ACS10900 TOWARDS SUSTAINABLE PEACE, POVERTY ERADICATION, AND SHARED PROSPERITY Colombia Policy Notes September 2014 TOWARDS SUSTAINABLE PEACE, POVERTY ERADICATION, AND SHARED PROSPERITY Colombia Policy Notes September 2014 © 2014 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202–473–1000; Internet: www.worldbank.org Some rights reserved 1 2 3 4 17 16 15 14 This work is a product of the staff of The World Bank with external contributions. The findings, in- ter- pretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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Graphic design: Robert Reineke CONTENTS Acknowledgements.............................................................................................. xi Acronyms.......................................................................................................... xii An Overview of World Bank Policy Notes for Colombia...........................................xvii Three development objectives.......................................................................................xviii Transition to sustainable peace............................................................................................. xviii Fast poverty reduction but persistent inequality........................................................................... xx Recent economic growth has brought shared prosperity. Is it sustainable?...................................... xxi Nine policy areas............................................................................................................xxiii Organizing the territory........................................................................................................xxiv Improve rural areas first.......................................................................................................xxiv Make cities more connected and productive..............................................................................xxvi Manage disaster risks better................................................................................................xxviii Strive for environmental sustainability.................................................................................... xxx Marshalling all forms of capital: infrastructure, finance and innovation.....................xxxii Close the infrastructure gap................................................................................................. xxxii More and better financial services for all................................................................................xxxv Make innovations thrive.....................................................................................................xxxvii Empowering people and localities..............................................................................xxxvii Tools for an integrated Social Protection System...................................................................xxxviii Improve the decentralization process..........................................................................................xl Common threads............................................................................................................ xlii Part One  –  Background Notes Chapter 1. Supporting Colombia’s Transition to Sustainable Peace and Development................................................................................ 1 Main Messages................................................................................................................... 2 The dynamics of armed conflict in Colombia .................................................................. 3 What does sustainable peace mean? ......................................................................................... 5 Understanding armed conflict and the transition to peace............................................... 6 The transition to sustainable peace and development.................................................................... 7 Policies and programs for the three transitions............................................................................. 9 Challenges for the Colombian government in the transition period............................... 13 iv CONTENTS Political transition ............................................................................................................... 14 Security transition................................................................................................................. 15 Development transition.......................................................................................................... 16 Endnotes.......................................................................................................................... 17 Chapter 2. Toward Shared Prosperity in Colombia................................................23 Main Messages................................................................................................................. 24 Building the foundations of shared prosperity in Colombia: Recent trends in poverty, shared prosperity, and inequality..................................... 25 A decade of impressive poverty reduction ................................................................................. 25 Who and where are the poor in Colombia?............................................................................... 27 More shared prosperity with reduction in inequality toward the end of the decade......................... 30 The drivers behind the observed changes in poverty and inequality............................... 32 Evaluating the dynamics of sources of income.......................................................................... 34 Understanding the sources of poverty reduction......................................................................... 37 Understanding the sources of changes in inequality................................................................... 39 Projecting future poverty incidence rates.................................................................................... 39 Final remarks.................................................................................................................... 41 Endnotes.......................................................................................................................... 42 References........................................................................................................................ 43 Annex 1: Decomposing poverty reduction—The intra-sectorial effect versus the inter-sectorial effect............................................................................................. 45 Annex 2: Typology of economic classes in Colombia..................................................... 46 Annex 3: Figures.............................................................................................................. 47 Annex 4: Main differences in methods for measuring poverty in Colombia................... 50 Chapter 3. Structural Changes – Implications for Growth, Productivity, and Competitiveness................................................................................51 Main Messages................................................................................................................. 52 Structural changes and growth dynamics........................................................................ 54 Growth decomposition and productivity dynamics...................................................................... 56 Growth at the regional level.................................................................................................... 62 Structural changes in international trade.................................................................................. 64 Macro implications and risks........................................................................................... 67 Endnotes.......................................................................................................................... 71 Part Two  –  Theme 1: Developing the Territory Chapter 4. Agriculture and Rural Development Policy Note....................................75 Main Messages................................................................................................................. 76 The agricultural sector in Colombia: opportunities and challenges................................ 77 Causes of underperformance in the rural economy........................................................ 79 Rural development........................................................................................................... 80 Challenge #1: Adopt a territorial approach to rural development................................................ 81 Challenge #2: Overhaul rural institutions and rural policy-making processes............................... 82 Challenge # 3: Tackle the land problem.................................................................................. 84 CONTENTS v Implementation modalities: immediate next steps....................................................................... 86 Policy recommendations.................................................................................................. 87 Restoring rural livelihoods...................................................................................................... 87 Getting agriculture going........................................................................................................ 88 Supporting territorial development........................................................................................... 90 The road ahead: rebalancing public and private roles.................................................... 91 Endnotes.......................................................................................................................... 93 Chapter 5. Urban Sector.....................................................................................95 Major Messages............................................................................................................... 96 Background...................................................................................................................... 97 Knowledge....................................................................................................................... 98 The System of Cities in Colombia.......................................................................................... 98 Challenges at the city level.................................................................................................... 100 Policy Recommendations............................................................................................... 102 Endnotes........................................................................................................................ 104 Bibliography................................................................................................................... 105 Chapter 6. Disaster Risk Management in Colombia............................................. 107 Key Messages................................................................................................................. 108 Background.................................................................................................................... 110 Knowledge..................................................................................................................... 112 Policy recommendations................................................................................................ 116 Endnotes........................................................................................................................ 118 Chapter 7. Environmental Sustainability............................................................ 121 Major Messages............................................................................................................. 122 Background.................................................................................................................... 124 Is economic growth in Colombia environmentally sustainable?.................................... 125 Priority issues on the environmental agenda through the lens of sustainable growth.............................................................................................. 127 Priority environmental challenges through the lens of shared prosperity: environmental health.............................................................................................. 132 The OECD accession creates an impetus for green growth.......................................... 135 Policy recommendations................................................................................................ 136 Endnotes........................................................................................................................ 140 References...................................................................................................................... 141 Theme 2: Marshalling Human, Financial and Physical Capital Chapter 8. Transport Infrastructure.................................................................. 143 Main Messages............................................................................................................... 144 Background.................................................................................................................... 145 Knowledge..................................................................................................................... 147 Policy Recommendations............................................................................................... 152 Endnotes........................................................................................................................ 156 vi CONTENTS Chapter 9. Financial Sector............................................................................... 159 Main Messages............................................................................................................... 160 Background.................................................................................................................... 161 Financial sector structure..................................................................................................... 162 Main challenges............................................................................................................. 164 Oversight of the financial sector............................................................................................ 164 Development of capital markets............................................................................................ 165 Financial inclusion............................................................................................................. 167 Recommendations......................................................................................................... 168 Improve oversight of financial sector...................................................................................... 168 Development of capital markets............................................................................................ 168 Support financial inclusion................................................................................................... 170 Endnotes........................................................................................................................ 171 Chapter 10. The Urgent Innovation Agenda—Governance, Knowledge, and Firms..... 173 Main Messages............................................................................................................... 174 Background and context................................................................................................ 176 Challenges...................................................................................................................... 177 Governance of the Colombian National Innovation System...................................................... 177 Challenges to factor accumulation and allocation.................................................................... 178 Demand-side challenges....................................................................................................... 180 Challenges to the supply of skills and knowledge.................................................................... 180 Policy recommendations................................................................................................ 183 Recommendations for improving the governance of the NIS...................................................... 183 Recommendations for improving factor accumulation and reallocation........................................ 184 Recommendations for the demand side................................................................................... 185 Recommendations for the supply side..................................................................................... 187 Endnotes........................................................................................................................ 190 Theme 3: Empowering People and Localities Chapter 11. Moving Toward a Social Protection System......................................... 193 Main Messages............................................................................................................... 194 Background: Colombia’s Social Protection “System”—Strengths and Areas for Improvement.......................................................................................................... 195 Challenges......................................................................................................................... 198 System fragmentation reduces the effective and efficient use of social protection programs.............. 199 Insufficient or unbalanced coverage leaves large segments of the population vulnerable to certain risks........................................................................................................... 200 Limited information for system functioning............................................................................. 201 Global Evidence to Move Colombia Toward a true SPS.............................................. 202 Transition from a static set of social protection programs to a dynamic SPS............................... 202 Policy Options to Reduce System Fragmentation, Improve Coverage, and Close Information Gaps................................................................................................... 203 Strengthen SPS tools to overcome inefficiencies created by system fragmentation and to reach uncovered populations..................................................................................... 203 Build the labor sub-system by creating information for policymaking and program purposes......... 205 CONTENTS vii Modernize the health sub-systems by developing a new health care model for Colombia with stronger internal management and control............................................... 205 Endnotes........................................................................................................................ 208 Chapter 12. National and Subnational Public Finances and Governance................... 211 Main Messages............................................................................................................... 212 Background.................................................................................................................... 213 Progress.......................................................................................................................... 215 Challenges...................................................................................................................... 217 Stronger decentralization framework and better institutional coordination................................... 218 Stronger capacity of SNGs................................................................................................... 219 Policy recommendations................................................................................................ 219 Stronger decentralization framework and better institutional coordination................................... 219 Stronger capacity of SNGs................................................................................................... 223 Endnotes........................................................................................................................ 223 Bibliography................................................................................................................... 225 List of Boxes Box 2-1: Multidimensional Poverty in Colombia........................................................................... 26 Box 2-2: Growth of Colombia’s Middle Class was Positive but Lagged Other LAC Countries.... 28 Box 2-3: Equity Implications of Fiscal Policy Changes in Colombia............................................. 33 Box 2-4: Persistently High Levels of Non-Monetary Inequality.................................................... 35 Box 3-1: Recent Demographic and Labor Markets Dynamics...................................................... 59 Box 3-2: How vulnerable Is Colombia’s External Sector to Oil Price Fluctuations?..................... 69 Box 7-1: Wastewater Treatment Has High Social and Economic Returns: The Example of Río Bogotá............................................................................................. 129 Box 7-2: The Bio Carbon Fund in Colombia—Initiative for Sustainable Forest Landscapes (ISFL).............................................................................................................................. 131 Box 11-1: Building a System for Social Protection: Cero a Siempre................................................... 187 Box 12-1: Government’s Transfers to SNGs: SGP and SGR......................................................... 217 Box 12-2: Technical Assistance to Boost Local Capacities: Specific Elements............................... 221 List of Figures Figure 1-1: Violence in Colombia......................................................................................................... 4 Figure 1-2: Vicious Cycles of Violence ................................................................................................ 6 Figure 1-3: Three Transitions Toward Sustainable Peace.................................................................... 8 Figure 1-4: Timeline for a Transition to Sustainable Peace in Colombia............................................. 8 Figure 1-5: Repeated Cycles of Action to Bolster Institutional Resilience........................................... 9 Figure 2-1: Moderate Poverty Reduction............................................................................................ 25 Figure 2-2: Extreme Poverty Reduction.............................................................................................. 25 Figure 2-3: Less Poor, More Middle Class, but More Vulnerable to Falling Back into Poverty......... 28 Figure 2-4: Poverty Incidence Across Areas........................................................................................ 29 Figure 2-5: Measures of Shared Prosperity Between the Early and Late Parts of Decade................ 30 Figure 2-6: Robust Department-level Improvements in the SPI over the Decade............................. 31 Figure 2-7: LAC Inequality................................................................................................................. 32 Figure 2-8: 2002–12: A Period of High Inequality and Low Mobility............................................... 32 Figure 2-9: Concentration and Gini Coefficients............................................................................... 34 viii CONTENTS Figure 2-10: Growth and Redistribution Components of Changes in Poverty and Middle Class....... 37 Figure 2-11: Components of Changes in Extreme and Moderate Poverty Reduction 2002–13......... 38 Figure 2-12: Stagnation of Total Inequality is Due to Stagnation of Labor Income........................... 39 Figure 2-13: Explaining Changes in Income Inequality, 2002–12....................................................... 40 Figure 2-14: Can We Expect Extreme Poverty to be 3 Percent or Less by 2030?................................ 41 Figure A3.1: Multidimensional Poverty Mapping................................................................................. 47 Figure A3.2: Income Shares by Income Quintiles and Over Time...................................................... 48 Figure A3.3: Growth Incidence Curve of Per Capita Income, 2008–13.............................................. 49 Figure 3-1: Growth Performance in Past Decades (%)....................................................................... 54 Figure 3-2: Colombia’s Per Capita Income Gap (%).......................................................................... 54 Figure 3-3: Counterfactual GDP Per Capita (US$)............................................................................ 55 Figure 3-4: Sectorial Decomposition of GDP.................................................................................... 55 Figure 3-5: The Changing Composition of GDP Growth................................................................. 56 Figure 3-6: Commodity Intensity/Dependency................................................................................. 56 Figure 3-7: Income Per Capita as % of Bogota.................................................................................. 63 Figure 3-8: Education and Income Across Departments, 2010 (OECD 2013).................................. 63 Figure 3-9: Quality of Roads at Department Level, 2009 (OECD 2013).......................................... 64 Figure 3-10: Evolution in Poverty Rates............................................................................................... 65 Figure 3-11: Recent Trade Dynamics................................................................................................... 66 Figure 3-12: Export Values vs Volumes................................................................................................ 66 Figure 3-13: Colombia as % of World exports..................................................................................... 66 Figure 3-14: Changes in Export Composition...................................................................................... 67 Figure 3-15: Concentration in the Export Basket................................................................................. 67 Figure 3-16: Concentration in Export Destinations............................................................................. 67 Figure 4-1: Production of Principal Food Crops in Colombia, 1990–2012....................................... 77 Figure 4-2: Projected Impacts of Climate Change on Coffee-Growing Areas in Colombia.............. 79 Figure 4-3: Evolution of direct support.............................................................................................. 80 Figure 4-4: Evolution of agricultural public goods and direct support.............................................. 81 Figure 4-5: Land Distribution Inequality............................................................................................ 85 Figure 5-1: Distribution of the Bottom 40 Percent in Colombia, 2002–12........................................ 97 Figure 5-2: Sectorial Budget, Ministry of Housing, City and Territory (Million US$), 2000–2014...................................................................................................................... 101 Figure 5-3: Sources of Funding for Municipal Investment Expenditures........................................ 102 Figure 6-1: Disasters Events and Losses in Latin America, 1961–2011........................................... 110 Figure 6-2: Area and Population Exposed to Earthquakes, Landslides, and Floods in Colombia... 112 Figure 6-3: Loss of Life and Destroyed Housing per 100,000 Inhabitants, 1970–2011.................. 113 Figure 6-4: Destroyed Housing and Loss of Life per 100,000 Inhabitants, by Municipal Population, 2001–10................................................................................ 114 Figure 6-5: Correlation Between Poverty and Natural Disasters in LAC, 2009............................... 115 Figure 6-6: La Niña and El Niño Phenomena vs Annual Registered Losses.................................... 115 Figure 6-7: Total Investments in Disaster Risk Management at National, Department, and Municipal levels....................................................................................................... 116 Figure 7-1: Adjusted Net Savings, Including Particulate Emission Damage, 1990–2012................ 125 Figure 7-2: Gross National Savings, Education Expenditures, and Natural Resource Degradation and Depletion, 1990–2012........................................................................ 126 Figure 7-3: Environmental Health Costs in Colombia and in the Region (% of GDP)................... 133 Figure 7-4: Total Natural Resource Rents and Environmental Expenditures (% of GDP).............. 136 CONTENTS ix Figure 8-1: Investment in Transportation Infrastructure.................................................................. 145 Figure 8-2: Transport Infrastructure Quality Rating According to the World Economic Forum 2013.................................................................................................................... 145 Figure 8-3: Logistics Performance Index, 2014................................................................................ 146 Figure 8-4: High Cost of Importing and Exporting......................................................................... 146 Figure 8-5: Quality of the National, Secondary, and Tertiary Roads.............................................. 148 Figure 9-1: Financial Sector Structure (as a percentage of GDP 2012)........................................... 161 Figure 9-2: Comparison of Access to Finance Indicators in Latin America.................................... 162 Figure 9-3: Percentage of Assets of the Subsidiaries of Colombian Banks Abroad as of Dec 2013............................................................................................................... 163 Figure 9-4: Annual Issuance in the Capital Markets........................................................................ 163 Figure 10-1: Colombia’s Deficient R&D Performance....................................................................... 176 Figure 10-2: Schematic of the National Innovation System............................................................... 177 Figure 10-3: Support Systems for Firms across Age and Level of Sophistication.............................. 178 Figure 10-4: Differences Between Cities in Colombia........................................................................ 179 Figure 10-5: New Business Density, 2012........................................................................................... 179 Figure 10-6: Startup Financing Cycle................................................................................................. 180 Figure 10-7: Mapping of Colombian SME Investment Funds.......................................................... 181 Figure 10-8: Productivity and Managerial Differences in Colombia.................................................. 182 Figure 10-9: Managerial Quality in Colombia................................................................................... 182 Figure 10-10: Private Sector Opinion on the Quality of Scientific Research and Degree of Collaboration with Universities...................................................................................... 183 Figure 11-1: Colombia’s Social Protection System is Fragmented, with Significant Coverage Gaps............................................................................................................... 195 Figure 11-2a: Affiliation with Health System....................................................................................... 196 Figure 11-2b: Out-of-Pocket Health Expenditures, 2012..................................................................... 196 Figure 11-3: Social Expenditure and Inequality................................................................................. 198 Figure 11-4: Infant Neonatal Mortality.............................................................................................. 198 Figure 11-5: Perception of the Health Care System........................................................................... 199 Figure 11-6: Current Vision of the Colombian Social Protection System......................................... 202 Figure 11-7: Colombia’s SPS when Applying a Systems Approach................................................... 202 Figure 12-1: Regional Disparities........................................................................................................ 215 List of Tables Table 1-1: Goals for Colombia’s Transitions..................................................................................... 10 Table 1-2: Pace of Political Transitions............................................................................................. 10 Table 2-1: Inequality in Colombia.................................................................................................... 31 Table 2-2: Assumed Rates of Growth in Per Capita Income............................................................ 40 Table 3-1: Growth Accounting Exercise............................................................................................ 57 Table 3-2: Growth Decomposition: Contribution to Total Growth in Value Added Per Capita, Colombia 2001–13 (%)................................................................................. 62 Table 3-3: Royalties and Regional Convergence (Lopez–Calva, Castelã, and Enamorado 2013)...................................................................................................... 65 Table 6-1: Events and Losses by Decades........................................................................................ 113 Table 7-1: Summary of Environmental Health Costs in 2010....................................................... 133 Table 8-1: Road Network in Colombia 2013.................................................................................. 149 Table 10-1: Ease of Doing Business Rank (Doing Business Report, 2014)....................................... 178 x CONTENTS Table 12-1: Fiscal Decentralization................................................................................................... 213 Table 12-2: Policy Challenges and Recommendations...................................................................... 222 List of Maps Map 5-1: Distribution and Concentration of Jobs in Colombia...................................................... 98 Map 5-2: The 18 Urban Agglomerations........................................................................................ 99 Map 5-3: The System of Cities........................................................................................................ 99 ACKNOWLEDGEMENTS This set of policy notes was produced by World Bank experts working in the Colombia Country Team. Chapter 1 was drafted by Dorly Castañeda, Marcelo Fabre, Margarita Puerto Gomez, and Markus Kostner. Chapter 2 was produced by Carlos Rodríguez Castelán, Lea Giménez, and Daniel Valderrama under the general guidance of Louise Cord. Chapter 3 was produced by Barbara Cunha with inputs from Konstantin Wacker, German Galindo and Diana Marcela Carrero Rivera. Chapter 4 was au- thored by Michael Morris and Natalia Gómez with inputs from Laurent Msellati, Holger A. Kray, Carole Megevand, Victoria Stanley, Enrique Pantoja, Luz Berania Diaz Rios, Diego Arias Carballo, Juliana Castaño Isaza, Erick C.M. Fernandes and Daniel M. Sellen. The authors of Chapter 5 are Angelica Nuñez and Jose Luis Acero with inputs provided by Anna Wellenstein, Catalina Marulanda, Augustin Maria, Camila Rodriguez, and Mauricio Cuellar. Chapter 6 was prepared by Eric Dickson, Claudia Lorena Trejos, Daniel Sellen, and Diana Marcela Rubiano Vargas. Chapter 7 was prepared by Irina Klytchnikova under the general guidance of Emilia Battaglini, with research assistance by Anna Lena Sauer and helpful comments from Ernesto Sanchez-Triana, Carole Megevand, Juliana Castaño, Rita Cestti, Greg Browder, Daniel Sellen, Franka Braun, Daniele La Porta and Todd Johnson. Chapter 8 was drafted by Mauricio Cuellar, Leonardo Canon, Shomik Mehndiratta, Carlos Murgui, Daniel Pulido, and Marcela Silva. The author of Chapter 9 is Patricia Caraballo, with inputs and contributions received from Eva M. Gutierrez, Catiana Garcia-Kilroy and Rekha Reddy. Chapter 10 was prepared by Javier Botero, Wendy Cunningham, Eva Gutierrez, Robert Hawkins Leonardo Iacovone, Esperanza Lasagabaster, and William Maloney. Chapter 11 was produced by Alejandra Corchuelo, Ana María Oviedo, Antonio Giuffrida, Ronald Gomez, Joana Silva and Wendy Cunningham. Chapter 12 was drafted by a team led by Pedro Arizti, including Eguiar Lizundia, Jorge Luis Silva, Barbara Cunha, Carlos Rodríguez Castelán, German Galindo, John Gonzalez, Mónica Peñuela, Manuel Fernando de Castro, and Azul del Villar. Peer reviewing was provided by Augusto de la Torre, Issam Abousleiman, Mathew Stephens, Gabriel Demombynes, Emily Sinott, John Nash, Peter Ellis, Joaquín Toro, Juan Gaviria, James Seward, Jose Guillerme Reis, Truman Packard, Alberto Leyton and Emilia Battaglini. Consultations were also held with representatives of Ministerio de Hacienda and Dirección Nacional de Planeación, who provided rich insights and knowledge of priority issues in Colombia. The overview as well as coordination of the set of policy notes was led by Samuel Freije, with inputs and support from Domoina Rambeloarison and German Galindo. Editorial reviews and translations were by Robert Reineke, Richard Galm, Juan Carlos Liceaga and Manuel Gómez. Adminsitrative sup- port was provided by Beatriz Elena Franco, Elsa Coy and Lorena Bustos. Overall supervision was pro- vided by Gloria Grandolini and Gerardo Corrochano (World Bank Directors for Colombia) and Issam Abousleiman (Country Manager for Colombia). ACRONYMS 4G Fourth Generation of Concession Educación Superior Program National Intersectorial Commission of AFP Administradoras de Fondos de Quality Control of Higher Education Pensiones y de Cesantía CONPES Consejo Nacional de Política Pension Fund Administrator Económica y Social ANI Agencia Nacional de Infraestructura National Council on Economic and National Infrastructure Agency Social Policy ATM Automated Teller Machine COP Colombian Peso BID Banco Interamericano de Desarrollo COP Conference of the Parties to the Inter-American Development Bank Convention BVC Bolsa de Valores de Colombia CORPOICA Corporación Colombiana de Colombia Stock Exchange Investigación Agropecuaria CAR Corporación Autonoma Regional Colombian Corporation on Autonomous Regional Corporation Agricultural Research CAT-DDO Catastrophe Risk Development CPI Consumer Price Index Loan Deferred Drawdown Option CSA Climate Smart Agriculture (World Bank) CSO Civil Society Organization CB Commercial Bank DALY Disability Adjusted Life Years CEDLAS Centro de Estudios Distributivos, DANE National Bureau of Statistics Laborales y Sociales DB Doing Business Center for Distributive, Labor and DNP Departamento Nacional de Planeación Social Studies National Planning Department CEPAL Comisión Económica para América DPS Departamento para la Prosperidad Latina y el Caribe Social United Nations Economic Department for Social Prosperity Commission for Latin America and DRM Disaster Risk Management the Caribbean ECLAC Economic Commission for Latin CGR Comptroller’s General Office America and the Caribbean Contraloría General de la República EIA Environmental Impact Assessment CIAT Centro Internacional de Agricultura EITI Extractive Industries Transparency Tropical Initiative International Center for Tropical ELN Ejército de Liberación Nacional de Agriculture Colombia CNA Consejo Nacional de Acreditación National Liberation Army National Accreditation Council ENCV Encuesta de Calidad de Vida CONACES Comisión Nacional Intersectorial Quality of Life Survey de Aseguramiento de la Calidad de la ACRONYMS xiii ENDS Encuesta Nacional de Demografía IDC Índice Departamental de y Salud Competitividad de Colombia National Demography and Health Department Competitiveness Index Survey IDEAM Instituto de Hidrología, EPA Export Promotion Agency Meteorología y Estudios EPS Entidad Promotora de Salud Ambientales Public Health Agency Institute of Hydrology, FAG Agricultural Guarantee Fund Meteorology and Environmental Fondo de Garantía Agropecuria Studies FAO Food and Agriculture Organization IDP Internally Displaced Person FARC Fuerzas Armadas Revolucionarias IGAC Instituto Geográfico Agustín de Colombia Codazzi Revolutionary Armed Forces of Agustin Codazzi Geography Colombia Institute FDI Foreign Direct Investment ILO International Labor Organization FDN Financiera de Desarollo Nacional IMAN Impuesto Minimo Alternativo National Development Bank Nacional FEDEGAN Federación Nacional de Ganaderos National Alternate Minimux Tax National Rancher Federation IMF International Monetary Fund FINDETER Financiera de Desarollo Territorial INCODER Instituto Colombiano de Desarrollo Territorial Development Finance Rural Company National Institute for Rural FONADE Fondo Financiero de Proyectos de Development Desarollo INTOSAI International Organization of Financial Fund of Development Supreme Audit Institutions Projects INVIAS National Road Agency FSAP Financial Sector Assessment Instituto Nacional de Vías Program IP Intellectual Property FTA Free Trade Agreement IPO Initial Public Offering GDP Gross Domestic Product IPSAS International Public Sector GEF Global Environment Fund Accounting Standards GEIH Gran Encuesta Integrada de IQ Intelligence Quotient Hogares ISFL Initiative for Sustainable Forest Large Integrated Survey of Landscapes Households IT Information Technology GNI Gross National Income LAC Latin America and the Caribbean HCS Health Care System LAPOP Latin American Public Opinion HHI Herfindal-Hirschman Index Project HOI Human Opportunity Index LAVCA Latin America Private Equity and IAP Indoor Air Pollution Venture Capital Association ICFES Instituto Colombiano para el LCSSO Latin American and Caribbean Fomento de la Educación Superior Social Development Colombian Institute for the LEADER Liaison Entre Actions de Promotion of Higher Education Développement de l’Économie ICRG International Country Risk Guide Rurale ICT Information and Communications Links between Actions for Rural Index Development xiv ACRONYMS LOOT Ley Organica de Ordenamiento PE Private Equity Territorial PEFA Public Expenditure and Financial Territorial Management Organic Accountability Law PES Payment for Environmental Services LSE London School of Economics PISA Programme for International Student M&E Monitoring and Evaluation Assessment MADR Ministerio de Agricultura y Desarollo POMCA Plan de Manejo de Cuencas Rural Watershed Management Plan Ministry of Agriculture and Rural POS Plan Obligatorio de Salud Development Mandatory Health Plan MADS Ministerio de Ambiente y Desarrollo POS Point of Sale Sostenible POT Plan de Ordenamiento Territorial Ministry of Environment and Territorial Organization Plan Sustainable Development PPA-PDA Programa Agua para la Prosperidad MESEP Misión para el Empalme de las Series Water for Prosperity de Empleo, Pobreza y Desigualdad PPP Purchasing Power Parity Mission for the Splicing of PPP Public Private Partnership Employment, Poverty and Inequality PPSAM Programa de Proteccion Social al Series Adulto Mayor MHCP Ministerio de Hacienda y Crédito Social Protection Program for Adults Publico PyME Pequeña y Mediana Empresa Ministry of Finance and Public Credit Small and Medium Enterprise R&D Research and Development MHCT Ministerio de Vivienda, Ciudad y RC Régimen Contributivo Territorio Contributory Regime Ministry of Housing, City and REDD+ Reduced Emissions from Deforestation Territory and Forest Degradation MICT Ministerio de Comercio, Industria y REDI Recent Economic Developments in Turismo Infrastructure Ministry of Commerce, Industry and RS Régimen Subsidiado en Salud Tourism Subsidized Regime MILA Mercado Integrado Latinoamericano RUAF Registro Único de Afiliados Integrated Latin American Market Unique Register of Affiliates MMR Mild Mental Retardation SAVER Saneamiento para Vertimientos MEN Ministerio de Educación Nacional Sanitation of Wastewater Discharge Ministry of Education SEDLAC Socio-Economic Database for Latin MPI Multidimensional Poverty Index America and the Caribbean MT Medium-term SENA Servicio Nacional de Aprendizaje NBFI Non-Bank Financial Institution National Training System NGO Non-Governmental Organization SFC Superintendencia Financiera de NIS National Innovation System Colombia OCYT Observatorio Colombiano de Ciencia Superintendency of Finance y Tecnología SGP Sistema General de Participaciones Colombian Observatory for Science SGR Sistema General de Regalías and Technology SGSSS Sistema General de Seguridad Social OECD Organization for Economic en Salud Cooperation and Development ACRONYMS xv General System of Social Security in UAESPE Unidad Administrativa Especial del Health Servicio Publico de Empleo SINA Sistema Nacional Ambiental Special Administrative Unit for the National Environmental System Public Employment Service SISBEN Sistema de Selección de Beneficiarios UAP Urban Air Pollution de Programas Sociales UK-DECC United Kingdom Department of System for Selecting Beneficiaries of Energy and Climate Change Social Programs UNFCCC United Nations Framework SME Small and Medium Enterprise Convention on Climate Change SNG Subnational Government UNGRD Unidad Nacional para la Gestión del SNPAD Sistema Nacional para la Prevención Riesgo de Desastres y Atención de Desastres National Unit for Disaster Risk National System for Disaster Management Prevention and Response UNICEF United Nations Children’s Fund SNR Superintendencia de Notariado y UPC Unidad de Pago por Capitación Registro URB Unified Registry of Beneficiaries Superintendence of Notaries and VAT Value Added Tax Registry Offices VC Venture Capital SNS Superintendencia Nacional de Salud WAVES Wealth Accounting and Valuation of National Superintendence of Health Ecosystem Services SPI Shared Prosperity Indicator WBG World Bank Group SPS Silvo-pastoral systems WDI World Development Indicator SPS Social Protection System WDR World Development Report SRO Self-Regulatory Organization WEF World Economic Forum ST Short-term WHO World Health Organization TA Technical Assistance WSH Water, Sanitation and Hygiene TC Titulizadora Colombiana WTI West Texas Intermediate TFP Total Factor Productivity WWTP Wastewater treatment plant TTO Technological Transfer Office An Overview of World Bank Policy Notes for Colombia xviii OVERVIEW For its client countries, the World Bank provides provides the means for a more encompassing so- incoming presidential administrations with a se- cial protection system, and both productivity and lective diagnostic of current challenges and an social protection are necessary for poverty eradica- independent set of policy recommendations to tion and sustainable peace. Notwithstanding these contribute to the nation’s development process. In intricate connections, and only for ease of expo- the case of Colombia, the inauguration of a new sition, we discuss these three objectives and nine administration for 2014–18 is the occasion for a policy areas separately. After discussing the evo- new set of policy notes. lution and status of the objectives, the following sections group policies into three general themes: The World Bank has been a long-time partner of (i) organizing the territory; (ii) mustering physical, Colombia’s development process. For years, World financial, and human resources; and (iii) promot- Bank experts have studied the Colombian econo- ing people and localities. my and provided diagnoses and policy recommen- dations, some of which have contributed to the dis- Three Development Objectives cussion and implementation of important reforms. Recent sets of published policy notes have been “Colombia: The Economic Foundation of Peace” Colombia faces three fundamental development in 2003 and “A Window of Opportunity” in 2007. objectives. Attaining higher levels of well-be- ing for all Colombians will necessarily involve Progress brings new challenges. Colombia’s recent achieving sustainable peace, eradicating poverty, advances in economic and social policy demand a and sharing prosperity. Without peace, the coun- focus on more sophisticated solutions to new ques- try would not fully secure the most fundamental tions or to intractable old problems. These new human rights. With poverty, many would be de- policy notes are based on the current involvement prived from the most basic needs. Without shared of World Bank experts in Colombia and their in- prosperity, only a few would enjoy the benefits of sights on which policies could help sustain peace, economic growth. These three objectives are nec- eradicate poverty, and share prosperity. Today, essary conditions for Colombians to realize their these three development objectives—sustainable full development potential. Recent trends indicate peace, poverty eradication, and shared prosperi- they are within reach. ty—seem within realistic reach for the first time in Colombian history. Transition to sustainable peace This overview summarizes the current status of Achieving sustainable peace is currently a the three development objectives and the proposed Government priority and an utmost aspiration policies to achieve them in nine areas: rural devel- for Colombian society. More than fifty years of opment, urban development, disaster risk manage- violence have affected at least three generations ment, environmental sustainability, infrastructure, of Colombians at the national, subnational, com- financial markets, innovation, social protection, munity, and individual levels. Between 4.7 million and subnational governments. These policy areas and 5.7 million people were internally displaced are interrelated—i.e., advances in one are neces- between 1985 and 2012. In the same period, an sary for successes in others. For instance, building estimated 220,000 people were killed, 27,000 were infrastructure is necessary for rural and urban de- kidnapped, 25,000 disappeared, and 6,421 chil- velopment, but infrastructure requires sound finan- dren were recruited by illegal armed groups. The cial markets and efficient local governments. All of causes of this protracted conflict have evolved over those factors will not be enough to increase pro- time with cycles of violence, instability, and weak ductivity if firms and universities do not make in- governance, impacting not only on human lives novation thrive. In the end, increased productivity but also economic development. It is estimated An Overview of World Bank Policy Notes for Colombia xix that without the armed conflict, Colombia’s an- to Sustainable Peace and Development). First, “post con- nual growth rate would be 1.5 percentage points flict” may be a misleading term because a period of higher and poverty rates would be half what they conflict followed by reduction of tensions or even a are now. The Government has moved forward on peace agreement can be followed by a new cycle of several fronts to attain sustainable peace. Under violence. Peace should be seen as a process rather the Ley de Justicia y Paz (Justice and Peace Law) and than the end of peace negotiations or military pol- the Ley de Víctimas y Restitución de Tierras (Victims and icy. Second, conflict is territory specific. Building Restitution Law) of 2011, the Government has set peace at the national level implies distinct policies a framework for reintegrating ex-combatants, re- based on local dynamics and their relationship to turning land to people displaced by conflict, and the central government. Third, the sustainability providing reparations to enable families and com- of the peace-building process implies that policies munities to resume their livelihoods. In the past de- aimed at preventing violence are multi-sectorial. A cade, the Government has made strenuous efforts deep understanding of institutional capacity is es- to reduce violence and increase state presence. sential for transforming vicious cycles of violence The country is no longer considered high risk for into virtuous cycles of institutional transformation. investment; it has increased its capacity to guaran- tee basic citizens’ rights; crime and murder rates The ongoing peace process with the FARC has have declined; and even drug production, one of become a central government priority, offering the main drivers of conflict, has been significantly an opportunity to end the country’s repetitive cy- reduced. Furthermore, the ongoing peace process cles of violence. Nonetheless, sustainable peace can lead to consolidation of a sustainable peace. in Colombia will depend on the results of a col- lective effort of envisioning the country at peace However, cycles of violence and entrenched conflict and building it. While the Colombian transition to persist in some regions and against some groups. peace is unique, lessons from other countries can Since the early 2000s, Colombia has seen sub- be useful for policy makers. Global experiences stantial declines in the number of new internally show that the main challenge in peace processes displaced people (IDP), politically motivated homi- is to prevent cycles of violence from recurring in cides, victims of land mines, and the homicide rate order to allow society to build a sustainable peace. (related not only to the conflict but to general crim- inality). However, occasional peaks show the con- Chapter 1 uses international evidence to identify tinued risk of bursts or cycles of violence. The na- three main transitions Colombian society must un- tional trends disguise regional differences. Violence dergo to build sustainable peace. First, a security is more prevalent in regions with weak local insti- transition from violence to respect of human rights tutions, high revenues from natural resources ex- and international humanitarian law—the aim is traction, and the presence of illegal armed groups. to prevent the recurrence of violence. Second, a Arauca, Casanare, Caquetá, Meta, Nariño, and development transition from a war economy to a Valle del Cauca are among the departments with peace economy—the aim is to create a more in- a larger share of violent events. In addition, spe- clusive economy, with a legal option for ex-com- cific population groups are overrepresented among batants and victims to participate while promoting victims of armed conflict—for example, rural, af- economic recovery, rebuilding financial systems, ro-Colombian, and indigenous populations. and enhancing basic service delivery. Third, a po- litical transition—the aim is to create conditions This time and space variability, observed in the conducive to a participatory democracy. international experience as well as in Colombia, leads to three main changes to the understanding These transitions involve implementation of a of armed conflict and peace, outlined in Chapter 1 complex set of security, judicial, and socio-eco- of these policy notes (Supporting Colombia’s Transition nomic policies at the national and local levels. For xx OVERVIEW instance, when peace and stability return to ru- line and are likely to return to poverty if macro- ral areas affected by civil conflict, there will be economic conditions were to worsen (Chapter 3 an urgent need to resettle displaced populations, on economic growth discusses the main macroeco- give them secure access to land for their liveli- nomic risks). Vulnerability is also associated, on the hoods, provide them with the means to resume other hand, to environmental risks: natural disas- productive activities, and restore their voice in ters and pollution (Chapters 6 and 7 examine these the national policy dialogue (Chapter 4 on ru- sources of vulnerability). ral development provides diagnostics and poli- cy recommendations in this regard). In addition, Inequality, as measured by the Gini coefficient, fell subnational governments could play a critical role from 0.57 in 2002 to 0.54 in 2012, but it remained in the transition process. Because the risk of vio- above the regional average and much higher than lence is greater in departments or municipalities the OECD average. The persistence of high lev- with weak institutions, building capable and le- els of inequality can be linked to several factors, gitimate institutions at the local level will be key including insufficient access to higher education, to breaking Colombia’s cycles of violence (Chap- pensions, and affordable housing. However, these ter 12 on subnational governments elaborates on factors have shown slight improvements in recent this). Some policy options are summarized as pol- years. The exception is the unremitting inequality icy recommendation later in this report, and oth- across regions. The gap between the departments ers are extensively discussed in the accompanying with the highest and the lowest poverty rates has policy notes. increased over the decade. In 2002, the difference in poverty rates between Huila and Bogota D.C. Fast poverty reduction but persistent was 37.8 percentage points; in 2012, the Choco inequality and Bogota D.C. poverty rates were 56.4 percent- age points apart. The promotion of social policy In the past decade, Colombia has reduced pover- and economic growth in Colombia’s vulnerable ty faster than ever before, but income inequality regions is fundamental for reducing inequality and vulnerability to poverty remain at unaccept- (Chapter 4 on rural policy and Chapter 12 on ably high levels. Chapter 2 of these policy notes subnational government management have policy (Toward Shared Prosperity in Colombia) provides a de- recommendations to pursue this goal). tailed analysis of Colombia’s poverty and inequal- ity trends over the past decade. Between 2002 and In addition to regional differences, another im- 2012, Colombia decreased its moderate poverty portant aspect of poverty and inequality concerns headcount rate from 49.7 percent to 32.7 percent disadvantaged groups—i.e., internally displaced and its extreme poverty headcount rate from 17.7 people (IPDs), indigenous people, and afro-descen- percent to 10.4 percent. The multidimensional dants. Ethnic minorities face high rates of pover- poverty rate—defined as the percentage of people ty. Indigenous households have both the highest deprived in at least five well-being indicators— rate of multidimensional poverty (58 percent in declined from 49 percent in 2003 to 27 percent 2010) and the lowest reduction from 2003 to 2010. in 2012. This rapid decline in poverty has been Among these disadvantaged groups, the IDPs face accompanied by an increase in the share of the enormous barriers. In 2010, their poverty rate was population in the middle class from 15.1 to 27.2 96.7 percent. Their extreme poverty rate was 66.4 percent; however, the share of the population vul- percent, implying that at least one out of four peo- nerable to poverty also rose, becoming the largest ple in extreme poverty was an IDP in 2010. These group in Colombia at 37.7 percent. This rising numbers are based on standalone reports, but vulnerability to poverty is, on the one hand, the more systematic data are needed draw a precise consequence of recent decline in poverty. People profile of poverty and inequality among these dis- escape poverty but still remain close to the poverty advantaged groups. An Overview of World Bank Policy Notes for Colombia xxi The rapid reduction in national poverty rates is a protection system. Chapter 11 on the social protec- consequence of two forces: faster economic growth tion system in Colombia explains how this system and expansion of social protection programs. The can be made more effective and inclusive through a growth of employment and earnings driven by eco- series of coordination and modernization policies. nomic growth explain more than 60 percent of the reduction in extreme poverty from 2002 to 2012. Along with rapid poverty reduction, economic Public transfers, mostly due to the Familias en Accion growth has brought shared prosperity. The World and Adulto Mayor programs, account for the remain- Bank’s Shared Prosperity Indicator (SPI) measures ing 40 percent. Labor incomes, either through an whether economic growth is shared with those who increase in earnings per worker or workers per are relatively less well-off—the bottom 40 percent family, represented 73 percent of the total reduc- of the population in terms of income. In Colombia tion in moderate poverty between 2002 and 2012. from 2002 to 2012, the annualized growth rate of An additional 16 percent of the reduction in mod- real income per capita among the bottom 40 per- erate poverty came from transfers. Interestingly, ac- cent grew at a slightly higher rate (4.4 percent) than cess to housing represented a further 7 percent of the annualized growth rate of per capita income of moderate poverty reduction, but it had no impact the whole population (3.4 percent). on extreme poverty, hinting at the need for a policy to provide affordable housing for the poor. If it continues in coming years, this pattern of inclusive growth can lead to the eradication of Colombia’s social assistance and social insurance extreme poverty within a decade. Assuming programs have grown and won international rec- Colombia maintains the rates of growth and pov- ognition in recent years. The General System of erty reduction observed during 2008–13, extreme Social Security in Health (Sistema General de poverty will be below the 3 percent mark—the Seguridad Social en Salud, or SGSSS) was creat- World Bank’s global goal of poverty eradication— ed by the Law 100 of 1993 and guided the rapid by 2013. This depends on enhancing the effec- expansion in coverage, financial protection, and tiveness of social protection programs and, more equity of the health system. Colombia’s health in- fundamentally, maintaining the healthy growth surance program is globally applauded for its uni- rates of recent years. Can these rates of inclusive versal coverage. In response to the 1999 economic growth be sustained in the near future? crisis, Colombia created the conditional cash trans- fer program Familias en Acción, which has grown into Recent economic growth has brought its largest social assistance program. Numerous im- shared prosperity. Is it sustainable? pact evaluations have found the program improves human capital outcomes of children. In 2006, the Colombia sustained historically high growth rates Government created Banca de las Oportunidades to in the past decade, supported by sound macro pol- support financial inclusion through a combination icies, commercial integration, and favorable exter- of policy actions, including regulatory reforms, fi- nal conditions. Significant structural reforms since nancial capability initiatives, and incentives for the early 1990s, combined with important trade providers to meet low-income consumers’ demand agreements, have led to a modernization of the for banking services. The Government has also pro- economy. Prudent macroeconomic management moted the opening of bank accounts for the vast has also helped improve resilience. Colombia majority of Familias en Acción beneficiaries. In 2006, weathered the international financial crisis of Colombia also created the Red Juntos program (now 2008–09 remarkably well and consolidated its called Red UNIDOS), a one-stop-shop to help the ex- position among the fast-growing Latin American treme poor to access this variety of social programs. (LAC) economies. Finally, favorable terms of trade This agglomeration of programs, however, suffers and international financing conditions helped at- from fragmentation and coverage gaps in the social tract investment, accelerate economic activity, and xxii OVERVIEW increase trade. As result, the Colombian economy on the innovation system elaborate policy recom- sustained an average GDP growth of 4.8 percent mendations towards these ends. in the past decade, more than 1 percentage point above the average for the previous three decades A closer look at sources of growth by econom- (3.5 percent). In per capita terms, the difference is ic activity indicates that productivity gains were also large—around 3 percent in the past decade, uneven and largely influenced by labor realloca- compared with 1.7 percent in previous decades. In tions. Almost all sectors had increases in produc- the past four decades Colombia has been continu- tivity—measured by output per worker—in the ously closing its per capita income gap with other past decade. These gains are the result of a com- LAC countries. In 1970, LAC’s per capita income bination of factors: capital accumulation, employ- was 2.1 times Colombia’s income; by 2012 the dif- ment reallocations, and total factor productivity ference was reduced to 1.6 times. TFP gains. Interestingly, non-tradable activities have generated more than 50 percent of the new Colombia’s long-term economic growth has value added and productivity gains in the decade. been heavily based on factor accumulation; pro- On the other hand, tradable activities (i.e., agricul- ductivity growth was almost nil for most of the ture, mining, and manufacturing) have lost share period, although it recovered in the last decade. of total employment, despite gains in output per Chapter 3 (Structural Changes — Implications for worker, particularly in the mining sector. In the Growth, Productivity, and Competitiveness) describes end, the long-term trends of output in Colombia Colombia’s sources of economic growth over show the combined share of output in agriculture several decades. Per capita GDP growth since and manufacturing declined from 9.7 and 18.1 1960s has relied mostly on factor accumulation. percent to 6.2 percent in 1976 and 12.0 percent in Total factor productivity (TFP) contributed only 2012. This long-term pattern is common to many 0.1 percentage point to the almost 2 percent av- countries, but it calls attention on the need to ac- erage annual growth between 1961 and 2011. celerate productivity growth in tradable activities This does not differ much from the rest of Latin to avoid wideining productivity differentials across America. However, an interesting pattern emerg- sectors. es when looking at high-growth Asian economies: Their rate of human capital accumulation does While economic activity remains relatively diver- not differ much from Colombia’s. The differ- sified, Colombia’s exports are among the world’s ence in per capita GDP growth is explained by most commodity-dependent. Various indicators Colombia’s lower accumulation of physical/fi- can be used to analyze commodity intensity/de- nancial capital and lower rates of TFP produc- pendency. Considering primary sector (agriculture tivity growth. In 2001–11, average per capita and extractives) value added as a share of GDP, GDP growth increased to 2.8 percent, similar to Colombia at 14.2 percent appears to be less com- the Latin American average, but still below the modity-intensive than both LAC (25 percent) and 3.9 percent in high-growth Asian economies. In Asian economies (18 percent). However, this chang- this decade, Colombia has even managed to ac- es when fiscal and export dependency are con- cumulate human capital faster than high-growth sidered. Commodity-related revenues represent Asian economies, but capital accumulation and 17.6 percent of Colombia’s government revenues. productivity growth still lag in comparison, ex- This figure is larger for the LAC region (approxi- plaining the recurrent difference in per capita mately 30 percent) but lower for Asian economies GDP growth compared to the Asian economies. (approximately 14 percent). Colombia’s commodi- This indicates that convergence requires reforms ty exports as shares total exports (70.2 percent) trail to accelerate capital accumulation and productiv- only Venezuela and Bolivia among LAC coun- ity growth. Chapter 8 on building infrastructure, tries; they are well above the averages for the re- Chapter 9 on financial markets, and Chapter 10 gion (51 percent) and Asian countries (19 percent). An Overview of World Bank Policy Notes for Colombia xxiii In contrast, commodity exports as share of GDP well and achieved high growth while diversify- (11 percent) are much lower and in line with the ing their economy beyond commodities—such as LAC (11.7 percent) and Asian (12.3 percent) aver- Norway, Chile, Botswana, Indonesia, Malaysia, ages. This is mainly due to the fact that Colombia is or Thailand. In contrast, many commodity-rich relatively closed when compared to its peers. countries are lagging in development, supporting the ideas that a “curse” can emerge if resourc- Trade growth and, in particular, export growth es are poorly managed. Examples might include have benefited significantly from high commodity Nigeria, Venezuela, or Algeria. On top of fiscal prices during the past decade. Colombia’s export considerations of how to manage commodities value grew an average of 13.6 percent a year, and natural resources, important environmental largely driven by increases in the international considerations also need to be addressed. Chapter prices of Colombia’s main export commodities. 7 on environmental sustainability gives an account Favorable prices helped increase Colombia’s of these issues for Colombia. share of world exports from 0.2 percent in 2002 to almost 0.4 percent in 2012. The gain was almost Colombia has taken important steps to mitigate entirely driven by extractive exports. Without the risks associated with the commodity boom, them, Colombia’s exports remain almost constant but lessons from other economies suggest that as share of the world’s total. more can be done. Given the macroeconomic framework, Colombia seems well-equipped to Colombia’s resource boom has been a blessing in counter near-term risks and achieve structural many dimensions, but it poses social and economic shifts into non-commodity sectors. The public policy challenges. The boom has boosted foreign sector is characterized by modest debt levels, and investment, economic growth, and government the fiscal deficit has been on a downward path. revenues. However, the rising terms of trade and The legal framework has been reformed with a related capital inflows may lead to appreciation of fiscal rule to facilitate counter-cyclical policies, a the exchange rate, undermining the competitive- decreased reliance on commodity revenues, and ness of other sectors. Fuel sales increased to almost a reform to widen the tax base. Furthermore, the two-thirds of total exports, while manufacturing’s central bank has earned considerable credibility share of total merchandise shipments declined in the market and operates independently under significantly. In addition, extractive activities are a sound framework of flexible inflation target- often highly capital intensive, do not create many ing. While the fiscal rule helps limit fiscal vola- jobs, and generate large rents, which may harm tility from commodity cycles, it does not per se the income distribution. Finally, the relatively large resolve the problem of how to transfer resources share of extractive activities trade and government from commodity industries to other sectors of the revenues increases macroeconomic exposure to economy. Sector specific policies for comprehen- price fluctuations and volatility. Volatile revenues sive rural and urban development (as explained in and associated pro-cyclical spending could have Chapters 4 and 5) can help balance the patterns real costs for growth. of economic growth in Colombia. Commodity production and natural resources Nine Policy Areas abundance do not necessarily hinder growth. The associated increase in oil export revenues brings along certain opportunities for Colombia Achievement of the development objectives de- because—if well-managed—it might serve as scribed in the previous section can be advanced a financing source for economic development. through a set of policies. Although referring to There are many examples of countries rich in a given sector and instrumented by specific poli- natural resources that managed their resources cy actors, these policies are interrelated and have xxiv OVERVIEW links to different sectors as well as effects upon land abandoned between 1980 and 2010 at 6.65 more than one objective. The order in which they million hectares (CODHES, 2012). are presented involves proximity of subject and method of analysis, not ranking or prevalence. Despite the significant decline in the incidence of poverty at the national level, both moderate and Organizing the Territory extreme poverty remain significantly higher in ru- ral areas. In 2012, extreme poverty in rural areas was 22.75 percent, compared with 6.59 percent Colombia is one of the world’s richest countries in urban areas. For moderate poverty, rural areas in terms of biodiversity, and it is generously en- were at 46.8 percent and urban areas at 28.4. These dowed with forests, water, and mineral resources. rates represent significant gains from 2002, when Located in northwest South America, Colombia is rural areas had extreme poverty of 33.11 percent one of five “megadiverse countries” or biodiversity and moderate poverty of 61.7 percent, compared hotspots; i.e., countries that possess an exceptional with urban area rates of 12.24 percent in cities and wealth of plant and animal species. One reason for 45.45 percent in the countryside. While moderate this wealth of biological resources is the wide va- poverty reduction was impressive in both urban riety of landscapes across Colombia. The country and rural areas, the gap between them increased has 311 different types of ecosystems—61 million from 1.35 to 1.64, suggesting that urban areas hectares covered by different kinds of forests, 10 were more effective at lifting Colombians out of million hectares of natural savannas, and about poverty. Half of the population in extreme poverty two million hectares of páramos. In addition, the live in rural areas. Over all, the evidence suggests country has six million hectares of varied marine that poverty reduction been slightly biased towards and coastal ecosystems. urban areas. Eradicating extreme poverty implies paying special attention to rural areas. This immense diversity is accompanied by wide dif- ferences in living standards from one region to an- The rural sector in general and agriculture in par- other, growing exposure to the risk of disasters and ticular have considerable untapped potential for environmental degradation, and a still unrealized wealth creation and poverty reduction. Both fea- potential for multi-modal connectivity and inter-re- ture many unutilized and underutilized resources. gional convergence. For Colombians, this territory For instance, only 5.3 million of 22 million hect- poses a wealth of opportunities and challenges. ares of arable land are currently cultivated, and 38.8 million hectares are characterized by exten- Improve rural areas first sive pasture systems with an average stocking rate of less than one animal per hectare. Despite this Violence and illegality are concentrated in rural considerable potential, the agricultural sector has areas. In recent decades, these parts of the coun- underperformed. For the decade 1994–2004, ag- try have endured the most serious and persistent riculture managed average annual growth of 1.1 conflict: violence, illegal crop plantations, drug percent, while the economy grew at a 2.2 percent trafficking, land concentration, and displacements. rate. For 2004–13, growth rates were 2 percent for Colombia’s rural areas have the highest incidence agriculture and 4.7 percent for the economy. After of poverty. Their main economic activities—ag- years of lagging, the agricultural sector has shrunk riculture, fishing and forestry—have shrunk and as a share of the Colombian economy, going from underperformed. Consequently a large number of 9.7 percent in 1976 to 6.2 percent in 2012. locals—between four and six million, depending on the source—have left vast rural areas under- The decline of the agricultural sector reflects years populated, the people struggling to get by in large of public neglect and a lack of incentives for farm- urban centers. CODHES estimates the amount of ers to invest in productivity-enhancing technology. An Overview of World Bank Policy Notes for Colombia xxv The underperformance can be traced to three ba- articulate and adopt a territorial approach to ru- sic causes. First, institutions have been weak and ral development. Efforts to promote rural devel- ineffective. The public institutions charged with opment have often been less effective than an- delivering services to Colombia’s rural sector are ticipated because they have consisted mainly of fragmented, understaffed, and inconsistently man- sector-specific interventions. Instead, a territorial aged. Responsibility for key functions is distribut- approach is characterized by: (i) multiple goals ed across multiple agencies, responsibility remains and objectives; (ii) sector interactions that opti- highly centralized, and local capacity has generally mize synergies; (iii) respect for the interests of local been weak. Second, policies have been inappropri- communities; (iv) adaptive planning and manage- ate, inconsistent, or inconstant. Agricultural poli- ment; and (v) collaborative action and comprehen- cies have differed over the years in terms of focus sive stakeholder engagement. The ongoing Misión and approach, but a common feature has been a Rural initiative represents a movement toward such recurring reliance on special initiatives, programs, an approach. and projects to provide immediate solutions to pressing crises. Third, public investments have Second, such development must overhaul the in- been ineffective. Government spending has result- stitutions charged with implementing rural devel- ed in wide gaps in the allocation of public goods opment policies and programs and introduce a and services between rural and urban areas, disad- new policy-making process. The institutions that vantaging the rural population in terms of oppor- currently hold the mandate for rural development tunities. This rural disadvantage has undermined in Colombia are poorly suited for implementation the incentives for private investment in farm and of an integrated territorial approach. Effective im- non-farm activities. Public investments directed to plementation of a territorial approach will require the rural sector very often have had little impact re-thinking the way services are delivered to rural beyond the very short term, partly because they areas. It will be necessary to build a new institutional have tended to subsidize inputs and support pric- architecture consisting of centralized policy-setting es received by private producers while neglecting and financing agencies, decentralized coordination to finance the public goods and services needed mechanisms, and strong local implementation ca- to improve overall competitiveness. Between 2010 pacity. If a territorial approach to rural development and 2014, for example, the Ministerio de Agricultura y is to take hold in Colombia, it will require a rebal- Desarollo Rural (MADR) invested COP 7 billion in ancing of the relationship between the center and direct subsidies and COP 13 billion in subsidized the periphery. Chapter 4 elaborates on the roles that credits to agriculture producers. Ministry of Agriculture and Rural Development, its Vice Ministry of Rural Development, the National However, rural development is more than agricul- Institute for Rural Development (INCODER), and tural development—it encompasses everything that local agencies can play in a successful implementa- contributes to improved livelihoods of rural popu- tion of a territorial approach in Colombia. lations, including infrastructure, health, education, technology, connectivity, and social protection. Third, rural development must tackle the land Rural development requires significant investment problem. Colombia’s unequal distribution and in public goods and services, rather than direct inefficient use of land stands as the single larg- subsidies to private goods and services. In an age est obstacle to rural economic growth, social and of budget constraints, rural development efforts political stability, and durable peace. Colombia’s should focus primarily on areas where poverty is land resources are underutilized and inequitably high and where the presence of the state is lacking. distributed in ways that incur significant costs for society through unrealized agricultural growth po- The development of this “new rurality” will have tential, environmental degradation, poverty, con- to overcome three main challenges. First, it must flict, and social dislocation. Regardless of its other xxvi OVERVIEW features, one thing is certain: to succeed, any new of commercial farmers who produce mainly cash rural development strategy will have to begin by crops for domestic and export markets. For the tackling the land problem. Three priorities stand first group, efforts will be needed to transition from out: formalize land tenure, build a national land subsistence-oriented farming to more commercial administration system, and correct land use ineffi- farming. The second group will need to modernize ciencies through policy reforms. production methods so they can compete in an in- creasingly globalized economy. Needed interven- What needs to be done to reverse decades of un- tions include: (i) revitalizing technology generation derperformance in Colombia’s rural economy and transfer systems through public private part- and unlock agriculture’s potential to contribute nerships and commercial alliances for production to broad-based, sustainable growth? Chapter 4 of commercial crops; (ii) developing programs for (Agriculture and Rural Development) identifies three sets silvo-pastoral systems (SPS) through a mix of fi- of actions for immediate implementation, with nancial incentives; and (iii) reducing deforestation considerable potential to help set the rural econo- and forest degradation rates while stimulating in- my on the path to sustainable growth. vestments in commercial forestry systems that are technically efficient, economically profitable, so- The first action will be to resettle displaced popula- cially inclusive, and environmentally friendly. tions and provide people with the means to resume productive activities and restore their livelihoods. The third action focuses on making policies sus- As peace and stability return to rural areas, the im- tainable by safeguarding them against economic mediate priority will be to secure rural households instability, weather variability, and environmental access to land, to the productive inputs needed to degradation. Over the longer term, the health and re-launch agricultural activities, to the information well-being of the rural sector will depend on the and knowledge needed to use those inputs effec- Government’s ability to successfully implement a tively, to the financial resources needed to pay for territorial approach to development. Interventions them, and to the infrastructure needed to deliver in this realm include: (i) a new institutional archi- surplus production to the market. Needed inter- tecture to manage territorial development at both ventions in the short to medium term include: national and local levels; (ii) an institutional frame- (i) securing access to land; (ii) distribution of phys- work to manage agricultural risk; and (iii) imple- ical inputs for agricultural production as well mentation of National Climate Adaption plan, as technical assistance, to ensure that recipients with appropriate monitoring. make effective use of the resources they receive; and (iii) affordable small-scale rural infrastructure, Make cities more connected and including affordable irrigation technologies (both productive gravity systems and pump-driven systems), com- munity-level processing and storage facilities, and Today 75 percent of Colombians live in cities, but physical markets. this share is expected to grow to 85 percent by 2050—an increase of 20 million new urban dwell- The second action will be to turn agriculture into a ers. While commodities have been an important fac- profitable activity for small-scale family farmers as tor in Colombia’s growth, the urban economy has well as large and medium-sized commercial farm- contributed more than 50 percent to GDP growth ers. This will require a two-pronged approach be- rate in the past four decades. Moving forward, cause agriculture has two distinct sub-sectors—a strengthening the role of cities may help mitigate relatively large sector composed of small-scale the inherent risks of commodity-intensive econo- family farmers, who produce mainly for home mies. An efficient urban system will be necessary consumption and are poorly integrated to markets, to support the transition from a commodity-driv- and a relatively small but growing sector composed en economic system to a stronger resource-based An Overview of World Bank Policy Notes for Colombia xxvii manufacturing structure and then to more knowl- urban system’s economic efficiency and allow for edge-intensive industries and services. cities to specialize and perform specific functions within the system. In sum, Colombia would benefit Cities will also play a major role in continued pov- from an increased integration and connectivity of erty reduction. Despite lower rates of moderate its system of cities through transport and logistics and extreme poverty than rural areas, cities have infrastructure, which would encourage specializa- larger shares of the moderate poor (more than tion and increase competitiveness in international 70 percent). Moreover, policies and investments markets. that facilitate (through planning and land avail- ability) and promote (through increased invest- At the city level, there are three general challenges. ment) access to city-level services—such as water, First, within-city coordination of service provision sanitation, affordable housing, health, education, needs to improve. In many cities, water, sewerage, urban transport, and public and recreational spac- solid waste management, electricity, and transport es—will be essential for country-wide poverty networks frequently span several administrative reduction. This is particularly apt for reductions boundaries, yet metropolitan planning and coor- in the multidimensional poverty index, which re- dination has been limited. There is a need to fos- sponds not only to incomes but also to services ter and enhance coordination at a regional and characteristic of city life. metropolitan scale, recognizing the need to adjust to the functional relationship between small and Colombia’s urban areas can be analyzed at two medium-sized cities. Second, the cities need to levels. First, the system-of-cities level studies the take advantage of agglomeration economies to in- functioning of the largest urban agglomerations crease their economic potential. High population and inter-connected cities as a whole. Second, the densities have not been matched by high econom- city or urban agglomeration level focuses on local- ic densities. For instance, a comparison of actual ity-specific problems of urban planning, service building densities with legally permitted densities delivery, and public finance. in such cities as Bogota shows considerable un- deruse of available land. In 2010, 63 percent of Expensive inter-city connectivity burdens commercial space, 53 percent of residential space, Colombia’s system of cities, which include and 54 percent of industrial space in Bogota were 18 urban agglomerations and 28 nodal cities. underused. This is probably a result of several fac- Large physical and economic distances separate tors, but information asymmetry between market Colombian cities. To move goods from one city to participants likely plays a large role. Low economic another often requires transport over the Andes densities hamper the ability of cities to enable eco- and navigating altitude differences in excess of nomic interactions that help create markets and 2,000 meters, exacerbating economic distances promote innovation and investment and increasing logistical costs. Unlike many vi- brant cities across the globe, Colombian cities are Third, cities need to diversify and enhance their at a distance from ports and other cities in the ur- sources of financing. Small and mid-sized cities ban portfolio. Bogota and Medellin are more than must strengthen their fiscal fundamentals, while 500 kilometers from a port. In contrast, Shenzhen, mid-sized and large cities must continuously inno- Mumbai, and Bangkok are port cities that connect vate with fiscal instruments. Municipal tax collec- their countries to world markets. To reach major tions have increased with decentralization and ad- ports, goods coming from Colombian cities must, ministrative reforms across all categories of cities. on average, be transported about three times fur- However, small and mid-sized cities have not kept ther than in Brazil and Chile, and six times further pace with larger cities in their ability to increase than in Argentina, the Republic of Korea, and local revenues. Real tax revenues show a positive China. Better connecting cities would increase the correlation with the cadastral system’s accuracy. xxviii OVERVIEW Large cities have more comprehensive land cadas- institutions, has not proven effective in promoting ters. Bogota, for example, has attained 100 percent metropolitan coordination in the long term; (ii) de- land registration. In comparison, only 43 percent fine and promote the most convenient incentives of all rural areas in Colombia are included in the in terms of technical assistance, funding, financ- system. Only Bogota, Medellin, and Cali have in- ing, and guarantees to foster metropolitan projects; dependent cadaster offices; all others are handled and (iii) formulate and support creation of Public at the national level. A strong push is required to Services Master Plans (water, sanitation, and solid strengthen the fiscal fundamentals for small and waste management). mid-sized cities. This might be done through ca- pacity-building in municipal fiscal management, Manage disaster risks better strengthening local cadastral systems, and struc- turing fiscal and performance incentives in the na- Latin America is experiencing an increase in the tional transfer system. number of reported disasters—a trend likely to continue because 20 LAC countries have more Chapter 5 (Urban Sector) has detailed policy rec- than 50 percent of their GDP exposed to two or ommendations for the system of cities and cities. more natural hazards. Annual expected economic At the system-of-cities level, the following actions losses for the region amount to more than US$5 would be recommended. The country needs to de- billion, and most of these losses are associated with velop and adopt a national urban policy that rec- damage to public sector assets in health, educa- ognizes and defines its system of cities. To achieve tion, water, transport, and infrastructure sectors or this, the following actions are recommended in the damage to private houses. In addition, significant short term: (i) implement the CONPES on Urban losses are often concentrated in the agricultural Policy to define the system of cities, instructing the sector, impacting production, markets, government National Statistics Department (DANE) to generate tax revenues, and trade balances. Nonetheless, data at metropolitan, agglomeration, and regional rapid urbanization, with its growth of city popu- levels and instructing the ministries to mainstream lations and assets in combination with poorly or and apply the system-of-cities analysis within their unplanned development, is the main driver of the sectorial policies; (ii) mainstream the system-of-cit- costs associated with disasters in the region. ies concept in the National Development Plan 2014–18; and (iii) promote an institutional reform Colombia has the world’s 10th highest economic within the Ministry of Housing (MHCT) to move risk of two or more hazards, according to the World from a housing-centered agenda toward a territo- Bank’s natural disaster hotspot study. In Colombia, rial approach to development in coordination with 84.7 percent of the population and 86.6 percent other relevant sectors, including urban planning of the assets are located in areas exposed to two or and economic activities, water and sanitation, more natural hazards. The exposure includes both waste management, urban transport, social facil- low-frequency/high-impact events, such as earth- ities, and urban amenities. quakes, Pacific tsunami, volcanic eruptions, and occasional Atlantic hurricanes, and high-frequen- At a city level, the Government needs to foster and cy but lower impact events, such as floods and land- enhance coordination at a regional and metropol- slides. Many researchers expect climate change to itan scale, recognizing the need to adjust to the exacerbate flooding and landslides in large parts of functional relationships between small and medi- the country. Colombia has Latin America’s high- um-sized cities. To achieve this, the following ac- est rate of recurrent disasters triggered by natural tions are recommended in the short term: (i) define events, with an average of more than 600 reported and promote the most convenient systems of coor- disasters each year. Colombia’s main challenge in dination, taking into account the Colombian legal disaster risk management is reducing some of its framework, which allows the creation of multiple extremely high levels of vulnerability. An Overview of World Bank Policy Notes for Colombia xxix Increasing climate variability in Colombia, most better resource and risk management would have a commonly associated with the cyclical occurrence direct impact upon poverty and regional inequality. of El Niño and La Niña phenomena, contribute to growing losses. Between 1950 and 2011, El Niño Four factors contribute to the accumulation of impacted the country 15 times and La Niña 13 disaster risk. First, conceptual advances in the re- times. While the nationwide flooding and land- lationship between disaster risk management and slides associated with La Niña 2010–11 produced sustainable development have not been incorporat- one the largest economic losses as a result of rain- ed into government policy or made an integral part fall, other episodes such as La Niña 2008–09 had of public administration, allowing risk conditions similar economic impacts in terms of the number to grow. Second, risk is constantly accumulating in of municipalities affected and the types of prin- cities and rural areas due to ineffectual municipal cipal losses (agrarian, housing, transport). The land-use planning policies and instruments and tendency for greater weather variation in specific deficient watershed management. Third, the in- areas of the country cannot lead to the conclusion adequate application of disaster risk management that these regional changes have directly increased policies in sectorial planning threatens the sustain- the country’s disaster risk. ability of investments, both in goods and services sectors, contributing to rising levels of exposure Broadly speaking, scientists and politicians recog- and vulnerability. Fourth, in the absence of a clear nize climate change’s potential negative impacts; policy on government responsibility for respond- however, disaster risk in Colombia is notably ex- ing to disasters and the associated losses, citizens acerbated by additional factors. The increase of and the private sector are implicitly discouraged disaster risk can be attributed to a combination of from assuming proactive roles in risk reduction and climate variability and the population’s heightened management, resulting in greater fiscal costs. vulnerability as a result of economic, social, and environmental drivers. To reverse this situation, six policy recommen- dations are proposed—with further elaboration The growth in exposure of people and assets, com- into short and medium-term actions in Chapter bined with inadequate land-use planning, explains 6 (Disaster Risk Management in Colombia). First, im- growing economic and social impact of disasters. plement the National Disaster Risk Management In geographical terms, 36 percent of the national Law. This recommendation focuses on the regu- territory (960 municipalities, including those with lation of Law 1523 and adoption of the National the largest populations) is exposed to high seismic Disaster Risk Management Plan (according to hazards, predominately in the Pacific and Andean Decree 1974/2013). It is also necessary to move regions. Similarly, 18 percent of Colombia faces forward in the operationalizing funding mecha- high landslide risk (most frequently attributed to nisms for local and sectorial disaster risk manage- heavy rains), and 12 percent of the national terri- ment initiatives. Second, increase effectiveness and tory is located in areas with increased vulnerabil- efficiency of disaster risk management investments, ity to floods. The share of the population at high strengthening the mandatory incorporation of di- risk is 28 percent for earthquakes, 32 percent for saster risk management criteria in public projects landslides, and 38 percent for flooding. Moreover, and the adoption of a strategy for monitoring re- Colombia faces a particularly regressive distribu- sponsibilities and investments. This recommen- tional impact in terms of who bears the greatest dation also includes the development of land-use burden of risk. Small and low-income municipali- planning instruments, with investment plans to ad- ties do not necessarily have the greatest economic vance effectively in disaster risk reduction. Third, losses in absolute terms, but they are socio-eco- strengthen subnational capacity in the design and nomically the most vulnerable to natural hazards application of planning instruments to reduce the and they have least capacity to recover. As a result, causes and accumulation of disaster risk. This xxx OVERVIEW recommendation promotes the review of local quarrying contributed 7.7 percent, with electricity, and regional capacity for disaster risk assessment gas, and water adding 3.6 percent. However, the and responds to the demand for risk knowledge in genuine net savings indicator, a measure of envi- land-use and development planning. It would also ronmental sustainability, shows that Colombia’s support the formulation and implementation of a gross national savings, after subtracting the costs national policy on at-risk settlements. of pollution and depletion of minerals and nat- ural resources, fluctuate around zero, far below Fourth, systematically reduce flood and landslide OECD and regional averages. Furthermore, en- risk to minimize associated impacts. This recom- vironmental degradation has high costs for the mendation centers on improving the understand- economy, estimated at 3.7 percent of GDP by the ing of disaster risk and its links to environmental 2007 World Bank study. These salient facts give policy, development, and adaptation to climate rise to environmental challenges typical of a mid- change. It entails assigning responsibility for man- dle-income country with high income growth, a agement of rivers and water bodies to a single na- rich endowment and high dependence on natu- tional entity and establishes the roles and coordi- ral resources, and a high concentration of urban nation mechanisms for the associated agencies. It population. Chapter 7 (Environmental Sustainability in aims to adopt regulations for flood and landslide Colombia) highlights two areas that merit specific at- control and management and to develop a strat- tention: pollution management and environmen- egy for implementation, monitoring, and control. tally sustainable growth. Fifth, reduce disaster risk and associated impacts through policies and sectorial action plans. This Pollution management is the main priority on recommendation can be achieved through appoint- Colombia’s environmental agenda, including air ing a unit responsible for disaster risk management pollution, water pollution, and solid waste man- in each sector and the implementation of sectorial agement. As the economy and urban population policies for risk management in each ministry. The have grown, the annual costs of urban air pollu- strategy also seeks to support the adoption and tion have increased dramatically to an estimated implementation of sectorial and inter-ministerial 1 percent of GDP, matching the contribution of action plans in risk management. And sixth, assign the minerals sector or coal. Together with other public and private responsibilities in risk manage- environmental health problems—indoor air pollu- ment and strengthen the Government’s policies tion from solid fuel used for household chores and for reducing fiscal vulnerability. This final policy inadequate access to improved water sources and recommendation addresses the adoption of clear sanitation—annual environmental health costs policy guidelines on the level of protection that the reach 2 percent of GDP. Without considering the national government and local authorities offer to cost of natural disasters, this makes urban air pol- those affected by disasters. It suggests adjustment lution the biggest environmental problem—ahead of regulations to clarify the private sector’s respon- of water supply, sanitation, and hygiene. sibility and reduce fiscal contingencies resulting from the needs expressed by the affected popula- Investment in wastewater treatment and solid-waste tion. It also promotes strategies to increase local management needs to keep up with the growing ur- and sectorial awareness of risk management and ban areas. Only around a quarter of Colombia’s improve capacity in risk management strategies. wastewater is treated, with the rest discharged di- rectly into water bodies and marine estuaries. Many Strive for environmental sustainability of the rivers passing through Bogotá, Medellin, Cali, and other urban areas are heavily polluted, and Natural resources are important to the Colombian coastal cities such as Cartagena and Barranquilla economy. In 2012, agriculture, forestry, and fish- experience water quality problems in estuary and ing represented 6.2 percent of GDP, mining and near-shore areas. Solid waste management and the An Overview of World Bank Policy Notes for Colombia xxxi management of hazardous waste are other areas be minimized by strong governance and effective that require greater policy and investment efforts. public spending on other productive sectors of One-fifth of Colombian municipalities, located the economy and education. Countries well-en- predominantly in rural areas, do not have adequate dowed in natural resources often do not develop waste disposal, and around one-third of the coun- highly diversified economies, and they are at risk try’s sanitary landfills are not properly managed of developing weak institutions—a phenome- and do not comply with environmental regulations. non known as “the resource curse.” But recent Reducing pollution will require efficient and sus- empirical evidence reveals that possessing com- tainable water utilities; partnership building at the modity wealth does not necessarily compromise local, national, and international levels; proper pol- a country’s growth. The risks can be overcome icies; greater institutional planning; and adequate by: (i) prudent management of natural resource financial arrangements. rents; (ii) replacement of whatever natural wealth that is extracted with other forms of durable cap- Urban air pollution causes three times as many ital; and (iii) efficient public spending fueled by deaths as inadequate water supply, sanitation, windfall rents from natural resources. In a con- and hygiene, and five times as many deaths as in- trary case, total wealth will decline and growth door air pollution. Despite considerable progress will not be sustainable, and some evidence sug- in environmental management over the past de- gests that is happening in the LAC region. cade, a recent assessment reveals that Colombia’s Because of unproductive choices, countries with population still faces significant adverse impacts high resource rents tend to end up with lower from exposure to urban air pollution (UAP), in- genuine savings rates. This has been happening adequate water, sanitation, and hygiene (WSH), in Colombia, where the adjusted net savings—a and indoor air pollution from solid fuel use (IAP). measure of savings after subtracting the costs of The total health cost attributable to these three natural resources extracted and the costs of pol- factors amounted to about COP 10.2 trillion an- lution—have lingered around zero and far below nually, or about 2 percent of GDP in 2010. In the regional average. This indicator suggests that terms of mortality, about 7,600 premature deaths the Colombian economy has a very low rate of a year can be attributed to these environmental savings, and growth is not sustainable from an en- factors. About 5,000 deaths are associated with vironmental perspective. UAP, around 1,600 with inadequate WSH, and 1,000 with IAP. In terms of the burden of dis- Regarding environmentally sustainable growth, ease—measured in terms of lost disability ad- it is also important to consider that the peace justed life years (DALYs)—the pattern is similar: process, a renewed focus on agricultural develop- nearly 70 percent of DALYs are attributable to ment, and the planned investment in roads infra- UAP, around 20 percent to WSH, and around structure may expand the deforestation frontier. 10 percent to IAP. The relative burden of health The measures to promote forest and biodiversity costs from these three factors are at the same level conservation and address deforestation pressures as 2002, but the overall magnitudes of the costs will need to be closely connected with policies has changed, reflecting population and income that support sustainable agriculture. Promoting growth, better access to improved sanitation, and sustainable forestry and land-use practices will growth in Colombia’s urban population. Health require: (i) strengthening the technical assis- costs in the three sectors are moderate compared tance programs through rural extension services; to other countries in the region, and the share of (ii) supporting agricultural research and innova- air pollution costs is high. tion to improve agriculture’s resilience to climate change; (iii) slowing the advance of the defor- Colombia’s economy is vulnerable to risks asso- estation frontier by measures that promote a shift ciated with its natural resource richness; they can from extensive cattle farming, notably through xxxii OVERVIEW greater security of land tenure; and (iv) improv- Marshalling All Forms of Capital: ing the management of protected areas. In inten- sive agriculture, incentives for more efficient use Infrastructure, Finance and of fertilizers and pesticides would help improve Innovation farmers’ profits while reducing soil and water pollution. As a percentage of GDP, capital investment in The formidable and complex environmental chal- Colombia has been growing for several consecutive lenges facing Colombia require a comprehensive years: from 14.9 percent in 2000 to 24.6 percent and ambitious agenda. This agenda, spelled in in 2013. This ratio is now among the highest in more detail at the end of Chapter 7, can be sum- the region. Furthermore, foreign direct investment marized into five general areas. First, enforce en- has reached record levels lately, making Colombia vironmental regulations, such as monitoring and one of the region’s preferred destinations of in- enforcement of environmental standards for land- ternational investors. And yet, productivity gains fills and developing economic instruments for the are meager and convergence to higher living stan- hazardous waste sector as stipulated by the 1993 dards is too slow. The fruits of recent efforts will Law 99. Second, strengthen data and information be seen in the near future. Colombians need to systems. This includes the creation of real-time enhance these efforts by making more and better air quality alert systems to reduce exposure during investments. peak pollution times, strengthening of data and systems measuring fertilizer consumption by type Close the infrastructure gap of crop and optimum use and providing technical assistance to farmers through extension services, Colombia’s infrastructure gap is particularly acute and, more generally, developing a national policy in road transport—shown by the high logistics on green environmental accounting, with guid- costs compared to similar economies around the ance on information provision and coordination world. A host of studies and benchmarks high- across agencies and the public. Third, increase light Colombia’s transport infrastructure bottle- investments that foster environmental protec- necks. For instance, Colombia ranks 69th among tion—wastewater treatment, vehicle fleet renewal 144 countries in the World Economic Forum’s (e.g., junking programs for the old bus fleet and competitiveness ranking (2012–13 and 2013–14 programs to retrofit the most polluting vehicle reports), pulled down mainly by the quality of classes), and integrated urban planning with al- its combined transport, supply, and telecommu- ternative transportation systems (e.g., scaling up nications infrastructure (ranked 92nd) and the Bus Rapid Transit). Fourth, enhance institutional quality of its institutions (ranked 110th). In the coordination. It is necessary to build in-house ca- World Bank’s 2014 Logistics Performance Index, pacity for environmental analysis among district Colombia ranks 97th among 160 countries, making environmental authorities, the Department of it one of the worst performers relative to regional National Planning (DNP), the Ministry of Health, peers. The country ranks 93rd among 185 econ- and the Ministry of Environment and Sustainable omies in the World Bank’s 2013 Doing Business Development—in partnership with the academia, indicator related to Ease of Cross Border Trade, which local universities, and other stakeholders. Fifth, predominantly highlights the country’s high in- promote green growth and meet internation- land transportation costs and time in performing al standards for environmental protection. This a foreign trade transaction. In particular, more includes developing a national Green Growth than 65 percent of the exporting/importing costs Strategy and pursuing Colombia’s proposal for in Colombia are associated with inland transport, achieving the OECD’s body of environmental and these costs are more than double the LAC instruments. and OECD averages. Furthermore, an analysis of An Overview of World Bank Policy Notes for Colombia xxxiii Colombia’s infrastructure gap by transport mode boundaries will need to be better defined to achieve finds the largest deficiency in road infrastructure, more efficient and specialized interventions, partic- where Colombia ranks 130th out of 148 countries ularly with regard to the decentralization process. in WEF’s competitiveness ranking for 2013–14. A 2013 study by Fedesarrollo estimates that reducing It will then be necessary to clarify and strengthen Colombia’s gap in road infrastructure would re- the competencies and roles of various transport quire at least 25 percent more roads (approximate- agencies at the national level. First and foremost, ly 45,000 kilometers) and 30 percent more paved the Ministry of Transport needs to overhaul its roads (approximately 8,000 kilometers). The gaps technical capacities to strengthen its policy-mak- in port and airport infrastructure are less signifi- ing functions and move away from a short-term cant, although most facilities are already operating and reactive vision and management, strengthen at maximum capacity, and this will only worsen its policy-making functions, and link them with a with increased trade and passenger demand. concrete long-term infrastructure investment plan. Second, the new institutional set-up emerging at Closing the Colombian infrastructure gap involves the national level calls for a broad exercise to clar- a series of challenges. These include: (i) lack of ify the roles of various transport sector agencies in long-term strategic planning in the sector and a a coherent and coordinated manner and to make fragmented institutional and regulatory frame- sure that the capacities are being developed to ful- work; (ii) limited local and national capacity to ly discharge the responsibilities established by the manage the decentralization of the road network new institutional framework. and other decentralized functions; (iii) an unprece- dented increase in the number of road concessions Second, the majority of secondary and tertiary demanding contract management capabilities; roads are under subnational jurisdiction, and they (iv) weak frameworks to address transport sector ex- are largely unpaved and in poor condition. It is a ternalities, such as road accidents, transport-related clear indication of limited institutional capacity greenhouse gas emissions, and resilience to climate of local governments in planning, structuring, fi- change-related events; and (v) slow diffusion of mul- nancing, and project management. This challenge timodal transport corridors and improved logistics calls for improvements in the institutional set-up practices. Chapter 8 (Transport Infrastructure) elabo- for managing the secondary and tertiary road net- rates on policy recommendations to address each work and bolstering capacities at the subnational of these. What follows summarizes the the main level. There is a need to mesh long-term planning diagnostics and policy actions. for the national, regional, and local road networks. In addition, it will be important to bolster project First, the transport sector has been characterized structuring and project management capacities at by inadequate policy and planning capacity, the the subnational level. The ultimate goal is to avoid lack of a multimodal policy, a short-term and re- fragmented and atomized public investments by active vision and management, and a shortage of prioritizing the structuring and implementation of technical personnel in key agencies. The recent ad- subnational projects that have regional or national ministration’s reform package is a step in the right impact and are conceived within a long-term in- direction for overcoming some of these shortcom- frastructure master plan. ings. Yet, the new institutional set-up also raises some concerns, such as delegation of some core Third, implementation of the 4G concession pro- functions of the Ministry of Transport to other re- gram will result in 40 new projects for the construc- cently created transport agencies and the prolifer- tion of 8,100 kilometers of national roadways over ation of project structuring agencies. The changes the next eight years, generating new investments may help create a pipeline of transport projects in of approximately USD$26 billion. By the end the near future, but eventually competencies and of 2014, executing the 4G program as expected xxxiv OVERVIEW would double the 25 road concessions from pre- The recommendation is to mainstream road safety vious generations of public-private partnership and environmental management in the transport (PPP) programs. This tremendous increase in proj- sector policy agenda. The Government needs to ects under management will put significant pres- continue in an aggressive and decisive manner to sure on contract management functions and will design and implement an integrated, multi-disci- call for an important institutional effort. Research plinary, and results-focused approach to road safe- and experience indicate that concession agree- ty. In this respect, moving forward with the cre- ments are subject to a high incidence of renegotia- ation of the Road Safety Lead Agency with a Safe tion, and the Government must be in a strong po- System approach based on technical and indepen- sition to manage incumbent operators and enforce dent criteria is crucial. These concerted efforts to contracts that are inherently complex and involve improve road safety should ultimately be measured a wide variety of legal, financial, and technical ob- and monitored against the United Nations goal for ligations on the part of private operators that must the Decade of Action—reducing by 50 percent the be continuously monitored. deaths by road accidents in 2011–20. In terms of environmental management, Colombia needs to Colombia needs to enhance the Government’s revamp its adaptation, mitigation, and resilience PPP contract management capacity and reinforce strategies to manage the climate change risks and the planning, structuring, and project evaluation vulnerabilities on transport infrastructure. This filters in the PPP project planning cycle. The 4G will require collecting and continuously updating program’s unprecedented increase in the num- information on high risk areas as well as designing ber of road concessions will demand an import- and implementing disaster risk assessment policies ant institutional effort in contract management. and associated prevention and mitigation mea- In this respect, setting up adequate governance sures in the transport sector. and technical competencies in the Transport Regulatory Commission to respond to its chartered Fifth, road transport dominates a sector character- responsibilities is critical. The Agencia Nacional de ized by low diffusion of multi-modal and logistics Infrastructuras (ANI) contract management func- practices. The overall modal split in Colombia’s tions also need to be revamped. In terms of im- freight transportation clearly shows road transport’s proving the planning and structuring capacities of dominance, with 70 percent of total freight volume transport PPPs, the Government could also consid- moved by truck. Railroads account for 27 percent er designing and implementing a capacity-building and are used almost exclusively to move coal from program on PPPs for public structuring agencies. mines to maritime ports for export. Inland naviga- Refining the PPP project cycle and establishing tion represents 3 percent of freight, with flows con- more detailed guidelines and procedures is also key. centrated on the Rio Magdalena and mainly used to transport oil and its derivatives. Commercial Fourth, the ever-growing number of casualties and navigability for other products could be feasible fatalities on the road network has made road safe- but would require development of intermodal fa- ty a prominent issue at all levels of government. cilities and dredging to ensure all-season naviga- In Colombia, road fatalities are the second cause bility. Under these conditions, modern multimodal of death overall, and the leading cause of death transport is virtually non-existent in Colombia, and among children and early youth (the 5- to 14-year all freight except for coal and oil moves by road. cohort). In terms of resilience to climate change, the meteorological phenomenon known as La Niña The policy recommendation centers on promoting proved the road sector’s lack of preparedness in the adoption of multimodal transport in trade and 2010 and 2011 and demonstrated the need for private participation in logistics services. Colombia mainstreaming environmental management and can expect a significant expansion of freight disaster risk policies in the transport sector. transport as a result of new trade agreements. In An Overview of World Bank Policy Notes for Colombia xxxv response to this increased pressure in its transport high equity market capitalization, investors buy networks, the adoption of multimodal transport and hold, limiting turnover. In addition, the size strategies should emerge from an integrated and of domestic private sector issuance is very small strategic planning exercise focused on key trade compared to peer countries. corridors and guided by economic rationales— cost-efficiency criteria, distances to be travelled, Despite their recent progress, financial markets can type of cargo to be transported, etc. In addition, still do more for equity, growth, and resilience in logistics platforms must be planned to optimize Colombia. Current challenges include: (i) reform- flows from production centers to multimodal in- ing an oversight architecture that has not adapt- tegration centers, taking into account that logistics ed to the new financial structure; (ii) further de- activities put additional strain on the already con- veloping government debt and non-debt markets gested urban road networks. In this sense, the most and broadening the investor base; (iii) expanding important task for the Government is to provide financial inclusion, particularly in rural areas, by the enabling environment and regulations for the increasing the population’s financial literacy and private sector to develop these complementary lo- creating financial products to enhance access to gistics services (logistics centers, transfer centers, credit for small and medium enterprises (SMEs). and cargo consolidation facilities). A list of diagnostics and actions—derived from Chapter 9 (Financial Sector Policy Note)—follows. More and better financial services for all First, Colombia’s financial oversight architecture Leaving behind the crisis of 1999, Colombia’s was designed more than a decade ago and has not banking system is today much better supervised adapted to the new financial sector structure. The and resilient, a fact demonstrated during the re- definition of financial intermediation, focused ex- cent global financial crisis. Colombia has become clusively on collection of resources for the public, a pioneer within the region in adapting macro- is both strict and unclear in interpretation, creating prudential policies and Basel III standards. At the grey areas for supervision, such as provision of fu- same time, Colombia’s capital markets have been neral insurance or issuance of pre-paid cards. Some rapidly expanding in size, and they are now among financial cooperatives that collect resources from the most developed in Latin America. Banking members are now bigger than some of the banks and insurance sector intermediation is compara- subject to full prudential oversight. The formation ble to countries of similar per capita GDP, size, of cross-border conglomerates and the develop- and demographics—but capital market intermedi- ment of capital markets have put increased de- ation to the private sector remains below potential. mands on prudential and conduct supervision (dis- Assets of the supervised financial system reached cussed below). In addition, new intermediaries are 75 percent of GDP at the end of 2013, with the being created, such as issuers of electronic deposits, banking sector accounting for more than half of expanding the universe of supervised institutions. all financial system assets. Credit to the private sec- tor has recovered to its pre-1999 crisis levels, dou- The existing financial sector oversight architec- bling from a low of 20 percent of GDP in 2003 to ture should be revised to accommodate the new fi- 40 percent in 2003. Pension Fund Administrators nancial sector structure. A first-best option would are the most important non-bank financial institu- involve a comprehensive review of the definition tions, holding assets equal to around 21 percent of of financial intermediation as well as the man- GDP in 2013. Insurance premiums are still small dates of all institutions with responsibilities for at 2.4 percent of GDP, but they have been grow- financial sector oversight. Such a review should ing. Meanwhile, mutual funds are slowly growing take into account international experiences in to be the second largest player of the capital mar- countries with similar financial sector structures kets, with assets of 6.8 percent of GDP. Despite as well as the comparative advantages of existing xxxvi OVERVIEW institutions in Colombia. A comprehensive eval- The policy recommendations span several activ- uation would involve changing several laws, but ities: (i) improve the liquidity of the government a more modest review could involve the heavy bond market yield curve from short- to long-term burden the law puts on the Superintendencia tenors; (ii) support development of an institutional Financiera de Colombia (SFC) for conduct su- and regulatory framework that promotes financ- pervision. At the minimum, authorities should re- ing for housing and infrastructure through capital think the structure of SFC. An alternative worth markets; (iii) develop policy and regulatory chang- considering would be a “Twin Peaks” structure, es to support a more diversified institutional inves- with SFC retaining responsibilities for prudential tor base for long-term financing; (iv) continue the supervision of all institutions and conglomerates process of phasing out double taxation on foreign and a new institution in charge of conduct su- investors as well as the complex administrative pervision across all markets and the creation of and registration procedures for accessing foreign a more collegiate decision structure. It is also rec- exchange and the domestic securities market; and ommended that authorities continue to develop (v) promote the development of options for hedg- the integrated risk measurement tools necessary ing minimum wage risk and increase competition for monitoring conglomerates’ increasingly com- in the annuities industry. plex risk structure. While the Colombia groups’ recent expansion abroad is positive for the sys- Third, fostering access and usage of financial ser- tem, it requires close monitoring and improved vices, particularly in rural areas, is a key challenge in risk management tools to better gauge trends and Colombia. Progress has been made in the number risks overseas. Moreover, the increased complex- of access points, but low product use reduces the ity of Colombian capital markets calls for new benefits of inclusion. Colombians have difficulties approaches for regulatory oversight. SFC would using financial products in the informal economy benefit from updating the supervisory framework because of consumers’ lack of knowledge concern- to ensure that supervisors have access to all infor- ing the financial products available, the benefits of mation necessary to assess a conglomerate’s intra- using those products, and the institutions that pro- party risks and its exposure to new jurisdictions. vide them. Even as financial services become more In addition, it could take further steps to enhance physically accessible, many Colombians need to protection of minority shareholders’ rights and increase their comfort level with formal financial investor protection, especially for collective in- institutions. A recent World Bank survey found that vestment vehicles. more than two-thirds of the Colombian population could not do a simple interest rate calculation, and Second, Colombia needs to develop financial mar- they were never taught to manage money, making kets, particularly for investments in housing and it difficult for them to analyze the terms and condi- infrastructure. Government bond markets are well tions of financial products. A similar lack of formal developed, representing 22 percent of GDP as of financial knowledge was found in other develop- December 2012. However, the non-government ing countries in Latin America, such as Mexico. debt market is small at 5.9 percent of GDP, and it Finally, credit for SMEs, particularly microcredit, is dominated by financial institutions. Equity mar- remains limited. The 2013 Gran Encuesta PYME ket capitalization has seen a substantial increase (GEP) survey indicated that more than 50 percent over the past several years, but it is highly concen- of SMEs reported no access to the financial sector; trated among a small number of issuers. The num- in particular, SMEs cannot access sufficient long- ber of new IPOs or secondary offerings is also very term financing to modernize their operations, and small. Furthermore, the capital markets’ investor they lack alternative non-bank financing sources. base is dominated by pension funds, with an incip- ient mutual fund industry and a small presence of Colombia needs to ratify a comprehensive financial insurance companies and foreign investors. inclusion strategy, with a strong inter-institutional An Overview of World Bank Policy Notes for Colombia xxxvii coordination mechanism. This strategy should in- the needs of firms and farms. The demand for clude: (i) well-designed financial education inter- innovation comes from companies and entrepre- ventions for promoting responsible use of financial neurs. There can be little productivity growth if services; (ii) legal and regulatory improvements they lack the capacity to innovate or if the com- to continue promoting the regular use of finan- petitive and trade context offer few incentives to cial services, with an emphasis on mobile banking innovate. Most important, the governance of the and other technological innovations that facilitate innovation system includes the institutions that de- transactions; and (iii) the effective implementation fine policies and programs to promote innovation, of the new Guarantees Law (1676) and creation the rules for their coordination, and the incentives of an enabling framework for factoring to support to accumulate and reallocate physical and knowl- the Government’s objective of easing SMEs’ credit edge capital to enhance and promote productivity access. growth. Innovation contributes little to Colombian economic growth because the innovation system is Make innovations thrive weak in all three components. Poor growth performance in Colombia is largely Supply of skills and knowledge in Colombia re- explained by lackluster productivity, associated to quires increased quality and relevance. Colombia is low innovation levels. Measured by TFP growth, not producing students with enough 21st Century productivity has averaged a low 0.5 percent over skills. At the primary and secondary levels of ed- the past 60 years, climbing to 1 percent between ucation, Colombia continues to underperform in 2003 and 2010—a rate that is still slow even by math and science. In the most recent results from LAC or Asian standards. An extremely large num- PISA 2012, Colombia scored significantly be- ber of Colombian companies are too far from the low the averages for both the OECD and similar frontier to proactively respond to increasing exter- middle income countries in Latin America. The nal competitive pressures. At 0.18 percent in 2011, National Training System (SENA) absorbs vast re- national research and development (R&D) expen- sources yet gets mixed reviews from the private sec- ditures as a share of GDP are roughly half the ex- tor on relevance and quality. Studies suggest little pected rate for a country at Colombia’s level of or no impact of technical education. Enrollment in development. Other resource-abundant countries tertiary education fails to attract and retain talent. like Canada and Australia invest approximately Finally, agricultural extension needs an overhaul, 2 percent of GDP in R&D, with South Africa at and universities and research centers are weakly 0.93 percent and Malaysia at 0.63 percent. For connected to private sector demand. Colombia, the decline in R&D from 0.25 percent at the end of the 1990s is entirely explained by the Demand for innovation among Colombian firms collapse in private sector R&D—from a peak of 12 is lacking because of the weak quality of manage- percent in 1997 to under 0.04 percent in 2006–10. ment, which generates low technological “absorp- According to the National Innovation Survey IV tive capacity.” A recent LSE-World Management (2007–08), only 11.8 percent of Colombian firms Survey, undertaken jointly by World Bank and with more than 10 workers innovate in product or DNP, revealed that Colombian firms are among process, compared to 30 percent on average for the worst measured to date in management quali- countries at Colombia’s level of development. ty. Strikingly, the survey also suggests that manag- ers have the largest gap between “perceived per- The national innovation system is a conceptu- formance” and “real performance.” al framework integrated by three pillars: supply, demand, and governance. On the supply side, Finally, governance of the Colombian innovation innovation requires sources of ideas and quali- system is fragmented, overlapping, and inefficient. At ty human capital across the spectrum relevant to present, Colombia does not have a coherent system xxxviii OVERVIEW to encourage increasing productivity and sophistica- prove the quality of firm management along a tion of firms over time. Many different elements of range of dimensions—production and operations, the support system are scattered across poorly coor- quality control, strategy, logistics, human resource dinated ministries. SENA, for instance, operates ba- management, the environment, continuous im- sic start-up support as well as sophisticated techno- provement, lean manufacturing, Six Sigma, 5S, logical parks (“technoparque”). COLCIENCIAS and etc.; (ii) agricultural extension; and (iii) targeted InnPulsa are also charged with higher-end support programs for micro-entrepreneurs that support a to innovative firms. In fact, Colombia has at least 56 “group” of local entrepreneurs (like post-conflict different programs to support improvements within regions targeting re-integration of youth at higher existing firms, spread across multiple agencies that risks of participating in illicit activities). are often overlapping and underfunded. The recent review performed by the Comite Tecnico Mixto Recommendations for improving the supply side shows that many of these programs are small and are the most complex to implement and longest to underfunded, with 90 percent receiving only 20 per- mature. These involve: (i) establishing targets for cent of the total resources. improving the quality of primary and secondary education, with a focus specifically on science and Recommendations in Chapter 10 for improving math outcomes; (ii) developing and implementing governance of the national innovation system in- a plan to upgrade universities to ensure alignment volve moving toward a clear division of roles, spe- with the needs of industry; (iii) ensuring develop- cialization, and coordination so that it becomes ment of a supply of technical skills of high qual- an integrated system. In this context, one agency ity and aligned with the needs of industry; and would focus on the supply of higher level human (iv) consolidating and upgrading research centers. capital and research; another one, with close con- nections to private sector, would focus more on the Empowering People and Localities demand side and raising firms’ capacity for inno- vation. Another one would specialize in technical training, with a strong regional and local presence. People are not only the direct beneficiaries of de- Finally, the activities of these specialized agencies velopment but, more important, the main agents could be monitored and reviewed from a central of developmental change. When people have institution that would have no responsibilities in access to health, education, and protection from the specific implementation of concrete programs vulnerabilities and risks, they will be able to ful- and activities. A coordinating body at the highest ly participate and guide the development process. level—a presidential body—is necessary to im- This participation occurs predominantly in the lo- plement these recommendations and to engage calities where people live. Having capable people in ongoing oversight of the system and long-run and effective localities is a prerequisite for success- planning. ful development. The next two sections refer to an integrated social protection system and to efficient Recommendations for strengthening firms’ de- subnational governments (departments, munici- mand for innovation require identifying specif- palities) as development mechanisms that promote ic needs and targeting programs. SMEs and less people and localities. advanced firms constitute the great majority of Colombian businesses and require specific pro- Tools for an integrated Social Protection grams that help them close the productivity gap System with more advanced companies. These programs require adequate design, piloting, implementa- Over the past 20 years, Colombia has developed tion and evaluation. The recommendations in- a rich array of social security, social assistance, clude: (i) technological extension programs to im- and labor-market programs to support the needs An Overview of World Bank Policy Notes for Colombia xxxix of vulnerable populations. Approximately 80 na- investment to results, including (i) system frag- tional programs are operating to manage a range mentation, (ii) coverage gaps and overlaps, and of social risks, and some programs have achieved (iii) limited information. First, the social protection substantial coverage. Coverages offered to those system (SPS) is fragmented along many dimen- who pay into the system of contributory social sions. Multiple programs address the same risk, security schemes are: pensions, health insurance, partly due to financing mechanisms. For example, occupational hazard insurance, and a set of other Colombia is in the process of developing its fifth benefits (via Cajas de Compensación, workers’ clubs program to provide cash to the elderly population. that provide services ranging from unemploy- Multiple programs are also a result of several min- ment insurance to sports clubs); these programs istries or directorates developing their own pro- are intended to protect against income shocks grams for sub-sets of the population. For example, and help smooth consumption over the life cycle. multiple entrepreneurship programs target women, To reduce poverty and promote greater human extreme poor, rural populations, micro-enterprises, development, Colombia has a range of social indigenous groups, and youth, all of which provide promotion (assistance) interventions, many of a combination of skills development, entrepreneur- which provide the same services as the contribu- ial training, and stipends or loans. tory system but to a population that does not pay into the system. The objective of these programs System fragmentation makes the SPS inefficient as is to “graduate” the poor to the social security a means of managing social risks. The ad hoc col- programs and to protect them against shocks. lection of programs by institutions at the national These are rounded out by several labor market and subnational level does not create a pathway interventions that promote employability, provide out of the risk. Even if it did, the target popula- job training (mostly through SENA), and protect tions have little awareness of which programs they workers against economic shocks. are eligible for and which programs can best raise their living standards. Administrative fragmenta- In spite of the development and expansion of so- tion also creates unnecessary costs and confusion. cial programs and institutional realignment, the The two health insurance regimes unified their results are not as strong as hoped. Social expen- benefit packages, but they still maintain different ditures increased 50 percent over the past decade, sources of financing, follow different methodolo- one of the region’s fastest rates of growth, and gies for the calculation of insurance premiums, use poverty rates fell. However, the record isn’t entire- different insurers, and follow different sets of rules ly encouraging. The Gini indicates inequality re- and regulations. This produces costs that could be mains among the highest in Latin America. Health avoided with increased harmonization between outcomes are average—or below average in some the two regimes. cases. Maternal mortality has been stagnant since 2009; infant neonatal mortality (11.2 per 1,000 Second, in spite of a large number of social pro- live births in 2012) is higher than in neighboring grams and considerable overlap, Colombia faces countries with similar development levels; so is the two coverage issues: insufficient coverage of some prevalence of diabetes. As discussed in Chapter 2, risks and insufficient coverage of some popula- cash transfers to the poor, namely Familias en Acción, tions. In health, the risk of poverty from illness is were responsible for significant declines in rates of effectively mitigated by health insurance that cov- extreme poverty (28 percent) and moderate pover- ers around 92 percent of the population—but the ty (19 percent), but declines were much smaller in risk of illness is not well covered. The health insur- rural areas, where Familias is most prevalent. ance model focuses on individual and specialized health services, rather than providing wider-reach- The disappointing outcomes can be traced to var- ing public health, prevention, and health promo- ious factors that create bottlenecks in converting tion activities and addressing health problems at xl OVERVIEW the primary-care level. Labor risks are also insuf- purposes. A labor sub-system is necessary because ficiently covered. Programs for the more than two labor risks are insufficiently covered in a country million unemployed are limited to job training, with high informality and unemployment rates. largely through SENA, with a smaller number ac- Two main recommendations are: First, create an cessing labor intermediation services. The elder- inclusive, comprehensive employment service, ly population is well covered, but the benefits are providing the population with information about insufficient. Nearly half of the 2.4 million people job search and training opportunities. This sys- over age 60 are poor; among the 30 percent who tem would replace the more limited service of- receive pensions, most are not poor. fered by SENA to its graduates. Second, articu- late and strengthen regional labor observatories Third, although social expenditures in Colombia to provide consistent information for policy-mak- are on par with the Latin America region, improved ing and decision-making. information collection and management could lead to efficiency gains. For instance, the health Third, modernize the health sub-systems by devel- sector could better manage information to improve oping a new health-care model with stronger in- beneficiaries’ use of the system and the quality of ternal management and controls. The main idea services. The National Superintendence of Health is to reduce administrative fragmentation through: (SNS) has a mandate for the inspection, surveil- (i) creation of a new health care model that would lance, and control of more than 9,000 providers focus on managing the health risks of the popu- and insurers across the country, but it lacks the fi- lation living in specific geographical areas and nancial and human resources to effectively collect enhancing the coordination between local health information and act on it to improve health care administrations and insurers; (ii) develop more so- quality. Similarly, the labor sub-system has severe phisticated and effective tools to manage health information gaps that lead to policy and program financing processes—from payment systems to inefficiencies. Colombia does not have a unified in- technology assessments and price regulations for formation database about labor market trends. pharmaceuticals; (iii) enhance the regulatory ca- pacity of the Superintendencia de Salud, through Three policy recommendations—developed in new functions and upgrading its technical and hu- more detail in Chapter 11 (Moving Toward a Social man capabilities; and (iv) conduct public outreach Protection System)—are offered as responses to these to improve the image of the SGSSS during this challenges. First, strengthen SPS management period of reform as a means of collecting and tools to overcome inefficiencies created by sys- disseminating information and addressing public tem fragmentation and reach uncovered popu- concerns. lations. In the long run, Colombia can converge to an interconnected and articulated SPS with a Improve the decentralization process set of risk-focused program streams that are eas- ily identifiable and accessible by the population, In decentralizing, Colombia has aimed to find complemented by a series of sub-systems similar- the right balance between central authority ly functioning in an articulated and client-focused and local autonomy, equity in resource distribu- manner. Through planning, coordinating what is tion, and higher efficiency in public spending. already there, and introducing new tools in a grad- Colombia is a unitary country, divided into 32 ual yet high-quality way, Colombia can achieve departments (regional governments) headed by an effective SPS and the efficiency gains and im- popularly elected governors and departmental proved outcomes that come with it. assemblies. Composed of locally elected rep- resentatives, the assemblies are responsible for, Second, build the labor sub-system by creat- among other things, approving the departments’ ing information for policymaking and program budgets. In addition, there are just over 1,100 An Overview of World Bank Policy Notes for Colombia xli municipalities with elected mayors and munici- Regalías (SGR) reform appears to be a step in the pal councils. According to the IMF, subnational right direction. World Bank projections suggest governments (SNGs) collectively account for a poor departments will grow faster than richer ones large share of public spending in Colombia—8.1 under the new framework. In sum, while the new percent of GDP in 2011. Departments and mu- royalties system will help reduce disparities, more nicipalities raise about 3 percent of GDP in tax efficient execution of SGR resources and bolder revenues, with the remainder provided by the reforms are needed to increase the pace of region- General Participation System (Sistema General de al convergence. Participaciones, or SGP), central government trans- fers, and other funding sources, such as non-tax Critical gaps across Colombia’s regions, depart- revenues and royalties on natural resources. Small ments, and municipalities remain an impediment municipalities tend to be poorer than larger ones. to regional competitiveness and are closely relat- In municipalities with populations of less than ed to services delivered by SNGs. Educational 50,000, 46 percent of the inhabitants have at least achievement shows significant regional variance. one unmet basic need, compared with 29 percent Regional disparities in competitiveness, as mea- nationwide. The country as a whole has a keen sured by levels of economic performance, infra- interest in the decentralization framework and structure, human capital, and science and tech- SNGs’ efficiency and effectiveness because of the nology, have broadened during the past decade. high incidence of poverty in small municipalities Furthermore, SNGs have significant shortcomings and the resources managed at the local level and in the overall management of resources. The evi- their impact on service delivery and national de- dence suggests that SNGs lack the capacities, the velopment goals. systems, and the data to properly manage, moni- tor, control, evaluate, and report on the use of re- Fiscal decentralization has substantially advanced sources affecting service delivery. in Colombia over the past two decades. Today, SNGs execute the vast majority of the national Broadly, the functioning of Colombian SNGs fac- budget. Table 0.2 shows this move toward fiscal es two types of challenges. The first relates to the decentralization; the share of subnational expen- decentralization framework and institutional co- ditures represented by total government expendi- ordination. There are three issues: (i) poor coor- tures grew in more than 10 percentage points from dination between central and subnational govern- 1995 to 2009. ment, (ii) distortions to the incentives framework, and (iii) inconsistent long-term strategic planning. However, the current fiscal and governance frame- In Colombia, the breadth of programs, funding work for SNGs has not led to rapid regional con- sources, agency responsibilities, and SNG priori- vergence. Although Colombia has seen steady ties challenge the central Government’s ability to but slow convergence in per capita income across coordinate interventions. Moreover, the incentive regions, the overall fiscal system (taxes and trans- structure for improved SNG performance has fers) shows a limited redistributive capacity, even been distorted by frequent changes in the policy compared with other countries in LAC region. environment and the limited range of fiscal incen- The SGP, which provides central Government tives or disincentives from the central Government transfers to the SNGs based on poverty variables to effectively reward or sanction performance. (among other factors), has had little impact in re- Finally, the strategic planning mechanisms of the ducing differences among departments and mu- Government and SNGs are only weakly linked. nicipalities. Similarly, it is unclear whether the The available information does not permit expres- comprehensive tax reform recently approved by sion of sector and regional priorities that would Congress will do anything to address disparities promote the development of long-term planning across regions. By contrast, the Sistema General de strategies. xlii OVERVIEW The second type of challenge is related to the or outstanding performance or assist underper- capacity of SNGs. Two issues are prominent— formers in achieving sustained performance. It is (i) not enough attention to broadening local also necessary to make operational the incentives revenue sources and (ii) weak local capacity to that are already attached to the SGP and SGR manage new decentralized systems. At 1.5 per- institutional frameworks. cent of GDP for 2010, Colombia’s property tax collections are now above the Latin American Fourth, review and adjust the decentralization average (0.8 percent of GDP) and slightly below framework after an independent evaluation, par- the OECD average (1.8 percent). However, this ticularly the SGP, the SGR, and the role of the revenue represents only 20 percent of the over- departments. In the first place, the Government all local tax collection, and most municipal tax should undertake an in-depth analysis of the administration authorities (except those in the SGP and SGR to independently determine what large cities) have weak management and control is working well and what is not. The findings capacity. could lead to changes (operational rather than le- gal) that increase the system’s efficiency, probably Chapter 12 (National and Subnational Public Finances by merging the SGP and SGR funds into a single and Governance) provides a set of five policy rec- budget, control, and M&E framework. In addi- ommendations in response to these challenges. tion, it would be advisable to review the impact of First, improve coordination among levels of gov- the current formulas for resource allocation. The ernment and key central Government agencies. Government should also continue working on clar- The three critical levels of government (central, ifying and enhancing the role of the departments, departmental, and municipal) and key central ac- including proposals for a new organic law (Ley de tors, such as DNP, Ministry of Hacienda (MHCP), régimen departamental). Such proposals should out- the Ministry of the Interior, and Contraloría General line the departments’ competencies, their role as de la República (CGR), require closer collabora- coordinators/supporters of small municipalities, tion and synchronized action. The agencies need and their control and M&E functions in resource standardized and coordinated approaches to core use, evaluating results, and municipal fiscal and public management functions and processes, such management performance. as accounting and public financial management as well as procurement rules and standards. Second, Fifth, sustain technical assistance to SNGs through enhance subnational control and its monitoring new management and IT tools. Capacity-building and evaluation (M&E) framework. The central activities should focus on solving problems that Government should emphasize improving and prevent the adequate delivery of services or the integrating the control and M&E instruments sustained improvement of service outcomes. The of the agencies directly involved, such as DNP, new technical assistance delivery approach should MHCP, and CGR. Institutionalizing evaluation aim at (i) creating management tools for SNGs, is key to identifying and tracking SNGs’ perfor- especially in core management areas—planning, mance. Evaluation will generate regular feedback investment, procurement, financial management, loops to guide SNGs’ management and strength- local tax administration, and civil service; and en the central Government’s role in tracking (ii) ensuring technical continuity through a low SNGs’ progress. Third, implement an effective turnover of trained staff. incentives framework for SNGs. It is critical to define performance indicators and information Common THreads tools to measure SNGs’ management capacity, set out standards and good practices in subnational public management performance, and imple- This overview of the World Bank policy notes for ment an incentives framework to reward superior Colombia concludes with a listing of common An Overview of World Bank Policy Notes for Colombia xliii threads that weave through all the chapters. As responsibilities. Strengthening and empowering mentioned at the beginning, the various recom- subnational governments is a regular plea through mendations are inter-connected and impact one or these policy notes. more of the development objectives. These com- mon threads are evidence of regularities that per- Fourth, and related to the third point, coordination vade Colombia’s most pressing development chal- through levels of government and across agencies lenges. Making them explicit helps define guiding is deemed paramount. All areas under analysis in principles for developmental change in Colombia. these policy notes indicate the need for a better institutional framework. Development of a ter- First, not surprisingly, almost all policy notes call ritorial approach to rural development, national for more and better capital investment, particular- urban policy and metropolitan plans, national in- ly in infrastructure but also in other forms of capi- frastructure plans, a national innovation system, tal accumulation. Be it in rural roads, multi-modal social protection system—all these areas require transportation, watershed systems, wastewater and better institutional coordination and, in some case, landfill plants, there are multiple calls for modern redesign. These policy notes diagnose overlapping projects. Moreover, the policy notes’ support for agencies’ mandates, population coverage gaps, better universities, research centers, capital mar- conflicting authorities, and limited planning and kets, and long-term financing mechanisms make implementation capacity. Overcoming these insti- the point that Colombia also needs more mature tutional limitations is a task that will lead not only financial and knowledge capital. a more effective administration but also to a better direction in the development process. Second, and related to the first point, the policy notes support a subtle re-examination of subsidies Fifth, quality databases, information systems, and vis-a-vis investment in public goods. A case in point M&E protocols face growing yet unmet demand. is the detrimental impact on investment in rural de- Labor and health databases, air pollution infor- velopment from the excessive concentration of sub- mation systems, the Sistema Integrado de Información sidies within the budgets of Government agencies Financiera, timely census data, and rural and urban attending rural areas. Policies to increase private land cadasters are just a few examples of infor- participation in infrastructure, land-value capture mation requirements mentioned in various poli- mechanisms as a tool for local government financ- cy notes. These data are needed for better policy ing, and enforcement of land and safety regulations planning and implementation. Without the data, are all signs of a need to reconsider explicit or im- problems cannot be diagnosed, programs cannot plicit subsidies that drag public finances and hin- be monitored, and solutions cannot be confirmed. der, or plainly prevent, investments in public goods. Information and M&E protocols are indispensable for modern economic and social progress. Third, the policy notes recognize the utmost im- portance of enhanced subnational governments These five common threads, and the multiple and for policy implementation. Subnational govern- diverse analyses and policy recommendations from ments are seen as a vital agents of policy imple- which they are derived, intend to contribute to the mentation—from their role as enforcers of local understanding of Colombia’s current develop- environmental regulations and their responsibility ment challenges. They testify to the commitment in delivering basic social services to their participa- of World Bank experts in Colombia and their de- tion in urban planning, investment in rural devel- sire to help, in some small way, the country achieve opment infrastructure, and managing municipal its higher development goals. finances. However, the notes also recognize that local governments leave a lot to be desired in terms Colombians and their institutions have a fruitful of capacity, incentives, and means to address these experience in implementing development policies, xliv OVERVIEW and their current advanced challenges are proof reach of achieving fundamental development of the many successes they have achieved in recent goals: sustainable peace, eradication of poverty, years. These advances have put them within close and shared prosperity. PART ONE BACKGROUND NOTES CHAPTER 1 Supporting Colombia’s Transition to Sustainable Peace and Development Main Messages This background note proposes a framework for understanding the transition from armed conflict to sustainable peace in Colombia. The first section describes the general characteristics of the conflict in Colombia. The second section introduces the overall World Bank approach to armed conflict as a development challenge, then draws implications for Colombia, discussing the transition from war to peace and the linkages between the security, development, and political transitions. Finally, the third section analyzes Colombia’s current policies and the main challenges involved in the transition period. The topics covered by the peace dialogues in Havana are interrelated and address conflict stress- es—such as land concentration, inequalities among population groups, the rural/urban gap, deficient justice, unemployment, and lack of opportunities for young people. However, implementation of the agreement will be decisive in advancing the transition toward sustainable peace and development. Challenges loom at every level: at the individual and family level, with the trauma and psychosocial effects of the armed conflict on various generations; at the community level, with high levels of mistrust (among citizens, communities, and vis-à-vis the state) and a culture of illegality; at the subnational level, with deficient capacities of local government institutions and lack of civilian state presence in con- flict-affected areas; and at the national level, with the top-down policies and difficulties in inter-sector coordination. An agreement resulting from the peace dialogues will accelerate political, security, and develop- ment aspects at the national level and in specific regions. However, insecurity may rise as a result of negotiations because armed actors will try to fill spaces left by FARC, and the guerrilla’s dissidence will try to grow. As insecurity rises, public support for the negotiations may wane in regions affect- ed by violence and in cities where the benefits of peace will not be tangible. Like other countries in the aftermath of peace negotiations, the Colombian government’s greatest challenge in ensuring the agreement’s success will be guaranteeing a minimum level of stability after the negotiations while strengthening current institutions and transforming those that perpetuate cycles of violence. Policies and programs from different sectors should share the common objective of preventing cycles of vio- lence from recurring, and they should be designed to reinforce the three transitions to peace—polit- ical, security, and development. There is a great risk that local power-holders will either violently resist implementation of peace-agreement measures or adapt to them without necessarily transforming the institutional frame- work. To mitigate the risk of national policies’ instability or perverse effects, it is important to have regional information and design policies in a differentiated way according to each area’s capacities, needs, and challenges. In addition, a clear road map establishing short-, medium-, and long-term ac- tions and objectives is essential to supporting transitions at the local level. Finally, policy processes can build confidence on the peace outcome prior to deepening the institutional transformation with the purpose of reducing inequalities among people and among regions. The Dynamics of Armed Conflict In the past decade, the Government has made strenuous efforts to reduce Colombia’s violence in Colombia and poverty levels and increase state presence. The country is no longer considered a high risk for in- Colombia can be seen as a country with two seem- vestment, and it has increased its capacity to guar- ingly incompatible profiles. On one hand, it is a antee basic citizens’ rights. Even drug production, stable formal democracy, immune to the authori- one of the main drivers of the conflict, has been tarian and populist tendencies that have negatively significantly reduced. Despite this progress, the two impacted other South American countries. With a incompatible profiles of Colombia still coexist, and per capita GNI of US$11,380 for 2012,1 it is also violence continues to take a heavy toll on society. an upper middle-income country, representing one of Latin America’s most dynamic economies. It is Some economic analysis even goes so far as to well integrated in the global economy, with OECD suggest that if the country had been at peace for standards within its reach. the past 20 years, per capita income would be 50 percent higher today.6 Furthermore, it is estimated On the other hand, Colombia has been trapped that without the armed conflict, Colombia’s annual in repeated cycles of violence, where inequality, growth rate would be 1.5 percentage points higher.7 poverty, and weak institutional capacity reinforce armed conflict and vice-versa.2 To date, attempts An institutional framework, or a set of tac- to end the armed conflict through peaceful or it rules, among stakeholders and entities pre- military means have not succeeded. Starting in serves the coexistence of the two profiles of the early 1940s, the violence arose from ideolog- Colombia—the formal democratic upper mid- ical confrontations between two main political dle-income country and the conflict-affected parties.3 During the Cold War, east-west polar- one. This institutional framework impedes the ization shifted the center of gravity of violence functioning of democratic institutions, leaving to asymmetrical, low-intensity warfare between behind regions and population groups. For in- communist insurgencies and government forces. stance, violence is greatest in regions with weak During the 1980s, the armed conflict became local institutions,8 high revenues from natural re- a protracted confrontation of multiple actors, sources extraction,9 and the presence of illegal including drug-trafficking cartels, insurgency armed groups. In addition, specific groups, such movements, and paramilitary forces with mul- as rural, afro-Colombian, and indigenous pop- tiple, overlapping forms of violence. Since the ulations, are overrepresented among victims of 1990s, these illegal armed groups have regularly the armed conflict. Education is also deficient on attacked infrastructure, undermined state legiti- the Pacific and Caribbean coasts and in other ar- macy, and used violence and terror against civil- eas where conflict is intense, which has negative ians, dispossessing them from their lands, creat- implications for future generations and increases ing forced displacement, and damaging the social the development gaps with the rest of the coun- fabric.4 Fifty years of violence have affected at try.10 Furthermore, the government’s capacity least three generations of Colombians at the na- varies across sectors and public entities; for ex- tional, subnational, community, and individual ample, government entities such as the Ministry levels (see Figure 1-1). Between 4.7 million and of Finance, the Central Bank, the Planning 5.7 million people were internally displaced be- Department, and the Ministry of Defense are tween 1985 and 2012. During the same period, better equipped, more efficient, and have more an estimated 220,000 persons were killed, 27,000 stable and qualified staffs than average line min- people were kidnapped, 25,000 disappeared, and istries. As a result, central government policies 6,421 children were recruited by illegal armed may be unable to reach violence-affected areas groups.5 and may even have perverse effects.11 In some Supporting Colombia’s Transition to Sustainable Peace and Development 3 4 PART ONE | CHAPTER 1 Violence in Colombia FIGURE 1-1:  Political Violence 120 Internally Displaced Persons (IDPs) 100 700,000 Number of homicides 600,000 80 Number of people 500,000 60 400,000 40 300,000 20 200,000 0 100,000 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 0 Homicides of mayors Homicides of city councillors 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 and former mayors Homicides of other Homicides of unionized sectors' union leaders Displaced population per year teachers Homicides of journalists Victims of Antipersonal Land Mines Number of Massacres and Victims of massacres 700 800 Number of victims/casualties 600 700 500 600 400 500 300 400 200 300 100 200 100 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Wounded civilians Wounded military Dead civilians Dead military Victims of massacres Number of cases of massacres IDPs registered 700,000 600,000 500,000 400,000 300,000 200,000 100,000 0 Before 1985 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Displaced people Received people Declared people Source: Data from the Observatory of Human Rights and International Humanitarian Law of the Vice-presidency of Colombia, 2014. (continued on next page) Supporting Colombia’s Transition to Sustainable Peace and Development 5 Violence in Colombia (continued) FIGURE 1-1:  Homicide Rate per 100,000 population in Colombia, 1938–2013 90 80 Homicide rate per 100,000 70 60 50 40 30 20 10 0 1983 1941 1944 1947 1950 1953 1956 1959 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 Year Source: DANE. regions, key democratic institutions such as the subnational needs in the peace-building process, division of powers, free elections, and freedom which implies that a potential final agreement can of expression are respected: in others, the scope be more than an “elite pact” among holders of of central state policies is very limited. political, economic, and military power. For this to happen, an understanding of stakeholders at The subnational areas where the institutional the local, national, and international levels is es- framework is weak are not well prepared to handle sential for guiding the design and implementation external and internal stresses. The external stress- of policies. National stakeholders include state es can come from factors stemming from regional actors such as the Congress, army, and local au- and global dynamics, none of which are under thorities, and non-state actors like illegal armed government control. They include instability of groups, the private sector, civil society (including neighboring countries like Venezuela, price fluctu- ethnic groups), opposition groups, and the media. ations of primary goods on international markets, It should also be recognized that the FARC is only global drug trafficking and cartel strategies, illegal one of the multiple stakeholders in the armed con- trafficking of natural resources. Internal stresses flict, and that the risk of increased violence is high can come from factors normally under the control in the aftermath of the peace agreements. of individual states, including the presence of il- legal armed groups and their strategies to control The transition from war to sustainable peace and territory or populations (landmines, confronta- development will require a particular equilibrium. tions with other groups, threats), illegal economic On one hand, it will involve short-term strategies for activities, polarization of society, mistrust of the stability built upon coalitions with some stakehold- government, corruption, limited access to justice ers. On the other, it requires long-term institutional and participation, high income inequality, unem- transformations that will lead to the integration of ployment, and difficulties in accessing the means parts of the territory and excluded populations into of production such as land and credit. the national political, social, and economic life. Central government policies like the peace process What does sustainable peace mean? with the FARC offer an opportunity to end the cy- cles of violence. The preliminary agreements from The definition of a peaceful Colombia will de- Havana recognize the importance of addressing pend on the results of the peace negotiations and a 6 PART ONE | CHAPTER 1 collective effort of envisioning a country at peace. be analyzed as dynamics of violence and conflict According to Sergio Jaramillo, the Colombian embedded in a stable state, geographically concen- High Commissioner for Peace, signing a peace trated, but with implications for the whole country. agreement with the FARC signifies the start of a transition process toward peace.12 The peace pro- Based on recent analysis of researchers and practi- cess is a means to end the violence while defining tioners, the World Bank 2011 World Development solutions to five core issues in Colombian society Report (WDR) proposes a view of conflict as cy- that need to be resolved independently of political cles of violence, arguing that many countries and and ideological affiliations. These core issues are: subnational areas face cyclical violence, instability, (i) rural development and land reform, (ii) politi- and weak governance that have a significant impact cal participation, (iii) cessation of conflict, (iv) ad- on levels of human development. For instance, 40 dressing the problem of illegal drugs, and (v) vic- percent of countries that have experienced civil tims’ rights. Thus, a peace agreement will define war revert back to conflict within a decade.14 In “what to do” without arms as an obstacle, while addition, new types of violence and conflict have Colombian citizens in each region will decide arisen in the form of interlinked criminal activi- “how” this will occur, or in other words, how to ties, rebel groups, and global movements. This transition from war to peace. view of conflict emphasizes not only its repeated and interlinked effects but also its regional and Global experiences show that the main challenge global repercussions. External factors (e.g., price in the aftermath of a peace agreement is prevent- shocks, climate change, international disputes) and ing the recurrence of cycles of violence, allowing internal factors (e.g., corruption, youth unemploy- society to implement the necessary and agreed-up- ment, discrimination) act as stresses that can cause on changes.13 Part of this challenge also lies on the violence to spiral if the institutional framework is way in which society as a whole is to be engaged not strong enough to address them. Countries and in the implementation of the agreements. Part of subnational areas with the weakest institutional le- Colombian society challenges current views and gitimacy and governance are the most vulnerable development of the peace talks and agreements to violence and instability and the least capable of and the country requires coming to terms with responding to internal and external stresses.15 these. The following section outlines a global per- spective for understanding conflict as a develop- FIGURE 1-2:  Vicious Cycles of Violence ment challenge and a framework for a transition to sustainable peace and development, and it identi- fies policy options that have been effective in other Weak Institutions not Transforming contexts to prevent recurring cycles of violence. They may be useful for the Colombian case and its conflict dynamics, stresses, and stakeholders. New Pact New Stress Understanding Armed Conflict and the Transition to Peace The understanding of conflict dynamics has changed considerably since the Cold War. An in- ter-state perspective has evolved to an intra-state VIOLENCE and one that considers the correlation between pov- FRAGILITY erty, inequality, lack of governance, and violence. Subnational conflicts like the Colombian one can Source: 2011 WDR. Supporting Colombia’s Transition to Sustainable Peace and Development 7 This perspective on conflict entails three main for combatants originating in both statutory and changes in the understanding of armed conflict non-statutory forces and victims to participate while and peace. First, post-conflict may be a misleading promoting economic recovery, rebuilding financial term because periods of conflict ended with peace systems, and enhancing basic service delivery; and agreements can actually be followed by new cycles (iii) a political transition, aimed at creating condi- of violence (see Figure 1-2). In this regard, peace tions conducive to a participatory democracy.16 should be seen as a process rather than a stage to which a peace process or a military policy may The three transitions—security, development, and lead. Second, conflict is territory specific, and a political—are a simplification of the multiple chal- country can simultaneously endure multiple cycles lenges faced by a society in building sustainable of violence depending on subnational contexts. peace based on democratic principles. For instance, Therefore, building peace at the national level im- different aspects of the justice transition are part of plies distinct policies based on local dynamics and the three transitions. The successful disarmament of their relationship to the central government. Thus, ex-combatants, the process of truth and judgments a clear understanding of local stakeholders and of mass atrocities, and the guarantee of non-repeti- stresses—both internal and external—is essential. tion for victims will support the security transition. Third, the sustainability of the peace-building The transformation of an illegal armed group to a process implies that policies aimed at preventing political party able to participate in the national life violence are multi-sectorial and should address in- is part of the political transition, while sustainable stitutional transformation and good governance in reparation for victims is part of the development the long term. Consequently, a deep understand- transition. In addition, the social transition is often ing of institutional capacity is essential for trans- referred to as the reconciliation process between forming vicious cycles of violence into virtuous members of the society polarized by ideology, reli- cycles of institutional transformation in a gradual gion, social classes, or ethnicity. In our perspective, and systemic manner. Just as violence repeats, ef- reconciliation and inclusion are at the same time forts to build confidence in the peace outcome and outcomes and underlying process of each transition, transform institutions follow a repeated pattern. the final purpose of which is a redefinition of the social pact.17 As they are interdependent and simul- The transition to sustainable peace and taneous, policies tend to overlap them. The utility development of the framework is that it allows policies to reduce the risk of reinforcing cycles of violence by carrying Three main transitions for building out actions for each transition while taking into ac- sustainable peace count implications for the other transitions. Such a risk has been extensively analyzed in the literature In the peace-building literature, the overall tran- about countries emerging from war.18 It also allows sition from war to peace is made up of multiple for the prioritization of those actions that reinforce transitions that happen simultaneously at the local, the three transitions—in graphic terms, actions at subnational, and national levels. Considering that the intersection of security, economic development peace means more than simply the non-existence and political actions (see Figure 1-3). of violence, the literature identifies three main tran- sitions that a society must undergo to build peace: Even though the transitions should occur simul- (i) a security transition from violence to the respect taneously, launching recovery and reconstruction of human rights and international humanitarian programs requires minimum security conditions. law, with the objective of preventing the recurrence In addition, strong economic recovery in the short of violence; (ii) a development transition from a term significantly reduces the risk of recurring war economy to a peace economy, aimed at creat- violence, and political transformations towards ing a more inclusive economy with a legal option a strong participatory democracy underpin both 8 PART ONE | CHAPTER 1 Three Transitions Toward FIGURE 1-3:  the medium term corresponds to the time frame Sustainable Peace set at the negotiation table for the implemen- tation of the final agreement, which is 10 years. Figure 1-4 illustrates the time frame for building sustainable peace. Security Prioritizing policies for transforming institutions and preventing a recurrence of violence Development Political Transition periods can create either mistrust among stakeholders who lack confidence in the government’s promises or capacity to transform . Security transition from violence to the respect the situation, or high expectations of rapid change of human rights and international humanitarian law that cannot be delivered by existing institutions. . Development transition from a war Moreover, since there are winners and losers in economy to an inclusive peace economy terms of the reforms agreed upon in a peace pro- . Political transition from sub-national cess, losers can become spoilers and increase insta- fragility to a participatory democracy bility to resist change. Governments are therefore under pressure to demonstrate commitment to peace in the short term without causing instability and, at the same time, prepare the necessary re- economic and security gains.19 Governments face forms for long-term peace. multiple trade-offs because they need to ensure that the political and security objectives prevail In this regard, the 2011 WDR proposes a frame- over other goals, including good macroeconomics work to deal with the trade-off between short-term that require a degree of flexibility in the short term stability and the long-term goals of transforma- and clear growth goals in the long term. 20 tion. Considering that there is a limit to the degree of change that society can absorb at any one time, The time frame for a transition toward the WDR proposes prioritizing policies and intro- sustainable peace and development ducing gradual changes. Priority should be given to policies aimed at transforming institutions that The long-term perspective of a transition towards have a direct role in the prevention of repeated cy- sustainable peace is at least one generation, while cles of violence—such as justice, citizen security, the short-term perspective corresponds to four to seven years following the conclusion of a peace agreement. Based on international experiences, the Timeline for a Transition to FIGURE 1-4:  2011 WDR estimates that achieving functioning Sustainable Peace in Colombia bureaucratic quality takes a minimum of 20 years, and bringing corruption under reasonable control Short term Long term takes 27 years. The fastest institutional transfor- 4–7 years for increasing One generation mations of the 20th century took one generation— absorptive capacity (20–30 years) in Portugal and South Korea.21 According to an OECD econometric study by Hoeffler, economic Medium term recovery occurs slowly and is strongest during the 10–15 years for implementing fourth, fifth, and sixth years following the signing the peace agreements of a peace agreement.22 In the Colombian case, Supporting Colombia’s Transition to Sustainable Peace and Development 9 and job creation. However, many reforms need to unique, lessons from other countries can be useful build trust and create capacity before being imple- to policy makers. Drawing on key lessons from the mented. Thus, the first phase before institutional 2011 WDR, this section discusses the three transi- transformation involves restoring confidence by tions for Colombia in the short, medium, and long developing collaborative, inclusive-enough coali- term. The next section will focus on the current tions, using signals and commitment mechanisms Colombian government policies and key challeng- to build support, and delivering early results. es for the transition to peace. The second phase involves institutional changes in The main goal of all of the transitions is to prevent the security, economic, and political spheres that recurring violence. Table 1-1 summarizes the spe- focus on citizen security, jobs, and justice, sectors cific goals of each transition over the short, medi- that stand at the crossroads of the three transitions. um, and long terms. The two phases help to mitigate the risk of a new cycle of violence by increasing resilience to exter- Political transition toward a nal and internal stresses. Figure 1-5 shows the two participatory democracy phases of policy design as repetitive loops meant to prepare profound transformations while working As highlighted in the case of Northern Ireland and on the stability of the short term. the democratic transitions in Chile and Portugal, successful political transitions have taken place Policies and programs for the three through a series of actions undertaken over a de- transitions cade or more (see Table 1-2).23 The 2011 WDR analysis of transitions to peace In Colombia, the scope of the political transforma- in the 20th century found that some policies and tion will be determined by the peace agreement. programs have proven to be more effective than In any event, for any reform aimed at improving others in preventing cycles of violence from recur- the quality of a democracy to succeed, the rela- ring. While the Colombian transition to peace is tionship between the state and its citizens must be Repeated Cycles of Action to Bolster Institutional Resilience FIGURE 1-5:  Citizen security, justice, and jobs External stress Res tor Trans ing con for m in g Re sto dence T ra n s rin gc for ming on Res ins to r it u dence ti o t Tr a n ing ns con sf o r m i n g ins dence ut t it io ns ins tu tio ti ns Violence and External support Fragility And incentives Source: 2011 WDR. 10 PART ONE | CHAPTER 1 TABLE 1-1: Goals for Colombia’s Transitions Transition Short-term priority Medium-term goal Long-term goal Political-democratic Justice services provided at Institutional architecture is Political participation and participatory the local level inclusive; local governments reconciliation Dialogues with guerilla redeployed and strengthened; groups initiated, reduction of transitional justice measures fully corruption and impunity implemented Security-citizen security Citizen security programs Reforms of security forces carried Peaceful coexistence and launched at the local level out respect for human rights Development-inclusive Jobs creation programs Recovery and (re)integration of Inclusive economy and human development established and early service people and regions in the national development delivery in subnational critical economy; education and health areas initiated reforms strengthened, and participation must be reinforced political game can be extremely beneficial in build- at the local level. The policy dilemma becomes ap- ing confidence in the peace outcome. According to parent in the short term because local coalitions are the 2011 WDR, these signals include reducing in- crucial in preventing violence, but dismantling pa- justice and impunity, increasing the transparency tronage systems occurs only over time. In this regard, of information, implementing visible anticorrup- the 2011 WDR suggests a two-step process to find tion measures, and defining credible and feasible a balance between stability and change: first, build approaches and timelines toward political reform. trust in the transition to peace by implementing pol- icies that signal a break from the past and instill trust Parallel to the security strategy, there should also be that the new direction will not be reversed; second, provision of local-level justice services, reinforce- encourage institutional transformations in different ment of ombudsmen offices, and a matching of in- sectors, with priority on providing justice in critical creased police force capacity with courts, prison sys- regions. Through such a process, the institutional tems, and witness protection programs. In addition, architecture that preserves inequalities among the the aftermath of a peace agreement should open population and regions is gradually transformed. participation spaces (with facilitators) at the local level in which civilian stakeholders (civil society or- Short-term priority: justice and participa- ganizations (CSOs), the private sector, local author- tion. In the early stages of the transition to peace, ities, churches, ex-combatants) can conduct a safe sending signals of changes in the rules of the dialogue about common projects for their region. Transitional justice measures start in the short term TABLE 1-2:  Pace of Political Transitions but are fully implemented in the medium term. They have the potential to reinforce recognition of Years to threshold at victims, promote civic trust, and contribute to the pace of... ICRG indicators democratic rule of law—if they are truthfully im- 1985–2009 fastest 20 fastest ever plemented, which means that they are encouraged Bureaucratic quality 20 12 by the national government with an institutional Corruption 27 14 framework at the local level.24 To operate proper- Military in politics 17 10 ly, for instance, local peace committees for truth Gov. effectiveness 36 13 and reconciliation programs require financial and Source: 2011 WDR. human resources, including third-party mediation. Note: ICRG = International Country Risk Guidance. At the same time, community-driven approaches Supporting Colombia’s Transition to Sustainable Peace and Development 11 aimed at reintegrating ex-combatants appear to be would still be necessary to maintain service delivery an important part of the process. To be completely and guarantee citizen participation. To encourage reintegrated, ex-combatants have reported that it institutional strengthening and participation, poli- is important to them to feel like an active part of cies can combine state and non-state actors as well their communities.25 as top down and bottom up approaches, with the participation of local CSOs, the private sector, and For these participatory spaces to be effective, it is authorities. important to increase and, in some cases, create the capacity of local institutions, particularly in In Colombia, it is expected that ex-combatants conflict-affected regions, by providing human re- would be integrated into political life in the me- sources, training, and technology. Furthermore, dium term. If the security strategy and the tran- citizens should learn their rights and ways to hold sitional justice measures are carried out, political local institutions accountable, reporting noncom- parties should be able to organize, and the guerril- pliance with agreements. las’ institutional structure will be absorbed in the legal political sphere. Strong strategic communication of the signals of change is important. The media plays a key role The security transition toward the in sending these signals, building trust in the peace end of armed confrontations, respect outcome, and ensuring public accountability. for human rights, and reduction of Experience shows that this capacity needs to be de- perceived insecurity28 veloped in a coordinated manner, so that the media can support the transition to peace without losing its Policies designed to encourage the security tran- autonomy.26 In this regard, basic skills and journal- sition aim to achieve specific goals in each period istic training are as essential as establishing profes- and can: (i) restore confidence in the peace out- sional standards and strict regulations concerning come within security forces and civilian popula- false information and stigmatization. In Colombia, tions, demonstrate a break from the past, and help for instance, there seems to be a social sanction to build collaborative coalitions with key stake- that favors victims and punishes perpetrators, cre- holders to prevent spoilers from taking actions that ating disincentives for ex-combatants. This could would negatively impact the peace agreement and negatively impact reintegration and the transition (ii) gradually transform security institutions. to peace.27 Media and communication policies can help reduce resistance toward reintegration. The short-term priority of the security transition is to consolidate and coordinate security services The medium-term goal in the transition to a par- to ensure a comprehensive security approach that ticipatory democracy involves enabling the institu- reduces objective insecurity as well as perceptions tional architecture to integrate isolated regions and of insecurity. making elections and deliberative spaces accessible to all. The long-term outcome is achieved when According to the 2011 WDR, the conditions to political participation is possible and reconciliation allow for the right-sizing of the military may not is achieved. It also implies that the social pact has be appropriate in the short term, but civilian over- been rebuilt. sight of the security forces is required to prevent abuses and increase public trust. Security forces, According to the 2011 WDR estimates, the end of the police, and the military can reinforce their le- the early period of political transition should be gitimacy by: (i) increasing the dialogue with politi- conducive to carrying out other reforms, such as cal leaders from different ideological backgrounds education and health. At that stage, the capacity to discuss the mission of the security forces in sup- of local institutions would be improved, but efforts porting national objectives, such as reconciliation; 12 PART ONE | CHAPTER 1 (ii) increasing the dialogue with local authorities outcome is to reduce violence while ensuring that and communities to define “community safety people can coexist peacefully, with respect for hu- plans” with an emphasis on violence prevention; man rights and justice available to all. and (iii) increasing the participation of women in police and military forces, which may reduce mis- Development transition from a war trust toward security forces, particularly concern- economy to an inclusive peace economy ing sexual abuse.29 The experience of Haiti’s police reform is an example of progress in basic functions Programs and policies supporting the development and state-society trust in security institutions.30 transition can prevent violence from recurring while encouraging virtuous cycles in the short, medium, It is important for the military to commit to im- and long term. Policies can help to: (i) build trust provements in accountability and human rights in the peace outcome by increasing service delivery without undermining their engagement in the and job opportunities through better performance transition to peace. In this regard, choices need to of public institutions and an improved operating be made about the institutions where dismantling environment for the private sector and (ii) gradually covert, abusive, or corrupt networks will occur. It transform the institutional framework at the local will be important to identify the positions within and national levels to avoid the perpetuation of in- those institutions that will be subject to screening equalities and the exclusion of people and regions. and the types of abuses that will be prioritized. Even a small but visible transformation can send Short-term priority: job creation and early a strong signal of a real break with the past and service delivery. According to the 2011 WDR, persuade stakeholders to work collaboratively. survey evidence from Colombia, the Democratic Republic of the Congo, Gaza, Mali, Sierra Leone, At the local level, early delivery of results include and Cote d’Ivoire suggests that unemployment concrete actions, such as demining, that are needed and idleness are the main reasons that young peo- not only to reduce deaths, but also to allow people ple join rebel groups and gangs.31 In Colombia, the to move freely and without fear and to enable pub- Government’s challenge is to encourage job cre- lic services to be delivered. In addition, it is essen- ation and economic growth at a time of potential tial to protect social leaders, human rights activists, fiscal deficits. At the same time, authorities cannot and leftist groups. These actions will allow for the lose sight of other important goals—sound mac- efficient implementation of important policies for roeconomic management in the long term, main- the economic and political transitions, such as land taining low inflation, facilitating access to credit, restitution, victims’ return, and service delivery in and encouraging private sector investment with a isolated areas. social perspective (responsible entrepreneurship). The medium-term goals of the security transition Programs include emergency job creation projects are reforming the main security institutions and designed to meet local communities’ (not partic- continuing to reduce insecurity, real and perceived. ular population groups’) needs, with local inputs, Police and military reforms include professional- priorities, and ownership. The focus should be on ization of forces under civilian oversight and the conflict-affected areas, where reconstruction proj- redefinition of incentives. Instead of targets based ects can create employment in the short term and on the number of rebels or criminals captured or promote regional development through communi- killed, the goals can include freedom of movement ty clean- up and reconstruction of bridges, schools, and citizen trust in particular areas. The main pur- health centers, churches, sanitation facilities, oil pose of the security forces would be enhancing pipelines, and energy towers. 32 Broad communi- national unity and effective state-society relations ty-based programs may also be more conducive to while addressing criminal violence. The long-term stability and tailored to facilitate the reintegration Supporting Colombia’s Transition to Sustainable Peace and Development 13 of youth.33 For instance, projects can increase live- groups. In this regard, development policies can lihoods with farm and fishery rehabilitation, small be designed in a way that brings different actors business support through microcredit, training, and together for legal economic purposes, reinforcing market assistance. A mixture of state and non-state, inclusive coalitions. The experiences of Indonesia bottom-up and top-down approaches can also serve and Liberia show the importance of being present to underpin long-term institutional transforma- at the local level to regain citizens’ confidence in the tion. In this regard, it may be useful to examine the state’s capacity to provide a better quality of life, experiences of India and Mozambique in commu- create employment opportunities for youth in the nity-based public works.34 Kosovo and Rwanda35 short-term, and generate a positive climate for in- offer interesting lesson related to value-chain proj- vestment and growth.40 Foreign Direct Investment ects, access to finance, and investments to bring companies, particularly those operating in the pri- producers and markets together. mary sector, can be encouraged to support the pro- cesses of service delivery as a way gaining a “social Nonetheless, short-term measures should be mar- license” to operate by following Global Compact ket-sensible, and market-sensible development guidelines. In Afghanistan, for example, the com- must be conflict-sensitive.36 Encouraging devel- munication firm Roshan engaged extensively with opment of the local private sector is necessary for local communities in extremely violent areas while creating sustainable jobs and transforming infor- expanding the country’s mobile network. Mobile mal and illegal economies into formal and legal services increased people’s access to information, ones. The national and local private sectors, as finance, and accountability mechanisms. well as foreign investors, can play an important role in building trust among population groups by The medium-term goals of the transition from a supporting the peace process and its implementa- war economy to an inclusive peace economy are tion at the local level. In Northern Ireland, sup- stabilizing the labor market for better livelihoods port from the Confederation of Business Industry and making local economies more dynamic and helped increase the government’s communication better connected to the national economy. Both capacities through nationwide media and public serve the objective of reintegrating ex-combatants, campaigns.37 In South Africa, the Consolidated internally displaced people (IDPs), and victims into Goldfields organized the dialogue between the society. This implies an improved operating envi- African National Congress and the Afrikaners.38 ronment for the private sector, including access to In the Philippines, La Frutera Inc. and Pglas Corp. finance, clear property rights, land registers, busi- promoted reconciliation and religious tolerance at ness-friendly taxes, and the delivery of essential the workplace in a marginalized area by employing services (electricity, water, justice). The long-term Muslims and Christians, including ex-combatants. outcome includes reduced inequality among pop- In Sri Lanka, chamber of commerce members ulation groups and regions and increased social from across the country promoted joint initiatives cohesion. In addition, areas that have been pre- between Muslims, Sinhalese, and Tamil business- viously isolated and adversely affected by violence es.39 Foreign investors and diaspora can play an reach national levels of human development, and essential role by investing in conflict-affected ar- gain in shared prosperity. eas, creating jobs directly, and by supporting local private sector business through “buying local” and Challenges for the Colombian encouraging value-chain development. Government in the Transition Early service delivery will help the government Period send signals of its good intentions to people at the local level and demonstrate its ability to deliver on Recent decades have seen seven attempts to end promises and withstand pressure from influential Colombia’s armed conflict through dialogue. At 14 PART ONE | CHAPTER 1 the end of 1990s, the failure of peace negotia- political transition. The first characteristic is the tions between the Government and the country’s existence of the two profiles of the country, the largest guerrilla group, the FARC, was a hard les- democratic upper-middle income profile and the son for Colombian society41 and the international conflict-affected one profile. This characteristic community. As a result, the current peace process can make the transition smoother than in other in Havana is viewed with considerable skepti- upper middle income countries affected by armed cism by Colombian society, and multilateral ac- conflict (Iraq, Lybia, Lebanon) because a consider- tors have not yet been called upon to participate. able part of the state is efficient, democratic, and Nevertheless, the process could represent a real op- able to collect domestic resources. It could be en- portunity for sustainable peace—if it is followed by larged to increase its presence and capacity in the a coherent transition to peace. In this regard, the conflict-affected parts of Colombia, particularly role of international partners may prove essential rural areas. However, Colombia’s two profiles can in supporting the implementation phase of the po- also make the transition more challenging. Moving tential agreements and restoring confidence in the beyond conflict implies breaking the equilibrium peace outcome and the transformation of institu- between the two profiles, which has benefitted tions perpetuating cycles of violence. some population groups. Resistance from these groups can inhibit the institutional transformation Through an examination of the current Colombian necessary for building an inclusive country. The government’s main policies, this section discusses implementation of current central government the main challenges in launching the transitions in policies—such as victims’ reparations and land the aftermath of a peace agreement. restitution processes—shows the scope of the chal- lenge of overcoming the two profiles of Colombia. Political transition These policies need to be reviewed to increase their efficiency and improve judicial procedures42 The peace dialogue represents the main step to- because their success can be a strong signal of ward peace because it opens the way to a politi- commitment to peace. cal transition that reinforces the development and security transitions. Two main transformations The second characteristic of Colombia’s transition have been undertaken by the current administra- would be the subnational dynamics determined by tion of President Juan Manuel Santos. The first local contexts. Each region has to be understood transformation, already accomplished, is recog- on its own as well as in terms of its links with the nition of the armed conflict, its correlation with national dynamics. For instance, dialogues with il- poverty, inequality, and exclusion, and its impact legal armed groups operating in some conflict-af- on vulnerable populations and the country’s de- fected regions—notably, the ELN guerrillas—may velopment. The second transformation is embed- be necessary at the national or local levels for po- ded in the policy framework designed to reinforce litical transition to advance. Colombian regions the peace agreements, which includes the Victims draw lessons from transitions in other armed-con- Reparation and Land Restitution Law, the Judicial flicts. For example, the Indonesian central govern- Framework for Peace, and the Rural Mission and ment’s role in integrating subnational areas like Agrarian Pact. The potential Havana agreements the Aceh region, where the Free Aceh movement will scale up current government efforts in many was active, after the 2004 tsunami and earthquake regions and offer the possibility of transforming might be interesting. Areas of Colombia affected institutions that have long perpetuated cycles of in- by isolated conflict could also learn from Liberia, a equality, exclusion, weak governance, and violence. low-income country considered fragile, where the government managed to capitalize on donor pro- Two characteristics of the Colombian institution- grams to visibly deliver public goods and restore al framework constitute the main challenges for confidence in state institutions.43 Supporting Colombia’s Transition to Sustainable Peace and Development 15 Colombian citizens’ perception of corruption is resolution, the Government has continued its tra- another challenge for the Government. According ditional approach to security. Indeed, over the last to the LAPOP survey, Colombians’ perception of decade, the approach to security has been dominat- corruption levels has increased since 2008; in 2012, ed by the counterinsurgency logic reinforced by the it was the highest of the LAC region (82/100).44 war on drugs. The objective has been to defeat the Changing these perceptions is going to be crucial to guerrillas militarily, eliminate their sources of reve- building trust in the capacity of the state to engage a nue, and regain state control over territories. Since transition toward sustainable peace by sending sig- 2012, the Government’s main counterinsurgency nals of real change in politics and policies (as indicat- plan has been the Espada de Honor under which mil- ed in the CONPES No. 167, “Estrategia Nacional itary attacks on the FARC have led to the killing of de la Política Pública integral anti-corrupcion”). the organization’s main leaders. In addition, during The experience of the Philippine program of pro- the last 12 years, the Government has also profes- motion of good local governance through a “Seal sionalized the military forces, increased police and of Good Housekeeping” and the “Performance military presence throughout the country, and in- Challenge Fund” may give some insights on how to volved civilians in intelligence operations. While se- incentivize anticorruption measures and account- curity levels have improved considerably, especially ability at the municipality and department levels. for main roads and urban centers, the war on drugs Indicators of governance become key determinants has been controversial—a conclusion repeatedly of access to resources and programs. emphasized by President Santos in international fo- rums. Based on aerial spraying of coca crops with The political transition will be crucial for the de- the chemical glyphosate and manual eradication, velopment transition, and it will be shaped by the this policy has had a modest effect on drug traffick- security transition. The redefinition of the rural ing.45 Researchers and civil society organizations institutional framework, particularly concerning have also emphasized the devastating effect of gly- land titles, is essential for economic development phosate on the environment and health. to take place, a linkage recognized in the prelim- inary Havana agreement on rural development. The peace process can be an effective way to end However, current policies for titling rural land, armed confrontations, but current security policies updating cadasters, and registering land-use infor- will need to be rethought. If a peace agreement mation have been difficult to implement even on a is reached, a cease-fire, disarmament, demobiliza- small scale. Land restitution programs have faced tion, and reinsertion will follow, and the defense challenges at the administrative and judiciary lev- and security doctrine will have to shift from count- el; so far only 16,700 restitutions have been made, er-insurgency logic towards a strategic conversion or less than 2 percent of potential claims. In ad- to a new force structure based on the definition of dition, the programs have faced challenges at the new missions and assignments for both the mili- security level due to the violent opposition of local tary and police. power-holders, displayed through the assassination of social leaders and threats to civilian population. Concerning the reformulation of policies, it is In a post-agreement scenario, transitional justice essential to take into account lessons from past measures can speed up processes for victims’ repa- governments’ main inter-institutional efforts for ration and land restitution if coordinated with the consolidating security gains—the National Policy for security transition. Territorial Consolidation and Reconstruction. The lessons will help to complement top-down policies with Security transition bottom-up approaches and to facilitate a greater presence of the civilian state in pacifying select- Despite the new approach to armed conflict in ed regions and guaranteeing fundamental rights Colombia and current efforts aimed at a negotiated for everyone. For instance, the program has been 16 PART ONE | CHAPTER 1 unable to impact the whole state, although it in- Development dynamics can reinforce the security creased expectations in the seven regions where it and political objectives of the transition to peace operated. According to program impact evalua- by addressing conflict stresses like inequality, un- tions, the main obstacles involved (i) the top-down clear rules, and uneven access to information in character of the program that left local authorities the short, medium, and long terms. In the medium passive, (ii) difficulties in promoting inter-institu- term, it is expected that implementation of agree- tional coordination (for instance, essential roads ments on rural development—including land ti- were not built); (iii) the ambitious goals of the pro- tling, infrastructure, and access to land, credit, and gram, which were to be achieved in a short period, services—would be fully under way. If potential sacrificing citizen participation, trust-building, and stresses from the free-trade agreements are identi- accountability; and (iv) the dominance of patron- fied in the short term and the institutional frame- age networks and weak institutions in the local po- work is prepared to handle them, international litical sphere. In 2014, for example, most of the markets can offer good opportunities to integrate areas targeted for consolidation were considered rural areas into national and global economies. extremely high risk for elections due to high lev- Transitional arrangements facilitating market ac- els of corruption and fraud. Citizens mistrust the cess for products coming from conflict-affected justice system, mayors’ offices, and police.46 Thus, areas for a trade agreement’s first 10–15 years the security-driven consolidation policy faces the can boost incentives for local economies. In this challenge of restoring confidence at the local level regard, the experience of Haiti and Mozambique and transforming institutions in the political and can be useful.49 development spheres. The private sector has an essential role to play once Development transition the state is engaged in strengthening regulations and institutions, rebuilding basic infrastructure, Another characteristic of Colombia’s transition to and providing security. For instance, Colombia’s peace is the country’s current positive growth cycle reintegration programs based on public-private and its macroeconomic stability, which represents a partnerships can be enriched with local stakehold- major opportunity for reaching and implementing ers’ participation and reconciliation objectives.50 a peace agreement. A dynamic economy is condu- In addition, partnerships between the public cive to integrating regions and population groups and private sectors, donors, and civil society can excluded from national life and launching a process help to rebuild markets and investor confidence, of institutional transformation without experienc- leading to new employment opportunities. Value ing a massive disequilibrium or aid dependence. chains can also connect farmers with the private sector and FDI, and spark innovation and em- The objectives of the government’s development ployment growth. Eventually, targeted programs plan can reinforce security and political transfor- can be transformed into employment creation in mation. Until now, the national plan’s goals have the private sector.51 Colombia is ranked 43rd in emphasized increasing growth, balancing the fis- Doing Business,52 well above the regional average, cal deficit, and reducing unemployment. Of the revealing the dynamism of the country’s private five priority sectors, mining and housing have ad- sector. Public policies may consider drawing on vanced, but infrastructure, agriculture, and infra- the private sector, both national and international, structure for land transport in rural areas47 have to support short-term actions in conflict-affected lagged national levels.48 Therefore, although the areas to develop formal local economies in the general goals of the plan have been fulfilled, the medium and long term. Colombia’s national in- fact that those three sectors lag behind have affect- vestment promotion agency can play a key role in ed regions historically excluded and geographical- supporting investors and informing them about ly isolated from the national economy. risk-mitigation options. Supporting Colombia’s Transition to Sustainable Peace and Development 17 Endnotes 1 GNI Per capita, PPP (current international prices), 6 According to WB Country brief 2008. World Development Indicators (see http://databank. 7 Daniel Mejia, quoted by The Economist, 2012. A worldbank.org/data/views/reports/tableview.aspx). literature review on quantitative studies of the costs 2 Recent political economy literature examines the of violence on economic growth in Colombia was consequences of weak state capacity for economic done by Riascos, A, Vargas, J, (2011), “Violence and growth and welfare as well as the effects of armed growth in Colombia: a review of the quantitative lit- conflict on state capacity. Acemoglu, Ticchi, amd erature,” Universidad del Rosario, Serie Documen- Vindigni (2006) argue that elites may have incen- tos de Trabajo, No 102. tives to choose inefficient state institutions to limit 8 Acemoglu, Robinson, and Santos quantitative anal- redistribution. A similar argument is developed by ysis shows the equilibrium of a Colombian demo- Besley and Persson (2011) for explaining why po- cratic central state with non-democratic regions by liticans make inefficient fiscal choices. Besley and studying the incentives for the legislative and exec- Persson (2008) have documented a negative cor- utive to tolerate paramilitary presence and control relation between internal conflict and the capacity over some regions. Acemoglu, Robinson, and San- of the state several decades later. Cardenas, Eslava, tos (2013) “The Monopoly of Violence: Evidence and Ramirez (2013) apply the model for Colombia from Colombia,” Journal of the European Econom- and show how internal conflict deteriorates state ca- ic Association, January, 11 (S1). pacity in Colombian municipalities. Acemoglu, D, 9 Dube and Vargas demonstrate how a rise in the in- Ticchi, D, and Vindigni, A (2006), “Emergence and ternational price of natural resources (oil, coal, gold) persistence of Inefficient States,” Journal of the Eu- increases conflict in the Colombian regions where ropean Economic Association, 9, 177–208. Besley, those resources are exploited. Cardenas, Eslava, T and Person, T (2011), Pillars of prosperity, Princ- and Ramirez analyze how violence erodes state ca- eton University Press. Cardenas, Besley, T and Per- pacity for collecting taxes and providing public ser- son, T (2008), “Wars and State capacity,” Journal of vices. Since the lack of state presence increases il- the European Economic Association. legal actors’ presence and control over the regions, 3 An intensively violent period (1948–1958) known the perverse cycle is completed: weak institutions, vi- as la Violencia was characterized by political violence olence, poverty, and inequality. Dube, O, Vargas, J between the Colombian Conservative Party and the (2013), “Commodity price shocks and civil conflict: Colombian Liberal Party. evidence from Colombia,” The Revue of Econom- 4 World Bank, SIDA (2000), “Colombia. Essays on ic Studies Advance Access (February). Cardenas, M, Conflict, Peace and Development.” Eslava, M, Ramirez, S (2013), “Why internal con- 5 Source: Centro Nacional de Memoria Historica, in- flict deteriorates state capacity? Evidence from Co- forme general “Basta Ya”, 2013. Statistics about vic- lombian municipalities,” CEDE, Universidad de tims are controversial, see Chapter 1 of the report, p. Los Andes, Documento 59 (December). 52. The NGO CODHES estimates 5,712,506 IDPs, 10 The Fundacion Compartir study (2014) shows the while the Government registered 4,744,000 IDPs lower level of education for teachers in the Pacific, since 1985, the date established by law for recognizing Caribbean, and Amazon regions, and its direct re- the status of victim. The Commission for Historical lation with attacks from illegal armed groups, dis- Memory estimates 218,094 deaths by violent conflict placement, and poverty. Also, the level of teachers’ from 1958 to 2012, including civilians and combat- education determines the level of student perfor- ants. In January 2014, the website of the Unit for In- mance. Fudacion Compatir (2014), “Tras la excel- tegral attention and Victims’ Reparation registered a encia docente. Como mejorar la educacion de todos total of 5.9 million victims demanding reparations. los colombianos” (January). 18 PART ONE | CHAPTER 1 11 See the negative correlation between political com- ger conflict among populations that do not have ac- petition with murders of politicians in municipal cess to the opportunities generated by the sector elections, Sanchez, F, Palau, M, (2006), “Conflict, or armed actors capable of taking the production decentralization and local governance in Colom- means by force. By the same logic, a security action bia: 1974–2000,” CEDE, Universidad de Los An- that leaves local population without a sustainable des, Documento 2006–46. livelihood can spur mistrust, increase youth unem- 12 Jaramillo, S, Alto Comisionado para la Paz (2013), ployment, and open the way to illegal economies. In “Transicion en Colombia ante el proceso de paz y la addition, elections and decentralization carried out justicia,” El Tiempo, May 14. in non-secure environments where other political 13 Conflcits are not one-off events; they are ongoing rights are not guaranteed and inequalities are ram- and repeated. In the 2000s, for instance, 90 per- pant can make competition for power a source of cent of the civil wars occured in countries that had violence. Del Castillo, G (2008), Rebuilding war-torn experienced a civil war in the past 30 years. Addi- societies: the challenges of post-conflict reconstruction, Ox- tionally, many countries that have negotiated politi- ford University Press. Ball (2001), “The challenges cal and peace agreements face high levels of crime of rebuilding war-turn societies,” in Crocker, Ches- and violence—for example, El Salvador, Guatema- ter et al. (eds), Turbulent Peace: The challenges of manag- la, and South Africa. Hewitt, Winkelfeld, Gurr et ing international conflict, USIP. Cousens, E, Kumar, C, al (2012), Peace and conflcit 2012, Center for Interna- (eds) (2001), Peacebuilding as poltics: cultivating peace in tional Development and Conflict Management. See fragile societies, Lynne Rienner. Siegle, J, O’Mahony, World Bank (2011), Conflict, Security and Development, P, (2006, “Assesing the merits of descentralization World Development Report 2011. Referred to as as a conflict mitigation strategy,” prepared for US- 2011 WDR. AID’s Office of Democracy and Governance as a 14 Collier et al. (2008),” Post-conflict risks,” Journal of supporting study to the revision of the Decentraliza- Peace Research, 45 (4). tion and Democratic Local Governance Program- 15 2011 WDR, p. 7. ming Handbook. 16 Castaneda (2014) proposes defining peacebuilding as 19 Collier et al. (2008). the crossroads of these three transitions, based on the 20 Del Castillo (2008), Economic reconstruction of literature and practitioners debates on peacebuilding. war-torn societies: the role of the international fi- Castaneda, D (2014), The European Approach to Peace- nancial institutions,” Seton Hall Law Review, Vol 38. building. How the EU used civilian tools for peace in Colom- 21 2011 WDR, p. 108. bia and beyond, to be published, Palgrave. David (1999) 22 Hoeffler, A, (2012), “Growth, Aid, and Policies in summarizes the common elements of the peace- Countries Recovering from War”, OECD-DAC, building approaches. David, C, (1999), “Does peace- WP 1/2012. building build peace? Liberal (mis)steps in the peace 23 Portugal and Chile transformed insitutions during process,” Security Dialogue, Vol. 30, No. 1. their transitions from dictatorship (1974, 1990). 17 After a peace agreement, many other transitions are Transformation included reducing military control taking place, including justice and social transitions. over politics, achieving a functioning bureaucratic However, the three main transitions encompass the quality, bringing corruption under reasonable con- others. Countries like Vietnam went through the trol, and undertaking land reform, WB (2011), p. economic and security transitions but the political 13, p. 109. South Korea’s transition after the Kore- one was not based on democratic principles. East- an War (ended in 1954) offers an example of trans- ern Europe’s transition involved political and eco- forming institutions to rebuild the country and fos- nomic transformations but in most cases not the se- ter development finaced by U.S. funds. After the curity one nor the social consequences of long-term war, land reform took place. armed struggle. 24 De Greiff, Duthie (2009), Transitional Justice and De- 18 For instance, economic policies that encourage de- velopment, International Center for Transitional Jus- velopment of a specific industry or sector can trig- tice and Social Sciences Research Council. Supporting Colombia’s Transition to Sustainable Peace and Development 19 25 In Colombia, 97 percent of ex-combatants reported 33 WB (2011), Jobs, World Development Report, p. 195. that they needed to feel like an active part of their 34 McLeod and Davalos (2008), “Post-Conflict Em- communities to be completely reintegrated. But re- ployment Creation for Stabilization and Poverty re- ception communities fear them and jealousy in- duction,” UNDP. Wilson (2002) “Reopening Mo- creased with demobilization benefits. Kaplan and zambique: Lessons Learned from the Feeder Road Nussio (2013) argue that well-organized commu- Program,” ILO, UNDP, SIDA, Maputo. Del Nin- nities may support participation of ex-combatants, no, Suabarao, Milazzo (2009), “How to Make Pub- protecting them from remaining armed groups, bet- lic Works Work: A Review of Experiences,” Social ter than non-organized communities. Security con- Protection Discussion Paper 905, WB. ditions are not determinant in the integration pro- 35 Coffee in Rwanda is a good example of value chains cesses. Guerrilla ex-combatants are more likely to creating jobs and increasing social cohesion. See participate in community organizations than para- Boudreaux and Jutta (2009), “The Role of Entrepre- militaries (and less than civilians). nourship in conflict reduction in the Post-Genocide 26 WB (2011), WDR, p. 124. Rwandan Coffee industry: Quantitative Evidence 27 Cardenas, Casas, Mendez, from Field Study,” Working paper 09–24, Mercatus 28 Wills et al. found that perceived insecurity in rural Center, George Mason University. For Kosovo dairy Colombia affects the levels of subjective well-being products and other examples of value chains, see of individuals and communities. Interestingly, a re- Parker (2008), “A Synthesis of Practical Lessons from duction of violence does not necessarily reduce per- Value Chain Projects in Conflcit-Affected Environ- ceptions of insecurity, while the social capital can re- ments,” Micro Report 105, USAID. The 2002 “bull- duce the perception of insecurity and mitigate its dozer initiative” in Bosnia and Herzegovina (and the effect on well-being. Wills, E, Orozco, L et al. (2011), subsequent “guillotine” initiative) can be an example “The relationship between perceptions of insecuri- of a program meant to simplify business regulations, ty, social capital and subjective well-being: Empirical eliminating bureaucratic impediments to private sec- evidence from rural areas of conflict in Colombia,” tor growth. Herzber (2004), “Investment Climate Journal of Socio-Economics, 40. Reform: Going the Last Mile, The Bulldozer Initia- 29 The police in Nicaragua have given priority to tive in Bosnia and Herzegovina,” Policy Research “gender perspective,” one of their nine institution- Working Paper, 3390, WB. Rwanda’s experience in al principles and values. Nicaragua. Mobbeck,E how to overhaul its contract enforcement regime, (2010), “Gender, Women and Security Sector Re- cosnidered an impediment to investment, is an ex- form,” International Peacekeeping, 17 (2). UN-Women, ample on how to increase domestic business regis- “Gender-Sensitive Police Reform in Post-Conflict tration and encourage investment. Biz CLIR (2007), Societies.” “Overhauling Contract Enforcement: Lessons from 30 2011 WDR, p. 153. In five years, Haiti’s national Rwanda,” BizCLIR Issues Paper 17, USAID. police transformed from the least to the most trust- 36 Bold, C (2009), “The Importance of Private Sector ed institution of the state. Development in Conflict-affected Countries,” IFC 31 Boas, Tilnes, and Flat (2010), “Comparing the Cas- Smart Lessons (November). es,” Background paper for WDR 2011. Neumay- 37 International Alert (2006), “Local Business, Local er (2003), “Good Policy Can Lower Violent Crime: Peace: the Peacebuilding Potential of the Domestic Evidence form a cross-national Panel on Homicides Private Sector.” Rates 1980–97,” Journal of Peace Research 40–6. 38 Gerson, A (2001), “Peacebuilding: the private sec- 32 USAID strongly recommends: Job creation should tor’s Role”, in the American Journal of International Law, not single out population groups by ex-combatants, Quoted by Porter Peschka (2011). victims, and ethnicity because this could rekindle or 39 Porter Peschka, M (2011), “The Role of the Pri- perpetuate problems. USAID (2006), “Job Creation vate Sector in Fragile and Conflcit-Affected States,” in Postconflict Societies,” Issue paper No. 9, Janu- WDR 2011, Background paper, July 2010 (updat- ary, p. 2. ed April 2011). 20 PART ONE | CHAPTER 1 40 After the tsunami of August 15, 2005, the Helsinki 42 A 2014 OAS report 2014 assesses the challenges in peace agreement ended the 30-year conflict in Indo- implementing the victims’ reparation and land res- nesia. The Ministry of Home Affairs and the Aceh titution law. Among them, there is low institutional and Nias Rehabilitation and Reconstruction Agency articulation (returns are done without the support of (BRR), with funding from the World Bank, adopted the military or an increased presence of the state), the community-driven development approach to al- consultation and participation spaces are weak (ter- leviate poverty in rural areas, improving local gover- ritorial tables for dialogue do not have a budget), in- nance by helping communities plan their own devel- formation does not circulate, victims have dispro- opment, develop basic community infrastructure, and portionate costs for making claims, and risks for enhance social development and livelihood opportu- victims’ leaders are high. See OEA/ Sec Gr (2012), nities. Goovaerts, Piet; Gasser, Martin and Belman “Decimo octavo informe Semestral del Secretaria- Inbal, Aliza, “Demand-driven Approaches to Live- do General al Consejo Permanente sobre la Misión lihood Support in Post-War Contexts: A Joint ILO/ de Apoyo de la Organización del Estados America- WB Study,” the WB Social Development Papers, nos al proceso de Paz en Colombia (MAPP/OEA),” Conflict Prevention and Reconstruction Series–CPR November 4. No. 29. The signing of the Accra Comprehensive 43 See Giovine et al. (2011). After the Accra Agree- Peace Accord on August 18, 2003, and the subse- ment in August 2003, the international communi- quent departure of ousted President Charles Taylor ty supported the transition to peace by (i) prevent- ended the civil war in Liberia. Rule was turned over ing full state capture by corrupt elites in advance of to the National Transitional Government of Liberia elections (2006) and (ii) securing a peace dividend on October 14, 2003. A short-term employment cre- for the vulnerable groups that could most direct- ation program, called Roads-with-UNMIL, helped ly threaten peace (young ex-combatants and refu- prevent youth reinsertion in illegal armed gorups by gees). Two innovative instruments were used: (i) an improving their livelihoods. This measure reinforced anticorruption scheme called Governance and Eco- stability in the short term, allowing for later adoption nomic Management Assistance Program (GEMAP), of classical development instruments, such as pub- involving such measures as expatriate co-signing au- lic works and private-sector involvement. Giovine, thority and (ii) a short-term employment-generation Krech, Ionkova, Bach (2011), “Holding on to Mon- scheme now known as—Roads-with-UNMIL. rovia. Protecting a fragile peace through econom- 44 Rodriguez Raga, Sellison (2013), Cultura política de la ic governance and short-term employment,” Back- democracia en Colombia y en las Américas, 2012: Hacia ground paper for the WDR 2011, WB. la igualdad de oportunidades, Barometro de las Ameri- 41 Around 70 percent of the population in conflict cas, p. 113. areas support the current peace process, compared 45 Mejia, D (2010), Politicas anti-droga bajo el Plan Colom- to a national average of 58 percent, according to bia: costos, efectividad y eficiencia, Universidad de los An- the Observatorio de la Democracia, Los Andes des, April 15. Isacson, A (2013), Time to Abandon Coca University (http://obsdemocracia.org/). There is Fumigation in Colombia, WOLA, October 7. a high level of mistrust in rural and urban areas 46 Econometria, SEI S.A. (2010), “Evaluar el Esquema concerning FARC intentions. For instance, 82 per- Operativo y Funcional del Plan Nacioanl de Con- cent consider the guerrillas a criminal band and solidacion Territorial frente a lo establecido en la less than 20 percent believe they have political ide- directiva presidencial, levantar línea de base de los als (according to the Centro Nacional de Memoria beneficiarios y formular recomendaciones,” Evalua- Historica’s 2012 survey on Colombian perceptions tion for DNP and PNC. CIP, “Waiting for Consoli- of the guerrillas and the paramiliry demobilization dation: Monitoring Colombia’s U.S.-aided Counter- process). Encuesta Nacional. “Que piensan los Co- insurgency and Development Program,” Report by lombianos después de 7 años de Justicia y Paz?’ Abigail Poe, Adam Isacson, Yamile Salinas, Nancy September 2012. Sánchez, February 1, 2012. Supporting Colombia’s Transition to Sustainable Peace and Development 21 47 An OECD study on transport points out the insi- 49 Porter Peschka, M (2011). tutional difficulties in making a coherent policy for 50 For a detailed analysis of the reintegration programs transport in Colombia with bottlenecks due to the in Colombia, see Thorsell (2013), “Towards Peo- lack of co-ordination between agencies and minis- ple-Centred Economic Reintegration? An Analysis tries and national and subnational levels as well as of the Economic Reintegration Strategy of Demo- the lack of fiscal and institutional capacity at the bilised Combatants in Colombia,” Colombia Inter- subnational level. Nieto-Parra, Olivera, and Tibo- nacional, Enero-Abril 2013. cha (2013), The politics of transport infrastructure policies 51 WB (2011), p. 195. in Colombia,, OECD Development Centre. 52 See Doing Business: http://www.doingbusiness. 48 See Policy Notes analysis. org/data/exploreeconomies/colombia. 22 PART ONE | CHAPTER 1 Toward Shared Prosperity in Colombia 23 CHAPTER 2 Toward Shared Prosperity in Colombia Main Messages 24 PART ONE | CHAPTER 1 Between 2002 and 2013, Colombia experienced strong, sustained economic growth. Real GDP per capita grew at an annual average of 3.3 percent, more than 1 percentage point above the Latin Ameri- can and Caribbean (LAC) average. Colombia also managed to weather the 2008 global financial crisis, maintaining positive growth throughout 2008–13—in fact, the average growth rate during this period was similar to the pre-crisis average. Growth was more “pro-poor” in the post- than pre-crisis years, with the population at the lower end of Colombia’s income distribution reaping greater growth-related benefits than the average population. Colombia also achieved impressive reductions in the share of the population facing extreme, moderate, and multidimensional poverty. Extreme poverty fell from 17.7 percent in 2002 to 9.1 percent in 2013, while moderate poverty fell from 49.7 percent in 2002 to 30.6 percent in 2013. Colombia also achieved a significant decrease in the Multidimensional Poverty Index (MPI)—from 49 percent in 2003 to 24.8 percent in 2013. Nevertheless, poverty levels in Colombia remain high. Almost one in three households is considered poor; and, in addition, vulnerable households represent the largest social group, which means that a sizable segment of the population is at risk of falling back into poverty. Both moderate and extreme poverty rates remain significantly higher in rural areas than urban ones and, in fact, the moderate pover- ty gap between the two areas widened in 2002–13. Only one in four households is considered middle class, putting Colombia behind other LAC countries, such as Argentina, Brazil, Chile, and Mexico. In the past decade, poverty reduction was driven primarily by an increase in labor income, greater la- bor market participation by household members, and the expansion of public transfers. In addition, the observed poverty reduction associated with transfers coincided with the expansion of conditional cash transfer programs. For example, Familias en Acción increased its coverage from around 514,000 house- holds in 2005 to approximately 2.86 million in 2013, or nearly 25 percent of Colombian households. Despite their relatively small contribution to total income, transfers were a key driver in reducing Colombia’s income inequality, particularly in 2008–13. However, Colombia remains one of the most unequal countries in the region. Even after the past decade’s robust economic growth and decreasing poverty rates, the share of total income going to the bottom 10 percent of the population continues to be around 1.1 percent, while the top 10 percent receives more than 42.3 percent. Overall, the analysis suggests that Colombia’s poverty would have declined further had the country experienced more equitable economic growth, indicating that reducing inequality remains a relatively unexploited source of further welfare gains. In 2010, the Government introduced the Prosperidad para Todos development plan. In addition to sustainable economic growth, the plan calls for positive distributional and social effects. Under the Pros- peridad para Todos umbrella, the December 2012 tax reform focused on changing the distributional impact of the tax system and reducing informality in the labor market. Further inequality reductions would necessitate additional tax reforms and more generous and better-targeted social transfers, and sustained efforts to increase access to high-quality education and to basic services for the less well off. Building the Foundations of continues to be significantly higher in rural areas (Figure 2-1). Shared Prosperity in Colombia: Recent Trends in Poverty, Shared Along with poverty reduction expressed in mon- etary terms, Colombia also achieved a significant Prosperity, and Inequality decrease in the Multidimensional Poverty Index (MPI) (see Box 2-1). A decade of impressive poverty reduction More households in Colombia are now middle class and fewer are living in poverty, yet a substan- Colombia has made impressive strides in reducing tial number of them remain vulnerable to falling poverty. Extreme poverty fell from 17.7 percent back into poverty (Figure 2-3). Currently about in 2002 to 9.1 percent in 2013, an average an- one in three Colombian households is considered nual drop of 0.78 percentage points (Figure 2-1). poor and one in four households is considered Moderate poverty fell from 49.7 percent in 2002 middle class. Moreover, with about one in three to 30.6 percent in 2013, an average annual drop households classified as vulnerable, a substantial of 1.73 percentage points (Figure 2-2).1 The de- percentage of the population runs the risk of fall- cline in moderate poverty translates into an abso- ing back into poverty. During 2002–12, Colombia lute decrease in 5.97 million poor people—from managed to increase the size of its middle class by nearly 19.96 million in 2002 to about 13.99 mil- 12.1 percentage points, a gain of 80 percent.2 By lion in 2013. The rate of poverty reduction was 2011, the vulnerable class surpassed the poor; ac- comparable across urban and rural areas; how- cording to conservative estimates, the middle class ever, it should be noted that extreme poverty should also surpass the poor by 2015.3 Despite the FIGURE 2-1:  Extreme Poverty Reduction FIGURE 2-2:  Moderate Poverty Reduction 35 70 33.1 61.7 30 60 49.7 25 50 42.8 Percentage Percentage 20 40 45.5 17.7 19.1 30.6 15 30 12.2 26.9 10 9.1 20 5 6.0 10 0 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 National Rural Urban National Rural Urban Source: World Bank staff calculations based on DANE-MESEP data. Source: World Bank staff calculations based on DANE-MESEP data. Note: Poverty estimates based on the official poverty line. The MESEP Note: Poverty estimates based on the official poverty line. The MESEP committee decided that reporting data/statistics for 2006 and 2007 would committee decided that reporting data/statistics for 2006 and 2007 would not be prudent given the methodological changes that took place in those not be prudent given the methodological changes that took place in those years. In other words, only the statistics reported for the 2002–05 and the years. In other words, only the statistics reported for the 2002–05 and the 2008–13 series are comparable. 2008–13 series are comparable. Toward Shared Prosperity in Colombia 25 26 PART ONE | CHAPTER 2 progress, it is important to note that Colombia’s of four people are poor) has a 5 to 7 percent prob- poverty remains high, and the size of its mid- ability of transitioning to the richest 20 percent of dle class still lags other LAC countries, such as the distribution. Similarly, Ferreira et al. (2013) an- Argentina, Brazil, Chile, and Mexico (see Box 2-2). alyze long-term intra-generational mobility be- tween income classes (poor, vulnerable, and mid- Colombia has failed to close the regional gaps in dle class) and find that Colombia’s poor have a less social mobility. According to Angulo et al. (2012), than 1 percent probability of moving out of pover- Colombia’s inter-generational social mobility ty and into the middle class in one generation (17 increased when measured by physical assets or years), a relatively low mobility rate shared by 10 by years of educational attainment—but it re- of the 18 LAC countries they considered. mains lower than in such comparable countries as Mexico and Chile. In particular, the authors esti- In recent years, Colombia’s average rate of pov- mate that a Colombian from the lowest 40 percent erty reduction surpassed the LAC average, nar- of the physical assets distribution (where three out rowing the gap with its regional peers. World Bank BOX 2-1: Multidimensional Poverty in Colombia In 2011, the Government adopted a multidimensional measure of poverty. To be classified as multidi- mensionally poor, a person must be deprived in at least five of 15 designated welfare indicators. These key measures are: educational achievement, illiteracy, school attendance, educational gap, access to childcare services (health, nutrition, care), child labor, long-term unemployment, formal employment, healthcare access, healthcare access when needed, access to drinking water, access to sanitation, quality of floor in the housing, quality of wall, and critical overcrowding. MULTIDIMENSIONAL POVERTY REDUCTION The MPI for Colombia declined from 49 percent in 2003 to 24.8 percent in 2013, indicating that 50 49.0 the country halved the share of its population that is multidimensionally poor. In contrast to 40 35.0 monetary poverty, the changes in the MPI were 30.4 29.4 larger during the pre-crisis period, when the 30 Percentage 27.0 24.8 MPI decreased on average by 2.8 percentage points whereas between 2008 and 2013 the 20 MPI decreased on average by 2 percentage 10 points. These differences between the MPI and monetary poverty are likely due to the universal 0 coverage of some of the MPI indicators. 2003 2008 2010 2011 2012 2013 Regarding the spatial distribution of multidi- Source: DANE (2013) for MPI 2010–2013, DNP (2011) based on Encuesta mensional poverty, most of the population un- de Calidad de Vida (DANE) for MPI 2003–08. der this condition lives in the largest cities al- though the incidence is higher in smaller municipalities (see Figure A3.1 in Annex 3). Since being adopted as an official poverty measurement, the MPI declined from 30.4 percent in 2010 to 24.8 percent in 2013; this decline translates into approximately 2.13 million Colombians being lift- ed out of multidimensional poverty in three years. The key drivers behind the MPI’s decrease were (continued on next page) Toward Shared Prosperity in Colombia 27 poverty estimates based on the regional US$4-a- poverty reduction with relatively smaller rates of day poverty line show that moderate poverty in GDP growth. Colombia decreased an average of 1.54 percent- age points a year between 2002 and 2008. Between Who and where are the poor in 2008 and 2012, it decreased at a much faster 2.28 Colombia? percentage points a year. This acceleration in pov- erty reduction contrasts with the rest of the region. Compared to the vulnerable and middle-class The LAC rate of moderate poverty reduction was populations, the poor in Colombia have lower higher during the 2002–08 period (1.92 percent- levels of educational attainment, are less likely to age points) than in subsequent years (1.39 percent- work (both men and women),4 have more mem- age points through 2012). Nonetheless, Colombia bers per household, and are more likely to live in has yet to regain its 2002 moderate poverty rank- female-headed households. Poorer households also ing vis-à-vis other LAC countries. It should also be have higher dependency ratios due to larger num- noted that Brazil and Mexico achieved comparable bers of children under 14 years of age and elderly BOX 2-1: Multidimensional Poverty in Colombia (continued) improvements in the health and education dimensions. In particular, there have been declines of 3.9 percentage points in the number of individuals with no health insurance, 3.8 percentage points in the number of individuals with low educational attainment, and 3.4 percentage points in the number of in- dividuals with an educational gap. Critical overcrowding, informal employment, and no access to health- care services when needed are more than 3.5 percentage points away from the targets set for 2014. Otherwise, all of the indicators are likely to reach their respective targets on time. Nevertheless, no access to health care services when is needed, long-term unemployment, and no access to sanitation deserve particular attention; they have experienced setbacks or little improvement over the three-year span. MPI (%) 2010–13 No health insurance Low educational achievement Educational gap Informal employment Critical overcrowding Poor access to childcare services Illiteracy Child labour No adequate external walls Low school a endance No adequate oors No access to drinking water Long-term unemployment No acess to sanitation No access to healthcare services when needed –5 –4 –3 –2 –1 0 1 2 3 4 5 6 Percentage points Distance to the goal Progress 2010–2013 Source: World Bank staff calculations based on DANE (2013). 28 PART ONE | CHAPTER 2 FIGURE 2-3: Less Poor, More Middle Class, but above 70 years of age. Although the dependency More Vulnerable to Falling Back Into Poverty ratio declined for all three socio-economic groups in 2002–13, it remained significantly higher for the 60 51.5 less well-off relative to the middle class.5 50 40 37.7 The elderly and ethnic minorities face high pov- Percentage 32.1 32.9 30 27.2 erty rates. A recent press release by Colombia’s 20 15.1 National Bureau of Statistics (DANE) reports that 10 the incidence of moderate poverty among house- 0 holds headed by senior citizens (older than 65 years 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 old) was 27.6 percent in 2012—but it was much higher in rural areas (42.7 percent). According Poor Vulnerable Middle class to a recent study by Angulo et al. (2011), indig- Source: World Bank Staff calculations using SEDLAC data (CEDLAS and the World Bank). Poor are individuals living in households for which the average enous households have both the highest rate of per capita income is less than US$4 PPP, vulnerable are those with average multidimensional poverty (58 percent in 2010) and per capita incomes between US$4 and US$10 PPP, and middle class those with average per capita incomes between US$10 and US$50 PPP. the smallest MPI reductions in 2003–10. Income BOX 2-2: Growth of Colombia’s Middle Class Was Positive but Lagged Other LAC Countries In the past decade, the Latin American middle class grew at a faster pace than in the 1990s. Despite sig- nificant variation across countries, the region achieved overall positive growth of the middle class from 2002 to 2012 (see figure below). The year 2011 was the first time the LAC region had more people in the middle class than in poverty (World Bank 2013), and 2012 saw a continuation of the trends of declining poverty and a growing middle class. When it comes to transitioning the poor and the vulnerable into the middle class, Colombia was similar to its regional peers with comparable middle class populations in 2002— e.g., Bolivia and Ecuador. However, a number of countries outperformed Colombia—e.g., Costa Rica, Brazil, Chile and Peru. By 2012, Colombia had the fifth smallest middle class in LAC. THE RISE OF MIDDLE CLASS IN LAC (CIRCA 2002–12) 60 50 40 Percentage 30 20 10 0 – urban – urban Costa Rica Chile Brazil Peru Paraguay Bolivia Ecuador Mexico Colombia Republic El Salvador Honduras Guatemala LAC Uruguay Argentina Dominican Circa 2002 Circa 2012 Source: World Bank staff calculations based on the Socio-Economic Database for Latin America and the Caribbean (CEDLAS and the World Bank). Note: Circa 2002 denotes other years for Argentina (2004), Chile (2003), Guatemala (2000), Ecuador (2003), Paraguay (2003), and Peru (2004); circa 2012 denotes other years for Chile (2011), the Dominic Republic (2011), Guatemala (2011), Honduras (2011), and Paraguay (2011). The definition of middle class is based on López-Calva, L. y E. Ortíz-Juarez (2014). Toward Shared Prosperity in Colombia 29 comparisons based on ethnicity encounter some FIGURE 2-4: Poverty Incidence Across Areas biases related to the large share of non-market in- 20M 20,0M comes for specific ethnic groups (Cárdenas et al. 18,2M Millions of inhabitants 32,3% 28,8% 2012); however, it is important to note that the un- 15M 14,0M conditional family per capita income is 59 percent 26,0% 10M 35,5% 38,4% lower for Afro-Colombian households than for 7,1M 7,1M 41,4% 5M 32,4% 36,4% households in a different ethnic group, suggesting 4,1M 32,2% 48,6% 48,3% 32,7% 32,6% that the prevalence of monetary poverty among 0M 49,3% 2002 2008 2013 2002 2008 2013 Afro-Colombians is likely to be significantly higher. Extreme poor Poor In terms of regional poverty, the large historical Headcount ratio disparities between urban and rural areas persist. 70% 61,7% Despite the significant decline in the incidence of 60% 59,2% 56,6% 50% 52,6% poverty at the national level, both moderate and Percentage 42,8% 40% 40,4% extreme poverty levels remain significantly high- 33,1% 36,2% 32,6% 30% 27,0% er in rural areas (Figures 2-1 and 2-2). From 2002 20% 19,2% 19,5% 19,1% 17,5% to 2013, rural areas’ extreme poverty rates fell 10,3% 10% 7,6% from 33.11 to 19.1 percent; in urban areas, they 5,6% 3,0% 0% fell from 12.24 to 6.0 percent. During the same 2002 2008 2013 2002 2008 2013 period, moderate poverty in rural areas declined Extreme poor Poor from 61.7 to 42.8 percent, while urban areas saw a Rural Other urban areas Main urban areas (13 A.M) drop from 45.45 to 26.9 percent. Moreover, the ru- ral-urban ratio in the poverty headcount increased Source: World Bank staff calculations using DANE-MESEP (2002–2013). from 1.35 to 1.59 percent, suggesting that urban areas were more effective than rural areas at lifting Colombians out of poverty. pronounced. In 2002, the gap between the depart- ment with the highest poverty rate (Huila) and the While large historical disparities between urban lowest poverty rate (Bogotá D.C.) was 37.8 percent- and rural areas persist, the incidence of pover- age points; in 2013, the difference was about 52.85 ty varies considerably when comparing the 13 percentage points, with Choco displacing Huila as main metropolitan areas with other urban areas the department with the highest poverty rate. (Figure 2-4). In 2013, the poverty rate in the me- dium and small urban areas (40.4 percent) was 2.3 The findings suggest that poverty reduction in times greater than the main metropolitan areas 2002–13 was biased toward main urban areas and (17.5 percent). In fact, the rate for the medium and high-income departments (see Annex 1). In par- small urban areas was not far below the rural pov- ticular, about 57 percent of the total poverty re- erty rate of 42.8 percent. Between 2002 and 2013, duction occurred in high-income departments and the share of the poor population living in medi- Bogotá, home to approximately 50 percent of the um and small urban areas increased by 5.9 per- population. The low-income departments, home centage points; by contrast, the percentage of the to approximately 20 percent of the population, ac- poor living in the main urban areas decreased by counted for only 13.9 percent of this period’s total 6.3 percentage points. The urban rate was only 10 poverty reduction. percent lower than the other urban rate in 2002. By 2013, it was nearly 40 percent lower. Socio-demographic factors were also significant in the 2002–13 patterns of poverty reduction (see Moderate poverty declined at the national level, but Annex 1). A decline in the share of households differences at the department level became more with less than 25 percent labor force participation 30 PART ONE | CHAPTER 2 Measures of Shared Prosperity FIGURE 2-5:  40 percent—i.e. the SPI—grew at 2.7 percent, Between the Early and Late Parts below the mean growth rate of about 3.1 percent of Decade (Figure 2-5). Between 2008 and 2013, however, 8 the bottom 40 percent of Colombia’s income dis- tribution fared better. The SPI rose to 6.6 percent, 6 significantly higher than the 4.1 percent growth in 4 average income per capita. Over the 11-year peri- od, the SPI was 4.5 percent per year, slightly high- 2 er than the 3.6 percent for the general population. 0 2002–2008 2008–2013 2002–2013 Over the same period, department-level improve- National ments in the SPI were robust (Figure 2-6). Between Annualized growth rate of mean income among bo om 40% 2002 and 2008, the annualized growth rate of per Annualized growth rate of mean income capita mean income was generally higher than the Source: World bank Staff estimates based on MESEP-DANE 2002–2013. SPI. The reverse was true during the latter part of the period (2008–13), resulting in a narrowing of the income gap between the less well-off and the accompanied an almost equal increase in the share average person across departments. of household with more than 50 percent labor force participation; this shift was associated with a 29 per- Colombia’s income distribution remains among the cent reduction in poverty. Similarly, when consider- most unequal in the world. Real income per capita ing household composition, there was a decline in growth patterns in 2002–13 are consistent with the the share of households with three or more children inequality measures (Table 2-1). For example, the and an increase in the number of households with ratio of per capita income of the richest 10 percent less than two children; this shift was associated with to the bottom 10 percent to the income distribu- a 27.6 percent of the observed reduction in pover- tion declined slightly—from 13.36 in 2002 to 12.1 ty. Lastly, the decline in the number of households in 2013. However, the ratio between the richest 75 headed by an individual with less than primary ed- percent and the bottom 25 percent of the income ucation was linked to a 22.4 percent of the total distribution remained virtually unchanged, going reduction in poverty. from 3.62 in 2002 to 3.61 in 2013. Similarly, the Gini coefficient and the Theil index remained prac- More shared prosperity with reduction tically stagnant during the earlier part of the period, in inequality toward the end of the and declined only marginally during the latter part decade of the period.7,8 With comparable or higher levels of inequality at the beginning of 2002–12 period, The World Bank’s Shared Prosperity Indicator regional peers (e.g. Bolivia and Brazil) achieved (SPI) measures the annualized growth rate of av- better results in reducing income inequality over erage income among the bottom 40 percent of the the 10-year span. Moreover, Colombia’s Gini co- population. It gives an indication of how well pros- efficient remained higher than the regional av- perity is shared with those who are relatively less erage in 2012, placing Colombia among the well-off while keeping a focus on overall economic three most unequal countries in LAC, one of the growth (Basu 2013).6 most unequal regions of the world (Figure 2-7). Over time, some qualitative differences emerge Low mobility accompanies Colombia’s high in the distribution of economic prosperity’s ben- and persistent inequality. Some income redis- efits in Colombia. In the pre-crisis period of 2002 tribution took place in 2002–12 (bottom pan- and 2008, real income per capita of the bottom el of Figure 2-8), driven primarily by persistent Toward Shared Prosperity in Colombia 31 FIGURE 2-6: Robust Department-level Improvements in the SPI over the Decade 12% 11% Boyacá Sucre Annualized growth rate of bo om 40% 10% Magdalena La Guajira 9% Antioquia 8% Bolívar Huila Risaralda Cauca Valle del Cauca Cundinamarca Cesar 7% Bogotá D. C. Cauca Norte de S. Santander 6% Quindío Caquetá Meta Nariño 5% Caldas Santander Chocó Córdoba Boyacá Cundinamarca 4% Nariño Bogotá D. C. Tolima Huila Tolima Antioquia 3% Atlántico Córdoba Bolívar Sucre Caldas Meta 2% Norte de S. Quindío 1% Valle del Cauca Magdalena 0% Cesar –1% Chocó Cauca La Guajira –2% –3% –3% –2% –1% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% Annualized growth rate of per capita mean income 2002–2008 2008–2012 Source: World Bank staff estimates based on MESEP-DANE (2012). declines in the income held by the top quintile the period, it did so only marginally. However, and increases in the income held by the middle the redistribution process taking place during the class. However, the gap between the highest quin- latter part of 2002–13 can be described as “pro- tile and the bottom 40 percent of the population poor”; in particular, between 2010 and 2013, remained large at the end of the period. In 2013, when Colombia experienced the largest decline the year with the lowest level of inequality, the in inequality, the redistribution of income bene- richest 20 percent of the population held about 58 fited the poorest half of the population and the percent of total income, while the bottom 40 per- vulnerable class more than during the pre-cri- cent held around 10 percent of total income (top sis years (bottom panel of Figure 2-8). Overall, panel of Figure 2-8). Moreover, while the income persistently high levels of inequality limited the share of the bottom 40 percent increased over growth’s effect on poverty reduction.9 TABLE 2-1: Inequality in Colombia 2002 2008 2010 2013 Gini 0.572 0.566 0.560 0.539 Theil 0.692 0.651 0.641 0.586 p90/p10 13.4 14.4 13.0 12.1 p75/p25 3.6 3.8 3.7 3.6 Annualized changes Gini points –0.099 –0.325 –0.680 Theil points –0.674 –0.528 –1.832 p90/p10 0.174 –0.675 –0.325 p75/p25 0.038 –0.074 –0.046 Source: World Bank staff calculations based on DANE-MESEP (2002–2013). 32 PART ONE | CHAPTER 2 FIGURE 2-7: LAC Inequality The redistributive capacity of Colombia’s tax sys- tem was limited during the period. Lustig et al. 0.60 (2013) compare Colombia with other countries in Latin America. They find that pre-tax income 0.55 inequality in Colombia and Brazil was almost identical—0.575 and 0.574, respectively. After taking into account each country’s existing tax, 0.50 subsidies, and cash and in-kind transfer structures, Colombia’s Gini coefficient is only marginally re- 0.45 duced (to 0.535) whereas Brazil’s declines signifi- cantly (to 0.439). 0.40 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 It is clear that the redistributive capacity of the Colombian system of taxes (see Box 2-3) and so- Bolivia Brazil Colombia LAC Mexico Peru Uruguay cial transfers can be improved. In particular, the effect of social transfers in Colombia, when netted Source: LAC Equity Lab tabulations of SEDLAC (CEDLAS and the World Bank). out of the tax system, shows a weak effect on in- come inequality. In Figure 2-9, social programs on the right-hand side are only relatively progressive FIGURE 2-8:  2002–12: A Period of High compared to initial distribution (including indirect Inequality and Low Mobility subsidies, spending on tertiary education, and in- direct taxes), while the social programs on the left- Share of total income 70 hand side are progressive in absolute terms (such 61.7 as the conditional cash transfer program Familias 60 58.3 en Acción, subsidies to the elderly through the Adulto 50 Mayor program, now Colombia Mayor, and spending Percentage 40 on health and elementary education).10 30 19.5 20 18.1 In sum, as noted earlier, high inequality hampered 10.811.8 10 6.5 7.2 economic growth’s impact on poverty reduction (see 2.9 3.2 0 Box 2-4). Simulation results show that poverty in Poorest Q2 Q3 Q4 Richest Colombia would have declined more had the coun- quintile quintile try experienced more equitable economic growth. 2002 2013 Change in the share of total income by periods 2 1.0 1.4 The Drivers Behind the Observed 1 0.6 0.3 Changes in Poverty and Inequality Percentage points 0 –1 As a first step in understanding the main driv- –2 ers of Colombia’s improvement over time, this –3 section examines the trends for each underly- –3.3 ing component of income and decomposes the –4 Poorest Q2 Q3 Q4 Richest distributional changes in income from 2002 to quintile quintile 2013. The insights taken from this analysis are in- 2002–2008 2008–2013 tended to build the evidence base for Colombia’s Source:World Bank staff calculations using on DANE-MESEP (2002–2013). future policy making. It must be noted, however, Toward Shared Prosperity in Colombia 33 BOX 2-3: Equity Implications of Fiscal Policy Changes in Colombia In December 2012, the Government passed tax reforms designed to improve fiscal policy’s impact on inequality and poverty reduction. These reforms focused on various elements of the tax code. A key component is the new income tax system, Impuesto Minimo Alternativo Nacional (IMAN), which aims to increase income taxes for the top 0.6 percent of the population while decreasing them for the rest of Colombians. Prior to the 2012 tax reform, the population was divided into four different tax brackets based on income levels. IMAN creates more tax brackets to increase the progressivity of the direct tax system. The introduction of the new income tax system was expected to drastically improve the distri- bution of wealth within the country. While lowering income tax rates for 99.4 percent of the population, the Government sought to maintain revenues with tax-system changes that were revenue neutral. THE IMPACT OF THE COLOMBIA TAX REFORM ON THE GINI COEFFICIENT AND ON TAX REVENUES Scenarios Gini Coefficient Tax revenue (1,000,000,000 COP) Gini – status quo 0.58634 4.9 Gini – Tax bill 0.57827 4.8 Gini – Approved reform 0.57901 4.8 Source: World Bank staff calculations based on GEIH 2011 and administrative data 2010. Note: Coefficient is estimated for all workers reporting labor income. The World Bank conducted a series of analyses to measure the impact of these reforms on inequality and tax revenues. The first analysis, which examines the impact of IMAN, is based on data from ad- ministrative tax records and household statistics from the Gran Encuesta Integrada de Hogares (GEIH). The two sources of data allow constructing a pseudo-income distribution, correcting the problem of underrepresentation of high-income households that is typical of household surveys. The results re- veal that the Gini coefficient decreases from 0.586 to 0.579. The estimated impact of the reform is not trivial, considering that the average yearly reduction of Latin American countries’ Gini over the past 10 years was 0.51 percentage points.a The analysis also shows that the introduction of IMAN leads to a slight decrease in government rev- enues of approximately 100 million COP. However, it is important to note that this analysis only ac- counts for changes in the income tax (IMAN) and does not include the introduction of the corporate (CREE) and luxury taxes or the changes in the VAT structure. GINI COEFFICIENT AND TAX REVENUE (CONSUMPTION) Scenario Gini Coefficient Tax Revenue (1,000,000,000 COP) Gini – status quo 0.50968 15.7 Gini – Tax bill 0.50881 16.1 Gini – Approved reform 0.50895 16.2 Source: World Bank staff calculations based on LATAX simulator and ECV 2011. The second analysis, based on consumption data from the ENCV (Encuesta de Calidad de Vida), fol- lows the LATAX microsimulation technique and focuses on the effect of the changes to the VAT on in- come distribution and tax revenues, assuming individuals’ purchasing habits remain the same. Because this analysis only considers changes to the VAT code, consumption (vis-à-vis income) is used to deter- mine the proportional impact of cash gains and losses. The analysis shows that Colombia’s 2012 tax re- form yields a modest reduction in the consumption Gini from 0.50986 to 0.50895. The result is in line with the IMAN analysis. With regard to tax revenues, the corresponding simulation yields an increase in tax revenues from 15,700,000,000 to 16,200,000,000 COP. a Calculated using SEDLAC (Center for Distributive, Labor and Social Studies and the World Bank) harmonized data for 2001–11. 34 PART ONE | CHAPTER 2 FIGURE 2-9:  Concentration and Gini Coefficients Familias en Acción y Adulto Mayor –0,422 Health –0,314 Primary education spending –0,308 Pre-school education spending –0,269 Secondary education spending –0,166 Education –0,126 Indirect subsidies 0,051 Other conditional cash transfers 0,113 Tertiary education spending 0,285 Indirect taxes 0,361 Housing 0,527 Final income Gini 0,535 Disposable income Gini 0,568 Post‐ scal income Gini 0,569 Net market income Gini 0,574 Market income Gini 0,575 –0,6 –0,4 –0,2 0 0,2 0,4 0,6 0,8 Gini Concentration index Source: Lustig et al. 2013, based on data from ECV 2010. that the analysis does not identify causal effects; quintiles of the income distribution. In 2013, for however, it does help focus attention on the fac- example, labor income accounted for 65.15 per- tors that quantitatively are most important in de- cent of total income of the lowest quintile (the scribing recent changes in poverty and inequality. poor) and 71.3 percent of total income of the highest quintile (the rich). Between 2008 and 2013, Evaluating the dynamics of sources of moreover, the labor income share increased across income all quintiles, except for the bottom one. The observed changes in Colombia’s levels of Over the years, income from transfers increased poverty and inequality can be attributed to, considerably for the poor, suggesting that transfers among other things, changes in household de- played an important role in the observed reduction mographic characteristics (age composition, in extreme poverty. The increase in the relative fertility, labor market participation), changes size of income from transfers coincides with the in the share of occupied adults (access to labor expansion of conditional cash transfer programs.11 markets), changes in labor income (rewards and In particular, transfers accounted for 5.7 percent distribution of skills), and changes in non-labor of income for the bottom quintile of the income income (transfers, housing, pensions, and other distribution in 2002, rising to 17.2 percent in 2013. non-labor income). Understanding the relative Above the lowest two quintiles (that is, for the third importance and the dynamics of each of these quintile and higher), however, transfers increased factors may help to shed light on the main driv- only slightly, remaining a relatively negligible ers of changes in poverty and inequality from source of income throughout the period. 2002 to 2013. This section examines the trends for each underlying component of income. The remaining sources of income are unlike- ly to have been important drivers of poverty Changes in labor income likely led to significant reduction. The results corresponding to other changes in the overall income distribution. The sources of household income shows that capi- data show that labor income constitutes a major tal, pensions, and other types of income gener- part of total income both over time and across all ally account for relatively small shares of total Toward Shared Prosperity in Colombia 35 BOX 2-4: Persistently High Levels of Non-Monetary Inequality Ferreira (2012) estimates that inequality of access to basic services, as measured by the Human Opportunity Index (HOI), explains more than 20 percent of Colombia’s total inequality. The HOI is a scalar measure that synthesizes two factors: the average coverage rate of a basic good or service for the population under study and the relative measure of equality of opportunity, adjusted for differences in access to basic services between individuals based on their circumstances (Paes de Barros et al. 2009).a Regarding the dynamics of the HOI, Molinas et al. (2012) show that Colombia’s HOI registered clear improvements between 1997 and 2008, increasing by 17 percent. Colombia also did well com- pared to other countries, placing above the LAC average and near the HOI level of top performing countries in the region (chart below). However, the country still shows important gaps in equality of access to basic services (water, sanitation, internet, and education), and the main circumstances ex- plaining the inequality are parental education and geographical location. Columbia’s recent progress in educational attainment has been slower than its regional peers (World Bank 2013). Moreover, the dispersion or inequality in years of education increased substantially in Colombia, while it decreased in LAC. This dispersion contributed to increasing labor income inequality in Colombia, diminishing the reduction in income inequality gained by changes in returns to skills (Azevedo et al. 2013). HUMAN OPPORTUNITY INDEX (CIRCA 2012) HUMAN OPPORTUNITY INDEX IN COLOMBIA 100 (2012) 100 93.8 93.1 91.5 87.5 80 79.7 80 60 Percentage 60 55.5 HOI 40 40 20 20 12.5 0 Uruguay Chile Costa Rica Argentina Panama Brazil Ecuador Colombia Mexico Peru LAC Dominican R. Paraguay Bolivia Guatemala Honduras Nicaragua El Salvador 0 School enrollment Completion of 6th grade on time Electricity Water Sanitation Internet Cellphone Source: World Bank (2014). Note: The overall HOI is a simple average of the HOI computed for each opportunity. Argentina, Dominican Republic Guatemala, Nicaragua and Source: World Bank (2014). Panama do not have the same number of opportunities in the overall HOI. Note: The circumstances used in this analysis are the gender of the child, For more details about the circumstances, years selected for the circa and parents’ education, family per capita income, number of siblings, presence of the opportunities that are not present in the overall HOI please see World both parents, gender of the household head, and urban or rural residence. Bank (2014). Turning to the quality of education, the 2012 PISAb scores reveal a pending task because Colombia had below-average performance in all three subjects tested—math, reading, and science (OECD 2014). The standardized scores can also be used to assess access to quality education in the LAC countries that participated in the assessment (see charts below). Colombia shows consistently low levels of access to quality education relative to other LAC nations in basic math (27 percent), reading (50 percent), and science skills (45 percent). Similarly, Colombia finds itself among the countries with the lowest PISA HOI. (continued on next page) 36 PART ONE | CHAPTER 2 BOX 2-4: Persistently High Levels of Non-Monetary Inequality (continued) These findings have important implications for equity and shared prosperity in Colombia, where ed- ucation is often found to inhibit inter-generational mobility. Estimating the effect of inequality of op- portunities on the inequality outcomes in Colombia, Ferreira and Melendez (2012) find that 18 to 24 percent of inequality in adult labor outcomes (labor income or per capita household income) is explained by characteristics that are beyond an individual’s control; the most important is parental ed- ucation. Similarly, Ferreira et al. (2013) find that 3.5 additional years of parental education in Colombia are, on average, associated with more than 2.5 additional years of schooling in the next generation. Peru had the highest education persistence among the countries studied, with slightly over three years of schooling in the next generation, and Ethiopia had the lowest education persistence, with less than 0.5 years of schooling. The study also reports that Colombia ranked seventh among 42 countries—rich and poor—in the correlation of education attainment across generations. PISA HOI Basic Skills in Math Basic Skills in Reading 60 80 50 70 60 40 50 30 40 20 30 20 10 10 0 0 Panama Peru Argentina Colombia Brazil Uruguay Mexico Trinidad and Tobago Chile Costa Rica Panama Peru Colombia Brazil Argentina Costa Rica Uruguay Mexico Chile Trinidad and Tobago Basic Skills in Science 70 60 50 HOI 40 30 Access 20 10 0 Peru Panama Colombia Brazil Argentina Uruguay Mexico Trinidad and Tobago Costa Rica Chile Source: http://www1.worldbank.org/poverty/visualizeinequality/. Note: Access in this case refers to the percentage of students who demonstrate the basic competencies in math, reading, science, respectively, if above level 2 according to OECD. The HOI is computed as in Molinas et al (2012). Overall, the empirical evidence suggests further improvements in education are likely to translate into significant reductions in inequality, generate large welfare-enhancing impacts among the less well-off, and produce positive spill-over effects on health outcomes.c a Barros et al. (2009) define circumstances as: “personal, family or community characteristics that a child has no control over, and that, for ethical reasons, society wants to be completely unrelated to a child’s access to basic opportunities.” Children are used to calculate the index because they are less likely to have any control of their circumstances. b The Programme for International Student Assessment (PISA) evaluates student skills in math, reading, and science for students roughly between 15 and 16 years of age in more than 65 countries. c For instance, higher education among household heads leads to increases in total household income that are the largest for the lowest quintile and decrease moving up the income ladder (Zuluaga 2007). Toward Shared Prosperity in Colombia 37 household income (Figure A3.2, bottom panel). labor markets), changes in labor income (rewards One exception is the relative share of pensions in and distribution of skills), and changes in non-la- the top quintile, which represented about 10 per- bor income (transfers, housing, pensions, and other cent of these households’ income throughout the non-labor income).13 period. Overall, the observed changes in house- hold income over time are related to the relative Consistent with the trends in poverty and inequal- growth of labor income, the growth in transfers at ity, the Datt and Ravallion (1992) decomposition, the lower end of the income distribution, and the which breaks down the changes in poverty head- relative stagnation of capital, pensions, and other count into its growth and redistribution com- sources of income. ponents, suggests qualitative differences in the underlying drivers of poverty reduction between Understanding the sources of poverty the earlier and the latter parts of the period. In reduction12 2002–08, the reduction in the poverty headcount ratio was mostly explained by the growth compo- This section delves into the most important driv- nent (Figure 2-10). In particular, 95 percent of the ers of poverty reduction and the rise of the middle reduction in moderate poverty was due to growth, class in Colombia between 2002 and 2013. First, and redistribution accounted for only 5 percent. it analyzes the extent to which the changes in pov- In the same period, the redistribution component erty levels and the middle class are due to increas- had a negative effect on the reduction of extreme ing mean income (holding constant the income poverty headcount. Between 2008 and 2013, how- distribution prevailing in 2002) and the extent to ever, the redistribution component explained near- which the changes are due to shifts in the distri- ly half of extreme poverty reduction and 28.7 per- bution of income (holding constant the mean level cent of moderate poverty reduction. of income prevailing in 2002). Observed changes in total household income are then decomposed As in LAC (World Bank 2013), poverty reduction into different parts that can be attributed to chang- in Colombia was driven primarily by labor mar- es in household demographic characteristics (age ket changes, such as increases in labor income and composition, fertility, labor force participation), a greater labor market participation of household changes in the share of occupied adults (access to members. Figure 2-11 shows the decomposition FIGURE 2-10: Growth and Redistribution Components of Changes in Poverty and Middle Class 40 20 28.7 0 –5 –27.1 –15.9 –20 –28.7 Percentage –43.8 –40 –71.3 –95 –84.1 –60 –72.9 –71.3 –56.2 –80 –100 –120 2002–2008 2008–2013 2002–2013 2002–208 2008–2013 2002–2013 Extreme poverty Moderate poverty Redistribution Growth Source: World Bank staff calculations based on DANE-MESEP (2002–2013). Note: Figure reports the results of a Datt and Ravallion (1992) decomposition. 38 PART ONE | CHAPTER 2 of observed changes in total household income moderate poverty decrease is related to changes into parts that can be attributed to changes in in labor market income and participation. household demographic characteristics, changes in the share of occupied adults, changes in labor The expansion of well-targeted public transfers income, and changes in non-labor income. The in- proved effective in terms of reducing poverty in crease in labor income explains 43 percent of the Colombia. The change in poverty associated with decline in moderate poverty, with higher female transfers was –16.8 percent for moderate poverty earnings responsible for 13.6 percent and male and –39.7 percent for extreme poverty; the corre- earnings responsible for 29.4 percent. Moreover, sponding changes in LAC were –13 percent and the share of occupied household members ex- –23 percent (World Bank 2013). These patterns plains 28.3 percent of the variation for moder- suggest that the safety-net expansion that took ate poverty and 20.7 percent for extreme pover- place in 2002–13 was both effective in reducing ty. In other words, more than 70 percent of the poverty—in particular extreme poverty—and FIGURE 2-11: Components of Changes in Extreme and Moderate Poverty Reduction 2002–13 Moderate poverty 0 –5 –3 –3 –10 –6 –15 –11 –14 Percentage –20 –17 –17 –25 –25 –30 –29 –29 –35 –40 –45 –46 –50 Share of Labor Share of Labor Transfer Capital Pension Housing occupied income occupied income +Other non labor income Men labor Women labor Non labor income Extreme poverty 5 0 0 –5 –2 –3.70 –10 –15 –10 –11 –11 Percentage –20 –25 –23 –22 –30 –35 –33 –40 –40 –45 –45 –50 Share of Labor Share of Labor Transfer Capital Pension Housing occupied income occupied income +Other non labor income Men labor Women labor Non labor income Source: World Bank staff calculations based on DANE-MESEP (2002–2013). Note: Figure shows contributions of changes in income per capita from 2002 to 2013 to poverty reduction (%). For details on the underlying methodology, see Azevedo et al. (2012). Other non-labor income includes income from capital, housing, and non-workers income. Share of occupied refers to gains attributable to increases in the number of employed household members. Toward Shared Prosperity in Colombia 39 well-targeted (see the evolution of transfer shares Stagnation of Total Inequality FIGURE 2-12:  across quintiles in the Annexes). is Due to Stagnation of Labor Income Compared to the LAC region as a whole (World 0.796 0.786 Bank 2013), the contributions of pensions to pov- 0.8 0.756 0.766 erty reduction in Colombia were low. In particular, 0.758 0.738 0.765 0.752 0.7 the change in poverty associated with pensions in Colombia was –2.8 percent for moderate poverty 0.6 0.567 0.545 0.544 0.543 Pseudo Gini and 0.1 percent for extreme poverty: the analo- 0.504 0.526 0.5 gous numbers for LAC were –13 percent and –15 0.536 0.456 0.491 0.462 percent (Figure 2-11). This is not surprising given 0.4 0.406 0.420 Colombia’s “pay as you go” pension system, which has 1.4 million beneficiaries who are almost exclu- 0.3 0.257 sively at the upper end of the income distribution. 0.2 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Understanding the sources of changes in inequality Capital Housing+Others Labor Income Pensions Transfers Pension and capital income (which is considered Source: World Bank staff calculations using DANE-MESEP (2002–2013). regressive) do not account for a significant propor- tion of Colombia’s income inequality. Figure 2-12 illustrates the level of inequality of each source of are linked to a 28.6 percent decline in inequality income as measured by the pseudo-Gini coeffi- (Figure 2-13). Two factors contributed to this rel- cient. Pension and capital income, being primarily atively high elasticity of inequality to changes in held by those in the higher income deciles, have transfers. As noted earlier, transfers not only grew a pseudo-Gini coefficient of around 0.75. Despite at a high rate relative to other sources of income the unequal distribution, pensions explain only 8.5 during 2008–13, but they also benefited those at percent of the observed level of income inequality the lowest end of the income distribution the most in 2002–13 and capital income only 4.3 percent.14 (see Figure A3.2 and Figure A3.3). As a result, the pseudo-Gini of transfers declined by more than Labor income accounted for 54.8 percent of the 50 percent over 2002–13—from 0.536 to 0.257. observed reduction in inequality in Colombia Overall, the growth in transfers combined with (Figure 2-13). However, it is important to note their “pro-poor” redistribution effects had a posi- that the highly unequal distribution of labor in- tive and relatively large impact on the reduction of come, coupled with the fact that labor income income inequality over the past decade. represented more than two-thirds of total income throughout 2002–13, explains Colombia’s per- Projecting future poverty incidence rates sistently high level of inequality. For instance, like the Gini of total income, the pseudo-Gini corre- To reach the extreme poverty target of 3 percent sponding to labor income declined only margin- by 2030, defined by the World Bank, Colombia ally, decreasing from 0.567 in 2002 to 0.526 in must reduce its poverty level by an average of 2013, primarily during the latter part of the 11- 0.36 percentage points a year, equivalent to a cu- year period. mulative reduction of 6.1 percentage points over the corresponding 17 year period. The suggested Transfers were a surprisingly important driver of pace of poverty reduction is lower than the one reduced inequality. Representing less than 5 per- the country has experienced since 2002 (annual cent of total income throughout 2010–13, transfers reduction of extreme poverty of 0.77 percentage 40 PART ONE | CHAPTER 2 Explaining Changes in Income FIGURE 2-13:  Poverty projections presented in this section are Inequality, 2010–2013 based on different methods and assumptions on changes in income growth and growth elasticity of 0 poverty (Table 2-2). Three projection methods are –2.1 –5.5 used, all of them based on the recent trends of eco- –10 –9.0 nomic growth and poverty reduction in Colombia. –20 The first method projects future poverty assuming Percentage a constant rate of poverty reduction based on the –30 –28.6 recent growth of per capita GDP and the corre- –40 sponding growth elasticity of poverty. Given that the growth of per capita GDP usually differs from –50 household income growth, the second method uses –54.8 the 2010–13 mean household per capita income –60 Labor Transfers Pensions Capital Housing growth (from household surveys) and simulates fu- income +Others ture income distributions departing from the 2013 Source: World Bank staff calculations using DANE-MESEP (2010–2013). distribution. Finally the third method is similar to the second but unlike the latter it assigns different growth rates to each income decile (following the concept of growth incidence curve). points). Assuming that population growth remains constant, achieving this target implies moving 2.23 According to the above discussed methods, million people out of extreme poverty by 2030. Colombia will reach the target of 3 percent extreme Based on Colombia’s recent poverty reduction per- poverty rate before 2030 (Figure 2-14). The first formance, three different methodologies are used method projects an extreme poverty rate of 3 per- to project the future performance of the country to cent by 2024. The second and third methods, project its goal of extreme poverty eradication. a 3 percent extreme poverty rate by 2030 and 2022, TABLE 2-2: Growth Rates and Poverty Elasticities Parameters Used in Poverty Projections Assumptions based on short term trends 2010-13 Moderate Extreme poverty Method Growth poverty elasticity elasticity Per-capita GDP growth Annualized growth rate of GDP per-capita Static elasticity Static elasticity 3.7 –1.7 –2.5 Household per-capita Annualized growth rate of mean household per- Dynamic elasticity. Dynamic elasticity. income growth capita income –1.5 –1.7 3.5 Household per-capita Annualized growth rate of mean household per- Dynamic elasticity. Dynamic elasticity. income growth by income capita income by income decile. –1.7 –1.5 decile Growth first decile: 6.8 Growth second decile: 6.0 Growth third decile: 5.7 Source: Authors’ calculation based on GEIH-MESEP (2010-2013) DANE for poverty measures and DANE National Accounts for GDP. Note: Growth of incomes and poverty elasticities correspond to annualized growth rates between 2010 and 2013. Static elasticity is equal to the ratio between annualized growth rate of moderate (extreme) poverty and annualized growth rate of GDP per-capita. Dynamic elasticity means that the annualized growth rate was applied to the 2013 income distribution, thus the value of elasticity depends on the percentile of the income distribution selected and the growth rate applied, the numbers above for the dynamic elasticities are the average elasticity for each year. Toward Shared Prosperity in Colombia 41 Can We Expect Extreme Poverty to Be 3 Percent or Less by 2030? FIGURE 2-14:  Extreme poverty projections Moderate poverty projections 20.0 60 17.5 17.7 49.7 50 15.0 40 12.5 30.6 10.0 9.1 30 7.5 20 5.0 11.9 3.2 10 10.1 2.5 1.7 1.4 4.5 0.0 0 2002 2005 2008 2011 2014 2017 2020 2023 2026 2029 2002 2005 2008 2011 2014 2017 2020 2023 2026 Observed 2029 Household per-capita income growth by income decile Per-capita GDP growth Household per-capita income growth Source: World Bank staff calculations using GEIH-MESEP (2010-2013) DANE for poverty data, and DANE National Accounts data for GDP. Note: the dashed lines indicate the point at which poverty would be at 5% and 3%, respectively. respectively. The estimates also suggest that moder- However, important challenges remain. Poverty ate poverty will be cut by half (about 15 percentage levels in Colombia are relatively high and the size points) sometime around 2021 and 2026, depending of the middle class continues to lag behind other the method that is used (Figure 2-14). Moreover, fol- LAC countries. Moreover, a sizable segment of the lowing recent trends in growth and poverty reduc- population—more than one out of three house- tion, by 2030 it is expected that the moderate pover- holds—remains vulnerable to falling back into ty will be between 5 and 10 percentage points. All of poverty. Large historical disparities between urban these projections suggest that if unemployment rate, and rural areas also remain. More important, in- labor income growth and non-labor income growth equality in Colombia remains high. The share of continue its recent performance (2010–13), poverty total income going to the bottom 10 percent of the headcount in Colombia will achieve the current lev- population continues to be around 1.1 percent, els of countries with relatively low poverty rates like while the top 10 percent of the population receives Argentina and Uruguay. more than 42.3 percent. Final Remarks To address these challenges, the Government introduced a national development plan called Prosperidad para Todos in 2010. In addition to sus- From 2002 to 2013, Colombia experienced strong tainable economic growth, the plan calls for posi- economic growth along with impressive declines in tive distributional and social effects. This plan rep- moderate, extreme, and multidimensional poverty. resents an important step toward attaining shared More households in Colombia are now classified prosperity; nevertheless, the results from this note as middle class, and conservative estimates show show that the associated fiscal reforms are expect- the middle class should surpass the poor in size by ed to have only a moderate impact on inequality. 2015. Notwithstanding qualitative differences be- Further poverty and inequality reductions would tween the earlier and the latter part of the peri- require sustained growth, deeper fiscal reforms, od, Colombia’s less-well-off people benefited more more and better targeted social transfers, and sus- from growth than the average person, signifying tained efforts to increase access to high-quality ed- progress toward greater shared prosperity. ucation and to basic services for the less well-off. 42 PART ONE | CHAPTER 2 Endnotes 1 Between 2008 and 2012, moderate poverty de- 8 Moreover, the decomposition of the Theil index creased an average of 2.33 percentage points a year, by region reveals that within country inequality whereas between 2002 and 2008, moderate pover- also remained practically stagnant in 2002–12, ex- ty decreased at a much slower pace (1.27 percentage plaining around 10 percent of the period’s over- points per year). Declines in the $1.25 a day (PPP) all inequality. poverty rate were similarly impressive, going from 9 Simulation results show that poverty in Colombia 11.7 percent in 2002 to 6.6 percent in 2012. would have declined more had the country experi- 2 Estimations by Angulo et al. (2013) for 2002–11 show enced a more equitable economic growth. For in- similar trends and levels. The authors use the mid- stance, substituting Colombia’s income redistribution dle class definition of Lopez-Calva and Ortiz-Juarez Brazil’s and holding Colombia’s per-capita income (2011), who argue that the central characteristic of growth at the actual level in 2002–12 results in a coun- the middle class is vulnerability to poverty. Under terfactual reduction from Colombia’s observed pov- this definition, US$10 PPP a day is an absolute low- erty headcount of 4.1 percentage points in moderate er bound for the middle class, and this coincides with poverty and 1.3 percentage points in extreme poverty. a less than 10 percent probability of falling into pov- 10 This does not, however, reflect quality issues in ac- erty. The lower bound for the vulnerable class is the cess to basic services. official poverty line of US$4.06 PPP a day. 11 According to Escobar and Olivera (2013), public 3 The forecast is derived by, first, taking the average transfers as a portion of public spending increased of the annualized growth of per-capita income from significantly between 2003 and 2010, going from two periods—2008–13 and 2010–13—and then ap- 10.3 percent in 2003 to 13.6 percent in 2010. Sim- plying the estimated average annualized growth to ilarly, during the latter part of the 11-year period, per capita household income. there was a large expansion of social programs, such 4 Male and female labor force participation increased as AIS and Familias en Acción. The coverage of the among the middle class and the vulnerable; among latter increased from around 514,000 households the poor, it declined for men and remained practi- in 2005 to about 2.86 million households in 2013 cally stagnant for females. (nearly 25 percent of households in the country). 5 For more details, please refer to Annex 2. 12 For the purpose of benchmarking, Colombia’s ex- 6 In April this year, World Bank Group President Jim perience to that of LAC, this section uses SEDLAC Yong Kim announced a twin strategy for the World harmonized data and the World Bank poverty lines. Bank going forward: (1) to end global extreme pov- For details, see Annex 4. erty by 2030 and (2) to promote “shared prosperity,” 13 For details on the underlying methodologies used in a sustainable increase in the economic well-being of this section, see Datt and Ravallion (1992) and Bar- the poorer segments of society, defined as the poor- ros et al. (2006). est 40 percent of the population. 14 The observed income inequality refers to that mea- 7 Between 2010 and 2013, the Gini index declined 2.1 sured by the Gini coefficient; the Gini coefficient is points, from 56 to 53.9, and the Theil index declined calculated as the weighted sum of the pseudo-Gini 5.5 points from 64.1 to 58.6. This four-year decline coefficients corresponding to different income com- in inequality coincided with the acceleration in the ponents, weighted by the relative contribution of average rate of poverty reduction in Colombia. each to total income. 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Toward Shared Prosperity in Colombia 45 Decomposing poverty reduction—The intra-sectorial effect Annex 1:  versus the inter-sectorial effect Components Distribution Intra- Inter- of intrasectoral sectoral sectoral Interaction Household Characteristics 2002 2013 effect effect (%) effect (%) effect (%) Departments where households live by level of GDP – per capita Bogota D.C 16.2 16.7 18.3 99.0 0.8 0.2 High level of income 33.8 31.7 38.7 Medium level of income 29.9 30.9 28.2 Low level of income 20.1 20.7 13.9 Participation of occupied inside the household Occupied less than 25% of household members 33.2 22.7 22.6 73 29 –2 Between 25% and 50% of household members 50.1 50.1 42.2 More than 50% of household members 16.7 27.2 8.2 Number of occupied of the household None or one occupied 43.8 41.6 41.8 98.1 2.1 –0.16 Two occupied 32.8 35.2 29.2 Three or more occupied 23.3 23.3 27.2 Children and youth among the household Without child or youth 22.7 30.5 12.9 73.8 27.6 –1.3 With one or two child or youth 49.5 52.3 39.6 With three or more children or youth 27.8 17.2 21.3 Gender of household head Male 77.1 68.4 84.4 102.2 0.5 –2.8 Female 22.9 31.6 17.8 Education of household head None or primary 56.4 46.2 61.3 85.6 22.4 –7.91 Secondary education 32.3 36.4 24.0 Tertiary education 11.4 17.4 0.3 Zone Urban 74.2 76.7 72.1 97.4 2.3 0.3 Rural 25.9 23.3 25.7 Source: World Bank staff calculations based on DANE-MESEP (2002–2013). 46 PART ONE | CHAPTER 2 Annex 2: Typology of economic classes in Colombia Poor Vulnerable Middle Class 2002 2013 2002 2013 2002 2013 Family per-capita income 2.2 2.5 6.3 6.8 19.7 20.2 Household Characteristics Demographic characteristics Number of members with ages 0–14 2.5 2.2 1.4 1.3 0.8 0.7 Number of members with ages 15–22 0.9 0.8 0.8 0.7 0.5 0.4 Number of members with ages 23–69 2.3 2.1 2.4 2.3 2.3 2.2 Number of members older than 70 0.2 0.1 0.2 0.2 0.2 0.2 Total number of household members 5.8 5.2 4.7 4.5 3.8 3.5 Education characteristics Primary education 1.9 1.4 1.3 1.1 0.5 0.5 Secondary education 1.4 1.4 1.7 1.5 1.2 1.1 Tertiary education 0.1 0.2 0.4 0.5 1.3 1.2 Total Number of adult household members 3.3 3.0 3.4 3.1 3.0 2.9 Labor Characteristics Male participation rate (%) 73.4 66.8 76.8 76.2 76.3 79.4 Female participation rate (%) 42.4 42.0 51.9 54.5 59.3 62.9 Total Participation rate (%) 57.3 53.7 64.2 65.2 67.8 71.2 Male unemployment rate (%) 16.0 11.5 11.2 7.3 7.7 4.9 Female unemployment rate (%) 29.6 22.1 17.5 13.4 9.9 6.6 Unemployment rate (%) 21.2 15.9 13.8 9.9 8.7 5.6 Dependence rate of the household 3.7 3.5 2.6 2.5 2.1 1.9 Proportion of occupied members in the 31.0 31.9 44.1 46.5 53.0 59.2 household (%) Geographic Characteristics Urban (%) 67.8 67.4 77.8 76.1 85.3 86.8 Household head characteristics Female household head (%) 22.5 35.1 23.5 30.1 23.2 30.1 Primary education (%) 70.6 63.3 50.9 47.7 23.1 27.5 Secondary education (%) 26.7 32.3 38.9 41.0 35.2 35.7 Tertiary education (%) 1.8 4.3 8.8 11.3 41.0 36.8 Source: World Bank staff calculations based on DANE-MESEP (2002–2013). Note: Lopez-Calva et al. (2012) estimate the threshold of Middle Class between US$10–US$50 (2005 ppp) daily per-capita. This threshold minimizes the probability of falling again into poverty defined as US$4 (2005 ppp) daily per-capita. A person is considered poor if his/her monthly per-capita income falls below the national poverty line; a person is considered vulnerable if his/her monthly per-capita income falls above the national poverty line and below the income level that corresponds to the lower bound used to define the middle class. Toward Shared Prosperity in Colombia 47 28 Toward Shared Prosperity in Colombia Annex 3: Figures Annex 3: Figures Multidimensional FIGURE A3.1:  A3.1. Mapping Poverty Figure Multidimensional Poverty Mapping Source: World Bank staff calculations base don Dirección de Ingreso Social, Departamento para la Prosperidad Social (DPS), Bogotá, Colombia. Source: World Bank staff calculations based on Dirección de Ingreso Social, Departamento para la Prosperidad Social (DPS), Bogotá, Colombia. 28 48 Percentage Percentage 0 2 4 6 8 10 12 14 0 10 20 30 40 50 60 70 80 90 PART ONE 2002 2002 | 2003 2003 2004 2004 2005 2005 FIGURE A3.2:  2006 2006 2007 2007 2008 2008 2009 2009 2010 2010 Poorest quintile Poorest quintile CHAPTER 2 2011 2011 2012 2012 2013 2013 2002 2002 2003 2003 2004 2004 2005 2005 2006 2006 2007 2007 2 2 2008 2008 Share pensions 2009 2009 2010 2010 2011 2011 2012 2012 2013 2013 Share labor income 2002 2002 Source: World Bank staff calculations based on DANE-MESEP (2002–2013). 2003 2003 2004 2004 2005 2005 2006 2006 2007 2007 3 3 Share capital 2008 2008 2009 2009 2010 2010 2011 2011 Share transfer 2012 2012 2013 2013 2002 2002 2003 2003 Income Shares by Income Quintiles and Over Time 2004 2004 2005 2005 2006 2006 2007 2007 4 4 2008 2008 2009 2009 2010 2010 2011 2011 Share housing 2012 2012 2013 2013 Share other non-labor income 2002 2002 2003 2003 2004 2004 2005 2005 2006 2006 2007 2007 2008 2008 2009 2009 Richest quintile Richest quintile 2010 2010 2011 2011 2012 2012 Toward Shared Prosperity in Colombia 49 FIGURE A3.3:  Growth Incidence Curve of Per Capita Income, 2008–13 2008–2013 16 15.1 14 12 Annual growth rate 10.1 10 8.4 7.8 8 7.3 6.9 6.7 6.5 6.3 6.2 5.9 6 5.7 5.6 5.5 5.2 4.9 4.6 4.3 4 3.7 3.0 2 0 –2 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 Labor income Transfers Other incomes Total 2002–2008 16 14 12 Annual growth rate 10 8 6 4.4 2.7 2.9 3.2 3.4 3.6 3.6 3.8 4.0 4.0 4.1 4.1 4.2 4.1 4.0 4 2.5 3.4 1.7 2.3 2 0 –2 –0.4 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 Labor income Transfers Other incomes Total Source: World Bank staff calculations based on DANE-MESEP (2002–2013). Note: The figure shows the annualized average growth rate of real per capita income. Nominal values are deflated using Colombia’s average Consumer Price Index (CPI) by year. 50 PART ONE | CHAPTER 2 Main differences in methods for measuring poverty in Annex 4:  Colombia Monetary poverty – World Bank Monetary Poverty – Official measure Poverty Moderate poverty: proportion of the population Moderate poverty: proportion of the population measures whose family per capita income is below the whose family per capita income is below the total value moderate poverty lines officially set by LAC of the food and the non-food baskets. governments. Extreme poverty: proportion of the population whose Extreme poverty: proportion of the population family per capita income is below the value of the food whose family per capita income is below the basket. extreme poverty lines officially set by LAC governments. Poverty lines Moderate Poverty Line: Moderate Poverty Line: US$4.00 PPP (2005) per capita per day or US$4.06 PPP (2005) per capita day line or 198,926 pesos per capita per month (2012). 202,083 pesos per capita month line (2012). Extreme Poverty Line: Extreme Poverty Line: US$2.50 PPP (2005) per capita per day or US$1.83 PPP (2005) per capita per day or 124,329 pesos per capita per month (2012). 91,207 pesos per capita per month (2012). Welfare Measured by per capita family income, which Measured by per capita family income, which considers: measure considers: labor income, transfers, pensions, labor income, transfers, pensions, imputed rent, and imputed rent and capital income. capital income. Considers only observed income in the survey. Considers observed and non-observed (imputed) income in the survey. Conversion to Uses national CPI and conversion factor from Uses regional food (general) CPI of the poor population real values pesos to USD in 2005 PPP to deflate the income to convert the value of extreme (moderate) poverty line aggregate. to current values. Data source • SEDLAC harmonized data (World Bank- • ECH (2002–2005) and GEIH (2008–2013) from CEDLAS) based ECH (2002–2005) and GEIH DANE. (2008–2013) from DANE. • Observations of whole year. • Observations from third quarter of each year. Structural Changes – Implications for Growth, Productivity, and Competitiveness 51 CHAPTER 3 Structural Changes – Implications for Growth, Productivity, and Competitiveness Main Messages Colombia’s sound macro policies and commercial integration, aligned to favorable external conditions, helped sustain historically high growth and low volatility in the past decade. The growth helped to close the per capita income gap with top LAC economies (LAC6) and high income peers (OECD), but it was not enough to catch up with the fast-growing Asian economies. Colombia’s economic growth has been historically based on factor accumulation. While productivity growth increased in the past decade, it remains well below the Asian and high-income economies. Despite its positive performance, Colombia still faces bottlenecks to achieving high and sustained growth. While accumulation of labor (expansion of labor force participation), physical and human has played an important role in economic growth, Colombia still lags with respect to physical capital, par- ticularly infrastructure, and human capital. In addition, low productivity is an impediment to sustained growth and convergence. Low productivity growth has been linked to several factors, including lack of adequate skills to assimilate new technologies and consistently innovate, relatively low levels of inter- national trade and integration, and decades of armed conflict. Addressing these issues is a necessary step in Colombia’s convergence path. Growth only had a minor impact on Colombia’s regional disparities. Colombia’s growth performance brought a small reduction in per capita income disparities across regions, but differences in standards of living remain significant. In particular, differences in poverty rates, access to services, and quality of institutions have been stubbornly persistent. Economic growth was accompanied by important changes in the structure of production and exports, with the extractive sector playing a larger role over the past decade, fueled by high international prices. GDP composition experienced small changes, with an increase in the participation of extractive industries and a reduction in the role of manufacturing. However, economic activity remains relatively diversified by regional standards, with services representing the largest share of GDP. High interna- tional commodity prices, together with trade integrations efforts, fostered an expansion in Colombia’s international trade, both as a share of GDP and as a share of the world’s trade. Export expansion has been associated with an increasing participation of extractive commodities and a high concentration of Colombia’s export basket. Exports of non-commodity products had a more modest performance due to factors such as competition from Chinese producers and weak economic performance in des- tination countries, such as Venezuela. At the same time, export expansion has brought more diversifi- cation in trading partners. Colombia’s resource boom has been a blessing in many dimensions, but poses social and economic policy challenges. The boom has boosted foreign investment, economic growth, and government revenues. However, changes in the terms of trade have contributed to a concentration of exports and appreciation of the exchange rate, potentially undermining the competitiveness of other sectors. In addition, extractive activities are often highly capital intensive, do not create many jobs, and generate large rents. If not well invested or redistributed, these rents may increase income inequality. Finally, the relatively large share of extractive exports and government revenues increases macroeconomic exposure to price fluctuations and volatility. Without adequate management, volatile revenues and associated pro-cyclical spending could inhibit growth. Colombia has taken important steps to mitigate the risks associated with the commodity boom, but lessons from other economies suggest more can be done. Colombia has decreased its reliance in commodity revenues by building a strong macroeconomic framework with moderate debt levels and pursuing a fiscal consolidation aimed at facilitating counter-cyclical policies. Furthermore, the central bank operates under a sound framework of flexible exchange rate and inflation targeting. While these tools help limit volatilities driven by commodity cycles, they do not per se resolve the problem of how to transfer resources from commodity industries to other sectors of the economy. Development funds could also support diversification through well-targeted domestic investment. “Sustainable investment tools”1 can help allocate the resources of such funds, taking into account long-term development goals and project-based cost-benefit considerations. Structural Changes – Implications for Growth, Productivity, and Competitiveness 53 54 PART ONE | CHAPTER 3 Structural Changes and Growth to lag fast-growing Asian economies (Figure 3-2).3 In the past four decades, Colombia has been con- Dynamics tinuously closing the per capita income gap4 with other LAC countries. In 1970, LAC’s per capita in- Colombia’s historically high growth rates of the come was 2.1 times Colombia’s; by 2012, this dif- past decade have been supported by sound mac- ference was reduced to 1.6 times. The income gap ro policies, commercial integration, and favorable with OECD5 countries progressed in a nonlinear external conditions (Figure 3-1). Significant struc- way. In 1970, OECD countries had an average per tural reforms since the early 1990s, combined with capita income that was 8.8 times Colombia’s; it in- important trade agreements, have led to modern- creased to 10.9 in 2000 and fell back to 8.7 in 2012, ization of the economy. Prudent macroeconomic driven by both Colombia’s strong performance and management has also helped bolster resilience. the crisis faced by many high income countries. Colombia weathered the financial crisis remark- Colombia’s income growth was not strong enough ably well and consolidated its position among the to close its income gap with top Asian economies. fast growing Latin American (LAC) economies. The average per capita income for fast-growing Finally, favorable terms of trade and internation- Asian economies was similar to Colombia’s in al financing conditions helped attract investment, 1970; by 2012, it was more than three times higher. accelerating economic activity and trade. As a re- sult, the Colombian economy sustained an aver- Achieving high—and sustained—growth is crit- age GDP growth of 4.8 percent in the past decade, ical to shaping a country’s development process more than 1 percentage point above the average and fostering convergence to high income levels. for the previous three decades (3.5 percent). In per Sustaining slightly higher growth rates for long pe- capita terms, this difference is also large—around riods can significantly affect the pace of conver- 3 percent in the past decade, compared with 1.7 gence. A simple counterfactual exercise illustrates percent in the previous decades. what Colombia’s per capita income would look like today had the country followed different growth Growth helped close the per capita income gap paths since 1960 (Figure 3-3). If Colombia’s per with top LAC economies (LAC6)2 and high in- capita income growth over the past decade had come peers (OECD), but the country continues persisted since 1960, it would add 0.6 percentage FIGURE 3-1:  Growth Performance in Past Colombia’s Per Capita Income FIGURE 3-2:  Decades (%) Gap (%) 10 12 10.9 8 10 8.8 8.7 Colombia's GDP per cap. 6 Average GDP per cap./ 8 4 2 6 0 4 3.2 3.4 –2 2.1 1.7 2 1.6 –4 1.0 –6 0 1974–1983 1984–1993 1994–2003 2004–2013 1970 2000 2012 Avg Max Min LAC6 ASIA OECD Source: Authors’ calculations using IMF and WDI data. Source: Authors’ calculations using IMF and WDI data. Structural Changes – Implications for Growth, Productivity, and Competitiveness 55 Counterfactual GDP Per Capita (US$) FIGURE 3-3:  25000 Per capita GDP current US$ Korea 20000 15000 Chile 10000 Turkey Colombia 5000 0 1960 2010 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2.1 (actual) 2.75 (recent) 3.5 (intermediary) 4.25 (Asia) Source: Authors’ calculations using IMF and WDI data. point to actual performance, raising income commodity-dependent. Commodity intensity/ growth to around 2.7 percent instead of the actual dependency can be analyzed through different di- 2.1 percent. Under this scenario, Colombia would mensions (Figure 3-6). Considering value added as now have a per capita income level 50 percent a share of GDP in the primary sector (agriculture higher, similar to Turkey’s. If Colombia had been and extractives), Colombia (14 percent) appears to able to sustain an average growth rate similar to be less commodity intensive than both the LAC the 4 percent of fast-growing Asian economies, it (25 percent) and Asian economies (18 percent). would now have three times its current per capita However, this changes when fiscal and export de- income, rising to the level of high-income coun- pendency are considered. Commodity-related rev- tries like Korea and Greece. enues represent almost 18 percent of Colombia’s Colombia’s growth was accompanied by import- ant changes in the structure of production, with Sectorial Decomposition of GDP FIGURE 3-4:  increased participation of the extractive sector 5.0 5.0 during the past decade. From a sector point of view, 4.5 4.5 growth was consistently driven by non-tradable 4.0 4.0 services. Oil and mining have played an increas- 3.5 3.5 ing role, while manufacturing has gradually been 3.0 3.0 losing significance as an engine of growth. These 2.5 2.5 2.0 patterns brought small composition changes in the 1.5 2.0 Colombian economy over time. Extractive activ- 1.0 1.5 ities increased from 2.2 percent of GDP in 1976 0.5 1.0 to almost 8 percent in 2012, and manufacturing 0 0.5 –0.5 0 fell from 18 percent to 12 percent (Figure 3-4 and 1981–1990 1991–2000 2000–2012 Figure 3-5). Composition changes in exports (dis- Services Electricity, gas and water cussed later in the note) were much more significant. Transport, storage Manufacturing industry and communications Mining & quarrying Construction Agriculture, forestry and shing While economic activity remains relatively diver- sified, Colombia’s exports are among the most Source: Authors’ calculations using IMF and WDI data. 56 PART ONE | CHAPTER 3 The Changing Composition of GDP Growth FIGURE 3-5:  Composition of GDP Growth (%), 1976 Composition of GDP Growth (%), 2012 9.7 6.2 13.9 2.2 15.1 7.7 18.1 12.0 18.1 19.7 3.6 3.7 6.5 5.8 7.4 7.3 11.9 10.7 Agriculture, forestry, and shing Electricity, gas, and water Transport, storage, and communications Mining & quarrying Construction Financial intermediation and insurance Manufacturing industry Business, restaurants, and hotels Communal and personal social services Source: Authors’ calculation using WDI and IMF data. government revenues, less than the LAC average percent for LAC and 12.3 percent for Asia). This is (approximately 30 percent), but more than the av- mainly due to the fact that Colombia is relatively erage for Asian economies (approximately 14 per- closed compared to its peers. cent). Colombia’s commodity exports as a share of total exports (70 percent) is the third largest in LAC, Growth decomposition and behind Venezuela and Bolivia, and well above the productivity dynamics regional average (51 percent) and the average for Asian countries (19 percent). In contrast, commod- Colombia’s economic growth since the 1960s was ity exports as share of GDP (11 percent) is much based heavily on factor accumulation; productivity lower and in line with the regional averages (11.7 growth was almost nil for most of the period, al- though it recovered in the past decade (Table 3-1). Despite many caveats, growth accounting exercis- FIGURE 3-6: Commodity Intensity/ es can provide some intuition about an economy’s Dependency growth patterns.6 For Colombia, per capita GDP 80 growth since the 1960s has relied mostly on factor 70 accumulation. Of the almost 2 percent average an- nual growth between 1961 and 2011, total factor 60 productivity (TFP) contributed only 0.1 percentage 50 point. Physical capital accumulation contributed 40 1.4 percentage points, and the combined effect of 30 employment growth and human capital accumu- 20 lation contributed another 2.6 percentage points. 10 The higher speed of population growth partly 0 compensates for employment and human capital Primary Commodity Commodity Commodity expansion (–2.1 percentage points). Starting in the sector revenues exports exports (%GDP) (% revenues) (% exports) (% GDP) 1980s, average per capital GDP growth dropped to 1.6 percent and the TFP contribution became COL LAC ASIA negative due in part to Colombia’s weak econom- Source: Authors’ calculation using WDI and IMF data. ic performance in the early 1980s and late 1990s. Growth Accounting Exercise TABLE 3-1:  1961–2011 1981–2011 2001–2011 K L*H TFP N (–) Y p.c. K L*H TFP N (–) Y p.c. K L*H TFP N (–) Y Colombia 1.42 2.63 0.07 2.12 1.99 Colombia 1.43 2.28 –0.31 1.80 1.60 Colombia 1.49 2.42 0.35 1.51 2.75 LAC 1.39 2.45 0.06 2.05 1.85 LAC 1.20 2.38 –0.50 1.76 1.33 LAC 1.28 2.12 0.68 1.33 2.75 Brazil 1.54 2.53 0.51 1.97 2.61 Brazil 1.05 2.63 –1.14 1.55 1.00 Argentina 0.69 1.38 2.56 0.90 3.73 Bolivia 0.72 2.52 –0.40 2.17 0.67 Bolivia 0.75 2.74 –0.87 2.04 0.58 Brazil 0.90 2.24 0.33 1.09 2.38 Chile 1.76 2.09 0.15 1.57 2.43 Chile 1.74 2.57 0.12 1.40 3.03 Bolivia 0.99 2.37 0.52 1.77 2.12 Costa Rica 1.63 2.91 0.07 2.52 2.09 Costa Rica 1.33 2.61 –0.04 2.26 1.64 Chile 2.16 2.60 –0.52 1.03 3.21 Mexico 1.42 2.90 –0.36 2.17 1.79 Mexico 1.12 2.42 –1.16 1.65 0.72 Costa Rica 1.77 2.32 0.13 1.70 2.52 Panama 1.76 2.60 1.29 2.25 3.39 Panama 1.59 2.72 0.36 1.95 2.72 Mexico 1.09 1.73 –0.85 1.26 0.71 Peru 1.26 2.31 –0.08 2.13 1.36 Peru 1.18 2.14 –0.43 1.71 1.18 Panama 2.06 3.14 1.30 1.72 4.79 Paraguay 1.68 2.87 –0.41 2.42 1.71 Paraguay 1.47 3.10 –1.70 2.32 0.54 Peru 1.48 2.05 2.07 1.17 4.44 Uruguay 0.95 1.04 0.24 0.58 1.65 Uruguay 0.83 1.04 0.39 0.48 1.78 Paraguay 1.03 2.55 0.32 1.88 2.02 Venezuela 1.17 2.59 –0.46 2.68 0.61 Venezuela 0.68 1.99 –0.69 2.17 –0.18 Uruguay 0.90 0.91 1.34 0.17 2.98 Venezuela 0.75 1.77 0.63 1.73 1.43 Asia 2.34 2.51 1.52 1.86 4.50 Asia 2.26 2.08 1.46 1.52 4.28 Asia 1.68 1.75 1.62 1.13 3.92 China 2.59 2.27 2.77 1.44 6.19 China 3.04 1.79 4.73 1.02 8.54 China 3.67 1.14 5.04 0.55 9.30 Hong Kong 2.06 2.91 1.22 1.65 4.54 Hong Kong 1.80 1.38 1.60 1.11 3.66 Hong Kong 1.15 1.03 1.86 0.44 3.60 (SAR) (SAR) (SAR) Indonesia 1.89 2.25 1.05 1.79 3.40 Indonesia 2.33 2.10 0.71 1.52 3.63 Indonesia 1.84 1.71 1.65 1.16 4.05 Korea 2.87 2.53 1.67 1.36 5.71 Korea 2.76 1.79 1.91 0.83 5.64 Korea 1.75 1.27 1.01 0.46 3.56 Malaysia 2.34 2.99 1.05 2.41 3.97 Malaysia 2.37 2.84 0.45 2.37 3.29 Malaysia 1.52 2.04 0.96 1.90 2.62 Philipines 1.60 2.51 –0.17 2.52 1.41 Philipines 1.44 2.22 –0.59 2.26 0.81 Philipines 1.38 2.00 1.18 1.86 2.70 Singapore 2.51 3.09 1.79 2.25 5.14 Singapore 2.33 3.06 1.16 2.47 4.08 Singapore 1.69 3.08 0.64 2.55 2.85 Thailand 2.29 1.78 2.44 1.83 4.69 Thailand 1.89 1.88 1.53 1.23 4.08 Thailand 0.88 2.18 0.98 0.87 3.17 Taiwan 2.89 2.25 1.88 1.52 5.50 Taiwan 2.40 1.66 1.61 0.87 4.80 Taiwan 1.25 1.27 1.29 0.40 3.40 US 0.95 1.28 0.82 1.04 2.01 US 0.80 0.86 1.01 1.00 1.66 US 0.64 0.31 0.60 0.93 0.61 Japan 1.93 0.69 1.83 0.59 3.86 Japan 1.07 0.48 0.48 0.28 1.76 Japan 0.31 0.01 0.29 0.06 0.55 Source: Authors’ calculations using Penn World Table 8.0 and ILO. Note: K stands for capital; L for employment; H for human capital; N for population; and Y for output. Structural Changes – Implications for Growth, Productivity, and Competitiveness 57 58 PART ONE | CHAPTER 3 Finally, in the past decade (2001–11), average per regional average, Colombia’s transport infrastruc- capita GDP growth increased to approximately ture gap has increased over time (OECD 2013), 2.8 percent, with a larger TFP contribution (0.4 suggesting that a critical challenge for Colombia is percentage points). Factor accumulation patterns investing more effectively. remained similar to the previous decades, but the contribution of population growth (–1.5 percent- Colombia also lags with respect to human cap- age points) was much lower than employment and ital—in particular, educational outcomes. human capital (2.4 percentage points). Education plays a key role in developing human capital. Colombia’s total spending on education Colombian productivity growth is in line with the as a share of GDP (7.6 percent in 2011) is higher LAC average but significantly lower than the av- than the OECD average (6.2 percent) and the av- erages for Asian economies, the U.S., and Japan. erage in most emerging economies (OECD 2013); Low, and sometimes even negative, TFP growth however, spending per student is significantly low- has affected most LAC economies, with the excep- er—15 percent of per capita income vs 23 percent tion of Panama. Regional performance improved for the OECD (WDI 2011). Overall educational in the past decade with the rise of other high pro- outcomes remain poor. While Colombia has made ductivity countries, such as Peru and Uruguay. progress in primary and secondary educational However, LAC remains well below the fast-grow- attainment and achievement, it was among the ing Asian economies. The latter grew at an average lowest ranking countries in the PISA 2012, con- rate of 4.3 percent between 1961 and 2011, with firming underperformance relative to the coun- TFP growth accounting for 1.5 percentage points. try’s middle-income status. Enrollment rates in This corresponds to almost all the difference in pre-school and tertiary education also remain well per capita income growth between Colombia and below the OECD average and even some regional Asian countries. In the same period, the U.S. aver- peers, such as Argentina and Chile. Only half of aged TFP growth of 0.8 percent, while Japan was students aged 17 to 21 who have completed high at 1.8 percent. school pursue tertiary education; among those who do, 45 percent drop out, mostly during the Despite the importance of factor accumulation to first semester because they are not academically growth, Colombia still lags with respect to physical prepared (OECD 2013). In addition to affecting capital, particularly infrastructure. Colombia has a growth, inadequate skill formation has social and large infrastructure gap. The country ranks 117th equity implications. Low-skill individuals are more out of 148 countries in infrastructure quality,7 more likely to be unemployed or underemployed, with than one point below the world average. This gap is significantly lower expected incomes. the largest in the transport sector, where Colombia is ranked well below Latin American peers and While Colombia’s labor market outcomes im- other emerging economies (Perrotti and Sánchez, proved considerably in recent decades, contrib- 2011; WEF, 2012). Both the quality (i.e. paved roads uting to overall economic growth, unemployment out of total roads) and quantity (i.e. length of roads and underemployment rates are high, preventing per square kilometer) of roads are low (Calderón further gains from demographic dividends (see and Servén, 2010). Road length scaled by land Box 3-1). Following the LAC trend, the Colombian area is less than a tenth of the OECD average. The labor market conditions have improved over the length of the rail network is also limited. As a re- past three decades: labor participation has more sult of limited network and service bottlenecks, the than doubled, while the urban unemployment country’s costs of internal freight transport are one rate has declined to single digits. Despite these ad- of the highest in the world, with important con- vances, Colombia’s unemployment and informal- sequences on competitiveness. Despite sustaining ity rates remains among the region’s highest, with investment rates in roads and railways above the half of the employed people working informally in Structural Changes – Implications for Growth, Productivity, and Competitiveness 59 Recent Demographic and Labor Markets Dynamics BOX 3-1:  Labor market conditions have improved considerably in recent years: however, the unemployment rate remains high both by OECD and LAC standards, and formal job creation remains constrained by high labor costs. Following the LAC trend, the Colombian labor market has improved in the past three decades: labor participation has more than doubled, while the urban unemployment rate has declined to single digits. Despite these advances, Colombia’s unemployment rate remains among the region’s highest (below only Barbados, Jamaica, and The Bahamas) as well as above the OECD average. In addi- tion, half of employed individuals work in the mostly low-productivity informal sector. Colombia is currently under a “demoraphic dividend” that represents a window of opportunity to increase living standards. Between 1960 and 2000, the country completed the transition from a largely rural agrarian society to a predominantly urban industrial one, with low fertility and mortality rates. During this period, the age profile of the country shifted from high concentration of young people (more than 63 percent of the population was younger than 25 in 1960) to a more balanced one (47 percent of the population was younger than 25 in 2010). As a result, the labor force temporarily grew more rapidly than the population dependent on it. Periods with decreasing dependency ratios are known as demographic windows or windows of opportunity. During this period the share of net savers relative to net consumers tend to increase, freeing up resources for investment in economic development. The dependency rate declined from 74 percent of working-age population in 1984 to 60 percent in 2000 (Figures below). Dependency ratios are expected to continue decreasing until 2025–30, when Colombia’s demographic window of opportunity will start closing. LABOR FORCE PARTICIPATION RATE DEPENDENCY RATIO (as percentage of working age population) (ratio of working age population 90 to non-working age population) 80 85 75 80 75 70 70 65 65 60 60 55 50 55 45 50 40 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Colombia Chile LAC Mexico Peru Colombia Chile LAC Mexico Peru Source: WDI, World Bank 2014. Source: WDI, World Bank 2014. Women have driven the increase in labor participation, and the labor force composition has shifted toward workers with higher educational levels. Between 1984 and 2013, labor-force participation in- creased from 54 percent to 67 percent. Female participation almost doubled since 1984, explaining most of this trend. Meanwhile, the 25- to 55-year age group increased the most. Furthermore, labor participation of Colombians with more than 12 years of education rose 8.7 percent between 1991 and 2012, compared with an increase of 4.9 percent from those with less than 12 years of education. (continued on next page) 60 PART ONE | CHAPTER 3 Recent Demographic and Labor Markets Dynamics (continued) BOX 3-1:  National unemployment fluctuated significantly during the past three decades, but it has been de- creasing steadily since the 2008 global crisis. The national unemployment rate spiked in the second half of the 1990s, reaching its all-time high amid the 1998 recession. After this episode, the rate con- tinued to fall until the 2008 global economic crisis, when it rose again to 12 percent. Since then, un- employment decreased to 9.6 percent in 2013. Women’s unemployment decreased from an all-time high of 24 percent in 2000 to 14 percent in 2013, while men’s declined from 17 percent to 8 percent in the period. Unemployment dynamics differed considerably between cities. Bogota saw a decrease from 18 percent in 2001 to 9 percent in 2013; Cali’s decrease was more modest—from 18 percent to 14 percent. Finally, employment opportunities are consistently better for educated workers in urban areas throughout the whole period. Despite increasing wages, wide wage dispersion persists between formal educated and informal non-educated workers. The size of the national informal sector has remained above 40 percent since 1984. Moreover, informal workers’ relative income has decreased, reflecting the low productivity of the Colombian labor force. Colombia’s institutional set-up led to a 21 percent real increase in the min- imum wage between 1998 and 2010. However, two-thirds of informal workers earn less than the mini- mum wage. This fact is exacerbated by the differences in educations and skills. Given the high minimum wage, formal workers tend to be educated and enjoy legal protection and good labor conditions, while informal workers tend to be less educated and subject to lower-quality jobs. RATIO OF MINIMUM TO AVERAGE WAGES NON-WAGE LABOR COSTS AS SHARE OF TOTAL 80 LABOR COSTS 60 70 55 60 50 45 50 40 40 35 30 30 25 20 20 15 10 10 0 5 Mexico Russia India United States China Greece Korea Spain Turkey Poland OECD Brazil Portugal Australia Slovenia France Colombia 2007 Colombia 2011 0 Korea Chile Mexico United States United Kingdom Turkey OECD average Norway Portugal Spain Colombia Sweden France Germany Italy Belgium Source: OECD Economic Surveys: Colombia 2013 – © OECD 2013. Source: OECD Economic Surveys: Colombia 2013 – © OECD 2013. Several investigations point to restrictive labor regulations, particularly the high minimum wage and non-labor costs, as the main cause of this segmentation in the labor market. In 2011, Colombia’s mini- mum wage stood at 71 percent of the average wages, up from 58 percent in 2007 and one of the high- est in the world (Figure above to the left).a Regional differences in incomes are high, and the uniform national minimum wage is at or above median incomes outside the capital. High non-wage labor costs compound the effects of the minimum wage on formal employment. At 82 percent of wages (formal (continued on next page) Structural Changes – Implications for Growth, Productivity, and Competitiveness 61 Recent Demographic and Labor Markets Dynamics (continued) BOX 3-1:  and informal), these costs are high by OECD standards (Figure above to the right), contributing to the high informality, particularly in the poorer regions of the country. Although the 2012 tax reform reduced non-wage labor costs, plenty of space remains for creating the right incentives to increase formal employment and realize the gains from Colombia’s demographic dividend. The Government has recently moved forward in addressing constraints to formal job cre- ation. In its 2012 tax reform, payroll taxes were reduced from 29.5 percent to 16 percent for employ- ees with salaries below 10 minimum wages (which represent the bulk of all employees). According to official estimates, this reduction could create between 400,000 and 1 million new jobs in the formal sector. Nonetheless, the country could still do more to reduce labor costs, improve job creation, and improve the matching between workers and firms. a The salary is determined by a tri-party negotiation process at the end of the year, and it is against the law to decrease it. low-productivity jobs. So far, these outcomes have from competing with, buying from, selling to, and prevented Colombia from taking full advantage of receiving investment from foreign firms. By limit- its demographic dividends (decreasing dependen- ing trade and investment for decades, Colombia cy ratios). Addressing them would help accelerate has restricted opportunities for technology adop- economic growth and convergence during the tion. In fact, Colombia’s improvements in TFP remaining 10 to 15 years of this favorable demo- growth coincide with a continued effort to open graphic window. the economy.9 Finally, decades of armed conflict had important consequences for economic activ- Historically, many factors have contributed to ity and regional disparities (discussed in more de- Colombia’s slow productivity growth, includ- tails in the next section). The conflict imposes high ing particularly low levels of innovation. First, direct and indirect costs, hindering investment in Colombia’s low levels of human capital have im- physical assets, destroying human capital (injuries plications for productivity. Those with little or no and deaths), and creating distortions that affect education are predominantly employed in less overall productivity, such as violation of property productive activities in the informal sector. In ad- rights, disruptions and public services and institu- dition, quality education helps develop advanced tions. Estimated growth losses associated with the skills that are crucial for assimilating new technolo- conflict range from 0.6 percentage point to 1.77 gies and consistently innovating. In fact, innovation percentage points a year.10 rates are low and Colombia’s management practic- es are among the worst in the region.8 According Productivity growth was uneven across econom- to the National Innovation Survey IV (2007–08), ic sectors, and it was largely influenced by labor only 11.8 percent of Colombian firms with over 10 reallocation across sectors. An alternative growth workers innovate in product or process, compared decomposition exercise can help illustrate labor to 30 percent on average for countries at its level productivity and labor reallocation dynamics of development. At 0.18 percent in 2011, nation- across sectors (Table 3-2).11 Labor productivity al research and development (R&D) expenditures gains, measured by valued added per worker, ac- as a share of GDP are roughly half the expect- counted for 63 percent of the overall per capita ed rate for a country at Colombia’s level of de- output growth between 2001 and 2013 (1.8 per- velopment. Second, Colombia remained relatively centage points of the 3 percent annual growth closed until the early 1990s. The economic litera- rate); changes in the employment rate (21 per- ture has identified positive productivity spillovers cent) and labor force as a share of the population 62 PART ONE | CHAPTER 3 Growth Decomposition: Contribution to Total Growth in Value Added Per Capita, TABLE 3-2:  Colombia 2001–13 (%) Contribution Contribution of within sector Contributions of changes in changes in output of Inter–sectoral Employment (%) per worker (%) Shifts (%) Total (%) Sectoral contributions Agriculture –7.07 4.63 6.52 4.07 Mining and hydrocarbons 0.38 5.88 1.14 7.41 Manufacturing –0.75 5.63 –0.27 4.61 Electricity, gas and water 0.21 0.23 0.78 1.22 Construction 4.67 6.56 0.75 11.98 Commerce, hotels, restaurant 9.90 7.75 –2.15 15.49 Transport and comunication 6.32 3.07 0.13 9.52 Financial services and real state 9.96 –10.51 18.44 17.89 Communal, social and personal services –2.39 13.52 1.00 12.13 Change in capital per worker 24.85 TFP 11.91 Subtotals 21.23 36.76 26.33 84.31 Demographic component 15.69 Total 100.00 Annual % change in value added per 3.08 capita 2001–2013 Source: Authors’ calculations using DANE data. (16 percent) account for the rest. Labor produc- sector, decreased aggregate productivity, while tivity and gains can be decomposed into changes large employment shifts into financial services, a in labor productivity within sector and employ- highly productive sector, had the largest positive ment and labor reallocation across sectors, while impact on aggregate productivity. employment gains can be decomposed by sector. In Colombia, the first component of labor pro- Growth at the regional level ductivity accounted for 60 percent of the gains (37 percent of the overall growth) and the second Colombia’s growth performance contributed to a accounted for the remaining 40 percent (26 per- small reduction in per capita income disparities, cent of the overall growth). In almost all sectors, but differences in living standards remain signif- within-sector productivity gains contributed to icant. Per capita income in most states increased aggregate productivity gains. The exception was relative to the benchmark of Bogota, with the financial services, where employment grew faster biggest gains in states with lower relative income than the sector’s value added. Labor reallocation (Figure 3-7). Researchers find mild convergence12 impacts vary across sectors. For example, labor during the 2000s.13 However, Colombia’s differ- shifts out of agriculture, a sector with relatively low ences in per capita income among regions are labor productivity, positively contributed to overall still large when compared with the regional dif- productivity growth. At the same time labor shifts ferences in OECD economies (OECD, 2013). out of manufacturing, a high productivity sector, Most of the regions’ GDP per capita gap with re- had a negative impact on aggregate productivity. spect to Bogotá is due to low labor productivity. Labor shifts into commerce, a low productivity This dispersion across departments has remained Structural Changes – Implications for Growth, Productivity, and Competitiveness 63 FIGURE 3-7: Income Per Capita as % of Bogota 350 300 250 200 150 100 50 0 Casanare Chocó Arauca Bogotá D. C. Santander Meta Valle Antioquia Cundinamarca San Andrés y Prov. Boyacá Atlántico Huila Bolívar Quindío Risaralda Tolima Caldas La Guajira Cesar Córdoba Norte Santander Vichada Guaviare Guainía Amazonas Putumayo Magdalena Caquetá Cauca Nariño Vaupés 2000 2012 Source: Authors’ calculations based on DANE data. almost constant over the past decade. The main Education and Income Across FIGURE 3-8:  exception has been commodity-producing ar- Departments, 2010 (OECD 2013) eas, where highly productive commodity sectors have emerged, although they have created little 21 employment. 18 GDP per capita (million pesos) 15 Regions with low productivity suffer from the same bottlenecks that explain Colombia’s lag with respect 12 to Asia and high-income countries. In addition to 9 violence, which has been especially intense in poor 6 regions, low access to education and subpar stu- dent performance have been identified as the main 3 bottlenecks hindering regional GDP per capita 0 220 240 260 280 300 320 340 growth and productivity14 (Figure 3-8). In addition Education performance (Saber9 exam) to traditional education, these regions lag behind in entrepreneurial training during secondary, ter- Source: OECD Economic Surveys: Colombia 2013 - © OECD 2013. tiary, and continuing education (OECD, 2012b). Furthermore, the quality of transport infrastruc- ture differs greatly across regions (Figure 3-9). closely correlated with per capita income, except High regional discrepancies in the quality of roads for oil-producing regions. suggest significant opportunities to raise competi- tiveness through mere rehabilitation and mainte- Historically, institutions have also played a role in nance of existing roads in low- performing regions per capita income disparities across regions, but if (Ramírez and Parra-Peña, 2010). These differenc- well implemented recent reforms might help allevi- es are reflected in the Department Competitive- ate this issue. The 1991 constitution sought to pro- ness Index, which measures basic services, efficien- mote regional expenditures yet failed to reduce in- cy, sophistication, and innovation. The index is equalities. Sub-national authorities began to receive 64 PART ONE | CHAPTER 3 Quality of Roads at Department Level, 2009 (OECD 2013) FIGURE 3-9:  100% 80% 60% 40% 20% 0% Chocó Cauca Putumayo Meta Cundinamarca Boyacá Magdalena Caquetá Huila Risaralda Nariño N. Santander Santander Antioquia Sucre Cordoba Guajira Cesar Tolima Casanare Caldas Quindio Valle del Cauca Bolivar Atlántico Poor and unpaved Intermediate Good Source: OECD Economic Surveys: Colombia 2013 - © OECD 2013. much larger public resources (especially those While per capita income across regions suggests linked with oil production) but their capacity to ef- a slow convergence, differences in poverty rates fectively manage and invest them was not raised. and access to services are stubbornly persistent. As a result, the vast royalties from natural resources Colombia’s moderate and extreme poverty rates extraction have been ineffective (Olivera and Perry, (monetary poverty) have dropped significantly over 2009) or misused. Between 2000 and 2012, close to the decade. However, regions that already had low- a third of the sanctions in the public administration er poverty rates had larger poverty reduction than (national and sub-national) were applied to mayors regions with higher poverty rates (Figure 3-10). and local councilors (OECD, 2013). The 2011 roy- As a result, differences across regions were main- alties reform is expected to alleviate this problem. tained and, in some cases, even amplified. A sim- It aims to distribute revenues more equitably across ilar pattern arises when multidimensional poverty regions, with the share allocated directly to com- is taken into account. This indicator reflects access modity-producing regions reduced from 80 percent to key public services. While the indicator is only before 2011 to 10 percent after 2014. Most of the available for recent years, it suggests little change resources will be spent on infrastructure projects (40 in regional disparities. percent) and on a science, innovation, and technol- ogy fund (10 percent). In fact, non-tax revenues and Structural changes in international trade transfers seem to be negatively associated with per capita income growth at departmental level. Based International trade as a share of GDP has in- on the model prior to the reform, royalties are also creased steadily, rising from 21 percent in the early negatively associated with growth; when the reform 1970s to 32 percent in 2012, but Colombia is still is considered, royalties become positively associated among the LAC’s most closed economies. Between with regional growth (Table 3-3, based on Lopez- 1980 and 2012, goods exports increased from 7.6 Calva et al., 2013), i.e. they are expected to become percent to almost 16 percent of GDP, while goods a convergence factor. It is worth keeping in mind imports rose from 13.5 percent to 16 percent of that potential implementation challenges—for ex- GDP. Despite the increase, Colombia’s trade as a ample, the capacity to design, select, and execute share of GDP remains lower than the LAC aver- infrastructure and innovation projects—are not age (39 percent) and much lower than the aver- considered in these estimates. age for fast-growing Asian economies (75 percent). Structural Changes – Implications for Growth, Productivity, and Competitiveness 65 TABLE 3-3: Royalties and Regional Convergence Fixed Effects Estimates of Conditional Convergence, 2012–2016 No Reform Reform (1) (2) Real Income at t–1 –0.02366*** –0.03444*** (0.00412) (0.00063) Taxes at t–1 0.02081*** 0.01046*** (0.00255) (0.00037) Non Tax Revenue at t–1 0.00043 0.00040*** (0.00091) (0.00011) Regalias at t–1 –0.00015** 0.00119*** (0.00007) (0.00004) Transfers at t–1 –0.03518*** –0.03151*** (0.00362) (0.00047) Constant 0.59363*** 0.82186*** (0.04808) (0.00845) R–squared 0.716 0.983 Number of Observations 154 154 Source: Enamorado, Lopez–Calva, y Rodríguez-Castelán, 2013. Notes: Dependent Variable: Growth rate, Per Capita Income; Fixed effects estimates weighted by population size; Robust Standard Errors within parentheses; All monetary measures are expressed in logs and real terms 2005; *** p<0.01, ** p<0.05, * p<0.1. In the LAC, Colombia is the second most closed from high commodity prices. Colombia’s export economy after Brazil (21 percent of GDP). value grew an average of 13.6 percent a year during the past decade. This growth was large- Trade growth, and in particular export growth, ly driven by increases in the international prices during the past decade have benefited significantly of Colombia’s main export commodities. When FIGURE 3-10:  Evolution in Poverty Rates 80 35 70 30 60 25 20 50 15 40 10 30 5 20 0 10 –5 0 –10 Norte de Santander Bogotá D.C. Huila Sucre Chocó La Guajira Boyacá Nariño Cordoba Magdalena Bolivar Cesar Cauca Tolima Caquetá Cundinamarca Atlántico Total Nacional Antioquia Quindio Caldas Santander Meta Valle del Cauca Risaralda 2002 Drop in poverty Group Average 66 PART ONE | CHAPTER 3 FIGURE 3-11:  Recent Trade Dynamics 34 190 32 180 170 30 160 28 150 26 140 130 24 120 22 110 20 100 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Trade (%GDP) Terms of trade Source: Authors’ calculations using IMF and WDI data. Export Values vs Volumes FIGURE 3-12:  Colombia’s Share of World FIGURE 3-13:  Imports and Exports (%) 600 0.40 500 0.35 400 0.30 300 0.25 0.20 200 0.15 100 0.10 0 0.05 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Export value ind Import value ind Export volume ind Import volume ind Exports (%) Exports except extractives (%) Imports (%) Source: Authors’ calculations using IMF and WDI data. Source: Authors’ calculations using IMF and WDI data. measured in volumes, export growth fell to an Export expansion has been associated with an in- average of 6 percent per year (Figure 3-12). For creasing participation of extractive commodities imports, this difference was 14 percent growth in and a high concentration of Colombia’s export values and 10.6 growth in volumes, further ex- basket. Colombia experienced significant changes posing Colombia’s external balance to commod- in export composition during the past decade. In ity-price fluctuations. However, favorable prices the mid-1990s, manufacturing goods accounted helped raise Colombia’s exports as a share of for the majority of exports (62 percent), followed the world total from 0.2 percent in 2002 to al- by extractives (28 percent) and agriculture (10 per- most 0.4 percent in 2012. This effect is almost cent). By 2012–13, the roles have been reversed, entirely driven by extractive activities. Excluding with extractive exports accounting for 58 percent extractive exports, Colombia’s exports remain al- and manufacturing (38 percent) and agriculture most constant as a share of the world’s exports (4.5 percent) falling significantly (Figure 3-14). (Figure 3-13). While high oil and mining prices account for a Structural Changes – Implications for Growth, Productivity, and Competitiveness 67 large portion of this change, other factors were decade. New countries arise as important destina- also at play. For example, the economic crisis tion partners. For example, China did not appear in Venezuela, one of the main destinations of among the top 20 export destinations at the begin- Colombia’s manufactured products, contributed ning of the decade; now, it is the third largest con- to a weak performance of this sector. Changes sumer of Colombia products. Mexico also gained in the structure and composition of exports led importance as an export destination. In contrast, to a much higher level of concentration15 in Venezuela, the third largest destination at the be- Colombia’s export basket (Figure 3-15). ginning of the decade, is now in 10th position. Overall, these changes made Colombia’s exports In terms of export destinations, Colombia is more less concentrated16 with respect to destination mar- diversified than it was at the beginning of the kets (Figure 3-16). The changes in destination mar- kets are associated with the change in export com- position. The new partners are net commodity importers and net manufacturing exporters, while Changes in Export Composition FIGURE 3-14:  old partners like Venezuela are net manufacturing importers. 100 90 80 37.9 Macro Implications and Risks 70 61.8 60 50 Colombia’s resource boom has been a blessing in 40 57.5 many dimensions, but poses social and economic 30 20 28.1 policy challenges. The boom has boosted foreign 10 10 investment, economic growth, and government 0 4.5 revenues. However, changes in the terms of trade 1995–1996 2012–2013 and related capital inflows have contributed to the Agriculture Extractive Industrial Other appreciation of the exchange rate, undermining the competitiveness of other sectors. As previously Source: Authors’ calculations using IMF and WDI data. Concentration in the Export FIGURE 3-15:  Concentration in Export FIGURE 3-16:  Basket Destinations 0.50 0.30 0.45 0.40 0.25 0.35 0.20 0.30 0.25 0.15 0.20 0.15 0.10 0.10 0.05 0.05 0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 HHI export products HHI export partners Source: Authors’ calculations using IMF and WDI data. Source: Authors’ calculations using IMF and WDI data. Note: HHI stands for Herfindal-Hirschman index. 68 PART ONE | CHAPTER 3 discussed, fuel sales increased to almost two-thirds Colombia’s recent economic dynamics indicates of total exports, while manufacturing’s share of some initial symptoms consistent with the Dutch total merchandise exports declined significantly. In disease, but it is too early for conclusions. Over addition, extractive activities are often highly capi- the past decade, Colombia’s real exchange rate tal intensive, do not create many jobs, and generate appreciated by almost 40 percent vis-à-vis trad- large rents, which may harm income distribution. ing partners.18 This has made the country’s export Finally, the relatively large share of extractive ac- goods more expensive for foreigners, decreasing tivities in trade and government revenues increases the international competitiveness of Colombian macroeconomic exposure to price fluctuations and goods with high price elasticities, such as manu- overall economic volatility.17 Volatile revenues and factured goods. In fact, manufacturing exports fell associated procyclical spending could have real as a share of total exports, and overall production costs for growth. has been sluggish. The strong exchange rate also lowered domestic costs of imports, and Colombia Commodity production and natural resources has run slightly negative trade and current account abundance do not necessarily hinder growth. The balances. In particular, the current account deficit increase in oil export revenues brings certain op- has not been positive in a single quarter since 2001 portunities for Colombia because—if well-man- (see Figure 3-2). While these facts are consistent aged—they might serve as a financing source for with the Dutch disease, it is important to be cir- economic development. Norway, Chile, Botswa- cumspect because other factors might be involved. na, Indonesia, Malaysia, and Thailand are ex- In the case of manufacturing performance, factors amples of countries rich in natural resources that such as the crisis in Venezuela, and competition managed their resources well and achieved high from China seemed to have been much more im- growth rates, diversifying their economies beyond portant than exchange-rate appreciation (Griffin, commodities. In contrast, many commodity-rich 2014). Manufactures might have also been affected countries are lagging in development, supporting by sluggish external demand of high income part- the idea that a “curse” can emerge if resources are ners such as the U.S. and Europe. poorly managed. Examples in this group might in- clude Nigeria, Venezuela, and Algeria. A large fraction of the current account deficit is financed by abundant FDI flows, which have One of the potential challenges associated with been relatively stable over time.19 Nevertheless, large commodity booms is the “Dutch disease.” FDI flows can still be challenging; for instance, Natural resources generate large profits (econom- Colombia receives a considerable amount of FDI ic rents) in places where they are abundant—that in the commodity sector, which is usually prone is, where they can be produced at a marginal cost to sudden capital flow reversals (see Figure 3-3). below levels that prevail elsewhere. This has two For this reason, the current account deficit could major effects on the economy’s relative incentives. create some pressures in the medium term if the First, to the extent the resources are exported, the investment flows were to reverse—especially with inflow of foreign exchange appreciates the real ex- official reserves that are low compared to other change rate— that is, it raises the price of non-trad- resource-rich emerging economies.20 Box 3-2 dis- able goods relative to tradable goods. Second, it in- cusses the potential repercussions for Colombia of creases the returns to production of the resource a sudden drop in oil prices. Over the longer run, relative to other tradable goods. Both of these ef- a structural current account deficit implies that fects reduce the incentive to invest in production of it will be paid off in the future. The ability to do other tradable goods, resulting in a production and so will depend on sustaining growth and export export structure dominated by the resource. competitiveness. Structural Changes – Implications for Growth, Productivity, and Competitiveness 69 In addition to external prices, commodity booms expected life of commodity resources in Colombia depend on the internal production capacity. is, however, difficult to estimate because explo- Although the commodity boom is likely to contin- ration in much of the country has barely start- ue, considerable uncertainty surrounds its length ed. Uncertainty about future discoveries is large. and intensity. Colombia’s proven oil and gas re- Similarly, forecasts for commodity prices and serves are estimated to last seven to eight years. terms of trade have wide error margins. While Oil production is expected to peak in 2018 at 1.14 commodity prices may decline as new sources of million barrels a day and then decrease slowly to supply emerge, their levels may well remain rela- less than 0.8 million barrels a day in 2035. The tively high based on growing demand from Asia. BOX 3-2: How Vulnerable Is Colombia’s External Sector to Oil Price Fluctuations? Colombia’s high reliance on oil exports—about two-thirds of exports are fuel—and its persistent cur- rent account deficit raise questions about the external sector’s vulnerability to oil price fluctuations. Movements in oil prices are quite substantial: in the past 20 years, yearly declines of 60 percent and monthly declines of 20 percent were not uncommon.a For our analysis, we assume an annual price de- cline of a third.b Considering estimated net petroleum exports of 240 million barrels per yearc and an oil price of US$100 per barrel, a one-third decline could potentially translate into a US$8 billion loss of export revenues. The current account deficit of US$12 billion would increase by two thirds. However, this back-of-the envelope calculation neglects that foreign demand does respond to oil price changes. It is often said that demand for oil is fairly inelastic, but this assumption is certainly too restrictive. To better assess the vulnerabilities of Colombia’s current account to an oil price shock, we calculate a short-run price elasticity of total oil exports of approximately 0.3, meaning that the value of oil exports decreases by about one-third of the percentage shock to prices. Considering this effect, the current account deficit would only increase by an estimated 20 percent. In practice, of course, many other effects are at work (e.g., the exchange rate, domestic demand, and capital flows). If we estimate the effect of oil prices on the overall current account balance in a simple reduced-form model, we hardly find any significant effect at all. Considering these results, we assess Colombia’s risk exposure to oil price fluctuations as modest. However, it should be noted that considerably larger oil price shocks might occur and calculations with data from “normal” times are usually not a good guide for such singular events. In such a bust environment, Colombia’s vulnerability to shocks will depend more on factors like global capital flow patterns or the perception of investors—which in turn will be influenced by long-run development perspectives—and the capacity of the macroeconomic framework to accommodate such shocks in the short run (e.g. international reserves which are currently at a largely adequate leveld). In any case, what will probably matter most is not the short-run fluctuation of the oil price by itself but a development outlook predominantly based on oil (and other commodities). a This magnitude is calculated as the lower quartile value minus 1.5 times the inter-quartile range for WTI: Q1 – 1.5 x IQR b Note that declines by 60 percent from the year before might not be uncommon for a given month but this is often mitigated over the whole year. In the past two decades, the largest price decline measured over a full calendar year was 45 percent (2009), followed by 35 percent (1998). We thus consider a shock of a third a reliable downside magnitude. c www.eia.gov. d See Endnote 20. 70 PART ONE | CHAPTER 3 Sound fiscal management and reforms have in- trajectory and avoiding typical “middle income creased Colombia’s overall resilience to shocks, traps.” Finally, broadening the tax base would but the fiscal account is still exposed to a sudden increase social ownership in public expenses: drop in oil prices. Colombia has implemented as more public expenditures are financed from important reforms in the past decade, includ- general taxes, taxpayers will have an incentive to ing two comprehensive tax reforms that helped monitor the efficiency and effectiveness of these increase non-oil revenues and a fiscal consoli- expenses more closely. dation rule and medium-term fiscal framework that gradually reduces the structural deficit to 1 Colombia has taken important steps to mitigate percent of GDP by 2020. The rule shielded the the risks associated with the commodity boom, government’s fiscal target from oil price fluctua- but lessons from other economies suggest more tions and determined that a part of the savings can be done. Given the macroeconomic frame- in favorable cycles should be dedicated to an oil work, Colombia seems well-equipped to counter sovereign fund. Sound management also led to near-term risks and achieve structural shifts to- a reduction in central government debt from 45 ward non-commodity sectors. The public sector is percent of GDP in 2003 to 37 percent in 2013, characterized by modest debt levels, and the fiscal reducing fiscal risks. Nevertheless, a sharp de- deficit has been on a consolidation path. The legal cline in oil prices could temporarily affect fiscal framework has been reformed, with a fiscal rule outcomes as oil-related revenues represent 16 designed to facilitate counter-cyclical policies and percent of total central government revenues. A decrease the reliance in commodity revenues and US$10 decline in the per barrel oil price reduc- a tax reform to widen the tax base. Furthermore, es central government revenue by approximately the central bank has earned considerable credibili- 0.4 percent of GDP (with a one year lag). If a ty in the market and independently operates under large shock occurs before the sovereign fund is a sound framework of flexible inflation targeting. fully funded, Colombia will have to rely on other While the fiscal rule helps limit fiscal volatilities tools to avoid real implications to the economy, driven by commodity cycles, it does not per se re- such as the renewed US$5.8 billion IMF flexible solve the problem of how to transfer resources from credit line. the commodity industries to other sectors of the economy. Supporting this transition through bud- Besides short-term risks from macro-financial get expenses would be one option. Alternatively, linkages,21 overreliance on commodity produc- development resource funds that exist in many tion has several adverse structural implications. countries, such as the United Arab Emirates or One of them is the pass-through of commodi- Kazakhstan, do not necessarily have to invest in ty price volatility to the rest of the economy. foreign assets but could also support diversifica- Macroeconomic volatility has long been an im- tion through well-targeted domestic investments. pediment to growth and poverty reduction in “Sustainable investment tools”23 can help allocate Latin America.22 While Colombia’s fiscal frame- the resources of such funds. They combine the work reforms have introduced some buffers rationale of saving resource revenues abroad with against oil price swings (see below), economic di- the benefits of investing them domestically, consid- versification could further contribute to stability. ering bottlenecks and lacking absorptive capacity It would also broaden the tax base, which is im- in the domestic economy, thus taking into account portant because Colombia’s revenue collection long-term development goals and project-based as a share of GDP is relatively low. A broader cost-benefit considerations. Such tools have been tax base is important for investments in training, parameterized for other resource rich countries education, and infrastructure as well as for pro- but could be adjusted for the Colombian case and gressive redistribution, all of which are import- could further refine the county’s elaborate fiscal ant to sustaining the current economic growth framework. Structural Changes – Implications for Growth, Productivity, and Competitiveness 71 Endnotes 1 See Berg, A., R. Portillo, S.C. Yang, F.F. Zanna K:148956~piPK:216618~theSitePK:2743783,00. (2013). “Public Investment in Resource-Abundant html) Developing Countries,” IMF Economic Review, 12 Both beta and sigma convergence. 61(1): 92–129. 13 Lopez-Calva, Castelã, and Enamorado (2013), Agu- 2 Argentina, Brazil, Chile, Peru, Mexico, Venezuela. irre Tobón (2005), Branisa and Cardozo, (2009), 3 Korea, Singapore, China, Thailand, Indonesia, and Royuela and García (2010). Malaysia. 14 CEER, 2007. 4 Measured by GDP per capita at constant 2005 US$. 15 Measured by the Herfindahl–Hirschman Index. 5 Considering only high income OECD countries. 16 Measured by the Herfindahl–Hirschman Index. 6 It is worth to keep in mind that results can be sensi- 17 Commodities and extractive commodities in par- tive to assumptions about measures of human cap- ticular have higher short-term price volatility than ital, estimated return on human capital, capital de- other goods. Price fluctuations, regardless of their preciation, labor force, etc. We chose to adopt the effect on investment, create volatility in foreign ex- Penn World Table assumptions to ensure consisten- change earnings and government revenues (World cy across a large number of countries. This assump- Bank 2010). tion might differ from other country specific studies. 18 In addition to commodity revenues, capital inflows 7 Infrastructure Quality Index, World Economic Fo- from industrialized countries during a period of rum 2013–14. loose global financial conditions also put apprecia- 8 World Bank (2013). tion pressures on the exchange rate. The exact de- 9 Eslava, Haltiwanger, Kugler, Kugler, (2012). gree of appreciation in the real effective exchange 10 A. Saavendra (2013), M. Santa Maria, N. Rojas, G. rate depends on the underlying method used to Hernandez (2013). construct the trade weights. The JP Morgan meth- 11 The methodology adopted uses Shapley decompo- od leads to lower appreciation (close to 30 percent); sition to link changes in particular components to IMF IFS data indicates a stronger appreciation changes in total per capita GDP by taking into ac- (above 50 percent). count the relative size of each economic activity 19 WBG staff calculations based on IFS data. Further- as well as the magnitude of the changes. This ap- more, almost the whole FDI position is financed by proach gauges the marginal effect on a variable of equity and investment fund shares, not debt instru- interest (in this case, output per capita) of the se- ments. The latter are considered as more volatile. quential elimination of each of its contributory fac- Flows in recent years, however, were very debt-in- tors (in this case, the national working age popula- tensive. tion, employment rates and output per worker in 20 By the end of 2012, Colombia’s official reserves each economic activity). Since there are several pos- covered 5.1 months of imports. This is a magni- sible sequences of elimination, the method assigns tude similar to other commodity exporters, such as to each factor the average marginal contribution of Angola (7.1), Malaysia (6.6), Indonesia (6.1), Nige- all possible elimination sequences. The decompo- ria (5.7), Chile (4.5) and Venezuela (3.9). Howev- sition was produced using the Job Generation and er, it is considerably less than, for example, Alge- Growth Decomposition Tool from the World Bank’s ria (34.8), Bolivia (14), Peru (12.5), and Botswana Employment Lab. For a full description of the meth- (12.2). Source: WDI. Accumulated reserves, howev- od and a simulation toolkit, visit: (http://web.world- er, increased since early 2012. For an assessment of bank.org/WBSITE/EXTERNAL/TOPICS/ optimal reserve holdings, see Calvo, G. A., A. Izqui- EXTPOVERTY/EXTEMPSHAGRO/0,,con- erdo, R. Loo-Kung (2012): “Optimal Holdings of tentMDK:22042518~menuPK:2743902~pageP- International Reserves: Self-Insurance against Sud- 72 PART ONE | CHAPTER 3 den Stop,” NBER Working Paper 18219. According on Economic and Social Progress in Latin America. to their calculations (for 2010), Colombian reserve Gavin, M., R. Hausmann, R. Perotti, and E. Talvi holdings were too small. (1996), “Managing Fiscal Policy in Latin America 21 Potential risks in this aspect include inter-linkages and the Caribbean: Volatility, Procyclicality, and between such phenomena as the build-up of debt Limited Creditworthiness.” IADB Working Paper in pockets of the market not on the supervisory au- 326. Crespo-Cuaresma, J., S. Klasen, and K.M. thorities’ radar screen, currency mismatches on bal- Wacker (2013), “Why We Don’t See Poverty Con- ance sheets, overvaluation in segments of the equity vergence: The Role of Macroeconomic Volatili- market, the possibility of a drop in capital inflows, ty.” Courant-Research-Centre: Poverty, Equity, and and the interplay of these factors that might lead to Growth. Discussion Paper 153. a vicious downward spiral with asset price declines 23 See Berg, A., R.Portillo, S.C. Yang, F.F.Zanna and credit defaults. (2013). “Public Investment in Resource-Abundant 22 See e.g. Inter-American Development Bank (1995), Developing Countries,” IMF Economic Review, “Overcoming Volatility in Latin America.” Report 61(1): 92–129. References Andrew Berg, Rafael Portillo, Shu-Chun S. Yang & Macroeconomic Volatility. Courant-Research- Luis-Felipe Zannan (2013). Public Investment Centre: Poverty, Equity, and Growth Discussion Paper, in Resource-Abundant Developing Countries. 153. IMF Economic Review, 61, 92–129. Katherine Aguirre (2005). Convergence in social Boris Branisa & Adriana Cardozo (2009). Regional indicators for Colombia. An approximation Growth Convergence in Colombia Using from the traditional and non-parametric ap- Social Indicators. Discussion Papers Ibero-America proach. Revista Desarrollo y Sociedad, segundo Institute for Economic Research, 195. semester, 147. Eslava Marcela, John Haltiwanger, Adriana Kugler Mauricio Santa María Salamanca, Norberto & Maurice Kugler. 2004. (2012). Trade, Rojas Delgadillo & Gustavo Hernández Díaz Technical Change and Market Selection: (2013). Crecimiento económico y Conflicto Evidence from Manufacturing Plants in Armado en Colombia. Archivos de Economía Colombia. Society for Economic Dynamics, Departamento Nacional de Planeación, 400. Meeting Papers 1039. Michael Gavin, Ricardo Hausmann, Roberto Global risks 2012. Cologny, Switzerland: World Perotti & Ernesto Talvi (1996). Managing Economic Forum, 2012. Print. Fiscal Policy in Latin America and the Guillermo A. Calvo, Alejandro Izquierdo, Rudy Caribbean: Volatility, Pro-cyclicality, and Loo-Kung (2012). Optimal Holdings of Limited Creditworthiness. Inter-American International Reserves Self-insurance against Development Bank Working Paper, 326. sudden stop. NBER Working Paper, 18219. Ted Enamorado, Luis F. López-Calva & Carlos Inter-American Development Bank (1995). Rodríguez-Castelan (2013). Crime and Overcoming Volatility in Latin America. Growth Convergence. World Bank Policy Report on Economic and Social Progress in Latin Research Working Paper, 6730. America, John Hopkins University Press, Vicente Royuela & Gustavo Adolfo García Washington D.C. (2010). Economic and social convergence Jesús Crespo Cuaresma, Stephan Klasen & in Colombia. The Research Institute of Applied Konstantin M. Wacker (2013). Why We Economics Working Paper, 2010/14, 2. Don’t See Poverty Convergence: The Role of Structural Changes – Implications for Growth, Productivity, and Competitiveness 73 PART TWO POLICY NOTES 74 PART ONE | CHAPTER 3 Structural Changes – Implications for Growth, Productivity, and Competitiveness 75 CHAPTER 4 Agriculture and Rural Development 76 PART ONE | CHAPTER 4 Main Messages Rural areas of Colombia, long home to high levels of poverty and lagging development, are at risk of falling even further behind the country’s urban areas. Decades of civil conflict have taken a heavy toll on the rural economy. Security deficiencies and neglect of the rural population have led to the displacement of hundreds of thousands of households and the abandonment of countless farms and small enterprises. The result has been a slowing of productive activity in many rural areas, accompanied by increasing instability. Agricultural growth, once a leading driver of overall GDP growth, has faltered. Production gains have been narrowly concentrated in a handful of export crops, while output of many of the staple crops grown by the majority of rural households has stagnated. The lagging agriculture performance has exacerbated what was already a wide welfare gap between urban and rural areas. The recent sluggish performance of the rural economy poses a problem for the Government, but it also represents an enormous opportunity. Blessed with abundant land and water resources, Colom- bia’s rural sector has considerable untapped potential for wealth creation and poverty reduction, but that potential is not being realized. Many agricultural policies have been ineffective, service delivery to rural areas remains weak, and chronic underinvestment in rural infrastructure has left many producers unable to access inputs and isolated from markets. With the peace talks raising prospects that security may soon be restored to the countryside, pol- icy makers could soon be presented with an opportunity to reverse the decades-long decline in the rural economy. The task will not be easy, however, and it will not be accomplished overnight. For that reason, the Government will have to implement a phased approach that focuses in turn on issues that need to be addressed in the short, medium and longer term. As peace and stability return to rural areas, the immediate priority will be providing rural households with the means to engage in productive activities and resume their livelihoods. This will mean ensuring that households have secure access to land, to the productive inputs needed to resume agricultural activ- ities, to the information and knowledge needed to use those inputs effectively, to the financial resources needed to pay for them, and to the infrastructure needed to deliver surplus production to the market. After measures have been implemented to restore rural livelihoods, especially in areas that have been severely affected by conflict, a second priority will be to get agriculture going. This will be possible only when the constraints currently inhibiting agricultural growth are overcome. These constraints include fac- tors that contribute to low farm-level productivity, factors that reduce the profitability of agriculture, and factors that undermine the competitiveness of Colombian producers. Overcoming these constraints will require a comprehensive strategy of policy reforms, institutional changes, and supporting investments. Finally, over the longer term, the health and well-being of the rural sector will depend on the ability of the Government to implement a territorial approach to rural development. This will require a fun- damental rethinking of how services are delivered to rural areas. Starting with a broad concept of the rural sector that encompasses multiple sectors, a wide range of partners and stakeholders, and many different economic activities, it will be necessary to build a new institutional architecture consisting of centralized policy-setting and financing agencies working hand in hand with strengthened decentral- ized implementation and coordination entities, local civil society organizations, and private firms. The Agricultural Sector in Colombian economy; by 2012, it represented only 6.2 percent of total GDP. Colombia: Opportunities and Challenges Across a wide range of sub-sectors, the trends are not encouraging. The rural sector in Colombia is blessed with abun- Food crops. Over the past two decades, production dant resources. It features many unutilized and of many leading food crops has fluctuated widely underutilized resources that, if properly exploited, around generally flat trends (Figure 4-1). Two no- could provide the basis for broad-based and sus- table exceptions are maize (production increased tainable growth. These include: in response to strengthening demand from the feed industry) and wheat (production plummeted i. 22 million hectares of arable land, only 5.3 in the face of increasingly competitive flour im- million hectares of which are currently culti- ports). For food crops generally, the overall pat- vated (IGAC, 2012); tern is symptomatic of a sector with little inno- ii. 38.8 million hectares currently used for graz- vation and production subject to the vagaries of ing and livestock production, largely charac- weather. terized by extensive and inefficient pasture sys- tems with an average stocking rate of less than Cash crops. Over the past two decades, cash crops one animal per hectare (IGAC, 2012); have suffered differing fortunes. Production of iii. 60 million hectares of forest, including 477,575 traditional export crops, especially coffee, cocoa, hectares currently being managed as commer- and cotton, has fallen as productivity has stagnat- cial plantations (IGAC, 2012); ed and competitiveness has declined. Meanwhile, iv. Abundant water resources that can be exploit- production has surged for some non-traditional ed for energy generation, agriculture, and a export crops, including palm oil, flowers, and sug- wide range of industrial uses; ar cane. v. Extractive resources (minerals and energy) that could become an important source of income for rural populations; vi. Rich biological diversity, providing many op- Production of Principal Food FIGURE 4-1:  portunities to generate wealth through biodi- Crops in Colombia, 1990–2012 versity and environmental services; and vii. Attractive landscapes that could be the basis 180 for sustainable tourism as a source of income 160 Production Index (1990–92 = 100) generation for rural populations. 140 120 Despite its considerable potential, the rural econ- 100 omy has underperformed. Agriculture is the back- 80 bone of the rural economy in Colombia, yet over the past 20 years, value added in agriculture has 60 risen by less than the whole economy. For the de- 40 cade 1994–2004 agriculture had an average annu- 20 al GDP growth of 1.1 percent whereas the whole 0 1990 1995 2000 2005 2010 economy grew at a 2.2 percent rate. For the period 2004–2013 the rates were 2.0 and 4.7 percent, re- Beans Cassava Maize Potatoes Rice Wheat spectively.1 After years of lagging performance, the agricultural sector has lost relative size within the Source: FAOSTAT. Agriculture and Rural Development 77 78 PART TWO | CHAPTER 4 Livestock. Livestock production, especially the rais- just under 148,000 hectares in 2011–12. While the ing of cattle for meat and dairy, is an important trend is clearly positive, many underlying drivers activity, contributing 20 percent of agricultural of deforestation continue to pose major threats GDP and 1.6 percent of total GDP. The livestock to natural forests in specific areas—the so-called sub-sector generates approximately 950,000 jobs, “hotspots of deforestation.” These drivers include representing about 28 percent of all rural em- the expansion of the agriculture frontier, concealed ployment and 7 percent of all employment. Over planting of illegal crops, forced displacement of one-third (34 percent) of Colombia’s total land large numbers of people and unauthorized coloni- surface is used for cattle ranching, or about 38.8 zation, construction of roads and other infrastruc- million hectares. According to the Livestock Sector ture, illegal logging, uncontrolled forest fires, and Strategy 2019, among those 38.8 million hectares, illicit mining. According to IDEAM2 (2013), the only 19.3 million are suitable for this purpose. expansion of the agricultural frontier was respon- The remaining land is suitable for forestry (10 sible for 65 percent of Colombian deforestation million hectares) and agriculture (9 million hect- between 2005 and 2010. The lack of policies that ares). The underutilization of much of the land promote commercial reforestation and the lack of that is used for livestock production, combined regulations and implementation of environmental with unequal distribution of land, has been a ma- standards, in particular illegal mining, exacerbate jor source of conflict in many parts of the country. this problem. Ranching is for the most part carried out in areas Climate change poses a growing threat. Colombia with high levels of poverty, unequal income dis- is very vulnerable to climate change, with yield tribution, widespread illiteracy, recurrent violence, declines of 10 to 20 percent projected by 2020 and highly unequal patterns of land ownership. for maize, soybeans, and wheat, even after taking Except for a small percentage of very large farm- into account adaptation efforts involving adop- ers, most landholdings are small and face financial tion of new plant varieties and better land and and technological limitations. Working capital and crop management practices. Colombian farmers, natural resources are inefficiently used, leading to particularly smallholders, will need to cope with high production costs and marginal profitability. changing precipitation patterns, extreme weath- Average stocking rates on pastures are estimated at er conditions, and increased risks of droughts, less than one animal per hectare. This sub-sector is floods, pests, and fires. Studies by the Palmira one of the major drivers of deforestation in trop- (Valle del Cauca)-based International Center for ical areas, and also a main contributor to green- Tropical Agriculture (CIAT) paint a worrying house gas emissions and soil erosion scenario for coffee, with major contractions like- ly by 2050 in the areas most suitable for coffee Forestry. With more than 50 percent of its national (Figure 4-2). territory under natural forests, representing over 60 million hectares, Colombia is classified as heav- The impacts of climate change will not be exclu- ily forested. Native forests are the main source of sively negative. For example, irrigated rice appears wood and fiber used by local communities and na- likely to benefit from warmer, more humid con- tional industries. ditions: rice yields are projected to increase by 10 to 15 percent between 2020 and 2050, assuming Tapping the potential of forests to contribute to good crop, land, and water management. In addi- growth and poverty reduction will depend on pres- tion, a recent WBG Low Carbon Growth study for ervation of this important resource, which will Colombia revealed that forests, fruit trees, and oth- mean slowing and eventually stopping deforesta- er perennial crops could potentially provide good tion. The annual rate of deforestation decreased options for crop diversification and replacement from around 238,000 hectares from 2005–10 to for coffee in the medium to long term.3 and 2050, assuming good crop, land and water management. In addition, a recent WBG Low Carbon Gr study for Colombia revealed that forests, fruit trees and other perennial crops could potentially provide options for crop diversification and replacement for coffee in the medium to long term. 2 Agriculture and Rural Development 79 Figure FIGURE 4-2:4-2: Projected Projected Impacts Impacts of Change of Climate ClimateonChange on Coffee-growing Coffee-Growing Areas Areas in Cauca, in Colombia Colombia Source: CIAT 2011. Source: CIAT 2011 12. Alikely outcome of climate change will be more extreme weather-related events, especially dro and floods. Evidence of the impacts of such extreme events was apparent during 2010 –11, when Colo A likely outcome of climate change will be more genetics, inadequate use of purchased inputs, low experienced severe flooding that led to huge extreme weather-related events, especially droughtslosses and levels steep declines of mechanization and in yields poor irrigation, of several ac- crops, suc coffee: of the and 3.2 million floods. people Evidence of affected the impacts ex- La bythe of such Niña cess phenomenon to production in 2011, credit, and fragile 67%experienced natural and agricu treme events was 2012), losses (BID-CEPAL, apparent Developing during 2010–11, climate when smart resource human agriculture Nationalpractices bases. (CSA) must be a priorit institutions that overcoming the projected climate impacts and providing resilient productivity growth in the face of loo Colombia experienced severe flooding that led to provide services to rural producers have been huge losses and steep declines in yields of several climate change. slow to react to structural changes in global de- crops, such as coffee: of the 3.2 million people affect- mand for Colombia’s traditional exports—for II. ed by the of Causes phenomenon in 2011, 67in underperformance La Niña the rural percent economy example, the steep decrease in coffee prices fol- experienced agricultural losses (BID-CEPAL, 2012). lowing the collapse of the International Coffee 13. Agricultural Developing climate productivity smart agriculturegrowth has lagged, (CSA) practic- Agreement. reflecting years of public neglect and a lac incentives for farmers to invest in productivity-enhancing technology. A range of factors contribute t es must be a priority for overcoming the projected climate impacts and providing resilient productivity Low productivity in agriculture is reflected in a lack low productivity of agriculture and constrain agricultural growth:weak research and extension serv growth in the face of looming climate change. of competitiveness. Colombia’s large domestic mar- limited use of improved genetics and purchased ket inputs, low levels of mechanization and irrigation, provides substantial potential for agricultural access to production credit, and fragile natural and human resource bases. National institutions that pro Causes of Underperformance services to rural producers have bee n slow to react in growth to in the short to medium structural changes term. Once produc- tion has expanded to fully meet in global domestic demand for Colom demand, the Rural Economy additional growth will have to come via expansion into international markets. Access to these markets Agricultural productivity growth has lagged, is constrained, however, by the non-competitive- reflecting years of public neglect and a lack of ness of Colombia’s export crops. This arises from incentives for farmers to invest in productiv- a number of factors, including high production ity-enhancing technology. A range of factors costs, the difficulty of accessing global markets, a contribute to the low productivity of agriculture challenging international trade environment, and and constrain agricultural growth: weak research inconsistent macro policies (e.g., foreign exchange and extension services, limited use of improved policies that have alternately encouraged and then 80 PART TWO | CHAPTER 4 discriminated against exports), and a deficient agri- pressing crises. Policies have tended to change fre- cultural innovation system (World Bank 2003). quently with new political leadership (Figure 4-3). Many special initiatives and programs, while The underperformance that has characterized well-intentioned, have been financially unsustain- the rural economy can be traced to a number able. In some cases, this has been because agri- of causes related to government support to the cultural policies have provided trade protection sector. for products in which Colombia does not enjoy a comparative advantage in production. Policies that Weak and ineffective institutions. The public institutions protect sub-sectors deemed strategically important charged with delivering services to Colombia’s ru- have done a disservice by permitting inefficient ral sector are fragmented, understaffed, and in- producers to survive, while relieving them of pres- consistently managed. Responsibility for key func- sures to modernize production methods in ways tions is distributed across multiple ministries and that would allow them to lower production costs agencies, so it has been difficult to forge an overall and compete effectively in international markets.4 vision for agricultural development. Responsibility remains highly centralized, resulting in top down Ineffective public investments. Government spending approaches that frequently fail to address the pri- has been biased against the rural sector, resulting orities of rural communities. Local level capacity in wide gaps in the allocation of public goods be- has generally been weak. Finally, service delivery tween rural and urban areas and disadvantaging has been subject to elite capture, with a dispro- the rural population in terms of opportunities. In portionate share of public resources earmarked addition, the anti-rural bias in public goods and for agriculture going to a few small but politically services has undermined the incentives for private powerful producers of export crops. investment in farm and rural non-farm activities. Public investments that have been directed to the Inappropriate and inconsistent policies. Agricultural pol- sector very often have had little impact beyond the icies have differed over the years in terms of focus very short term, partly because they have tended and approach, but a common feature has been a to subsidize inputs and support prices received by recurring reliance on special initiatives, programs, private producers, rather than financing the pub- and projects to provide immediate solutions to lic goods and services needed to improve overall FIGURE 4-3: Evolution of Direct Support 100 90 80 70 60 Percentage 50 40 30 20 10 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Subsidies and compensation Incentives Source: Calculations for the National Human Development Index, 2011, based on DNP. Agriculture and Rural Development 81 FIGURE 4-4: Evolution of Agricultural Public Goods and Direct Support 2,000,000 1,800,000 Million pesos (constant 2012) 1,600,000 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Agricultural public goods Direct support Source: Presentación IGAC Sep./08: Declaración del 2009 como Año de los Suelos de Colombia. competitiveness. While in the early 1990s, pub- • Rural development is more than agricultural de- lic spending was oriented toward sectoral public velopment—it encompasses everything that con- goods (agricultural competitiveness, and public tributes to improved livelihoods of rural popula- goods for rural development), it shifted its empha- tions, including infrastructure, health, education, sis to direct support to producers (mainly market- technology, connectivity, and social protection; ing subsidies, and compensation for prices) in the • Rural development requires significant invest- first decade of the 2000s. For instance, this includ- ment in public goods and services, rather than ed: incentives for rice storage, compensations for direct subsidies to private goods and services; and the price of cotton, a program protecting income • In an age of budget constraints, rural devel- from coffee production, and special lines of cred- opment efforts should focus primarily on areas it, among others. It is worth noting that a trend where poverty is concentrated and where the toward a more equitable distribution of resourc- presence of the state is lacking. es, mainly targeted to sectorial public goods, has emerged in recent years. If the administration is to succeed in realizing the vision of a “new rurality,” it will have to overcome Rural Development three main challenges: • It must clearly articulate and successfully adopt Today, vast areas of rural Colombia suffer from a territorial approach to rural development; high levels of poverty and lagging development. • It must overhaul the institutions charged with Four decades of civil conflict have led to the dis- implementing rural development policies and placement of millions of households, the aban- programs and introduce a new process for pol- donment of hundreds of thousands of farms, the icy-making and territorial development plan- stagnation of a once-dynamic agro-industrial sec- ning; and tor, and the withering of many non-agricultural • It must tackle the land problem because the rural activities (e.g., tourism). unequal distribution and inefficient use of land poses the single largest obstacle to growth, so- The Government is pursuing a new vision of rural cial and political stability, and durable peace development grounded in three principles: in Colombia. 82 PART TWO | CHAPTER 4 Adopt a territorial approach to rural (3) presupposes some territorial identity and the pos- development sibility of building a long term collective territorial project through participatory planning; (4) advocates In Colombia, as in many other countries, efforts for conscious involvement and collaboration of dif- to promote rural development have often been less ferent local actors (public, private and civil society); effective than anticipated because they have con- (5) emphasizes territorial competitiveness (as op- sisted mainly of sector-specific interventions—in posed to mere product competitiveness) and making agriculture, education, health, transport, energy, maximum economic use of territorial assets; and water and sanitation, and so on. These sector-spe- (6) favors economic synergies through the clustering of cific interventions generally failed to take into ac- activities around development axes to achieve critical count the multi-faceted nature of rural livelihoods; economic masses.5 as a result, they have not been able to exploit im- portant synergies between complementary activi- The territorial approach to rural development has ties. Sector-specific interventions tend to be inef- its origins in the field of applied ecology—spe- ficient because they do not recognize interactions cifically, in the integrated landscape approaches among productive activities that can be critically that are increasingly being used to guide the man- important in generating and sustaining benefits at agement of productive landscapes. Landscape multiple levels—individual, household, commu- approaches tend to be characterized by five nity, and territory. Furthermore, by neglecting to common components that are also relevant for fully address trade-offs associated with competing territorial approaches to rural development: uses of resources, they fail to incorporate the per- (i) interventions must be designed to promote spectives of all stakeholders and do not address the multiple goals and objectives; (ii) ecological, so- many possible sources of conflict over resources. cial, and economic interactions must be man- aged to reduce negative trade-offs and opti- The traditional fragmentation of effort can be over- mize synergies; (iii) roles of local communities come only by adopting a broader, yet at the same must be acknowledged and taken into account; time more integrated, approach to rural develop- (iv) planning and management of interventions ment—a so-called territorial approach. The distinctive must be adaptive; i.e., they must evolve over time features of this strategy for rural development have as circumstances change and as experience accu- been aptly described by Caballero (2005): mulates; and (v) collaborative action and compre- hensive stakeholder engagement must be encour- The territorial approach to rural development results aged and institutionalized. from a combination of a view of the rural economy and a policy approach to rural development. Under While the logic of a territorial approach to rural this approach, the rural economy consists of: (1) a development is easy to grasp, the practical chal- widened concept of the rural space to include small lenge confronting policy makers is how to translate rural towns and links with intermediate cities; (2) a the underlying principles into actual investment multi-sectorial approach to the rural economy cover- plans. In a world of budget constraints, difficult ing different economic sectors including farm and non- questions invariably arise: Which sectors to tar- farm activities; and (3) a recognition of the existence get? What actors to involve? How much to invest? of different territories in the rural space with different What order to follow? Answers to these questions capacities, potentials and needs. are necessarily elusive, partly because the optimal combination and sequence of investments varies The policy approach correspondingly: (1) is fo- according to local circumstances. cused on the productive transformation of the rural economy; (2) recognizes the importance of institu- In the absence of a magic formula that can be tional change to bring about such transformation; used to guide decision-making, the way forward Agriculture and Rural Development 83 is usually to engage in some type of participatory existing institutions will be unable to meet. What planning exercise involving diagnosis of the prob- will be needed, therefore, is a restructuring of the lem, identification of key constraints, elaboration current institutional architecture to strengthen sec- of potential interventions, and estimation of costs torial coordination mechanisms, empower region- and benefits. This is followed by a prioritization al and local organizations, and promote public/ exercise that takes into account the various inter- private synergies. This new architecture must be ventions’ likely contributions—individually and in able to serve as an effective platform for building combination with others—to the achievement of consensus among public agencies, private firms, locally relevant objectives. and civil society organizations with respect to a territorial development strategy. The ongoing Misión Rural initiative represents the first step in such a planning exercise. The Misión The institutions that currently hold the mandate Rural team is in the process of generating data and for rural development in Colombia are poorly analyses that will feed into a broad-based priori- suited for implementation of an integrated terri- ty-setting exercise, the results of which can be used torial approach. During the past two decades, the to design a new rural development policy grounded institutions responsible for agriculture and rural in a territorial approach. The Misión Rural team is development activities have become steadily more undertaking a functional review of existing policies concentrated. What was once a diversified con- and service delivery bodies for rural development. figuration featuring multiple specialized institu- An additional effort to analyze and benchmark tions whose activities were loosely coordinated by key institutions’ strategy, operations, budgets, and MADR has evolved into a new structure in which human resources management functions will be responsibility for rural development activities has required to derive concrete recommendations for become consolidated within a smaller number of the new rural development strategy. Because it is institutions that have operated more or less inde- being carried out in a participatory manner, using pendently, sometimes without much coordination frequent consultations with a wide range of stake- and often without a lot of resources. Meanwhile, holders and partners, the Misión Rural initiative the rural investment budget has become more con- should serve as a platform for building consensus centrated within MADR. At the same time, invest- among public agencies, civil society organizations, ments in many of the sectors that are important and private actors in support of an inclusive inte- in the rural space (e.g., energy, mining, education, grated rural development strategy that is grounded health, social protection, environment, and infra- in a long-term vision of territorial development that structure) continue to be decided by ministries oth- transcends electoral cycles. er than MADR, including many for which the ru- ral development agenda is relatively unimportant. Overhaul rural institutions and rural policy-making processes The fragmentation and lack of coordination among rural institutions is made worse by a lack of strong Adoption of a territorial approach to rural devel- accountability to local authorities. In many regions, opment will have limited impact unless it is accom- the political and administrative decentralization panied by changes in the policies governing rural that resulted from the 1991 Constitution has not development and the institutions charged with im- had the intended effect of empowering local gov- plementing those policies. Broadening the concept erning bodies. As a result, they have not been able of the rural sector to include an expanded num- to fulfil the important role assigned to them in mak- ber stakeholders and a wider range of economic ing sure the goods and services provided by public activities (both agricultural and non-agricultural), agencies meet local needs. When key public agen- and recognizing the importance of location in de- cies approach spatial planning at different levels of velopment objectives, will generate demands that aggregation, the inevitable result is fragmentation 84 PART TWO | CHAPTER 4 of effort and dispersion of resources. Responsibility INCODER would in turn need support at the lo- in many public agencies remains highly central- cal level. Rural Development Agencies—similar to ized, resulting in top-down approaches that fre- the Local Action Groups established through the quently fail to address rural communities’ priorities. LEADER program7—could be created to imple- Capacity at local level has eroded steadily over time, ment territorial development plans at the local lev- and it is now generally very weak. el. The Local Action Groups would identify and execute local development strategies, including Effective implementation of a territorial ap- making decisions about the allocation of financial proach will require re-thinking the way services resources and managing them. Experience shows are delivered to rural areas. It will be necessary that successful Local Action Groups bring together to build a new institutional architecture compris- public and private partners and strike an equitable ing strong centralized policy-setting and financ- balance among the interests of the full range of ing agencies, decentralized coordination mecha- socio-economic groups present in the area. nisms, and strong local implementation capacity. If a territorial approach to rural development is More evidence-based policy-making should ac- to take hold in Colombia, it will require a rebal- company institutional reforms, with expanded ca- ancing of the relationship between the center and pacity to take into account the wide variance in cir- the periphery. cumstances at the local level. Policy and program design will have to be based on comprehensive The recent re-organization of MADR included cre- analyses of the strengths, weaknesses, opportuni- ation of the Vice Ministry of Rural Development,6 ties, and threats associated with the diverse terri- leaving MADR well-placed to assume the lead tories. Implementation will need to be based on role in the design and implementation of rural customized sets of interventions targeting locally development policies and strategies at the national relevant development challenges. Following prin- level. Key functions that MADR could undertake ciples of decentralized program management, the include: (i) data collection and analysis, (ii) strat- selection of interventions for each region would egy formulation, (iii) policy and program design, be decided by representative regional councils, (iv) implementation of selected policies and pro- formed from a number of key rural stakeholders, grams, (v) coordination of policies and programs and empowered communities will implement and implemented by others, and (vi) facilitation of the evaluate the impacts of rural development inter- relationship between the central ministries and de- ventions at the territorial level. centralized agencies and organizations. Tackle the land problem The Colombian Institute for Rural Development (INCODER) should focus on facilitating territorial Regardless of its other features, one thing is cer- development, leaving the land administration func- tain: to succeed, any new rural development strat- tion that it currently performs to a new institution. egy will have to begin by tackling the land prob- It has already been noted that effective rural devel- lem. Colombia’s land resources are under utilized opment requires coordinated interventions in multi- and inequitably distributed in ways that incur ple sectors—e.g., agriculture, transport, energy and significant costs for society through unrealized mining, education, health, telecommunications, and agricultural growth potential, environmental deg- social protection. Since MADR cannot take respon- radation, poverty, conflict, and social instability. sibility for all activities, INCODER could coordi- Several studies have used soil maps and current nate multi-sectorial investments at the regional level land cover and land use data to estimate what are and facilitate communication with other centralized referred to as “conflicts of land use” (IGAC, 2003, agencies and decentralized bodies operating at the Malagón 1998, Acción Social). The results show that sub-national level. 62.3 percent of Colombia’s territory presents a Agriculture and Rural Development 85 FIGURE 4-5: Current and Potential Land Use 80 70 60 50 Percentage 40 30 20 10 0 Potential land use Current land use Potential land use Current land use Potential land use Current land use Ca le grazing Forest Agriculture Source: Presentación IGAC Sep./08: Declaración del 2009 como Año de los Suelos de Colombia. conflict with its potential or biophysical best use held without property titles, and 44 percent of the (Figure 4-5). land in rural areas is not covered by the cadaster. The lack of titles has posed a major challenge for In addition to land misuse, land distribution remains the restitution process. highly unequal. Empirical studies8 of Colombia’s rural sector show that about 1 percent of the par- The informality of land tenure in rural areas is a cels cover more than half (53.8 percent) of the contributing factor to the inequality of land distri- available land; meanwhile, about 90 percent of the bution (high land Gini) and the on-going conflict. parcels share approximately one-fourth of the land. Improving land governance and securing land Furthermore, trends in land tenure indicate that rights for all people is necessary for both rural de- between 1984 and 1996 the largest landholdings velopment and peace consolidation in rural areas. expanded, medium-sized landholdings contracted, and small landholdings became further fragmented. What will it take to tackle the land problem in The Gini coefficient of land inequality is already Colombia? Three priorities stand out: among the highest in Latin America and continues to worsen (Figure 4-6). Formalize land tenure A further difficulty is the lack of complete land re- Colombia has a strong legal framework that recog- cords in rural areas. It is estimated that about two- nizes a broad spectrum of rights for both individu- thirds (68.7 percent) of the land in rural areas are als and groups. However, weaknesses persist in the norms, regulations, institutions, and procedures FIGURE 4-6: Land Distribution Inequality for land administration and management. This is a particular problem for informal or undocument- Land Gini Coe cient ed land rights—an estimated two-thirds of rural 1.0 0.87 0.81 land rights. Formalizing land tenure will require 0.65 Colombia to: 0.5 • Strengthen the institutional framework by estab- 0 lishing a clear leader for the land sector at the Colombia LAC World national level (including cadaster, registry, for- Source: Ana María Ibáñez (2012) and FAO (2012). malization, restitution), with both the political 86 PART TWO | CHAPTER 4 and financial capital to make reform happen functions. This could be done through the and coordinate the many institutions involved. articulation of the national territorial zoning • Begin systematic cadaster-registration pilot guidelines, territorial zoning commissions, and programs that include formalization of land territorial zoning plans. rights in several areas of the country. This will • Develop guidelines and criteria to improve ef- test institutional coordination, determine re- ficiency in land use in a consultative manner source needs, and identify any needed regula- (at both national and local levels), presenting tory or law changes.9 the strategy as support that the central level of- • Over the medium term, consider real institu- fers to municipalities to positively impact rural tional reform, particularly a merging of the productivity and employment. cadaster (from IGAC) and the land registry • Keep tax rates current and based on up-to- (from SNR) to create a real land administra- date values. Low tax rates can distort private tion agency. investment decisions and should be corrected to avoid a misallocation of limited economic Build a national land administration resources, such as the best quality of agricul- system tural lands. Measures can be put in place to ensure that the poor are not economically dis- Colombia desperately needs a national land ad- advantaged, but overall taxes need to reflect ministration system that can work for all citizens the value of the land. in all parts of the country, with services available at least at the municipal level. This will require in- Local governments have to be part of the solu- stitutional coordination and/or reform at the na- tion—both as users of the information and as sig- tional and local levels. Public awareness campaigns nificant players in land-use planning and property can then help build a culture among citizens of taxation. Local governments could also help sup- valuing property registration and keeping the sys- port the maintenance of the cadaster. Currently, tem up-do-date; however, this can only work if the there are limited incentives for mayors to make re- system is affordable and available to all. forms and improve tax collections, and municipal- ities have limited capacity to improve on their own, Correct land use inefficiencies through making support for local governments essential. policy reforms. Implementation modalities: immediate In urban areas, 70 to 80 percent of landowners next steps are identified for tax purposes; in rural areas, it is less than 50 percent due to the level of informality The Government has confirmed its strong com- and lack of up-to-date information in the cadas- mitment to introducing a new rural development ter. Eighty percent of municipal tax revenues are strategy that will set the rural economy firmly on a collected by only 28 of the 1,094 municipalities in path to sustained growth, poverty reduction, secu- Colombia. Colombia’s rural land base is also un- rity, and stability. dervalued and lightly taxed, which limits the scope of local governments to increase their revenues Realizing this ambitious set of objectives will be and acts as an incentive for speculation, land con- possible only if three major challenges can be centration, and misuse of rural land. Correcting overcome: (i) successfully adopting a territorial ap- land use inefficiencies will require Colombia to: proach to rural development; (ii) overhauling the institutions responsible for implementing rural de- • Develop better mechanisms (institutional, le- velopment policies and programs and introducing gal) to coordinate the national, departmen- a new policy-making process; and (iii) tackling the tal, regional, and local plans and planning land problem. Agriculture and Rural Development 87 Overcoming these three challenges will require to the local level, but many small and medi- changes in the way rural development policies are um-sized municipalities still do not have access designed and implemented. In this context, the fol- to sufficient resources to make significant in- lowing actions should be considered for immediate vestments in the public goods and services. The implementation: fiscal decentralization strategy needs to be ac- celerated, with the goal of channeling enough 1. Introduce participatory planning processes that recog- resources to local municipalities to allow them nize territorial differences. The National Planning to scale up their support to local rural devel- Department (DNP) could play an important opment activities. Local governments must be role in supporting the collective identification of encouraged and empowered to play a larger “rural spaces” or “territories” that would form role in land-use planning and the management the basis of a new territorial approach to rural of property taxation. Currently, mayors have development. These “rural spaces” or “terri- limited incentives to implement reforms and tories” would be based on clearly defined cri- improve tax collection, and municipalities have teria—e.g., agro-environmental homogeneity, limited capacity to manage the public resourc- economic dynamics, rural-urban interactions, es that are earmarked for rural development. or socio-cultural identity. DNP could work with sectorial ministries and territorial entities to Policy Recommendations ensure that sector investments respond in a co- ordinated way to territorial development plans. DNP could also support participatory planning Achieving broad-based and sustainable growth processes within the “rural spaces” or “territo- in the agricultural sector and promoting rural ries” by coordinating preparation of participa- development in Colombia will not be achieved tory territorial plans that would be supported quickly. Because the challenges facing the rural by national agencies but be implemented at the economy are numerous and varied, and because territorial level. the resources available to address the challenges 2. Strengthen the decentralized institutions that engage in are limited, the incoming Government will not be rural development. At the territorial level, capac- able to tackle all problems simultaneously. Even ity and participation will need to ensure that recognizing that transforming the rural economy all rural stakeholders are able to work together will be enormously challenging, policy makers will effectively in formulating territorial develop- have to begin somewhere. In this context, three ment plans, participating in their implemen- sets of actions can be identified with considerable tation (through rural development agencies), potential to help set the rural economy on the and carrying out supervisory activities. Under path to sustainable growth in the long term. the Pacto Nacional Agrario, the Government is already investing significant resources in an ef- Restoring rural livelihoods fort to revive the Departmental and Municipal Rural Development Councils, which could po- As peace and stability return to rural areas, the tentially play an important role in supporting immediate priority will be providing rural house- territorial development planning by serving as holds with the means to engage in productive ac- spaces for effective interaction among diverse tivities and resume their livelihoods. The need will groups of rural stakeholders and the building be most urgent in areas that have been affected by of social consensus around territorial develop- civil conflict, but other areas (i.e, the poorest and ment strategies. most affected by disasters) will require assistance 3. Make available increased funding to support multi-sec- as well. This will mean ensuring that households torial activities. Colombia’s fiscal decentralization have secure access to land, to the productive in- strategy has increased the flow of resources puts needed to resume agricultural activities, to the 88 PART TWO | CHAPTER 4 information and knowledge needed to use those fertilizer, agricultural implements, breeding stock, inputs effectively, to the financial resources needed and veterinary supplies—to households that lack to pay for them, and to the infrastructure needed the means to purchase these supplies. The goal to deliver surplus production to the market. should not be to set up permanent programs that will distribute inputs on a continuing basis, but Efforts are already under way to achieve these ob- rather to provide a one-off injection of resources jectives. Under the Victims and Restitution Law of that will allow disadvantaged households to get 2011, the Government is restoring land to people back on their feet. who were displaced by conflict, and it is providing reparations to families and communities to enable Global experience in post-conflict situations sug- them to resume their livelihoods. However these gests that distribution of physical inputs will have initiatives are just underway and significant addi- to be accompanied by technical assistance that en- tional resources will be needed to meet the nation’s sures recipients make effective use of the resources. needs. Needed interventions include: To the extent possible, these efforts should be ori- ented to integrate farmers into commercial value Securing access to land. Millions of households lack chains. MADR, CIAT, and the World Bank are secure title to land used for agricultural activities currently evaluating the potential of the approach and remain reluctant to make investments need- of the Productive Alliance project, which com- ed to improve the land’s long-term productivity. bines farmer organization with access to finance, Improvements in the framework governing ten- markets, and technology in disadvantaged and ure, access, and use of land are needed, first to post-conflict areas. Preliminary outcomes suggest clarify access and use rights for those who are re- that the model may be well-suited for combining turning to lands from which they were displaced. livelihood restoration and rebuilding productive Over the longer term, ensuring greater security of capacity. tenure will be important not only for Colombians but also for the growing numbers of foreign in- Exploiting quick wins in small-scale rural infrastructure. vestors who are expressing interest in commercial Following decades of underinvestment, infra- agriculture enterprises in Colombia. structure deficiencies remain a major constraint in many rural areas, particularly infrastructure Land administration reform will require spe- related to irrigation, processing and storage of cial attention to the needs of minority groups. crops, and road transport. The widespread per- Indigenous peoples (3.3 percent of the popula- ception is that attacking infrastructure constraints tion) and Afro-descendant communities (10.5 per- necessarily requires massive and sustained public cent) have been disproportionally victimized by investment; however, plentiful evidence indicates land taking throughout the conflict period (DANE, that relatively modest investments in small-scale 2005). The 1991 Constitution clearly recognizes infrastructure can have rapid and significant im- the special territorial rights of indigenous peoples, pacts on production. An urgent priority for the and Afro-descendants’ land rights are included in new Government will be stimulating investment Law 70 of 1993. in affordable, small-scale rural infrastructure, in- cluding irrigation technologies (both gravity and Rebuilding productive capacity. People living in rural pump-driven systems), community-level process- areas, especially places heavily affected by con- ing and storage facilities, and physical markets. flict, and displaced populations returning to these areas will require immediate assistance to resume Getting agriculture going their livelihoods. During a transitional period, the Government will be called upon to distribute A second priority for the Government must be productive inputs—seed and planting materials, establishing the conditions for getting agriculture Agriculture and Rural Development 89 going quickly. Immediate measures can serve as such critical aspects as credit, sector profitability, a down payment on the more far-reaching inter- exchange rate volatility, producer price stabili- ventions that will be needed over the longer term zation schemes, coffee institutions, and research. to bring about structural changes and unleash the The studies’ results and recommendations from enormous untapped potential of agriculture as a the Coffee Commission are expected to provide driver of broad-based growth and poverty reduc- key insights on policy options, including structural tion. Needed interventions include: changes needed to ensure the sector’s long-term competitiveness. This analytical exercise could Aligning policies and programs. Reversing years of pol- also be carried out for other crops showing com- icies that protected economically strategic or polit- petitive advantage. ically influential sectors, the Government in recent years has signaled its commitment to building a Tapping the potential of livestock. Sustainable devel- competitive, export-oriented agricultural sector by opment of the rural economy will not be possible entering into more than 20 free-trade agreements. without the integration of livestock production Adjusting to these agreements will require effort. into rural livelihood strategies. Because many live- The Government will have to work to dismantle stock keepers are poor, productivity gains in the protectionist measures, choke off the flow of sub- sector are likely to contribute to both growth and sidies going to inefficient producers, and reorient poverty reduction. Improving the productivity of public investment toward the provision of public livestock systems would allow domestic consump- goods and services (e.g., infrastructure, basic re- tion requirements to be met with a reduced land search, provision of market information) that will area, freeing up unproductive pasture land for oth- support tomorrow’s more competitive commercial er uses. Silvo-pastoral systems (SPS) that are man- agriculture. aged to take advantage of productive synergies between improved pastures, carefully selected tree Providing market access. Arguably the most criti- species, and livestock offer particular promise as an cal constraint to agricultural development in alternative livestock model. Through the alliance Colombia has been poor market access, especial- led by the Federación Nacional de Ganaderos (FEDE- ly outside the coffee zones and some other privi- GAN) and with financial support from the Global leged areas, such as the Sabana of Bogotá and the Environment Fund (GEF) and the United King- Valle de Cauca. Improving market access requires dom Department of Energy and Climate Change infrastructure investments (e.g., rural roads, stor- (UK-DECC), the Government has launched pilot age capacity, processing facilities), but it also en- programs designed to promote adoption of SPS tails market information systems, rural credit pro- on a large-scale. The most promising approach grams, and value chain integration mechanisms. consists of a mix of financial incentives (such as Experience in Colombia and elsewhere shows payment for environmental services, or PES), with that when market access is improved, producers technical assistance to farmers. Lessons learned are quickly able to absorb improved technologies from the on-going project are expected to help in and lift production systems to higher levels (Perry designing future PES schemes. 2012).10 Improved market access not only increases agricultural opportunities but more generally con- Taking advantage of forest systems. Sustainable devel- tributes to a more livable countryside. opment of Colombia’s rural economy will also re- quire attention to forests and forest systems. At a Seizing the opportunity of systems and products that minimum, it will be important to preserve the nat- are potentially competitive. In February 2013, the ural capital that is currently embodied in natural Government established the Coffee Commission, forests. The country needs to pursue the progress with the responsibility of developing a new strategy made on the Reduced Emissions from Deforesta- for the sector. It called for a set of studies covering tion and Forest Degradation (REDD+) agenda to 90 PART TWO | CHAPTER 4 define development trajectories that will not come alliances as vehicles for promoting the introduction at the expense of natural forests. The Wealth Ac- and dissemination of innovations (Perfetti 2009).11 counting and Valuation of Ecosystem Services The Productive Alliances Program provides a good (WAVES) initiative, which develops tools to more example of how commercial partnerships between accurately measure the full range of environmen- producers and agribusiness firms can stimulate in- tal services produced by natural resources, could novation, raise productivity, and improve competi- help better determine the “true value” of natural tiveness in selected value chains. forests—information that would contribute to for- est-policy decision making. Opportunities exist as well to strengthen extension service delivery systems already being run by estab- Preservation of natural forests can complement lished industry organizations. For example, efforts development of commercial forestry systems that are under way to strengthen the role of the munic- are technically efficient, economically profitable, ipalities in providing technical assistance. They are socially inclusive, and environmentally friendly. required to prepare agricultural extension plans, An important first step in developing a national which are required to offer free technical assistance commercial forestry development strategy would to small- and medium-scale producers, either by be to develop a model that would allow: (i) identifi- developing capacity or by contracting with private cation of the most promising areas for commercial businesses or NGOs. reforestation, (ii) identification of the most prom- ising value chains, based on current and projected Colombia has started to put in place more decen- future demand for tree products, (iii) assessment tralized systems for technology generation and of the infrastructure and logistical systems need- application. The Proyecto Transición de la Agricultura, ed to deliver tree products to markets, and (iv) as- for example, managed a substantial competi- sessment of institutional frameworks that could be tive grant with considerable success. Support to put in place to ensure equitable and sustainable CORPOICA, the national agricultural research management of natural forests and the commer- organization, has also been strengthened, but the cial forestry sector. The World Bank Group is cur- challenge now is to stabilize support for at least 10 rently assisting the Government with the develop- to 20 years. New initiatives for technical assistance ment of a series of analytical papers on promoting are in the pilot stage. It is time that Colombia con- commercial reforestation in Colombia through a solidates the most promising initiatives and ensures PROFOR grant. long-term funding for them. Reforming agricultural innovation systems. Technology- Managing production risk. As agriculture becomes driven increases in agricultural productivity will increasingly commercial, it becomes more im- be needed to get Colombia’s agriculture going. For portant to ensure that producers, consumers, and this to happen, technology generation and trans- investors are adequately protected from risk. Risk fer systems will have to be revitalized. While some management takes on added significance because new technology can be generated locally, much the agricultural sector of Colombia is particularly can also be imported and adapted to local condi- vulnerable to natural hazards. In recent years, the tions. Efforts to develop a national innovation sys- lack of a comprehensive ex ante strategy to man- tem focused on generating new technologies are age the agricultural sector’s fiscal risks has result- just a start; Colombia will also need to encourage ed in higher-than-anticipated fiscal outlays as the the emergence of small, local innovation systems Government provided emergency assistance to focused on technical assistance and the applica- uninsured farmers. In an effort to control unan- tion of knowledge already available. This suggests ticipated fiscal outlays, the Government needs to emphasis should be placed on encouraging pub- look at ways to improve the institutional frame- lic/private/NGO partnerships and commercial work to manage agricultural risks. MADR has Agriculture and Rural Development 91 recently taken steps to create an Agricultural Risk recently launched Misión Rural13 are trying to lay Management and Financing Directorate. These the groundwork for this strategy. initiatives need to be continued and strength- ened, with the goal of identifying risk manage- While the legal framework for territorial planning ment instruments that are tailored to the needs of exists in Colombia, implementation presents a Colombia’s evolving rural economy. number of challenges. Law 388/97 requires local governments to establish territorial plans, or Planes Promoting climate-smart agriculture. Climate change is de Ordenamiento Territorial (POTs), which among oth- already having significant impacts on Colombia’s er things set out technical guidelines with respect agricultural sector, as witnessed by major flooding to land use and territorial development. Purely in experienced during the 2012–13 crop season. These administrative terms, implementation of POTs impacts will become more significant in the future. has been a limited success: only 65 percent of Analyses by CIAT researchers indicate that signifi- Colombia’s 1,097 municipios have completed the cant temperature rises, more erratic precipitation, process and ratified the POT. In addition, POTs and higher pest and disease prevalence are likely by for rural areas have rarely been used as a tool to 2050. By 2050, the expected average increase in an- address directly the challenges of municipalities nual mean temperature is estimated at 2.5 degrees and rural populations. Many lack technical rigor, C, and precipitation is likely to rise by 2.5 percent. and even those that are technically sound tend to Without accelerated adaptation, climate change is be of limited use in the absence of serious par- likely to translate to: (i) soil degradation and organic ticipatory analysis of the issues. Since land-use matter losses in Andean hillsides; (ii) flooding along planning is a local function, a great deal depends the Caribbean and Pacific coasts; (iii) niche losses on the willingness and capabilities of local may- for coffee, fruit, cocoa, and bananas; (iv) changes in ors and staff, which vary greatly across the coun- the prevalence of pests and diseases; and (v) melting try. While planning laws call for citizen participa- of glaciers and water stress. To address the exten- tion, it is not fully regulated nor well understood sive socioeconomic implications of these effects, the by local authorities; therefore, it is little practiced. Government must prioritize adaptation, investing Participation is generally used for the approval of in regionally-based assessments, research and devel- plans already formulated by technical staff, not opment, and technology transfers to and training to feed into the planning process and identify the for farmers. needs and priorities of the local population. Projections show that 80 percent of crops will likely Introducing a new approach to policy-making. If a territo- be impacted in the majority of their current areas of rial approach to rural development is to take hold cultivation by 2050, with particularly severe impacts in Colombia, it will require rebalancing the rela- on high-value perennial crops. Considerable work tionship between the center and the periphery. To has been done to identify specific threats, quantify ensure that public interventions effectively address likely impacts, and rank adaptation measures, but the key development and reconciliation challeng- this work needs to be more systematically integrated es facing rural areas, policy and program formulation into policy design and investment planning. will have to be based on a comprehensive, evi- dence-based analysis of the strengths, weaknesses, Supporting territorial development opportunities, and threats associated with these areas. The analytical approach being used for the Over the longer term, the health and well-being Misión Rural reflects this type of approach. Policy of the rural sector will depend on the ability of and program implementation would then be based on the Government to complement the sectorial ap- customized sets of interventions targeting locally proach with a territorial approach to rural de- relevant development challenges. Following prin- velopment. The Pacto Nacional Agrario12 and the ciples of decentralized program management, the 92 PART TWO | CHAPTER 4 selection of interventions for each region would is grounded in a long-term vision that transcends be decided by regional councils, formed from a the electoral cycle. number of key rural stakeholders. Although the primary focus will still be on the productive trans- The Road Ahead: Rebalancing formation of the rural economy, achieving this goal will require institutional changes that mean- Public and Private Roles ingfully empower communities to take control of participatory, bottom-up processes that allow them What needs to be done to reverse decades of under- to plan, implement, and evaluate the impacts of performance in the rural economy of Colombia development interventions at the local level. and unlock agriculture’s potential to contribute to broad-based, sustainable growth? The coun- Building a new institutional architecture. Effective im- try must restore the livelihoods of the many rural plementation of a territorial approach to devel- households that have seen their fortunes decline opment will require a complete rethinking of how and transform today’s subsistence-oriented agri- services are delivered to rural areas. Starting with a culture into a vibrant and dynamic commercial broad concept of the rural sector that encompass- agriculture. Achieving this transformation will es multiple sectors, a wide range of partners and not be easy. will not be easy. Agricultural activities stakeholders, and many different economic activi- are mainly carried out by private operators—the ties, it will be necessary to build a new institutional millions of individuals, cooperatives, associations, architecture consisting of centralized policy-set- and firms engaged in the production, processing, ting and financing agencies, decentralized imple- transport, storage, and distribution of raw com- mentation and coordination entities, local civil so- modities as well as transformed products. Public ciety organizations, and private firms. A functional spending can stimulate growth only indirectly. review of existing policy programming and deliv- Government policies can play a catalytic role by ery bodies could serve to analyze and benchmark providing public goods and services that boost the strategy, operational, budget, and human resource returns to private investment, but public interven- management functions of key institutions and de- tions must be appropriately targeted and correctly rive recommendations for the definition and deliv- timed to “crowd in” rather than “crowd out” pri- ery of a new institutional architecture. This new vate spending. In the final analysis, the success of architecture could serve as a platform for building the government’s efforts to get agriculture going consensus among public agencies, civil society or- and transform the rural economy will depend on ganizations, and private actors in support of an in- its ability to leverage the latent power of the pri- clusive, integrated rural development strategy that vate sector. Agriculture and Rural Development 93 General Specific development Actions challenge Short-term policy options Medium-term policy options 1. Restoring Land tenure security Continue restoring land to people Improve the legal and institutional rural affected by conflict and providing framework governing tenure, access, livelihoods reparations to families and and use of land. communities. Build a national land administration Pilot approaches for systematic system. registration and cadaster. Recapitalization of Distribute seed, fertilizer, farming Reform rural finance mechanisms, households implements, and technical assistance programs, etc., and restore rural to resettled populations. extension services to better serve the needs of rural poor. Infrastructure quick wins Selective road construction projects to connect surplus production areas to markets. Small-scale irrigation projects where returns are highest. 2. Realizing Crops Revitalize technology generation and Improve the institutional framework to the potential transfer systems. manage agricultural risks. of agriculture Encourage public/private partnerships and commercial alliances to promote introduction and dissemination of innovations. Livestock Pilot SPS adoption through a mix of Scale up PES/Technical Assistance financial incentives (such as payment schemes at the national level to for environmental services, or PES), “transform” the livestock sector in with technical assistance to farmers. Colombia. Forestry Pursue readiness to REDD+ and Reduce deforestation and forest WAVES agenda. degradation rates. Define models for the development of Stimulate investments in commercial commercial plantations. forestry systems that are technically efficient, economically profitable, socially inclusive, and environmentally friendly. 3. Adopting New institutional Undertake a functional review of Install a new institutional architecture a territorial architecture existing policies and service delivery to manage territorial development, approach bodies for rural development. including strengthening the local level. to rural Use the Misión Rural initiative as Increase funding to support multi- development the platform for building consensus sector activities at the territorial level among public, private and civil society (accelerate fiscal decentralization). organizations in support of inclusive Invest significantly in public goods and integrated rural development strategy. services, rather than direct subsidies to Support implementation of POTs with private goods and services. participatory local planning processes. Test multi-sector coordination initiatives for service delivery. Risk management Design an institutional framework to Implement the institutional framework manage agricultural risks. to manage agricultural risks. Climate smart Strengthen the National Climate Implement the National Climate rural development Adaptation Plan with clear objectives Adaptation Plan, monitor impacts, and that defines tasks and details continuously update. investment needs. 94 PART TWO | CHAPTER 4 Endnotes 1 Source, DANE. Data taken taken from Banco de la ate technologies, and services delivered as a coherent Republica web site: http://www.banrep.gov.co/pib- package with tailored policy measures. http://ec.eu- base-1994 and http://www.banrep.gov.co/es/pib. ropa.eu/agriculture/rur/leaderplus/index_en.htm. 2 Instituto de Hidrología, Meteorología y Estudios 8 “Unidades Agrícolas Familiares, tenencia y abando- Ambientales de Colombia. no forzado de tierras en Colombia,” Acción Social, 3 World Bank. 2014 (in press). Low Carbon Growth Proyecto Protección de Tierras y Patrimonio de la in Colombia. Población Desplazada, Diciembre 2010, Bogotá. 4 Perfetti, J.J.(coordinator); A. Balcázar; A. Hernán- 9 The World Bank has extensive international experi- dez; J. Leibovich with A. Becerra; S. Botello; S. ence with such processes and could provide techni- Cortés; L. Estrada; C.Rodríguez; H. Vásquez. 2103. cal assistance. Políticas para el desarrollo de la agricultura en Co- 10 Perry, S. 2012. El sistema de extensión agropecuaria lombia. Bogotá and Washington: SAC and Fedesar- en Colombia. Bogotá. rollo. 11 Perfetti, J.J. 2009. Crisis y pobreza rural en América 5 Caballero, J.M. 2005. The Territorial Approach to Latina: el caso de Colombia, Documento de trabajo Rural Development. World Bank. No. 43, Programa Dinámicas Territoriales Rurales, Departamento Administrativo Nacional de Es- RIMISP, Santiago, Chile. tadística (DANE). 2013. Cuentas Nacionales Trime- 12 The rainy season in 2011–12 generated a crisis in the strales. Producto Interno Bruto. Segundo Trimes- rural sector that exacerbated longstanding structur- tre-Septiembre 2013. al constraints to rural development and peace. Farm- 6 Decreto No. 1985, 2013. ers strongly protested. This situation was a “wake- 7 The Links between Actions for Rural Development up” call for the country, leading to the Pacto Agrario. (LEADER) initiative was established by the Europe- MADR has allocated important resources to consti- an Union to help rural actors consider the long-term tute and strengthen local participation in collecting potential of their regions. As the name suggests, the information in rural areas, defining local public pol- focus of the initiative is on promoting rural develop- icies. and identifying priority subpro­ jects for invest- ment at the local level. LEADER encourages rural ment in the short run. This information, together territories to explore new ways to become or to re- with the Agrarian Census (2014), will be critical in- main competitive, to make the most of their assets, puts for the Misión Rural in generating medium- and and to overcome the challenges they may face, such long-term policy guidelines for rural development in as an aging population, poor levels of service provi- Colombia, consistent with the principles of the pre- sion, or a lack of employment opportunities. In this liminary peace accords already reached in Havana. way, LEADER contributes to improving the quality 13 Launched by President Santos in early March 2014, of life in rural areas both for farm families and the with outcomes expected by December 2014, the wider rural population. It uses a holistic approach to Misión Rural is designed to generate the information address rural problems. It recognizes, for example, needed to orient rural development policy toward that being competitive in food production, having an growth, equality, and political and social stability in attractive environment, and creating job opportuni- Colombia. ties for the local population are mutually supportive BID-CEPAL. 2012. Valoración de daños y pérdidas. aspects of rural life, requiring specific skills, appropri- Ola invernal en Colombia 2010–2011. Structural Changes – Implications for Growth, Productivity, and Competitiveness 95 CHAPTER 5 Urban Sector 96 PART ONE | CHAPTER 5 Main Messages Colombia is at an advanced stage of urbanization and has a demonstrated capacity for innovative urban management. In the past, cities have contributed to economic growth and poverty reduction, and they can continue to do so. However, Colombia must overcome poor connectivity among cities and between cities and ports, lack of effective coordination mechanisms for urban agglomerations, unarticulated and duplicate plan- ning instruments, and lack of efficiency and innovation in how cities finance themselves. This note has two sets of Policy Recommendations: Colombia needs to address the challenges at two levels: (i) national/System of Cities level, and (ii) city/agglomeration level. Main recommendations at the national/System of Cities level include: (i) implement the CONPES on Urban Policy defining the System of Cities, instructing the National Statistics Department (DANE) to generate data at metropolitan, agglomeration, and regional levels and instructing the ministries to mainstream and apply the System of Cities approach within their sectorial policies; (ii) mainstream the System of Cities concept in the National Development Plan 2014–18; and (iii) promote an institutional reform within the Ministry of Housing (MHCT) to move from a housing-centered agenda toward a territorial approach to development. Main recommendations at the city/agglomeration level include: (i) define and implement incentives (co-financing, technical assistance, and guarantees) to promote strategic metropolitan projects; (ii) de- velop framework approaches for the use of alternative tools to finance urban investments, such as tradable development rights, land-value capture mechanisms, and the structuring of public/private partnerships for urban redevelopment and renovation. Background contributed to economic prosperity (Figure 5-1). Overall, Colombia’s economic growth has been Colombia is at an advanced stage of urbaniza- strongly driven by commodities, but the urban tion and has a demonstrated capacity for inno- economy, including manufacturing, financial ser- vative urban management. Today 75 percent of vices, retail, commerce and hospitality has con- Colombians live in cities. This share is expected to tributed more than 50 percent to GDP’s growth grow to 86 percent by 2050, which would represent rate in the past four decades.5 Moving forward, around 20 million new urban dwellers.1 Relative to strengthening the role of cities may contribute to its regional peers, Colombia stands out as having a mitigating the risks inherent to commodity inten- strong urban sector.2 Several Colombian metropol- sive economies.6 An efficient urban system will be itan areas rank among the world’s 50 most-densely necessary for the move from a commodity-driv- populated cities,3 and many have provided inter- en economic system to a stronger resource-based nationally recognized examples of successful ur- manufacturing structure and then to more knowl- ban initiatives. Examples include slum upgrading edge-intensive industries. It is important that cities programs to improve mobility and reduce social enable this transition through an improved con- and economic exclusion in Medellin, sustainable nective infrastructure, sound land management, urban transport programs in Bogota, and pro- and proactive policies that ensure urban livability. grams to foster competitive local urban economies in Bucaramanga. At the national level, the country Cities will also play a major role in continued pov- has developed well-recognized legal frameworks erty reduction and shared prosperity. Despite the and institutions to promote sound urban policies. urban areas’ lower poverty rates, the larger size of the urban population still makes the urban poor an In the past, cities have been engines of growth; important target for reducing overall poverty. As of moving forward, they will be important to sustain- 2013, urban areas housed more population in mod- ing Colombia’s achievements in economic growth. erate and extreme poverty (9.5 million) than rural Between 2002 and 2012, Colombia experienced areas (4.6 million). Thus, while the poverty rate is steady and strong economic growth as well as an 40 percent higher in rural areas compared to urban impressive decline in the prevalence of moderate, areas, the number of people affected by a 1 percent extreme, and multidimensional poverty.4 Decades reduction in the urban poverty rate is 68 percent of sustained urbanization gradually increased the higher than the same change in the rural poverty concentration of people and jobs, consolidating rate. Moreover, the dominance of the main cities in economies of scale and agglomeration that have terms of economic density and jobs creation (Map FIGURE 5-1: Distribution of the Bottom 40 Percent in Colombia, 2002–12 25 Millions of inhabitants 19,96m 20 18,17m 18,30m 17,28m 32% 16,07m 15 29% 13,99m 22% 23% 24% 26% 34% 10 35% 38% 32% 34% 7,09m 7,09m 41% 5 32% 36% 4,15m 42% 36% 32% 33% 45% 43% 49% 48% 33% 0 49% 2002 2008 2013 2002 2008 2013 2002 2008 2013 Extreme poor Poor Bo om 40% Rural Other urban areas Main urban areas (13 A.M) Source: World Bank staff calculations based on GEIH-MESEP (2002–2013). Urban Sector 97 decades5. Moving forward, strengthening the role of cities may contribute to mitigating the risks inherent to commodity intensive economies.6 An efficient urban system will be necessary for the move from a 98 PART TWO | CHAPTER 5 commodity-driven economic system to a stronger resource-based manufacturing structure and then to more knowledge-intensive industries. It is important that cities enable this transition through an improved connective infrastructure, sound land management, and proactive policies that ensure urban livability. 5-1) makes5-1: Figure the Distribution urban agglomerations 40of a source of the Bottom MAP Map5-1: 5-1:Distribution  and Distribution Concentration and of of Concentration opportunities for low income families. Percent in Colombia, 2002-12 These num- Jobs in Colombia Jobs in Colombia bers suggest that city-level policies and investments that facilitate (through planning and land avail- ability) and promote (through increased invest- ment) access to basic services—such as water, sani- tation, affordable housing, health, education, urban transport, and public and recreational spaces—will be essential for country-wide poverty reduction. Despite relatively lower levels of poverty, the main urban areas (13 metropolitan areas) show con- tinued divergence from middle-sized cities in key development indicators, contributing to regional disparities (Figure 5-1). The urban poverty rate of Source: World Bank staff calculations based on GEIH-MESEP (2002-2013) Source: World Bank staff calculations (2010) based on DANE Census 2005 Source: World Bank staff calculations (2010) based on DANE Census 2005. the Colombia’s middle-sized cities (42.2 percent) in is similar to the rural poverty rate (46.8 percent), or almost two times the urban poverty rate of 3. the 13will Cities largestalso play a major metropolitan role areas. in continued poverty reduction and shared prosperity. Despite Furthermore, two levels: (i) at the national urban system (also de- the urban areas ’ lower in the past 10 years, middle-sized cities’ povertyof the poverty rates, the largersize urban population still makes the urban poor an fined as the System of Cities), and (ii) at city (or important target rate for reducing has increased overall 5 percent, poverty. reaching As of 2013, urban areas housed more population in moderate 40 percent agglomeration) level. and extreme poverty (9.5 million) than of the national distribution in 2012. By contrast, rural areas (4.6 million). Thus, while the poverty rate is 40 percent higher in rural the areas compared percentage of the poor toinurban the 13 areas, largestthe number of people affected by a 1 percent reduction in the met- urban poverty rate is 68 percent higher ropolitan areas fell 6 percent over the decade. than the sameKnowledge change in the rural poverty rate. Moreover, the dominance of the main Addressing this and cities in terms the existing of economic urban-rural dis- density and jobs creation (Map 5-1) makes the urban agglomerations parities willa source be crucialof toopportunities achieving shared forprosper- low income The families. System of TheseCities numbers in Colombiasuggest that city-level and policies ity investments that facilitate and contributing to the post-conflict agenda. (through planning and land availability) and promote (through increased investment) access to basic services —suchColombia’s as water,System sanitation, of Cities affordable incorporates 151 mu- health, housing, education, urban transport, and public The main sources of persistent inequality in and recreational nicipalities and includes around 28 million inhabi- poverty spaces — will be essential for country-wide reduction.Colombia are the historical disparities between tants. A distinct feature of Colombian cities is their urban and rural areas. Despite the significant de- 4. Despite relatively lower levels of poverty, the tendency main urban to become agglomerations or functional areas (13 metropolitan areas) show cline in the incidence of poverty at the national metropolitan areas—where basic urban services continued divergence frommiddle-sized cities in key development indicators, contributing to regional level, moderate poverty remains high in rural ar- and activities are spread across several municipal- disparities (Figure 5-1). The urban poverty rate of the Colombia’smiddle-sized cities (42.2 percent)in is eas relative to urban ones. Over the past decade, ities. An “agglomeration” is defined as a group of similar to the rural poverty rate (46.8 percent), or almost two times the urban poverty rate of the 13 largest moreover, the gap between rural and urban areas municipalities that have a functional relationship. metropolitan areas. Furthermore, in the past 10 years,middle-sized cities’poverty rate has increased 5 has widened, with the ratio of moderate poverty In the case of Colombia, the Mision Ciudades8 stipu- percent, reaching 40 percent of the national distribution in 2012. By contrast, the percentage of the poor in between the two regions increasing from 1.35 to lates that a municipality has a “functional relation- the 13 largest metropolitan areas fell 6 percent over the decade. Addressing this and the existing urban-rural 1.64.7 In fact, the moderate poverty headcount ship” when 10 percent or more of its population disparities will be crucial to achieving shared prosperity and contributing to the post-conflict agenda. rate of rural areas in 2012 was still higher than commutes to an adjacent “core” municipality to 5. The that ofmainurban areas inof sources 2002.persistent Overall, the evidence in conduct inequality Colombia theirare main the historical daily activities.disparities 9 The analysis between urban and rural suggests the areas. reduction Despite of povertythe hassignificant decline been slightly in thethat suggests incidence Colombia ofhas poverty at the national 18 agglomerations that level, moderate poverty biased towardsremains urban high areas. in rural areas relative to urbanspan more ones. Over than 113 the past decade, municipalities moreover, (Map 5-2). In the gap between rural and urban areas has widened, withthe ratio of moderate addition, the methodology poverty between identified the two 38 nodal cit- regions 7 increasingThe fromkey 1.35 to 1.64 challenge for . the In fact, next the moderate poverty administration ies that headcount do not spanrate beyond of rural areas in the municipal 2012 was still adminis- higher than that will be of urban developing in 2002. areaspolicies urban thatOverall, harness thethe evidence suggests trative boundary but thethat have moreof reduction poverty than 100,000 has been benefitstowards slightly biased urban areas. of urbanization for economic growth and inhabitants, or perform core functions within a poverty reduction. This involves policy action at region. So the System of Cities includes 18 urban 2 Urban Sector 99 MAP 5-2: The 18 Urban Agglomerations MAP 5-3: The System of Cities Barranquilla Barranquilla Cartagena Cartagena Cúcuta Cúcuta Bucaramanga Bucaramanga Medellín Medellín Bogotá Bogotá Cali Cali AGLOMERACIONES URBANAS SISTEMA DE CIUDADES > 5.000.000 hab. 1.500.000 - 5.000.000 hab. Aglomeraciones Urbanas 500.000 - 1.500.000 hab. 100.000 - 500.000 hab. Ciudades Uninodales Ciudades Uninodales 0 50 100 200 KM 0 50 100 200 KM Source: DNP-Mision Ciudades, 2014. Source: DNP-Mision Ciudades, 2014. agglomerations and the 38 nodal cities for a total cities in the urban portfolio. Bogota and Medellin of 151 municipalities (Map 5-3). are more than 500 kilometers away from a port. In contrast, Shenzhen, Mumbai, and Bangkok are The Colombia Urbanization Review—Amplifying the port cities that connect their countries to world Gains from the Urban Transition10 identified import- markets. Better connecting Colombian cities will ant challenges of the System of Cities. Colombi- increase the economic efficiency of the urban sys- an cities need to better connect among themselves tem, allow cities to specialize, and result in cities and with external markets, which would in turn performing a specific function in the system. promote higher levels of specialization. Significant physical and economic distances separate Colom- The ongoing expansion of the national road infra- bian cities. To move goods from one city to an- structure12 will help to link cities more efficiently. other often requires transport over the Andes and Moving forward, cities need to integrate the new includes navigating altitude differences in excess infrastructure within their urban spaces and econo- of 2,000 meters, exacerbating economic distanc- mies. A critical aspect that may further impact the es and increasing logistical costs.11 To reach major efficiency of the overall urban system is how met- ports, goods coming from cities must, on average, ropolitan agglomerations plan their urban space be transported about three times further than in in a sustainable manner to better connect to future Brazil and Chile, and six times further than in Ar- highway corridors and take advantage of new road gentina, the Republic of Korea, and China. Un- networks to enhance productivity and competive- like many vibrant cities around the globe, Colom- ness while mitigating possible negative externalities. bian cities are at a distance from ports and other Specifically, metropolitan agglomerations will need 100 PART TWO | CHAPTER 5 to: (i) plan how to connect to future highway net- provision of social services. In many Colombian works; (ii) optimize the location as well as the cost of cities, water, sewerage, solid waste management, transport and logistics infrastructure, understand- electricity, and transport networks frequently span ing possible implications on land prices, land-use several administrative boundaries, yet there are changes, and urban sprawl; (iii) coordinate land-use limited examples of metropolitan planning and planning at metropolitan scale; and (iv) develop the coordination. Urban management is not a chal- tools to implement a coherent green logistics and lenge exclusively for municipal governments, so urban connectivity approach that mitigates adverse addressing the urban agenda will require much externalities, such as gentrification, sprawl, and closer collaboration across governments. To be ef- negative environmental and social impacts. fective, Colombia will need efficient, multi-tiered policy coordination mechanisms to support pol- In sum, the benefits from increased integration icy formulation and coordinated interventions and connectivity through transport and logistics between national and local governments. To de- infrastructure need to be supported by policies at liver services more effectively, metropolitan and re- the System of Cities, agglomeration, and region- gional agencies may be necessary where there is a al levels that would allow specialization and in- mismatch between municipal boundaries and the creased competitiveness. Yet, designing policies at urban economic footprint. the national level with this in mind is never easy, and the country first needs to develop information Land-use planning in agglomerations will be the systems at the System of Cities level that shape cornerstone of effective collaboration amongst mu- policy design and implementation. For example, nicipalities. Legal and administrative constraints understanding the trends in intra-city trade can make integrated land and territorial planning vir- prove essential to logistics investments and gen- tually impossible. Currently, disaster risk, environ- erating information on labor mobility, and they mental, water resource management, and rural and should help determine investments and planning urban planning are done separately, with little or no in service provision, notably housing, education, incentive to coordinate. Furthermore, the location and health. of jobs, houses, and basic services has important implications for urban residents and for municipal Challenges at the city level budgets, yet there are no incentives in place to en- sure investments are not location-neutral. Integrated At the city/agglomeration level, Colombian cities urban planning could facilitate service provision by face important challenges. First, they need to find generating economies of scale, which in turn could better ways to coordinate and collaborate across make additional resources available for cities by us- governments to strengthen urban planning and ing innovative land-value capture instruments. service delivery. Second, they need to take advan- tage of agglomeration economies to increase their Land-use planning for the housing sector deserves economic potential. Third, they need to diversi- particular attention. Because of Colombia’s large fy and enhance their sources of financing. These overall housing deficit of 3.8 million (2.2 million in challenges are discussed below. urban areas), the housing sector has been a priori- ty for the Government in recent years (Figure 5-2). Coordination across subnational governments In 2014 alone, the Government allocated around is fundamental to consolidating and harnessing US$1 billion to support public housing for the Colombia’s decentralization process. Colombia is poorer segments: in addition, it operated programs one of the most-highly decentralized countries in to support interest rate buy-downs for low- and Latin America. Over 1,000 municipal governments middle-income households and subsidized credit have identical responsibilities for land-use plan- guarantees. Most of the new housing stock is be- ning, basic infrastructure service delivery, and the ing built in the fringes of cities, where developers Urban Sector 101 Sectorial Budget, Ministry of FIGURE 5-2:  accompany this concentration are not. The World Housing, City and Territory Development Report 2009: Reshaping Economic Geography (Million US$), 2000–2014a recognized that development is far from being a process of smooth convergence. Instead, it is highly 2000 spatially differentiated. Typically, developing coun- 1800 tries have widening welfare gaps between leading 1600 1400 and lagging regions, partly due to agglomeration 1200 economies coupled with falling transport costs. In 1000 low-income Cambodia, for example, the gap be- 800 600 tween leading and lagging areas in consumption of 400 otherwise similar households is almost 90 percent. 200 In middle-income Argentina, the gap is 50 percent; 0 in Canada, it is just 20 percent.13 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Investment Operations Total budget 2014 The WDR 2009 recommends that governments should pursue integration to exploit the benefits Source: World Bank staff calculations using Central Bank and Ministry of Finance and Public Credit’s data.b of concentration while keeping spatial disparities a In 2010, the former Ministry of Environment, Housing and Territorial manageable. Policies should aim at improving Development (MAVDT) was divided in the Ministry of Housing, City and Territory (MVCT) and the Ministry of Environment and Sustainable market links between leading and lagging regions Development (MADS). through greater domestic factor mobility, especial- b Bitacora de Cifras Presupuestales 2000–2014 http://www.minhacienda.gov. co/HomeMinhacienda/presupuestogeneraldelanacion/cifrasHistoricas. ly of labor. However, other spatially targeted pol- icies may also be needed. The guiding principles for designing policies are higher densities, shorter are able to find affordable plots. Indeed, cities in distances, and lower divisions between cities/re- many cases have expanded their urbanized areas gions. Three of the world’s most prosperous places to accommodate these new developments. Urban display these characteristics: Tokyo, the largest city expansion that responds only to building targets in the world with 35 million people, is packed into merits careful evaluation because it can be counter- less than 4 percent of Japan’s land; in the United productive in terms of affordability (by increasing States, the world’s largest economy, about 35 mil- household expenditures on transport and munici- lion people change residences each year; and with- pal expenditures on investments and maintenance in Western Europe, today’s most connected conti- of infrastructure), urban and economic densities, nent, countries trade about 35 percent of GDP.14 and social exclusion. Land-use planning at the ag- glomeration level can help in understanding mo- In Colombia, higher population densities have not bility patterns and identifying underutilized areas been matched by high economic densities. For in- within city limits as alternatives to urban expansion stance, a comparison of actual building densities and, perhaps more important, to develop innova- with legally permitted densities in such cities as tive land value capture mechanisms that can be Bogota shows considerable underuse of available used for affordable inner-city housing production. land. In 2010, 63 percent of commercial space, 53 percent of residential space, and 54 percent of in- Municipal and regional integration is not only dustrial space in Bogota were underused. This is crucial to providing better services, planning, and probably a result of several factors, but informa- governance but also to fostering stronger, more re- tion asymmetry between market participants likely silient and inclusive economies. The concentration plays a large role. Low economic densities hamper of economic activity within regions is inevitable the ability of cities to enable economic interactions and usually desirable for economic growth, but the that help create markets and promote innovation large spatial disparities in welfare levels that often and investment. 102 PART TWO | CHAPTER 5 Cities need to diversify and enhance access to fi- Sources of Funding for Municipal FIGURE 5-3:  nance to expand service delivery. It is estimated Investment Expenditures that during the next 25 years a municipality of % less than 100,000 inhabitants will require approxi- 70 mately US$150 per capita annually to meet its in- 60.8 60 vestment needs in service delivery and infrastruc- ture. A city with population between 100,000 and 50 38.7 1 million will require US$145 and a city with over 40 34.5 1 million inhabitants US$107 per capita. Of these 30 29.2 23.2 20.6 22.9 resources, 75 percent would be needed to maintain 20 17.6 10.6 10.9 current and future infrastructure.15 This situation 10 8.0 9.2 8.2 5.3 is even more challenging because smaller munici- 0 0.2 palities currently rely mainly on national transfers <100mil 100mil–1mll > 1mll to fund their investments; their operating costs SGP Propios Credit Royalties Other used up almost all of their resources and they had Source: DNP-Mision Ciudades 2014. no capacity to acquire debt. Mid-sized and small cities must strengthen their fiscal fundamentals, while mid-sized and large cit- development funds and specialized financial inter- ies must continuously innovate with fiscal instru- mediaries, and expanding the existing land-based ments.16 Municipal tax collection has increased financing instruments. Colombia is a leader in with decentralization and administrative reforms land-based financing instruments in Latin America. across all categories of cities. However, mid-sized However, these innovative land-based financing in- and small cities have not kept pace with larger struments have had limited “penetration” beyond cities in their ability to increase local revenues. one single transaction per city. Mid-sized and large There is a positive correlation between real tax cities should aim to innovate with new instruments revenue and the accuracy of the cadastral sys- for infrastructure financing, adapting international tem. Large cities have more comprehensive land and regional experiences to the Colombian context. cadasters. Bogota, for example, has attained 100 Among these are: tradable development rights, land percent land registration. In comparison, only sales and leases, tax-increment financing, and the 43 percent of all rural areas in Colombia are in- structuring of public/private partnerships for ur- cluded in the system. In Colombia, only Bogota, ban redevelopment and renovation. Medellin, and Cali have independent cadaster offices; all others are handled at the national lev- el. A strong push is required to strengthen the Policy Recommendations fiscal fundamentals for mid-sized and small cit- ies. This might be done through increasing ca- Within Colombia’s decentralized environment, pacity-building in municipal fiscal management, what should the role of the national government strengthening local cadastral systems, and struc- be in the urban sector at both the System of Cities turing fiscal and performance incentives in the and the agglomeration levels? This note presents a national transfer system. list of policy recommendations that can be imple- mented in the short and medium term. Mid-sized and large cities must find new and innova- tive ways to finance urban infrastructure. Cities will At a System of Cities level: require broad and diversified strategies to finance themselves, including increasing access to munici- The country needs to develop and adopt a na- pal bonds and credit markets, accessing municipal tional urban policy that recognizes and defines Urban Sector 103 its System of Cities. To achieve this, the following action plans per agglomeration; (ii) implement a actions are recommended in the short term: (i) im- comprehensive strategy for land use and logistics plement the CONPES on Urban Policy defining around major cities at a metropolitan scale, in- the System of Cities, instructing the National cluding analysis on potential adverse externalities Statistics Department (DANE) to generate data at and possible implications on land markets, and metropolitan, agglomeration, and regional levels (iii) develop territorial strategies for the urban and instructing the ministries to mainstream and area and its hinterland. apply the System of Cities analysis within their sectorial policies; (ii) mainstream the System of At a city/agglomeration level: Cities concept in the National Development Plan 2014–18; and (iii) promote an institutional reform The Government needs to foster and enhance co- within the Ministry of Housing (MHCT) to move ordination at a regional and metropolitan scale, from a housing-centered agenda toward a territo- recognizing the need to adjust to the functional re- rial approach to development in coordination with lationship between small and medium-sized cities. other relevant sectors, including urban planning To achieve this, the following actions are recom- and economic activities, water and sanitation, mended in the short term: (i) define and promote waste management, urban transport, social facil- the most convenient system of coordination per ities, and urban amenities. agglomeration, taking into account the Colombian legal framework, which allows the creation of mul- Generating sufficient, systematic, and robust infor- tiple institutions, has not proven to be effective mation at the System of Cities level is a necessary in promoting metropolitan coordination in the first step. The Misión Ciudades developed valuable long-term; (ii) define and promote the most con- information on population dynamics, infrastruc- venient incentives in terms of technical assistance, ture investments needs, environmental planning, funding, financing and guarantees to foster met- and information and communication technolo- ropolitan projects; and (iii) formulate and support gies at the System of Cities level. Moving forward, the creation of Public Services Master Plans (wa- Colombia could benefit from a systematic infor- ter, sanitation, and solid waste management) per mation and statistical database at the agglomer- agglomeration. ation level to better understand the dynamics of the System of Cities as well as helping determine Colombia needs to foster efficiency and innova- policy and investment priorities. tiveness in how cities finance themselves, especial- ly for infrastructure solutions. To achieve this, the The country needs to deepen its economic con- following actions are recommended in the short nectivity between and within its agglomerations. term: (i) promote, support, and implement a na- As a complement to the road network expansion tionwide strategy to assess public management and the government’s efforts to consolidate the performance in small and medium-sized cities, main highway corridors, cities will need to plan including the revision of budget and fiscal man- ahead for potential bottlenecks at city and metro- agement, debt management, and capacity to fi- politan levels by implementing land-use plans that nance in national and international markets; and take advantage of the new infrastructure while (ii) develop framework approaches for the use of mitigating urban sprawl, reducing negative exter- alternative tools to finance urban investments, nalities, and enhancing quality of life for urban such as tradable development rights, land-value residents. The Government will need to: (i) pro- capture mechanisms, and the structuring of pub- mote within its National Competitive System lic/private partnerships for urban redevelopment the development of competitive and innovation and renovation. 104 PART TWO | CHAPTER 5 Policy Challenges at a System of Cities level Recommendations The country needs to develop (i) Implement the CONPES on Urban Policy to define the System of Cities, instructing the and adopt a national urban policy National Statistics Department (DANE) to generate data at metropolitan, agglomeration, that recognizes and defines its and regional levels and instructing the ministries to mainstream and apply the System of System of Cities Cities analysis within their sectorial policies; (ii) mainstream the System of Cities concept in the National Development Plan 2014–18; and (iii) promote an institutional reform within the Ministry of Housing (MHCT) to move from a housing-centered agenda toward a territorial approach to development in coordination with other relevant sectors, including urban planning and economic activities, water and sanitation, waste management, urban transport, social facilities, and urban amenities. The country needs to deepen its (i) Promote within its National Competitive System the development of competitive and economic connectivity between innovation action plans per agglomeration; (ii) implement a comprehensive strategy for and within its agglomerations land use and logistics around major cities at a metropolitan scale, including analysis of potential adverse externalities and possible implications on land markets; and (iii) develop territorial strategies for the urban area and its hinterland. Policy Challenges at a city/agglomeration level Recommendations The Government needs to foster (i) Define and promote the most convenient system of coordination per agglomeration, and enhance coordination at a taking into account the Colombian legal framework, allowing the creation of multiple regional and metropolitan scale institutions, has not proven effective in promoting metropolitan coordination in the long term; (ii) define and promote the most convenient incentives in terms of technical assistance, funding, financing, and guarantees to foster metropolitan infrastructure projects; (iii) formulate and support the creation of Public Services Master Plans (water, sanitation, and solid waste management) per agglomeration. The country needs to foster (i) Promote, support, and implement a nationwide strategy to assess public management efficiency and innovativeness in performance in small and medium-sized cities, including the revision of budget and fiscal how cities finance themselves management, debt management, and capacity to finance in national and international markets; and (ii) develop framework approaches for the use of alternative tools to finance urban investments, such as tradable development rights, land-value capture mechanisms, and the structuring of public/private partnerships for urban redevelopment and renovation. Endnotes 1 Misión Ciudades, 2014 5 Colombia Urbanization Review—Amplifying the Gains from 2 Colombia had only six cities with more than 100,000 the Urban Transition, 2012. inhabitants in 1951; today, it has 57 cities with pop- 6 While there is no evidence of a commodity curse in ulations between 100,000 and 1 million (including Colombia, the 2010 WB Report Natural Resources in three cities between 1 million and 4 million and one Latin America and the Caribbean beyond Booms and Busts? mega-city reaching 9 million residents). identifies several commodity-related risks that can 3 Bogota, Medellin, Cali, Barranquilla, and Bucara- adversely affect a country’s prospect for economic manga. and institutional development if they are not man- 4 The annualized growth rate of real GDP per-capi- aged properly. ta averaged 3.2 percent over the past decade, more 7 World Bank’s own calculation (2014). than 1 percentage point above the LAC average for 8 The WB supported the Mision del Sistema de Ciudades the same period. (2012–13). Under this initiative, a council of nation- Urban Sector 105 al and international experts has been convened to 11 It costs US$94 to move one ton from Bogotá to provide cross-sector policy guidance to ensure that Cartagena,compared to US$75 to ship one ton from cities are engines of sustainable and inclusive eco- Cartagena it to the United States.. Roda & Perdo- nomic growth in Colombia. The initiative is focused mo (2011) cited in the Colombian Urbanization Review on the efficiency of the entire urban system. A total (2012) of 17 studies were commissioned under the Mision 12 For further analysis on the infrastructure challeng- to better understand demographic trends, environ- es and road network development, see the Infrastruc- mental and urban planning synergies, investment ture Policy Note. needs, productivity, and System of Cities poverty 13 World Development Report 2009. and inequality trends. 14 Ibid. 9 Using the OECD standard, the threshold was estab- 15 Misión Ciudades, 2014. lished as 10 percent of labor force commuting to 16 For further analysis on the subnational fiscal chal- work to the urban core. lenges, see the National and Subnational Public Finances 10 World Bank, 2012. and Governance Policy Note. Bibliography Banco de la Republica. “Tasa de Cambio del Peso World Bank. (2010), “System of Cities: Harnessing Colombiano” http://banrep.gov.co/es/trm. Urbanization for Growth & Poverty Departamento Administrativo Nacional de Alleviation”. Sustainable Development Estadísticas (DANE). http://www.dane.gov.co. Network. Washington, DC. Departamento Nacional de Planeación (DNP). World Bank. (2013), “Planning, Connecting, and (2014) “Documento Técnico de Soporte: Financing Cities – Now: Priorities for City Misión del Sistema de Ciudades. Versión Leaders”. Washington, DC: World Bank. Preliminar” Dirección de Desarrollo Urbano. DOI: 10.1596/978–0-8213–9839–5. Bogotá, Colombia. World Bank. (2013), “Shifting Gears to Accelerate Ministerio de Hacienda y Crédito Público (MHCP). Shared Prosperity in Latin America and the “Bitácora de Cifras Presupuestales 2000–2014” Caribbean”, Poverty, Gender and Equity h t t p : / / w w w. m i n h a c i e n d a . g o v. c o / Unit. HomeMinhacienda/presupuestogeneral Samad, T., Lozano-Gracia, N. and Patman, delanacion/cifrasHistoricas. A. (eds.) (2012), “Colombia Urbanization OECD. (2006), “Competitive Cities in the Global Review: Amplifying the Gains from Economy”, OECD Territorial Reviews. ISBN the Urban Transition”, Directions in 92–64–02708–4. Development. Washington, DC: World Bank. World Bank. (2009), “World Development Report doi:10.1596/978–0-8213–9522–6. 2009: Reshaping Economic Geography”. UNHabitat. (2009), “Planning Sustainable Cities”, Washington, DC: World Bank. Global Report on Human Settlements 2009. 106 PART TWO | CHAPTER 5 Structural Changes – Implications for Growth, Productivity, and Competitiveness 107 CHAPTER 6 Disaster Risk Management in Colombia 108 PART ONE | CHAPTER 6 Main Messages The growth of disaster risk in Colombia can be attributed for the most part to issues relating to inade- quate territorial, sectorial, and private-sector management, rather than such external factors as climate change. According to the Analysis of Disaster Risk Management in Colombia,2 four factors contrib- ute to the escalating disaster risk. First, conceptual advances in the relationship between disaster risk management and sustainable development have not been incorporated into government policies or become integral parts of public administration, contributing to the growth of risky conditions. Sec- ond, risk is constantly accumulating in cities and rural areas due to a failure to implement and control municipal land-use planning policies and instruments and inadequate watershed management. Third, the inadequate application of disaster risk management policies in sectorial planning threatens the sustainability of investments, both in goods producing and service sectors, contributing to rising levels of exposure and vulnerability. Fourth, in the absence of a clear policy delimiting government responsi- bility for responding to disasters and the associated losses, citizens and the private sector are implicitly discouraged from assuming proactive roles in risk reduction and management, resulting in greater fiscal costs.1 To address these challenges, Colombia would benefit from enhancing governance for disaster risk management. The focus of these measures should be on consolidating government policies that strengthen local capacity for land-use planning, improve the coordination of government entities for watershed management, define responsibilities of sectorial stakeholders, and promote the partici- pation of public and private actors, contributing to reducing the government’s fiscal vulnerability to disasters. Supporting recommendations: Regulate the Disaster Risk Management Law 1523 (2012) with particular emphasis on the institutional framework, the associated funding windows for national and sub-national governments, and the Na- tional Disaster Risk Management Plan (Plan Nacional de Gestión del Riesgo de Desastres). Through these integrated actions, the effectiveness and efficiency of risk management investments will be strengthened through strategic planning, coordination among territorial levels, and monitoring and control. Structural Changes – Implications for Growth, Productivity, and Competitiveness 109 Adopt regulations for flood and landslide control and management, technical standards for risk as- sessment and mitigation, and a strategy for implementation. To achieve this objective, the various agents responsible for watershed management will be central to reducing flood and landslide risk through planning, investment, and monitoring and control. Through these strategies, the formulation and implementation of watershed management plans (Planes de Ordenacion y Manejo de Cuencas Hidrográficas) should be accelerated and incorporated as a determining instrument in municipal land use plans (POTs). Strengthen local capacity in territorial management to reduce the origin and accumulation of disaster risks. A national strategy to strengthen municipal risk management should take into account differenc- es in institutional, technical, and financial capacities among local governments to design and imple- ment their respective Municipal Disaster Risk Management Plans (Planes Municipales de Gestión del Riesgo). One of the main objectives of these plans will be to orient and prioritize interventions and investments in risk reduction. In addition, a specific focus should be placed on reducing the amount of housing in high-risk areas through incorporating hazard and risk assessment into land-use planning, implementing integrated neighborhood improvement plans, and designing resettlement programs for non-mitigable high-risk areas. Reduce the continued generation of disaster risk and associated impacts through policies and sectorial action plans. To achieve this, the design and implementation of sectorial policies for risk management in each ministry should include risk assessment and associated prevention and mitigation measures. The wider application of these sectorial policies and plans will also support the consideration of disas- ter risk in public projects and investments, facilitate effective and timely disaster response efforts, and support an important dialog on the shared responsibility for reducing risks between the Government and the private sector. Priority sectors include finance, housing, agriculture, water supply and sanita- tion, and transportation. 110 PART TWO | CHAPTER 6 Background In Colombia, 84.7 percent of the population and 86.6 percent of the assets are located in areas ex- posed to two or more natural hazards. The exposure Latin America is experiencing an upward trend includes both low-frequency/high-impact events, in the number of reported disasters, and 20 LAC such as earthquakes, tsunami (in the Pacific), volca- countries have more than 50 percent of their GDP nic eruptions, and hurricanes (in the Atlantic), and exposed to two or more natural hazards.3 Annual high-frequency but lower impact events, such as expected economic losses for the region amount to floods and landslides. Many researchers expect cli- more than US$5 billion (Figure 6-1), and most of mate change to exacerbate flooding and landslides these losses are associated with damage to public in large parts of the country. Colombia has Latin sector assets in health, education, water, transport, America’s highest rate of recurrent disasters trig- and infrastructure sectors or damage to private gered by natural events, with an average of more houses. In addition, significant losses are often than 600 reported disasters each year. Colombia’s concentrated in the agricultural sector, impacting main challenge in disaster risk management is re- production, markets, affecting government tax ducing some of the existing extremely high levels revenue and the trade balance. Nonetheless, rap- of vulnerability. id urbanization, with its growth of urban popu- lations and assets in combination with poorly or The country has been a pioneer in Latin America unplanned development, is the main driver of the in developing a comprehensive approach to di- costs associated with disasters in the region.4 For saster risk management, resulting in a decrease example, it is estimated that a major earthquake in fatalities. Specifically, advances in monitoring, near any of Colombia’s largest cities could gener- early warning systems, and the organization of ate losses of US$12.7 billion for Bogota, US$7.5 national and local entities for emergency response billion for Medellin, US$6.4 billion for Cali, have contributed to a reduction in the loss of life and US$2 billion for the coffee-growing region caused by natural phenomena. However, damage (Cardona, et al. 2004 a and b). to property, infrastructure, and livelihoods con- tinues to rise, largely because of an increase in Colombia has the 10th highest economic risk of vulnerability as a result of insufficiently planned two or more hazards in the world, according to the urban growth, inadequate land-use planning, and natural disaster hotspot study by the World Bank. limited application of building codes. The increase FIGURE 6-1: Disasters Events and Losses in Latin America, 1961–2011 Count of Disasters Damages from Disasters (US$ millions) 600 50,000 300 25,000 0 0 1961–1970 1971–1980 1981–1990 1991–2000 2001–2010 1961–1970 1971–1980 1981–1990 1991–20002001–2010 Source: EM-DAT. Source: EM-DAT. Note: Truncated for 2010 losses. Disaster Risk Management in Colombia 111 of economic losses in recent events demonstrates re-allocations; (iii) the National Fund (Emergency this, especially during La Niña 2010–11. Economic Response Account), the main source of resources losses attributed to this single event were as high for responding to the multiple low-intensity disas- as COP$2.1 trillion (US$1.1 billion) (0.4 percent ters that occur every year; (iv) the National Royalties GDP-2010) and the total damage was estimated Fund that has been used since 2007 to provide ad- at COP$11.2 trillion (US$6.1 billion). Among the ditional resources for disaster response and recon- most affected sectors were housing (44 percent), struction in regions and municipalities where it is infrastructure (38 percent), social services5 (11 per- permitted by law; (v) subsidy accounts or pools are cent), and the productive sectors (7 percent).6 utilized by selected ministries, and these may be accessed for additional financing in the event of a The development and approval of the National disaster (their financing is scarce); (vi) contingent Policy and a National System for DRM (Law 1523, loans (such as the Catastrophe Risk Development April 2012) established a new institutional frame- Policy Loan Deferred Drawdown Option (CAT- work for Disaster Risk Management. This has DDO) from the World Bank), which give the gov- been pursued by adopting a more comprehensive ernment immediate and timely access to liquidity approach to risk management, establishing new in national disasters; (vii) city-specific disaster pre- structures and functions for different subnational vention and management funds, which are in place levels, and ensuring a more explicit alignment with for selected major urban areas, are now mandato- the Constitution of 1991, oriented toward sustain- ry for all municipalities under Law 1523 and must able development. The National Policy on DRM include funding mechanisms for the understanding was based on a broader understanding of risk re- of risk, risk reduction and emergency response; and duction and its multiple dimensions, rather than (viii) the use of international loans, creation of new retaining a predominant focus on disaster response. taxes, and sale of government assets in the case This new approach facilitates the mainstreaming of extreme events. Finally, the MHCP and World of DRM into land-use and territorial planning Bank have been working closely to define a new while facilitating the application of principles of parametric instrument which, through its eventual sustainable development. Nonetheless, important application, would protect the national budget fol- steps remain to be addressed relating to the regu- lowing a catastrophic seismic event. lation of Law 1523, with an initial focus on those articles permitting the operationalization of fund- The use of the World Bank-financed CAT-DDO ing mechanisms for territorial levels and sectoral after the 2010–11 La Niña phenomenon showed disaster risk management initiative (understanding the advantages of contingent credits as sources of risk, risk reduction and emergency response). immediate liquidity. As part of the Government’s program on disaster risk management, the MHCP As part of the country’s approach to fiscal risk in 2008 signed its first contingent pre-negotiat- management, Colombia has made important ad- ed credit line in the amount of US$150 million, vances in financial protection instruments to cover which could be activated immediately upon dec- post-disaster expenditures associated with imme- laration of a national disaster. In December 2010, diate response, rehabilitation, and reconstruction. the Government made effective use of this instru- Depending on the magnitude and type of event, ment and requested its full disbursement to cope the Government has a variety of instruments and with the damage from the La Niña 2010–11 phe- sources of financing at its disposal to reduce its nomenon. In November 2012, the Government fiscal exposure. These include: (i) insuring govern- and the World Bank signed a second CAT-DDO ment property against the impacts of natural haz- in the amount of US$250 million. ards, mandatory since 1993, allows part of the fi- nancial risk in case of a disaster to be transferred Since 2012, the MHCP has made significant prog- to the insurance/reinsurance sector; (ii) budgetary ress in designing a comprehensive strategy for the 112 PART TWO | CHAPTER 6 financial management of disasters. The ministry (departments of Huila, Chocó, Valle del Cauca, identified three priority policy areas for assessing, re- Nariño, Risaralda, Cauca, and Quindío). At the ducing, and managing fiscal risk from natural disas- same time, 18 percent of the national territory ters: (i) identification and understanding of fiscal risk is located in areas that have high landslide risk due to natural disasters; (ii) financial management of (most frequently attributed to hydro-meteorolog- disaster risk, including the implementation of inno- ical phenomena), especially in the departments vative financial instruments; and (iii) catastrophe risk of Quindío, Risaralda, Caldas, Nariño, Cauca, insurance for public assets. As the strategy was being Arauca, Meta, Huila, Cundinamarca, Boyacá, developed, the Government implemented parallel Tolima, and Santander. Twelve percent of the na- activities in the three areas to improve its financial tional territory is located in areas with increased capacity to respond to emergencies and mitigate vulnerability to floods, distributed in 79 munic- long-term fiscal impacts from disasters. With World ipalities, mainly in the departments of Valle del Bank support, MHCP launched the “Colombia: Cauca, Atlántico, Cundinamarca, Magdalena, Policy Strategy for Public Financial Management Antioquia, Cordoba, Cesar, Cauca, and Meta. of Natural Disaster Risk” in December 2013. The Although Colombia has been working steadily document was presented in a national Forum jointly in the area of hazard assessment, it is necessary hosted by MHCP and UNGRD. to advance in vulnerability and risk analyses in order to define and implement associated risk re- Knowledge duction measures. Between 1970 and 2011, more than 28,000 events According to a World Bank analysis of disaster were registered that caused significant losses, near- risk management in Colombia,7 86 percent of the ly 60 percent of which were reported as of 1990 country’s population is exposed to medium and (Table 6-1). Data demonstrates an evident increase high seismic hazards, 31 percent to medium and in reported events, which can be attributed to the high landslide hazards, and 28 percent to poten- growth in exposed population and assets and the tial severe flooding (Figure 6-2). In geographical greater availability and quality of information terms, 36 percent of the national territory (960 sources. municipalities) is exposed to high seismic haz- ard, mostly in the Pacific and Andean regions FIGURE 6-2: Area and Population Exposed to Earthquakes, Landslides, and Floods in Colombia Flooding Flooding Landslides Landslides Earthquake Earthquake 100 80 60 40 20 0 20 40 60 80 100 100 80 60 40 20 0 20 40 60 80 100 Percentage Area (104 Km2) Percentage Population (million) High Medium Low Source: OSSO Corporation, 2011 from OSS O-EAFIT Corporation, 2011. Disaster Risk Management in Colombia 113 During this period, loss of life due to disasters di- increased (Figure 6-3). The Andean and Pacific re- minished, but the quantity of housing destroyed gion had the largest damages and losses associated TABLE 6-1: Events and Losses by Decades Principal source Population Housing Housing Partly of information Decade Events Fatalities Affected Destroyed Affected Hemerographic 1970–79 5,657 4,025 1,710,541 23,060 25,584 1980–89 5,123 28,316 4,727,790 29,317 15,873 Official 1990–99 6,465 3,957 9,204,412 88,956 191,828 2000–09 9,270 2,180 9,284,073 41,689 470,987 2010–11 2,187 519 2,823,885 7,403 358,378 Total 28,702 38,997 27,750,701 190,425 1,062,650 Source: OSSO Corporation, 2011 from OSSO-EAFIT Corporation, 2011. FIGURE 6-3: Loss of Life and Destroyed Housing Per 100,000 Inhabitants, 1970–2011 4 3 Rate value 2 1 0 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Year Lineal (Deaths/100,000 inhabitants) Linear (Deaths/100,000 inhabitants ) 100 80 Rate value 60 40 20 0 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Year Dwellings destroyed/100,000 inhabitants Linear (Dwellings destroyed /100,000 inhabitants) Source: OSSO Corporation, 2011 from OSSO-EAFIT Corporation, 2011. Note: The notable spike (1999) is the result of coffee-growing region earthquake and La Niña episode. The graph does not include losses produced by the Rl Nevado del Ruiz volcanic eruption of 1985. 114 PART TWO | CHAPTER 6 with destroyed housing, while the Caribbean and intermediate events in the housing are greater—in Pacific regions (most susceptible to floods) had the fact, 250 percent larger—than those produced by highest quantity of partly affected housing. In both large disasters. This calculation, even though conser- regions, damages and losses relative to population vative, demonstrates that the accumulation of events were concentrated in municipalities with less than considered minor or moderate requires a strong 100,000 inhabitants, which are typically character- policy response to reduce the vulnerability of the ized by high proportions of unsatisfied basic needs.8 population in the housing sector. These impacts are generally produced by environmental degradation In natural disasters, small and low-income munic- and the inappropriate use and occupation of land, ipalities do not necessarily have the greatest eco- mainly by the most fragile socioeconomic strata. nomic losses in absolute terms; however, they are socio economically the most vulnerable to natural Regional analysis reveals a positive correlation be- hazards and have least capacity to recover. Data tween natural disasters and declining welfare indi- on losses, normalized by the size of the municipal cators (Figure 6-5).9 A recent study on poverty and population, indicate that both destroyed houses natural disasters in Colombia showed that disasters and losses of life are focused in municipalities with increased the percentage of population that suffers populations of between 10,000 and 50,000 inhab- hardships related to “educational conditions in the itants (Figure 6-4). home” and “conditions of children and youth.” Moreover, disasters had a greater impact on the Between 1970 and 2010, accumulated losses in percentage of the population characterized by high the housing sector associated with all types of di- levels of truancy, low educational achievement, sasters (large, intermediate, and minor) amount- limited access to potable water, and poor quality of ed to US$7.1 billion, and average annual losses household materials used in flooring.10 In general, were US$177 million. The large disasters (OSSO it refers to those populations that are living in small Corporation, 2011) have resulted in losses of ap- municipalities with low technical and financial ca- proximately US$2 billion. Intermediate and minor pacities for advancing in disaster risk management. disasters have caused housing losses of approxi- mately US$5 billion. The numbers confirm that the Increasing climate variability, most common- effects of damages and losses caused by minor and ly associated with the cyclical occurrence of the Destroyed Housing and Loss of Life Per 100,000 Inhabitants, by Municipal FIGURE 6-4:  Population, 2001–10 10000 1000 Destroyed housing /100,000 Deaths/100,000 inhabitants 1000 100 inhabitants 100 10 10 1 1 0.1 0.1 1000 10000 100000 1000000 10000000 1000 10000 100000 1000000 10000000 Population size Population size Source: OSSO Corporation, 2011 from OSSO-EAFIT Corporation, 2011. Disaster Risk Management in Colombia 115 Correlation Between Poverty and FIGURE 6-5:  as La Niña 2008–09 had similar economic impacts Natural Disasters in LAC, 2009 in terms of the number of municipalities affected and the types of principal losses (agrarian, hous- 45 ing, transport). The tendency to register height- 40 GTM ened weather variation in specific areas of the headcount (%) Circa 2009 35 country can not lead to the conclusion that these Extreme poverty 30 NIC HND regional changes have directly increased disaster 25 risk in the country. SLV COL 20 DOM ECU PRY BOL 15 MEX BRA PER In addition to socio-economic inequality, environ- 10 PAN mental degradation exacerbates existing vulnera- ARG CRI 5 CHL bilities. Susceptibility to river flooding, flash floods, URY and landslides in Colombia has grown as a result 0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 of deforestation, soil erosion, and unplanned set- % of population a ected by droughts, oods tlements. The factors that contribute to increas- and extreme temperatures in 2009 ing vulnerability—such as the built environment’s physical characteristics, political/institutional ca- Source: Shifting Gears to Accelerate Shared Prosperity in Latin America and the Caribbean, The World Bank, 2013. pacity to implement risk-reduction programs, and economic instability—are also increasing in rural areas, where the natural characteristics of the land El Niño and La Niña phenomena, contribute to are often at odds with productive uses, such as live- growing losses in Colombia (Figure 6-6). Between stock and agriculture. This is particularly evident 1950 and 2011, El Niño impacted the country 15 in municipalities with high percentages of unsat- times and La Niña 13 times. While the nationwide isfied basic needs and limited development that flooding and landslides associated with La Niña contributed to high levels of environmental degra- 2010–11 produced one the largest economic losses dation. For example, Colombia’s agricultural sec- incurred as a result of rainfall, other episodes such tor is particularly vulnerable to natural hazards, an FIGURE 6-6: La Niña and El Niño Phenomena vs Annual Registered Losses 500 450 400 Number of losses registered 350 300 250 200 150 100 50 0 1970 1975 1980 1985 1990 1995 2000 2005 2010 Year La Niña Phenomena El Niño Phenomena Not declared La Niña Number of losses registered Source: Campos, A. et al., Analysis of Disaster Risk Management in Colombia: A Contribution to the Creation of Public Policies (Bogotá: The World Bank, GFDDR, 2012). 116 PART TWO | CHAPTER 6 exposure that could be reduced by climate-smart Total Investments in Disaster FIGURE 6-7:  agriculture and productive land-use planning. Risk Management at National, Pending challenges also include the analysis and Department, and Municipal quantification of agriculture risks, which could po- Levelsa tentially serve as an input to the National Disaster Financing Strategy. 1800000 1600000 Broadly speaking, the potential negative impacts 1400000 2010 COP$ million of climate change are recognized by scientists and 1200000 politicians; however, disaster risk in Colombia is 1000000 notably exacerbated by additional factors. The in- 800000 crease of disaster risk can be attributed to a com- bination of climate variability and the population’s 600000 heightened vulnerability as a result of economic, 400000 social, and environmental drivers.11 200000 0 In assessing the financial resources allocated to 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 the country’s defined goals relating to disaster risk National expenditure in DRM management, fundamental differences exist in the Departmental expenditure in DRM amount and items financed by different levels of Municipal expenditure in DRM government. While the national government has predominately focused its efforts on enhancing the Source: Campos, A. et al., Analysis of Disaster Risk Management in understanding of risk and emergency response/ Colombia: A Contribution to the Creation of Public Policies (Bogotá: The World Bank, GFDDR, 2012). recovery12 (Figure 6-7), local governments have a Blank data points for departmental and municipal expenditures refer to non-available data. invested modestly in selected measures that con- tribute to risk reduction, such as reforestation and watershed conservation.13 Municipal investments, however, reveal an inverse relationship to those impacts on all sectors, especially the agriculture made by the national government, demonstrating sector. As previously seen, severe flooding and the national government’s strong role in financing widespread landslides have affected a significant the recovery process. This is largely the result of percentage of the country, causing serious crop a lack of required counterpart funding from local damages to landlords possessing large tracts of governments, discouraging municipalities from as- land, devastating the livelihoods of small farm- suming responsibility in recovery efforts. ers, and damaging housing, transportation, and other sectors. Events that can produce the most critical future scenarios from the viewpoint of their financial impact and loss of life are a severe earthquake, Policy Recommendations tsunami (in the Pacific), a volcanic eruption, and a La Niña episode. Earthquakes, although Colombia would benefit from improved gover- they are rare, have a greater potential impact in nance structures relating to disaster risk manage- the country. A large-scale volcanic eruption, al- ment. These measures should focus on consolidat- though it may recur once in 500 years, would also ing government policies that strengthen national, be a crisis of national magnitude. Heavy cumu- regional and local capacity for land-use planning, lative rainfall caused by the La Niña phenomenon improve the coordination of government entities may produce the most immediate effects in terms for watershed management, define responsibil- of number of municipalities with significant ities of sectorial stakeholders, and promote the Disaster Risk Management in Colombia 117 participation of public and private actors, reducing improving the understanding disaster risk and its the Government’s fiscal vulnerability to disasters. links to environmental policy, development, and The six proposed policy recommendations are: adaptation to climate change. This policy suggests assigning responsibility for management of rivers Implement the National Disaster Risk Management Law. and water bodies to a single national entity and This recommendation focuses on the regulation establishes the roles and coordination mechanisms of Law 1523 and adoption of the National Disas- for the associated agencies. It aims to adopt regula- ter Risk Management Plan (according to Decree tions for flood and landslide control and manage- 1974/2013). It is also necessary to advance in the ment, and to develop a strategy for implementa- operationalizing funding mechanisms for local and tion, monitoring, and control. sectorial disaster risk management initiatives. Reduce disaster risk and associated impacts through policies Increase effectiveness and efficiency of disaster risk manage- and sectorial action plans. This recommendation can ment investments. Strengthen the mandatory incor- be achieved through appointing a unit responsible poration of disaster risk management criteria in for disaster risk management in each sector and public projects and the adoption of a strategy for the implementation of sectorial policies for risk monitoring responsibilities and investments. This management in each ministry. The strategy also recommendation also includes the development seeks to support the adoption and implementation of land-use planning instruments, with invest- of sectorial and inter-ministerial action plans in ment plans to advance effectively in disaster risk risk management. reduction. Delimit public and private responsibilities in risk management Strengthen subnational capacity in the design and application and strengthen the Government’s fiscal vulnerability reduction of planning instruments to reduce the causes and accumula- policies. The adoption of clear policy guidelines on tion of disaster risk. This recommendation promotes the level of protection that the national government the review of local and regional capacity for disas- and local authorities offer to those affected by disas- ter risk assessment and responds to the demand for ters is addressed in this final policy recommenda- streamlining of risk knowledge in land-use and de- tion. It suggests adjustment of regulations to clarify velopment planning. This would also support the the private sector’s responsibility and reduce fiscal formulation and implementation of a national pol- contingencies resulting from the needs expressed icy on at-risk settlements. by the affected population. It also promotes strate- gies to increase local and sectorial awareness of risk Systematically reduce flood and landslide risk to minimize management and improve capacity in risk manage- associated impacts. This recommendation centers on ment strategies. 118 PART TWO | CHAPTER 6 Enhance Governance In Disaster Risk Management Policy challenges Short-term policy recommendations Medium-term policy recommendations Implementation of 1. Regulate Law 1523 with an initial 1. Regulate Law 1523 with a focus on those the Disaster Risk focus on those articles related to articles related to operationalizing funding Management Law operationalizing funding mechanisms for mechanisms for sectorial disaster risk (1523). local disaster risk management initiatives. management initiatives. 2. Prioritize the adoption of the National 2. Fulfill defined objectives and targets of the Disaster Risk Management Plan. National Disaster Risk Management Plan. Increase effectiveness 3. Strengthen the mandatory incorporation 3. Adopt a strategy to strengthen planning, and efficiency of criteria for disaster risk management coordination, monitoring, and control for of disaster risk in the formulation of sectoral investment investments in risk management at regional and management projects through the National Bank for local levels of government. investments. Public Project Investment. 4. Develop planning instruments relating to disaster risk management, watershed management, and local land use with investment plans. Strengthen subnational 4. Design a national strategy to strengthen 5. Implement a national strategy to strengthen the capacity in the design the technical and financial capacity technical and financial capacity of regional and and application of of regional and local governments to local governments in disaster risk management, planning instruments incorporate disaster risk management which seeks mechanisms to promote to reduce the causes for the purposes of land use and participation of the private sector. and accumulation of development planning. 6. Formulate and implement a national strategy disaster risk. for settlements in high-risk areas that sets guidelines for land zoning, defines mitigation criteria, and lays out resettlement programs when required. Systematically reduce 5. Assign responsibility for management 7. Within Watershed Management Plans, regulate flood and landslide risk of rivers and water bodies to a the inclusion of risk assessment and mitigation to minimize associated single national entity to improve the as part of each Master Plan for Flood and impacts. understanding of risk management and Landslide Control. intra-governmental coordination for 8. Formulate and incorporate Watershed decision making. Management Plans as a determining instrument in municipal land-use management planning. Reduce disaster risk 6. Assign a unit responsible for disaster risk 9. Implement sectorial policies through specific and associated impacts. management in each ministry. action plans for risk management in each 7. Design sectorial policies for risk ministry. management in each Ministry. 10. Design and adopt inter-ministerial risk management action plans. Delimit public and 8. Initiate implementation of the policy 11. Design financial protection strategies for private responsibilities strategy for public financial management priority sectors and subnational governments in risk management of natural disaster risk. to protect the country’s financial balance on a and strengthen the long-term basis. Government’s fiscal 12. Regulate the procedures and mechanisms vulnerability reduction under which private sector agents participate policies. in different phases of disaster risk management. 13. Promote and incentivize municipal and sectorial strategies to increase general awareness regarding disaster risk management at the household level. 14. Revise and adjust regulations to clarify public and private responsibilities relating to compensation for damages arising from disasters. Disaster Risk Management in Colombia 119 Endnotes 1 Analysis of Disaster Risk Management in Colom- physical makeup of housing and its resilience, and bia: A Contribution to the Creation of Public Poli- the ability to recover in relation to the economic cies. Bogota, Colombia: The World Bank: GFDRR, characteristics of the homes. 2012. 9 The World Bank, 2013. Shifting gears to accelerate 2 Ibid, p. 5 shared prosperity in Latin American and the Caribbean. 3 Dilley, M., R. Chen, U. Deichmann, A. Lerner-Lam, 10 Sanchez Fabio and Calderon Silvia. Pobreza y De- M. Arnold, J. Agwe, P. Buys, O. Kjestad, B. Lyon, G. sastres naturales. Proyecto “Fortalecimiento de la Yetman, Natural Disaster Hotspots – A Global Risk Anal- Gobernabilidad para la Administración del Riesgo ysis (Washington D.C.: World Bank, 2005), p. 91. Social en Colombia,” 2012. 4 The World Bank, 2013. Guarding against disaster. 11 Marulanda, M., Cardona, O.D., Barbat, A. 2008. LCRVP Briefing Note. The Economic and Social Effects of Small Disas- 5 CEPAL, BID (2012). “Valoración de daños y pérdi- ters Revision of the Local Disaster Index and the das – Ola invernal en Colombia 2010–2011”, p. 61. Case of Study of Colombia. Megacities Resilience 6 Includes the following subsectors: education, health, and Social Vulnerability. United Nations University, family welfare, cultural heritage, sporting facilities, Munich Re Foundations. security and defense, and justice. 12 National investments in emergency response have 7 The World Bank, 2012. Analysis of Disaster Risk risen markedly in response to major disasters—for Management in Colombia: A Contribution to the example, the 1999 earthquake (Eje Cafetero) and the Creation of Public Policies. Bogota, Colombia. GF- flooding and landslides of 2010–11(La Niña). DRR. 13 Selected large cities in Colombia, specifically those 8 Unsatisfied basic needs (UBN) is one of the indi- with greater technical and financial capacity, have cators that has traditionally been used to measure made investments directly in risk reduction and di- poverty in Colombia. The UBN makes evident the saster response. fragile conditions of the population in terms of the 120 PART ONE | CHAPTER 6 Structural Changes – Implications for Growth, Productivity, and Competitiveness 121 CHAPTER 7 Environmental Sustainability 122 PART ONE | CHAPTER 7 Main Messages Natural resources are a backbone of the Colombian economy. In 2012, agriculture, forestry and fishing represented 6.2 percent of GDP while mining and quarrying represented another 7.7 percent. How- ever, a measure of environmental sustainability for Colombia, the genuine net savings indicator, shows that gross national savings, after subtracting the costs of depletion of minerals, natural resources and pollution fluctuate around zero and are far below the OECD and the regional averages. Furthermore, environmental degradation has high costs for the economy, estimated at 3.7 percent of the GDP by the 2007 World Bank study. These salient facts give rise to the environmental challenges typical of a middle-income country with high income growth, a rich endowment and high dependence on natural resources, and a high concentration of urban population. The OECD accession process has created an impetus for strengthening environmental management in Colombia, a policy interest in moving to- ward a sustainable growth path, and an incentive to address the most pertinent environmental health challenges. This policy note highlights two main areas: pollution management and environmentally sustainable growth. Pollution management—air pollution, water pollution and solid waste management—is the main priority on Colombia’s environmental agenda. As the economy and the urban population have grown, the annual costs of urban air pollution have increased dramatically to an estimated 1 percent of GDP, matching the contribution to GDP of the minerals sector or coal. Together with other environ- mental health problems—indoor air pollution from solid fuel used for household chores and inade- quate access to improved water sources and sanitation—annual environmental health costs reach 2 percent of GDP. Without considering the cost of natural disasters, this makes urban air pollution as the biggest environmental problem, ahead of water supply, sanitation, and hygiene. Investment in wastewater treatment and solid-waste management needs to keep up with the growing urban areas. Only around a third of wastewater in Colombia is treated, with the rest discharged direct- ly into water bodies and marine estuaries. Many of the rivers passing through Bogotá, Medellin, and Cali and other urban areas are heavily polluted, and coastal cities such as Cartagena and Barranquilla experience water quality problems in estuary and near-shore areas. Solid waste management and the management of hazardous waste are other areas that require greater policy and investment efforts. One-fifth of Colombian municipalities, located predominantly in rural areas, do not have adequate waste disposal, and around one-third of the country’s sanitary landfills are not properly managed and do not comply with environmental regulations. Reducing pollution will require efficient and sustain- able water utilities, partnership building at the local, national, and international levels, proper policies, greater institutional planning, and adequate financial arrangements. Structural Changes – Implications for Growth, Productivity, and Competitiveness 123 In relation to environmentally sustainable growth, it is important to consider that the peace process, a renewed focus on agricultural development and the planned investment in roads infrastructure may expand the deforestation frontier. The measures to promote forest and biodiversity conservation and address deforestation pressures will need to be closely connected with policies that support sustain- able agriculture. Promoting sustainable forestry and land-use practices will require: (i) strengthening the technical assistance programs through rural extension services; (ii) supporting agricultural research and innovation to improve agriculture’s resilience to climate change; (iii) slowing the advance of the deforestation frontier by measures that promote a shift from extensive cattle farming, notably through greater security of land tenure; and (iv) improving the management of protected areas. Colombia is one of few global pilot countries participating in the BioCarbon Fund initiative supporting such practices. It has also signed on to the Aichi targets on protected areas, with the objective of expand- ing them to the areas with underrepresented ecosystems, areas under pressure from development and the advance of the agricultural frontier and other ecosystems that generate important economic services such as water provision and regulation, biodiversity habitats and biological corridors. Further- more, in intensive agriculture, incentives for more efficient use of fertilizers and pesticides would help not only improve farmers’ profits but also reduce soil and water pollution. 124 PART TWO | CHAPTER 7 Background Code on Renewable Natural Resources and Protection of the Environment. It was strength- ened throughout the past two decades, making Colombia is one of the richest countries in the Colombia the Latin America region’s front-run- world in terms of biodiversity, and it is generously ner in the quality of environmental institutions endowed with forests, water, and mineral resourc- and regulations under Law 99 (1993), which es- es. Located in the northwest of South America, tablished Colombia’s system of environmental Colombia is one of what have been called the five management in its current form. Pioneering ef- “megadiverse countries” in the world, i.e. coun- forts include implementation of economic instru- tries that possess an exceptional wealth of plant ments—water pollution and use charges—and and animal species—known as a biodiversity the possibility of expanding them to air pollution hotspot. We only need to look at a few figures to and hazardous waste management. As part of the realize just how special Colombia is. Stretching OECD accession process, Colombia has signed from the Pacific Ocean to the Caribbean Sea, the the green growth declaration and taken on a com- country covers “only” 0.8 percent of the world’s mitment to take significant steps to strengthen en- land surface, yet, with between 45,000 and 51,000 vironmental management. species, it is home to some 15 percent of all plant species in the world. And with 1,860 bird species, Against this backdrop, Colombia faces acute en- reptiles, mammals and 469 amphibians, Colombia vironmental challenges from rapidly rising pres- has a biodiversity of fauna unrivalled by any other sure from air and water pollution in urban areas, country. Moreover, in terms of the number of spe- forest and land degradation in rural areas, and a cies of flora that only occur in one specific region, growing vulnerability to natural disasters and the the so-called endemic species, Colombia is also a effects of climate change. Those environmental world leader. One reason for this huge wealth of challenges have intensified with the recent com- biological resources is the wide variety of land- modity price boom, the investment needs to over- scapes across Colombia. The country has 311 dif- come the infrastructure deficiencies (the main ferent types of ecosystems. 61 million hectares are bottleneck for the economy’s competitiveness), covered by different kinds of forests, and about 2 and the rising urban population. The country fac- million hectares of páramos and 10 million hect- es tradeoffs. The large potential economic ben- ares of natural savannas, as well as 6 million hect- efits from developing mineral resources and the ares of different marine and coastal ecosystems. road network are juxtaposed against the need to Coastal zones, coral reefs and marine areas gen- protect terrestrial and marine areas and the eco- erate significant economic benefits through ecosys- system services they generate, such as clean drink- tem services they generate—tourism, artisanal and ing water, bio-commerce, and tourism. The sig- commercial fisheries and protection of the coast- nificant potential for developing agriculture and lines, housing and infrastructure.1 Colombia is the bringing new land into production vies with the second most biologically diverse country in Latin risks of deforestation and pollution by agrochem- America. And this does not even take into account icals, with the resulting degradation of water re- the richness of biodiversity in the Chocó region sources, soils, marine estuaries, and coral reefs near the Pacific and in the peripheral parts of the and the siltation of hydropower dams. Urban Orinoco plains and Amazonia—for the biosphere sprawl and settlement in vulnerable areas must here is still largely unexplored.2 Colombia is also be weighed against the risks posed by floods and generously endowed with gold and other precious landslides, accentuated by the effects of climate metals, oil, and coal. change. Colombia is vulnerable to the effects of climate change, particularly through the devastat- Colombia’s solid framework of environmental ing impacts of the natural disasters it frequently management dates back to the 1974 National experiences. Colombia is a minor contributor to Environmental Sustainability 125 the global greenhouse gas emissions, with more the “genuine” saving, or the adjusted net sav- than half of its emissions stemming from land ings indicator, is a proxy for sustainability, and it use, including emissions from agriculture, forest- shows the true rate of savings in an economy af- ry and deforestation. In terms of greenhouse gas ter accounting for natural resource depletion and mitigation, the focus has been on emissions from pollution damages. While it is an imperfect indi- land-use change, the largest driver of emissions cator, suffering from measurement and theoret- in Colombia, and on the transportation sector, ical shortcomings, negative adjusted net savings which offers large local side benefits of mitigation for several years in a row suggest that economic when local pollution is reduced.3 growth is likely unsustainable from an environ- mental perspective because total wealth is being Sustainable management of natural resources in depleted. Genuine savings tend to be lower in re- Colombia and effective management of pollu- source-rich economies, so it is no surprise to find tion are important for the prospects of sustained them fluctuating around zero in Colombia in the growth and shared prosperity. This policy note past few years as energy production has increased examines whether economic growth has been (Figure 7-1).4 sustainable, compares Colombia’s environmental challenges and performance with other countries Colombia’s economy is vulnerable to risks asso- in the region and the OECD, and highlights criti- ciated with its natural resource richness; they can cal steps on the environmental policy agenda, in- be minimized by strong governance and effective cluding the most urgent measures to help reduce public spending on other productive sectors of the costs of pollution and degradation of natu- the economy and education. Countries well-en- ral resources and increase resilience to climate dowed in natural resources often do not devel- change. This policy note casts the issues in terms op highly diversified economies, and they are at of shared prosperity, which is a concept recent- risk of developing weak institutions—a phenom- ly adopted by the World Bank in its development enon known as “the resource curse.” But recent assistance. It is an approach particularly relevant empirical evidence reveals that possessing com- for the middle-income countries like Colombia modity wealth does not necessarily compromise a as they seek to focus on overall economic growth country’s growth. The risks can be overcome by: that includes those who are relatively less well off (i) prudent management of natural resource rents; (the bottom 40 percent). In some cases, establish- ing the links between the environment and natural resources and poverty is straightforward, as with Adjusted Net Savings, Including FIGURE 7-1:  environmental health, air pollution, and access to Particulate Emission Damage, improved sources of drinking water; in other cas- 1990–2012 es, the link is plausible but is not easily quantifiable due to the need for case-specific data on popula- 20 tion exposure to pollutants, as with solid waste and 15 wastewater. 10 5 Is Economic Growth in Colombia 0 Environmentally Sustainable? –5 1998 1999 2000 2005 2010 Colombia’s generous endowment of natural OECD LAC Colombia wealth increases the urgency to ensure sustain- Sub-Saharan Africa East Asia and the Paci c able use of those resources. According to re- search on wealth accounting and social welfare, Sources: World Bank (2014). Calculated from the Adjusted Net Savings database. 126 PART TWO | CHAPTER 7 (ii) replacement of whatever natural wealth that gap, particularly in terms of road quality, where is extracted with other forms of durable capital; Colombia ranks 130th in the world, according and (iii) efficient public spending fueled by wind- to the recent Global Competitiveness Report. fall rents from natural resources. In a contrary Investment in the road sector through the Fourth case, total wealth will decline and growth will not Generation (4G) program is expected to reach 7 be sustainable, and some evidence suggests that is percent of GDP over the next seven years, and it is happening in the LAC region.5 Because of unpro- critically important to ensure the efficiency of that ductive choices, countries with high resource rents spending.6 Another key is scaling up investment in tend to end up with lower genuine savings rates. education to build up human capital. More gener- This has been happening in Colombia, where the ally, it is critical to transform natural resource rents adjusted net savings—a measure of savings af- into other forms of capital in the economy’s key ter subtracting the costs of natural resources ex- growth sectors. Finally, ensuring sustainable long tracted and the costs of pollution—have lingered term growth requires integration of environmental around zero and far below the regional average considerations in the policy and investment agen- (Figure 7-1 and Figure 7-2). This indicator sug- das of the infrastructure, mining, energy, agricul- gests that the Colombian economy has a very low ture and other productive sectors. The risks are rate of savings, and growth is not sustainable from particularly high in Colombia due to the central an environmental perspective. role of the extractive industries in the economy, the plans to further scale up investment in the road sec- To take advantage of a period of high commod- tor, and the advance of the agricultural frontier in ity prices without depleting its wealth, Colombia the context of the peace process. All of these would needs to increase its investment in the economy’s need to develop in the presence of strong and effec- productive sectors and education and strengthen tive environmental institutions at the national and the management of natural resource rents. One local levels, with an incentive structure to inter- set of measures includes closing the infrastructure nalize environmental costs, and with an improved Gross National Savings, Education Expenditures, and Natural Resource Degradation FIGURE 7-2:  and Depletion, 1990–2012 30 Gross national savings, education natural resources degradation 20 and depletion (% of GNI) expenditures and 10 0 –10 –20 –30 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Pollution damages Carbon dioxide damages Minerals depletion Energy depletion Net forest depletion Education expenditures Fixed capital depreciation Gross national savings Sources: World Bank (2014). Calculated from the Adjusted Net Savings database. Note: Adjusted net savings are a measure of environmental sustainability calculated as follows: gross national savings plus education expenditures less natural resources depletion (minerals, energy and forest) and pollution and carbon dioxide damages. Net forest depletion for Colombia in the cross-country dataset is zero, understating this category and the overall depletion estimates for Colombia. “LAC” denotes the Latin America and the Caribbean Region average. Environmental Sustainability 127 enforcement capacity of sectoral regulators and Priority Issues on the environmental agencies. Environmental Agenda through Environmental and social risks will need to be well the Lens of Sustainable Growth managed. That will require the strengthening of the environmental licensing system, strategic envi- ronmental assessments of projects with cumulative Wastewater treatment and solid waste manage- effects, much more robust monitoring and enforce- ment are important priorities on the urban en- ment systems, and improved coordination between vironmental agenda, and tackling pollution has the environmental and sectoral agencies and with- high economic and social benefits. The 2004 in the National Environmental System (Sistema National Action Plan for Municipal Wastewater Nacional Ambiental, or SINA) to ensure compliance Management helped set the framework for the with the environmental regulations. An import- rapid evolution of wastewater management pro- ant element for developing these mechanisms for grams in Colombia’s large urban areas and spelled infrastructure and extractive industries projects out an ambitious target of reaching a 50 percent is the availability of forest and biodiversity mon- threshold of wastewater treatment by 2019. It is itoring systems, an early alert system for detecting unlikely that the target will be met due to the fi- deforestation, pollution monitoring, and economic nancing challenges in the sector; even though analysis of the costs of pollution and degradation wastewater treatment facilities have been built in of forests, biodiversity and other natural resources. many municipalities, many of them are not op- With support from the Nature Conservancy and erational because of insufficient funding to cov- World Bank, the Ministry of Environment and er operation and maintenance costs. Wastewater Sustainable Development (Ministerio de Ambiente treatment is also the top concern on the broader y Desarrollo Sostenible, or MADS) developed a pi- water resources management agenda because of oneering methodology for an additional instru- the significant pollution problems in urban and ment—biodiversity offsets. They enable projects agricultural watersheds; at the same time, water to compensate for their biodiversity losses with quantity tends to be less of a problem and season- an equivalent or greater value of strengthened al water scarcity, made worse by the effects of cli- biodiversity conservation in other areas. The reg- mate change, affects some hotspot areas, such as ulatory and institutional framework needs to be La Guajira, a large number of municipalities on developed to enable the implementation of offset the Atlantic coast, and many municipalities in the projects, and valuation work for terrestrial and Orinoquia and Central region. As for solid waste marine biodiversity needs to advance.7 Another management, it is particularly weak in mid-sized set of measures to help move Colombia onto a cities, small towns, and rural areas, and challenges more sustainable growth path consists of improv- remain in terms of enforcement of environmental ing the management of natural resource rents standards for landfills. through efficient institutions, governance mech- anisms, and transparent information disclosures. The wastewater treatment rate in Colombia is In the extractive industries, an important initia- relatively low, with only 33 percent of wastewater tive for disclosure is Colombia’s candidacy for the receiving any type of treatment. Many of the riv- Extractive Industries Transparency International ers passing through such urban areas as in Bogotá, (EITI) initiative.8 Improvements in the methodol- Medellin, and Cali are highly polluted, and coastal ogy for tendering strategic mining and oil reserves cities such as Cartagena and Barranquilla experi- and ensuring compatibility with the terrestrial and ence water quality problems in estuary and near- marine protected areas’ boundaries is another pri- shore areas. In 1950, an estimated 50,000 hectares ority measure to help promote development of the of wetlands were connected to the Río Bogotá. By extractive sector in a sustainable way. 2009, less than 1,000 hectares remained—much of 128 PART TWO | CHAPTER 7 it degraded by poor water quality. Some evidence in new projects. At the current level of financing, indicates that the high social benefits from waste- it is highly unlikely that Colombia will meet the water treatment and recovery of urban watersheds National Action Plan for Municipal Wastewater go far beyond the environmental benefits. For ex- Management’s target of having 50 percent of ample, a survey of 1,000 households carried out wastewater in Colombia treated by 2019. To tackle as part of project preparation to improve waste- this challenge, it is necessary to improve financial water treatment and recuperate the watershed of sustainability of wastewater treatment companies Río Bogotá indicated strong support for cleaning up through tariff policies. the river and transforming it into an urban envi- ronmental asset. The key elements of success are An urgent need exists for review of the priority ac- the presence of an efficient and sustainable water tions under the municipal Wastewater Management utility, partnership building at the local, national, and Treatment Plans and review of the instruments and international levels, and the proper policy, insti- for wastewater treatment financing. Among those tutional planning, and financial arrangements (see measures, it would be necessary to make changes to Box 7-1). In Cartagena, the recent implementation the water use and water pollution charges scheme, of a wastewater treatment project resulted in aston- established in accordance with the Law 99 (1993). ishing results and a recovery of water quality in the The level of the fees, the pollutants that the charge coastal zone, with multiple social and environmen- is based on, and the management scheme of the tal benefits.9 Given Colombia’s extensive coastlines revenues from the fees need to be revised, with and a significant concentration of population in the objective of promoting greater investment in coastal cities, wastewater treatment in coastal areas wastewater treatment capacity by municipal sourc- and discharge of treated wastewater is a significant es. Furthermore, the way the fees for water pollu- issue. Discharge norms have not yet been developed tion are currently calculated, they do not provide a for coastal zones. Devising sufficiently flexible dis- sufficient incentive to reduce pollution—so a revi- charge standards that take into account the charac- sion of the formula for the fees is needed.10 teristics of the receiving body of water (the ocean) is an important element of a strategy to scale up in- The challenges in terms of solid waste manage- vestment in wastewater treatment in Colombia. ment are also formidable. Around 79 percent of 27 tons of solid waste Colombia’s cities generate ev- Efforts to improve wastewater treatment are un- eryday is disposed of properly in landfills. Around derway in other Colombian cities, and two main one-third of the sanitary landfills do not operate challenges will need to be addressed—coordina- in accordance with the environmental standards, tion and financing. The first involves coordination resulting in health impacts through the spread of and scale. Effective coordination mechanisms be- communicable diseases, fires, and pollution of wa- tween municipalities are needed to invest in waste- ter sources. Some waste is dumped directly into water treatment facilities of the right capacity that water bodies. The regulatory framework for sol- connect all main discharge sources. Coordination id waste management has been strengthened but strategies can build upon the existing mechanisms requires further steps to increase investment and in the sector. Investment targets in wastewater treat- improve the monitoring and enforcement. For ment can be articulated with the municipal devel- hazardous waste and chemicals management, the opment plans through such programs as Water for regulatory framework requires strengthening, and Prosperity (Programa Agua para la Prosperidad, PAP- the existing information is not sufficient to priori- PDA) and Sanitation of Wastewater Discharge tize policy actions and investment measures. (Saneamineto para Vertimientos, SAVER). The second issue is the availability of financing and, in par- Colombia is a global hotspot for mercury pollu- ticular, the challenges municipalities face in gen- tion with high resulting environmental and health erating sufficient funds to co-finance investment costs, making this a particularly urgent priority Environmental Sustainability 129 BOX 7-1: Wastewater Treatment Has High Social and Economic Returns: The Example of Río Bogotáa More than 1,000 water bodies in Colombia have suffered as a result of the discharge of untreated wastewater. This has caused anoxic conditions in rivers in such places as Bogotá, Medellin, Cali, and Sogamoso and eutrophication in lakes and wetlands. The contamination of natural water resources reduces options for human consumption, increases the risk of infectious diseases, and deteriorates groundwater and other local ecosystems. Large cities such as Bogotá, Medellin, Cali, and Cartagena are currently embarking on wastewater treatment programs. Colombia currently has 410 wastewater treatment plants (WWTPs) in 354 mu- nicipalities—about 32 percent of the municipalities in the country. However, only about 33 percent of these WWTPs perform efficiently and in accordance with environmental standards. The World Bank assessed the economic feasibility of the Río Bogotá Environmental Recuperation and Flood Control project, designed to improve wastewater treatment and recuperate the watershed of the Rio Bogotá. The project was judged economically feasible, with net benefits of US$249 million over 40 years and an internal rate of return of 16.9 percent. The main benefits come from willingness to pay for an improved Río Bogotá environment with a string of multi-functional parks, along with reduced flood damages along the river. A well-structured contingent valuation study was conducted in which more than 1,000 households were interviewed to determine their willingness to pay for environmental improvements. The survey indicated strong support for cleaning up the river and transforming it into an environmental asset. The average willingness to pay was estimated at around US$3 per household per month, generating 92 percent of the net benefits. The forecast wastewater tariff increases needed to sustain operation of the Salitre wastewater treatment plant are estimated at US$1.50 per household per month. a Adapted from World Bank (2010). on the chemicals management agenda. Mercury the direct health impacts on the population of the is used extensively in Colombia’s gold mining and mining areas, are striking. In municipalities down- in some industrial processes, and health risks are stream from the Antioquia region’s gold produc- particularly acute in the small-scale and artisanal tion areas, the mercury pollution-related economic mining sectors. Mercury pollution has high health toll from IQ losses and MMR may be on the order costs due to the neurological effects on adults and of 81 billion COP (US$43 million) to 231 billion children—loss of intelligence (as measured by COP (US$122 million), or 14 percent of the value Intelligence Quotient, or IQ) and mild mental added in the metallurgical sector of Antioquia.11 retardation (MMR). Mercury directly affects the Other health effects could not be quantified due to gold-producing municipalities, where the popu- the difficulty of attributing a range of illnesses to lation is exposed to vapors from mercury-based mercury exposure, nor was it possible to quantify gold production processes and water pollution. It the cost of environmental impacts, so the above has indirect effects on the water sources, agricul- estimate is a lower bound on the damages. The ture, and fisheries of downstream populations. A epidemiological evidence is currently limited, and recent World Bank study found that health risks additional toxicological studies and epidemiolog- in the Antioquia region and the affected down- ical monitoring are needed to generate a more stream municipalities alone, without considering accurate estimate of the health effects of mercury 130 PART TWO | CHAPTER 7 pollution and the resulting costs. Nevertheless, the under pressure from development and the advance need is clear for public intervention to improve of the agricultural frontier and other ecosystems awareness of the pollution and promote measures that generate important economic services such to improve incentives for innovation and the adop- as water provision and regulation, biodiversity tion of clean technologies in the mining sector. habitats and biological corridors (see Box 7-2). Furthermore, in intensive agriculture, incentives The peace process opens up new growth prospects for more efficient use of fertilizers and pesticides for agricultural production and the rural sector, would help not only improve farmers’ profits but and several steps can help make that growth en- also reduce soil and water pollution. vironmentally sustainable. Colombia’s rural areas were the most heavily damaged by years of conflict In addition to managing pollution risks and slowing and violence. They have not been at the center of the advance of the deforestation frontier, growing policy attention in the past few decades, leaving the in a sustainable way will require improved man- agricultural sector and the rural economy suffer- agement of the risks of natural disasters. Floods ing from underinvestment and subpar provision of and landslides are the most frequent disasters that public services. Under the new political scenario, afflict Colombian cities and rural areas, and their investment in these areas would unleash significant frequency is expected to rise due to the effects of pro-poor growth potential. As the policy note on climate change and greater climate variability. agriculture and rural development emphasizes, it is Colombia is well advanced in terms of a compre- critical to use Colombia’s rich forest resources and hensive approach to disaster risk management, cultivable land in ways that maintain the natural but the systems in place have not been sufficiently capital base, which includes 60 million hectares of effective in preventing population exposure and forests, 22 million hectares of arable land (only a vulnerability. Part of the problem is the gradual quarter cultivated), and abundant water resources. increase in the occupation of areas unsuitable for Given Colombia’s mountainous terrain, land deg- sustainable development; or land uses and pro- radation and soil erosion are pervasive and result ductive activities incompatible with the existing in annual economic losses estimated at more than landscapes and ecosystems. Improved manage- 0.7 percent of GDP (Sanchez-Triana et. al., 2007). ment of the risks will require strengthening exist- ing planning and policy instruments, such as the In terms of the policy recommendations, the mea- Watershed Management Plans (Planes de Manejo de sures to promote forest and biodiversity conserva- Cuencas, POMCAs), Territorial Management Plans tion will need to be closely connected with policies (Planes de Ordenamiento Territorial, POTs), and the that support sustainable agriculture. Promoting Departmental and Municipal Plans.12 sustainable forestry and land-use practices will require: (i) strengthening the technical assistance The range of services generated by Colombia’s programs through rural extension services; (ii) sup- ecosystems is not appropriately recognized by the porting agricultural research and innovation to economy. Sitting at the confluence of the Andes improve agriculture’s resilience to climate change; and Chocó biodiversity hotspots, Colombia is con- and (iii) slowing the advance of the deforestation sidered the world’s second most biodiverse country. frontier by measures that promote a shift from ex- It is home to unique ecosystems, such as the high-al- tensive cattle farming, notably through greater se- titude tropical wetlands and páramos. In addition to curity of land tenure. Colombia is one of few glob- being home to unique biodiversity, the páramos also al pilot countries participating in the BioCarbon play a key role in water regulation and reducing the Fund initiative supporting such practices. It has risk of landslides in downstream areas. In this con- also signed on to the Aichi targets on protected ar- text, sustainable land use and protection of the up- eas, with the objective of expanding them to the stream watersheds and páramos will translate into real areas with underrepresented ecosystems, areas economic and social benefits, making delimitation Environmental Sustainability 131 BOX 7-2: The BioCarbon Fund in Colombia—Initiative for Sustainable Forest Landscapes (ISFL) The BioCarbon Fund Initiative for Sustainable Forest Landscapes (ISFL) is a multilateral facility, sup- ported by donor governments and managed by the World Bank. It seeks to promote reduced green- house gas emissions from the land sector through REDD+,a more sustainable agriculture, and climate smart land-use planning and policies. It has pledges totaling US$300 million from Norway, the United Kingdom, and the United States. The ISFL is set up to support activities to manage land-use change while minimizing forest loss and greenhouse gas emissions. It builds on the experience of Tranches 1 and 2 of the BioCarbon Fund and will address the loss of forests, which remains a fundamental global challenge, particularly in the tropics. In Colombia, more than 50 percent of greenhouse gas emissions can be attributed to land-use transformation in the rural sector. Deforestation and other land-use changes account for almost one- third of global emissions. Agriculture is estimated to be the driver of approximately 80 percent of deforestation worldwide, with commercial agriculture being most important in Latin America. At the same time, agricultural expansion is also part of a strategy to raise rural incomes. ISFL promotes climate-smart agricultural and low carbon land-use practices in selected geographical areas where agriculture is a major cause of deforestation. The initiative builds on a portfolio of jurisdic- tional programs in Zambia, Ethiopia, Indonesia, and Colombia. The ISFL consists of two components: i. Technical assistance and grant funding to support selected countries with implementation of its REDD+ strategies and the creation of enabling environments that change the way land- use decisions are made. Grants will be disbursed through the BioCarbon Fund’s associated technical assistance facility, the BioCFplus; ii. Results-based financing (a.k.a., payment for performance) based on achieved emission re- ductions. The main metric for results-based payments will be carbon emission reductions, but other economic, environmental, and social indicators will be monitored. Carbon payments (including some upfront milestone payments) will be made through the BioCarbon Fund. In Colombia, the selection of a jurisdiction is ongoing in close coordination with the ministries charged with agriculture (MADR) and the environment (MADS). a REDD was first discussed in 2005 by the UNFCCC at its 11th session of the Conference of the Parties to the Convention (COP) at the request of Costa Rica and Papua New Guinea, on behalf of the Coalition for Rainforest Nations, when they submitted the document “Reducing Emissions from Deforestation in Developing Countries: Approaches to Stimulate Action,” with a request to create an agenda item to discuss consideration of reducing emissions from deforestation and forest degradation in natural forests as a mitigation measure. The 2007 COP in Bali introduced the terminology REDD+ under the “Bali Action Plan,” with reference to additional eligible mitigation activities: sustainable management of forests, conservation of forest carbon stocks and enhancement of forest carbon stocks. Source: Wikipedia. of the páramos an urgent priority for the economic The ongoing program on Wealth Accounting and agenda as well as biodiversity conservation. In light Valuation of Ecosystem Services (WAVES) in Co- of the Government’s commitment to achieving the lombia, supported by the World Bank, seeks to help Aichi targets of protecting 17 percent of terrestrial improve the recognition of the role natural resourc- areas and 10 percent of marine areas by 2020, the es and ecosystem services play in the economy and expansion of protected areas would need to target generate national accounting data on water, for- places that generate the most valuable ecosystem ests, and ecosystem services as an input for deci- services or include underrepresented ecosystems.13 sion-making processes. 132 PART TWO | CHAPTER 7 Priority Environmental lost disability adjusted life years (DALYs)—the pattern is similar: nearly 70 percent of DALYs are Challenges through the Lens of attributable to UAP, around 20 percent to WSH, Shared Prosperity: Environmental and around 10 percent to IAP.14 The overall bur- den of health costs from these three factors is at Health the same level as 2002, but the relative magnitude of the costs has changed, reflecting population The shared prosperity and pollution management and income growth, an improvement in access to agendas are closely linked. According to a recent improved sanitation, and growth in urban pop- World Health report, about 7 million premature ulation in Colombia.15 Health costs in the three deaths—one in every eight deaths globally in sectors are moderate compared to other countries 2012—are linked to exposure to air pollution from in the region, and the share of air pollution costs ambient and household sources (WHO, 2014). is high. Indoor air pollution, mainly due to the use of sol- id fuels for cooking and other domestic needs, is Health costs of urban air pollution have increased another major cause of respiratory illness, dispro- relative to other health costs, but better air quality portionately affecting women and children and in Bogota helped temper the rise. In 2002 a World primarily rural households. Inadequate access to Bank study found that urban air pollution was the improved sources of drinking water and sanitation fourth highest in terms of associated costs, follow- is the leading cause of diarrheal illness and mor- ing water supply, sanitation and hygiene, and nat- tality of children under five years of age, with the ural disasters (Sanchez-Triana et. al., 2007). In the risks of disease and mortality amplified by malnu- recent round of evaluations that update the earlier trition. The environmental health problems linked study, the mean annual cost of Colombian urban to pollution from those sources have high econom- air pollution is estimated at 5.7 trillion COP, or 1.1 ic costs in terms of premature mortality, health percent of GDP in 2010 (Table 7-1). Mortality rep- expenditures, and the loss of productivity, not to resents about 79 percent of total estimated costs. mention deterioration of the quality of life. Setting aside natural disasters, this puts urban air pollution in first place, ahead of water supply and Urban air pollution causes three times as many sanitation and hygiene (Golub et al., 2014).16 As deaths as inadequate water supply, sanitation, and evident from sensitivity analysis carried out by the hygiene, and five times as many deaths as indoor study, the costs of urban air pollution would have air pollution. Despite considerable progress in en- been even higher in the absence of an improvement vironmental management over the past decade, a in air quality in Bogota. recent assessment reveals that Colombia’s popu- lation still faces significant adverse impacts from Improvements in fuel quality and other policy exposure to urban air pollution (UAP), inadequate measures implemented since 2002 to improve ur- water, sanitation, and hygiene (WSH), and indoor ban air quality in Bogota alone have helped reduce air pollution from solid fuel use (IAP) (Golub et al., pollution. Using methodologies and statistical 2014). The total health cost attributable to these methods to estimate health costs of pollution vali- three factors amounted to about 10.2 trillion COP dated by the World Health Organization (WHO), annually, or about 2 percent of GDP in 2010 the recent assessment estimates that a reduction (Figure 7-3). In terms of mortality, about 7,600 an- in particulate matter—PM10 levels—from an av- nual premature deaths can be attributed to these erage of 66 micrograms per cubic meter in 2002 environmental factors (Table 7-1). About 5,000 to 59 micrograms helped save an average of 200 deaths are associated with UAP, around 1,600 with lives in 2010 due to the avoided mortality from inadequate WASH, and 1,000 with IAP. In terms respiratory illnesses; in addition, around 252 bil- of the burden of disease—measured in terms of lion COP a year in health costs were saved due to Environmental Sustainability 133 FIGURE 7-3: Environmental Health Costs in Colombia and in the Region (% of GDP) 4.5 6,000 4.0 0.9 5,000 3.5 3.0 4,000 US$ per capita % GDP 2.5 1.3 1.0 0.9 0.2 0.2 3,000 2.0 0.9 0.4 0.6 0.3 0.2 1.5 0.9 0.8 0.6 0.8 2,000 1.9 0.8 1.1 0.5 1.0 1.6 1,000 0.5 1.0 0.9 1.1 1.0 1.0 1.1 0.7 0 0 Bolivia Guatemala El Salvador Nicaragua Peru Honduras Colombia Colombia Ecuador (2005) (2006) (2006) (2007) (2006) (2006) (2002) (2010) (2004) WSH Urban AP Indoor AP GDP per capita (current US $) Source: Country Environmental Analyses for various years. For Colombia, see Golub et al. (2014) for the 2010 results and Larsen (2004) for 2002 (reported in Sanchez-Triana et al., 2007). Note: For Colombia, the estimates of the costs of urban air pollution (AP) for 2002 and 2010 (shown above) are not directly comparable because a slightly different methodology was used in the more recent assessment. The latest data take into account significant income growth in Colombia over the past decade and an expansion of the air-quality monitoring network (and populations of cities with monitoring data are included in the 2010 analysis, whereas in 2002 an extrapolation was used for cities without monitoring networks). About half of the costs are due to population exposure to air pollution in Bogota, and air quality has improved there since 2002. Sensitivity analysis reveals that, keeping all other factors constant, health costs due to air pollution in Bogota alone would have been 7 percent higher in 2010 had air quality not improved. that improvement in air quality. Without the gains, fuels (mainly fuel wood) in rural areas of Colombia the number of deaths due to air pollution in 2010 is 1.1 trillion COP (0.22 percent of GDP in 2010). would have been 7 percent higher than estimated; This environmental factor weighs most heavily on in 2012, 16 percent more deaths would have been the vulnerable groups and often perpetuates the attributed to air pollution. poverty cycle. Mortality in children under age five years of age represents 6 percent of the cost, and Indoor air pollution weighs the most on women mortality in women over 30 years of age represents and children, affecting the rural population and about 78 percent. Acute respiratory illness in chil- perpetuating the cycle of poverty. The mean esti- dren and adult females and Chronic Obstructive mated annual cost of health impacts from indoor Pulmonary Disease morbidity of adult females air pollution associated with the use of traditional represent 16 percent of the cost. TABLE 7-1: Summary of Environmental Health Costs in 2010 Annual Mortality Annual Morbidity Associated Monetary Costs Number of premature DALYs COP Percentage Factor deaths (million) (billion) of GDP Urban Air Pollution (UAP) 5,000 65 5,700 1.12 Water, sanitation and hygiene (WSH) 1,600 20 3,450 0.68 Indoor Air Pollution (IAP) 1,000 12 1,129 0.22 Total 7,600 97 10,279 2.02 Source: Golub et al. (2014). Note: US$1=COP$1,817. DALYs are disability-adjusted life years. The epidemiological and environmental data are for 2010, and the GDP was reported for 2009 at the time of the study. 134 PART TWO | CHAPTER 7 Health costs of inadequate water supply, sanita- compared to just over 50 percent in 2010 (ENDS, tion, and hygiene have fallen, but a large share of 2005; ENDS, 2010). The highest incidence of sol- the costs still results from child mortality. The mean id fuel use is found in the Eastern (18 percent) and estimated annual cost of health impacts from an Caribbean regions (20 percent). Bogotá is the only inadequate supply of drinking water and sanitation region where solid fuel use for household uses is and from poor hygiene in Colombia is 3.45 trillion negligible. COP (0.68 percent of GDP in 2010). Mortality in children under age five represents 17 percent Sanitation and diarrheal treatment have improved of the cost, with morbidity accounting for the re- in rural areas, reducing the incidence of diarrheal maining 83 percent. Diarrheal mortality and mor- illness. General malnutrition (low weight for age) in bidity represent about 89 percent of the total cost, Colombia decreased from 7 percent in 2005 to 4.5 estimated at 3.05 trillion COP annually. Urban percent in 2010. Severe malnutrition has also de- areas represent about 77 percent of the total di- creased slightly—from 0.6 to 0.5 percent (ENDS, arrheal cost. The reduction of health costs in this 2010: 298). The use of some sort of oral rehydra- sector has been associated with improvements in tion therapy—the main remedy used to treat di- public health measures, with a resulting reduction arrheal illness in children—increased from 61 per- of background diarrheal mortality and morbidity cent in 2000 to 70 percent in 2005 and 74 percent burdens, and an increase of rural populations with in 2010 (ENDS, 2010: 256). Although not propor- access to improved sanitation in 2002–10. tional to GDP growth over the same period, these improvements are still notable. However, systematic Recent efforts to strengthen air quality manage- differences remain between urban and rural areas ment have diminished increases in air pollution. as well as among regions in terms of the awareness Colombia has made significant progress toward and care of diarrheal diseases in children. effective air pollution management in in the past decade. The 2010 Air Pollution Control and Rural-urban and regional differences persist in the Prevention Policy made progress in air quality as- supply of safe drinking water and provision of ap- sessment, monitoring, standardization of air quality propriate means of sanitation. In the 2002–2010 inventories, fuel-quality improvement, and imple- period corresponding to the environmental health mentation of incentive programs for environmental analysis above, national demographic and health control and monitoring. Despite the policy efforts surveys show decreases of 13 percent in the share of to control air pollution and a series of measures im- Colombia’s population without access to improved plemented at the national and local levels, pollution sanitation, using the WHO/UNICEF definition.17 pressure continues to grow with an increase in the The share of the rural and urban population with vehicle fleet. Over the 2000s, it increased 40 to 50 improved sanitation reached 84 and 99 percent, percent in Bogota and Bucaramanga and 10 to 20 respectively. The national statistics on rural and ur- percent in Cali and Medellin. ban coverage by piped sewerage networks, which is one of the improved sanitation sources for the No systematic efforts have been made to reduce the purposes of environmental health analysis and the burden of disease from indoor air pollution. One WHO/UNICEF definition, show similar gains in area where little progress has been achieved over rural areas. According to the household surveys the past decade is in management of indoor air carried out by the National Statistics Department, pollution. No efforts have focused on decreasing the coverage of rural areas by sewerage networks exposure to indoor air pollution, and the burden increased from around 65 percent in 2003 to nearly of diseases associated with it continues to be over- 70 percent in 2013. Nevertheless, inadequate WSH whelmingly concentrated among Colombia’s rural in rural areas is still a serious environmental health households. Trends are not encouraging—53 per- and health equity problem that disproportionately cent of rural households used solid fuels in 2005, affects the relatively poor rural population. Environmental Sustainability 135 In terms of the next steps on the policy agenda, need to be established to facilitate improved collab- the following steps will be critical for advancing oration across municipalities and between munic- in terms of controlling the air pollution: (i) de- ipalities, the Autonomous Regional Corporations sign economic instruments to reduce air pollution (Corporaciones Autonomas Regionales, or CARs), and along the lines of water use and pollution charges national environmental and sectoral agencies. in Colombia (e.g., air pollution charges established Improvements along those dimensions will help by the 1993 Law 99); (ii) promote renewal of the reduce environmental health costs in contamina- vehicle fleet (e.g., junking programs for the old bus tion hotspots, where exposure to pollutants and fleet, programs to retrofit most polluting vehicle vector-borne diseases due to improper solid waste classes); (iii) promote fuel switching from coal to management is high. Typically, the poorest house- natural gas and switching to improved ovens in holds benefit the most from such improvements. industry (e.g., improved stoves programs for brick producers); (iv) strengthen the capacity for air The OECD Accession Creates an quality and emissions modeling at local environ- mental authorities, forging alliances with universi- Impetus for Green Growth ties and other interested stakeholders; and (v) cre- ate real-time air quality alert systems to reduce The prospect of OECD accession creates an op- population exposure during peak pollution times. portunity for strengthening environmental man- On the indoor air pollution management agenda, agement in Colombia and moving toward a more a national program will need to be developed in sustainable growth path. As part of the accession conjunction with local agencies to improve incen- process, Colombia has signed the declaration on tives for the use of improved stoves and, where green growth. In the environmental performance available, switching to cleaner fuels such as natural review for Colombia, the OECD recommends es- gas. The implementation of the 2014 Law 1715 tablishing green growth as a central element of the on Renewable Energy presents an opportunity 2014–18 National Development Plan and defining for reducing the costs of indoor air pollution by concrete, measurable environmental objectives for promoting the use of alternative non-fossil energy key economic sectors. By green growth, the OECD sources in rural areas that are not interconnected. refers to development that achieves sustainable eco- nomic growth and social stability, safeguards the In terms of the water supply and sanitation agen- environment, and conserves resources for future da, investments in wastewater treatment need to be generations. Conversely, “development that is not scaled up significantly, with emphasis on household based on green growth may lead to prosperity, but sanitation and hygiene. A significant scaling up of only in the short term, and will soon be undermined investment in wastewater treatment will require the by insecurity and vulnerability” (OECD 2013: 13). enabling institutional and financial conditions. In The benefits of green growth result from sustain- that context, the methodology for water use and able management of natural resources, lower risks water pollution charges will need to be revised, of pollution, greater access to basic infrastructure with an eye to improving incentives for investment services for all population groups (including the in wastewater treatment. From the health perspec- poor, more secure livelihoods), and a shift to a resil- tive, provision of improved sanitation to house- ient and less energy-intensive growth path. holds and the soft measures—education and pro- motion of hygiene—will result in the highest social To gain the OECD membership, Colombia will benefits and help further reduce child mortality. need to show how it plans to attain the key targets Institutional strengthening and the scaling up of of the OECD’s acquis on the environment. The investments are also needed in the solid waste man- OECD’s requirements include a set of around 72 agement sector, including hazardous waste and recommendations and decisions and 45 specific chemicals. Effective coordination mechanisms will recommendations for strengthening environmental 136 PART TWO | CHAPTER 7 management in Colombia. A key element will be Total Natural Resource Rents and FIGURE 7-4:  increased public and private spending on envi- Environmental Expenditures ronmental protection and environmental services; (% of GDP) now, it is significantly lower in Colombia at around 1.8 (% of GDP, incl. industry and government) 0.33–0.6 percent of GDP, compared with 1 per- 1.6 Italy Romania cent and above for OECD countries (Figure 7-4).18 Environmental expenditures 1.4 Czech Republic The recent assessment by the Contraloria notes that Bulgaria 1.2 Poland the current level of environmental expenditures in Finland 1.0 France Mexico Norway Colombia is insufficient for adequate performance Slovak Republic 0.8 Croatia of the national environmental institutions of the Hungary Portugal Colombia 0.6 National Environmental System (Sistema Nacional Turkey Spain 0.4 Ambiental, or SINA). The low level of public envi- 0.2 ronmental expenditures and the economy’s remark- 0 ably high dependence on natural resource rents, as 0 2 4 6 8 10 12 14 well as the high costs of environmental degradation Total natural resources rents (% of GDP) in Colombia, make it necessary to place sustainable growth at the core of the development agenda. Source: Eurostat (2013) and DANE (2013). Note: An additional category of environmental expenditures, reported for some European countries, are outlays by public and private enterprises Institutional strengthening is one of the most chal- specializing in producing environmental services. The category is high for some European countries (especially Spain, France, Poland, Italy, and Romania) lenging and important areas in Colombia’s shift to and is not reported in the figure above to make the data comparable to Colombia. DANE does not report environmental expenditures by private a green growth path. Despite such recent measures enterprises. as the creation of the new National Environmental Licensing Agency, challenges remain in the en- forcement of Colombia’s extensive framework of environmental laws and regulation, and serious environmental enforcement” (OECD, 2014: 42). difficulties persist in the vertical organization of Progress in this area will be critical for attaining the environmental management system. The 33 more sustainable developmental outcomes. CARs have key responsibilities for implementing environmental policies at subnational level. The Policy Recommendations MADS is responsible for developing policy guide- lines and issuing regulations and standards at the national level and coordinating CARs’ activities, Policy recommendations fall within the following and CARs are supposed to function as integral areas: (i) reducing the environmental health costs by parts of the environmental management system controlling urban air pollution, improving access to and guarantee the implementation and enforce- improved water supply and sanitation sources, and ment at the local level. However, as pointed out by reducing indoor air pollution; (ii) improving waste- the OECD, “the Constitution provides CARs with water management; (iii) strengthening the perfor- a high degree of autonomy in administrative and mance of the solid waste sector and improving haz- fiscal terms, and they are subject to few account- ardous waste management; (iv) accounting for the ability constraints and controls. In addition, their role of natural capital and ecosystem services and system of governance leaves them vulnerable to their sustainable use in the Colombian economy; capture by local interests; and they are financed in and (v) short-term recommendations to attain green a way that results in most of them lacking human growth, including institutional strengthening and and other resources. These weaknesses hinder the the improvement of the environmental licensing development of the national environmental infor- process to increase its effectiveness and efficiency. mation system and the implementation of envi- The policy note does not provide recommendations ronmental impact assessment (EIA) and licensing to help reduce the vulnerability to natural disasters; procedures, and impede a consistent approach to that is covered by a separate policy note. Environmental Sustainability 137 Development Challenges Policy Recommendations 1. Pollution has high health • Design economic instruments to reduce air pollution (e.g. introduce air costs in Colombia and weighs pollution charges established by the 1993 Law 99 and revise fuel and disproportionately on the poor. vehicle taxation schemes to provide incentives for the use of clean fuels and Urban air pollution has the highest clean vehicles); health costs, and they have risen to • Promote renewal of vehicle fleet (e.g., junking programs for the old bus the top in terms of mortality and fleet; programs to retrofit most polluting vehicle classes); economic costs due to illness. • Promote integrated urban planning, alternative transportation systems such as scaling up Bus Rapid Transit (BRT) Transmilenio lines and traffic management through Peak and Plate (pico y placa) and congestion pricing programs; • Promote fuel switching from coal to natural gas, switching to improved ovens in industry (e.g., improved stoves programs for brick producers); • Strengthen the capacity for air quality and emissions modeling at local environmental authorities, forging alliances with universities and other interested stakeholders; • Create real time air quality alert systems to reduce exposure during peak pollution times. 2. Health costs of inadequate water • Promote access to improved drinking water sources and sanitation, supply, sanitation, and hygiene have particularly in rural areas. Carry out a cost-benefit analysis of interventions fallen but a large share of the costs in the water supply and sanitation sector at a disaggregated level by district still results from child mortality. and poverty level to improve the targeting of the investments; • Promote hygiene programs (e.g. hand washing campaigns) shown to be effective at improving health outcomes in this sector, particularly when they support customized curricula in schools and kindergardens and “training of trainers” programs; • Strengthen the capacity to carry out economic analysis of health costs and cost benefit analysis of policy interventions and investment programs by building in-house capacity at the district environmental authorities, Department of National Planning, Ministry of Health and Ministry of Environment and Sustainable Development, in partnership with academia, local universities and other stakeholders. 3. Indoor air pollution causes • Design and implement a cross-sectoral program to address indoor air respiratory illness and premature pollution that includes the interventions below; mortality, weighing the most on • Evaluate existing improved stove programs and implementing measures to women and children, affecting the ensure improved delivery and operation of the programs and to maximize rural population and perpetuating their effectiveness and efficiency in contributing to the achievement of the cycle of poverty. improved health outcomes in population groups most affected by indoor air pollution, in addition to fuel efficiency as promoted by Ley 1715 of 2014; • Establish different mechanisms to build awareness of the health effects of indoor air pollution, particularly in rural communities, through existing outreach programs, such as those for rural health care; • Include in housing subsidy programs for rural low-income housing requirements for building codes and housing design in poor communities to allow for improved ventilation, including the design of chimneys; • Evaluate the availability of LPG and other cleaner fuels in areas that predominantly use fuelwood, and implement actions to improve availability and access to fuelwood users in a safe and cost-effective manner; • Implement a research program to improve understanding of underlying factors that affect exposure levels; • Extend the coverage of rural electrification programs. (continued on next page) 138 PART TWO | CHAPTER 7 (continued) Development Challenges Policy Recommendations 4. Wastewater is a major source of • Significantly increase investment in wastewater treatment, creating pollution in urban watersheds and enabling conditions for investment in and promotion of PPPs, particularly only a quarter of wastewater flows by improving the coordination of investments in wastewater treatment are treated. infrastructure across municipalities, by articulating the PAP-PDA and SAVER program targets with municipal and departmental plans; • Strengthen the financing mechanisms of operation and management costs of wastewater treatment facilities through such measures as tariff changes and the development of other financial instruments (e.g. guarantees); • Strengthen the municipal capacity for designing bankable wastewater treatment project of appropriate scale; • Revise the system of water use and pollution charges established by the 1993 Law 99 (see below). 5. Solid waste management faces • Strengthen the monitoring and enforcement of environmental standards for formidable challenges; 20 percent of landfills; municipalities do not have adequate • Develop economic instruments for the hazardous waste sector as stipulated waste disposal and 30 percent of by the 1993 Law 99; sanitary landfills do not follow the environmental regulations. Hazardous • Strengthen the coordination mechanisms between the CARs and waste is lagging solid waste in terms municipalities in solid waste management; of regulation and implementation. • In the area of hazardous waste and chemicals management, improve pollutant and polluted sites inventories and devise strategies to address environmental legacies; • To reduce the health costs of mercury pollution, implement a series of actions, including (i) monitoring of air and water quality in mining production areas and in areas downstream, (ii) carry out epidemiological surveillance of populations exposed to pollution, (iii) carry out awareness campaigns, (iv) promote the use of clean technologies in the mining sector, (v) promote formalization in the small-scale and artisanal mining sector, (vi) develop inspection and monitoring capacity at the National Mining Agency. 6. Sectorial policies and water • Strengthen the mandate of the MADS for water resources management, resources management plans do not developing mechanisms to add to the impact of water resources planning translate into investment plans at the tools on investments; watershed and local levels. There is an • Revise the system of economic instruments for water resources management absence of an integrated framework (water use and pollution charges); the current levels are very low and do for marine and coastal resources not provide sufficient incentives to reduce pollution and do not promote management. greater investment in wastewater treatment, particularly by municipalities; • Develop wastewater discharge standards for coastal and marine areas, taking into account the absorption capacity of the receiving water body (e.g. assess the feasibility of submarine emissaries when treatment is sufficient); • For coastal and marine areas, develop a new Integrated Coastal Zones Management Policy building upon two earlier overlapping policies and a Masterplan to implement it. (continued on next page) Environmental Sustainability 139 (continued) Development Challenges Policy Recommendations 7. Ecosystem services, biodiversity, • Attain the Aichi targets on protected areas, expanding them in areas with and forest resources generate underrepresented ecosystems, areas under pressure from development significant economic benefits, and, among other criteria, areas that generate significant ecosystem services particularly drinking water and (e.g. the páramos); water regulation services in cities. • Develop a national policy on green environmental accounting, with They reduce the risks of natural guidance on information provision and coordination across agencies and the disasters, particularly floods and public; landslides. However, the value of these services is not adequately • Enhance policy framework, including access to credit for small and medium accounted for in sectorial policies farmers, to release land with degraded pastures from extensive livestock and a large share of the páramos, production for other uses that have potential for environmental mitigation, wetlands, and strategically such as agroforestry, silvopastoral systems, and commercial forestry, and important ecosystems has been promote sustainable agricultural production methods; altered, reducing the water • Strengthen data and systems measuring fertilizer consumption by type of regulation benefits. As the peace crop and optimum use and provide technical assistance to farmers through agenda progresses and investment extension services; in road infrastructure rises, the • Secure land tenure regimes for small landholders, promoting land-use agricultural frontier will likely intensification and reducing clear cutting, and remove any perverse expand, adding to the deforestation incentives for land titling that promotes the expansion of slash-and-burn pressures. Furthermore, agriculture agriculture. is the main source of greenhouse gas emissions in Colombia. 8. Economic growth is not on a • Strengthen environmental institutions, coordination mechanisms across sustainable path, with a low level of sectors on the environmental agenda, coordination between the MADS and genuine savings. CARs, and develop financing mechanisms to facilitate improved monitoring and enforcement; • Strengthen the environmental licensing process and the Strategic Environmental Assessment for projects with significant cumulative impacts, and improve the methodology for tendering strategic mining and hydrocarbons reserves; • Develop a national Green Growth Strategy and Colombia’s proposal for the attainment of the OECD’s body of environmental instruments and priority recommendations; • Develop real-time environmental information systems to provide inputs in decision making, including forest monitoring, a mining sector cadaster, and green national accounting (e.g., for devising the green growth strategy and the licensing process); • Ensure the attainment of the Extractive Industries Transparency International (EITI) status. 140 PART TWO | CHAPTER 7 Endnotes 1 An ongoing study by the World Bank “Valuing Ma- 8 The Extractive Industries Transparency Initiative rine and Coastal Ecosystems in Colombia: Consid- (EITI) is a global coalition of governments, compa- erations for the Design of Conservation Strategies” nies and civil society working together to improve has estimated the value of the economic services gen- openness and accountable management of revenues erated by the coastal and marine ecosystems of Co- from natural resources. Countries implement the lombia. Preliminary estimates suggest that of the dif- EITI Standard to ensure full disclosure of taxes and ferent types of ecosystems, those with a higher value other payments made by oil, gas, and mining compa- per hectare are the coral reefs (US$1,097 per hectare nies to governments. These payments are disclosed in per year) coastal bioma (seagrass, shelf sea, estuaries an annual EITI Report. Colombia had declared its and shores) with a value of US$446 per hectare, and intention to apply for EITI candidacy during 2014. coastal wetlands (mangroves) with an estimated val- 9 Browder, Greg and Ricardi Duvil (2014). “Restor- ue of US$600 The study concludes that marine and ing the Coastal Environment in Cartagena, Colom- coastal ecosystems generate an annual flow of goods bia.” Latin America and Caribbean Region LCSEN and services estimated at between 0.94 and 3.06 per- Occasional Paper Series. The World Bank. Wash- cent of GDP in 2013. It is important to note that ington, D.C. these are average estimates and that they are based 10 See, for example, Rudas (2010) and Blackman on limited data that are not site-specific and cannot (2006). be used for the purposes of devising compensation 11 World Bank (2012). “Assessment of the Environ- and offsets programs. For a description of the meth- mental and Health Impacts of Mercury Pollution in odology and the detailed results, refer to the study. Colombia.” Washington, D.C. Draft report. 2 Adapted from Howard, Pippa (2014). “Developing 12 Campos et al. (2011). “Analysis of Disaster Risk Offsets for Loss of Biodiversity: Experience from Management in Colombia. A Contribution to the Colombia.” The World Bank, Washington, D.C. Creation of Public Policies.” The World Bank. 3 The World Bank (2014). “Low Carbon Develop- Washington, D.C. ment for Colombia.” Washington, D.C. 13 OECD (2014). “Environmental Performance Re- 4 The concept of adjusted net savings rests upon the view: Colombia.” OECD Publishing. premise of three forms of capital: natural, human, 14 DALYs are the sum of years of potential life lost due and physical. Transformation of one form of capital to premature mortality and the years of productive in another is possible. Thus, education expenditures life lost due to disability. are added to gross natural savings and partly offset 15 See Sanchez-Triana et al. (2007). the depletion of natural capital (Hamilton (2000), 16 To assess the benefits of improvements in air quality Hamilton and Ruta (2009)). observed in Bogota since 2002, a sensitivity analysis 5 Sinnott et al (2010). “Natural Resources in Latin was carried out by Golub et al. (2014). It shows the America and the Caribbean. Beyond Booms and changes in mortality and morbidity and the associat- Busts?” World Bank, Washington, D.C. ed costs in Bogota in two cases: a high concentration 6 International Monetary Fund (2014). “Colombia. scenario with the average levels of PM10 measured Staff Report for the 2014 Article IV Consultation.” in Bogota in 2002, and a low concentration scenar- Washington, D.C.: p. 12. io with the levels measured in 2012. It is estimated 7 Howard, Pippa (2014). “Biodiversity Offsets: the that 200 additional mortality cases would have oc- Options for Colombia.” Latin America and the Ca- curred in Bogota had pollution levels remained un- ribbean Region LCSEN Occasional Paper Series. changed at the 2002 level; 440 fewer mortality cases The World Bank. Washington, D.C. would have occurred, ceteris paribus, with a con- Environmental Sustainability 141 centration level on average equal to 48 µg/m3 (i.e., source is one that, by the nature of its construction the ambient level of PM10 measured in Bogota in and when properly used, adequately protects the 2012). The set of policy measures, including the in- source from outside contamination, particularly fe- troduction and enforcement of more stringent fuel cal matter. An “improved” sanitation facility is one quality standards in Bogota, that led to the lower that hygienically separates human excreta from hu- measured levels of PM10 resulted in a reduction of man contact. The definitions used by the JMP are mortality cases in Bogota by 7 percent in 2010, com- often different from those used by national govern- pared to what they would have been had air quality ments. Estimates in JMP reports may therefore dif- not improved. A further improvement in air quali- fer from national estimates. Source: http://www.ws- ty in 2012 resulted in a reduction of mortality cas- sinfo.org/definitions-methods/watsan-categories/ es in Bogota by 16 percent, compared with the base- 18 Public environmental protection expenditures in line (2010) scenario. Colombia dropped from 0.6 percent of GDP in 17 The WHO/UNICEF Joint Monitoring Program 2012 to 0.33 percent in 2013. The difference is due (JMP) has established a standard set of drinking-wa- to a change in the methodology and accounting for ter and sanitation categories that are used for mon- investments in the water supply and sanitation sec- itoring purposes. An “improved” drinking-water tor in 2012. References Browder, Gregor and Ricardi Duvil (2014). ENDS (2010). Encuesta Nacional de Demografía y “Restoring the Coastal Environment in Salud 2010. Asociación Probienestar de la Familia Cartagena, Colombia.” Latin America and Colombiana (Profamilia), Bogotá, Colombia. Caribbean Region LCSEN Occasional Paper Eurostat (2013). “Energy, transport and environ- Series. The World Bank. Washington, D.C. ment indicators.” Luxembourg: Publications Blackman, Allen (2006). “How Well Has Colombia’s Office of the European Union. Wastewater Discharge Fee Program Worked Golub, Elena, Irina Klytchnikova, Gerardo and Why?” Economic Incentives to Control Sanchez, and Juan Carlos Belausteguigoitia Water Pollution in Developing Countries (2014). “Environmental Health Costs in Policy Brief Series. Resources for the Future. Colombia: Changes from 2002 to 2012.” The Washington, D.C. World Bank, Washington, D.C. Campos, Anna, Niels Holm-Nielsen, Carolina Hamilton, Kirk (2000). “Sustaining Economic Diaz, Diana Rubiano, Carlos Costa, Fernando Welfare. Estimating Changes in Per Capita Ramirez, and Eric Dickson (2011). “Analysis Wealth.” World Bank Policy Research Work- of Disaster Risk Management in Colombia. ing Paper No. 2498. The World Bank. Wash- A Contribution to the Creation of Public ington, D.C. Policies.” The World Bank. Washington, D.C. Hamilton, Kirk and Giovanni Ruta (2009). Departamento Nacional de Estadísticas “Wealth Accounting, Exhaustible Resources (DANE) (2013). Cuenta de Actividades and Social Welfare.” Environmental and Resource Ambientales. Boletín de Prensa. Bogotá, Economics42, pp. 53–64. Colombia. Howard, Pippa (2014). “Biodiversity Offsets: the Disposición Final de Residuos Sólidos en Colombia Options for Colombia.” The World Bank. (2013).” Superintendencia de Servicios Públicos. Washington, D.C. Bogotá, Colombia. 142 PART TWO | CHAPTER 7 International Monetary Fund (2014). “Colombia. Sinnott, Emily, John Nash, and Augusto de la Staff Report for the 2014 Article IV Torre (2010). “Natural Resources in Latin Consultation.” Washington, D.C. America and the Caribbean. Beyond Booms OECD (2014). “Environmental Performance and Busts?” World Bank, Washington, D.C. Review: Colombia.” OECD Environmental The World Bank (2014). “Low Carbon Performance Reviews. OECD publishing. Development for Colombia.” Washington, OECD (2013). “Putting Green Growth at the D.C. Heart of Development.” OECD Green The World Bank (2012). “Assessment of the Growth Studies, OECD publishing. Environmental and Health Impacts of Rudas, Guillermo (2010). “Tarifas de las tasas por el Mercury Pollution in Colombia.” Washington, uso del agua. Impactos sobre el costo del servicio de D.C. Draft report. acueducto residencial y sobre la rentabilidad indus- The World Bank (2010). “Project Appraisal trial y agropecuaria.” Documento de Trabajo. The Document on a Proposed Loan in the Amount Nature Conservancy, Patrimonio Natural and of US$250 million to the Corporación Autonoma Wildlife Fund. Bogotá. Regional de Cundimarca with a Guarantee from Sanchez-Triana, Ernesto, Kulsum Ahmed, and the Republic of Colombia for a Río Bogotá Yewande Awe, eds. (2007). “Environmental Environmental Recuperation and Flood Priorities and Poverty Reduction. A Country Control Project.” Washington, D.C. Environmental Analysis for Colombia.” The World Bank. Washington, D.C. Structural Changes – Implications for Growth, Productivity, and Competitiveness 143 CHAPTER 8 Transport Infrastructure 144 PART TWO | CHAPTER 8 Main Messages Background: Colombia’s transportation network plays an important role in the country’s economic and social development. However, a fragmented institutional and regulatory framework, low technical capacity, and persistent low levels of investment lacking a strategic vision are the root causes of the country’s transport infrastructure gap. Current challenges include: (i) lack of strategic long-term planning in the sector and a fragmented institutional and regulatory framework; (ii) limited local and national capacity to manage the decen- tralization of the road network and other decentralized functions; inflexible and volatile budgets and limited contracting and implementation capabilities leading to low investments; (iv) an unprecedented increase in the number of road concessions demanding important contract management capabilities; (v) weak frameworks to address transport sector externalities, such as road accidents, transport-related greenhouse gas emissions and resilience to climate change related events; and (vi) low diffusion of multimodal transport corridors and improved logistics practices. Main policy recommendations include clarifying and strengthening the competencies and roles of agencies at the national level, improving subnational level competencies in planning, project structur- ing, and project management, enhancing the contract management capacity for public/private part- nership (PPP), streamlining the PPP project cycle and the planning and structuring of PPPs, mainstream- ing road safety and environmental management in the sector’s policy agenda, promoting multimodal transport based on integrated planning principles and economic rationale, and enhancing the envi- ronment for private participation in logistics services. Background quality of its combined transport4, electricity sup- ply and telecommunications infrastructure (ranked 92nd), and the quality of its institutions (ranked The availability and quality of infrastructure are 110th, Figure 8-2). In the World Bank’s 2014 key determinants of long-run growth and affect the Logistics Performance Index, Colombia ranks 97th competitiveness of an economy; hence, improving among 160 countries, making it one of the worst the provision of infrastructure will be a determining performers relative to regional peers (Figure 8-3).5 factor in Colombia’s ability to cash in on a poten- The country ranks 93rd among 185 economies in tial growth dividend. Colombia’s economic perfor- the World Bank’s 2013 Doing Business indicator mance has been impressive in recent years, yet the related to Ease of Cross Border Trade,6 which predom- country suffers from severe connectivity challenges inantly highlights the country’s high inland trans- that drag down its growth and competiveness. In- portation costs and time in performing a foreign vestment in transport infrastructure averaged 0.8 trade transaction (Figure 8-4). In particular, more percent of GDP from 2001 to 2009, with recent Na- than 65 percent of the exporting/importing costs tional public investment rising to 1.3 percent of GDP in Colombia are associated with inland transport, in 2010 and 2011 (Figure 8-1).1 However, several es- and these costs are more than double the LAC and timates conclude that investment should rise to at OECD averages.7,8 Furthermore, an analysis of least 3 to 4 percent of GDP to close the country’s Colombia’s infrastructure gap by transport mode infrastructure gap2 and meet projected demand.3 finds the largest deficiency in road infrastructure, where Colombia ranks 130 out of 148 in 2013– Colombia’s infrastructure gap is particularly acute 2014 WEF’s GCR. A 2013 study by Fedesarrollo9 in road transport—as shown by the high logistics estimates that in order to reduce the gap in road costs compared to similar economies around the infrastructure10 in Colombia, the country should world. A host of studies and benchmarks highlight have at least 25 percent more roads (approximate- Colombia’s transport infrastructure bottlenecks. ly 45,000 kilometers), and 30 percent more paved For instance, Colombia ranks 69th among 144 roads (approximately 8,000 kilometers).11 The gaps countries in the World Economic Forum’s com- in port and airport infrastructure are less signifi- petitiveness ranking (2012–2013 and 2013–2014 cant, although most of them are already operating reports), mainly being pulled down mainly by the Transport Infrastructure Quality FIGURE 8-2:  Investment in Transportation FIGURE 8-1:  Rating According to the World Infrastructure (% of GDP) Economic Forum 2013 1.8% 1.63% OECD 5.33 1.6% Chile 4.54 (46) 1.4% Uruguay 4.31 (55) 1.2% 0.97% Mexico 4.14 (64) 1.0% Brazil 4.02 (71) 0.8% 0.66% Ecuador 3.81 (79) 0.6% Argentina 3.52 (89) 0.4% Peru 3.50 (91) 0.2% Colombia 3.50 (92) 0 2004 2005 2006 2007 2008 2009 2010 Venezuela 2.61 (125) Total Public Private 0 1 2 3 4 5 6 Source: Calculations based on DNP and DANE. Yepes, T, J. Ramírez, L. Source: World Economic Forum 2013. Villar and J. Aguilar, Infraestructura de Transporte en Colombia (Colombia: Note: Colombia’s overall transport infrastructure quality rating is 3.50 on a Fedesarrollo, 2013). scale of 1 to 7. Numbers in parenthesis refer to countries’ overall ranking. Transport Infrastructure 145 146 PART TWO | CHAPTER 8 Logistics Performance Index, 2014 FIGURE 8-3:  have placed tremendous pressure on the country’s road infrastructure and underscored the need to OECD 3.67 improve connectivity within cities and between Chile 3.26 (42) cities and ports to external markets. Transport in- Mexico 3.13 (50) frastructure deficiencies also hinder regions from Argentina 2.99 (60) reaping the full benefits of trade. Regions con- Brazil 3.94 (65) tinue to be self-contained and relatively autarkic, Peru 2.84 (71) Venezuela 2.81 (76) which hampers greater regional integration and Ecuador 2.71 (86) more specialized and competitive cities.12 The Uruguay 2.68 (91) predominance of road transport has increased Colombia 2.64 (97) to the extent that other modes of transport, in- 0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 cluding river and rail, have historically ceased to be an option for the movement of general cargo. Source: World Bank’s Logistics Performance Index 2014. Note: Colombia’s overall transport infrastructure quality rating is 3.50 on a Instead, they have concentrated on moving spe- scale of 1 to 7. Numbers in parenthesis refer to countries’ overall ranking. cial cargo, such as coal (rail) and oil/oil derivatives (rivers).13 Indeed, if Colombia continues on its current growth trajectory, if at the same time the at maximum capacity, and this will only worsen new FTAs increase trade,14 and if all planned road with increased trade and passenger demand. investments are carried out in the coming years, the road network will have an acceptable level Against this backdrop, the economic relevance of service by 2020. By 2035, however, demand of Colombia’s road sector has never been higher, will again exceed road capacity.15 For the reasons triggered mainly by a rapid expansion of freight described above, this Policy Note focuses on the transportation by road and the potentially high- road sector’s looming challenges, while discussing er demands of new free trade agreements (FTA). constraints to creation of a modern multimodal Colombia’s growth has been accompanied by in- transport sector and the role logistics services play creases in foreign and domestic trade flows, which in this respect. FIGURE 8-4: High Cost of Importing and Exporting Cost of Export Procedures ($USD) Cost of Import Procedures ($USD) 2500 2,355 170 3000 2,470 7% 300 2500 150 2000 13% 350 6% 170 7% 250 15% 2000 10% 1,900 1,535 1500 1500 1000 1000 65% 77% 500 500 0 0 Totals Ports and terminal handling Documents preparation Customs clearance and technical control Inland transportation and handling Totals Ports and terminal handling Customs clearance and technical control Documents preparation Inland transportation and handling Source: Doing Business 2014. Transport Infrastructure 147 The transport sector is of paramount importance ly during 2015, will be the keystones from the Na- in overcoming the regional isolation at the root of tional Government to develop and prioritize the the country’s socioeconomic inequalities. The lack robust pipeline of infrastructure projects within of roads and deficient road conditions are obstacles long term vision master plans. to rural areas’ connection to the rest of the coun- try. Being isolated hinders access to public services, Despite these achievements and the sector’s import- makes products more difficult to sell to larger mar- ant role in the country’s economic and social de- kets, limits economic opportunities, slows region- velopment, a transport infrastructure gap persists, al integration and competitiveness, and may even rooted in a fragmented institutional and regulatory limit the presence of the Government16 in some framework, low technical capacity, and persistent regions. Although the planned improvements to low levels of investment that lacks a strategic vision, the national road network (roads under conces- particularly in the secondary and tertiary networks. sion) are important to connecting rural areas with Colombia’s transport sector underwent a series of markets, improving the connectivity and quality of transformations since the 1990s, but the pace of re- secondary and tertiary roads is crucial for both re- forms and the degree to which these reforms have gional development and reducing rural poverty.17 been internalized at the national, departmental, and municipal levels are quite different and even The Santos administration has implemented a vary significantly among the subnational levels. number of reforms to revamp the institutional and The recent program of bold reforms is meant to regulatory framework, improve the investment cli- improve the investment climate for private partic- mate, and enhance public-private dialogue in the ipation and strengthen the institutional framework transport sector. Responding to problems encoun- at the national level. Successful implementation tered in the three generations of concessions that of the Fourth Generation of Concession Program started in the mid-1990s,18 the Santos administra- (known as 4G)21 will be the ultimate test to gauge tion embarked on a set of comprehensive reforms whether the reforms pay off. For those roads not expected mobilize more private sector resources under concession, what has become evident is that and skills for public transport projects. A PPP Law the decentralization of road infrastructure carried (Law 1508, 2012) was enacted. The National Insti- out in the 1990s was left incomplete. In practice, tute of Concessions was transformed into the Na- the allocation of competencies and responsibili- tional Infrastructure Agency (ANI)— in charge of ties at the national and subnational level was never structuring and managing road concessions. The made clear. As a result, there is a need to revamp Financiera de Desarrollo Nacional (FDN) was created the institutional capacity at all levels and develop to provide long-term funding and innovative fi- more strategic planning and financing options, so nancial products to the infrastructure sector. Fi- investments in the secondary and tertiary network nally, a number of existing public agencies (FIN- generate economic and social impacts. DETER and FONADE) were given a mandate to provide project structuring services to develop a Knowledge pipeline of projects. The new Infrastructure Law (Law 1682 from November, 2013), is designed to tackle some of the most pressing transport bottle- Road transport is the dominant mode in necks that have historically led to cost-overruns Colombia concentrating more than 70 percent and delays in transport projects.19 It also calls for of total freight volume movements; the sec- creation of two important agencies in the trans- tor has been characterized by low diffusion of port sector: the Transport Planning Unit (desig- multi-modal and logistics practices. The overall nated by Decree 946 of 2014) and the Transport modal split in Colombia’s freight transportation Regulatory Commission (Decree 947 of 2014). shows a clear dominance of road transportation, These two agencies,20 which are planned to be ful- with 70 percent of total freight volume moved 148 PART TWO | CHAPTER 8 by truck. Railroads account for 27 percent of 11.88 percent are paved).28 This network includes freight, and are used almost exclusively to trans- roads that are the responsibility of three different port coal from mines to maritime ports for ex- administrative levels, i.e., national, departmental port. Inland navigation represents 3 percent of and municipal, as follows: (i) 17,249 kilometers of freight, and flows are concentrated on the Rio national roads, of which 11,682 are under public Magdalena, which is mainly used to transport oil domain managed by the National Road Agency and its derivatives. Commercial navigability for (INVIAS), and 5,262 are concessions managed by other products could be feasible, but requires the the ANI (with provisions for additional 8,100kilo- development of intermodal facilities and dredg- meters from INVIAS to be transferred to ANI to ing to ensure all-season navigability. Under these be bid as part of the 4G plan, which will leave ANI conditions, modern multimodal transport is vir- with 13,362 kilometers); (ii) 42,954 kilometers of tually non-existent in Colombia, and except for secondary roads are under the jurisdiction of 32 coal and oil, all freight is concentrated by road.22 Departments; (iii) an estimated 141,945 kilometers Almost all of Colombia’s international trade is of rural and local roads are primarily under the channeled through maritime ports. Truck flows jurisdiction of municipalities, although INVIAS through border crossings with Venezuela and and Departments also manage a portion of this Ecuador take comparatively small volumes, while network;29 and (iv) 12,251 kilometers of private air transportation is only relevant for the small roads (Table 8-1). About 80 percent of the primary fraction of higher value products or perishable network and 27 percent of the secondary network goods.23 As of recently, initiatives are underway is paved. Moreover, only 1,170 kilometers of the to expand the installed port capacity on both primary network are dual carriageways. In general, coasts, improve the connectivity between ports the quality of the road network is poor (Figure 8-5), and inland transportation network,24 and ex- except on the access corridors to major cities and pand the navigability in the Rio Magdalena,25 by ports, which are predominantly under concession. which the National Government expects to cut Yet, since most of the assessment of road assets down by 50 percent freight transport costs to the (particularly those under public domain) relays Caribbean coast and foster coal mining. solely on visual inspections, there is a need to com- plement with more robust techniques to identify, Logistics services and practices have improved in quantify, and value the condition of the network. Colombia, and the formulation and adoption in 2008 of a National Logistics Plan was a step in the right direction to develop the enabling environment FIGURE 8-5: Quality of the National,a and prioritize a set of actions to promote modern Secondary, and Tertiary Roads logistics practices and multimodality. However, nu- merous challenges still remain, including the con- 3.83% solidation of a national logistics observatory; im- 14.44% proving inspection and customs clearing of freight at ports, airports and border crossings;26 improving 26.03% cargo handling in urban centers; improving car- 26.68% go transport pricing and tariff schemes; improving 27.93% the performance, efficiency, safety, reliability and greenhouse gas emission levels of the freight truck fleets; and mainstreaming communication and in- Very good Good formation technology in logistics practices.27 Regular Bad Very bad The country’s road infrastructure includes a net- Source: INVIAS for the national road network under its jurisdiction. Fedesarrollo (2013) for the secondary and tertiary roads. work of 214,399 kilometers (out of which only a Includes only national roads under INVIAS jurisdiction. Transport Infrastructure 149 TABLE 8-1: Road Network in Colombia 2013 Length (Km) % Paved (km) Unpaved (km) National Roads INVIAS 11,682 (3,582) 8,313 3,369 ANI 5,262 (13,362) 5,262 Departments 305 305 Total 17,249 8.0% 13,880 3,369 Secondary Roads Departments 42,954 20.0% 11,598 31,356 Rural and Local Roads INVIAS 26,970 Departments 14,195 Municipalities 100,780 Total 141,945 66.2% 141,945 Private Roads 12,251 5.7% 12,251 Total 214,399 100% 25,478 188,921 Source: Plan Vial Regional (PVR 2013). Note: For national roads, number of kms in parenthesis reflects the reallocation due to the 4G plan. The new institutional set-up at the national level port sector agencies. The second issue emerges as offers an opportunity to revamp the institutional a result of the new 4G concession program, and capacity, but Colombia needs to clarify the roles, the fact that more than 75 percent of the nation- responsibilities, and coordination mechanisms of al road network will be managed by ANI. Against the road sector agencies and, more generally, the this backdrop, the National Road Agency (INVI- entire transport sector. The transport sector has AS), which has important technical capacity de- been characterized by inadequate policy and plan- ployed through the 32 Departments, is struggling ning capacity, the lack of a multimodal policy, a to find a new role and mandate that will allow it short-term and reactive vision and management, to act as facilitator in the process of decentraliza- and a shortage of technical personnel in key agen- tion of regional road networks Lastly, the prolifer- cies.30 The Santos administration’s recent reform ation of project structuring agencies (ANI, FDN, package is a step in the right direction for overcom- FONADE, and FINDETER) may help create a ing some of these shortcomings. Yet, the new insti- pipeline of transport projects in the near future, tutional set-up also raises some concerns. The first but eventually there will be a need to better de- relates to the role of the Ministry of Transport. fine their competencies and boundaries to achieve One of its core functions—planning and prioritiz- more efficient and specialized interventions. ing investments with high rate of social returns— has been delegated to the Transport Planning At the subnational level, the process of decen- Unit. This unit, like a number of other recently tralizing the road network is still incomplete. Two created transport agencies (Regulatory Commis- tasks are of paramount importance to achieving sion, ANI), is an independent body (agencia adscri- the integration of the road network under all ju- ta), not part of the ministry. The strategy has been risdictions: (i) building up the institutional capacity adopted as a way to create incentives to attract and (planning, structuring, financingand project man- retain technical staff, improve governance struc- agement) and (ii) strengthening the coordination tures, and contracting and implementation capac- mechanisms between national, departmental, and ity. Nonetheless, it is important that the Transport municipal levels. Begun in the 1990s, the process Ministry also revamps its technical and implemen- of decentralizing the road network (both in terms tation capacity to retain its policy-making mandate of financing and capabilities) has proved inade- and consolidate and coordinate the different trans- quate. The poor condition of the road network, 150 PART TWO | CHAPTER 8 particularly the secondary and tertiary roads that FONADE, and FINDETER) could help build are mainly under subnational jurisdiction, is a these capabilities at the sub-national level; alterna- clear indication of such deficiencies (Figure 8-5). tively, the government could follow the examples Through the Ministry of Transport, the national of Brazil, Mexico, and other countries and set up Government has recently made some strides in project structuring facilities or leverage support supporting the departments with the mechanisms from private structuring agencies.35 and institutional arrangements and regional fi- nancing mechanisms31 required to comply with the In terms of financing strategies, Colombia needs decentralization of competencies introduced in to develop a resource framework and the contract- the 1990s. To this effect, the Ministry of Transport ing and implementation capabilities for stable fi- launched a program (Plan Vial Regional) to help nancing of the publicly managed road sector and the departments strengthen their technical and adopt cost-effective asset management policies to institutional capacities, access sources of funding, make the most of available resources. The road and financing and implement road management network, particularly those assets managed by the methodologies for the secondary road network.32 public sector, has been subject to disruptive “stop- Yet, this technical support has not been extended and-go” implementation programs, resulting from to municipalities to improve the planning, procure- inflexible and volatile budget allocations. The pat- ment mechanisms for works33 and road manage- tern has impeded a long-term maintenance strate- ment capabilities of tertiary roads. Information gy36 and implies that higher financial requirements on the quality of these networks is limited, com- are needed to overcome the backlog of deferred plicating the process of investment planning and maintenance. Furthermore, limited contracting leading to fragmented and sporadic investments and implementation capabilities—at all levels of that make very little sense from an economic or government— result in further maintenance back- social perspective. Sources of financing, including logs because budget allocations are not executed those from the national Government, are also ex- in a given year.37 Against this backdrop, a sound tremely volatile, worsening the situation. Design of resource framework and a system for the financ- a technical assistance program similar to the one ing of the road network in which resource alloca- put in place for the secondary road network could tion is based on cost-effective policies according to be an option for improving municipal planning agreed and coherent priorities, developing more and road management capabilities under the cur- modern and sound financial planning mechanisms rent decentralized framework. Furthermore, the adequately linked to investment plans is required Ministry of Transport should leverage the newly to reduce the deterioration of the road network created Transport Planning Unit to achieve an and maintenance backlog.38 At the national level, integrated planning process that generates strate- the 4G program under execution by ANI has pri- gic investments at the subnational level that make oritized corridor projects (including construction, sense from a regional perspective. Project structur- operation and maintenance for over 20 years) with ing and project management capacities also need the highest socioeconomic benefits. In this sense, to be shored up at the subnational level. These PPP legislation includes road maintenance re- are becoming particularly important under the quirements which are not dependent yearly bud- reforms supported by the new Royalties Law (Ley get allocations. In its turn, INVIAS is developing a de Regalias)34 and the PPP Law. Under these laws, performance-based road rehabilitation and main- subnational entities can originate and structure tenance program39 to improve management and transport infrastructure projects to be financed by quality of the national road assets. However, de- royalty transfers and/or can receive unsolicited ployment of this type of program would imply se- proposals from the private sector that would need curing the necessary funds to rehabilitate segments to be evaluated and filtered (more on this below). that have not received interventions in recent years, National public project structuring agencies (FDN, implementing more modern planning strategies to Transport Infrastructure 151 anticipate future requirements, and designing effi- try of Transport, FONADE, FDN, FINDETER, cient work programs aligned with existing budgets. ANI). In addition, project evaluation filters from Through the Plan Vial Departamental, the Ministry the above mentioned agencies are coming in too of Transport has helped departments tap into late in the preparation cycle, since early screenings more stable sources of financing and adopt more are required to reduce the risk of wasting resourc- cost-effective management policies, but municipal- es in the preparation and evaluation of inadequate ities still face enormous challenges in this respect. PPP projects and to avoid conflicts when national and subnational government entities deny (or ask With its growing concession program, Colombia to significantly modify) projects at a later stage. needs to enhance the Government’s PPP contract management capacity and reinforce the planning, Lastly, it is of paramount importance that Colombia structuring, and project evaluation filters in the continues to address transport sector externalities PPP project planning cycle. Implementation of the by mainstreaming road safety initiatives and envi- 4G concession program will result in 40 new proj- ronmental management programs (including resil- ects for construction of 8,100 kilometers of na- ience to climate change events of the road network tional roadways and generate new investments of and comprehensive vehicle mechanical and emis- approximately USD$26 billion over the next eight sions inspections) into the policy agenda. Due to the years. If the 4G program is executed as expected, ever-growing number of casualties and fatalities on by the end of 2014 alone, ANI will have at least 25 the road network, road safety has become a com- more road projects to manage.40 This represents a mon and prominent issue at all levels of govern- doubling of the 25 road concessions from previous ment. In Colombia, road fatalities are the second generations that ANI currently manages.41 This cause of death overall, and the leading cause of tremendous increase in projects under manage- death among children and early youth (5 to 14 year ment will put significant pressure on ANI’s con- cohort).43 Between 2012 and 2013, Colombia took tract management function and call for an import- important strides to establish a new institutional ant institutional effort. As documented in research and technical framework to address road accidents and experience, concession agreements are subject and vehicle maintenance standards, by creating the to a high incidence of renegotiation42 and the Gov- Road Safety Lead Agency (Law 1702, 2013) based ernment must be in a strong position to manage on international best practices (in parallel with the incumbent operators and enforce contracts that National Road Safety Fund to earmark specific re- are inherently complex and involve a wide vari- sources for the implementation of the new policies), ety of legal, financial, and technical obligations on and the revised technical-mechanical mandatory the part of private operators that must be contin- inspection for all motor vehicles (Decree 019 of uously monitored. As previously mentioned, the 2012). New regulation was also enacted to increase country needs to strengthen investment planning fines for driving under the influence of alcohol. in the road sector, irrespective of the procurement Adequate enforcement and monitoring schemes model utilized (public works or PPP). Once a pipe- for these regulations are still in the early stages and line of projects that makes sense from an economic may undermine the effectiveness of the measures. and social perspective is defined, public structuring In terms of resilience to climate change, the expe- agencies (ANI, FDN, FONADE, and FINDE- rience with the meteorological phenomenon known TER) should come in to support in the develop- as La Niña in 2010 and 2011 proved the lack of pre- ment of PPP projects, both at the national and paredness of the road sector, and called for main- local levels. In this sense, the Government’s PPP streaming environmental management and disaster support framework needs to be streamlined, with risk policies in the transport sector. Against this the mandates and competitive advantages of the backdrop, the PPP Law requires government agen- various agencies involved in the PPP project cycle cies to undertake a natural disaster risk and vulner- better defined (Ministry of Finance, DNP, Minis- ability analysis for all proposed projects. 152 PART TWO | CHAPTER 8 Policy Recommendations and tertiary road network, bolster capaci- ties at the subnational level, and develop a more stable financing framework and sys- Policy Recommendation #1: Clarify and tem for prioritizing investments, with the strengthen the competencies and roles of goal of generating impacts that make sense various transport agencies at the nation- from an economic and social perspective. al level. First, and foremost, the Ministry of There is a need to mesh long-term planning of Transport needs to overhaul its technical capaci- the national, regional, and local road networks. ties to strengthen its policy-making functions and With the deployment of the Plan Vial Departamental move away from a short-term and reactive vision program, the Ministry of Transport has taken and management of the sector, strengthen its poli- important strides in helping departments with cy-making functions and link them with a concrete their planning and project structuring capacities. long term infrastructure investment plan. The cre- The ministry could leverage this program to sup- ation of the new Transport Planning Unit is a step port municipalities in developing competencies forward because the sector has been characterized and instruments to manage the tertiary road net- by a lack of integrated, long-term planning (and work—e.g., collection of statistics, compilation of a corresponding robust project pipeline). For this road inventories, guidelines to manage the net- Unit to work properly, the Ministry of Transport work, identification of funding sources, etc. The needs to have the right technical personnel and Transport Planning Unit should also become the the adequate coordination mechanisms and infor- coordinating body for the integral planning of the mation flows, so the core planning function is not sector at the subnational level, and INVIAS could delegated but feeds into policy-making. Second, take on a new and more focused role in providing with the new institutional set-up emerging at the technical assistance to municipalities in the man- national level, a broad exercise should be launched agement and maintenance of the tertiary network. to clarify the roles of various transport sector agen- To this effect, the experience of countries like cies in a coherent and coordinated manner and to Peru, Mexico, and India44 could be benchmarked make sure that the capacities are being developed in designing a rural roads program anchored at to fully discharge the responsibilities established by INVIAS. The financing framework also needs to the new institutional framework. For instance, the be tackled, particularly for rural roads. Since mu- national roads agency INVIAS is currently strug- nicipalities are largely dependent on transfers from gling to find its role as facilitator of the decentral- the national Government, there is a need to prior- ization of road networks amongst the new wave of itize resource allocation based on economic and/ road concessions led by Public structuring agencies or social parameters to generate greater impacts. (ANI, FDN, FONADE, and FINDETER). These Lastly, there is a need to bolster project structur- agencies are are openly competing to build a pipe- ing and project management capacities at the line of transport sector PPPs, which can benefit subnational level. To tackle these deficiencies, the greatly from a long term infrastructure master Government could consider the following alterna- plan led by the Ministry of Transport and the tives: (i) agreements with national public project Transport Planning Unit. The Superintendence of structuring agencies (mainly FONADE, due to its Ports and Transport also needs to be revamped to experience and important technical capacity, and focus on supervision and build the technical capac- also including FDN and FINDETER) to increase ities to respond to the new challenges is needed in and strengthen support to sub-nationals; (ii) es- coordination with the recently created Transport tablishment of a proposed project structuring fa- Regulatory Commission. cility, perhaps funded by royalty system proceeds and with support from international honest bro- Policy Recommendation #2: Improve the in- kers; (iii) leverage support from private structuring stitutional set-up to manage the secondary agencies, as it is done in countries like Brazil or Transport Infrastructure 153 Mexico. The ultimate goal is to avoid fragmented (ii) mandating the use of standard project prepa- and atomized public investments by prioritizing ration and evaluation forms for private and public the structuring and implementation of subnation- proponents; (iii) signaling to the private sector the al projects that have regional or national impact priority sectors leveraging information from long and are conceived within a long term infrastruc- term infrastructure master plans and its derived ture master plan, as opposed to fragmented and project pipeline. atomized public investments45 Policy Recommendation #4: Continue to Policy Recommendation #3: Enhance PPP mainstream road safety and environmen- contract management capacity and the tal management in the transport sector planning and structuring of PPPs. The 4G policy agenda. The Government needs to con- program’s unprecedented increase in the number tinue in an aggressive and decisive manner to of road concessions will demand an important in- design and implement an integrated, multi-dis- stitutional effort in contract management. In this ciplinary and results-focused approach for road respect, setting up adequate governance and tech- safety. In this respect, moving forward with the nical competencies in the Transport Regulatory creation of the Road Safety Lead Agency with a Commission to respond to its chartered responsi- Safe System approach46 based on technical and bilities is critical. Contract management functions independent criteria is crucial. The experience in the ANI also need to be revamped by implement- of Lead Agencies operating successfully in Spain ing such initiatives as: (i) institutional specialization and Argentina should be considered. At a min- in managing pre-defined types of obligations that imum, Colombia’s Lead Agency should take on are present across all concession agreements (i.e., the following responsibilities: (i) spearhead road insurance requirements, performance bonds, su- safety issues and serve as the central convening pervision of quality of service, etc.); (ii) quality cer- body for other stakeholders, including civil soci- tification for policies and procedures to provide a ety, private sector, and national and local govern- sense of security to private sector participants and ment bodies; (ii) organize and lead the team that infrastructure users; (iii) intelligent use of outsourc- plans and implements road safety policies; and ing possibilities for tasks that could be better han- (iii) lead technical aspects and establish a system dled by third parties; (v) training and professional for road safety information. In addition to creat- development programs to build a cadre of expe- ing the Lead Agency, Colombia needs to revise its rienced contract managers; and (vi) a governance National Traffic Code to include the road safe- structure that shields the function from potential ty perspective/policy in its norms and include outside interference. In terms of improving the road safety design47 criteria in the road network planning and structuring capacities of transport currently being developed, particularly dual car- PPPs, the Government could consider designing riageways. These concerted efforts to improve and implementing a capacity building program road safety should ultimately be measured and on PPPs for public structuring agencies. It would monitored against the goal set by United Nations provide structured training to public sector officials for the Decade of Action—reducing by 50 per- responsible for the preparation and evaluation of cent the deaths by road accidents in the 2011–20 investment projects (Peru and Uruguay recently period. In terms of environmental management, implemented such programs). Refining the PPP Colombia needs to revamp its adaptation, mitiga- project cycle and establishing more detailed guide- tion, and increased resilience strategies to man- lines and procedures is also key. The Government age the risks and vulnerability posed by climate could consider facilitating PPP project preparation change on its transport infrastructure. This will and evaluation by: (i) introducing project screen- require the collection and continuous update of ing at the pre-feasibility stage and better enforcing information on high risk areas, the design and im- the PPP project registry created by the PPP Law; plementation of disaster risk assessment policies, 154 PART TWO | CHAPTER 8 and associated prevention and mitigation mea- types of freight through inland navigation and rail, sures in the transport sector. these investments need to be complemented with adequate logistics platforms and services that will Policy Recommendation #5: Promote the make multimodal transport feasible. Additionally, adoption of multimodal transport in trade logistic platforms must be planned in consider- corridors, guided by integrated planning ation to optimize flows from production centers principles and economic rationales, and en- to multimodal integration centers taking into ac- hance the enabling environment for private count that logistic activities put additional strain to participation in logistics services. As previ- the already congested urban road networks in pro- ously mentioned in this note, Colombia can expect duction centers.48 In this sense, the most important a significant expansion of freight transportation as task for the Government is to provide the enabling a result of new trade agreements. As a response environment and regulations for the private sector to this increased pressure in its transport networks, to develop these complementary logistics services the adoption of multimodal transport strategies (logistics centers, transfer centers, and cargo con- should emerge from an integrated and strategic solidation facilities). It will involve facilitating and planning exercise focused on key trade corridors simplifying all procedures related to cargo control, and guided by economic rationales—cost-efficien- inspection, and customs clearance. cy criteria, lengths to be travelled, type of cargo to be transported, etc. Furthermore, although The following matrix summarizes the overall di- the Government is making important strides in agnostic and policy recommendations over short improving the infrastructure for handling certain (one year) and long-term (four years) horizon: Transport Infrastructure 155 Development Challenge Policy Recommendations—Short Term Policy Recommendations—Long Term Lack of strategic long-term • Define/clarify competencies, governance planning and clarity on the structures, and coordination mechanisms roles and competencies of national level agencies (Transport of agencies at the national Planning Unit, Regulatory Commission, level. Superintendence of Ports and Transport). • Carry-out long-term investment master planning of the transport network which can set the grounds for a robust project pipeline and based on state of the art planning tools and sound economic analysis (cost-benefit analysis) while generating linkages with transport policy strategies. Limited local (and national) • Design and roll-out a program, led by • Leverage the Transport Planning Unit as capacity to manage more the Ministry of Transport, to support the coordinating body for the integral decentralized systems. subnational governments in defining planning of the sector at the subnational competencies and instruments to level. manage the secondary and tertiary road • Leveraging on studies and reports on network. diagnosis and strategies to fund public • Implement Standard Bidding documents investment at the national and subnational for road construction and maintenance level for of infrastructure projects programs at the subnational level. (including the REDI study financed by • Bolster project structuring and the World Bank), propose strategies to project management capacities at the increase the public investment levels and subnational level. innovative financing mechanisms at both levels. Limited contract • Create, staff, and set up adequate • Design and implement a capacity- management capacities governance and technical competencies building/training program on PPPs for points to the need to in the Transport Regulatory public structuring agencies. strengthen the planning and Commission to respond to its chartered • Refine and streamline the actual PPP structuring of PPPs. responsibilities in the PPP realm. project cycle (as dictated by the process • Revamp contract management functions and procedures manual published by the in the ANI for pre-defined types of Ministry of Hacienda) by standardizing obligations that are present across all project documents and establishing concession agreements. supervision, monitoring and enforcement • Strengthen an early screening process mechanisms for these detailed guidelines in the PPP cycle to allow prioritizing and procedures. projects in which private participation • Better define competitive advantages is more financially and economically and enforce mandates of the different feasible. public sector agencies involved in the PP project cycle, ensuring that project evaluation filters are timely and technically robust and avoiding relegating filters as procedure check-boxes. • Link the PPP project pipeline with a long term infrastructure master plan which defines priority national and subnational projects. Weak sectoral frameworks • Staff and setup adequate governance • Establish the National Road Safety to address transport sector and technical competencies in the Road Observatory. externalities, such as road Safety Lead Agency. • Incorporate environmental management accidents and climate policies in transport sector agenda. change. (continued on next page) 156 PART TWO | CHAPTER 8 (continued) Development Challenge Policy Recommendations—Short Term Policy Recommendations—Long Term Low diffusion of multimodal • Adopt multimodal systems in trade • Continue with the implementation of and logistics practices. corridors, guided by strategic planning the National Logistics Plan, including and economic rationale. dimensions related to: improving • Consolidate the consolidation national inspection and customs clearing of logistics observatory at DNP. freight at ports, airports, and border crossings; improving cargo handling in urban centers; improving cargo transport pricing and tariff schemes; improving the performance, efficiency, safety, reliability, and greenhouse gas emission levels of the freight truck fleets; and mainstreaming communication and information technology in logistics practices. Endnotes 1 Estimates from National Planning Department toms clearance and technical control; (iii) ports and (DNP) indicate that combined private and Nation- terminal handling; and (iv) inland transportation al public investments in transport infrastructure in and handling. 2013 ascended to 2.94 percent of GDP. 7 High costs, however, are partly explained since Co- 2 The “infrastructure gap” is defined as the difference lombia has its main production centers in the moun- between a specific infrastructure requirement and tainous center of the country and more distant from the effective current supply or stock of infrastructure. coastal ports than benchmark countries in the region. The Economic Commission for Latin America and 8 The cost of exporting a similar good (per Doing the Caribbean (ECLAC) estimates the gap based on Business methodology) amount to US$2,355 in Co- the development of the stock of infrastructure-relat- lombia, US$1,283 in LAC (average), and US$1,070 ed capital relative to infrastructure demand. Refer to in OECD countries (average). The correspond- ECLAC, July 2011. “The Infrastructure Gap in Lat- ing costs of importing are US$2,470, US$1,676, in America and the Caribbean.” and US$1,090. World Bank’s Doing Business 2014 3 According to Fedesarrollo (2013), 20 percent of this http://www.doingbusiness.org. investment should be allocated to close the infrastruc- 9 Refer to Fedesarrollo. 2013. “Infraestructura de ture gap and the remaining 80 percent to the expect- Transporte en Colombia”. ed increase in demand until 2020. See Fedesarrollo, 10 However, benchmarks aggregating total number of 2013. “Infraestructura de Transporte en Colombia.” kilometers of main, secondary and tertiary (rural) 4 The WEF’s GCR does not include a specific indica- roads place Colombia as the country with highest tor for “quality of transport infrastructure.” How- road density in the region. ever, measurements based on businessmen’s percep- 11 Fedesarrollo. 2013. “Infraestructura de Transporte tions of the quality of roads rank the country 130 of en Colombia.” 148 (2013–2014). Other perceptions rank railroad 12 In Colombia, where cities are relatively autarkic infrastructure, quality of port infrastructure, and and do not currently play complementary roles be- quality of air transport infrastructure. cause of the presence of a large number of eco- 5 Colombia ranks third to last in South America, nomic sectors but at low scales with limited special- ahead of only Ecuador, and Venezuela. ization, lowering transportation costs could lead to 6 The indicator groups the procedures in the follow- more specialized and competitive cities. See Pablo ing four aspects: (i) document preparation; (ii) cus- Roda (2011). Transport Infrastructure 157 13 The National Infrastructure Agency—ANI—has of US$24.5 billion and aims to tackle some of the made efforts to promote transport infrastructure challenges faced by previous phases. projects which favor a multimodal approach, as 22 Roda, Pablo (2012). “Conectividad Interurbana en demonstrated by the structuring and bidding of the Colombia” Misión Ciudades. strategic Magdalena River navigability project. 23 World Bank (2004). Recent Infrastructure Develop- 14 In 2005, Colombian ports moved 91.8 million tons, ments. a number increased to 131.9 million tons in 2010. 24 Refer to CONPES 3744, April 2013 “Política Portu- Iin the coming years, this activity is expected to in- aria para un País más Moderno.” crease between 20 and 40 percent, according to a 25 Refer to CONPES 3758, August 2013. “Plan para recent study by Fedesarrollo (2013). “Infraestructu- Restablecer la Navegabilidad del Río Magdalena.” ra de Transporte en Colombia,” p. 39. The bidding process for this Project is well advanced 15 Roda, Pablo (2012). “Conectividad Interurbana en with contract award planned to happen during Q4 Colombia” Misión Ciudades. 2014. In 2014, this project received the award for 16 Including the supply of government health, educa- “most strategic infrastructure project in Latin Amer- tion, security, and institutional services. ica” at the 12th Latin American Infrastructure 17 Plan Vial Regional. 2013. Red Vial Nacional, 2013. Leadership Forum. 18 The problems associated with private participation 26 The National Government is advancing towards the in transport projects (project delays, high cost-over- approval of a new National Ports and Customs Stat- runs and the renegotiation of several contracts at a ute (Estatuto Aduanero), which aims at moderniz- high cost to the Government) have been largely doc- ing, streamlining and strengthening customs pro- umented. Refer, for instance to Benavides (2010). cessing at border crossings, ports, and airports. “Reformas para Atraer la Inverson Privada en la In- 27 Refer to CONPES 3779, October 2013. fraestrctura Vial”; OECD Working Paper (2013). 28 Plan Vial Regional. 2013. “Red Vial Nacional 2013” “Opening the black box of contract renegotiations: 29 Owing to lack of local resources and capacities for An analysis of road concessions in Chile, Colombia road maintenance, the decentralization process and Peru.” could not be fully completed and therefore signifi- 19 The most important bottlenecks include: approv- cant portions of the tertiary road network remain al of environmental licenses, land and resettlement with INVIAS under national jurisdiction. Refer to processes, and responsibility for the intervention World Bank (2004). Recent Economic Develop- and financing of public utility networks during con- ments in Infrastructure in Colombia. struction of transport infrastructure. See “Informe 30 World Bank (2004). Recent Economic Develop- de la Comisión de Infraestructura,” October 2012. ments in Infrastructure in Colombia. http://www.infraestructura.org.co/present/23nov/ 31 Reports on the status of the decentralization process STEINER.pdf. indicate that limited Municipal and Departmental 20 The Transport Planning Unit and the Transport finances undermine the capacity of subnational en- Regulatory Commission were created as decentral- tities to embark in decentralized road construction ized agencies from the Ministry of Transport; how- and maintenance projects. ever, no institutional arrangements are yet in place 32 As of 2013, the results of the first phase of the Plan to enable fluid communication channels between the Vial Regional were: (i) 32 departments carried out in- agencies and the existing Planning Bureau (Oficina ventories of their roads, cataloging 35,210 kilometers Asesora de Planeacion) at Ministry of Transport. of roads; (ii) 25 Departmental Road Plans were ap- 21 In Colombia, concessions of the national prima- proved; (iii) a set of road management guidelines and ry network can be divided chronologically into methodologies were developed to support the depart- four generations or phases, each with its own con- ments; (iv) a regional support group was created in tract design principles. The Santos administration is the Ministry of Transport: and (v) facilitating access launching the fourth generation, which includes ap- to finance (such as Royalty System, FINDETER, etc). proximately 8,100 kilometers and total investments See Ministry of Transport (2013). Plan Vial Regional. 158 PART TWO | CHAPTER 8 33 Including the implementation of Standard Bidding 40 It is expected that bids for the first package of nine Documents for Departmental and Municipal road roads (five Autopistas de la Prosperidad and four works contracts, which allow improved bidding pro- Victorias Tempranas) will be received by the end cesses with ultimate gains in cost-effectiveness. of April 2014 (April 9th for the Autopistas de la 34 Introduced in 2012, the new Royalties Law, among Prosperidad), and the projects will be awarded by other reforms, created a dedicated fund to finance the end of June 2014. Another 10 projects are cur- strategic regional infrastructure investments. Trans- rently in the prequalification process and are ex- port projects, primarily focused on improving the sec- pected to be awarded by the end of September ondary and tertiary network with paved roads, repre- 2014. Finally, six more projects developed un- sent the highest share of infrastructure investment. der private initiative are in advanced stages of 35 Estruturadora Brasilera de Projectos (EBP) in Brazil preparation with bidding processes expected to be and the MuniAPP or PIAPPEM Programs in Mex- launched in 2014. ico are among the facilities that fund project prepa- 41 Also note that ANI has assumed the responsibility ration and develop a PPP pipeline both at the na- for managing all seven of the concession contracts tional and subnational level. India’s web-based PPP that govern the operation of 17 airports in Colom- Toolkit (http://toolkit.pppinindia.com/) aims to bia, and it will also be responsible for managing new improve the quality of infrastructure PPPs. concession contracts in the rail sector. 36 While budgetary appropriations for the sector can 42 For instance, refer to OECD Working Paper (2013). be initially high, they can be curtailed throughout “Opening the black box of contract renegotiations: the year to keep overall spending in line with fiscal An analysis of road concessions in Chile, Colombia targets. and Peru;” Eduardo Engel E., Fischer R., Galetovic 37 According to the General Controller’s Office, A. (2009). “Soft Budgets and Renegotiations in Pub- road-sector agencies executed only an estimat- lic-Private Partnerships;” Guasch J. L., J. J. Laffont ed 15 percent of their budgets in 2013. Refer to and S. Straub (2007), “Concessions of Infrastructure Comptroller General’s Office (2013) Review of Na- in Latin America: Government-led Renegotiation.” tional Budget. 43 In 2013, road fatalities were approximately 5,600, 38 Official estimates indicate that the present backlog, according to the National Institute of Legal Medi- or cost of rehabilitating the network back to a high cine and Forensic Sciences. quality standard, is in the order of US$500 million, 44 For Peru, see Provias Descentralizado: http://www. plus US$120 million per year in maintenance costs. proviasdes.gob.pe/. For India, see the Indian Na- Refer to CAF (2008).” Mantenimiento Vial – In- tional Rural Roads Program, PMGSY: http:// forme Sectorial.” pmgsy.nic.in/. 39 These types of contracts, widely used in places such 45 Refer to National and Subnational Public Finances as Argentina and Brazil for the rehabilitation and and Governance Policy Note for a complementary maintenance of the road network, include the fol- discussion on this topic. lowing features: (i) linking budget allocations with 46 This approach is based on the principle of shared re- multi-year expenditure requirements established sponsibility to minimize the risk of accidents. This re- under the contracts; (ii) increasing cost-efficien- quires a multi-disciplinary and multi-sectorial vision. cy as compared to ad-measurement type contracts; 47 Road safety design features should reinforce road sig- (iii) minimizing delays in project implementation; naling standards and improve considerations on max- (iv) eliminating cost overruns; (v) reducing the risk of imum turn radii, configuration of road accesses and unsatisfactory quality in the rehabilitation and sub- lane exits andaccepted materials and configurations sequent maintenance works improving the condi- for lane shoulders and dual carriageway split sections. tion of the network, and slowing down the evolution 48 Logistic platforms should consider the regional and of roughness; (vi) cutting down government’s super- urban dimensions of its impact in order to avoid vision costs; and (vii) fostering innovation in the pro- hindering the internal competitiveness of urban gramming and execution of works. centers. Structural Changes – Implications for Growth, Productivity, and Competitiveness 159 CHAPTER 9 Financial Sector 160 PART TWO | CHAPTER 9 Main Messages The financial crisis in 1999 led to strengthening financial sector stability through revamping oversight. Today, Colombia’s banking system is much better supervised and resilient, a fact demonstrated during the recent global financial crisis. Domestic conglomerates dominate the financial landscape, changing the structure of the financial system. At the same time, Colombia’s capital markets have been rapidly expanding in size and instruments and they are now among the most developed in the Latin American region. Furthermore, a large share of the population still lacks access to formal financial services. Co- lombian authorities have made financial inclusion a core element of the socio-economic development of the country with enabling policies, but additional reforms are necessary. Current challenges include: (i) reforming an oversight architecture that has not adapted to the new financial structure; (ii) further developing government debt and non-debt markets and broadening the investor base; (iii) expanding financial inclusion, particularly in rural areas, by increasing the pop- ulation’s financial literacy and creating financial products to enhance access to credit for small and medium enterprises (SMEs). Main policy recommendations of this note address three areas. First, improving oversight of the financial sector: Recommendations include revising the existing financial sector oversight architecture with a view to adapting it the new financial sector structure, strengthening consolidated supervision as well as establishing new rules to address the risks facing conglomerates expanding abroad. Second, developing capital markets. Recommendations in this area include enhancing the efficiency of government debt markets; improving the enabling environment for issuing and investing in non-gov- ernment bonds to facilitate financing of key sectors as infrastructure and housing; and broadening the investor base and making it more competitive. In particular, the country would benefit by expanding the investment options for pension funds and removing existing barriers to foreign investors. Third, supporting financial inclusion. Organizing a national policy framework for financial inclusion with high-level and technical coordinating committees and a clear champion leader, perhaps at the presi- dential level, would improve the ability to design and target policies to promote responsible financial inclusion. Initiatives should focus on financial education for students and adults, facilitating the use of cell phones and other technologies in delivering financial services, and making it easier for SMEs to gain access to credit. Background intermediation to the private sector remains below potential. Assets of the supervised financial system Strengthening financial sector oversight and de- reached 75 percent of GDP at the end of 2013, veloping capital markets has been at the core of with the banking sector accounting for more than Colombia’s financial development agenda in the half of all financial system assets. Credit to the past decade. In 1999, poor loan origination stan- private sector has recovered to its 1999 pre-crisis dards coupled with weak banking supervision left levels, doubling to around 40 percent of GDP in banks particularly vulnerable to the economic 2013 since the low 20 percent in 2003 (Figure 9-1). downturn and culminated in the closing or recap- Pension Fund Administrators (AFPs) are the most italization of several banks. This financial crisis important non-bank financial institutions (NBFI), had a strong impact on macroeconomic stability holding around 21 percent of GDP in 2013. In- and growth, heightening poverty levels. Indeed, surance premiums are still small (2.4 percent of poverty increased 8 percentage points from 1995 GDP), but they have been growing. Meanwhile, to 1999,1 particularly in the urban areas. As the mutual funds are slowly growing to be the second situation stabilized, the focus shifted to strength- largest player of the capital markets (6.8 percent of ening financial sector stability through revamping GDP). Despite high equity market capitalization, oversight. Significant goals were achieved. Today, investors buy and hold, limiting turnover. In addi- Colombia’s banking system is much better super- tion, the size of domestic private sector issuance is vised and resilient, a fact demonstrated during very small compared to that of its peers. the recent global financial crisis.2 Colombia has become a pioneer within the region in adapting Despite progress in promoting financial inclusion, macroprudential policies and Basel III standards.3 a large share of the population still lacks access to At the same time, Colombia’s capital markets have formal financial services. Internationally compara- been rapidly expanding in size, and they are now ble data show that only 30.4 percent of Colombia’s among the most developed in the Latin American population over 15 years old has access to formal region. financial services (Findex, 2011), below the region- al average of 39 percent (Figure 9-2). This is simi- Banking and insurance sector intermediation is lar to the levels in Ecuador (36.7 percent), Mexico comparable to countries of similar per capita GDP, (27 percent), and Argentina (33.1 percent) but low- size, and demographics—although capital market er than Chile (42.2), Brazil (55.9), and Venezuela FIGURE 9-1: Financial Sector Structure (as a Percentage of GDP 2012) 120 100 80 60 40 20 0 Colombia Regional median Income group median High income OECD median Expected median Private sector credit as % of GDP Insurance premiums as % of GDP Pension funds assets % of GDP Market turnover ratio % Outstanding domestic private debt issuance % of GDP Source: Finstats. Financial Sector 161 162 PART TWO | CHAPTER 9 (44.1 percent). Women and those living in rural ar- than 40 percent of accounts at formal financial in- eas utilize financial services less. Findex shows that stitutions are not used on a monthly basis. 35.9 percent of men have a bank account, com- pared with 25.4 percent of women. Only 24.6 per- Financial sector structure cent of the population in the rural areas has an account at a formal financial institution, compared Domestic conglomerates, increasingly operating to 33.5 percent of the urban population. Recent across borders, dominate the financial landscape. research findings highlight the importance of in- Currently, 36 conglomerates have a strong pres- creasing financial services availability, including ence in the financial system, with many of them improved household welfare, reduced vulnerabil- operating in the real sector as well. These entities ity to risks, and increased business activity. typically include one or more banks, leasing com- panies, financial corporations, insurance compa- Colombia’s banking penetration has grown, but nies, pension fund administrators, and real sec- actual customer usage remains low. Based on a tor companies. Ten of these conglomerates hold strong banking system and favorable macroeco- about 80 percent of total financial sector assets. In nomic conditions, the number of commercial the banking sector, the percentage of assets held by bank branches has grown to 15 establishments per the top three banks—Bancolombia S.A., Banco de 100,000 adults in 2012, up from 13.9 establish- Bogota S.A., and Davivienda S.A.—has remained ments per 100,000 adults in 2008.4 This is similar largely stable at around 50 percent in the past three to the levels of Mexico (15) but lower than Peru years. This rises to 62 percent if the four banks (70) or Brazil (47). Penetration grew in terms of ter- owned by the Grupo Aval conglomerate are ana- ritorial presence, with more than 38,000 bank cor- lyzed as a single bank.6 After recent mergers and respondents registered at the end of 2013. Nearly acquisitions, two domestic financial conglomerates every municipality in the country has the presence dominate the pension-fund industry. Colombian of some financial institution. However, as many as financial conglomerates have around 170 subsid- two-thirds of banking correspondents handle less iaries abroad, with the largest assets of subsidiaries than five transactions a day and/or only accept bill in Panama (44.4 percent), El Salvador (14.0 per- payment transactions.5 Findex data show that more cent), Costa Rica (9.8 percent), and Honduras (6.7 percent) (Figure 9-3). FIGURE 9-2: Comparison of Access to Finance Indicators in Latin America % of population claiming to have a bank account Physical access points per 100,000 adults 60 250 50 200 40 150 30 100 20 10 50 0 0 Commercial ATMs Point of sale Bank Argentina Brazil Chile Colombia Ecuador Mexico Venezuela Regional median bank branches devices correspondents Colombia Brazil Mexico Peru Source: World Bank Findex 2011. % of population (age 15+) reporting Sources: IMF Financial Access Database 2012 (commercial banks and ATMs, possession of an account at a formal financial institution. branches) and the Alliance for Financial Inclusion (POS, CBs). Financial Sector 163 Percentage of Assets of the FIGURE 9-3:  Annual Issuance in the Capital FIGURE 9-4:  Subsidiaries of Colombian Banks Markets Abroad as of Dec 2013 Annual Issuance (Bn of CP) El Salvador Panamá 14.0% $43.6 44.4% $38.9 $8.4 $30.2 Costa Rica $32.8 $29.3 $13.8 9.8% $8.8 $2.2 $24.4 $24.9 $21.3 $8.1 $13.7 $18.8 $4.4 $5.7 $10.2 Honduras $4.7 $5.1 $6.9 6.7% $11.9 $20.0 $15.7 $16.1 $19.2 $18.7 $24.5 $26.4 $17.8 Guatemala 4.2% 2004 2005 2006 2007 2008 2009 2010 2011 2012 TES Private debt Equities Other Countries 20.9% Source: SFC, MHCP, BVC, CT. Source: Superintendencia Financiera de Colombia. Presentation “Supervisión de Conglomerados: La Visión del Supervisor”, Cartagena June 27 2014 and WB calculations. Equity market capitalization has seen a substantial Note: The assets correspond to the sum of the assets of individual subsidiaries in each country. increase over the past several years, but it is highly concentrated in a small number of issuers. As of the end of December 2013, 82 companies were While government bond markets are deep, the listed across a range of sectors (agriculture, com- non-government debt market is small and dom- merce, finance, industrial, etc.), with a total market inated by financial institutions. At the end of capitalization of approximately US$215 billion. 2013, the Ministry of Finance registered that Traded volumes in shares were approximately government bond markets in Colombia amount- US$26 billion in 2013. However, the listings of ed to about 30 percent of GDP. Most debt is de- two large state-owned companies, Ecopetrol and nominated in local currency, with average ma- ISA, and two large financial groups drive the re- turity of outstanding debt at around five years. sult. The market is not very liquid, with trading The architecture of the primary and secondary concentrated in the 10 largest stocks accounting markets is well-structured with links to each oth- for around 80 percent of total market capitaliza- er through the primary dealer scheme and the tion and a free float of only around 20 percent. two-tiered trading model. In contrast, non-gov- The number of new IPOs or secondary offerings ernment debt amounts only to about 6 percent is very small—only four over the past three years. of GDP. Issuance is concentrated in large issuers with credit ratings that rarely go below AA+. The Pension funds are an essential factor shaping the underdevelopment of the market seems related to supply of capital-market instruments. In 2013, four factors: (i) bank dominance in the financial pensions’ assets under management were at about sector as the main source of funding for corpo- 21.4 percent of GDP.7 Pension funds hold the larg- rations; (ii) high risk aversion among institution- est share of these assets in government securities, al investors which limits demand for smaller and followed by corporate securities, foreign assets, and, second tier rated issuers, even if they are above to a much lesser extent, deposits and equity in other investment grade; (iii) high concentration of the financial institutions. According to recent Financial investor base dominated by four pension funds; Sector Assessment Program (FSAP) findings, how- and (iv) regulations resulting in high issuance ever, the ownership of leading AFPs by domestic costs and long time-to-issuance. All these factors economic groups could potentially be affecting the result in small and concentrated holdings, leading investment decisions of the industry.8 There are to low liquidity. strict regulations on affiliated parties that prohibit 164 PART TWO | CHAPTER 9 pension funds from investing in companies in their secured transactions law that helps businesses use conglomerate. While this is best practice, it further their assets to access credit was approved in 2013, narrows the investment options available in a coun- and the collateral registry went live in March 2014. try with a high concentration of industrial-financial A financial education decree, a Committee on conglomerates. This makes it even more important Financial Education, and a national financial in- to broaden asset classes, including increasing share clusion strategy were approved in 2014 with a view of corporate bonds and developing infrastruc- to promote the usage of financial instruments in ture-related securities. Colombia. Despite recent growth, private equity funds Products designed to better serve low-income (PE) and venture capital (VC) represent only 1 per- populations have complemented financial inclu- cent of the total investment in Latin America. The sion policy efforts. Savings accounts with simpli- industry plays a key role in leveraging resources fied processing and electronic deposits have been to support entrepreneurship growth in the early developed to seek a balance between the greater stages, and in promoting a diverse and sophis- flexibility needed to promote financial inclusion ticated productive sector in Colombia. The PE/ and the safety requirements imposed by the Risk VC industry grew at an average annual rate of Management System of Money Laundering and 104 percent between 2005 and 2012. According Terrorism Financing. Mobile wallets and remit- to Bancoldex (2012), this capital was committed tance-linked products are among the innovations to 31 funds, concentrated mainly in infrastructure supporting increased use of financial services and real estate sectors. Despite this important dy- that are becoming more common in Colombia.11 namic, Colombia’s PE/VC is still small compared Along with this, a 2009 Law on consumer protec- to regional peers.9 According to the Latin America tion for financial services mandates financial in- Private Equity and Venture Capital Association stitutions to educate consumers on the products (LAVCA) Scorecard,10 one of the most important they offer. challenges for the development of this industry in Colombia is the somewhat complex tax environ- Main Challenges ment for the PE/VC industry. Colombian authorities have made financial inclu- Oversight of the financial sector sion a core element of the socio-economic develop- ment of the country with enabling policies. In 2006, Financial oversight architecture was designed the government created Banca de las Oportunidades to more than a decade ago, and has not adapted to support financial inclusion through a combination the new financial sector structure. The definition of policy actions, including regulatory reforms, of financial intermediation in Colombia, focused financial capability initiatives, and incentives for exclusively on collection of resources for the pub- providers to meet low-income consumers’ de- lic, is both strict and unclear in interpretation.12 mand for banking services. The Government has For instance, financial cooperatives that collect re- also promoted the opening of bank accounts for sources from members are now bigger than some the vast majority of beneficiaries of the Familias en of the banks subject to full prudential oversight. Acción conditional cash-transfer program. There The formation of cross-border conglomerates has also been progress in lightening regulatory and and the development of capital markets have put tax treatment for low-balance accounts, including increased demands on prudential and conduct exempting them from the 4x1,000 tax and intro- supervision (discussed below). In addition, new ducing simplified account-opening procedures. intermediaries are being created, such as issuers Furthermore, the regulatory and supervisory envi- of electronic deposits, expanding the universe of ronment for microcredit has been strengthened. A supervised institutions. Financial Sector 165 The Superintendencia Financiera de Colombia under consideration proposes to include under full (SFC) has a broad mandate and a structure that SFC supervision the holding companies of finan- makes supervision difficult.13 Currently, the SFC cial institutions and to force changes in a group’s has a long list of responsibilities in both pruden- structure. However, other important legal gaps tial and conduct areas, including the supervision need to be addressed, including the definition of of participants typically not covered by similar financial conglomerates, the definition of related institutions worldwide,14 with some functions that party, and the scope and conduct of consolidat- are unipersonal to the superintendent. This broad ed supervision that do not allow supervisors to authority presents challenges for the organization fully “capture” an economic group and supervise and resources of the SFC, which could create bot- diverse risks. In addition, some of the financial tlenecks. On the strategic level, the SFC has not soundness indicators reflect only the situation for conducted an approval/review of regulatory pri- the consolidated supervised entities. This aspect orities, plans, and resources with a view toward en- could be solved if not only the financial and reg- suring that the strategic direction and resources are ulated entities but also the holding companies are aligned with the agency’s expectations. The SFC’s subject to SFC supervision. Such a change requires structure also presents challenges to the oversight a modification of the law and is under discussion of self-regulatory organizations (SROs) by splitting by Colombian authorities. the responsibility for oversight between a range of independent departments without a centralized The SFC has a robust framework for the supervi- coordination and limited experience on the matter. sion of several individual risks, but lacks an inte- grated view of risks management. As mentioned Recent changes in the structure of the Colombian in the 2012 FSAP, the SFC has issued norms pre- financial sector, such as the increased internation- scribing the standards for financial institutions’ alization of financial conglomerates, have exposed risk management on credit, market, liquidity, op- the need to enhance regulatory and superviso- erational, and anti-money laundering risks. While ry standards. As the 2012 FSAP recommended, these norms are applied to the individual institu- oversight practices should be adapted to the new tions and individual risks, a general requirement challenges of conglomerates and the increased in- mandates that supervised entities manage their ternationalization of the system. Conduct supervi- risks in a comprehensive way for the whole finan- sion, regulation of pension funds, and consolidated cial groups. Furthermore, no standards exist for supervision are some of the key areas affected by the management of interest rates in the banking the evolving structure. Increased market concentra- book and country and transfer risks. These latter tion and intra-party exposures could increase the risks, which were originally considered low priori- risks of financial instability, with potentially adverse ty, have become significant with the expansion of macroeconomic consequences. It also could affect Colombian banking groups abroad. competition and price formation in key markets. Moreover, the increasing penetration of foreign Development of capital markets markets has generated a series of concerns: (i) the exposure of cross-border conglomerates to country, Policies to continue the development of capital transfer, and foreign exchange risks as well as con- markets are a high priority for government au- tagion risk within entities belonging to the group; thorities. Overall, a range of actions is needed to (ii) the legal authority and operational capabilities of further develop and improve Colombia’s capital the supervisor to address this new task; and (iii) the markets. The challenges include: enhancing the use of appropriate corporate governance practices. efficiency government debt markets; improving the enabling environment for issuing and investing There are legal gaps that weaken the powers of in non-government bonds to facilitate financing SFC as the supervisor. A legal reform currently of such key sectors as infrastructure and housing; 166 PART TWO | CHAPTER 9 and broadening the investor base and making it project bonds, credit enhancement schemes, and more competitive. Reforms to tackle most of these infrastructure funds; and (v) forming the enabling issues are already underway or in the process of environment for pension funds to engage in in- being designed, but additional targeted interven- frastructure financing through capacity-building tions are needed. and a revision of their investment and minimum return rules. Key challenges to further developing govern- ment debt markets is increasing secondary mar- Pension funds dominate the investor base due ket liquidity across the yield curve and creating to limited development of other intermediaries, competition in placement mechanisms by re- including foreign investors that are subjected to ducing the share of direct placements to public cumbersome regulations. The capital markets in- institutions. A better functioning of the money vestor base is dominated by pension funds, with market would also contribute both to improved an incipient mutual fund industry and a small government debt markets and more efficient li- presence of insurance companies and foreign in- quidity management tools for the financial sector. vestors. As far as foreign investors are concerned, Despite efforts to improve repo markets and the they have very little presence, mainly due to an interbank reference rate, important bottlenecks unfavorable tax treatment and administrative red persist for more efficient money markets, such as tape, particularly in the foreign exchange market. the 4x1,000 tax on financial transactions that pe- As of October 2013, foreigners held 6.6 percent nalizes shorter-term transactions, which is being of Colombia’s total domestic Government secu- gradually phased out, and the erratic issuance of rities, compared to Peru (52 percent), Uruguay T-bills strictly tracking the Treasury’s cash flow (50 percent), Mexico (36 percent), and Brazil (17 needs as established by law. percent). An important challenge remains to develop mar- Current regulations for pensions and insurance kets to funds investment needs, particularly in impede further risk-taking and the provision of housing and infrastructure. The potential exist long-term finance by pension funds. Participation to significantly boost growth in the non-govern- of other investors in the capital market is still small. ment debt market through the development of Pension funds are an essential factor shaping the new types of fixed-income securities to finance supply of capital- market instruments, but their housing and infrastructure. The latter could have portfolios are relatively conservative and subject to a significant impact in the securities market be- minimum return regulations linked to the industry cause of Colombia’s existing infrastructure gap.15 average, which encourages herd behavior along a In this context, a comprehensive approach is re- benchmark of the industry’s average return. The quired across several government agencies. The insurance industry is so far a negligible provider of most important changes are being developed long-term financing because the conditions to de- under the leadership of the Ministry of Finance, velop life insurance products at competitive pric- National Infrastructure Agency (ANI) and the es are missing. Minimum pension disbursements, National Development Bank (FDN), with the including annuities, need to be by law above the support of the World Bank Group. Issues include minimum wage, running above inflation in the (i) improvement of the institutional set up in the past, which makes it impossible to hedge through Government to structure, allocate, and monitor market mechanisms. As a result, pension annuity infrastructure projects; (ii) the need for flexible products tend to be overpriced, demand for such issuance regulations for professional investors; products is limited, and the private pension fund (iii) lack of prudential regulations for banks that system is at risk because of its dependency on the are specific to project finance; (iv) creation of availability of affordable annuities. The annui- new products and investment vehicles, such as ty market is also affected by the inefficiencies in Financial Sector 167 the disability and survivorship market. The en- rural areas. Promoting access and use of financial gagement of the public sector is required to assess services that will facilitate channeling resources to options that would make life insurance a viable productive uses, especially in the area of agricul- business as in countries at Colombia’s level of tural finance, is also a key challenge at the core of development. This is not only relevant for the in- the peace process. In addition, Colombia needs surance industry but also for the sustainability of to find ways for financial institutions to operate private pensions. in a sustainable manner in rural areas, without high levels of government guarantees to facilitate The Mercado Integrado Latinoamericano (MILA), the transactions. The expansion of financial inclusion regional exchange initiative, is in the initial stages can help to improve household management of of development, and substantial regulatory har- risks, smooth consumption, and spur enterprise monization needs to take place to further develop activities. an integrated regional capital market. MILA in- volves connecting exchanges of Colombia, Chile, The need to strengthen the capability of the and Peru keeping its home regulations and super- Colombian population to make sound financial visor. The three country supervisors are collabo- decisions is an important challenge. Even as fi- rating to harmonize rules and facilitate cross-bor- nancial services become more physically accessi- der transactions. Results are still modest, but the ble, many Colombians need to increase their lev- initiative has triggered a series of cross-border ac- el of confidence in formal financial institutions. quisitions to create regional investment banks that A recent World Bank survey found that more can be expected to reshape the industry in the re- than two-thirds of the Colombian population gion. It is also expected that Mexico will join the could not do a simple interest rate calculation, initiative with the recent approval of its financial and they were never taught to manage money, reform. Challenges ahead include further har- making it difficult for them to analyze the terms monization of regulations and taxation regimes and conditions of financial products. A similar on portfolio investments, the inclusion of IPOs, lack of formal financial knowledge was found improving custodial connectivity, and expanding in other developing countries in Latin America, into fixed-income assets. such as Mexico. Financial inclusion Credit for SMEs, particularly microcredit, re- mains limited. According to Asobancaria,17 the Fostering access and usage of financial services, number of firms with at least one financial product particularly in rural areas, is a key challenge in reached 632,000 in December 2013, an increase Colombia. Progress has been made in the number of 25 percent compared to 2012. The most used of access points, but low product use reduces the product is the savings account. However, just 1 benefits of inclusion. Colombians have difficulties percent of these firms offer microcredit. The 2013 using financial products in the informal economy Gran Encuesta PYME (GEP) survey indicated that because of consumers’ lack of knowledge con- more than 50 percent of SMEs reported no access cerning financial products available, the benefits to the financial sector; in particular, SMEs have of using those products, and the institutions that difficulties accessing sufficient long-term financing provide them.16 Authorities have important chal- to modernize their operations, and they lack al- lenges in increasing the greater use of financial ternative non-bank financing sources. According services through mobile and other alternative to data from Factoring Chains International, channels that enable outreach to wider segments Colombia lags Brazil, Mexico, and Chile, vol- of the population and the development and utili- ume factoring,18 is often an important source of zation of flexible products customized to the needs finance for SMEs that have difficulty accessing low-income population, especially those living in bank finance. 168 PART TWO | CHAPTER 9 Recommendations especially to oversee currently unregulated bank holding companies. At the same time, the definition of related parties, the definition of a conglomerate, Improve oversight of financial sector and the methodology for calculating consolidated capital should be revised. The existing financial sector oversight architecture should be revised with a view of adapting it the It is recommended that authorities continue to de- new financial sector structure. An option would in- velop the integrated risk measurement tools neces- volve a comprehensive review of the definition of sary for monitoring the increasingly complex risk financial intermediation as well as the mandates structure of conglomerates. While the Colombia of all institutions with responsibilities for financial groups’ recent expansion abroad is positive for the sector oversight. Such a review should take into system, it requires close monitoring and improved account international experiences in countries risk management tools to better gauge trends and with similar financial sector structures as well as risks overseas. SFC would benefit from updating the comparative advantages of existing institutions the supervisory framework to ensure that super- in Colombia. A comprehensive evaluation would visors have access to all information necessary to involve changing several laws, but a more modest assess a conglomerate’s intraparty risks and its ex- review could involve the heavy burden the law puts posure to new jurisdictions. Formal written guid- on the SFC for conduct supervision. ance with regard to the comprehensive risk man- agement of banks and banking groups is necessary. At the minimum, authorities should rethink the The adoption of a new supervisory framework structure of SFC. An alternative worth consid- would give the SFC explicit authority to tailor pru- ering would be a “Twin Peaks” structure, with a dential norms to the risk profile of each bank to SFC retaining responsibilities on prudential su- help manage systemic risk and enhance the effec- pervision of all institutions and conglomerates tiveness of risk-based supervision. and a new institution in charge of conduct su- pervision across all markets and the creation of The increased complexity of Colombian capital a more collegiate decision structure. In addition, markets calls for new approaches for regulato- strengthening the independence and the legal ry oversight. The need for reform arises not only protection of the superintendent and other senior from new types of products and investors but also officials would be essential to make risk-based from the recent liquidation of Interbolsa, the larg- supervision viable. Currently, the head of the est broker-dealer. In addition to ongoing efforts financial sector regulator (SFC) is appointed by to improve the oversight framework, it might be the Government and may be changed after every beneficial to review the current Self-Regulatory political election. A fixed-term appointment stag- Framework to achieve a clearer delineation of re- gered between administrations would help ensure sponsibilities between the regulators and the Self- its independence. Regulatory Organizations.19 In addition, the SFC has substantial authority to oversee the securities Despite significant improvements on consolidated sector, but could take further steps to enhance pro- supervision, further strengthening of supervisory tection of minority shareholder rights and inves- procedures is necessary. The SFC has established tor protection, especially for collective investment good coordination mechanisms with interna- vehicles. tional peers to monitor conglomerates’ activities. However, consolidated supervision in Colombia is Development of capital markets hindered by some domestic financial groups’ com- plex and non-transparent corporate structures. Liquidity of the government bond market yield The SFC should gain legal authority in this area, curve from short- to long-term tenors should be Financial Sector 169 improved. The government bond market is al- i. A revision of pensions funds minimum return ready relatively developed, but improvements regulations to introduce more competition could be made in terms of price formation and and flexibility in their portfolio composition, liquidity. This would support a more efficient including higher exposure to infrastructure fi- money market for liquidity management in the fi- nancing. 24 nancial sector and more efficient price formation ii. A revision of pension funds investment regu- in longer-term maturities. Reforms recommend- lations to increase their capacity to invest in ed include: (i) a more regular issuance policy in alternative assets, including infrastructure. T-bills; (ii) a revision to the re-opening and liabil- iii. An assessment of the main obstacles prevent- ity management policies to further support sec- ing pension funds from increasing their expo- ondary market liquidity; (iii) a revision of prima- sure to infrastructure investments (e.g. projects ry market and primary dealers rules to increase financial structure, risk management capacity, competition.20 economies of scale for dedicated teams) and the implementation of programs to address The development of an institutional and regula- them. tory framework to support capital market financ- iv. The development of guidelines for best ing for housing and infrastructure is essential, giv- practices in terms of required resources and en that they are strategic sectors for Colombia’s risk-monitoring schemes for infrastructure in- development. Reforms are necessary on several vestments by institutional investors. fronts: (i) reviewing laws and regulations related to housing and the issuance of mortgage covered Colombia would benefit by continuing the process bonds; (ii) establishing a “hybrid issuance regime” of phasing out double taxation of foreign investors for professional investors;21 (iii) reviewing pru- as well as revising the complex administrative and dential regulations so banks can increase their registration procedures to access the foreign ex- capacity to lend to project finance schemes and change and the domestic securities market. A great- provide guarantee facilities while keeping equiv- er presence of foreign investors would help address alent standards to those of corporate lending; the structurally concentrated nature of Colombia’s (iv) developing credit enhancement and take-out financial sector by increasing competition. It would schemes to facilitate institutional investors engage- also contribute to extending maturities, improving ment in infrastructure financing;22 and (v) devel- liquidity, and increasing the appetite for instru- oping high-quality infrastructure funds, including ments with a higher risk profile. Drawbacks related both equity and bonds that could channel pension to excessive capital inflows and outflows could be funds’ investments. handled by establishing more transparent and sim- ple regulations that would enable the Government Policy and regulatory changes could support a more to control flows when necessary while reducing dis- diversified institutional investor base for long-term tortions in capital market development. financing, particularly the reinforcement of the regulatory framework to engage pension funds in The efficiency and competitiveness of annuities long-term financing for infrastructure. Increasing market should be improved. To address these chal- the pool of investors, particularly long term, would lenges, two types of actions are recommended: support the deepening of capital markets. Existing (i) the development of options for hedging mini- investors, such as pension funds, could play a great- mum wage risk and increased competition in the er role in capital market development while in- annuities industry; and (ii) an estimation of the ac- creasing the opportunities for higher returns within tuarial cost of the insurance of disability and sur- acceptable risk limits.23 Specific activities planned vivorship for users in the private pension scheme, by the Government and supported by World Bank so a competitive pricing structure could be intro- experience in other countries include: duced for these services. 170 PART TWO | CHAPTER 9 Support financial inclusion programming, or workplace initiatives) could be a more appropriate avenue to promote desired finan- Colombia needs to implement a comprehensive cial behaviors. Efforts to support the enforcement of financial inclusion strategy, with a strong inter-in- Colombia’s financial consumer protection frame- stitutional coordination mechanism. Organizing a work, particularly provisions related to transparent national policy framework for financial inclusion presentation of costs, will be a key complement to with high-level and technical coordinating com- financial education efforts. mittees as well as a clear champion would improve the ability to design and target policies to promote Additional legal and regulatory improvements are responsible financial inclusion. The strategy would necessary to continue promoting the regular use of support efforts to promote the access to and use financial services, with an emphasis on technologi- of financial services, with a focus on marginalized cal avenues that facilitate transactions. Authorities populations, SMEs, and rural areas. should continue to support an enabling regulatory framework for the use of mobile banking and oth- Inclusion will be helped by promoting the sustain- er technological innovations, which would make ability of financial sector operations in rural ar- it easier to expand financial services to the poor, eas. Credit guarantee programs, such as the Fondo women, and other unserved groups, particularly Agropecuario de Garantia (FAG), offer high levels of in remote areas where branches are not cost-ef- coverage for loans that could be creating moral haz- fective. The use of a technology like cell phones ard problems for banks that use the guarantees. To can provide a massive link to increase the use of avoid contamination of rural lending markets, FAG formal banking services, offering large segments and other guarantee programs should be reviewed of the population cheaper access with simpler in light of past performance and international good procedures. Efforts to expand financial services in practices. Furthermore, capacity-building should innovative ways (i.e., through correspondents and be provided to credit cooperatives and other private mobile channels) will help bring these services clos- institutions that have shown promise in serving the er to customers. For example, the Pague Digital law needs of rural businesses and households. proposed in 2014 would establish a license for new classes of financial services providers for electronic Well-designed financial education interventions will payments, deposits, and savings that is expected to be an important element of promoting responsible facilitate and reduce the costs of these transactions use of financial services. Following the issuance of for consumers. As Colombian financial institutions the national financial education decree, primary expand their outreach and tailor their products and schools in select municipalities will begin pilot pro- requirements to serve a larger pool of consumers, grams for financial education in 2014, with a pro- customers’ demand and use should increase as well. posed expansion in the following year to secondary schools and the rest of the country. Age-appropriate The effective implementation of the new curricula, resource materials and, teacher training Guarantees Law (1676) and creation of an en- will be critical to support the understanding of abling framework for factoring would support the the fundamentals of personal finance and use of Government’s objective of easing credit access for financial products. Colombia could draw on the SMEs. The law was enacted in August 2013, fol- Brazilian experience, which rigorously evaluated its lowed in February 2014 by Decree 400, regulating public financial education program with the sup- the use of movable assets as collateral in financial port of governmental institutions and representa- operations. The new law is expected to facilitate a tives from several private sector institutions. For the much faster execution of guarantees. Additionally, adult population, shorter interventions featuring the defining regulations to support the use of electron- transmission of key messages (i.e., through public ic invoices could support the use of factoring as a service programming, the media and entertainment source of finance for SMEs. Financial Sector 171 Development Challenge Recommended Policy Option Institutions Timeline Improve Rethink the structure of SFC and strengthen the independence of the SFC, MHCP ST oversight of superintendent. financial sector Strengthen consolidated supervision by (i) giving SFC legal authority to SFC, MHCP ST oversee currently unregulated bank holding companies and (ii) redefining the concepts of related parties and conglomerates. Adopt an improved capital adequacy regulation adapted to Basel III SFC, MHCP ST recommendations. Develop integrated risk measurement tools necessary to monitor the SFC, MHCP MT increasingly complex risk structure of conglomerates. Improve the capital markets oversight framework. SFC, MHCP ST Develop capital Improve liquidity of the government bond market yield curve from short- to MHCP MT markets long-term tenors. Support development of an institutional and regulatory framework that MHCP ST promotes financing for housing and infrastructure through capital markets. Develop policy and regulatory changes to support a more diversified MHCP ST institutional investor base for long-term financing. Continue the process of phasing out double taxation on foreign investors as MHCP MT well as the complex administrative and registration procedures for accessing foreign exchange and the domestic securities market. Promote the development of options for hedging minimum wage risk and SFC, MHCP MT increase competition in the annuities industry. Support Approve a comprehensive financial inclusion strategy, including financial MHCP ST financial literacy actions. inclusion Promote the sustainability of financial sector operations in rural areas. SFC, MHCP MT Support an enabling regulatory framework for the use of mobile banking and MHCP MT other technological innovations, including the proposed Pague Digital law that establishes a new license category to issue electronic payments and deposits. Develop a platform to support the use of factoring as a source of finance for MHCP MT SMEs. Note: ST = Short Term; MT = Medium Term. Endnotes 1 In 1995, the poverty rate was 49.5 percent; in 1999, companies, in particular through the adoption of it was 57.5 percent. However, these numbers should Basel III standards. In addition, measures have been be carefully examined because they were calculat- adopted to support the strengthening of financial ed using a dated poverty measurement methodol- conditions of credit establishments during financial ogy that clashed with improvements in the national distress periods, including countercyclical provisions. household survey system that led to changes 2002. 4 IMF Financial Access Survey (2012). According to 2 Government efforts have been extensively supported the Association of Banks of Colombia (Asobancar- by the World Bank and other multilaterals through a ia) this number increases to 17 per 100,000 adults. number of operations, including loans, technical as- 5 FSAP 2012. sistance, analytical work, and policy dialogue. 6 Conglomerates can own various financial institu- 3 Some of the reforms implememted in the past few tions or subsidiaries. For instance, one of the larg- years have the objective of strengthening the capi- est local groups (Aval Group) manages four banks tal and liquidity standards for banks and insurance (Banco de Bogota, Banco de Occidente, Banco AV 172 PART TWO | CHAPTER 9 Villas, and Banco Popular) and is controlled by one 14 For example, SFC is responsible for payment sys- final beneficiary owner. The Grupo Empresarial An- tem oversight, a mandate typically placed in central tioqueño (GEA) is composed of three firms (SURA, banks, as well as the oversight of health insurance Argos, and Nutresa) and has a complex structure of providers. control. While this group has a significant stake in 15 Including US$26 billion of planned investments in Bancolombia as well as insurance and pension insti- an ambitious road concessions program (G4). tutions, it is hard for the SFC to monitor the horizon- 16 See World Bank, Colombia’s Financial Capabilities tal relationships among these financial institutions. Report, July 2013. Grupo Bolivar has divided its control into several 17 Informe Semestral de Inclusion Financiera, June 2013. holdings, each one in charge of a different financial 18 In 2012, Colombia’s total factoring volume was at business (banking, insurance, and pension funds). EUR4.5 billion, while Brazil reached EUR43.6 bil- 7 Source: Quarterly National Accounts and SFC Re- lion, Mexico EUR26.1 billion, and Chile EUR24 port “Actualidad del Sistema Financiero Colombia- billion. no” December 2013. 19 An assessment of strengths and weaknesses of the 8 AFP Proteccion, belongs to Group Antioqueño current model would need to be conducted to deter- (37 percent of pension assets), AFP Porvenir be- mine whether the existing SRO model is adequate longs to Group Aval (44 percent), AFP Colfondos seven years after its inception. The World Bank belongs to Group Scotiabank (14 percent), and AFP team is supporting this assessment. Recommenda- Old Mutual Skandia belongs to Group Old Mutu- tions are being made taking into account the exist- al (UK) (5 percent). ing current oversight framework, but it would need 9 Other emerging Latin American countries account to be revised if SFC responsibilities were to change. for a larger regional share of the industry, including 20 The World Bank team is currently supporting the Brazil (79 percent), Mexico (4 percent), and Peru (4 MHCP in reinforcing its government debt market percent). strategy along these lines. 10 The LAVCA Scorecard measures 13 dimensions 21 This is in line with professional issuance regimes de- that affect the development of private equity and veloped in the U.S. (e.g. 144A), the EU, and several venture capital. advanced EMEs, which now account for the major- 11 According to the 2013, SFC financial inclusion re- ity of the fixed-income market. port, a significnt increase in the usage of mobile and 22 FDN is currently developing such instruments and is internet banking was registered, with a growth rate expected to be one of its main providers. of the number of transactions of 870 percent and 94 23 Pension funds’ demand is an essential factor shaping percent respectively during the 2009–2013 period. the supply of capital market instruments, but their 12 Collection of resources from more than 10 individ- portfolios are relatively conservative and subject to uals without a licence could be considered illicit fi- minimum return regulations based on the industry nancial intermediation. average, which encourages herd behavior. 13 The mandates of the SFC are to preserve the stabil- 24 With World Bank support, authorities are working ity, safety, and confidence of the financial system; or- on the reform of the private pension industry by im- ganize and develop the Colombian capital markets; proving the enabling environment for investment di- protect investors, depositors, and insurance policy versification, revising the minimum returns schemes holders; and assure protection for consumers of fi- and other areas for the strengtening of the pension nancial services. Recently the SFC was given respon- industry in Colombia. sibility for oversight of public health agencies (EPS). Structural Changes – Implications for Growth, Productivity, and Competitiveness 173 CHAPTER 10 The Urgent Innovation Agenda— Governance, Knowledge, and Firms 174 PART TWO | CHAPTER 10 Main Messages Innovation—the adoption of new production techniques and the introduction of new products—is the best defense against foreign competition and the commodity-driven exchange rate appreciations that are especially hard on the SME sector.1 Innovation is also essential for taking advantage of the new markets opened by free-trade agreements (FTAs) and to reviving the agricultural sector, where stagnant productivity has become a sensitive political issue. Colombia has a window of opportunity, created by a strong macro environment, increased integration with the global economy, and a com- modity boom that offers the resources for the important project of development. However, it faces important weaknesses in innovation policy that threaten to undermine this opportunity; these weak- nesses require substantial and urgent policy changes. To seize the opportunity, the innovation agenda must become a priority for the country.2 This policy note makes policy recommendations regarding the governance of the National Innovation System, funding for innovation, modernization of demand (i.e., firms) and demand (e.g., education centers) for innovation. The governance and public components of the National Innovation System (NIS) require reform man- aged at the highest levels, and existing institutions need to specialize, become technically stronger, and stop competing among themselves. The well-known market failures that characterize innovation imply an important role for government in redressing them. Coordination among the players in the Colombian innovation system has been hampered by weak institutional capacity within agencies and competition among them. Although progress was made with the creation of the coordinating Comite Tecnico Mixto in 2013, a large number of programs remain fragmented and redundant.3 Similarly, the agricultural research and extension services need modernizing. At the oversight level, overlapping le- gal norms leave it unclear who is in charge of certain aspects of the system and hence who should lead reform efforts in those areas.4 Colombia needs to rethink its NIS with an eye toward clear definition of roles and development of a multi-decade plan for institutional strengthening. Success will require strong leadership at the presidential level. The coming on line of regalias (royalties) offers new resources for innovation, but a strategy is needed to lower the risk of resource misallocation from low capacity at subnational levels. One promising idea that has begun to be implemented—a series of almost off-the-shelf modules for successful national initiatives in such areas as secondary school science education, technological assistance or agricultural extension. However, the current bottom-up strategy for allocating regalias is separated from a national strategy supporting innovation. Key focus on modernizing lagging firms and farms is crucial because they are the main generators of innovation and productivity. Growth is driven by firms and farms, and they must be at the center of discussions of innovation and reforms of the NIS. Recent studies suggest that Colombia’s firms lag substantially in management quality and preparation for innovation. Further, productivity in the agri- cultural sector, where 60 percent of the poor live, has not kept pace with overall growth. Improving the quality of human capital and the supply of knowledge is essential. Studies find that low-quality education is one of the contributing factors to low productivity and slow economic growth in Latin America, including Colombia. From weak fundamentals in math and science, as reflected in re- cent PISA scores, to low university enrollments and PhD graduates in engineering and science to relevant research—the country must remove improve the quality and relevance of its educational offerings. Monitoring and evaluation (M&E) needs to become a central element of all government programs. Major programs of worker training, government research, and firm support lack the most rudimentary documentation of their effectiveness. Mainstreaming M&E throughout the Government would force prioritization, help in the consolidation and pruning of programs related to innovation, and lead to better targeting. The Urgent Innovation Agenda—Governance, Knowledge, and Firms 175 176 PART TWO | CHAPTER 10 Background and Context Colombia’s Deficient R&D FIGURE 10-1:  Performance Poor growth performance in Colombia is largely 4.5 explained by lackluster productivity, associated to Finland 4.0 low innovation levels. Half of Colombia’s growth is Korea Predicted and Observed R&D/GDP (%) Japan due to productivity improvements, a large fraction 3.5 of which come from innovation. TFP growth has 3.0 averaged a low 0.5 percent over the past 60 years, 2.5 climbing to 1 percent between 2003 and 2010—a Taiwan rate that is still slow even by LAC standards (e.g., 2.0 China compare with Chile’s 2 percent TFP growth after 1.5 reforms). An extremely large number of Colombian Brazil 1.0 companies are too far from the frontier to proac- Turkey Spain tively respond to increasing external competitive 0.5 India Mexico Hong Kong pressures. At 0.18 percent in 2011, national re- 0 Colombia Malaysia search and development (R&D) expenditures as a 4 5 6 7 8 9 10 11 share of GDP are roughly half the expected rate for Log GDP per capita a country at Colombia’s level of development (the Source: Goñi, Edwin y Maloney, William. Why Don’t Poor Countries do dotted line in Figure 10-1). Other resource-abun- R&D. World Bank Working Paper. dant countries like Canada and Australia invest approximately 2 percent of GDP in R&D, with South Africa at 0.93 percent and Malaysia at 0.63 to yield returns and are harder to liquidate in the percent on R&D. For Colombia, the decline in short-term, even if they are more profitable in the R&D from 0.25 percent at the end of the 1990s is long run. This risk minimization strategy hampers entirely explained by the collapse in private sector profitability and generates an inefficient allocation R&D—from a peak of 12 percent in 1997 to under of resources.6 0.04 percent in 2006–10. According to the National Innovation Survey IV (2007–08), only 11.8 percent Three main pillars support National Innovation of Colombian firms with over 10 workers innovate Systems (NIS) in general and Colombia’s National in product or process, compared to 30 percent on System of Science, Technology and Innovation average for countries at its level of development. in particular, each of which will be analyzed sep- arately (Figure 10-2). First, the governance system Conflict lowers productivity because of risk-avoid- includes the institutions that share responsibilities ing coping strategies impact productive choices. An for defining the policies and programs to promote often overlooked consequence of the conflict is its innovation, the rules and mechanisms for their coor- effect on productive choices because of the greater dination, and the overall context that shapes incen- risks for investments in productive activities. This tives for the accumulation and reallocation of the is especially strong in agriculture. A recent study physical and knowledge capital that promotes pro- shows that farmers who live in areas threatened ductivity growth. Second, on the demand side, firms by armed fighters tend to favor fast-growing crops, and entrepreneurs are the centerpiece of the NIS; if which allow short-term returns, or they convert they lack the capacity, or the competitive and trade cropland into pasture for cattle, a mobile product contexts offer few incentives to innovate, then there that can be quickly liquidated (Arias et al 2013).5 can be no productivity growth. Last, but not least, In this risky context, farmers prefer to avoid cof- on the supply side, innovation requires sources of fee, cocoa, rubber, fruit trees or other permanent ideas and quality human capital across a spectrum crops, which require investments that take longer that is relevant to the needs of firms and farms. The Urgent Innovation Agenda—Governance, Knowledge, and Firms 177 FIGURE 10-2: Schematic of the National Innovation System Oversight of Innovation System Supply side Accumulation & Allocation Demand side Universities Knowledge ink Tanks Firms Technology Parks Entrepreneurs Consultants Productivity • Human capital Barriers to accumulation/allocation • Macro environment • Quality systems • Financial markets • Competitive regime • Best practices dissemination • Entry/exit barriers • Trade regime • Science and technology systems • Business climate/regulatory barriers • International market • International Linkages • Entrepreneurship Barriers to knowledge accumulation • Market failures • IP regime • Early stage nancing (i.e. seed and venture) • Factor market rigidities Source: Maloney, 2014. Distortions that influence incentives for the alloca- to move toward better jobs, with a higher content tion of inputs can have sizeable economy-wide ef- of new economy skills.9 fects on overall productivity. By comparing China and India with United States, Hsieh and Klenow (2009) show that these distortions, external to the Challenges firm, account for 30 to 60 percent of the productiv- ity gaps among these countries.7 The usual factors Governance of the Colombian National affecting physical capital accumulation, such as Innovation System those captured by Doing Business (DB) Reports,8 are also relevant to the accumulation of knowledge The governance system supporting innovation in capital. In addition to those factors measured by Colombia is characterized by fragmentation, dupli- DB indicators, especially important for innovation cation, and lack of specialization. Creating innova- and productivity are intellectual property regimes, tive firms involves an extensive process of raising financing conditions for early stage ventures, and the capacity of existing and new firms and culti- factor-market rigidities. vating over time their demand for innovation and ability to absorb technologies. To date, Colombia Quality of education matters. A World Bank does not have a coherent integrated system of sup- Study on Education and Skills for the 21st port mechanisms that will encourage the increasing Century in LAC (2009–11) concludes that Latin productivity and sophistication of firms over time America’s inability to increase the new economy and render them more able to use and generate skill content of its labor force may be related to output-increasing knowledge. Figure 10-3 shows low educational quality and unfavorable business that many different elements of the support sys- environments. The analysis shows that education tem are now scattered across different entities, with plays an important part in the acquisition of skills; substantial overlap and duplication of programs. more education enables individuals to engage in The National Training System (SENA), for in- occupations with higher skill content; and better stance, operates both basic start-up support as well quality education would likely enable the region as advanced technological parks (technoparque). 178 PART TWO | CHAPTER 10 Support Systems for Firms FIGURE 10-3:  that support innovation are numerous, and many Across Age and Level of are very small, with an excessive number of “pilots” Sophistication being launched. Most critically, a majority of the programs lack a rigorous evaluation framework. In practice, evaluation is a concern that emerges ex Colciencias, iNNpulsa Technological approach Advanced Fund and calls, post, which makes it difficult to rigorously evaluate Technopark -SENA SENA (calls), CDT the efficacy and efficiency of these programs. For Mature SET this reason, high-level policy makers are in a dif- SENA centers and formation ficult position when they have to decide about ex- Limited Entrepreneurship MIPEs-SENA, agricultural panding, reforming, or eliminating a program. -SENA extension New Existent Declining Lack of capacity at subnational government ham- Life cycle of the company pers the effectiveness of the regalias funds devoted to innovation. Ten percent of the COP 9 billion of Source: World Bank Mission (May 2012). Note: SET = System of Technological Extension. royalty funds, or about US$500 million, are ear- marked for innovation, science, and technology. Capacity constraints in local administrations may Colciencias and InnPulsa are both responsible for affect project formulation and effective execution supporting the most sophisticated and innovative of expenditures. Funds requested by local govern- firms. In fact, Colombia has at least 56 different ments point to lack of adequate regional innovation programs to support improvements within existing strategies that balance both activities to improve firms, spread across multiple agencies that are often skills (supply side) and firms capabilities to effective- duplicative and underfunded. The recent review ly use these skills to innovate (demand side). performed by the Comite Tecnico Mixto10 shows that many of these programs are small and under- Challenges to factor accumulation and funded; 90 percent of the programs control only 20 allocation percent of the total resources. Substantial room for improving the business envi- Most programs that support innovation lack a ro- ronment exists in Colombia. While it has achieved bust evaluation strategy, making it hard to justify ex- important progress in the Doing Business indica- pansion, improvements, or elimination. Programs tors,11 Colombia still lags the regional top performer TABLE 10-1: Ease of Doing Business Rank (Doing Business Report, 2014) Business Rank Ease of Doing Construction Dealing with Registering Insolvency Protecting Electricity Contracts Resolving Starting a Enforcing Economy Property Investors Business Borders Trading Permits Getting Getting Across Paying Credit Taxes Colombia 43 79 24 101 53 73 6 104 94 155 25 Argentina 126 164 181 80 138 73 98 153 129 57 97 Brazil 116 123 130 14 107 109 80 159 124 121 135 Chile 34 22 101 43 55 55 34 38 40 64 102 Mexico 53 48 40 133 150 42 68 118 59 71 26 Peru 42 63 117 79 22 28 16 73 55 105 110 Source: World Bank. The Urgent Innovation Agenda—Governance, Knowledge, and Firms 179 (i.e. Chile), and it is even further behind when com- FIGURE 10-5: New Business Density, 2012 pared with OECD countries (Table 10-1). 14 Regulations and incentives for entry of dynamic 12 young firms at the subnational level are particularly 10 important. Recent work has shown that the vast ma- 8 jority of jobs and income growth in Colombia is gen- 6 erated by the top 10 percent of young firms.12 The need to facilitate entry, support, and, if necessary, 4 allow exit of such firms is therefore crucial. Large 2 differences exist in terms of barriers to entry be- 0 Argentina Mexico Colombia Brazil Peru Chile Siganpore Australia tween places like Armenia, Santa Marta, or Pereira, where setting up a new business takes no more than a couple of days, and places like Dosquebradas, Tunja, or Valledupar, where the same operation Source: Entrepreneurship Snapshot, World Bank, (2012). takes more than 20 days (Figure 10-4).13 market size: 0.16 percent of GDP, compared to The lack of a developed system to support ear- Brazil at 0.27 percent or the US and UK at close ly-stage financing reduces entry opportunities, to 1 percent. Government programs to amelio- especially for innovative young firms. As they rate market failures and provide financing across move from the proof of concept phase to being the innovation lifecycle (start up, venture capital established and perhaps publically listed, innova- etc.) related to innovation are deficient in cover- tive firms require a spectrum of distinct financing age, fragmented, and poorly coordinated. sources of differing characteristics (Figure 10–6). Colombia has representation in most phases of The intellectual property regime requires strength- the life cycle—but it is truly small (Figure 10- ening and adapting to the needs of Colombia’s en- 7).14 For the innovative start-ups, Colombia’s trepreneurial ecosystem and specifically SMEs. An market-driven programs of venture capital/ effective intellectual property (IP) regime plays an private equity (VC/PE) remain low relative to important role in fostering innovation in various ways. It fosters technological innovation through patents, business innovation through trademarks, FIGURE 10-4:  Differences Between Cities in software innovation through copyrights, and even Colombia more “indigenous” types of innovation through geographical indications. Colombia has improved Days to start a business its IP regime and tried to make it more efficient 50 and effective—but important challenges are 40 ahead. First, granting IP offices judicial powers in 30 2012 was an important step forward in improving the efficiency of IP litigations; however, it is still 20 necessary to improve the quality of IP examina- 10 tions and reduce delays. Second, the IP system’s 0 user base of the outside Bogota is very limited and Armenia Santa Marta Pereira Ibague Cali Cartagena Manizales Bogota Neiva Bucaramanga Medelin Palmira Sincelejo Barranquilla Pasto Villavicencio Cucuta Riohacha Popayan Monteria Valledupar Tunja Dosquebradas hampered by the absence of regional IP services. Third, the availability of information for business- es has improved (i.e. online), but most Colombian companies, especially SMEs, still have very limited Source: Doing Business in Colombia (2013). knowledge and capacity to take advantage of the 180 PART TWO | CHAPTER 10 FIGURE 10-6: Startup Financing Cycle Startup Financing Cycle Corporate [PE - growth/buyout Later Stage nancing, Bank debt, [PE/Growth Funds, Public equity, etc.] Early Stage Factoring, Leasing, [VCs, Angels, Bank funding, etc.] Financial Stage Startup Capital Mezzanine funds, etc.] [Angels, Microcredits, VC rms—series A, Focus of SME PE Seed Capital etc.] funds in developing [Angels, Family & countries Friends, Microcredits, etc.] Nascent market in developing countries, which can be unlocked with twinned nancing/ TA models Signi cant capacity development needs, in addition to nancing gap, in developing countries Concept Product Development Initial Revenue Established Corporate (Idea created, rst (Product prototype (Proven product but (Sustained positive (Strong sales/revenue business plan needs to be nalized negative cash ow) cash ow and and stable cash ows) prepared, and introduced to business is viable) but product not fully market) tested or market ready Stage of Company Source: Authors’—Various Research Sources. IP system. Finally, the system is now specifically management quality measured to date (Figure 10-9). focused on patents, which may not be the most im- This translates to poor ability to identify and adapt portant instruments for Colombian SMEs.15 new technologies, little long-run planning, and poor human resource policies. In fact, the top quartile Demand-side challenges of Colombian firms performs close to the bottom quartile of U.S. firms in terms of their manageri- Firms are very heterogeneous and their needs al score.17 Moreover, Colombian managers are not are different. In Colombia, the top firms are aware of their poor managerial performance—the 400 percent more productive than the laggards. gap between “perceived performance” and “real per- Differences of the same order of magnitude exist formance” is largest in Colombia. A recent study of in terms of their managerial capacities, limiting firm practices by Bain Consulting found that only 37 firms’ ability to raise funds, particularly in ear- percent of Colombian firms benchmark their activi- ly stages (Figure 10-8).16 Instruments to support ties against best practices, well below the 83 percent innovation need to be tailored to specific groups in the global sample. Similarly, only 37 percent of of firms and the temptation of “one-size-fits-all” Colombian firms undertook practices for knowledge needs to be carefully avoided. management, while the global average was 62 percent. Weak quality of firm management generates low Challenges to the supply of skills and technological “absorptive capacity.” A recent London knowledge School of Economics-World Management Survey undertaken jointly by World Bank and DNP re- Colombia needs to improve the quality of its ed- vealed that Colombian firms have among the worst ucation system to supply skills and knowledge The Urgent Innovation Agenda—Governance, Knowledge, and Firms 181 FIGURE 10-7: Mapping of Colombian SME Investment Funds Investment Stage size (US$) Mid-Cap growth/Buyout $10 MM + PE in SMEs $3–10 MM Venture capital $100,000–$2 MM Impact investing <$100,000 Seed/Angel/Incubators No-Low returns Market returns Rate of return Source: LAC SME/PE TA fund pre-feasibility study (World Bank). required for the new economy jobs. At the primary training is the least profitable, trailing below and secondary levels of education, Colombia con- both other public institutions and private ones.19 tinues to underperform in math and science. In Furthermore, there appears to be an absence of the most recent results from PISA 2012, Colombia systematically collected data to undertake a careful scored significantly below the OECD average evaluation of the various programs. For instance, as well as below all other middle-income Latin data is lacking on the performance of its graduates. American countries participating in PISA (Chile, Costa Rica, Mexico and Brazil), with one excep- Colombia faces a serious shortage of qualified tion—Peru. These results suggest that Colombia human capital at higher educational levels. The is not producing students with enough 21st cen- challenges of raising enrollments in higher educa- tury skills, such as higher-order cognitive and so- tion (throughout the country and across socioeco- cio-emotional abilities (which include creativity, nomic backgrounds) and attracting and retaining critical thinking, entrepreneurship, etc.).18 the best talent contribute to the deficient supply of advanced human capital. The usual pyramid The relevance and quality of technical educa- of skills showing a vast number of technicians tion is not sufficient to respond to the demand of and relatively few university graduates is inverted Colombian firms. The technical education system in Colombia, with 65 percent of tertiary students (SENA) absorbs vast resources yet gets mixed re- enrolled in university and 35 percent in technical views from the private sector on relevance and programs. Though showing a higher than average quality. In addition, the curriculum is not meeting number of engineers, Colombia is below the aver- the demands of the private sector, particularly for age in graduating PhDs in science and technology 21st century skills. Existing studies suggest little or fields. In higher level technical training, there is a no impact of SENA technical education on earn- shortage of the private sector providers who could ings, and cost-benefit analysis suggest that SENA’s best meet the needs of industry. 182 PART TWO | CHAPTER 10 FIGURE 10-8: Productivity and Managerial Differences in Colombia TFP Di erences among Colombian Firms Managerial Di erences among Colombian Firms 0.6 2.0 1.5 Distribution of rms 0.4 1.0 0.2 0.5 0 0 –4 –2 0 2 4 –0.5 0 0.5 Distance from average sectoral productivity Distance from average management score Source: Entreprise Survey Data 2010 (World Bank). Few academic programs and institutions are ac- only about 22 percent of the programs and 10 credited as high quality by the national educational percent of the institutions. Moreover, only 14 per- quality assurance system. The mandatory Register cent of the faculty in Colombia has doctorates, of Qualified Programs (Registro de Calidad) rep- compared to 40 percent in the region, suggesting resents an enormous, positive step in quality assur- a deeper issue of overall quality in the system. In ance. However, high-quality accreditation covers addition, with the information from the Labor FIGURE 10-9: Managerial Quality in Colombia Colombia Autoparts Colombia 1.28 Colombia Mexico 1.14 India Brazil 1.10 Brazil Chile 1.02 China Argentina 1.02 Greece Greece 0.97 Chile India 0.95 Argentina Portugal 0.84 Republic of Ireland Republic of Ireland 0.81 Portugal China 0.79 New Zealand Northern Ireland 0.75 Northern Ireland New Zealand 0.72 Poland Canada 0.58 Mexico Australia 0.57 Australia Poland 0.52 France Italy 0.48 Italy Great Britain 0.47 Great Britain Germany 0.35 Canada United States 0.25 Sweden France 0.19 Germany Sweden 0.19 Japan Japan 0.13 United States Singapore –0.34 0 1 2 3 4 –1.5 –1.0 –0.5 0 0.5 1.0 1.5 Mean of overall management Average overscoring (selfscore-management) Source: DNP/World Bank based on World Management Survey. The Urgent Innovation Agenda—Governance, Knowledge, and Firms 183 Observatory for Education on labor market inser- has a long history of extension programs, but it is tion for higher education graduates and SABER a history of policy inconsistency over time and in- PRO results, more emphasis could be placed in the adequate attention to research and maintenance of accreditation process in results and outcomes. the human capital of agents (Perry 2012, Perfetti et al. 2009). Despite the country’s vast land resources Universities and research centers are weakly con- and the importance of rural prosperity for achiev- nected to private-sector demand. Colombia’s col- ing peace, Perry contends: “Today, there is no na- laboration between higher education institutions tional system of extension nor of technical assis- and the private sector compares unfavorably to tance in Colombia and reforms over the last two peers and OECD countries, probably reflecting a decades have appeared to leave what system there low opinion of the quality of scientific institutions was exhausted and disarticulated.” In terms of (Figure 10-10). On the research side, Colombia coverage, agriculture institutes are often involved has more than 300 Technological Centers, only in research, which does not translate into technolo- 40 percent of which were evaluated as performing gy diffusion (Scott 2005). Furthermore, for vast ar- reasonably well.20 Colombia produces 9.3 scien- eas of the country, there is little in the way of solid tific and technical journal articles per million in- agricultural research that would point farmers of habitants, compared with averages of 21 for Latin any size toward lucrative crops, perhaps for export, America and 590 for most developed countries. appropriate to their ecosystems. Moreover, the Colombian Observatory for Science and Technology (OCYT) reports that the research Policy Recommendations is highly concentrated in humanities and social sci- ences, which account for almost half of the indexed publications. More clarity on research outcomes is Recommendations for improving the needed, along with alignment of financial incentives governance of the NIS to ensure quality and relevance to the private sector. Establish a presidential level coordinating body. The agricultural system of research and extension A coordinating body at the highest level is neces- is in need of a thorough modernization. Colombia sary to implement the recommendations suggested Private Sector Opinion on the Quality of Scientific Research and Degree of FIGURE 10-10:  Collaboration with Universities 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 Argentina Brazil Chile Colombia Costa Rica Mexico China Spain Korea India Ireland Australia Sweden Israel Finland United States Turkey Malaysia Siganpore Taiwan Hong Kong Quality of Scientific Institutions University/private sector collaboration Source: World Economic Forum, 2013-2014 Global Competitiveness Report (2013 data). 184 PART TWO | CHAPTER 10 here and to engage in ongoing oversight of the sys- structure, staffing them with leaders respected in tem and long-run planning. This would provide a the relevant fields, and stabilizing the finances are strong signal of the political will to push forward essential steps to their essential roles in the NIS. the “innovation locomotive.” Arguably, the coordi- nating body should be an energetic joint National Regalias need to become a central element of a Council of Competitiveness and Innovation that national strategy of innovation. The current bot- would be led by the nation’s president, attended by tom-up strategy to allocate regalias for innovation the relevant ministers, and structured by the Alta projects has the advantage of responding to the lo- Consejeria for Competitiveness and Innovation. The cal needs, as identified by the governors, but it sep- council should include academics, public servants, arates the effort from a national strategy to support and private sector figures of national weight who innovation. A more streamlined menu of programs would engage actively in developing a long-range that have been rigorously evaluated and aligned to view, undertaking unimpeachable studies on key this strategy could be offered to the regions—for in- issues, defining the country’s priorities for science, stance, programs for science education, technologi- technology, and innovation, and, vitally, promoting cal assistance, agricultural extension, and research. the innovation and productivity agenda credibly These programs could be packaged as modules with the public. A subcouncil at the ministerial that regions can draw on, including those with level, attended by ministers, would be tasked with weak administrative capacity, as effective, relevant formulating specific policy. ways of employing these resources. Focus, specialize, and enhance the capabilities of Program evaluation needs to become a routine. the NIS institutions within a clear innovation strat- Programs of innovation, science and technolo- egy. Colombia needs to clearly articulate a 10-year gy, training, and support to firms should have an strategy for its NIS that both defines long-term evaluation of impact built into their design. This goals and prioritizes activities to reach those goals. provides discipline and improves the efficacy of Flowing from this strategy, the country will need to government efforts. A public expenditure review define the roles and limits of relevant government should be undertaken for existing programs to un- agencies to meet NIS goals and develop a 10-year derstand where resources are flowing; dominant plan for institutional strengthening. Currently, the programs need to be evaluated, and priorities re- system is characterized by fragmentation, overlap, aligned in light of the findings. and duplication. The recommendation calls for moving toward a clear division of roles, specializa- Recommendations for improving factor tion, and coordination. In this context, one agency accumulation and reallocation would focus on the supply of higher-level human capital and research. Another one, with close con- Develop a plan for regulatory reforms at the nections to private sector, would focus more on the subnational level aimed at a “raise to the top.” demand side and raising firm capacity for inno- Implementation of business regulation differs vation. Yet another one would concentrate and substantially across Colombian cities. A strategy specialize on technical training, with a strong focus of subnational regulatory reforms could use as on regional and local presence. Finally, the activi- examples those cities that have been successful ties of these various specialized agencies could be in streamlining policies and procedures and im- monitored and reviewed by a central institution, plementing national regulation efficiently. Most which would have no responsibilities in the im- of the business regulatory framework is legislat- plementing programs and activities. In each area, ed at a national level, with a smaller part, such Colombia faces major challenges; hence, narrow- as local fees and taxation, being within the pur- ing the mission of each, strengthening the capac- view of local state and municipal governments. ity of functionaries, revisiting the organizational The similarity in legal frameworks facilitates the The Urgent Innovation Agenda—Governance, Knowledge, and Firms 185 learning process and the application of best prac- Recommendations for the demand side tices across the country. The Mexican experience shows the importance of having federal agencies Identifying specific needs and targeting of pro- working with subnational governments to pro- grams should be a key principle. The heteroge- mote and assist on the regulatory reform agenda. neity of Colombian firms makes it essential to adopt instruments that target the specific needs Private capital markets require further public sup- of different types of potential beneficiaries. port to meet the needs of SMEs and highly inno- This requires two steps: (i) a detailed diagnostic vative start- ups, especially in providing technical of these needs and (ii) a careful design that re- assistance and development of an exit strategy for sponds specifically to them instead of replicating private equity funds. Technical assistance (TA), programs previously applied in different types when delivered in conjunction with private eq- of firms. Programs and interventions could be uity, can unlock more investment commitments. financed through the regalias if designed as mod- However, the small size of Colombian PE funds ules of best practice that could be modified to limits their ability to provide TA. Such twinning local contexts. is actually the rule in VC in the U.S., where man- agerial resources often are scarce in young, grow- Low productivity firms require specific programs ing firms; the most innovative entrepreneurs are that help them to close the productivity gap. not necessarily endowed with talents as managers. Recommendation in key areas include: A major role of VC is the fielding of good man- agers and managerial expertise.21 The Brazilian • Technological extension: Technological exten- success in developing PE/VC is largely due to the sion programs have been used in the U.S., existence of Novo Mercado and Bovespa Mais, which Singapore, Korea, Japan, and other countries provide an exit strategy to PE investors by tak- to improve the quality of firm management ing companies public. Similar exit opportunities along the dimensions of production, opera- should be considered in Colombia. tions, quality control, strategy, logistics, hu- man resource management, the environment, Strengthen the intellectual property regime in continuous improvement, lean manufacturing, ways that are relevant and respond to the needs of Six Sigma, 5S etc.22 Pending the results of the Colombian SMEs. Despite some recent improve- Inter-governmental Pilot on Technological ments, four IP areas would benefit from further Extension, scaling-up across Colombia would advancement. First, the IP regime needs to be- increase the competitiveness of SMEs and lay come integrated in a broader innovation strategy, the foundations for more innovative firms in including other initiatives supporting innovation. the future. Second, the nature of Colombian SMEs limits • Agricultural extension: A parallel system of ex- the role of patents, so other instruments such as tension and research was absolutely critical trademarks, copyright, protection of traditional to stimulating growth and poverty reduction knowledge, and geographical indications are es- in U.S. rural sectors. Colombia would benefit pecially important and should be given a central from bottom-up development of research cum role. Third, the IP regime is currently centralized extension systems that are linked nationally in Bogota, which points to a need to raise aware- and offer incentives for continual upgrading ness among potential users outside the capital. of knowledge and human capital and concrete Finally, the limited current use of various IP in- evaluations of coverage and efficacy. Ideally, a struments suggests a large scope for experiment- well thought out program, coordinated with ing, with simplification of procedures and provi- university upgrading and centers of excel- sion of incentives for expanding the use of the lence, would provide an excellent use for fund- various instruments. ing from regalias..23 186 PART TWO | CHAPTER 10 • Targeted programs for micro-entrepreneurs: In areas either in process or product; in Colombia, where most of the existing firms are micro perhaps 12 percent. An ambitious goal could units, characterized by high degrees of social be to perhaps triple the present level to cre- exclusion and poverty, programs such as tech- ate a critical mass of innovative companies. nology extension are unlikely to respond to Matching grants for process and product in- users’ needs. It is important to design specific novation should be used in conjunction with interventions that support “groups” of local matching grants for technology transfer, such entrepreneurs. Currently, the technology ex- as technology extension programs.25 tension pilot program is developing a specific • Technology centers. Beyond the basic elements intervention for micro enterprises; in addition, of running businesses covered by technolog- Colombia can learn from successful experi- ical extension, there is a role for institutions ences in post-conflict regions targeting re-inte- that remedy the appropriation externalities of gration of youth at higher risks of participat- technology transfer, technology development, ing in illicit activities.24 These programs have adaptation, and diffusion more important to their own specifics and should not be mixed industries and to their more sophisticated cli- with programs such as technology extension, ents. These are discussed in more details in but they can be useful, especially in the short- section on the supply side. term transition toward peace and reduction • Technological transfer offices (TTO). While the prob- of inequalities by providing alternatives to lems of upgrading universities will be discussed illicit activities. However, it is recommended below, tightening the linkage between innova- that programs to increase productivity of mi- tion within universities and the private sector cro-enterprises (and the self-employed) should often happens through TTOs. These offices be evaluated and compared to alternative pro- can also serve as a place for the private sector to grams to facilitate transition into labor mar- interact with universities and bring together the kets and obtaining salaried occupations. demand pull and science push. Colombia has had good experience with TechNova, a collabo- To move up the ladder of technology sophistica- rative TTO for more than six universities from tion and managerial capacities, companies require Antioquia that started developing capability for support from specific agencies and programs that contract research in existing companies. Other facilitate the adoption of newer technologies. Many TTOs perform in a much less effective manner, of these programs have been implemented in the and there is generally a shortage of evaluation past—but in a fragmented and non-rigorous man- of the effectiveness of TTOs. ner. Many of these programs have never been eval- uated. An important step going forward is, to the For technologically advanced start-ups, the NIS extent possible, assessing their effectiveness and should focus on nurturing an ecosystem that sup- evaluating the lessons from these programs before ports these firms through incentives based con- designing new ones. Even more important, the un- tracts. Technology intensive start-ups require a certainty about the impact of some of these pro- combination of entrepreneurial support, seed grams increases the importance of designing a rig- funding and angel networks, and performance orous evaluation framework to decide how to better based incubators together. Based on emerging best target and improve them to maximize their effec- practices, support for these types of companies tiveness. Recommendation in key areas include: should be delinked from the “choice of companies to support” and should focus more on supporting • Matching grants programs: Mature firms in those institutions that create such a microcosm Colombia of between US$1–US$10 mil- with types of contracts that generate incentives lion score very low in terms of innovation. to focus on increasing performance of final ben- Globally, 30 percent of such firms innovate eficiaries, such as ex-post compensation based on The Urgent Innovation Agenda—Governance, Knowledge, and Firms 187 success. This approach would put the burden of the focus should be on services that solve informa- identifying appropriate business ideas on experts tional failures about the quality of products be- and financiers rather than on Government, which ing exported. Third, export and FDI promotion instead would operate as a “wholesale” supporter. should be consolidated into a single agency, and In sum, the existing system requires improving the the number of EPAs in the country minimalized. structure of incentives for incubators and accel- However, export strategy could be considered in a erators with a specific focus on rewarding perfor- more dynamic context, coordinating new export mance ex-post rather than picking winners ex-ante. leaders jointly with cluster mapping. A coherent policy to identify clusters with ex- In addition to differentiation and targeting, anoth- port potential and preparing them for exporting er key principle should be moving toward more would help reap the benefits from the recent FTAs. horizontal programs and policies. Currently, a Gathering of foreign market information produces large number of programs are “vertical” or “the- important externalities related to consumer prefer- matic,” requiring choices about sectors or benefi- ences, business opportunities, quality and techni- ciaries that are highly risky, a process that can be cal requirements, etc. Private firms alone will not potentially influenced by external lobbies. While at provide foreign market information because com- times it is necessary to apply “vertical” instruments panies hesitate to incur research and marketing (such as in specific pilot programs for sectors with costs that can also benefit competitors. The same certain needs), such programs should channel the applies to pioneer exporters, who make a consid- bulk of resources. It is also suggested to merge var- erable investment in attempts to open foreign mar- ious “vertical” fragmented programs into larger kets, cultivating contacts, establishing distribution and more impactful “horizontal” ones that address chains, and undertaking other costly activities that the needs of more sectors rather than narrowly de- can be used by their rivals.26 Information asym- fined groups of companies. metries and spillovers call for the establishment of trade networks as public goods. Recommendations for the supply side More resources could be devoted to export pro- Establish targets for improving the quality of pri- motion, although the design of the export pro- mary and secondary education, with a focus on motion agency should be carefully considered. A science and math outcomes. First, quality begins recent World Bank study27 confirmed that export with teachers. Essential components of increasing performance improves substantially with invest- quality in the classroom includes a more compre- ment in export promotion agencies (EPAs). A hensive teacher reform to recruit the best students 10 percent increase in EPA budgets at the mean into teaching (particularly science and math), in- leads to a 0.6 to 1 percent increase in exports after centives and support excellence in the classroom correcting for selection and endogeneity biases. through measurement and accountability, and the Colombia’s below- average spending on export upgrading of existing teacher skill. Second, recent promotion suggests that more could be done, par- evidence suggest that a key driver of improving ticularly in the context of the FTAs. It is not clear school outcomes is the managerial capacities of that this should be done through a public agency, school directors, coupled with appropriate incen- nor is it clear how effective the interventions of tives and autonomy. Third, an overall review of PROEXPORT have been (this is an area where learning needs to scale back rote memorization in we lack knowledge and going forward evaluation favor of further development of socio-emotional, of PROEXPORT is very relevant). As always, the 21st century skills, and active pedagogies. design of the EPA is critical. First, as with all inno- vation agencies, private-sector participation in the Develop and implement a plan to upgrade univer- board seems correlated with effectiveness. Second, sities. Accreditation, progressive upgrading of staff 188 PART TWO | CHAPTER 10 competencies, curriculum reform, the use of clear • Evaluation: Introduction of clear mechanism to evaluation systems, and greater awareness of pri- evaluate research output and allocate universi- vate sector skills demand are critical for upgrading ty funding based on performance criteria, such Colombian universities. as those used in other OECD countries (i.e. the UK), could introduce incentives for attracting • Accreditation will help define a level of ex- and retaining high-quality researchers. cellence for universities and provide a level • Avoid Public Sector Crowding Out: A greater role of transparency for students choosing careers for the private provision of higher education, and institutions. The mandatory Register of including technological education, is desirable, Qualified Programs (Registro de Calidad) rep- both because competition with accreditation resents an enormous, positive step in quali- leads to higher quality, and because the private ty assurance. Nonetheless, it is inherently a sector has a greater incentive and ability to re- “desk-review” of program quality; the quality spond to the individual needs of the private assurance system should expand and deepen sector firms. A level playing field where public with additional checks, so that the quality of entities are not subsidized to the degree that education can be assured along with the cur- private supply cannot emerge is essential. rent checks on relevance, content, and organi- • Post-doc opportunities: A stronger post-doctor- zation of instruction provided by the Registro ate program to attract diaspora PhD students de Calidad system. Specifically, (i) external would be one strategy to increase staff com- evaluators should scrutinize more thoroughly petency. Colombia spends about 10 percent the readiness of institutions to provide pro- of what Chile does plugging in returning stu- grams for which they apply; (ii) all institutions dents. Policy considerations could include a should present evidence of sound, impartial reinsertion bond (bono de reinsercion) that would outcome evaluations and careful monitoring support the process of entering the private sec- of student progress in existing programs and tor or university sector for two years. demonstrate that infrastructure is adequate. In • Revised curricula: The curricula at universities addition, strengthening co-operation between should be reviewed to ensure that there are ICFES and CONACES/CNA would allow opportunities for students to engage and de- student assessment information to improve velop projects related to real-world problems, the overall design and operation of the qual- with an infused spirit of entrepreneurship, ity assurance system. ICFES should continue increased connections with the private sector improving SABER 11 and SABER PRO tests, and social challenges, and a corresponding enduring comparability across years and their move away from theoretical and rote learning. adaptation to different types of institutions • Ties with private sector: To support stronger links and programs, including technical and tech- of universities to the private sector, matching nological institutions. Revised SABER 11 and grant-type programs that pair universities, the SABER PRO exams will enable value-added private sector, and technological consortia can assessment of tertiary education programs. provide both incentives for relevance and ex- Valued-added measures will also allow judg- ploit synergies in the two sectors. Issues such ments on how effectively different institutions as relevance of research to the private sector, have used resources invested by students and connections to industry, and attitudes toward the state. Widespread dissemination of rank- entrepreneurship are important. Student en- ings of program, such as is done by U.S. News trepreneurship programs, technology transfer and World Report for U.S. universities, would offices, and intellectual property policies are facilitate educational choices by students and all initiatives to create a more innovative cul- hiring choices by firms. ture in universities. The Urgent Innovation Agenda—Governance, Knowledge, and Firms 189 Development Challenge Recommended Policy Option Institutions Timeline Restructure governance Raise the political attention for the innovation agenda Presidencia, ST of the National Innovation and establish a presidential-level coordinating body to Colciencias, DNP, System strengthen coordination. SENA, MICT, Bancoldex, Inpulsa Clarify the role of various institutions, strengthen and Presidencia, ST-MT specialize them. Colciencias, DNP, SENA, MICT, Bancoldex, Inpulsa Build on the suggested institutional reforms to Presidencia, ST-MT revise existing programs, streamline them, and avoid Colciencias, DNP, duplication. SENA, MICT, Bancoldex, Inpulsa Revise system of regalias, link it to a national innovation Presidencia, ST-MT strategy, and use a of pilot-evaluation-scale up Colciencias, DNP approach. Establish regulations for rigorous monitoring and Presidencia, DNP ST evaluation of government programs. Improve incentives for Shift the focus of regulatory reforms to the subnational DNP, MICT, Local MT the accumulation and level. Governors allocation of knowledge Increase support for private capital markets, especially MHCP, DNP, Bancoldex, ST through the provision of TA and exit strategies for PE Inpulsa investors. Pilot, evaluate, and scale up managerial mentoring DNP, Bancoldex ST-MT schemes for young and high-potential start-ups. Strengthen IP regimes to respond needs of Colombian DNP, MICT MT SMEs. Demand side of Complete, evaluate, and scale up technology-extension DNP, MICT, Inpulsa, ST-MT innovation: focus on firms program. SENA performance Design, pilot, evaluate, and scale up programs for DNP, MICT, SENA ST micro-entrepreneurs. Reform the agricultural extension and integrate it with MADR MT agriculture research. Design, pilot, and evaluate targeted programs for DNP, MICT, ST-MT higher potential and more sophisticated firms such as: Colciencias, Bancoldex, • Matching grants schemes Inpulsa • Technology centers • Technology transfer offices Design, pilot, and evaluate targeted programs for DNP, MICT, Bancoldex, ST-MT exporters and integrate them with other existing Inpulsa programs. Supply side of innovation: Establish targets to improve educational quality, with a MNE ST focus on relevance and special focus on science and math outcomes. quality of knowledge and Develop and implement an upgrade plan for MNE, Colciencias MT skills universities that focuses on: (i) accreditation, (ii) evaluation, (iii) revised curricula, (iv) post-doc opportunities, and (v) articulation with private sector. Evaluate current supply of technical skills and revitalize MNE, SENA MT the system of technical and vocational training to align it with needs of private sector. Note: ST = Short term; MT = Medium term. 190 PART TWO | CHAPTER 10 Consolidate, review incentives, and upgrade re- Ensure the supply of technical skills that are high search centers. These centers should remedy mar- quality and aligned with the needs of industry. ket failures arising from the transference, adapta- Main issues for SENA include: (i) streamlining its tion, and diffusion of technology. One first step organization so that it is more efficient and focuses is to review and consolidate research institutes training where there is a demand; (ii) improving as well as clarify missions and incentives to raise the relevance of courses through a tighter dialogue quality and relevance. Financing will also need to and feedback from the private sector; (iii) incorpo- be reviewed in light of international experience. rating entrepreneurship training and socio-emo- For instance, Finland’s VTT features performance tional and higher-order cognitive skills into the contracts and cost sharing where a third comes teaching methodologies; and (iv) focusing on mar- from the state, a third through matching grants, ket failures and filling gaps the private sector will and a third from the private sector.28 not fill (for example, providing training services in remote zones or in fields where there is demand but private sector does not want to invest). Endnotes 1 This policy note distinguishes between “innovation” 7 Chang-Tai Hsieh and Peter J. Klenow, 2009. “Mis- and “invention.” Invention usually refers to the first allocation and Manufacturing TFP in China and occurrence of an idea, while innovation refers to the India,” The Quarterly Journal of Economics, MIT first commercialization of the idea. While inventions Press, vol. 124(4), p. 1403–48, November. may occur anywhere (i.e. universities, research cen- 8 DB indicators are used as proxies for business envi- ters, etc.), innovations normally occur in commer- ronment mostly because of data availability. How- cial firms. To turn an invention into an innovation, ever, it should be stressed that DB indicators are just a firm normally needs to combine different elements a subset of those regulations that matter for improv- of knowledge, skills, and capabilities (i.e. production ing firms productivity and, more specifically, for im- knowledge, market knowledge, distribution system, proving incentives for innovation. financial resources, etc.). 9 The debate about the size of education’s contribu- 2 Innovation was to have been one of the critical “lo- tion to productivity and growth is still open. Ha- comotives” of the previous administration but the nushek and Woessmann (2012) suggest that consid- agenda lost substantial momentum after the first ering educational achievement, a more appropriate year. measure of human capital than school attainment, 3 For example, similar programs for firm innovation would solve the “growth puzzle” behind slow growth and entrepreneurship are found at least three agen- of Latin American countries. However, recent work cies—Colciencias, SENA, and iNNpulsa. by Acemoglu, Robinson and Gallego (2014) and 4 For instance, Law 1286 put Colciencias in the role Caselli (2013) using different methodologies sug- of rector of the innovation sector, while the 2010 gests that accounting for achievement and educa- Plan de Desarrollo put iNNpulsa more in charge of tional quality explains only a limited part of Latin the firm-related programs and DNP more in charge American countries’ productivity gap. of oversight. 10 Comite Tecnico Mixto de Innovacion (2014). Anal- 5 María Alejandra Arias and Ana María Ibañez and isis del Ecosistema de Innovacion: Instrumentos de Andres Zambrano, “Agricultural Production amidst Apoyo a la Innovacion (2010-Sept2013), Borrador, Conflict: The Effects of Shocks, Uncertainty and 15-1-2014, Colciencias. Governance of Non-State Armed Actors,” Mimeo. 11 Colombia is one of the top reformers in the past de- 6 See article in The Economist, October 26 2013. cade, according to the 2014 DB report. The Urgent Innovation Agenda—Governance, Knowledge, and Firms 191 12 Eslava and Haltiwanger (2013). versity of Wisconsin, and the majority of decent en- 13 See Sub-national Doing Business data. gineering schools in the southern U.S. arose from 14 At the seed/angel phase, for example, Fundacion Ba- this program. varia has closed only one deal in the past few years. 24 Examples of these programs are discussed in Blat- PE at the SME level is similarly thin. tman, Christopher, Nathan Fiala, and Sebastian 15 For details on this topic, see the OECD’s report Martinez. “Generating skilled self-employment in “National Intellectual Property Systems, Innovation developing countries: Experimental evidence from and Economic Development: Perspectives on Co- Uganda,” forthcoming, Quarterly Journal of Economics. lombia and Indonesia,” OECD, 2014. Annan, Jeannie, Christopher Blattman, Eric Green, 16 According to a World Bank study, PE firms report and Julian Jamison. “Does entrepreneurship em- that half of the firms requesting investments lack power women? Evidence from Uganda.” Annan, coherent financial statements and business plans. Jeannie and Christopher Blattman. “Can swords be 17 In Colombia, about 36 percent of the larger firms turned into ploughshares? Experimental effects of are family-owned. Family-owned firms show sub- an agricultural program on employment, lawless- stantially worse management practices than diffuse- ness, and armed recruitment.” ly owned firms. 25 Several assessments of these programs suggest that 18 http://www.sri.com/sites/default/files/publica- the impact can be very large in specific innovations tions/imports/21st_century_skills.pdf. and in generating a routine for innovation in mid- 19 Carlos Medina and Jairo Nunez (2005). The Impact sized firms. of Public and Private Job Training in Colombia. 26 The services offered by EPAs can be divided into IDB Working Paper. Alejandro Gaviria Uribe and four broad categories: (i) country image building Jairo Nunez Mendez (2002). Evaluating the Impact (advertising, promotional events, but also advocacy); of SENA on Earnings and Employment. Document (ii) export support services (exporter training, tech- 220, Archivos de Economia, Direccion de Estudios nical assistance, capacity-building, including reg- Economicos, DNP. ulatory compliance, information on trade finance, 20 Colombian Observatory of Science and Technology. logistics, customs, packaging, pricing); (iii) market- 21 De Carvalho, Antonio Gledson; Calomiris, Charles ing (trade fairs, exporter and importer missions, fol- W.; Matos, João A. Venture Capital as Human Re- low-up services offered by representatives abroad); sources Management. Journal of Economics and and (iv) market research and publications (gener- Business, v. 60, p. 223–255, 2008. al, sector, and firm level information, such as mar- 22 Rigorous evaluations of interventions in India’s tex- ket surveys, on-line information on export markets, tile sector using randomly selected firms receiving publications encouraging firms to export, importer consulting services related to modern management and exporter contact databases). techniques found rates of returns of 11 percent in 27 Lederman, Daniel and Olarreaga, Marcelo and one year (compared to a control group) through bet- Payton, Lucy, 2010. “Export promotion agencies: ter quality control, improved efficiency, and reduc- Do they work?” Journal of Development Econom- tions in inventory. ics, Elsevier, vol. 91(2), pp. 257–265, March. 23 See Santiago Perry (2012). El Systema de Exten- 28 The common tendency to offer majority financ- sion Agropecuaria en Colombia. Perfetti y Gallego ing by the state leads to deficient incentives to ori- (2009). Propuesta de una Politica Nacional de Asis- ent work toward the productive sector. Too much tencia Tecnologica Agropecuaria. The roots of U.S. public funding, and such institutes lose their incen- progress in agricultural productivity can be found in tives to connect to the private sector. Too little pub- the land-grant college system started in the 1860s, lic funding, as is the case of the Crown Research In- which supported the establishment of universities stitutes in New Zealand, and the centers look more with a specific technical and agricultural extension like private consulting firms and do not provide the mission. UC Berkeley, UC Davis, the University of mandaated public goods of technological recollec- Illinois, Cornell, the University of Michigan, Uni- tion and diffusion. 192 PART TWO | CHAPTER 10 CHAPTER 11 Moving Toward a Social Protection System Credit: OCHA Colombia Main Messages Colombia has expanded the quantity and coverage of social programs over the past decade but Colombians are not efficiently using the Social Protection System (SPS); as programs expand, the Gini remains one of the highest in the region and poverty reduction could have been furthered. However, a slight adjustment in vision and the creation or the enhancement of a few tools to support the system can better get the right program to the right people in an efficient manner. This note proposes transitioning from Colombia’s current collection of social programs to a co- hesive and integrated SPS that provides to all Colombians effective protection from income shocks, helps smooth consumption over the life cycle, and promotes greater human development. Such a SPS would be characterized by an articulated set of risk management programs that are easily iden- tifiable and accessible by the population, complemented by a series of sub-systems functioning in a similarly articulated and client-focused manner. This approach would aid the eligible to access and utilize benefits in a systematic way to navigate an individualized pathway for overcoming their specific social challenges. Such a vision can be achieved by creating systems management tools to better connect and allo- cate access to existing programs. These tools can also be used to manage the supply of programs. By identifying gaps in program coverage of certain risks or populations and by revealing inefficient pro- gram overlaps, programs can be created, merged, revised, or eliminated to meet population needs while increasing the efficiency of the overall SPS. This note reviews the progress achieved to date in creating the SPS, issues facing the key sub-sys- tems of health, labor, social assistance, and social security, and the tools to be developed to move toward an integrated SPS. To this end, the note recommends: (i) upgrading existing SPS management tools to better identify the needs of the population, the supply of programs to meet those needs, and articulation processes to link supply to demand, (ii) developing information systems that provide bet- ter access to labor market opportunities and health services and improve management of the labor and health sub-systems, and (iii) creating a new health management model and modernizing financing strategies and tools to reduce administrative fragmentation in the health system and improve health outcomes. Background: Colombia’s Social provide the same service as the contributory system but to a population that does not pay into the system. Protection System—Strengths The objective of these programs is to “graduate” the and Areas for Improvement poor to the contributory social security programs and to protect against shocks. These are rounded out Over the past 20 years, Colombia has developed a by several labor market interventions that promote rich array of social security, social assistance, and employability, provide job training (mostly through labor-market programs to support the needs of vul- the National Training Service known as SENA), nerable populations.1 Approximately 80 national and protect workers against economic shocks. programs are operating to manage a range of social risks and some programs have achieved substantial The health insurance program is globally ap- coverage (Figure 11-1). The contributory social se- plauded for its universal coverage. The Law 100 curity schemes (“insurance” in Figure 11-1) offer of 1993 created the General System of Social pensions, health insurance, occupational hazard in- Security in Health (Sistema General de Seguridad surance, and a random set of other benefits (via Cajas Social en Salud, or SGSSS), which has seen a rap- de Compensación, workers’ clubs that provide services id expansion in coverage, financial protection, ranging from unemployment insurance to sports and equity over the years. As of December 2013, clubs) to those who pay into the system; these pro- 43.2 million people were covered by health in- grams are intended to protect against income shocks surance (approximately 92 percent of the el- and help smooth consumption over the life cycle. igible population); nearly half paid through To reduce poverty and promote greater human de- payroll contributions of a household member velopment, Colombia has a broad range of social (Contributory Regime, or RC) and the other half promotion (assistance) interventions, many of which paid through general taxes (Subsidized Regime, FIGURE 11-1: Colombia’s Social Protection System is Fragmented, with Significant Coverage Gaps 50 2 programs 100 Potentially eligible bene ciaries (%) 45 90 40 80 Coverage (millions) 35 70 52 programs 30 60 25 50 20 40 15 14 programs 30 3 programs 5 programs 10 20 5 10 – – Unemployment Illness Child development Poverty Old age Risk Coverage (insurance) Coverage (assistance) Potentially eligible bene ciaries Source: SINERGIA; Informe de Gestión 2013, Sector de la Inclusión Social y la Reconciliación, DPS; Informe de Actividades al Congreso 2012–13, Ministerio de Trabajo; Informe de Gestión enero-septiembre 2013, SENA; Informe de Rendición de Cuentas, Gestión 2012–13, Ministerio de Agricultura y Desarrollo Rural; Informe al Congreso 2012–13, Sector de Comercio, Industria y Turismo. Note 1: Potential beneficiaries in each category are those who are eligible; for unemployment, potential beneficiaries are all the unemployed; for illness, it is the entire population; for child development, it is the share of the population under age 18; for poverty, it is the poor as measured by monetary poverty; and for old age, it is the population over age 65. Note 2: This figure does not pretend to be exhaustive; it only includes programs reported by three entities and two sectors (see source note). Note 3: “Coverage” of “unemployment” programs counts beneficiaries of all labor-market related programs; such beneficiaries may be out of the labor force, working, or unemployed. The “potentially eligible beneficiaries, %”, uses as its numerator the total number of beneficiaries of programs that are limited to the unemployed, and as its denominator the number of unemployed. Moving Toward a Social Protection System 195 196 PART TWO | CHAPTER 11 or RS) (Figure 11-2a).2 The financial protection training programs in the SENA and universities of the system is quite effective; out-of-pocket ex- (1,753 students). About 35 percent of the poor are penses of the population represent 17 percent covered by the program. Numerous impact eval- of total expenditures in health, compared to a uations have found that participation in Familias regional average of 34 percent (Figure 11-2b).3 improves human capital outcomes of children. A Evidence also points toward increased access to randomized control trial of the program found services, especially those related to reproductive that primary school attendance of Familias bene- health. The percentage of pregnant women that ficiaries increased by nearly 2 percentage points had at least four prenatal check-ups grew from 70 and secondary school attendance increased by percent in 1990 to 90 percent in 2010.4 These ac- nearly 7 percentage points.6 Beneficiaries are 4 to complishments have also helped to increase equi- 8 percentage points more likely to complete high ty in access and use of health services, especially school (relative to a graduation rate of 50 per- for those living in rural areas and the poor, and cent for the control group)7 and are more likely reduced the risk of catastrophic and impoverish- to attend a higher education institute than similar ing health expenditures in cases of illness.5 youth who were not beneficiaries.8 Familias bene- ficiaries are similar to non-beneficiaries in perfor- In response to the 1999 economic crisis, Colombia mance on standardized tests.9 In terms of health, created the conditional cash transfer (CCT) pro- malnutrition among children less than three years gram called Familias en Acción, which has grown old living in rural areas decreased by 6 percentage into the country’s largest social assistance pro- points, and a reduction of 4.1 percentage points gram. It aims to break the intergenerational trans- was measured in urban areas. Children were tall- mission of poverty by providing more than 2.6 mil- er and heavier (by 0.21 standard deviation) by age lion families with cash transfers when they comply 9–12.10 In rural households, the cash transfer re- with their co-responsibilities in terms of invest- duced income poverty by 5.4 percentage points ments in their children’s human capital; in paral- and extreme poverty by 12. 6 percentage points, lel, the Government provides basic health, nutri- with a decline in extreme poverty among urban tion, and education services. In 2013, the program household of 17.1 percentage points.11 was expanded to provide cash transfers to nearly 80,000 high school graduates from Familias-eligible Simultaneously, Colombia has begun to build households who attend technical or technological Systems Management Tools to better deliver social FIGURE 11-2A: Affiliation with Health System FIGURE 11-2B: Out-of-Pocket Health Expenditures as % of Health A liation with Health System by regimes Expenditures, 2012 50 45 57% 40 49% 35 47% 30 37% 38% 25 31% 25% 26% 20 15 17% 10 5 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Argentina Bolivia Brazil Chile Colombia Ecuador Mexico Peru Venezuela Population Total System RS RC Source: NHA-WHO 2012. Source: Minsalud—Fosyga. Moving Toward a Social Protection System 197 programs to those who need them. The SISBEN, one institutional umbrella. A Ministry of Labor and a tool to identify and rank the extreme poor with Pensions, with a Vice-Ministry of Employment, the objective of identifying potential social program raised the focus of labor policy, labor-related so- beneficiaries, was developed in the mid-1990s and cial protection programs, and active labor-market is in its third iteration. It has been used to identify programs in the government’s portfolio. Finally, households eligible for poverty-oriented programs, Colombia built a true sub-system, through the Cero such as the Familias en Acción. Law 797 in 2003 a Siempre initiative (see Box 11-1). (Article 15) established the RUAF (Registro Único de Afiliados), which was intended to serve as a Unified With the growth in universal health insurance, a Registry of Beneficiaries, listing the social programs large social assistance program, and an increase that every Colombian accesses. In 2006, Colombia in the number of social programs, social spend- created the Red Juntos Program (now Red UNIDOS), ing in Colombia is on par with the Latin America a one-stop-shop to help the extreme poor access region (Figure 11-3). Colombia’s social expendi- social programs. Patterned on the ChileSolidario ture as a share of GDP is 9.7 percent, compared model, this program is implemented by more than to a regional average of 8.3 percent, but far less 10,000 coaches assigned to more than 1.5 million than the 20 percent in Argentina and Brazil. The of the “extreme poor,” including displaced families, steady growth in social expenditure from 3 percent to help them access social programs that will help in 1990 to nearly 10 percent two decades later mir- them overcome extreme poverty. In 2010, the Social rors a growth pattern across the region, although Prosperity Department was created with the objec- Colombia had one of the largest increase in social tive of unifying all social assistance programs under expenditures as a share of GDP. BOX 11-1: Building a Sub-System for Social Protection: Cero a Siempre The Cero a Siempre is an Early Child Development strategy that provides comprehensive care for pregnant women and children into early childhood. It differs from a program or ministry because it relies on management tools that are the basis of a sub-system. Key features are: i. The initiative coordinates the many programs that serve this population rather than devel- oping and managing its own programs; ii. The system administrator developed articulation processes among various service providers to deliver the right service at the right time for the beneficiary; iii. An Inter-sectorial Committee coordinates actions and articulates entities at the national, de- partmental, and municipal levels, each actor involved recognizing the central importance of its role and offering its institutional structure, policy actions, resources (monetary and human), and capabilities to ensure the development of each child and pregnant woman; iv. Beneficiaries, not institutions, are at the center of the Strategy; it organized existing entities and programs around pregnant women and children; the monitoring system follows the conditions and quality of life of every Colombian child who has been served by any program in the system; v. La Ruta Integral de Atenciones (RIA) is a reference instrument to guide local authorities and other local actors to design pathways to meet the particular needs of new mothers and chil- dren. The RIA recognizes that certain populations have special needs, which does not imply differential care but instead universal care, with a tailored, appropriate approach. Source: Constanza Liliana Alarcón. Estrategia de Atención Integral a la Primera Infancia: Fundamentos Políticos, Técnicos y de Gestión,Coordinación. Alta Consejería Presidencial para Programas Especiales, Coordinación. Bogotá, Colombia, 2013. 198 PART TWO | CHAPTER 11 FIGURE 11-3: Social Expenditure and Inequality 25 0.600 Social Expenditure as % of GDP 20 0.500 0.400 15 Gini Index 0.300 10 0.200 5 0.100 0 0 Argentina (*) Bolivia (EP) (***) Brasil Chile Colombia (**) Costa Rica Ecuador Guatemala (***) Honduras Mexico Peru Dominican Republic Uruguay Latin America and the Caribbean Social Expenditure (1) Gini Sources: Social Expenditure: http://estadisticas.cepal.org/cepalstat/WEB_CEPALSTAT/Portada.asp; Gini: World Bank. (2013).a Note 1: Social expenditure is spending in social assistance, pensions, and health. Note 2: Gini Data: (*) Argentina and Uruguay only considers urban areas; (**) Source: DANE, Reporte Pobreza, 2012; (***) No data available. a World Bank. (2013). ―Shifting Gears to Accelerate Shared Prosperity in Latin America and The Caribbean.” LCSPP. June 2013. In spite of the development and expansion of so- Challenges cial programs and institutional realignment, the results are not as strong as hoped. Many indica- The less-than-hoped-for outcomes can be traced tors are positive. Social expenditure increased 50 to various factors that create bottlenecks in con- percent over the past decade, one of the largest verting investment to results, including system rates of growth in the region, and poverty rates fragmentation, coverage gaps and overlaps, and and the Gini coefficient fell. However, the record information management. isn’t entirely encouraging. The Gini still remains one of the highest in Latin America. Population FIGURE 11-4: Infant Neonatal Mortality health outcomes are average—or below aver- age in some cases. Maternal mortality has been Mortality rate, infant (per 1,000 live births) stagnant since 2009; infant neonatal mortality 40 (11.2 per 1.000 live births in 2012) is higher than 35 neighboring countries with similar development 30 levels (Figure 11-4); so is the prevalence of dia- 25 betes. In addition, the SGSSS is characterized by a worse perception among the population than 20 other health systems (Figure 11-5). As discussed 15 in the Poverty Chapter, Familias en Acción, the con- 10 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 ditional cash transfer program, was responsible for significant declines in rates of extreme pov- Argentina Brazil Colombia erty (28 percent) and poverty (19 percent), but Mexico Peru Venezuela declines were much smaller in rural areas, where Familias is most prevalent. Source: WDI-The World Bank. Moving Toward a Social Protection System 199 Perception of the Health Care FIGURE 11-5:  SENA, with each program serving a small num- System (HCS) ber beneficiaries.12 Our HCS needs to be rebuilt System fragmentation leads to an inefficient use of 100% the SPS as a means to manage social risks. This 80% manifests itself in two ways. First, the ad hoc de- velopment of programs by many institutions at the 60% national and subnational level does not create a 31% 40% pathway out of the risk. Emerging from poverty, 27% 27% 20% illness, unemployment, or any other risk requires 14% 12% 11% 11% 10% 20% 8% 8% 7% a series of steps that build on each other. If a step 0% 3% is missing, progress out of the risk is interrupted. AUS CAN FR GER NETH NZ NOR SWE SWIZ UK US MEX COL So while people are benefitting from the programs, they are not necessarily achieving their larger Source: Commonwealth Fund International Health Policy Survey in Eleven goals. Second, even if the collection of programs Countries (2010); and: Primary Care Surveys-Inter American Development Bank, Colombia and Mexico 2012 (preliminary results). did create a path out of the risk, the target popula- tions have limited knowledge of the programs they are eligible for and which programs can best raise System fragmentation reduces the their living standards. It is very costly for individ- effective and efficient use of social uals to collect information from all ministries and protection programs secretaries at various levels of government and to identify the set of programs to fill their specific The SPS is fragmented among many dimensions. needs. Even if programs could be identified, the First, multiple programs address the same risk transaction costs of applying, receiving notice of (Figure 11-1), partly due to the different programs eligibility, and obtaining benefits are high.13 covering the same risk, funded by different sources (contributory and subsidized) and, in some cases, Administrative fragmentation also creates unneces- providing the same benefit. This fragmentation is sary costs and confusion. The two health insurance increasing as Colombia fills coverage gaps by creat- regimes, the RS and the RC, notwithstanding the ing subsidized programs that provide the non-con- unification of their benefit packages (POS), still main- tributing population the same benefits as the con- tain different sources of financing, follow different tributory programs. For example, Colombia is in methodologies for the calculation of the insurance the process of developing its fifth transfer program premium (UPC), use different insurers (EPS), and to the poor elderly population. follow different sets of rules and regulations. This produces costs that could be avoided by an increased Multiple programs are also a result of differ- harmonization between the two regimes. The decen- ent ministries or directorates developing their tralization process has introduced additional frag- own programs for sub-sets of the population. mentation into the SGSSS.14 Horizontal fragmenta- For example, multiple entrepreneurship pro- tion was exacerbated with transfer of the insurance grams target women, extreme poor, rural pop- function to multiple EPS, and vertical fragmentation ulations, micro-enterprises, indigenous groups, arose when local governments became active in the and youth, all of which provide a combination provision of services and management of the RS.15 of skills development, entrepreneurial training, and stipends or loans. They are implemented The fragmented health financing system creates by the Social Prosperity Department, Ministry significant inefficiencies due to administrative cost, of Labor, Ministry of Agriculture, Ministry of multiple processes, legal decisions, and perverse in- Commerce, Ministry of ICT, Colciencias, or centives. The RS is funded by up to 16 different 200 PART TWO | CHAPTER 11 sources,16 which include payroll contributions, ear- In health, the risk of poverty from illness is effec- marked levies from general taxes, local revenues tively mitigated by health insurance that covers from lotteries, and RC solidarity contributions dis- around 92 percent of the population—but the tributed to multiple intermediaries (EPS) who then risk of illness is not well covered. The health in- pay service providers. Due to the heterogeneity of surance model focuses on the provision of indi- the sources and limited capacity of some actors, RS vidual and specialized health services, rather than financial resources do not always reach the provid- wider-reaching public health, prevention, and ers, jeopardizing the financial stability of the sys- health promotion activities and addressing health tem. Several studies show that the current practices problems at the primary-care level. Evidence of including risk adjustments in insurance premi- shows that health systems with a strong primary ums (UPC) are not sufficient to avoid risk-selection care orientation are able to produce better health by EPS, and the current POS definition leads to outcomes and higher levels of satisfaction.22 the reimbursing of medical procedures that are Expensive, individualized care—for example, a not cost-effective.17 In addition, SGSSS complexity high rate of general hospitalization (9 percent),23 creates vulnerabilities related in particular to fraud most of which the evidence suggests was unneces- and corruption in claims processing and beneficia- sary,24 or 16 percent of Ministry of Health budget ry affiliation, areas of vulnerability that do not exist for individualized legal claims for services outside in integrated public-provision systems.18 of the POS (tutelas)25—distorts expenditure and coverage of the health care system.26 More gener- This fragmentation leads to horizontal equity, but alized health prevention and promotion activities it creates potential distortions in the labor market are increasingly needed in Colombia, a country and vertical inequities. Workers in the RC system facing an aging population and an epidemiological pay a percentage of their salaries for health insur- transition characterized by an increase in the bur- ance, while workers who earn the same amount but den of diseases related to chronic conditions and are in the RS system pay nothing to access the same non-communicable diseases.27 POS—this could discourage formal employment.19, 20 Regarding vertical inequities, a pensioner in the Labor risks are also insufficiently covered. Programs Prima Media regime and one in the Ahorro Individual for the more than 2 million unemployed are lim- may pay the same amount into the system but the ited to job training, largely through SENA, with former may receive a much higher pay-out due to a smaller number accessing labor intermediation the different structures of the programs. Finally, services. Very few benefit from temporary employ- the system has severe regressivity due to a patching ment, other supports to obtain work or start a small together of benefits over time. For example, while firm, and unemployment insurance.28 Support for all formal sector employees contribute to pension the working poor is particularly scarce.29 The qual- and contributions are capped, higher earners take ity of these services is questionable as well. Over a a disproportionate amount of the system. In fact, nine-month period, for example, only 15.3 percent Colombia has one of the most generous top pen- of SENA graduates who registered with the labor sion contributions in the world.21 intermediation service obtained jobs in a labor market with 8.5 percent unemployment. Insufficient or unbalanced coverage leaves large segments of the population The elderly population is well covered (Figure 11- vulnerable to certain risks 1), but the benefits are insufficient. While nearly half of the 2.4 million people over age 60 are In spite of a large number of social programs for var- poor,30 only 30 percent receive pensions, and most ious populations, and much overlap, Colombia faces of these beneficiaries are not poor.31 The rest re- two coverage issues: insufficient coverage of some ceive a stipend equal to US$20–$35 a month risks and insufficient coverage of some populations. (the minimum pension payment is approximately Moving Toward a Social Protection System 201 US$300 monthly).32 However, the elderly poor The health sector could better manage informa- have needs in addition to money, including health- tion to improve beneficiaries’ use of the system care, housing (25 percent live alone or with an- and the quality delivery of services. The EPSs can other elderly person),33 nutrition, and psycho-so- play a larger role in helping Colombians man- cial well-being. Healthcare itself is covered by age their health risks by guiding users toward the the health insurance system, but out-of-pocket most cost-effective health-care services, includ- expenses are substantial.34 With the conversion ing illness prevention and health promotion. At of PPSAM (Programa de Protección Social al Adulto a higher level, weak and complex supervision of Mayor) and Juan Luis Londoño de la Cuesta programs the health sub-system leads to insufficient over- to the cash-transfer program Colombia Mayor, sight. The National Superintendence of Health 500,000 more people are receiving benefits (for (SNS) has functions of inspection, surveillance, a total of 1,213,500), but the nutrition and psy- and control over more than 9,000 providers and cho-social well-being dimensions are no longer insurers across the country,37 but it lacks the fi- addressed by any program. nancial and human resources to effectively col- lect information and act on it to improve health By the nature of its work, the rural population care quality. is outside the social insurance programs and has not fully benefitted from their rapid growth. In The labor sub-system, still in its developmental addition to the Familias en Acción program, which stage two years after the creation of the Ministry originally targeted the rural population (until of Labor, has severe information gaps that lead 2011), there are 10 programs solely focused on to policy and program inefficiencies. Colombia rural areas, with coverage of 450,000 in a pop- does not have a unified information database ulation of more than 11 million. While the RS about labor market trends. Instead, universities, covers rural areas—for example, 83 percent of local chambers of commerce, DANE, Ministry of the rural population is covered by the RS—it is Health, Ministry of Education, Ministry of Labor, not clear which of the smaller programs are op- SENA, and local governments collect and monitor erating in rural areas. The lack of social support selected basic indicators. These efforts are isolat- is reflected in rural poverty statistics. While pov- ed, incomplete for monitoring national trends, and erty has declined in Colombia over the past de- typically updated on an ad-hoc basis. To strength- cade, only one-quarter of the reduction was due en the regional labor observatories, the Ministry of to lower rural poverty. This is not to say that the Labor instituted the ORMET Network to provide situation in rural areas has not improved. Poverty financing and training. However, the country does rates are down a third over the past decade—to not have the broader set of procedures and institu- 42.8 percent for the broad measure and 19.1 per- tional arrangements to convert the current efforts cent for extreme poverty by 2013. However, the into a consolidated and updated system. This lack improvement has been much greater in urban ar- of information makes it difficult to create labor eas, where both rates dropped by 50 percent over policy, direct labor programming, and focus train- the same period—to 26.9 percent for poverty and ing strategies. Further, it limits the public’s ability 6.0 percent for extreme poverty.35 to make decisions about the types of training they should select and the location of job opportunities. Limited information for system functioning Similarly, Colombia does not have a robust system to provide information for effective job search. Although social expenditures in Colombia are on For years, SENA provided the only public labor par with the Latin America region, improved in- intermediation service, although only SENA formation collection and management can lead to graduates and employers could access it. There efficiency gains in various sub-sectors.36 are no evaluations to assess how well the system 202 PART TWO | CHAPTER 11 functioned. Instead, nearly half of Colombians Current Vision of the Colombian FIGURE 11-6:  find jobs through word of mouth, leading to in- Social Protection System efficient job matches and excess time spent in job search. Integrated Access Human Managing Social to Assets Capital Crises Security Formation Global Evidence to Move Social Promotion System Colombia Toward a True SPS Source: Bases del Plan Nacional de Desarrollo 2010–2014 Prosperidad para todos, DNP. Transition from a static set of social protection programs to a dynamic SPS recognition that directly mapping an SPS to these There is a global movement away from social concepts does not produce the expected outcomes protection programs and toward the SPS con- since the model (i) leads to system fragmentation cept. A true SPS can be defined as an “articu- since each sub-system is independent,41 (ii) as- lated collection of social interventions (services, sumes that individuals are in a single pillar at any transfers, and benefits delivered through pro- time, (iii) assumes a relatively static model that in- grams) that help people and families through- dividuals only move up, thereby ignoring negative out their life-cycle to confront the risks that they shocks, (iv) mixes various risks, tools, and actors face.”38 A system management model that coor- within a pillar, and (v) loses the beneficiary in a dinates information on the demand and supply structure driven by financing source and institu- of social services can convert a random collec- tional organization. Finally, it does not have the tion of social interventions and sub-systems into characteristics of a system: articulation, integra- an efficient SPS. tion, and flexibility. The conceptual framework underlying Colombia’s Instead, there is a movement toward a current SPS is still relevant in this changing mod- beneficiary-centered risk management model el, but the institutional structure needs to be up- where the SPS is designed to serve beneficiaries dated. Holzman and Jorgensen (2000)39 propose and their heterogeneous set of risks. In this model, that an SPS should provide interventions that the person or family is at the center, with a specific reduce risks that lead to poverty, mitigate shocks set of risks and goals. Although the programs are that could lead to poverty, and cope with struc- the static building blocks of the SPS, the dynamic tural poverty. This conceptual model formed the management tools manage access to and exit from basis of Colombia’s, as well as many other coun- programs as people move through the system, tries’, SPS.40 Figure 11-6 depicts the institutional accessing support according to their needs. This application of the model in Colombia. Risk pre- model rests on five sets of tools: (i) demand man- vention is addressed through human capital for- agement tools to identify and understand the target mation (education and training); risk mitigation population and its needs, (ii) supply management is addressed through social security (health, pro- tools to identify the existing supply of program, fessional risk insurance, pensions), assets (housing, link beneficiaries to the supply, and give provid- financial inclusion, micro-insurance), and risk ers incentives to meet the demand, (iii) inter-in- management pillars (natural disaster, Internally stitutional management processes that are specif- Displaced Populations – IDPs, emergency em- ically designed and budgeted to create functional ployment); and coping is the social promotion. inter-institutional collaboration, (iv) information While the conceptual model is still the bedrock of management tools for the system (such as popu- what an SPS should achieve, there is increasing lation registry, Unified Registry of Beneficiaries), Moving Toward a Social Protection System 203 which differ from program Management Infor- Policy Options to Reduce System mation Systems, and (v) budget management tools for the system, which differ from those at the pro- Fragmentation, Improve Coverage, gram level.42 These tools are useful for creating a and Close Information Gaps SPS, but they also build efficiency in the sub-sys- tems and identify and address coverage gaps for certain risks or certain populations. Strengthen SPS tools to overcome inefficiencies created by system Figure 11-7 presents an adaptation of the current fragmentation and to reach uncovered model that addresses many of the shortfalls by sim- populations ply introducing systems tools. The family is added to the diagram. The family is linked to the pro- In the long run, Colombia can converge to an inter- gram streams (groups of programs addressing the connected and articulated SPS with a set of risk-fo- same risk and, collectively, forming a pathway out cused program streams that are easily identifiable of that risk) through demand management tools and accessible by the population, complemented and supply management tools. Program streams by a series of sub-systems similarly functioning in are linked to each other through inter-institution- an articulated and client-focused manner. Getting al management processes, information manage- there is perhaps more of a challenge for a mid- ment tools, and system-wide budget management dle-income country like Colombia that already has tools. Examining the interior of the streams shows established program tools, compared to a country the interconnections among programs as well. starting from almost nothing.43 Through planning, Figure 11-7 also allows families to move among building on what is already there, and introduc- streams of programs and to move “backwards” ing new tools in a gradual yet high-quality way, (i.e., from social security to social promotion) be- Colombia will achieve an SPS and the efficiency cause of a shock to the family. The diagram is far gains and improved outcomes that come with it. from complete, but it is intended to communicate The following policy options are based on the cri- that the proposal is not for a new SPS; instead, it teria that they are fundamental pieces of an SPS, introduces a few tools to make the existing system and they (or their components) already exist in work more as a system—i.e. interconnected and Colombia and can be strengthened. articulated. Further Develop and Maintain Supply Management Tools. Two tools are recommended: (i) an inventory of social protection programs and (ii) a stronger Red Colombia’s SPS when Applying a FIGURE 11-7:  UNIDOS. The inventory provides the information Systems Approach for SPS organizers to identify pathways (within program streams) for beneficiaries to manage their Demand Supply risks and to identify gaps in coverage that will pre- management management tools tools vent graduation. Such an inventory not only in- cludes program names but also information about Integrated Access Human Managing eligibility criteria, coverage, and program effec- Social to Assets Capital Crises Security Formation tiveness. It includes national as well as departmen- tal and local programs. While institutions have a Social Promotion System list of their own programs, the challenge involves bringing these together into a single inventory, Inter-institutional management tools Information management tools adding the categories of analysis, and maintaining Budget management tools a team to constantly update it. Given Colombia’s constantly evolving set of social programs, this 204 PART TWO | CHAPTER 11 inventory will require constant curating and reg- to regularly report to the system, (iv) adjusting the ular interaction with various ministries, depart- software that matches program data to the RUAF, ments, secretaries, and NGOs. ensuring inter-operability; (v) training staff respon- sible for the reporting process to ensure proper use Strengthen Red UNIDOS, especially in rural zones. of the system; and (iv) developing privacy norms so Although only focused on the extreme poor, the that the information can be confidentially accessed Red UNIDOS program is the seed of an articulat- by appropriate users.45 ed SPS. It fulfills the function of identifying de- mand for social services and connecting supply Modify the demand management tool SISBEN III, into a and demand by (i) working with the extreme poor better tool to identify the poor and to minimize type I and type to identify pathways to manage their specific risks II risks, to be regularly updated and be used by a wide range and (ii) bringing information about supply to those of programs.46 The SISBEN is a globally recognized populations. The model has been highly success- tool to identify beneficiaries of social programs. ful in Chile, and Colombia has room for improve- It also provides a profile of the extreme poor that ment. UNIDOS would benefit from an external can be used by coaches to develop exit paths and review of its current program, its current artic- by programs to identify social needs among spe- ulation and coordinating instruments (Comisión cific populations. The current SISBEN47 index Intersectorial, SIUNIDOS, and Mesa de Pobreza), the (SISBEN III) has been refined to reduce the pos- completeness of its program inventory, internal sibility of manipulation, minimize errors of inclu- management, and coverage of certain populations sion, and allow for incremental precision so that (rural, elderly) to identify areas for improvement. programs can define their own cut-off points for eligibility criteria. In spite of the successes, the Strengthen information management tools, specifically by SISBEN continues to be a relatively static instru- improving the RUAF to serve as a unified registry of benefi- ment, only updated when individuals self report ciaries (URB). A URB is a database that includes an new information and only accessible at the central entry for all citizens and identifies all the social pro- level through DNP. The challenge is to identify an grams they are currently accessing. It provides ad- efficient process to make the SISBEN self-updat- equate and reliable information to individuals and ing. An option for a faster updating includes an their coaches (such as Red UNIDOS coaches), and integrated master data base to follow individuals program administrators can access full information through their life (rather than the current prac- about who is participating in which social program. tice of excluding individuals from the data base if Through the inventory of programs, it can also they happen to rise above an extreme poverty line be used to identify those programs that a person at some times). A sub-set of the SISBEN should is eligible for and is not accessing. The RUAF is be confidentially accessible by key SPS actors, in- the basis of the URB. It includes all people with a cluding local governments, to improve supervision birth certificate (registro de nacimiento), and for each it of the system. This would need to be developed identifies the programs the person is affiliated with. in conjunction with the URB and with the Red However, the RUAF is not functioning as an URB UNIDOS, with an examination of current laws that because the information is outdated and the registry may hinder this inter-institutional collaboration. is compromised by not having a unique identifying number for each Colombian.44 To transform the Create inter-institutional management tools to strengthen RUAF to a URB, the next steps include (i) identifi- the articulation process to better collectively address specific cation of a coordinating agency with a high level of social risks. Colombia has dozens of inter-sectori- legitimacy and the inter-institutional management al commissions (comisiones inter-sectoriales) with the tools to make the RUAF effective; (ii) analysis of goal of enhancing cross-sectorial collaboration the extent and nature of the unique identifier prob- around social issues. However, many of these lem; (iii) identification of incentives for programs are not true processes; usually, they are add-ons Moving Toward a Social Protection System 205 to already busy schedules, largely consisting of Create an inclusive, full-service employment service. meetings. The inter-sectorial collaboration tool Recognizing the usefulness of such a system underlying an SPS is a process in itself, with for the general population, the Ministry of an identified technical team, joint goals around Labor sponsored legislation to create a Public collaboration (as opposed to higher-level goals Employment System that would be guided by the around outcomes), a work program with clear ministry and implemented through the Special responsibilities and timeline, accountability to Administrative Unit for the Public Employment highest level decision-makers, and its own bud- Service (Unidad Administrativa Especial del Servicio get. The Cero a Siempre strategy to manage risks in Público de Empleo, or UAESPE). The general ob- early childhood was largely a success due to the jective is to provide the population with infor- intense and structured effort around articulation mation about job search and training opportuni- and coordination. These lessons can be useful to ties. This system is expected to replace the more others. As a first step, the lessons from the Cero limited service offered by SENA to its graduates. a Siempre experience should be shared through a The UAESPE is in its design phase and needs to few pilot cross-sectorial efforts, with budget and define itself, including its mission, who it intends coaches to support the work. to serve, its range of services, the results it aims to achieve, the actors that will feed into the system, Build the labor sub-system by creating its budget, and its IT systems. information for policymaking and program purposes Modernize the health sub-systems by developing a new health care model Articulate and strengthen regional labor observatories to pro- for Colombia with stronger internal vide consistent information for policy-making and for de- management and control cision-making. An organizational process to develop a national labor observatory would build on the Create a new health care model for Colombia. The existing regional bodies. This would require con- Ministry of Health is developing a new model of ceptualizing a national observatory’s role, defin- health care and service delivery, which would fo- ing indicators and outputs, and conceptually and cus on managing the health risks of the population technologically aligning the work of the regional living in a specific geographical area.48 To achieve observatories. To start this process, the Ministry of this objective, the model envisages enhancing the Labor needs to (i) map all the information being coordination between local health administrations produced at national and subnational levels, in- (responsible for public health activities) and insur- cluding variables, frequency of collection, meth- ers (responsible for illness prevention and health ods of collections, and use of data; (ii) analyze the promotion activities) to improve the capacity of map to identify commonalities, gaps, and mis- the health delivery network at primary care level.49 alignments; (iii) identify software to access useful The new model would need appropriate incentives information; (iv) create protocols on indicators, and a new regulatory approach to ensure that all data collection methods, data analysis methods, parts of the SGSSS— insurers (EPS), providers of and information sharing for the national database health services (Instituciones Prestadoras de Salud, or (recognizing that local needs may require addition- IPS), and local authorities—work in a coordinat- al information); (v) identify funding mechanisms to ed way.50 In particular, the role of the EPS would sustain local actors’ inputs to the larger system and evolve from the financial management of the re- upgrade their technical skills to collect data, main- sources to the more complex role of managing the tain its quality, and meet standardization require- health risks of the enrolled population. ments; and (vi) design and standardize the analysis and outputs (bulletins, regular reports, etc.) of the Develop more sophisticated and effective tools to manage labor observatory system. health financing processes. The structural changes and 206 PART TWO | CHAPTER 11 recent judicial norms to govern the health system health reform, (ii) upgrading the technical and hu- require revising financing mechanisms. Specific man capabilities of the HS to deal with the coming steps include: (i) revise the provider payment sys- changes in terms of risk adjustments for the sys- tem used in Colombia to include incentives and tem, and (iii) estimating the costs of total decen- performance-related payments, (ii) unify the pro- tralization of the HS to extend its outreach to all cedure to calculate the UPC for the RS and RC regions of the country. regimes, (iii) improve the definition of benefits in- cluded in the POS to reduce scope for legal claims, Conduct public outreach to improve the image of the SGSSS and (iv) continue expanding the role of health during this period of reform. To make visible the benefits technology assessment (HTA) and price regula- that the insurance model offers in terms of access, tions for pharmaceuticals. coverage, and benefits for Colombians, the Ministry of Health needs to strengthen its communications to Enhance the regulatory capacity of the Superintendencia de address public concerns. This includes: (i) improving Salud (HS). Although the Law 1438 already defined the direct communication and interaction with users a new set of functions and attributions for the HS, and communities to increase the sense of ownership, its capacity should be enhanced to fulfill not only designing and carrying out a multi-media strategy to its current mandate but also expanded responsi- explain the rights, benefits, and functioning of the bilities in the future. This would include: (i) a new system; and (ii) working with insurers and providers conceptual framework for inspection, monitoring, to strengthen the transparency policy on contracts, and control as outlined in the proposed ordinary care provision, processes and procedures. Development challenge Short-term policy options Medium-term policy options Strengthening Social Protection System tools Compile complete and accurate Approve a CONPES to create an inventory Develop and implement the processes information on social protection of social programs, define their uses, to create and maintain the inventory program supply (supply management identify their administrators, and define the of national, departmental, and local tool). process to maintain current the inventory. social programs. Constantly update the inventory. Match social program supply to social Institutional analysis of Red UNIDOS and Institutional reform so that Red demand (supply management tool). identification of strategies to strengthen UNIDOS can effectively guide the its role within its current institutional extreme poor through the range of parameters. social protection/assistance programs across the entire social protection/ assistance system. Improve social demand information (i) Review of the RUAF to identify the Develop a protocol and implement management by creating a unified structural limitations to serving as a URB, incentives to maintain the RUAF up-to- registry of beneficiaries (information (ii) identify a rector for the system and train date and confidentially accessible to a management tools). staff to populate the database, and (iii) select set of users. update software to facilitate uploading data and downloading information. Modify the SISBEN dynamic targeting Review options to convert the SISBEN to Implement a process for a dynamic tool so that it is regularly updated a dynamic information collection system; SISBEN clearly linked with program (demand management tool). review laws that limit these options. eligibility criteria, once short term option is achieved. Articulation among sub-system Record the tools, and the process to Implement operational inter- programs to more efficiently and develop the tools, from the Cero a Siempre institutional tools in all cross-sectoral effectively respond to social demand. model; pilot these tools in two other inter- efforts in the social sectors. sectorial initiatives. (continued on next page) Moving Toward a Social Protection System 207 (continued) Development challenge Short-term policy options Medium-term policy options Build labor sub-system through improved information Improve labor information systems Map the labor information being created by Implement the tools for a national to guide potential workers and labor various institutions and develop a schematic labor observatory, built on stronger policy. for a unified labor observatory; develop subnational data collection and analysis protocols and software to standardize and efforts. upload the regional labor observatories; Review the UAESPE to identify define the mission, beneficiaries, range of strengths and areas for improvement to services, and IT system of the UAESPE and continue moving toward a full-service the oversight role of the Ministry of Labor. labor intermediation service. Develop a new model of health care with stronger internal management and control Implement a prevention/promotion Review the articulation tools between the Reorganize service networks and health care model to improve local health administration and the EPS; estimate demand for remote regions; coverage and health outcomes and review the changes needed for transforming implement the patient-centered the efficient use of the sub-system EPS from financiers to health management medical home model in large resources. providers. population centers. Reduce administrative fragmentation (i) Analysis and design of pharmaceutical Further reform of the health financing through more sophisticated and policy and price regulation, (ii) institutionalize system toward a pay-for-results system. effective tools to manage health the Health Technology Assessment, and financing. (iii) revise the incentives system and accountability mechanisms among the various players in the sector (e.g. EPS, IPS, central and local governments) to improve performance and governance in health management and health information systems. Reduce fragmentation through Refine use of data on frequency of health Unify methodology across regimes enhanced risk management of the usage from Individual Register of Service for insurance premium computation insurance system through changes in Provision (RIPS). (UPC). risk adjustment mechanisms. Design and test incentives for better Implement a set of pay-per- performance. performance guidelines based on health outcomes of affiliates. Achieve more efficiency and Design a new framework of inspection, Integrate both financial and health transparency in the system through monitoring, and supervision to move from risks in the risk-based monitoring and improvements in oversight and the traditional compliance based approach supervision system. control capabilities. toward a risk-based monitoring and supervision system. Improve public confidence in the Design of a new communication strategy for Increase participation of users and health system through awareness of the Health System. community in policy-making of the achievements and rights. Implementation and enforcement of a tighter system. transparency policy. 208 PART TWO | CHAPTER 11 Endnotes 1 Since the 1990s, Colombia has been building the 7 Independent Evaluation Group (2011). “Assessing the components of a social protection system. Unlike Long-Term Effects of Conditional Cash Transfers on its neighbors, Colombia did not suffer severe crises Human Capital: Evidence from Colombia,” Report during most of the 20th century. In spite of deep civ- No. 59127, The World Bank, Washington DC. il strife, families took care of each other when expe- 8 Camacho, Adriana and Roman Zarate (2013). “Go- riencing a sudden negative shock to their well-being ing one Step Beyond with Conditional Cash Trans- and programs to reduce poverty were not a part of fers: College Outcomes,” LCSHD/World Bank. un- the overall policy dialogue. This changed with the published. 1991 Constitution. The 1990s saw Law 100 to cre- 9 IEG 2011, ibid. ate a universal health insurance system, the creation 10 Institute for Fiscal Studies, Econometría, and Siste- of a registry of the poor via SISBEN. When the mas Especializados de Información 2006, ibid; In- 1999 economic crisis hit, Colombia saw that it did stitute for Fiscal Studies, Econometría, and Sistemas not have the basic structure to support those whose Especializados de Información (2012). “Impactos incomes were lost or diminished. Shortly thereafter, de largo plazo del Programa Familias en Acción en the social safety net (Red de Acción Social) was creat- municipios de menos de 100 mil habitantes en los ed through three large cash-transfer programs: Fa- aspectos claves del desarrollo del capital humano.” milias en Acción, Jóvenes en Acción, and Empleo en Acción. Bogotá, Colombia: National Planning Department. At the same time, Law 789 defined a social protec- 11 Institute for Fiscal Studies, Econometría, and Siste- tion system and created a Ministry of Social Pro- mas Especializados de Información 2006, ibid. tection. The programs and institutions grew and, in 12 Acosta, Olga Lucia, Nohora Forero Ramírez, and 2006, Colombia recognized the need to better coor- Renata Pardo Pinzón (in process). “Diagnóstico so- dinate its social protection and social assistance pro- bre el Sistema de Protección Social Colombiano y las grams to more efficiently and effectively reach the Principales Acciones que se Deben Realizar para su poor. This led to the creation of Red Juntos, modeled Ajuste y Modernización.” CEPAL, United Nations. on the successful Chilean experience (ChileSolidario). 13 This is particularly costly for the poor who do not Social assistance and protection programs contin- have the tools or training to undertake such an ef- ued to expand and multiply in the period. fort and who do not have the experiences to shortcut 2 SISPRO: Sistema de Información de la Protección their understanding of the information they collect. Social www.sispro.gov.co/. Described by Kahneman (2003). “Maps of Bound- 3 World Bank (2012). World Development Indicators. Oc- ed Rationality: Psychology and Economics” Ameri- tober 2012. The World Bank, Washington DC. can Economic Review. 93:5, p. 1449–1475. 4 Profamilia. (2011). Encuesta Nacional de Demografía y 14 Montenegro, Fernado, and Oscar Bernal (2013). Salud 2010. Profamilia, Bogotá, Colombia. “Colombia Case Study: The Subsidized Regime 5 Equity in access was further improved by the sen- of Colombia’s National Health Insurance System.” tence T-160 of 2008 of the Constitutional Court UNICO Studies Series 15. The World Bank, Wash- that commanded the unification of benefit packages ington DC; Guerrero, Ramiro, S. Prada, D. Cher- of the RC and RS regimes (Colombia, Corte Con- nichovsky, and J. Urriago (2013). “La doble de- stitucional, Sentencia de Tutela No. 760 de 2008). scentralización en el sector salud: Evaluación y 6 Institute for Fiscal Studies, Econometría, and Siste- alternativas de política pública.” Centro de Estu- mas Especializados de Información (2006). “Evalu- dios en Protección Social y Economía de la Salud ación del Impacto del Programa Familias en Acción– (PROESA) and Universidad Icesi. Cali, Colombia. Subsidios Condicionados de la Red de Apoyo Social.” 15 The role of the local government is particularly im- Bogotá, Colombia: National Planning Department. portant in the provision of public health services in Moving Toward a Social Protection System 209 rural areas. where health providers are predomi- 22 Starfield B., Shi L., Macinko J. (2005). “Contri- nantly public. bution of Primary Care to Health Systems and 16 Ministerio de Salud y Protección Social (2013). Ex- Health.” The Milbank Quarterly, 83:3, p. 457–502. posición de motivos del Proyecto de Ley (Senado). 23 Derived from the Encuesta de Calidad de Vida, 2011. “Por el cual se redefine el Sistema General de Se- 24 Guanais et al. (2012) estimated that the rate of guridad Social en Salud y se dictan otras disposi- avoidable hospitalizations (i.e., ambulatory care ciones.” Bogota, Colombia. sensitive conditions) for the country is 21 percent, 17 Nuñez, Jairo and J. Zapata (2012). “La Sostenibi- the second highest in LAC. Guanais F.C., Gó- lidad Financiera del Sistema de Salud Colombia- mez-Suárez R, Pinzón L. (2012). “Primary Care Ef- no-Dinámica del gasto y principales retos de cara fectiveness and the Extent of Avoidable Hospital- al futuro.” Fedesarrollo, Bogotá, Colombia; Ruiz izations in Latin America and the Caribbean.” SPH F, Uprimny M. (2011); “La salud: entre la refor- Discussion Paper No. IDB-DP-266. Inter-American ma estructural y el ajuste regulatorio.” Documen- Development Bank, Washington, DC. to Técnico GPES/1596–11. Asocajas – Cendex, 25 The monetary value of legal claims (tutelas y recobros) Bogotá, Colombia; Alfonso, E., Riascos, A. and M. for services not included in the benefit package (no- Romero (2013). “The Performance of Risk Adjust- POS) increased from 1.8 percent of the total SGSSS ment Models in Colombia Competitive Health In- expenditure to 16 percent in 2009. Nuñez, Jairo and surance Market.” Working Paper Quantil 2013–1. J. Zapata (2012). “La Sostenibilidad Financiera del 18 Savedoff, W. (2007). “Transparency and corruption Sistema de Salud Colombiano-Dinámica del gasto in the health sector: A conceptual framework and y principales retos de cara al futuro.” Fedesarrollo, ideas for action in Latin American and the Caribbe- Bogotá, Colombia. an,” Health Technical Note 03/2007, IDB, Wash- 26 The scope for legal claims is related to the fact that ington D.C.; Hussmann K. (2011). Vulnerabilities to the POS was not updated from inception of the Corruption in the Health Sector: Perspectives from Latin new system until 2012 and consequently lagged new American Sub-Systems for the Poor (with a Spcial Focus on technologies for health care and the fact that ser- the Sub-national Level. UNDP. vices are too strictly defined in the POS. This rul- 19 Camacho A, Conover E, and Hoyos A. (2013). Effects ing, together with the Law 1428, established a year- of Colombia’s Social Protection System on Workers’ ly update of the benefit package and set the goal of Choice between Formal and Informal Employment. an “implicit” plan, which should be more flexible The World Bank Economic Review, p. 1–23. and in tune with the epidemiological profile of the 20 In this regard, the recent fiscal reform (Ley 1607 population. Ministerio de Salud y Protección Social of 2012) has substituted part of the financing of (2013). Exposición de motivos del Proyecto de Ley health, SENA, and ICEBF from employers and (Senado). “Por el cual se redefine el Sistema Gener- employees contributions to general taxation to re- al de Seguridad Social en Salud y se dictan otras dis- duce the disincentive to formality. “Proyecto de posiciones.” Bogota, Colombia. Ley No. 1607, exposición de motivos al proyecto 27 Montenegro F, Bernal O. 2013. Colombia Case de Ley por medio de la cual se expiden normas en Study: The Subsidized Regime of Colombia’s Na- material tributaria y se dictan otras disposiciones.” tional Health Insurance System. UNICO Studies Ministerio de Hacienda y Crédito Publico, Bo- Series 15. The World Bank, Washington DC. gotá, 2012. 28 The unemployment insurance program is operated 21 Ministerio de Trabajo (2013). “Nuevo Modelo de through Cajas de Compensación, drawing from its own Protección para la Vejez,” Presentación a la Mesa resources. Approximately 95,000 people receive the de Expertos. October 2013. http://www.min- benefit each year, largely limited by the small share trabajo.gov.co/component/docman/doc_down- of formal-sector workers who voluntarily set aside load/935-presentacion-nuevo-modelo-de-protec- a portion of their retirement account to receive un- cion-par-la-vejez.html. employment insurance. 210 PART TWO | CHAPTER 11 29 SENA, Informe de Gestión enero-septiembre de tems,” Social Protection and Labor Discussion Pa- 2013, Bogotá, Diciembre 2013. per #1202. World Bank. 30 Acosta, ibid. 42 Silva, ibid. 31 The poorest 20 percent of the population receives, 43 Robalino, ibid. on average, no pensions income while the richest 20 44 The RUAF was created under Ley 797 2003 (Article percent received an average of 164,000 Colombi- 15) as an entity that integrates the social protection an pesos monthly. Similarly, pensions comprise 0.2 sector (Ministerio de la Protección Social). It establishes percent of household income in the poorest house- that the inclusion in such registry is mandatory for holds, compared to 10.3 percent in the wealthiest access to subsidies or publicly funded services and housholds. Background Note: Colombia Poverty requires a unique identification number according and Shared Prosperity. to the existing documents. 32 http://www.fondodesolidaridadpensional.gov. 45 Development of the Law 1712, March 2014 (Trans- co/prosperargel/que-es-programa-proteccion-so- parency and Right to Access to Public Information cial-adulto-mayor. Law). 33 Muragarra, Edmundo (2012). “Aging, Poverty and 46 Camacho, Adriana and Emily Conover (2013). Social Protection in Colombia Evidence and Policy “Effects of Subsidized Health Insurance on New- Options.” LCSHS/World Bank. Unpublished. born Health in a Developing Country.”.Economic De- 34 Muragarra, ibid. velopment and Cultural Change, 61: 3, p. 633–658. 35 Source: Background Note: Colombia Poverty and 47 According to the Law 715 2001, Article 94, the SIS- Shared Prosperity. BEN has to be reviewed every three years. 36 The General System of Social Security in Health 48 Recognizing the varous situations in terms of health (Sistema General de Seguridad Social en Salud-SGSSS) needs, availability of services, and insurers across and the emerging Labor Sub-System are discussed the country, the MinSalud is developing different here. The efficiency issues in the third sub-system of models: (i) a model for disperse and indigenous pop- Social Assistance are encompassed in the above dis- ulations; (ii) a model for urban areas characterized cussion on Fragmentation. by competition in the markets for insurance and 37 Nuñez, Jairo and J. Zapata (2012). “La Sostenibi- provision; and (iii) an intermediate model for areas lidad Financiera del Sistema de Salud Colombia- with limited competition among insurers and provi- no-Dinámica del gasto y principales retos de cara al sion mainly by public providers. futuro.” Fedesarrollo, Bogotá, Colombia. 49 The MinSalud had proposed to upgrade the Health 38 Silva, Veronica (forthcoming). “Notas sobre un Management Zones (HMZ). Zone managers would Sistema de Protección Social y sus Herramientas de be responsible for organizing and managing the net- Gestión.” LCSHD/World Bank. In process. work of service providers to respond to the popula- 39 Holzman, Robert and Steen Jorgensen (2000). “So- tion’s specific health needs and comply with the ben- cial risk management : a new conceptual framework efit plan. for social protection and beyond,” Social Protection 50 The new regulatory framework would require an in- Discussion Papers 21314, The World Bank. creased capacity of the Superintendencia de Salud 40 Ley 789 (2002). to monitor insurers and local health authorities. 41 Robalino, David, Laura Rawlings, and Ian Walker (2012). “Building Social Protection and Labor Sys- CHAPTER 12 National and Subnational Public Finances and Governance Main Messages Over the past two decades, Colombia has made significant progress on decentralization to promote growth and reduce regional disparities and poverty, but its fiscal and governance framework still has not delivered rapid regional convergence. Current challenges, however, include suboptimal implementation of the decentralization frame- work, weak local revenue sources, lack of long-term strategic territorial planning, scarce local and cen- tral capacity to manage more decentralized systems, and limited citizen engagement. This policy note includes a set of main policy recommendations: enhance overall coordination among various levels of government and among key agencies in the central Government; implement an effective incentives framework to reward subnational government performance; improve subna- tional control, monitoring, and evaluation; revisit the decentralization framework, particularly the roles and responsibilities of departments; and provide sustained technical assistance to improve public sector management and to broaden local revenue sources in subnational governments. Background in small municipalities and the extent of resources managed at the local level and their impact on ser- In decentralizing, Colombia has aimed at finding vice delivery and national development goals. the right balance between central authority and lo- cal autonomy, equity in resource distribution, and Fiscal decentralization has substantially advanced higher efficiency in public spending. Colombia is a in Colombia over the past two decades. Today, unitary country divided into 32 departments (re- SNGs execute the vast majority of the national gional governments) headed by popularly elected budget. Table 12-1 shows this move toward fiscal governors and departmental assemblies. Composed decentralization; the share of subnational expendi- of locally elected representatives, the assemblies tures represented by total government expenditures are responsible for, among other things, approving grew in more than ten points from 1995 to 2009.5 the departments’ budgets. In addition, there are just over 1,100 municipalities with elected mayors The 1991 Constitution transferred responsibilities and municipal councils. According to the IMF, sub- and resources to municipalities and departments national governments (SNGs)1 collectively account for the delivery of key public services. The transfer for a large share of public spending in Colombia system that resulted from the 1991 Constitution fo- (8.1 percent of GDP in 2011). Departments and cused on financing education, health, and water and municipalities raise about 3 percent of GDP in sanitation to standardize SNGs’ provision of these tax revenues (Table 12-1), with the remainder2 services across regions. By the mid-1990s, a number provided by the General Participation System of shortcomings in the decentralization framework (Sistema General de Participaciones, or SGP), central had become evident. To enhance SNGs’ capacities Government transfers, and other funding sources, to manage their responsibilities and resources, the such as non-tax revenues and royalties on natural 1991 Constitution provided for the certification of resources.3 Small municipalities tend to be poorer SNGs based on their fiscal performance. However, than larger ones: while 29 percent of the popula- earmarking transfers did not produce the expected tion at large has one or more unmet basic needs, improvements in coverage or quality of services, and approximately 46 percent of the inhabitants of certification of individual SNGs succumbed to po- municipalities with fewer than 50,000 inhabitants litical pressures and became pro forma during the late report at least one unmet basic need.4 The country 1990s. In addition, Colombia’s economy entered as a whole has a keen interest in the decentraliza- into recession between 1998 and 1999, with growth tion framework and SNGs’ efficiency and effec- declining from 0.6 percent in 1998 to –4.3 percent tiveness, shaped by the high incidence of poverty the following year.6 This led to a significant drop TABLE 12-1: Fiscal Decentralization Subnational Total taxes Subnational taxes Subnational taxes expenditures as % of Transfers to SNGs Year as % of GDP as % of GDP as % of total taxes total expenditures as % of GDP 1990 8.2 1.7 20.2 n.a. n.a. 1995 10.0 1.9 21.0 18.5 3.6 2000 11.7 2.2 19.3 24.9 6.9 2005 15.2 2.8 18.1 29.4 7.3 2010 17.3 2.9 16.8 28.95a 7.8a Sources: Adapted and updated from Bird (2011) and Sánche, España and Centeno (2012) and based on data from ECLAC/CEPAL, OECD, Banco de la República (http://www.banrep.gov.co/es/series-estadisticas/see_finanzas_publi.htm), and Ministry of Finance and Public Credit (http://www.minhacienda.gov.co/ HomeMinhacienda/politicafiscal/Estadisticasfiscales). a Data for 2009. National and Subnational Public Finances and Governance 213 214 PART TWO | CHAPTER 12 in current revenues, reducing the resources trans- (or thresholds) that may trigger the executive ferred to SNGs in nominal terms by 23.6 percent branch’s use of preventive or corrective measures. in 1998 and 24.6 percent in 1999. Meanwhile, the Preventive measures may include “performance rapid increase of transfers (Table 12-1) stimulated plans” between the executive branch and SNGs, expenditure growth and debt and diminished the which prescribe the specific actions for the SNGs incentives for SNGs to raise their own revenue. to mitigate or eliminate the risk event.11 Corrective Consequently, the country experienced a debt crisis measures include the executive branch’s authority in the late 1990s that even threatened fiscal sustain- to take over SNGs’ roles and resources to ensure ability at the national level.7 provision of services that are at risk. This innova- tive tool aims to strengthen the government’s ac- Between 1997 and 2003, a second set of reforms countability to citizens in the delivery of services, was designed to discourage excess spending and transparency and efficiency in the use of public borrowing.8 In 1999, a new bankruptcy law (Law resources, and coordination of performance be- 550) focused primarily on private corporations but tween different levels of government to align them also included provisions for bankruptcy protection with stated national objectives. procedures for highly indebted SNGs and public enterprises that could not, or chose not to, work The drive toward performance-based transfers has out a voluntary rescheduling with their creditors.9 continued through reforms to the royalties system Beginning in 2000, the Congress approved reforms and territorial management. In June 2011, the geared toward limiting the growth of transfers and Congress approved another constitutional reform imposing strict budget constraints on SNGs through geared toward introducing results conditions in a subnational insolvency framework and spending the royalties system (Sistema General de Regalías, or limits. These rules—collectively referred to as the SGR). Created in 1991, the royalty transfer system Fiscal Insolvency Framework (Esquema de Saneamiento was based on the revenues of commodities, such as Fiscal)—also allow the central Government to es- oil, gas, and minerals. While the annual amount of tablish Debt Restructuring Agreements and Fiscal royalties was previously insignificant, it increased and Financial Performance Agreements with SNGs substantially over the past two decades with rising to improve their organizational and operational ca- commodity prices and production. In 2008, royal- pacity and correct fiscal imbalances. In 2001, the ties payments amounted to COP 6 trillion (about SGP established the total amount to be distributed US$3 billion, or 1.3 percent of GDP), six times to SNGs at the 2000 level (as a percent of GDP) of higher than the levels of the 1990s.12 The new the previous general transfers. Thereafter, the share law calls for joint management bodies (Órganos received by SNGs was to be increased annually by Colegiados de Administración y Decisión) between 2 percent in real terms until 2005 and then by 2.5 the national Government and SNGs, with the goal percent up to 2008. of improving the efficiency of the decision-making process relative to the use of royalties, including Since 2000, the central Government has been the possibility of suspending transfers to under- developing indicators and strengthening capacity performing SNGs.13 The law aims at ensuring that to properly monitor services delivered by SNGs. resources are channeled towards relevant, strategic, Because the national goals for key services set out and viable projects. In 2011, Congress approved the in previous National Development Plans had not Territorial Management Organic Law (Ley Orgánica been achieved, a third set of reforms was approved de Ordenamiento Territorial, or LOOT),14 which com- after 2008, authorizing the executive branch to plements the royalty reform by seeking to reduce monitor and control SNGs’ compliance with the the risk of investment fragmentation and low-qual- coverage, quality, and continuity goals set out ity projects among SNGs through various associ- for the key services financed by the transfer sys- ations among municipalities and other territorial tem.10 The new system features a set of risk events entities.15 National and Subnational Public Finances and Governance 215 Progress fiscal system (taxes and transfers) shows a limited redistributive capacity, even compared with other countries in Latin America and the Caribbean.17 The decentralization process has produced mixed The SGP, which provides central Government results in terms of promoting growth and reduc- transfers to the SNGs based on poverty variables ing regional disparities and poverty. Since 2002, (among other factors), has had little impact in re- Colombia’s strong growth has been accompanied ducing differences among departments and mu- by poverty reduction and substantial job creation, nicipalities. Similarly, it is unclear whether the which were expected to have a major impact in comprehensive tax reform recently approved by terms of inequality and regional convergence. Yet Congress will do anything to address disparities the country’s Gini coefficient (0.54 in 2012) is still across regions. By contrast, SGR reform appears one of the highest in the region and worldwide, to be a step in the right direction. World Bank pro- eclipsing that of peers like Peru (0.48 in 2010). jections suggest poor departments will grow faster This is due to the large and enduring disparities than richer ones under the new framework.18 In between urban and rural areas and the stark dif- sum, while the new royalties system will help re- ferences in poverty rates among departments duce disparities, more efficient execution of SGR (Figure 12-1).16 In fact, small municipalities (under resources and bolder reforms are needed to in- 10,000 inhabitants) have poverty rates above the crease the pace of regional convergence. national average (45.1 percent versus 27.78 per- cent), and their pace of poverty reduction has been Critical gaps remain an impediment to regional slower than average (37.1 percent reduction versus competitiveness and are closely related to services 54 percent in large municipalities for 1985–2005). delivered by SNGs. Educational achievement shows significant regional variance in Colombia: urban The current fiscal and governance framework for departments and cities fare significantly better than SNGs has not led to rapid regional convergence. rural areas in terms of literacy, absenteeism, and av- Although Colombia has seen steady, but slow, con- erage years of schooling.19 Moreover, differences in vergence in per capita income levels, the overall FIGURE 12-1: Regional Disparities Incidence of Monetary Poverty by Department in 2012 (%) 80 70 60 50 40 30 20 10 0 Bogotá D.C. Santader Cundinamarca Antioquia Valle del Cauca Risaralda Meta Total National Atlántico Caldas Boyacá Quindío Norte de Santander Caqueta Tolima Bolivar Huila Cesar Nariño Sucre Magdalena La Guajira Córdoba Cauca Chocó Source: DANE—Encuesta Continua de Hogares (2002–2006) and Gran Encuesta Integrada de Hogares (2008–2012). Note: The incidence of monetary poverty indicates the percentage of people who are classified as poor based on a certain level of consumption; i.e., it allows for the observation of the non-conditional probability that an individual will be poor in a given department. 216 PART TWO | CHAPTER 12 other key drivers of competitiveness appear to be be slow.26 However, relaxing the controls to speed widening. According to the Economic Commission up execution could raise major issues in terms for Latin America and the Caribbean (ECLAC),20 of transparency and accountability in the use of regional disparities in competitiveness, as measured funds. Finally, having separate systems (SGP and by levels of economic performance, infrastructure, SGR) to finance similar regional objectives and human capital, and science and technology, have projects is costly, inefficient, and subject to un- broadened during the past decade. Leading depart- avoidable overlaps (see Box 12-1). ments have made substantial progress, while those in the middle and at the bottom remain stagnant. This The role of departments in promoting coordi- trend poses a challenge for the subnational finance nating, and providing support to municipalities framework because the lagging departments are also is still unclear and is perceived to be weak. With more dependent on central Government transfers. the wave of decentralization reforms that started in 1986 partly transferred to the departments the The SGP has contributed to expanding the decen- responsibility for providing critical services, such as tralization process and improving a number of basic health and education; however, this intermediate services across the country. The SGP fosters better government layer remained institutionally weak. fiscal management by both the central Government Colombia’s decentralization framework has not and the SNGs, improving the coverage of key ser- granted clear specialized roles to departments in vices.21 As a predictable source of resources for terms of service provision, technical assistance, or SNGs, the SGP has contributed to better subna- supra-municipal and sector approaches. In prac- tional planning and efficiency in the use of resourc- tice, the framework is based on a bipolar scheme es. However, the increase in the coverage of basic in which the central Government defines policies services has not been accompanied by increases in and municipalities execute them, leaving depart- the quality of these services.22 Evaluation reports ments somewhere in between. Uncertainty about from the Ministry of Finance and Public Credit the departments’ roles and responsibilities has led (Ministerio de Hacienda y Crédito Público, or MHCP), to frequent clashes with municipalities and undue the Comptroller General’s Office (CGR), and the delays in formalizing the new LOOT-authorized National Planning Department (DNP) indicate sig- forms of territorial association that the depart- nificant shortcomings in the overall management ments either refuse to sponsor or openly oppose. of resources. The evidence suggests that SNGs lack Arguably, this dynamic is also conducive to pub- the capacities, the systems, and the data to properly lic investment atomization—that is, the widespread manage, monitor, control, evaluate, and report on use of public funds for small and micro projects the use of resources affecting service delivery.23 with little regional impact. It is evident that small municipalities will benefit from departments’ sup- The new SGR distributes resources more evenly port in such areas as tax administration and service across regions but still faces efficiency and capacity delivery of key regional competencies (e.g., health, challenges. The new SGR24 has created a frame- education, and local infrastructure maintenance). work that is conducive to better regional equity25 and better management of resources. However, As Colombia approaches the end of the internal there are concerns about the efficiency of the conflict, SNGs could play a critical role in the tran- institutional framework for approval of region- sition process. Because the risk of violence is greater al investment projects through the regional SGR in departments or municipalities with weak institu- management bodies which includes direct DNP tions, building capable and legitimate institutions participation, and about the central Government’s at the local level is key to breaking Colombia’s cy- capacity to respond to demand and expedite the cles of violence.27 Strengthening SNG institutions execution of regional projects. Execution of SGR will be critical as the country enters a post-conflict resources, as monitored by the CGR, continues to transition. For instance, municipal governments National and Subnational Public Finances and Governance 217 BOX 12-1: Government’s Transfers to SNGs: SGP and SGR Most of the central Government’s transfers to SNGs are channeled through two systems: SGP and SGR. • The SGP funds are transferred to SNGs pursuant to articles 356 and 357 of the Constitution to finance services under the SNGs’ jurisdiction—mainly health, education, and water and sanitation. • The SGR includes the systems of revenues, transfers, institutions, procedures, and regulations that, according to articles 332, 360, and 361 of the Constitution and Law 1530 of 2012, govern the dis- tribution and transfer to the SNGs of revenues from exploitation of nonrenewable natural resourc- es. The system determines the use, management, execution, control, and objectives of the funds, including regional and inter-generational equity, savings, competitiveness, good governance, and macro-stability. In 2012, almost COP 34 trillion (US$18 billion) were made available to SNGs via these two systems, as follows: Source of financing Amount in COP (millions) Amount in US$ (billions) SGP 25,951,621 13.7 SGR 7,904,418 4.2 that show willingness to improve their manage- Government and Congress had in mind when ap- ment capacities and start providing better public proving the most recent reforms. Before enacting services will also become more accountable to and additional reforms in the short to medium term, trusted by citizens during the transition process. A the country might consider focusing on reaping new virtuous cycle will be set in motion as SNGs’ the benefits of the reforms already passed by mak- performance—measured by improved delivery ing them fully operational and strengthening the of public services—creates higher levels of trust institutional capacity of the responsible national among citizens. While the peace process continues and subnational agencies. at the national level, departments and municipal- ities should prepare to face the challenges of the The country still shows uneven implementation of post-conflict transition by building basic adminis- the decentralization framework. As Bird highlight- trative and managerial skills and welcoming feed- ed and a recent World Bank study showed,29 SNGs’ back from citizens throughout the process.28 management and service delivery have had success- es and failures, with no clear correlation with size or economic resources. The main reasons include the Challenges lack of incentives to promote SNGs’ own revenue While the new legal and regulatory framework collections30 and the lack of accountability created for decentralization is expected to improve SNGs’ by the fact that different levels of government con- performance, additional measures are required for trol services’ inputs.31 The at-best modest impacts better service delivery. In particular, analytic work on service delivery of greater and better-distrib- conducted by the World Bank on decentralization uted amounts of resources flowing to the regions in Colombia shows that the country still faces sig- has been widely documented. More important, nificant challenges in achieving the high goals the the capacity of SNGs to use, manage, monitor, 218 PART TWO | CHAPTER 12 control, and report on these resources remains an decentralization hinges largely on the success- issue. It appears that Colombia has focused on the ful application, within a clear legal framework, decentralization framework’s “macro” elements of of a customized mix of incentives and policies, (particularly on the fiscal “rules of the game”) but often developed at the local level and piloted, has made little progress on the “micro” dimension refined, and then replicated nationwide under of the institutions in charge of implementing the the close scrutiny of citizens. In Colombia, the framework (i.e., the administrative and managerial incentive structure for improved SNG perfor- tools at the three levels of government that should mance has been distorted by frequent changes in make the fiscal rules operational). Weak local core the policy environment; non-conditional central management areas, such as financial management Government transfers, even with poor local reve- and procurement, have had a negative effect on the nue efforts; and the limited range of fiscal incen- day-to-day use of funds and on the results expected tives or disincentives from the central Government from regional investment projects. to effectively reward or sanction performance. The problem has been exacerbated by a lack of Broadly, Colombia faces two types of challenges: transparency and accountability in many (usually ones related to the decentralization framework and smaller) municipalities and failure to promote cit- institutional coordination and ones related to the izen participation.32 capacity of SNGs. Attention to both is critical for more efficient revenue mobilization and more effec- Challenge #3: Inconsistent long-term strategic tive service delivery. planning and lack of reliable regional perfor- mance data. The strategic planning mechanisms Stronger decentralization framework of the Government and SNGs are only weakly and better institutional coordination linked. The available information does not permit expression of sector and regional priorities that Challenge #1: Poor coordination between central would promote the development of long-term and regional governments. The interface between planning strategies. The central Government, as the central Government and SNGs centers on co- part of OECD working groups, has developed ordination and monitoring mechanisms: the Fiscal important initiatives—including the creation of Insolvency Framework, performance plans, results a territorial management observatory, the gen- agreements, and Contratos Plan. They provide tools eration of better subnational statistics, and work to help SNGs improve their capacities to manage on defining functional associations at the region- the administration of resources and the delivery of al level—but it will need to further boost strate- services. Unfortunately, the breadth of programs, gic and analytic capacities for improved regional funding sources, agency responsibilities, and SNG policymaking. Subnational information is scarce priorities challenge the central Government’s ability and spotty; basic statistics and administrative, fi- to coordinate interventions. For example, demands nancial, and local management data are missing. for information by various central entities often are The last census (2005) is almost 10 years old, and duplicative, vary in content or timing, and/or reflect there is no certainty on whether it will be updat- arbitrary agency-specific priorities that together ed in 2015. Overall, lack of data prevents subna- add to reporting SNGs’ administrative burdens and tional policymaking, program evaluation, and the costs. The departments’ competency uncertainties monitoring of SNGs’ performance. For instance, and general institutional weaknesses do not contrib- Colombia’s decentralization experiences need to ute to clarity in roles and coordination across levels be gathered, systematized, and expanded to be of government. more relevant for various types of SNGs, and then potentially replicated nationwide. Local ini- Challenge #2: Distortions to the incentives tiatives and preferences should also be tracked as framework. In many countries, successful fiscal part of exploring the most effective links between National and Subnational Public Finances and Governance 219 accountability and performance to help increase In addition, SNGs’ administrative and financial citizens’ participation in the planning process. To software systems are generally outdated, require ensure the long-term sustainability of improved a high degree of manual entry, do not allow for data collection and dissemination mechanisms, data sharing between management functions synergies and economies of scale could be ex- (such as budgeting and accounting, for example), plored with academic institutions at the SNG and do not permit fluid information sharing with level. higher levels of government. These issues reduce the efficiency of administrative processes and oc- Stronger capacity of SNGs cupy time that would otherwise be dedicated to program management and attention to citizens. Challenge #4: Not enough attention to broadening SNGs’ weak civil service often prevents the tech- local revenue sources. At 1.5 percent of GDP for nical continuity of local staff, creating high turn- 2010, Colombia’s property tax collections are now over. Finally, despite improvements in the legal above the average for Latin American countries (0.8 and regulatory framework that governs procure- percent of GDP) and slightly below the average for ment systems, SNGs lack adequate capacity to OECD countries (1.8 percent), with Brazil at 1.9 manage these systems and often resort to legacy percent and Argentina at 3.0 percent. However, or informal procurement practices.34 this tax represents only 20 percent of the overall local tax collection,33 and most municipal tax ad- ministration authorities (except those in the large Policy Recommendations cities) have weak management and controlling ca- pacity. Stronger tax administration remains a core As Colombia assesses the new decentralization local public management function that needs to be framework’s results, it should focus on developing improved in small and medium-sized municipali- capacities at the local level, but do it more effective- ties, and specific actions coordinated by regional ly. Building capacity has been a recurrent theme, authorities are needed to broaden local revenue but implementation has arguably been less than sources, with a particular focus on key areas, such successful. Learning from the past, the new ap- as property tax administration. proach to boosting local capacities should feature these main elements: (i) continuing and sustaining Challenge #5: Weak local capacity to manage technical assistance using new management and in- new decentralized systems. Although service cov- formation technology (IT) tools; (ii) implementing erage has seen significant increases, the improve- an effective incentives framework; (iii) improving ments have come at very high costs, have not coordination among key actors; (iv) enhancing the attained the expected results, and have had very framework for control, monitoring, and evaluation uneven impacts among SNGs. Clearly, few SNGs of the local use of national and local resources; are close to their potential level of performance. and (v) promoting citizens’ participation. The ta- Poor capacity in expenditure planning and exe- ble at the end of this notesummarizes the policy cution, treasury and accounting, public procure- recommendations around thematic objectives and ment, internal control and auditing, and human timeframes. resource management commonly undermines the efficiency of subnational expenditure. The prog- Stronger decentralization framework ress the central Government made in reforming and better institutional coordination its financial management system (by launching the Sistema Integrado de Información Financiera) has Policy area #1. Improved coordination among levels of not been extended to SNGs. Cash management government and key central Government agencies. The is poor, and payments to service providers are three critical levels of government (central, de- often delayed, affecting service delivery prices. partmental, and municipal) and key central 220 PART TWO | CHAPTER 12 actors, such as DNP, MHCP, the Ministry of the Policy area #3. Effective implementation of an incentives Interior, and CGR, require closer collaboration framework for SNGs. Strong management systems and synchronized action. In addition, a number require a clear and explicit incentives framework. of new organizations35 need additional support Successful subnational management rests on iden- to increase their efficiency. Central agencies’ in- tifying an array of possible incentives, instruments, formation requests to SNGs need to be further and metrics for subnational performance, stan- streamlined.36 The agencies also need to promote dards of good performance, and documentation standardized and coordinated approaches to and dissemination of good practices. It is critical core public management functions and process- to define performance indicators and information es like accounting and public financial manage- tools to measure SNGs’ management capacity, set ment as well as procurement rules and standards, out standards and good practices in subnational all while taking into account the different needs public management performance, and implement and capacities of each subnational level of gov- an incentives framework to reward superior or out- ernment. This requires a review of the territorial standing performance or assist underperformers distribution of powers and responsibilities, which in achieving sustained performance. Finally, it is can serve as the basis for the establishment of critical to make operational the incentives that are strategies for improved intergovernmental coor- already attached to SGP’s and SGR’s institutional dination. Finally, for better resource allocation frameworks. and evaluation of subnational funds, the cen- tral Government needs to move toward analyz- Policy area #4. Through an independent evaluation, review ing subnational public programs, regardless of and adjust the decentralization framework, particularly the whether the funds involved are recurrent or in- SGP and the SGR, and the role of the departments. In vestment funds and independently of the source the first place, the Government should undertake of financing (national budget, SGR, SGP). an in-depth analysis of the SGP and SGR to in- dependently determine what is working well and Policy area #2. Enhanced subnational control and the mon- what is not. The findings could lead to changes itoring and evaluation (M&E) framework. Colombia’s (operational rather than legal) that increase the current control and monitoring instruments are system’s efficiency, probably by merging the SGP inefficient, fragmented, conceptually inconsis- and SGR funds into a single budget, control, and tent, and focused on ex post reviews and sanctions. M&E framework. In addition, it would be advis- However, SNGs’ fragmentation and their lack of able to review the impact of the current formulas data and capacities erect a barrier to monitoring for resource allocation. Finally, the Government and evaluating their performance. The central should continue working on the clarifying and Government should emphasize improving and enhancing the role of the departments, includ- integrating the control and M&E instruments ing proposals for a new organic law (Ley de régimen of the agencies directly involved, such as DNP, departamental). Such proposals should outline the MHCP, and CGR. If the efficiency and effective- departments’ competencies, their role as coordina- ness of decision-making and expenditure execu- tors/supporters of small municipalities, and their tion at the subnational level are to be improved, control and M&E functions in the use of the re- procedures need to be harmonized and stream- sources, results achieved, and municipal fiscal and lined. At the same time, institutionalizing eval- management performance. Their potential role as uation is key to identifying and tracking SNGs’ promoters and/or co-implementers of investment performance. Evaluation will generate regular projects sponsored by associations of municipali- feedback loops to inform SNGs’ management ties may become paramount to providing regional and will strengthen the central Government’s cohesiveness and to avoiding atomization of pub- role in tracking SNGs’ progress. lic investment. National and Subnational Public Finances and Governance 221 BOX 12-2: Technical Assistance to Boost Local Capacities: Specific Elements Lessons learned point to the need to focus on the development of local capacity to carry out specific core management functions. This work should feature the following elements: Defining SNG management standards on the basis of normative and standardized concepts of robust subnational management core functions. The design should be guided by Colombia’s successful experi- ences and by international criteria, such as the International Public Sector Accounting Standards (IPSAS) adopted by the specialized Board of the International Federation of Accountants, the principles and guidelines adopted by the International Organization of Supreme Audit Institutions (INTOSAI), and the manuals and guides of the IMF’s Government Finance Statistics. Avoiding discrete interventions and focusing on sustained hand-holding technical support, particu- larly to small and medium SNGs. As recent work with SNGs has shown, it is critical to provide sup- port gradually and in a sustained and customized fashion. While support at the diagnostic stage is useful, technical assistance during implementation is even more important. This sustained assistance is key and should be provided initially by the central Government and later on by experts from aca- demia and/or the private sector. The central Government should, however, regulate the standards for strong SNG management through periodic assessments (similar to the Public Expenditure and Financial Accountability [PEFA] assessments). In sum, the effort is about using standard tools but applying them in a local context in a sustained and regular fashion. Adopting a nontraditional approach to capacity-building. While knowledge of core management functions and standards is key to enhancing local capacity, training should be oriented toward devel- oping practical competencies that allow local officials to make decisions and allocate resources more efficiently. Capacity-building efforts have hitherto made little difference at the local level; thus, a new approach focused on addressing municipalities’ actual management needs should be developed. Leveraging new technologies for data generation and use. For example, the use of cloud computing, allowing easier access for users (both SNGs and central Government), will reduce the need for ad hoc local IT solutions, reduce or eliminate the burden of regular reporting, improve the quality of fiscal and financial data, and facilitate SNGs’ internal management and service delivery to citizens. It should be aligned with ongoing Government initiatives such as Vive Digital, which (among other targets) aims at reaching most SNGs with optic fiber. An explicit agenda on boosting the generation of subnational data is needed to enable SNGs’ policymaking and management of investment projects. Carrying out a reg- ular census, institutionalizing the padrón, or working on other data sources will remain key challenges. Reinforcing transparency, control, and accountability through citizens’ participation. The central Government recognizes that Colombia’s experiences with citizen-sponsored initiatives need to be gath- ered, systematized, and expanded to be more broadly applicable for different types of SNGs and repli- cated nationwide. Local initiative and preferences will play a key role in this effort, but the Government should make examples available, facilitate peer learning, identify and publicize successes, explore and reinforce the transmission lines between better accountability and performance, and to the extent pos- sible reward the SNGs that make significant progress. The Government is leading, supporting, and pro- moting mechanisms to raise citizens’ participation in the planning, budgeting, and execution of public (continued on next page) 222 PART TWO | CHAPTER 12 BOX 12-2: Technical Assistance to Boost Local Capacities: Specific Elements (continued) investments. However, all these initiatives are being led by different agencies, with different methodol- ogies, and they are not being coordinated to take advantage of synergies. Some SNGs receive support from the Dirección de Apoyo Fiscal to prepare a participatory budgeting process, while others receive support from the DNP’s Directorate of Royalties to promote citizens’ participation in the monitoring of investment projects financed from royalties or other sources. However, the central Government has no coordinated effort or strategy to promote the institutionalization of citizen participation mechanisms at key points in the planning and expenditure chains. This calls for a new strategy to enhance citizen par- ticipation and raise levels of accountability. In addition, the Government should continue and broaden current initiatives, including open government or citizens’ audits (auditorias visibles). Medium-term policy Policy areas Policy challenges Short-term policy recommendations recommendations Stronger Poor coordination • Carry out an in-depth analysis of the SGP • Merge the financing, decentralization between central and and SGR system and review the impact of control, and monitoring and framework and regional governments the current formulas for resource allocation evaluation (M&E) functions of better institutional Distortions to the and the regime of tax exemptions. the SGP and SGR systems for coordination incentives framework • Design proposals and generate a consensus improved decision-making on a new Ley de régimen departamental. and resource management. Inconsistent long- term strategic • Develop an incentives strategy to • Enhance the subnational planning and lack encourage SNGs to form associations control and M&E framework of reliable regional for co-investments and shared service by integrating the control performance data provision. and M&E instruments of the agencies directly involved. • Establish a program to boost central and departmental capacities for long-term • Generate and disseminate strategic territorial planning. better local financial, administrative, and sector • Implement an SNG incentives framework to data, institutionalizing data guide regional transfers. sources such as the census, • Define standards, good practices, padron, or administrative performance indicators, and information sources. tools to measure and reward SNGs’ performance. Stronger capacity Not enough attention • Set up a program coordinated by • Design supporting of SNGs to broadening local regional governments to support mechanisms to help revenue sources stronger tax administration of key small SNGs enhance local Weak local capacity municipal taxes (e.g., property, industry revenue sources. to manage new and commerce), including work with • Review the framework decentralized systems cadaster and property registry. regulating SNGs’ civil • Harmonize local management practices service. and implement international standards • Promote and scale up for core management areas (e.g., IPSAS citizen participation accounting standards, INTOSAI auditing initiatives by defining standards). a comprehensive new • Design an SNG management system strategy. and roll it out gradually with sustained technical assistance using new IT tools. National and Subnational Public Finances and Governance 223 Stronger capacity of SNGs especially in the core management areas that are key to improving the allocation and use of public Policy area #5. Sustained technical assistance to SNGs resources for service delivery—planning, invest- through new management and IT tools. Capacity- ment, procurement, financial management, local building activities should be focused on solving tax administration, and civil service; and (ii) en- problems that prevent the adequate delivery of suring technical continuity with low turnover of services or the sustained improvement of ser- the technical staff needed for the success of larg- vice outcomes. The Bank’s experience using er, multiyear projects as well as for performance tools such as MiGestion and Rapid Assessment measuring, project M&E, intergovernmental and Action Plans37 in selected municipalities has negotiations and outsourcing, and the formation shown the effectiveness of targeted approaches. of public-private partnerships, which will likely The new technical assistance delivery approach be more important for SNGs than specific sector should aim at (i) creating a coherent and struc- skills. (Box 12-2 describes some of the important tured supply of capacity-building tools to SNGs, elements of such technical assistance.) Endnotes 1 For the purpose of this document, SNGs are the gov- crisis). In the early 1990s, Colombia carried out ernment entities (Entes Territoriales) below the central a process of financial liberalization. At the same Government—both departments and municipalities time, a sharp increase in capital inflows caused sig- (as provided by Article 286 of the 1991 Constitution). nificant monetary and credit expansion, encourag- 2 Around 60 percent of the total resources were man- ing increased public and private spending. While aged by SNGs for 2000–09, according to the 2012 private and public savings rates increased, the cur- IDB flagship report “More than Revenue: Taxation rent account deficit expanded. The demand for as a Development Tool.” non-tradable goods (especially real estate) then ex- 3 According to the previous law, royalty resources panded, leading to an increase in domestic cred- were distributed only to entities that produced or it and asset prices as well as a real appreciation of transported natural resources. Law No. 1530/12 the Colombian peso. Between 1997 and 1999, a re- changed the distribution criteria. versal of capital flows and deteriorating terms of 4 DANE (2005 Census). For more details, see the pol- trade led to a sharp decline in aggregate spending icy background note “Towards Shared Prosperity in and the elimination of the current account deficit. Colombia.” Output declined more than 4 percent in 1999, and 5 In the region, only federal countries such as Bra- real estate prices fell about 27 percent in real terms. zil (23.4 percent for 2009) and Argentina (14.7 per- The reversal of capital flows affected the financial cent) show higher percentages of subnational taxes system through the reduction in liquidity and the as a percentage of GDP. Within the OECD, Spain, a consequent increase in funding costs. The increase constitutionally non-federal country with a highly de- in real interest rates, coupled with the decline of centralized political structure, has undergone a signif- real estate prices in real terms, increased the finan- icant process of fiscal decentralization in the past 15 cial burden on households, increasing the number years; the percentage of subnational taxes relative to of nonperforming loans and affecting the credit GDP went from 4.8 in 1995 to 23.7 in 2009. ratings of financial intermediaries. The Colom- 6 Colombia’s economic crisis of the late 1990s was a bian debt grew from a little over 200 basis points result of a combination of internal (real estate mar- over treasuries towards the end of 1997 to over 900 ket bubble) and external factors (the “Asian tigers” points in the third quarter of 1998, affecting the 224 PART TWO | CHAPTER 12 balances of both the indebted private sector and 16 Thiel index data for 2011 (0.58 nationwide, 0.55 for government. urban areas, and 0.41 for rural areas) suggest that 7 Ministerio de Hacienda y Crédito Público (2009). the country’s high level of inequality is exacerbated 8 Specifically, Congress enacted the follwing laws: by income inequality across regions. Law 358 of 1997 (for the sustainability of subna- 17 “Enhancing Fiscal Capacity to Promote Shared tional debt), Law 617 of 2000 (aimed at racionaliz- Prosperity Project” (P145605), Project Document; ing of national debt) and Law 819 of 2003 (which World Bank. establishes norms in terms of budgeting and fiscal 18 Enamorado, López-Calva, and Rodríguez-Castelan transparency and responsibility). (forthcoming) have found evidence that poor depart- 9 Del Villar et al. (2013). ments in Colombia are growing faster than rich ones. 10 In 2007, the Congress approved Constitutional They have also found preliminary evidence that the Amendment No. 04, which was later regulated by new royalties scheme is succeeding in reducing in- the executive branch (Decree 28 of 2008, Frame- come disparities across Colombian departments. work to Monitor, Track and Control SGP resourc- 19 DANE, 2005 Census. es). Both rules approve and implement the “Strate- 20 http://www.cepal.org/colombia/noticias/docu- gy for Integral Monitoring, Tracing and Control of mentosdetrabajo/6/51446/Escalafon_de_la_Com- Expenditures Financed by the SGP.” petitividad_2012–2013.pdf. 11 These performance plans include Debt Restruc- 21 Despite issues of attribution, evidence shows that turing Agreements with MHCP and Development education coverage has increased in terms of en- Planning Agreements (Contratos Plan) with the Na- rollment numbers: between 1990 and 2010, net pri- tional Planning Department (DNP). mary school enrollment rose from 71 percent to 88 12 This contrasts with the evolution of resources trans- percent. In health, according to a recent impact ferred to the SNGs under the SGP, which have re- evaluation, the SGP has had a positive and signifi- mained constant since the inception of the system in cant effect in terms of access to health services and 2001 (they represented 4.7 percent of GDP in 2002 illness prevention, and mortality rates dropped from and 4.3 in 2009). 28 percent in 1990 to 16 percent in 2010. During 13 This reform is referred to as “Framework to Moni- the same period, rural population with access to im- tor, Track and Control Royalties Resources.” proved water sources rose from 70 percent to 72 per- 14 Law 1454 of 2011, approved after 20 years of polit- cent, and population with access to improved sani- ical bargaining. tation facilities rose from 68 percent to 78 percent. 15 LOOT paves the way for long-term strategic and Source: World Bank Data Bank. larger-scale projects by promoting the formation 22 Despite the country’s progress on educational in- of investment-specific departmental or munici- dicators, such as expenditures per student, no evi- pal associations, similar to the single-purpose or dence indicates that increases in SGP resources have multi-purpose associations of SNGs common in had positive impacts on the quality of education. In Europe. New regional and provincial investment fact, a 2009 impact evaluation conducted by DNP projects will be financed out of two new funds cre- shows that in tested municipalities, an increase in ated by the royalties reform: the regional develop- SGP funds reduced the average score on the nation- ment fund and the compensation fund. The law al evaluation test by 0.27 percent to 0.33 percent. created the Comisión de Ordenamiento Territorial, a See Departamento Nacional de Planeación (2010). technical and advisory body that will propose, su- 23 In addition to the document cited in the preceding pervise, and evaluate the execution of territorial note, see Departamento Nacional de Planeación policies. It also introduced the Contratos Plan, an in- (2003), Contraloría General de la República (2009), tergovernmental coordinating tool that brings to- and Ministerio de Hacienca y Crédito Público gether various levels of government to undertake (2009, 2011). projects that meet national priorities. By February 24 See Constitutional Amendment No. 5 of 2011, Law 2012, seven Contratos Plans were in place. 1530 of 2012. National and Subnational Public Finances and Governance 225 25 See Enamorado, López-Calva, and Rodríguez-Cas- those of SNGs blocks validation of contracting telan (forthcoming). data. The agency still has to benchmark nationwide 26 Despite some discrepancies between CGR and procurement practices, analyze local practices, cat- DNP about the figures and categories, evidence alogue lessons learned, and develop system interfac- strongly suggest that the royalties resources of 2012 es with SNGs. and 2013 are not being executed as expected, and 35 The LOOT and the royalties reform created orga- the implementation of regional investment projects nizations to enhance the effectiveness and efficiency continues to lag. of SNGs’ funds—for example, the Territorial Man- 27 See World Development Report 2011: Conflict, Security and agement Commission and the Órganos Colegiados Development, World Bank. de Administración y Decisión. 28 See “Triangles of (Dis)trust” in Arizti et al. (2010). 36 The implementation of the Formulario Unico Terri- 29 See Bird (2011) and World Bank (2009a). torial (FUT), a single format for SNG reporting to 30 Although SNGs’ revenues have increased, no evi- MHCP, has been acknowledged as an improvement, dence supports the idea that the gains have been but municipalities still dedicate large amounts of due to a tax effort beyond the positive economic time to responding to countless and overlapping re- cycle. quests from central agencies. 31 Liu, L., Del Villar, A., et al. This note takes into ac- 37 MiGestion is a tool created to assess the strength of count the conclusions from studies conducted on the core public management processes and functions in political economy context of decentralization in Co- small municipalities and guide an improvement pro- lombia: Rojas, F., Bird, R., and Del Villar, A.; and gram of specific actions in line with international Mosqueira, E., and Webb, S. standards, such as PEFA. A Rapid Assessment and 32 The role of the central Government in providing Action Plan is an exercise the Bank carries out for positive incentives and fostering inter-institution- subnational governments to identify public man- al coordination has also been identified in Samad, agement improvements in different functional ar- Lozano-Gracia, and Panman (2012) as an opportu- eas that can affect fiscal performance and service nity for improving performance in SNGs. delivery. The methodology is problem-driven, re- 33 See Corbacho, Fretes, and Lora (2012). sults-oriented, and focused on quick gains. It has 34 For instance, the recently established procurement been successfully applied in Colombian municipal- agency (Colombia Compra Eficiente) noted that lack of ities, including Barranquilla, Cali, and Cartagena. integration between its procurement systems and Bibliography Acto Legislativo 05 de 2011, por el cual se consti- de Cartagena de Indias. 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