Colombia

Colombian Economy

Overview
Economic Sectors
Macroeconomic Performance
Market Size
Export Promotion Policy
Special Trade Regimes and Export Incenives
Foreign Investments
Why to Invest
Links

Overview

Colombia has stood out in Latin America and the world for having a stable, sound economy and for meeting its international commitments.

Colombia's economy is one of the largest in Latin America, just behind Brazil, Mexico, Argentina and Venezuela. Colombia's open economy has favored economic growth. Colombia has one of the lowest external debts in the region and enjoys privileged access to international capital markets. In terms of wealth, Colombia could be classified as a middle-income developing country. The Colombian economy has followed a consistent course of self-sustained growth, which has only been interrupted under exceptional circumstances, such as the international economic crisis that affected most emerging markets in the late 1990s.

The country is rich in natural resources and has a skilled labor force, as well as a modern manufacturing and consumer economy. Well-endowed with minerals and energy resources, Colombia has the largest coal reserves in Latin America and is second to Brazil in hydroelectric potential. In 2000 oil reserves were estimated to be 2.6 billion barrels, equal to about 3.5% of the world total and potential reserves were possibly 10 times this volume. Colombia also boasts significant amounts of ferronickel, gold, silver, platinum, and emeralds.

Colombia has been making enormous efforts to improve its investment climate in order to attract long-term foreign capital and ensure the transfer of new technologies, modernize its economy and improve the efficiency of its domestic companies. Besides that, Colombia has introduced various incentives to promote and reactivate the economy in certain areas of the country through a series of measures involving transport, tax havens, foreign investment flexibility and special trade and customs regulations.

The last four governments have implemented non-discriminatory treatment policies for national and foreign investors, allowing the free transfer of profits and capital abroad. Restrictions to invest in certain sectors have been eliminated (except for activities related to national defense and security and the processing and disposal of toxic waste). Prior government authorization for foreign capital investment is no longer required. Adequate compensation is guaranteed if private property is expropriated in exceptional cases.

In addition to its bilateral investment agreements, Colombia is also a signatory to international investment protection agreements with the Overseas Private Investment Corporation (OPIC), the Multilateral Foreign Investment Guarantee Agency (MIGA) and the Convention on Settlement of Investment Disputes (ICSID).

The following incentives have been adopted to boost economic development and foreign trade:

There are twelve (12) Free Zones in Colombia, in Bogotá, Quindío, Aráuca, Cúcuta, Palmaseca, Buenaventura, Rionegro, Malambó, Santa Marta, Barranquilla, Cartagena and La Candelaria (Valle).
Tax incentives include customs duties and VAT exemptions on goods and services brought into the zones.
Foreign exchange benefits refer to the right to exchange, hold or negotiate foreign currency; the right to open domestic or foreign bank accounts in a foreign currency and a number of procedural facilities.
Colombia has nearly five million square meters of modern facilities designated as free zones.
Four currently depressed border cities (Buenaventura, Valledupar, Ipiales and Cúcuta) have been granted special status to encourage further exports and export-oriented
investment.
Other incentives include a special labor regime and/or investment in disaster areas ("Páez Law", in much of Cauca and Huila and the "Quimbaya Law", in the coffee-growing region that was struck by the 1999 earthquake).
Following advances in commercial policies, in the year 2000 the World Economic Forum ranked Colombia third in the world - after Ireland and Singapore - for its export promotion policies. This, in conjunction with the exchange rate adjustment, placed Colombia in 35th place in the internationalization factor. As a result of this and Colombia's active commercial policy, non-traditional Colombian exports in the year 2000 grew by 16.5%, a growth rate that was unprecedented during the previous 5 years and, more significantly, manufacturing exports rose by 20.1%. A similar trend was observed in 2001.

According to the National Planning Department, foreign investment in Colombia was six times higher during the first half of 2001 than the sum recorded for the entire year 2000.

Whereas in the year 2000 net foreign investment (non-oil) was US$288 million, such investment reached US$1,674 million between January and June 2001.

The highest foreign capitalization went into the financial sector (US$822.8 million) and communications (US$529.6 million). Mining and stone quarrying obtained US$246 million while investment in manufacturing was US$159.2 million. Others sectors benefiting from foreign investment were trade and hotel and catering, which received US$ 109.5 million.

Further information:
Colombian Central Bank
National Department of Statistics
System of Socio-demographic Indicators
Colombian Government Trade Bureau
Foundation for Higher Education and Development

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Economic Sectors

Colombia is among the six countries with the largest oil reserves in Latin America. The state-owned oil company Ecopetrol develops just 14% of these reserves, while the remainder is in the hands of private companies operating either independently, or in joint venture with Ecopetrol.

Many oil companies from different parts of the world have participated in developing this important economic sector through exploration and production activities in Colombia. Companies such as Petrobras, Petrobank, Transcanada, ExxonMobil, ChevronTexaco, BPAmoco, Oxy, Nomeco, Conoco, L.L. & E., Santa Fe Energy, Lukoil, Triton, Harken, Shell, Elf Aquitaine, Total, Repsol YPF, PetroCanada, Canadian Petroleum, Sipetrol, San Jorge, Teikoku and Ampolex have played an important role in helping the country to find its place as an oil exporter.

In 2003, total exports of crude oil and its derivatives exceeded US$ 3 billion which represents over 25% of total Colombian foreign sales. During the same year, the Foreign Direct Investment (FDI) flow in Petroleum sector was US$ 312 million which represents 20% of total FDI flow.

Gas
Colombia's gas reserves rank sixth in Latin America, amounting to 7,490 giga cubic feet (GCF). These reserves are found on the Atlantic Coast (36%) and in the inland (64%). Ecopetrol holds 3% of the country's gas reserves and the remaining 97% is explored under association contracts with private partners.

The country's natural gas demand has been growing in the residential, industrial, commercial and automobile segments. This increase is a result of the government's policy to encourage Colombians to substitute natural gas for oil, as it is less expensive, more environmentally friendly and safer than other fuels.

Coal
Colombian coal is attractive to international markets and represents 11% of the country's total export revenues. International demand for Colombia's coal comes mainly from Western Europe, Canada, Chile, the United States, Mexico and Israel. Colombia has the largest coal reserves in Latin America, consisting of high quality bituminous coal, which is relatively clean burning and has a sulfur content of less than 1%.

Coal reserves in Colombia are estimated at 6.4 billion tons and are distributed along the Andes Mountain Range and the Caribbean Coast. Cerrejon Zona Norte, located on the Caribbean Coast, is the largest coal mining operation in Latin America and one of the world's largest open pit coal mines. It contains at least 1 billion tons of reserves and produces over 1 million metric tons per month.

Software
The Colombian software industry is characterized by high rates of innovation and accelerated content development. Colombia offers important advantages for investing in the information technology sector: the number of qualified human resource has been growing, both in terms of quality and quantity; the country offers income tax deduction for investment in technology development projects and income tax exemption for new software products; and there are approximately 850 companies dedicated to software development, allowing for a great diversity of products and services. This increases the opportunities for the development commercial alliances, as well as outsource software development.

Telecommunications
The sector was dominated by a state company until the nineties, when Law 72 of 1989 and the 1991 Constitution allowed the private sector to participate in public utilities. The introduction of cellular telephones in 1994 brought foreign and domestic private capital into this sector.

Upgrading in the nineties has introduced some of the latest technology into Colombia, placing it almost on a par with industrialized countries and making telecommunications one of the most dynamic sectors of the economy. This sector is expected to grow significantly in coming years as new technologies come on to the market, long-distance services improve and new operators emerge thanks to privatization and/or company capitalization.

Textiles and Apparel
With over 100 years in operation, the textiles and apparel sector is one of Colombia's most important industries, accounting for 9% of total industrial production. The sector exports 30% of its products. The textiles and apparel industry offers multiple attractive advantages to the foreign investor:

Unilateral tariff preferences granted by the US's ATPDEA
Domestic production of key raw materials and inputs such as cotton, fiber, thread and fabric, among others
Vertical integration within plants that allows for several steps in the production process to be completed in the same production facility (design, fabric cutting, washing, embroidering, dyeing and stamping)
Potential opportunities derived from the forthcoming FTA with the US

Petrochemicals
The strength of Colombia's petrochemicals sector lies in the significant experience gained over the years, availability of resources needed for production, expansion of the local market, high production standards, and the rise in exports in recent years. The petrochemical sector contributed US$ 1.04 billion to Colombian exports in 2003 (8%).

Tourism
Colombia has a vast potential for tourism development because of its coasts on both the Atlantic and Pacific Oceans, a wide variety of geographical regions, numerous rivers, and abundant bio-diversity.

In terms of cultural attractions, Colombia has many colonial Spanish-style cities, countless historical, cultural, architectural and archaeological monuments, attractive coffee-growing and dairy farms, and several cultural and festival-type events like rodeos, cavalcades, bullfighting, theater festivals, biennial exhibitions, musical contests, craftsmanship exhibitions, beauty pageants, parades, carnivals, agribusiness shows, and many others.

Further Information:
Colombian Government Trade Bureau

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Macroeconomic Performance

During the last seventy years, the Colombian economy has been an example of stability. Until the late 1970's, the economy grew an average of 5% per year, slowing to below 4% in the 1980's. Despite this decline, Colombia's GDP outperformed that of most other Latin American countries, where the debt crisis crippled output levels. While Latin American countries grew an average of 1.1% in the 1980's, Colombia's average growth was 3.7%.

Liberalization of the economy in the 1990's laid the foundations for the economy to exceed its historic growth levels. As a result, between 1992 and 1995, the economy grew an average of 4.7% per year. However, throughout the period 1996-1999 internal and external factors diminished this outstanding growth and in 1999 the GDP contracted 4.2%. Since 2000, the economy has rebounded, growing 2.9% in 2000, 1.5% in 2001, and 1.8% in 2002. The government is implementing economic reforms to ensure the return of high and sustainable growth. The country's economic stability, fiscal adjustment program, security and defense strategy, and government credibility, ensures continued growth.

According to the National Department of Statistics (DANE), the Colombian economy grew 3.95% in 2003, handily surpassing the estimated growth for several countries in the region, such as Chile (3.2%), Bolivia (2.5%), Mexico (1.2%) and Brazil (0.1%), and even exceeding Latin America's overall growth (1.5%). By the end of 2004, the government expects an economic growth of 4%.

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Market Size

Colombia has the largest population in the Andean Community, ranking third in Latin America after Brazil and Mexico. The current population of approximately 45 million is composed primarily of young people, with 78% of the population under age 45.

Colombia has the fourth largest economy in Latin America, after Mexico, Brazil and Argentina, and with US$ 96.6 billion it represents 5% approximately of Latin America's total GDP. According to the United Nation's Human Development Report 2004, Colombia's per capita GDP (US$ 6,400) is almost in line with Latin America's average (US$ 7,200).

Market Access
Strategic partnerships with major economies have provided expanded market access for Colombia's products and services. Indeed, through major integration agreements, Colombia has access to a 1.11 billion people market outside of the country.

Since 1991, Colombia has been engaged in an ambitious modernization and economic internationalization process that includes several trade agreements (Group of Three G3, Andean Community, Chile, Mercosur, Caricom) and Tariff Preferences (ATPDEA, Andean GSP). These agreements create an export platform that provides Colombia easy access to the US, European and Latin American markets.

Colombia has also been a signatory member to the General Agreement on Tariffs and Trade (GATT) since the mid-1980's and at present belongs to the World Trade Organization (WTO). As a WTO member, Colombia has legislation on safeguards and countervailing, and anti-dumping measures, consistent with international standards.

In April 2004 the negotiations of the Free Trade Agreement (FTA) between Colombia, Ecuador and Venezuela (members of the Andean Community) and Brazil, Argentina, Paraguay and Uruguay (members of MERCOSUR), were closed. The FTA will boost the free flow of goods and services and will reduce or eliminate tariff and non tariff barriers, thus leading to substantial growth in Colombian exports.

Finally, it is expected that the FTA negotiations between the Andean Community and the United States will be completed by mid 2005. The rounds of negotiations, which began in May of 2004 deal with subjects such as markets access, agriculture, environmental, institutional and labor issues, competition, state purchases, cooperation and strengthening of commercial capacity, dumping, investments, copyrights, financial services, telecommunications, cross border services, and problem solving mechanisms. With the FTA, Colombia will be able to optimize and improve its competitive advantages, be stronger to enter the North American market, and substantially increase Foreign Direct Investment (FDI).

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Export Promotion Policy

Liberalization of the economy also brought significant changes to the country's export promotion policies. Promotion by sectors and subsidized credit were abandoned, and a system based on horizontal incentives that concentrate mainly on providing information on markets and business opportunities, was adopted.

In the search for a stronger productive sector oriented towards the international market, the Strategic Export Plan 1999-2009 was created. This plan has five strategic objectives, as follows:

Increasing and diversifying the supply of export goods and services to match world demand
Promoting and increasing foreign investment to foster exports, directly or indirectly
Increasing productivity and making exports competitive
Regionalizing exports
Developing an export-oriented culture

As a result, Colombian exports have widened, gained competitiveness and expanded into new markets.

Special Trade Regimes and Export Incentives
Various mechanisms operate in Colombia to promote investment and export activity through a series of special incentives, such as:

Free Trade Zones (FTZ): Geographic areas established to promote industrial processing of goods and services, primarily for export. Free trade zones in Colombia offer a number of tax incentives, foreign exchange benefits and procedural incentives.

Special Economic Export Zones (SEZ): Cities with a special regime for new export-oriented businesses. The main purpose of this regime is to attract investment in order to strengthen national export volume by creating special conditions favoring the entry of private capital to the zones, facilitating the exportation of Colombian goods and services. SEZ mainly provide advantages in labor and tax law.

Special import-export system (Vallejo Plan): System that grants a partial or total custom duty and tax exemption on import of inputs, raw materials, intermediate or capital goods and spare parts, when destined to the production of related export goods or services.

Large Users (ALTEX): Special customs benefits for producers that achieve a 30% export quota on total sales and/or whose previous year exports amounted to a minimum of US$ 2 million.

As a result of Colombia's active commercial policy, exports have been growing. During the first half of 2004, exports grew 16%, from US$ 6.2 b to US$ 7.3 b. The better export performance can be explained by the 14% increase in external sales of traditional products (US$ 3.4 b), where the rebound of ferronickel exports, coal and coffee are noteworthy. Non-traditional exports recorded a 17% increase (US$ 3.9 b), as a result of higher sales of industrial sector, particularly the textile and apparel sector, and machinery and equipment.

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Special Trade Regimes and Export Incentives

Various mechanisms operate in Colombia to promote investment and export activity through a series of special incentives, such as:

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Foreign Investment

Over the past decade, Colombia has made considerable progress improving its foreign investment legislation. The country lifted controls on remittance of profits and capital, and gave foreign investors the same rights as national investors. It also allowed foreign capital to enter without prior authorization from the government.

Colombia has signed some foreign investment protection agreements, such as the Overseas Private Investment Corporation (OPIC), whose purpose is to encourage US investment abroad; the Multilateral Investment Guarantee Agency (MIGA), multilateral institution that offers guarantees against non-commercial risks; and the International Centre for Settlement of Investment Disputes (ICSID), treaty created to provide a mechanism for international conciliation and arbitration.

According to the Central Bank, during the first quarter of 2004, Foreign Investment (FI) showed a 116% growth, from MM (million) US$ 328 to MM US$ 709, as compared to the same period of 2003, primarily due to the good performance of the Foreign Direct Investment (FDI), which grew by 74%, from MM US$ 314 to MM US$ 546. Likewise, Foreign Portfolio Investment (FPI) increased from MM US$ 14 to MM US$ 163, a growth of 1,046%.

During the first quarter of 2004, Mining/Quarrying was the most active sector with MM US$ 312, equivalent to 57% of the total FDI flow, followed by the Petroleum Sector, with MM US$ 102 or a 19% share of the FDI. These two sectors accounted for 76% of the FDI., an increase of 22% combined share, as compared to the first quarter of 2003.

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Why to Invest

Overview

Colombia - One of the countries that has improved the most in conditions for investors.

Colombia is one of the two countries of the world where the conditions to create companies and make businesses have improved the most, according to a report of the World Bank that analyzed the conditions of 145 countries and the changes that each has undergone with the purpose of becoming more attractive for investors.

The report, known as 'Doing Business in 2005: Obstacles to Growth', is sponsored by the World Bank and the International Finance Corporation and points out that Colombia, along with Slovakia, are the two countries of the world that have advanced the most in this last year in terms of improvement of conditions for investors. Colombia has been qualified as the second quickest country in implementing reforms.

More Grow

According to 'Doing Business in 2005: Obstacles to Growth', these reforms might contribute in the generation of work opportunities for women and young people, incentive companies to enter a formal economy, and promote economic growth.

The report estimates that the improvement of these conditions is associated to the additional growth in 2.2 points in the annual economic growth because companies loose less time and money in unnecessary regulations, and assign more resources to the production and commercialization of their products. Moreover, governments expend less in inefficient regulations and more on social services.

The document assures that the register of new companies in Colombia rose 16% between 2003 and 2004, after simplifying the requirements of the income.

The time that was need to install a company reduced from 60 to 43 days, thanks to a call center.

The 10 most active countries in the implementation of reforms destined to improve investment were: Slovakia, Colombia, Belgium, Finland, India, Lithuania, Norway, Poland, Portugal, and Spain.

Challenges

Despite the positivism of the report, 'Doing Business in 2005: Obstacles to Growth', it indicates that in poor nations it is two times more difficult to start business than in rich countries. There is also less protection of intellectual property.

Michael Klein, Vice-president of the Private Sector Development of the World Bank, referred to the problems that poor countries would have if they do not improve investment conditions.

"Poor countries that are in need of new companies could be even more distant from rich countries, which are simplifying regulations and transforming the atmosphere of investments into a more favorable one," he affirmed.

On the other hand, according to Doing Business, property registries were first developed to help raise tax revenue. What was good for the tax authorities has since proven to be good for strengthening property rights - the registries strengthen incentives to invest, facilitate trade, and expand access to credit. New indicators cover the steps, time and cost to register property. Measures of the legal provisions that strengthen property rights and the efficiency of property registries are also developed.

Oportunities

'Doing Business in 2005: Obstacles to Growth' is the second in a series of annual reports investigating the scope and manner of regulations that enhance business activity and those that constrain it.

New quantitative indicators on business regulations and their enforcement can be compared across more than 130 countries, and over time. The indicators are used to analyze economic outcomes and identify what reforms have worked, where and why.

Doing Business constructs two sets of indicators on the regulation of operations. One measures the steps, time and costs of complying with licensing and permit requirements for ongoing. The other assesses the enforcement of regulations through two of the most common types of inspections-labor and tax.

Investing in Colombia is good business. Why? Here follow some of the reasons:

Colombia offers preferential access to a market of 800 million consumers in the European Union, USA, Mexico and the Andean Community for a number of products.
Colombia's excellent geographical position makes it ideal for strategic partnerships and joint ventures given that Colombia has free trade agreements with many countries in the region and the world and enjoys preferential tariffs to many markets.
Colombia's domestic market is the third largest in South America and ranks second among all Spanish speaking countries in the region.
A high urban population implies significant purchasing power for consumer goods.
Colombia is self-sufficient in gas, energy and natural resources.
Colombia's Special Export Zones on the Atlantic and Pacific coasts provide exemption from remittance tax, import duty and, until 2002, from income tax.
Colombia has a modern, simplified customs regime.
Colombia's long tradition of democratic stability is a source of confidence for investors.
Colombia provides extensive investment opportunities in telecommunications, mining and gas, transport, manufacturing and agriculture. There are no provisions for expropriation by the government without going to court. Following constitutional reform, such legislation was abolished as it discouraged foreign investment.
Colombia has subscribed and is entering into further investment promotion and protection agreements with several countries in the world.
Colombia offers a competitive labor force (labor costs are lower than in other countries of the region).
Colombia is open to international markets. It is a member of the World Trade Organization, duly fulfils its functions in this major multilateral forum and plays an active part in all its negotiations.
Colombia has a stable economy and is very rich in natural resources.
Some of the largest oil companies in the world, including BP, have investments in Colombia. In 2001 Colombia signed 32 new oil exploration contracts whereas previously only 8 to 10 contracts had been signed in a single year.
Colombia offers investors major trade opportunities. In addition to a domestic market of 42 million inhabitants, Foreign markets for Colombian goods are expanding following Latin American integration and preferential schemes in the Western Hemisphere which altogether account for 500 million consumers. In addition, the tariff benefits it enjoys in the European Union extend its preferential scope even further.
Colombia belongs to the Latin American Integration Association (ALADI/ALAIA) and the Andean Community (CAN). Colombia has free trade agreements with Mexico, Venezuela, Chile and CARICOM. At present, it is negotiating a far-reaching agreement with MERCOSUR and one with Central America and playing an active part in the FTAA negotiations