Colombian peace deal to significantly benefit the national economy

After five decades of civil conflict between the state, FARC, the National Liberation Army (Ejército de Liberación Nacional, ELN) and other paramilitary groups, Colombia’s painstaking peace process achieved a breakthrough in 2016. Negotiations between government and FARC guerrilla representatives had been under way in Havana, Cuba, since September 2012.

PEACE AGREEMENT: On August 24, 2016 FARC – by far the largest of the guerrilla groups – and government negotiators announced that they had reached a peace agreement. Although significant public opposition to the initial deal was evident, it was widely expected that the referendum to ratify the agreement on October 2, 2016 would pass.

However, the measure was narrowly defeated 50.2% to 49.8%. Public opposition centred on the perception that the government had made too many concessions to what is widely perceived as a defeated terrorist organisation. There were objections, for example, to the prospect of former guerrilla leaders, considered by many to be guilty of war crimes, participating in the political process through guaranteed representation in Congress. Deep concerns were also raised about granting non-custodial sentences to those who confessed to war crimes.

After the referendum, negotiators agreed to modify the agreement to address some of the concerns expressed by voters, and produced an amended version on November 24, 2016. Rather than risk a second defeat by referendum, the government chose to pursue ratification through Congress, which was successfully accomplished six days later. The following week, some 6000 members of FARC began to demobilise to designated sites around the country, where UN inspectors have been overseeing their disarmament. By March 30, 2017 the UN had reportedly registered a total of 7000 surrendered weapons.

DETAILS OF THE DEAL: Some of the main changes that were made to the agreement between the referendum and congressional ratification included the fact that it would no longer be incorporated into the country’s constitution. Additionally, the proposed transitional justice tribunal would not be made up of foreign magistrates. The text was also amended to clearly state that private property rights would not be affected by the peace deal.

The majority of the original agreement went unchanged, including several clauses to which significant objections had been raised during the referendum campaign. Among other elements of the deal, comprehensive rural reform will include a new land fund. This will provide land to rural community members who previously did not own property. In addition, it will also formalise property titles and modernise the rural cadastre.

FARC’s successor organisation will be recognised as a political party with guaranteed political participation, state funding to finance political activities and congressional representation for two terms from 2018 onwards. As part of comprehensive efforts to stamp out drug trafficking, the authorities will work with local communities to replace illicit crops while targeting traffickers with the full force of the law. To address victims of the conflict, the agreement will establish a Truth Commission and a Special Jurisdiction for Peace, which will serve as a transitional court prosecuting human rights violations and other crimes carried out during the conflict. A number of measures to ensure comprehensive reparations for victims are also in the pipeline.

A series of legislative and constitutional changes to implement the peace agreement are expected to take place during 2017, however, public funding for new initiatives under the agreement have not been explicitly allocated in the 2017 budget. Providing for such costs, especially at a time when the public finances are already under considerable pressure, is likely to be a medium-term political challenge.

PEACE DIVIDEND: While the politics of peace have been widely contested, there is a broad consensus that the agreement will be a net positive for the country’s social and economic development over the longer term. Some have argued that Colombia has already begun reaping the peace dividend in recent years, as the security situation improved and as prospects for a lasting peace agreement came into view under the presidency of Juan Manuel Santos.

The National Planning Department (Departamento Nacional de Planeación, DNP) estimated that a peace deal could increase the potential growth rate by 1.1% to 1.9%, while foreign direct investment inflows could triple to reach $36bn in the long term. A study by the DNP also suggested that peace could spur growth in tax revenues, offsetting the rise in government expenditures with a budget increase of 0.7% of GDP, less the cost of victim compensation. “It’s difficult to pin down empirically the precise peace dividend Colombia will likely accrue, but what is clear from studying other countries is that the impact is unambiguously positive in terms of confidence, investment and growth,” Gabriela Piraquive, chief economist at the DNP, told OBG in early 2017.

RURAL REWARDS: While the aggregate economic boost brought by lasting peace promises to be significant, it is likely to bring particular benefits to certain regions and sectors. “The peace dividend is potentially significant for the country as a whole, but particularly for the less-developed rural regions. Peace can help spur faster economic growth in the future while also narrowing regional inequalities and promoting social inclusion,” Leonardo Villar, president of the local think tank Fedesarollo told OBG. “Peace and security are fundamental aspects of individual and societal well-being, so even if they don’t show up in macroeconomic indicators, we should see an immediate improvement in living standards arising from the peace agreement.” In a similar vein, Juana Téllez, chief economist at investment bank BBVA, pointed out, “A reduction in deaths and injuries can only be positive for the country’s human capital.”

Rural areas are expected to reap the most significant benefits of peace over the medium to long term, with the agriculture and agri-food sectors particularly ripe for investment. Mining will become possible in some remote areas which had not previously been accessible due to security concerns. The construction sector is also expected to experience growth, as buildings and infrastructure are renewed or, in many cases, built for the first time in former conflict zones.

The economy will benefit from long-term plans to significantly boost investment in infrastructure. However, the gains may be greatest for remote areas that had previously been under conflict. In addition, the tourism sector is also expected to receive a significant peace dividend. Not only will this be advantageous for former conflict areas, it should also boost tourism across the country, as Colombia’s reputation as a dangerous destination fades.

SHOULDERING THE BURDEN: The precise peace dividend may be incalculable, but implementing the agreement will not be without its financial costs, particularly in the short to medium term. The peace agreement contains a multitude of commitments, but the government has not made explicit allocations in the 2017 budget for implementation costs. In early 2016 the Congressional Peace Commission estimated that implementing the peace agreement could cost the government $31bn. There is some ambiguity as to what should be classified as a financial cost of peace. For example, rural development and countrywide infrastructure investment are national priorities notwithstanding the recent peace agreement, and featured prominently in the National Development Plan 2014-18. Furthermore, victim compensation has been paid since 2011, when the Victims and Land Restitution Law was passed. However, there are a number of costs that will arise directly from the peace agreement, such as the controversial payment of pensions to former fighters, and the establishment of the transitional judicial system. Over time, as peace takes hold, government expenditure on security costs will likely fall. “While military costs are expected to decline over the longer term, as security threats fade, they will likely remain high in the short term. Near-term costs will stem from efforts to establish rule of law and increase the presence of government authorities across the country,” said Villar.

The immediate challenges to implementing the peace agreement are demilitarisation of FARC, bringing the ELN and other armed groups under the agreement, as well as establishing the Special Jurisdiction for Peace. Extending the reach of the state and the rule of law to transitioning conflict zones is an important goal for the medium term.

While there are certainly challenges ahead, 2016 brought a landmark peace agreement and with it the potential to significantly increase economic growth and living standards across the whole of Colombia.