World Looks On

What will be the immediate and long-term benefits of Colombia’s potential accession to the OECD?

We work with our member countries to help them establish better policies enabling better lives for their citizens. The accession process provides Colombia with the opportunity to undertake a comprehensive diagnosis of its public policies vis-í -vis the OECD’s best practices. It is also an opportunity to accelerate structural reforms and upgrade legal and regulatory frameworks to increase their effectiveness. For instance, the OECD has recently provided in-depth comments and suggestions on different sections of Colombia’s next National Development Plan. But this is also a two-way road. Learning from peers is also an important aspect of OECD membership. Our member countries will also benefit from Colombia’s policy experience in dealing with its economic and social challenges.

What are the most fundamental regulatory reforms that need to be undertaken to promote inclusive growth in Colombia?

Colombia’s economy has done remarkably well over the past decade. Strong growth was driven by an oil and mining boom, and by foreign direct investment in the commodity sector and broad-based investment. This has allowed for a rapid catch-up in GDP per capita relative to OECD economies. However, income inequality and labor informality are still very high. Poverty has declined, but old-age poverty is significantly higher than in most Latin American countries. Fewer than 40% of all Colombians have an old-age pension and half of the elderly live below the national extreme poverty line. The government provides old-age income support for the poor through the Colombia Mayor program, but the support is well below the poverty line. An in-depth reform of the pensions system and the old-age income support is required to increase coverage and equity. The minimum wage is high relative to the average wage, pushing low-skilled workers, youth, and those in less developed regions into the informal sector. Keeping minimum wage growth close to inflation would help with tackling informality.

How should Colombia adapt to plummeting petrol prices?

The Colombian economy needs to diversify beyond the oil and mining sector. The fading commodity boom requires policy action to sustain growth. Investment beyond the natural resource sector is needed to create formal jobs and reduce the high levels of income inequality. A comprehensive tax reform is needed. The gradual elimination of the net wealth tax on businesses approved in December 2014 was a step in the right direction. However, more can, and should, be done. In particular, a gradual reduction in corporate tax rates, broadening the corporate tax base by eliminating special regimes and taxing capital income more at the individual level would boost investment and make the tax system more progressive. More investment in transport infrastructure, as well as reforms to improve the business climate, such as better enforcement of bureaucratic procedures, improved monitoring of institutions vulnerable to corruption, and further reducing barriers to trade and competition in product markets will also help.

What can be done to reduce tax evasion in Colombia, and how serious an obstacle is this to inclusive growth in the country? What other fiscal reforms ought to be prioritized in the country?

Widespread tax evasion is a significant drag on tax revenues. Official estimates of VAT evasion are currently at around 25%, amounting to around 2% of GDP. While part of the high evasion reflects the overall high informality of the economy, institutional weaknesses in the tax and customs administration are also to blame. Strengthening and modernizing the tax administration (DIAN) would help reduce tax evasion. Tax revenues comprise about 20% of GDP, which is low compared to other Latin American countries and the OECD average. Lower oil revenues and the expiration of a number of taxes are putting strains on the budget at a time when social and development spending needs are rising. Heavy reliance on corporate income taxes reduces investment. At the same time, the redistributive impact of taxation is reduced because most income and wealth taxes are paid by firms, rather than households. All of this leads us to believe that Colombia needs a comprehensive tax reform that boosts revenues and shifts the tax burden to support more inclusive and green growth. Tax loopholes and exemptions that reduce the tax base and mainly favor the rich should be reduced significantly.