Posted July 17th 2010 at 2:24 pm by
in Colombia, Colombia Political Economy

Colombia Has an Industrial Policy, and It's Called Competitiveness

Former presidents Álvaro Uribe of Colombia and George W. Bush of the United States shake hands at the White House. Foto: AFP PHOTO / Saul LOEB

I was originally attracted to study foreign investment and its impact on employment in Colombia because of the state of economic policy making here. In the early 1990’s, Colombia began pushing for trade liberalization and attracting foreign investment as an economic growth and employment generation strategy. Yet I noticed that while many policymakers were devotedly wed to free trade ideology, this commitment was not met with commensurate evidence showing free trade’s allegedly positive impact on Colombian welfare. This red flag prompted me to ask myself the same question that has plagued Latin American politics for decades: What is best for Colombia, free trade or industrial policy? What I have come to learn through working with economic policymakers in this country is that such ideologies are not as polarized in the case of Colombia. There is something much more clever going on here; Colombia is using the guise of ‘competitiveness’ and ‘free trade’ to mask a sophisticated and targeted industrial policy.

Before I go into specifics about the Colombian case, I want to provide the general arguments for and against trade liberalization and industrial policy. There are essentially two ways for countries to grow and generate employment in the long run, and both involve some degree of ‘learning’ on behalf of local enterprises. The debate revolves around choosing the best means toward the common end of knowledge acquisition and technological advancement.

Industrial policy advocates argue that markets must be protected if they are to grow, become competitive, and export in the global economy. Local products cannot survive competition from multinational corporations, thus infant industries must be incubated before they can walk on their own (compete with global imports). The more sophisticated policies create performance standards to emulate the incentive structure of the private sector, and use an array of tools to encourage local business growth: currency manipulation, domestic content requirements, import tariffs, and private-public forums on barriers to entrepreneurship. Import substitution industrialization (ISI), as it came to be known, was built on the premise that local businesses could not survive competition from predatory foreign firms, and thus imports would have to be substituted by creating tariffs so high that local businesses could only afford to purchase from domestic firms. Protection in this way, it is argued, could spur the industrial investments needed to create a real comparative advantage when trading with other countries. In this same line of thought, protectionists argue that without such policies, small and medium sized enterprises have no competitive edge, resulting in a redistribution of profits away from the masses and toward the upper echelons of society, widening the inequality gap. Further extensions include using industrial policy to enhance specific sectors which facilitate the structural transition from agricultural to manufacturing-based economies.

Free traders, in the traditional sense, are market-oriented and neoliberal in their beliefs that countries need to both ensure undistorted price signals (i.e. no government fiddling in markets) and produce and trade on the basis of their comparative advantage. In developing countries, they believe that government protection leads to the growth of inefficient industries and creates a window for rent-seeking and corruption. Neoliberal thinkers believe that developing countries can learn to be competitive from Western firms by linking in to their managerial processes, supply-chains, shared technology, and productivity practices. The argument follows that countries should compete to attract foreign direct investment (FDI), or multinational firms and equity which catalyze local productivity spillovers and generate high linkages to domestic suppliers, ultimately boosting the demand for both production and employment within the host economy. A further argument follows that low-income citizens can only import cheap goods, such as Chinese rice or Brazilian oranges, when there are no barriers to trade. A similar stance applies to local firms interested in growing by using cheaper input supplies to produce their goods.

So in a country just beginning to rebound from an armed conflict that, among more dismal things, created a huge displaced population and overwhelming urban unemployment rate, what is the right strategy on the macro level? The need for investment as an employment generation strategy is clear.  In fact, outgoing President Uribe often uses the phrase “without investment there are no social programs” in many of his speeches. But Colombia has taken an interesting compromise which plays to both camps. The country has both appeased the World Bank and investment community by climbing to the top of ‘competitiveness’ and ‘business environment’ polls, while at the same time protecting major industries with ‘business-oriented’ incentives which are really traditional subsidies with a pro-market image.

Perhaps the more interesting initiatives come from cluster strategies espoused by Michael Porter, which essentially argue that government should play to the competitiveness of local and regional assets by creating initiatives that take advantage of the industrial structure and production inputs (including human resources) of a region. The theory follows that an agricultural cluster should have all of its related industries in the same location, including research and development (think Silicon Valley), and trade with other domestic clusters, which will eventually strengthen both parties a la comparative advantage. But part of Colombian cluster initiatives have to do with direct government support, including training programs, academic improvement, infrastructure investments, and other areas where the government can be involved. Accordingly, there is a deliberate policy in Colombia to diversify and choose which sectors it wants to encourage, but this is done under the image of increasing ‘competitiveness’, which implies business and free trade.

Just last week on July 7th, 2010, President Obama announced his support for the U.S.-Colombia Free Trade agreement, the Tratado de Libre Comercio, in order to encourage U.S. exports during a prolonged slump. While my research here well help determine whether foreign investment has been overall beneficial for or detrimental to Colombian jobs, a part of me hopes that clever Colombian policymakers are indeed deliberately fooling the world into thinking they are extreme neoliberals while behind the scenes they are incubating local business growth with industrial policy.

Ben Hyman is a Masters Candidate at the Department of Urban Studies and Planning at MIT, where Economics is his focus. Ben is working in Colombia this summer. This past year, he contributed extensive research to the Cartagena Practicum, which examined the viability of moving a major outdoor food market in Cartagena, Colombia.

11 responses to “Colombia Has an Industrial Policy, and It's Called Competitiveness”

  1. Jordi Sanchez-Cuenca says:

    Thanks Ben for this interesting post. I live and work in Ecuador, neighbour of Colombia, and with supposedly opposite economic policy. Colombia and Ecuador have a lot in common and they have a sort of love-hate relationship. On the one hand Colombia has managed to improve a lot it’s economic and social standards, however Uribe and Santos have a doubtful approach to human rights, keeping close ties with the Paramilitares (right wing guerrilla + drug traffickers) as a way to put pressure on the FARC (allegedly left wing guerrilla + drug traffickers). On the other hand you have Correa’s Ecuador, who has to bear the burden of being a paradigmatic “banana republic” for many decades, and now trying to reconstruct its institutions and industry through a strong leading central state, with a strong focus on social rights and state-led development planning. In both cases I see that industrial policy and free trade are actually mixed, and the political discourse is an exaggerated version of a rather moderate, mixed economic policy. I understand that these political discourses respond to their own specific historical situations and social demands.

  2. Shoko says:

    Hi Ben,

    Great to see that you are applying the theoretical lenses of regional economic development that we gained last semester to what you are observing and experiencing in Colombia. As you mentioned, I think the question of “to free-trade or not to free-trade” is no longer a one or the other type of question. As we talked about it in Prof. Polenske’s class, there are many hybrid alternative approaches that have evolved since the theories of classical neoliberal economics.

    Right now, I am in Vietnam – a politically socialist country, but here in HCM city, I have no trouble purchasing my Louis Vuitton bags and my Armani suits. Since its Doi Moi economic reform in the late 80s, I’m learning that Vietnam has transformed into a socialist-oriented market economy (I think something very similar to that of China). How do you even start to understand the impacts of this type of economy and decide whether it is good or bad?

    In our class last semester, I guess we never really talked so much about how cultural and political context influence the suitability and applicability of these economic theories (Although we did talked about why Japanese people can cut metals for cars more precisely than westerners!), but to me, it’s really interesting to think about the intersections and links between politics, economics, and culture.

  3. Martha says:

    Hola Ben,

    Greetings from Cali, Colombia!

    Thank you for your interesting reflections. Yes, I agree that Colombia is a medium size economy with small range for maneuver plus there is no role model to follow. I also agree that Colombian policy is trying to get the best of the two polarized options. The question I have, is this policy effective? I am not sure; remember that we have in Colombia one of the highest rates of unemployment and inequality of Latin America. Security problems is one of the reasons for the two challenges but as the ministry of industry and development and ministriy of labor disappeared during Uribe’s administration to reduce government expenses, there is not a clear industrial or employment policy. How about a city policy for employment generation? Did you find something in the city level? So my question for you as an urban planner, what would be your advice for the current mayor in Bogota?

  4. Ben Hyman says:

    Hi All:

    Thank you all for leaving your comments. I’m going to respond backwards, so Martha, then Shoko, then Jordi.

    First Martha: Between 2002 & 2004 Colombian unemployment fluctuated between 13 & 18 percent, versus 9 & 14 percent from 2004 to 2008 (even during the recession).

    Now, anything over 10% is a horrible unemployment rate– I’m not saying this has been good, but there has been a clear correlation between security improvements and investment/employment generation in that time. There is obviously huge urban unemployment due to displacement, which yields two basic options: a giant land titling program to redirect the displaced to rural productivity, or increase investment in urban areas– of which, both FDI and Industrial Policy are powerful tools.

    As an urban planner, I think micro-finance, micro-enterprise, job-training, and community efforts are necessary. However generating human resources without job opportunities does nothing in the short-run. How does Colombia improve productivity– the key of job creation? Either through FDI or Industrial Policy. So SOMETHING needs to happen on the large macro/regional level to compliment the ground-level efforts. While Uribe did cut those programs you mentioned, he also increased social program spending dramatically, and has generated a targeted structural transformation policy. I think his program cuts were more political than anything, since industrial policy had long been associated with corruption in Colombia– but that doesn’t mean his administration does not believe in directly choosing and subsidizing industries. I guess the short answer, is I don’t know if it’s been effective, we’ll just have to wait and see as Santos continues the same policies. What I do know is there is interesting stuff going on with clusters, receiving a lot of government spending and attention.

    Shoko: as far as determine what to focus on, I think most urban planners are very concerned with quality of life, social inclusion, and other important development issues. My calling is employment generation, which whether good or bad, cubes me into the world of economics.

    Jordi: similar response, as I mentioned in my first post, most people have to judge Uribe by weighing his human rights record with what he’s done for job creation, long-term security, and the economy. I think it comes down to how you weigh your social and economic priorities, “at what cost”, is often the question.

    Thanks so much for your support guys– I’m glad people are reading this!

  5. Hector says:

    In general, over the past decade, Colombia has achieved strong rates of GDP growth, increasing per capita income, and decreasing unemployment rates. But, are all Colombian’s benefiting equally? The short answer seems to be “no”.

    Over the past decade national income inequality (as measured by the Gini Coefficient) in Colombia has remained relatively unchanged. In fact, in regard to income distribution, Colombia is the ninth most unequal country in the world. For example, in 2006, the top 20% of Colombia’s population controlled more than 61% of the country’s income, while the bottom 20% controlled 2.3%

    If indeed Colombia has been “fooling the world” by espousing extreme neoliberal ideology while in reality implementing Industrial Policy strategies, a decrease in income inequality should be expected. As noted in Ben’s post, advocates of Industrial Policy argue that this model of economic development serves not only to increase, but to redistribute national wealth.

    So, why over the past decade has income inequality remained persistently high? Perhaps it is because the Industrial Policy model, or Colombia’s version of it, is ineffective in this regard (e.g. the local business elites are appropriating themselves of most of the profits). Or, it could be that the model has not yet been implemented long enough to make an impact on income inequality. Another explanation could be that the model has been effective in reducing income inequality, but only in targeted regions, such as those included in cluster initiatives. Uncovering evidence of the latter would be an important finding in support of Colombia’s economic development model.

    Overall, Ben’s research will shine light on if/how Colombia’s economic development policies are directly and indirectly leveraging record levels of foreign direct investment (FDI) to achieve these trends (e.g. using increased tax revenues to develop and protect infant industries). My hope is that his research will also explore if/how the economic development policies are addressing a stubbornly high rate of income inequality.

  6. Ben Hyman says:

    Hey Hector,

    Good comments. Look, in the US there is rampant inequality as well, but the minimum poverty floor is much higher. The US does not have extreme poverty (under $2/day) as does Colombia, and I think this should be the ultimate metric we should be looking at. While inequality is important for general social justice, I think the real question has to do with access to opportunity–equity and employment. Lack of access usually has to do with deprivation of basic human rights to education & health, and extreme poverty rates, rather than inequality.

    I will indeed be analyzing the impact of FDI on inequality, but as one of my professors once said, inequality is a tricky pony. Nobody’s really figured that one out yet (except maybe Cuba).

  7. Hector says:

    Following Martha’s post, I wanted to add a couple of comments regarding targeted economic development programs and labor policy.

    A significant challenge to economic development programs is that the more geography or issues they seek to address, the more diluted they tend to become. An example is L. Johnson’s War on Poverty initiative in the US, which aimed to do nothing less than eliminate poverty. Many attribute the initiative’s lackluster results to the fact that funding was spread too thin across the United States and that its objective was too general. In other words, it had an ambitious strategy “eliminate poverty” which failed due underfunded and insufficiently targeted tactics.

    It seems to me that following sector-specific approaches to industrial development provide an opportunity to develop context-specific and achievable tactics, such as relevant training and vocation-oriented education programs. Over the past half decade in New York City, for example, workforce development programs have increasingly been tailored to provide job training support for growing sectors in the economy like air transportation. In short, this approach increases the chances that trained individuals will find jobs quickly.

    In this regard, Colombia may well be at an advantage by focusing on developing sector-specific clusters.

    However, it is important that Colombia not cut off its nose to spite its face. While seeking to produce economic growth through industrial development, it is critical that they do not fully sacrifice worker well-being in the name of economic development. Thus, it is worrisome that Colombia abolished its labor ministry as Martha notes. What government institution has taken its place to assure worker-rights and work conditions?

    In sum, is Colombia’s economic development strategy missing a critical tactic: labor rights protection?

  8. Ben Hyman says:

    I agree completely Hector. I must admit that I don’t know much about labor unions, labor rights, and labor standards in Colombia, but I do know this soundbite of information:

    “In its 2009 report, the ILO had already expressed “satisfaction” with the actions taken by the Colombian Government to comply with Conventions 87 (Freedom of Association and Protection of the Right to Organize), 98 (Association Law and Collective Bargaining) and 154 (Collective Bargaining). Additionally it noted with interest various measures put in place by Colombia to comply with Convention 17 (on Compensation for Accidents at Work), and Conventions 87 and 98.

    The rights of workers in Colombia are protected by a robust legal framework, including constitutional and statutory protections that reflect the core labor standards defined under the ILO’s Declaration on Fundamental Principles and Rights at Work.

    Colombia has ratified 60 ILO Conventions, including all eight fundamental labor rights conventions.”

  9. Jordi Sanchez-Cuenca says:

    Ben and Hector. Thanks for these magnific comments; it’s an extremely interesting debate.

    Ben, I want to say that inequality matters. Why? Because inequality is not only a matter of having very rich people, but also having a very small proportion of the population that have a disproportionate capacity to influence public policy, usually in their favour. How do you think banks in the US and Europe, directly responsible for the ongoing crisis, managed to get massive, unprecedented benefits from our governments (our taxes!) and are now getting massive profits in spite of working within ill economies? How do you explain that their CEOs are geting such massive bonuses after all the harm they have caused? This is just an example of how disproportionate inequality brings about disproportionately unfair distribution of economic benefits and burdens. At the end, such income inequalities are not just about economics, but also power, and it is very clear that big fish have it much easier to influence government’s decision making, with or without bribes.

  10. Alexa Mills says:

    This is a very interesting discussion.

    Ben, I would like to know more about Colombia’s cluster initiative. I think it would be great to have a post describing what it is, what it can potentially offer Colombia, whether Colombia is modeling it’s initiative after anyone else, and what other economies should be keeping their eyes on this model.

    Shoko I am also still interested in your comment about the connections between economics, politics, and culture. A few years ago I did some research on resource-rich economies. I was working in a coal mining town in Eastern Kentucky at the time. I learned that the natural boom-bust cycle of resource-rich economies (places that have coal, oil, precious gems..) crowds out other industries. People flock to jobs based on the natural resource, but when a bust hits everyone becomes unemployed. The unemployed are only skilled in work related to resource extraction, so other industries don’t locate in those areas because there is no trained labor force, and most labor they could recruit would flock to the coal mines in the next boom cycle. Another characteristic of these economies is that incumbents in local races are more likely to get re-elected than they are in non-resource economies because (a) a politician can take credit for a boom cycle even if it has nothing to do with his actions and (b) politicians can take bribes from extractive industries and use the money for re-election. If all of that is true, I wonder how democracy can best function in a resource-rich economy? Resource-rich areas should save money in a boom cycle so that there are savings to get through a bust cycle, but why would politicians elected to short terms be motivated to save? If they spend during the boom, they can get re-elected on the schools they built and roads they paved, or whatever they did.

    Anyway, all to say that I appreciate this discussion for trying to figure out the best policies for the specific case of Colombia. Thanks for the comparisons to Ecuador & NYC.

  11. Ben Hyman says:

    Hey Jordi. I think your comment is totally valid. I do think inequality matters, I just think on paper, I’ve seen a lot fewer situations where inequality actually decreases. But consider the following real-life example:

    From 1980 to 2000 Chinese extreme poverty dropped from 50% to 10%. Over this same period, the inequality gap worsened. So what does this mean? Rich people got richer faster, but about 400 million people broke through the extreme poverty line! Now, when it comes to democratic say and influence in the policymaking process, I think you’re probably right. But in China’s autocratic top-down case, more and more people came out of poverty and became employed every year!!! Still, Chinese manufacturers were getting richer faster. So is this right? And how’d they do it? Industrial policy, ISI, followed by market presents to top manufacturers, widening inequality, and eventually pulling 400 million people out of extreme poverty.

    OK– I’m painting this picture for dramatic purposes. Obviously inequality is unjust, and in Bogotá especially, you can feel it every day. But I don’t always buy that lack of participation is the issue– as there have been some (few) cases where authoritarian non-participatory government has created amazing benefits for its masses of poor (sorry CoLab!)

    More on clusters, inequality, Dutch Disease (resource extraction) to come!!! Thanks so much for comments people.