Las Claves del Futuro: Economía y Conflicto en Colombia, (Keys to the Future: Economics and Conflict in Colombia)

Citation

Sandilands, R. (2003), "Las Claves del Futuro: Economía y Conflicto en Colombia, (Keys to the Future: Economics and Conflict in Colombia)", Journal of Economic Studies, Vol. 30 No. 2, pp. 183-187. https://doi.org/10.1108/jes.2003.30.2.183.1

This book represents the thought and experience of a prominent economist who directed Colombia's National Planning Department (DNP) during the crisis years of 1998‐2002. On demitting office with the change of government in August 2002, Juan Carlos Echeverry assumed the post of Dean of the Faculty of Economics at the prestigious University of the Andes where he continues to exercise great influence on students and economic policy‐makers. His book surveys the evolution of the Colombian economy over the past 30 years, with a focus on the last decade during which time Colombia embarked on an ambitious programme of “apertura”, or openness.

Echeverry notes that he was a member of the team that negotiated with the IMF, and was basically sympathetic to the “Washington consensus” that stressed “fiscal health” (smaller deficits), privatisation, financial liberalisation, central bank independence, and tax, pension and labour‐market reforms. He laments that the vicious and very costly “narco‐guerrilla war” that Colombia has suffered during this period has greatly offset the benefits of allegedly sound economic policy, and has given liberalisation an undeserved bad name.

The appearance of Las Claves del Futuro (The Keys to the Future) in Colombia is very timely. It almost coincided with the publicity surrounding the celebration of the centenary of the birth of another economist who achieved great prominence as a teacher and practioner in Colombia: Lauchlin Currie (1902‐1993). After a distinguished career at Harvard, the Federal Reserve Board, and in the White House as Franklin Roosevelt's economic adviser from 1939‐1945, Currie came to Colombia as head of a World Bank mission in 1949 (see Sandilands, 1990; Laidler and Sandilands, 2002). He was invited to stay on as an adviser to successive governments for the next 40 years. Most notably he was the father of a unique index‐linked housing finance system (known in Colombia by its Spanish acronym, UPAC, for “unit of constant purchasing power”) which he stoutly defended from its birth in 1972 until his own death in December 1993.

Echeverry gives considerable space to an analysis of that innovative but highly controversial housing finance system. He notes that its main original aim was to make construction a “leading” sector that could permanently boost the overall economic growth rate (as explained in detail in Currie (1974)). In 2002 the system lay in ruins, the victim of countless debilitating modifications. Construction had for the past four years been leading the economy down instead of up. Many thousands had lost their jobs, both directly and as a result of the depressed state of the industries that supply the construction sector. Urban unemployment stood at 18 per cent, with the official figure for urban underemployment standing at 33 per cent. In other words, only half of the workforce was fully employed (rural underemployment was worse than the urban rate.)

The two directors of the National Planning Department who implemented Currie's celebrated Plan de las Cuatro Estrategias (Plan of the Four Strategies) between 1971 and 1974 were Roberto Arenas and Luis Eduardo Rosas. At the Currie centenary in October 2002 both recalled the great impulse that UPAC had given to construction and to overall growth in the 1970s, together with full employment and improved distribution. Comparing the dynamism of the 1970s with the stagnation of today, Rosas remarked, in a newspaper tribute to Currie: “!Como nos hace de falta en estos momentos!” (“How we have need of him now!”)

Echeverry concedes that in the 1970s and 1980s construction played a very positive role. It created jobs and was a contra‐cyclical influence. But he claims that in the 1990s, with apertura (the policy of economic openness) and the great influx of external credits and drug money, construction became a pro‐cyclical speculative activity that was bound to collapse, as collapse it did in 1998 – although he stressed that the problem was compounded by the fiscal strain of a worsening civil war. His main complaint is that construction is a sector that has been privileged and has diverted resources from traded goods. It also relies on unskilled workers whereas the future depends on skills and an allocation of resources more in tune with the market forces that Adam Smith emphasised. Let us rely on Smith, says Echeverry, not on protectionist “models of development” and privileged “leading sectors”.

However, Currie's ideas were also heavily influenced by Smith. Currie's mentor at Harvard in the 1920s was Allyn Young, whose presidential address to the British Association in 1928 on “Increasing returns and economic progress” (Young, 1928) has inspired modern development theory, to which Currie has been an interesting contributor (see, for example, Currie, 1997). Echeverry does not refer to this so‐called endogenous growth theory, perhaps because of his profound scepticism of “models of development”. But Young and Currie were inspired by the opening chapters of The Wealth of Nations where Smith emphasised that the key to increased productivity was specialisation or the division of labour. And the division of labour in turn depended on the size of the market or on real demand.

Today demand management is generally associated with Keynesian policies to tackle short‐run business cycles around a secular trend. These cycles are closely associated with interruptions to the flow of monetary incomes and expenditures (or monetary demand). But Smith and Young focused on competition, openness and the mobility of labour to increase the underlying trend of real demand and market size (or what Smith also called “the power of exchanging”), hence specialisation, hence productivity.

Young explained that in the modern economy specialisation takes the form of new, more specialised firms and industries that compete against the old. They introduce new forms of organisation and technology, but only as and when it pays to do so. The larger the market size, the greater the incentive to innovate. Currie extended this idea to show that the existing growth rate (of the overall market or GDP) had a tendency to perpetuate itself. But in Colombia where resources were abundant but grossly malallocated and underutilised, and where labour mobility was very poor, growth fell far short of potential. This self‐perpetuating (or endogenous) growth rate was a vicious circle that could best be broken by institutional measures to liberate the great potential supply.

This is where Currie's vision of construction's potential role goes rather further than Echeverry's. As a “leading sector” it is valuable not so much as a contra‐cyclical, stabilising force (though it could also serve that purpose). Rather, it could help Colombia (and other countries) to break free of her historically slow, endogenous growth path. It is a leading sector because it:

• •

  is an important direct and indirect component of GDP, so its growth has a significant effect on overall growth;

• •

  moves independently of movements in the rest of the economy, and can be moved exogenously through discretionary policies;

• •

  plays a vital role in promoting labour mobility; and

• •

  is a sector with enormous latent demand.

But in the past this latent demand had been severely repressed. Potential homeowners can usually only buy a home with the help of substantial mortgages. Thus effective demand required a rapidly expanding flow of credit on convenient terms. This was not available because chronic inflation discriminated against housing finance. High inflation requires high interest rates to attract savings. But for people borrowing large sums high interest rates impose a severe cash‐flow problem in the short term (the so‐called “front‐end loading problem”). This curtails effective demand. By contrast, “constant value” savings and loans made it both more attractive to save and easier to borrow.

Echeverry is a stout opponent of inflationary finance. But in Colombia chronic inflation has been a reality for the past 50 years. Echeverry fails to highlight the main distortionary effects that inflation introduces. In practice some sectors suffer far greater harm than others. The disadvantaged sectors – mainly construction and exports – are not “privileged” when measures are introduced (such as UPAC and realistic exchange rate policies) that protect them from the distortions of inflation. Furthermore, conventional macroeconomic policies designed to squeeze inflation out of the system (through temporarily higher interest rates on government bonds) and to reduce the fiscal deficit (much of it due to depressed incomes) can also damage the housing sector by making it less attractive to place savings there.

Currie understood how to combine deflationary monetary and fiscal policies with policies to reactivate the real economy by redirecting incomes and expenditures towards leading sectors that rely not on the printing press but on genuine savings. The great economist Harry G. Johnson similarly distinguished between “expenditure‐reducing” and “expenditure‐switching” policies (Johnson, 1958). A blueprint for such a combination, with detailed quantitative estimates of the size of the required “compensatory” effect required of the leading sectors, was drawn up by Currie and Montenegro, 1984 as advice for the administration of President Belisario Betancur in the mid‐1980s. The advice was not taken and the country went through a very bad bout of instability and capital flight.

The construction sector has another very important role ignored by Echeverry: it is an indispensable element in the labour mobility mechanism. This promotes not only faster growth, but also better distribution. In Colombia there is still a great imbalance in the allocation of labour, notably between low‐paying agriculture and high‐paying urban activities. And in cities like Bogota there is urgent need for better balance between where people live and where they work, and for an improvement in the quality of the housing needed and/or demanded by all income groups.

Echeverry claims there is a conflict between investment in internationally traded goods and investment in housing. Yet in countries such as Singapore, noted for spectacular export growth, investment in housing has also been enormous, and far greater than in Colombia. Despite re‐housing almost the entire population in the last 35 years its construction sector still booms. There has been no saturation of demand.

As people's incomes have increased so Singaporeans have demanded better and better accommodation and related infrastructure. This has been aided by low inflation and large pension fund contributions that are released for housing finance at low rates of interest (but positive in real terms). Building is concentrated on well‐built conventional high‐rise blocks for the middle classes. As these families move into new homes lower‐income families move into the ones they have vacated. This “filtration” or “escalation” process enables poorer families to enjoy far better accommodation than the type of subsidised vivienda de interes social (popular housing) that Colombia is desperately trying to provide today out of limited fiscal resources.

Housing and exports are complements, not substitutes. Both are capable of expanding on the basis of a stimulus to and redirection of real savings, rather than via inflationary finance or subsidies. Here are the real “keys to the future”.

By contrast, Echeverry's overview of the Colombian economy and economic policies during the last 30 years focuses mainly on the structure and balance of the national budget and the rate of growth of money and credit. This is rather typical too of the focus of the international lending agencies when drawing up conditions for further foreign loans. There is much of value in this analysis. However, its key limitation is that it gives too little weight to the dynamic changes in the composition of real incomes and expenditures over time in developing countries like Colombia, and of the need to ensure that the country's abundant natural and human resources are allocated – and reallocated – accordingly. Herein the supreme importance of the mobility mechanism, and of the related role of a dynamic and well‐funded construction sector.