Cover Story | 4/1/2009 12:00:00 AM
The Looming Recession
The economy was not as strong as the government claimed. Vigorous measures will be required to move forward.
Last week, Treasury Minister Oscar Ivan Zuluaga, Commerce Minister Luis Guillermo Plata and Carolina Renteria, the director of the National Planning Department announced that economic growth last year was just 2.5 percent. In the fourth quarter of last year, GDP expanded by a mere 0.7 percent.
Renteria admitted that she was shocked by the across-the-board slow-down in sectors ranging from construction, public works, and agriculture to the coffee industry, local government projects, and investment. She was being refreshingly frank. But it’s amazing that Colombia’s rapid economic decline would catch government officials by surprise considering that, over the past six months, it’s been painfully obvious that much of the world’s financial framework was crashing to the ground.
Ever since the global financial services firm Lehman Brothers filed for Chapter 11 bankruptcy protection last September, U.S. companies that were icons of the 20th Century have fallen like dominoes. All of this has plunged the United States into its worst economic crisis since the Great Depression of the 1930s. Meanwhile, unemployment is reaching alarming levels in Europe, Japan is in the midst of its worst recession since World War II, and the global crisis has led to the fall of governments in Iceland, Hungary and the Czech Republic.
Despite the unfolding catastrophe, the Colombian government’s economic team believed that the boom years of growth and prosperity would help shield the country. Critics who warned of trouble were dismissed as nay-sayers. True, perception is important and government officials must exude confidence. But they should also have taken the necessary measures to prepare for a looming and widely predicted crisis.
Toward the end of last year, President Uribe warned that the economic slowdown would reduce the state’s income from taxes but his subsequent economic measures were insufficient. It wasn’t until February that the government announced an emergency infrastructure plan costing 55 trillion pesos as well as a jobs program run by the SENA and a plan to provide credit for the auto and appliance sector.
The latest economic data have brought more bad news. In January, industrial output fell by nearly 11 percent, the worst freefall since the economic crisis of 1999. Trade contracted 4.5 percent, remittances from abroad fell 13 percent and exports dropped 7 percent. In addition, a difficult winter provoked a 25 percent contraction in the coffee industry in the last quarter of 2008. All of this pushed up unemployment.
When officials saw these new these figures, the economy finally took center stage on the government’s agenda. Instead of 3 percent growth, the government now predicts that the economy will expand by between 0,5 percent and 1.5 percent this year. But The Economist magazine and Barclays Bank are forecasting a 1 percent contraction in the Colombian economy. Due to falling demand, it’s likely that GDP will shrink in the first quarter of 2009, signaling that the country has entered a recession – meaning two consecutive quarters of shrinking GDP.
Spending is one of the keys to getting out of a recession and the Uribe government pins part of the country’s economic problems on mayors and governors who failed to invest some 4 trillion pesos on public works projects. Officials are also dismayed over the failure of city officials to move ahead on massive public works projects in Bogota, which accounts for 27 percent of the country’s GDP.
But for many experts, the Uribe government holds the lion’s share of the blame. Juan Carlos Echeverry, the former Department of National Planning, says that the government failed to convince governors and mayors to accelerate state spending. In addition, the government could have lowering the value-added tax and gasoline prices while providing tax breaks to stimulate consumer spending. But Zuluaga, the treasury minister, has stated that he will not support any tax breaks because that would reduce government funds available for anti-poverty programs. Luis Carlos Villegas, president of the National Business Association of Colombia, said: “It’s a pity that the country couldn’t face the international crisis with higher levels of growth but the government failed to loosen up monetary policy.”
Villegas was laying part of the blame on the board of directors of the Central Bank. For many months, the Central Bank increased interest rates in order to control inflation which, over the past eighteen months, had been rising. The desire to reign in inflation is understandable, but it’s unclear why it took so long for the bank’s board waited to react in the wake of the crisis on Wall Street which erupted in September. Acting as if nothing had happened, the board waited four months before reducing interest rates.
The world appears to be facing the worst economic crisis since 1929 and it was naïve to think that Colombia could emerge unscathed, especially in an era of globalization. It’s also scandalous that following Black September on Wall Street that the government failed to take drastic and timely measures. Instead of focusing on Colombia’s tottering economy, the Uribe government and the Congress were consumed by issues like the “personal dose” of recreational drugs, whether or not mayors and governors should have the right to be reelected, and a proposed referendum on Uribe’s efforts to run for a third term.
Fortunately, it’s still possible to change course. Banks in Colombia are strong, the government has financial resources for 2009 and President Uribe can count on a majority in Congress to implement his economic stimulus plans. It’s time to get to work.