The Colombian economic problem is not the Budget deficit 1

The pandemic and international economic turmoil have manifested in the rise of liabilities of the Colombian government. However, according to Colombia’s central bank, the debt has been rising since 2008’s global crisis before the Covid outbreak, a fact that shows a structural problem in the production apparatus.  

Here I will contend that the agenda of the next new president of Colombia should not be focused on keeping budget surpluses but on addressing a sound economic development policy.  

On June 19, 2022, the new president of Colombia will be elected. There are two options, Gustavo Petro a progressive politician who was a member of a guerrilla in the 80s, and Rodolfo Hernandez, a millionaire businessman.

Although both candidates have highlighted the need to curb fiscal deficits, Hernandez has stressed outrightly that the problem of the Colombian economy lies in the budget deficit. In this article, I will argue why the problem of Colombia’s economy is not a matter of government budget balance.

 

What has Rodolfo Hernandez asserted about the Colombian government budget?

According to Rodolfo Hernandez, the economy of Colombia has expanded in the last decades but the poverty has increased due to the wastefulness, bureaucracy, and corruption of politicians. In other words, Hernandez reckons that main Colombia’s problem lies in the mismanagement of public resources by politicians, and the solution is to slash the excessive public spending that creates a public deficit.

Consequently, Hernandez assured that he will act under the “saving logic to generate cash flow and be able to support the generation of employment while substituting imports” (click here).

First of all, the main macroeconomic problem of Colombia, as a developing economy, lies in the lack of capital and low investment rate, and a balanced budget is not going to solve it.

On the other hand, if we take a look at the data of the world economy, it seems like the government budget deficit is the natural state of the capitalist economies, as the majority of countries delivered negative figures in their budget balances (click here). In fact, there are some economies that have done very well despite their unbalanced budget. For instance, China is a rapid-growth economy and kept government budget deficits at least since the 90s (click here).

The rapid-growth economies have been those with investment rates above 30% as a share of GDP sustained over time and not necessarily those that have kept balanced budgets.

Table 2. Investment as a share of GDP in selected rapid-growth economies

The problem of Latin American countries lies in the low investment rates, which is a distinction between them and the Asian-rapid-growth economies. All of them have fallen far behind in investment rates, with the exception of Venezuela, although that economy was not able to sustain an investment/GDP ratio above 30% on average since the 80s (Australia is in the sample because I took the table below from another of my posts).

Table 3. Investment as a share of GDP in selected Latin American countries

In Colombia, government austerity may bring about a slump if we keep in mind that public spending is virtually one-fourth of its GDP; according to the Penn World Table 10.0, government spending has risen from 13% to 23% as a share of GDP between 2012 and 2019. Therefore, if the reduction of the government share of the economy is not offset by the expansion of any other component of the aggregate demand, a slump will come about.

Slashing public spending is troublesome for economic growth because, given the rise of inflation in the last months, the Colombian central bank will curb prices with interest rate hikes. Two contractionary policies being applied at the same time are an explosive cocktail for an economy that is recovering from the pandemic aftermath.

It is well known that public spending constitutes a useful instrument to boost the economy in recessions and that the problem is not the debt itself but the lack of economic growth. If production speeds up faster than debt,  the ratio of debt to GDP shrinks.  

My point is that the stress should be on the investment rate and the Colombian real economy instead of the government budget balance. Lining up the government batteries against the budget deficit would get the whole economy in trouble.

Hernandez’s leftist rival for the presidency, Gustavo Petro, has argued that in order to have a steady investment and macroeconomic stability it is necessary to reduce the fiscal deficit. Petro’s proposal seeks to step up collection with higher taxes to the wealthiest, and thus, shorten the fiscal deficit (click here). 

Broadly speaking, the difference between Hernandez’s and Petro’s approach is that while Hernandez proposes the fiscal balance from the spending side, Petro will look for the reduction of the fiscal balance (not necessarily to zero) from the income side. 

In the next article, I stand out some figures on Colombia’s budget balance to deepen this subject: The Colombian economic problem is not the Budget deficit 2.

 

References

Feenstra, Robert C., Robert Inklaar and Marcel P. Timmer (2015), «The Next Generation of the Penn World Table» American Economic Review, 105(10), 3150-3182