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Colombia: Outlook
Country Study > Chapter 3 > The Economy > Outlook

OUTLOOK


After experiencing a severe downturn in the second half of the 1990s, Colombia began forcefully addressing many of its most pressing problems in 2000. Since Álvaro Uribe became president in 2002, in addition to implementing the Democratic Security Policy, the government also has attempted to improve respect and protection of human rights and to involve the international community in the process of reestablishing peace, law, and order in the country. During this period, there has been improvement in indicators such as reductions in the number of guerrilla attacks in urban areas, the number of homicides and kidnappings, and the amount of land devoted to the production of illegal crops. There also have been increases in the amount of traffic on intercity highways and a reduction in attacks on the electric-power grid and oil pipelines. Although all these indicators have generated an improved social, political, and economic environment, it is not entirely clear yet whether such improvements will be sustainable in the long term.

As a result of these strategies, in the early twenty-first century the deteriorating trend in the fiscal accounts has been reversed, and the public-debt burden has been reduced. Likewise, economic growth has picked up significantly from its depressed levels of the late 1990s to 7.5 percent per year in 2007, the highest growth rate in 30 years, although growth has not yet remained at a high enough level for long enough to provide adequate employment to a growing population. Thus, unemployment, while lower than in 1999, is still quite high (9.9 percent in 2007), and poverty indicators, though improving, are still at very high levels. Notwithstanding the progress in recent years, many challenges remain, including the need to create the conditions to reduce poverty further and to improve income distribution.

Among the most important economic achievements of the last 15 years are the reduction in the rate of inflation to single digits, close to the levels prevailing in developed countries. This was no small achievement for a country that had sustained moderate two-digit inflation for almost 30 years. Other achievements include an improved allocation of resources in some sectors, such as electric energy and fuel, and the greater quantity, quality, and variety of goods and services available to Colombian nationals thanks to the increasing activity of the private sector as entrepreneur and of the state as a market regulator. Economic diversification has been impressive and not easily matched by other countries in the region. In only a few decades, Colombia went from an economy heavily dependent on coffee to a country with a fairly diversified export base. Even at extraordinarily high prices, oil, the leading export, accounted for just 26 percent of total exports in 2006.

Although the economy has recovered its momentum, many challenges lie ahead. In particular, Colombia’s potential rate of GDP growth must increase substantially if there is to be a meaningful and lasting reduction in the still very high levels of poverty. Enhancing the rate of potential GDP growth will imply challenges in several areas, including strict adherence to macroeconomic discipline, further progress on the structural reform agenda, and continued improvements in security. The main challenge to maintaining macroeconomic stability has to do with fiscal policy. Although the share of public debt over GDP has begun to fall, it remains high. Thus, fiscal and pension reforms will be key challenges in the next few years. Changes to the tax code, a reduction in revenue earmarking, a better distribution of expenditure responsibilities among levels of government, and a continuous updating of the reach of the pension system to better reflect demographic changes will be integral elements of any strategy to maintain sound public finances.

Colombia will also have to continue striving to become a more diversified economy, better integrated to international markets. In that vein, and besides taking an active part in all multilateral trade negotiations, the government is planning to broaden the scope of its preferential trade agreements, benefiting from the progress made during the negotiation of a free-trade agreement between Colombia and three other Andean countries and the United States.

Important progress has been made in recent years, yet there is ample room for further improvements in the business environment. Colombia’s government remains legislator, regulator, and entrepreneur in several sectors, such as oil and public utilities. These roles, which sit ill together, have developed despite some effort to create more transparency. Steps include the creation of the National Hydrocarbons Agency (ANH) and the sale of Colombia Coal (Carbocol). Despite some progress, there is much to be done in further improving the business environment, including developing the capital market, simplifying and stabilizing the tax regime, and strengthening and consolidating the financial sector.

Colombia will need greater integration with the world economy and further infrastructure development: better roads and improved ports and airports. In particular, better highways will be needed to connect Bogotá and other major cities and regions, other internal connections, and to link Colombia to Venezuela and Ecuador, and better local roads within the country. Colombia also needs improved options and infrastructure to reach Panama, Peru, and Brazil. The construction of the tunnel at La Línea remains a major challenge, currently being addressed, but making better use of Colombia’s rivers for transportation and optimizing the possibilities of its railroads are changes that remain necessary.

Clearly, enhancing physical capital will not be enough, and Colombia also will need to increase its human capital significantly. This challenge, which is not unique to any country, becomes even more pressing in a more highly integrated global economy. Even though Colombia has increased education funding and equity, improvements in efficiency are sorely needed. The application of international standardized tests is not generalized; the development of bilingual public education is in very early stages; and significant resources for tertiary education subsidize supply, rather than the removal of credit constraints on students on the demand side.

Improvements in information on (and focus, coverage, and efficiency of) Colombia’s social protection policies remain major challenges as well, despite the natural institutional barriers that operate under any democratic regime, and that are particularly strong in this area. Improving the quality of information in general will be a major challenge because it is not uncommon to find divergence in the data provided by different institutions, such as the World Bank and DANE.

Consolidation of peace and minimal security conditions within the country will be important to restore consumer and investor confidence across all sectors of the economy, and a boost for international tourism as a source of foreign exchange. As such, a major question is whether President Uribe’s Democratic Security Policy, which so far has yielded a short-term boost to the national morale as a result of its major breakthroughs—such as the submission to justice of the main paramilitary leaders; the deaths of three members of the FARC’s Secretariat in the first half of 2008; and the death, capture, or demobilization of many of the other members of the AUC and FARC—can become a nonpartisan and permanent policy, delivering long-lasting results.

In 2005 the Colombian government proposed a long-term program to commemorate the second centenary of independence in 2019. The program outlines long-term goals for 2019 and policies to significantly increase annual per capita income and to drastically reduce poverty, indigence, and unemployment. The process of achieving such goals is expected to eradicate illiteracy for people between the ages of 15 and 24, and to vastly increase Internet usage with broadband access, expand seaport capacity, and increase public areas for people living in urban centers. Whether these goals can be achieved over several presidential terms, without a national political commitment, remains to be seen.

Data as of 2010




Last Updated: January 2010


Editor's Note: Country Studies included here were published between 1988 and 1998. The Country study for Colombia was first published in 1988. Where available, the data has been updated through 2008. The date at the bottom of each section will indicate the time period of the data. Information on some countries may no longer be up to date. See the "Research Completed" date at the beginning of each study on the Title Page or the "Data as of" date at the end of each section of text. This information is included due to its comprehensiveness and for historical purposes.

Note that current information from the CIA World Factbook, U.S. Department of State Background Notes, Australia's Department of Foreign Affairs and Trade Country Briefs, the UK's Foreign and Commonwealth Office's Country Profiles, and the World Bank can be found on Factba.se.

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