1. Colombia and the Drug Trade Keith Keiderling Renata Sheyner

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

3. 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)

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

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

6. Interdependent relationships exist between the players. Drug Cartels CorporationsCorporations GovernmentRevolutionaries

7. 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

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

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

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

11. 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

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

13. 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

14. … 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

15. 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?

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

17. 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