What will be the immediate and long-term benefits of Colombia's potential accession to the OECD?
We work with our member countries to help them establish better policies that provide better lives for their citizens. The accession process gives Colombia the opportunity to undertake a comprehensive diagnosis of its public policies vis-à-vis the OECD's best practices. It is also an opportunity to accelerate structural reforms and upgrade its legal and regulatory frameworks to increase their effectiveness. For instance, the OECD has recently provided in-depth comments and suggestions on different sections of Colombia's next National Development Plan. But this is a two-way street, where learning from peers is also an important aspect of OECD membership. Our member countries will therefore benefit from Colombia's policy experience in dealing with its economic and social challenges.
What fundamental regulatory reforms must be undertaken to promote inclusive growth in Colombia?
Colombia's economy has done remarkably well over the past decade. Strong growth was driven by an oil and mining boom, and by foreign direct investment in the commodity sector and broad-based investment. This has allowed for fast catch-up in GDP per capita relative to OECD economies. However, income inequality and labor informality remain high. Poverty has declined, but old-age poverty is significantly higher than in most Latin American countries. Fewer than 40% of all Colombians have an old-age pension and half of the elderly live below the national extreme poverty line. The government provides old-age income support for the poor through the Colombia Mayor program, but that, too, is below the poverty line. An in-depth reform of the pensions system and old-age income support is required to increase coverage and equity. The minimum wage is high relative to the average wage, pushing low-skilled workers, youth, and those in less developed regions into the informal sector. Keeping minimum wage growth close to inflation would help with tackling informality. Furthermore, and despite real progress, unemployment remains high. Meanwhile, limited access to pre-primary and tertiary education for underprivileged households reduces opportunities for upward mobility. The tax system is largely regressive and does little to reduce income inequality. A comprehensive tax reform is needed to increase fairness, growth and revenues to finance better social policies and investment in skills.
How should Colombia adapt to plummeting petrol prices?
The Colombian economy needs to diversify beyond the oil and mining sector. The fading commodity boom requires policy action to sustain growth. Investment beyond the natural resource sector is needed to create formal jobs and reduce the high levels of income inequality. A comprehensive tax reform is needed. The gradual elimination of the net wealth tax on businesses approved in December 2014 was a step in the right direction. However, more can and should be done. In particular, a gradual reduction in corporate tax rates, broadening the corporate tax base by eliminating special regimes and taxing capital income more at the individual level, would boost investment and make the tax system more progressive. More investment in transport infrastructure, as well as reforms to improve the business climate, such as a better enforcement of bureaucratic procedures, improved monitoring of institutions vulnerable to corruption, and further reduction in barriers to trade and competition in product markets would also contribute positively.
What can be done to reduce tax evasion in Colombia, and how serious an obstacle is this to inclusive growth? What other fiscal reforms ought to be prioritized?
Widespread tax evasion is a significant drag on tax revenues. Official estimates are currently at around 25%, amounting to around 2% of GDP. While part of the high evasion reflects the overall high informality of the economy, institutional weaknesses in the tax and customs administration are also to blame. Strengthening and modernizing the tax administration (DIAN) would help reduce tax evasion. Tax revenues comprise about 20% of GDP, which is low compared to other Latin American countries and the OECD average. Lower oil revenues and the expiration of a number of taxes are straining the budget at a time when social and development spending needs are rising. Meanwhile, heavy reliance on corporate income taxes reduces investment. At the same time, the redistributive impact of taxation is reduced because firms, rather than households pay most income and wealth taxes. All of this leads us to believe that Colombia needs a comprehensive tax reform that boosts revenues and shifts the tax burden to support more inclusive and green growth. Tax loopholes and exemptions that reduce the tax base and mainly favor the rich should also be reduced significantly.
One area where Colombia is significantly lagging in terms of OECD accession indicators is private sector-funded R&D. What can be done to improve this?
Colombia's innovation system needs to be strengthened. Gross R&D expenditure is only 0.2% of GDP, compared with 1.2% in Brazil and a 2.4% average in the OECD area. Other measures of innovation, such as patent registrations and scientific publications per capita, place Colombia below regional peers such as Argentina, Brazil, and Chile. Colombia's innovation system lacks a strong business core as a result of which business R&D expenditure relative to GDP is negligible in relation to the size of its economy, and only 30% of total R&D is undertaken by the business sector, compared to 65-70% in leading OECD countries. Policy has thus far emphasized support for research-driven enterprises and university-industry linkages. This is important, but the potential for innovation goes far beyond such entities, and includes the broader base of small and medium-sized enterprises and young firms. Access to finance also represents a major constraint for the creation, survival and growth of small firms, especially innovative ones. Policy measures have recently been introduced in the business sector to alleviate financial constraints while fostering innovation and productivity. Raising the level of business innovation will require further investment in skills, particularly engineering, design, management as well as information and communication technology (ICT). Policymakers need to promote an environment of mobility between firms and public research institutes, facilitate student placements in industry and foster increased business investment in human resources. In addition to focusing on doctoral graduates and other high-level skills, more attention should be devoted to professional technical degrees.
Click here to see the Economic Survey of Colombia 2015.
© The Business Year - March 2015