concentration of industry and population in the six largest cities. Despite the outward signs of growth, serious flaws remained in the The late nineteenth century witnessed the development of tobacco and coffee export industries, which greatly enlarged the merchant class and led to population expansion and the growth of cities. other Latin American states. The growth experience reflected in figure 4 also coincides with the division of our time window: During the first period, the Colombian economy diverged from other Latin American economies; by 1970, Colombian GDP per capita reached a minimum of slightly less than 0.8 times that of the region. Naturally, a key ingredient of the regime was tight control of all transactions in foreign currency. Garca Garca and Guterman (1988), authors' calculations. Drawing down foreign exchange reserves (20 postwar expansion, Colombia underwent a distinct transformation. Colombia continued to produce raw materials, and although coffee prices collapsed during the depression, output continued to expand. Recently, the Department of Immigration has seen a 16% increase in foreigners coming to visit Colombia. Later in this chapter, we will elaborate on the relationship between financial repression and monetary policy in Colombia. In some areas the gold-bearing gravels also contain silver and platinum. From 1967 to 1980, the Colombian economy, and particularly the coffee industry, experienced sustained growth. This tradition persisted after the central bank was reformed in 1951, particularly after the minister of finance acquired veto power in the board at the same time as the composition of the latter was altered to include representatives from the productive sectors of the economy. Sources: Banco de la Repblica Colombia. the construction industry. During the second half of the decade, this pattern reversed, but at this point, inflation was already in a decreasing pattern. 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. The second period of our analysis was characterized, first, by larger and more persistent inflation and fiscal deficits. 
Colombias economy has recovered remarkably well from the COVID-19 crisis, and strong scal and monetary policy support have averted a stronger contraction of incomes. During the second period, the Colombian economy converged relatively quickly, especially during periods of coffee booms, and after avoiding negative economic growth during 1980s. 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. We are not able to identify indexed debt, so we can only discriminate between debt issued in Colombia, which we denote as domestic debt, and debt issued abroad, which we denote as foreign debt. The Colombian economy has been relatively less volatile than several of its Latin American peers: during this period, it has experienced no hyperinflationary episodes (although, as discussed, inflation was high and persistent during the seventies and the eighties), and growth has been relatively stable: the worst recession since records began occurred in 1999, with a trough in real growth of -4.2 percent in 1999, a relatively small contraction compared to other Latin American economies.1. Strong export earnings and a large increase in foreign exchange reserves were the most noticeable results of this economic expansion. Foreign debt in Colombian pesos was first issued in November 2004 and has never represented more than 15 percent of the total. Copyright 2020 by the Regents of the University of Minnesota, Powered by Manifold Scholarship. First, since 1970 foreign debt has been greater than domestic debt, up until the 1990s. Figure 5. Despite the nominal independence of the central bank (the minister of finance only became a member of the board of directors of the central bank in 1931, and even then without the right to vote), in practice the borrowing limit was customarily bypassed by informal agreements between the government, Congress, and the central bank to enact laws that would allow the latter to directly purchase public debt instruments issued by the government (not included in the category of direct loans). Nonetheless, social and economic improvements remained uneven. We also use data from the central bank for inflation and exchange rates. 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. We assume that foreign debt is issued in US dollars and that domestic debt is issued in Colombian pesos, since debt issued in different currencies has little relevance. Unprecedented amounts of foreign capital found their way into both private investment and public works during this period as a result of the strong performance of coffee and other exports. Log nominal exchange rate, 19912017. Kodama, Masahiro, How Large Is the Cost of Business Cycles in Developing Countries?,, Ocampo G., Jos Antonio, La poltica econmica durante la administracin Samper,, Ocampo Gaviria, Jos Antonio, Una evaluacin de la situacin fiscal colombiana,. Colombia has grown exponentially during the past few years, with GDP growth double the expected rate. Together, figures 23 and 24 suggest that when the monetary base increased, the monetary authorities also increased the reserve requirements. Ocampo G., Jos Antonio, La poltica econmica durante la administracin Samper, Coyuntura Econmica, December 1998, 28 (4), 155187. low, whereas other workers, notably urban employees, received large Spanish imperial rule defined In 2000, after the worst economic crisis in record (to be discussed shortly), inflation reached the single digits for the first time since the 1970s. Figure 4. The reaction of the central bank was twofold: first, it shifted upward the exchange rate bands (figure 15), arguing that the fundamentals of the economy had changed because of the Southeast Asian and Russian crises of the late 1990s; second, the central bank defended the exchange rate band by intervening heavily in the foreign exchange rate market, which led to an important decrease in foreign exchange reserves (figure 18), and, crucially, by increasing the nominal interest rates of the economy. In each case, those owning the land benefited excessively, whereas those working the land remained impoverished. 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. 3. Starting at a local level, [we have to] assure the taxes we are paying, and all of Colombia is paying are invested in much more efficient and clear ways., Senior Vice President, Americas Program, U.S. Chamber of Commerce, Executive Director, U.S.-Colombia Business Council, U.S. Chamber of Commerce, President, National Business Association of Colombia. 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. The cumulative effect of transfers accounts for close to slightly over 60 percent of GDP by the end of the period of analysis, which implies average transfers of 1 percent of GDP. 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. minority. 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 1991.7. It also discourages travel to the States. The fact that GDP growth in Colombia remained well above zero during the global financial crisis of 20082009 is indicative of the increased resilience of the economy to external shocks. The reforms are important. coffee, so that future downswings in the industry would not have equally The economy under the Spanish system of mercantilism. 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. This has led the government to issue a tax reform proposal. 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. 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. The World Bank views tertiary level education (beyond high school) as an indicator of a countrys ability to prosper, end extreme poverty, and build a stronger society. Since then, monetary independence, together with increased fiscal discipline and the adoption of a floating exchange rate, allowed the economy to recover a certain degree of persistent macroeconomic stability, as evidenced by low historical inflation and fiscal deficits close to the average of our time window. Specifically, the monetary reform of 1963 created the monetary board, which was in charge of monetary, credit, and exchange policy, aimed at contributing to the financing of those sectors of the economy considered crucial for long-term economic development. In 1999 the exchange rate was allowed to float (almost freely). These developments helped to bring about a period of fast economic growth (see figure 12) and reduced external financing needs, for coffee was at the time the most important export commodity produced in a relatively undiversified Colombian economy. Figure 20. Reserve requirements and inverse of money multiplier. Figure 2. Figure 22. In terms of exchange policy, prior to 1967 Colombia had a complex system of multiple fixed exchange rates, which were often adjusted (figure 9). manufacturing. 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. 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. much of Colombia's social and economic development. Current account as a share of GDP. Tourism is becoming a shining star in its economy. Debt to GDP. The Colombian government issues bonds abroad, known as TES Global, that are denominated in Colombian pesos. Figure 21. 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. This is not driven by the external sector as some other growth rebounds have been in previous years.. Unfortunately, we can only identify the currency of the bonds issued until very recently. disproportionately to the export sector, cities, and manufacturing The recession lasted from 1998 to 2000; real GDP fell by 4.2 percent in 1999, the worst contraction since records began. were the most noticeable results of this economic expansion. Figure 17. 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. During this period, monetary financing was mostly in the form of transfers of profits from the central bank. 5. 
Sources: Banco de la Repblica Colombia. We name this period monetary dominance. 10. colombia gran revolution boyaca battle Junguito and Rincn (2007) and Banco de la Repblica Colombia, authors' calculations. labor arrangements existed on the haciendas, such as sharecropping, Figure 7. Financing. Also, since 2001 the share of foreign debt in US dollars has averaged more than 80 percent of the total outstanding debt. Sources: Banco de la Repblica Colombia. Figure 3. Sources: Hernndez Gamarra and Jaramillo Echeverri (2017), authors' calculations. Prior to 1991, as discussed, fiscal deficits and monetary finance were small but frequent. groups, with perhaps as much as 70 percent of the population receiving Inflation, 19912017. Figure 7 shows the evolution of the fiscal deficit and its main sources of financing throughout our time window. That year, a coffee production boom in Colombia coincided with a poor harvest in Brazil and rising international prices. However, this deficit was financed mainly by foreign debt, and the monetary base even decreased. There is still a lot of fiscal stimulus in the pipeline to help households and businesses navigate the COVID crisis.. It has been argued elsewhere that a reason for the macroeconomic stability that Colombia endured throughout its history is the memory of a hyperinflation episode at the beginning of the twentieth century, during a civil war. 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. Agriculture remains a major component of the Colombian economy, although industrial development since the 1940s has been remarkable. The great lesson is that our work cannot stop there.. In 1991, a new constitution enshrined monetary dominance via an independent central bank in charge of reducing inflation and accountable to Congress.
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