CAUSE OF ECONOMIC DECLINE IN COLOMBIA UP FOR DEBATE

BOGOTA, Colombia -- The Colombian economy was once the envy of Latin
America, as its spotless record of paying debts and its modest but
steady growth seemed impervious to rebel and drug violence, world
financial upheaval and the boom-and-bust cycles felt up and down the
continent.

But last year, this poster child for conservative financial guidance
tumbled into its worst recession in 70 years. The last time the
country suffered such a sharp drop in economic growth, imported Model
A's were rattling through the streets of Bogota.

While the government reports the economy is on the road to recovery,
experts debate the cause of Colombia's decline. The country's
experience drives home a key point: Even with the most conservative
money management and the steady underground supply of money from
drugs and from legitimate exports like oil, an economy cannot always
avoid pitfalls.

Colombian authorities and Wall Street analysts insist that global
financial tumult, a spending spree by former President Ernesto Samper
and the postponement of more reforms sent Colombian finances spinning
out of control.

But an economist whose opinion differs 180 degrees, Eduardo
Sarmiento, says Colombia's adherence to Washington's prescription of
privatization, deregulation and trade liberalization set the stage
for its recent woes.

Others argue that narcotics trafficking finally caught up with the
country, causing a costly rift with Washington that was healed only
by the entrance of President Andres Pastrana a little more than two
years ago.

Colombian officials insist that a significant part of the problem
stemmed from financial troubles in Asia and Russia. Those troubles
made global money managers skittish about investing in stocks and
bonds in small economies such as Colombia's, and money flowed out of
the region.

"Colombia entered a recession along with the rest of Latin America,"
said Miguel Urrutia, manager of the Banco de la Republica, the
central bank. "With the crisis in Asia and the crisis in Russia,
capital flows were reversed."

Interest Rates, Recession

To entice more capital to remain in the country, authorities raised
interest rates in 1998. The move drove small businesses, mortgage
holders, credit card holders and banks into severe payment problems.
Low oil prices chipped away at Colombian export earnings.

As a result, the economy shrank by more than 5 percent last year, the
first official recession since the early 1930s. Unemployment hit 20
percent, the highest in the hemisphere.

What is unusual about the economic retrenchment is that Colombian
economic officials have a well-earned reputation for maintaining a
conservative grip on finances to prevent the boom-bust cycles that
plague other countries in the region.

During the debt problems of the 1980s, Colombia maintained the
highest growth rate in Latin America with a 3.7 percent average
annual growth. From 1991 to 1998, the average annual growth dipped
only slightly to 3.3 percent. While annual inflation remained in the
20 percent range, it never reached the levels seen in other Latin
economies.

Urrutia said that during the mid-1990s, Colombia let down its guard
on spending, unleashing a real estate bubble that ended when
skyrocketing interest rates caused demand for new housing and
commercial rentals to dry up. Banks, especially the government-run
banks, are awash in bad loans.

Late last year, Colombia, which never defaulted on its foreign debt
in the 1980s, was suddenly drowning in debt.

Standard & Poors gave Colombia two credit downgrades, and it is now
assessed at two notches below the investment grade it held until 1999.

Colombian authorities turned to the International Monetary Fund for
discipline. The International Monetary Fund pledged $2.7 billion in
standby loans but extracted strict penalties, such as trimming the
1999 budget deficit from more than 7 percent of the gross domestic
product -- the broad measure of the economy -- to 3.6 percent this
year.

A Slow Recovery

Economic growth has resumed and the economy is forecast to expand by
3 percent this year.

Urrutia said the economy is on course to meet the International
Monetary Fund targets.

"We are complying with everything that had been agreed," he said.
"There is no problem."

Still, a June central bank report shows that the budget deficit in
the first six months at 6 percent was almost double the International
Monetary Fund target. Banking officials say that the nation's banks,
suffering from credit problems, will not reach their goal of 16
percent loan growth for the year, suggesting the economy is starved
for cash.

International investors cheered the Oct. 3 sale of Carbocol, the
government's 50 percent stake in the largest open-pit coal mine in
the world, a move that should give the government a $380 million nest
egg -- some 8 percent of the budget deficit. But the sale of the
electricity company and phone company to private investors has been
put on hold.

Exports have been boosted by a 30 percent devaluation of the
Colombian peso, a slide in value that makes the goods cheaper to sell
abroad. But the recovery is still very slow with construction starts
and private consumption lagging badly.

Financial officials in Bogota do not mention the role of drugs, even
though the problem permeates the country politically, economically
and geographically.

Washington's displeasure with Samper, whose campaign allegedly took
drug cartel donations, created both political and economic
uncertainty in Colombia as the Clinton administration moved from
partial decertification on drugs to outright decertification. Today,
in a new era of cooperation, fighting the drug war is the
administration's reason for giving Colombia a $1.3 billion aid
package.

Less Drug Money

Bruce Bagley, University of Miami international studies professor,
takes the position that drugs have played a major role in the
economic fortunes in addition to global finances, high interest rates
and capital flight.

"What is also ignored in these factors is that in 1995, the United
States decertified Colombia," Bagley said.

Although the administration exempted Colombia that year from the
economic sanctions that accompany decertification, full
decertification followed in 1996 and 1997.

There are few statistics on the financial effects. But while foreign
direct investment rose substantially in 1996 and 1997 to top $5
billion, by 1998, the number had tumbled almost in half to $2.6
billion. It fell again last year to $1.4 billion.

"There was less drug money coming into the economy as well, hence
less money to launder," Bagley said.

U.S. hostility to the Samper government spooked investors, sparked
capital flight and sent Samper to "open the floodgates of public
spending in order to back his populist position," Bagley said.

Colombia's once-prudent spending reverted to a budget deficit
becoming one of the highest in the hemisphere.