The 2016 Index of Economic Freedom compares Colombia with the United State in the following categories: Business Freedom, Trade Freedom,Fiscal Freedom, Investment Freedom and Freedom from corruption. The scores were as follows:
- Business Freedom: Colombia 78.2 % , U.S 84.7 %
- Trade Freedom: Colombia 81.0 % , U.S 87.0%
- Fiscal Freedom: Colombia 80.1 % , U.S 65.6%
- Investment Freedom: Colombia 80.0% , U.S 70.0 %
- Freedom from Corruption: Colombia 74. % , U.S 37.0 %
From the figures above, Colombia is not far off from the U.S in most categories, except the defining significant difference in corruption between the two countries. Also, according to the World Bank’s Ease of Doing Business website, Colombia measures a 54 comparing to the United States’ 7.
Colombia has a total population of 47.79 million individuals, and the country’s income is generated from the upper middle class. Colombia’s GDP at market price is $377.7 billion and the overall well-being of the country, as it stands today, is considered unstable. Colombia is experiencing a high inflation rate which is currently 7.59%, the highest it has been since December 2008. The top 3 components that make up Colombia’s high inflation rate are housing, food, and transportation. Colombia has a mixed economic system with major commercial and investment ties to the U.S. The private sector is not considered the primary engine of the economic growth because Colombia has an economy that is mixed which means that the private sector and the government direct the economy.
The United States income level is generated from the higher income class. The U.S has a total population of 318.9 million individuals. Its GDP at market price is $17.42 trillion. The overall well-being of the country as it stands today is considered stable. The U.S has a inflation rate of 1.4% as of January 2016. with the ideal inflation rate for the U.S needs to be about 2.0%. The top 3 components that make up the United States inflation rate are rent, medical care, and transportation. The U.S has a mixed economic system just like Colombia does. The private sector is not the primary engine of the economic growth. The private sector and the government direct the United States economy.
Colombia is considered unstable because it has such a high inflation rate. Since Colombia has an inflation rate of 7.59%, the dollar is considered to be worth less. The United States is considered stable because it has an inflation rate of 1.4%, the dollar is considered to be worth more. The inflation rate has an effect on price stability in each country. The higher the inflation rate, the more unstable the price is. The closer the inflation rate is to the ideal 2.0%, the more stable the price is considered. The biggest factor that has an effect on both countries is the population; High population lowers GDP per capita and lowers the cost of living.
Colombia’s institutions are plagued with a weak infrastructure that leaves the country considerably vulnerable to corruption and hinders their economy. The lack of smaller state government programs to enforce justice within Columbia has allowed for marginalized groups to fend and govern themselves. Eventually, alternative structures would form from wealthy landowners, narco-traffickers, guerrillas, and paramilitaries to fill the governing gap. These makeshift unofficial governments coupled with drug trade and trafficking have led to an immense level of corruption throughout Colombia’s government. The structures developed by marginalized groups and funded through sale of illegal products such as cocaine produce a massive system for bribery. Companies and drug lords alike use their money to buy-out politicians and instill political and economic protection for themselves.
By the numbers, eighty percent of Colombians believe their government to be corrupt to this day, and ninety-three percent of entrepreneurs believe many businesses are paying bribes. Economically, these actions prevent new businesses from moving into Colombian markets and existing businesses from growing properly due to corrupt government officials balancing law in favor of bribers. For the Colombians to overcome the corrupted governments, it is essential for state governments to expand into ungoverned states. By expanding into untapped areas and eliminating the source of bribery and corruption, the Colombians can expand their economic growth (Gillin).
According to the Oxford Business Group on Colombian Agriculture: “With demand for cacao on the rise and a projected global deficit of 1 million tons by 2020, cacao production in Colombia is set to receive special attention in the next few years.
To capitalize on the tremendous growth, the government and the private sector are joining forces and rolling out long-term strategies to increase production and enhance Colombia’s competitiveness at the international level. The Colombian government intends to boost the country’s competitiveness internationally through incentives to production, both in renovation campaigns and with the grafting of new trees. The goal is to bring into production an additional 700 million hectares available for cacao cultivation, while providing producers with adequate financing instruments and incentives to invest in their plots
The promotion of cacao production has also been part of the government’s coca (cocaine) eradication program for some years since both trees require similar growing conditions. A shift to cacao cultivation is being promoted as an option for farmers looking to leave the cultivation of illicit crops; The government has plans to renovate 80,000 hectares of old plantations.
Domestic Monopolies: Anna Andrianova’s article “Colombia learns free trade can’t fix everything” discusses the impact of domestic monopolies on Colombia’s economy. Andrianova writes, “For Colombia, free trade has delivered on many promises. Consumers in the country now have access to a much greater variety of goods and merchandise. But some groups, especially farmers, are struggling to survive amid a flood of cheap imports.” Since 2013, Farmers have started to rally against high costs for fertilizer and low-priced food imports, and truck drivers were enraged by expensive fuel (Andrianova).
Not all those price fluctuations came as a result of free trade agreements. But Colombia’s pacts with the U.S. and Europe have failed to improve things in some domestic sectors and appear to have worsened them in others. Colombia used to be self-sufficient in food production, but now it is importing around 10 million tons of food, forcing Colombians to have to sell the harvest lower than the cost of production.
James Robinson, a professor of government at Harvard University, pointed to the faulty structure of Colombia’s farming sector, which he said restrains growth. Robinson claims: “I think there is not enough free trade.” He cited ”an ‘oligarchized’ arrangement in the Colombian wholesale market as the source of the problem. Wholesale prices paid to farmers are low because of domestic monopolies, even though consumer prices are high.” He added that smugglers bring food from Ecuador and Venezuela to take advantage of Colombia’s higher retail prices.
Restrictions on foreign investments: Colombia, along with Bolivia, Ecuador, Peru, and Venezuela, is a member of the Andean Pact. Foreign investments in Colombia are divided into direct investments and portfolio investments.
Foreign investments are treated as national investments. As such, foreign investors are allowed to participate, without restriction, in all industrial and economic projects. Foreign investments do not require prior approval, except in specific sectors, such as utilities (energy, water, and sewerage systems), postal services, public health (including garbage collection), communications (including television and radio stations but not cellular telecommunications), financial institutions (in the circumstances described below), oil, and mining.
Direct investments occur when foreign individuals or companies invest directly in a business entity constituted in Colombia or when foreign individuals or companies acquire participations, shares, or social quotas with the intent of permanency. A direct investment in a company may also be executed for the development of collaboration, concession, service, management, license, or technology transfer agreements. This investment strategy is allowable, provided that the investment does not involve the acquisition of shares and that income received by the foreign investor comes from the Colombian company’s profits, as specified in its corporate purpose.
In portfolio investments, foreign capital contributions are made to acquire shares, bonds, and other negotiable securities listed by the Foreign Investment Statute.
Foreign investment is expressly prohibited in national defense and security activities and in activities dealing with the disposal of toxic, radioactive, or dangerous waste not produced in Colombia. It is also prohibited in companies devoted exclusively to the sale and rental of real estate and in securities issued on the basis of real estate construction or real estate assets.
Foreign investors have the right to remit profits abroad that are obtained from their investments. Foreign investors may also remit abroad invested capital and gains, once corresponding taxes have been paid, in compliance with the Tax Code.
During the 1990’s in Colombia, privatization programs were mainly emphasized on sales of power related industries, natural gas, and manufacturing. Privatization in Colombia was originally initiated to encourage market competition. These privatization programs consisted of concession contracts, sales contracts, and sectoral regulatory reforms. Concession contracts are used to promote private investments in public works which helps promote the development of a country’s infrastructure (railroads, mining, maritime ports, aqueducts, sewers, and mobile phone networks). The United States used similar tactics until the 1970’s once most of the US infrastructure had been established. The US now is focusing on maintaining and advancing its infrastructure versus Colombia who is still trying to establish its infrastructure. For Colombia’s growth on a national and global standpoint, infrastructure is one of the most important aspects to the country’s economic engine. With that being said, the US has one of the most well developed infrastructures in the world which can be linked as directly proportional to its economic success. The US government still regulates certain sectors such as nuclear related fields, food and drug industries, financial institutions, and the medical sectors.
Freely Convertable Currency: One US dollar is equivalent to $3128.81 Colombian Pesos. This shows the inflation of the Colombian dollar is quite high. Colombia’s currency has a floating system, where the currencies value fluctuates depending on the supply and demand of the markets within its economy. This allows prices to regulate and change against different economical and financial events. This makes a lot of uncertainties making the floating system very unpredictable.
In March 2012, Colombia joined the WTO. There are three tariffs levels for Colombia: 0-5% on capital goods, industrial goods, and raw materials that are not produced in Colombia; 10% on manufactured goods, but with some expectations (automobiles which can be 35% duty, beef and rice which can be 80% duty, then milk and cream which can be 98% duty); and 15-20% are consumer and “sensitive” goods.
The United States is Colombia’s largest trading partner. On May 15, 2012 the U.S. exports of consumers became duty free to Colombia, which was about 80% of the U.S. exports. There was an average tariff on the U.S. exports range from 7.4-14.6%, which raised U.S. exports. There is currently and agreement on agricultural commodities eliminates duties on wheat, barley, soybeans, bacon, almost all fruits and vegetables, cotton, and a vast majority of processed products.
There is also free TRQ, tariff rate quotas, on standard beef, chicken leg quarters, dairy products, corn, sorghum, animal feeds, rice, and soybean oil. Since the U.S. is the largest trading partner this will making trading between the two countries a consistent thing. The United States and Colombia have signed agreements on trade. Because of this new agreement this made the property rights for Colombia a lot stronger.
When looking at the size of state bureaucracy for Colombia, it can be said that it is the smaller of two countries. Chile and Colombia are the smallest, which was calculated by 1% of their population. There was not much information on how and what they do to elect officials for the state of bureaucracy.
For the United States there is a total number of the federal government agencies, commission, and departments that make up the organization of the state of bureaucracy. The size and complexity is said to be overlapping responsibilities for the federal bureaucracy. There are four broad types for the bureaucracy: cabinet departments, government corporations, independent agencies, and regulatory commissions. This is more organized than compared to Colombia because we have more connections and opportunities to have a big state of bureaucracy. For Colombia they did not say what exactly made up their bureaucracy expect that it was 1 of the two smallest for Latin America.
For the balance surplus budget of Colombia, it was recorded as a budget deficit, which was equal to 2.4% for the GDP of 2014. The budget averaged -3.63 from 2001 up to 2014. In 2005 it reached an all time high of 0.23% but there was a record low of -8.47% the year before in 2004. The Ministry of Finance and Public Credit of Colombia report the budget. For the United States in 2001, there was a surplus of $127.3 billion. But just liked Colombia there was a deficit in 2004 and 2005 for the United States. In 2004, there was a $413 billion deficit, and in 2005 there was $318 billion deficit. Currently for the 2015 data, the United States is in a $438 billion deficit, there was not data to compare for Colombia as the current balance budget surplus or deficit.
Gillin, Joel. “Understanding Colombia’s Conflict: Weak, Corrupt State.”Understanding Colombia’s Conflict: Weak, Corrupt State. Columbia Reports, 13 Jan. 2015. Web. 07 Mar. 2016.
“The Organization of the Bureaucracy.” Ushistory.org. Independence Hall Association, 2016. Web. 07 Mar. 2016.
Lora, Eduardo. The State of State Reform in Latin America. Stanford, CA: Stanford UP, 2007. Print.
“Colombia Government Budget | 2001-2016 | Data | Chart | Calendar | Forecast.” Colombia Government Budget | 2001-2016 | Data | Chart | Calendar | Forecast. Colombia Government Budget, Dec. 2014. Web. 07 Mar. 2016.
Manuel, Dave. “A History of Surpluses and Deficits in the United States.” DaveManuel.com. Dave Manuel, 2016. Web. 07 Mar. 2016.
“Trade Regulations and Standards in Colombia.” Colombia Trade Regulations and Standards. Export.gov, 18 Jan. 2012. Web. 07 Mar. 2016.