Government making major improvements to Colombian economy

In late October 2015 the World Bank released its report “Doing Business 2016: Measuring Regulatory Quality and Efficiency”, which ranked a total of 189 countries worldwide for the ease with which 10 specific business processes can be performed. They are: starting a business, dealing with construction permits, getting electricity, registering property, getting access to credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts and resolving insolvency.

For each of these activities the World Bank compiles a distance to frontier (DTF) score on a scale of zero to 100. The DTF is designed to capture the gap between a country’s performance in each of the 10 processes and a measure of best practice developed across the entire sample. The higher the DTF score, the closer a country is to best practice. According to the World Bank, “When compared across years, the distance to frontier score shows how much the regulatory environment for local entrepreneurs in an economy has changed over time in absolute terms, while the ease of doing business ranking can show only how much the regulatory environment has changed relative to that in other economies.”

Third Regionally

In 2016 Colombia was ranked 54th in the world for its ease of doing business, slipping back two places from the 2015 ranking of 52nd out of 189. However, despite this small fall, the country’s overall DTF score improved to 70.43 from 69.89. Overall Colombia was the fourth-highest ranked economy in Latin America and the Caribbean, behind Mexico (38), Chile (48) and Peru (50) but ahead of Costa Rica (58), Jamaica (64), Panama (69), Brazil (116) and Argentina (121).

There was evidence that despite its moves up and down the rankings, Colombia has managed to achieve sustained improvement. In an October 2015 press release the World Bank commented, “Colombia has emerged as the country in Latin America and the Caribbean that has improved its business regulation the most since Doing Business started 12 years ago. Colombia has reduced from 70 to 11 the number of payments required to file taxes and it has improved access to credit by broadening the range of assets that can be used as collateral, for instance.”

Mixed Bag

In 2016 Colombia performed best in getting credit, where it ranked second, followed by protecting minority investors (14th), resolving insolvency (30th) and dealing with construction permits (38th). However, it lagged behind international best practice in starting a business (84th) and trading across borders (110th). While its paying taxes rank was still low at 136th out of 189, it managed to climb 10 spots from 150th in 2015. The country’s weakest area was enforcing contracts, where it ranked 180th. Every year, the World Bank highlights areas where reforms have introduced improvements, making business processes easier, or where changes have had the contrary effect, making things more difficult. In 2016 Colombia was recognised for having made one reform with a positive impact on paying taxes.

The DTF score for paying taxes is calculated on a number of sub-categories. As mentioned, the main positive change caused by reform was that the average number of tax payments was reduced from 70 to 11. This brought Colombia in line with the OECD average (11.1 tax payments per annum) and well ahead of the average for Latin America and the Caribbean (30.1 payments per annum). However, the time taken to prepare, file and pay taxes, at 239 hours, remained significantly above the OECD average of 176.6 hours. And an important negative was that the total rate of company tax remained above the average in both Latin America and the OECD.

For this sub-indicator, the World Bank calculates “the amount of taxes and mandatory contributions payable by the business in the second year of operation, expressed as a share of commercial profits”. In Colombia’s case this was identified as 69.7%, which compared unfavourably to the averages for Latin American and the Caribbean (47.7%) and the OECD (41.2%). The conclusion was that while Colombia’s 2016 DTF score for paying taxes rose to 63.32 (from 58.36 in the previous year), there was still a need for further improvement. Comparable DTF scores were much higher in Mexico (73.67) and Peru (81.18).

Global Competitiveness

Colombia is also regularly covered in the World Economic Forum’s (WEF) annual global competitiveness report, which ranks a country’s ability to compete across 12 main criteria or pillars. In the 2015-16 edition of the report, Colombia was ranked 61st out of 140 countries, having risen five positions since the 2014-15 report. This new ranking positioned Colombia as the fifth-most-competitive country in Latin America, behind Chile (35th), Panama (50th), Costa Rica (52nd) and Mexico (57th).

Colombia performed best in areas such as financial market development (25th out of 140), macroeconomic environment (32nd), market size (36th) and business sophistication (59th). Where it performed least well was in areas such as labour market efficiency (86th), health and primary education (97th), goods market efficiency (108th) and institutions (114th). The WEF report regularly conducts a survey of business opinion to identify the most problematic factors for doing business. In Colombia’s case the top issues were the tax rates, which was mentioned by 18.6% of respondents, followed by corruption (15.5%), inadequate supply of infrastructure (11.1%), inefficient government bureaucracy (9.8%) and complexity of tax regulations (8.9%).

Successive Colombian governments have sought to address the issue of competitiveness. In 2006 the former government set out a long-term vision under which by 2032 Colombia would become the third most competitive country in Latin America. As a result the country would achieve per capita incomes equivalent to those of a high-middle-income country and develop a high value-added goods and services export economy, which would also promote innovation and regional development, improve the quality of life, and reduce poverty and inequality. In the same year a new coordinating body was created, known as the National Administrative System of Competitiveness, which has subsequently been renamed the National System of Competitiveness, Science, Technology and Innovation (Sistema Nacional de Competitividad, Ciencia, Tecnología e Innovación, SNCCTI). The SNCCTI has a national committee that advises the president and council of ministers, and works with public and private sector stakeholders across a range of projects. The overall aim of reforming business processes and reducing costs is also acknowledged in the most recent National Development Plan, which covers the years 2014-18.

Although progress has been made as a result of these institutional arrangements, a number of stakeholders feel that more needs to be done. In November 2015 the private sector advisory group Consejo Privado de Competividad (CPC) published its “National Competitiveness Report 2015-16”, which said the country was still falling short of meeting basic requirements to compete. The report highlighted what it saw as the need to improve the quality of institutions, health care, primary education and infrastructure, as well as “policies which help increase the sophistication and diversification of the economy and guarantee an increase in productivity.” Interestingly, as part of its deliberations the CPC met with Idris Jala, head of Malaysia’s Economic Transformation Programme, which is more ambitious in its objectives for Malaysia, targeting developed-nation status by 2020 and identifying 12 key economic sectors as priorities for accelerated development.

Regional Dimension

Part of the debate on streamlining business processes and improving the operating environment has focused on Colombia’s regions and cities. One example of progress is the city of Medellín which, despite having a reputation for drug-related violence in the 1980s and 1990s, in 2013 won recognition as the world’s most innovative city from the Urban Land Institute. Medellín has developed a number of initiatives, including offering support for start-up companies and improving public transport. Another city making special efforts to improve the business environment – with a particular focus on ICT and business process outsourcing – has been Manizales, in the department of Caldas.

In 2015 Deloitte released its “2015 Index of Social Progress”, which ranked Colombian cities according to measures of social development, placing Manizales in the number one position, ahead of Bucaramanga, Medellín and Bogotá. Meanwhile, the 2015 edition of the Economic Commission for Latin America and the Caribbean ranking of Colombian “departments”, or provinces, by competitiveness identified the top five as Cundinamarca, Bogotá, Antioquia (Medellín), Caldas (Manizales) and Santander (Bucaramanga).