Colombia finds the price of peace

By:
Rob Dwyer
Published on:

Wealth tax proposed; Finance minister sensitive to FDI fears

Mauricio Cárdenas, Colombia’s finance minister, says the country won’t pay for peace with its fiscal stability.

Private sector estimates on the cost of a peace agreement with the rebel faction Farc – which has yet to be finalized – will be as high as 3.8% of GDP. While Cárdenas says that the costs are yet to be determined, because the peace accord is not yet finalized, he says there will be no change to the financial stability law that has underpinned Colombia’s recent growth.

“We are sticking to the fiscal rule, which we think is fundamental for our economic credibility,” he says. “The framework we have has allowed Colombia to gain better access to the financial markets – we have a higher credit rating than we had four years ago and the interest we pay on our bonds is much lower so the fiscal rule is something we will defend.”

Colombia is working on a progressive tax reform to tackle inequality. The proposals include a wealth tax – with a 1.5% annual levy on net assets and a proposal to increase corporate tax to 37% from 34% for companies earning more than $500,000 in profit.

“We are not afraid about using the word ‘redistribution’ in Colombia,” says Cárdenas. “I know that word is banned from political discourse in countries like the US but for us it is a necessity.”

The proceeds will be used in a way that is “consistent” with the peace process, he says, such as investing in the rural sector, education and childhood development. However, the proposed tax reform is independent of the direct costs that will come from the peace agreement.

We estimate that a peace agreement could boost growth by around 0.3% per year, while implementing the peace accord would cost at least 1.0% of GDP per year

Francisco Rodriguez, BAML
According to Francisco Rodriguez, Andean economist at Bank of America Merrill Lynch, the financial costs of implementing the peace accord will be large. “We estimate that a peace agreement could boost growth by around 0.3% per year, while implementing the peace accord would cost at least 1.0% of GDP per year,” he says. “The cost could rise by as much as 3.8% in the case of a very ambitious programme. Large scale land reform could be very costly given the country’s high inequality in land ownership and the large number of internally displaced people.”

Cárdenas disputes Rodriguez’s assertion that the benefits of the peace accord were “cashed yesterday” and will lead to only 0.3% added growth. “There have been many studies of the [economic benefits of the] peace process which project added annual GDP of between 1% and 2%,” he says. “So we are using a conservative 1% assumption about the additional growth that will come from growth in agriculture, energy, mining and tourism.”

However, Cárdenas is less willing to estimate the costs of the process. “The truth is no-one really knows because the peace process hasn’t been finished and nothing is agreed until it’s all agreed,” he says. “So we don’t know. But when it happens – and I hope that it happens soon – we will create a formula to pay for whatever price tag comes with the peace process. And the formula has to combine international co-operation – and include more taxes – and we will have to combine all these forms to pay for something that I see as a temporary investment, for a number of years, but it will pay off later on and will help Colombia grow faster.”

Cárdenas is very sensitive to concerns that additional taxes may deter FDI from the country. “Our economic model relies strongly on private investment so we need to make sure that remains robust,” he says. “Today the investment rate in Colombia is 30% of GDP and that is keeping Colombia growing faster than anywhere else in the region. So we will be very careful in figuring out a way to pay for peace without implementing any taxes that compromise our rate of private investment.”