Economic reforms in Colombia

One of the most important characteristics of contemporary Colombian history is the serious economic crisis that this country experienced from 1998 until 1999 when the economy declined 4.3%. The objective of this dissertation is to use micro data sets to deepen the understanding of this recent crisis. The first part of the dissertation analyzes the impact of fiscal federalism in municipalities' economic performance. Has decentralization had tangible effects on growth? According to my research the answer to the previous question is yes and no. Yes in municipalities with good governance, and no in municipalities with bad governance. Previous studies analyzed the effects of decentralization on performance in specific areas such as education, health, and water and sewage. Arguably these studies could give some indication of the overall effect of decentralization. However, no study exists for any Latin American country that looks at overall performance, for instance, by growth across localities. To my knowledge this is the first study in Latin America that explicitly analyzes the effects of decentralization on localities' growth. This research also presents the important innovation of using the theory of efficiency to construct proxies for good and bad governance. The second part of the dissertation analyzes the causes and explanations of the crisis. Macro patterns show that Colombia experienced a boom-bust cycle after the liberalization process that started at the beginning of the nineties. These macro patterns were characterized by a co-movement of the credit to GDP ratio and the non-tradable to tradable output ratio. In the model that I used, economic crises are typically preceded by real exchange rate appreciation and a lending boom, in addition to unusually fast bank credit growth. Also, prior to crises the non-tradable sector grows faster than the tradable one. In this model, in the aftermath of crises, credit falls more sharply than GDP and the non-tradable sector experiences a sharp fall while the tradable sector experiences an acceleration of growth after a mild recession. During crises and after them, the real exchange rate presents an important depreciation. To explain this pattern, this study used a two sectors model in which asymmetries in borrowing constraints and currency mismatches act together to generate a boom-bust cycle where shocks are amplified by movements in the real exchange rate. The latter model is consistent with macro data observed in Colombia. This study also used a micro data set to document the existence of this mechanism. I explored the asymmetries among firms and in particular I found that there was a sectorial asymmetry among tradable and non-tradable sector firms that can be associated with an asymmetry in financing opportunities.