Institutions and Welfare in Colombia: a comparative analysis

Diego A. González

Institutions and Welfare in Colombia: a comparative analysis

Diego A. González

Abstract

Based on different sources about institutions and welfare in Colombia, the association between the efficiency of the institutions, and the economic development are evaluated. Adding information from nations such as Chile and Venezuela, the comparison with countries with similarities in culture and economy is executed. In theory, the institutions’ strength is related to improvements in welfare. Considering this aspect, the situation of Colombia as a developing country is highlighted from a point of view, thus the recommendations on improvement of current institutional and welfare-related points at issue are worth mentioning. Positive relationships were found between the institutions and economy in most of the scenarios for each country assessed, however, exhibited negative and significant relationships to resources of commodities and economic development.

Table of Contents

List of Figures and Tables

List of abbreviations

1. Introduction

2. Theoretical Framework

2.1. Institutions

2.2. Welfare

2.2.1. Human Development Index (HDI)

2.2.2. Millennium development goals (MDG)

2.2.3. Happiness in an economy: Easterlin Paradox

2.3. Relationship of institutions and welfare

2.3.1. Influence of institutions on welfare

2.3.2. Industrialization theory on institutions

2.3.3. Modernization theory on institutions

2.3.4. Dutch Disease

3. Country profile: Latin America region

3.1. Colombia

3.2. Chile

3.3. Venezuela

4. Results

4.1. Data and statistics

4.2. Health: Life expectancy and infant mortality

4.3. Education: Expected and mean years of schooling

4.4. Economy: GNI and poverty

4.5. Basic Needs: Water and Electricity

4.6. Human Development Index: The representation of the quality of life

4.7. Strength of Institutions: Law and corruption

5. Recommendations

6. Conclusion and Discussion

References

List of Figures and Tables

List of Figures

Figure 1 Determinants of income      12

Figure 2 Human Development Index components      22

Figure 3 Easterlin Paradox: Happiness vs GNI p.c.      35

Figure 4 Dutch Disease: Demand and offer changes      46

List of Tables

Table 1 Determinants of development: Channels of Influence      14

Table 2 Evolution of the dominant meaning and measurement of welfare      19

Table 3 Life expectancy at birth      71

Table 4 Infant mortality rate per 1000 live births      73

Table 5 Expected years of schooling      74

Table 6 Mean years of schooling      75

Table 7 GNI per capita PPP      76

Table 8 Poverty headcount ratio at 1.90 USD a day (%)      78

Table 9 Share of the total population with improved water sources      79

Table 10 Access to electricity (% of the population)      80

Table 11 HDI with country comparison      82

Table 12 Country Perception Index 2018 (CPI)      85

List of abbreviations

CPI Corruption Perception Index

GDP Gross Domestic Product

GNI Gross National Product

IMF International Monetary Fond

HDI Human Development Index

IEA International Energy Agency

OECD Organisation for Economic Cooperation and Development

OLS Ordinary Least Squares

PPP Purchasing Power Parity

UNDESA United Nations, Department of Economic and Social Affairs

UNESCO United Nations Educational, Scientific and Cultural Organization

UNICEF United Nations Children's Fund

UNDP United Nations Development Programme

WHO World Health Organization

1. Introduction

The expression of Latin America was mentioned to the countries, located south of the Rio Grande in the United States in which they speak a language e.g. Spanish, Portuguese, and French, derived from Latin, besides referring to characteristics common such as the localisation in the Western Hemisphere and the origins of language (Bulmer-Thomas, 2003). Some authors; such of stated; the differences of climate, ethnicity, natural resources, population, or degree of development marked the difference in the formation of republics by much more than geography and language (e.g., López-Calva, 2010; Ferreira, 2008).

The majority of Latin American countries won independence from their European rulers in the late 1810s and in the early 1820s. Even with the promises of increase of living standards, none of the countries in the region has accomplished uniformly enough high living standards, educational levels, grades of competitiveness, or stages of technological development in comparison to a developed country (Bértola and Ocampo, 2012). Even though some Latin American countries are still deprived of richness and large segments of population are on the sidelines of economic and social development progresses, the region has made large steps in bringing about prominent economic, social, and political changes that have positioned it on a development path, as a whole and in some social areas, to accomplish middle-income position on a global scale.

From another point of view, underpopulation and labor scarcity persisted in North America throughout the entire colonial period, but even with that, there was a tremendously elevated rate of population growth in the colonies, securing the British power over the North American region (Walton and Rockoff, 2013). The overpopulation was relatively associated to the available land and the constant territorial expansion, besides the increasing demand of the population, originated by the commercial successes, auspicious economic circumstances and finally the high value of labor, making an immense difference between South and North.

Looking in the real world, we see the border between the United States and Mexico in the place called Nogales, one part in Arizona (United States) and the another in Sonora (Mexico). The people of the United States can choose their profession, including education and skill formation, meanwhile, the companies could invest in human capital and technology, resulting in constant increases in productivity and income. In the political aspect, the can freely choose their politicians and participate in the democratic process, in the way the politicians tend to work in benefit for the citizens. In the opposite side, on the other place of the border, in Mexico, the mechanism is different and dissimilar, with lower welfare conditions and in an alternative world with disparate institutions (Robinson and Acemoglu, 2012). The differences between the two Nogales are quite developed because of the efficiency of the institutions and their influence on the welfare of the territory, which leads to GDPs from 30.000 USD per capita to 10.000 USD per capita, although both cities are separated by a short distance.

Why do these countries have different economic outcomes? In the case of the United States and Mexico along the border, the geographical and cultural differences apparently do not play a vital role in economic development and hence in the general welfare of territories (e.g., Robinson, 2012; Rodrik, 2003). According to the example, it determines a significant part of institutions on the development of these two countries, in short, an improvement of institutions quality attracts improved economic conditions for the people.

In the case of Latin America, the countries of Colombia, Chile, and Venezuela have a direct relationship with Mexico, sharing a similar culture and language basis, nonetheless Mexico is larger in population and GDP, economically speaking, in comparison with the mentioned countries (e.g., Franko, 2006; Sigmund, 2011). Comparing with the United States, the cultural, regional and economic difference goes beyond an international comparison with any Latin American country.

How are these countries performing each other and compared with the rest of the world? What does make them different from each other? The three countries share a common history, from the point of the war of independence until today, beginning with upright promises about an independent future success, but ending up with an alternative outcome (e.g., Pop-Eleches, 2008). The recent economic and politic history of Colombia, Chile, and Venezuela is going to be described.

Returning to the topic of country comparison, the following countries Colombia, Venezuela and Chile share numerous common aspects to plausibly participate in this research. Firstly, similarities in the culture, geography, and language are exposed in the three nations. Furthermore, the territories have analogous proportions in population and in economic indicators as well. Finally, the history of the three countries are correlated to each other, but with some different outcomes and situations of each other.

About Colombia, the country has been highlighting the headings in the media because of drug crime business which undesirably had an influence on Colombia’s image by the large-scale cocaine manufacture and trade in the earlier 1980s and in the earlier 1990s (Schneider, 2014). Since the early 1990s, Colombia has experienced remarkably turbulent social, economic, and political changes (e.g., Leech, 2011; Herbolzheimer, 2006; Estrada, 2018). These have been characterized by relatively profligate economic growth, raised levels of violence, and the evolution of an illegal psychoactive drugs industry (Thoumi, 1995). Differences in politics and ideologies movements have had since independence’s day about more than 200 years ago.

About Chile, the nation was founded by Spanish conquistadors in the 1540s, and after the wars of independence, the country started to play a significant economic role, where there has been unusual institutional permanency in the Spanish America of nineteen century (Collier, 1996). The modern history of Chile (1973-1990) is noticeable profoundly by the dictatorship of General Augusto Pinochet for 17 years (Bertelsmann Stiftung, 2018), in which the government had not a good opinion in relation to the firm hand and the control measures, resulting in violations of human rights. Some experts categorized the government model as extremely economic liberalism, in which the state abandons no only interventions on markets but also essential services such as education, health, labor and social security (e.g., Gough, 1979; Roberts, 2016).

About the situation of Venezuela, the country suffers an immense inflation, radical changes in the foreign exchange specially with USD, including the official and unofficial foreign exchange due to the unilateral decision of government for the official exchange rate and generating hence the corruption with the criminality work with a market-oriented exchange rate, and the macroeconomic vacillations of the Venezuelan economy in the last years (Cartaya, 2011). Moreover, the country profoundly depends on the petroleum prices and variations on oil prices prominently affect the Venezuelan economy, and on another hand, the lack of fiscal control and monetary control lead in an excessive public expenditure and elevated indebtedness (e.g., Buxton, 2014).

Besides, does an increase in income drive to more happiness? The Easterlin paradox clarifies that happiness improves with the individual income, including decrescent results in happiness with increases in income. In the theory, there is a positive relationship between income and the degree of happiness, but empirically, there are no results which verify the theoretical structure (e.g., Easterlin et al, 1974; Nuscheler, 2012). Another thing to be considered, in all times, the countries with higher incomes are at an assumed period happier than others with lower income. Yet, hovering the incomes of a country does not mean an increase in happiness of territory (e.g., Easterlin, 1995; Bruni, 2007; Frey, 2002).

Basing on the theoretical framework, the institutions develop an essential role on income structure, in the same way, are also correlated to income and geography (e.g., Robinson, 2012; Acemoglu, 2007, 2011; Kuznets, 1968). The integration of a country with other countries and its quality of institutions are triggered by endogenous causes, in relation to other country and to geography, but also to revenue levels. Problems of endogeneity and opposite connection obstruct the research among the causal factors (Rodrik, 2003). The Geography has an effect on institutions in which there historically were disadvantageous consequences for institutional development extreme inequalities and could enable more concentration of a reduced group of elites (e.g., Engerman, 1994; Boone, 1996).

The develop of welfare, explicit the welfare state, originated from the industrialization process and the implementation of social regulations. In order to fulfill the regulations, the expansion of the state, concerning all social and regulation aspects, has to be applied (e.g., Conceição, 2008; Esping-Andersen, 1990; Olson, 2000; Svenson, 1999). Moreover, the current modernization of society allows people to gain access to politics through the democratic process, leading to the construction of welfare programs. The effect of industrialization and modernization on the evolution of the welfare state goes beyond the limits (e.g., Claudia and Costin, 2018; O’Connor, 2017; Poulantzas, 1973).

Another explanation for the situation of the three countries is the presence of the Dutch Disease on the development process. If these countries receive a potent development of economy because the boom of commodity prices on the primary economic sector, there is a deployment of the distribution of investment in the booming sector, but at the same time this investment is displaced from other sectors, including possible national milestone sectors (e.g., Corden, 1984; Snape, 1977). Thought the Spending and Resource Movement effect, an operation of labor from the non-tradeable industry to the booming and to the lagging industry, especially in direction to the booming industry is executed (e.g., Corden, 1982; Forsyth, 1980).

All this theoretical information concludes in direction to the development of the empirical process. The sectors of Health Care, Education, Income, Basic Supplies: Water and Electricity, and the Application of Law recommend objective indicators in order to find the relation among each value with the welfare and the goals of institutions, resulting a positive relation between the increase of an indicator with economic development, but intrinsically with human welfare (e.g., Claudia, 2018; Conceição, 2008). In these welfare sectors list, there are some features that could be more specific to measure the welfare and institutions efficiency, however, the base of the most criteria is supported under uninformed statistics information and purely subjective basis. It is totally probable the basis of Application of Law is related to subjective standards, even supported by industry experts, that could collect exogen influences from pragmatic politic references.

2. Theoretical Framework

2.1. Institutions

According to Adam Smith (Smith, 2019), all sort of business can rarely develop long in any government which does not possess a steady administration of justice, in which the citizens have the security for the ownership of private property, in which the law supports trust of contracts, and in which the authority of the state enforces paying-backs of liabilities from all persons in charge who are able to pay off. In short, all kind of industry can develop in any state with a certain level of assurance in the justice of government. What the author declares, there is no development in any state without, in this instance, a certain level of application of justice. In this case, justice applies oneself to be the first milestone of the importance of institutions for an economy. Even though, there are other aspects in the development of a country to be considered and therefore for can be caused by the enforcement of the certain level of legality.

The influence of the institutions could be seen through the-United-States-and-Mexico border, in which there are notorious differences between the two towns at the border, the most impacting differences between the two Nogales. The effectivity of institutions of the United States allows people to freely choose their profession, education and skill formation; in the same way, the companies have motivations to increase investments in human development and technology, resulting in higher salaries to the inhabitants in territory. Moreover, they can participate in the democratic process, meaning they can choose politicians and participate in political institutions. The opposite case occurs at another side of the border, in Mexico, where the people lacks the welfare conditions than their northern neighbors have because of the different institutions' structure (Robinson, 2012). The mentioned case about the economic situation at the border between Mexico and United States displays not only the importance of the legal frame on welfare but also the importance of other types of institutions, such institutions for education, in order to improve the economic and social conditions of any state, discarding any cultural and cultural difference on which a possible justification could base. On the evidence of those present, this case repeats again in each country in the world, showing up the dependency of the economy on institutions.

The degree to which a country is economically united with the other countries and the quality of institutions is caused by endogenous causes, in relation to other country and to geography, but also to revenue levels. Problems of endogeneity and opposite connection obstruct the research among the causal factors (Rodrik, 2003). The institutions are affected by geography, the income level and the level of integration, and in the same way, the institutions have an effect on the income level and the integration level. In figure 1, the relations between endogenous and exogenous economic variables are showed up together. In this case, the geography is categorized as an exogenous variable and the income level, institutions and the integration are formed a group of endogenous variables, assuming the integration as the level of competitiveness of economy for international trade, based on the performance of each state.

Figure 1 Determinants of income

Source: Rodrik 2004 (p. 134)

Going further into the figure, the Geography is considered as an exogenous determinant and influences the economic performance, in the same way, obtaining a direct outcome on revenues, through the influence on agricultural, mineral and resource productivity, even influencing the human being through the food providing (arrow (1)). The Geography could affect the distance from markets and the structure of communications, e.g. a country with mountains, with jungle and without sea access seems to have difficulties on market, and the extent of integration (arrow (2)). It has also an impact of the quality of institutions (arrow (3)), where there historically were disadvantageous consequences for institutional development of engendered extreme inequalities and enable the entrenchment of a reduced group of elites (Engerman, 1994).

Following the determinants of income, the integration impacts directly on the income level in the same way as on the development of institutions (arrows (4) and (5)). While the other are the relevant ones, reverse feedbacks from incomes and institutions are considered relatively unessential (arrows (6) and (7)), but the institutions and the productivity can cause a higher level of competitiveness, rather than a cause thereof. The rule of law, the improvements in property rights and other characteristics of the institutional frame are a self-regulating element of incomes (arrow (8)), but can also be the consequence of high income. Although the model is more oriented into the competitiveness of an economy-related to the external market, some of the evidence suggests an important role from the institutionalist point of view. In practice, there is an evident institution-income-integration axis, there is no strong economy without a resistant entrenchment of institutions either a capable competitiveness level on international markets.

Advancing on the topic, the model of the determinants of income holds research support under Acemoglu’s and Rodrik’s OLS Sample. Firstly, the Acemoglu Sample is about surveys on countries who had been colonies through history, it deals with 73 countries. Secondly, The Rodrik Sample summons up more countries for surveys, involving not only the colonies mentioned by Acemoglu but also other countries, ending up with 119 countries. Rodrik states they are all the countries around the world, ignoring states under special circumstances or with the minuscule geographical field. On table 1, after completing the research, both samples connect the determinants of income to the effects on economic development per worker.

Table 1 Determinants of development: Channels of Influence

Source: Rodrik 2004 (p. 147)

Based on OLS regression which is debatably the most commonly used technique for appropriate linear statistical representations. An OLS regression model represents the resulting: Yi = β0 + β1 Xi1 + β2 Xi2 + … + βk Xip + εi, where Yi is the outcome variable, 0 is the regression constant, Xij is the case i’s a score on the jth of variables in the model, βj is predictor j’s partial regression weight, and εi is the error for case i (Hayes, 2007). The values in parentheses display up to the standard error, showing up the trustworthiness of the value above thereof. The R-value corresponds to the correlation between the results. The asterisks mean the significance of the result.

On the table of the determinants of development, a close correlation between institutional development and the income per worker, capital per worker, human capital per worker and the productivity factor for both samples are founded out. In comparison with the samples, the role of institutions had a more solid impact on salaries and production of workers of former colonies as of no-former colonies, but in any case, the effect on is positive, compared with the influence of geography and integration on the salaries and productivity, which is characterized to be negative, even so, the impact of them on former colonies is sturdier. In order to classify, the current influences from above to bellow insignificance are institutions (+) and integration (-), according to the results, there is no meaning of geography.

Criticizing the corresponding model in general, on the one hand, there are states with plenty of natural but lack economy development resources is most of the countries have petty of resources but they are not well developed. On another hand, there are states with an absence of natural resources but they are economically industrialized. Another aspect to be considered, the institutions should get along with human rights, in the case of a dictatorship, or with personal data protection affairs. In reality, some countries comply arguably with the requirements of the World Bank or any international institution, even so, they do not receive the results they expect. Adding in, there is a big question about free trade or putting up commercial restrictions.

2.2. Welfare

The welfare and the welfare state have their origins after the first industrial revolution and the expansion of social needs through the democratic process, requiring an evolution of institutions complexity and state capacity to match them, meaning more social and administrative expenses (Conceição and Bandura, 2008). Starting from the premise, the welfare state is caused by economic development and thus, in consequence, the creation of new needs. The degree of country development has an influence on the welfare state and the definition of goals. In short, if the state wants to grow up, the future needs have to be created and thus the social spending of the welfare state has to increase. In the end, a self-fulfilling vicious circle is created and is difficult to break out.

As the course of the industrialization process, in the theory of modernization, the labor and social rights gained more importance because of the access to the social-political process through political participation in social-democratic parties, serving as the base of the welfare states. The industrialization and modernization approach is increasing each day, being essential and irreversible (Claudia and Costin, 2018). Two different theories about the behavior of the social state are formed. On the one hand, the industrialization theory supports the development of the social state through the originated needs from economic development (e.g. as a result of the industrialization) that the state has to cover. On the other hand, the modernization theory provisions the development of the social state through the social changes and the democratic process (e.g. exigencies to social-democrats) whose exigencies have to be fulfilled. In short, both theories, industrialization, and modernization, represent the changes from the time of industrialization and as a result the technological change thereof. The modernization theory is highly related to the political changes and the democratic process, enforcing the obligations of the welfare state to cover the demanded social needs. Seeing it from that point of view, the welfare state is the result of the success of social development, offering more help to the citizens to achieve their purposes in life.

The welfare state could divide into three different types, focusing on the industrialized western states. At the same time, it could be divided into three different emphases: the social-democratic welfare state is in the Scandinavian region. the liberal welfare state is in the Anglo-Saxon community, the conservative welfare state, displaying the models of the social-democratic, liberal and conservative world (Esping-Andersen, 1990). In the liberal states, the market has a priority, social rights and social benefits are comparatively underdeveloped. The conservative state follows the tradition of different gilds, beneficing specific segments of the population. The social-democratic state is financed by a considerable amount of taxes, with the following advantages: more benefits than in a liberal state, equal distribution of benefits, and universal public services.

2.2.1. Human Development Index (HDI)

There is something in question, what are the most significant characteristics of poverty and welfare and how are they optimally measured? Over the last 50 years, the discussion of this subject has encouraged from welfare as economically resolute to wider conceptualizations of poverty, from seeing the means of welfare to analyzing the consequences, from recognizing needs to perceiving rights, from few indicators to many, and from a reflection to a central emphasis of the development discourse. In each decade since the 50s, the central meaning and measurement of welfare have been molded by the dominant context and the training of development (Sumner, 2004). In table 2, the meaning of welfare over the decades has changed, from beginning from GDP growth to using the application of HDI and other newfangled concepts. Seeing the changes from a merely economic approach and more income related to the aggregation of institutional features, such as education and health. It also implies, the meaning of welfare will change in the future a change in the future. The meaning of welfare will be related to more human-being-integrated aspects. Being beyond the question, are the given meanings appropriated to the definition of welfare? Do these terms apply in the future?

Table 2 Evolution of the dominant meaning and measurement of welfare¹

Source: Sumner, 2004, (p. 4)

Observing at the evolution of the dominant meaning and measurement of welfare, the use of HDI is getting a practical measure because it contains the factors health, education and income, and these factors can be measured with other countries, even the HID would apply for small region designations, such cities and federal states. Different from that, the MDGs contains a limited perspective, related to the extent of economic development, and the dependency on international standards, after the MDGs are completed. Once the MDGs are achieved, the states have to reestablish new goals and then they have to communicate together, in order to synchronize their goals with the international standards.

The HDI was shaped to highlight that people and their competences should be the definitive standards for determining the development of a country, even not using economic growth (GDP or GNI) alone. The HDI is called for to request nationwide policy election, inquiring how two nations with the equivalent level of GNI per capita can result with diverse human development consequences. These differences can kindle discussions about government strategy primacies. The HDI is a summary quantity of regular success in key dimensions of human development: long and healthy life, knowledge and have a decent standard of living. The HDI is the mathematic application of standardized indices with three dimensions (UNDP, 2019). Even with the use of HDI as a welfare measure, there is no representation for human being satisfaction. The human development is a long way different from the economic growth, in other words, the income level does not represent the development as a human being. Another aspect to be considered, even the HDI contains important elements in education and health, beyond the income measure, the index does not contain any relationship with happiness. The happiness does not have a significance in the measure of HDI. In short, the HDI dimensions can be close to human-being satisfaction, but there is a long way to go for implementing the happiness factor as a welfare measure.

Besides the GNP and GDP per capita, which control the economic aspects without considering the social-economic characteristics, these indicators are getting along with the HDI as the expression of human welfare. The presumption of the negative relationship between income and human welfare such as environmental, work-life, leasure considerations could play a role in happiness level (Claudia and Costin, 2018). There is always the contradiction between the economic improvement and the state of happiness, considering it as cliché and affecting on the debate of welfare measure. By the way, the everyday life of the people, the balance between work and family are important to be considered.

In figure 2, it shows up the main dimensions of the HDI. This encompasses up the health structure, the education level and the level of income have an important role in HDI. These dimensions correspond to the according to indicators e.g. life expectancy, expected years of schooling and mean years of schooling, and in the case the GNI per capita (PPP $). This model highlights the following aspects and called into question: the exclusive use of GNI as the income input for the formulation of the HDI, the relationship between life expectancy and quality of life and the relation between the years of schooling and the education.

Figure 2 Human Development Index components

Source: United Nations Development Programme (UNDP), 1990

The proposition of a method of calculating the HDI is based

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