Michael Koelle
OECD
Paula Garda
OECD
OECD Economic Surveys: Colombia 2024
OECD Economic Surveys: Colombia
Abstract
Stagnant productivity has been a long-standing challenge for inclusive growth in Colombia. Productivity differences across regions are large and persistent. The Peace Agreement, urbanisation, the global green transition, and shifting global trade patterns all provide opportunities for development of Colombia’s regions. Converting these opportunities into a lasting and sustainable productive transformation requires reforms to improve the competitiveness of every region. These reforms include improving general framework conditions such as lowering the cost of doing business formally and fighting corruption, and policies that explicitly promote regional convergence and development such as better transport interconnectivity and a comprehensive reform of fiscal decentralisation.
Differences in productivity and living standards across Colombian regions are among the highest in the OECD (Figure 3.1). The gaps in per capita income across regions have persisted for centuries (Fergusson et al., 2017[1]). Decades of conflict have further exacerbated regional income gaps by disrupting economic activities, displacing populations, and throttling development in affected areas. The Peace Agreement implemented since 2017 has opened new opportunities for development and to enhance the productive and employment capacities of lagging regions. The main challenge now lies in ensuring that those opportunities benefit all territories in the country (OECD/UN/UNIDO, 2019[2]).
Note: Panel A shows TL2 regions (departments in Colombia) for 2022 or the latest available year. Panel B shows categories defined by quartiles of GDP in millions (real 2015 COP).
Source: OECD calculations based on the OECD Regional Statistics; and DANE.
Strong economic growth in the past two decades, averaging close to 4% per year, has mainly benefitted regions with already better initial conditions (Figure 3.2). For example, between 2005 and 2022, real per-capita income in Bogotá, the capital, almost doubled. Strong growth mainly benefited the regions that contain the largest cities – such as Bogotá, Antioquia (with Medellín), or Valle del Cauca (with Cali) – and a cluster of regions in the centre of the country including Risaralda, Quindío, Caldas and Cauca. Overall, regional inequality as measured by the Gini coefficient of per capita income has stayed flat over the last two decades.
Source: OECD calculations based on DANE.
Productivity is the main driver of differences in average income across regions. The average worker in Bogotá is more than four times as productive as the average worker in Nariño, a predominantly rural department on the Pacific Coast. Colombia’s regions have very different productive structures (Figure 3.3). The regions with the country’s largest cities generate most of their output from industry and advanced services such as professional, ICT, financial and other business services. Other regions in the centre of the country such as Caldas, Cauca, or Risaralda have undergone a similar degree of structural transformation, which might be a driver behind their strong growth (see Figure 3.2). By contrast, predominantly rural departments such as Vichada, Vaupés, or Chocó – which are among the poorest regions and have seen zero improvement in living standards – specialise in agriculture, with a low presence of industry and business services and a large share of activity falling on the public sector. Finally, several regions including Casanare, Cesar, La Guajira, Meta and Putumayo generate more than half of their output from natural resource extraction, creating little value added or formal employment.
The regions in the Andes and on the Caribbean coast are home to most of the country’s urban centres, which concentrate economic activity (see Figure 3.1, Panel B). By contrast, the peripheral Pacific coast and the Amazon and Eastern lowlands are sparsely populated and mostly lack the highly productive, large, and formal firms and industries that would generate high-quality jobs for its populations (Box 3.1). While Colombia’s economic geography features a relatively large number of metropolitan areas, a challenging geography and a lack of adequate transport infrastructure prevent a better integration among the different economic centres as well as between urban and nearby rural areas. Moreover, the peripheral rural areas are home to most of the country’s minority ethnic groups, including Indigenous people who dominate in the Amazon and Afro-Colombians, the majority of which live in regions on the Pacific coast.
Boosting productivity across all regions is crucial to addressing Colombia’s persistently low aggregate productivity. During the three decades since 1990, labour productivity has been mostly stagnant, growing only by 1% per year, on average (Figure 3.5, Panel A). This is about half the rate of average productivity growth among OECD countries and Latin American peers. Some countries in the region, such as Brazil, Chile, and Peru, have seen their productivity double over the same period. As a result, Colombia is still the OECD country with the lowest GDP per hour worked, even after considering differences in purchasing power (Figure 3.5, Panel B).
Note: Regional GDP excludes taxes. Industry includes manufacturing, utilities, and construction. Personal services include retail and wholesale trade, transport, food and accommodation, and other services. Business services include ICT, finance, real estate and professional and scientific services. Public services include health, education, public administration, and defence.
Source: OECD calculations based on DANE.
Low productivity – at the national and the regional level – results from gaps in a number of enabling factors, including the business environment, infrastructure, skills, and institutions (WEF, 2019[3]). At the country level, Colombia ranks the worst among OECD countries in such enabling factors (Figure 3.6, Panel A) and there are large gaps among regions (Figure 3.6, Panel B, C). As in many other countries, cities are ahead of most rural municipalities (Figure 3.6, Panel D) due to economies of scale and agglomeration, closeness to markets and facilities, and stronger governance capacity (Government of Antioquia, 2021[4]). Improving the competitiveness of Colombia’s regions further requires reversing the long-term decline in investment (see Chapter 2). Attracting investment, in infrastructure and in sectors that contribute towards diversification of the productive structure and of exports, would help attain the higher growth potential necessary for a sustainable economic convergence of Colombia and its regions.
Colombia is the 9th biggest OECD country by population (with about 52 million inhabitants) and 5th largest by area (with about 1 million square km). Administratively, Colombia is a unitary republic divided into 33 regions (called departments) including the Bogotá Capital District and 1,103 municipalities, 18 non-municipalised areas and the San Andrés Island. Geographically, the country is divided into the central Andean area, the Caribbean coast, the Pacific coast, the Amazon lowlands (Amazonía), Eastern lowlands (Orinoquía), and Caribbean islands. Several major rivers cut across the Andes, adding to Colombia’s challenging geography and contributing to high transport costs. For example, while the air distance between Bogotá and Medellin is only about 250km, it takes more than 8 hours to travel between the cities by road due to large elevation changes.
Colombia’s population structure is similarly concentrated as other large OECD countries, and less concentrated than Latin American economies such as Argentina, Chile, Costa Rica, or Peru. Colombia is a highly urbanised country, with 76% of its population living in cities (OECD, 2022[5]). The population is concentrated in several major cities, six of which have more than 1 million inhabitants: Bogotá, Medellín, Cali, Barranquilla, Cartagena, and Bucaramanga (see Figure 3.1, Panel B). About 19% of the population live in the functional urban area of Bogotá (Figure 3.4).
Note: Data refer to 2022 or the latest available year. Functional urban areas (FUAs) are defined as in (Dijkstra, Poelman and Veneri, 2019[6])
Source: OECD City Statistics.
Colombia’s regional disparities are often described along a centre-periphery model. Most metropolitan areas are situated in the Andes and along the Caribbean coast. By the same token, there are large urban-rural divides, and the rural hinterlands are often poorly connected to regional administrative and economic centres (OECD, 2014[7]). However, high inequalities also occur within cities and metropolitan areas, in the periphery of which many Colombians internally displaced by the conflict settled, often in poor housing conditions and surrounded by inadequate infrastructure (World Bank Group, 2021[8]).
Improving the performance and productivity of regions and catalysing a regional convergence process has been on the agenda of successive governments. The government’s National Development Plan 2022-2026 aims at regional convergence, among other priorities. Similarly, one of the five pillars of the government’s Reindustrialisation Strategy – which aims at closing regional productivity gaps, developing value chains, deepening internationalisation, promoting diversification, and strengthening the institutional framework – is designed to identify and support locally defined priorities and needs for productive development to better integrate regions into global value chains (see Box 3.2). The government envisages a close connection between policies to encourage the development, sophistication, and diversification of the economy’s productive base and the energy transition, which for Colombia as an oil-exporting nation requires not only a transformation of the domestic energy matrix but also a diversification of its exports. Authorities view the global green transition as a chance for Colombia to build on its specialisation in clean energy and position itself within global value chains as a source of sustainably produced goods and services.
Boosting the productivity of Colombia’s regions requires a broad policy strategy resting on two pillars. The first pillar consists of policies that aim at improving general framework conditions to lift productivity overall, regardless of location, including measures to improve the business climate, foster innovation, diversification, investment and trade, improve access to finance, level up education, and fight corruption across the country. The second pillar is comprised by genuinely regional and place-based policies that differ according to specific regional needs and explicitly aim at improving the productivity of the most lagging regions. It includes reducing infrastructure gaps, especially in rural areas, fostering rural development and improving the capacity of the fiscal decentralisation framework to narrow gaps in living conditions across the country.
Note: In Panel A, data refer to USD 2017 PPPs, and labour productivity is defined as GDP per worker. LAC and OECD are GDP-weighted averages for countries with available data. In Panel B, data refer to USD constant prices 2015 PPPs, and LAC is a simple average of Chile, Costa Rica, and Mexico.
Source: Feenstra, Robert C., Robert Inklaar and Marcel P. Timmer (2015), “The Next Generation of the Penn World Table”, American Economic Review, 105(10), 3150-3182, available for download at www.ggdc.net/pwt; and OECD Productivity.
Note: The competitiveness indicators in this chart are based on the framework by WEF (2019[3]), Consejo Privado de Competitividad, Universidad del Rosario SCORE, and the University of Antioquia. They are composed of variables representing business dynamism, access to finance, human capital, digitalisation, infrastructure, innovation, functioning of the labour market, trade openness, and institutions.
Source: World Economic Forum (WEF), the Global Competitiveness Index 4.0 2019 dataset; Consejo Privado de Competitividad, Departmental Competitiveness Index 2023; DANE; and Government of Antioquia, Municipal Competitiveness Index 2021.
The Reindustrialisation Strategy (Política Nacional de Reindustrialización) is a broad-based policy to support the transformation of the productive sector to meet the challenges of climate change, accelerated technological change, and the changing geopolitical environment. Notwithstanding its name, the strategy includes both goods and services sectors and is targeted not at protecting specific industries but at supporting the development of value chains chosen for their forward and backward linkages as well as their importance to the national interest.
The strategy rests on five pillars, four of which target broad economic sectors: (1) the just energy transition, including renewable energy and electromobility; (2) agroindustry and food sovereignty, (3) health, pharma, and biotech, (4) defense-related industries, including shipbuilding and civil defense engineering. A fifth, horizontal pillar is meant to strengthen regional and local economies according to their respective comparative advantages and economic structures.
Over the 10-year horizon until 2034, the Strategy is supposed to accomplish the following objectives: (a) close productivity gaps, (b) increase diversification and sophistication of the economic structure, (c) strengthen value chains, (d) deepen and balance regional and global trade integration and attract FDI inflows, and (e) improve the institutional framework and incentives to raise value added and with it productivity, competitiveness, and innovation.
The Reindustrialisation Strategy is flanked by other economic strategies in the 2022-2026 National Development Plan, including a rural development strategy built around the Peace Agreement (see below) and a strengthening of the grassroots economy and its integration with formal economic activity (see Box 3.3).
Source: Documento CONPES No. 4129, Política Nacional de Reindustrialización, December 2023
3.2.1. Creating an attractive business environment in all regions
One factor that contributes to low and highly dispersed productivity are burdensome regulations (Figure 3.7), which are especially stringent for licenses and permits and other administrative requirements on businesses (Panel B). The 2020 Entrepreneurship Law reduced registration costs and simplified some administrative requirements, but many of its provisions have not yet been elaborated and implemented (Global Entrepreneurship Monitor, 2023[9]). Accelerating the implementation of already legislated measures to ease entrepreneurship by regulatory simplification would further improve the business environment and support the government’s aim to create a diversified, broad-based, and entrepreneurial business economy, as for example envisaged in the Reindustrialisation Strategy and the strategy to boost the grassroots economy (see below). Pilot schemes to create regulatory sandboxes as envisaged in the Entrepreneurship Law and the Reindustrialisation Strategy are a welcome step and should be monitored and evaluated with a view of permanently implementing what has worked well.
The establishment of online one-stop shops is an important step in reducing the regional differences in the burden on start-ups. Colombia introduced a virtual one-stop shop after 2018, resulting in a significant improvement in the burden of administrative requirements on new start-ups (Figure 3.7, Panel C). One of the administrative requirements for starting a business is registering with the local chamber of commerce, which used to require an in-person visit to the chamber’s offices. Since 2022, all 57 chambers of commerce have integrated these procedures in the virtual Single Entrepreneurship Window, which now offers a true one-stop shop for starting a business available in 84 municipalities. While this is a welcome progress, it still means 92% of municipalities do not offer yet fully integrated one-stop shops to start a business. The authorities should continue to expand the geographic coverage as well as the number of procedures available through the Single Entrepreneurship Window, and gradually include digital payment options. Similarly, one-stop shops can be leveraged as a single point of information for entrepreneurs, beyond just complying with formalities. For example, in Sweden the one-stop shop is run by a consortium which includes the agency for economic and regional growth, and it helps entrepreneurs navigate public support available locally, both on business operations such as finance and accounting and on personal matters such as pensions. A step in this direction in Colombia could be to link the single window to other information portals for entrepreneurs, such as Portal Innovamos for innovation policy.
Note: In Panels A and B, LAC is a simple average of Brazil, Chile, Costa Rica, Mexico, and Peru. In Panel B, LLCs = Limited liability companies and POEs = Personally-owned enterprises.
Source: OECD Product Market Regulation Indicators 2023.
High informality harms the business environment and competition in Colombia, as in other countries in Latin America (Eslava, Meléndez and Urdaneta, 2021[10]). By not complying with costly regulations and taxes, informal firms create unfair competition for formal firms, lowering the number of formal firms that operate in each market. At the same time, informality is often a response to a complex business environment where regulations are burdensome and enforcement is imperfect (Ulyssea, 2018[11]). The 2019 National Strategy for Business Formalisation envisaged lowering the cost of regulatory compliance, increasing the benefits of formalisation, stepping up monitoring and control, and improving evidence for public policy-making with better statistics and impact evaluation. The roll-out of one-stop shops discussed above as well as a reduction in the annual renewal fees for business registration are among the implemented measures of this strategy. Incentivising greater formalisation is also a component of the current authorities’ focus on the grasroots economy (Box 3.3) through a lens which views formality as a multi-dimensional phenomenon, with different types of informality alongside administrative, social security, regulatory and tax dimensions (Box 3.4).
A long-standing challenge to assess the success of formalisation policies is the lack of reliable and up-to-date information on the informal economy (CONPES, 2019[12]). The economic census planned for 2024, the first in three decades, is a welcome step to better understand the scope and size of the informal and grassroots economy. Mexico, for example, has been conducting an economic census of all fixed business establishments (formal and informal) every five years since the early 1990s. The microdata are linkable over time as well as with other business statistics, allowing to gain a detailed and comprehensive picture of informal firms and their dynamics, including at geographically very disaggregate levels. Mexico’s statistical institute makes these data available to researchers in a secure environment that ensures data confidentiality and protection.
The “economía popular”, as it is known in Colombia, encompasses a diverse array of grassroot economic organisations, both individual and communal, often informal and relying on kinship and neighbourhood networks. Authorities recognise the persistence and significance of these economic structures, which have often developed over decades of violent conflict with limited state presence. A detailed national strategy on the popular economy is expected for late 2024.
According to the National Development Plan, the main elements of the strategy to boost the grassroots economy include:
Recognition for and visibility of the grassroots economy, including in national statistics, and promotion through a new consultative and advisory body, the National Council of the Popular Economy.
Vocational training and mapping of skills for the occupations in the grassroots economy, such as through the National Qualifications Framework.
Gradual inclusion of informal workers in social protection and occupational health schemes.
Simplification of administrative procedures for starting and running a business.
Provision of direct and indirect support for economic units, such as through public procurement, training and technology extension services, access to credit, and a better digital and financial infrastructure to serve the specific needs of participants in the grassroots economy.
Promotion of access to formal jobs through training, certification, and public employment services.
Source: Government of Colombia (2022) “Colombia, Potentica Mundial de la Vida. Bases del Plan Nacional de Desarrollo, 2022-2026.”
One way of increasing the participation of firms in the formal economy is by offering simplified tax and regulatory regimes to small businesses, or at least offering simplified administrative proceedings to comply with the general regimes (Mas-Montserrat et al., 2023[13]). The National Development Plan envisages raising awareness and promoting the use of the simplified tax regime for small businesses and creating a simplified insolvency regime.
Colombia’s insolvency framework is more favourable to productivity growth and reallocation than those of other Latin American or emerging market economies, but there is still room for improvement vis-à-vis best practices in OECD countries (André and Demmou, 2022[14]; Adalet McGowan and Andrews, 2016[15]). Insolvencies and corporate restructuring tend to be slow and cumbersome and yet result in a low recovery rate (CONPES, 2020[16]). The introduction of a simplified insolvency framework for small businesses during the pandemic was a step in the right direction, but the regime was discontinued after a court ruling. The experiences with the regime should be evaluated and its useful features integrated into permanent legislation.
The simplified tax regime was introduced in 2019 for some sectors of activities and broadened to more sectors in 2022. This regime is open to micro and small enterprises and to auto-entrepreneurs and covers up to seven different categories of taxes, including corporate income tax, personal income tax (for auto-entrepreneurs) and some sub-national taxes through a single, simplified tax declaration. By mid-2023, about 118,000 taxpayers had opted for the new regime, split roughly equally between individuals and firms, and half of those contributors did not previously have a tax identification number. There is also suggestive evidence that the simplified regime is helping subnational governments to expand their tax base, since businesses no longer need to register separately with the different tax authorities, but only sign up once to the simplified regime. Extending the regime to all economic activities, and to gradually include those in the grassroots economy would be helpful to reduce informality and support business growth (Chapter 2). Enhancing its design to facilitate micro and SMEs’ tax compliance, for example by defining the tax base as net income, would also help. A net income tax base would incentivise firms to report their costs that are at the same time revenues of other firms, facilitating cross-reporting which can be used to improve tax enforcement. Facilitating a seamless transition between the simplified and general regimes will be essential to incentivise high-growth firms to shift to the general regime. More generally, broadening the corporate income tax base and lowering the very high statutory corporate income tax rate as well as abolishing other distortive business taxes would foster formality and productivity growth (Chapter 2).
The National Strategy for Business Formalisation (CONPES, 2019[12]) recognises four dimensions of business formality: registration upon starting a business, compliance with social security charges for workers, formality in production processes, and tax formality.
Data from the National Survey of Microenterprises reveals significant differences in the degree of compliance along these different dimensions (Table 3.1). Whereas about a quarter of small businesses register, less than 10% and 5% make health and pension contributions on behalf of their workers, respectively. Around 20% comply with local business taxes. Most microenterprises fall below the mandatory thresholds for making corporate income (CIT) and value added (VAT) tax declarations.
Share of informal firms by indicator, 2022
Source: DANE, Índice multidimensional de informalidad empresarial (IMIE)
3.2.2. Continuing to remove barriers to trade
Strong engagement in international trade and investment flows plays a key role boosting productivity, for several reasons. First, trade promotes the adoption of internationally competitive production techniques through competitive pressures and the advanced technology, managerial and organisational practices that foreign affiliates tend to bring with them (Javorcik, 2004[17]; Arnold and Javorcik, 2009[18]). Second, the size of the global export market provides opportunities for exploiting economies of scale, especially when domestic markets are relatively thin, thus increasing the incentives to innovate (Aghion et al., 2022[19]). Third, imports of sophisticated intermediate goods and modern machinery can facilitate technology adoption (Amiti and Konings, 2007[20]; Caunedo and Kala, 2021[21]).
Colombia and its regions are not making the most out of international trade and foreign direct investment. Goods exports are concentrated in a few natural resource commodities and destinations (Figure 3.8, Panel B), with oil and other minerals accounting for close to half the export basket (44%), and a total share of primary exports (including oil, coal, and raw agricultural exports) accounting for 60%. The United States is the main export destination. Other countries in the region are also important markets (Figure 3.8, Panel A). Exposure to trade is one of the lowest in the OECD and lower than in other medium-sized and large countries such as Peru, Chile, Mexico, France, or Spain (Figure 3.9, Panel A), and has not improved much over time (OECD, 2019[22]). Regional trade disparities are significant: Antioquia, Cesar, and Bogota accounted for over 50% of Colombia’s non-natural resource exports in 2023. Micro, small and medium-sized enterprises collectively contribute only 18% to the country’s total exports. Advancing on export diversification is a long-standing recommendation by the OECD to Colombia (OECD, 2013[23]; OECD, 2019[22]; OECD/UN/UNIDO, 2019[2]). It is also essential in the country’s twin strategy of ushering in the green transition away from fossil fuels, which requires developing alternative drivers of export and growth, and the productive transformation embodied by the Reindustrialisation Strategy, which foresees the development of a broader industrial and export structure.
Source : UN Comtrade.
Colombia benefits relatively little from the embedded technology, better quality, and lower prices that come with advanced intermediate inputs. Only about 10% of value added in Colombian exports is of foreign origin, the second lowest in the OECD, only behind the United States with its enormous domestic market (Figure 3.9, Panel B). Such low backward participation in global value chains also reflects the fact that exports are still dominated by natural resource commodities, especially oil. More generally, there is room for the country to make better use of the market access facilitated by its existing free trade agreements to achieve greater export diversification in terms of products and markets. A new foreign trade policy was put in place in 2023 with the objectives of supporting the internationalisation of Colombia’s regions, integration with the LAC region and the Global South, and the energy transition.
Significant trade barriers are one explanation behind Colombia’s tepid embrace of internationalisation, as analysed in detail in a previous OECD Economic Survey (OECD, 2019[22]). Tariffs are higher than in other countries of the region such as Chile or Peru. Although average tariffs have decreased and the number of tariff-free products has increased, tariff dispersion has risen (Rivera Perez et al., 2021[24]; Garcia Guzmán, Rivera and Robledo, 2021[25]). This means that remaining tariffs are concentrated in specific sectors, where they are often applied only to narrow tariff lines relevant for specific domestic producers (Echevarria, Giraldo and Jaramillo, 2019[26]; Garcia Guzmán, Rivera and Robledo, 2021[25]). This limits exposure to global competition and access to inputs for these sectors, especially within value chains (i.e. if an upstream sector is highly protected). In addition, non-tariff trade barriers are high, especially in the food, agriculture, and textile sectors, and their prevalence has been increasing while tariffs went down (Echevarria, Giraldo and Jaramillo, 2019[26]).
As recommended by the OECD previously (OECD, 2022[27]; OECD, 2019[22]), Colombia could start reducing its high tariff and non-tariff barriers. Starting with those items where current protections are the highest would most significantly reduce tariff dispersion. A review of trade barriers on selective items, especially intermediate goods that are essential to specific value chains, such as materials for shipbuilding and maintenance and temporary imports of vessels to be repaired in docks, should be undertaken as they might be important bottlenecks to the Reindustrialisation Strategy and more broadly to an increased participation by Colombia in global value chains and in high value-added sectors.
Many import goods must be shipped via a small number of authorised ports of entry, creating non-tariff barriers that are especially onerous for regions far away from the respective authorised port. The designation of those ports does not always correspond strictly to technical criteria, such as logistical capacity or the capacity to prevent smuggling. Colombia uses port of entry restrictions more widely than any other country in the LAC region, affecting more than 1,700 different products (Kee and Forero, 2021[28]). For example, sugar can only be imported via one pacific port (OECD, 2022[27]). Such restrictions together with high domestic transport costs result in inefficient logistics and price dispersions across regions. Authorised port of entry restrictions should be reviewed according to technical criteria and reduced. In parallel, expanding the capacity at ports, including technical installations and customs procedures to handle a greater variety of products, should also be a priority.
Note: Panel A is the average from 2016-2022. Panel B shows 2020 or latest, and LAC is an average of ARG, BRA, CHL, CRI, MEX and PER.
Source: OECD Trade in Value Added (TiVA).
One notable source of export diversification are services, which make up almost 20% of total exports (see Figure 3.8). Tourism, 60% of total services exports, is a major and fast-growing source of foreign exchange earnings and promoting it is a priority for the government. Currently tourism benefits mainly urban areas such as Medellín and the Caribbean coast. By contrast, there is still a largely untapped potential of attracting tourism to rural areas, which the government is trying to foster (Box 3.5). The continued implementation of the Peace Agreement, a reduction in violence, as well as the development of rural infrastructure are important enablers of attracting foreign tourists to rural areas, taking advantage of the many natural assets of Colombia’s regions including in areas such as eco-tourism and community tourism, which could become important sources of mid-skilled jobs for peripheral regions. At the same time, there is room to increase exports of knowledge-intensive services, mostly based in urban areas, as discussed in a previous OECD Economic Survey (OECD, 2019[22]). A useful example could be the case of Costa Rica, which over two decades moved from a services industry structure largely based on tourism to one sustained by knowledge-intensive services through the strategic attraction of foreign direct investment.
The government plans to harness tourism to promote peace and foster territorial development and to create opportunities for growth and reconciliation in communities affected by conflict by highlighting local cultures and natural landscapes.
According to the Tourism Sector Plan 2022-2026, there are three main programs to boost local economic development with tourism and to improve the capacity of tourism services providers:
“Tourism for a peace culture” targets groups such as conflict victims, peace agreement signatories, former combatants, those involved in illicit crop substitution, and other peace-building actors and prioritises 90 territories historically affected by conflict.
National Programme for Stimulus, Incentives, and Promotion for the Tourism Sector (EMPRETUR) is a programme to foster capacities, innovation, quality standards and productivity in the tourism sector, with participation awarded on a competitive basis. Regions on the Pacific coast, which have been historically affected by armed conflict and where tourism is underdeveloped relative to the Caribbean coast, are prioritised by the programme.
Tourism-Friendly Schools is a programme to develop skills and capacities, strengthen the tourism culture, and promote peacebuilding, implemented in currently 302 secondary schools.
Source: Government of Colombia (2022) “Tourism in harmony with life. Tourism Sector Plan 2022-2026.”
3.2.3. Taking advantage of nearshoring opportunities to move up the global value chain
Foreign direct investment (FDI) flows have recovered to their historical average of around 5% of GDP, after a decline since 2015 and a further fall during the pandemic. At the same time, FDI has continued to become more diversified, as already noted in the 2019 OECD Economic Survey of Colombia (OECD, 2019[22]). While the oil sector attracted a third of all inward FDI between 2006 and 2015, its contribution has reduced to around 16% in the last two years (Figure 3.10). Financial and business services and manufacturing are now among the largest destination sectors for FDI. Foreign-owned firms in these sectors outperform similar Colombian firms and generate positive spillovers (Li and Aranda Larrey, 2021[29]). Yet there is still room for making better use of FDI to improve Colombia’s participation and position in global value chains (CONPES, 2023[30]). Like exporting, FDI is highly concentrated in the more developed regions, with six regions making up 85% of the total FDI stock in the country (Li and Aranda Larrey, 2021[29]).
Colombia is geographically well-placed to take advantage of nearshoring opportunities. Its Caribbean ports are within less than a week’s shipping time from the United States, and only a few days from Mexico. Moreover, Colombia has free trade agreements with most other countries in the Americas. There are specific opportunities in offshoring of service activities, given that Colombia is in a similar time zone as other major economies on the Latin American continent, including the United States, Mexico, and Canada. However, with the exception of call centers, few such opportunities have materialised, despite a large potential (Baldwin, Cárdenas and Fernández, 2021[31]) boosted by the global rise of remote work (Adrjan et al., 2024[32]). Countries such as Costa Rica have successfully managed to become a hub for IT and business service offshoring activities. Some cities in Colombia, in particular Medellín, have since the pandemic become important destinations for “digital nomads”, i.e. fully remote expatriate workers, employed by or contracting for firms in their country of origin, typically the United States. This trend has not transformed yet into meaningful opportunities for Colombians residing in Colombia, despite large wage differences even in specialised and highly skilled professions.
Note: In Panel A, LAC is the simple average of Argentina, Brazil, Chile, Costa Rica, and Mexico.
Source: UNCTAD STAT Data Centre; and Banco de la República.
Policies to increase the attractiveness of Colombia as an FDI and nearshoring destination consist first and foremost in improvements in the investment and business climate. This would include increasing regulatory and policy certainty for investors, safeguarding macroeconomic stability and the strong macroeconomic policy framework, improving regulations, and better infrastructure and logistics performance. In other words, the same policies that would foster investment and productivity in general would also help increase Colombia’s attractiveness for nearshoring. Moreover, there is evidence at the regional level that better institutional efficiency, regulations, and infrastructure are associated with more entrance of multinational enterprises (Li and Aranda Larrey, 2021[29]). There is large heterogeneity in nearshoring opportunities across the country, such as services in cities and sustainable manufacturing in regions with a high renewable energy potential. Continuing to improve coordination between the central investment promotion agency ProColombia, regional agencies (such as Invest in Bogotá), departmental competitiveness councils, and other actors such as local governments, could bring FDI to more regions. The Reindustrialisation Strategy offers another anchor point for strategic attraction of FDI to improve productivity and positioning in global value chains. Finally, approaches to improve regional attractiveness more broadly, including on social indicators which are as dispersed as economic ones (IADB, 2024[33]), would improve their image vis-à-vis investors (OECD, 2023[34]).
The impact of FDI on invest-receiving regions is amplified if it results in productivity spillovers, either through supply chains or via worker movements in the local labour market (Greenstone, Hornbeck and Moretti, 2010[35]; Abebe, McMillan and Serafinelli, 2022[36]). There is robust empirical evidence of positive spillovers of FDI in Costa Rica (Alfaro-Ureña, Manelici and Vasquez, 2022[37]) where explicit policies to promote linkages between foreign and local firms have long been put into place. These policies include screening potential local suppliers, facilitating exchanges and matchmaking with foreign affiliates. Colombia could learn from Costa Rica’s experience, for example by evaluating and expanding the supplier development project introduced by Colombia Productiva in 2023 and by continuing to strengthen FDI facilitation services and the single window of investment.
One source of untapped potential for better international integration is Colombia’s diaspora (CONPES, 2022[38]). About 10% of the population – about five million Colombians – reside abroad, with the largest group in the United States and sizeable populations in Canada, Chile, Mexico, and Spain (Nedelkoska et al., 2021[39]). Many retain close ties to their region or city of origin and frequently visit Colombia. While currently the main economic role of the diaspora are remittances – about 2.7% of GDP in 2022 – there is a large potential for diaspora Colombians to be facilitator of trade and foreign direct investment. Colombia could follow the example of other countries with a strong diaspora – for example, Ireland with its Global Irish, Scotland with its GlobalScot programmes, and programmes of the Spanish regions of Cantabria and Valencia – and actively promote networking, investment opportunities, and opportunities for engagement with Colombian entrepreneurs and firms. Such initiatives could also be led by regions or cities to foster regional ties of their specific diasporas.
3.2.4. Fostering innovation and diversification
Innovation and the adoption of new technologies are key to improving productivity within sectors and firms, as well as the usher in structural transformations and take advantages of the opportunities offered by nearshoring and the global energy transition. Innovation is also required to advance the green transition of Colombia’s domestic economy (Chapter 5). Public and private expenditure on research and development (R&D) is low (Figure 3.11). In 2020, Colombia only spent 0.3% of GDP on R&D, less than most other countries in the region and an order of magnitude less than the average OECD country. R&D spending needs to increase rapidly to reach the target of 0.5% the government has set for 2026. R&D and innovation is low in the private sector: more than 80% of firms never invest into any R&D (DANE, 2023[40]).
There are large regional inequalities in innovation (Figure 3.12). The leaders are Bogotá and its surrounding region and Antioquia, which host the country’s main universities, research centres and innovative firms. By contrast, very little innovation takes place in many peripheral regions including for example La Guajira, which has Colombia’s highest solar and wind energy potential and thus large potential for being a leader in the energy transition. Innovation is particularly low in the agricultural sector, where only 2% of large farms make use of advanced technologies such as drones, sensors, or automated systems (CONPES, 2023[30]). One of the results of such inequalities in innovation is that highly productive and competitive activities are concentrated in a small number of superstar firms (Figure 3.13).
Innovation programmes such as R&D tax credits can support business R&D spending and stimulate innovation with positive results (OECD, 2023[41]; Millot and Rawdanowicz, 2024[42]). The eligibility of firms to qualify for R&D tax credits was broadened a few years ago (OECD, 2019[22]) and now attracts firms in a broad cross-section of sectors. There are no eligibility criteria according to sector and firm size; however, most tax credits tend to be awarded to large firms, even though small firms benefit from higher deduction rates. R&D tax credits make up most (about 90%) of government support for business R&D, with direct grants only playing a minor role. The maximum grant size has been recently lowered, and eligible projects can now include knowledge transfer from large to small firms. Other instruments of R&D policy are capacity development for regional governments (who are envisaged to take more responsibilities in targeting R&D support in their region), the promotion of alliances between national and regional innovation support programmes, and an earmarked portion from the royalty transfer system that is reserved for R&D (see below). More generally, the government tries to foster strong complementarities of innovation policy with the Reindustrialisation Strategy and the energy transition.
Note: LAC is the unweighted average of Argentina, Chile, Costa Rica, and Mexico.
Source: OECD Main Science and Technology Indicators (MSTI).
Note: The Innovation Index measures performance in innovation by region via seven pillars: (1) Institutions; (2) Human capital and research; (3) Innovation infrastructure; (4 & 5) Market and business sophistication, (6) Knowledge production and technology; and (7) Creative output.
Source: Observatorio Colombiano de Ciencia y Tecnología.
The prioritisation process for providing industrial and productive development policies including R&D subsidies, investment promotion, export promotion, and technological extension services could be improved. One direction could be to follow best practices and formulate priorities in terms of national challenges – such as the energy transition or internationalisation – rather than specific products or industries (OECD/UN/UNIDO, 2019[2]). Another would be placed-based approaches, which target certain areas. Such place-based approaches could also help coordinate interventions in different policy areas, by focalising complementary interventions in the same geographical areas. Geographic targeting should focus on functional areas rather than administrative boundaries to account for spatial economies; new methodological guidelines have been developed for this purpose. Targeting could involve cross-regional and cross-departmental cooperation models, such as Administrative Planning Regions and Territorital Association Schemes (see below). One tool to implement place-based approaches are “industrial corridors”, such as those in Mexico, where the government concentrates infrastructure investment, the creation of industrial parks, and investment promotion in one location with the goal of creating new regional value chains. However, there are trade-offs to be considered between targeted policies and more general ones. For example, evidence from the United States suggests that financial incentives to individual firms can be more costly and less effective compared than more general policies such as infrastructure, manufacturing extension services, or customised job training (Bartik, 2020[43]).
Source: OECD/UN/UNIDO (2019), Production Transformation Policy Review of Colombia.
Colombia has a wide array of programmes of technology and knowledge transfer services. Fábricas de Productividad, a programme that offers consulting services to firms, was found to be associated with large increases in productivity of participating firms (Fedesarrollo, 2021[44]). An evaluation of an earlier pilot showed significant improvements in management practices, productivity, sales, and profits (Iacovone, Maloney and McKenzie, 2021[45]). Other programmes managed by the export promotion agency ProColombia, the Ministry of Science, Technology and Innovation, the National Planning Department, and other agencies provide support and consulting services to develop new products for export markets and to transform knowledge and patents into practical innovation. Zasca training centres offer integrated training, consulting, technology extension and matchmaking services to microentrepreneurs as part of the government’s reindustrialisation and grassroots economy strategies. However, productive and business development programmes are still quite concentrated, with 65% of resources destined to SENA. It would be worthwhile to re-evaluate from time to time the programme mix and the funding allocated and to continue programmes that proved successful in evaluations, discontinue those that did not, and experiment with adding new programmes to the mix.
Industrial, innovation, and trade policies could be better coordinated (OECD/UN/UNIDO, 2019[2]). There are important synergies between these policy areas. For example, production development policies might identify mechanisms to increase productivity such as learning from exporting. This would in turn call for coordination with export and investment promotion and R&D support policies. Vocational and technical training programmes work better when they are conceived in partnership with the private sector and take into account local skills demand (see below). Another area for better coordination are business support programmes, which could become a tool to implement the regional component of the Reindustrialisation Strategy. The regional competitiveness councils could play an enhanced coordination role for business and productive development initiatives between regional and local governments, the private sector, chambers of commerce, and universities and other research centres (OECD, 2023[34]). Coordination could also be improved by through better linkages between regional and national productivity agendas, for example building on recent initiatives by the National Planning Department. A key challenge here lies in striking a balance between top-down approaches, ensuring implementation of the national government’s strategies throughout the territory, and bottom-up initiatives, empowering locally identified priorities and policies advocated by elected regional and local authorities, a challenge common to many OECD countries. Türkiye, for example, formulated a ten-year national strategy of regional development which provided a unified framework for the numerous regional development initiatives, and helped to coordinate the work of the independent regional development agencies (OECD, 2018[46]).
3.2.5. Ensuring inclusive access to finance
Access to finance has improved significantly in recent years, although significant regional gaps persist. In 2022, more than 90% of Colombians had access to finance – defined as having at least one financial product – whereas in 2008, only about half of the population did (Figure 3.14, Panel A). However, there are still large gaps in financial access across territories and regions (Figure 3.14, Panel B). Access to finance is 100% in cities – although use is somewhat lower – but decreases in more rural areas, with only 55% of Colombians in remote areas having any financial product. In some regions of the Amazon, access to finance is as low as 30% (Banca de las Oportunidades, 2023[47]).
Improving access to finance is important for removing constraints that hold back productivity, especially in regions with low financial access. Empirical evidence from Colombia points to several ways in which this can occur. Firms that experienced an increase in access to finance had higher productivity, investment, employment, and exports (Eslava, Maffioli and Meléndez, 2012[48]). By contrast, firms that face greater financial constraints import less (Restropo Angle, Niño Cuervo and Montes Uribe, 2012[49]). This could restrain productivity growth because it reduces the transfer of technology embedded in imported intermediate inputs (Amiti and Konings, 2007[20]; Gebrewolde et al., 2022[50]). In rural areas, access to credit allows producers – such as coffee farmers – to increase production, productive use of land and yields, which in turn improves their living standards (Echavarría, Villamizar-Villegas and McAllister, 2017[51]). Better access to finance is crucial in the context of climate change for both adaptation and mitigation efforts, as highlighted in Chapter 5. Finally, the government views financial inclusion, especially for the grassroots economy, as a cornerstone towards increased formalisation of the economy.
Bank penetration is low, with less than 60% of adults having a bank account (Figure 3.14, Panel C). Several Latin American countries including Mexico and Brazil have improved bank penetration by tying the payout of social benefits to tenancy of a bank account or card, often provided by state-owned banks. International evidence shows that this not only increased bank penetration but also improved the competitiveness of traditional retailers and tax compliance by bringing more activities into the formal sector (Higgins, forthcoming[52]). In Colombia, a key innovation of the pandemic emergency relief programme Ingreso Solidario was to disburse payments directly into bank accounts and mobile wallets (OECD, 2022[27]). While this increased bank penetration and uptake of mobile payment technologies somewhat, there is still room for improvement. For example, beneficiaries without a bank account or mobile wallet could be automatically provided with such a product, as was the case in Mexico and Brazil.
Note: In Panels A and B, access to financial products is defined as the share of adults that have at least one financial product. Panel C shows the share of people aged 15+ years with an account at a financial institution, a mobile money account, or both. Panel D shows the share of assets held by the largest 3 banks.
Source: Banca de las Oportunidades (2022), Reporte de Inclusión Financiera; World Bank, Global Findex; and World Bank, Global Financial Development.
Bank competition is low (Figure 3.14, Panel D), and banks have historically enjoyed high margins as discussed in a previous OECD Economic Survey (OECD, 2019[22]). Although there are many domestic and foreign banks operating in the market, the top-3 banks have a combined market share above 70 percent, more than in other peer countries in the region. Moreover, financial conglomerates, comprising banks and non-bank companies including insurers, retail stores, and hospitals are very prominent in the Colombian banking sector (World Bank, 2021[53]). Their presence across different consumer goods and services markets gives conglomerates access to large amounts of costumer data that helps them gain a competitive advantage in many markets. Close monitoring of the evolution of competition among banking conglomerates is needed to deter anti-competitive practices. This requires strengthening inter-institutional cooperation among the competition authority, the banking regulator and the financial superintendence, including in merger reviews.
The state-owned financial conglomerate, Grupo Bicentenario, has become the third-largest financial group in Colombia (World Bank, 2021[53]). While this might be positive for financial inclusion, especially in areas currently underserved by commercial banks, the dominant position of Grupo Bicentenario raises challenges. Moreover, the government envisages a central role for Grupo Bicentenario in channeling access to finance to priority sectors in the grassroots economy and reindustrialisation strategies. Grupo Bicentenario’s activities and governance should be carefully monitored and regularly assessed by the competent authorities in matters of banking competition independent entities, including the competition authority and the banking supervisors, to ensure the government’s role is limited to that of a shareholder, with full operational independence maintained by the entity.
Rural areas are especially underserved by commercial banks, resulting in high bank concentration and low competition. Many rural municipalities are only served by Banco Agrario, the largest retail bank within Grupo Bicentenario (World Bank, 2021[53]). Informal credit based on relational contracts is another important source of finance for many farmers. Colombia has an active formal microcredit market, which disbursed a little more than 1 million loans (about 1 per 50 inhabitants) in 2019 (Asomicrofinanzas & Banco de la República, 2023[54]). While this market has exhibited strong growth, it is smaller and less dynamic than those in other countries in the region such as Peru where 15 NGOs disburse microloans compared to 6 in Colombia. More than 40% of the microcredit portfolio belongs to Banco Agrario (Asomicrofinanzas & Banco de la República, 2023[54]).
Incentivising the creation of a vibrant ecosystem of private financial institutions in rural areas would improve rural access to finance. Creating incentives for rural financial institutions to join larger federations while improving their governance and regulatory oversight would help in this respect. In several OECD countries such as Austria, Germany and the Netherlands, federative credit and savings associations are among the largest financial institutions in terms of clients and a cornerstone of rural and agriculture finance. Creating incentives for financial innovation, including through regulatory sandboxes to encourage experimentation, is another policy lever to foster financial ecosystems, and recent policies have been going in this direction.
A major source of informal credit in Colombia is provided by organised criminal groups, with severe social consequences. These loans, known as gota a gota (“drop by drop”), are typically for low amounts, available immediately without any paperwork, and are paid back daily or weekly at very high implied annual interest rates (Padrón Jaramillo, 2023[55]). If not paid, lenders recur to violence against the borrower and their family members to recover the loan and interest. According to survey estimates, 20% of Colombians recur to gota a gota loans. This illegal market has become a major source of income and money laundering for organised criminal and armed groups.
To combat gota a gota markets, the government plans to increase credit access through various channels, including consumer credit via the Banco Agrario and second-tier loans and guarantees from Grupo Bicentenario to private financial institutions. It will be important to safeguard competition in consumer credit markets by maintaining a level playing field between state-owned and private lenders and by defining objective criteria for credit allocation that privilege loan repayment. The government’s flagship programme CREO goes in this direction. It consists of a subsidised micro credit line of up to around USD 500 (USD 1,000 for agricultural loans) backed by a public guarantee for up to 70% of the loan amount, targeted at vulnerable households without prior credit records and offered through all major commercial banks, both public and private. Moreover, reviewing the maximum interest rates that financial institutions can charge on consumer and micro credit (“usury rates”) could help to assess whether the policy that aims at preventing excessive costs for those accessing financial products and services is in fact spurring access to informal credit. Higher usury rate limits could also spur banking competition by incentivising new entry into high-risk or high-cost market segments.
Easing documentation requirements for loans, especially for small loans and those disbursed via mobile payment systems, is another essential element for offering viable legal alternatives to gota a gota. Recent policy action by the central bank and the government to make instant mobile payment systems interoperable is a step in the right direction. In Brazil and Mexico, integrated mobile payment systems were central to the development of mobile-based microloans, two thirds of which benefit customers with low access to finance (Sumlinski et al., 2023[56]). Authorities should undertake a review of potential regulatory barriers to access to credit, especially for small loans solutions based on mobile technologies.
A lack of credit records with one of the major credit bureaus is another major obstacle to financial inclusion of previously unbanked population segments. Ensuring the preservation of records with the credit bureaus would improve the information content of this data and enhance their role in helping the allocation of credit and expanding financial inclusion. The CREO programme will help individuals to start building a credit record, and it should be complemented with the development of an alternative credit scoring approach that uses public databases to collect individual information, for instance from the business register, social benefits register, and transactions registers such as from digital wallets and mobile phones. The government is working towards such an alternative credit scoring methodology, which it plans to roll out in collaboration with private credit bureaus. It has further recently issued open finance and open data regulations which may support innovation in this area.
Educating the public about the risks associated with informal microcredit and the advantages of using regulated financial institutions would be another important element of channeling credit demand away from gota a gota to the formal financial system. Consumers may be attracted to gota a gota loans because they cannot compare what seems a low headline interest rate (e.g. a 10% weekly or 20% monthly interest rate) to effective annual rates offered by the formal financial system. Improving financial literacy both for the young population at school and through adult training programmes, for example through SENA’s complementary education track and Banca de las Oportunidades financial education programmes should be a priority. This could be complemented with a review of financial regulations to make basic information of products simple and understandable especially for vulnerable populations. For example, the United Kingdom’s Financial Conduct Authority has put in place a guidance for the fair treatment of vulnerable consumers and in 2023 introduced a “consumer duty” by which financial service providers need to abide.
3.2.6. Levelling up labour market relevant education and training across all regions
Low levels of skills and human capital, as well as skills mismatch, are key drivers of regional disparities in productivity and income. The same factors further result in one of the highest rates of youth neither in employment, education nor training (NEET) among all OECD countries, with important regional differences (Figure 3.15). For example, more than half of all young adults in Chocó are NEET, compared to below 30% in Bogotá. Providing Colombians in every region with the skills they need to take advantage of the opportunities in their labour markets requires levelling up differences in skills provision across regions. Moreover, developing the right skills is critical for achieving the structural transformation envisaged in the Reindustrialisation Strategy and to promote formalisation, growth, and access to high-quality jobs for the grassroots economy.
Vocational education and training (VET) is a powerful tool to bridge school-to-work transitions for young adults and thereby reducing NEET rates (OECD, 2023[57]). In Colombia, there is a strong regional component to this since VET programmes offered by the National Training Service (Servicio Nacional de Aprendizaje) SENA are in many rural areas the only local educational option beyond the lower secondary level, when mandatory schooling ends. SENA provides VET degree courses to about 1.3 million youth, mostly at the upper secondary and technical tertiary levels, and mostly geared towards technical professions in the service sector, such as administrative assistance, IT systems, technology and programming, data analysis, and accounting (SENA, 2022[58]). Expanding upper-secondary vocational programmes by SENA, starting with the regions where few upper-secondary alternatives exist and where NEET rates are the highest, seems one of the most immediate ways in which authorities could tackle the issue. VET students’ performance is relatively good compared to those in general secondary education. For example, in the PISA 2022 aptitude tests, Colombia is one of the few OECD countries where at the secondary levels, VET students outperform those in general education, scoring on average 20 points higher in maths (Figure 3.16). These performance differences towards the start of upper secondary schooling still carry over to final exam scores upon graduation. However, enrolment of students in upper-secondary vocational programmes is one of the lowest among OECD countries (OECD, 2019[22]).
Note: In Panel A, LAC is a simple average of Argentina, Brazil, Chile, Costa Rica, and Mexico.
Source: OECD Transition from School to Work; and OECD Regional Education.
An important consideration, however, is that VET and especially full-time programmes leading to a degree or certificate should be offered in line with local and regional skills needs. Such programmes require substantial time investment by students as well as teaching resources and should be designed accordingly. Labour mobility is low, reflecting poor infrastructure and a high cost of housing relative to wages. Skills mismatch is high, and many employers cite an inadequately trained workforce as a major impediment for their operations (OECD, 2019[22]). Moreover, the absorption capacity of formal labour markets for VET graduates is very different across regions (Figure 3.17). Expanding upper-secondary VET should therefore be aligned at the local and regional level with both skills needs and the structure of local industries and labour markets. It should also be coordinated with other economic policies such as the Reindustrialisation Strategy. While sectoral roundtables (mesas sectoriales) are in principle the forum for local employers to provide input into course offerings, they seem to not be very effective (Gonzalez-Velosa and Rosas Shady, 2016[59]).
One channel through which the coordination and involvement of the local business sector could take place are the regional productivity commissions, as well as a close coordination with local chambers of commerce. In Switzerland, for example, professional organisations – trade associations, employer associations, and trade unions – have a leading role in defining the content and examination process of VET programmes. In Sweden, funding allocations to VET education providers are conditional on showing market demand for the skills taught and engaging employers. In Denmark, each upper secondary VET institution has to work with at least one local training committee, which serve as a link to both local employers and the national training committee. In France, subsidies to employers of apprentices are differentiated by region, allowing to target specific regions with a particular need for expanding such VET programmes.
Performance difference in mathematics of students enrolled in a vocational vs general programme
Note: Data refer to the PISA score in mathematics after accounting for students' and schools' socio-economic profile.
Source: OECD PISA 2022.
Increasing the reach of dual VET to more regions and towns might be a way to increase both the relevance of VET training for local businesses and to improve the absorption rate of VET graduates into the formal sector.Many apprentices are taken over onto regular contracts by their host firms once they finished their training. A dual VET system exists in Colombia, but its coverage is very limited. Only around 2000 apprentices were enrolled in a dual programme in 2021 (SENA, 2022[58]), largely to train machine operators for the textile sector. Moreover, around 80% of dual VET places were offered in the regions of the three largest cities, Bogotá, Medellín (Antioquia) and Cali (Valle del Cauca).
On-the-job training and lifelong learning are important elements to develop and keep up with the skills needs of a changing world of work, with advantages to both workers and firms. This is especially important in Colombia, where skills gaps are one factor that keep individuals stuck in informal jobs and prevent them from moving to more productive roles in the formal sector (OECD, 2022[27]; OECD, 2019[22]). The main on-the-job training programme is offered by SENA through its “complementary education” track in which more than 8 million Colombians participate each year. This track includes short-cycle programmes and courses that teach specific technical and general skills. For example, among the most popular courses in the complementary programme in 2021 were English, food preparation and hygiene, Microsoft Excel, and administration of COVID-19 vaccines (SENA, 2022[58]). Other programmes are offered by a multitude of organisations including compensation funds, non-governmental organisations, and private firms. Many such programmes and training providers lack quality certificates. Moreover, programmes are fragmented and lack integration into a common framework of learning pathways. Finally, workers that face no labour market difficulties, and those with more formal education, are much more likely to receive training than more vulnerable workers (OECD, 2019[22]).
Note: Data shows the share of SENA VET graduates who held a formal job registered in the social security system within one year of graduation.
Source: SENA (2022), “Reporte de datos de la formación integral para el trabajo 2022”.
To further improve the quality and relevance of training, a national regulatory framework to accredit training providers and rationalise and clarify course offerings should be put in place (OECD, 2022[27]). The ongoing implementation of a National Qualifications Framework is a right step in this direction, allowing to map the standards, competencies, and skills a person should acquire from each unit of education. This in turn provides a baseline against which course offerings could be compared and assessed. As the large positive returns from a skills certification programme administered by SENA show, Colombian workers struggle to signal their skills, especially to employers in the formal sector (Mancino, Morales and Salazar, 2023[60]). Authorities should continue to pursue and monitor the implementation of the National Qualifications Framework. Another option to help workers better signal their skills, including those acquired informally, would be setting up a system for the recognition of prior learning (OECD, 2023[61]).
Measures to improve demand for education and training – by setting correct incentives and alleviating financial constraints – should complement the above measures to improve the supply of high-quality education and training programmes. Renta Jóven – formerly called Jóvenes en Acción – is a conditional cash transfer programme to vulnerable youth (14-28 years old) who have finished upper secondary vocational education. A subsidy is paid to cover tuition fees and a maintenance grant, conditional on attending a post-secondary course at SENA or another accredited institution. The programme has been previously found by an impact evaluation to increase post-secondary enrolment and decrease school non-completion (Gómez Gerena and Sánchez Torres, 2017[62]). Another programme, Ser Pilo Paga, provided merit-based university scholarships to high-performing upper-secondary graduates and increased university enrolment of eligible youth, especially at high-quality institutions (Londoño-Vélez, Rodríguez and Sánchez, 2020[63]). Although these programmes do not have a specific geographic focus, given the targeting of youth from poor and vulnerable households with eligibility criteria, they implicitly were geared towards youth from more rural areas.
3.2.7. Continuing the fight against corruption
Corruption reduces the attractiveness of Colombia’s business environment and impinges on the ability of its state to provide high-quality infrastructure and services for all its citizens. Corruption especially affects poorer and more rural regions (Figure 3.18). A strong rule of law protects private property rights and underpins contract enforcement, necessary incentives for investment, innovation, and sustainable growth (Acemoglu, Johnson and Robinson, 2001[64]; Johnson, McMillan and Woodruff, 2002[65]). By contrast, corruption interferes with growth by reducing the provision of public goods and services, diverting public resources, distorting capital and labour allocation, reducing the government’s ability to enforce the law, and lowering trust in public institutions (Olken and Pande, 2012[66]). Corruption tilts the playing field towards businesses and individuals that engage in corrupt practices or have privileged relationships, rather than those with strong performance in the marketplace. Excessively strong vested interests can also amplify political opposition to reforms. In the shadow of decades of conflict in Colombia, systemic corruption, state capture and organised crime were able to spread and connect, further undermining the state’s legitimacy and capacity (OECD, 2017[67]).
Note: For Bogotá, data for the Transparency Index refer to 2017.
Source: OECD calculations based on DANE; and Transparencia por Colombia.
Over the years, Colombia has made significant progress with efforts and initiatives to foster integrity and combat corruption in the public sector (OECD, 2017[67]). The recent introduction of concomitant and preventive control at the supreme audit institution presents another advancement in building a modern integrity system (OECD, 2021[68]). However, according to corruption perceptions indicators, significant room for improvement remains relative to best performers in the region such as Chile and Costa Rica, and many other OECD countries (Figure 3.19).
Regulating financial contributions of individuals and businesses to political parties and candidates can help avoid policy capture by special interests, improving inclusiveness and fairness in public decision-making (OECD, 2021[69]; OECD, 2017[70]). Given the limited public financing, campaigns are highly dependent on private funds; and legal contribution limits are only weakly enforced (Transparencia por Colombia, 2019[71]). Moreover, there are no limits on the amounts individual candidates can privately contribute, opening room for contributions by third parties directly to the candidate. Candidates and parties also take on significant amounts of debt (Saavedra, Soto and Carvajal, 2023[72]). Private financing is particularly predominant in regional and local elections. This opens the door for nepotism and corruption when candidates start paying back campaign contributions with political favours once in office (Fedesarrollo, 2021[73]). Stricter enforcement of limits and transparency requirements for private campaign contributions would lessen the dependency of political candidates on special interests and thus reduce corruption incentives. Gradually, private campaign funding should be replaced by public funds, allocated in a transparent manner and with strict accountability rules.
Combatting corruption requires an active and effective civil society that make their voice heard. Unfortunately, despite much progress since the heights of the internal violent conflict, social, community, trade union and human rights leaders and activists still face high risks. Reducing violence against trade unionists has been recognised as a key issue for improving social and employment rights in Colombia (OECD, 2022[74]; OECD, 2016[75]). Despite significant increases in protective measures by authorities, and a prioritisation of the investigation of violence against trade unionists by the Prosecutor General’s Office (OECD, 2022[27]) 8 to 16 trade unionists – depending on classifications – were assassinated in Colombia in 2023 (OECD, 2024[76]). Conviction rates for those crimes are still low. Moreover, violence affects social movements and community leaders in rural areas, many of them of Indigenous or African descent. In 2023, according to the Human Rights Ombudsman Office, 181 community leaders were victims of homicide. This represents a marked increase in violence since the signing of the Peace Agreement. Assassinations are concentrated in rural regions, especially in post-conflict areas where armed groups are still present (INDEPAZ, 2023[77]).
Effective vigilance by civil society further requires a greater degree of transparency in the use of public funds. Currently, accessibility to information on public budgets and spending is made difficult by lack of user-friendly data formats (Transparencia por Colombia, 2023[78]). Access to some data, especially at disaggregate levels, is restricted to due to privacy concerns. Improving dissemination of fiscal and financial information, including at very disaggregate levels including by region, would be a right step in this direction; for example by modernising the Ministry of Finance’s Economic Transparency Portal,
Illicit financial flows – of money originating from corruption, crime, terrorism, and tax evasion – strip countries of important resources and contribute to the proliferation of unlawful and harmful activities. The first voluntary foreign asset disclosure programme organised by the Colombian tax authorities revealed assets hidden abroad worth almost 2% of GDP (Londoño-Vélez and Ávila-Mahecha, 2021[79]). Colombia fully participates in international information exchange for tax purposes (Figure 3.19, Panel E) including with countries that have historically been tax havens for Colombians. Colombia established its anti-money laundering convention early, in 1995, and takes effective anti-money laundering measures in many areas (Figure 3.19, Panel F). However, progress could be made in enforcement, specifically in investigation and prosecution and in the application of financial sanctions. Moreover, better implementation of standards that mandate the disclosure of final beneficiaries of financial transactions, including information exchange between different government entities, could improve transparency on financial flows and help combat corruption (Transparencia por Colombia, 2023[78]) including by facilitating the due diligence screening of potential suppliers and contracting partners by public entities.
Note: Panel B shows the point estimate and the margin of error. Panel D shows sector-based subcomponents of the “Control of Corruption” indicator by the Varieties of Democracy Project. Panel E summarises the overall assessment on the exchange of information in practice from peer reviews by the Global Forum on Transparency and Exchange of Information for Tax Purposes. Peer reviews assess member jurisdictions' ability to ensure the transparency of their legal entities and arrangements and to co-operate with other tax administrations in accordance with the internationally agreed standard. The figure shows results from the ongoing second round when available, otherwise first round results are displayed. Panel F shows ratings from the FATF peer reviews of each member to assess levels of implementation of the FATF Recommendations. The ratings reflect the extent to which a country's measures are effective against 11 immediate outcomes. "Investigation and prosecution¹" refers to money laundering. "Investigation and prosecution²" refers to terrorist financing.
Source: Panel A: Transparency International; Panels B & C: World Bank, Worldwide Governance Indicators; Panel D: Varieties of Democracy Project, V-Dem Dataset v12. Panels E & F: OECD Secretariat’s own calculation based on the materials from the Global Forum on Transparency and Exchange of Information for Tax Purposes; and OECD, Financial Action Task Force (FATF).
3.3.1. Connecting cities and regions through better infrastructure
The quality of Colombia’s transport infrastructure is low in international comparison (Figure 3.20). Road and especially railroad infrastructure is bad even compared to countries in the region, where infrastructure is typically less developed than in other OECD countries. This restricts economic activity, trade, regional specialisation, and the development of domestic and international value chains. Transport costs are high. According to the latest National Logistics Survey, the cost of logistics (largely made up of transport) amounts to 18% of the total shipment value. Colombia’s cities are poorly integrated with their hinterland, which is largely explained by the poor quality of rural roads and transport connections (OECD, 2022[80]). As a result, there is a sizeable dispersion in logistics costs, which can reach 30% in some regions.
Note: In Panel A and B, LAC is the simple average of Argentina, Brazil, Chile, Costa Rica, Mexico, and Peru.
Source: World Economic Forum, the Global Competitiveness Index 4.0 2019 dataset; and World Bank, Logistics Performance Index 2023.
Mountainous geography contributes to high logistics costs but closing large gaps in road infrastructure can help reduce transport costs. While a well-established public-private roadbuilding progamme has helped improve many national trunk roads, transport infrastructure and connectivity are especially poor in rural regions. Most (94%) rural roads – which make up 70% of the country’s road network – are unpaved, and often in poor state (OECD, 2022[80]; CONPES, 2023[30]). Some rural in-land areas are only reachable by river transport. The long-lasting violent conflict has left rural roads in the most affected areas underdeveloped. Developing rural roads would help connect vulnerable areas to government services – including healthcare, education, security, and justice – and to markets This would also help put forward alternatives to illicit crop growing which is still prevalent in many former conflict areas. The lack of connectivity in rural regions has further widened the development gap with urban areas and a feeling of abandonment (OECD, 2022[80]). Low public investment (Figure 3.21), making up only 2.3% of GDP compared to an OECD average of 3.3%, can explain Colombia’s persistent infrastructure gap (Ramírez-Giraldo et al., 2021[81]).
Improving rural roads should be a priority for infrastructure policy. Since the construction and upkeep of rural roads – which connect the municipal seats with surrounding villages – is mainly under the responsibility of municipal governments, improving their capacity to implement, manage, and supervise projects (see below) would contribute to improving rural road transport. This can include involving the local community (OECD, 2022[80]). As part of its grassroots (“popular”) economy strategy, the government promotes “public-popular associations”, to involve rural communities and grassroots community associations in the upkeep and upgrading of rural roads and other public procurement projects. To succeed, the government will need to verify that the communities can execute projects, maintain project quality and technical standards, safeguard governance and competition, and prevent corruption. Considering previous experiences with “union service contracts” in Colombia, where associations were specifically formed to circumvent hiring under standard labour laws (OECD, 2016[75]), due diligence on community organisations will be required to ensure that these are genuine, democratic, and accountable associations of community members. Moreover, empirical evidence suggests that road contracts assigned in non-programmatic ways incurred a higher cost than those awarded competitively (Bonilla-Mejía and Morales, 2024[82]). To fully leverage cooperatives for improving rural infrastructure, it is essential to enhance their regulatory compliance and mitigate risks of failure or misuse by strengthening supervision (OECD, 2022[83]). Moreover, decisions on infrastructure investment, especially projects financed by public investment where a market-based business case based on user fees is often unfeasible, should be guided by sound cost-benefit analysis.
Note: LAC is the simple average of Brazil, Chile, Costa Rica, Mexico, and Peru.
Source: OECD (2023), Government at Glance 2023.
Rail and river transport offer a great potential to complement transport along the road network, as well as to aid with the government’s decarbonisation and emissions reductions plans. However, rail and river transport other than for minerals and fuels are rarely sufficient by themselves to link markets but require connectivity with other transport modes to complete the logistics chain. Railroad development has been neglected at the expense of roads since at least the 1980s. As a result, Colombia’s railway infrastructure is poor, with 49% of the rail network inactive and 5% dedicated exclusively to coal transport (OECD, 2022[80]). A 2020 Railway Master Plan promises improvements in the rail infrastructure, and the portfolio of the next generation of public-private infrastructure projects (see below) has been widened to also include railway projects. Authorities should be vigilant that these plans result in a meaningful transformation of and improvements to the country’s rail infrastructure.
Colombia’s rivers provide a passenger and freight transport alternative with great potential for use. Out of the almost 25,000 km of rivers, 74% are navigable and less than 20% allow for permanent year-round navigation. However, important sections of major rivers including the Magdalena – which provides a connection from the sea to within 100km of both Bogotá and Medellín – are not fully navigable year-round for larger boats without additional engineering works, and fluvial port infrastructure is often outdated.
Improving the smooth interplay among different modes of transport is a priority for the development of transport infrastructure (OECD, 2022[80]). While 99% of all imports (by weight) occur by ship, 77% of all internal shipments are by road, and only 18% by rail and 5% on rivers, according to the Ministry of Transports’ National Register of Freight Shipments. Moreover, between 2015 and 2021 more than 80% of public transport investment went into roads, 9% into airports, and only 1% into rail and 0.2% into river transport. The 2023 update of the Intermodal Transport Master Plan envisages a greater connectivity among different forms of transport, with road development increasingly conceived as a complement, especially for the first or last miles of a cargo shipment, with rail and river infrastructure. Such welcome vision, however, requires the successful implementation of the rail and river transport masterplans, which should be a priority for authorities; including by ensuring the implementation of the multimodal transport projects included in the 2022-2026 pluriannual investment plan. It also requires resources: the implementation of the Master Plan would need funds equivalent to close to 20% of GDP, spread out until 2045 (DNP, 2023[84])
The private sector plays a significant role in infrastructure development (Figure 3.22). Colombia has a well-established framework for public-private partnerships (PPPs). The framework dates back to the 1990s and has been leveraged to improve primary roads in the past (OECD, 2019[22]). Projects currently under execution – mostly motorways and other national trunks roads – belong to the 4th generation of the programme (“4G”). Project execution under 4G has significantly slowed down in 2023, contributing to the decline in private investment. According to authorities, this is largely because 4G projects are either fully or largely completed (and hence room for additional investments is minor) or are still in the pre-construction phase, held up by environmental permits, delays in prior consultation with Indigenous communities, and similar issues. Moreover, tight financial conditions and high interest rates induce banks and builders to wait before closing project financing contracts, and uncertainty over the government’s commitment to contractually agreed road toll increases might make companies more cautious. Projects in the 5th phase (5G) are currently under adjudication, and some first projects have already been adjudicated. They include not only roads but also other forms of transport (e.g., rehabilitation of a canal waterway). PPPs have also recently been extended to cover non-transport infrastructure such as water treatment plants and hospitals and are planned to cover other social infrastructure such as educational institutions. Expanding PPPs to renewable energy would further help advance the energy transition.
Source: Consejo Privado de Competitividad, Informe Nacional de Competitividad 2023-2024.
Ambitious plans to improve transport infrastructure and to usher in the green transition all rely on the ability to crowd in private investment. While Colombia’s framework is already strong, there is room for improvement in several dimensions to increase the efficiency and agility of PPP project implementation. Planned steps by authorities, including an institutional strengthening of the technical secretariat in the National Planning Department, and further increasing the application of value-for-money criteria to strengthen the cost-benefit analysis of projects, a strengthening of capacity in sub-national entities, and support for project structuring, are all appropriate steps in this direction. Despite the potential of PPP to deliver much-needed infrastructure investment under limited fiscal space, they require carefully designed frameworks to mitigate some of the inherent risks (Box 3.6).There is further a need for stronger standardisation of contracts to improve both the legal certainty and predictability for investors and to harmonise the conditions for public use of the infrastructure, for example the user fees of toll roads, which can vary strongly. Another area for improvement is the allocation of land rights on which infrastructure is built. Land disputes are a main reason for delays in the start of the construction phase. The planned rollout of the multipurpose land registry (see below) promises improvements in this area. Systematically involving communities in early stages of infrastructure projects, especially when formal prior consultation is required, would further reduce the incidence or intensity of land disputes.
PPPs help governments develop long-term infrastructure projects despite limited fiscal space and administrative capacities by leveraging the private sector’s project management expertise and funding. However, the complex and long-term nature of PPPs contracts, which are inherently incomplete and cannot fully predict future conditions, creates risks that governments must manage.
Fiscal risks involve government guarantees for demand shortfalls, exchange rate risk, or early termination. On the other hand, the fact that PPP projects often cover critical infrastructure or services creates a moral hazard risk for the government to agree to renegotiation or even take over the project and all its liabilities in case of difficulties. A good practice to make contingent fiscal risks transparent are to incorporate them into the country’s Medium-Term Fiscal Framework; a practice which Colombia adheres to. In addition, Colombia operates a fund to cover public sector contingent liabilities of PPPs.
Long-term project risks make it difficult to ensure value for money ex post if conditions change. Upfront commitment – by both the public party and the private operator – to all project costs along the lifecycle along with accountability is key. Accountability means that government payments are conditional on the private party providing the specified outputs at the agreed quality, quantity, and time frame. In most European countries, the grounds for termination due to fault of the private party are clearly defined, which adds to the predictability of PPPs contracts and improves financing conditions by increasing the acceptability of future PPPs payment streams as collateral (Allan & Ovary, 2013[85]).
Source: OECD (2012) Recommendation of the Council on Principles for Public Governance of Public-Private Partnerships; World Bank (2017) Public-Private Partnerships Reference Guide, Version 3.
Digital infrastructure is another area where an important share of investment is carried out by the private sector. However, higher construction costs and lower economies of scale in low density rural areas often reduce the business case for private sector providers. As pointed out by a previous OECD Economic Survey and the 2022 Rural Policy Review, Colombia is the OECD country with the largest rural-urban divide in digital connectivity (OECD, 2022[80]; OECD, 2019[22]). While a previous policy succeeded in creating a public broadband backbone to connect each municipal seat, a “last mile” problem of connecting individual users to the network persists. Improving individual internet connectivity requires a mix of solutions including addressing regulatory bottlenecks and improving coordination among stakeholders to lay local connections, exploring solutions based on satellite or mobile data networks, speeding up the implementation of public Wi-Fi access points and kiosks, and improving the regulatory framework to ease the creation of community networks, which in other countries such as Mexico and Brazil facilitate access on a non-profit basis in rural areas where the service offered by the main commercial providers is absent or prohibitively costly (OECD, 2022[80]). Cost is a major impediment for internet connectivity of poor households, with only 40% of poorest quintile households connected to the internet compared to 93% in the richest quintile, in addition to Colombia’s complex geography.
Logistic performance indexes suggest that, beyond improving infrastructure, Colombia has also room to improve the quality of logistics services (Figure 3.20, Panel B). As discussed in a previous OECD Economic Survey (OECD, 2019[22]), logistics performance has decreased over time and evidence suggests that this had a negative impact on exports. An area where Colombia performs particularly poorly is the customs clearance process. Clearing times are high. It takes ten times as many hours to comply with documentary requirements for importing and exporting in Colombia than it does in the average OECD country (World Bank, 2023[86]). According to the 2022 OECD Trade Facilitation Indicators, customs performance could be improved by expanding the acceptance of copies of documents, expanding the coverage of Authorised Economic Operator programmes, making greater use of advance rulings, and taking a more risk-based approach to controls.
3.3.2. Reforming fiscal decentralisation and subnational governance arrangements
Colombia’s subnational governments – regions (called departments) and municipalities – have significant financial resources and spending responsibilities (OECD, 2015[87]). About half of subnational governments’ income comes from inter-governmental transfers (Figure 3.23). However, subnational governments have little autonomy to decide on the use of transferred funds. There are two main transfer systems, the revenue sharing system that redistributes funds mostly earmarked for specific sectors – mainly health, education, and water sanitation – and the royalty transfer system, the main source of finance for public investment by subnational governments (Box 3.7).
Note: The data refer to effective cash operations, i.e., the spending implemented from different sources of revenue, which might refer to the budget allocations defined ex ante.
Source: Departamento Nacional de Planeación (DNP).
A high-level commission (Misión de Decentralisación) is reviewing subnational governance arrangements and providing reform recommendations to redefine the arrangements and responsibilities of subnational governments (Box 3.8). In all main aspects, the findings and recommendations in this subsection are aligned with those of the commission. These include the need for clarification of responsibilities and their differentiation according to the characteristics and capacities of territories and their administrations; a simplification of the revenue sharing system with a greater role for fiscal equalisation; an overhaul of the resource allocation mechanisms of the royalty transfer system; and the creation of a regional convergence fund.
Colombia is one of the most decentralised unitary countries in Latin America (SNG-WOFI, 2022[88]). About half of the income of subnational governments are transfers, a share very similar to the average in OECD countries.
The revenue sharing system (Sistema General de Participaciones) regulates fiscal transfers from the national government to subnational authorities to finance current expenditure. Most of the transfers in this system are earmarked by the Constitution to sectors such as education, health, and sanitation as a fixed proportion of aggregate transfers. The allocation of aggregate transfers for each sector to individual subnational entities is based on a complex formula defined by law that includes different variables (e.g., test scores, enrolment rates, drop-out rates in education) and development indicators. Only about 10% of the transfer income is not pre-allocated to sectors. This leaves subnational governments with the role of implementing plans and budgets decided elsewhere.
Transfers from the royalty transfer system (Sistema General de Regalías) are the main source of finance for public investments in subnational governments. The system distributes royalties from the extraction of non-renewable natural resources, which according to the Constitution belong to the nation. After a reform in 2011, all subnational governments are eligible to receive royalty transfers, but those with a direct role in natural resource extraction receive a higher share than others. Some parts of royalties are earmarked. To receive royalties, subnational entities need to apply with specific investment projects, which need to be part of their respective official development plans. While poorer regions typically benefit from higher royalties – both for regional and municipal governments – those higher royalties have not been successful in reducing poverty over the last decade (Figure 3.24).
Note: Each point corresponds to a region. Royalties per capita of a region represent all the revenues from the royalty transfer system (including both departmental and municipal revenues) in real terms (COP thousands, 2012 prices).
Source: OECD calculations based on data from the Ministry of Finance, Departamento Nacional de Planeación (DNP); and DANE.
There is a large degree of duplicity of functions across levels of government (Bonet, Pérez V. and Ayala, 2014[89]; OECD, 2019[90]). This reflects the incomplete decentralisation process, which at times has been reversed (López-Murcia, 2022[91]). Some responsibilities such as education, health, water, sewage, and social assistance – which account for a majority of subnational government expenditure – are shared across all levels of government (SNG-WOFI, 2022[88]; OECD, 2019[90]). While such arrangements are not uncommon in OECD countries, a lack of a clear delineation of responsibilities may lead to fragmentation, inefficient overlap, and poor incentives for each level of government that may try to pass the blame for poor service quality to other entities (OECD, 2021[92]).
A successful clarification of responsibilities requires a transparent division of power, a corresponding level of revenues, and an assignment of responsibilities to the level of government which best corresponds to the intended user group and geographical reach (OECD, 2019[93]). For example, during the 2007 reform of subnational administrations in Denmark, regions were granted responsibilities for the most demanding healthcare services, while municipalities were assigned responsibilities for health promotion, social welfare, and public health education. To reduce cost-shifting, municipalities co-finance shared ressources at the regional level, such as rehabilitation facilities.
Commissioned in 2021, the Misión de Descentralización's objectives were to carry out technical analysis and present proposals to redefine the arrangements and responsibilities of subnational governance. The commission was composed of academic experts, senior civil servants and elected officials and presented its draft report to Congress in February 2024.
Its main reform proposals are:
A new typology of territorial entities that considers new delegation of responsibilities, technical assistance, and policy priorities.
A reform of the law defining subnational governance arrangements to clarify responsibilities, strengthen collaboration, and allow for differentiation.
Simplification of the revenue sharing system, with fiscal equalisation as the main criterion.
Establishing a regional convergence fund.
Defining a subnational fiscal framework.
Strengthening information systems and collaboration mechanisms across entities.
Strengthening open governance and citizen participation.
Creating a new territorial entity for Indigenous territories.
Source: Misión de Descentralización (2024), “La misión de descentralización: Una oportunidad para el desarrollo regional.”
The allocation of responsibilities across different levels of government would benefit from more clarification, considering both subsidiarity – i.e., the principle that local problems are best solved locally – and capacity. There can often be a vicious cycle that prevents capacity development – responsibilities are not delegated to local and regional authorities because of a lack of capacity, which in turn prevents those authorities from gaining experience to strengthen their capacity. Responsibilities should be linked with capacity development, including through mechanisms which allow for delegation of responsibility and capacity development to occur gradually and in tandem (see below). Given the large heterogeneity across Colombia’s territory, there is scope for asymmetric decentralisation (OECD, 2019[90]), meaning differentiation in the delegation of responsibilities and decision-making based on regional characteristics. Metropolitan areas could be given greater responsibilities and autonomy – for example, to create metropolitan transport authorities, a model which is being piloted in Cali – whereas in remote rural areas, the distribution of capacities and economies of scale would imply that regions take over more responsibilities from municipalities. The development of typologies for territorial entities, such as the one recently developed by the National Planning Department, would provide an administrative tool to support such policy changes.
Colombia’s parallel multiple fiscal transfer systems and their design (Box 3.7) contribute to the complexity of subnational government finances. Rules for assigning revenue transfers are complex, based on different income bases, and in many cases earmarked to specific spending categories. These rigidities restrict the possibility of local governments to plan and finance projects and initiatives that respond to local needs and priorities, such as in infrastructure and other public services, or accommodating migrants. At the same time, spending rigidities and complex assignment mechanisms limit the targeting of resources according to pro-development criteria. Moreover, the revenue transfer system, which in principle could play the role of a fiscal equalisation mechanism, achieves only limited equalisation. Inequality in revenues per capita before transfers is very high in Colombia, with a Gini coefficient of above 40 (Table 3.2), compared to about 20 on average across OECD countries. The revenue transfer system cuts the dispersion in municipal per capita revenues in half, but barely changes the revenue dispersion of regions.
The fiscal transfer systems should be reformed with several simultaneous objectives in mind: improving fiscal equalisation mechanisms, strengthening mechanisms to address development needs and promote convergence, and simplifying the system (OECD, 2019[90]). These objectives could be achieved in several ways, including consolidating into a single system or alternatively reforming the existing parallel systems but improving coordination between them (OECD, 2015[87]).
The formulas to assign transfers in the revenue sharing system could be simplified and consider tax revenue equalisation and closure of gaps in living standards or public services such as education and health coverage. For example, the Swiss fiscal equalisation system combines horizontal tax revenue equalisation with special funding allocations for regions with low tax-raising capacity or high spending needs due to a region’s socio-demographic profile or challenging geography. The Swedish system combines an income equalisation system with cost-equalising grants that balance the cost differences in delivering a public service in rural or remote areas.
Gini Coefficient of per capita revenues across subnational governments, 2022
Source: OECD calculations based on data from Departamento Nacional de Planeación (DNP).
Allowing subnational governments to re-use unspent funds from one sector in another sector would make the revenue sharing more flexible and adaptive to local needs and improve overall budget execution in subnational governments. However, these considerations need to be carefully balanced against possible incentives for subnational governments to underspend earmarked funds to free resources for other purposes. At the same time, the system should offer higher flexibility to adapt spending to local needs and priorities, for example by combining a basic allocation with additional funds that could be awarded competitively based on needs and the quality of proposals. A reform of subnational finances could also create greater incentives for municipalities to invest into their own revenue collection, for example by offering rewards such as matching grants tied to above-average revenue collection. A reform could also condition some grants on the achievement of targets, such as improvements in coverage or quality.
Instruments for fiscal transfers to subnational entities can also be designed with the specific objective of regional convergence. For example, the European Union’s (EU) cohesion policy aims at balanced territorial development, with three quarters of resources for investment allocated to regions with a GDP per capita below 75% of the EU average (OECD, 2021[94]). Many EU place-based policies contain transparently defined eligibility criteria which regulate the disbursement of subsidies, for example business investment subsidies, based on local criteria (i.e., the local unemployment rate or GDP per capita). An evaluation of such policies in the United Kingdom found that they increase employment especially in small firms in areas eligible for subsidies, but not productivity (Criscuolo et al., 2019[95]). Colombia could adapt these examples and provide some fiscal transfers or direct subsidies according to regional development indicators. The proposed regional convergence fund is indeed a step in this direction. Well-designed cohesion policies could further include incentives for structural transformation as well as institutional upgrading, such as making disbursement conditional on transparency and competition in public procurement (OECD, 2021[94]).
The capacity of subnational governments to directly raise revenue can be improved. Subnational tax revenue amounts to about 3-4% of GDP, or about a third of total subnational government revenue (see Figure 3.23) – similar to the OECD average (OECD, 2023[96]). There are important differences in revenue generation between departments and municipalities. The most important sources of tax revenues for municipalities are local business taxes and recurrent property taxes, which together made up around 70% of total municipal tax revenue in 2023. While those revenues have grown over time, they are often still low for the 90% of all municipalities classified as small (Bonet, Pérez V. and Ayala, 2014[89]). Many of these municipalities are not even able to cover their current administrative expenditure from their own income, relying on transfers instead. The roll-out of the land registry will improve municipal property tax collection, but the small tax base in smaller and poorer municipalities limits how much revenue can be raised. Revenue from recurrent immovable property taxes (0.8% of GDP) is already the highest among Latin American countries and close to the OECD average (Chapter 2).
The tax base is especially thin for regions. Most of their own tax revenues come from “sin taxes” (i.e., excise taxes on alcohol, tobacco products, etc.), in addition to stamp duties and vehicle taxes. Smuggling and other illegal activities significantly reduce the tax base that regions can rely upon. Overall, tax revenues of regions make up only 0.7% of GDP, and their total budgets 2.6% of GDP. This seems insufficient for regions to fulfil their roles, especially if they are expected to take a more active role in supporting rural municipalities, as recommended previously by the OECD (OECD, 2019[90]; OECD, 2016[97]). Several options exist to raise regional tax revenues, including increased efforts to tackle illicit trade in tobacco and alcohol products, promoting shared taxation between the national and subnational governments, or promoting more flexibility in terms of user tariffs and fees and optimising income from properties (OECD, 2019[90]; OECD, 2016[97]).
Capacity in many subnational governments remains low. Typically, large urban municipalities and wealthy departments with a strong economic base and a concentration of population, firms and economic actors, have good capacity to raise taxes, create impactful programmes and projects, and administer their resources. The certification system ensures that a greater share of responsibilities is devolved by them. By contrast, for many poorer and often rural municipalities the region takes over many responsibilities for implementing and executing programmes. While these arrangements are generally sensible, they perpetuate existing large differences in capacity. Colombia therefore needs mechanisms to gradually devolve responsibilities at the same time as developing capacities to fulfill them.
A good example that reunites these principles and that Colombia could consider mainstreamining into other areas are the Territorial Pacts (previously called Contratos Plan) used for infrastructure development. Those contracts are binding agreements between the national government and sub-national authorities to coordinate their investment agenda and jointly deliver a defined list of interventions (OECD, 2016[98]; OECD, 2014[7]). Within the contract framework, sub-national governments have certain autonomy to decide on how to allocate the given budget to achieve the plan’s objectives, while working together with national officials. This contributes to building implementation capacities and spending responsibilities at the subnational level.
The new land registry increases opportunities for municipalities for raising own fiscal revenue. This, however, requires sufficient administrative and human resource capacity in municipal governments, which have now become responsible for managing the registry and keeping it up to date. Authorities should ensure sufficient capacity-building takes place. Regional governments might further be able to assist municipalities by centralising tasks, for example by identifying properties based on the registry and determining applicable tax bills.
Decentralisation would also benefit from good co-ordination mechanisms across levels of government and cross-jurisdictional cooperation (OECD, 2019[93]). The 2019 Pact for Decentralisation promotes joint projects between individual subnational administrative entitites. The Pact strengthened the Administrative Planning Regions created by the 1991 constitution, which are associations of several departments and municipanities, and which since a 2022 legal change are now independent legal entities. In addition, municipalities can join Territorial Association Schemes to bid together for cross-municipality projects funded by the royalty transfer system. Both of these administrative innovations are steps in the right direction – and complement earlier initiatives for inter-municipal cooperation for example in urban transport – to create projects with a regional economic impact beyond the boundaries imposed by administrative divisions. However, incentives for participation and cooperation in these schemes could be improved (OECD, 2023[34]). In Finland, for example, where municipalities were until a 2023 reform the only subnational level of government, inter-municipal cooperation, in part faciliated by regional councils that are formed by associations of municipalities, is very common, with a trend towards larger co-operative units to benefit from economies of scale and scope. Colombia could consider providing financial incentives to support horizontal associations across municipalities and departments (OECD, 2016[97]).
3.3.3. Implementing the Peace Agreement to boost rural development
The armed conflict that Colombia suffered for many decades had severe consequences for livelihoods and the country’s productive capacity, especially in conflict-prone areas. Infrastructure was destroyed, investment confidence was diminished, and 8.5 million Colombians were forcefully displaced, according to the National Registry of Victims, many of them rural farmers. Land concentration in Colombia is higher than in any other country of the region, with the top 1 percent of farms concentrating more than 80% of the land (World Bank Group, 2021[8]) and is both a source and a result of violent conflict (OECD, 2022[80]). The Peace Agreement that entered in force in 2017 between the government and the major insurgent group FARC marked an important milestone for advancing peace and development. There is room for advancing and improving the Peace Agreement’s implementation and impact on economic catch-up and convergence of rural areas (OECD, 2022[80]). Evidence points to large and lasting effects of programmes related to the peace process, such as reparations for victims (Guarin, Londoño-Vélez and Posso, 2023[99]) and economic returns to peace – such as greater confidence, higher aggregate demand, and more investment especially from abroad (Gaviria et al., 2015[100]).
The development strategy laid down in the Peace Agreement has a strong territorial character. Special development areas, PDET (Programas de Desarrollo con Enfoque Territorial), have historically been most affected by armed conflict, poverty, institutional weaknesses, and the presence of illicit crops and receive earmarked funds and assistance. The 170 PDET municipalities make up 36% of the national territory and contain a quarter of the rural population. They are concentrated in rural mountain ranges and the Amazon basin (Figure 3.25, Panel A). However, since the signing of the Peace Agreement, the incidence of conflict has not seen any sustainable reduction due to the continued presence of different armed groups in the territory (Figure 3.25, Panel B).
The rural reform (Reforma Rural Integral), a cornerstone of the rural development strategy in the Peace Agreement, seeks to improve access to land, promote rural productivity and competitiveness, strengthen rural institutions, and enhance the well-being of rural populations, particularly smallholder farmers, Indigenous people, and Afro-Colombian communities. This reform addresses long-standing challenges in the agricultural sector resulting from decades of conflict and poor policy choices (OECD, 2015[101]).The land reform seeks to provide over 3 million hectares of agricultural land to rural dwellers with no or insufficient land, and the formalisation (via land titles) of another 7 million hectares. Other components of the rural reform are focused on encouraging productive investments by farmers and include the provision of credit and agricultural extension services to newly formalised farmers, illicit crop substitution programmes, and a systematic horizontal integration of PDET into national policies, especially infrastructure plans and social protection policies. The 2022-2026 Multi-Annual Investment Plan allocates COP 50 trillion (around 3% of GDP) for the implementation of the Peace Agreement, about 80% is earmarked for rural development, in particular education, health, and infrastructure.
Note: PDET are special development areas designated by the Peace Agreement, made up of municipalities which have historically been the most affected by armed conflict, poverty, institutional weaknesses, and the presence of illicit crops.
Source: Agencia de Renovación al Territorio (ART), Programas de Desarrollo con Enfoque Territorial – PDET; and Departamento Nacional de Planeación (DNP).
Implementation of the land reform has been slow and has not always brought about the desired structural transformation of post-conflict areas (CGR, 2023[102]). By March 2023, only about 20,000 ha (less than 1% of the final objective) of land had been restituted and only about 3m ha (45% of the objective) had been formalised. Accelerating this pace requires an adequate budget for land acquisition as well as enabling authorities to identify suitable agricultural land, as well as its owners. The 2024 budget contains a significant increase in current expenditure for the implementation of the Peace Agreement, with the objective of acquiring 500,000 ha of land for redistribution in 2024. COP 5tn (0.3% of GDP) have been allocated for this purpose from the national budget and special funds. Formalising the ownership of land would help remove distortions introduced by informal tenancy and displacement, help develop land markets for a more efficient allocation of productive land, and better inform public policy related to land and food security (OECD, 2023[34]).
The development of a modern cadastre system would help advance the implementation of the land reform. Land registers especially in rural areas plagued by conflict, and in which land might have frequently changed hands informally or unlawfully, are incomplete and outdated. This poses not only a constraint for the formalisation component of the land reform – which implies creating a land title for the rightful owner – but also in other areas. Infrastructure projects are often held up by uncertainties or litigation around ownership of the land where it should be built upon. Moreover, information on land valuation is often outdated, distorting tax collection and other public services. A functional and complete rural cadastre would be the starting point to promote a better use of land, as it would improve legal certainty and facilitate transactions, give incentives for a better use of land, and help attract private investment (OECD, 2019[22]). Moreover, the multipurpose land registry includes information of actual and potential use of each property, which would help implement the large-scale land agricultural land acquisition programme.
Colombia is introducing a multipurpose land registry and should accelerate its roll out. In contrast to traditional cadastres, which are often designed for specific purposes (e.g., tax), the multipurpose cadastre (catastro multipropósito) is a unified land registry for any purpose (legal, fiscal, statistical, etc.) offered as a public service to citizens. The registry covered 45.9 million hectares in June 2022, a significant increase from 2019 when only 2.5 million hectares were registered (CPC, 2023[103]). The authorities have committed to update at least 70% of the multipurpose cadastre by 2026 from 12.4% today. Further developing the multipurpose land registry requires harmonising information across sources, for example, the property tax database and the land tenancy registry which might not be aligned. To keep the cadastre up to date, interoperability across different systems and different user groups is needed. Strengthening capacities of local governments with technical assistance, ensuring permanent human and financial resources dedicated to the cadastre, and fostering close coordination with national and other local governments are other essential measures for sustaining an effective cadastre (OECD, 2022[80]). In the past, the political economy of an improved land registry which might lead to higher taxes on large landowners has also proved challenging (Vargas and Villaveces, 2016[104]).
The allocation of funds related to the Peace Agreement could be improved. A portion of funds from the royalty transfer system is earmarked for PDET municipalities, and allocation is decided by the OCAD PAZ committee. Historically, applications to access these funds were decided on a first-come, first-served basis, which resulted in a concentration of funds in some municipalities, while many of the poorer municipalities were left out. In 2023, the methodology for assigning funds was changed to a more technical scoring approach based on gaps in development indicators. Authorities should monitor whether the change in methodology brings local PDET plans and funding allocation closer to local needs.
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