Since 1979, Colombia’s annual GDP growth has been on average two percentage points lower than what was observed between 1950 and 1980. The sources-of-growth decomposition shows that this deceleration can be accounted entirely by changes in productivity. Indeed, between 1960 and 1980 productivity gains increased output per worker by nearly 1% per year. Since 1980, productivity losses have reduced output per worker at about the same rate. The time series analysis suggests that the im-plosion of productivity was caused by the increase in criminality which diverted capital and labor to unproductive activities. In turn, the rise in crime was the result of rapid expansion in drug-traffi ck-ing activities, which erupted around 1980. Conse-quently, the fortunes associated with the emergence of Colombia as the world largest producer of co-caine had a signifi cantly negative effect on growth and productivity. This explanation is supported by cross-country evidence that shows that Colombia’s underperformance, especially in the 1990s, is ex-plained by its high homicide rate.
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