A combination of responsible fiscal control, economic diversification and social inclusion make for a resilient economy. While Colombia has made significant strides towards achieving such equilibrium there is still headway to be made, with issues such as the country's stubbornly high unemployment rate, social inequality, and the threat from narcotraffickers still to be tackled.

Resilience is probably the most sought-after attribute for an economy today. What is resilience made of? In my opinion, it has at least three basic components.

First, a consistent fiscal discipline reflecting deep agreements within those who govern a country. The following conditions should be met: the unwritten contract between the government and its congressional coalition has to abide with responsible budget appropriations, while within the presidential cabinet, the prevailing equilibrium should respect fiscal sustainability at every point in time.

Second, the productive sector should have the capacity to adapt to ever-changing international conditions, either of export and import prices, or technological, marketing and logistic requirements. As a result, export volumes will expand and imports will not overflow domestic markets. Product and market diversification has become the metric of economic success for emerging economies.

Third, the economy should be able to create jobs at a rate that matches the increase in labour participation, and reduce its employment rate to socially admissible levels. Similarly, a steady reduction of its poverty rate should be compatible with admissible levels of social impatience. Here, the size and frequency of economic cycles present the biggest challenges.

One could think of more conditions for solid economic performance, but these three, pertaining to politics, productivity and social improvement seem demanding enough. How can we judge the resilience of Colombia's economy vis-à-vis these standards?

A decade of progress

In 2011, the Colombian congress approved a fiscal sustainability constitutional reform and a strict fiscal rule, and agreed that budgets are not to be augmented within the fiscal year. As a result, revenue overperformance from high commodity prices and record tax collection reduced the fiscal deficit from 3.6% to 1% of gross domestic product (GDP) within two years. Public debt declined from 40% of GDP 10 years ago, to 25%.

Under the fiscal rule, the fiscal deficit should turn to surplus in 2016, and net public debt should stabilise at less than 20% of GDP. Public savings derived from low interest payments will reach 1% of GDP.

A constitutional reform of the royalties distribution system was approved by the Colombian congress in mid-2011. This reform seeks to distribute revenues generated by the exploitation of natural resources in a more equitable way, which in turn will allow the development of every region in Colombia. The system favours investment in infrastructure projects, which should be carefully planned and reviewed in order to guarantee that they will have a positive impact on the Colombian population. In addition, a significant share of monies will be saved in years in which the country faces production (and price) booms, and will be spent in years of deceleration, contributing to the fiscal stability of the country.

Simultaneously, energy prices and tariffs were reduced, in order to dampen costs in productive sectors. Free-trade agreements have been signed with the US, Europe and almost every country in the Americas. Colombia is negotiating new ones with Asian economies. 

Social improvements

South-south trade, especially within Latin America, has quadrupled within the past two years. President Juan Manuel Santos' administration has launched an ambitious 10-year, $80bn plan to improve the country's infrastructure, which is hindering the progress of the country's economy. Colombia's large multilatinas companies have taken advantage of the international crises to purchase valuable assets abroad. 

Foreign direct investment has stabilised at about 4% of GDP, and goes to many productive sectors aside from oil and mining. Colombia has enormous potential in both agri-business and manufacturing. The economy is responding well to the productive challenge of the global economy.

With respect to the challenge of social inclusion and the creation of a middle class, Colombia's poverty rate has fallen from more than 60% 10 years ago to 34% today. Innovative social programmes are helping each poor family to 'graduate' from poverty, and our middle class has doubled in size in the past decade to reach almost 50% of the population.

Our biggest challenge is to formalise goods, services and labour markets, and to stabilise unemployment – a stubborn indicator that has fluctuated between 12% and 14% since the mid-1990s – at less than 10% of the labour force. Our goal for 2020 is a 6% unemployment rate and a 25% poverty rate.

Political side winds

Colombia's prospects for the present decade are good. What can derail such forecasts? Politically, the risk of colourful extreme left governments seems small, given the country's long democratic tradition and institutional strength. However, the institutional threat of protracted narcotrafficking in a country that has 30% of its territory covered with rainforest cannot be overlooked.

The effectiveness of the military in fighting guerrillas and paramilitaries is a dynamic issue. The 'bad guys' pursue profitable businesses, something that ignites creativity and innovation. The technological advances in coca cultivation, and transportation – such as using submarines to get cocaine from the coast's shore to the ships that transport it to the consumer markets – and money laundering are continuous and substantial.

As in Mexico, Colombia has well-financed mafias that require equally well-funded policing and judicial systems. The country has invested heavily in law enforcement, increasing its security expenditure by two percentage points of GDP during the past two decades. No other Latin American country has made a comparable effort. The morale of the troops and police forces also depends on political commitment. During the past 10 years such resolve has strengthened, the funding has increased, and popular and political support has solidified.

Domestic competitiveness will depend on our adaptability to international demand and technological progress, production diversification and governmental efficacy. The track record on these three criteria is not bad, but also not good enough. These are probably the key performance criteria for this decade.

Ironically, Colombia commands unprecedented resources, stemming from high commodity prices and good economic performance. This liquidity should serve to tackle deep-rooted social problems. The biggest challenge of my generation of policymakers is social fairness. Latin America is a resource-rich continent, plagued by inequality. 

Room for improvement

Policy-makers across the region have learned the hard way how to manage natural resource bonanzas. The lessons from 50 years of failures, as well as recent successes, are apparent for everyone to learn from. The underpinnings for sustainable growth have been deployed, with higher savings and investment rates, and better governance of public finance and public administration. 

Those are the achievements of the past two decades. The next two decades should witness fairer income distribution and a substantial reduction of poverty rates. These new goals have already received serious attention. The development of a welfare state à-la Latin America is under way, which seeks to provide universal coverage of healthcare, education, pensions, unemployment insurance and poverty alleviation. The key question will be how to maintain the fiscal sustainability and political feasibility necessary to establish high-quality universal coverage of social services and other public goods.

The most important input for social inclusion is avoiding macroeconomic crises. Big mistakes abound in Colombian and Latin American economic history. They have cost entire decades of economic stagnation and social suffering. Our main task as macroeconomists is avoiding them. And the mother of all crises is fiscal profligacy and asset price bubbles, especially in housing.

Colombia’s economic institutions are fairly well prepared for avoiding the big and costly economic mistakes of the past. Either in banking regulation and supervision, central bank competence, judicial independence or in public policy design, there is a tradition of mostly competent, honest public officials. 

The private sector has renovated its technological capacity based on savings rates of about 25% of GDP, and investment rates close to 28% of GDP. There is enormous capacity for expansion in the financial and capital markets, which currently account for less than 50% of GDP, a much smaller proportion than in some other Latin American countries. Similarly, financial inclusion and mass consumption should expand at least for the next two decades. 

Colombia is enjoying the virtuous circle of social and economic advance, and there are serious reasons to believe that such promise can be kept for two decades more.

Juan Carlos Echeverry is Colombia's minister of finance and public credit.

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