Colombia Gains Economic Freedom By Fighting Drugs, Corruption

By Dialogo
March 24, 2011

A decade of targeting drug lords and Marxist guerillas is paying off for
Colombia, as the rule of law is restored and the economy is starting to flourish,
according to the recently released 2011 Index of Economic Freedom by the Heritage
Foundation and The Wall Street Journal.
“The key to understanding the relationship between economic freedom and
prosperity is particularly important in Latin America,” Israel Ortega, a spokesman
for the Heritage Foundation, told Diálogo magazine “By improving domestic security,
the governments there are bolstering economic security.”
Colombia saw the 10th best global improvement in its score on the Heritage
index, which ranks 187 countries according to 10 categories that examine economic
openness, competitiveness, and the rule of law.
Colombia was ranked at 68.0 on a 100 point scale, making it a mostly free
country, and No. 45 in the world. By contrast, Hong Kong was No. 1 and the U.S. was
No. 9.
“Led by Colombia’s 2.5 point gain, Latin America continued to improve across
the board,” the Heritage Foundation study said.
President Alvaro Uribe, elected in 2002 and re-elected in 2006, made national
security a top priority, prosecuting a war against both the left-wing Revolutionary
Armed Forces of Colombia (FARC) and right-wing paramilitary groups.
He also waged an aggressive war on narcotics trafficking in collaboration
with the U.S.
“Over his tenure, peace was restored to large areas of the country and
unemployment dropped significantly,” the Heritage report said.
Colombia is one of the region’s longest-standing democracies.
Recently elected president Juan Manuel Santos won a run-off in June 2010 with
64 percent of the vote. He’s pledged to preserve “democratic security” and advance
economic growth.
The legitimate Colombian economy depends heavily on exports of petroleum,
coffee, and cut flowers, according to the Heritage report.
The government is pursuing a policy of deregulation to further its economic
growth. Colombia’s government recently eliminated a policy of setting minimum
freight prices for the trucking industry. Months of rain last year damaged highways
and bridges and caused an increase in transportation costs, rendering the old rules
obsolete.
“With today’s decision, the system of highway cargo transport goes from one
of intervention on prices to one of free, but monitored prices,” said a statement
from the office of President Santos.

Deregulatory policies pay off

Foreign direct investment (FDI) in Colombia was $7.2 billion last year.
Compound annual growth is expected to be 4.2 percent over the next five years.
Colombia’s score of 68.0 on the index reflects improved scores for business,
investment, labor freedom, and government spending. Colombia is ranked 7th out of 29
countries in the South and Central America/Caribbean region,
But there is still room for considerable improvement.
“Further growth in economic freedom in Colombia will require deeper
institutional reforms that include better protection of property rights and a
stronger judicial system,” the Heritage study said. “Corruption remains considerable
in many sectors of the economy, and the relatively high marginal tax rates encourage
tax evasion.”
For instance, money laundering operations in Colombia involving funds from
drug-trafficking amount to close to $8.7 billion dollars per year, according to
Colombia’s Financial Information and Analysis Unit, based in Bogota.
There were more than 42,000 suspicious operations from January 2006-December
2010, the finance ministry said.
According to the Heritage study, fighting corruption and narcotics
trafficking remains a significant concern, as does the influence of criminal
organizations on the police, the military, and some members of the judiciary and
civil service. The local chapter of Transparency International is working with
Colombian authorities on a number of anti-corruption measures, including ethics and
entrepreneurial programs.
According to the Heritage report, corruption erodes economic freedom by
introducing “insecurity and uncertainty” into economic relationships. The score for
this component is derived primarily from Transparency International’s Corruption
Perceptions Index (CPI) for 2009, which measures the level of corruption in 180
countries. Other sources include the Country Commerce and Country Report of the U.S.
Trade Representative and the U.S. Department of Commerce’s Country Commercial Guide.
But there are also major expansions of legitimate international businesses.
During the first few weeks of the new year, many new foreign firms announced
investments in Colombia.
“We think that for the short term we will see an important dynamism in the
area of tertiary services, software and information technologies, tourism of
businesses and health, audio-visual production, enterprise and logistic
infrastructure and different services specialties,” said Adriana Suárez, executive
director of INNVEST in Bogota, an economic development agency in Colombia, told
Diálogo magazine.

Significant improvements

Overall, 25 of Latin America’s 29 countries posted gains in economic freedom
last year. Just three reported a decline. Costa Rica and, surprisingly, Haiti
demonstrated significant improvement in 2010.
“Overall, the region continues to become more open to trade and investment
and to address regulatory reform,” the Heritage report said. “But weakness in
intellectual property, the courts, and the rule of law keep most countries in the
region mired in or slightly below the middle of the pack.”
Chile ranks as the freest economy in Latin America. Its economy is freer than
countries like the Netherlands, the United Kingdom and Germany. Last year, Chile
became the first South American country to join the Organization for Economic
Co-operation and Development (OECD). President Sebastian Piñera and his center-right
Alianza coalition in Congress assumed power last March.
“Chile has charted a different path than many of its neighbors,” said Ortega
of the Heritage Foundation, noting that some governments in Latin America have been
tempted to embrace socialism. “Chile’s healthy economic freedom comes partly from
its openness to global trade and investment.”
Chile benefits from a transparent and stable financial and judicial sector,
and there’s little tolerance for corruption, Ortega said.
Uruguay has the second-freest economy in the region, with El Salvador and
Peru close behind.
Mexico’s economic freedom score is 67.8, making its economy the 48th freest
in the 2011 Index. Its score declined by 0.5 point, reflecting declines in freedom
from corruption and fiscal freedom.
The country reported $12.5 billion in foreign direct investment last year,
according to the survey.
“Since the election of President Carlos Salinas in 1988, successive
governments have adopted limited reforms and have begun to alter Mexico’s
corporatist economic model,” the Heritage report noted.
President Felipe Calderon, of the National Action Party, has achieved key
judicial, fiscal, pension, and electoral reforms, but proposals to further
liberalize the economy, especially by opening the energy sector to foreign
investment, lack legislative support.
“Calderon faces a major security challenge from illegal drug cartels,” the
Heritage report said.
President Calderon has also committed his administration to fight against
corruption at all levels of government and in 2008 launched Operación Limpieza,
“investigating and imprisoning corrupt government officials in enforcement
agencies.”
According to the Heritage report, Brazil’s economic freedom score is 56.3,
making its economy the 113th freest in the 2011, one which lags behind Chile and
Mexico.
The score is 0.7 point better than last year as a result of improvements in
investment freedom and trade freedom. Brazil is ranked 21st out of 29 countries in
the South and Central America/Caribbean region, and its overall score is “below the
regional and world averages,” the study said. The state’s expanding role in the
economy explains its ranking, according to the study.
President Luiz Inacio “Lula” da Silva, first elected in 2002 and re-elected
in 2006, was barred from seeking a third term by the country’s constitution, created
in 1988. In last fall’s presidential elections, Lula’s hand-selected successor,
Dilma Rousseff, was elected Brazil’s first female president.
“Ms. Rousseff is further to the left than the present administration, but she
has pledged not to make a sudden change of direction,” Peter Kennedy, a spokesman
for Shaw Capital Management, an investment bank with a large portfolio of
investments in Brazil, told Diálogo. “The investors, and voters, believe her so
far.”
The efficiency and overall quality of government services remain poor despite
high government spending as a percentage of GDP, the Heritage report said.
Burdensome taxes, inefficient regulation, poor access to long-term financing,
and a rigid labor market are barriers to new business growth.
“The judicial system remains vulnerable to political influence and
corruption,” the Heritage study added.
The Brazilian economy has been growing because of increased demand for
commodity exports, and over the past decade, economic growth there has averaged
around 4 percent, accompanied by low inflation. Brazil has a large agricultural and
industrial base, but a growing services sector has accounted for over 60 percent of
GDP in recent years. The global financial and economic turmoil’s impact has been
moderate.