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Analysis: Behind Colombia's recovery

By
BRIAN ELLSWORTH, UPI Business Correspondent

CARACAS, Venezuela, Sept. 22 (UPI) -- After tumbling in the wake of the 1997 Asian financial crisis, Colombia's economy is seeing the light at the end of the tunnel. Inflation is down to 6.3 percent after spiking to 16.7 percent five years ago, gross domestic product is expected to grow by over 3 percent this year, and investment is on the rise. Industries are recovering and construction contractors are once again breaking ground, generating jobs that have helped push unemployment below 16 percent for the first time since 1998.

While most Colombians agree on the figures, many dispute who is responsible for them.

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According to firebrand Colombian President Alvaro Uribe, the recovery is the result of aggressive new security policies, shakeups in government bureaucracy and good economic planning. But critics insist that Uribe's spin doctors are playing fast and loose with the numbers, overlooking structural problems and trumping up the effects of his reforms. Nonetheless, most recognize that the economy has taken a turn for the better -- though the trend may not last forever.

Uribe was elected in 2002 in the wake of failed negotiations between former President Andres Pastrana and the Colombian Revolutionary Armed Forces (FARC), Colombia's largest guerrilla group. Feeding off anti-guerrilla sentiment, Uribe promised that an immediate crackdown against the rebels would increase confidence in the economy, allowing investment to grow and jobs to return. Whether or not Uribe does in fact control the country's rebel groups has yet to be seen, but his approval ratings hover near 60 percent and the economy continues to gain steam.

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"The fact that Uribe has taken such a strong stance on security has convinced a lot of people that a change is possible," says Fabio Villegas, President of the National Association of Financial Institutions, a Colombian economic think tank. "As a result we're seeing lower interest rates, exchange rate stability and increased flow of capital." Villegas points out that new security measures have led to a 12 percent increase in traffic on Colombia's roads, reflecting a decreased risk in transporting products across the country that itself has increased economic activity.

The recovery is also surprising, says Villegas, given that neighboring Venezuela, one of Colombia's largest trading partners, faced an 8.6 percent decline last year and an 18.5 percent decline during the first semester of 2003.

To fight back against Colombian guerrillas, Uribe launched a series of controversial measures increasing authorities' power to arrest, involving ordinary citizens in counterinsurgency activities, and creating local militias. The Supreme Court rejected many of the new procedures as unconstitutional, but many war-weary Colombians have lined up behind the new initiatives, which many see as the source of new confidence in the economy.

In addition to new security measures, Uribe has launched economic policy reforms that aim to streamline state spending and increase tax revenues. Even while increasing military spending, Uribe has increased taxes, slashed the government bureaucracy and courted private investment. He has also taken on reforms of state-owned enterprises such as Telefonica Colombia and the state oil company Ecopetrol, tasks that previous governments have avoided. Uribe expects to consolidate many of these reforms through a referendum this October -- a gamble that will pay off if he wins, but will curtail his support if he loses.

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"Uribe has gained popularity by presenting himself as a stern father figure who demands sacrifice but takes responsibility for his mistakes," says Michael Shifter, a senior fellow at the Washington-based think tank The Inter-American Dialogue. "He has shown that he is willing to take risks, and people find that refreshing." According to Shifter, much of Uribe's political acumen lies in his ability to make difficult decisions, such as cutting spending and increasing taxes, while simultaneously maintaining popular approval. Shifter adds that Uribe has received good advice from his economic team.

Nonetheless, opposition critics say Uribe is overstating the strength of his economic program while still riding high on the wave of popular support that put him into office. One of the obvious problems with Uribe's approach is that he is trying to balance the government deficit while simultaneously increasing expenditures on security measures, effectively burning the candle at both ends. The result has been higher taxes and less funding for social programs, both of which have a significant impact on Colombia's poor. "There are a still numerous structural issues Uribe has not addressed," says Phillip McLean a senior associate at the Center for Strategic and International Studies (CSIS). "For example, Colombia continues rolling over its debt rather than paying it off, which is going to catch up with Uribe eventually."

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Activists also criticize Uribe for accelerating the fumigation of coca fields as part of a U.S. designed drug eradication strategy, effectively sending Colombia's rural campensinos into cities already clogged with poor migrants displaced by political violence.

Others point out that the Uribe was just plain lucky to enter office when prices for Colombian exports such as oil and coffee were on the rise -- which has nothing to do with the Uribe or his economic policy. The InterAmerican Development Bank indicates that Colombia is still quite susceptible to external economic shocks, which were largely responsible for Colombia's stagnation in the late 1990s, and expects declines in Colombian exports in the coming months. And the recovery hype should also be taken with a grain of salt, some say, since Colombia has never suffered the extreme economic stagnation of its Latin American neighbors, experiencing consistent economic growth throughout the last 50 years.

The upcoming referendum will be an important factor in determining whether or not Uribe's can move forward with his economic reforms, as well as a good barometer of his overall political support. But while Uribe's political honeymoon may last longer than expected, the fate of the economy will rest not only on Uribe's public approval ratings, but on his ability to execute his economic program.

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