Colombia’s Fresh Start
The Tortuous Road Ahead
by robert looney
bob looney teaches economics at the Naval Postgraduate School in California.
Published February 14, 2023
Latin America has in recent years seen a “pink tide“ of leftist candidates win presidential elections in Brazil, Mexico, Argentina, Peru, Chile and most recently Colombia — all determined to eradicate poverty. Sound familiar? A similar “red tide“ rose to power in the 2000’s (think Brazil’s Lula, Bolivia’s Evo Morales, Argentina’s Nestor Kirchner and Venezuela’s Hugo Chavez), taking advantage of a global commodities boom to pay for ambitious social initiatives, only to leave their economies in tatters when the commodity supercycle turned south.
Colombia’s new president, Gustavo Petro, appears to have learned at least one thing from the mistakes of his ideological predecessors: he is determined to break his country’s dependence on commodity exports. In fact, his plan is to rapidly transition the economy from hydrocarbon production, a goal that reflects his admirable concern with climate change but appears at odds with some hard truths about the hand he’s been dealt.
Breaking with the Past
A former member of the M-19 guerrilla movement, Petro is Colombia’s first president identifying with the ideological left. His policies focus on traditional leftist concerns, with distribution of income at the top of the list. But in contrast to other Latin American countries with leftist governments, he also seems serious about containing climate change and he has managed to convince some centrist parties to join a coalition government. The mutual accommodation, it’s hoped, will provide a window of opportunity to advance at least some of the government’s core goals.
Petro is aided by the fact that Colombia’s political economy has changed in the decade since Harvard political scientist James Robinson characterized it as a delicate equilibrium in which urban elites promoted democracy and macroeconomic stability, even as rural elites benefitted from “violence, civil war and drug dealing.” This unlikely tug-of-war somehow achieved a long period of stability, but also made fundamental economic reforms nearly impossible.
The uneasy stasis broke down after the government signed peace accords with the Revolutionary Armed Forces of Colombia (FARC), rural-based leftist rebels, in 2016. At the same time, the country began to feel the consequences of serious structural imbalances stemming from the two-pronged economic development strategy dating from the 1990s. The first consisted of neo-liberal, market-friendly changes to encourage increased investment and productivity. The second of a government commitment to provide universal access to social welfare services, a responsibility enshrined in the 1991 constitution.
Economic growth did average a respectable 3.5 percent from 1990 to 2007 and 3.3 percent from 2008 to 2021. But Colombia’s income distribution remained shockingly unequal. In 2020, some 43 percent of the population lived below the poverty line.
In Latin America, only Guatemala, Haiti, Honduras and Mexico have higher poverty rates, while only Suriname and Brazil have more skewed income distribution. Meanwhile, the very idea of socioeconomic mobility remains a bad joke: the OECD estimated that it would take 11 generations for an impoverished child in Colombia to achieve the national income average!
With Petro’s opponents sure to seize on every opportunity to criticize — politics is a blood sport in Colombia — he will likely struggle to hold together a functional government.
Petro to the Rescue?
Petro’s election highlighted mounting popular dissatisfaction with Colombia’s elites and its traditional political class, suggesting that constructive change was possible. Describing his administration as a new beginning, Petro has championed ambitious reforms in areas ranging from taxation to land tenure to healthcare.
Unfortunately, the reforms do not appear to include what may be the prerequisite to all the others: improved governance. From 2015 to 2021, the (admittedly subjective) World Bank scoring on rule of lawshows Colombia declined from the 47th to the 36th percentile, while control of corruption fell from the 47th to 44th. Regulatory quality, an indicator of the business environment, declined from the 67th percentile to the 61st. Nor do Petro’s reforms address the eroding economic freedom led by declines in enforcement of property rights and efforts to return to fiscal health.
Petro’s economic agenda thus far primarily focuses on transfers to the poor, with a broadening of subsidies for low-income households, government-financed pensions for the elderly, job provision for those unable to find private-sector employment and land reform to be accomplished with financial incentives rather than expropriation. But Petro’s agenda does not address supply-side issues — notably productivity growth — which the OECD deems critical to generating enough government revenue to restore Colombia’s ability to borrow abroad.
Although Colombia’s legislature did pass a diluted tax reform bill last November, the extra revenue will go toward social spending rather than fiscal consolidation. Indeed, if fully realized, Petro’s social programs would expand the budget deficit considerably above the already problematic level of 6.4 percent of GDP estimated by the IMF for 2022.
Remember, too, that Petro’s agenda includes efforts to contain climate change, a worthy but unusual priority for a country struggling with so many other problems. He has plowed ahead on his campaign promise to end oil exploration in Colombia. This despite criticism from members of his own party that Colombia needs to capitalize on current high fossil fuel prices to finance its ambitious social agenda.
While the Petro administration is still honoring existing fossil fuel contracts, it is estimated that ending exploration will lead to a drop in oil and gas production of 47 percent and 27 percent respectively over the next five years. Not only would this cost Colombia about $8 billion in export income, but the country would likely need to begin importing gas by 2026 and oil by 2028.
These predictions seem to be right on track. Ecopetrol, the largest oil company operating in Colombia, had plans to capitalize on the country’s offshore gas deposits and recently announced significant finds at its Gorgon 2 gas field. However, Mines and Energy Minister Irene Velez undercut Ecopetrol’s Gorgon 2 announcement by insisting that environmental and social constraints on offshore production made the field unviable.
Colombia is beginning 2023 beset by inflation, lackluster economic growth, a depreciated currency, high interest rates and diminished investor confidence. Against this backdrop, the election promises made by Petro seem many bridges too far. And with Petro’s opponents sure to seize on every opportunity to criticize — politics is a blood sport in Colombia — he will likely struggle to hold together a functional government.
Colombia is a very difficult country to govern in the best of times. And these aren’t the best of times.