Author: Nathaniel Parish Flannery
Posted on: Forbes| September 25th, 2017
Colombia, Latin America’s fourth largest economy, is a country that is experiencing dynamic growth in some sectors but is still characterized by immense inequality and deep seated social divisions. For half of century Colombia’s social conflict has played out on the battlefield between guerilla groups such as the Fuerzas Armadas Revolucionareas de Colombia and a national government that has pushed a centralized top-down approach to both economic development and peace-building. After decades of armed conflict the country is moving forward with a peace process which will see the FARC put down their guns and form a political party.
Colombia may be starting a new chapter. Between 2000 and 2016, Colombia received more than $150 billion in total foreign direct investment. Starbucks, Glencore, General Motors, IBM and PepsiCo have already opened new operations in Colombia. Foreign companies in the mining, tech, and agriculture sectors are now considering making new investments. According to Santiago Angel, the head of the Colombian Mining Association, “If we get the investment conditions we want…as an industry, we could again bring in between $1.5 billion and $1.7 billion a year, for a five-year investment of $7.5 billion.” The peace process may open new opportunities for investment and economic development but Colombia still faces a long and difficult road ahead. To discuss what’s next for Colombia I reached out to Nicholas Watson, a political risk analyst at Teneo Intelligence.
Nathaniel Parish Flannery: What are the regions and sectors you think might benefit the most from new investment if Colombia’s peace process improves security?
Nicholas Watson: The end of the conflict with the FARC will help open up previously off-limits areas of the country to exploration and development; this process has been underway for several years already as security conditions have been improving, but the peace deal with the largest guerrilla group will accelerate this opening. The sectors that stand to benefit most are agriculture, tourism, and extractives.
In agriculture, an average of 20,000 hectares of new lands were planted every year over the past two decades. From 2014 to the middle of this year, over one million hectares have been planted. Credit to agricultural smallholders doubled between 2011 and 2016. Cacao is often held up as a particular product that stands to benefit in the new post-conflict environment, but the government’s recent success in securing access for Hass avocadoes into the US market shows how other products enjoy better prospects; additionally, production of lemons, mango, and pineapple is expanding significantly this year. The government still has major challenges ahead to ensure these opportunities are not lost. Infrastructure improvements, particularly to the road network, remain urgent in many areas. Conflict-affected areas need to be better connected to urban areas and ports. Departments such as Arauca and Vichada, places which were once touted by President Juan Manuel Santos as Colombia’s potential «breadbasket,» remain poorly connected. Extractive sector performance and prospects depend on broader factors, such as mineral prices, that are out of the government’s control. However, the government needs to ensure it addresses companies’ concerns about bureaucratic red tape and the fiscal regime to attract mining and oil and gas companies. For example, the effective corporate tax burden remains relatively high, and continues to undermine business competitiveness.
Tourist arrivals increased by 70% between 2010 and 2015, and employment in the sector expanded by 17% in the same period. The potential exists for further growth in the coming years, given the diversity of Colombia’s tourism offering. The government needs to improve tourism infrastructure; for example, build up Santa Marta and Barranquilla on the Caribbean coast so that Cartagena is not the only major destination in this region.
Parish Flannery: Overall, how is Colombia’s economy doing right now? Do you expect that the FARC’s entry into politics will have any impact on Colombia’s economic policy?
Watson: The economy is doing relatively well compared to most regional peers, but recovery from the oil price shock remains sluggish. The IMF is forecasting growth of 2% this year. The good news is that the currency has stabilized, and inflation is now on a downward track after peaking last year; this has enabled the Central Bank to engage in sustained monetary loosening.
The FARC has as adopted positions of resource nationalism in the past; the group’s lead negotiator in the peace talks, Ivan Marquez, in 2012 at the opening of negotiations, launched into a memorable diatribe against foreign companies operating in Colombia, particularly in the extractive sector. Although Marquez and others within the FARC appear to have softened their opposition to foreign investment in the intervening years, the FARC is likely to exploit any community opposition to extractive projects, for example on environmental grounds. The FARC is also likely to oppose greater trade openness. However, though the new party, which is also called the FARC, will automatically hold ten seats in Congress from 2018, the party will be unable to block legislation or obstruct economic policy-making on its own.
Parish Flannery: Over the last twenty years how much progress has Colombia made on improving social inclusion and reducing poverty and inequality?
Watson: Considerable progress in tackling inequality has been made over the last 20 years, particularly in access to health services and education. Solid economic growth rates, relatively low inflation, and other advances such as employment formalization, have helped reduce both poverty and inequality. But the fight against poverty has been steady rather than dramatic; from 2015 to 2016 poverty when measured by income actually rose slightly. In addition, structural socio-economic inequalities persist. Colombia is still the eighth most unequal country in the world, according to the UNDP.
Land ownership is one of the major causes of inequality; Oxfam last year released a report – based on the 2014 census – confirming that Colombia has the highest concentration of land ownership in Latin America. According to Oxfam, just 704 landholdings accounted for half the total land area, about 111.5 million hectares, that was covered in the census. The remaining half is distributed among over two million landholdings. The long-running conflict actually succeeded in worsening land inequalities. Gender inequality also remains an issue, while inequalities between different regions are also pronounced.
The challenge for the government is to direct its resources as accurately as possible. Subsidies aimed at reducing poverty and inequality were worth around 9% of GDP in 2015, but are often misdirected, while too much goes towards pensions. The FARC’s entry into mainstream politics will help focus government attention on previously overlooked and marginalized areas of the country which represent the former guerrilla group’s core constituency. That underscores how tackling issues of inequality will be absolutely critical to consolidating peace.