COLOMBIA
What are the issues facing Columbia Today?
Colombia’s Infrastructure Gap
Colombia officially the Republic of Colombia, is a transcontinental country spanning South America and an insular region in North America.
Despite its history of domestic conflict, Colombia managed to become the 37th member of the Organisation for Economic Co-operation and Development in 2020. While the impacts of COVID-19 on the country’s economy resulted in a 6.8% GDP decline for that year, according to the World Bank, this may be followed by a rebound in 2021 and 2022.
Still, significant longer-term challenges are likely to remain - such as the need to reduce inequality and poverty, and to increase security and achieve a stable peace with demobilized FARC guerrillas.
It is clear that humanity’s most important challenge is climate change. All countries, to a greater or lesser extent, are working (or pretending to work) on decarbonization, the energy transition, and green growth. Colombia has made ambitious commitments on its CO2 emissions following COP26. Although the energy transition is likely to become a critical component for economic growth and emission reductions, deforestation in the Amazon remains a pending issue.
There is skepticism among environmentalists, communities, and international partners about the current government’s ability to translate its ambitious announcements into concrete measures. It is likely there will be greater pressure on the next president to lead on the ratification of the Escazú Agreement, fight against illegal mining, and confront the legal actors behind Amazon deforestation such as the livestock industry.
Colombia’s overtaxed and inadequate infrastructure must be addressed, if it is going to be able to sustain its economic growth and continue to improve the general quality of life. It ranked 81st out of 141 countries in terms of overall quality of infrastructure in the WEF’s Global Competitiveness Index for 2019, 92nd in terms of transport infrastructure in particular, and 91st in terms of the percentage of the population with access to electricity.
A lack of infrastructure investment is hindering the country's sustainable development. Colombia generally has low road network density compared with other countries in the region, and depends heavily on road transportation to move freight because the development of rail and river infrastructure is at an early stage. This translates into relatively high shipping costs, high commodity prices, and high prices for consumer products - all of which undermines productivity and competitiveness.
Colombia has seen a recent increase in both public and private infrastructure investment, however. Key projects have included the Ruta del Sol highway that connects the nation’s capital with large urban areas in the country's interior, and with the Caribbean coast.
The Colombian government created the Financiera de Desarrollo Nacional, a semi-public finance institution that is designed to better support infrastructure. The government has also developed a new regulatory framework for public-private partnerships, and steps have been taken to better facilitate capital deployment to public infrastructure - as well as to bolster efficiency and transparency in the bidding for projects.
In 2013, the “fourth-generation” (4G) program was introduced, which involves more than 30 concession projects and the construction of more than 1,200 kilometers of additional highways. As part of the program, the government set investment targets for the year 2021 of approximately $25 billion for road infrastructure and up to $100 billion for transport infrastructure.
Dozens of projects have been awarded, and they are expected to help reduce travel times by up to half while boosting national GDP growth by 1.5% annually. However, in order to best support the 4G program the infrastructure sector must be increasingly professionalized, policy-makers must help unlock additional investment capital in sustainable ways, and solid guarantees must be provided to long-term investors.
Education, Science and Technology
Colombia’s innovation economy is constrained by issues with its education system. In order to improve the quality of education in Colombia, both increased investment and the efficient and equitable use of those funds is essential.
Access to primary and secondary education in Colombia has improved, and post-secondary education opportunities such as university programs have expanded. However, according to Fedesarrollo, a research institute, persistent inequality in terms of both education access and the quality of education have particularly affected low-income populations in marginalized rural areas, and members of ethnic groups.
Guidance should also be provided to the lowest-performing schools and teachers, and priority should be placed on rural areas with higher rates of poverty. The Colombian government should implement policies aimed at attracting, developing and retaining the best teachers, and teachers' salaries should be comparable to those offered by other competitive professions.There are also inequalities between socio-economic classes when it comes to academic performance. The World Economic Forum’s Inclusive Growth and Development Report 2015 noted that just 1.5% of students from poor backgrounds in Colombia placed in the top quartile on the OECD’s PISA math assessment, compared with figures ranging between 12% and 15% in countries such as the Republic of Korea and Singapore.
Total research & development investment in Colombia in 2015 was equivalent to just 0.2% of GDP, well behind the OECD average of 2.5%. The WEF’s 2017 report Bridging the Skills and Innovation Gap to Boost Productivity in Latin America suggested providing tax incentives to firms that conduct R&D, regardless of their size, supporting public-private funding schemes for basic and applied research and skills development, and forging stronger links between academia and businesses.
Other issues that must be addressed include a lack of access to venture capital funding, and a need to strengthen intellectual property rights.
That means the country’s talent pool is not being fully utilized, according to the Organisation for Economic Co-operation and Development (OECD)’s Colombia Country Note Education at a Glance 2017. While only 22% of adults in the country have a tertiary (from a university or trade school) degree, too many students have been enrolled in higher education programs relative to more practical technical education programs.
Colombia's Middle Class and Inequality
A 2015 Organisation for Economic Co-operation and Development report noted that income for the top 10% of the population was 37 times greater than the income drawn by the bottom 10%, and that Colombia’s severe inequality is being driven by persistently high unemployment, a large informal (unregulated, or grey) economy, and a broad variation of wage levels within the formal economy.
A significant portion of the country's population lives below the national poverty line. The prevalence of the informal economy in Colombia hinders poverty reduction efforts, and the growth of the country’s middle class.
With roughly 50 million inhabitants as of 2020, Colombia is the third most populous country in Latin America behind Brazil and Mexico. Colombia’s middle class grew to an estimated 28% of the population by 2016, up from 15% in 2006, according to Family Legacy, a report published by the Inter-American Development Bank. However, despite achievements in poverty alleviation, almost 28% of Colombians still live under the national poverty line, and the country continues to have one of the world’s highest rates of economic inequality.
The recent expansion of the country’s middle class is partially explained by an increase in formal employment, due to fiscal and labour market reforms. These reforms have also pushed unemployment in the country to historic lows. The middle-class expansion is also due to strong recent economic growth in Colombia, which the IDB estimated was responsible for more than 90% of the reduction of extreme poverty that occurred between 2002 and 2013.
Targeted government loans and social programs have also played a role in the positive trend, which could be furthered by boosting the redistributive impact of the country’s tax system, and by implementing more targeted social spending.
According to the results of a 2016 survey conducted by Colombia’s National Administrative Department of Statistics, only 38% of all workers were accounted for in the regulated, formal economy at that time, while around 42% were self-employed (a category that includes a significant amount of informal work).
Informality curbs contributions to Colombia’s pension system, and may also pressure employer-funded retirement schemes by deepening tax distortions. According to research published by the IDB, rampant informality in the country is caused by the relatively high cost of official labour, a skills gap due to weaknesses in the job training system, and an ability to frequently rotate between formal and informal work.
Based on the current system, by 2050 a lack of retirement savings in Colombia could affect between 50% and 80% of people older than 65. Pension reform is necessary; the system in Colombia has problems with adequacy and coverage, and it runs a deficit equivalent to about 3.5% of GDP annually. Contributory pensions, where employees contribute funding to a scheme, only cover 32% of Colombian workers, a lower level than in other Latin American countries. About 92% percent of pension subsidies in the country benefit just the top 40% of Colombia’s earners, due to issues with fragmentation and administrative costs.
Building Peace in Colombia
The prospect of sustainable peace offers an opportunity to reap social and economic dividends. A government study estimated that achieving peace would boost annual GDP growth by up to 0.3% over the following decade thanks to increased foreign and domestic investment, more consumption, a tourism boost, and business expansion into more remote regions.
The peacebuilding process entails complex challenges, however. Dissident factions of the Revolutionary Armed Forces of Colombia (FARC) have refused to demobilize, for example, and in late 2020 hundreds of demobilized guerrillas marched in Bogota to demand an end to the killings of former combatants.
After more than half a century of violence, the Colombian government and Revolutionary Armed Forces of Colombia (FARC) guerrillas reached a peace agreement in 2016. A revised peace deal was subsequently ratified by congress, though critics argue that it provides excessive political and judicial benefits to former FARC leaders. The FARC, which has retained its acronym as a political party, performed poorly in national elections held in 2018 - though it was guaranteed a handful of seats in congress as part of the peace agreement.
Achieving the right balance between peace and justice, and properly integrating former combatants into society will require significant public faith in political processes - and efficient institutions.
In addition to guarantees of political participation, the peace agreement includes measures to support social and economic development in rural areas, provide reparations, and eliminate the illicit drug production that was one of the former guerrilla group’s main sources of funding. The end of hostilities with the FARC promises to generally improve security and respect for human rights in Colombia while curbing drug trafficking.
A truly comprehensive approach to improving domestic security in Colombia will also require dealing with the powerful criminal groups known as “Bacrim” - such as the Urabeños, and the still-active National Liberation Army (ELN). Government talks with the ELN resulted in a ceasefire, though the guerrilla group committed a series of attacks when the deal expired in January 2018, aimed at infrastructure and the military.
The government must increase its capacity to deliver basic social services across the country (in conflict-affected regions, in particular). Public-private partnerships should play a role in this, by catalyzing broad economic and employment growth (the Colombian government has estimated that the implementation of the peace agreement may involve spending the equivalent of 15% of GDP over the course of several years).
Institutions and Public Finance in Colombia
COVID-19 has threatened to expand the country’s already sizeable informal workforce, while stalling tax reform efforts. The public perception of corruption has meanwhile been relatively high - more than half of the people surveyed in the country thought corruption had increased during the prior year, according to a report published by Transparency International in 2019.
About half of all wage earners in Colombia are believed to work in the informal, or grey economy - where they generally contribute little or nothing to the tax base while enjoying relatively scant social protections. As COVID-19 spread throughout the country in 2020, it sent the official unemployment rate above 20%, potentially further expanding the informal economy at the expense of regulated sectors that could aid fiscal stability. The pandemic has also threatened to undermine faith in public officials and institutions, and anti-government protests continued despite coronavirus-related mobility restrictions.
Public trust in the government had faltered even before the pandemic; the results of a 2017 YanHaas survey showed that 70% of respondents in the country did not have a positive opinion of government institutions and believed Colombia’s Supreme Court of Justice was not doing a good job, while 80% of respondents had a negative opinion of congress.
Tax evasion is a significant problem in the country; it is estimated to equate to 4% of GDP even when only taking into account income and value-added tax. According to the Organisation for Economic Co-operation and Development, Colombia collected far less in taxes as a percentage of GDP than the OECD average in 2015. Meanwhile, tax expenditures are relatively high (close to 4% of GDP). Amid declines in oil-related revenue, the Colombian government has in the past been forced to implement tax increases (a comprehensive tax reform in 2016 increased the value-added tax rate, and taxed dividends). However, as the pandemic began to have a broad economic impact in the country in early 2020, efforts to pursue further tax reform and shore up government finances were set aside.
According to the Inter America Development Bank, Colombia must look for ways to broaden its base of taxpayers, introduce e-invoicing (in order to combat VAT evasion), and increase inspections and audits of taxpayers. Only by actively addressing tax evasion will it be possible to progressively increase the government revenues necessary to combat health crises, provide fiscal sustainability, and support growth.
Economic Diversification in Colombia
With industries like oil and coal accounting for more than half of its exports, Colombia is particularly susceptible to commodity market fluctuations. Commodity dependence has stunted the country’s economic growth. Colombia still depends heavily on natural resource-intensive industries for its economic growth. According to the CIA World Factbook, as of early 2018, the country was the fourth-largest oil producer in Latin America, and one of the world’s main producers of coal.
One obstacle to lessening dependence on extractive industries, however, is that Colombia has not yet taken full advantage of its trade agreements. Its agricultural sector has meanwhile stagnated; agriculture as a share of GDP fell from 8% in 2000 to 6.2% by 2017, and the sector’s growth has been relatively sluggish. More closely tying agricultural output to global value chains could help diversify the economy - and help reduce inequality.
Farmers and indigenous communities need to develop more sustainable land-use practices and forest conservation mechanisms, and a more comprehensive approach to rural development is required to reduce protracted regional disparities. The Inter-American Development Bank recommends directing more public investment to the sustainable development of rural areas, formalizing of land ownership titles, and the expansion of credit for small farmers.
A 2018 report published by the IDB cited access to finance as one of the greatest potential obstacles for companies in Colombia, particularly small- and medium-sized enterprises. While small- and medium-sized firms represented 99% of the country’s business sector and 35% of GDP as of 2015, these companies only received 14% of all commercial loans (reasons for these include shortages of eligible collateral).
Colombia’s travel and tourism sector present another key opportunity for diversification (at least, for the post-pandemic period). The number of foreign tourists traveling to Colombia has surpassed global and Latin American averages, and according to government, figures tourism accounted for 1 in every 11 jobs in the country by 2015.
According to the World Bank’s World Development Indicators, the spread between the average active rate paid by borrowers and the passive rates paid by lenders exceeds 7% in the country; it is only about 1.8% in Chile, and close to 3% in other, similar economies. This situation is partly caused by the distortions stemming from the concentrated nature of Colombia’s banking sector. The cost of taking out a loan is high in Colombia generally, compared with other emerging economies.