2009 Index of Economic Freedom

Quick Facts

Population:

• 45.6 million

GDP (PPP):

• $290.6 billion
• 6.8% growth
• 4.4% 5-year compound annual growth
• $6378 per capita

Unemployment:

• 11.2%

Inflation (CPI):

• 5.5%

FDI Inflow:

• $6.3 billion

Colombia's economic freedom score is 62.3, making its economy the 72nd freest in the 2009 Index. Its overall score is 0.2 point higher than last year, primarily reflecting improved trade freedom and business freedom scores. Colombia is ranked 15th out of 29 countries in the South and Central America/Caribbean region, and its overall score is higher than the regional average.

Colombia is now one of South America's most stable economies and scores relatively well in business freedom, trade freedom, and financial freedom. Improvements in the business environment and trade because of reforms aimed at steady growth and monetary stability have led to economic growth of over 5 percent in recent years. The vibrant economy has reduced Colombia's unemployment rate to its lowest level in a decade.

Colombia's overall economic freedom would advance if lingering institutional weaknesses were addressed. Despite nominal openness to foreign investment, regulations are complex and uncertain. The rule of law remains uncertain. Business contracts are generally respected, but judicial corruption undermines legal transparency. State ownership is limited to a few utilities, but public expenditure commitments are high because of large transfers from the central government to regional state-owned enterprises.

Background Back to the top

Colombia is one of South America’s oldest continuous democracies. President Alvaro Uribe, elected in 2002 and re-elected by a landslide in May 2006, has ended years of appeasement of Marxist guerrillas, vigilantes, and drug traffickers. By enforcing the law against both the Revolutionary Armed Forces of Colombia (FARC) and its anti-Communist nemesis, “the paramilitary,” Uribe has restored security. The lives of Colombians have improved substantially, and unemployment has been cut by at least 5 percentage points in the past five years. The economy depends heavily on exports of petroleum, coffee, and cut flowers. A trade agreement with the U.S. that would encourage economic diversification and stimulate further growth was submitted to the U.S. Congress for action in 2008.

Business Freedom 77.4 Back to the top

The overall freedom to start, operate, and close a business is relatively well protected by Colombia's regulatory environment. Starting a business takes about the world average of 38 days. Obtaining a business license requires less than the world average of 18 procedures and 225 days. Closing a business is relatively easy.

Trade Freedom 72.4 Back to the top

Colombia's weighted average tariff rate was 8.8 percent in 2006. Import bans and restrictions, import price bands for certain goods, some service market access limits, some restrictive standards and regulation, some restrictive import licensing, issues involving the enforcement of intellectual property rights, non-transparent customs administration and valuation, export promotion programs, and corruption add to the cost of trade. Ten points were deducted from Colombia's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 72.9 Back to the top

The top income and corporate tax rates were reduced from 34 percent to 33 percent beginning in 2008. Other taxes include a value-added tax (VAT) and a financial transactions tax. In the most recent year, overall tax revenue as a percent-age of GDP was 23.0 percent.

Government Size 65.9 Back to the top

Total government expenditures, including consumption and transfer payments, are moderate. In the most recent year, government spending equaled 33.7 percent of GDP.

Monetary Freedom70.6 Back to the top

Inflation is relatively moderate, averaging 5.2 percent between 2005 and 2007. The government controls 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. Fifteen points were deducted from Colombia's monetary freedom score to adjust for measures that distort domestic prices.

Investment Freedom60.0 Back to the top

Foreign investment is granted national treatment, and 100 percent foreign ownership is permitted in most sectors. The legal and regulatory systems are generally transparent and consistent with international norms. The largest obstacles to investment are frequent changes in business rules, complex arbitration procedures, and weak enforcement of awards. Foreign investments must be registered with the central bank's foreign exchange office within three months of the transaction date to allow repatriation of profits and remittances and to access official foreign exchange. Residents who work in certain internationally related companies may hold foreign exchange accounts.

Financial Freedom60.0 Back to the top

Colombia’s relatively large financial sector has become more stable and modern. 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. Two private financial groups account for about 45 percent of bank assets. In comparison to other countries in the region, Colombia has a smaller presence of foreign banks, which collectively account for less than 20 percent of total banking assets in 2008. Credit is allocated on market terms. All financial institutions nationalized during the crisis were privatized or liquidated by mid-2006; as of early 2008, the government retained 15 percent of total banking assets. Foreign companies are prominent in the insurance sector, and competition has intensified since 2003. Colombia’s small capital market has constrained broader access to long-term credit. Additional financial reform is expected, and several measures to boost the capital market have also been discussed.

Property Rights40.0 Back to the top

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 Corruption38.0 Back to the top

Corruption is perceived as significant. Colombia ranks 68th out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. Although Colombia has made notable improvements in fighting corruption and narcotics trafficking in general, concerns remain over the influence of criminal organizations, especially on the police, military, and the lower levels of the judiciary and civil service.

Labor Freedom66.0 Back to the top

Colombia's restrictive labor regulations hinder employment and productivity growth. The non-salary cost of employing a worker is high, but dismissing a redundant employee can be relatively inexpensive. Regulations controlling working hours are relatively flexible.