Colombia's economy is 61.9 percent free, according to our 2008 assessment, which makes it the world's 67th freest economy. Its overall score is 2.3 percentage points higher than last year, reflecting improved scores in seven freedoms, including investment and monetary freedom. Colombia is ranked 15th out of 29 countries in the Americas, and its overall score is equal to the regional average.Colombia scores moderately well in business freedom, investment freedom, and financial freedom but is average in most respects. That it maintains relatively robust institutions in spite of a violent subculture is a sign of promise for the future.
Labor freedom and property rights score more poorly. Despite nominal openness to foreign investment, regulations are complex and uncertain. Rule of law is uneven. Business contracts are generally respected, but judicial corruption makes legal transparency difficult.
Background:
Colombia is one of South America's oldest continuous democracies. In the 1980s, leftist insurgents and paramilitary vigilante groups took up drug trafficking, killing and marauding throughout much of the countryside. President Alvaro Uribe, re-elected by a landslide in May 2006, has ended years of fruitless appeasement and is enforcing the law against both rebels and paramilitaries. He has also moved to demobilize illegal rural armies. The lives of ordinary Colombians have improved dramatically, and a safer business environment has helped to cut unemployment by at least 5 percentage points in the past five years. Uribe's next challenge is to reduce the burden of government so that the economy can grow faster. Currently, it is heavily dependent on exports of petroleum, coffee, and cut flowers. A pending trade agreement with the U.S., if approved, should encourage economic diversification and stimulate growth.
Business Freedom - 72.5%
The overall freedom to start, operate, and close a business is relatively well protected by Colombia's national regulatory environment. Starting a business takes an average of 42 days, compared to the world average of 43 days. Obtaining a business license requires less than the world average of 19 procedures and 234 days. Closing a business is relatively easy. Some bureaucratic procedures have been simplified.
Trade Freedom - 70.8%
Colombia's weighted average tariff rate was 9.6 percent in 2005. Despite progress in dismantling non-tariff barriers, bureaucracy, non-transparent regulation, import bans and restrictions, restrictive import licensing, price bands, issues involving the protection of intellectual property rights, non-transparent customs administration and valuation, state export promotion programs, and corruption add to the cost of trade. Consequently, an additional 10 percentage points is deducted from Colombia's trade freedom score.
Fiscal Freedom - 72.8%
In December 2006, the top income tax rate and the top corporate tax rate were reduced to 34 percent from 35 percent. Other taxes include a value-added tax (VAT) and a financial transactions tax. In the most recent year, overall tax revenue as a percentage of GDP was 20.1 percent.
Freedom from Government - 71.2%
Total government expenditures, including consumption and transfer payments, are low. In the most recent year, government spending equaled 31 percent of GDP. State ownership is now limited to a few utilities enterprises and some development banks.
Monetary Freedom - 71.4%
Inflation is moderate, averaging 4.6 percent between 2004 and 2006. Relatively unstable prices explain most of the monetary freedom score. The government maintains prices for ground and air transport fares, some pharmaceutical products, petroleum derivatives, natural gas, some petrochemicals, public utility services, residential rents, schoolbooks, and school tuition, and the Agriculture Ministry may intervene temporarily to freeze prices of basic foodstuffs through agreements with regional wholesalers. An additional 15 percentage points is deducted from Colombia's monetary freedom score to adjust for measures that distort domestic prices.
Investment Freedom - 60%
Except for remittances abroad, foreign and domestic capital are treated equally. Most of the economy is open to foreign investment, except for activities related to national security and toxic waste disposal. A few areas like finance and energy development require authorization. Foreign investment in television networks and programming is capped at 40 percent, and reciprocal access to the investor's home country is required. The largest obstacles are regulation and constantly changing business rules, although consolidation has simplified compliance. In most sectors, 100 percent ownership is permitted. Portfolio foreign investment must remain in the country for one year. Residents who work in certain internationally related companies may hold foreign exchange accounts. All foreign investment must be registered with the central bank.
Financial Freedom - 60%
Colombia's financial sector is relatively large and sophisticated. Banking has undergone significant consolidation and privatization since the 1998–1999 financial crisis. The government has strengthened regulations and seized some banks for falling below solvency requirements. As of December 2006, there were 17 commercial banks: 11 domestically owned and six foreign-owned; one is state-owned. All financial institutions nationalized during the crisis were privatized or liquidated by mid-2006 except for the state-owned Granbanco-Bancafé. Foreign companies are prominent in the insurance sector, and competition has intensified since 2003. The informal credit market is extensive. Foreign investors face few restrictions in small equity markets, and renewed enthusiasm for investing in developing markets has stimulated foreign investment in Colombian equities.
Property Rights - 40%
Contracts are generally respected. Arbitration is complex and dilatory, especially with regard to the enforcement of awards. The law guarantees indemnification in expropriation cases. Despite some progress, the enforcement of intellectual property rights is erratic. Infringements, especially the unauthorized use of trademarks, are common. In areas controlled by terrorist groups, property rights cannot be guaranteed.
Freedom from Corruption - 39%
Corruption is perceived as significant. Colombia ranks 59th out of 163 countries in Transparency International's Corruption Perceptions Index for 2006. Despite significant advances in fighting corruption, criminal narcotics organizations influence the military and the lower levels of the judiciary and civil service.
Labor Freedom - 61.4%
Restrictive employment regulations hinder employment and productivity growth. The non-salary cost of employing a worker is high, but dismissing a redundant employee can be relatively costless. Unemployment insurance consists of a mandatory individual severance account system. Regulations on modifying the number of working hours are relatively flexible.
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