Executive summary

The economy has been more resilient than other Latin American countries to the commodity shock

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Growth has been among the strongest in the region, reflecting the flexible exchange rate and inflation targeting monetary policy, and fiscal rules. The effects of the fall in global commodity prices were borne by a rise in the fiscal deficit limited by the fiscal rule and a large depreciation of the exchange rate. Monetary tightening ensured that the second round effects of the depreciation and climate-related (El Niño) price rises did not feed through into an inflationary spiral. The comprehensive tax reform of December 2016 will help the economy adjust to lower oil prices and reduce the dependence of the budget on oil revenues. Higher tax revenues would increase the scope for redistributive policies to reduce inequality and sustain public investment.

Making growth more inclusive and raising productivity

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Strong growth and welfare programmes to the most vulnerable groups have substantially reduced poverty. Lower taxes and fees on wages have brought more people to better quality formal jobs, thereby raising both productivity and inclusiveness. Health coverage is universal. Productivity and job opportunities have also been enhanced by recent reforms facilitating the opening of business, obtaining construction permits, registering property and paying taxes. However, productivity growth is low and the gap between rich and poor among the highest in Latin America. Informality and gender gaps remain high, and social mobility low. Years of armed conflict, stringent local regulations and distortions in the tax system have created disparities in productivity and access to basic services across regions.

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Further simplifying procedures for company registration and the affiliation of workers to social security, improving labour market programmes, expanding early childhood education, and raising education quality would boost inclusion, social mobility and living standards. Greater and more affordable child, elderly and disability care would open the job market to more women. Colombia needs to increase the redistribution of income through the tax and transfer system. Raising productivity will be fundamental to continued increases in living standards for all Colombians, and will require better job opportunities in poorer regions and higher public investment to improve infrastructure and lower costs of trade. Better incentives for firms to invest on R&D and stronger links between the business sector and research institutions would foster innovation. In some sectors such as rail, electricity and roads, greater competition and less regulation are needed to support private investment.

MAIN FINDINGS

KEY RECOMMENDATIONS

Further improve macroeconomic resiliency

The financial system is sound but some vulnerabilities create risks

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

Infrastructure and social spending needs are likely to exceed those in the medium term fiscal framework.

Raise more revenue in the medium term.

Sustain strong economic growth

Low skills are holding back productivity growth.

Provide more public support to skills training in regions lagging behind.

Establish a national curriculum for school education and professionalise teachers’ careers.

Poor infrastructure raises transportation costs.

Sustain the increase in public investment.

Finance more infrastructure programmes on a regional basis.

Implement the road infrastructure program (4G) and guarantee that Private-Public-Partnerships continue to have proper cost-benefit analysis.

Innovation performance is weak as a result of low investment in R&D and poor business sector-academia links.

Provide more grants and loans for R&D to enterprises.

Fund R&D projects that bring industry and academia together.

Firms’ competitiveness is hampered by regulatory burdens and slow judicial outcomes.

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

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

Low participation in global value chains limits the adoption of frontier technologies.

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

Make growth more inclusive

High informality exacerbates inequalities by limiting access to public benefits.

Further reduce taxes and fees on wages (non-wage labour costs).

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

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

Women do not have enough opportunities in the formal or informal labour market.

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

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

Education outcomes depend strongly on family socioeconomic backgrounds. Differences in rural-urban poverty rates remain high

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

Expand early childhood education.