Colombia Economic Structure

During the 1980s and 1990s, Colombia boasted a strong fiscal policy. The fiscal structure, however, deteriorated in the mid 1990s, which prevented the fiscal policy from being a tool for short-term economic stabilization. Since then, economic reforms have been limited, regressive, and formulated to address short-term needs rather than long term requirements. Also, public policy in Colombia has not been growth-oriented in key areas such as infrastructure and transportation.[br]

During the 1980s and 1990s, Colombia boasted a strong fiscal policy. The fiscal structure, however, deteriorated in the mid 1990s, which prevented the fiscal policy from being a tool for short-term economic stabilization. Since then, economic reforms have been limited, regressive, and formulated to address short-term needs rather than long term requirements. Also, public policy in Colombia has not been growth-oriented in key areas such as infrastructure and transportation.[br]

As a result, public investments have been decreasing for a long time and fiscal policy has been adjusted to match the limited investments. During the commodities boom in 2004-2007, when the GDP grew by 7.5% in 2007, there had been tremendous increase in expenditure. As a result, in the economic downturn of 2008-2009, fiscal stimulus was limited.

 

The Colombian government was forced to implement a counter cyclical fiscal policy in 2008-2009. This has been possible due to previous fiscal adjustments and better access to international markets. Although access to external finance helped the government to offset the economic downturn, the debt levels are still high and are beyond sustainable margins. The 2010 projections are also not looking encouraging enough. The deficits are expected to increase again along with lower revenue.

 

According to the Colombian Central Bank, however, the economy is likely to grow by 2-3% in 2010. This is attributed to its efficient management of the counter cyclical fiscal policy compared to its Latin American counterparts Chile and Peru. In addition, Brazil, Chile and Peru are expected to benefit more from Colombia’s economy in 2010 compared to the recovery in the Asian markets.

 

Colombia Economic Structure: Long Term Perspective[br]

Colombia can develop its fiscal policy outlook in 2010 and beyond by improving consistency in spending and revenue policies with macroeconomic stability. Colombia must align budget allocations according to fiscal policy priorities, and evaluate expenditures. Also, Colombia must adopt structural tax reforms to reduce tax exemptions, increase taxable base, and improve tax administration.

 

For the short term, Colombia must enforce rules to encourage fiscal savings and make sure spending evolves with long-term fiscal revenues. The government should also adopt and encourage social support programs, and stabilize mining and energy income.