The Andean Tigers: Will Colombia and Peru Land on their Feet?

By Robert Valencia

In business journalism, “tiger” is synonymous with the astonishing growth a handful of Asian countries from the 1960s through most of the 1990s. Last Thursday, a report by the Wall Street Journal titled “The New Tigers” labeled Latin America’s two rising stars, Colombia and Peru, the world’s next economic big cats. The two countries, however, are taking different paths to realizing their undeniable potential. While Colombia has vowed to invest $100 billion in infrastructure, Peru—so far, at least—is jeopardizing their growth with increasing social inequality and deteriorating infrastructure. If these countries don’t take full advantage of their resource-led booms now, they could easily lose all their gains if commodities prices ever fall.

The Wall Street Journal praised Colombia and Peru’s mixture of growing middle classes, low public debt, dynamic economic expansion, and a large youth population. The report goes on to highlight both countries’ strong credit ratings—among the top three in the region—their control over inflation, strong currencies, an increase of foreign direct investment, and resilient economies even in the midst of global turmoil (Colombia grew 5.9 percent and Peru grew 6.9 percent last year, according to the IMF). Both countries, like the rest of Latin America, have weathered the global crisis thanks to fiscal regulation. So much so, many analysts believe that in 2014, Colombia will surpass Argentina to become Latin America’s third largest economy.

The economic successes of both countries come from similar patterns. Peru emerged from a rebellion waged by The Shining Path, whereas Colombia’s last four administrations have fought to keep a lid on their own guerrillas. In the 1990s, Colombia and Peru opened up their markets in a process known as apertura económica; both countries have recently signed a long-awaited Free Trade Agreement with the United States and added China as one of their main trade partners in the energy sector. In addition, the Lima and the Bogotá Stock Markets, coupled with Santiago, created the Latin American Integrated Market (MILA), which has become the third largest stock market in the region. The WSJ report also recognized Colombia as a regional and global player, following Businessweek’s report on Colombia as a very promising emerging market and HSBC Global Asset Management’s CIVETS emerging markets list, where Colombia is the only Latin American country listed.

The current boom is due in large part to their rich mining resources. Colombia, for example, exported more than $37 billion in natural resources, while foreign investment in oil, mining, and natural gas topped $9 billion in 2011, representing 12.5 percent of the nation’s economy. Today, Ecopetrol is Colombia’s largest state oil company and joined Latin America’s big four (alongside Pemex, Petrobras, and PDVSA) thanks to its new oil discoveries in Colombian soil and clinching offshore drillings opportunities in the Gulf of Mexico. Likewise, Peru has made big profits due to its large deposits of gold, silver, zinc, and copper since this industry have become a critical source of tax revenues. Despite sitting on a treasure trove, both the Colombian and Peruvian mining industries have faced strong opposition from civil society, which claims that massive land exploitation leads to environmental disasters while the money generated from mining production is not earmarked to communities in most need of it.

So far, these countries have experienced an economic boon despite their precarious infrastructure, but strictly relying on one primary sector of the economy may have dreadful results. Colombia could very well mirror the devastating consequences of depending on a fluctuating commodity to anchor your economy. Venezuela’s economy weakens whenever the price of oil drops in the global market. A high dependence on raw materials could lead both countries to the “Dutch disease,” that is an increase in exploitation of natural resources, while the manufacturing sector decreases. Peru, for example, has seen a $55 billion deficit in infrastructure development, according to the Lima Chamber of Commerce, specifically in the telecommunications, transportation, and electric grids. According to the Institute for Management Development, Peru’s competitiveness ranking dropped from 41 to 43 in a list of 59 economies due to the lack of infrastructure overhaul, while Colombia comes in at 46th place, since its infrastructure hasn’t changed significantly in the last 15 years.

Though countries like Mexico, Brazil, and Chile (the latter also named the “Southern Tiger” by Chilean President Ricardo Lagos) still claim most of the lion’s share in foreign direct investment thanks to stronger capital markets and a more diverse trade, the two Andean tigers should seize the influx of foreign investment and non-renewable commodities to spur socioeconomic growth in secondary and tertiary sectors, while improving its electric grids and infrastructure that can also endure a common natural woe like El Niño, which caused a year-long electric outage in Colombia 20 years ago.

Most importantly, the population’s well-being is an important factor to determine to some degree how wide economic prosperity has spread. Thirty percent of Peru’s population remains under the poverty level. And in the case of Colombia, a massive return of expatriates who are fleeing Europe’s economic turmoil to seek greener pastures in their homeland can worsen the already high unemployment rate (10.8 percent, among Latin America’s worst). As a result, Colombian President Juan Manuel Santos pledged to invest $100 billion over the next ten years on rebuilding infrastructure, including the construction of 100,000 homes for the poor and the creation of hundreds of thousands of mortgage for low-income families. This is a crucial step in ensuring that Colombia’s economic success continues and can be diversified. Still, incorruptible institutions are needed to oversee the implementation of these programs. Though Colombia and Peru have proved to be economic examples for their Latin American peers recently, unless Peru invests in diversifying its economy and its infrastructure, it will be a short-lived boom. Colombia, on the other hand, appears to be moving in the right direction but still has serious hurdles to overcome before it can really be mentioned with the Asian tiger of the late 90s.



Robert Valencia is a Research Fellow at the Council on Hemispheric Affairs and is a contributing writer for Global Voices. He also has a personal blog called My Humble Opinion.

[Image courtesy of C. Bucheli]

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