SEMANA/Interview | 10/3/2008 12:00:00 AM
“We didn’t go too far”
The head of the Colombian Central Bank (Banco de la República), José Darío Uribe, dismisses criticisms by those who blame it for the economic slowdown.
JOSÉ DARÍO URIBE: In 2007 increases in spending growth exceeded more than eight percent and credit for spending on big ticket items increased by more than 50 percent. That rate of growth wasn’t sustainable because it increased inflation and made both individuals and the financial system vulnerable. Those growths had to be lowered for the good of the economy in the long term. The interest rates increase, of course, contributed to moderating spending growth and credit but other factors unrelated to monetary policy also had a role. For example, food prices and prices on regulated goods have increased a lot, which reduces the real available income of people. That also negatively affects spending, more than the increase in the cost of credit. In addition, the spending of durable goods, like electrical appliances, have their natural cycles: one doesn’t change one’s refrigerator or television every year.
SEMANA: Perhaps you went too far?
J.D.U.: The increase of interest rates of the Banco de la República came about from very low levels in 2006. The interest rate of the bank, excluding inflation, is now at 2.2 percent, and if we calculate that as an average of the so-called indicators of basic inflation, 4 percent. In no way can it be said that the board of the Bank has gone too far in the increase of its interest rates. In addition, don’t forget that inflation and inflationary expectations distance themselves from established targets and, as I said earlier, the expense and credit achieved unsustainable rates. Unsustainable growth always ends in recession and large increases in unemployment and poverty.
SEMANA: What other things have had such major effects on the GDP in the second trimester?
J.D.U.: Public works fell around 15 percent in the first semester of this year. That takes away at least .6 percentage points of growth. Or, in other words, if the growth of public works had been 0 percent, instead of under 15 percent, the growth of the GDP for the first semester would have been at least 4.7 percent and not 4.1 percent. The restriction on car exports to Venezuela, the natural slowing down of investment in transportation equipment after various years of continuous growth, the strike at Cerromatosos (a large nickel mine), and the slowdown of public spending growth also had effects.
SEMANA: Growing at four percent isn’t going backwards?
J.D.U.: In 2006-07 we grew at more than six percent. It isn’t strange then that now we might grow below our potential. In addition, we should keep in mind that the potential growth of the economy isn’t an observable variable, it must be estimated and any estimation is imprecise and changes with time. Lastly do not underestimate a growth rate of four percent. With that growth the per capita GDP could grow a little bit above the 2.5 percent rate, which is more than the average Colombian growth rate from all of the 20th century. Of course, we would like to grow at a sustained manner at a higher rate, but for that we would have to be discussing important topics such as our institutions, physical and human capital investment, technological innovation, the efficiency of the assignment of resources and our physical infrastructure.
SEMANA: And employment will be most affected…
J.D.U.: That is an important point. For now I would say that the country should think about why in 2003 we grew 4.4 percent and the unemployment rate fell 1.5 percentage points, while in 2007 we grew 7.8 percent, almost double from 2003, and the unemployment rate fell only 0.8 percentage points, almost half from that year.
SEMANA: Would there be any way to correct the course of growth? In these circumstances, wouldn’t it help a great deal if rates were lowered by the Bank?
J.D.U.: Remember that the commitment of the Bank is with macro-economic stability. This means the search for low and stable rates of inflation while avoiding pronounced output deviations with regards to a sustainable level. In that sense, before speaking about a correction of the course of growth we have to verify whether the economy is heading towards an unstable situation. That’s what we do at the Bank. Depending on what happens with monetary policy it will be adjusted according to the objectives I have mentioned.