Colombia has been attracting worldwide foreign direct investment (FDI) and has understandably been looking towards China as a model, as well as Asia in general, as the recent Sino-Latin American economic forum demonstrated. But Colombians must learn from the Chinese culture of saving before record-high FDI can turn into palpable benefits for the country at large.
Despite the financial crisis, Colombia expects to receive around US$8.5 billion in Foreign Direct Investment (FDI) this year, compared to US$10.5 billion in 2008. But record-high FDI levels have not translated into higher standards of living for most Colombians. This is because most FDI is in the oil and minerals industries; in 2009, up until November 15, these industries received 89% of total FDI, or US$5.983 billion. These industries neither contribute to creating jobs nor create secondary industries. Moreover, massive FDI to these few industries result in the "Dutch disease", whereby a high exchange rate leads to a de-industrialization on a national level.
In order to increase FDI the government has turned to signing free trade agreements (FTAs) in the hope of spurring economic development. FTAs have been signed with the United States, Canada, Guatemala, and Chile. There are FTAs under negotiations (or about to start) with the European Union, South Korea, Australia, Singapore and Panama. But these FTAs would only increase FDI in the mining sectors.
The government’s focus on FDI may be a result of East Asian countries' rapid economic development through FDI. But it is important to note that these countries also followed a state-led development process. In this model the government plays a significant role in creating and promoting certain industries, rather than leaving the free market to rule unconstrained. In the case of China there are various important elements that led to its rapid rise.
Time magazine, in a recent Asian edition, published five things that the U.S. can learn from China. These were: ambition (in undertaking gigantic infrastructure projects), education, elderly care (important transmitter of cultural values), savings, and determination (to achieve life-changing goals). Colombia is missing some of these elements, especially ambition and determination. But the most important missing element is savings.
Savings are crucial for economic growth because what is saved is invested, thus resulting in solid economic growth by tapping into the country’s entrepreneurship.
Some may argue that in open economies FDI compensates for a sub-optimal domestic savings rate. But, Diego Comins, a Harvard Business School professor, argued that savings also play an important role in the underutilization of FDI. FDI introduces state-of-the-art technology. When foreign companies cannot (or do not want to) shoulder the economic burden of adopting such technologies, local companies must become supporters of this adoption or co-financers. But these locals companies can only become viable with appropriate domestic savings channeled through a sound banking system.
Some may point to the chicken and egg problem regarding savings: if there are not jobs how can there be savings, and if there are not savings how can there be businesses creating jobs? Nevertheless, anyone who has been to Colombia can confirm that Colombians live a happy-go-lucky life without any deep contemplation of the future. Asians could not be more different in this regard. This may explain why Latin America’s share of global trade has remained stagnant for 30 years at 5%, while Asian’s has quadrupled to reach 20% in the last 30 years.
In Colombia, low savings rates hinder economic development. According to the latest data compiled by the Legatum Prosperity Index, Colombia’s domestic saving’s rate was 20% of Gross Domestic Product. It ranked 61st out of 104 countries. China’s savings rate is third highest overall at 53% of GDP.
An example of Colombia’s household economic culture was illustrated by an October poll conducted by Fedesarrollo, an independent foundation dedicated to economics research in Colombia. It found that for the second consecutive month Colombians' positive perception of the economy decreased, and yet the number of people considering the purchase of a car increased.
The importance of savings become clear when Colombia's economy competes in similar sectors to China, namely manufacturing. It is not surprising when after 2001 (China's entry into the World Trade Organization) China's inward FDI negatively affected FDI flows to only one country in Latin America: Colombia. If this wasn't bad enough for Colombia’s industry, China's current FDI goes to Colombia's raw material sectors that serve to manufacture the products that Colombia would later purchase.
Some changes in policies are crucial if Colombia would like to enjoy the benefits of its record-high FDI. For instance, appropriate governmental and banking policies, as well as policies attracting the right kind of FDI. But the most important element spurring a sustainable economic development is savings; as China knows only too well.
tomtom33
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... If only those Chinos had been more profligate spenders. Then they couldn't have financed so much US debt, and the US politicians would have been forced to curtail their more profligate spending. |
gringomedillin
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... the writer is wrong the FTA would only incease FDI in the mining sectors. the main reason is FTA is not about mining it is about free trade of all products, The only reason FDI in mining and oil is so high is that prices for these comodities are at high levels, so if the government is so how tryin gto tie the two together they are wrong, they don't go hand and hand. Colombia is missing some of these elements, especially ambition and determination. I angain have to disagree with the writer I think Colombians have great ambition and determination, one can see that on a daily bases in the streets of Colombia, as for savings how can one save when what you make each month is needed to live, Colombians like many Chinese live day to day they do not have extra money to save, the China you might see and know is Hong Kong which not to long ago became part of China, it is not like mainland China , recent changes on mainland China as as a result of Hong Kong merger, In fact in rural China life is much like rural Colombia. |
gringomedillin
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... China trade has soared in part with the government control the value of it's currency, the Government is who builds and runs the companies in the country with the exception of Hong Kong, once controled by England until turned over . Japan in part has had a strong economy in part it did not provide for it's defense as it was provided by the USA, While I agree savings helps some with ones economy, The USA once was big savers until easy credit came around , . Colombia has a few issue it needs to deal with, one is the cost of labor ,the other is the cost of saving, When one deposits 700.000 pesos in a bank, the bank takes 35.000 pesos, 5%. for many Colombians that is a large amout , While some Colombian banks a reporting strong earnings ,it is on the backs of Colombians trying to make ends meet. Maybe I am spoiled as here in the States it doesn't cost me a when I deposit or withdraw money I pay no monthly fee, I only pay if I need to order checks or if I try and spend more then I have in my account . If the Government of Colombia wants to see more savings then they need to reform it's bank system, FDI is not going to do it nor will increased saving increase FDI, what will increase FDI is an open and fair process for FDI's to operate on equal footing. One just needs to look to Venezuela and see when the process is not open/fair results in. |
Iain George Salisbury
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... In my experience, the last thing Colombians lack is ambition and determination and they are certainly willing to invest in projects they consider worthwhile. I was impressed by the number of people willing to work ten hours before turning out for two and a half more learning English - and pay for the privilege! There are huge human resources in the country. |
crispancho
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... The Banking system in Colombia rapes the consumer, and the fees they charged are a disgrace to Colombians! Get rid of the high importation tax the goernment charges and pass the savings to the consumer. A smart idea maybe the consumer will have some extra cash to spend more! Uribes says that free trade will help Colombians, but we all know that it would only benifit him and his rich elite friends who would sell Colombia's natural resources to China, USA. |
Heine Mathiasen
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... As I see it security is an absolute neccesity to prosperity - therefore it´s absolutely paramount to say security first and prosperity for the people second. U cannot have the second without the former. It´s true that the elite always benefits first in a society - but when u have real security u can start redistribution wealth throgh taxes - but only then. I think it´s dangerous to call for social reforms as long as security is not in place. But I agree that the government should ensure an efficient banking sector through inrcreased regulation if it has the ressources to do so. The importance of efficent capital flow for both people and businesses cannot be exaggerated. Colombians are ressouceful people - so give them the right framework and I am sure they will prosper. |
