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.