Colombia: Kidnapping Capital to Economic Beacon

In a world marked by widespread political and economic pessimism, Colombia remains a source of hope. This June, the government signed a ceasefire agreement with the left-wing FARC rebels, whose insurgency has lasted more than half a century. In the months ahead, the country’s people will vote on a peace deal that would end a conflict that has resulted in over 200,000 deaths and the displacement of 6 million people, over ten percent of Colombia’s population.

The epidemic of crime associated with rebel groups and drug cartels has also subsided. Around the turn of the millennium, Colombia was known as the kidnapping capital of the world, accounting for an estimated half of all abductions globally. Today, the country sees less than one kidnapping per day, down from eight in 2000, and accounts for only an estimated 4% of incidents worldwide. The murder rate has also dropped significantly, from over 70 per 100,000 people in 1996 to 25 in 2015.

Positive economic indicators accompany this progress. For example, even as foreign investment in the energy sector plunged in the first quarter of this year, “overall foreign investment has more than doubled during the same time frame,” an Ernst and Young executive told CNBC. The government also plans to spend $70 billion on infrastructure by 2035. Only 20% of Colombia’s roads are paved, so there is plenty of low-hanging fruit.

Only 20% of Colombia’s roads are paved .

A peace deal could open up significant opportunities in tourism and mining. In part thanks to increased stability, analysts estimate the number of tourists visiting Colombia could rise by 50% by 2020. The appeal of a city like Medellín—which the New York Times profiled as an up-and-coming destination last year—foreshadows how peace and investment could attract tourists more broadly. An end to the conflict could also open up development of some of Colombia’s previously under-tapped gold and copper reserves.

In addition to opportunities in tourism and mining, the country has a wealth of agricultural land waiting to be put to use. Coffee and palm oil are two booming sectors, but there are other possibilities as well. One potential source of growth is marijuana, a crop that the country is geographically well suited for. The government has already granted licenses to produce and export marijuana derivatives, and more are expected soon. 

One potential source of growth is marijuana, a crop that the country is geographically well suited for.

As noted in the Wall Street Journal, “Fourteen countries that have opened up to medicinal marijuana imports including the U.S., Canada, Germany, Spain and Holland are being looked at as prospective customers.” As one businessman put it, “It’s health; it’s science; it’s the opportunity to redeem the name of the country.” Growers are hoping to produce the plant at a tenth of the cost its Canadian and American peers manage.

Also related to trade, Colombia is a member of the promising Pacific Alliance trade bloc, along with Chile, Mexico, and Peru. Together, they represent over a third of Latin America’s GDP and are cooperating to implement reforms that could give an economic boost to them all. And let’s not forget that Colombia has both Caribbean and Pacific coasts, providing it unique access to both Eastern and Western markets.

The country’s leadership is also proving effective at handling crises as they arise. For instance, thanks in part to proactive public health efforts, the domestic spread of the Zika virus has been less devastating than originally feared. While Colombians have suffered 100,000 Zika infections—the second-most in Latin America—the country was able to declare the epidemic over in July—the first in the region to do so. Officials had originally expected the virus would affect 700,000 people. 

If the Colombian story is looking positive from a bird’s eye view, it looks even better to its Venezuelan neighbors. Desperate for supplies as their own country suffers from widespread shortages, they have flocked across the Colombian border to secure necessities like food and medicine. Closed by Venezuelan President Maduro last year, the border is now being permanently re-opened. 

Despite the progress to peace—both domestically and with its eastern neighbor—not everything is positive about the Colombian economy. In particular, the oil price drop has hit Colombia hard. Oil historically accounts for around one-fifth of the country’s government revenue, and two-fifths of its exports. The downturn has driven a nearly 4% budget deficit and the loss of 40,000 jobs. Since August 2012, the value of the Colombian peso has dropped 60% against the dollar. Now, policymakers are scrambling to make up the lost revenue.

Moreover, as droughts associated with El Niño drove up food prices, the country’s inflation rate jumped to 8.6%. The sharp decline in the peso, thanks to the oil bust, has also raised costs for imported goods. To beat back rising prices, the central bank has had to hike interest rates eleven months in a row. As typically happens when rates rise dramatically, economic activity has slowed.

And peace, while looking likely, is far from certain. For one, it is not clear that the electorate will vote to accept the FARC peace deal. While recent polls suggest popular opinion turning in favor of the deal, a couple of prior surveys had signaled majority opposition to the measure, with conservative politicians arguing that it is too favorable to the rebels. There are also significant concerns about electoral fraud, and distrust of politicians on both sides is widespread.

A failure to cement the deal could hurt the country’s economic plans and credit ratings. And even if the settlement is finalized, mopping up the damage will be an imposing burden in itself: officials are already working hard on the complex task of restituting land that citizens fled during the conflict, and have hatched a plan to clear out landmines placed during the hostilities. The weak economy will constrain the government’s ability to fund a peace that could cost as much as $90 billion to implement.

Despite these challenges, many Colombians are optimistic, and for good reason. As the political scientist Alejo Vargas put it, “Even if it’s not the final deal, we can say without a doubt the process is irreversible now.” The progress is real. “This is a transcendent step,” he added. 

Vikram Mansharamani is the President of Kelan Advisors, LLC and the author of Boombustology: Spotting Financial Bubbles Before They Burst (Wiley, 2011). To learn more about him or to subscribe to his free mailing list, visit his website. He can also be followed on Twitter @mansharamani or by liking his Facebook page.