New programmes in Colombia to decrease inequality

Though Colombia has achieved impressive economic growth over the last decade, the benefits of this remain unequally distributed. The government has acknowledged this issue and made a commitment to pursue equitable policies. The OECD defines inclusive growth as “economic growth that creates opportunities for all segments of the population and distributes the dividends of increased prosperity, both in monetary and non-monetary terms, fairly across society.”

Large Informal Economy

One of the key obstacles to more inclusive growth in Colombia is the issue of informality. People in the informal sector work in a range of occupations, from farm labourers to taxi drivers and domestic servants, as well as small businesses. However, they make no direct tax contributions, have no security of employment and do not receive pensions or other social benefits. Alfredo Bula, CEO at the Financial Fund for Development Projects, told OBG, “In the coming years, increasing government services in rural areas and remote municipalities is an absolute priority, as these are the regions which need the greatest levels of support.”

According to an analysis on informality prepared in 2014 by the Colombian Insurers’ Association ( Federación de Aseguradores Colombiano, Fasecolda), by the end of May 2014 a total of 13.9m people, or 64.8% of the labour force, were informal. According to Fasecolda, this was one of the highest informality rates in Latin America, higher than Mexico (52.7%), Ecuador (49.1%) and Brazil (30.2%). Fasecolda’s report said that in the same month, Colombia had a total population of 46.2m, of which 36.7m, or 79%, were of working age. Of that working-age group 64%, or 23.5m people, were economically active and 21.4m were actually employed, meaning that Colombia had an 8.9% unemployment rate.

A potentially serious and long-term threat to inclusive growth is the inadequacy of current pension coverage. Fasecolda calculated that only 7.5m people were making regular contributions to the country’s pensions system. With a public sector pay-as-you-go or “defined benefits” system and a private sector “defined contributions” system, where each contributor pays into an individual account, some believe there is a potential long-term deficit in the public system that could be a risk to fiscal solvency.

Income Distribution

A key related issue is that Colombia’s distribution of income is one of the most unequal in Latin America. This has remained the case despite some improvements over the past two decades. According to the January 2015 OECD report “Colombia: Policy Priorities for Inclusive Development”, in 2012 the top 10% of the population by income earned 37 times more than the bottom 10%, compared to a ratio of 25:1 in Chile and Mexico and an average of 9:1 in the OECD. One measure of income inequality is the Gini coefficient, derived from household income surveys and often expressed on a 0-1 scale, where zero represents theoretical “perfect equality “ (all households have the same income) and 1 represents theoretical “perfect inequality” (all the income held by one household).

According to World Bank data, in 2000 Colombia was the third most unequal country in South America with a Gini coefficient of 0.587, placing it behind Bolivia (0.628) and Brazil (0.601). After the decade of strong commodity export-led growth that followed, most Latin American countries had reduced their Gini coefficients, but Colombia’s progress was less marked than that of many of its peers. In 2010 Bolivia, the most unequal country in South America, had reduced its Gini coefficient by 6.5 points to 0.563, Brazil had achieved 5.4-point reduction to 0.547, while Colombia had only managed a reduction of 2.8 points to 0.559. This meant that although it had made some progress towards greater equality, Colombia’s relative position had worsened, becoming the second-most unequal country in South America after Bolivia. According to the latest available IMF data for 2014, Colombia’s Gini coefficient has reduced a little further to 0.538, but this is still among the highest in the world.

Poverty Reduction

Another measure of inclusive growth is the proportion of the population living in poverty. Here there has been a process of consistent improvement. According to a June 2015 IMF selected issues paper, “In Colombia, poverty has declined markedly since the late 1990s (from 50% in 2002 to 28.5% in 2014 using the national definition), underpinned by both skilful macroeconomic policies and well-targeted social programmes. Nonetheless, the benefits of stronger growth have not resulted in equally strong reductions in income inequality (the Gini coefficient declined only from 0.572 in 2002 to 0.538 in 2014), and inequality in Colombia remains among the highest in the world.”

The IMF also suggested that persistently high inequality is caused by a series of issues connected to the nature of the labour market, including informality, education, pensions and fiscal policy. However, the IMF recognises that the government’s National Development Plan for 2014-18 includes a series of initiatives designed to support inclusive growth. These include measures to strengthen the quality and availability of public education and provide loans for low-income students. Importantly, the government has also sought to simplify and streamline formal contributions to pension and health care systems, which could reduce labour informality. The development plan seeks to extend a safety net for the poor by extending the scope of Colombia Mayor, a non-contributory pension scheme.

Including Everyone

In its June 2015 Article IV consultation for Colombia, the IMF’s directors made specific and supportive reference to the country’s inclusive growth programme. A press release said, “They agreed that key priorities are to reduce informality in the economy, improve competitiveness and infrastructure, and foster social mobility, especially through better education and health care.”

The OECD’s report also made a set of policy suggestions designed to promote more inclusive growth and combat what it described as the related problems of low productivity, high levels of informality, unemployment and income inequality. The report called for a comprehensive policy reform package that would tackle deficiencies in the country’s territorial development, education and innovation systems, competition framework, land rights and infrastructure. It suggested tax reform should be one of the top priorities, since “tax revenues are insufficient to meet the public spending and investment needed to close the productivity gap.” It also suggested that the tax system could be made more progressive, so as to reduce its negative impact on employment levels.

Increased Potential

The expected peace settlement with rebel forces should also have an impact on the country’s ability to achieve more inclusive growth. The effect will be positive, although still difficult to quantify. According to Mauricio Cárdenas, minister of finance and public credit, the peace agreements negotiated during the course of 2012-15, covering a whole range of measures, could involve total commitments equivalent to $90bn from all sources over the next 10 years. In late 2015 Congress approved a $3.4bn appropriations bill for post-conflict spending in 2016, which could be a rough indicator of the ongoing annual amount required from the central government over the next decade. There were some doubts over how this would be financed, with Juan Camilo Restrepo, the former minister of agriculture, suggesting foreign aid would cover only 15% of the bill. Cárdenas, however, is more optimistic, arguing that given the faster rate of GDP growth to which the settlement would lead, peace will finance itself.

In the long term, improving the quality of Colombia’s public education system may make a major contribution to inclusive growth. Colombia has regularly performed poorly on Programme for International Student Assessment (PISA) tests, which are carried out by the OECD. On the 2012 PISA tests Colombia was behind most of its Latin American peers. The average performance for 15-year-olds in Colombia was 403 points, compared to an OECD average of 496 points. Regionally, the country was behind Chile (441) and Mexico (424) but only slightly below Brazil (410), and ahead of Peru (384).

The government responded in March 2015 by launching the Synthetic Index of Educational Quality (Índice Sintético de Calidad Educativa, ISCE). Based on a scale of 1-10, the ISCE is being used to introduce performance-related incentives. In a press release, Gina Parody, the minister of education, said, “If the school’s staff meets [its] objective, everyone from the janitor to the head teacher will receive an additional monthly salary.” In the first ISCE results in 2015 Colombia’s primary schools received an average of 5.13. This will need to be improved to at least 7 if Colombia is to meet its targets for competitiveness.