Colombia - Foreign Economic Relations

Foreign Trade

Colombia's foreign trade regime underwent numerous changes after it began to flourish around the turn of the century. Following a period of high coffee exports that continued through the 1920s, Colombia enacted strict foreign exchange provisions and instituted a restrictive trade program to stimulate economic growth during the Great Depression, when global markets dried up. This was a common response by Latin American nations during the Great Depression; in Colombia's case, the extent to which these controls were loosened or tightened depended largely on the prevailing price of coffee and the country's willingness to expand coffee exports for higher returns.

In the aftermath of the Great Depression and World War II, Colombia employed protectionist trade policies in full force as part of an import substitution industrialization strategy. From 1950 to 1967, Colombia implemented a sophisticated system of exchange rate controls, tariffs, quotas, and licensing designed to shelter the fledgling industrial sector from foreign competition, a technique that was still espoused by a minority of industrialists in the 1980s. This policy served to restrict the importation of manufactured goods that competed with Colombian-made products; however, the undervalued peso penalized the agricultural sector by reducing coffee revenues. Because Colombia required expensive capital goods to build its industrial base, cheap coffee, which was the main source of funds for the purchase of foreign goods, eventually induced serious balance of payments problems.

Besides financial problems, import substitution industrialization caused inefficiencies in Colombia's manufacturing sector, inhibited the efficient allocation of resources, employed fewer workers than export industries, and further skewed the distribution of income. Collectively, these difficulties forced Colombia to change its economic course; policymakers shifted from import substitution industrialization to export promotion with the reforms of 1967. The economy was redirected toward producing for export markets in order to solve the problems created under import substitution industrialization. Because opening the economy to international markets fostered greater competition from abroad, economic planners expected a more efficient manufacturing sector to emerge as it responded to stronger market forces. A crucial element of this strategy was the adoption of a "crawling peg" exchange rate system.

The results of the market-oriented policies were quickly realized: export manufacturing became the fastest growing sector, which, in turn, encouraged employment growth, the diversification of markets and products, and the overall expansion of the economy in the 1970s. This continued until the late 1970s, when the expansion in coffee production devastated manufacturing by reallocating resources to the agricultural sector and by overvaluing the peso.

The fall in manufacturing exports, the subsequent decline in coffee prices, and the global recession of the early 1980s once again caused balance of payments problems for the government, which reinstated import controls in 1983 to prevent the draining of foreign exchange reserves. The economy did not begin to recover until 1984, when policies were adopted that were aimed at reemphasizing international competitiveness and a diversified export structure. The more open trade polices were approached timidly at first for fear that the manufacturing sector would not recover at a sufficient rate, rekindling trade imbalances and capital flight. Between 1984 and 1986, however, nontraditional exports grew at a healthy pace.

Despite the existence of a few remaining import controls in 1987, policymakers, business leaders, and international consultants agreed that the economy's growth was linked to increased international competitiveness in industry, mining, and agriculture. Programs were in place in 1988 under the Barco government to phase out the final deterrents to free trade, and Colombia approached the 1990s with a firm commitment to open international economic relations.

In the late 1980s, Colombia's exports were still based on natural resources, with coffee and petroleum the two largest foreign exchange earners. Crude and refined petroleum products represented 12 percent of total exports in 1986; the Colombian Foreign Trade Institute (Instituto Colombiano de Comercio Exterior--Incomex) reported that petroleum and its derivatives were the fastest growing export commodities in 1987.

In addition to legal exports, the shipment of marijuana and processed cocaine abroad had an important effect on Colombian trade. Colombia was the largest supplier of illegal drugs in Latin America in the 1980s, although estimates of the value of these drugs varied tremendously. From 1981 to 1986, annual receipts from the drug trade ranged from US$1 billion to US$4 billion. The actual amount of money that was laundered back into the economy each year, however, was much lower; estimates varied from US$200,000 to more than US$1 billion. Regardless of the precise dollar figure, most analysts agreed that drug money had a significant effect on foreign exchange reserves. Many believed that narcotics accounted for as much as the equivalent of 50 percent of officially recorded exports. Although the drug trade was highly lucrative, the government made significant efforts to restrain the production and export of this dangerous contraband.

Foreign economic relations

In the late 1980s, because its economy remained highly dependent on the outside world, Colombia conducted its foreign economic relations on several levels. In addition to the dynamic trade links long established with the developed world, Colombia also sought foreign investment and economic assistance. To achieve these goals, Colombia gradually opened its economy to the outside world, particularly after 1967, in order to integrate foreign markets, technology, and capital with its diversifying and expanding economic efforts at home.

In the pursuit of economic liberalization, Colombia forged strong bilateral relations with both developing and industrialized countries. Colombia maintained trade relations with numerous industrialized nations, including the United States, Japan, the Federal Republic of Germany (West Germany), the Netherlands, Canada, and Britain. Economic arrangements with developing countries, by contrast, were important but constituted a much smaller portion of Colombia's trade.

In addition to bilateral trade agreements, Colombia also participated in several organizations dedicated to improving trade among regional members. As one of the original signatories to the Latin American Integration Association (Asociaci�n Latinoamericana de Integraci�n--Aladi), formerly the Latin American Free Trade Association (LAFTA), Colombia supported early attempts to develop a common market in Latin America. Although no more than 8 percent of trade among its members could be attributed to Aladi, integration efforts were an important aspect of both political and economic relations in Colombia and Latin America. Colombia was also a signatory, in 1969, to the Cartagena Agreement, which established the Andean Common Market (Ancom), also known as the Andean Group (Grupo Andino). Formed as a reaction to LAFTA's poor performance, the Andean Group was particularly important to Colombia because most of the nation's subregional trade in Latin American was with its northern neighbors.

The Andean Group was created to encourage greater economic cooperation within the region; although problems arose among member countries, it continued to operate with the full support of its constituency in the late 1980s. Commerce orchestrated by Andean Group agreements, however, amounted to no more than 5 percent of the combined trade of the group's members at that time. Colombia was the group's largest trading partner.

In addition to regional trade groups, Colombia was a member of all United Nations (UN) organizations, including the General Agreement on Tariffs and Trade (GATT) and the Economic Commission for Latin America and the Caribbean (ECLAC). Moreover, Colombia participated in concessional trade arrangements, such as the Generalized System of Preferences (GSP) offered by the United States.

As a leading exporter of coffee, Colombia supported the provisions for coffee trade outlined in the International Coffee Agreement (ICA). Originally struck in the early 1960s, the agreement had nearly seventy-five signatories by the mid-1980s, one-third of which were importing countries. The goals of the agreement included stabilizing world coffee prices and ensuring that a steady supply was available to consuming nations. In an international environment emphasizing free trade, however, the provisions for fixed prices and export quotas came under attack in the late 1980s. By the end of 1987, importing countries led by the United States had decided against extending the agreement, preferring to let international markets set the prices and quantities of coffee sold in the world. Despite this setback, the exporting countries argued that the ICA had been beneficial to all parties for twenty-five years and lobbied for the agreement's resurrection.

Colombia also offered free-trade zones and continued to expand them after they were introduced in 1964. Numerous parts of the country provided facilities for transshipment, assembly, packaging, or sampling of goods. Goods that were then sold in Colombian markets were treated as normal imports, whereas those that continued on to markets outside Colombia traveled free of any government duty or regulation. To encourage foreign participation, these zones also provided exchange rate incentives, allowed free repatriation of profits for the foreign investors, and granted preferential rates on utility use. In 1988 free-trade zones were operated as autonomous organizations under the stewardship of the Ministry of Economic Development. They were located in Barranquilla, Buenaventura, Cartagena, C�cuta, Palmasca, and Santa Marta.

In addition to trade, Colombia nurtured foreign investment. The Andean Group's adoption of Decision 220 in 1987 further loosened foreign investment regulations, allowing greater freedom for the repatriation of profits, a higher percentage of foreign ownership, and investment in a wider variety of firms. In 1986 there were more than 700 foreign firms operating in Colombia, totaling US$2.7 billion in investment. Approximately 85 percent were concentrated in mining and manufacturing. Government efforts were directed toward attracting capital for export industries that would maximize the use of local materials and labor. Additionally, the government was courting foreign banks as potential investors in the restructured financial sector and hoped to bring in more capital for the highly promising petroleum industry.

The United States accounted for two-thirds of all foreign investment in 1986; it was followed by Western Europe with 21 percent, the Caribbean and Latin America with 9 percent, Canada with 2 percent, and the rest of the world with 1 percent. United States interests included manufacturing, such as affiliates of General Motors, International Business Machines, Union Carbide, and Goodyear; pulp and paper producers, such as W.R. Grace and International Paper; and food-processing companies, such as Borden and R.J. Reynolds, in addition to mining and petroleum companies.

In the 1980s, Colombia continued to be a major recipient of foreign economic aid and assistance. In 1949 it became the first Latin American country to receive a World Bank mission dedicated to analyzing its foreign assistance needs for development. As a member of the World Bank group of lending agencies, as well as the IDB, Colombia had consistently received financing for the development of infrastructure, public services, and other areas often neglected by capital allocated on purely economic grounds. Nearly 40 percent of Colombia's outstanding public debt in 1986 was in the form of longterm credits from the World Bank and IDB, totaling US$3.8 billion.

Bilateral aid and concessional loans also played an important role in financing Colombia's economic development. In 1986 total outstanding loans to government development agencies, such as the United States Agency for International Development and the United States Export-Import Bank, amounted to US$2.4 billion. Approximately 50 percent was owed to the United States, 18 percent to Japan, 9 percent to West Germany, and 23 percent to numerous other donors. Since the 1940s, Colombia had consistently ranked among the top Latin American countries in terms of subsidies provided by the United States; total value of development assistance, food aid, and other economic support was US$1.5 billion as of 1987. Most of that assistance had been terminated by 1978, however. Since that time, Colombia had not received significant amounts of development assistance from the United States.

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