Colombia's Economic Problems and Prospects

06/24/2011 11:29 am ET | Updated Aug 24, 2011

Recently, a global transition to a more diffuse distribution of economic power is broadly recognized, pointing to a shift in the balance of global growth from rich to low- and middle- income economies. Colombia may be a prime example as its recent rapid per capita income growth of 8.8% per year points to the potential for Colombia's convergence to the ranks of rich countries. However, Colombia's economic growth has been constrained by 40 years of a costly and ineffective drug war policy that has failed. The illicit activity of the drug cartel grosses approximately $10-$20 billion a year; it does not enter into the GDP accounting. In addition, the FARC (Revolutionary Armed Forces of Colombia) has stifled Colombia's drive towards economic prosperity. Baring the impasse which is largely social and political the economy would flourish.

Colombia's drug production conforms to the theory of a French classical economist -- Jean Baptiste Say (1803), who coined Say's law -- that supply creates its own demand. It follows that production of illicit drugs creates demand which is injurious for the user. And the drug users' (consumers) demand along with supply has created a black market internationally. Drug war has not suppressed production on the supply side. And on the demand side policies such as criminalization, incarceration and stigmatization has not suppressed the use of illicit drugs. It is time to modify both supply and demand policies and shift to providing farmers' subsidy on the supply side for not producing illicit drugs and employing medical treatment of drug users instead of criminal sanctions. Such shift in policies would disarm drug cartel as a way to deny profit of drug dealers.

Colombia is nestled in the northern part of South America, with 46 million people and a GDP of $235 billion, is the fourth largest economy in the continent. Although Colombia's per capita GDP is well below the United States', a rapid increase can be seen starting around the year 1999, which was the same year Plan Colombia was formulated, an agreement that provides Colombia with military and monetary aid by the United States to combat drug trafficking.

Considering recent increases in Colombia's GDP per capita at 8.8% per annum there is great potential for economic convergence, and in fact, the estimates of the convergence theory point to a possible Colombia's per capita income convergence in roughly 42 years, i.e., by the year 2051. However, this forecast is highly optimistic at this time considering Colombia's political impasse. Drug trafficking undoubtedly plays a large role in the Colombian black market economy; cocaine is produced at $1,500/kilo and is sold in the U.S. for as much as $50,000/kilo. There is so much profit to be made with the trafficking of drugs that even many Colombian government officials fall victim to temptation.

Moreover, the aid funds from Plan Colombia are being used to fight the FARC (Revolutionary Armed Forces of Colombia) (CRS). This Marxist-Leninist guerrilla organization has been playing Robin Hood (taking from the rich and giving it to the poor) and has been at war with the Colombian government since 1966. This time period has been known as La Violence. The FARC raises its funds through ransom, kidnappings and taxing drug trade out of its South Colombian region. Plenty of Colombia's resources have been used to fight this brutal civil war that has lasted about half a century, with no end in sight. In fact, as mentioned earlier, Plan Colombia has further instigated the FARC because of the pesticides being spread all over the countryside to kill the coca plants that cocaine comes from. However, the pesticides are also killing the legal crops of the small Colombian farmers. Moreover, the pesticides are also damaging the farmers' health making it even harder for them to provide for their families.

The key to forging ahead is for the Colombian government, with the help of international assistance, makes it economically unappealing for the FARC's guerrilla fighters to continue fighting in support of the FARC's leaders and their ideology. Economic incentives must be offered to these fighters exceeding the benefits that they receive for fighting. With a lack of support and a strong central government the 14 leaders of the FARC will have no way of continuing their fight.

No doubt FARC's mission will become superfluous when Colombia's per capita income rise to a high level. Indeed, the end of the FARC conflict would also free many of Colombia's resources that would be put to better uses instead of being wasted on the exhausting civil war. Also, currently FARC provides great armed protection to the Colombian drug cartels that operate out of the land that the FARC controls. Without this strong source of protection, the drug cartel would be automatically weakened. Once the area is rid of the coca plants, the land can be used for the production of legal crops. In fact, Colombia is rich in natural resources such as minerals and fuel oils, so there is no reason why Colombia cannot prosper once these issues are resolved.

Nake M. Kamrany is professor of economics and director of program in law and economics at the University of Southern California. Danielle Nicole Ramirez is an Associate at the Research Group for Global Conversion of Per Capita Income in Los Angeles.