Luis Alberto Moreno, President, Inter-American Development Bank (IDB): Viewpoint

Viewpoint: Luis Alberto Moreno

After coming dangerously close to becoming a failed state, over the past two decades Colombia has regained control over its territory by clamping down on violent drug cartels and guerrillas, and setting the stage for a protracted boom that transformed it into South America’s second largest economy. In less than a generation, Colombia went from being a country where every other person lived in poverty to one where more than half of the population has made it to the middle class.

There is no question that Colombia benefitted from favourable external conditions – namely record high commodity prices and ultra low international interest rates – that lifted almost all boats in Latin America. But it also managed the windfall far better than many of its neighbours, bringing down inflation while raising savings and investment rates.

In the coming years, Colombia could possibly advance along the same path of stable growth it has followed for decades, avoiding the boom-and-bust cycles that characterised many other countries in our region. If it succeeds in doing so, in a couple of decades Colombia’s per capita income could nearly double, reaching $20,000, which is comparable to the present level of Uruguay or Panama.

Another possibility is to aim higher. Colombia has the potential to become a diversified and competitive economy with a large and solidly established middle class. In this scenario, over the next 20 years Colombia might reach a per capita income of $30,000, roughly where Spain or South Korea are today. This goal is not as distant as it might seem. To reach it, Colombian society must rally around a blueprint for growth. This is not a pipe dream; in the past Colombia reached broad political consensus on constitutional reforms and fiscal discipline rules. And while last year’s divisive referendum over the peace pact with the FARC guerrilla group was a temporary setback, I am convinced that Colombians are more than prepared to endorse a long-term plan for shared prosperity. A blueprint for strong, sustained and inclusive growth would address Colombia’s main shortcomings including low levels of productivity, weak public sector management and limited socioeconomic mobility.

Colombia should also make a massive effort to upgrade its transport infrastructure. Only 25,000 km of Colombia’s 200,000-km road network are paved. Not surprisingly, the average cost of transporting a container is $1800 – more than double the average cost for the rest of our region. Raising spending in this area from 2-3.5% of GDP per year would allow the government to pave at least half of the entire road network and improve all 140,000 km of rural roads, an indispensable investment to boost farm productivity.

To finance such an ambitious public works programme, Colombia will need to overhaul its tax system. At present, it collects the equivalent of about 17% of GDP – an average that is more in line with low-income countries than high-income countries, which average about 26% of GDP. A very important step in this direction was taken earlier this year by substantive changes made to the tax system, such as increasing the value-added tax and introducing a tax on dividends. There is still work to be done on optimising income tax structure and improving tax collection, but Colombia is moving in the right direction.

It may seem like an exceedingly tall order, but there are several reasons to take this more ambitious route. One is the need to set ourselves apart from other emerging economies courting foreign investments. Another strong incentive is the rising expectations of our citizens. We have seen the outcomes in Europe, the Middle East and even other parts of Latin America when people’s hopes of a better future are dashed. Colombians today overcame seemingly impossible odds when they defeated the violence that threatened their nation’s existence. Now, they have an opportunity to make a definitive leap towards prosperity.