Will A Peace Agreement Boost Trade And Investment In Colombia?
The Revolutionary Armed Forces of Colombia — known in Spanish as FARC – have reached a final peace agreement with Colombian president Juan Manuel Santos, following a ceasefire pact that the two sides reached in June. Although the peace agreement, which marks the end of the last major armed conflict in the Americas, will require a referendum subject to public approval, the accord has already been viewed as an historic step towards ending a brutal war that went on for a half century.
The FARC guerrillas, established during the Cold War as an “anti-imperialist,” Marxist-Leninist peasant force, have been funded through kidnapping, ransom, drug-trafficking and other criminal activities. The peace agreement was expected to be formally announced August 24 from Cuba – where negotiations began in 2012. If it is ratified by the Colombian people, the initial phase of the FARC’s demobilization program is expected to take about six months. At the end of that period, all FARC members will have been demobilized and disarmed, and will either take part in a reintegration program or a criminal trial, in the case of those who are accused of human rights violations. In the past, the FARC has been classified as a terrorist organization by the governments of Colombia, the United States, Canada, Chile, New Zealand and the European Union.
The peace agreement comes at a time when Colombia is looking to attract the foreign investment it needs to cement its status as one of Latin America’s emerging free-market, middle-income nations. Despite the ongoing civil war, Colombia’s per capita GDP steadily expanded from $1200 in 1980 to $6,060 in 2015, according to data from the World Bank. In recent years, Colombia’s progress stood out in stark contrast with the disastrous decline in neighboring Venezuela, whose government has pursued an anti-capitalist course under late president Hugo Chavez and his successor, Nicolas Maduro.
More recently, however, Colombia’s GDP growth rate has declined to about 3% in 2015, compared with 4.4% growth in 2014, because of slumping prices for its exports of crude oil, and weaker demand from China for its other commodity exports. If history is any guide, a successful completion of the peace process will have a major positive impact on Colombia’s growth, says Wharton management professor Mauro Guillen, who is also director of The Lauder Institute. “When you take a look at parts of the world where there was a protracted conflict, including terrorism, and then there was a peace process, there has been an economic boom” after the peace. The most recent such case involved Northern Ireland, where the Good Friday agreement with the Republic of Ireland was signed in 1998. “Since that agreement nearly 20 years ago, Northern Ireland has been doing really well. And the removal of the border between Northern Ireland and the Republic [of Ireland] has essentially spurred economic activity…. This is going to be huge for Colombia in terms of attracting investment.”
“This is going to be huge for Colombia in terms of attracting investment.” –Mauro Guillen
According to a study by the DNP, the Colombia government’s planning department, a peace deal with FARC rebels could triple annual foreign direct investment in Colombia to $36 billion, and boost its annual economic growth rate to 5.9%. A successful peace agreement is also expected to boost consumer confidence and domestic consumption. Increased foreign investment would enable the country’s industries to become more competitive in global markets, according to the study. To reach those conclusions, the DNP study compared economic data from 36 countries that had overcome armed conflict. Guillen adds that another very important aspect of the peace settlement will be its positive impact on Colombia’s brain drain. “A lot of well-educated people in Colombia left the country over the last 30 years because of the guerrilla war,” and other social disruptions, such as the prolonged “security crisis” surrounding battles against Colombia’s notorious drug cartels.
According to Bill Burlew, president of the U.S.-Colombia Business Partnership, an association of two dozen major corporations that invest there, “Colombia is looking to attract more investment in technology, and you see offices of Facebook, Google, Oracle and others there.” Moreover, with the reduction in street crime, “Tourism is doing wonderfully well. For example, Four Seasons is building a hotel in Cartagena,” a scenic Caribbean port city that has become a favorite destination for upscale travelers, who no longer cringe with fear at the very mention of the country’s name.
More Challenges Ahead
However, Burlew is more cautious about the prospects for attracting enough new foreign investments. “It really remains to be seen,” he says. “On the surface, you would say that this is a very good thing because we have signed this … peace deal. But Colombia is going to face a lot of challenges as a result of it — and they are not easily solved.” For example, Colombia faces the prospect of a large number of displaced people, which will require spending the government likely can’t afford. “That means taxes are probably going to go up,” Burlew notes. “They are already talking about that, which means that some corporations that invest there may be paying more” to do business in Colombia.
“In today’s global economy, everything is an opportunity cost,” Burlew adds. “In the meantime, because the price of oil has fallen, and the Colombian peso has fallen to about 3000 pesos to the dollar, compared with 1800 pesos to the dollar in 2012. That is great if you are an American tourist going there now; it’s a lot cheaper. But [the Colombian government] will have a lot of challenges fiscally and in their budget.”
In addition, energy companies are being very cautious about Colombia, Burlew says. “They need to make new discoveries; the cost of doing business there can be pretty high. There is a lot of local opposition — the fracking debate has come to Colombia. And there are some antiquated rules about gas and what they can do with it there.” Another challenge is stronger competition from other emerging countries, such as Mexico, whose governments are opening up their markets further to foreign investment. “Foreign investors are asking where should they put their dollars,” Burlew notes.
Guillen cautions that it is very important that both sides — the government and the rebels — stick to the agreement. A major challenge in peace processes such as this one is that “there is always mutual suspicion about the motives of the other party, and to what extent it is committed to the peace process. That is the most significant potential problem.” In one recent example, on August 10, a bomb exploded close of the town hall of El Retorno, a rural municipality in central Colombia surrounded by coca plantations, raising public fears that a recently split dissident group from the FARC is carrying out guerrilla attacks.
“In today’s global economy, everything is an opportunity cost.” –Bill Burlew
In another troubling sequence of events, Colombian authorities are currently in the process of taking control of land that was obtained due to mass displacements as a result of paramilitary violence in the 1990s and early 2000s. According to government officials, a disinformation campaign by