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Analysis
Colombia opportunities

Colombia opportunities

Post-conflict model for Latin America

by Ben Robinson in Bogotá

Tue 18 Apr 2017

Until 2008 the northern coast of Colombia was the scene of violent conflicts between paramilitary groups, guerrillas, drug gangs, and government forces. Today, it is a fast-growing tourist destination. The starkness of that contrast, and the speed at which it has happened, has been repeated across the country.

This progress is reflected in Colombia’s impressive growth figures. It is the fastest growing large economy in Latin America, averaging GDP growth of almost 5% a year in the decade to 2014 and almost 4% during the last five years. This is despite a fall in the price of oil which, along with oil products, makes up over 50% of the country’s exports.

This has been possible in part because, unlike elsewhere in Latin America, the Colombian government has a history of running sustainable fiscal policies and implementing structural reforms aimed at improving competitiveness. This meant that once peace came to Colombia, after the government’s 15-year-long negotiations with paramilitary groups, and after a deal was reached with the Revolutionary Armed Forces (Farc) in December 2016, the country had a firm basis on which to achieve rapid development.

Unemployment is below 9% and falling. The current account deficit has dropped to 4.8% from 6.5% in 2015. Consumer price inflation is below 5%, with the Banco de la República forecasting 4% by the end of 2017. This gives the central bank room to cut interest rates, which it has already done twice this year, bringing the benchmark rate down to 7%.

Macroeconomic stability has encouraged inward investment and diversification, with consumer goods, manufacturing and processing attracting growing interest. This is in addition to the historical focus of (mainly Spanish) investors in energy, telecommunications and banking. The government is pursuing a large infrastructure investment plan focusing initially on a $25bn road transportation project. As well as providing a substantial fiscal stimulus, this will lower the costs and time involved in making and transporting goods in the country – over 80% of all internal transportation is on Colombia’s poor quality and dangerous roads. This will improve the competitiveness of manufacturing and other industries, encouraging higher investment and greater diversification away from oil, mining and agriculture.

While change has come quickly to Colombia following the peace, vulnerabilities remain. The government has been unable to consolidate its power across the country, and effective control in many areas remains in the hands of paramilitary groups. The highly-visible presence of troops and police in cities and on main roads often does not extend into the vast rural areas.

Paramilitary groups have disparate aims. Continuation of the wary peaceful coexistence is far from guaranteed. As foreign money pours into the country, opportunities could arise for violent disputes between rival groups for control of newly developed areas. Protection racketeering of new businesses is already common in the areas around the busy port city of Santa Marta and elsewhere. Meanwhile, drug gangs remain prevalent in rural areas.

The political crisis in neighbouring Venezuela presents further challenges. Hundreds of thousands of Venezuelans have escaped to Colombia, sometimes to the resentment of poor local inhabitants. Should further economic, political or security shocks affect that country, many more people are likely to follow. A complete collapse in Venezuela would be difficult for Colombia to manage and could set the latter’s development back significantly.

Despite these risks, we should be more optimistic about Colombia’s prospects. Its fast growth means it acts as a magnet for its poorer neighbours. Local businesses increasingly look to Colombia as a trading partner and attractive investment location. In the political sphere, Colombian initiatives are holding increased sway among regional bodies. In physical terms too, Colombia is helping to integrate Latin American countries, recently opening the first low-budget airline between Bogotá and Quito, in Ecuador, and La Paz, in Bolivia.

The ‘pink tide’ of left-wing governments across the continent has ended, with Argentina and Brazil leading the move towards centrist administrations, structural reforms and renewed international financial market access. Colombia is in a good position to make the most of this transformation and to play a leading role in the next stage of Latin America’s development. It has already shown it has the capacity to make substantial changes quickly. If this success continues, it is likely to become an increasingly important voice on the world stage.

Ben Robinson is Economist at OMFIF.

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