Will Peace in Colombia Boost Growth?

In late 2015, I asked both Colombian President Juan Manuel Santos and Finance Minister Mauricio Cárdenas one simple question – what single policy could best generate sustainable growth? In separate interviews, both answered simply and without hesitation: “Peace”.  

Colombia has faced brutal civil conflict with FARC rebels for the last five decades. The violence killed over 200,000 and left seven million people displaced; it not only ripped families apart, but pulled at the fabric of the country itself, at various points leaving massive tracks of land off limits to the state.

“Peace alone would lead to roughly 1.5 and 2 percent annual growth for life,” stated President Santos. Finance Minister Cárdenas agreed, sighting Colombia’s recent strong economic performance despite years of ongoing civil conflict. “We can assume that the country will be even more successful in a peaceful environment.” (Full interview online here)

On August 24, 2016—almost a year to date after our interview—President Santos announced just such a peace. After years of dialogues with rebel leaders in Havana, Cuba, his government has come to terms of an agreement that would start with FARC guerrillas submitting their arms to a United Nations team, and would feature the group’s reintegration into society.

So can the rapid growth promised by the government be far behind?

Colombia certainly has built economic momentum: It has averaged 4.6 percent annual growth over the last ten years, despite the Global Recession of 2008-09 that threw so many economies off course. Colombia’s macroeconomic foundation has matured rapidly – sure, it faces currency fluctuations like many emerging markets at the moment, but it has thus far withstood market turbulence, and remains dedicated to a floating peso. Inflation has averaged a modest 3.3 percent over the last five years. With the civil conflict waning, investment has become safer and more attractive, averaging 23.8 percent increases annually over the last decade (Source: IMF Data).

In short, the country is a Pacific Puma – our nickname for the most exciting and dynamic economies in Latin America at the moment.

Nevertheless, it faces important challenges. For example, one critical hindrance is infrastructure: Colombia is rich in natural resources, but getting those resources to port can be as expensive as shipping them to Asia. A dearth of quality roads and ports has prevented Colombia from fully taking advantage of the free trade agreements it has signed with the EU, US and various Asian countries.

Can a peace agreement with FARC rebels really address these deep-seated problems?

The answer is maybe. The Santos Administration argues that one reason infrastructure remains so underdeveloped is that the conflict with rebels made long term projects – such as building roads in rural regions – too risky. It’s tough to build schools where you can’t even send soldiers. The peace agreement calls for tens of billions of dollars of critical development investment in regions such as Cauca and Choco that have been off-limits due to the violence.

A peace agreement could also lead to more inclusive growth. Because the Colombian left has been so closely affiliated with FARC, it has been unable to consolidate its voice in the legitimate political sphere: Colombia is one of the few Latin American countries that has not had a truly left-leaning president.

As a result, both urban and rural poor—and unfortunately Colombia has a lot of both—can feel that their interests are not represented in the government. Whether someone agrees with the left or not, we can all agree that when people feel left out of the system, they are more likely to seek alternative means to acquire power—in the case of Colombia this meant grabbing a riffle and taking to the hills or jungles to join FARC. Peace could lead to more inclusive democracy, which would, in theory at least, render more inclusive growth.

This geographical, political and economic unification of the country in a peaceful atmosphere leads many, such as President Santos and Finance Minister Cárdenas, to believe that the current economic momentum would only accelerate.

But the plan is not foolproof, and Colombia may not reap immediate benefits. For one thing, this particular peace agreement is by no means unanimously popular. Nearly all Colombians are fed up with the war, but many do not support provisions in this agreement that call for “community service” and “restricted movement” – but not jail time—for those who admit to human rights atrocities. Nearly everyone in the country has faced the consequences of fifty-two years at war, and the idea that those who perpetuated that violence will now be granted amnesty and political legitimacy is unacceptable to many.

President Santos has asked congress to convene a national plebiscite vote on October 2^nd, where Colombians will have a chance to vote for or against the proposed peace deal. Should a majority vote against the pact, this would presumably force President Santos back to the negotiation table with FARC leaders, and would indicate a stinging rebuke to a peace years in the making. At the moment, polling for the vote remains tight, and the outcome impossible to predict.

Yet, even if the peace pact is approved, much hard work remains. Through the decades, FARC has financed its activities through illegal, though lucrative endeavors such as cocaine smuggling, extortion and kidnapping. FARC’s political leaders may respect the peace, but it remains to be seen if the “gangster” element of the operation respects the Havana accord.

When I raised this issue with Colombian Defense Minister Luis Carlos Villegas, he agreed, suggesting that a peace agreement is a first step, not a last step. “It is a critical first pass,” he added. “But ultimately it is not sufficient for definitive peace.”

As we wrote some months ago, Colombia is at a crossroads. It appears to have chosen the right direction, but the road may be a little longer then people thought.