draining development.pdf - Khazar University

Illicit Capital Flows and Money Laundering in Colombia 151loans from the financial system. Upper-income groups account for alarge share of this population segment.Colombia experienced a financial crisis in 1999 caused by a significantchange in the way mortgage balances were estimated. In response topersistent high inflation rates, a constant value unit system was establishedin the early 1970s. In essence, this set a fixed interest rate on mortgages,although the principal could be adjusted according to inflation. In1999 in the midst of a financial crisis and high interest rates, the adjustmentmechanism was changed, and interest rate levels were used insteadof inflation. The values of the principal in mortgages ballooned, andmany borrowers found themselves with mortgages that exceeded substantiallythe value of their properties; the real estate market collapsed.In 1999, Colombia, for the first and only time in the postwar period,showed negative growth in GDP (−4.2 percent). After the financial andreal estate crisis, financial institutions had to clean their portfolios, andtheir total credit exposure declined. Using annual data, Tafur Saiden(2009) shows that, during the 1990s, the ratio of credit to GDP increased,reaching 37.9 percent in 1998. Then it dropped sharply, to the 24–25percent range in 2002–05. 4A tax on financial transactions that was raised from 0.002 to 0.003percent and then to 0.004 percent was earmarked to support the troubledfinancial sector. The government, however, found it an expedient sourceof funds and maintained it after the crisis was over. Today, it gathers inabout 1 percent of GDP (Marulanda 2006). Increases in service costs,including many hidden fees, were another response of the financial sectorto the crisis. Bank charges now include account management fees, fees touse ATM machines, and even fees to consult balances on ATM machinesand the Internet, among many others. Moreover, the interest intermediationgap is probably the largest in Latin America. 5 The penetration ofbanking services in Colombia faces other obstacles, such as the fear ofphysical assault following a deposit withdrawal or cashing a check. Thistype of crime is so common that the police are now offering protectionon demand to bank customers who make large withdrawals.Land concentration and the lack of territorial controlThe lack of territorial control by the central state has facilitated thegrowth of power among local groups. Left-wing guerrillas (Ejército de