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Colombia: Closing the Equity Gap

Can Colombia's new president Juan Manuel Santos close the equity gap?


August 10 provided a great photo opportunity for both Colombia's new president, Juan Manuel Santos, and his Venezuelan counterpart, Hugo Chavez, each smiling and jovial. Meeting in the Colombian city of Santa Marta, the two leaders agreed to restore diplomatic ties, which were severed earlier in the summer after Santos's predecessor, Alvaro Uribe, accused Venezuela of harboring left-wing Revolutionary Armed Forces of Colombia (FARC) rebels.

But smoothing Colombia's relationship with its feisty Andean neighbor hasn't been the only item on Santos's agenda since being elected in a landslide victory in June and inaugurated in early August. Santos won June's run-off election amid promises to voters he’d attack Colombia’s deep social problems, which are widely believed to be root cause of the violence and criminality that have plagued this country for decades. Since his inauguration in August, he has begun acting on those promises, rolling out an ambitious slate of proposals.

While some critics say the reforms don’t go far enough, most applaud him for putting complex social issues, such as agrarian reform and informal employment, before the public in a way not seen during the Uribe administration – or any other since President Carlos Lleras Restrepo in the late 1960s.   With his proponents controlling 80% of the seats in Congress, there’s a good chance much of Santos’ agenda will become law. Senate President Armando Benedetti says members of Congress are on the same page as the president in the need to address the nation’s social and economic divide. "Inequality has been a problem since Colombia’s independence [in 1810] and it’s what has caused the violence throughout our history," he says. "If the violence is ever to stop, inequality has to be addressed.”   A Safer Place   Hand in hand with Santos's promises of social reform was a vow to consolidate and add to the security gains made by his highly popular predecessor, Alvaro Uribe.Boosted by US$7 billion in U.S. military and development aid under “Plan Colombia” -- making the country one of the biggest recipients of U.S. aid -- the armed forces pushed leftist rebels deep into remote mountains and jungles during Uribe’s eight years in office. That led to significant reductions in murders, kidnappings and other violent crimes. Colombia’s improved security is indeed a dramatic turnaround since 2002, when Uribe was welcomed during his Bogota inauguration with a rocket and mortar attack by the FARC, the nation’s largest rebel group. The rebels then had the capital encircled and Colombia’s hapless armed forces were, in the words of one U.S. observer, “playing for a tie.”   The atmosphere was different when Santos was inaugurated on August 4. Santos, a former defense minister in Uribe's conservative administration, has basked in the gratitude that the electorate feel toward the outgoing leader and the armed forces, now considered to be among the hemisphere’s best.   Most Colombians would agree that times have changed dramatically for the better. Colombia has, in Uribe’s words, become fashionable. Foreign visitors increased 17% year on year in 2009 – compared with 2% growth in global tourism. Investment from abroad in Colombian mining, oil and hotels has poured in. Optimism is also reflected in the local stock market, whose main index hit a record in late August. And the economy is on track for robust 4% growth in 2010, roughly in line with growth expectations for the region overall.   But those achievements mask a major concern -- social inequality. Compared with other countries in Latin America, Colombia has extremely high extremes in income levels while the concentration of land ownership remains in relatively few hands. Alejandro Gaviria, dean of the Department of Economics at Universidad de los Andes in Bogotá, describes his nation as “split in two” between haves and have-nots. It’s not a uniquely Colombian problem, but even as countries like Bolivia and Brazil narrowed the gap over the last decade, Colombia did not, he says.   Some improvements to lift the country out of poverty were made during Uribe's presidency. For example, as in other Latin American countries, his administration introduced a program offering poor households cash if they send their children to school and to the doctors. But for the most part, resources were poured into boosting the armed forces -- today there are 440,000 men and women in the military and national police, compared with 280,000 in 2002.   Now, Colombians are left with a society rife with tensions. "Mix inequality with bad social conditions, impunity for criminals and the low esteem in which the state is held especially in remote areas, and you have people who will resort to non-institutional means of behavior,” says Juan Carlos Ramirez, head of the United Nation’s Economic Commission for Latin America and the Caribbean (ECLAC) office in Bogota. "By that, I mean they will resort to violence."   Spreading the Wealth   Juan Carlos Echeverry, the country's new finance minister, says one way the Santos administration will attack inequality will be by overhauling the way it manages the growing tide of royalties and taxes the nation reaps from the oil and coal sectors.   Under the law currently, 80% of royalties from the revenue earned in the oil and coal sectors go to nine regions where just 3% of the population lives. It's widely acknowledged -- even by President Santos -- that a large portion of those royalties disappear in corruption and waste, and often end up in the pockets of local gangs. A new proposal unveiled in late August would invest the revenues in infrastructure projects across the country. The plan could lead to broader based, more fairly distributed prosperity, says Finance Minister Echeverry. The potential benefits are huge, partly because the government’s share of mineral sales is expected to double to US$6 billion by 2014 from US$3 billion currently.   The plan would address the aching need for more and better roads, tunnels, ports and other infrastructure. Roads connecting ports with the interior are so poor that one recent study found that a cargo container at the docks in the Caribbean port of Cartagena took less time to travel to Hong Kong than to Bogota.   Echeverry also says that the government wants some of the tax and royalty revenues from natural resources to be put into a "stabilization fund," which would be similar to funds used in Norway, Chile and Kuwait and would be used for special projects (such as repairing damages after a natural disaster), budgetary shortfalls (for example, covering its pensions system), and education and other social projects. He reckons that initially, it would be 1% of GDP, or more than US$2 billion a year.   Meanwhile, the new government has unveiled a plan that could be the most sweeping agrarian reform ever made in Colombia. Over the past 20 years, rebel and paramilitary groups have more than three million Colombians have been displaced from their homes, taking some four million hectares of land in order to deprive their enemies of local support and amass land wealth for themselves.   Under the new plan that's likely to take years to implement, land would be returned or put to productive use. A new review mechanism would break a logjam in the current judicial process by shifting the burden of proof to new owners to prove they rightfully acquired title, as opposed to the previous regime that required the peasants who had been chased from their land to prove their ownership.   Roberto Steiner, formerly of the International Monetary Fund and now head of a Bogota think tank Fedesarrollo, says the land reform package “could change the country” by addressing the plight of millions of displaced Colombians, who have been forced off their land and out of their homes by warfare and land-grabbing mafias.   But this is one area in particular that Santos can expect to meet resistance, he says. "Like the civil rights laws in the U.S. in the1960s, the … land reform in Colombia will start horribly because of opposition of the powerful interests in whose hands all this land now sits,” Steiner predicts. "But by simply declaring that it wants to compensate people who have been wronged, society would be taking an important step.”   Getting the Basics   Colombia’s poverty rate is the highest in the region, at 45% of the population. Steiner says high poverty and inequality sets Colombia apart from neighbors like Chile, where there is inequality but low poverty compared with the rest of Latin America.   While poverty rates in Latin America have generally declined over the past 10 years, Colombia’s has remained stubbornly high. Although it has 8% of the continent’s population, the country accounted for only 5% of families escaping poverty over the last decade, says Gaviria of the University of the Andes.   "The poor may be sending their kids to school and getting access to clean drinking water, but 20% of the population lacks something we would classify as basic needs, such as clothing, transportation or social protection,” adds ECLAC’s Ramirez.   “Colombia is a paradox. The establishment can show that over time some things have improved, like life expectancy, education levels and access to medical care,” says Francisco Thoumi, a Colombian economist and former Latin American studies professor at University of Texas. "But there is a contradiction between that data and the persistent violence. As a World Bank report in the 1980s put it, Colombia is a wonderful place, except for the fact everyone is killing each other.”   Another statistic that sets Colombia apart is the high percentage of the workforce that is “informal.” Comprising more than half the workforce according to some estimates, the country's informal workers don’t pay taxes or contribute to the pension and health systems. Yet they generally are on lower wages and have less job security than "formal" workers.   One reason for Colombia's high informal employment rate, which is common throughout much of Latin America in varying degrees, is that employers are required to pay the equivalent of 70% of their employees' wages into pension, health and other non wage costs, says Fedesarrollo’s Steiner.   According to Echeverry’s estimate, 75% of all companies in Colombia with payrolls of 50 workers or less are “informal.”   "First and foremost, the implication of informality is that people feel less happy and secure and so feel less a part of society,” says Jose Antonio Ocampo, a Colombian economist at Columbia University in New York.   The situation has also pushed Colombia’s universal healthcare system to the brink of insolvency. Employee and employer contributions into the system are far lower than projected in 1991, when universal health care was established. The shortfall costs the government an estimated US$2 billion a year or more, says Ocampo.   According to Echeverry, the new administration's response has been reforms along the lines of one measure that would give companies tax incentives to hire staff under the age of 25. Currently, the unemployment rate is 12.4% -- the second highest unemployment rate in Latin America and the Caribbean after the Dominican Republic -- but 25% for the workforce younger than 25. Companies that put young workers on the payroll would get substantial tax credits for their non-wage labor costs.   Santos has other problems to deal with. He inherits a 4% budget deficit, caused by not only the gap in funding for the health and pension systems, but also the costs of fighting the ongoing war against leftist rebels and drug traffickers at a time when U.S. aid is declining. U.S. help will decrease to about US$460 million next fiscal year, from a peak of more than US$700 million in 2007. But the conflict is far from over -- less than a month after Santos's inauguration, 14 Colombian policemen were killed while on patrol in the southern state of Caqueta and their five-truck convoy hit land mines and then attacked by FARC rebels.   Could Be Better?   In some respects, Santos’s reforms don't go far enough, say experts. For Steiner, it is disappointing that the president is not overhauling the tax collection system, among the hemisphere’s weakest. Annual tax collections amount to about 15% of total economic output, above Mexico’s 12%, but far behind Brazil’s 35%.   For both Ocampo and Thoumi, its that Santos is not devoting more money to counter the Colombian peso’s 40% appreciation against the U.S. dollar since 2006, a result partly of the "Dutch disease," which strikes commodity-rich countries that are flooded with dollars. Ocampo says the appreciation is making it hard for the economy to generate jobs to compete against countries with lower wages in dollar terms. “The new president faces huge challenges,” Ocampo says.   By and large, economists say the reaction to the Santos agenda is a good start for his administration. “The president has valid ideas and I hope he succeeds,” Thoumi says.   “The trick for Santos will be to manage a war economy at the same time he is managing a post-conflict economy,” says Gaviria of University of the Andes. "But his agenda assumes very solid growth for the rest of decade. The panorama is favorable for Colombia and for South America the rest of this decade.”

Republished with permission from http://www.knowledge.wharton.upenn.edu -- the online research and business analysis journal of the Wharton School of the University of Pennsylvania.


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