Review: Relevant Economic Effects of COVID-19 in Colombia.

According to the World Bank (2021), Colombia was experiencing a positive macroeconomic behavior from the beginning of the XXI century, as a result of the implemented countercyclical policies to maintain a steady growth. The main feature for policy making to understand the effects of economic cycles is the notion of uncertainty about the functioning of the local economy and external shocks that may restrict the capacity of governments to permeate economic crises. These external shocks can be exemplified after Covid-19 which caused a profound impact in Colombia, resulting in the worse social and economic crisis of the century.

The aim of the present literature review is to analyze the economic shock of Covid-19 in Colombia, the main causes of economic recession and those practices that can help to alleviate its consequences in the future. Academic articles and secondary data from international organizations support concepts and analysis. Conclusions will bring ideas upon pivotal aspects to be explored for the improvement of economic policy making in times of crises and uncertainty. 

The COVID-19 shock in Colombia.

In recent decades, the macroeconomic strategies applied in Colombia has been characterised by conservative, supportive and export-based policies, resulting in high growth levels. This statement is supported by Easterly et al, (1994) who have also identified that in early 1980s after a coffee boom, a rising public investments mostly in the energy industry led to growing payment balances and debt crisis; however, it was evaded through strict adjustments and regulatory measures to stabilise the economy. Such actions and gradual successes continued to the present until Covid-19 crisis reached. According to Muñoz and Pachón (2021), the pandemic had a notable social and economic consequences in Latin America and therefore in Colombia, which already had structural issues, triggering a general discontent among different spheres of the society and economic sectors. As a strict lockdown lasts for more than 3 months, it is recognised that the country had its worse economic recession of the century. The authors explain that the main effects were seen in the negative growth rate at levels of -6.8%, the worse level since 1985 and higher that the 1999´s global crisis. From this scenario, poverty increases were observed in terms of daily meals (three) of households which decreased from 7.1 to 5.4 million. This position has proved to be common in recent Colombian crisis, because the poor and vulnerable have less opportunities and means to counteract a reduction of income and the damage of human capital. In other words, these groups do not have any remedy but apply detrimental alternatives such as removing their children from schools and cutting food consumption (Santamaria et al, 2009), which perpetuates poverty and other forms of inequalities. On the other hand, one of the utmost effects were reflected in the labor market as more than 1.5 million people lost their jobs, rising unemployment rates from 10.5% to 16% with direct effects on gender gaps (Muñoz and Pachón, 2021). Regarding poverty rates, at least 1.45 million people have descended at this economic level, with a reverse of approximately 3% considering before pandemic levels (World Bank, 2021). In sum, pandemic spread and the restrictions executed by the government provoked adverse effects on the whole economy, including production systems, levels of poverty, unemployment rates, consumption patterns, foreign investments, consumer and industrial confidence, among others (Bulir et. al, 2021). As a result, uncertainty and economic instability permeated all sectors of the society.

Because, economic crisis is typically determined by the robustness and stability of macroeconomic policies and financial regulations, in the Colombian case, COVID-19 hit the economy but was limited by rapid and suitable governmental interventions that not just were perceived in the social sectors but also in the economy (World Bank, 2021). Nevertheless, consistent with iD4D (2021) reports, while Latin-American countries executed fiscal policies oriented to increase public spending and reduce tax rates, Colombian fiscal actions reached 2.7% of its GDP. It was combined with strict reduction in fiscal revenues owing to the loss of productivity from different industries as Covid-19 cases increased and most of population was locked down for more than 6 months. Thus, the total fiscal deficit reached 7.6% of GDP in 2020. But the most remarkable indicator of recession was the loss of the Colombian investment grade from Fitch, one of the global leaders in credit ratings, downgraded the country to junk (iD4D (2021). The major factors considered by the rating company were: deterioration of public finances and fiscal policies from 2020 to 2022; government debt rising; and loss of confidence upon the government capacity to solidly allocate debt on a descendent path course in the coming years (Fitch, 2021). Moreover, they emphasised that the Colombian gross general government debt in terms of GDP is expected to reach 60.8% of GDP in 2022, which double 30% the initial level when Colombia obtained the grade BBB in 2011. As a result, indicators show a possible increase of debt by 2022 and not significant reductions in the short and medium term, which place the country in a vulnerable position to shocks. Correspondingly, regarding fiscal policies, Fitch (2021) forecasts certain risks in the achievement of government plans, mostly reliant on tax structures. Given the unpredictability of tax reforms, the scenario seems not clear for fiscal alleviation.

On the other hand, Fitch (2021) stated that after Covid-19, the country entered into an economic recession, increasing government debt which is expected to be stabilised in 2024. However, La República (2021) reported that as a consequence of the pandemic which generated lockdowns and more than 100.000 deaths, the macroeconomic scenario is unstable and uncertain exampling the following effects:

• Upturn of unemployment rate around 20%

• Increase of poverty conditions

• GDP at levels of -6.8% as in 1980´s

• Loss of industrial confidence with a contraction of 8%

• Inflation of 1.61%

• Exports reduction in 52.3%

• Manufacturing industries with reduction of 25.4%

• Construction with reduction of 31.7%

• Rise of exchange rates

Exchange rates had an important impact on government deficits as the Peso, the official Colombian currency, was also depreciated at high levels. Therefore, other economic variables were affected such as: capital account imbalances and external interest rates which also upsurge payments on foreign currency debt (iD4D, 2021).

Possible measures to tackle economic crisis.

With the Keynesian theories, Alesina and Passalacqua (2016) state that increases on public spending for times recessions and reductions in periods of booms are intended to recover the economy. For instance, having high unemployment rates and low capacity utilisation, a policy of public spending and lower tax rates may increase aggregate demand. Thus, public spending is usually increased during economic declines and it should be compensated by flexible spending reductions during times of growth (Alesina and Passalacqua, 2016). Generally, in abundance periods countercyclical policies are characterised by reductions of public spending, resulting in a steady growth. On the other hand, in times of economic crises, savings are used for public spending; but this policy is accompanied by tax and interest rates reduction, in order to control recession (World Bank, 2017).

As was initially stated, Colombian policy makers have intervened different macroeconomic variables to control recessions and stimulate growth through: inflation targeting regime, flexibility on exchange rates and a rule – based fiscal approaches. The margins of such measures have incentivized economic growth since 2000, bringing alleviation in times of recessions or global shocks such as the proliferation of COVID-19 in 2020 (World Bank, 2021). The OECD (2010) emphasizes on relevant variables to be considered in times of uncertainty and global changes, which has been broadly exemplified in Colombia:

• Policy-makers must consider the notion of “uncertainty” for the correct functioning of the economy, the origin of economic shocks or the effects of any policy; in order to make consistent decisions.

• Policy sectors must structure adequate and precise safety margins and to be more cautious in times of economic expansion.

• Suitable fiscal regulations must support fiscal policy for times of recession to counteract the main obstacles that may lead to rapid recovery during the next upsurge. 

• The monetary and financial policy structure must achieve an optimum coordination and articulation between economic and financial stability. 

• Financial policy must support micro-prudential regulation. Likewise, regulatory interventions should focus on emerging credit-driven bubbles. Similarly, macro-prudential policies must tackle systemic risks. 

• There may be a case for monetary policy leaning against the tendency. Whether asset prices are conditioned by a credit boom and financial rule is judged to be not enough robust.

• Variations to structural policy frameworks could enhance the strength of the economy to internal and external shocks, with consequences on the degree of leverage households and firms to adopt. 

Regarding the previous statements, governments must consider existing global interdependencies for economic decision making, as any external factor may have direct or indirect effects at the local level. There is also a necessity to establish structural policy interventions specially among those sectors where governments allocate their assets and have a strong influence on the GDP. The OECD (2010) also remarks that since the mid-1980´s economic cycles have been less amplified and longer in periods of expansion, decreasing recession periods. Nevertheless, global tendencies have direct effects on price volatilities converting economic cycles in a synchronized course within and across countries.

Conclusions

The restrictions executed in Colombia as a consequence of Covid-19 provoked adverse effects on production systems, poverty, unemployment, consumption, investments, consumer and industrial confidence. As catalyser measures, structural policy interventions are urgent across the whole economic sectors where the Colombian government allocate productive assets for the reduction of unemployment rates, poverty alleviation and higher levels of GDP. The OECD remarks that since the mid-1980´s economic cycles have been less amplified and longer in periods of expansion, decreasing recession periods; however, global tendencies have a direct effect on price volatilities converting economic cycles in a synchronized course within and across countries. The OECD emphasizes on relevant variables to be considered in times of global changes such as: the notion of “uncertainty” for the correct functioning of the economy to make suitable economic decisions; policy sectors must structure adequate and precise safety margins in times of economic upturns; suitable fiscal regulations must support fiscal policy for times of recession to rapid recovery and steady growth in times of expansion; monetary and financial policy structure articulated with economic and financial stability; financial policy must support micro-prudential regulation and macro-prudential policies must tackle systemic risks; variations to structural policy frameworks could enhance the strength of the economy to internal and external shocks.

Further research is necessary to apply additional precautionary strategies. Moreover, exposed countries as Colombia whose poverty levels are high, must determine strict countercyclical policies to permeate crisis and reduce the impact of global hardships such as the Covid-19.

Reference List

Alesina, A. and Passalacqua, A. (2016). The political economy of government debt. Handbook of Macroeconomics, 2, 2599-2651.

Bulir, Ales, et al. (2021). “Using Macroeconomic Frameworks to Analyze the Impact of COVID-19: An Application to Colombia and Cambodia”. International Monetary Fund.

Diario La República. (2021). “Estos son algunos de los efectos económicos que ha dejado el Covid-19 en Colombia”. https://www.larepublica.co/especiales/encuesta-empresarial-2021-i/estos-son-algunos-de-los-efectos-economicos-que-ha-dejado-el-covid-19-en-colombia-3125811

Easterly, William., Rodriguez, Carlos Alfredo. and Schmidt-Hebbel, Klaus (1994). “Public sector deficits and macroeconomic performance”. In Public Sector Deficits and Macroeconomic Performance. Oxford University Press, for The World Bank.

Fitch Ratings. (2021). “Downgrades Colombia’s Ratings to ‘BB+’ from ‘BBB-‘; Outlook Revised to Stable”. https://www.fitchratings.com/research/sovereigns/fitch-downgrades-colombia-ratings-to-bb-from-bbb-outlook-revised-to-stable-01-07-2021

Ideas for Development. (2021). “Colombia caught in financial turmoil”. https://ideas4development.org/en/colombia-caught-in-financial-turmoil/

Muñoz, M. and Pachón, M. (2021). COVID en Colombia: Una crisis de gobernabilidad y de respuesta. Revista de Ciencia Política (Santiago), 41(2), 291-320.

Santa María, M., Acosta, P., Rodríguez, A. and Khun, D. (2009). “Creative approaches to monitor the impact of economic crises in Colombia”.

The World Bank. (2021). “The World Bank in Colombia”. https://www.worldbank.org/en/country/colombia/overview#1

The World Bank. (2021). “Supporting Colombia´s Covid-19 Crisis Response”. https://www.worldbank.org/en/results/2021/04/09/supporting-columbia-s-covid-19-crisis-response