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Macroeconomic policy, external shocks and social protection

Colombia highlights

Colombia’s poor are affected by global commodity prices


Increases in international prices of food products, oil, and other commodities would benefit the Colombian economy. There are two main reasons for this. First, Colombia is a net producer of these products, and secondly, Colombia’s export diversification means that price increases in one product will not have a large effect on the exchange rate, and the country should not suffer from the problem known as “Dutch Disease”. 

A fall in world prices of Colombia’s main exports leads to a fall in 34% fall in total exports, despite an increase of 84% in exports of non-affected products. This leads to a 1.9 percentage point drop in GDP, which is compounded by a 7.8 percentage point increase in imports. The affected sectors, however, only represent 35% of total employment (65% are in non-affected sectors). This, together with the positive effect of a depreciation on exports of non-affected sectors and greater demand for qualified labor, helps explain why the shock leads to higher employment, incomes, and lower poverty rates.

In the case of a fall in global food prices, domestic production responds to greater global demand, and demand for labor increases by 16%, with higher incomes and lower poverty, as described above.

External shocks have a large effect on poverty rates, particularly in the case of changes in global prices of food products

Poverty is measured as a share of total population. The vertical axis measures the yearly changes, in percentage points from the baseline model results. Please see the full country study for a definition of the simulated scenarios.


Social policies are effective, but carry a large cost


Most social policy options have a direct impact on the poorest segments of the population, significantly reducing poverty rates. However, the fiscal cost is high and crowds out public and private investment. Looking at the combined effect of the external shock with a policy of transfers, the net effect is a smaller fall in GDP than in the absence of the policy reaction. The effect on poverty, however, is less beneficial, remembering that the external shock had a positive effect on income and poverty, while the transfer policy alone is expected to have a negative effect due to its impact on investment. This is an interesting case where the government, in the face of an external shock such as the one simulated, should not react by adding transfer policies.

Social policies also affect poverty rates, but are costly and undermined some of the benefits of some external shocks

Poverty is measured as a share of total population. Fiscal balance is measured as a share of total GDP. The vertical axis measures the yearly changes, in percentage points from the baseline model results. Please see the full country study for a definition of the simulated scenarios.

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The book "Financing Human Development in Africa, Asia and the Middle East" is forthcoming in the fourthquarter of 2012.

The book's quantitative assessments, conclusions drawn, and policy recommendation are prepared based on the country studies of the project "Realizing the Millennium Development Goals through socially inclusive macroeconomic policies".

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