Colombia's structural problems and unsuitable solutions
Monday, December 1, 2008
Senator Parmenio Cuellar, a member of the leftist Polo coalition, analyzes the pyramid schemes phenomenon, also known as Ponzi schemes.
The so-called pyramid schemes flourish in countries with very lttle banking, very little financial depth and public finances in disarray.
The former Attorney General suggests 'a national pact' as a solution to this terrible catastrophe that has befallen the country, to get Colombians to do legal banking and suggests in addition that 'other financial systems should be conceived that would really benefit the most vulnerable segments of the Colombian society, in keeping with the Political Charter of the Colombian Constitution of 1991, which specifies that banks should serve the interest of the people and not that of oligopolies.'
The initial chaos caused by the proliferation of pyramid schemes did not surprise all people, some thought it would just last for a couple of months more, and others never imagined the magnitude of the social upheavals which had been in the making for about two years. Experts like Christopher Jarvis, chief economist of the IMF Policy Development and Review Department, who has been researching this type of scheme for some time determined tha the so-called pyramid schemes proliferate in countries with very little formal banking, very little financial depth and public finances in disarray. Jarvis has intimate knowledge of what happened in Albania in 1997 and in 1998 when powerful operators like VEFA, Gjallica, and Kamberi just about ruined the country that had just introduced a market economy.
As far as Colombia is concerned, the different factors that contributed to the emergence of parallel financial systems are fairly evident: just 44% of the poulation has access to financial products of any kind, and furthermore, according to studies done by the World Bank 50% to 80% of the adult Colombian population have no access to any form of formal or legal banking. Also, the dubious state of public finances became obvious, when the government, although it had all the necessary administrative tools to deal with this parallel system, tried to sit out the problem and remained passive; this in view of the fact that Ponzi schemes proliferated for all to see at an alarming rate in areas with a large number of cities. Christopher Jarvis was thus in a position to show in one of his papers that the sitation in Albania in 1997 was very much like the situation in Colombia in 2008.
The deficiencies of public finance did not only beome apparent as a result of the passive role of the government regarding the steps that needed to be taken in dealing with the companies involved with Ponzi schemes. These deficiencies became apparent also when the government simply wanted the legislature to deal with the problem by having a bill passed with no teeth at all that not only was completely unnessary but also inadequate as far as the dangers of Ponzi schemes are concerned. First of all, a law against criminal activities such as 'massive and habitual soliciting', had been on the books for two decades already, but yet had never actually been enforced in cases involving pyramid schemes. This new bill just called for harsher penalties. Secondly, given the fact that the government has the necessary administrative tool, it is hard to imagine that it would go ahad and ignore the penal code, but at the same time impose harsher sentences, and never enforce the law because of legal loopholes which these companies made use of. The question needs to be asked now what the effectiveness of all this has been in terms of handling the crisis brought about by Ponzi schemes.
Now as far as the article is concerned that deals with financial transactions and the different ways of stashing cash, the wording chosen was such that anyone could be found to engage in criminal activities; not only small businesses that have a corresponding cash flow, but also the affluent, smart investor who would like to evade the fiancial transaction tax, known as the 4x1000, even the incautious who forgot to report their working capital. This of course not only weakened the trust in our currency, but also hampered all economic activities in an economy such as ours, which is largely of an informal nature.
This provision would probably have the intended results in countries like Switzerland or any other country with a picture book economy, being very formal as far as its governing forces and activities are concerned, but for an economy such as ours this provision would have to be fatal.
It needs to be pointed out that there are two solutions to this problem: one that has to be implemented immediately and the other one requires structural changes. The immediate solution requires that the government intervene given that it has the necessary tools provided by the Constitution of 1991. The structural solution requires a national agreement or pact with appropriate policies that encourage all Colombians to do legal banking. Alternative fiancial systems are also necessary that would finally benefit the most vulnerable segments of our society, which would be in accordance with our Political Charter, which demands that banks should serve the people and not the oligopolies. This would not only improve the fiancial situation of many Colombians and help them to start their own business, but also help to improve the general financial climate und culture of the Colombian society.