Lessons for SA from South America

Posted 04 August 2015 Written by Ciaran Ryan
Category International

Two South American countries - Colombia and Venezuela - offer lessons in governance that we would do well to heed. Colombia is now one of the fastest growing economies in South America. Venezuela, ravaged by a drop in oil prices and poor leadership, is moving in the opposite direction, according to Moneyweb.

A tourist takes a photograph of the city from Cerro de Monserrate in Bogota, Colombia, on Tuesday, June 16, 2015. Colombia's fiscal deficit will widen next year to the most since 2010 amid lower crude prices, according to the government's latest financial plan. Photographer: Cassi Alexandra/BloombergColombia, once the drug den of the world and now one of its fastest growing economies, has a few lessons to teach SA. This is true also of its neighbour Venezuela, now the basket case of South America. In Venezuela’s case, the lessons are tragic.

Like most neighbours, Colombia and Venezuela haven’t always seen eye-to-eye. The two countries nearly came to war in 2009 when Colombia arrested four Venezuelan soldiers who crossed the border, and has repeatedly accused its neighbour of harbouring Marxist FARC guerrillas.

Relations have improved since then, but in most other respects the two countries are headed in entirely different directions.

Colombia, once the regional hub for drug traffickers and kidnappers, has undergone a remarkable transformation in recent years. Its economy is the fastest growing in the region after Bolivia, clocking an average 4.3% growth between 2001 and 2014. It also ranks second in the 2015 Economic Freedom Index, behind Chile, the result of vast improvements in labour, trade and investment freedoms.

The same index lists Venezuela as the second worst country in the region in terms of economic freedom, just a shade above Cuba.

The Colombian government simplified and shredded laws that stood in the way of growth, reduced tax on business and signed free trade agreements with scores of countries. It offers assistance for start-up businesses, and a housing boom – powered by government subsidies and soft bank interest rates – has helped the construction sector achieve 10% annual growth in recent years. The government is also spending huge sums on infrastructure, which is expected to boost economic growth by 0.7% a year.

Colombian President Juan Manuel Santos, re-elected for a second term in 2014, has tried to distance himself from the policies of his predecessor, Álvaro Uribe, who resolved to smash FARC guerrillas and reduce crime. Santos has put economic vitality at the forefront of his government. He has done far more than his predecessor in reaching an accommodation with the guerrillas and reducing crime, which by the latest count is down 30% over the last decade.

A peace deal thrashed out in Havana, Cuba, between FARC guerrillas and the government last year promises to bring an end to all illegal drug activity and redistribute land to the rural poor. This is a war that has been waged with varying levels of intensity since 1948. The writing was on the wall for FARC once the US offered Cuba and Iran an olive branch, and by some reports, just a few thousand guerrillas remain in remote parts of the country. The rest have opted for reintegration and a chance to launch a new career in South America’s hottest economy.

Astonishingly, Colombia has now surpassed Argentina as the region’s third largest economy, after Brazil and Mexico.

The story in Venezuela could not be more different. Its growth rate averaged 2.5% between 1998 and 2014, but is expected to shrink by 7% this year. The economy has been savaged by the drop in the price of oil, on which it depends for 95% of its foreign earnings. Inflation is likely to top 150% this year, the highest in the world, and there is a fear the country will default on its foreign debt in 2016.

The country operates a three-tier official exchange rate, alongside the black market rate which has halved against the US dollar this year alone. South Africans who lived through the two-tier financial rand under apartheid will understand the propensity for fraud in such a system, where those with access to the cheaper financial rand could profit 20% or more by converting these to so-called commercial rands. Venezuela’s weak currency makes it a bargain for tourists with hard currency, but the country’s reputation for crime and shortages is keeping all but the hard-core backpackers away. Some hotels, while offering great deals, are asking tourists to bring their own toilet paper and soap. Shortages of food, medicine and other basic necessities, most of which are imported, are blamed on the declining revenues from oil sales.

Under the late President Hugo Chávez, Venezuela was venerated by post-Soviet coffin bearers as a socialist Valhalla that would redeem Karl Marx’s fading vision of a workers’ paradise. That vision lies in tatters under his successor, Nicolás Maduro, who seems cursed with bad luck, bad governance and a gaffe-prone tongue. Not to mention out-of-control corruption: an estimated US$20 billion of the US$59 billion allocated for imports in 2012 disappeared through fraud, according to the former head of the country’s central bank, Edmée Betancourt.

Venezuelans have responded in the only way they can: emigration. Research by Simón Bolívar University’s economics department says 1.2 million Venezuelans now live abroad, a 2000% increase since the mid-1990s. Nearly one in ten of those remaining are considering moving abroad.

Brazil, the largest economy in the region, squats uncomfortably between these two. Though it has a sizeable industrial base, it reliance on commodity exports has pushed it into recession. Like SA, its growing welfare bill has crippled its budgetary flexibility, though with an unemployment rate of just 6%, Brazilians are better able to ride out the storm.

All countries in the region look with envy at Chile and Colombia, the two fastest growing countries in South America. SA would do well to study them too.

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