Colombia
The economy of Colombia has been growing strongly in recent years, helping to reduce poverty. The poverty rate has decreased from 57% in 2002 to 49%. However, it is still very high and wealth is distributed unequally. Another malice for the country is its shadow economy, which has been estimated to be between 20% and 40% of GDP. Now country is suffering from the global economic crisis.
GDP and growth rate. According to the CIA Factbook, Colombia's GDP by purchasing power parity in 2008 was $396 billion what put it into the 29th place in the world. However, considering GDP based on PPP per capita the same year was $9,200, putting Colombia on the 109th place on the list. Real growth rate in 2008 was 2.4%. Agriculture is the main factor of the country's economy and contributes 10.8% of GDP. Manufacturing accounts for 16.2% of GDP. Mining of coal and oil makes another 6.7% of GDP.
Fiscal policy. Budget revenue as well as budget expenditures has been growing steadily during the years, and in 2008 were $68 billions and $67 billions respectively. This was the sole year in the past decade, when the budget balance was positive, and it is predicted to revert into deficit again in upcoming years. Main source of revenue for Colombia is oil exports which contributes 25% of government revenues. Other important sources are remittances as well as support from international donors, in particular the USA. Taxes is another important source of revenue, and they are of three types in Colombia. The VAT tax is progressive and can vary from 0% (for insurance, medical care products) to 20-25% (for wines and spirits), however for most of the goods the VAT is 16%. Corporate taxes are 35% (15% for those in free-trade zone), and individual taxes are from 0 to 33% progressively. Considering budget breakdown, 41% of the budget goes to the current transfers, 32% for foreign debt service, 13% for investments. Public debt in 2008 was $107 billions which was 43% of Colombian GDP, however, the government intends to cut public debt to 40% of GDP by 2010.
Monetary policy. The monetary policy applied by the Central Bank of Colombia has two objectives: (i) to achieve and maintain low, stable inflation rates and (ii) to stabilize the output growth rate near levels that are sustainable in the long term.
The Colombian peso (COL) is the official currency of the country. 1000 COL is 0.33 EUR. For 2008, central bank discount rate was 11.5% and commercial bank prime lending rate was 17.18%. Stock of money (M1) was $21.58 billion and stock of quasi money (M2) was $26.57 billion, stock of domestic credit was $89.69 billion. Market value of public shares was fluctuating from $56.2 billion in 2006 and $102 billion in 2007 to $87.03 billion in 2008. Currently, the government is increasing its spending by providing subsidies for housing and the purchase of appliances.
According to Colombia Reports, just a week ago, the Central Bank of Colombia cut its benchmark rate by 50 points to 3.5%. This was done because the local economy continues to struggle and the fall in inflation gives the Central Bank space to keep expanding its monetary policy in order to both stimulate the aggregate demand and prevent further decline in the local foreign exchange market.
Unemployment. Unemployment rate in 2008 was 11.3%, however, it jumped to 14.9% during the first quarter of 2009. The loss of jobs hits hardest in the cities: urban unemployment has been constantly increasing in the recent years. In total, 2.8 million Colombians are now without a job.
Inflation rate. In 2008, inflation rate in Colombia was 7%. Colombian consumer price index grew 2.12% in 2009. That is 4.41% lower than the last year when the index grew 6.53%.
Recommendations.
Due to big fiscal deficits and falling currency, the ratio of public debt to GDP has risen sharply. That's why I would advice first of all to attract foreign investments, e.g. by creating more free trade zones, in order to strengthen the currency.
Then, Colombia needs to reduce the fiscal deficit, and, logically, there are two ways to do that - either by raising revenues or by reducing expenditure. It's hardly possible to reduce the expenditure, as the government needs to spend on infrastructure to support domestic demand. Moreover, it needs to invest into social sectors, defence and make investments. So the sole way to reduce the fiscal deficit is to raise revenues.
Raising revenues by raising taxes is impossible as well, since current policies are, on contrary, to reduce taxes steadily, since Colombian taxes are ones of the highest in South America. Furthermore, the inadequate tax structure and high tax rates cause cost increases and unfair competition. Taxes need to be reduced more aggressively also to reduce the shadow economy, which currently account for 20% and 40% of GDP.
What I could suggest for the government is to introduce a progressive property tax, so that the rich would pay more. That would increase the revenue and reduce the deficit. Another solution could be inter-governmental agreements. Colombia could either lend money for the foreign countries with a lower interest rate (that might be a bit of a risk, though, and could pay off in the long run only) or sell its goods and services (e.g. labor, timber, etc.) at a lower price (on the condition that they buy it only from Colombia). Then Colombia could not only boost the revenues, but also to decrease unemployment.
Another point to consider is the growth of aggregate demand which is currently slowing down. It is important to increase aggregate demand, since it is an important contributor to economic progress of the country. I would advice the government to spend more on infrastructure. However, it needs to consider how much it would like to increase aggregate demand, as when increased too much, aggregate demand may cause inflation and worsen the account balance of payments. And again, increase in aggregate demand will cause an increase in output, what is likely to reduce unemployment: as output increases, firms demand more labor to produce the extra goods.
