COLOMBIA'S ECONOMIC SHOCK

Drug Withdrawal: Country Thrown Into Recession As Cocaine Gangs Cut Off
Flood Of Contraband Goods.

Bogota, Colombia - for nearly all this decade, Colombia's economy was on a
cocaine high. Construction boomed. Car sales climbed. Real estate values
soared.

The country was awash in imported luxury goods. In Bogota's affluent north,
swanky marble-floored shops sold rolex watches, $200-a-pair italian shoes,
$90,000 land rovers.

Regardless of whether they were involved in the drug trade, most Colombians
benefited indirectly as billions of dollars flooded into the economy via
the cocaine gangs.

Wrapped in armani suits, the ruling class flaunted its wealth with power
lunches and european vacations. The lower classes profited from a rise in
jobs.

But the drug traffickers apparently are now repatriating less of their
profits, combining with fallout from the asian and russian economic crises
to throw Colombians into their worst recession in decades. They are
learning just how the narcotics business distorted the economy, weakening
colombia's industrial and agricultural base.

``The fictitious economy is finished,'' says Virgilio Correa, a dairy
cattle breeder. ``We were living as if were a rich country when really we
are a poor country.''

Much of the damage was done by a big rise in unregulated and untaxed
imports of goods and raw materials, a trade the drug gangs used as their
main vehicle for laundering cocaine money. Contraband grew to account for
at least 25 percent of imports, some $5 billion a year.

Fanny Kertzman, chief of colombia's tax and customs agency who is leading
a belated crackdown on the contraband trade, says the flood of goods
destroyed tens of thousands of jobs by decimating the domestic leather,
textile, liquor and tobacco industries.

``Consumer appliance producers have shut down. Those that make blenders,
assemble tv sets, they all went bust,'' says Kertzman.

In 1984, the national cigarette industry supplied 85 percent of the
domestic market, she says. By 1995 it was down to 30 percent, with less
than 10 percent of the market going to legally imported cigarettes.

Liquor has fared worse. Eighty percent of the market is contraband now, the
Colombian Association Of Liquor Importers says. In the past two years,
eight liquor importers went out of business. Only two remain.

``Contraband isn't only in consumer goods,'' kertzman says.

It's in raw materials, in powdered milk imported from europe that has
driven down domestic milk prices, in bananas, corn and rice from Ecuador,
in gasoline from Venezuela -- even chicken parts, she says.

The heyday of the Medellian and Cali drug cartels reduced Colombia from
a net exporter to a net importer. Legal and illicit imports tripled from
1989 through 1997, when they reached $14.4 billion, producing a trade
deficit of $2.9 billion.

Of course, the figures don't factor in profits from the estimated 500
metric tons of cocaine and 6 metric tons of heroin colombia annually
exports. Economists estimate that illegal narcotics represent from 3 to 15
percent of the value of colombia's economy -- $90 billion last year.

When they first started smuggling illicit profits home nearly two decades
ago, Colombia's cocaine barons fueled a real estate boom of fantastic
proportions.

Gang lords' purchases of the best ranch land drove up prices four- and
fivefold in some regions as traffickers acquired roughly a third of the
country's 35,000 square miles of prime grazing land, says Alejandro Reyes,
a political scientist at National University.

The ranch land buying spree displaced peasants, hurt agricultural
production and spurred the rise of the right-wing paramilitary groups now
responsible for most of colombia's political murders, says Reyes, who has
studied the phenomenon in depth.

Urban investments

The drug bosses also invested heavily in urban construction.

``Back in the late '80s and early '90s, you saw rapid growth. You saw the
building industry going crazy. The skylines in Medellen, Cali and
Bogota (Colombia's three largest cities) changed dramatically,'' notes
Gregory Passic, a former U.S. Drug Enforcement Administration finance
expert now working for the National Drug Intelligence Center.

When recession hit last year, the real estate market collapsed.

"Today, half the country is for sale and no one's buying," Reyes says.

In the rich, green savannah surrounding Bogota, prime dairy farmland sells
for $3,000 an acre, a little over a third of what it cost two years ago -
and there are still no buyers, says Correa, the dairy breeder.

In fact, the dairy business is becoming unprofitable and many farmers are
getting out, he says. In other regions, unemployed farmworkers have
switched to the drug trade by becoming coca-leaf pickers.

Even before the Asian and Russian financial crises turned international
investors away from emerging markets, including Colombia, the drug lords
had begun moving their money abroad, analysts believe.

Beginning in 1995, a U.S.-aided police crackdown captured the Cali cartel's
top leaders and seized dozens of trafficker ranches and mansions. For the
cartels, investing at home had become too risky.

Law enforcement officials and analysts believe Colombia's third-generation
drug barons have shifted much of their profits to offshore banking havens
in the Caribbean and other places to take advantage of lax controls on
money flows.

"The flow of narcotrafficking income into colombia has definitely
diminished substantially in the past few years," Reyes says.

It's not just drug traffickers who are pulling their cash out of Colombia.
Upper-class Colombians are also shifting investments abroad -- a sign of
lost confidence in the economy, says Salamon Kalmanovitz, a director of the
country's central bank.

Kalmanovitz says his countrymen invested $670 million abroad in the first
eight months of this year, twice as much as in all of 1998 and three times
as much as in 1997.

In September, President Andres Pastrana secured credits worth $6.9 billion
from the International Monetary Fund and other lending institutions that he
intends to use to revive an economy that shrank 6.7 percent in the first
half of 1999.

His administration is also trying to stem unregulated imports with
toughened laws and fines.

The government will need to move carefully if colombia's legitimate economy
is to be rescued, experts say.

Many analysts think the government's assaults on unregulated imports and
money laundering will aggravate colombia's distress in the short term,
although they also applaud the effort.

"Once your dopers decide where the capital goes instead of the government
or industry, then you're really in trouble," says Passic, the former DEA
finance expert.