffee industry laid the groundwork for national concessional loans further relieved stress on Colombia's international
consequences of the recession. The recession lasted from 1998 to 2000; real GDP fell by 4.2 percent in 1999, the worst contraction since records began. Additionally, local governments are restricted regarding how much debt they can issue, as explained thoroughly in Sandoval, Gutirrez and Guzmn (2000). In this sense, with higher financial repression, monetary emission would correspond to a larger share of seigniorage revenues. From 1967 to 1980, the Colombian economy, and particularly the coffee The benefits of economic growth accrued The modern economy is much more broadly based, with the exploitation of hydrocarbon fuels and several metals, agricultural production, and the manufacture of goods for export and home consumption. Sources: Colombian Coffee Growers Federation, authors' calculations. much of Colombia's social and economic development.
Although characterized by fiscal dominance, inflation was also relatively low during this period, mainly because throughout the decade, the size of the government was small: its expenditures fluctuated between 5 and 7 percent of GDP. During the second period, 19711990, the Colombian economy experienced high and persistent inflation and higher fiscal deficits, this time in the context of frequent use of monetary emission to finance government expenditures and heavily controlled foreign exchange markets, particularly after international finance dried up in the wake of the Latin American debt crisis of the early eighties. other Latin American states. The combination of domestic economic achievements in the 1970s and Caballero Argez, Carlos and Miguel Urrutia Montoya, Las crisis financieras del siglo XX, in Carlos Caballero Argez and Miguel Urrutia Montoya, eds., Historia del sector financiero colombiano en el siglo XX: Ensayos sobre su desarrollo y sus crisis.
We highlight the fact that the fiscal deficit peaked in the years during which banking crises occurred: 2.75 percent in 1982 and over 6 percent of GDP in 1999, during the year of the worst economic crisis since the beginning of the twentieth century. In 1999 the exchange rate was allowed to float (almost freely). Land and wealth were still the privilege of a minority. Simply enter your email address below and we'll send you a FREE REPORT: Beautiful, Diverse and Safe - Take Another Look at Colombia. Ocampo Gaviria, Jos Antonio, Una evaluacin de la situacin fiscal colombiana, Coyuntura Econmica, June 1997, 27 (2), 89121. The real exchange rate devaluation after the economic crisis of the late nineties is evident, however, and accounts for slightly more than 6 percent of GDP in 2002. Figure 9. After 1991, although financial repression was gradually abandoned, macroeconomic imbalances began to build up, creating the conditions for the financial crisis of the late nineties. improvements remained uneven. Junguito and Rincn (2007), Banco de la Repblica Colombia, authors' calculations. To address this, in 1974 the Colombian government established special financial institutions named CAVs (savings and home corporations), whose main goal was to supply mortgages. As can be seen in figure 19, the swap was completed in such a way that the participation of government debt securities in the assets of the central bank came to resemble almost exactly the share of outstanding government debt prior to 1991. In early 1983, the monetary board used monetary emission to provide discount credit to credit-choked productive sectors as well, in a context in which the default of domestic banks to international financial institutions created additional hardship for the ability of the central government to obtain financial support abroad. In this chapter, we characterize the joint history of monetary and fiscal policies in Colombia since 1960 following the framework presented in chapter 2. Figure 13 illustrates this fact: coffee exports accounted for over 10 percent of GDP in some years. The Economic Development of Latin America since Independence. To understand the role that monetary and fiscal policy has played in Colombia, we focus on how the national central government has financed its fiscal deficit since 1960. as a national entity.
During the second half of the decade, this pattern reversed, but at this point, inflation was already in a decreasing pattern. Together, figures 23 and 24 suggest that when the monetary base increased, the monetary authorities also increased the reserve requirements. Foreign Exchange reserves, 19601970. The benefits of this floating have been twofold: monetary policy could focus on controlling inflation instead of reacting to the exchange rate, and the nominal exchange rate could respond to foreign shocks (figure 15).9.
But something that is really important is the social indicators, and we are really focusing on trying to improve them.. Coffee contributed most to trade, growing from only 7 percent of total exports in the 1870s to nearly 75 percent by the mid-1920s. In the second period, an expanded fiscal deficit led to increased inflation under the frequent use of monetary emission to finance government expenditures. industry, experienced sustained growth. The Colombian government issues bonds abroad, known as TES Global, that are denominated in Colombian pesos. Skewed income position to ride out the global recession, especially in comparison with Figure 12. The financial crisis helps to explain the increase in both the fiscal deficit and the stock of debt. Subscribe to the Magazine Today and Save 65%, IL Magazine: Discover the World's Best Retirement Haven for 2022 + 24 more, about subscribing to International Living Magazine. The rarity of large fiscal or monetary imbalances or extended periods of large monetary emission for budget finance purposes in Colombia could have contributed to a relatively stable macroeconomic environment during the period of analysis. Given the institutional structure brought about by the monetary board, this period can be understood as one in which fiscal dominance prevailed: increasing fiscal deficits during specific periods (particularly around the financial crisis of the early eighties) were matched by heavy use of credit from the central bank and high average inflation. Recent years have seen major changes in the petroleum industry in Colombia.
Last, and perhaps most important of all, early in the decade of the 1990s, the government decided to turn to the domestic financial market to finance its increasing primary deficit through the use of debt securities (TES). A notable exception to the low inflation during this period is 1963, a year that saw a one-off spike in inflation that reached the maximum observed for our sample (33.6 percent). Reserve requirements and inverse of money multiplier. Specifically, Hernndez Gamarra and Jaramillo Echeverri (2017) argue that there is a historical, negative correlation between the growth of the monetary base and the money multiplier. Figure 21. 5. Sources: Junguito and Rincn (2007), Banco de la Repblica Colombia, authors' calculations. disproportionately to the export sector, cities, and manufacturing It is worth mentioning that interest on domestic debt includes interest on loans by the central bank to the government before 1991. labor arrangements existed on the haciendas, such as sharecropping, No claims are made regarding the accuracy of Colombia GROWTH AND STRUCTURE OF THE ECONOMY information contained here. Second, the constitution changed the nature and structure of the central bank, making it far more independent from the central government than at any time in its previous history. contact. Finally, the experience during the third period has been mixed: divergent during the first year and rapidly converging afterward (a trend that continues to this day). It is driven by exports of petroleum, emeralds, minerals, bananas, coffee, and cut flowers. markets other than Spain. At the same time, existing evidence indicates that policymakers routinely employed heavy financial repression to control key monetary aggregates (Hernndez Gamarra and Jaramillo Echeverri 2017). Figure 6. In the transition between a fiscal deficit predominantly financed with monetary emission to one predominantly financed with domestic debt instruments, there is an important question with regard to the fate of the debt stock of the government to the central bank. The economy at that time was based primarily on mining, agriculture, and cattle raising, with contributions also made by local artisans and merchants. More and more people are discovering the wonderful country of Colombia. Local governments can levy particular local taxes, and some local governments even issue bonds that are publicly traded, but the latter sources are not the most important for financing.2. Figure 4 shows that the Colombian economy did not significantly outperform comparable Latin American economies. Figure 7 shows the evolution of the fiscal deficit and its main sources of financing throughout our time window. percent in 1987, thanks in part to a particularly strong contribution by Despite the financial crisis, it cannot be said that the decade of the 1980s was a lost decade for the Colombian economy, insofar as economic growth between 1980 and 1991 averaged 3.31 percent per year (more than double that of Latin America as a whole). In figure 22 we compare the observed dynamics of debt to GDP with the implied evolution of debt with a fixed real exchange rate. 9. The benefits of economic growth accrued disproportionately to the export sector, cities, and manufacturing groups, with perhaps as much as 70 percent of the population receiving little or no benefit from this period of expansion. The argument proposed here of a policy mix of money growth and financial repression implies a broader understanding of money supply in the context of a simple government budget constraint, as detailed in earlier sections. Junguito and Rincn (2007), authors' calculations. Our data allow us to discriminate between interest rate expenditures on domestic debt and those on foreign debt. Similarly, bonds have been issued in Colombia that are indexed to US dollars. This number, although above a benchmark rate of 2 percent for the United States, was not sufficient to allow the economy to achieve a perceivable degree of convergence. Wages for agricultural laborers remained low, whereas other workers, notably urban employees, received large salary increases. Although this aid allowed Colombia to maintain a relatively higher rate of GDP growth than the rest of Latin America, aggregate production remained depressed. During the course of the Coffee's success, therefore, was ultimately responsible for a reliable To address the negative effects of inflation, CAVs were authorized to issue loans denominated in UPACs (constant purchasing power units), indexed first to inflation and eventually to a measure of the nominal interest rate of the economy. percent in 1982 and 50 percent in 1983) to compensate for both trade and
When the Banco Nacional was intervened by authorities in June 1982 (and the Banco del Estado in October of the same year), the ensuing loss of public confidence in the financial system forced the central bank to use its lender of last resort facilities, in a first stage, eventually followed by the decree of outright nationalization powers to the central government. During this period, monetary financing was mostly in the form of transfers of profits from the central bank. Figure 23. The Colombian economy grew 3.1% in 2015, is on track to grow another 2.5% in 2016, and the Central Bank of Colombia predicts a 2% expansion for 2017. Colombia has transformed from its dark past and offers a stable government, good infrastructure, and breathtaking scenery to vacationers, ecotourism, business conventions, trade shows, medical tourism, and of course those wanting to relocate part- or full-time to the country. The combination of domestic economic achievements in the 1970s and generous foreign aid, however, placed Colombia in a relatively favorable position to ride out the global recession, especially in comparison with other Latin American states. A favorite mechanism for regulated institutions to evade controls was the use of complex operations between financial and real sector firms belonging to the same financial conglomerate. The resources that the central bank generated (growth of monetary base and seigniorage) did not necessarily correspond to what it transferred to the government. Second, although the use of monetary emission to finance the government was frequent, it was never sizable compared to other countries: monetary emission to finance fiscal deficits was more than 2 percent of GDP only during two small time windows, 19771978 and 19911992. The first period, divergent fiscal dominance, covers the window from 1960 to 1970; the second, convergent fiscal dominance, period covers the nineteen years from 1971 to just before the promulgation of a new constitution in 1991; and the third and final period, monetary dominance, spans from 1991 to 2017, which is the latest data point in our analysis. In the colonial period the economy was based almost entirely on gold mining, including robbery of the metal from the graves (guacas) of indigenous persons. Foreign exchange reserves, 19912017. Similarly to how we deal with domestic and foreign debt, we assume that interest payments on foreign debt are in US dollars, while interest payments on domestic debt are in Colombian pesos. Since 1996, the symptoms of a massive crisis in external funding were being observed at the same time that a number of emerging economies were encountering difficulties in international capital markets. In 1985, the government created the National Fund for the Guarantees of Financial Institutions (Fondo de Garantas de Instituciones FinancierasFogafn), in charge of administering the deposit insurance fund and a resolution fund for financial institutions.
According to Caballero Argez and Urrutia Montoya (2006), the total cost of the crisis to Fogafn reached 9.7 percent of the GDP in 1998. Sources: Junguito and Rincn (2007) and Banco de la Repblica Colombia, authors' calculations. coffee, so that future downswings in the industry would not have equally According to Hernndez Gamarra and Jaramillo Echeverri (2017), from 1951 to 1963, monetary policy was under the control of private entities (among them, private banks), delegated by the government to administer monetary and exchange policy in the interest of an ordered development of the Colombian economy..
Relative GDP per capita. The ability of the central bank to purchase TES in secondary markets does not constitute seigniorage or monetary emission to finance the fiscal deficit inasmuch as interest rates are market determined. In this section, we analyze the role that these transfers played in the dynamics of debt. First, since 1970 foreign debt has been greater than domestic debt, up until the 1990s. The transfers commitments provided by the constitution to the regional governments caused a rapid increase in central government expenditures (see figure 8), mostly in social security (Ocampo Gaviria 1997). This point marks the launch of the market for bonds issued by the government. This was largely because the global The Colombian government issues bonds abroad, known as TES Global, that are denominated in Colombian pesos. Sources: World Bank, authors' calculations. The Banco de Colombia was finally nationalized in January 1986. Strong commodity prices have improved the terms of trade and are supporting fiscal outcomes, against the background of rising external demand. financial and multilateral development institutions, which forced them In four years (19001903), inflation was over 50 percent per year, and in 1901 it reached 327.6 percent. National development proceeded from improved transportation A practical question that is left to be addressed is why and how, during the prolonged period of fiscal dominance between 1960 and 1991, inflation never increased to levels remotely comparable to those of other Latin American economies that suffered recurrent hyperinflationary episodes. Recently, the Department of Immigration has seen a 16% increase in foreigners coming to visit Colombia. In the transition between a fiscal deficit predominantly financed with monetary emission to one predominantly financed with domestic debt instruments, there is an important question with regard to the fate of the debt stock of the government to the central bank. Despite the successes of the 1970s, the national economy began to flounder in the early 1980s.
This event occurred in the context of a newly independent central bank, increasingly flexible exchange markets, and a reorientation of deficit finance toward the domestic capital markets. In this sense, with higher financial repression, monetary emission would correspond to a larger share of seigniorage revenues. little or no benefit from this period of expansion. If you had asked any Colombia analyst at, let's say June last year or July last year, how much Colombias economy would grow, most people [were] working with the assumption that the economy would grow around 5%, he explained. Colombia is known for its oil, coffee, copper, and gold and each of those markets has contributed to the countrys economic growth over the past few decades. Annual growth of the monetary base and annual change of the money multiplier.
A favorite mechanism for regulated institutions to evade controls was the use of complex operations between financial and real sector firms belonging to the same financial conglomerate. Throughout most of the 1980s, Colombia ranked among the leading recipients of World Bank (see Glossary) loans, as well as direct assistance from the United States. Inflation has risen well above target, initially driven by food and energy prices, which have particularly affected low-income households. Colombian economic system. noncoffee industrial sector and the service sector was accomplished in We identify three main periods in Colombia since 1960 that correspond to different dynamics in inflation, the fiscal deficit, the structure of financing of the deficit, and the institutional structure of monetary policy. According to Caballero Argez and Urrutia Montoya (2006), the financial crisis was the result of increased financial repression during the coffee boom years, which led to financial innovations oriented toward speculative investments and occasionally evading regulatory controls.5 When the Banco Nacional was intervened by authorities in June 1982 (and the Banco del Estado in October of the same year), the ensuing loss of public confidence in the financial system forced the central bank to use its lender of last resort facilities, in a first stage, eventually followed by the decree of outright nationalization powers to the central government. Brtola and Ocampo (2012) and Kodama (2013) highlight the low macroeconomic volatility that Colombia has experienced.
facilities, financed directly and indirectly by the coffee industry. Greater economic integration soon became evident with the heavier concentration of industry and population in the six largest cities. Financial repression may have helped to avoid large, undesirable macroeconomic fluctuations. international prices.