Honduras (yes, tiny Honduras) took a bold step earlier this year which could alter its economic trajectory and potentially impact the rest of Latin America. Frustrated by a lack of results from economic liberalization and free trade agreements which have been thwarted by cronyism, corruption and a lack of competitiveness, the Honduran Congress passed a constitutional amendment in January giving the government the power to create special development regions, or Charter Cities, which will have their own legal jurisdiction, administrative systems and laws. Charter Cities are created with a governing system defined by the city’s own charter document rather than by state, provincial, regional or national laws. The most recent examples include Hong Kong and Shenzen in China but the history of cities based on a unique governing charter goes back to the 12th century founding of Lübeck, a prosperous trading outpost in northern Germany. Continue reading
Tag Archives: Democratic Prosperity
The strength of the Colombian peso is hitting non-commodity exporters and Dutch Disease—the negative consequences of an influx of foreign exchange related to natural resource investment and production—could place Colombia’s quest for “Democratic Prosperity” for all at risk. The peso is being boosted by three underlying factors: the spike in earnings from oil and mining exports, an increase in foreign investment in the extractive sectors and an influx of foreign debt to finance the rising fiscal deficit. Each of these trends will generally continue over the medium term and given the stronger than expected first quarter GDP growth and the pro-growth policies of the new administration some are now suggesting that the peso has entered a new equilibrium. Barclays Capital released a report last week suggesting that the exchange rate will end this year at Ps1,700:US$1. Exporters are obviously anxious.
While it is true that the fundamentals supporting the peso are historically strong, the exchange rate is dependent on some uncontrollable external factors. Mainly, the international price of oil and minerals and global risk sentiment. With average commodity prices set to grow only moderately, and in some cases decline, next year and GDP growth in developed countries expected to slow during the rest of this year and most of next, pressures on the peso will ease gradually. The exchange rate will probably average closer to Ps1,900:US$1, but this may not be much comfort to exporters competing on cost. They have been pressuring policymakers to intervene but past interventions have had only a mild and temporary impact. So what to do, pressure for stronger interventions or follow another path?
An anecdote about the Colombian leather industry in the mid-1990s, as told in Plowing the Sea: Nurturing the Hidden Sources of Growth in the Developing World written by development consultants Michael Fairbanks and Stace Lindsay, may shed some light on the subject. The authors’ research showed them that Colombian leather was priced too high and the quality was too low for most buyers in the US. The two consultants then went to Colombia to tell the manufacturers of their findings. “Its not our fault,” was the reply. It was the fault of the tanneries who supplied the cow hides. The owners of the tanneries were just as defiant, “it is the fault of the slaughterhouses who give us low quality hides” they suggested. The slaughterhouses in turn blamed the ranchers for ruining the hides by branding them too much. Finally, the ranchers exclaimed that, far from being their fault, it was actually the “fault of the cow” who rubbed its hide against the barb wire fence to scratch and avoid the region’s flies.
Given the current situation with the peso there is no time more to waste on blaming (whether cows or central bankers). Colombian industry needs to innovate, improve production and add more value to its export products in a way that allows them to compete, no matter the strength of the peso. Innovation and adding value creates higher-paying jobs which will help develop a larger middle class and boost internal consumption. This is what is needed to spur stronger economic growth and reduce inequality.
Yes the government can make some adjustments which would ease the pace of peso strengthening. The new administration can also implement policies to help the private sector succeed and the Banco de la República can help to prevent some volatility. But, in the end, Colombian exporters need to take responsibility for their future. The time of “blaming the cow” is past and if Colombia wants to become a truly prosperous country it needs to invest in human capital and innovate, innovate, innovate.