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Once beleaguered Colombia now a success story

5th December 2014

By: Keith Campbell

Creamer Media Senior Deputy Editor

  

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The successful economic performance of the South American country of Colombia, while founded in incremental reforms carried out over several decades, was significantly boosted by a number of major reforms and developments in the 1990s and early 2000s. Thus affirms Colombian economist and executive director of the Bogotá-based think-tank Fedesarrollo, Leonardo Villar. These reforms and developments were the granting of independence to the central bank, fiscal reform and a greatly improved security situation.

Since 1981, Colombia has had the third-fastest economic growth rate in Latin America; since 2005, it has been classified as an upper middle income country; inflation today is running at about 3% a year (between the 1970s and 1990s it averaged 20% to 30% a year); and the country’s external current account deficit is entirely covered by foreign direct investment inflows. The national investment rate has been growing fast since 2000/1, from 15% of gross domestic product (GDP) then to about 30% now. Colombia’s GDP grew by 5.4% in the first quarter of this year and the forecast growth for 2014 as a whole is 4.7%. Fedesarrollo predicts GDP to grow at 4.5% next year. This compares well with other Latin American countries. The unemployment rate is 8.4% and the overall poverty rate is 9.1%.

“Since the central bank was granted independence in the new Constitution of 1991, the bank’s board of directors has been required to focus on achieving and maintaining low inflation,” explains Villar. “The attainment of low inflation has allowed the central bank to provide flexibility to the exchange rate and this has proved to be very useful to manage the economic cycles and to allow for contracyclical monetary policies.”

The fiscal reform implemented an ongoing programme of austerity. The reform took the shape of a “fiscal rule” that required (and requires) that the country’s structural deficit be reduced each year in relation to the year before. At the start of this century, this was supplemented by controls imposed on departmental (provincial) and local governments, preventing them from accumulating too much debt. (It should be noted that Colombia has a small State, with the country’s overall tax burden being only 19% of GDP and there is only one significant State-owned business, the national oil company Ecopetrol; the main economic role of the State is regulation.)

The improvements in the security situation since the turn of the century have been great. In 2002, the homicide rate was 70 per 100 000 people; today it is 33. (South Africa’s official murder rate for 2012/13 was 32.2 per 100 000 people.) The rate of kidnapping today, although still high, is only 10% of what it was ten years ago. The current peace process between the government and the FARC (Revolutionary Armed Forces of Colombia) and ELN (National Liberation Army) guerrilla groups is, despite hiccups, making good progress. Moreover, successful military, intelligence and police operations over the past decade have greatly weakened both groups. Although drug trafficking remains a problem, the once notorious cartels are no longer a problem, having been shattered years ago.

Despite the conflict, Colombia has been a democracy since 1958 with regular elections for President and Congress. And the current peace process is not the country’s first. The 1991 Constitution was the result of peace talks between the State and some guerrilla groups, the most important of these being M19 (19th of April Movement). That Constitution, in addition to granting independence to the central bank, increased political decentralisation, introduced elections for department governors and increased fiscal transfers to regional governments. And some former M19 members are now leading democratic politicians in Colombia.

But the country still has problems. While the overall poverty rate is, as mentioned above, 9.1%, the rural poverty rate is much higher at 19.1%. Moreover, rural poverty is not spread evenly over the country, but is much higher in the country’s coastal and eastern periphery regions. (Colombia’s most prosperous area is its central region, where most of the big cities are located.) This is partly the result of poor infrastructure. In an index of 148 countries, Colombia ranked only 130 in roads, 113 in railways, 110 in port infrastructure and 96 in air transport. The country has a very difficult geography, with lots of mountains and jungle. Further, the country’s State educational system performs very poorly – it is one of the worst in Latin America, a region notorious for its poor public education systems.

To deal with the inadequate infrastructure, the government is planning a massive programme to build 8 000 km of roads. This will require an investment of nearly $25-billion. This will be done through public–private partnerships, with most of the investment coming from the private sector (so the roads will be tolled) but with government subsidies to make the projects financially viable for the investors. The government is also planning an ambitious educational reform programme. This will improve the qualifications of the teachers and keep children in school for longer.

Villar recently addressed a meeting of the Centre for Dynamic Markets at the Gordon Institute of Business Science, in Johannesburg.

Edited by Martin Zhuwakinyu
Creamer Media Senior Deputy Editor

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