Regulatory reforms are being driven by a desire to join the OECD

In mid-2013, one of the central objectives set by the government of President Juan Manuel Santos Calderón began to be realised. Colombia first applied to join the Organisation for Economic Cooperation and Development (OECD) in January 2011, and in May 30, 2013 the body’s secretary-general, José Ángel Gurría, formally invited Colombia and Latvia to take the steps necessary for their inclusion in the group of countries.

Although Gurría stated that Colombia’s entry into the OECD is feasible in the medium term, seeing the process through is no simple task. The Andean country must adopt and implement many practices and standards required by the organisation, although the OECD has not stipulated the method by which practices should be implemented. Colombia faces the challenge of adapting demanding reforms in fiscal, economic and social issues, while also addressing sensitive issues such as poverty, inequality and its long-running internal conflict. Completing these tasks will be crucial to the success of Colombia’s membership bid.

Demanding Requests 

The OECD has requested a number of strict adjustments if the country wants to be integrated into the international body. Following the formalisation of Colombia’s candidacy, the OECD issued a series of reports analysing the status of the Andean country regarding good governance, innovation and regulatory policies, among other subjects. It also published a series of guidelines for Colombia to follow in taking the needed measures for inclusion.

While publicly expressing confidence in Colombia’s ability to join the body, Gurría said during a visit in October 2013 that the country would need “to steer economic development in an environmentally sustainable and socially equitable direction”. As part of its various reports, the OECD noted the transparency and high standards of Colombia’s tax system, as well as the robustness of the local regulatory environment, particularly in relation in accounting information. Following Colombia’s initiative to institute the reforms enumerated by the OECD’s first round of recommendations, the group is now working on a new round of suggestions likely to be published in 2015.

More Equity

The OECD’s “Society at a Glance 2014" report highlights the high poverty rates found in Chile and Mexico, the only Latin American countries that currently belong to the organising body, with poverty rates at 18% and 20.4%, respectively. Only two other members of the organisation share such poverty levels, these being Israel (20.9%) and Turkey (19.3%). Paradoxically, poverty levels in the US follow closely, at 17.4%; however, the average poverty level among OECD member countries is 11.3%. In 2012 Colombia recorded a poverty rate of 32.7%, according to the official data from the National Statistics Department ( Departamento Nacional de Estadística, DANE), indicating that the country still has a long way to go in this respect.

Similarly, the level of social equity in Colombia must be substantially improved if the country is to accede. OECD reports show that the most unequal of its current members is Chile, which has a Gini coefficient of 0.5. The Gini coefficient – an indicator used by the World Bank to measure countries’ distribution of wealth, with 0 being maximum equality and 1 being minimum equality – stood at 0.53 in 2013 for Colombia.

Research & Development 

Another element that the OECD emphasises to its members – and where Colombia lags significantly – is the level of investment in innovation and research and development (R&D). In Colombia, where levels of investment in innovation are limited, about 70% is made by the public sector. The involvement of the private sector in R&D is minimal, in contrast to other successful emerging economies in Asia and Latin America. On average, OECD members see the private sector providing between 65% and 75% of investment in innovation. In Brazil, the private sector is responsible for around 50% of R&D investment, with total investment the equivalent of 1.2% of GDP. However, in Colombia, spending on R&D represents only 0.2% of GDP, while the average in OECD member countries is 2.4%. Boosting innovation is key for Colombia to address many of the challenges it faces, particularly low levels of productivity and high costs.

Sustainable Growth:

Colombia’s booming extractive sector is threatening the environment of one of the most biodiverse countries in the world, which is a matter of concern for the OECD. In a review issued by the organisation in February 2014, Colombia’s commodity boom and the attendant impact on economic and social development is analysed, leading the OECD to issue recommendations that Colombia work to protect itself from Dutch disease and achieve sustainable and equitable growth. Key suggestions include a deeper focus on structural policies to improve productivity and an improvement in resource reallocation. The report also discusses ensuring the implementation of environmental rules, guaranteeing that the royalty law results in feasible projects that boost productivity, and promoting further competition via trade and market reforms.

Finally, the OECD report suggests enhancing the reallocation of resources through labour, finance and business reforms, to bring about more inclusive growth. Colombia has begun to move in the direction indicated by the organisation, and in May 2014 it joined an OECD commitment to reach an agreement on climate and environment treatment in 2015.

Tax

Also in May 2014, Colombia agreed to share tax information with OECD member countries under the Declaration on Automatic Exchange of Information in Tax Matters, which was endorsed during the OECD’s annual Ministerial Council Meeting in Paris. According to an OECD statement, “Countries commit to implement a single new comprehensive standard on automatic exchange of information.” The standard obliges members to obtain all fiscal information from their financial institutions and exchange it automatically with other participants on a yearly basis. While the OECD has positively evaluated Colombia previously in this regard, it nevertheless recommends strengthening fiscal regulations through various measures.

Adherence to the practices governing member countries can be decisive in facilitating the future inclusion of the Andean country in the OECD. Gurría told OBG that one of the most effective tools to reduce inequality is through a reform of the tax system. “This is especially true in a country like Colombia, where additional revenue is badly needed to expand social protection programmes, which still tend to have low coverage and do little to reduce inequality,” he added.

Better Education

Education in Colombia is, according to the OECD, a sector requiring structural revision. While efforts to increase coverage have paid off, the country needs significant changes to achieve better quality education at all levels. In the most recent results of the OECD’s Programme for International Student Assessment (PISA) tests, Colombia ranked 62nd of the 65 nations measured. Although some education specialists around the world are unhappy with the method used by PISA because it can encourage short-term measures, the report is clear in showing the poor areas of Colombia’s basic education, including mathematics (where Colombia ranked 61st) and science (58th).

Colombia fell 10 positions from 52nd place in the 2009 tests, which suggests that the path followed by education policy makers is failing. A PISA test on “solving problems of the XXI century”, carried out in March 2014, ranked Colombia last out of 44 participants. However, none of the countries in Latin America that took part in this test achieved any significant placement. Chile had the best regional ranking at 36, followed by Brazil’s 38 and Uruguay’s 42.

After a recent visit to Colombia, the director and coordinator of these tests, Andreas Schleicher, commented that, “despite the country’s poor performance, Colombia’s education is on the right track”. One area in which the OECD has praised Colombia’s education system is its education loan programme, the Colombian Institute of Educational Credit and Technical Studies Abroad, which the OECD described as one of the best such schemes in the world. “More than 330,000 students benefit from this system, which provides zero-interest loans,” the former Minister of Education, María Fernanda Campo Saavedra, told OBG.

Good Governance

The OECD’s report on good governance in Colombia, published in late 2013, highlighted the “waves of structural reforms that Colombia has been implementing to combat violence and the profound damage (caused) by insecurity, poverty, inequality, corruption and patronage”. Good governance is included in Colombia’s National Development Plan 2010-14, which aims to strengthen institutions and “ensure adequate use of resources to provide public services efficiently and effectively, by increasing the coverage and quality of public services”.

While it is still early to measure the impact of the reforms carried out in the past four years, the OECD praised the methods used by the Colombian government and remarked on the progressive achievement of its objectives. Luis Velez Cabrera, Colombia’s superintendent of corporations, told OBG: “The superintendency is actively working to prevent money laundering from drug trafficking, corruption, smuggling, illegal mining and other proscribed activities. To this end, we opted for a self-monitoring mechanism that is mandatory for all big companies and operates from mid-2014.”

Becoming A Member

Colombia’s entry into the OECD would have several positive effects. Analysts typically agree that OECD membership would strengthen Colombia’s macroeconomic fundamentals and help ensure that inflation is kept at low levels, that the fiscal deficit remains under control and that growth continues at around 5% per annum. If a peace agreement with insurgents is achieved, this could also contribute to stability and facilitate longer-term policies. OECD membership would help drive increased rates of foreign direct investment, in turn helping reduce the country’s economic vulnerability.

Entry into the OECD would also force Colombia to strengthen its institutions, thus decreasing the country’s still-high levels of corruption, particularly at the local and departmental levels. “This membership will help Colombia build greater global trust on its economy, by using international best practices to improve its regulations and its business climate, strengthen its participation in global value chains, and develop the latest tools to measure progress and promote inclusive growth,” Gurría told OBG. “The institutional role still has to be strengthened to reduce corruption if we want to be accepted into the OECD,” Saúl Pineda Hoyos, director at the Centre for Competitive Thinking of the University of Rosario, told local press in 2014. “The levels of crime and violence that prevent business from growing are still noticeable. Corruption and crime are a major concern for the OECD and are even now a heavy burden for Colombia.” On the negative side, Colombia would likely experience a reduction in the humanitarian aid from UN, which totalled $600m between August 2010 and March 2014. In addition, Giovanny Reyes, a professor at the University of Rosario, told El Colombiano that, “OECD membership implies millions in fees to be paid to the organisation.”

Local think tank Fedesarrollo has high expectations for Colombia’s entry into the Paris-based body. According to a recent statement by its director, Leonardo Villar, with Colombia’s entry into the OECD, “we would have a reason to maintain good policies in various sectors of the economy. It would be a sort of safety net to allow us to do things correctly”. In the same vein, Minister of Finance Mauricio Cárdenas Santa María told reporters in December 2013 that, “Being a member of this organisation is adhering to the best practice club, a stamp of quality and trust in the management of our economic policies.” Another benefit resulting from the inclusion of Colombia would be an increased capacity for the country to establish alliances with other member countries. Also worth highlighting would be the potential progressive adoption of best practices in tax, commerce, labour, environmental issues and transparency. In short, Colombia’s accession to the OECD brings many long-term benefits for the country, which would help to strengthen its institutions as well as make progress in sustainable development and reduction in the level of poverty.