Somewhat Serious Predictions for 2010

Last night I saw Puerto Rican astrologer Walter Mercado on TV, making predictions for 2010 for all the twelve signs of the zodiac. I am a Sagittarius, so according to Mr. Mercado, 2010 will be “excellent for travel and sports (but I’ve always been terrible at sports!)” and I should “change and reinvent [my] life” (if you are interested to know what Mr. Mercado predicts for your sign, go here). After listening to that most vague prediction for the next 365 days of my existence, I started thinking that if Mr. Mercado can get away with that, I should definitely try to make my own predictions for Colombia in 2010.

So here you will find what I think will occur in Colombia next year. Most of my predictions are nothing but educated guesses, as I do not claim to possess any psychic powers whatsoever. Nonetheless, others are simple hunches dictated by my intuition. As you will have to wait for an entire year in order to know whether or not I was right (and by that time we will all have forgotten what I said), I think there is little risk in putting my predictions out there.

Let us start with the economy, perhaps the easiest part, as smarter people than me have already made their forecasts for next year. The government thinks that the economy will grow 2.5% next year. As their forecasts are oftentimes inflated, the situation in Venezuela is unlikely to change for the better, and there will be no expected structural changes to the economy in the foreseeable future, I predict growth will be lower than that. The IMF believes so, too, and they forecast that Colombia’s GDP will increase 1.3% next year. 2010 will open with an unemployment rate of around 13% in January, which will gradually go down throughout the year, but do not expect it to go below 11%. Inflation will also speed up from its historic low this year, reaching 4-5% in 2010.

Now, let us move to politics. I predict that President Alvaro Uribe will not be able to stand for reelection next year, as the referendum that is meant to change the Constitution will not pass. I believe that the Constitutional Court will decide that the proposal for a referendum is constitutional, and will leave the matter in the people’s hands. It will be the best solution for them not to lose face before the government and wash their hands of all responsibility. However, fewer than 7.5 million Colombians will vote on the referendum, and as a consequence Mr. Uribe will have to leave the Presidency on August 7, 2010. He will be remembered as one of the greatest heads of state ever to rule Colombia.

The Presidential election will move forward and there will be a need for a run-off election, which Juan Manuel Santos will win. The runner-up will be one of these three men: Polo Senator Gustavo Petro, former Medellin Mayor Sergio Fajardo, and former Minister of Agriculture Andres Felipe Arias. Mr. Petro has more chances than the other two, according to the latest polls. In Venezuela, Mr. Santos’ victory will be received as the victory of the far right, and the cold war between that country and Colombia will continue. As a consequence, Venezuela’s economic blockade against Colombia will remain in place and tensions along the border will increase. Nonetheless, there will be no war between the two countries in 2010, as President Chavez will be more concerned with Venezuela’s dismal economic performance and the political problems it will bring. Throughout 2010, the situation along the border will be one of high alert.

In the United States, Congress will finally ratify the Free Trade Agreement with Colombia, although that is likely to occur only in the second half of 2010. Nonetheless, the US government’s general attitude towards Colombia will remain somewhat cold, and the government in Bogota will slowly learn to rely less on its American ally. Aid for drug eradication will diminish next year (this we already know for a fact) and the Colombian government which is already running a budget deficit will have to find that money inside its own pockets.

So, these are my main predictions for 2010. Other minor ones include: the introduction of Colombia’s third private TV channel, more problems for the construction of Bogota’s metro system and the inevitable moment of reckoning that Colombia is not prepared for hosting the soccer U-20 World Cup in 2011.

Of course, time could prove me totally wrong. Perhaps Mr. Uribe will after all win the 2010 election (or maybe even Mr. Petro, who knows), perhaps there will be a war with Venezuela, and perhaps the US Congress will not vote on Colombia’s FTA. Whatever. Walter Mercado probably has been wrong dozens of times and he still has a good number of followers, so I hope the people who read this column (and I thank them dearly for having borne with me for the past seven months) forgive me if none of my predictions become true.

From my home in Bogota, I wish you all a very happy 2010.

There is No Alternative: Reaction Paper to 'The Take'

Recently I had to write another reaction paper to the film 'The Take', a documentary written by Naomi Klein about "cooperatives" in Argentina during that country's economic crisis in the first few years of this decade. During that time, some workers took over abandoned factories and tried to run them on their own, oftentimes successfully. Here is the link to the documentary's website.

This is my reaction paper:

The movie The Take is exactly what can be expected from a film written by Naomi Klein. A fighter for all things anti-capitalist, Ms. Klein is a loud critic of economic freedom, trade, business-friendly policies, the IMF, and pretty much everything else that has to do with globalization. In her film she takes the particularly bad case of Argentina as proof that capitalism does not work for the poor, and that a viable alternative model is that of worker-led cooperatives as the ones shown in the movie.

Of course, Ms. Klein’s film is wrong. The Take is full of half-truths, biased preconceptions, misinformation and a good deal of emotional manipulation designed to misguide the viewer. Let us start with the man that the movie portrays as the personification of evil: Carlos Menem. Ms. Klein’s film alleges that Mr. Menem followed “el modelo” (the capitalist model) to the letter, bringing Argentina to the brink of economic collapse. Indeed, Argentina went from prosperity to chaos in just a few years. According to the Economist Intelligence Unit, GDP per head (at PPP) went from USD 9,455 in 1998 to USD 8,003 in 2002 –in other words, in four years, the average Argentinean lost 15.3% of its income.That is a real economic tragedy.

But that tragedy occurred precisely because Mr. Menem did not follow the capitalist model to the letter. A series of economic mistakes, all of which violated capitalist orthodoxy, were what led the country to such a disastrous outcome. First, let us talk about pegging the Argentinean Peso to the US dollar, an irresponsible policy which made it impossible for the Argentines to adjust its balance of trade, leaving exporters vulnerable to rises in the US dollar and the subsequent loss in competitiveness for Argentine products abroad. But that was not Mr. Menem’s worst anti-capitalist mistake. The real problem was the huge budget deficit and the associated high levels of foreign debt that Argentina ran under Mr. Menem’s tenure. His government did not have any discipline regarding fiscal policy and continued handing out subsidies (as shown in the movie), contrary to the main tenets of the Washington Consensus. If Mr. Menem had not pegged his currency to the dollar, if he had cut spending to repay debt and not the other way around, if he had stopped giving subsidies to businesses (all of which are so-called neoliberal policies), Argentina would have certainly not fallen into the economic depths it saw between 1999 and 2002.

Yet, Ms. Klein does not tell you this. She preaches that it was capitalism what doomed the country to failure, keeping for herself the complex details that put her version in trouble. Instead, she chooses to take the example of the workers in the cooperatives as an anti-capitalist, anti-profit alternative to neoliberalism. Undeniably, it is really difficult not to agree with the plight of the workers. They are good, hardworking people who are simply trying to make a living by helping each other and making their factories spring back to life. They are the people who were affected by Menem’s recklessness and ill-advised economic policies. Now they simply want their jobs back.

Nonetheless, even if Ms. Klein and the workers themselves would like to pretend otherwise, the Argentine economy cannot survive on what is produced by the cooperatives. Their alternative is doomed to remain precisely that –an alternative to mainstream modes of production in which an investor is needed in order to set up a factory. Think about it: the workers were only able to take over the factory because it was there in the first place. The old capitalist interviewed in the film had put 90 million dollars of his money (probably with a few million courtesy of Mr. Menem) in that factory. Not in a hundred years would the workers on their own have been able to come up with such a large sum of money in order to set up their own cooperative. The cooperatives only work if there is something else for them to take, and to that extent they are really incapable of becoming a viable alternative for economic growth in Argentina or anywhere else. Of course, I am glad that the workers got what they demanded, but nobody should pretend that this is a real substitute for globalization. To be sure, as Margaret Thatcher liked to point out, there is no alternative.

The Land of the Impossible: Why Can't Colombia Get Things Done?

Arriving at Bogota’s El Dorado International Airport is an interesting experience. We Colombians are always thrilled about getting home, so oftentimes people clap right after the airplane lands. After waiting for everybody to leave the plane, you find yourself in an overcrowded room where immigration agents check passports. The service is usually very speedy, which makes you wonder how strict the agents are about who gets into Colombia and who doesn’t.

After getting your passport stamped, you go to the somewhat more chaotic baggage claim room. The five or six conveyor belts are all filled with bags, and so is the floor. Airport workers must constantly take unclaimed bags off the conveyor belts just to make room for the bags of following flights. People move around frantically searching for their possessions in the midst of the confusion.

Once you find your bags, you move to the customs line, which is best defined as a messy mass of people coming from all sides, trying to get past one of the small doors where the customs agents are sitting. You show the agent your customs form, and if you are lucky, he won’t ask you to have your bags searched by the police standing on the other side of the room. Once you make it to the exit, you see the sea of people waiting for travelers, all pushing against the ugly metallic barriers placed there to contain them. You finally find your relatives among the many unfamiliar faces, and, even as you hug them, you reach the inescapable conclusion that Bogota urgently needs a new airport.

This truth has been evident to all Bogotans for a while now. In order to improve the situation, in August 2006 the national government ceded control of the airport to a private firm that is supposed to transform and expand it. That was more than three years ago, but in that time the airport has had only a minor overhaul. The main thrust of the project, which requires the construction of a huge building with two new terminals, decent rooms for immigration, customs and baggage claim, has been all but abandoned.

The biggest obstacle to the construction of the new airport has been the question of whether the current ugly gray terminal should be torn down or not. For some, the old building (it was built in the 50s) has an important historic value that makes it worth preserving. The issue went all the way to the Inspector General and the State Council, whose decisions confirmed that the old terminal may be demolished in order to make room for the new building. Finally, last month an agreement on those terms was signed by the private owners of the airport. With all the delay, it is estimated that Bogota should have its new airport by 2014, and not by 2012 as was originally planned.

The difficult birth of Bogota’s new airport is representative of how tough it is to complete large public works in Colombia. Two more examples serve to emphasize the point. First, let us talk about Colombia’s third private TV channel. For the past ten years, Colombian TV has been dominated by a duopoly formed by RCN and Caracol, and although a boom in cable TV has brought more competition to the market, ordinary Colombians have little choice on their television screens. The government started to discuss the opening of a third TV channel in late 2007, and, soon after, three private conglomerates expressed interest in the project.

A big debate followed about whether the ownership of the third TV channel should be determined through an auction or by other means. Constant changes in the technical requirements for the channel (whether its signal would be transmitted in Ultra High Frequency or Very High Frequency, for example) created further delays. In the meantime, both the Comptroller General and the Inspector General started asking questions about the transparency of the whole process, and recently two of the three conglomerates said they would not be bidding for the TV channel anymore. The government insists that the third TV channel can still be auctioned even if there is only one bidder in the race. The future of the project is uncertain. Ironically, browsing the website of El Tiempo, Colombia’s leading newspaper, I found an article published in February of 2008 titled “Third Channel will have to Wait until 2009”. It now seems it will have to wait until 2010, too.

Our second example of the Colombian inability to move forward with big projects is Bogota's metro system. Mayor Samuel Moreno won the election largely on his promise that he would finally build “el metro” for a city that craves it. After much skepticism from his opponents, the Mayor finally announced the route that the first line of the new metro system would follow. The mayoralty appointed a manager for all things related to the project, and they set up a nice webpage. It seemed like Mr. Moreno was finally achieving some progress, when Planeacion Nacional, the national government’s department for planning, said last week that there were some serious errors in the technical studies that Mr. Moreno’s administration had presented. Now, those errors will have to be addressed by the bureaucrats in charge of the project, and their correction could increase the cost of the metro system by tens of millions of dollars. Even without this problem, Bogota wasn't expected to have its metro until 2016. How much longer will we have to wait now?

So yes, I sometimes feel Colombia is the land of the impossible. Our leaders make us dream of fancy new airports with no overcrowding, of smart and refreshing new channels that will bring diversity to our dull TV screens, and of fast and modern trains that can take us from one place to another in no time. But these dreams and grand projects often become entangled in the strong and sticky nets of bureaucracy and the juridical mess. For some reason, everything takes forever, and the constant changes in the specifications of the projects and the contents of the law make it difficult for private companies to go about their business.

Everyone agrees that a new airport, a third TV channel, and Bogota’s metro system would be fantastic things for the country, and yet it seems impossible to make them happen. Is it due to excessive red tape?Corruption? Plain inefficiency? Private third parties trying to hinder the progress of their private competitors? All of the above? I honestly do not know the reason behind this lack of action, but whatever it is, I do not expect it to change any time soon. I guess that means I will have to stop complaining about El Dorado and simply try to enjoy the ride.

This article appeared first in Colombiareports.com

Why Lowering the Minimum Wage is a Good Idea

In Colombia, the end of the year always marks the beginning of an interesting event. No, it is not Christmas. If you thought it was el día de los inocentes (equivalent to April Fools’ Day), which Colombians celebrate on December 28, you did not guess right either. The event I am referring to, which occurs every single year in an almost ritualistic fashion, is the minimum wage negotiation.

The event proceeds as follows: In order to define the minimum wage for the following year, government officials meet with members of Colombia’s labor unions and representatives of business groups, say, in the presidential palace. The leaders of the labor unions start by demanding a rise of 10% (plus or minus a few percentage points) to the minimum wage. To this, the business leaders respond that the workers’ demands are simply unfeasible. A 10% rise in labor costs would mean that they would have to lay off some people. The negotiations go on for a while and no side is willing to give up. With no consensus in sight, the government proceeds to set the new minimum wage by decree. The increase is usually closer to what the business leaders propose, although a few points higher just for the government to save face.

The ritual repeats itself on and on, and this year is no exception. The first disagreements between the parties in the negotiations have appeared already. An added complication to the description above is that the Constitutional Court ruled in 1999 that the increase to the minimum wage could never be below inflation. This year, the economic downturn has brought prices down in Colombia, so inflation is expected to be about 2.5%. With this in mind, the business leaders argue that an increase of 3.5% in the minimum wage is fair, whereas the workers will accept no less than 8%. The labor unions argue that increasing the wage above inflation will boost aggregate demand, which will help get the economy back on its feet, as the workers will have more money to spend. The businessmen reply that such a suggestion is nonsense, arguing that the last thing that industries need right now is a hike in their payrolls, especially considering the deterioration in commercial relations with Venezuela.

What to do? Who is right? Indeed, this is class warfare at its best. The poor against the rich. The needy workers fighting the greedy capitalists, demanding what is rightfully theirs. To be honest, the corporatism involved in the whole process makes me rather uncomfortable. The government sitting together with the unions and the businesses trying to find a harmonious way to allocate resources is definitely something very far from the free market economy I want Colombia to become.

But as we have to work with what we have, let us go for the second-best solution. The government should decree a rise for the minimum wage of no more than 4%. Anything else beyond that would increase unemployment and enlarge the already immense informal economy. However, as the government should be mainly concerned with reducing both unemployment and the informal economy (not merely with preventing their expansion), there is something much braver that the government must do: create a parallel, flexible, cheaper version of the minimum wage, totally different from today’s stiff and expensive scheme.

Confused? Let me elaborate. For 2009, Colombia’s minimum wage was about COP496,000 per month (US$247). In addition to that, employers must pay their employees a subsidy for transportation of 59,300 pesos (US$ 29). That is the money that the worker receives in cash every payday. Backstage, however, employers are required by law to pay 12% of the salary to the worker’s retirement fund, 8.5% for his healthcare, 10.4% towards a severance pay fund (known in Colombia as cesantía), 9% for other welfare benefits and funds that go to two state agencies (this pay is called cobros parafiscales), and the list goes on. As a result, one worker in Colombia ends up costing 872,000 pesos (US$ 435) in total, although the employee only sees a fraction of that sum.

If you think there is no problem with this, and that it is really okay for employers to pay this much for each one of their workers, think again. In Colombia around 4.5 million people earn the minimum wage, according to some calculations. Yet, the same estimates put the number of people who earn less than the minimum wage at 8 million! These are the people who work in the informal sector, those without formal contracts and social security. By making their labor too expensive by decree, the minimum wage has shut off millions of Colombians from the formal sector. It is simply not profitable for employers to spend COP872,000 a month on some workers, especially in a country where labor is as abundant as it is in Colombia. By increasing the price of labor, the minimum wage ends up benefitting the few who earn it, at the expense of the rest of the workers who are made unemployable due to the high price tag the government has put on their skills.

But before you call me a snob for saying that Colombia’s US$435-per-month minimum wage is high, listen to this: Colombia has South America’s most expensive minimum wage relative to its income per capita, as shown by the graph above. This means that it is relatively more expensive to hire people in Colombia than in any of the other South American nations. It is no coincidence that Colombia has South America’s highest unemployment rate. Take another example: if in the United States the ratio of minimum wage to income per head were equal to Colombia’s, minimum wage workers would earn about US$2,500 a month, and not the US$1392 they earn today (working 8 hours a day, 6 days a week for the US$7.25 an hour mandated by the federal government). So yes, the minimum wage in Colombia is too high for the size of the economy.

Indeed, US$435 per month is an insufficient amount of money to provide a good living – on that I agree with the labor unions. But increasing the minimum wage to ever higher levels is only going to produce more unemployment and put more people in lower paid informal jobs. Seriously, if poverty could be eradicated simply by ordering businesses to pay higher wages, there would be no mystery to economic development, and all nations would have done it already. So what the Colombian government must do now is to bring people from the informal economy into the formal sector by creating a special, lower minimum wage for them. Perhaps this new wage won’t be very high, but it will certainly be better than the US$5 a day that some Colombians earn (and they are not the poorest ones). By liberalizing the labor market and by making the minimum wage more flexible, new formal jobs for the poor and the unskilled will appear. In time, the unemployment rate will go down to normal South American levels (which are still terribly high).

Nonetheless, it is not very likely that anybody in the minimum wage negotiations considers this option in any way whatsoever. The ritual of the negotiations will carry on as usual. And unfortunately, so will unemployment.

This article appeared first in Colombiareports.com

A look at Latin America's human development

For many, the Human Development Index (HDI) is a good measure for quality of life across nations. The United Nations Development Program uses the index to rank countries according to their level of 'human development', taking into account variables of income, life expectancy, literacy rates, and education enrollment. A country with high levels of income, high literacy rates, high life expectancy and high levels of education enrollment will accordingly have a high level of human development.

Calculating the HDI for any country is not difficult. The big picture is that you take the average of the three indexes (income, life expectancy and education), which have been standardized and transformed in values (usually) between 0 and 1. The Wikipedia article on the HDI explains in depth how it is done.

I looked for HDI data for 17 Latin American countries in 1980 and in 2007, in order to see how human development in these nations had evolved in these 27 years. The graph below shows the results:


The existence of three clearly defined groups becomes evident. The first one, composed by Chile, Argentina, Uruguay, Costa Rica, Mexico, Panama and Venezuela have high levels of human development. Ecuador, Colombia, Peru and Brazil, the second group, have medium levels of human development. The third group, made up by El Salvador, Bolivia, Honduras, Nicaragua, Guatemala and Paraguay, has low levels of human development.

From this data it seems that human development is "sticky". In 2007, Latin American countries remained in the group where they started out in 1980. There was virtually no intergroup mobility, as there were no spectacular leaps (or disastrous declines) in human development levels across Latin America. The only exception to this is Paraguay, which in 1980 could arguably be classified in the 'medium' group, but that was at the head of the low HDI category in 2007.

About intragroup mobility, that's another story. Look at Chile, for example: Back in 1980, Chile had the lowest HDI of all the countries in the top group. Panama, Mexico, and Venezuela all had higher human development. Neighboring Argentina was way up there, too. Today, however, the tables have turned: Chile now has the highest HDI level of all these countries. Just look at the slope of Chile's line in the graph to take a grasp of how much that country has achieved in the past 27 years.

Another example of intragroup mobility is at the bottom of the graph, between Guatemala and Nicaragua. In 1980, the former had a considerably lower HDI than the latter (0.531 vs. 0.565). As a matter of fact, Guatemala back then had, by far, the lowest HDI of the sample. In 2007 things had changed: although Guatemala's performance still pales compared to the other countries in its group, Nicaragua has joined it at the bottom of the ranking.

Venezuela More Newsworthy than FARC: Eltiempo.com word count

Click to enlarge

As I wrote in a previous entry, Colombia's interest in FARC is waning. In turn, Venezuela is catching the attention of Colombians, as talk about war against that country has intensified this year.

In order to show this, I looked at the number of articles that appeared in Eltiempo.com (El Tiempo is Colombia's leading newspaper) that contained the words 'FARC' and 'Venezuela', between the year 2000 and 2009. As El Tiempo has printed many more articles in recent years, I divided the number of articles containing the words 'FARC' and 'Venezuela' by the number of articles that contained the word 'país'(country), which I assumed to remain fairly constant throughout the years.

The graph below, then, shows the number articles containing these two words as a proportion of the articles containing the word 'país' in El Tiempo. The graph shows that Venezuela has become a more important topic of Colombian news than the FARC, which, in turn, has fallen outside of the news spotlight in 2009.

The graph also shows the number of articles containing the word 'paramilitares', proving that the paramilitary groups have always been featured less in El Tiempo than either FARC or Venezuela.