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Mauricio Cárdenas

COLOMBIA - Finance

The Hard Jobs First

Minister of Finance and Public Credit, Colombia

Bio

Mauricio Cárdenas graduated from the Universidad de los Andes and obtained his PhD in Economics from the University of California, Berkeley. Before becoming Minister of Finance and Public Credit he was Minister of Mines and Energy. Between 2008 and 2011 he was Director of the Latin America Initiative at the Brookings Institute, and has considerable experience in the field of academia and economic consultancy.

"The goal of the current administration is to turn Colombia into a more competitive country with sustainable higher economic growth."

Colombia’s government approved a set of tax reforms late in 2012. How will this move the country toward prosperity and reduced inequality?

The government has designed an innovative set of policies to achieve national prosperity by improving targeted social spending and stimulating formal job creation. This will result in a reduction of income inequality, which currently stands as one of the highest in the world. Specifically, the recently approved tax reforms generated a cut in almost half of non-wage labor costs. This will increase the competitiveness of labor-intensive sectors, which previously carried most of the burden of payroll taxes. As a result, estimates are that the reform will lead to the creation of about 1 million new formal jobs and an increase in the size of the formal sector by about 10 percentage points. Furthermore, the reforms introduced a progressive schedule for individual income taxation. The new scheme consists of the National Alternative Minimum Tax (IMAN) and the Simple Alternative Minimum Tax (IMAS). The new tax regime is designed to be paid by employees earning over $35,000 per year. At the same time, workers earning less than $17,000 per year will be exempt from paying this tax. This will generate a reduction of close to 2 percentage points in the Gini inequality index.

At close to 10%, Colombia’s unemployment rate is one of the highest in the region. How is the government addressing this issue?

The unemployment rate has exhibited an important reduction in recent years. It currently stands at 9.6% as of December 2012, reaching the government’s goal of a single-digit rate. This has been accompanied by lower unemployment rates for heads of households, which in December 2012 stood at 4.8%, the lowest level in five years. However, unemployment in Colombia is still higher than that of its Latin American peers, and informality and inequality continue to be a problem. As such, some key programs are being implemented in order to further reduce the unemployment rate and to improve the quality of existing jobs. On the one hand, the recently approved tax reform that reduces non-wage costs for firms will have a positive impact on formalization and therefore on improving the quality of jobs. On the other hand, the 2010 job creation and formalization law aims to decrease the barriers of entry into the formal sector by reducing the transaction costs of hiring workers that belong to vulnerable groups, such as unskilled workers, women above 40 years of age, displaced populations, and young workers, among others. The law gives tax incentives to firms hiring people from these groups. These measures will reduce the long-term unemployment rate and bring it closer to the regional average, which currently stands at about 7%.

“The goal of the current administration is to turn Colombia into a more competitive country with sustainable higher economic growth.”

The peso jumped 10% last year and over the past decade soared 65%, more than any other emerging market currency. What measures are being taken to weaken the peso?

Over the last few years, there has been a real appreciation of the peso as a result of improved terms of trade, a larger volume of exports, and increased FDI. It is worth mentioning that this has been a worldwide phenomenon mainly derived from the weakening of the European and US economies. Thus, the behavior of the real exchange rate has been coherent with the dynamism of the Colombian economy as well as with worldwide economic trends. The expansion in the oil and mining sector’s production has been a challenge for fiscal policy in order to prevent this boom from becoming a destabilizing factor in the economy. In that sense, the contribution of the royalties system reform and the adoption of a fiscal rule on central government finances will be key. They ensure that the cyclical revenue from increased oil and mining production will be saved, both by the national and sub-national governments, thereby mitigating the real exchange rate appreciation and the risks of deindustrialization generated by the competitiveness loss in the labor-intensive tradable sectors. The main policy response could be described as increased public saving, efforts to reduce foreign borrowing, and other measures to cut production costs for the other tradable sectors in the economy to improve their competitiveness. That is how a mandatory surcharge on electricity was removed, resulting in a reduction in the average cost of production of about 5%; a tariff reform was implemented to reduce the average nominal tariff from 12.4% to 6%. This implies a reduction in the cost of raw materials for the manufacturing and agricultural sectors. The government has also been working on the delicate balance of communicating adequately the different challenges the oil and mining industries face, to avoid unnecessary pessimism in a very dynamic economy but to allow agents to build informed expectations. The recent drop in coal prices is a good example of where agents should modify their expectations, which includes also the future exchange rate. On the other hand, the Central Bank recently extended the program for daily auctions to purchase foreign currency, through daily purchases of no less than $30 million until May of 2013. This represents an increase from $500 million in average monthly purchases under the previous program to no less than $750 million under the current one. In this way the country keeps cumulating international reserves to maintain the reserves-to-GDP ratio compatible with the country’s financial depth and its growing participation in the global economy.

What other strategic sectors besides mining, oil, and gas will lead growth in the coming years?

The goal of the current administration is to turn Colombia into a more competitive country with sustainable higher economic growth, while increasing the wellbeing of the population. To fully achieve this goal, the government has developed the National Development Plan based on several key areas: globalization of the economy, infrastructure development, and access to better technology. On globalization, the government has implemented measures for the modernization and diversification of the economy through the signing of free trade agreements with the US, the eurozone, and several Asian economies. These trade agreements will increase the potential market of locally produced goods and will also enhance technology adoption and thereby productivity. We have also established a master plan for infrastructure that aims at the maintenance, rehabilitation, and development of the road network. Additionally, more than $20 billion is committed through public and private-public projects, which will substantially reduce the current infrastructure gap. Regarding innovation and technology, the government has increased the amount of resources allocated for science and technology, with the earmarking of 10% of total royalties for this specific purpose. This program aims to increase exports, create jobs, and train highly qualified labor. On the basis of these three components, we expect the high contributions of the agricultural, manufacturing, and services sectors will maintain Colombia’s growth rates around 5% or higher over the next five years.

How will Colombia take advantage of the current investment boom, and what measures will be introduced to further spur growth?

The improvement of Colombia’s macroeconomic and fiscal indicators has raised investor confidence in the country. Consequently, the Colombian investment rate has doubled over the last decade, reaching levels of 28% of GDP. This represents a record high and one of the top regional rates. Further evidence of this fact is the rise in FDI, which in 2012 reached a historical mark of more than $16 billion. This is a fundamental asset that will underpin the process of capital accumulation and the subsequent increase of the economy’s potential GDP. The dynamics of the so-called economic engines will continue to foster growth. First of all, the agricultural sector will continue with its crop-renewal plans. Second, an ambitious infrastructure expansion program and the dynamics of housing construction will strengthen this area. Third, the mining sector will continue its expansion due to increasing FDI inflows, which have already yielded an oil production of 1 million barrels per day. Finally, the new royalties’ distribution scheme has devoted large resources to science and technology, which will enhance the country’s productivity. The macroeconomic and fiscal balance, the high investment rates, and continued growth in the economic engines will keep the Colombian economy on its dynamic path of recent years, with an output growth reaching its potential.

What is your outlook for Colombia’s economy in 2013 and beyond?

The Colombian economy has achieved macroeconomic and fiscal balances, the most important pillars for building sustainable economic growth. Although the country is still exposed to a highly uncertain international environment, the economy rests on a solid foundation that permits countercyclical monetary and fiscal policies if external conditions worsen. On the supply side, economic growth during 2013 will rest on the dynamism of the financial, services, and mining sectors, which will grow at rates of around 5%. On the demand side, private and public consumption will play an important role. Households confidence continues at record levels, which guarantees that consumption will keep growing at high rates. On the public side, the implementation of the new royalty system, which will gain full steam during this year, will help stimulate demand in the public sector. In the medium term, we expect the Colombian economy to consolidate its position as the third largest economy in the region, with GDP tripling in size and output per capita doubling, thereby further raising current living standards while taking millions of citizens out of poverty. In 20 years we expect Colombia to be a fully developed, export-driven, and technology-generating economy with unemployment rates below 5%, an informal sector of less than 20% in size, and with equality levels comparable to those of OECD economies.

© The Business Year – February 2013

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