Colombia and the low growth trap

Hi everybody!

A few days ago I read the blog post of September 6th from Christine Lagarde head of the International Monetary Fund (IMF) which deals with a very interesting concept called the low growth trap, and felt it was appropriate to look at it a little more closely in light of Colombia’s last trimester growth rate of 1.2% that was published last week. According to Lagarde the low growth trap is made by the interaction of 3 forces, the low growth, high inequality and slow progress in structural reforms, theses forces by themselves creates a vicious circle that leads towards lower growths each time. If we pay attention to this year political events we will see how these factors came into play in the Brexit, the American presidential elections and next Sunday’s referendum in Italy.

The next graph shows the world economic growth long run average from 1990 to 2007, according to World Bank data is 3.5%, how the last 4 years the rates has been lower than the threshold and according IMF projections this year will also be the case. For Colombia, even that 5 of the 7 rates from 2010 has been higher than the average, the tendency has been decreasing since 2013 until last year was below the average of 3.60% with a rate of 3.08% and accordingly to the Central Bank (Banco de la República) market analyst perspective survey 2016 rate will be lower still around 2.13%.

Made by the author. Data from FMI, Wordl Bank and Bancode la República
Made by the author. Data from IMF, Wordl Bank and Banco de la República

But why is this low growth phenomenon happening? Lagarde divides rightly the problem in Developed and Emerging Economies. In the developed the main causes are :

  • The public and private debt overhangs from past crises which has weakened the demand. Is important to remember that the GDP of a developed economy is more consumption than investment oriented, so a demand weakening will have a greater impact in the growth rate.
  • From the supply, productivity deaccelaration and adverse demographic tendencies are slowing the potential growth. This implies that the firms loses incentives to invest if the future growth expectations are lower and in terms of the demographic tendencies the aging of the population and the reduction in labor supply and low homes consumption dynamism are the main traits. If you want a clear example just check Japan.

On the other hand, for emerging economies the problems goes down to the commodities:

  • China’s economic model change going from investment to consumption and moving from external to internal demand has reduced the demand for commodities with in turn affects the growth of many emerging economies.
  • Additionally, to the Chinese effect, there’s been a reduction of the commodities global prices, where a clear example is the oil over supply which has lead prices to their lowest levels this year affecting the exporters countries economies like Colombia.

But how is Colombia affected among these dynamics? Clearly through the reduction of commodities prices, it’s not a coincidence that the growth rates are below average in the same years than the prices in oil has been plummeting down, which shows that the core of the problem lies in the export’s concentration. I’ve said it over and over again, If Colombia doesn’t reduce its economic dependence to oil, it’s going to be a victim of international markets forces beyond its control.

What’s the solution? From my point of view is generated a stronger internal demand attracting foreign investment creating a strong internal market which will reduce the oil income dependence and will allow other economy sectors to flourish. This is easy said than done in an inflation scenario with prices above the central bank target, but we should ask ourselves if this inflation is product of an excess in demand or a shortage in supply?

That’s all for today and have a great weekend!

*If you want to check Christine Lagarde post you can look at it in the next link: We Need Forceful Policies to Avoid the Low-Growth Trap

*This post reflects the author opinion and shouldn’t be used as an investment recommendation.

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