2 August 2018

Colombia’s new President can choose free trade or pave the way for Chavismo in 2022

by Daniel Raisbeck, Fellow of IFT

The economic and humanitarian debacle that 21st century socialism unleashed in Venezuela was a decisive factor in the recent presidential campaign in neighbouring Colombia.

It therefore came as a relief to those hoping to avoid mass expropriations, wide scale scarcity, and hyperinflation that Colombian voters successfully warded off the Bolivarians at their gates on June 17th.

The results, however, should by no means dispel all concern. Centre-right president elect Iván Duque did defeat the far left candidate Gustavo Petro, a former guerrilla leader and a close ally of Hugo Chávez, albeit by a mere two million votes.

As Petro himself suggested after the election, if he had convinced roughly one million of Duque’s voters to back him instead, he would be moving into the presidential palace on August 7th. That is certainly a big “if,” but the mere thought of a possible Petro presidency is unsettling if not terrifying.

During the campaign, Petro said that he planned to tell specific businessmen to sell him (i.e. the state) their companies at a “fair price.” He also blamed Venezuela’s economic collapse on its dependence on oil without mentioning price controls and other ruinous socialist policies that he supported for years. And he ensured that he would put the state in charge of leading sectors of the economy, from health care to the local airline industry. While Petro’s campaign slogan was vacuous— “A Human Colombia”— the red flags with hammer and sickle routinely waved at his rallies expressed what he is about far more accurately.

Duque, on the other hand, made entrepreneurship a pillar of his campaign and frequently spoke in defence of private property. He also stressed the need to cut wasteful government spending and lower corporate taxes well below 30% in order to make Colombia more attractive for investment. Crucially, Duque promised to help strengthen the country’s feeble capital markets, telling Bloomberg that Colombia needs far more IPO’s and fixed income investment options beyond government bonds. Given his pro-business rhetoric, a local journalist went as far as suggesting that Duque’s vision was that of a minimal state as opposed to Petro’s big government hyper-interventionism.

If only. While the Colombian media highlighted Duque’s selective pro-market policies, they downplayed his own protectionist streak. For instance, he has repeatedly said that he won’t sign a single free trade agreement during his presidency. His rationale is the trade deficit fallacy. Duque assumes, à la Donald Trump, that importing more than you export necessarily harms a country, completely overlooking how consumers benefit from the choice of better products at lower prices.

Encouragingly, the Colombian public is far more sympathetic to free trade than their president elect. According to a Gallup poll conducted last April, 66% of citizens are in favor of signing new free trade agreements “with many countries.” The protectionist minority, however, wields considerable power.

It might have been no coincidence that Duque launched his anti-free trade invective while meeting rice growers in the central-eastern region of the country. Earlier this year, the Colombian government, under pressure from the influential rice industry’s pressure group, blocked the entry of 85,000 tons of rice from Ecuador. Such protectionism can only harm the poorest while benefitting some of Colombia’s largest companies.

According to a 2013 study by Fedesarrollo, a think tank, getting rid of all tariffs on foreign rice would lift 1.2 million Colombians out of poverty and a further 443,000 out of extreme poverty. The rice lobby chief, however, claims that 500,000 families depend on the national rice industry for their income, whether directly or indirectly. While industrial fat cats can offer Duque and other politicians a concrete number of votes in exchange for tariffs and trade restrictions, the millions potentially rescued from poverty through free trade are politically voiceless. Thus the mercantilists tend to get their way.

In fact, one reason to be skeptical of significant change under Duque’s government is his party’s close ties to industrial or agricultural pressure groups that have long been sheltered from real competition and / or have profited from direct subsidies. These include the cattle ranchers, the coffee growers, and the state-owned liquor monopolies in the 32 Colombian states (departamentos). Also, despite ceaselessly promoting tech-driven economic growth (what he calls the “orange economy”), Duque chose old-fashioned electoral techniques over technological progress by taking the side of the taxi lobby over Uber and other ride-sharing services.

Perhaps this should come as no surprise since Duque is a protégé of former president Álvaro Uribe. Their party, Centro Democrático (CD), is conservative in the paternalist Latin American mold, not in the free-market, Anglo-Saxon tradition of Ronald Reagan and Margaret Thatcher. Until recently, a page on the CD website proclaimed that the party favored a “communitarian state” as opposed to “the neoliberal model that neglects the community’s interest and favours market forces.”

The problem, of course, is that interventionism and cronyism breeds not only economic inefficiency, but also considerable corruption. An agricultural subsidies program launched during Uribe’s government (2002-2010) is a case in point, as substantial sums meant to support struggling farmers were transferred to families of large landowners, a drug trafficker, and even a pair of well-off beauty queens.

The frequency of such shenanigans at the Colombian taxpayers’ expense has bred massive outrage against a venal political class. One of the reasons for Petro’s success, in fact, was that, like Chávez before him, he successfully sold himself as a champion against corruption and garnered a good portion of the growing anti-establishment vote.

The economic establishment managed to win this time around, but a string of corruption scandals involving the usual rent-seeking suspects will almost guarantee Petro the presidency in 2022, much as hard leftist Andrés Manuel López Obrador won the recent election in Mexico on an anti-corruption ticket. Indeed, if Duque fails to liberate the economy from the mercantilists, his campaign slogan might as well have been après moi, le déluge.

While many analysts claim that Colombia’s success under Duque will depend on sustained GDP growth—the economy has been growing at a meagre pace for a developing country— discerning eyes should be on economic liberty as measured by the Cato / Fraser Institute’s Index of Economic Freedom, where Colombia sits at a lowly 116th place out of 159
countries. If Duque cuts taxes drastically— few other nations charge higher rates on corporate profits than Colombia’s 69.7% according to the World Bank—, eliminates needless regulations and frees international trade, the growth will take care of itself.

On the other hand, if Colombia’s new president opts for the cronyist status quo, a swing toward the hard left in 2022 may be inevitable. Why, after all, would a majority choose a political right that only tepidly embraces free trade and offers its own, mild version of the “communitarian state?” Voters know very well that the Chavistas can deliver the real thing.

Daniel Raisbeck is a Fellow of IFT, and founder of Movimiento Libertario, Colombia

Daniel Raisbeck

Daniel Raisbeck is Editor of the PanAm Post and Managing Director of the Bastiat Society.