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Colombia Table of Contents


Foreign Trade

Colombia's foreign trade regime underwent numerous changes after it began to flourish around the turn of the century. Following a period of high coffee exports that continued through the 1920s, Colombia enacted strict foreign exchange provisions and instituted a restrictive trade program to stimulate economic growth during the Great Depression, when global markets dried up. This was a common response by Latin American nations during the Great Depression; in Colombia's case, the extent to which these controls were loosened or tightened depended largely on the prevailing price of coffee and the country's willingness to expand coffee exports for higher returns.

In the aftermath of the Great Depression and World War II, Colombia employed protectionist trade policies in full force as part of an import substitution industrialization strategy. From 1950 to 1967, Colombia implemented a sophisticated system of exchange rate controls, tariffs, quotas, and licensing designed to shelter the fledgling industrial sector from foreign competition, a technique that was still espoused by a minority of industrialists in the 1980s. This policy served to restrict the importation of manufactured goods that competed with Colombian-made products; however, the undervalued peso penalized the agricultural sector by reducing coffee revenues. Because Colombia required expensive capital goods to build its industrial base, cheap coffee, which was the main source of funds for the purchase of foreign goods, eventually induced serious balance of payments problems.

Besides financial problems, import substitution industrialization caused inefficiencies in Colombia's manufacturing sector, inhibited the efficient allocation of resources, employed fewer workers than export industries, and further skewed the distribution of income. Collectively, these difficulties forced Colombia to change its economic course; policymakers shifted from import substitution industrialization to export promotion with the reforms of 1967. The economy was redirected toward producing for export markets in order to solve the problems created under import substitution industrialization. Because opening the economy to international markets fostered greater competition from abroad, economic planners expected a more efficient manufacturing sector to emerge as it responded to stronger market forces. A crucial element of this strategy was the adoption of a "crawling peg" exchange rate system.

The results of the market-oriented policies were quickly realized: export manufacturing became the fastest growing sector, which, in turn, encouraged employment growth, the diversification of markets and products, and the overall expansion of the economy in the 1970s. This continued until the late 1970s, when the expansion in coffee production devastated manufacturing by reallocating resources to the agricultural sector and by overvaluing the peso.

The fall in manufacturing exports, the subsequent decline in coffee prices, and the global recession of the early 1980s once again caused balance of payments problems for the government, which reinstated import controls in 1983 to prevent the draining of foreign exchange reserves. The economy did not begin to recover until 1984, when policies were adopted that were aimed at reemphasizing international competitiveness and a diversified export structure. The more open trade polices were approached timidly at first for fear that the manufacturing sector would not recover at a sufficient rate, rekindling trade imbalances and capital flight. Between 1984 and 1986, however, nontraditional exports grew at a healthy pace.

Despite the existence of a few remaining import controls in 1987, policymakers, business leaders, and international consultants agreed that the economy's growth was linked to increased international competitiveness in industry, mining, and agriculture. Programs were in place in 1988 under the Barco government to phase out the final deterrents to free trade, and Colombia approached the 1990s with a firm commitment to open international economic relations.

In the late 1980s, Colombia's exports were still based on natural resources, with coffee and petroleum the two largest foreign exchange earners (see fig. 8). Crude and refined petroleum products represented 12 percent of total exports in 1986; the Colombian Foreign Trade Institute (Instituto Colombiano de Comercio Exterior--Incomex) reported that petroleum and its derivatives were the fastest growing export commodities in 1987.

In addition to legal exports, the shipment of marijuana and processed cocaine abroad had an important effect on Colombian trade. Colombia was the largest supplier of illegal drugs in Latin America in the 1980s, although estimates of the value of these drugs varied tremendously. From 1981 to 1986, annual receipts from the drug trade ranged from US$1 billion to US$4 billion. The actual amount of money that was laundered back into the economy each year, however, was much lower; estimates varied from US$200,000 to more than US$1 billion. Regardless of the precise dollar figure, most analysts agreed that drug money had a significant effect on foreign exchange reserves. Many believed that narcotics accounted for as much as the equivalent of 50 percent of officially recorded exports. Although the drug trade was highly lucrative, the government made significant efforts to restrain the production and export of this dangerous contraband (see Drugs and Society , ch. 2; Narcotics Control and Interdiction , ch. 5).

Data as of December 1988

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Colombia Table of Contents