Economy and History

The informal economy is an inventive way of responding to social exclusion: renting cellphones by the minute. Photo by T. Luke Young.

​At the 20th century’s close, Colombia found itself immersed in a severe crisis entailing both an internal armed conflict and the most severe economic recession in modern history. Although, as various historians have correctly pointed out, violence has not been a constant feature of the country’s history, the century did begin in the midst of the last and worst civil war of the nineteenth century, the War of a Thousand Days, a result of which was the secession of Panama. Then, in the mid-20th century, another conflict known simply as “La Violencia” (The Violence), erupted. The most recent conflict bears some similarities with those of the past, particularly in terms of the colonization process that, given the peculiarities of Colombian geography, plays a role all over its territory. Other factors are also at work, notably the country’s traditional fragmentation of power. Nevertheless, the most recent conflict’s scale and severity are associated with an entirely new phenomenon: the extensive damage wrought by drug trafficking in terms of heightened violence and in Colombian society in general.

The second component of this crisis, the economic recession, exhibits previously unknown characteristics. Until recently, Colombia had been undergoing a relatively successful economic development process, avoiding some of the problems troubling other Latin American countries, particularly the severe external debt crisis of the 1980s. Unlike past crises, this one has many of the elements common to other Latin American countries such as heightened vulnerability to external financial cycles and a failure to fully adjust to an overly rapid trade liberalization. Other elements are more specific to Colombia, particularly the excessive growth in public sector spending resulting in a fiscal crisis. This was a product of efforts to build firmer foundations for peace through a combination of economic liberalization and an expanded scope for State action.

These two histories, of violence and economics, are partially interrelated but to a large extent run parallel to one another. In fact, despite many attempts to calculate this internal conflict’s impact upon economic growth, it cannot be proven the cause of the recent economic crisis. Nor can the uneven distribution of wealth and income, so typical of Latin America, be cited as the primary cause of the recent violence. Thus, we should look for clues to understanding the recent violence not in its common “Latin American” features but rather in some specifically Colombian traits—the impact of drug trafficking and the traditional fragmentation of power.

THE COFFEE REVOLUTION AND BEYOND

Three major processes marked Colombia’s 20th-century economic history: the “coffee revolution” at the start of the century, the country’s successful industrialization between the 1930s and the mid-1970s, and economic liberalization during the century’s closing decade. The transition from the first to the second process was smooth and seamless. The transition from the second to the third, however, was traumatic.

The century began in the midst of a veritable “coffee revolution.” Coffee output boomed and forms of production changed radically. The coffee plantations located in the eastern part of the country, hit hard by the War of a Thousand Days and the collapse of international prices, failed to recover when peace was restored and coffee prices started to rise in the first decade of the century. Moreover, these areas were to become one of the focal points of land disputes and the core of the country’s first land reform effort. In contrast, in western Colombia, where coffee cultivation prospered in the early decades of the century, production units were generally medium-sized and peasant-owned.

The coffee boom paved the way for the growth of the domestic market and for the development of the modern means of transport essential to integrating such a geographically complex territory. Both of these factors contributed to the industrialization process. Although these processes were in full swing in the 1920s and further quickened their pace thanks to the availability of external financing, the country was still at a very early stage in its industrialization when the Great Depression struck. As in many other Latin American countries, the worldwide crisis of the 1930s was the chief catalyst for the transition from a primary-product exporting economy to a semi-industrialized economy. From then on, until the oil shock of 1973, the economy grew steadily. Sweeping changes in its production structures and rapid urbanization ensued.

In addition to its own dynamic, a number of forces influenced this process of structural change: the integration of the domestic market, the international coffee market’s price cycle and economic policy. By the end of the 1920s, the country at last had the foundations of a modern transportation network. Its impact on the country’s industrial development became apparent in the following decade, when manufacturing companies began to design their operations based on the nationwide market rather than confine themselves to local markets. The interface between the domestic market’s integration and industrialization continued to be a hallmark of the ensuing decades, with lags in the development of the transportation network as a consistent characteristic of the process. A great deal of the industrialization pattern seen during these years was the result of the combined impact of the domestic market’s integration and the linkages generated by the process itself, which led to the development of new sectors producing agricultural and industrial raw materials. Industrialization, in turn, spurred rapid urbanization, helping to fuel the expansion of domestic demand.

The phases of this process were linked to the coffee industry’s cycle. When the coffee industry boomed (1945-1955), the availability of foreign exchange buoyed investment. The revaluation of the peso, which made imported goods such as machinery and equipment cheaper, was one of the main incentives for investment during such times. When coffee prices were low (mid 1950s through the 1960s), the devaluation of the currency spurred the development of new import-substituting sectors and non-traditional exports. Thus, the exchange rate functioned as the chief price signal for the diversification of production, acting on both the supply and demand for industrial goods. The instruments of trade policy—tariff protection, import controls and export subsidies—supplemented rather than substituted for the exchange-rate policy. In other words, rather than taking the place of market signals, they reinforced the signals generated by the coffee industry’s cycle via variations in the real exchange rate.

This phase of rapid structural change coincided with a long-term downward trend in the ratio between exports and national output, indicating that the domestic market was its main engine. Economic policy strengthened this trend in part, but sought to avoid directing import substitution towards production sectors that, because of the market’s size, had little chance of success. Even more importantly, as a result of the collapse of coffee prices beginning in the mid-1950s and the 1967 reforms to trade and foreign exchange rules, early on the country shifted to a “mixed model” that combined import substitution with export promotion. In the 1960s and the first half of the 1970s, a significant level of export diversification was in fact achieved, and the country took its first steps toward overcoming its over-dependence on coffee. A third component of this mixed model was economic integration, most clearly manifested in the creation of the Andean Group in 1969. The effects of this latter process, however, were rather limited.

The economic growth rates posted during the period of rapid structural change were not particularly high, since, at an annual level of 4.5%, the average was similar to the rate for the Third World or for Latin America as a whole. The glory days of industrialization came at the end of this period, between 1967 and 1974, when the mixed model was at its height and the Colombian economy boasted an annual growth rate of 6.5%. The most striking features of this long process of change were the highly stable growth achieved for almost half a century, its regionally heterogeneous base, and the characteristic gradualism and pragmatism of economic policy, which avoided, in particular, excesses in import substitution.

Regional heterogeneity had implications that went far beyond economics. Ever since the founding of the Republic, regional diversity had been manifested in the rejection of any sort of central hegemony, and hence, in a tradition of limited powers. The strong republican tradition, reflected in the early development of the right to vote and a very firm constitutional division of power, was rooted in the regional elites’ need to negotiate with each other. This tendency did not disappear with the return to political centralism in 1886, and was particularly expressed in the constitutional reform of 1910, which rejected the centralist impulses of the preceding years. This tradition of the division—and even fragmentation—of power could also be observed in the way political parties operated and in other spheres of social life. As new actors and social movements emerged, the tendency to avoid the formation of national hegemonies in any sector—whether workers, peasants, civic actors or entrepreneurs—remained strong.

The benefits of economic development were distributed very unequally. Around 1950, health, education and housing indicators were typical of a very backward country. With the advent of the National Front (1958-1974), large-scale educational and health programs were set up. Despite substantial improvement in the indicators, significant differences between the urban and rural areas remained. One milestone, the 1957 plebiscite led to the allocation of a proportion of the public budget to decentralized education and health expenditures, as well as to a formal alternation of the presidency and the equal division of public posts among the two traditional parties (the two central political features of the National Front).

Income distribution and poverty indicators also gradually improved. The available studies suggest that until the 1960s the benefits of economic growth were concentrated in high-income sectors (both urban and rural) and the skilled workforce, most of it urban. Consequently, until that decade, income distribution deteriorated, and there was little progress in poverty reduction. Then, however, in the 1970s, income distribution and poverty indicators began to improve, thanks to a combination of three factors: (a) a reduction of rural labor surpluses as a result of economic growth and large-scale internal migration; (b) an improved distribution of educational opportunities, thanks to the National Front’s social spending programs; and (c) a sharp reduction in the birth rate and, as a result, in household dependency ratios, which facilitated women’s entry into the workforce.

Rural violence was a recurrent feature of this period. The high concentration of rural land ownership, the conflictive nature of colonization processes and the lack of a strong State presence in rural areas certainly provided the context for many of these events, but the methods used and the identities of the groups involved in this violence changed over time. The 1920s and 1930s were marked by an escalation in peasant disputes, especially in the coffee-growing areas of the country where large landholdings prevailed. These conflicts carried over into the next decades, but were gradually eclipsed by the confrontations between conservatives and liberals that characterized “La Violencia.” Not without difficulty, the National Front put an end to this, but at that very time new disputes over land ownership were erupting, and some of the first revolutionary guerrillas began to make their appearance in the climate created by the success of the Cuban revolution.

The State responded to these tensions with two fairly modest land reform programs. The first was carried out between the mid-1930s and the mid-1940s and focused on downsizing the coffee plantations. The second agrarian reform program was launched in the 1960s as part of the National Front’s social policies. In both cases, rural landowners successfully mobilized against these programs, limited their scope and eventually dismantled them.

THE END OF RAPID STRUCTURAL CHANGE

The international crisis triggered by the oil shock of 1973 signaled not only the end of the boom that had begun in 1967, but also the end of the period of rapid structural change. Industrial growth slowed down sharply, thereby putting a stop to the upward trend in the share of GDP manufacturing provided. Non-coffee commercial agriculture, which had kept pace with the industrial sector, also began to see its growth rates slow in the late 1970s. The expansion of non-traditional exports’ share of the country’s total foreign sales temporarily came to a halt. Most importantly, these ruptures in previous trends coincided with the end of the government’s commitment to industrialization, which became evident for the first time under the last National Front Administration. The various components of the “mixed model” were thus abandoned without truly being replaced by a new development strategy. Such a strategy would come only much later, at the beginning of the 1990s. In the interim, the absence of a long-term strategy was coupled with an economic policy that shifted back and forth as circumstances changed.

The austerity policies implemented during the 1975-1978 coffee boom allowed the country to improve its external debt indicators significantly. When the boom came to an end, externally financed public-sector investment increased, a process that mirrored that of other Latin American countries in the second half of the 1970s. But this process had not advanced far enough when the Latin American debt crisis cut it short. Thanks to low levels of foreign indebtedness, Colombia did not experience the full force of the debt crisis. Consequently, the country was able to resume its growth in the second half of the 1980s and turned in the best economic performance in all of Latin America for that decade (an annual growth rate of 3.7%, compared to 1.1% for the region as a whole). The policies adopted in response to the crisis, in particular the devaluation of the currency and an increase in export incentives, paved the way for another boom in non-traditional exports, which took place prior to trade liberalization in the early 1990s. Burgeoning growth of non-traditional and mining exports enabled the country to finally overcome its dependence on coffee, and exports reached the highest percentages of GDP seen in half a century.

Despite this relatively satisfactory performance, in the early 1990s the country’s economic authorities called for a radical reorientation of its pattern of development. Although the interruption of the process of structural change in the mid-1970s did justify a policy shift, this turnaround actually came more as a result of the prevailing climate in the region as a whole rather than stemming from an actual need to overcome a supposed tendency towards economic stagnation. The ensuing “apertura económica” (economic opening), as it was called in Colombia, was swift and quite radical when considered in terms of the historical patterns of a country characterized by gradualism and pragmatism for more than half a century. Even so, it did avoid some of the extremes of capital-account liberalization and privatization that occurred in other countries of the region.

As in most of Latin America, the results of this effort were, in any case, mediocre. Economic growth, even in the years when production was expanding (1991-1997), did not differ from the rates posted in the 1980s (3.7%) and a number of industries, especially agriculture but also in the manufacturing sector, had severe difficulties coping with the heightened level of external competition. Even more disturbingly, and in contrast to Colombia’s previous experience, macroeconomic policy accentuated the economy’s instability. The aggregate domestic demand cycle was particularly intense. The expectations generated by the discovery of extensive oil deposits and the opening of the economy, as well as the avalanche of capital that began to inundate Latin America around that time, formed the background for the boom in private and public spending that took place during 1992-1995. The excessive domestic and external borrowing required to finance the country’s hefty current-account deficit rendered the economy highly sensitive to interest-rate hikes and any devaluation of the currency. Both did eventually take place as a consequence of the Asian crisis, resulting in a severe loss of wealth and a sharp adjustment in private-sector spending. In 1999 the Colombian economy experienced the steepest decrease in economic activity since national accounting records have been kept, and the subsequent recovery was weak. As a result, at an annual figure of 0.4%, economic growth for the period 1998-2002 was the lowest in the country’s history and below the population’s growth rate.

As these economic processes bear strong similarities to those occurring in other Latin American countries, it is difficult to associate them with the increasing violence plaguing the country. Accordingly, although the prevailing violence has certainly struck a blow to the economy, it would be incorrect to attribute the economic crisis to the violence. Nor should the economic crisis, or the aggravation of social conflicts, be seen as the underlying cause of this new wave of violence. Although the marked concentration of ownership and income and the high levels of poverty certainly create ideal conditions for conflict, it is not clear that these problems were growing worse precisely at the time that violence indicators skyrocketed in the 1980s. In fact, poverty rates declined slightly during that decade and continued to do so until 1999, following the more striking improvement of the 1970s. Although the improvement in distribution observed during those years was not maintained, neither were there any clear signs of a deterioration for this variable.

Indeed, there is some degree of consensus that the sharp increase in indicators of violence experienced in the 1980s has a clearly defined cause: the upsurge in drug trafficking, which came to finance all sorts of violence and overwhelmed the police and judicial authorities. Regional fragmentation also contributed to violence. In what amounts to a perpetuation of long-standing structures, the conflicts that arose –associated with guerrilla and paramilitary activities as well as drug trafficking– were largely a summation of local conflicts rather than centralized offensives. This has averted the disintegration of national structures but, on more than one occasion, has also created a feeling of chaos.

Be this as it may, since the 1980s a political awareness of the need to support social reforms in order to lay the groundwork for peace has emerged. This is certainly valid, especially in the case of rural areas, where drug trafficking became intermixed with historical conflicts in the agricultural frontier zones (including those involving guerrilla activity). In the 1980s, social programs targeted the areas of conflict through the National Rehabilitation Plan. The Constitution of 1991 took a stronger stance, reflecting the consensus concerning the need to confront the country’s serious social deficits and, at the same time, to strengthen democracy by handing over more functions and resources to local governments. Economic liberalization efforts thus coincided with the steep rise in decentralized public-sector spending, most of which went to social sectors.

The increase in social public-sector spending—the most rapid of any Latin American country in the 1990s—succeeded in extending the coverage of social services, but also helped set off a fiscal crisis that has made the task of macroeconomic management even more difficult since the mid-1990s. In any case, this strategy cannot be described as “economic populism,” as the succeeding administrations also tried to finance increased spending through a series of insufficient tax reforms. At the same time, the proportion of the urban population living below the poverty line fell from 47% in 1991 to 39% in 1997. However, a commensurate improvement in rural areas did not occur. On the contrary, as a result of the severe agrarian crisis triggered by the opening of the economy, rural poverty actually increased.

The recent crisis stopped these positive trends and, in some cases, reversed them. The worst setback was the increase in the proportion of the urban population living below the poverty line, which in just two years wiped out all the gains of the previous six years. The culprit in this case was the dramatic increase in open unemployment. Informal employment that, unlike the general pattern in Latin America, had diminished during the boom years, burgeoned during this recent crisis, reversing the achievements of almost an entire decade.

Violence and economic crisis were thus Colombia’s complex legacy as it moved into the new century. These are two parallel processes whose interconnections are surprisingly weak. Furthermore, the political process has sought to mitigate the effects of the social deficit as a possible contributing factor to the violence, though only with partial success. These efforts have, moreover, generated fiscal tensions that have made the management of the economic crisis more difficult. Most importantly, Colombian society has many strengths that can help it grapple with these problems. In particular, the country’s sturdy republican roots, have further been enhanced by the 1991 Constitution, which opened spaces for local and participatory democracy.

The simplistic views—a “failed State,” a “historical tradition” of violence, violence that essentially stems from poverty and a lack of democracy, an economic crisis generated by widespread violence, among others—so commonly voiced in many foreign (and some domestic) analysts’ interpretations of the current crisis are of little help. A stronger line of reasoning would recognize the roles of a number of features specific to Colombia, such as the country’s traditional fragmentation of power and the extensive damage wrought by drug trafficking, as well as other features common to many Latin American countries, particularly overestimation of the positive and underestimation of the negative effects of economic liberalization.