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Inflación en Colombia: expresión de la dependencia económica

La inflación ha incrementado en Colombia de forma importante. El aumento del nivel general de precios al consumidor pasó de crecer al 4.51% en septiembre de 2021 al 10.84% en agosto de 2022.

Pero la inflación actualmente no es exclusiva de Colombia, es un fenómeno mundial con el que el gobierno nacional tiene que lidiar. Para entender lo que está pasando con los precios de la economía colombiana, hay que entender lo que está atravesando el mundo.

 

Inflación a nivel mundial

Muchos analistas coinciden en que la inflación a nivel internacional se ha debido primordialmente a problemas de oferta, causados por el Covid –que reventó las cadenas de suministro en todo el mundo – y la guerra entre Rusia y Ucrania (OTAN) –que presionó al alza los precios de los alimentos y los combustibles.

Joseph Stiglitz –premio nobel de economía –argumenta que la inflación proviene de problemas en la oferta global, es decir, de dificultades en la producción y abastecimiento mundial, en lugar de exceso de demanda.

El economista Jack Rasmus, en un interesante artículo titulado la anatomía de la inflación, argumenta que en el segundo cuarto del 2022, la inflación fue producto de varios factores: una demanda moderada, –que se recuperaba después del confinamiento –la ruptura de las cadenas de suministro domésticas, los precios fijados por las corporaciones, y el impacto de la guerra de Ucrania y las sanciones a Rusia sobre los precios del petróleo, la energía y demás materias primas. 

Además, Rasmus, señala que se formaron expectativas de inflación futura que coincidieron con la subida del costo laboral unitario (CLU), que se transfiere a los precios de los consumidores. El CLU depende del salario y de la productividad, la cual ha caído en los últimos años, trayendo consigo el encarecimiento de la mano de obra –si los salarios incrementan el CUT incrementa, al igual que si la productividad del trabajo cae.

Steve Keen –reconocido economista Australiano –, quien coincide en que la inflación es causada por el covid y la guerra de Rusia en Ucrania, añade otro elemento: el declive de la productividad de los combustibles fósiles y la minería.

Keen hace explicito que la inflación no es cuestión de salarios ni de márgenes de ganancia (markups) muy altos, sino del incremento en los costos de convertir materias primas en bienes finales.

Todas estas condiciones internacionales se han convertido en una ola inflacionaria que ha golpeado a la economía colombiana desde afuera.

En un documento del Banco de la República, del 13 de Agosto de 2021 –antes del conflicto de Rusia en Ucrania –se señala que la inflación al interior del país fue impulsada por la ruptura de las cadenas de suministro que incrementó los costos del transporte internacional.

Los costos logísticos a nivel internacional se reflejaron en el incremento en la brecha entre los valores FOB y CIF entre 2019 y 2021. Las primeras siglas (Free On Board), corresponden al precio de la mercancía importada en el puerto de origen, mientras que las segundas (Cost, Insurance and Freight), incluyen los costos de seguros y el transporte desde el origen hasta el destino en los puertos de Colombia.

Dicho documento explica que la cuarentena había refrenado una demanda mundial que se expandió vía recuperación económica y subsidios, y que no encontró respuesta rápida por parte de la capacidad productiva y las cadenas logísticas globales que habían estado obstruidas por el confinamiento.

Pero lo que llama la atención, es que el Banco de la República encontró que el aumento de precios más significativo –atípico, digamos –se dio en “el índice de precios de las importaciones de bienes intermedios” –donde la brecha entre los valores FOB y CIF es más amplia – mientras que los precios de los bienes de consumo y de capital tuvieron aumentos similares en años anteriores (precios en dólares).

Las experiencias de los países asiáticos –que crecieron y mejoraron sus niveles de vida rápidamente –muestran que el desarrollo de industrias productoras de bienes intermedios junto con la inversión, constituyeron dos componentes medulares para su desarrollo económico, según argumenta John Ross

 

Inflación estructural

Se conoce que el principal problema en países en vías de desarrollo, como Colombia, radica en la falta de capacidad productiva, por tanto, importan inflación cuando las mercancías que compran del exterior se encarecen (Aboobaker y Ugurlu, 2020); ya sea por falta de oferta o por depreciación de la moneda nacional (peso) –lo que se conoce como exchange-rate pass-through.

Entonces, el problema de la inflación en Colombia, sería una cuestión estructural. En este sentido, es interesante el planteamiento que hace Devika Dutt en uno de sus artículos.

Dutt, argumenta que el incremento general de precios en los países en vías de desarrollo proviene del aumento en los precios de la energía y los alimentos, que no son más que reflejo de un problema estructural; cuellos de botella en la oferta de bienes, falta de infraestructura, y mercados subdesarrollados.  Además de malas cosechas y la depreciación de la moneda vía caída del precio de las materias primas que se exportan.

Lo que advierte Dutt, es que estas condiciones se relacionan a la oferta y no a una demanda impulsada por altos ingresos en manos de los consumidores, por tanto, una política antiinflacionaria debe pasar por solucionar la dependencia de importación de alimentos y energía.

Fadhel Kaboub, también pone el acento en la tasa de cambio y la dependencia de importaciones que tienen los países en vías de desarrollo.

Kaboub, sostiene que en países en vías de desarrollo la política de inflación objetivo de los bancos centrales debe ser tarea de ministerios de agricultura y de comisiones de energías renovables, y no de banqueros centrales manipulando tasas de interés.

En suma, de acuerdo a las visiones aquí expuestas, el problema de la inflación en Colombia se desprende, por un lado, de circunstancias de la economía global, y por el otro, de dependencia de su propia economía que se encuentra en vías de desarrollo.

Para solucionar el problema de la inflación estructural, el nuevo gobierno popular de Gustavo Petro y Francia Márquez debe hacer frente a problemas estructurales de la economía.

El DANE muestra en su último reporte, que fueron los alimentos y bebidas no alcohólicas el renglón cuyos precios crecieron más rápido que el promedio de bienes y servicios de la economía (en el mes de agosto de 2022).

Como ya se mencionó, la baja productividad acarrea costos altos, y estos se traducen en precios altos para los consumidores.

En el mejor de los casos, y según como se mida, Colombia ha tenido un muy bajo crecimiento de la productividad –de acuerdo a la productividad laboral (producción por empleado) el crecimiento ha sido del 1.5% en promedio en los últimos 70 años (datos de PWT, versión 10.0). Si se mide la productividad total de los factores –producción que no se explica por aumentos de trabajo y de capital –el crecimiento ha sido del -0.3% entre 1990 y 2022 (sí, entendió bien, ha sido negativa según TED database).

Esto quiere decir que la productividad por trabajador apenas creció en 70 años, y que los recursos empleados (capital y trabajo) crecieron más que el crecimiento de la producción –la eficiencia cayó.

Se conoce que la productividad y el crecimiento son impactados por el nivel de inversión que existe en una economía (recomiendo leer los papers de De Long y Summers 1991, 1992). 

Pero, como se muestra en otros posts, por un lado, Colombia ha tenido baja inversión relativa, y por el otro, la tasa de ganancia que estimula a la inversión pareciera depender de los precios internacionales de las materias primas (carbón y petróleo) que fluctúan y no se mantienen en el tiempo.

Una agenda de gobierno comprometida con la soberanía alimentaria y energética es crucial en la lucha contra la inflación; se debería rescatar la producción nacional de fertilizantes, además de promover fuentes energéticas basada en las renovables.

 

Referencias 

Aboobaker, Adam., Ugurlu, Esra Nur. 2020. Weaknesses of MMT as a Guide to Development Policy. Economics Department  Working paper series. 1-24

De Long, B., Summers, L.H., 1991. Equipment investment and economic growth. Quarterly Journal of Economics 106 (2), 445–502.

De Long, B., Summers, L.H., 1992. Equipment investment and economic growth. How strong is the nexus? 157–211.

 

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The Chilean economic growth, to what degree is it a miracle?

Chile underwent a set of economic reforms after the military coup in 1973 that overthrew the leftist-government of Salvador Allende.

The right-wing dictatorship was the pioneer in setting radical market reforms characterized by holding the state out of the way and privatizations of state-owned enterprises –something that turned into a worldwide trend (Magginson & Netter, 2021).

For years, Chile was considered a case of economic success; however, after 50 years of market-oriented reforms, Chile is still a primary goods-oriented economy that underwent a long social turmoil (2006-2019; student protests and social outburst).

A question arises: to what degree does Chile constitute a case of economic success? 

 

To what degree is Chile an economic «miracle»?

By and large, for a developing country, long-term economic growth is the outcome of exports –which brings about the foreign exchange to import capital goods and technical services – and investment –which builds up the stock of capital to expand future production and boosts labor productivity (De Long & Summers, 1991, 1992. Krueger, 1998).

After the economic reforms, Chile’s economy grew driven by exports and investment, relying on imports which grew faster than GDP. In other words, economic growth came about under outer-oriented policies –drawing upon the external sector (exports and imports).

Figure 1. Chile’s GDP by component 1951-2019

Source: figure made with data from Penn World Table, version 10.0. The data differ from version 9.1 in the case of Chile.

 

The country underwent an improvement in its economic growth rates while the rest of the Latin American economies fell behind after market reforms  –for instance,  Brazil and Mexico slowed down their economic growth rates from 1980 to 2011.

 

Figure 2. Economic growth rates, selected countries

Source: the figure was taken from Palma (2012); Brazil’s recent growth

 

However, as Palma (2012) points out, the period 1972-2008 delivered precisely the same average economic growth rate as the Import Substitution Industrialization (ISI) model 1950-1972 –that the Chicago boys substitute with a set of liberal recipes gathered in El Ladrillo, the textbook of the military putschists (De Castro, 1992).

When one looks into the data, the dictatorship period turns out not to be astonishing in economic terms as many have been told; the GDP (PPP) growth rates averaged 4.8% before the dictatorship and 2.3% during the dictatorship –the data comes from PWT (version 10.0) and the ranges of years are 1952-1972 vs 1974-1990, excluding the year of the military coup 1973 to avoid distortions.  

On the other hand, investment and capital accumulation stepped up steadily once democracy took over. 

Figure 3. Capital accumulation and investment rates (%GDP) 1951=100

Source: figure made by the author of the article with data from the Penn World Table, 10.0. The dark red line is the 5-year moving average of the ratio of investment to GDP.

 

It may be argued that the free-market reforms took time to show their benefits; after all, from 1986 the economic growth speeded up in a period that Palma (2019) identifies as a «highly-dynamic 12 year-period» between 1986 and 1998 –that encompasses the last years of the dictatorship and the beginning of democracy.

Why did the economy grow faster at the end of the dictatorship? Economics-Nobel prize winner Paul Krugman writes in The New York Times

It wasn’t until the late 1980s, by which time the hard-line free-market policies had been considerably softened, that Chile finally moved definitively ahead of where it had been in the early 70s.

 

Well, moving ahead of a leftist-managed economy under internal and external attacks to bring it down is not a big deal, mostly, when the dictatorship of  Augusto Pinochet was a recipient of «massive capital inflow», as Krugman argues.

In an interesting article on Chile, Michael Ahn Paarlberg writes that «The “economic miracle” Milton Friedman ascribed to Pinochet is one of the great false narratives of modern economic history«. The benefits of the economic reforms «began with kicking out the Chicago Boys, expanding public payrolls, reinstating the minimum wage, and nationalizing the banks.».

As seen in Figure 2, although it is true that in contrast to LA countries Chile succeeded in terms of economic growth rates, it is not that clear compared to the fast-growing countries of Asia (take a look at where China, India, and Vietnam are in Figure 2).

Investment rates are one of the big differences between fast-growing countries and «the Chilean miracle». According to PWT (version 10.0), the ratio of investment to GDP never reached 30%  –in 2008 it peaked at 29.5% during a favorable commodity price boom (including copper, the main Chilean export).

Chile’s ratio of investment to GDP fell far behind the one delivered by countries of East Asia. The following table illustrates what a real booming economy looks like in terms of investment rates sustained over decades.

Table 1. Ratios of investment to GDP, selected countries

Table made by the author of the article with data from the Penn World Table 10.0.

 

Palma (2019) argues that, contrary to Asian countries, Chile’s economy has run out of steam due to its inability to «upgrade» (industrialize) its productive apparatus, something that, according to Chang (2007, 2010) Asian countries, among others, achieved through a sound industrial policy.

Aside from the fast-growing countries of Asian, it is hard to consider Chile an economic miracle; while the former became a set of manufacturing-oriented countries that climbed up the ladder of the international division of labor, the latter never got over its primary goods-oriented economy and relatively low productivity growth (Palma, 2019).

 

Last remarks; inequality matters

There is a moral dimension in the economic reforms under a dictatorship, as pointed out by Michael Ahn Paarlberg when wrote down that:

The most appropriate gut reaction to this may be moral revulsion—3,000 people killed or disappeared so that you can enjoy your global sushi at the mall? But it’s also worth asking whether story is even true.

 

Chile has fantastic sushi, no doubt, but its economic growth is not as astonishing as its inequality. Branko Milanovic –a well-known leading economist of inequality  –asserts:

In 2015, its level of income inequality was higher than in any other Latin American country except for Colombia and Honduras. It exceeded even Brazil’s proverbially high inequality. The bottom 5% of the Chilean population have an income level that is about the same as that of the bottom 5% in Mongolia. The top 2% enjoy the income level equivalent to that of the top 2% in Germany… Chilean income distribution is extremely unequal. But even more so is its wealth distribution.

 

Well, holding less inequality than Colombia is not a great feat, as a Colombian, I know very well how income and wealth are distributed in a country where there are big drug traffickers, an unsettled long internal-armed conflict between guerrillas, the state, and right-wing paramilitaries –which has been a historical tool used against the working class.

Back to Branko Milanovic and keeping in mind that the press is not friendly when it comes to Vladimir Putin and Russia (the so-called land of oligarchs), Milanovic asserts:

Chile is the country where billionaires’ share, in terms of GDP, is the highest in the world (if we exclude countries like Lebanon and Cyprus where many foreign billionaires simply “park” their wealth for tax reasons). The wealth of Chile’s billionaires, compared to their country’s GDP, exceeds even that of Russians.

 

It is well-known the political turmoil Chile went through some years ago. I am writing this post from Santiago de Chile (the capital) and I was shocked by how the streets looked after the 2019’s «estallido social» (social outburst) –years earlier, in 2006, the country had undergone student protests called «revolución pingüina».

Many corner shops and store premises are closed and many spontaneous wall paintings made by the demonstrators can be seen around. It proves that inequality matters, even for owners.

A corner shop was vandalized and closed after the protest in Santiago de Chile. The photo was taken by the author of the article on 27 July 2022.

 

References

Chang, H. J. (2007). Bad Samaritants: The Myth of
Free Trade and the Secret History of Capitalism.
Bloomsbury Press.

Chang, H. (2010). 23 Things They don’t Tell You about Capitalism. Londres: Penguin Books. Recuperado de https://marcell.memoryoftheworld.org/Ha-Joon%20Chang/23%20Things%20They%20Don’t%20Tell%20You%20About%20Capitalism%20(1550)/23%20Things%20They%20Don’t%20Tell%20You%20About%20Capita%20-%20Ha-Joon%20Chang.pdf

De Castro, Sergio (1992). El Ladrillo: bases de la política económica del gobierno militar chileno. Centro de Estudios Públicos: Santiago de Chile. pp.193

De Long, J. Bradford & Summers, Lawrence H. Equipment Investment and Economic Growth. The Quarterly Journal of Economics, Vol. 106, No. 2 (May, 1991), 445-502.

De Long, J. Bradford & Summers, Lawrence H. World Bank and Harvard University Equipment Investment and Economic Growth: How Strong Is the Nexus? (Oct, 1992), 157-211.

Magginson, William. & Netter, Jeffry. Journal of Economic Literature Vol. 39, No. 2 (Jun., 2001), pp. 321-389.

Krueger, Anne. The Economic Journal. Vol. 108, No. 450 (Sep., 1998), pp. 1513-1522.

Palma, . J. G. (2012). Was Brazil’s recent growth acceleration the world’s most overrated boom?. http://www.econ.cam.ac.uk/dae/repec/cam/pdf/cwpe1248.pdf

Palma, J. G. (2019). The Chilean economy since the return to democracy in 1990. On how to get an emerging economy growing, and then sink slowly into the quicksand of a “middle-income trap”. https://doi.org/10.17863/CAM.46546

 

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Russianomics: the economic bunker needs supplies to endure

In previous posts on Russia’s economy under warfare, it has been shown that the country is facing sanctions on its war machine funding and its supply chains by the US-led coalition. This time, a range of figures will illustrate the readiness of the Russian economy to cope with the West’s penalties on its economy.

Understandably, President Vladimir Putin expected a backlash by the West to damage the Russian economy, as reported by Serina Sandhu, who explained that the economy could face a bank run if the sanctions set by the Western countries were successful.

 

The Russian economic bunker

Russian officials likely thought that the West’s response would lie in the attack on confidence in the economy. A good measure of confidence is the value of the domestic currency –thus, the attack on the national currency might be taken for granted.

On the other hand, it is well known that having enough gold and foreign exchange is a good backing for a domestic currency. Russia stored 2.271 tonnes of gold in 2019, fivefold the quantity held in 2000.

Such a speed of accumulation of real assets was not followed by any other country in Europe. Russia’s movement toward gold storage can be seen in the Russian reserves as a percentage of the US reserves, which rose from 5% to 25% –keep in mind that the US is the country with major gold tonnes stored according to the data reviewed.

Figure 1. Gold reserves of the Russian Federation

Chart made by the author with data from Market Index

 

In the economic hard times, Russian officials have drawn upon gold purchases; after the 2008’s financial crisis, Russia stepped up its purchases of gold and increased the pace even more after 2014 –when the problems with the US and Europe got worse due to the Euromaidan and Crimea integration into Russia.

The thing is that gold international prices in US dollars trended to rise in the last decades. First, the prices of that asset skyrocketed from 2000 to 2012, and then, from 2015 to 2020; If the bull trend turns into the new normal, the Russian government will have a sizeable amount of real assets getting exchange value –a Marxist way to say it –over time.

 

Low debt level

Also, Russia got its economy ready drawing upon austerity; while the government debt to GDP ratio has increased in Europe since the 2008’s global financial crisis (being over 90% of GDP) in Russia the debt fell since 2000, growing slightly since the pandemic outbreak.

Figure 2. The Russian Federation government debt (%GDP) 

Source: Trading Economics (government date %GDP)

 

According to the World Bank database (click here), after the Crimea conflict in Ukraine in 2014, the Russian Federation raised its international reserves faster than its debt, being one of the countries with the highest ratio of international reserves to debt. That is to say, the country counts on enough assets to meet its debt payments.

Such healthy finance has been possible given the trade-balance surplus Russia has enjoyed, exporting more than importing. Something that can be explained by a lack of investment momentum –a fact that is not favorable at all when it comes to long-term economic growth.

As you can see, exports grew faster than the whole economy (GDP), imports kept mostly following the economy, while consumption grew as fast as exports and investment fell behind, growing much lower than the whole economy.

Figure 3. Russia’s GDP index by component

Figure made by the author of the article with data from Penn World Table 10.0

 

In short, before its military intervention in Ukraine, Russia accumulated enough real assets in its warehouse as well as foreign exchange and kept its liabilities as a small portion of its economy. In other words, Russian officials turned the economy into a financial bunker solvent enough to keep steady the investors’ confidence.

 

Supply chain issues and prices hikes

However, as mentioned in a previous post, Russianomics: economic shelling on Russia’s supply chains!, the West has set several penalties on the Russian Federation that turned it into the most sanctioned economy. That means that importers have to face a range of hurdles in carrying out imports of foreign goods and services.

The prices in Russia are reflecting the negative effects of the West’s sanctions, which is why the growth of the consumer price index reached two digits figures immediately after Russia intervened in Ukraine, which comes about on 24 February 2022.

Figure 4. Inflation in the Russian Federation

Source: Trading Economics (consumer prices growth rates)

 

However, from April to June the growth in prices slowed down. Such a behavior matches with a strengthening of the ruble, which recovered its value after its drop in March.

Figure 5. Exchange rate U.S. Dollar/ Russian Ruble 

Source: the chart is taken from TradingView

 

As reported by The Wall Street Journal, Russia manufactured demand for its currency through the selling of gas in rubles rather than dollars and euros, thus, making “sanctioning nations support Russia’s currency” and ensuring “all funds from energy sales support its value”.

Although for now, Russia has been a sanction-proof economy, a question arises: how long can the Russian economic bunker endure economic warfare?

If we accept that prices are the reflection of relative scarcity and that the economy is about real value rather than nominal value, at the end of the day, whether Russians want the pace of prices to continue going down, their economy will have to cope with production and supply chain issues. In other words, it will have to deal with scarcity.

As already seen, investment in Russia has been pretty weak, and the reconversion of the Russian economic apparatus from Western-capital goods intensive to Asian-capital goods intensive (its industrialized allies) can be a very demanding task.

In a previous post it was stated that, when it comes to sanctions, the problem of the Russian economy lies in its capacity to import rather than export. Apparently, sanctions are working through the supply chains.

The following graph illustrates what Russia has to deal with: Russia stepped up its sales to China while its purchases from that country went down. 

Figure 6. China’s exports to and imports from Russia

Source: Peterson Institute for International Economics

 

According to PIIE, imports from sanctioning countries have fallen by 60% and from non-sanctioning countries by 40%. Besides, it reads that: China is the second-largest contributor to Russia’s import decline since the invasion, despite President Xi Jinping’s promise of «no limits» cooperation”.

Although it might mean that China is not backing Russia as it was expected, it is also possible that Russian companies are not able to reconvert their plants as fast as managers wish.

Furthermore, it is worthwhile to mention that a fall in economic activity –due to the pandemic and supply chain disruptions –would naturally bring down the number of imports (a sizeable economic downturn is forecasted click here). In other words,  it is hasty to say that import behavior is infallible evidence of real political support.

 

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Russianomics: economic shelling on Russia’s supply chains!

The West’s economic strategy against Russia’s funding has been ineffective up to date; the ruble is getting strong, as seen in the previous post Russianomics: attacking the war machine funding!

Nevertheless, as you may already know, the West has set a number of sanctions on the Russian economy, locking the import of dual-use items (click here). Economics-Nobel Prize winner Paul Krugman pointed out several times -on Spotify and in the NYT– that the Russian problem is not the revenue it gets through exports but the capacity to import spare parts and components for its economy and, punctually, for its war machine to keep it running.  

According to Riddle‘s article, sanctions make difficult the implementation of production plans and the delivery of military hardware, and in the NYT it was stated that the creation of Russia’s own supply chain will take Russia years and trillions of dollars.

 

Warfare means a massive expenditure on weapons

It is noteworthy to mention that Russia requires a massive amount of war materiel to fuel its army in Ukraine.

According to analyst Vikram Mittal’s article in Forbes, «doctrine holds that an offensive operation should have a 3-to-1 advantage in manpower» (click here) and, as informed by Bonnie Berkowits and Artur Galocha -in the Washington Post -it also requires spending «an enormous amount of ammunition» (click here).

Proof of it can be found in Alex Vershinin’s calculations:

The Russians have fired between 1,100 and 2,100 missiles… meaning that in three months of combat, Russia has burned through four times the US annual missile production. (click here)

 

In short, Russia -as the attacker -delivers higher expenses than Ukraine and will have to cope with the US «Arsenal of Democracy» policy (click here), how the supply of weapons from the US to Ukraine is known.

Although according to the Observatory of Economic Complexity (OEC)  Russia has a surplus in weapon production like the US, there is a sizeable gap in their military-industrial base; 27.3% of global weapon exports come from the US, while only 1.38% come from Russia.

However, the depletion of the armaments delivered a high rate not only from Russian inventories but even from the stockpile of the Arsenal of Democracy -as Hal Brands informed in Bloomberg (click here), therefore, the factories must be flat-out.

Can Russia deal with the economic warfare to keep running its army? Answering this question is a titanic task, but the following can give us some insights.

 

Everything may change if China sits down on the board

Russia is a very small economy besides the US, but, what about China? They are a close ally of Russia. It is already the second economy in the world (PPP) and 4.06% of world armaments come from there (OEC); its share and surplus in weapon production are higher than Russia’s.  

 

Figure 1. GDP (PPP) of Russia, China, and the US, 1950-2019

Source: Feenstra, Robert C., Robert Inklaar and Marcel P. Timmer (2015).

 

While Russia’s trade with China has risen, it has dropped with the West’s leading economies, at least since 2019. Virtually one-fourth of 2020’s imports in Russia came from China, and if India -another of Russia’s allies – is added, it makes one-third.

Origin Imports
2019 growth 2018-2019 2020 growth 2019-2020
China 20.6% 3.01% 23.0% 3.9%
Germany 12.4% -3.84% 11.9% -10.7%
Belarus 56.6% -5.90% 58.2% -4.2%
India 13.6% -24.20% 13.0% -11.1%
United States 38.4% -4.35% 25.8% -37.4%
Source: The Observatory of Economic Complexity (OEC)

Some analysts think that it is hard to believe that China will abandon Russia, its «irreplaceable partner», as was argued by Hu Xijin in Global Times; a tabloid newspaper in the People’s Republic of China:

…the idea of reconciling ties with the US by abandoning Russia has no market in China at all. Most Chinese people believe that the US’ ultimate goal toward Russia is to make it no longer a «nuclear threat,» yet its goal toward China is to make China completely lose its development and competitiveness, splitting China into puzzle pieces, with each piece being controlled by the US, purchasing US weapons and producing cheap products. (click here).

 

Therefore the key imports for Russia’s manufacturing sector and war machine would be assured as long as China’s production capacity allows it -leaving aside the India-Russia relationship. 

Of course, the figures plotted up to this point are quantitative and not qualitative. Russia will need a partner with the capability to produce tons of goods, but also the sanctioned high-tech and dual-use items it used to import from the West to build up its economy and army (click here).

Some people, like Krugman, think that «China’s high-tech industries are not yet thought to be sufficient to replace American components» (click here).

While others, like Michael Roberts, ponder the possibility that «Chinese companies, especially those that have themselves been the target of US sanctions, might help Russia circumvent the export controls» (click here).

No doubt, Russia is the world’s most-sanctioned economy (click here) and will have serious supply-side economic problems (issues), however, it is not by far the hard challenge Russia has faced in its history. Indeed, other smaller sanction economies, such as Venezuela, have coped with economic aggressions, and its president -Nicolas Maduro -is still in office.

Basically, Russia has two options; to carry out a substitution process or boost a parallel-imports system where goods not intended to go to Russia end in that country. Vladislav Inozemtsev reckons that the latter is more straightforward and likely than the former, he made a very compelling argument in this respect in Riddle:

…import substitution­­ is unrealistic under the current circumstances because now it must be a full-cycle production (as was the case, for example, in the Soviet Union)… This problem cannot be solved because the technologies used in the world (and ­in Russia) have advanced considerably, and the Russian industry itself is significantly inferior ­to the former Soviet industry, in both scale and capacity. (click here)

 

So Russia has problems in its supply chain due to sanctions but also has solutions.

 

Last remark

You may see the value of a currency as a measure of a war-effort outcome, if you follow the logic of economics-Nobel Prize winner Paul Krugman when he wrote on 28 February 2022:

…This leaves Russia’s economy highly vulnerable to sanctions that might disrupt this trade, a reality reflected in Monday’s sharp plunge in the value of the ruble despite a huge increase in domestic interest rates and draconian attempts to limit capital flight. (click here).

 

Well, now on 06 July 2022, the ruble is stronger than before the war and the euro plunged sharply.

Source: the chart is taken from TradingView

Not misunderstand the matter, the global economic turmoil is the aftermath of numerous variables, and it is hard to give credit only to one as the main cause of an economy’s performance in particular, but for Europe -at least –economic warfare has turned out a negative factor for its currency’s unfolding, a fact that contrast with Russia’s ruble, as shown in the previous post (click here).

The third part of this article encompasses the supply of components and equipment. Russianomics: the economic bunker needs supplies to endure.

 

* I am indebted to my friend Mr. James Barry for assistance in editing.

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Russianomics: attacking the war machine funding!

“The strategy of an economic blitzkrieg has failed.”

Vladimir Putin.

 

It seems that the western countries are desperate with the Russian advancement on Ukraine’s territory and the lack of effectiveness of their sanctions on Putin’s country.

The Ukrainian army cannot stand the Russian offensive and the morale of its soldiers are low (click here).  The victory in Kyiv seems already faded, and after a range of setbacks, the superiority of Russia’s military might is clear and recognized by Ukraine (click here).

The development on the ground has put pressure on the western countries that are struggling with the outcome of the economic warfare.

As was argued by Rasmus (click here) the proposals stemmed from G70’s meeting about attacking Russia’s war-machine funding (exports) are silly and ineffective: the Russian export revenue has hiked since the beginning of Russia’s war –or Special Operation; call it as you please – on Ukraine.

However, the issue of the West’s strategy against Russia’s war-machine funding falls behind by principle because Western politicians and advisers appear to think that the world economy is this:

World economy= G7

 

Just a reminder, the G7 is made up of The US, England, Canada, Germany, France, Italy, Japan and the European Union. Besides, here the term «western countries» is institutional rather than geographical (for instance, Japan and South Korea are part of the west).

But the truly global economy is something like this:

World economy= G7 + BRICS + rest of countries

 

Where BRICS encompasses Brazil, Russia, India, China, and South Africa. So Russia has big and trustworthy partners such as India and China to draw upon, two countries that are importing its energy goods and funding its army.

 

Today, demand does not determine the global prices of energy

So, keeping in mind the number of players, the world economy trade of oil and gas is closer to the traditional supply and demand scheme where there is no economy big enough to set world energy prices (click here). That is to say, in reality, China and India may offset the reduction in the West’s imports. Not to mention that Saudi Arabia does not seem to cooperate with the West in oil price reduction, according to Routers’ article (click here).

To avoid the energy price hikes that favor Russia’s revenues, The World Economic Forum shared on social media Hausmann’s proposal: «not to stop buying Russian oil but to tax Russian oil«. Russia has to compete, the argument goes, with other oil producers so it will be forced to reduce the price of its oil after tax in order to equal the price of its competitors’ oil without tax; the outcome of this policy would be the reduction of Russia’s revenue (click here).

However, Hausmann’s proposal still has the West’s demand as a key; a tax on Russian oil will reduce the demand in the countries that set up the tariff, and they are expecting Russia to lower its prices to compete with oil producers.

First of all, as can be read in a Forbes article, the international price spike is due to expectations of oil supply disruptions involving one of the biggest world producers: Russia (click here). Furthermore, what if Putin decides to export to his allies that are willing to step up their stockpiles instead of relying on the West’s demand?

The approach based on the idea that the global price of energy can be lower at the West’s will or that Russia would rather sell its output to its enemies at a discounted price seems to be wrong.

Jack Rasmus’ argument shed light on this matter:

No amount of G7 wishful thinking can make demand determine supply in today’s global energy markets, where broken and restructuring supply chains, sanctions, and war are the main determinants of price… Both the proposal to ban Russian gold exports to Europe and the proposal to manipulate oil demand to reduce its global market price—and thereby deprive Russia of revenues—are ideas that reflect more the desperation of the US and G7.

 

Theoretically, Hausmann’s tax idea which leads Russian producers to compete with oil from elsewhere in the West’s market works as a «price cap». What Rasmus argues is very illustrative:

Russia would have to be pretty dumb to agree to sell oil to Europe at the latter’s ‘price cap’ level which would be well below Russia’s already 30% discount oil price sales to India? It knows the likely knock on effect that would follow. India as a long term oil customer is far more important to Russia than Europe which says it’s ending as a customer in just six months.

 

The ruble, the Russian currency, has overcome the West’s sanctions and now has more value than before 24 February 2022, when the war in Ukraine started.

This does not seem like Russia is losing the economic warfare, not at least up to date:

Source: the chart is taken from TradingView
The second part of this article encompasses the supply of components and equipment. Russianomics: economic shelling on Russia’s supply chains!
* I am indebted to my friend Mr. James Barry for assistance in editing.
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The first leftist government in Colombia and the capital’s logic

According to the electoral results on June 19th, 2022, Colombians chose their first popular government in the country’s history, with Gustavo Petro and Francia Marquez as president and vice-president, respectively.

In his victory speech, Petro showed himself as a pragmatic politician looking for social change. His government will not come up with an economic model that threatens private ownership over the means of production, all the opposite, in his speech Petro stated the idea of “developing capitalism in Colombia” and the setup of a “popular economy”.

In plain English, the new government will run into the contradictions of the capitalist system, inevitably.

In this post, I will do an economic analysis based on the victory speech given on June 19th, 2022 by Gustavo Petro and Francia Marquez (the first Afro-Colombian vice-president in Colombia).

 

Change of economic model

Petro stated the need for private investment to be able to develop its government program. It would require policies that do not threaten the capitalist’s rate of profit. The system works under the profit logic, where someone invests and employs workers as long as she or he gets profits.

The thing is that judging by the economy’s behavior in the last years, the capitalists’ rate of profit has followed the performance of the extractive sector made up mainly of coal and oil (as seen in another post, click here), both raw materials that Colombia sooner or later has to shut down, given the global concerns on climate change.

In other words, Colombia must substitute one business for another able to turn out the necessary surplus to be invested.

 

Figure 1. Rate of profit and international prices of coal (in blue) and oil (in gray)

Figure made with data from Extended Penn World Table (Rate of Profit) and bp Statistical Review of World Energy (oil and coal international prices)

Petro comes up with the speeding up of energy transition. He said it in his speech when stated that it is not sustainable developing progressivism based on the fossil industry. However, a question arises: how can the economy move from an extractive economy to a productive economy?

If the market economy is kept, as Petro’s contend goes, an industrial policy is needed to encourage private investment in new economic activities; it involves a fiscal policy with tax reduction and/or setting new taxes to incentivize and disincentivize the required industries.

Besides taxes (including tariffs), subsidies may be another tool for stimulus, along with the role of the State as an investor. However, in regards to how to do the energy transition and boost the economy, it is not clear whether Petro’s strategy will rely on incentives to the private sector or on the participation and strengthening of government programs and State-owned enterprises.

 

Public and social debt

The public debt levels as a percentage of Colombia’s GDP have risen in the last years, with the foreign debt expanding along with the liabilities denominated in dollars (which are paid with exports). It means that the economy will need to grow or the State will need to collect more taxes in order to reduce the ratio of debt/GDP (click here to deepen).

 

Figure 2. Domestic and foreign public debt as a percentage of GDP

Figure made by the author of the article with data from Banco de la República de Colombia.

Besides the financial debt, Colombia has a social debt reflected in its inequality indicators (click here) and worsened by inflation and unemployment (click here to deepen). Any government that calls itself popular should look for more social equality, as the new vice-president said it: we will be «the government of the people with calloused hands, the government of the ordinary peoplewe will go for social justice…«

Nevertheless, how can a new leadership reconcile social justice with the capitalist desire to accumulate profit? After all, as stated by Petro in the victory speech, it is not possible to distribute what has not been produced”, and the economy relies on private activity.

The new government must deal with the internal contradictions stemming from a capitalist class that seeks its own interests and could draw upon investment blackmail, according to its odds, offshoring factories and taking the capital out of the country.

Moreover, the society is politically divided, Petro got 50.44% of the total votes, and Hernandez, the other candidate, 47.31%. If the popular government wants to hold governability and stability will have to look for agreements with capitalists and the political forces that traditionally have been in favor of the capitalists.

The challenges for the new administration lie in the need for an equilibrium where the change from extractive to productive economy keeps the rate of profit compelling enough for capital accumulation, at the same time that the economic activity grows with equality, that is to say, with more employment that provides social mobility for the majority of the Colombian population.

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¿Es el déficit fiscal el problema de la economía colombiana?

La pandemia y la inestabilidad económica internacional se han manifestado en el incremento de los pasivos del gobierno nacional, un hecho que ha despertado inquietudes sobre la insostenibilidad del endeudamiento de Colombia. 

En este artículo se argumenta que la agenda del próximo presidente de la república de Colombia, Gustavo Petro, no debería estar enfocada en mantener superávits presupuestarios, sino en abordar una sólida política industrial.

En este post se resumen dos artículos que tratan el mismo tema de forma más extensa (ver aquí y aquí).

 

El déficit fiscal y la deuda 

Para desarrollar el argumento, se tomarán algunas declaraciones realizadas por quien fuera candidato presidencial y rival de Petro, Rodolfo Hernández, quien proponía el ahorro público como la solución a los problemas económicos del país. 

De acuerdo con Rodolfo Hernández, la economía de Colombia se ha expandido en las últimas décadas, pero la pobreza ha incrementado debido al despilfarro, la burocracia y la corrupción de los políticos. En otras palabras, Hernández piensa que el principal problema del país yace en el mal manejo de los recursos públicos por parte de los políticos, y la solución es el recorte del gasto público excesivo.

En consecuencia, Hernández aseguró que él actuaría bajo “la lógica del ahorro para generar flujo de caja y ser capaz de apoyar la generación de empleo…” (ver aquí). 

Por otro lado, el presidente Gustavo Petro ha argumentado que para tener estabilidad macroeconómica y de la inversión, es necesario la reducción del déficit fiscal (veraquí).

El presupuesto del gobierno central ha estado desequilibrado al menos desde los años 80s, sin embargo, cuando la pandemia estalló, el gasto publico incrementó para hacerle frente al reto social que trajo consigo el confinamiento. Dependiendo de la fuente que se consulte, en 2020 el déficit fiscal alcanzó el 7.80% o el 6.98% del PIB (ver aquí y ver aquí).

Como resultado de años de déficits públicos, la deuda se acumuló como porcentaje del PIB, y se disparó.

 

Gáfica 1. Deuda pública interna y externa como porcentaje del PIB

Figure made by the author of the article with data from Banco de la República de Colombia.

La deuda extranjera ha crecido más rápido que la deuda doméstica, siendo el sector público el más endeudado.

 

Figure 2. Deuda extranjera pública y privada como porcentaje del PIB

figure made by the author of the article with data from Banco de la República de Colombia. Figures for 2020 and 2021 are provisional.

Para tener una idea de lo que implican estos números, según algunos economistas colombianos, antes de la pandemia, un déficit en el presupuesto público de 5% y una deuda sobre el 50% del PIB era un asunto del cual preocuparse.

La deuda extranjera ha incrementado como nunca antes desde 1995. Colombia debe ponerle atención, toda vez que se paga en dólares, una divisa que no puede ser emitida por el Banco de la República, y que se cancela con exportaciones (producción real).

 

¿Es el déficit fiscal el problema o la falta de inversión y crecimiento?

El principal problema macroeconómico de Colombia yace en la falta de capital y la baja tasa de inversión. Un presupuesto equilibrado no va a resolverlo.

Colombia es una economía en desarrollo y por tanto, no es una sorpresa que su gobierno pida prestado recursos financieros para realizar gasto público social para cumplir con sus responsabilidades. El gobierno no es capaz de recaudar suficientes fondos estableciendo impuestos a un sector productivo relativamente pequeño, por eso recurre a la deuda.

Además, dadas las limitaciones del aparato económico de Colombia, tampoco es raro que requiera de capital extranjero para invertir y crecer.

Hay que entender que Colombia importa más de lo que exporta, y dicho déficit comercial significa que la economía está usando moneda extranjera que no proviene de las exportaciones, sino de la deuda externa.

Por otra parte, si se observan los datos de la economía mundial, parece que el déficit público es el estado natural de las economías capitalistas. La mayoría de los países presentan números negativos en sus balances presupuestarios (ver aquí). De hecho, hay algunas economías a las que les ha ido muy bien a pesar de sus desequilibrios financieros; por ejemplo, China es una economía de rápido crecimiento y ha mantenido déficit públicos desde al menos los años 90s (ver aquí).

Si la comparación con China le parece descabellada, recuerde que aquí se está argumentando la posibilidad de la coexistencia de deuda y crecimiento.

La clave esta en la tasa de inversión que produce el crecimiento económico en el largo plazo.

 

Table 1. Tasas de inversión como porcentaje del PIB, países asiaticos seleccionados.

Source: Table made by the author of the article with data from Feenstra, Inklaar, and Timmer (2015)

El problema de las economías latinoamericanas es la falta de inversión, compare los datos de la tabla 1 con los datos de la tabla 2 a continuación (incluye Australia porque la tabla fue tomada de otro post).

 

Tabla 2. Tasas de inversión como porcentaje del PIB, países latinoamericanos seleccionados.

Source: own calculations with data from Feenstra, Inklaar, and Timmer (2015).

Por otro lado,  si la «logica del ahorro» se lleva a lo público, la austeridad del gobierno puede traer consigo una recesión económica, teniendo en cuenta que el gasto público es prácticamente un cuarto de la producción total del país (PIB); el gasto del gobierno ha pasado de representar el 13% al 23% del PIB entre 2012 y 2019 (Feenstra, Inklaar and Timmer, 2015), una contracción de ese gasto significa menos demanda agregada de bienes y servicios.

Si una reducción del gasto público, no es compensada por un aumento de otro componente del PIB (consumo privado, inversión o exportaciones), la recesión está garantizada.

Pero además de los datos mencionados, el problema radica en el nivel de inflación actual y la política del Banco de la República, que ha probado estar dispuesto a reducir el nivel general de precios a través de alzas de la tasa interés (ver aquí). Si esta última crece, la inversión y el consumo se encarecen y caen.

Entonces tendríamos, una política fiscal austera más una política monetaria que encarece el dinero, dos políticas contractivas a la vez es un cóctel explosivo que lleva a la economía a contraerse.

Bien se conoce que el gasto público constituye un instrumento útil para estimular la economía, y que el problema no es la deuda en sí misma sino la falta de crecimiento. Si la producción (PIB) se acelera más rápido que la deuda, la ratio deuda/PIB se reduce, pero si se contrae la economía, esa ratio crece y la situación financiera del país se agrava.

En Colombia hay recursos desempleados. La tasa de desempleo es mayor al 10% y la utilización de la capacidad instalada cayó en los últimos meses y se mantiene alrededor del 80% (ver aquí), así que, teóricamente, existe espacio para los estímulos fiscales que impulsen el empleo sin ocasionar un efecto expulsión  (crowding-out) y consecuentes subidas generales de precios.

Hay que recordar que el gasto público es un componente de la demanda agregada (PIB) y puede estimular la economía trayendo consigo un efecto de atracción de actividad privada (crowding-in), además, el gasto del gobierno está compuesto por el gasto en inversión y funcionamiento, de manera que, el gobierno puede jugar un rol importante al realizar inversiones (ejem: infraestructura).

Si el capital y trabajo ociosos son movilizados, la economía puede producir más ingreso y la ratio deuda/PIB se vería reducida (como ves, el problema no es la deuda, sino la falta de crecimiento económico). 

*Para profundizar sobre la hipótesis de crowding-out y crowding-in, recomiendo estos artículos cortos: ver aquí, aquíaquí  y aquí.

 

¿Y los inversionistas y el valor del peso colombiano?

Se podría argumentar que los inversionistas estarán preocupados acerca de la capacidad del gobierno de pagar la deuda y la posibilidad de inflación debido a la falta de confianza en la moneda nacional (emitida por el Banco de la República). Sin embargo, con la expansión económica crece el recaudo del Estado toda vez que los impuestos son una fracción del ingreso nacional: mayor PIB trae consigo mayor ingreso tributario.

Colombia no emite una divisa fuerte y debe tener cuidado de políticas excesivamente expansivas, no obstante, no existe un umbral de deuda/PIB definido que Colombia no deba superar, especialmente hoy en día que la pandemia ha golpeado a todos los países alrededor del mundo y la deuda se acumula en todas partes.

La pérdida de valor del peso colombiano en relación al dólar, surge como resultado del rezago de las exportaciones frente a las importaciones.  Esa es la razón por la cual la apreciación y la depreciación del peso colombiano dependen del precio internacional del petróleo y el carbón, los dos principales productos en los últimos años (ver gráfico 3, donde los precios de estos dos productos se miden en el eje izquierdo y la tasa de cambio en el derecho).

En otras palabras, si se quiere una moneda más fuerte, las exportaciones deben crecer más rápido que las importaciones, y esa dinámica pasa por incrementar el PIB.

 

Gráfico 3. Media móvil del precio internacional del petróleo, el carbón. y tasa de cambio nominal 

Figure and calculations made by the author with data from bp statistical review of world energy, and Penn World Table 10.0

 

Último comentario

Las autoridades económicas de Colombia deben poner el acento en la tasa de inversión en lugar del equilibrio de las finanzas públicas para reducir el déficit fiscal y la deuda como porcentaje del total de la economía. La ratio deuda/PIB puede ser reducida por medio de una acertada política industrial, de manera que el nivel de deuda sería un objetivo secundario que se cumpliría como consecuencia del crecimiento de la economía real.

 

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

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Gobierno popular en Colombia y la lógica capitalista

Segun los resultados electorales del 19 de junio, Colombia tendría el primer gobierno popular en la historia del país, con la elección de Gustavo Petro y Francia Márquez como presidente y vicepresidente, respectivamente.

En su discurso de victoria, Petro se mostró como un político pragmático que busca cambios sociales. El nuevo gobierno no propone un modelo económico que amenaza la propiedad privada sobre los medios de producción, todo lo contrario, en su discurso Petro planteó la idea de “desarrollar el capitalismo en Colombia y el establecimiento de una “economía popular”.

El proyecto popular propuesto por el nuevo gobierno de Colombia irremediablemente se encontrará con las contradicciones propias del sistema capitalista. A continuación, se hace un análisis económico basado en el discurso de la victoria electoral del 19 de junio, realizado por Gustavo Petro y Francia Marquez. 

 

Cambio de modelo económico 

Explícitamente Gustavo Petro plantea la necesidad de inversiones privadas para poder desarrollar su programa de gobierno. Esto requerirá de políticas que no amenacen la tasa de ganancia de los capitalistas. El sistema funciona con la lógica del lucro, en donde yo invierto y genero empleo siempre y cuando obtenga ganancias.

La cuestión es que, a juzgar por el comportamiento de la economía en los últimos años, la tasa de ganancia de los capitalistas ha seguido el desempeño del sector extractivo conformado principalmente por petróleo y carbón (como se examinó en otro post, ver aquí), dos materias primas que Colombia tarde o temprano tendrá que abandonar dada la preocupación por el cambio climático.

En otras palabras, Colombia debe sustituir un negocio por otro que genere excedentes necesarios para invertir. 

 

Gráfico 1. Tasa de ganancia (ROP) y precios internacionales del petróleo (en gris) y el carbón (en azul).

Figure made with data from Extended Penn World Table (Rate of Profit) and bp Statistical Review of World Energy (oil and coal international prices)

 

Petro propone acelerar la transición energética. Lo dijo en su discurso al afirmar que es insostenible que el progresismo construya alrededor de las industrias fósiles. Pero, ¿Cómo cambiar del extractivismo hacia la economía productiva? Si se mantiene la economía de mercado, como lo plantea Petro, esto requerirá de una política industrial que estimule la inversión privada en nuevas actividades económicas; esto pasa por la política fiscal, reduciendo impuestos y/o estableciendo nuevos impuestos para estimular y desestimular las industrias que se requieran.

Además de impuestos (donde están incluidos los aranceles), los subsidios son otra herramienta de estímulo, junto con la participación directa del Estado como inversor, pero no está muy claro qué estrategia puntualmente adoptará Petro al respecto, si será una política basada en incentivos al sector privado o en el fortalecimiento y la participación de programas y empresas públicas. 

 

Deuda pública y social

Los niveles de deuda pública como porcentaje de todo el ingreso del país (PIB) han incrementado sustancialmente en los últimos años, creciendo la deuda externa que se paga en dólares (con exportaciones). Esto requerirá del crecimiento de la economía o de una reforma tributaria que aumente el recaudo para lograr que la ratio deuda/PIB disminuya (ver aquí para profundizar).

 

Gráfico 2. Deuda pública interna y externa como porcentaje del PIB

Figure made by the author of the article with data from Banco de la República de Colombia.

Pero además de la deuda financiera, Colombia tiene una deuda social reflejada en sus indicadores de desigualdad (ver aquí) y agravada por la inflación y el desempleo (ver aquí post para profundizar). Cualquier gobierno que se llame popular deberá buscar mayor equidad, la nueva vicepresidenta lo dijo en su discurso de la victoria; «el gobierno de la gente de las manos callosas, el gobierno de la gente de a pie, el gobierno de los nadies y las nadies… vamos por la justicia social…».

Pero, ¿Cómo conciliar la justicia social con el deseo capitalista de acumular ganancias? Después de todo, como lo señaló Petro en el mismo discurso, “no se puede distribuir sin producir” y su modelo descansa en la actividad privada.

Tendrá que lidiar con las contradicciones internas de una clase capitalista que, en medio de su lógica, buscará sus propios intereses y que podría acudir al chantaje de las inversiones, de acuerdo a sus posibilidades, deslocalizando empresas y sacando su capital fuera del país. 

Además, la sociedad está políticamente dividida, Petro obtuvo el 50,44% de los votos y Hernandez el 47,31%. El gobierno popular tendrá que tender puentes de dialogo con los capitalistas y las fuerzas políticas que tradicionalmente les han favorecido. 

El nuevo gobierno tendrá que buscar un equilibrio d onde el cambio de modelo, del extractivismo a la economía productiva, mantenga una tasa de ganancia atractiva para los capitales y crezca con equidad, generando crecimiento económico con empleo, y así, brinde la posibilidad de movilidad social ascendente a la gran mayoría de la población.

 

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The Colombian economic problem is not the Budget deficit 2

This article complements my previous post (click here) and this time I will show some figures on Colombia’s debt in order to give a better picture of the current Colombian economic situation. 

 

Some figures 

The government’s budget has been unbalanced at least since the 80s, however, when the pandemic broke out the public spending rose to cope with the social challenges under production lockdowns and depending on the source you check, the budget deficit reached  7.80% or 6.98% of GDP in 2020,  (click here and click here).

Anyway, as a result of the budget unbalanced year after year,  the debt piled up as a percentage of GDP and skyrocketed during the pandemic to 66.1% in 2021.

Figure 1. Domestic and foreign public debt as a percentage of GDP.

Figure made by the author of the article with data from Banco de la República de Colombia.

The foreign debt has grown faster than the domestic debt, being the public sector the one with a higher share as a borrower from overseas.

 

Figure 2. Public and private foreign debt as a percentage of GDP.

figure made by the author of the article with data from Banco de la República de Colombia. Figures for 2020 and 2021 are provisional.

To have an idea of the figures, before the pandemic outbreak, for some Colombian economists a budget deficit of 5% and a debt of over 50% of GDP  was a matter of concern.

After looking at the figures above, a question arises: should Colombian officials take the government budget deficit as the main economic policy target?

To answer that question we should know that Colombia is a developing economy and it is not a surprise that its government borrows financial resources to spend and fulfill its social accountabilities: government is unable to rise money by taxing a relatively small economy, so that draws upon debt.

Moreover, given the boundaries of Colombia’s production apparatus, is not a surprise that such a developing economy asks for capital from abroad in order to invest and grow. In other words,  Colombia imports more than exports, and the trade deficit means that the economy is using foreign currency that does not come from exports but debt denominated in dollars (external debt), the currency Colombia cannot issue but needs to import the goods and services unable to supply from domestic industries.

In short, Colombia draws upon debt to grow and develop.

As it is well known in economics, investment is key for long-term growth and the trade deficit comes up when the investment is higher than savings. To understand this point, remember that the trade balance is virtually equal to the current account, which in turn, equals saving less investment (I will write a future post about this equation in detail):

Notice that the current account unbalance can come up due to a rise in investment or a drop in savings with respect to investment. If savings are getting smaller and investment does not rise, the current account deficit is growing because the consumption is getting bigger. 

The problem in Colombia is that investment has remained relatively low as a share of the total economy over time, far below 30% as a share of GDP, as was seen in the first post.

The investment to GDP ratio should hold over 30% over time to get fast economic growth rates, or at least this is what shows the Asian rapid-growth economies (click here). 

So if the economy does not invest enough, in the long run, the GDP will not grow faster than the debt’s growth or as fast as needed to reduce the debt to GDP ratio. Therefore, by principle, the main problem does not lie in the government budget deficit, but in the lack of investment to boost the economy. 

 

Budget deficit and investment

Someone might argue that the government budget deficit is a burden and, at the end of the day, the public sector draws upon a pool of real resources or, in other words, compete with the private sector for scarce resources, and when steps in the economy a crowding-out effect comes about (click here and here).

Someone also might argue that investors will be concerned about the government’s ability to pay back the debt and inflation might come up due to a lack of confidence in the Colombian peso. 

About the first argument: Colombia is a country with an unemployment rate of over 10% and its capacity utilization dropped in the last months recorded and remained around 80% (click here), so theoretically there may be room for some fiscal stimulus to employ resources without crowding-out effects and significant price hikes. In addition, if idle labor and capital are mobilized, the economy can turn out more output and the ratio of debt to GDP might drop (you see, the problem is not debt). 

Remember that public spending is a component of aggregate demand and can stimulate the economy bringing a crowding-in effect to the economy. Moreover, public spending is made up of current expenditure and investment, Colombia is a developing country with a backward infrastructure and the government can play an important role as an investor. 

With respect to the second argument related to the investor’s confidence,  as a developing economy, Colombia does not issue a hard currency and must take care of excessively expansive monetary policies, nevertheless, there is no defined debt/GDP threshold Colombia cannot surpass, especially nowadays that the pandemic has hit countries around the world and debt is piling up everywhere.

Foreign debt has increased like never before since 1995 and it is the indebtedness that Colombia must look after the most because it is denominated in dollars, a currency that cannot be issued by Colombia’s central bank; the only way to pay back such debt is through production (exports).

Although confidence in fiat money is key for keeping its value, devaluation in Colombia comes up as a result of lagging exports compared to imports. That’s why the revaluation and devaluation of the Colombian currency have followed the oil’s and coal’s international prices, its two main exported goods, in the last years. Devaluation rather than technology and productivity is the tool of backward economies to compete in the global market.

Figure 3. Moving average of oil, coal prices, and exchange rate

Figure and calculations made by the author with data from bp statistical review of world energy, and Penn World Table 10.0

 

My point in this article is that the ratio of debt to GDP can be reduced as a consequence of a sound development policy, therefor debt level should be a secondary government target. Seeking a debt reduction through balanced budgets may bring about growth difficulties and unemployment, and thus, further debt will be needed.  

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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

Source: own calculations with data from Feenstra, Inklaar, and Timmer (2015).

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

Source: own calculations with data from Feenstra, Inklaar and Timmer (2015).

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