OBG talks to President Juan Manuel Santos

Interview: Juan Manuel Santos

As free trade agreements (FTAs) are two-way streets, how much difficulty does Colombian industry face from foreign competition?

JUAN MANUEL SANTOS: The FTAs with the US and the EU are very important as these are our two principal trade partners. Together, both regions purchased more than 51% of our exports, and 37% of our imports came from the US and EU. While our economy is supplemental to theirs, the major challenge for Colombian productive sectors is to harness potential, particularly in low-exporting activities. That is the case of sectors with added value such as agriculture and livestock, and of labour-intensive industrial segments, including apparel and footwear.

Among the sectors where there is direct competition, some are internationally competitive but others need to move forward, so we are working to enhance their abilities in a global market. For the second consecutive year, we have reduced tariffs for foreign capital goods and raw materials, which contributes to the technological modernisation of our companies. Additionally, we offer very favourable credit lines to finance technological upgrades. Local companies might face other difficulties such as the high cost of energy and human resources. We have taken measures on both of these fronts, by removing surcharges on electricity and gas, as well as eliminating certain payroll taxes, which will mean lower employment costs.

The Organisation for Economic Cooperation and Development and the IMF say that addressing peso appreciation requires higher productivity, rather than monetary intervention. What is your view?

SANTOS: It is not entirely true that nothing can be done through a proper monetary policy. In fact, measures are already being adopted. Currency appreciation pressures are a consequence of international factors beyond the control of governments, and specifically of flexible monetary policies implemented by developed economies. Other factors affecting the peso include high commodity prices and increased foreign investment flows. To soften revaluation pressure from increased export revenues, we have adopted structural measures. The Royalties’ Scheme reform makes it compulsory to save part of its received revenues. In 2012 nearly $1.7bn was saved, and another $2.5bn will be saved between 2013 and 2014.

Another example is the fiscal rule, which defines a path for continued reduction of the structural fiscal deficit. Long-term sustainability of public finances will lower pressure on the exchange rate. Monetary policy also works in the same direction. Our central bank has lowered the reference interest rate and is currently purchasing more than $30m on a daily basis, allowing for a partial cushioning of the higher foreign currency offer available in the market.

These measures have undoubtedly helped temper the peso’s appreciation, although we have not managed to reverse the trend completely. Joint efforts between the government and the private sector to improve productivity and competitiveness are necessary complements to face revaluation.

What is being done to improve poorly performing sectors, such as agriculture?

SANTOS: The assessment of the dynamics of any economy cannot be understood without our case, as Colombia seeks to strengthen its international integration.

Since mid-2011, the world economy has been decelerating because of the sovereign debt crises in the euro zone and the weak dynamics of the US economy.

Even emerging economies, which were the world’s growth engines until early 2012, have lost some drive.

Despite this unfavourable environment, the Colombian economy grew by 5.9% in 2011 and 4% in 2012, both above the average for Latin America. While mining played an important role in this growth, we saw notable participation from other sectors such as construction, retail, transport and financial services. Our industrial sector grew by more than 4% in 2011 but decelerated in 2012, largely due to contracting global demand.

In the case of agriculture, we clearly have some structural problems, which we have been gradually solving. In April 2013 we launched the productivity and employment drive plan, with anticipated investments in excess of $2.7bn aimed at further stimulating industrial and agricultural growth and measures focused on increasing competitiveness and creating employment. While most of the foreign direct investment (FDI) entering the country has concentrated on hydrocarbons and mining, that does not mean it has ceased to grow in other areas. Part of the strategy to improve FDI interest in other sectors is the network of FTAs, which grant us permanent preferential access to more than 850m consumers, a figure we expect to increase to 1.5bn in 2014. We also have 11 investment protection treaties, which provide clear and stable rules for investors.

How are commercial relations with Asia and regionally in Latin America being developed?

SANTOS: The important FTAs with the US and the EU do not imply that we are neglecting our relationships with Asia or Latin America. On the contrary, we have been vigorously working on strengthening ties. We negotiated an FTA with South Korea, which is being ratified, and we started negotiating an agreement with Japan. We have investment protection treaties in place with Japan, China and India. Additionally, we want to join the Asia-Pacific Economic Cooperation, which we expect to achieve once the moratorium is lifted.

Regionally, we founded the Pacific Alliance with Mexico, Peru and Chile, which is something of great importance. The Pacific Alliance, which Costa Rica, Panama and Guatemala will join shortly, seeks to deepen integration among our countries through increasing trade, investment, and the flow of capital and people, as well as deepening our economic relationships with the entire Asia-Pacific region. This process has been labelled the most ambitious in Latin America’s history as well as that with the best prospects. The Pacific Alliance is drawing attention from numerous potential partners, not only in the Western Hemisphere, but also in Europe and Asia. Additionally, we have deepened trade agreements with other Latin American countries. In light of global trends, I firmly believe in our region’s potential in the upcoming few decades, although I am also aware of the fact that it is difficult to succeed in isolation. We need to combine our efforts and take advantage of greater economic integration.

Social inclusion is a difficult product to sell if the price of health, education and household amenities is taxation. What are your views?

SANTOS: A primary goal of this government has been to reduce poverty and inequality. To that end, the different programmes set in motion are yielding very good results. Over the past two years, 1.7m Colombians have overcome poverty and 700,000 have emerged from extreme poverty. More importantly, we have reversed a perverse trend where economic growth benefitted the wealthiest more than the poor, thus leading to the increase of inequality gaps.

Over these last two years, we reduced the Gini coefficient, which measures inequality within a nation, and Colombia is no longer counted among the continent’s most unequal countries. There is still much work to be done, however, as the challenges of poverty and disparity are immense. One very important programme is United Network, in which social managers visit families in extreme poverty and give them personalised help to take advantage of state programmes.

Another highly effective programme has been Families in Action, which provides economic subsidies to the poorest families provided that they send their children to school, as well as take them to nutrition and health centres. We have achieved almost universal coverage in health and education, and we are working intensively on improving the quality of both of these crucial areas. We extended and unified all health benefit plans, to avoid having first- and second-class healthcare by providing the same benefits for everyone.