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The dichotomies of Colombia continue to confound us all. On the one hand, the nation is under siege, with 35% of its territory (home to 3% of the population) controlled by three armed groups, the FARC, the ELN and the Paramilitaries. At the same time, Colombia's economy continues to grow under prudent fiscal management. The country has enjoyed the most enviable real growth record in Latin America for five decades. It is the only Latin American country that has never rescinded its international debt commitments. Nonetheless, the civil war has handicapped Colombia's economic potential, particularly over the last eight years. Today, the economy is threatened by violence, civil war, and corruption - all stemming in large degree from the drug trade. The greatest long-term threat to this young country may be the flight of capital and educated professionals to safer countries - resources that may never return.

The dichotomies of Colombia continue to confound us all. On the one hand, the nation is under siege, with 35% of its territory (home to 3% of the population) controlled by three armed groups, the FARC, the ELN and the Paramilitaries. At the same time, Colombia's economy continues to grow under prudent fiscal management. The country has enjoyed the most enviable real growth record in Latin America for five decades. It is the only Latin American country that has never rescinded its international debt commitments. Nonetheless, the civil war has handicapped Colombia's economic potential, particularly over the last eight years. Today, the economy is threatened by violence, civil war, and corruption - all stemming in large degree from the drug trade. The greatest long-term threat to this young country may be the flight of capital and educated professionals to safer countries - resources that may never return.

Rise of the Paramilitaries

The proliferation of drug lords in the 1980s began the negative changes that have brought Colombia to its tenuous position fifteen years later. But in the 1980s, Colombia continued to outgrow all of its Latin American neighbors. It was not until the '90s that the Paramilitaries grew substantially, exacerbating the danger already created by the FARC and ELN. During the '80s, cocaine growers and processors accumulated billions and purchased more than a million hectares of land, undermining 25 years of land reform. Much of this land extended into FARC controlled territories. The new owners were not prepared to pay the protection money that the FARC extracted from smaller landowners. So they joined the large ranchers in hiring Paramilitaries to defend their vast holdings.

The Paramilitaries make a point of never harming government soldiers. Military commanders and politicians, frustrated by the intransigence of the guerillas, have long turned a blind eye to Paramilitary killings. As a result, the "Paras" have grown six-fold over the last eight years. Their mercenaries earn 2 to 3 times the monthly salaries paid to ELN and FARC guerillas and military soldiers. Most Paras are now organized under an umbrella group known as the AUC, led by Carlos Castaño whose own father was murdered by the FARC. Years of impunity have turned them into the deadliest armed force in the country. According to The Colombian Commission of Jurists, Paramilitaries are now responsible for more than 240 non-combat deaths per month. This compares with an estimated 50 by the FARC and ELN combined. The Paramilitaries live off two pockets of rural wealth in Colombia, the ranchers and the cocaine producers.

Guerilla Kidnappings and the Brain Drain

The FARC's original mandate - to improve the plight of the rural underclass - carries little weight today, even among the poor. The children of small farmers have three choices. First, they can barely survive off the land in a world of shrinking commodity prices and disappearing government subsidies. Second, they can grow cocaine, a profitable but dangerous occupation. Or third, they can go to work for the Guerillas or Paramilitaries - whichever they think is likely to control the lands where they live. To survive, therefore, the rural poor continue to join the FARC and ELN. The Guerillas have tamed their activities somewhat through the peace negotiations. But they still have 21,500 mouths to feed (18,000 FARC / 3,500 ELN) and estimated annual budgets of US$ 250 million (FARC) and US$ 45 million (ELN). Having lost some of the cocaine producer and rancher extortion industry to the Paramilitaries, the FARC and ELN rely increasingly on small to mid-size ransoms drawn from kidnapping the urban upper and upper-middle classes. Colombia is the kidnapping capital of the world, with more than 4,000 reported abductions per year, plus an additional 12,000 that go unreported.

While most guerilla activity was historically concentrated in the countryside, kidnappers now encroach upon the cities seeking victims. Cali, Medellin and now Bogotá are increasingly dangerous places with recent car bombings in all three cities. With ransoms as low as a few hundred dollars, kidnapping is now affecting the less affluent social classes. Unemployed urban poor with no connection to the drug trade are turning to street crime to feed themselves. The rapid deterioration of safety in the cities is the most important motive behind the rise in emigration of Colombia's professional class - the future brains and capital of the country. More than 800,000 have left Colombia in the last four years alone, up 120% over the previous four-year period. Many head to Miami, where Colombians are now the 2nd largest nationality in the city after the Cuban-Americans. Other favorite destinations are New York, Los Angeles, and Madrid. This brain drain may be the greatest long-term threat facing Colombia.

Exports Drive Moderate Growth

In more immediate terms, the economy continues to grow, albeit at a more moderate pace compared to the last forty years. Growth this year will reach 2.8% after an equally modest 2.5% in 2000. Growth is driven by exports, which kicked into high gear in 1999 after Colombia floated its peso. This caused real devaluation of almost 20% that year and another 14% in 2000. The liberalization policies of the Pastrana administration continue the efforts of former President Gaviria, the first to open the economy after years of strong currency/closed trade policies. President Samper reversed many of Gaviria's reforms, providing further confusion to investors.

So far, the results of liberalization are mixed. Trade has grown but better import access and foreign investment liberalization are threatening Colombia's many mid-size manufacturing and service firms. Unemployment rose to nearly 20% last year. The neo-liberal experiment is in its most painful stages precisely when the country is suffering the demoralization of an unofficial civil war and all of its collateral damage. Pastrana should be praised for his bold efforts in economic reforms and peace negotiations. But fighting battles on both economic and military fronts may ultimately result in his downfall.

Unemployment on the Rise

In March 2001, exports shrank for the first time in three years. The general slowdown in demand reverberating from the flatter US economy comes at a bad time. Certain pockets of Colombian industry are poised to expand exports, with a competitive currency and with two years of re-engineering under their belts. Foreign direct investment will continue to grow, particularly in the country's newly liberalized sectors: electricity, telecom, oil and coal. But net employment growth will be negative over the near term as more jobs are cut through re-engineering and consolidation than are gained through production expansion. Construction is also in decline, putting more out of work. That raises the specter of unemployment rates in excess of 20%, which would set a dangerous precedent. Further hindering the neo-liberal experiment is a weak banking system, which nearly collapsed in the 1998-99 recession, as well as higher costs of servicing foreign debt under the floating Peso. Bank bailouts by the government may eventually cost upwards of US$ 11 billion.

Peace Hopes Dim

Pastrana's ability to negotiate a peace settlement with FARC grows dimmer as 2002, an election year, approaches. Voter discontent over the economy translates into the probability of a very different President in 2002. This outlook may discourage the guerillas from committing to a settlement that forces them to disarm. The last time the guerillas agreed to a ceasefire and joined the political fray was 1984. They won 4.5% of the national vote in 1986 and elected several mayors. By 1990, however, more than 1,000 party members had been killed, including two Presidential candidates. Most of the slaughter was attributed to Paramilitaries backed by Escobar and Rodriguez Gacha, silently condoned by the military.

Several leaders are waiting in the wings of discontent over Pastrana. Alvaro Uribe Velez is a liberal from the right wing. Noemi Sanin is an independent candidate. Horacio Serpa is a symbol of the traditional political machinery. Another possibility is today's Minister of Defense, Mr. Luis Fernando Ramírez, who would run as a Conservative. All of them promise a tougher approach with the guerillas, who most Colombians believe are given too much latitude in the negotiations.

Uribe is the most dramatic example of the new right emerging in Colombia. As Governor of Antioquia, he worked to create a law that permitted the creation of a militia designed to protect civilians from urban and rural violence. Uribe's tactics did reduce kidnapping and murder rates in Antioquia but trampled on the rights of questionably guilty citizens. Legislation establishing militias is now outlawed by Presidential decree. Cognizant of international scrutiny, Uribe also proposes the deployment of UN peacekeepers in select hot spots to help enforce a peace settlement.

How would the Bush Administration react to a move to the right in Colombia? Given the administration's priority of curbing the drug trade and the fear of guerilla spillover into other Andean countries, many speculate that a more aggressive stance against the FARC and ELN would be tolerated, if not encouraged.

A Diamond in the Rough

For the opportunist, Colombia can be a diamond in the rough. Its stock market is riddled with excellent industrial group stocks, trading at P/E ratios of less than 5, compared to an S&P average of 32. Colombia is a proven exporter of high quality processed and semi-processed goods such as cut flowers, leather, clothing, shoes, textiles, and glass. Foreign investment opportunities remain in energy, telecom and transportation. Colombia is no place for small or medium sized business, but global players, who can absorb the risk, will find attractive returns.