OPINION: Colombia's Juan Manuel Santos on the economics of peace

OPINION: Colombia's Juan Manuel Santos on the economics of peace

Colombia Comment & Opinion

Over the past decade, Colombia has been praised for attaining high economic growth and major socioeconomic achievements, while maintaining a stable and sensible macroeconomic framework. Between 2011 and 2015, its average economic growth was 1.3 percentage points higher than the average of Argentina, Brazil, Chile, Colombia, Mexico, and Peru (LAC-6). Moreover, its investment-to-GDP ratio peaked at 29.6% in 2015 — the highest ever recorded in the country’s history and also the highest among LAC-6 countries. Within the same group of countries, Colombia outpaced the region in terms of reducing poverty and unemployment rates between 2010 and 2015 — by 11.2 and 2.5 percentage points, respectively. 

These impressive achievements speak highly of Colombia’s economic resilience. Prudent macroeconomic management has allowed the country to withstand international shocks while delivering favorable economic results. In 2009, one year after the world’s 2008 financial crisis, Colombia’s GDP grew 1.7%, the highest rate among its LAC-6 peers. Likewise, when the commodity super-cycle came to an end for oil in 2014, Colombia’s economic performance remained high despite being a major oil and coal exporter: among LAC-6 countries, it grew the most that year (4.4%) and posted the second-highest in 2015 (3.1%). Indeed, while the world economy suffered an economic slowdown in the last quarter of 2015, Colombia was the 11th fastest growing economy according to The Economist magazine. 

BRIGHT FUTURE: Foreign direct investment into Colombia could triple, to $36 billion, as a result of the peace deal, says President Juan Manuel Santos

Yet, despite these remarkable results, to date Colombia still suffers the longest standing conflicts in the hemisphere with the FARC guerrilla — but not for long. With the aim of putting an end to a degraded war that has left over 7 million victims, the Colombian government unveiled in late 2012 the formal start of the peace negotiations with the FARC. Today, the peace terms have been agreed upon and, once Colombians ratify it on October 2, implementation will begin immediately. If the country’s economic and social development has been so successful to date, what will the future hold for us once the yoke of this war is permanently lifted?

Most studies on the economic consequences of peace agreements have found that the agreement reached in Colombia will bring an outstanding economic dividend to our citizens. Take for example a 2015 research led by the National Planning Department (DNP), using data from three of the largest data sources on armed conflicts, and having screened more than 117 countries which have suffered war.  

As shown by the study’s results, the evidence speaks of a significant economic peace dividend in all the countries studied, mainly due to increased confidence from both nationals and the rest of the world. Internally, the peace dividend translates into higher investment and household consumption rates, which jointly deliver higher economic growth. Externally, the effect on the country’s economy is felt through an increase in foreign investment and in international trade via higher exports. Though the effect is larger in the first years after the agreement has been signed, it lasts for at least 10 years. 

When applying these data to the Colombian case, the study by DNP finds that the country’s economic peace dividend will be considerable: in the wake of the peace agreement, Colombia’s GDP will grow between 1.1 and 1.9 percentage points more. From the demand side, the study finds that the increased confidence translates into a 2.5 point increase in consumption growth, a 5.5 point increase in the investment rate as percentage of GDP, a threefold increase in foreign direct investment, and a 17.7 point increase in the openness to trade (exports plus imports as a share of GDP). From the supply side, results are equally encouraging: 1.4 points of additional growth in the agricultural sector, 0.8 points of increased growth in the manufacturing sector, and a 4.4 point increase in the rate of growth of the construction sector.

Overall, Colombia’s economic outlook, now that the peace agreement has been signed, is nothing but reassuring. In the medium- to long-term, GDP growth might be close to 6%, GDP per capita may increase from the current $7,000 to about $12,000, foreign direct investment might grow from $12 billion to $36 billion, while exports may reach $65 billion, up from $37 billion today. 

In the last decade, Colombia has positioned itself as one of the most dynamic and resilient economies of the region. In the next decade, our country is bound to become an even more vibrant and peaceful world-class economy. LF