Colombia’s Lesson in Economic Development
A faster pace of economic development calls for micro-level reforms to help specific sectors and companies become more competitive in global markets.
February 2015 | by John Olivier
Many developing countries are frustrated because better macroeconomic conditions haven’t led to faster economic growth. Clearly, earning an investment-grade rating on sovereign debt isn’t enough. Colombia has enjoyed a surprising political and economic turnaround over the past decade. Nonetheless, many economists assert that the improvements in the business environment are necessary but not sufficient to ensure sustainable economic development. The country’s government concluded that to achieve enduring success, it would have to focus on making specific business sectors more competitive. Its Productive Transformation Program, launched in 2007, created a novel public–private partnership engaging eight industry sectors. Early results suggest that collaboration has not only removed barriers but also built competitive advantages.
The country has come a long way since 2000, when some economists and political analysts were saying that it was becoming a failed state. The government has reclaimed territories it had abandoned to drug traffickers and rebel armies, crime rates have fallen drastically, investor confidence is high, and unemployment has dropped. Growth slowed during the 2008–09 global recession, but Colombia has fared better than the rest of Latin America: from 2005 to 2009, the economy grew at an annual rate of 4.6 percent, compared with 3.6 percent for the whole region.
One big issue as Colombia tries to achieve sustained economic growth is its reliance on commodities. The country has a diversified industrial base focused on the internal market—the result of the import substitution model it (like most of Latin America) pursued from the 1950s until the early 1990s. Most of its industries failed to develop enough to become competitive globally; many of them underwent a painful restructuring once the country started opening its economy, in the 1990s. Some of the stronger sectors, taking advantage of newly signed free-trade agreements, worked hard to export manufactured goods to other Latin American countries. These efforts, however, haven’t reduced Colombia’s dependence on commodities, such as oil, coal, coffee, and fresh-cut flowers, which still collectively represent about 70 percent of its exports.
The leaders of Colombia’s business community and public sector are committed to accelerating the pace of the country’s economic development. This goal will require not only sustained improvement in the business environment, security, and fiscal policy but also microlevel reforms to ensure that specific sectors and companies become more competitive in global markets. The Productive Transformation Program is an important element in this process. Colombia’s new government, which takes office in August, has promised to continue it; in the second half of 2010, the program will be extended to the agribusiness sector. We think this approach offers lessons for other developing nations looking for ways to spur economic development.
The commodity sector is important, and Colombian officials rightly concluded that it should be nurtured, much as some high-income countries (for instance, Australia and Canada) have done to support economic development. But these officials also decided that other measures should be undertaken as well. To generate better-paying jobs for Colombians, the Productive Transformation Program seeks to accelerate the growth and competitiveness of higher-value-added sectors.
A keystone of the program is closer collaboration between the government and the business community. Rather than choose winners, as some developing countries have, Colombia invited all sectors to participate in the program. Given the government’s limited resources, it organized a contest to decide which ones to work with first. It did set preconditions: subsidies or protection would not be granted, so any improvement in competitiveness would have to occur under market conditions. In exchange, the government agreed to work with private businesses to educate and train the workforce in pertinent skills, to improve the regulatory environment, to help promote industries in foreign markets, and to develop the required infrastructure.