Finance, Foreign (Direct) Investment and Dutch Disease: the Case of Colombia

In the recent years the Colombian economy grew relatively rapidly, but it was a biased growth. The energy sector (the locomotora minero-energetica, to use the rhetorical expression of President Juan Manuel Santos) grew much faster than the rest of the economy. The manufacturing sector registered a negative rate of growth. These are the symptoms of the well- known “Dutch disease” and the case of Colombia has been already widely analyzed in the literature. In this paper, we investigate a different reason why an economy may suffer from an expansion of the mining sector. In particular, we want to shed some light on the financial side of the economy and its links with a resource-boom. We can observe several unsustainable dynamics: (i) a traditional Dutch Disease due to a large increase in mining exports and a significant exchange rate appreciation, (ii) a massive increase in foreign direct investment (FDI), particularly in the mining sector (iii) a rather passive monetary policy, aiming at increasing purchasing power via exchange rate appreciation, (iv) recently, a large dividends distribution from Colombia to the rest of the world and the accumulation of mounting financial liabilities. The paper shows why these dynamics may be interpreted as a case of financial Dutch disease and constitute a potential danger for the stability of the Colombian economy. Some policy recommendations are discussed.