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Colombia’s Chief Economist Gets It Wrong on Wealth Creation

By: Javier Garay - @Crittiko - Jun 9, 2015, 1:07 pm
El ministro de Hacienda, Mauricio Cárdenas, es uno de los mejores economistas colombianos, pero cae en contradicciones (Mercado de Dinero)
Finance Minister Mauricio Cárdenas is one of Colombia’s best economists, but he falls victim to contradictions between Keynesianism and fiscal discipline. (Mercado de Dinero)

EspañolLast week, a private event took place in Bogotá to analyze US-Colombia relations. Instead, however, participants diagnosed Colombia’s economic situation, including threats and challenges going forward, and they didn’t paint a pretty picture.

Among the principal speakers was Colombia’s Finance and Public Lending ministerMauricio Cárdenas. In his speech, the minister embodied the severe inconsistencies in economic thinking that currently exist in Colombia, and offered an example of why doubts about the country’s ability to create wealth in the future are fully justified.

In recent years, Colombia has improved her indicators on almost all fronts. This has improved expectations of the future, but it has also generated the desire among many social sectors for a greater role for the state in offering services, providing goods, and even redistributing income.

Beware that growth is not the same as development. One cannot assume that just by growing at moderate rates for a few years, a country can consider itself rich. Rather, the conditions that permitted the creation of wealth must be maintained, widened, and protected.

In this way, these services and goods that people demand today from the state will, in the future, come in their majority from the market. Moreover, a sustained increase in societal wealth will solve poverty. As a result, redistribution will be made unnecessary.

But voters aren’t interested in waiting for “the future.” They want to perceive the benefits now, immediately, even if these are spurious, ephemeral, and damaging for years to come.

And since politics isn’t about trying to persuade the masses to change their immediate passions, nor about thinking of the common good, but rather about being chosen for short-term office, the incentives for politicians to say and do exactly what the masses want are very strong.

In the process, there has to be a means of convincing the skeptics — or those affected by politicians’ decisions — and in many cases one of self-convincing. Here lies the importance of rhetoric, and this is what predominated in the intervention made by one of Colombia’s best economists, Minister Cárdenas.

For him, the measures that the government is taking will reduce the negative impact of the fall in oil prices. However, as I and my colleague Julio César Mejía show in a soon-to-be-published study for the Center for Free Initiative, the petroleum crisis is bad for governments, but benefits other economic agents.

Thus the government doesn’t have to do anything, but it is. And within the actions mentioned by the minister, we can observe five problems of economic thinking. The first: one of contradiction. On the one hand, he spoke a lot about fiscal responsibility. However, on the other, he adopted clearly Keynesian rhetoric, of the most orthodox kind, to justify public spending: the construction of infrastructure.

Second, he expressed himself chiefly in euphemisms. The existence of a fiscal rule in Colombia, through which the government has to meet strong deficit reduction targets, is paradoxically used as a license to spend more. The logic is more or less like this: we’re fiscally responsible, but we’re in crisis, so we can be a little irresponsible.

The most interesting thing is that these euphemisms are justified through the third problem: the obsession with experts. A single group of experts, chosen by the minister and his advisors alone, determines when and by how much they can exceed the fiscal rule by.

And, beyond their obvious omniscience, how do they take this decision? Via the fourth problem: a slavishness to statistics. The most serious issue is that in this case, these figures aren’t even verifiable or real. The experts excuse themselves for disrespecting the fiscal rule when they observe that petroleum prices or the national growth rate are “below their potential level.” What precisely is that level? How is it measured? Through econometric models that are designed by … the same experts themselves, or the ministry.

All the above brings us to the fifth problem: complacency. Minister Cárdenas told the room that Colombia is a global example of how to confront a crisis. It’s such an example that a country like Nigeria, in turn an example of fine practices, policies, and development in particular, wants to copy the Colombian model.

These are the problems with which, thanks to elaborate and polished rhetoric, we’ll continue to repeat the same errors of the past. And wealth creation will be the only thing affected. All that will remain will be the much-demanded redistribution of the very little that has been created up until now.

Translated by Laurie Blair.

Javier Garay Javier Garay

Javier Garay is a professor at the Externado University of Colombia. He has written two books on international issues, such as development, after his doctoral dissertation focused on the same topic. Follow him on Twitter @crittiko and through his personal blog, Crittiko.