Dutch Disease, Informality, and Employment Intensity in Colombia

From the first half of the 2000s until 2014 the Colombian economy was under the influence of an oil and mining production and export boom that triggered the potential for Dutch disease effects. This issue was at the center of important policy (and political) debates and merits attention due to its manifested and potential impacts on several dimensions of the economy. As the boom has the potential to induce shifts in the sectorial composition of the economy, it may have significant effects on employment dynamics and on the evolution of the employment intensity, especially when the informal sector is sizable. We study the potential effects of this boom, had it extended as forecasted until 2014, before the sudden drop in international oil prices in 2015. For this, we use a recursive dynamic computable general equilibrium model, calibrated to a 2011 Social Accounting Matrix of the Colombian economy, in which activities are differentiated in terms of their formal and informal components, and suitable details are included to account for the stream of income the government receives from the booming activities. We find that resource shift and spending effects from the boom are sizeable, leading to a relative drop in exports of non-boom sectors and to shrinking output for most sectors of the economy, while employment in the formal sector and for skilled workers is favored. Furthermore, we find that the policy package designed by the Colombian government to face potential Dutch Disease effects on the economy, has limited impact for ameliorating the resource shift and spending effects.