Shielding the Recession by Hector Mondragon

Hello Folks,

I just received this insightful analysis of Colombia and the impact the economic crisis is having on the country by Hector Mondragon, one of the leading critics of the neoliberal onslaught on Colombia. This was translated at distributed by Justin Podur, who among other things, writes regularly for Z Net, and En Camino. Recall that Hector Mondragon was forced to leave Colombia last year after being falsely accused by unidentified sources in the news media. He has worked as an adviser to the indigenous and peasant movement for years. Here's a link to the original post: http://www.zcommunications.org/znet/viewArticle/21361

Shielding the Recession
By *Hector Mondragon*
May 3, 2009

The rapid fall of industrial production and sales in the first months
of 2009 has cracked the media shield behind which the Colombian
government attempted to hide the reality of economic recession in Colombia.

In reality industry was in decline since May 2008. By the second
semester of 2008 the economy had completed two consecutive trimesters of
decline and was therefore formally in recession. The construction
figures tell the tale. The area approved for construction declined by
11.7% in 2008 relative to 2007; in January 2009 the decline was 29.7%
relative to January 2008. The housing construction figure was even more
dramatic: a 42.6% decline from January 2008-2009.

By the time the Ministry of Housing declared that Colombia was "shielded
from the international crisis", the crisis had already reached the
country. During 2008 the stock market lost 29% of its value and were 32%
cheaper than they had been at the peak of the bull market.

There was no way the Colombian economy could have escaped the
international crisis. In January 2009 remittances from Colombians living
abroad and exports were 16% and 13.2% lower than the previous year.
During 2008 the devaluation of the dollar (and consequent reevaluation
of the peso) put the brakes on industrial and agricultural exports,
especially of cut flowers, a commodity business that was in crisis long
before the rest of the economy. The quick collapse of demand in the US
and Europe aggravated the situation. The industry hoped the situation
would change with the reevaluation of the dollar (and devaluation of the
peso). Instead the international recession collapsed export prices for
nickel, coal, oil, which pulled the rug out from under Colombia's
flagship agrofuels program, sustained by state subsidies and prices set
by decree.

On the other hand, the Colombian recession is not solely or even
principally attributable to the international crisis. There is an
internal business cycle with its own dynamics that entered into its
descending phase. Certain domestic facts and policies have drawn and
sharpened the characteristics of the Colombian crisis.

First, relatively high interest rates, always higher than international
rates, spurred savings and foreign investment, helped the transnationals
to purchase Colombian banks and other Colombian businesses, and enabled
the Colombian government to sell bonds to support its budget. These
interest rates ended up strangling industry, agriculture, and commerce.

Second, the government set out on a policy of high fuel prices. When the
policy began the international price of fuel was high and, along with
the surging economy, concealed the policy.

There were two goals to the high prices of gasoline and diesel: the
fiscal logic of exporting goods at a higher price, a new tax that was
disguised as the 'suppression of subsidies'. In reality there was no
subsidy at all: the cost of production in Colombia is less than 25% of
the sale price. Ethanol is even more expensive, twice the international
price, in order to sustain the massive investment in agrofuels and
sugarcane and palm plantations of the massive plantations that bring a
higher income than the Latin American average, that in the case of
sugarcane are indigenous territories disputed by the plantation owners
and in the case of palm serve to legitimize the displacement or
servitude of the campesinos in territories dominated by the
paramilitaries and their financiers.

The fall of the international price of fuel in 2009 revealed the
politics of fuel price in Colombia. The result was a domestic price that
was both intolerable for the economy and imperative to sustain the
governent budget at a time when President Uribe hopes for re-election
and needs a minimum budget to surround his electoral campaign with some
achievements. Truck drivers, hopeless because of impossibly high fuel
prices and seeing their operations in free-fall, have declared a
national strike.

High interest rates, the high price of gas, and the agrofuels policy all
contributed to inflation, such that the Colombian recession, far from
being accompanied by a fall in prices like the US and Europe are
experiencing, is a typical case of stagflation.

Third, the illegal economy was another source for the economic boom. The
Ralito accords with the paramilitaries were followed with the laundering
of dollars and euros that helped to inflate the Treasury bonanza
<http://www.zmag.org/zspace/commentaries/2344>, the official budget, and
the "health" of the overall economy. "Pyramids
<http://www.zmag.org/zspace/commentaries/3366>" and Ponzi schemes
multiplied across the country without any controls, serving
simultaneously to launder more hot money, finance drug operations,
multiply the amount of money in circulation, raise overall sales, and
give the economy the illusion of health.

When the recession began, the pyramids that were not linked to
narcotrafficking collapsed immediately. Alarm bells rang about the
proliferation of these schemes. The government, so disengaged from the
issue, after failing for so long to fulfill its duty to monitor the
capture of savings, was forced to act. The closing of the pyramids
coincided with the rapid rise of the dollar and unleashed the phenomenon
referred to by Keynesians as the "liquidity preference": those who had
earlier overturned the system by placing their savings into pyramid
schemes now wanted only cash, in dollars.

The paramilitaries, in their peace process, could no longer hide that
they were continuing their narcotrafficking operations. The old
paramilitary leaders were extradited to the US and the process
collapsed. The mafia also showed a "liquidity preference" and a new
generation of paramilitaries arrived on the scene.

Once the Pandora's box of the crisis was open, the Colombian authorities
proclaimed emergency treatment. The Bank of the Republic lowered
interest rates, but it was too late. The effect was neutralized by the
preference for dollars.

Foreign investment during the first 80 days of 2009 was 27% lower than
the same period in 2008. The government's own figures say that the loss
was 15-20%. The result was a turn to external debt, which had been
shrinking just as the internal debt, in pesos, was growing at a
scandalous pace so long as dollars were cheap and Colombian interest
rates high. Dollars were now back to being strong and the external debt
was growing, starting with an issue of one billion dollars of external
debt. What the government started, the IMF would finish, as Colombia
opened an IMF "preventive" line-of-credit of more than $10 billion
dollars, in case of urgent need.

The return of Colombia to the arms of the IMF follows the G-20 meeting
that pulled that institution out of the cemetery to return to its old
work. Colombia is the fifth country to seek the poisoned medicine cooked
up in London. Mexico, the Ukraine, Poland, and Costa Rica preceded it,
although just before Latvia, Hungary, Iceland, Rumania, Serbia, and the
Czech Republic had to turn urgently to the IMF.

As in other parts of the world, public works have been announced. Even
though unemployment never went below 10% even during the boom, the fact
that unemployment has now gone over 14% at the beginning of the year
threatens political instability. If it goes still higher, Uribe can
forget about re-election.

The oft-repeated fall of some narcotrafficking dons may temporarily
increase the price of illegally exported cocaine. Another poison drug
will forge new dons that will benefit from the increased prices and the
elimination of competitors.

The government longs for the approval of the US and Canada that would
come from the free trade agreements. It longs to capture investments by
making perks and concessions available to investors. But increasing
imports at a time when North American products have dropped in price
would be a hard blow to Colombian domestic production.

Even now there are other ways out of the crisis, ways the majority of
Latin America is trying to follow. Colombia could focus on the internal
market, develop state plans for massive construction of social housing,
with state credit institutions, approve an agrarian reform to take
advantage of 5 million hectares of agricultural land now sitting idle
under speculative control, revitalize the Andean community, and recover,
as other Latin American countries are trying to do, its natural
resources. To open the way for this path we need peace.

Hector Mondragon is a Colombian economist and activist.

Translated by Justin Podur