Colombia and the Drug Trade Keith Keiderling Renata Sheyner

Agenda... Macroeconomic Overview Industry Analysis Business Operations Business Risk

Investors taking long-term approach as result of macroeconomic stability. F Economic indicators-1980s –avg. GNP growth: 14% –avg. GDP growth: 3.5% F Economic reforms-1990 –Privatization program –Trade reform program u Tariff reduction: 44% (1983) to 12% (1993)

The reasons for Colombia’s economic stability have been… InvestmentOpportunitiesInvestmentOpportunitiesStablecurrencyStablecurrencyDiversifiedEconomyDiversifiedEconomy

Agenda... Macroeconomic Overview Drug Trade Industry Analysis Colombian Business Environment Implications on Business Operations

Interdependent relationships exist between the players. Drug Cartels CorporationsCorporations GovernmentRevolutionaries

Competition is driven by relationship among forces. Rivalry Among Competitors Rivalry Among Competitors Cali/Medellin Cartels ELN/FARC  Oligopolistic power Farmers Multiple sources  Low Violent anti-competition tactics  High Increase marijuana use Other drugs  High Suppliers Barriers to Entry SubstitutesBuyers Inelastic demand Addictive & illegal product 70% of world supply  Low

Agenda... Macroeconomic Overview Industry Analysis Business Operations Business Risk

Cartels behave like corporations. Centralized Industry Centralized Industry Drug Trade ValueChainValueChainBusinessOperationsBusinessOperations

LocalNetwork Cartels excel in value chain management. End user FarmersDrugCartelsCartelNetwork Growth of coca paste Refining of paste Distribution Point of sale

Drug Cartels compete as global businesses. F “True business” organization –Law and business professionals –Usage of technology to gain competitive advantage –Influential salesforce F Decentralization of operations –Reduce risk exposure

Agenda... Macroeconomic Overview Industry Analysis Business Operations Business Risk

Negative impacts... F “Dutch disease” –Repatriation- $2 billion/yr. u Return in form of foreign exchange, contraband and legal imports   P$  overvalued peso   competitiveness of exports u “Dollarization” F Short-term investments  Inefficient allocation of resources

… and positive F Barriers against recessionary pressure –Capital inflow F  Demand –Farm equipment, chemicals, … F Social development –Reinvestment into community-services, wages, protection –Construction boom

Cartels influence government behavior and international perceptions. F Policies –Extradition (1991 and 1997) u US Decertification –“Muddling through” –“Apertura” –Government expenditures u Military u Social opportunity costs F Government –40% Congress connected to Cartels  corruption –Samper F Future issue-privatization?

Agenda... Macroeconomic Overview Industry Analysis Business Operations Business Risk

Environment forces corporations to behave as mini-governments. Corporation Political Risk Weak government Elections “Dignity of Colombia” Continuity of reforms Security Financial Risk Sustenance programs Exchange rates