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5: Colombian Banking

<< 4: The Pain and the Glory: Phases Two and Three in the Evolution of the INT || 6: The Impact of the INT on Colombian Economic Institutions >>

The Colombian state has not maintained a solid position before the matter of illegal drugs. Moreover, it has tried to maintain a costly and unstable equilibrium between essentially irreconcilable propositions: the perception of the economic benefits provided by the narcotrafico and the control of the pernicious effects of the same [phenomenon] over justice, public order and citizen welfare.(1)


While most scholars disagree about estimates of the revenue generated by the illegal narcotics trade (INT) in Colombia, they do agree that the illegal monies generated have been sufficient to undermine the state's capacity to devise, implement, and enforce economic policy. Eduardo Sarmiento Palacio, Dean of Economics at the University of the Andes, notes, however, that the dimensions of the drug problem have been exacerbated by the international media. When it is written that the INT has generated $150 billion dollars in revenue spread across Colombia, Peru, and Bolivia, but "whose income does not attain half these numbers, it is not difficult to conclude that these countries are totally dominated by drugs."(2) He argues that before effective policies can be implemented towards dismantling the INT, there needs to be a clearer understanding of the ways in which the INT influences the economy.

Review of the Literature on the Colombian Economy and the INT

Francisco Thoumi notes that although academia has been slow to study Colombia, such has not been the case with the World Bank. While World Bank studies do circulate, Thoumi notes, many of the better studies are not widely circulated. Although Colombian economists have had access to them, "they are hard to find in the United States outside the multilateral agencies' community."(3) The result is a de-emphasis of the political role in economic decision making. There exists only a limited literature which provides any depth explanation of or attempts to integrate the role of politics with economic decision-making in Colombia.(4) Within this nexus of politics and the economy, structural power has been created and maintained within Colombia.

In contrast to political and economic literature which makes a minimal effort to incorporate the INT into its studies, drug trafficking literature has always included an economic component. Much of what we now understand about the economic impact of the INT on foreign exchange, on employment, and domestic and foreign investment is the result of drug trafficking studies.(5) Again, only a small portion of this literature attempts to tie the impact of the INT to political decision-making set in a broader context and in a more precise way.

Bruce Bagley acknowledges this weakness in the INT literature with his critique of the realist paradigm in international relations theory.(6) A key flaw in the realist paradigm, Bagley notes, is its oversimplified assumption that nation-states are always the primary actors in international politics. The existence of multiple subnational and transnational actors in addition to "A variety of private, multinational, commercial banks, and other international institutions [which] engage in illicit money-laundering activities"(7) renders unrealistic any expectation that "institutionally underdeveloped, financially-strapped governments of Latin America will be in a position to gain or maintain effective control over these actors within the next decade..."(8)

Thoumi notes that many of Colombia's institutions retain "pre-capitalistic tendencies".(9) Thoumi's description coincides with the mercantilist theory of international political economy which describes a high level of state intervention and protection of local industries. These authoritarian and paternalistic tendencies have produced what "Kalmanovitz (1989) calls an `ethics of inequality' that shaped the institutions and values in the society."(10) The result has been the acceptance of a society as normal which is an unequal society.

Colombian development after World War II, according to Thoumi, led not to competitive markets, but to segmented markets resulting in "group or sectoral oriented actions"(11) where the distribution of power among the actors is skewed, concentrated, and exploitative. As such it allowed the actors to alter the "rules of the game" [reglas del juego]. These actors often used the governmental apparatus to obtain high profits only through increased protection, subsidized credit, import privileges, policies traditionally considered by economists, but also influencing judicial, legislative, and police systems..(12)

Market segmentation also resulted in political segmentation which resisted attempts by the Colombian government to established a more centralized, hierarchical regime. The National Front's use of parity and alternation between the main political parties gave way to increasingly segmented and regionalized politics no longer dominated by artisan politics. Diaz Uribe argues that such politico-economic segmentation has changed the face of clientelism, "as a system of social domination, (which) has been the backbone of Colombian political bipartisanism."(13) To say one is a Liberal or Conservative has less meaning than if one personalizes one's political affiliation with the name of a regional jefe.(14) Both forms of segmentation have resisted efforts of either coaptation and centralization by the national government. The INT arose within this structure and, as demonstrated earlier, favored its growth and development inasmuch as they were able to develop, at least regionally, their own reglas del juego. This raises the question of how successful methods, established by the Colombian government for dealing with challengers such as the INT to its power, have been. Recent efforts of trade liberalization and apertura of the economy have resulted in policies by the national government which recognize the importance of regionalized/segmented markets. These efforts, I shall later argue, represent an implicit recognition of a failed policy of national integration which extending beyond the years of the National Front. These policies also represent a pragmatic realistic style which has been the hallmark of Colombian politics.

Another oversimplification of the realist paradigm Bagley identifies is the assumption that the foreign policies of Latin American governing elites are rationally selected and implemented in a way to further "well-defined and widely accepted national interests."(15) Too often Latin American policy makers find themselves within political systems of tenuous legitimacy where there does not exist a viable consensus on national interests.

Thoumi notes that defining the Colombian state as an oligarchical democracy or consociational democracy implies a deeply unequal society wherein the state is controlled by a group to achieve the group's goals. Thus the state and its bureaucracy has only a limited accountability to its citizens to the point where the state may be "thought of as bounty"(16). The state does not reflect a consensus on what Colombian national security is or the goals the state should pursue in that interest. Such perceptions have important corollaries.

One, the aim of the several actors is not necessarily to produce a more equal society, but to climb a very steep pyramid. The rationale being that if the society has always been unequal and will continue to be so, why not be on top? Rationales of this type severely and narrowly restrict definitions of national interest as these groups/sectors which succeed in "getting the government to make policies that clearly benefit defined economic interests."(17) Two, the logical extension of this process is that since the laws do not benefit Colombian society at large, breaking the rules is considered legitimate. This in turn leads to further weakening of the rule of law over the economy. Almost every Colombian generates some illegal income, has purchased contraband, cheated on contracts, paid bribes, committed fraud, and/or has income hidden away from the government.

Thoumi identifies four sets of problems emanating from such predatory behavior. First, it leads to private systems of conflict resolution where taking the law into one's own hands leads to violence. Second, as individuals are able to increasingly break the law with impunity, it leads to setting behavioral standards that increasingly conflict with other privately set behavioral standards rather than a uniform and consensual "constitutionality". Within such an environment, the cost of business increases dramatically. Third, predatory behavior becomes the norm as individuals realize the weakness of the State in protecting property rights. Fourth, as larger amounts of private resources are required to protect private property, income growth declines and investments begin to be made for "reasons other than their profitability such as the usefulness of an asset as a capital laundering vehicle."(18) Such was the condition of the Colombian economy and its relationship to the Colombian state as it confronted the challenges offered by an accelerating illegal narcotics industry in the mid-1970s.

The purpose of this chapter is to provide an overview of Colombian financial and monetary structures. In its efforts to plan, develop, and implement its economic policy, which strategic alliances does the Colombian government engage that would affect its backward and forward linkages? With which powerful players does it intersect and engage? It is assumed, in accordance with Susan Strange's definition of power, that the institutional structure is, in part, defined by its power.

Forward linkages between banking operations and world politics consist of the politics of managing a global credit and monetary structure. Banks have created the active international financial markets. These international financial markets have had a predominant influence on the network of international payments and exchange rates in ways that have redefined the limits of international bargaining and added to the future of international monetary diplomacy.(19) What impact, if any, has the magnitude of INT revenue had upon the international dealings or vice versa of Colombian financial institutions? Have there developed any institutional linkages in the form of policy networks which have produced policies that actively mitigate against the resolution of the INT in Colombia?

Using U.S. banks as an example, and one which could apply to Colombian banking, British economist Susan Strange suggests a more central question is raised by the exodus of U.S. Banks to the Cayman Islands and other tax havens and the role they have in money laundering. She notes that such flight frees "large and lucrative parts of the profits made in the private sector of any responsibility for the provision of public goods and services--including defense services on which their operations totally depend."(20) This is a particularly salient issue for Colombia. The larger producer associations or gremios, such as Federacíon Nacional de Cafeteros (FEDECAFE) and of which I will have more to say later, have been charged with and assumed responsibility for providing public goods usually provided by the national government. For example, FEDECAFE owns Banco Cafetero, one of the nation's largest. It provides hospitals and educational facilities for its workers and their children.(21) Later I examine reports that suggest Banco Cafetero has been heavily involved in using off-shore banks to deposit Banco Cafetero revenues which were not funneled back through the Colombian state for redistribution. Strange agrees with a growing number of economists that money has been treated only as a commodity rather than as a source of power through the political management of money or creation of wealth.(22) In this chapter, we try to enlarge our understanding of the organization of Colombian economic institutions. Our central focus will be on how money as power and its political management has affected Colombian economic institutions.

Backward linkages refer to financial regulations made in a context of domestic politics. These linkages are not simple and vary with market conditions. Some questions with regard to the influence of the INT on backward linkages include: How is INT money to be moved and/or re-entered into the capital market given economic regulations designed to monitor the money supply? What impact, if any, have large amounts of illegal funds had on the economic organizations of Colombia in controlling the money supply and planning economic policy? Is it possible, if indeed useful, to distinguish between the legal functions of an economy and the political functions of an economy?

The following section provides a brief historical overview of the Colombian monetary structure and financial system as well as the development of the producer associations and their role in the political economy of Colombia.

Overview of the Colombian Banking and Monetary System

William P. McGreevey notes despite a booming tobacco export monopoly in mid-19th century Colombia, there was not a sufficient demand generated for the creation of formal banking institutions.(23) The Banco de Bogotá was the first successful bank opened in Colombia in 1871. During the next ten years the bank' success did not go unnoticed as ten major banks opened in Bogotá and thirty-five banks opened in the rest of Colombia. The real growth in banking did not occur until coffee was developed as a major export requiring the services of financial intermediaries.(24)

Banco Nacional was created in 1881 with government funds and in anticipation of revenues from the forthcoming Panamanian railway was backed by these revenues. In his work on the ex-patriate Cuban entrepreneur, Francisco Cisneros, Hernán Horna notes that the basic objective of Banco Nacional was to "provide loans to the [Colombian] government and promote public financing."(25)

The central bank, Banco de la República (BdeR), was formed in response to the recommendation of the Kemmerer mission in 1923. This coincided with the $25 million indemnity paid by the United States for its part in the secession of Panama from Colombia.(26) Originally the purpose of the BdeR was as an institution subject to economic law, yet retaining special administrative autonomy. Today it serves under the Monetary Board established in 1967 to guide the financial system through the establishment of regulations for policies affecting monetary, exchange, and credit systems.(27)

Simultaneously, the Bank Superintendency was created as the regulatory agency responsible for the oversight and imposition of penalties on the financial system. Law 45 establishing this oversight agency also provided the framework for creating commercial banks. Commercial banks are defined as "commercial credit institutions whose main function is to receive funds from surplus-holding agents, as to build up an adequate level of financial savings for the country's development."(28) Funds are received through current deposits, time deposit certificates, and savings deposits. Commercial banks function to make short and medium-term loans. Additionally, together with the financial corporations, they serve as financial intermediaries for resources from the BdeR's development finance funds. Commercial banks also provide foreign-currency financing required for import payments. Foreign currency funds come primarily from correspondent banks abroad or from foreign-currency deposits in accounts at the BdeR. Of twenty-five commercial banks nine are state-owned, seven are categorized as mixed, meaning part of their capital is owned by foreign investors, and the remainder are private.

Another form of financial intermediaries in the Colombian financial system are Finance Corporations [Corporaciones Financieras] and are analogous to development or investment banks in other countries. Created in 1957, at the beginning of the National Front, their purpose is to "promote, set up, transform or organize manufacturing, agricultural, or mining businesses."(29) Not until 1987, however was legislation passed enabling them to more effectively carry out their mission. Prior to this legislation, the Finance Corporations were characterized by a high degree of over-specialization which discouraged investors and decreased their profit margins.

Savings and loan associations were created in response to one of the periodic economic crises that plague Colombia. Established in 1971 they encouraged and stimulated private savings which were directed toward financing construction activities and increase housing acquisitions. Their establishment was considered unique in the sense that deposits and loans were calculated "in the constant purchasing power units, (UPAC), whose value in pesos is registered according to the monetary correction, for which a maximum of 24% annually was established in 1989."(30) The most immediate impact of UPAC was an enormous shift in savings from other accounts into UPACs where the interest rate was unregulated and would often go as high as 38%.

Another form of credit institution established in 1979 is the Trade Finance Company. These companies provide short-term loans for durable consumer goods. In order to procure funds from the public, time depository certificates were originally used. By February of 1990, a new law required promissory notes replace time depository certificates.

The Banco Central Hipotecario (Central Mortgage Bank) is state-owned and provides financing for home construction and purchase of low-income housing. It obtains funds via two methods: the UPAC system and the traditional system of issuing mortgage bonds.

The Caja Social de Ahorros [Social Savings Association] is similar in function to the commercial banks and represents one more in an array of lesser financial intermediaries. These include insurance companies, reinsurance companies, capitalization companies, investment management companies, mutual investment funds, leasing and factoring companies and cooperatives.  

Table 4. Colombian Financial Structure

                              ____________Monetary Authority______________________________________
________________________Monetary Board______________________________________
|                                                                                                        |
|                                                                                                        |_________Members |
|                                                                                                                                                |
|                                                             Ministers of Finance, Agriculture, Economic Development
|                                                                Director of National Planning Dept.; Governor of the Banco de la Republica,
|                                                                Director of the Foreign Trade Institute (INCOMEX)
|______Banco de la Republica____________________________________Bank Superintendency______________
____________________________Commercial Banks_____________________________
Private________________________Mixed___________________________State Owned
Bogotá                                                        Real                                                                   Popular
Commercial Antioqueño                         Internacional                                                  Cafetero
Credíto                                                       Anglo                                                                Ganadero
Industrial Colombiano                            Sudameris                                                        Colombia
Santander                                                  Royal                                                                 Comercio
Caldas                                                        Extebandes                                                        Estado
Colpatria                                                   Colombo Americano                                       Trabajadores
Occidente                                                  Credito y Comerico                                        Tequendama
                                                                            |                                                                   Caja Agraria
                                                        Cafe Social de Ahorros
                                   Financial Corporations (Corporaciones Financieras)
                                                       Savings and Loan Corporations
                                                            Trade Finance Companies
_________Other Financial Institutions___________________________________________________
|__Central Mortgage Bank____Insurance Companies________Mutual Invest funds
|___Leasing and Factoring Companies_______________High grade cooperative entities

Source: Banco de la Republica  

Clearly Colombia progressed in its need for financial systems and the array with which it has met this demand. But the Colombian monetary and financial system, despite an admirable growth rate, has been plagued by repeated crises . Sergio Clavijo describes the Colombian financial crises between 1970-1989 as those representing a globally repressed economy.(31) In response to a failed price and market system the Colombian state engaged in high levels of intervention which included import restrictions and foreign exchange controls. Domestic consumer goods were overpriced and, the M-2/GDP ratio doubled during this period with "nearly 45 percent of deposits (channeled) through non-banking institutions."(32) Examination of four of the five state owned banks reveal a record of administrative ineptness combined with uncompetitive market policies. Although strategies adopted by the Colombian monetary authorities helped avert financial panic and bank run-offs, the ensuing economic structure was not as coincident with the touted democratic apertura. Changes in these institutional structures as they relate to the manner and degree the Colombian economic system has been affected by the INT require a clear delineation of the role and relationship of producer associations and the Colombian government.

Gremios de la Produccíon [Producer Associations]

Producer associations are not unique to Colombia. Underdevelopment combined with a weak state has contributed to the existence of producer associations in most Latin American nations. While these groups possess some characteristics of interest groups as defined by political scientists, salient differences suggest generalizations about these associations should be made with care. For the purposes of this study I adhere to Hartlyn's definition of gremios de producción as producer associations rather than producer groups. The term producer groups is used in referring to activities of firms or businessmen, either alone or in conjunction with associations.(33) There are many producer groups who have never become members of producer associations. If the term included illegal enterprises, the INT could be said to consist of producer groups.

While foreign investment has always been important to Colombia, unlike some of its neighbors the "direct participation of foreigners in financial and industrial management was, by comparative standards, quite low."(34) Dix notes that until the drug trade accelerated, most of Colombia's capital was derived from domestic sources, principally coffee. A high degree of oligopolization has occurred among the financial and industrial sectors with enterprises tied to financial institutions through familial ties as well as interlocking directorates.

Consonant with the lateness of Colombian development, most of the producer associations were established after World War II. The exceptions being FEDECAFE, SAC and ASOBANCARIA.(35) Some are specialized while others, such as ANDI and ANIF, encompass a broad range of industrial, commercial, and financial firms. Older, more firmly established producer association such as FEDECAFE have elaborate organizational structures, including conventions and professional staffs to do research. Others such as SAC remain essentially regional organizations and struggle to keep their membership constant. What then is the relationship of producer associations to the Colombian government?

Producer Associations and the Colombian Government

The proliferation of producer associations began during the post World War II period and accelerated with the formation of the National Front regime. Alvaro Echeverri Uruburu describes the National Front itself as "un experimento gremial".(36) Alexander Wilde, in his study of the breakdown of Colombia's oligarchical democracy, notes despite efforts by leaders of the political parties to solve their democratic problem, "All institutional norms were lost in the face of escalating violence and party polarization."(37)

Because of political, social, and economic change that took place during `la violencia', the resultant state differentiation fragmented the political party apparatus, but not the oligarchs. They remained center stage as the stage was filling up with new actors. "Bureaucratic agencies, interest groups and gremios were organized, which both expressed and satisfied demands that had been channeled through the parties in simpler times."(38) Many of the new economic functions of government were insulated from party struggle even as parity and alternation were the key power-sharing mechanisms established during the National Front. In an effort to control cross-cutting cleavages such as class and familial relationships within the gremios, many of the producer associations adopted parity and alternation within their institutional structure.(39) Wilde proposes that the "decentralized agencies" and gremios, by the 1960s, constituted a genuine parallel government. As such the National Front "essentially institutionalized elaboration of the old system..they never found the leadership or the organization to force a fundamental transformation."(40)

A. H. J. Helmsing argues the creation of decentralized state agencies as well as the proliferation of producer associations "were in fact the main vehicles of centralization of the Colombian state (post `violencia'), not only away from Congress (and its domination by political parties) but also away from the departmental and local levels of government."(41) As a result government institutions became more technico which limited clientelism on the national level. Simultaneously nationally organized economic pressure groups became important mechanisms in making government policy. In its direct form influence and participation occurred when pressure groups participated on the boards of decentralized agencies or coordinating committees.(42) Helmsing suggests although decentralized agencies proliferated, the result was centralization of the Colombian government at the national level. This, however, resulted in a fiscal crisis by the end of the 1970s as the national ministries and decentralized agencies accounted for the greater part of governmental expenditures, especially investment expenditures.(43)

Echeverri Uruburu notes that so interlinked with the gremios was the Colombian government that, during the coffee bonanza of 1976, it launched a precipitous relinquishing of administrative and tariff controls. Sudden de-regulation of this sort did not permit the profits from the bonanza to be recirculated through the government. Additionally, the relinquishment of governmental control on imports and exports, along with the bonanza from the INT, resulted in a growing flow of foreign goods.(44) Echeverri argues that this incidence reveals the loss of influence by the industrial gremio ANDI and challenges assumptions about a unified elite in Colombia.

To assume that los gremios always operate oppositionally to the national government would be erroneous. Jonathan Hartlyn points out that the producer associations have provided important support for the various regimes during crises.(45) This support, however, could often work to the detriment of government formulated policy. Efforts to increase state revenues through a capital gains tax and presumptive income tax in 1974 and 1975 occasioned protests from the producer associations and resulted in a quite watered down tax law in 1979 which was actually prepared in ANDI's Bogotá office.(46) Participation of this type should not be interpreted as unlimited ability to influence and participate in decision making. ANDI had limited ability to influence the national government during the coffee and drug bonanzas of the mid-1970s when it found itself juxtaposed to the larger, better organized and more powerful FEDECAFE. Luis Carlos Galán, leader of the Llerista Liberals and later assassinated as presidential candidate, noted that over ime the gremios have displaced Congress as a forum of deliberation about national problems and that their (gremio) influence is growing.(47) The power that gremios possess, Galán continues, "follows not only (the) large capital they control, but the administrative capacity and information they possess about economic realities of the country".(48) Urrutia, himself a member of FEDESAROLLO (a decentralized governmental agency), demurs and suggests that the influence of the gremios and their ability to influence laws is much less than various studies would indicate. Urrutia attributes the lack of greater gremio influence to the difficulty of maintaining cohesion among the association of gremiales and notes that small groups are more effective and better organized.(49) He argues that the political structure of the gremios is federalist requiring the directors to travel constantly to maintain strict contact with local organizations and individual businessmen.(50) Urrutia emphasizes the local nature of the gremios and "locality" as the source of power and the authority to which the gremio is accountable, while simultaneously arguing that gremios now constitute oligarchies "in the sense that the authorities of the association exercise great power and are able to perpetrate their tenure."(51)

Urrutia's study provides a valuable insight into the heterogeneity of los gremiales but is less successful in discounting the influence possessed by the producer associations. Indeed his emphasis on the regionalistic structure of the producer associations, even with oligarchic regime structures at the more national level, is reflective of the political and economic regionalism of Colombia. Those who have the capacity to transcend regionalism and participate on the national level possess the advantage of multiple points of access to influence policy-making. Hartlyn notes that "Regime policies were substantially influenced by producer groups that possessed multiple points of access and means to pressure the regime."(52) Echeverri's charts of familial and gremial connections of various ministers and cabinet members reveal more fully the extent to which multiple points of access might exist. During the question and answer period at a recent conference on the Colombian economy(53) senior consultants for the Monitor Company were very harsh in their assessment of the producer associations in Colombia. In their conclusions of a study on developing entrepreneurship in the Colombian private sector, they noted that los gremios had proven to be a disaster as institutions through which to funnel change and implement policy. They argued that the associations had successfully limited currency valuations and promoted their own interests through the media when it was in their, not the national, interest to do so. Monitor's recommendation was that the government do away with subsidies altogether. They proposed generating entrepreneurial activity through incentives not subsidies using not only the producer associations but other institutional structures as well.(54)

The following section provides a brief overview of the banking system during the last half of the National Front regimes. This situates the banking industry historically into the Colombian economic framework Alfonso López Michelsen confronted when he became president in 1974.

When López Michelsen assumed the presidency in 1974, his most immediate goal was to oversee dismantling the political structures of the National Front agreement. Various Front governments had been effective in lowering the levels of violence from endemic to episodic and limited to certain regional locales. Institution rebuilding had continued apace with varying levels of strength and concentration of authority. Increased centralization of the national government, however, should not lead one to assume the bulk of policy decision making occurred at this level.

During the early 1960s economic controls remained scattered across numerous governmental agencies, private and mixed, "which exercise their functions of planning and execution at different levels".(55) These included the National Council on Economic Policy and Planning, FEDECAFE, and those agencies engaged in selected fields of credit such as Caja Agraria, Banco Central Hipotecario, and Banco Ganadero. The position of foreign banks in Colombia was rather liberal at this time. They functioned in the traditional mode of multinational corporations, were entitled to the same consideration as Colombian banks, and were not required to have a majority of Colombian stockholders.

Foreign investment was eagerly sought and obtained by various Front governments. However, the almost complete absence of controls in Colombia over foreign investment were believed to have contributed to the country's balance of payment problems in 1967. The import-substitution policy had resulted in costly additional imports where foreign exchange constraint was "identified as the key bottleneck slowing the country's economic growth".(56) The result was the passage of Decree 444 in March 1967 setting up a framework for the regulation of foreign investment. This system later served as the model in drafting Decision 24 of the Andean Pact which "established common treatment for foreign capital, trademarks, and patents within the Andean subregion".(57) Within this new institutional framework control of foreign investment was directed by a special division of the planning board. When López Michelsen assumed the Colombian presidency in 1974, foreign investment in Colombia had increased from U.S.$18.4 million in 1967 to U.S.$120.0 million.(58)

Paralleling foreign investment in manufactures was the growth of foreign financial sectors in Colombia during the Front regimes.(59) This is not to say that foreign banks retreated from Colombia. Those who remained from the 1920s included the Bank of London and Montreal (1920), The French and Italian Bank for Latin America (1924), the Royal Bank of Canada (1925) and, from the U.S., First National City Bank (Citibank) in 1929.(60) Primary growth in foreign banking came during the 1960s and paralleled the growth in manufacturing foreign investment.(61) The question arises: How important did foreign banking become for the Colombian economy?

Boyce and Lombard note that one way to measure this importance is to evaluate the participation of foreign banks with Colombian banks. Funds controlled by foreign banks can include assets in local currency as well as external loans. According to statistical data provided by the Banco de la Republica (BdeR), in 1973 "assets of foreign banks amounted to 13.6 percent of the assets of all commercial banks and generated 9.7 percent of the earnings of the entire Colombian banking sector".(62) At this level of measurement, Boyce and Lombard conclude that the importance of foreign banks is not overwhelming.

More penetrating investigations by Boyce and Lombard reveal a financial dependence index of 34 percent which represents the increased indebtedness to "private international money market [by the Colombian public sector] because of the availability of funds from international banks in the early 1970s."(63) Foreign banks controlled 41 percent of available funds for Colombia's debt.

Concerned about the growing importance of foreign banks, Colombia sought to curtail their importance by requiring foreign banks, like any other multinational firm, subject to Decree 444. Decree 444 required any foreign bank planning to increase its capital base to seek approval from the planning Board. In 1973 foreign banks were made subject to Decision 24 of the Andean Pact. The election of the Conservative party in 1970, however, led to the passage of Decrees 2791 and 2788 exempting foreign banks in Colombia from the Andean Statue of Capital.(64) These decrees provided relief for the foreign banking sector in Colombia. Previous decrees required they convert themselves into national banks and sell 80% of their stock. With the revised statutes they were free to continue to operate without such conversions. This type of legislative give and take over banking regulations is reflective of the still sharp partisan lines that existed in Colombia although the National Front had existed for better than a decade at this point. Members of the Conservative Party strongly supported foreign banking as a means to improve capital inflow in a nation with extremely low savings rates.(65)

The status of foreign banks was again reconsidered with the election of the Liberal party in 1974 which prepared a law requiring foreign banks to be converted to "mixed" enterprises. On February 24, 1975, President López signed Decree 295 which allowed the minister of finance to create

" a Commission to arrange the transformation of foreign banks and other institutions into `mixed enterprises. The commission was given legal power to achieve this transformation and was empowered to prepare proposed laws and regulations on this issue."(66)

The "Colombianization" of foreign banks required nationals to own 51% stock in the bank with this same percentile reflected in the financial, personnel, legal and commercial administration of the bank.

Decree 295 reflects a generalized concern among political and economic leaders that growth in foreign banking had become excessive inasmuch as its growth limited the control Colombians felt they should have over their own financial resources. It is interesting to note, however, that the Decree was issued as an executive decree by López Michelsen during a period after which he had declared an "economic state of siege" in 1974 and was not proposed as a law to the Congress. This strategy suggests that López Michelsen was concerned about the measure becoming mired in partisan concerns which continued to dominate the assembly. For his part, he considered inflation the major enemy of democratic institutions.

In Colombia, despite a large number of favorable indicators, inflation has, as a conceptual impact, revived a great skepticism and great pessimism about our [the state] ability to provide.(67)

Between 1974 and 1976 inflation rates were 12.5%, 13.6% and 25.6% respectively as reported from official figures in an article, "Costo de vida: Se necesitan tres slarios mínimos para sobrevivir" in ALTERNATIVA.(68)

According to Susan Strange, 1973 was a conjunctural year for international banking.(69) There occurred an effective devaluation of the dollar. The move to FERS (floating exchange rates) meant that countries with surpluses under fixed rates had larger surpluses under FERS leading to a larger debt to deficit ratio. The first oil shock during this year increased a nation's dependence on the banking system to find financing for current consumption and economic development.(70) Strange goes on to note that while markets, left to themselves, might be wasteful and unstable, "It may well be that there is a sort of critical threshold (emphasis added) beyond which it is dangerous for a national economy to go in matters of protective cushioning for parts of the mechanism (national economic mechanism)."(71)

For Colombia these conjunctural events heralded a boom in minor traditional exports such as ferronickle and flowers. At this time Colombia's foreign exchange reserves grew rapidly. International reserves grew from U.S. $431 million in 1974 to $U.S. 2,366 billion in 1978. By 1980 international reserves reached $U.S. 4,831 billion.(72) Between 1976 and 1978 the M1 grew at an annual rate in excess of 30%.(73) "Not only did the switch to the floating exchange rate contribute to the very successful export performance, but it ended the disturbing devaluation-inflation cycle which had been the despair of operatives under the previous system."(74)

The conscious strategy of López Michelsen to strengthen the financial sector as part of a plan to delink Colombia's development from foreign banks proved enormously successful.(75) Robert Dix notes that the financial and industrial sectors became increasingly oligopolized particularly in the form of conglomerates such as the Santodomingo complex and the Grupo Suramericano.(76) The oligopolization occurred not only among older established groups, but admitted newer groups such as the Grupo Grancolombiano, headed by Jaime Michelsen Uribe. So concerned were the older groups, particularly those in Antioquía, about the emergence of this new group's monopolization, it prevailed upon the Colombian government to enact legislation restricting the GranColombiano group.(77)



Correa and Steiner note that fiscal and administrative deconcentration rather than delegation or decentralization best describes the Colombian state between 1967 and 1980.(78) While the Colombian state achieved some degree of centralization through the National Front regime at the national level, fragmentation and regionalism persisted. The proliferation of governmental decentralized political agencies and producer associations provided multiple points of access to influence, implement, or impede governmental policies. The day to day business of politics continued at the local level which had been increasingly de-emphasized in favor of centralization during the National Front regime. Many governmental functions and provisions of public goods were contracted out to producer associations which, as Urrutia noted, were strongest at the local level. Dealing with challengers to its power through cooptation, repression, and mobilization continued to be the modus operandi of the Colombian government. This is consistent with our definition of Colombia as a dependent industrializing state where there are basic and fundamental differences concerning the basic organizing principles or structures of the state. It is also supports our contention that, during the National Front regimes, Colombia closely resembles Benjamin and Duvall's State 1 in its focus on maintaining legal political order. In Colombia's case, however, protection of property rights came from the state only in the enforcement realm, not the policy decision realm.

The major difference from past patterns is that cooptation and mobilization tended to occur through producer associations rather than political parties and repression took the form of the executive decrees allowed under political and economic "states of siege". López Michelsen's use of an economic state of siege to pass legislation Colombianizing foreign banks suggests that informal enforcement of contracts (in this case, state law) by producer associations entailed risks they were unwilling to take. It also supports North's assertion that organizations will try to maximize their objectives as provided by their institutional structure. López Michelsen's unwillingness to submit his bill to the Congress or broker agreements among the producer associations suggest a lack of consensus over Colombia's national interest. Thus, according to North, the producer associations were functioning as they were institutionally designed to function, as interest groups, not parallel arms of government.

Correa notes two areas of problems persist as Colombia began structural decentralization with the adoption of a new constitution in 1991. The first problem is the lack of a stable legal framework with consistent rules to reinforce autonomy and decentralized decisionmaking. The second problem is a revenue system that propitiates low savings rates and fiscal imbalances. This system can become a source of inefficiencies in resource allocation perpetuating a structural system dominated by reactive rather than responsive policy making.(79) The highly fragmented, intensely regionalized regime structure of Colombian politics as well as economic and social life was the context within which the INT was poised for take-off in the mid-1970s. Illegal narcotic's trafficking, as noted earlier, was but one of several products in the Colombian contraband trade until the mid-1970s. It not only became the dominant product in the traditional contrabandista's repertoire of goods, but allowed entry of other actors at various points of access. In the next chapter we assess the impact of the INT on Colombia's economic institutions.  

Table 5

1. Arturo Infante Villareal, "Introduccion", Narcotrafico en Colombia: Dimensiones politicas, economics, juridicas e internacionales. (Bogota: Tercer Mundo Editores, 1990, 47.

2. Eduardo Sarmiento Palacio, "Economica del narcotrafico" in Narcotrafico..., 77.

3. Francisco E. Thoumi, "Overview" in The Colombian Economy: Issues of Trade and Development, eds. Alvin Cohen and Frank R. Gunter (Boulder: Westview Press, 1992), 2.

4. An exception to this is the fine work done by Jonathan Hartlyn on the role of producer associations in coalition building in The Politics of Coalition Rule in Colombia (New York: Cambridge University Press, 1989).

5. Three excellent sources which provide an overview of drug trafficking in Latin America may be found in the Journal of InterAmerican Studies and World Affairs, Vol. 30, Nos. 1,2,3, Spring, Summer/Fall 1988 and a special edition issued in Fall 1992, Vol. 34, No.3.

6. Bruce Bagley, "U.S. Foreign Policy and the War on Drugs", Journal of InterAmerican Affairs and World Studies Vol. 30, Numbers 2&3, Summer/Fall 1988, 198-204.

7. Ibid., 197.

8. Ibid.

9. Francisco E. Thoumi, "An Institutionalist Interpretation of Colombia's Paradoxical Economic Growth Performance" Paper presented at the XVI International Congress of the Latin American Studies Association, April 4-6, 1990, Washington, D.C.

10. Ibid., 5.

11. Ibid., 7.

12. Ibid., 9-10.

13. Eduardo Diaz Uribe, El clientelismo en Colombia: un estudio exploratorio. (Bogotá:El Ancora Editores, 1986), 12-13.

14. Ibid., 34-35.

15. Ibid., 200.

16. Ibid., 6.

17. Ibid., 14.

18. Ibid., 16.

19. Aronson, 13.

20. Strange, Ibid.

21. Miguel Urrutia, Gremios, política económica y democrácia (Bogotá: Fondo Cultural Cafetero, 1983), 142. Urrutia discusses how textbooks used in Cafetero schools are written and have exercises designed to reinforce loyalty to FEDECAFE.

22. Susan Strange, "Interpretations of a Decade" in The International Economy of International Money: In Search of a New Order, ed. Loukas Tsoukalis (Beverly Hills; Sage Publications, 1985), 17.

23. William Paul McGreevey, An Economic History of Colombia: 1845-1930 (New York: Cambridge University Press, 1971), 168.

24. Ibid.

25. Hernán Horna, Transport, Modernization, and Entrepreneurship in Nineteenth Century Colombia:Cisneros and Friends (Uppsala: Acta Universitatis Upsaliensis, 1992), 41.

26. McGreevey, 204-205.

27. The Economic Research Department of the Banco de la Repúbilica has provided an excellent overview of the Colombian economic structure in the booklet, Colombia: Economic Structure 1989 ed. Banco de la República Economic Research Department(Bogotá: Banco de la República Editorial Department, 1989). Much of the technical information about banking structure is drawn from this publication.

28. Ibid., 63.

29. Ibid., 64.

30. Ibid., 65.

31. Sergio Clavijo, "Overcoming Financial Crisis During a Transition from a Repressed to a Market-Based System: Colombia 1970-1989". Chapter 5 in The Colombian Economy: Issues of Trade and Development eds. Alvin Cohen and Frank R. Gunter (Boulder: Westview Press, 1990).

32. Ibid, 94-98.

33. Jonathan Hartlyn, The Politics of.... fn 3, 267.

34. Robert H. Dix, The Politics of Colombia. (New York: Praeger, 1987), 65.

35. A list of the producer associations, the translation of their anagrams and the dates of their inceptions is provided in the Appendix.

36. Alvaro Echeverri Uruburu, Elites y Proceso Politico en Colombia: 1950-1978(Bogotá: Fundacíon Universitaria Autónoma de Colombia, 1987), 61.

37. Alexander W. Wilde, "Conversations Among Gentlemen: Oligarchical Democracy in Colombia", in The Breakdown of Democratic Regimes, 39.

38. Ibid., 42.

39. Echeverri Uruburu, 62-65.

40. Wilde, 62.

41. A.H.J. Helmsing, Firms, Farms and the State in Colombia (Boulder: Westview Press, 1986), 171.

42. Ibid., 172-173.

43. Helmsing, 173.

44. Echeverri Uruburu, 231-232.

45. Jonathan Hartlyn, The Politics of Coalition Rule in Colombia (New York: Cambridge University Press, 1988), 81.

46. Hartlyn, 116-117.

47. Urrutia, Miguel. Gremios, Política eonómica y democrácia (Bogotá: Fondo Cultural Cafetero, 1983), 16.

48. Ibid., 45.

49. Ibid., 48.

50. Ibid., 66.

51. Ibid., 104.

52. Hartlyn, The Politics of..., 105.

53. "Colombia: An Opening Economy?" held at the Martindale Center for the Study of Private Enterprise at Lehigh University, Bethlehem, Pennsylvania, October 19-21, 1994.

54. Michael Fairbanks and Stace Lindsay, "Building a Learning Nation: Lessons from Post-Apertura Colombia". Paper presented at Lehigh University, October 19, 1994.

55. ...A Statement of the Laws of Colombia in Matters Affecting Business (Washington, D.C.: Pan American Union, 1961), 232.

56. Ibid., 11. It should be noted, however, that Miguel Urrutia who served as Director of FEDESARROLLO in the late 1970s and 1980s disagrees with Lombard's assertion that the opposition to foreign banks was held by the public at large or any important sector of the financial community. Urrutia elaborates at length on this in "Colombia and the Andean Group" one of two papers presented at a colloquium in February 1980 sponsored by the Latin American Program of the Woodrow Wilson International Center for Scholars.

57. Ibid., 12.

58. Ibid., 16.

59. James E. Boyce and Francois J. Lombard, Colombia's Treatment of Foreign Banks (Washington, D.C.: American Enterprise Institute, 1976), 10.

60. Ibid., 22.

61. U.S. banks included Bank of America in 1966, Chase Manhattan as a major stockholder in Banco del Comercio along with Deutsche Sudamericanische Bank holding 5%.

62. Ibid., 27.

63. Ibid.

64. Ibid., 33.

65. Ibid., 31.

66. Ibid., 33.

67. Urrutia, Gremios de..., 180.

68. ..."Costo de vida: se necsitan tres salarios mínimos para sobrevivir" Alternativa No 112, May 2-9, 1977, 28.

69. Susan Strange, Casino Capitalism (New York: Basil Blackwell, 1986), 5-6.

70. Ibid.

71. Susan Strange, "Interpretations of a Decade" in The Political Economy of Money, ed. Loukas Tsoukalis. (Sage: Beverly Hills, 1985)

72. ...International Financial Statistics Yearbook Washington, DC: International Monetary Fund, 1992), 283-285.

73. Richard Lucies, The International Political Economy of Coffee (New York: Praeger, 1985), 34.

74. R. Albert Berry, "Colombia's Economic Development" in Politics of Compromise: Coalition Government in Colombia, eds. R. Albert Berry, Ronald G. Hellmand and Mauricio Solaún (New Brunswick: Transaction Press, 1980), 293.

75. ..."Boom Time for the Big Bankers" Latin American Regional Reports Andean Group RA-80-09, 7 November 1980, 8.

76. Robert H. Dix, The Politics of Colombia (New York: Praeger, 1987), 65.

77. ..."GranColombiano Under Attack" LARR Andean Group, 80-08, August 1981, 5.

78. Patricia Correa and Roberto Steiner, "Decentralization In Colombia: Recent Changes and Main Challenges". Paper presented at conference, "Colombia: An Opening Economy?" held at Lehigh University, Bethlehem, Pennsylvania, October 19-21, 1994.

79. Ibid., 29-31.  

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