Institutional Reforms: The Case of Colombia

Institutional Reforms: The Case of Colombia, edited by Alberto Alesina. Cambridge: The MIT Press. 2005. Paperback: ISBN 0 262 51182 7, $35.00. 420 pages.

Even by the standatds of a troubled region, Colombia has fared poorly in recent years. At the turn of the new millennium, Columbia was so

clearly in need of reform that Alesina and others made it the subject of "Institutional Reforms." Throughout the 1960s, 1970s and 1980s relative macroeconomic and political stability helped Colombia to record growth that consistently outperformed her neighbors. The growth continued through the first half of the 1990s before coming to an abrupt halt resulting in a prolonged slump that caused the first decline in Colombian living standards in decades. The contributors to "Institutional Reforms" attempt to answer "why," and suggest coherent and practical policy changes to help Colombia recover. Their conservative, neo-classical analysis predictably prescribes policies to ensure low inflation and reduce government intervention in the economy.

After Alesina's introduction and summary, Echavarría, Arbaláez and Gaviria describe the salient points of the recent economic history of Colombia. They explain the factors that have led Latin American growth to lag behind that of the world, Asia in particular, as well as the factors that have allowed Colombian growth to outpace that of other Latin American countries. The primary factors leading Asian economies to outperform Datin America include: openness to trade, low inflation, low government consumption, security and the rule of law. Of the factors contributing to Colombia's growth, the most important has been a relatively small and democratic government compared to the rest of Latin America. Colombia's only significant weakness, relative to Latin America, has been the especially weak rule of law, an issue covered in greater detail in Chapter 5 by Levitt and Rubio. However, Colombia's growth fundamentals began to come undone in the early 1990s. While the economy was propelled by speculation in land and housing the Colombian government began to lose its vaunted fiscal discipline, due in part, to an expected windfall from oil extraction that never materialized. During the 1990s, taxes as a share of GDP increased by 50%, while government spending doubled. The government's stock of debt almost doubled while interest payments tripled. In the second half of the 1990s, real per capita GDP shrunk by over 5%. Poverty and inequality, falling steadily for decades, began to rise again. The long-standing guerrilla wars intensified. The authors' regression analysis shows that the primary causes of the slump in Colombia have been the increased share of the government in GDP and the intensified civil war, with civil war nearly three times as important as. increased government spending. Also listed as a significant factor in the downturn is a decline in the terms of trade.

In Chapter 3, Kugler and Rosenthal address the issue of checks and balances in Colombia's government and in Chapter 4, Roland and Zapata cover paths for reform of Colombia's electoral system. The common thread throughout is the need for more efficient policy-making and more representative government. They make specific policy suggestions such as requiring a supermajority for the constitutional court to overrule economic policy and reform of the electoral system to reduce fragmentation. In Chapter 5, Levitt and Rubio provide a thorough overview of the state of crime and law-enforcement in Colombia. In Chapter 6, Alesina, Carrasquilla and Echavarria cover the macroeconomic issues resulting from decentralization. They make a strong case that the process of decentralization outlined in the 1991 constitution has led to fiscal irresponsibility in regional governments and suggest reforms, in particular creating a simple and transparent formula for transfers to the regions and forbidding regional governments from private borrowing. In Chapter 7, Ayala and Perotti cover the lack of transparency in the Colombian budgetary process, and suggest that allowing the media and other institutions to evaluate government expenditures properly would cause legislators to act with greater restraint. In Chapter 8, Borjas and Acosta address the results and costs of educational reforms in Colombia. They find little improvement in objective measures of educational achievement and attainment despite large increases in educational funding, which has taken the form of large increases in teacher pay and pensions. In addition, they find little educational benefit resulting from the expansion of state-funded day-care services due to inadequate oversight and poorly educated providers. In Chapter 9, Perotti gives a thorough overview of social spending in Colombia, finding that those who need help the most receive comparatively little. He suggests, among other things, that pensions be reduced for state employees and that coverage be extended to those in poverty. In Chapter 10, Alesina, Carrasquilla and Steiner cover issues of the central bank in Colombia, proposing complete independence and a straightforward mandate.

The proposals made throughout the book show excellent forethought, particularly regarding the feasibility of changes given existing institutions and political realities. It is a shame that so much time has elapsed since the authors began their work, as it is particularly time-sensitive material. It would have been worthwhile to include a short afterword to illustrate how the political and economic situation has changed in Colombia since the data was gathered, which policy recommendations have been acted on and to what result. As Alesina writes in Chapter 1, "some readers may wonder whether (these) issues . . . even matter in a country on the brink of a civil war and rampant violence." He argues that because such problems are rooted in discontent over poor governance, the institutional reforms outlined in the book are a necessary complement to efforts at pacification. However, the book's one weakness lies in the cursory coverage of the serious and related problems of crime and civil war. The authors make it clear that the biggest drag on Colombia's growth has been the weak rule of law, not their relatively strong democratic and macroeconomic institution. It follows logically that the benefits to reform of legal institutions will be high relative to macroeconomic and political reforms. Seemingly disregarding this elementary principle, the authors devote substantially more time and energy to detailing thorough policy prescriptions for macroeconomic and political reform than they do for the comparatively more beneficial reforms of legal institutions. Without a more detailed explanation of how to prevent the kidnappings, drug-related homicide and corruption in the judiciary the potential gains from other reform in Colombia may be impossible to realize.

AUTHOR_AFFILIATION

Christopher Michael Hannum

Colorado State University