copy the linklink copied!Key policy insights

Colombia has made good economic and social progress over the last two decades. Sound macroeconomic policies boosted confidence, which together with favourable demographics and external conditions underpinned resilient economic growth (Figure 1, Panel A). This has contributed to higher living standards (Panel B and C), and, together with improving access to education and social transfers, brought significant social improvements. Poverty has fallen markedly in recent years, while progress in reducing inequality has been more muted (Figure 2, Panel A and B). On 25 May 2018, Colombia was invited to become a member of the OECD.

However, challenges ahead to maintain performance and further convergence towards higher living standards are substantial. Colombia has already lost ground relative to some of its peers in Latin America in per capita growth. (Figure 3). The still high level of informality remains a major economic and social challenge, affecting income distribution, quality of jobs and productivity. Despite a recent decline, income inequality is the highest among OECD countries and one of the highest in Latin America. The strong economic performance over the past decade was also not shared by all regions and regional differences in living conditions remain large.

Potential growth has followed a downward trend due to lacklustre productivity. The traditional growth drivers, largely capital-intensive extractive industries and favourable terms of trade, have shown their limits. Exports remain dependent on oil prices, leaving Colombia vulnerable to external and unpredictable shocks. The non-extractive sectors lag behind due to high regulatory burden, infrastructure gaps and low competition and integration to international markets.

Colombia has now a historic opportunity to reignite growth and continue social progress, after 50 years of internal conflict. The sound macroeconomic policy framework, which has benefited from continuity over the years, provides solid foundations. Further advances in living standards and more balanced and inclusive growth will hinge on implementing structural reforms to foster productivity growth and improve the business and job creation frameworks.

The new government identified boosting economic growth as one of its key priorities (Box 1), as also reflected in the latest National Developmen Plan. The OECD estimates that structural reforms in key areas could raise GDP per capita by 11% in 10 years(Figure 1). The largest benefits stem from increasing international trade. At the same time, there is also a need to ensure that all Colombians benefit from the fruits of reforms, with a particular focus on increasing opportunities for those more vulnerable. To overcome political economy obstacles to implementation of reforms, OECD evidence suggests that communicating clearly the benefits of policy decisions boosts confidence and creates more ownership of the reform programme (OECD, 2017[1]). There are also clear benefits to ensure intergovernmental coordination across different policy areas.

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Figure 1. Economic growth has been resilient but has slowed
Figure 1. Economic growth has been resilient but has slowed

Note: LAC refers to the unweighted average of Argentina, Brazil, Chile, Costa Rica and Mexico. Data show a 3-year moving average of year-on-year percentage changes; For Panel C, each dimension is measured by the available indicators from the OECD How's Life 2017 set.

Source: OECD Analytital database; World Bank, World Development Indicators database; OECD, How’s Life? 2017.

 StatLink https://doi.org/10.1787/888934012085

Against this background, the main messages of the Survey are:

  • Macroeconomic policies are solid and have sustained growth and smooth adjustments to shocks over the years. Maintaining and strengthening the policy framework is key to sustainable macroeconomic policies and setting the basis for higher productivity and inclusiveness.

  • Putting Colombia on a path to stronger and more inclusive growth, and reducing dependence on natural resources, requires boosting productivity by adopting structural reforms in competition, regulations, trade policy, infrastructure, innovation, and skills.

  • Reducing informality and boosting job-quality would extend the benefits of growth to all Colombians, underpinning economic and political support for reform.

Finding the appropriate sequencing and prioritisation is essential for a successful reform agenda and avoiding reform fatigue. Continuing to reduce informality should be the first priority, as it is win-win for productivity, equity and public finances. Opening up to trade and taking more advantage of current trade agreements would boost productivity and job-creation and should be the second in line. Boosting fiscal revenues in a sustainable way and making the tax system more growth and equity friendly should also be a priority. Strengthening the fight against corruption would also be essential and would facilitate the reform agenda, as it would boost trust on government.

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Figure 2. Social indicators are improving but inequality remains high
Figure 2. Social indicators are improving but inequality remains high

Note: No data available for 2006 and 2007.

Source: DANE, OECD.

 StatLink https://doi.org/10.1787/888934012104

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Figure 3. Colombia has lost ground
Figure 3. Colombia has lost ground

Note: GDP per capita are in purchasing power parity terms. LAC refers to the unweighted average of Argentina, Brazil, Chile, Costa Rica, Mexico and Peru. Dynamic Asian Economies refers to the unweighted average of China, Malaysia, Philippines, Singapore, Thailand and Viet Nam.

Source: World Bank, World Development Indicators database.

 StatLink http://dx.doi.org/10.1787/888934012123

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Box 1. Key features of the programme of Duque’s government

The new government took office in August 2018 and is the first gender-balanced government in the history of Colombia. Among its main priorities are:

  • Boosting economic growth to 4% through structural reforms.

  • Reforming the tax system to make it more favourable to investment and job-creation.

  • Fighting informality by giving high priority to this area, as informality has a critical and large detrimental impact on productivity, inequality, tax revenues and access and financing of pensions.

  • Reforming the justice system by making the system more efficient and trustworthy for all citizens.

  • Reforming the pension system to ensure that more Colombians access old-age income.

  • Enhancing trade facilitation by launching round tables aimed at promoting reforms to reduce costs to trade.

  • Boosting innovation and entrepreneurship via better regulation, technology adoption and digital transformation.

  • Making the best out of Colombia’s rich cultural assets (branded under the term Economía Naranja (“orange economy”)).

  • Protecting environmental richness by increasing the share of renewables in the energy mix.

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Table 1. Structural reforms would boost growth
Potential impact of structural reforms on GDP per capita at different horizons

Structural policy

Policy change

Effects on the level of per capita income (%)

Latest data

After reform

2-years

5-years

10-years

Long-term effect

Business regulation

Reduce the cost of starting a business

85

78

0.1

0.3

0.4

0.4

Intermediate policy channels mainly affecting productivity

Increase openness (% of GDP)

35

41

0.8

1.3

2.0

4.2

Increase R&D (business expenditure) (% GDP)

0.1

0.2

0.0

0.1

0.2

0.6

Investment specific policies

Reduce corporate tax (% GDP)

5.1

3.6

0.5

0.6

0.8

1.4

Labour market policies

Increase activation (spending per unemployed, %. of GDP/capita)

0.04

0.6

0.4

0.7

1.0

2.0

Increase family benefits (% GDP)

1.6

2.1

0.6

1.8

2.9

3.8

Increase legal retirement age

59.5

62

0.5

1.6

2.5

3.2

Institutions

Increase the control of corruption

-0.3

0.2

0.3

1.0

1.6

2.0

All of the above

3.2

7.4

11.4

17.6

Corresponding to an average annual growth of:

0.3

0.7

1.1

1.6

Note: The reforms imply halving the gap to the OECD average. These estimates were obtained based on numerical indicators of Colombia’s policy stance in each policy area, taken from World Bank’s World Governance Indicators, Doing Business and World Development indicators; and OECD databases. These quantifications are illustrative, as they are subject to uncertainty, about both their size and the time horizon of their materialisation. Coverage of reforms differs from table 8, depending on the availability of the quantification tools.

Source: OECD calculations based on Balázs Égert and Peter Gal (2017), "The quantification of structural reforms in OECD countries: A new framework", OECD Journal: Economic Studies, Vol. 2016/1 and Balázs Égert (2017), “The quantification of structural reforms: taking stock of the results for OECD and non-OECD countries”, OECD Economics Department Working Papers, forthcoming.

copy the linklink copied!Growth is firming up

The economy is recovering from the large oil price shock of 2015-16, which moderated growth, led to a 70% depreciation of the currency vis-à-vis the US dollar, increased inflation and widened fiscal and current account deficits. The adjustment was, however, relatively smooth (Box 2), thanks to credible macroeconomic policies. The inflation-targeting independent central bank reacted by letting the exchange rate float and interest rates hikes, keeping inflation in single digits (Figure 5). The rules-based fiscal framework, while easing the adjustment to the oil price shock, contained deficits to manageable levels; as did a tax reform that reduced dependence on oil. Vulnerability to shocks was also eased with only moderate exposure to foreign currency funding of the deficit (more details below).

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Box 2. A smooth adjustment to a large terms of trade shock

The fall in terms of trade was significantly higher than in other countries in the region (Figure 4, Panel A). The value of exports fell by 47% in 2016, which substantially deteriorated the country's current account and widened the fiscal deficit. Increases in risk premia generated a strong nominal devaluation of the peso (Panel B). Appropriate macroeconomic policy responses smoothed the adjustment to this large shock, with GDP growth outperforming other countries (Panel C) and the current account undergoing a large and smooth adjustment (Panel D).

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Figure 4. The trade of terms shock was larger and the adjustment smooth
Figure 4. The trade of terms shock was larger and the adjustment smooth

Note: Current account is all transactions other than those in financial and capital items. The major classifications are goods and services, income and current transfers. The focus of the BOP is on transactions (between an economy and the rest of the world) in goods, services, and income.

Source: OECD Analytical database; Thomson Reuters; IMF, World Economic Outlook April 2019.

 StatLink http://dx.doi.org/10.1787/888934012142

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Figure 5. Inflation is near the 3% target
Figure 5. Inflation is near the 3% target

Note: Inflation expectations are defined as the 12-month ahead inflation expectations.

Source: Banco de la República, OECD Analytical database.

 StatLink https://doi.org/10.1787/888934012161

The economy gave signs of revival in the second half of 2017 (Figure 6, Panel A). Real investment bottomed out supported by declining interest rates and higher investment by subnational governments (Panel B). Declining inflation pushed real incomes up and supported consumption (panel C). An improvement in terms of trade supported exports and contributed to a reduction in the current account deficit (panel D), despite a recent deterioration of the current account driven by increased global trade tensions and the peso depreciation.

The labour market has remained subdued, reflecting the impact of the growth deceleration. Unemployment has recently edged to 10% (Figure 7, Panel A), among the highest unemployment rates in Latin America (Figure 7, Panel B). Progress achieved in increasing participation rates has also stalled, particularly in urban areas and among youth. Wages grew above inflation, particularly in manufacturing and retail trade (Banco de la República, 2018[2]). Informality has fallen in recent years, but nearly 60% of all workers still work in the informal sector (see Chapter 2). Increasing migration from Venuzuela imply significant pressures on the labour market (Box 3).

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Figure 6. Growth is picking up
Figure 6. Growth is picking up

Note: Data show year-on-year percentage changes. Base year of the underlying data series is 2015; WTI crude oil prices are monthly averages of average daily prices. Real investment refers to the total volume of gross fixed capital formation; LAC refers to the unweighted average of Argentina, Brazil, Chile, Costa Rica and Mexico.

Source: OECD Analytical database; Thomson Reuters.

 StatLink http://dx.doi.org/10.1787/888934012180

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Box 3. Migration from Venezuela imply challenges but also opportunities

Since 2014 more than one million Venezuelans migrated to Colombia, as a result of the economic, humanitarian and social crisis there. The arrival has intensified, doubling during 2018, and by December the number of Venezuelans migrants was 1 147 743, including both regular and irregular migrants arrived (MFMP, 2019[3]; DNP, 2018[4]).

The government has managed the challenging situation successfully, making efforts to integrate the migrants by providing timely border assistance and ensuring universal emergency and childbirth care. Documentation requirements have been made more flexible so that school-age children can have access to education at the pre-school, basic and secondary levels. Colombia has also relaxed some entry requirements and granted temporary permits to stay in the country. An integral policy strategy for the next years has been launched, including actions in areas such as education, healthcare, water and sanitatiation, labour market integration, childhood care and humanitarian help. Fiscal needs are estimated to be around 0.5% of GDP per annum, under a baseline assumption of two millions migrants entering the country by 2021. This estimate accounts for the higher demand on the provision of basic good and services that the increasing flows of migration will entail over the next three years.

The migration inflows have started to have an impact on the Colombian labour market, with a diverse regional impact. The participation rate of the Venezuelan migrants is 72%, while for non-migrant Colombians it is 64%. Unemployment rates for Venezuelans are particularly high, affecting the national unemployment rate (Fedesarrollo, 2018[5]). The cities most affected and experiencing problems to absorb the large numbers of migrants are Arauca, Riohacha, Cúcuta, as well as Bogotá and Medellín.

Investing in immigrants’ integration could deliver benefits in terms of potential growth. Venezuelan migrants tend to be younger than Colombias, allowing for a demographic bonus. In the short-term a positive impact on growth could derive from increased consumption and employment, Policies should aim at fostering the employability of migrants, for example, through skills certification and validation programmes for secondary and higher education. Extending the public employment services and training opportunities would also help. Efforts to support the integration of Venezuelans in the formal sector would maximise their fiscal contribution.

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Figure 7. The labour market has remained subdued
Figure 7. The labour market has remained subdued

Note: Yearly data taken as a 12-month average. Data for 2019 refer to the average of the period July 2018 - June 2019; Total unemployment as a percentage of total labour force. For Panel B, OECD refers to an unweighted average of its member countries.

Source: GEIH of DANE.

 StatLink https://doi.org/10.1787/888934012199

The current account deficit fell from more than 6% of GDP in 2015 to 3% in 2017, illustrating the significant and orderly adjustment experienced. The deficit, which widened in 2018, remains largely financed by foreign direct investment (Figure 8), helping to cushion exchange rate related risks.

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Figure 8. The current account deficit has been reduced during 2016-17
Figure 8. The current account deficit has been reduced during 2016-17

Source: IMF Balance Of Payments database.

 StatLink https://doi.org/10.1787/888934012218

The reduction during 2016-17 in the current account deficit has helped Colombia to remain less affected than other emerging economies by the most recent episodes of financial volatility (Figure 9). The peso has also been relatively more resilient to recent financial market turbulences (Figure 10). External debt has risen over the recent years, reaching around 47% of GDP (Figure 11, Panel A), suggesting that exposure to global financial conditions has increased. 13% of external debt is short-term. Reserves have also increased (Panel B), covering 16% of GDP and 9 months of imports. The coverage ratio, in terms of the current account deficit plus short-term debt at remaining maturity, is about 135%. A flexible credit line with the IMF also helps to deal with extreme events. The Central Bank executed a gradual programme of reserve accumulation, which ended in May 2019, to prepare for a possible reduction of the flexible credit line, which expires in 2020.

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Figure 9. Colombia has been resilient to recent episodes of financial uncertainty
Figure 9. Colombia has been resilient to recent episodes of financial uncertainty

Note: JP Morgan EMBI spreads.

Source: Thomson Reuters.

 StatLink https://doi.org/10.1787/888934012237

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Figure 10. The exchange has remained relatively stable since 2016
Figure 10. The exchange has remained relatively stable since 2016

Note: Real effective exchange rate is based on Consumer Price Index. WTI crude oil prices are monthly averages of average daily prices.

Source: Banco de la República, IMF International Financial Statistics (IFS); Thomson Reuters.

 StatLink https://doi.org/10.1787/888934012256

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Figure 11. Debt and foreign exchange reserves
Figure 11. Debt and foreign exchange reserves

Note: External debt to GDP is calculated as the ratio of total external debt in billion US dollars divided by gross domestic product in billion US dollars. LAC refers to the World Bank definition of Latin America & Caribbean (excluding high income).

Source: IMF, World Economic Outlook April 2019; World Bank.

 StatLink https://doi.org/10.1787/888934012275

Growth is projected to strengthen during 2019 and 2020, supported by rising domestic demand (Table 2). Improving confidence and easier financing conditions will support consumption. Investment will become a key driver of growth, aided by the lower corporate taxation, low interest rates, and infrastructure projects. As growth gains traction, the unemployment rate will edge down.

Risks to these projections include volatile oil or coal prices, which would boost or decrease investment. The tourism sector holds potential for upside surprises. Downside risks include additional delays in planned large infrastructure projects. The rise in protectionism could slow down global growth, dampening exports. Increasing migratory flows from Venezuela may imply higher spending needs than foreseen, particularly in health and education, and increases in labour informality. But, if well managed, it can also boost medium-term growth prospects. Currency mismatches are low but financial volatility in emerging economies could also present risks. The authorities consider that Colombia is in a good position to let the exchange rate act as a line of first defence, as inflation is close to the target, providing space to absorb exchange rate depreciation. The economy may also face unpredictable shocks, whose effects are difficult to factor into the projections (Table 3).

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Table 2. Projections

2016

2017

2018

2019

2020

Percentage changes, volume

(2015 prices)

GDP at market prices

2.1

1.4

2.6

3.4

3.5

Private consumption

1.6

2.1

3.6

4.7

3.9

Government consumption

1.8

3.8

5.6

2.9

3.5

Gross fixed capital formation

-2.9

1.9

1.5

4.6

5.3

Final domestic demand

0.6

2.3

3.5

4.4

4.1

Stockbuilding1

0.6

-1.2

0.4

0.3

0.1

Total domestic demand

1.2

1.2

3.9

4.6

4.2

Exports of goods and services

-0.2

2.5

3.9

4.0

4.0

Imports of goods and services

-3.5

1.2

7.9

8.8

5.5

Net exports1

0.8

0.1

-1.0

-1.2

-0.6

Memorandum items

GDP deflator

5.1

5.1

3.7

4.1

3.5

Consumer price index

7.5

4.3

3.2

3.5

3.6

Private consumption deflator

6.6

3.6

2.6

3.5

3.1

Unemployment rate (% of labour force)

9.2

9.4

9.7

10.1

9.2

Current account balance (% of GDP)

-4.3

-3.3

-4.0

-4.2

-4.2

Potential growth

3.4

3.2

3.2

3.1

3.1

Output gap

-2.4

-4.2

-4.8

-4.5

-4.1

Note: Contributions to changes in real GDP.

Source: OECD Economic Outlook 105 database updated with most recent available information.

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Table 3. Possible shocks to the Colombian economy

Vulnerability

Possible outcome

Possible policy action

Contagion from emerging markets financial volatility

Large exchange rate depreciation and higher costs of financing the fiscal deficit and servicing debt.

Tighten monetary policy and quicker reduction of the fiscal deficit.

Deepening crisis in Venezuela

Even larger inflows of migrants with higher humanitarian assistance needs.

Continue providing border assistance to immigrants and flexible residence permits.

International assistance may be required.

Sudden falls in oil prices

Prices for exports would fall, reducing public revenues and increasing the current account deficit. An associated increased in sovereign risk premium in emerging economies would diminish capital inflows.

Maintain adherence to the fiscal rule and build fiscal buffers overtime.

Boost competitiveness in non-oil sectors.

Natural disasters

A significant part of Colombian territory, population and GDP is at risk of natural disasters, such as floods or landslides, which can entail large social, economic and fiscal costs.

Strengthen disaster risk management and foster climate change adaptation strategies.

Financial stability has been preserved

Despite the large shocks, financial indicators of banks remain solid (Figure 12). Credit growth has decelerated since 2016, particularly commercial credit. Consumer credit growth has also decelerated, due to a tightening in credit standards. Non-performing loans have risen (Panel B) but remain low in international perspective (Panel C). The increase was largely driven by two large borrowers in energy and infrastructure sectors. Loan restructuring practices have been recently standardised.

Some risk to the sector arises from the expansion of several Colombian banks to other countries in Latin America. This expansion allows diversifying risks, as exemplified by the positive impact of the fall in oil prices on earnings of Colombian banks present in Central America, whose economies benefited from the fall in oil prices. At the same time, the expansion raises challenges for supervision. The recent strengthening of the supervisory framework, recommended in previous economic surveys, by granting the Superintendencia Financiera enhanced regulatory and supervisory powers over financial conglomerates is welcome. Compliance with prudential and risk management standards and access to information of financial conglomerates and financial holdings have also been increased. Foreign exchange and foreign exchange risks regulations by the Central Bank has also moved in this direction.

Existing regulations are robust but are not fully aligned with Basel III, which hampers the credit profiles of banks, affecting its access to international funding. The process to adapt to Basel III standards started in 2012 and is proceeding progressively. While other countries in the region have formally incorporated Basel III standards in their banking regulations, several pieces of regulations are yet to be approved in Colombia and a transition period will start. A recent decree will bring the capital framework closer to Basel III standards. Moving fully to Basel III regulations will further strengthen the resilience of the banking system and facilitate access to credit by banks, and ultimately by firms and households.

Corporate and household debts have reached near record levels but remain modest by international standards (Figure 12, Panel D and F). Around 15% of corporate debt is denominated in foreign currency, while households’ exposure to exchange rate risks is negligible. Unhedged corporate liabilities of non-exporting firms amount to 5% of GDP in 2018. Public debt denominated in foreign currency remains at 16%. Foreigners participation in local public bond market has increased and stabilised around 25% of the stock value. This reduces exchange risks for the government and increases liquidity but it also makes Colombia more sensitive to changes in international financial markets sentiment (Banco de la República, 2017[6]).

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Figure 12. Financial indicators remain solid
Figure 12. Financial indicators remain solid

Note: In Panel C, OECD refers to an unweighted average of all its member countries. In Panel D and Panel F, OECD refers to an unweighted average of 30 OECD member countries with available data.

Source: IMF Financial Soundness Indicators database, BIS.

 StatLink https://doi.org/10.1787/888934012294

copy the linklink copied!Macroeconomic policies are solid but the fiscal framework could be reinforced

The large oil price shock in 2015-16 put Colombian macroeconomic policy framework to the test. The smooth adjustment to the shock attests that the framework is strong and that policy action was timely. Looking ahead, with uncertainty rising about the global economy, monetary policy and fiscal policy should remain cautious.

Monetary policy

The Central Bank conducts monetary policy on an inflation targeting framework and flexible exchange rate. Skilful management of the monetary framework has contained inflation in a difficult environment. The oil shock and the associated exchange rate depreciation, together with the effect of El Niño, which increased significantly food prices, pushed inflation to 9% in July 2016. Monetary policy tightening avoided de-anchoring of expectations and inflation returned to the 3% target. With inflation decelerating sharply over 2017, the central bank gradually and appropriately eased its policy rate, supporting growth during 2017’s deceleration. At the beginning of 2018, the Central Bank eased futher its policy rate to support growth. Inflation is expected to remain close to 3%, allowing the Central Bank to maintain its current monetary stance, which is consistent with a Taylor rule (Figure 13). Going forward monetary policy should remain moderately accommodative, provided inflation and its expectations remain near the 3% target, and start to normalize as the output gap closes down.

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Figure 13. The monetary stance has become accommodative
Figure 13. The monetary stance has become accommodative

Note: The Taylor rule target rate is computed as: nominal interest rate = real natural interest rate + inflation rate + 0.5 * (inflation gap) + 0.5 * (output gap); the inflation target is set at 3%; the natural real interest rate is taken to be 1%. The estimated Taylor rule rate is based on a simple quarterly regression of nominal interest rate on lagged nominal interest rate, current inflation and output gap estimated over 2002Q1-2019Q2.

Source: OECD calculations and Banco de la República.

 StatLink https://doi.org/10.1787/888934012313

The Central Bank is undertaking changes in the communication of monetary decisions to fine tune its messages and align them to international best standards. Decisions on interest rates will be made in 8 of the 12 meetings held per year. This is aimed at aligning decisions with major data releases and allowing deeper discussion and analysis of macroeconomic and inflation conditions. The Central Bank could also consider introducing elements of forward guidance in its communication. Forward guidance is increasingly used by Central Banks, including some in the region such as Chile. Forward guidance can help smooth transmission of monetary policy (Pescatori, 2018[7]; Praet, 2013[8]; Campbell, Evans and A. Justiniano, 2012[9]).

Fiscal policy

Fiscal policy has been governed by a fiscal rule since 2012 that targets the central government’s budget balance, adjusted for cyclical factors and oil and mining prices. Potential GDP estimates and long-term reference oil prices are set by an external committee. A solid framework to ensure subnational fiscal sustainability is also in place, after problems of over-borrowing and excessive expenditure growth during the 1990s. Presently the fiscal situation of subnational governments is solid, presenting a budget balance of 0.6% of GDP in 2018.

The oil-price shock implied a sharp fall in oil-related revenues, from about 2.6% of GDP in 2014 to nearly 0% in 2016 (Table 4). As a consequence, the central government headline deficit increased from 2.4% to 4% in the same period. The increase in the deficit, together with the depreciation of the peso, triggered an increase in debt from 40% of GDP in 2014 to 51% of GDP in 2018. The deficit was reduced in 2017, thanks to a significant increase in non-oil revenues, partly related to a tax reform, and to one-off revenues related to fines to the telecom sector. The fall in the deficit in 2018 was mainly driven by increased oil-revenues and reduced public investment by the central government (MFMP, 2019[3]).

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Table 4. The government deficit has decreased
Percentage of GDP

Central government

 

2014

2015

2016

2017

2018

2019

2020

2021

2022

Total revenues

16.7

16.1

14.9

15.6

15.3

16.6

16.5

16.5

16.4

Oil revenues

2.6

1.1

0.1

0.3

1.0

1.1

1.2

1.3

1.3

Non-oil tax revenues

13.1

13.9

13.6

13.6

13.2

13.9

13.6

13.7

14.0

Personal taxes

1.1

1.2

1.2

Corporate taxes

5.3

5.1

4.9

Value added taxes

5.1

5.2

4.9

5.5

5.7

6.0

6.2

6.3

6.5

Other revenues

0.9

1.1

1.2

1.8

1.4

1.5

1.7

1.6

1.2

Total expenditures

19.1

19.2

18.9

19.3

18.4

19.0

18.7

18.4

18.1

Investment

3.0

3.1

2.0

1.9

1.4

1.6

Public consumption

13.9

13.5

14.0

14.5

14.2

14.3

Investment + Public Consumption

16.8

16.6

16.0

16.4

15.6

15.9

15.7

15.5

15.4

Interest

2.2

2.6

2.9

2.9

2.8

3.0

3.0

2.8

2.7

Migration shock

0.5

0.4

0.3

0.2

Fiscal balance

-2.4

-3.0

-4.0

-3.6

-3.1

-2.4

-2.2

-1.8

-1.6

Structural balance (fiscal rule)

-2.3

-2.2

-2.2

-1.9

-1.9

-1.5

-1.5

-1.3

-1.0

Fiscal impulse

-0.1

0.0

-0.3

0.0

-0.4

-0.1

-0.4

-0.3

General government

Total revenues

27.5

25.4

24.3

24.5

26.5

27.9

27.8

26.9

26.5

Total expenditures

29.2

28.6

27.4

26.9

28.8

29.9

29.1

28.0

27.6

Fiscal balance

-1.7

-3.2

-3.0

-2.3

-2.2

-2.0

-1.3

-1.1

-1.0

Note: Figures for 2019-2022 are projected. In 2017 public consumption includes advances of spending corresponding to 2018 amounting to 0.3% of GDP. From 2019 onwards, other revenues includes the plan of privatisations and Central Bank utilities. The fiscal impulse is calculated as the change in the structural balance. Data on personal taxes, corporate taxes and value added taxes come from the OECD. All other data come from Colombia’s Finance Ministry.

Source: Colombia’s Finance Ministry; (MFMP, 2019[3]).

Due to the unexpected additional spending needs stemming from the acceleration in the inflow of migrants from Venezuela, the council of independent experts (Comité Consultivo de la Regla Fiscal) suggested that the fiscal deficit could be reduced at a slower pace than previously planned (MFMP, 2019[3]). The new deficit reduction path implies an additional fiscal space of 0.5% of GDP in 2019, decreasing by 0.1 ppts of GDP by year until 2024. This will allow the authorithies to accommodate the migration shock and the associated additional spending needs into Colombia’s strong macroeconomic framework (OECD, 2019[10]).

Fiscal policy will be moderately contractionary over the next years to reduce the deficit in line with the fiscal rule, which calls for the structural central government deficit to decline to 1% by 2022. This gradual reduction of the deficit strikes an appropriate balance between spending needs, the gradual recovery and the need to ensure debt sustainability. These plans would help to stabilise public debt/GDP around its current level of 50% of GDP and put it on declining path overtime (Figure 14). However, the debt trajectory is highly sensitive to changes in interest rates, economic growth or oil prices. The need to stabilise the public debt is justified by strong dependence on volatile revenues and exposure as emerging economy to global financial shocks. Recent increases in the debt imply also that Colombia has now fewer buffers for unexpected events. The literature tends to limit prudent debt levels to 30-50% of GDP in emerging economies (Fall et al., 2015[11]) or maximum debt limit of 55-60% according to IMF (2019[12]) . In an ambitious reform scenario, as the one outlined in Table 1, debt would stabilise even if interest rates are higher and oil prices lower.

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Figure 14. Public debt has increased
Central government gross debt (% GDP)
Figure 14. Public debt has increased

1. Baseline long-term assumptions: Real long-term growth of 2.9%, long-term interest rate on government bonds of 5.8%, GDP deflator growth of 3%, primary fiscal balance of 0.4% of GDP in 2020 and 0.8% in 2030, oil price (Brent) of 68 USD in the long-term.

2. Same assumptions as in 1, and real long-term interest rates are higher by 2 percentage points over 2019-2040.

3. Same assumptions as in 2, but lower oil prices at 52 USD per barrel in the long-term.

4. Same assumptions as in 3 and higher annual GDP growth of by 1.1 percentage points every year until 2028 and 1.6 percentage points afterwards (see Table 1).

Source: OECD calculations based on the Medium Term Fiscal Plan 2019 and OECD Economic Outlook 105 database and updated.

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The medium-term fiscal plan foresees that debt reduction will come both from lowering spending and increasing revenue (MFMP, 2019[3]). Both revenues and spending remain lower than in OECD countries (Figure 15). Colombia has important spending needs, such as those related to bottlenecks in infrastructure, social programmes including pensions, or the peace process (Box 4). Social spending in Colombia remains relatively low (OECD, 2017[13]), while social needs are increasing. Central government investment, which has taken a large part of the adjustment, is already at low levels. Higher oil prices may provide temporarily additional revenues, but measures to optimise both public spending and revenue are needed to continue complying with the fiscal rule. From the spending side some measures adopted in the National Development Plan 2018-22 will help reduce spending, such as better tools for targeting subsidies.

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Figure 15. Public spending and revenue are lower than in OECD countries
Figure 15. Public spending and revenue are lower than in OECD countries

Note: Data refer to general government expenditures and revenues. LAC refers to the unweighted average of Argentina, Brazil, Chile, Mexico and Peru.

Source: IMF, World Economic Outlook database, April 2019.

 StatLink http://dx.doi.org/10.1787/888934012351

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Box 4. Implementation of the peace process has advanced

Reports by independent observers (KROC, 2017[14]; KROC, 2018[15]; KROC, 2019[16]) signal that the implementation of the peace agreement shows steady progress. Many of the initial short-term measures have been completed. The process has now entered the more difficult phase of advancing economic development of rural areas, enhancing citizen participation, reincorporating former fighters, substituting crops of illicit use, addressing the concerns of victims, and providing mechanisms for transitional justice (KROC, 2018[15]).

Achieving these goals will require sustaining budgetary and institutional reforms. The implementation of the agreement is estimated to require public spending of around 0.8% of GDP every year up to 2024 and slightly less afterwards. Promoting economic and rural development in other peace agreements has typically taken up to a decade (KROC, 2018[15]). This highlights that it is fundamental to sustain efforts overtime to enhance the capacity of the state to guarantee opportunities for development and citizen participation for all communities, especially in the territories most affected by the conflict.

The Pluriannual Investment Plan for Peace, contained in the National Development Plan 2018-22, amounts to 37.1 trillion pesos (3.8% of GDP). Resources will be focused on victims, the process of reincorporation and substitution of illicit crops, as well as on the population and territories with the highest rates of extreme poverty, illegal economies, institutional weakness and violence, especially in the 170 municipalities of the development programs with a territorial approach.

Completing and updating the cadastre is fundamental to boost rural development and a sustainable peace. Existing cadastral information is incomplete, as cadastral information lacks for one third of the country and half of current information is outdated. The cadastre would also help speed up formalisation and registration of land rights, as more than 40% of land ownership continues to be informal. A functional and complete rural cadastre would be the starting point to promote a better use of land, as it will improve legal certainty and facilitate transactions. This would improve incentives for a better use of land according to its suitability and help to attract private investment. Steady progress in land restoration programs, a cornerstone of the peace agreement aiming at land to be returned to its proper owners, would also be a fundamental step for a more inclusive rural development.

Simplifying the tax system and improving the tax mix

Raising revenue in a more efficient and fair way has been a long-standing challenge, as highlighted in previous Economic Surveys (OECD, 2017[13]; OECD, 2015[17]; OECD, 2013[18]). There were 20 tax reforms in the last 20 years but the tax system remains complex, with multiple special regimes and tax exemptions. The latest reforms were enacted in December 2016 and December 2018, incorporating some OECD recommendations, such as reducing the corporate tax rate, eliminating the business wealth tax or increasing the VAT rate and measures to reduce tax evasion (Box 5, Table 5, (OECD, 2017[13])). Further reform remains needed to rebalance the tax burden (Figure 16), held predominantly by firms, and to simplify the tax system. There is also a need to increase revenue in a sustainable way, which would increase predictability, helping to boost investment.

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Table 5. Past recommendations on improving the macroeconomic framework

Past recommendations

Actions taken since the 2017 survey

Approve the law awarding the financial superintendence regulatory powers over holding companies of financial conglomerates

In September 2017, the Law 1870 granted regulatory and supervisory powers over financial conglomerates to the financial superintendence.

Raise more revenue in the medium term

The December 2016 tax reform had the objective to raise more revenue and decrease the dependence on oil revenues. In addition to the increase in the VAT rate and the reduction in the corporate rate, the reform integrated a special corporate tax (CREE) within the corporate income tax. It also phased out the business wealth tax, reformed the treatment of non-profit organisations, and introduced a dividend tax at shareholder level, a carbon tax and a tax on plastic bags. In December 2018 ,the financing law was approved with the main objective of promoting economic growth through incentives for private investment and increasing tax collection. See Box 5 for the main measures.

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Figure 16. The tax burden is unbalanced
Figure 16. The tax burden is unbalanced

Note: OECD is the average of all member countries where data is available data for 2016. LAC is the average of all Latin American and the Caribbean countries for which data is available for 2017.

Source: OECD Revenue Statistics database.

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Box 5. Main measures included in the Financing Law

In December 2018, the so-called Financing Law (Ley de Financiamiento) was approved, including changes to several taxes. The main changes are:

  • gradual reduction of corporate income tax rates: 32% in 2020 ; 31% in 2021; and 30% in 2022;

  • introduction of tax credits for VAT on capital goods and gradual elimination of the tax for the industry and commerce tax (ICA) (50% during 2019-2021 and 100% in 2022);

  • gradual reduction and eventual elimination of the presumptive income tax system (reduced to 1.5% on 2019 and 2020, from 2021 the rate will be 0%);

  • new simplified tax scheme (Simple) for small firms;

  • creation of three personal income tax rates for high-income earners (35%, 37% and 39%) and unification of labour, pension and capital income;

  • introduction of a wealth tax for rich and increases in dividend taxes;

  • introduction of additional exemptions and special regimes: orange economy, agricultural sector, "megainvestments";

  • introduction of an additional CIT surcharge for large financial entities;

  • measures to strengthen the tax office (DIAN) to combat evasion.

The personal income tax yields a low share of tax revenue, both in comparison with other countries in the region and with OECD countries. Very few individuals pay personal taxes, or even submit tax returns. This is due to a high income threshold below which no personal income tax has to be paid (Figure 17). As a result, in 2018 more than 90% of the active population were exempted and did not submit a tax declaration. The latest reforms made an effort to limit exemptions but there are still exemptions benefiting high-income households, such as those related to pensions. Pension contributions are deductible from the income tax base and pension benefits are also tax exempt. This illustrates that there is room to broaden the tax base in an inclusive way by lowering the minimum income threshold and eliminating exemptions that benefit more affluent tax payers.

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Figure 17. There is room to broaden the personal tax base in a progressive way
Figure 17. There is room to broaden the personal tax base in a progressive way

Note: PIT stands for personal income tax. For Panel A, in Denmark, France and Turkey, PIT is levied on the first earned currency unit. For India, the average worker income covers only the manufacturing sector, including both men and women. In Panels B:D, data for Colombia are from 2019.

Source: OECD calculations based on the Taxing Wages models; OECD, Taxing Wages in Latin America and the Caribbean 2016; OECD, Taxing Wages 2019; For Panels B:D, data for Colombia come from Dirección de Impuestos y Aduanas Nacionales (DIAN).

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The last tax reforms in Colombia reduced the corporate tax burden. The 2016 tax reform reduced the corporate income tax rate to 37% in 2018 and 33% in 2019. The 2018 tax reform reduces the corporate income tax rate further to 30% in 2022, which is still high in international perspective (Figure 18). The 2018 tax reform also reduced effective corporate tax burden by eliminating the presumptive income tax and introducing a tax credit on the VAT levied on investment. Lowering further the tax burden on enterprises would help raise productivity and create formal jobs by strengthening investment incentives (Arnold et al., 2011[19]). The current fiscal space for lowering the statutory corporate rate further is limited, but some space could be created if the tax base is broadened by eliminating deductions and loopholes. Only those deductions contributing to increasing productivity, such as the R&D tax credit, should be preserved. Other deductions, such as those related to Free Trade Zones, should be thoroughly evaluated and those not found to contribute in a cost-effective manner to higher investment be phased down.

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Figure 18. The corporate tax rate remains high
Figure 18. The corporate tax rate remains high

Source: OECD Tax database.

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VAT revenues could be raised (Figure 19) with stronger compliance and less use of reduced rates. The VAT rate was increased to 19% in the 2016 reform, with reduced rates or exemptions covering spending on health, education, food, medicines or transportation. Computers, tablets and mobile phones are also exempt until certain limits. In the 2018 tax reform, soft drinks and beer were exluded from the exemptions. Better-off households enjoy a large share of the support that the reduced rates and exemptions provide (OECD, 2013[18]; OECD, 2018[20]). Applying the standard rate to all consumption and compensating low-income households through cash transfers holds the promise of increasing more revenue in a more inclusive way. Colombia has made good progress in rolling out conditional cash transfer schemes, showing that replacing reduced rates with cash transfers to low-income households is a feasible option.

A reform to broaden the personal and VAT tax bases is subject to significant political economy barriers. It would be important to focus communication efforts on emphasizing the intention to promote formalization of firms and jobs. At the same time, willingness to pay is positively associated to the quality of public services and the rule of law (Daude, Gutierrez and Melguizo, 2013[21]). The quality of public services is perceived as very low (Figure 20). Boosting government effectiveness, for example by improving public policies in education, social policies, justice or infrastructure, would also help to boost tax collection.

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Figure 19. VAT revenues should be higher
Figure 19. VAT revenues should be higher

Note: The VAT revenue ratio (VRR) is defined as the ratio between the actual value-added tax (VAT) revenue collected and the revenue that would theoretically be raised if VAT was applied at the standard rate to all final consumption. The OECD and LAC (excluding Colombia) aggregates are unweighted averages of data shown and data for Canada cover federal VAT only.

Source: OECD Consumption Tax Trends 2018, OECD Revenue Statistics in Latin America and the Caribbean 2019.

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Figure 20. Government is perceived to have limited effectiveness
Figure 20. Government is perceived to have limited effectiveness

Note: Government effectiveness reflects perceptions of the quality of public services, the quality of the civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government's commitment to such policies. Estimate of governance (ranges from approximately -2.5 (weak) to 2.5 (strong) governance performance). OECD refers to the average of all its member countries for which 2017 data is available. LAC refers to the unweighted average of Argentina, Chile, Costa Rica, Mexico, Peru and Uruguay.

Source: World Bank, Worldwide Governance Indicators database.

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Perceptions about government effectiveness would in turn improve with further progress in reducing tax evasion, which remains pervasive. Tax evasion on VAT and corporate income tax combined could be around 4% of GDP (OECD, 2015[17]). Strengthening further the tax administration, DIAN, whose capacities are constrained by low investment in IT systems (OECD, 2015[17]), is crucial (Figure 21). A broader use of IT would simplify tax administration and enforcement and lower costs for tax payers. The implementation of electronic invoicing, becoming mandatory at the beginning of 2019 and expected to be fully implemented by 2020, is a welcome step in that direction, as illustrated by Chile, where electronic invoicing was introduced in 2003, increasing revenues.

Another way to fight tax evasion would be to limit the use of cash, which accounts for 90% of all transactions, significantly higher than in other emerging economies, such as Brazil or Turkey (Pérez, Pacheco and Salazar, 2016[22]). Facilitating the transition from cash payments into electronic payments would also help to reduce informality and foster financial development (Rogoff, 2016[23]). Ongoing efforts to modernise the retail payment system and simplify saving accounts procedures would foster digital payments and facilitate the creation of a digital ecosystem. Additional policy options include banning cash for transactions above a certain threshold, as done by many OECD countries and some other countries in the region. In 2012 Mexico introduced a ban on large cash transactions, including real estate transactions, and Peru has recently introduced similar schemes.

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Figure 21. Tax administration could be strengthened
Figure 21. Tax administration could be strengthened

Note: In both panels, data refer to 2015.

Source: OECD (2017a), Tax Administration 2017: Comparative information on OECD and other advanced and emerging economies.

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Colombia should also consider phasing out the financial transaction tax, which favours informality and tax evasion, and hampers financial inclusion, despite some exempted transactions and financial products. Given the fiscal situation, the tax could be phased out gradually, as recommended in past OECD Economic Surveys (OECD, 2015[17]). Other taxes, such as environmentally-related taxes or property taxes could be increased instead. Environmentally-related taxes represent 0.6% of GDP, well below the OECD average and leading countries in the region, such as Costa Rica. Colombia recently introduced a carbon tax, and expanding efforts in that direction would offer the double dividend of increasing revenue and taxing environmentally damaging activities. Property taxes on housing represent 0.8% of GDP, well below the OECD average.

Strengthening the fiscal framework

The fiscal rule has provided macroeconomic stability and fiscal discipline. Fiscal targets are established every year, such that the structural budget deficit gradually decreases to 1% by 2022. Structural fiscal targets have been frequently revised, normaly driven by parameters adjustments (Figure 22). Providing additional technical analysis on the source and impact of these revisions would safeguard the credibility of the rule and avoid that frequent revisions end up jeopardising its credibility. The creation of an independent fiscal council, as in many OECD countries and several countries in the region (such as Chile and Brazil), could thus be a useful complement to the fiscal rule. It could undertake additional technical analysis of the inputs that feed into the rule and are used to estimate the structural balance. This would enhance independent oversight and accountability of fiscal policies. Fiscal councils typically produce official or alternative forecasts, analyse the executive’s budget proposals, and monitor compliance with fiscal rules and cost legislative proposals. A committee is currently in charge of advising about the fiscal rule. It has some of the characteristics of fiscal councils, but the scope of its analysis is limited, as it has no staff and its members work part-time on an unpaid basis.

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Figure 22. Structural deficit targets are frequently revised
Figure 22. Structural deficit targets are frequently revised

Source: Ministerio de Hacienda y Crédito Público.

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Enhancing public spending efficiency

The need to meet the fiscal rule, together with the need to continue reducing inequality and boosting growth, makes improving the efficiency of public spending a fundamental economic and social challenge. The government’s ability to allocate budget spending according to changing needs and priorities is undermined by excessive inflexibility (Figure 23). Spending mandated by law, earmarking, transfers to sub-national entities, pensions and interest spending imply that the share of spending that government can adjust is limited, and almost exclusively related to investment (Bernal, et al., (2017[24])). Existing mandated spending and earmarking of government revenues should be evaluated with a view to reduce budget rigidities.

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Figure 23. There is little room for discretionary spending
Figure 23. There is little room for discretionary spending

Note: The expenditure flexibility index tracks central government spending from 2010 to 2016 and classifies outlays as operating expenses (wage and other), transfers, investment or interest payments. Transfers include pensions and payments to subnational governments. In the case of Colombia the latter comprises transfers from the General System of Transfers (Sistema General de Participaciones, SGP). Others include general expenses. For the index, spending on interest, wages and transfers are considered to be mandatory and the share of mandatory outlays to total spending is calculated for each country. The index is scaled using the regional average for mandatory spending as a share of total spending, creating a relative ranking. The sovereigns divide into three categories: those with the most flexible expenditures, the most inflexible, and a neutral middle cohort.

Source: Moody's Investors Service.

 StatLink https://doi.org/10.1787/888934012503

Excessive fragmentation also hampers spending efficiency (Bernal, et al., (2017[24]). Currently there is no single budget process, but an operating budget and an investment budget. Royalties coming from natural resources are also under another budget. OECD countries make use of unified and comprehensive budget mechanisms, which help to avoid fragmentation and facilitate coordination.

The system in charge of allocating royalties from natural resources (Sistema General de Regalias, SGR) was reformed in 2012 to better distribute revenues between regions. Funding allocated to areas not endowed with natural resources increased from 20% to 80% of the total. This increase in revenues had a positive impact on social outcomes (Gallego, Maldonado and Trujillo, 2018[25]). However, the reform has also increased fragmentation and earmarking. Also, incentives to undertake new projects in productive areas has diminished, as those regions face negative externalities from production and lower rents (Bernal, et al., (2017[24]). This can hamper the sustainability of the royalties system. The allocation formula could be reviewed to improve incentives of regions with natural resources while preserving the positive contribution of the system to reduce regional inequalities. A bill in congress, since April 2019, increases incentives for the production of mineral-energy resources by raising the resources to the producing regions, and strengthens investment in all regions of the country by adjusting the project selection.

There is also a need to avoid excessive fragmentation projects financed with royalties, as the current setting provides incentives for low-scale low-impact projects (Contraloría, 2018[26]). Mechanisms, such as the one recently implemented in R&D projects, that foresees that funding will be allocated directly to research centres, which takes care of planning and executing projects, would help to identify and implement projects of larger impact. This offers also the advantage of avoiding problems related with weak governance and capabilities in some subnational governments, a crucial obstacle for making a better use of royalties (Contraloria, 2017[27]).

Making the most out of public spending also requires improving its targeting. Social programmes providing transfers and benefits to households amount to more than 12% of the GDP. Spending allocated to firms is also large, although more difficult to quantify as they involve tax exemptions. Several components of spending are poorly targeted and regressive, as a significant proportion of spending, such as those related to housing, goes to individuals in the highest income brackets (see social section). This suggests that there is high potential to improve the quality of spending by improving targeting, evaluating existing programmes and tax exemptions, retaining those found to have a positive and cost-effective impact on equity or productivity and phasing out the rest.

copy the linklink copied!Social indicators have improved, but Colombia remains a very unequal country

Key social indicators have improved in the last decade. Poverty has declined but regional disparities are large (Figure 24). Although in a declining trend, income inequality, measured by different indicators (World Bank, 2018[28]), remains high (Figure 25). It could take eleven generations for children of poor families to reach the average income in their country (OECD, 2018[29]). High inequality has its roots on large regional disparities with a wide gap between urban and rural areas. Colombia displays one of the highest levels of regional inequality in GDP per capita across OECD countries (OECD, 2014[30]). Inequalities particularly affect ethnic minorities and displaced people by the conflict, which are disproportionally concentrated in rural areas. Inequality is also a gender issue as female employment is low and wage gaps have been increasing. The increasing flow of immigration from Venezuela affects mainly the north-western regions of the country, adding to regional disparities. Access to high-quality education and health is also uneven among regions and socioeconomic groups. The pension system exacerbates inequities leaving many elderly in poverty given the low coverage among the most vulnerable. There is significant room to improve the targeting of public spending.

Making growth more inclusive will rely on improving opportunities for all Colombians in education and work, improving their chances to find sustainable income generation opportunities. Improving the targeting of social spending would help to reduce inequality. A pension reform would help to reduce old-age poverty. The peace agreement is an important opportunity to foster inclusive growth and close regional disparities, as it has a strong focus on rural development. Economic integration of the ex-combatants, providing them with income-generating opportunities, will be key. Local and regional administrative capacity should be strengthened for a more effective coordination with the national government to deliver public services of comparable standards and quality across all regions. This would be particularly important in those areas more affected by the armed conflict and migration.

Boosting inclusive growth will also hinge on improving social dialogue and reducing violence against trade unionists. Important steps have been taken to increase security, and violence against trade unionists has dropped considerably (Chapter 2). While the Peace Agreement signed in 2016 will most likely further enhance the security conditions in the country, a proactive strategy by the government to eliminate violence is needed.

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Figure 24. Poverty has declined, but territorial disparities remain large
Figure 24. Poverty has declined, but territorial disparities remain large

1. Relative poverty rates after taxes and transfers (threshold of 50% of the median income). The statistical definition is different from the one followed by DANE.

2. OECD refers to the unweighted average of its member countries.

3. LAC refers to the unweighted average of Argentina, Brazil, Chile, Costa Rica, Mexico and Peru.

Source: OECD calculations based on GEIH Household Survey 2017, OECD Income Distribution and Poverty database and SEDLAC.

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Social spending does little to reduce inequality

The government has made important efforts to expand social programmes, such as Red Unidos, Más Familias en Acción and Jóvenes en Acción, which helped to reduce poverty, especially extreme poverty. However, these measures change the Gini only slightly after accounting for taxes and transfers (Figure 25).

Mas Familias en Acción, the main conditional cash transfer to fight poverty, has positive impacts on educational attainment, nutrition and other dimensions of life quality (Angulo, 2016[31]). However, the level of cash transfers is low (Figure 25, Panel B). Family benefits, including financial support for families and children such as child-related cash transfers or benefits in kind for families with children, accounted for only 1.6% of GDP in 2014, below the OECD average of 2.2% (OECD Family Database).

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Figure 25. Higher cash transfers focused on most needy regions would reduce inequality
Figure 25. Higher cash transfers focused on most needy regions would reduce inequality

1. OECD refers to the unweighted average of all its member countries.

2. Cash transfers excluding pensions from the pension system for Colombia (in the pay-as-you-go system and special regimes, and Colombia Mayor) and refer to Mas Familias en Acción, Jovenes en Acción, Bienestar Familiar from ICBF, subsidies for displaced.

Source: OECD calculations based on GEIH Household Survey (2017) and OECD Income Distribution and Poverty database.

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Higher equity could be achieved by reallocating more spending towards cash transfer programmes, with a focus on vulnerable population, such as rural areas, ethnic minorities (Chapter 2), and those affected by the armed conflict. Spending on universal assistance, such as family or education-related transfers would also help (Causa and Hermansen, 2017[32]). Calculations by the OECD undertaken for this survey show a great potential of channelling more social spending to those more in need to rise equity and reduce poverty (Box 6). Cash transfers would be more effective if supplemented by a training component that improves participants’ chances to find more autonomous and sustainable income generation opportunities. Hence, targeting additional training opportunities to recipients of Más Familias en Acción may also be an effective way to give better job opportunities to those most in need, and help avoid possible pervasive effects on informality (Farné and Nieto Ramos, 2018[33]).

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Box 6. Potential impact of social policy reforms on poverty and inequality

Simulations, based on microdata from Colombian household survey (GEIH) for 2017, allow gauging the impact of increasing coverage and income-support for two of the most vulnerable populations: old-age and poor families in rural areas (Table 6). For both types of support, increasing coverage and the level of benefits are needed to achieve significant results on inequality and poverty-reduction.

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Table 6. Estimated impact on poverty and inequality

Poverty

Old-age poverty

P90/P10

% of population

Old-age income support (Colombia Mayor)

Baseline

19.3

22.7

8.3

Increased coverage

19.1

21.5

8.2

Increased transfer to poverty line

18.7

17.5

7.9

Increased transfer and coverage

18.2

13.5

7.6

Poverty

Rural poverty

P90/P10

% households

Cash transfers to the poor (Mas Familias en Acción)

Baseline

20.2

29.8

9.5

Increased transfer

19.9

27.9

9.3

Increased coverage in rural areas

19.8

27.0

9.3

Increased transfer and coverage in rural areas

19.1

24.0

9.1

Note: The P90/P10 ratio is the ratio of income of the 10% of people or households with highest income to that of the poorest 10%. For Colombia Mayor coverage is doubled reaching 2.5 million old-aged and subsidy is increased to poverty line (calculated by DANE depending on the region). For Más Familias en Acción, coverage is increased in 1 million families in rural areas covering 2.5 in total and subsidy is increased only in rural areas by 30 thousand COP$. The extension of coverage was based on ranked estimated probability of obtaining the subsidies depending on income available and individual and household characteristics.

Source: OECD calculations based on GEIH, DANE.

A large share of social programmes and benefits, such as those related to pensions or housing, goes to the relatively rich (Table 7). For example, 32% of the public services subsidies goes to the two highest income quintiles. The potential to reduce inequality and provide better opportunities to all by better targeting social programmes is large. Poverty alleviation programmes, such as Más Familias en Acción, are among the best targeted, but 29% of spending still goes to higher income quintiles. This suggest that part of the higher spending needed to increase the impact of some social programmes could come from a reallocation of spending (Table 8). Concentrating public resources into few well-evaluated programmes and integrating programmes with the same objective into one entity would also increase spending efficiency and avoid fragmentation (Bernal, et al. (2017[24]).

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Table 7. There is room to improve the targeting of social programmes and benefits
Share by quintile of disposable income, %.Year 2015

Size of the programme (%GDP)

Lower income

1st quintile

2nd quintile

3rd quintile

4th quintile

Higher income

5th quintile

Education (Inc. job training)

3.0

25.7

23.4

21.4

18.1

11.4

Pensions (Inc. Colombia Mayor)

2.3

4.3

7.8

13.7

23.4

50.8

Health

1.8

33.7

23.6

19.7

15.1

8.0

Public services

0.7

21.8

23.2

22.9

20.4

11.9

Poverty alleviation

0.5

33.4

23.0

15.0

17.2

11.5

Early childhood care

0.4

32.0

27.2

22.1

15.4

3.2

Housing

0.2

11.3

22.5

19.6

26.6

10.0

Other

0.2

48.7

35.7

7.5

5.4

2.6

Total

9.0

22.4

19.9

18.8

18.8

20.2

Note: The spending includes administrative costs, direct cash transfers to families and indirect subsidies. The pension subsidy refers to the difference between the profitability of the contributions, based on a fair profitability assumption, and what is actually paid to the pensioner. Public services includes subsidies on the consumption of electricity or natural gas. Poverty alleviation programmes include Red Unidos, Más Familias en Acción and Red de Seguridad Alimentaria. Housing includes family housing subsidy, displaced housing subsidy, urban housing, Red Unidos housing subsidy and mortgage loan coverages.

Source: Departamento Nacional de Planeación (DNP).

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Table 8. Illustrative long-term impact of some OECD recommendations

Measure

Change in fiscal balance (% GDP)

Social spending

Increase family benefits, such as conditional cash transfers and childcare services, from 1.6% of GDP to 2.1% (the OECD average).

-0.5

Increase spending on Colombia Mayor, the non-contributory pensions, from 0.2% of GDP to 1.0%.

-0.8

Improve targeting of social programmes and benefits by phasing out those received by the highest income quintile of the income distribution

1.8

Rebalancing the tax mix

Increase property tax, notably recurrent taxes on housing, from 0.8% of GDP to OECD median (1.7%)

0.9

Increase green taxes from 1% of GDP to OECD median (2.2%)

1.1

Lower the bands at which the personal income taxes and the higher income rate are levied to the OECD average (IDB, 2013).

1.4

Reduce the corporate income tax from 5.1% of GDP to halve the gap with the OECD mean (3.6%)

-1.5

Effect of structural reforms in Table 1 on the budget through higher GDP growth

The estimated impact on GDP per capita (Table 1) would lead to higher GDP by 11.4%, abstracting from population growth. The public-spending-to-GDP ratio of 28% of GDP in 2016 would be lowered to 28/1.114 of GDP and, assuming a long-run tax revenues to GDP elasticity of one (Frickle and Sussmuth, 2014), the estimated effect on the fiscal balance would be 1.3% of GDP.

1.3

Note: Estimations are accounting effects of measures on fiscal balance. In comparison with table 1, these ilustractive impacts cover only selected reforms.

Source: OECD calculations based on IADB (2013), Recaudar no basta: los impuestos como instrumento de desarrollo; Frickle, H. and B. Sussmuth (2014), “Growth and volatility of tax revenues in Latin America”, World Development, Vol. 54, pp. 114-138.

Sisben, the instrument used to select participants for social programmes, is currently being revised. It is a survey based instrument covering 76% of the population. Programme eligibility is currently based on a survey carried out in 2011 and the next Sisben will be ready by 2020, and will help to better target social programmes and public services, as foreseen by the National Development Plan 2018-22 (MFMP, 2019[3]). The non-automatic update of the main tool to target social subsidies, and its static nature, hamper the targeting and effectiveness of social subsidies. Targeting could be improved using administrative databases to increase automation and allow faster updates and recertifying of beneficiaries, especially in urban areas where income mobility is higher (Robles, Rubio and Stampini, 2015[34]). A universal tax return system would be key to improve targeting.

Reforming the pension system to increase coverage and equity

The current pension system comprises a small non-contributory pillar (Colombia Mayor) and competing public pay-as-you-go and capitalization contributory pillars (see Box 7). However, coverage is low and inequitable, which has contributed to high old-age poverty compared to OECD and Latin American countries (Figure 26). Only one in three in retirement age receive a contributory pension. Most of existing pensions were granted under the transition regime of the 1993 law, with less demanding requirements than current ones in terms of contributory weeks. Under current requirments, access to contributory pensions is expected to be less than 20% of the old-aged (Bosch et al., 2015[35]). While over 75% of the highest income quintile contributes to the pension system, less than 5% of the lowest quintile is able to do so. In rural areas, only 10% of the elderly are covered. A structural reform of the pension system is key to foster inclusive growth, as highlighted in previous Economic Surveys (OECD, 2015[17]) and Table 9.

The first priority of the pension reform should be to reduce old-age poverty. Coverage in the non-contributory component of the system, Colombia Mayor, which provides subsidies to the poorest, has increased in recent years, helping to reduce poverty (DNP, 2016[36]). However, the average benefit under Colombia Mayor is about a tenth of the minimum wage, and well below the poverty line and that of most OECD countries. The fiscal cost of increasing coverage and the size of the programme would be moderate compared to the social impact (Bernal, et al., (2017[24]). Simulations undertaken for this survey show that the reform would reduce old-age poverty significantly (Table 6).

There is also a need to reduce inequalities and improve coverage. The public contributory scheme is more generous with high-income earners, as replacement rates are higher, introducing unnecessary competition in the system and making it complex and unfair (Nieto Ramos and Farné, 2017[37]). This is partly driven by implicit pension subsidies in the public regime, as the government fills the gap when contributions fall short of outlays. This accounted to 2.1% of GDP in 2016 and 86% of it went to the richest 20% of the population (Table 7). Phasing out pension subsidies to the richest and aligning replacement rates between contributory regimes would make the system fairer and less complex.

The low coverage of the pension system reflects the widespread informality. Efforts to increase labour formality (see section below) are thus fundamental to expand coverage. The constitutional rule that the minimum pension be at least the minimum wage leads also to the exclusion of a large part of the population from the contributory system given the relatively high level of the minimum wage. Although it requires a difficult change to the Constitution, delinking the minimum pension from the minimum wage would allow increasing coverage. Another option is to give partial pensions to those reaching retirement age with insufficient contributions through BEPS, the programme for workers earning less than a minimum wage (Box 7). Pension coverage would increase if contributions made by those not finally eligible for pensions are mandatorily transferred to BEPS. Other measures to expand coverage and saved amounts in BEPS include making savings mandatory for micro entrepreneurs and seasonal or part-time workers. Finding ways to increase the BEPS subsidy, for example giving increasing subsidies depending on the saved amounts or giving a subsidy upon enrolment would make the programme more attractive. This would improve old-age income support.

The fiscal cost of the pension system is also high in relation to its coverage. In 2017, pension expenditures amounted to 3.9% of GDP, representing nearly 28% of the nation's tax revenues (Figure 26, Panel D). OECD pension systems achieve an average fiscal cost of 8% of GDP with almost universal coverage. The dependency ratio is projected to rise substantially, as the currently young population is ageing (Panel C), putting the long-run sustainability of the system at risk. Sustainability would be helped by establishing a higher minimum retirement age, tied to increases in life expectancy, as current retirement ages of 62/57 for men/women are below other OECD countries. Replacement rates are also generous by international standards. The maximum pension is 12 times the GDP per capita, very high compared to 3.2 in Argentina, 2.2 in Brazil, 1.95 in Greece or 1.3 in Spain. Using the average lifetime wage to calculate the pay base, instead of the last ten years of wages favouring steep earnings profiles, would help to finance extending the coverage in a sustainable and equitable way.

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Box 7. The contributory pillar of the pension system in Colombia

The contributory system allows people to choose between two schemes: i) a public Pay-as-you-go defined-benefit plan (Regimen de Prima Media – RPM), managed by a public sector entity (Colpensiones), that in 2017, benefited 58% of retired with pensions; ii) the fully-funded private scheme (RAIS) managed by private pension funds, which covered 6% of the pensioners in 2017. Workers can change regime every five years during their working life. The constitution provides that, the minimum pension cannot be lower than the minimum wage. The retirement age is 62/57 for men/women. Only formal sector workers earning at least the minimum wage can contribute to these two plans. They can only retire with a pension after at least 1300 weeks of formal work in the public regime. In the private regime, workers can get a pension at any age or weeks worked, once the accumulated capital in the individual account is enough to finance a pension of at least 110 % of the minimum wage.

To encourage voluntary savings by low-income Colombians, the so-called Periodic Economic Benefits Scheme (BEPS) was created and is targeted for low-income pensioners, with a state subsidy equal to 20% of contributions. Although the programme's coverage has grown, the number of people who save and the amounts saved are low. Design problems and the fact that the programme relies on voluntary savings by a low-income population, who have little spare income, have limited its impact and development.

The complexity of the system and the many adjustments needed suggest that a comprehensive parametric reform is needed, as analysed in a thematic chapter of the 2015 OECD Economic Assessment and also reflected in several reform proposals, such as the ones by ANIF, Colpensiones, Fedesarrollo and Bernal, et al. (2017[24]).

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Figure 26. The pension system is characterized by low coverage, high inequality and has sustainability problems
Figure 26. The pension system is characterized by low coverage, high inequality and has sustainability problems

1. LAC refers to an unweighted average of Brazil, Chile, Costa Rica and Mexico. OECD refers to an unweighted average of its member countries excluding Chile and Mexico.

2. OECD refers to the unweighted average of latest available data of its member countries excluding Australia, Israel and Switzerland.

3. Data refer to 2017 for Colombia. Data are latest available data for the remaining countries.

4. Population is based on the de facto definition of population, which counts all residents regardless of legal status or citizenship.

Source: Colpensiones; Ministerio de Hacienda de Brasil; MECON; OECD Pensions at a Glance: Latin America and the Caribbean (2014); OECD Pensions at a Glance 2017, OECD Stat Pension spending, Panorama de Pensiones de América Latina, World Bank.

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Table 9. Past OECD recommendations for a pension reform

Past recommendations

Actions taken since the 2017 survey

Thoroughly reform the pension system to reduce old-age poverty and inequality.

No actions taken

Expand eligibility of the beneficios economicos programme (BEPS)

By 2018, BEPS reaches 1 million beneficiaries and new offices were set across the country.

Increase coverage and benefit levels of the minimum public income-support programme (Colombia Mayor)

The coverage of Colombia Mayor was increased, but the level of the monetary benefits remained unchanged.

Equalise the retirement age between men and women. In the medium term, increase the retirement age and link it to the life expectancy evolution

No actions taken

Achieving quality education by giving priority to the most vulnerable population

Boosting the quality of education is a win-win policy for raising both productivity and inclusive growth. Substantial progress has been made in improving coverage and performance (Figure 27). Nonetheless, important challenges remain related to quality and equity. PISA scores in science remain below the OECD average and are highly dependent on socio-economic backgrounds. Although decreasing, school dropout rates and the share of students failing a year remain high (Radinger et al., 2018[38]). Regional disparities in enrolment (OECD, 2018[39]) and school outcomes are large (Panel D). Greater poverty in rural areas explains most of the performance gap with urban areas. But rural students face additional barriers, such as lower aspirations for their future education and lower incentives for students to stay in school given the large informal sector and the related high job turnover and wage penalty. Rural areas face difficulties in attracting and retaining high-quality teachers.

Education has been a key priority in recent years and the government has undertaken important measures to boost attainment (Table 10). Education was a key pillar of the National Development Plan, and is recognised in the peace agreement by developing a special rural education plan. The implementation of full-day schooling, the expansion of early childhood education and care, and the improvement of educational infrastructure all go in the right direction. Colombia has also implemented educational policies and programmes, such as From Zero to Forever (De Cero de a Siempre), Let’s All Learn (Todos a Aprender) or Being Hard Working Pays (Ser Pilo Paga), which were successful in increasing attainment and quality.

There is a need to ensure that more resources go to those more in need. Public spending in education at 4% of GDP in 2015, was slightly above the OECD average of 3.6%, and below the average 5% of the region. A significant proportion of spending is financed by central government transfers from the General System of Transfers (Sistema General de Participaciones, SGP) and their distribution is determined by law according to a formula based on a combination of population coverage, social equity, schools human resources, and efficiency criteria. A reform of the government transfer system would help (Radinger et al., 2018[38]) reduce fiscal asymmetries across regions and ensure more resources per student are channelled to the most vulnerable territories. Further financing could also come from reallocating resources from other spending programmes without impact on productivity or equity, such as agriculture or housing subsidies. This would allow increasing quality of education and expanding full-day schooling and the school meals plan. At the same time, there is a need to ensure that better educational outcomes is the main policy target and that reforms in the education area are pursued with that aim. Enhancing institutional capacities, especially at the territorial level where there is high variability in the efficiency of using the SGP funds (Galvis, 2015[40]) and continuously monitoring and evaluating programmes and spending are thus needed.

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Figure 27. School results have improved, but equity and regional disparities remain a challenge
Figure 27. School results have improved, but equity and regional disparities remain a challenge

1. Percentage of variation in science performance explained by the PISA index of economic, social and cultural.

2. The data for Costa Rica represents the change between 2010 and 2015.

3. Department average scores for Saber 11 which range between 0 and 100.

Source: OECD PISA 2006, 2009 and 2015. Saber 11, 2017-2 ICFES.

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Table 10. Past OECD recommendations on education

Past recommendations

Actions taken since the 2017 survey

Provide more public support to increase enrolment rates of disadvantages children in less developed regions.

Expand early childhood education.

During 2017, programs such as "De Cero a Siempre" and "Todos a Aprender" were enhanced, allowing a better quality of education and a greater coverage for rural population. In 2018 the "From Zero to Always" program benefits 1 million children in early childhood development, and has a budget of COP$ 2.6 billion. Particular attention was given to vulnerable population in Mocoa. The program "1000 dias para cambiar el mundo" was launched in 2017. It aims to contribute to the integral development of children during their first 1000 days of life throughout the improvement of nutrition and nourishment. This program mainly targets rural and highly vulnerable population.

Establish a national curriculum for school education and professionalise teachers' carers.

Increased coverage of “Todos a Aprender”, a programme that places tutors to help teachers from the most disadvantage schools and aims at improving quality of education.

The Government needs to prioritize increasing coverage and quality in early education, to improve student performance, reduce gaps in learning achievement and the impact of socioeconomic background. An integrated approach to early childhood development is offered through De Cero a Siempre strategy, encompassing education, health, nutrition and protection. But the educational component of early childhood education remains underdeveloped and is key to foster quality and have an impact on skills and employment prospects later in life. Governance issues have led to a fragmented system resulting in inequities in provision and quality and varying goals. Appointing one agency, such as the Ministry of Education, with clear authority and responsibility for delivering national early childhood education policy across the entire sector (care and preschool) would strengthen sector leadership and facilitate co-ordination, improvements in, and expansion of services (OECD, 2016[41]).

Raising the quality of teachers is key for a high-quality basic education. Colombia has taken considerable steps to professionalise teaching over the last two decades, but implementation has been challenging. An effective evaluation system for existing teachers and the establishment of a framework for professional development would be key to boost the quality of education (OECD, 2016[41]). Teacher selection is essentially based on teachers’ rights rather than students’ needs, leading to inefficiencies and inequities in the allocation of teachers. Making teaching in rural areas more attractive by shaping the working conditions and professional opportunities in these schools, while providing adequate supply of high-quality initial teacher education in rural areas, is essential. (Radinger et al., 2018[38]).

Curbing dropout rates, increasing employability and job quality of youth will hinge on strengthening upper secondary and higher education programmes while developing a vocational education track in close consultation with employers to match labour market needs (Chapter 2).

copy the linklink copied!Strengthening productivity growth

Over the last ten years, the growth potential of the economy, which measures how fast GDP can grow sustainably, has declined substantially (Figure 28). Growth at the current potential growth rate over the next 30 years would raise income per capita only to the level of Costa Rica today. By contrast, if the economy grew at 5% per annum, per capita incomes would reach approximately the current level of Spain.

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Figure 28. Potential growth is falling
Figure 28. Potential growth is falling

Note: Potential growth is expressed as a percentage change. Contributions to growth are shown for the remaining variables.

Source: OECD Economic Outlook 105 database.

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The fall in potential output reflects weak productivity, whose level is below other countries in the region and other emerging countries (Figure 29). Labour productivity has remained sluggish in all sectors of the economy, with the exception of the mining sector (Figure 30). Differences in productivity across regions are also large (Departamento Nacional de Planeación, 2016[42]), and this is well reflected in the successive national development plans, which have a strong regional component.

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Figure 29. Labour productivity has stagnated
Figure 29. Labour productivity has stagnated

Note: For both panels, units are measured in thousand USD per person employed (PPPs).

Source: OECD Productivity database; Feenstra, Robert C., Robert Inklaar and Marcel P. Timmer (2015), "The Next Generation of the Penn World Table" American Economic Review, 105(10), 3150-3182.

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Figure 30. Productivity is sluggish in all sectors
Figure 30. Productivity is sluggish in all sectors

Note: Productivity is defined as the GDP at constant (2015) prices for each sector divided by the number of persons employed in that sector.

Source: DANE.

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Boosting productivity through more competition

Two factors help to explain low productivity in Colombia at firm level. On the one hand, the average and typical firm is less efficient than the average firm in other economies. On the other hand, a high proportion of resources are used in firms of lower productivity, particularly in micro and informal firms.

The lower productivity of the typical firm could be linked to lower growth over their life cycle (Figure 31). Colombian firms tend to remain smaller, which hinders investment, knowledge spillovers, and specialisation of employees. In Colombia youngest cohorts of firms explain most of the employment and output growth, but these firms grow less than in advanced economies (Eslava, Haltiwanger and Pinzon G., 2018[43]). Low-performing firms are also less likely to be replaced by new and young firms.

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Figure 31. Colombian firms grow less
Figure 31. Colombian firms grow less

Note: Ratio of current employment to initial employment at different age categories.

Source: (Eslava, Haltiwanger and Pinzon G., 2018[43])

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These features are typical of economies where competition is not strong enough to create an environment in which the disciplining effect from new entrants prompts incumbents to become more efficient (Klapper et al., 2006[44]). Competition has been weak in some key sectors of the economy, such as telecommunications, banking, retail, food (OECD, 2015[17]) or transport (OECD, 2017[13]), contributing to low productivity, low wages and higher prices to consumers. A small number of large firms dominate the economy (Figure 32), indicating the need to promote a more competitive business environment, both locally and through international trade.

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Figure 32. Markets are largely dominated by a small number of firms
Figure 32. Markets are largely dominated by a small number of firms

Note: This indicator shows the extent of market dominance, 1-7 (best). In the World Economic Forum, Executive Opinion Survey, it is the answer to the following question: In your country, how do you characterize corporate activity? [1 = dominated by a few business groups; 7 = spread among many firms]. LAC is the unweighted average of Argentina, Brazil, Chile, Costa Rica and Mexico.

Source: World Economic Forum, The Global Competitiveness Index 4.0 2018 dataset (version 13 October 2018).

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Colombia has taken important steps towards a more competitive business environment. The budget of the competition authority, SIC, has been tripled in the last six years (SIC, 2018[45]). There have been important advances in the prosecution of business cartels, abuses of dominant position and collusion in public tenders (SIC, 2017[46]). Still, the competition authority faces substantial challenges and would benefit from the ability to impose higher and more dissuasive sanctions. Fines are so far expressed in terms of the minimum wage. They should be expressed in terms of sales that market agents have had instead, in line with other OECD countries (OECD, 2016[47]). In addition, those engaging in anticompetitive processes in public procurement processes should be disqualified temporarily, in line with OECD practices (OECD, 2016[47]). For the time being, they are entitled to continue participating in public procurement processes.

Regulatory burden is high (Figure 33). A process with the public administration takes on average 7.4 hours while in Chile it takes 2 hours. While in other countries in the region most procedures can be completed on line, this is only possible in Colombia in 35% of cases (Roseth et al., 2018[48]). While regulations may serve a variety of legitimate objectives, if ill-designed they can impose unnecessary restrictions on competition.

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Figure 33. Regulations are burdensome
Figure 33. Regulations are burdensome

Note: In Panel A, the indicator shows the perceived burden of regulations, 1-7 (best). In the World Economic Forum, Executive Opinion Survey, it is the answer to the following question: In your country, how burdensome is it for companies to comply with public administration’s requirements (e.g., permits, regulations, reporting)? [1 = extremely burdensome; 7 = not burdensome at all]. In both panels, LAC refers to the unweighted average of Argentina, Brazil, Chile, Costa Rica, Mexico and Peru.

Source: World Economic Forum, The Global Competitiveness Index 4.0 2018 dataset (version 13 October 2018); World Bank, World Development Indicators database.

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Introducing a legal obligation for the executive to systematically submit all new laws likely to affect competition to a regulatory impact assessment has proven effective in many OECD and Latin American countries, including Mexico (OECD, 2015[49]). In the context of the accession process to the OECD, Colombia has recently started to undertake impact regulatory assessment for selected regulations from the central government. This is a fundamental initial step to improve the quality of regulations. The scope of the impact assessments should be increased progressively, covering as well regulations from other parts of the government.

Large parts of the economy have also been shielded from international competition. Colombia remains significantly less integrated into international trade than other emerging economies (Figure 34), despite efforts to promote trade integration via trade agreements. Increasing Colombia’s exposure to trade will boost competition, productivity and growth. Colombia’s own experience in the early 80s, when trade tariffs were reduced, attests that this channel can be strong (Eslava et al., 2013[50]). Primary goods account for 70% of the export basket and there is room to diversify exports and to make trade a new source of growth, as analysed in Chapter 1. Notable progress to improve primary roads (Table 11) have been accomplished via 4G, a significant PPP initative. It remains important to continue to evaluate thoroughly the projects and to record life-time contingent liabilities in a timely and transparent way. Remaining significant gaps in transport infrastructure imply high trade costs (Chapter 1) and also fragment the domestic market, with a detrimental effect on competition. Filling these gaps, while preserving natural resources and the environment, would be a fundamental step to boost productivity.

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Figure 34. Exposure to trade is low
Figure 34. Exposure to trade is low

Note: Data for Peru show the average for the period 2010 - 2017.

Source: OECD Analytical database; IMF International Financial Statistics (IFS).

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Table 11. Past OECD recommendations to sustain strong economic growth

Past recommendations

Actions taken since 2017

Sustain the increase in public investment

Public investment accounted for 2.1% of GDP in 2016s central government budget. Its size decreased to 1.9% in 2017 and to 1.7% in 2018.

Implement the road infrastructure program (4G) and guarantee that private-public-partnerships continue to have proper cost-benefit analysis

By the end of 2018 the financing of 17 projects, out of the 30 planed under 4G, is expected to be closed. This amounts to USD 8.4 billions

The low productivity is also explained by the predominance of small firms (Eslava, Haltiwanger and Pinzon G., 2018[43]). Small firms account for around 90% of all Colombian firms and a significant amount of employment (Table 12). The high share of small firms is a feature shared with Mexico, but largest firms absorb a lower share of employment in Colombia than in Mexico or OECD countries. Firm-level empirical analyses confirm that resource misallocation is significant (Busso, Madrigal and Pagés, 2013[51]). The potential gains in terms of aggregate total factor productivity of moving to a more efficient allocation of capital and labour in the manufacturing sector could reach 50%. These estimates could be larger if resource misallocation induced by informality could be captured. There is little information at firm level about informal firms but households’ surveys show that informality is prevalent in small firms in all sectors, reaching 90% of employment (Table 13). Firms relying on informal contracting are less likely to innovate and grow, offer less training to their employees and have problems raising worker’s motivation and effort, reducing productivity (Battisti and Vallanti, 2013[52]; Perry et al., 2007[53]).

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Table 12. A large share of firms are small

Companies (% of total)

Employment (% of total)

Number of employees

Colombia

Mexico

OECD

United States

Colombia

Mexico

OECD

United States

1 to 9

87.2

88.0

80.3

49.9

31.6

30.6

30.2

4.4

10 to 49

10.6

9.7

14.6

32.7

21.5

20.7

20.9

16.2

50 to 249

1.8

1.5

4.1

14.1

19.4

16.6

17.9

33.4

250 and above

0.4

0.7

0.9

3.3

27.4

32.1

31.0

46.0

Note: Manufacturing sector. Data for Mexico refers to establishments and are from 2013. OECD refers to an unweighted average of its member countries excluding Chile.

Source: CAF (2018), OECD (2017) Entrepreneurship at a Glance 2017.

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Table 13. Informality is concentrated in small firms
Percentage of informal employment according to firm size and sector

 

All economy

Agriculture

Industry

Services

Small

88

94

87

83

Medium

22

48

22

19

Large

5

9

3

5

Note: OECD calculations based on 2017's Colombia's households surveys. Informal workers are those not contributing to the pension system.

Source: OECD calculations based on GEIH 2017 of DANE.

Reducing informality: win-win for inclusiveness and productivity

Informality is both a cause and a consequence of low productivity. It has also detrimental effects on social outcomes, as it reduces job quality and access to social services and labour protection and contributes to high income inequality. OECD calculations for this survey show that informal workers suffer an hourly wage penalty of 49%, after controlling for worker and job characteristics. Informality also erodes the tax base reducing the quantity and quality of public services (Binelli, 2016[54]; Tornarolli et al., 2014[55]; Maurizio, 2013[56]) and reduces access to pensions and its financing.

Informality has been decreasing after the 2012 cut in social security contributions but remains high (Figure 35). The share of informal wage earners, defined as those not contributing to pension or health system, is 33% in 2018. Self-employment, mostly informal and often associated to low productivity jobs, is also high at 43% of total employment and accounts for an increasing share of employment since the slowdown of the economy in 2014.

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Figure 35. Informality has declined but remains high
Figure 35. Informality has declined but remains high

1. Informality is defined as the percentage of workers in employment not contributing to the pension or health system. The statistical definition is different from the one followed by DANE.

2. Data comes from IADB SIMs database. Informality is defined as not contributing to the pension system. Source: OECD calculations based on GEIH of DANE and IADB SIMs database.

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Colombia has made several efforts to reduce informality. The most successful initiative was a 2012 tax reform, which reduced non-wage costs by 13.5%, in particular social security contributions, helping to create more formal jobs and increase wages (Kugler, Kugler and Prada, 2017[57]; Bernal et al., 2017[58]; Fernández and Villar, 2016[59]; Garlati-Bertoldi, 2018[60]). There is no silver bullet to continue reducing informality. A comprehensive strategy is required, with actions needed in several policy areas, such as taxes, business and labour regulations, enforcement or skills. Model-based simulations confirm that the associated improvements in terms of productivity and living standards would be large (Box 8).

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Box 8. Regulations, informality and productivity in Colombia

Illustrative simulations with a small macro-structural model (Chalaux, Kopoin and Mourougane, 2018[61]) can shed light on the interactions among regulations and informality and the impact that structural reforms can have on productivity and GDP per capita.

The simulations suggest that both labour and product market regulations matter. The gains in GDP per capita depend on the assumed productivity differential between the informal and formal sector. Some estimates indicate the productivity differential between formal and informal firms could reach 40% in Colombia. For labour regulations, this would imply a raise in GDP per capita by 10% over 10 years. Even if the productivity gap between formal and informal firms is smaller, the gains in GDP per capita could reach 5% over 10 years (Figure 36, Panel A). Easing product market regulations to the OECD average would raise GDP per capita by another 6-19%, depending on the assumed productivity differential (Figure 36, Panel B).

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Figure 36. Structural reforms can reduce informality and trough that channel boost growth
Per cent of GDP per capita relative to no-reform baseline depending on assumed productivity differential between formal and informal sector
Figure 36. Structural reforms can reduce informality and trough that channel boost growth

Note: The productivity differential is the gap between productivity in the formal and informal sectors. Reform means convergence of the product market indicator to the OECD average evenly over 10 years and convergence to the OECD minimum for labour market regulations, which are proxied by the indicator for workers on regular contracts.

Source: Model simulations based on Yoda (Chalaux, Kopoin and Mourougane, 2018[62])“A formal look at regulations and labour market informality in emerging-market economies”, OECD Economics Department Working Paper, OECD.

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Despite the 2012 reform, non-wage labour costs remain high, representing almost 50% of the wages, one of the highest in Latin America (Alaimo et al., 2017[63]). For example, employers pay a 4% payroll tax to finance the so-called Cajas de Compensación Familiar, which offer a wide range of services from housing and training programmes to sports and entertainment. Alternative sources of financing for these institutions need to be sought or the contribution could be made optional (voluntary). The services could also be reviewed to avoid duplication with other government programs and inequalities in access by workers.

The minimum wage, which is twice the poverty line and at 86% of the median wage, the highest in OECD countries, also contributes to informality and reduces employment prospects of low skilled workers, youth and people located in less developed regions (OECD, 2015[17]; Garda, forthcoming[64]). Limiting increases to inflation for some time would bring formal wages to a more job-friendly level (OECD, 2015[17]). Other options include differentiating the minimum wage by age or by region (OECD, 2017[13]) or establishing an hourly minimum wage, which would avoid the current penalisation of part-time employment.

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Table 14. Past OECD recommendations on reducing informality

Past recommendations

Actions taken since 2017

Further reduce taxes and fees on wages

No actions taken

Simplify procedures for company registration and the affiliation of workers to social security

Some regions made easier for companies to get registered

Establish social dialogue to discuss differentiating the minimum wage by age and regions.

No actions taken

Costly and complex business regulations also hamper the formalization of firms and jobs. A particular barrier to formalization is the high cost related to start up procedures (Figure 37). Registration costs are particularly high compared to countries in the region (Salazar, Mesa and Navarrete, 2017[65]; Maloney, 2017[66]), reaching 5.5% of the assets of a company, regardless of the size of the firm. The registration fee is not only paid when the firm starts its activity but also every year, and is updated in line with the minimum wage. Reducing registration costs, particularly for SMEs and start-ups, would be a fundamental step to facilitate formalization. One-stop shop mechanisms would also simplify the registration of companies, the procedures and the affiliations of workers to social security, which requires 8 forms and 12 procedures. After years of planning, a one-stop shop pilot exercise has started in Bogotá in 2018 for registration of companies. Itis planned to be extended to other cities and to include as well the affiliation of workers to social security. Increasing the use of digital tools would also offer the double dividend of reducing regulatory burden and the scope for corruption.

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Figure 37. Starting a business is costly
Figure 37. Starting a business is costly

Note: LAC refers to the unweighted average of Brazil, Chile, Costa Rica, Mexico and Peru.

Source: World Bank, Doing Business project.

 StatLink https://doi.org/10.1787/888934012769

Developing better skills and aligning them more to labour market needs would also reduce informality. OECD estimates for this survey show that completing secondary education decreases the probability of being in the informal sector by 15% compared to an individual without any level of education, while completing higher education or university reduces the probability by 80%. Additionally, there are large gaps between demand and supply of skills (Lora, 2015[67]). Promoting quality education for all (see above) and vocational education and training aimed at generating advanced skills and abilities that match labour market needs (see Chapter 2) would also be key to reduce informality and boost productivity.

Improving governance and reducing corruption

Systemic corruption distorts incentives, undermines confidence in institutions and fair competition in markets, erodes public services, and undercuts social trust. It is also bad for business and hampers productivity and inclusive growth (OECD, 2017[1]). The importance of quality of governance in explaining the differences in productivity across countries is well documented (Hall and Jones, 1999[68]; Olson Jr., Sarna and Swamy, 2000[69]; Nazrul Islam, 2008[70]).

Colombia has made significant progress with recent anti-corruption efforts and initiatives to foster integrity and combat corruption in the public sector (OECD, 2017[71]). However, it consistently rates poorly in corruption indices. High corruption has been identified as the main concern for Colombian citizens in latest surveys. The last Transparency International report ranked Colombia 99 out of 180 countries.

The biggest challenge to fighting corruption effectively remains at regional and local levels, where corruption seems to be more entrenched. Regulating the financing of political parties and campaigns would be a crucial step, as current legislation does not limit the resources that can be provided by the candidate. This implies that candidates can finance 100% of their campaign with own resources, undermining the possibility to track the origin and quantity of funds spent.

Contrary to most OECD countries, there is no whistle-blower law. Implementing effective whistle-blower protection legislation would be a crucial step in the fight against corruption, including at regional and local level. Whistle-blower protection mechanisms were recently introduced to fight cartel behaviour and they have proved valuable to detect and dismantle uncompetitive practices (SIC, 2017[46]).

Integrity in the public sector benefited from the establishment of the new central procurement entity, Colombia Compra Eficiente, in 2012. Only procurement from central government is centralised. A significant amount of purchases is still undertaken by subnational governments, indicating that there is still room to improve efficiency and reduce scope for corruption in procurement by bringing to Colombia Compra Eficiente all procurement activities of local and regional governments.

copy the linklink copied!Green growth indicators are good but deforestation as well as production and use of hydrocarbons pose challenges

Colombia is the second most biodiverse country in the world after Brazil (Chapman, 2018[72]). Biodiversity of natural resources holds significant opportunities and potential to spur economic growth and social inclusion in lagging regions. A sustainable use of these natural assets is crucial for helping people in these regions to fulfil their potential.

Good progress in decreasing deforestation stalled during 2016 and 2017, although 2018 saw some improvements (Figure 38). Part of the increase in that period is an unintended consequence of the peace process. Limited government presence persists in territories previously controlled by the FARC. Illegal mining and coca production has increased in those areas, previously inaccessible, exacerbating threats to biodiversity.

Coca crops in Colombia have increased since 2013 at an average rate of 45% per year, from 48000 hectares to 146000 in 2016. Data for 2017 show that the area planted had increase further by 17% (SIMCI, 2018[73]). Additional policy efforts to counteract illicit crops is therefore warranted, including eradication, prevention, and providing the affected areas with alternative income generation opportunities.

Illegal mining, consisting of carrying out exploration, extraction or collection activities without a valid mining title or authorisation, has also increased from 79 000 hectares in 2014 to 84 000 in 2016. This impacts 60% of Colombia’s water resources (DNP, 2016[74]), as illegal mining is responsible for large releases of hazardous chemicals. Increases in illegal gold exploitation have been particularly high, affecting national parks, indigenous reservations and Afro-descendant community lands (UNODC, 2018[75]). Continuing efforts to improve the enforcement of existing regulations against illegal mining is therefore warranted and should be prioritised.

Green growth has been at the core of national development plans and a national deforestation strategy has been established. One way the government can help protect its biodiversity is by officially declaring portions of its territory as protected areas. To date, around 14% of terrestrial area has been declared protected, which is well below areas protected in neighbouring countries such as Brazil or Peru. Protecting areas is not a panacea and proper management and enforcement is also needed. Colombia’s regional environmental management authorities, called Regional Autonomous Corporations (CARs), are responsible for managing forests in their jurisdictions. They frequently lack the resources and technical capacity necessary to address challenges in their regions.

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Figure 38. Deforestation is increasing
Figure 38. Deforestation is increasing

Source: Instituto de Hidrología, Meteorología y Estudios Ambientales (IDEAM).

 StatLink https://doi.org/10.1787/888934012788

Production-based CO2 emissions from combustion of coal, oil, natural gas and other fuels are much lower than in OECD countries, reflecting the low energy intensity of the economy and a high share of renewable energy supply, mainly hydroelectricity (Figure 39). Nevertheless, emissions from the energy sector are increasing and in the last greenhouse gases inventory they represented 43,6 % of total emissions. Colombia also emits substantial greenhouse gas emissions in agriculture, forestry and land use, and in this inventory accounted for 42,8% of greenhouse gas emissions. However, this calculation did not take into account the recent increase of deforestation. Policies to curb deforestation provide ample opportunities to reduce these emissions and preserve the role of Amazon forests as carbon sinks (Gobierno de Colombia, 2015[76]).

CO2 emissions per capita have risen in recent years. Rising energy demand has been met with increasing consumption of fossil fuels. The share of renewables has fallen. Colombia has one coal-fired power plant under construction and is planning another 3 (Global Coal Plant Tracker, 2018[77]). Expanding coal-fired electricity generation is inconsistent with reaching the climate objectives of the Paris agreement, which requires coal-fired electricity generation to be phased out. Increasing the share of renewables instead, as recently announced by the government, would help Colombia to meet its commitment to reduce greenhouse gas emissions by at least 20% by 2030. Achieving climate objectives will result in a large decline in demand for coal and oil worldwide. This underscores the need to diversify the Colombian economy away from oil and coal production.

Air quality is overall good, although pockets of poor air quality were reported in the 2014 OECD Environmental Performance Review of Colombia (OECD, 2014[78]), including in the two principal cities – Bogotá and Medellin. The volume of household and commercial waste remains small. Recycling has increased but is often undertaken by plants not meeting technical requirements. Mining is a source of hazardous waste (OECD, 2014[78]). Revenues from environmental taxes were low in 2015, but they will rise with the carbon tax introduced in 2018.

Colombia is highly vulnerable to climate change and extreme weather events (OECD, 2014[79]). The high mountain ecosystems, called páramos, are experiencing increases in maximum temperatures of 1°C per decade. During the 2010-11 La Niña phenomenon, major floods affected three million people, inflicting damage equivalent to about 2% of GDP. Colombia is responding to these challenges by prioritising climate resilience, shifting from disaster response towards a more integrated approach to risk prevention and management, and by integrating climate change and disaster risk management into sectoral policies and planning instruments. Colombia has also subscribed a World Bank catastrophe bond to cover for earthquake risks (World Bank, 2018[80]). There is also a need to simplify and enhance land use planning as a way to increase climate resilience (OECD, 2014[79]).

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Figure 39. Green growth indicators: Colombia
Figure 39. Green growth indicators: Colombia

Note: For Panel D, waste refers to waste collected by or for municipalities and includes household, bulky and commercial waste, and similar waste handled at the same facilities. Panel E refers to nominal tax rates (excises) for unleaded petrol and diesel, for households. Unit: 2010 USD PPP prices/litre, deflated using the CPI. For Panel F, patents refer to patent applications, using application date, inventors' residence and family size equal to 2 or more (i.e. filed in two or more jurisdictions).

Source: OECD (2018), Green Growth Indicators.

 StatLink https://doi.org/10.1787/888934012807

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copy the linklink copied!Annex. Progress in other structural reforms
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Past recommendations

Actions taken since the 2017 survey

Sustain strong economic growth

Finance more infrastructure programmes on a regional basis

Addtional resouces from royalties have been shifted to tertiary roads via the OCAD PAZ programme. This amounted to 500 million dollars.

Provide more grants and loans for R&D to enterprises

The number of enterprises accessing R&D tax credits has increased.

Fund R&D projects that bring industry and academia together

The government implemented Colombia científica programme to finance joint industry and accredited universisties research programmes. 8 programmes have been financed until 2018.

Remove regulations on public ownership and vertical integration in electricity, vertical integration and market structure in rail

No actions taken

Introduce a court or a division of a court dedicated solely to commercial cases and facilitate case management through electronic case management tools.

The Superintedence of Corporations introduced a electroinci case management tool to facilitate comecial disputes and business closures.

Make information on advance rulings on import conditions available more quickly and with higher visibility.

No actions taken

Gender balance

Raise awareness among young men and women, parents, teachers and employers with campaigns about gender-stereotypical attitudes towards academic performance and the likely consequences of overall educational choices for employment and entrepreneurship opportunities, career progression and earnings

In 2018, the campaign Less Myth’s, more equity (Menos mitos mas igualdad ) was launched with the aim of transforming gender-related believes, prejudices and stereotypes among young population..

Ensure the provision of affordable, good-quality child care and affordable long-term care for elderly relatives or those with disabilities

See below in education

Labour market

Expand access to and make greater use of active labour-market programmes.

Implementation of Bonds of Impact Social (BIS) and the public-private alliances.

Education and training system

Enhance public funding to low-income students, either through loans or scholarships. The ICETEX loan conditions could be more flexible for students from very low-income families or rural areas and more strict for those with less financial need.

In 2017,the coverage of the program "Ser pilo paga" was increased as well as resources. The Government also launched "Pilos por Mocoa" and "Todos somos PAZcifico" for the most vulnerable zones

Refocus upper-secondary education teaching and learning on core skills and real-life applications to help students achieve basic skills; improve the relevance of VET options to the labour market by engaging employers in the design of programs, curricula, certification, and quality assurance; and improve the second chance opportunities available to students who have dropped out

Establish a body/forum to engage employers and unions in vocational programs. Ensure that good data on the labour market outcomes of vocational programs is available to inform student carer choice and reduce the technicians' gap

In 2017, under SENAS's program "expanding coverage", 25 new public-private alliances were implemented to the Banco de Institutiones Educativas(BIE) in order to expand the availability of programs for tertiary education. For instance SENA-Fundetec and SENA-UDES

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