The Political Economy of Structural Reform in Colombia

Abstract

Between 1989 and 1993 a structural reform program was introduced in Colombia. If the reform package paled in comparison to those of other countries, it was remarkable given Colombia?s long-standing record of moving very cautiously in the reform front. The fact that the reform effort did not originate from a situation of 'economic crisis' makes the Colombian experience particularly interesting from a political economy point of view. A vast array of compensation mechanisms had to be introduced in order to forge the coalitions necessary to garner support for the reform agenda. The paper argues that many of the compensation mechanisms ? including exemptions to labor and social security reform and a generous transfer of central government revenue to territorial entities -- played a critical role in producing a dramatic deterioration in the fiscal accounts which, in turn, brought about unprecedented macroeconomic imbalances. While the expected outcome of a structural reform program usually refers to short-term sacrifices in exchange for long-term sustainable benefits, Colombia?s actual experience was remarkably different. Even though this has had little to do with having moved from a heavily intervened economy to a more market-oriented one ? and a lot to do with the deterioration of the fiscal accounts, a decline in the terms of trade, international financial turmoil and undeclared civil war --, important interest groups have lobbied for a backward-looking revision of several of the progressive, albeit incomplete, reforms of the early 1990?s.

JEL Classification: E32