Ghost Economics Spook Uribe’s Colombia

As Bogota’s Financial Pyramids Crumble, Uribe’s Face Turns Red as Questions Remain
While the world focuses on the next phase of its financial crisis, Colombia is finally coming to terms with its own home grown tale of impunity, exuberance and ineptitude. Until November 13th, the issue of its myriad pyramid schemes which, like so many other of the country’s problems can be found in its troubled history. This is an issue which had artfully evaded the full attentions of the country’s political and media elites in spite of its enormity. This scenario changed dramatically on the 13th of November when the offices of what seemed to be an increasingly popular “investment business” known as DRFE (Fast, Easy Money in Cash) were suddenly abandoned, with the owners mysteriously disappearing without trace. The company had successfully encouraged hordes of people to invest their funds in it, with the promise of significant returns within 6 months. The disappearance of the owners confirmed what growing numbers had long suspected – the “business” was little more than a fraudulent pyramid scheme, designed to convince as many as possible to part with their money, which was then spirited away, leaving behind shattered dreams and empty accounts. The anger felt by the deceived investors was only enhanced by the presence of taunting messages left outside the abandoned offices, mercilessly telling them that “now, you stupid, superstitious people, will have to work twice as hard just to recover what you gave us”.

“Dios Mio Gracias”: DMG´s Spectacular Rise and Fall
The resulting protests by the enraged victims induced the Government into finally confronting this troubling elephant in the room, the notorious multi-million dollar phantasmagoria known as DMG. It was named after its mercurial founder and owner, 28-year old David Murcia Guzman. Unlike DRFE and many of the country’s estimated 200 pyramid systems, DMG for three years consistently had been fulfilling its promises of rapid enrichment of its clients, and in fact, benefited hundreds of thousands of “investors.” DMG distributed prepaid credit cards to investors, with which they could buy various electronic-domestic products and other devices from selected retailers. In a remarkable twist on traditional brand name loyalty strategies, DMG then offered a return of 150-300% on the original investment within 6 months. In DMG’s commercial heartland in the province of Putamayo, up to 85% of its adult residents invested their savings in DMG, lifting its devoted subscribers out of poverty and allowing many to move away from coca cultivation. Some observers warned of the dangers of the resultant culture of idleness, easy money, and a recessive lifestyle but the overwhelming feeling within this neglected sector of the population was one of huge relief. Now able to pay for their education, healthcare, and home improvements, the people came to express the company’s initials as “Dios Mio Gracias” (My God Thank You).

The DMG Way
Within a short space of time, DMG expanded from Colombia’s south to its active metropolitan economic heartlands in Bogota, Cali and Medellin, while simultaneously rising from being an exclusive attraction to the poor, to becoming an increasingly attractive, if problematic, alternative for the country’s middle and upper classes. Despite persistent doubts over its legality, not to mention its financial sustainability, the country’s political establishment and society at large appeared almost amorously hypnotized by Guzman’s ostensibly miraculous ability to do the impossible: multiply people’s often modest savings to levels beyond their wildest dreams. The final collapse of DRFE, in addition to the pressure from Colombia’s orthodox financial sector (who had been nervously watching the increasing amounts of money being withdrawn from bank accounts in favor of investment in DMG), prompted the Government to seize DMG’s offices, while at the same time issuing arrest warrants for its managers. Guzman was dramatically captured in Panama on 18th November and extradited to Bogota within a matter of hours. Meanwhile, the Government promised to repay some of the citizens’ investments in exchange for turning in the necessary documents and handing back the prepaid credit cards. It opened up the Camping football stadium in order to expedite the return of the tainted funds to investors. Of course, the actual amount of funds found sitting in DMG’s immediate accounts amounted to far less than the amount owed to investors, meaning that, to date, it is far from clear how many people will get their full deposits back, if at all.

What Is Being Revealed?
These episodes, reminiscent of the magical realism highlighted by Colombian author Gabriel Garcia Marquez, open up serious questions concerning all levels of Colombia’s society. In many ways, DMG can be seen as maintaining a Colombian tradition of extra-legal “ghost economies,” operating in an atmosphere of legal impunity, and apparently defying conventional laws of economics in order to offer unimaginable benefits to otherwise neglected sectors of society. The extent to which significant amounts of the population have kept relying on ghost economies as the primary means of their economic advancement belies a reality far detached from the Government’s conventional discourse on economic growth and political stability along with a populace apparently immune to the often outlandish “populist” promises handed out by neighboring Venezuela and Ecuador. The majority of investors in DMG were poor Colombians who would not otherwise have benefited from the country’s high growth rates in recent years, making Guzman’s invitations to join “the DMG family” extremely attractive. In contrast to the venom now being directed against DRFE, average DMG investors at first mobilized in various cities to defend the company from what they saw as discrimination against the “poor people´s bank” by the Government. Protestors in Putamayo virtually paralyzed the province, targeting banks and government institutions, and even talked about separating from the Colombian state in order to allow DMG to keep operating.

Underneath questions over why it was so easy for DMG to build up such a committed support base lies doubts over the nature of the Government’s response to the phenomenon. While the authorities now openly accuse DMG of having links to drug trafficking and money laundering operations, this does not explain why the operation was allowed to carry out its activities in the open for over 3 years. One potential answer to this might rest in the company’s usefulness in satisfying sectors of the population which otherwise would not have benefited from the high economic growth registered during President Alvaro Uribe’s tenure:- good for statistics, good for Uribe’s political standing. In fact, the sheer quantity of people who benefited from DMG and other pyramid schemes raise questions about the Government’s claims to have reduced poverty with its free market policies. Alternatively, the Government’s inaction in light of these massive acts of fraud might be ascribed to basic cowardice – a clearly justified fear that any intervention would, and ultimately did, lead to concerted opposition to the Government. However, given Uribe’s highly pro-active style of Government (he is self-gratifyingly known for the refrain “iron fist, big heart”), and his willingness to aggressively confront “delinquents” such as the country’s guerrilla groups and drug traffickers, his failure to take any significant action against DMG for so long appears bizarre, if not downright strange.

Capturing the State
Perhaps the real answer behind Guzman’s ability to mesmerize the authorities in Bogota into over 3 years of inaction lies in the emerging revelations about his influence in the very elite circles which now condemn him. DMG went far beyond simply operating in the poorer sectors of society, as could be seen by the well dressed businessmen queuing outside the Camping stadium in desperate hope of recovering some of their funds. Various pillars of the establishment had invested money, or maintained healthy relations with the enterprise, from high profile politicians and businessmen, down to the celebrated soldiers who rescued Ingrid Betancourt and even the President’s children. By employing high profile lawyers and journalists, as well as financing regional politicians, DMG had managed to penetrate the inner circles of the modernizing, progressive, efficient Colombia so often portrayed by Uribe. It is now known, moreover, that Guzman ordered the formation of a “lobby” in Congress to guarantee the legal protection of DMG. This was all part of his strategy of co-opting power from the centre in order to allow his enterprise to keep functioning in impunity. Such events draw comparisons with the ability of Colombia’s drug traffickers to wield significant influence over Bogota’s major political actors since the 1980s.

Stupid People, Greedy Banks, or Something More Obvious?
Meanwhile, the debate as to the roots of the crisis has largely divided into two categories of critiques, both of which are somewhat lacking in explanatory power. For those on the right, wing, moralistic explanations are used to blame the DMG phenomenon on a culture of “lazy, ignorant” people, who prefer to take a risk than engage in hard work. The other explanation, more common among leftists, is to blame the problem on the restrictive nature of Colombian banks. The first theory is essentially unrealistic and contributes little to the debate. How many people in the world, particularly those living in poverty, would resist the opportunity to multiply their savings? What right do middle and upper class people, many of whom inherited their economic and educational status, have to lecture the poor on “easy” money? And while most people could sense that there must have been something illegal or immoral about DMG, it actually did operate legally in venues such as shopping malls, as well as in paying taxes; therefore, it was logical to conclude that it was no more “immoral” than any other aspect of the very thoroughly corrupted society found in Colombia. As for the financial system, it is indeed true that Colombian banks are generally restrictive in terms of the availability of credit, particularly when it comes to poorer sectors of society, but to conclude that the DMG catastrophe never could have occurred if the banking system had been more “progressive,” is illogical. A bank’s function is not to only multiply savings, and no bank in the world could possibly have competed with what DMG was doing. Moreover, in cases where individuals did get access to bank loans, they often invested those loans straight into DMG (the same was also true of many recipients of social services like Familias en Accion).

There are only two really clear policy implications to draw from the entire DMG affair. The first is that, as has been seen in the United States, deregulation of the formal financial sector invites recklessness, and simultaneously causes an accelerated deregulation of the informal and illegal sectors. Ironically, the deregulation of the financial system demanded by the banks worked against their own interest by weakening the regulating body that likely could have stopped DMG years earlier. The other, more profound implication, is that DMG provides the strongest proof yet of the catastrophic failure of Plan Colombia to weaken the grip of sordid illegal actors in the margins of Colombia’s economy and society. This thesis is nothing new: It has been known for years that eradication of coca in one area only causes a “balloon effect” of greater cultivation in other areas. Despite billions of dollars of investment, the quantity and quality of cocaine arriving at North American and European airports has not diminished, suggesting that its production and availability remains stable. Given that it is now widely accepted that DMG worked primarily by laundering profits from drug trafficking, we can infer its spectacular rise as good reason to believe that Colombia will never be free from the economic and social distortions of the drug trade until there is a radical rethinking of cocaine prohibition.

Colombia´s Uncertain Future
Regardless of such implications, the fallout from DMG and the pulverized pyramids left many Colombians waking up on New Year’s Day with a headache far worse than that typically associated with excess aguardiente on New Year’s Eve . DMG’s rise and fall revealed a face to Colombia’s society that had been proclaimed by Government officials to be a thing of the past, and its demise leaves behind a hard core of citizens determined to vote against a President they previously had adored. Along with other recent scandals such as the authoritarian treatment of indigenous protests, revelations about military commanders ordering the assassination of civilians in order to inflate statistics of killed “enemy combatants” the reconstitution of supposedly disbanded paramilitaries as “aguilas negras,” and an increasingly uncertain macro-economic outlook, the fallout from the DMG crisis, is enough to leave the country facing an increasingly uncertain future, with excuses and braggadocio some of the few weapons the government has at hand.