Bogota Eyes the Irish Model: WSJ, Monday, March 24, 2008

A few gems of info in this one....

Bogotá Eyes the Irish Model
By MARY ANASTASIA O'GRADY
March 24, 2008; Page A14

When Colombia's trade minister visited the Journal's New York offices two weeks ago, the last thing I expected to come up in our conversation was Ireland. To my surprise, it was the first subject he raised.

No sooner had Luis Plata sat down then he started talking about the Irish economic transformation -- from impoverished ugly duckling to swanky swan of Europe in just two decades -- and why a similar growth model is just what Colombia needs.

Some of the necessary policy adjustments are already under way in Bogotá, he said, and with any success, the reforms can be deepened. But the big question mark is whether the U.S. Congress will approve the pending Free Trade Agreement. The FTA, Mr. Plata explained, is as important to Colombia's growth as European Union membership has been to Ireland's.

To think that Democrats might undermine Mr. Plata's visionary agenda is troubling. In 2006, U.S. official development assistance aimed at alleviating poverty around the globe was $23.5 billion and it was pretty much money down a rat hole. That's because development requires economic liberalization, and leaders of poor countries have little incentive to disturb the status quo of monopolies and protectionism that put them in power. Their incentives are even less when rich-country handouts are flowing.

Now along comes Colombia, with a leader -- President �?lvaro Uribe -- who is willing to risk political capital to open domestic markets, cut taxes and spur competition in a bid to grow fast à la Ireland. All his government asks from Washington is two-way trade, but Democrats want to slam the door in his face.

Before Mr. Plata became trade minister last year, he headed a government export agency. "We starting going to Ireland several years ago, he says, "because we were looking at countries around the world that had been successful in attracting foreign direct investment. What we found was that Ireland had lowered its corporate tax rate from 40% to 12.5%," and as a result "was attracting investment, had lowered tax evasion and had increased tax collection. We went back to Colombia and said, 'why don't we just bring [our corporate rate] from 38% to 12.5%.'"

That wasn't a popular view with Colombia's treasury department. "It got me kicked out of their offices," Mr. Plata recalls.

No surprise there. Bean counters in every treasury in Latin America have tax-cut phobia in their DNA. It explains why they often get jobs at the International Monetary Fund in Washington after the collapse of the governments they've served back home. At the fund they can put into practice their deeply held convictions that the only responsible fiscal policy is one built on a static analysis to discover the "right" tax rate. Embracing the notion that production creates its own demand, and that government revenues expand under a low-tax regime, is considered high-risk behavior.

Mr. Plata is more sympathetic toward his treasury colleagues. He says that they have to balance the medium- and long-term benefits of tax cutting with the more immediate need to finance the government. Nevertheless, he was convinced that Ireland's experience could be applied to Colombia. Despite the initial reaction, his team "went to work" on the idea of attracting investment through tax cuts.

In a perfect world, he would have won a flat corporate rate. But he had to compromise and instead came up with the "single-enterprise free-trade zone." It expands the low-tax treatment that companies receive when they are located within a "free trade zone" -- normally an industrial park -- to any company that meets certain investment criteria. Businesses (excluding mining and oil) that qualify by meeting minimum investment amounts and employment targets now pay a 15% flat tax instead of 33%. They also import all raw materials with no tariffs and pay no value-added tax.

In addition to offering these tax advantages, the government is writing "stability contracts" to guarantee that the rules will not change when presidents do. It is also working to reduce the regulatory burden, since red tape is one of the most common complaints from foreign investors.

The "single-enterprise free-trade zone" was launched last May, and to date it has attracted about $864 million in foreign direct investment. That number would be higher under a pure flat tax, and if Colombia is to rival the Irish miracle, it will have to move in that direction. But to persuade the treasury to adopt a broad-based flat tax, Mr. Plata will have to show some results with his initial experiment.

That's why the FTA is so important. Companies investing in Colombia are looking beyond the domestic market and, as the minister notes, the recent dustup with Venezuela -- in which President Hugo Chávez threatened to close the border -- demonstrates the fragility of Colombia's export market. About half of Colombian exports now go to Venezuela and Ecuador. Access to the U.S. market and to duty-free imports from the U.S. are both crucial for producers.

All of this begs the question of why congressional Democrats want to reject the Colombian trade agreement. They say it's because Mr. Uribe hasn't done enough to quell violence against labor leaders in the country. But murders are down dramatically, and as Mr. Plata says, "you can't make the case that killing the FTA will make things better."

What will make things better is investment, which is fundamental to reducing poverty. Peru, Mexico and Central America all have FTAs with the U.S., which means that Colombia is automatically disadvantaged if it is denied one. And that could harm national security, which is so fragile. As Mr. Plata pointed out, "You don't win the peace with soldiers alone. You have to have a functioning economy." Surely Democrats can't be against that.

By tejasmarcos on Mar 24, 2008, 09:03 in Friendly Talkzone.

RAAAY says on Mar 24, 2008, 09:33:

Exactly the reason why I have been so bullish on the potential future of the Colombian economy. I witnessed first hand the effects of policy changes in Ireland that brought about the Celtic Tiger economy.

About six months ago here, I remarked to someone that I saw staggering similarities between Colombia and Ireland. One of those is the amount of FDI flowing in. Also, the very visable efforts being made here to promote non-traditional exports.

I see one of the biggest assets here, to be the young, highly educated population.

The only thing I would dis-agree with in this article is " from impoverished ugly duckling to swanky swan of Europe in just two decades "

It really did'nt take two decades to see the economic boom in Ireland. It was more like ten years. It was most visable in the main cities at first...........then it spread throughout the country. It has already started here. Look at the boom experienced in Bogoa and Medellin. It is nothing, to what it is going to look like in another five years.

It's not too late to buy property here, even at the current rate of the Peso. It is just going to get stronger.

.

.

.........Its useless to argue with ignorance

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Man Tequila says on Mar 24, 2008, 09:39:

Ireland benefited from the EU, but certainly underwent a positive economic sea change. This is one reason you don't hear about bombs going off in Londonderry and Belfast.

Ireland and Chile are also two countries which have made big inroads in to tackling poverty, and Colombia would also do well to take a close look at Chile.

As for anti-Democrat puffery, this is an issue too. It may be they just cannot be pleased, but Colombia might try to make them happier.

Aunque no me creas/ si me lo propongo/ lograre olvidarte/ porque a fin de cuentas/ no soy tan cobarde./ Y termino todo una de estas tardes/ no sera dificil buscar algún sitio donde refugiarme/ donde nunca mas vuelvas a encontrarme. (Polo Montañez)

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RAAAY says on Mar 24, 2008, 10:18:

Ireland benifited hugely from the EU.............Colombia benefits hugely from Plan Colombia and monies from Colombians in the States...........it probably comes close to balancing out............maybe even more to the favour of Colombia.

And............there is no such place as " Londonderry "

.

.........Its useless to argue with ignorance

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Man Tequila says on Mar 24, 2008, 10:21:

I didn't have a chicken in the IRA cockfight. I said "Londonderry" since this term was on the news a lot when I was a child in the 80s. As you know, many call it Derry depending on their loyalties.

http://en.wikipedia.org/wiki/County_Londonderry

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RAAAY says on Mar 24, 2008, 10:48:

http://www.derrycity.gov.uk/

http://www.cityofderrygolfclub.com/

http://www.cityofderryrfc.com/

http://www.derrygaa.ie/gallery/2008_CityHurlingBlitz/Na_magha

.........Its useless to argue with ignorance

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cali373 says on Mar 24, 2008, 12:20:

"a similar growth model is just what Colombia needs." a similar growth model is just what Every developing country needs.
There is a huge difference though, Ireland is part of the EU. So unless Colombia can become part of the EU, the same economic transformation will not happen in Colombia because the U.S. will get in the way.

Just look that Uribe is pulling all the political strings to get a trade deal with the U.S. but he does not put that kind of effort to do the same with the E.U. or Asian countries like Japan, China and Korea. Perhaps he just knows the U.S. will intervene.

Smile if you are a thinker!

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cali373 says on Mar 24, 2008, 12:23:

Notice how Mr.Plata spins this "All of this begs the question of why congressional Democrats want to reject the Colombian trade agreement, They say it's because Mr. Uribe hasn't done enough to quell violence against labor leaders in the country. But murders are down dramatically"

While Yes it is true that "murders in general" are down dramatically, that does not mean murders of Labor leaders and policitians that lean toward labor are down dramatically. So Mr. Plata did not lie, but he was dishonest.

Smile if you are a thinker!

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cali373 says on Mar 24, 2008, 12:31:

RAAAY I agree with you that one of the biggest assets in colombia are, the young, highly educated. There is only one problem, in proportion to the entire population of Colombia, there is not enough highly educated young people to create an economic boom like Ireland was able to. Chile has always invsted in education even under Pinochet.

When it comes to education Colombia sits in the Colonial era. The people in power could care less about having more people able to access higher education, this is the way it has been since Colonial times. Uribe is no winner on the education front either, since he just keeps cutting education funds. There have been several protests due to his education cuts, i hav seen them, but you won't see them on Caracol or RCN.

Smile if you are a thinker!

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tejasmarcos says on Mar 24, 2008, 12:32:

"Just look that Uribe is pulling all the political strings to get a trade deal with the U.S. but he does not put that kind of effort to do the same with the E.U. or Asian countries like Japan, China and Korea. Perhaps he just knows the U.S. will intervene."

- do not forget how heavily Colombia is relying upon USA military support. I doubt the EU could ever offer that type of support or atleast on the level(s) that the USA can.

trying to walk a straight line on sour mash and cheap wine...

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cali373 says on Mar 24, 2008, 12:39:

No the E.U. usually does not get involved in the civil conflicts of sovereign nations, they are smart, but they definitely have the money do so. Plan Colombia is a pork barrel project which will only work depeding on who is president of Colombia. It works with Uribe but past presidents and Military officials did nothing good with "U.S. Aide".

In 15 years we will still be talking about plan Colombia and the drug war and guess what. U.S. americans will still be snorting that fresh Colombian white powder.

Smile if you are a thinker!

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cali373 says on Mar 24, 2008, 12:42:

Another HUGE fact that Mr. plato "failed" to point out is that Ireland has a well established WELFARE STATE. That means that the majority if the population has access to publicly funded higher education and medical care!!! That make a huge difference to a society.

Smile if you are a thinker!

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adrimm says on Jul 7, 2008, 18:57:

Actually Cali373 I think that the free-university was ** the** difference for Ireland, moreso than the EU membership. The developed a highly educated & skilled workforce overnight, straight from a resource & agricultural industry. If anything having a high-standard and low-cost/free post-secondary education system can only be a huge benefit to Colombia both economically and culturally.

India, more by virtue of population than increased affordability has also attracted investment because of the increasing numbers of highly-skilled folks.

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