Colombia Looks to Turn Commodities Wealth into Development

Published in World Politics Review

Following a decade-long oil and mining boom, Colombia is facing the challenge of how to harness its energy wealth and push development forward.

Since former President Alvaro Uribe opened up Colombia’s oil and mining sectors in the early 2000s, Colombia has gone from producing just more than 500,000 barrels per day (bpd) in 2002 to nearly 1 million bpd in 2012. Over the same period, it has seen foreign direct investment inflows jump from $2.1 billion to $15.8 billion, more than half of which was destined for the oil and mining sectors last year. Some 68 percent of Colombia’s $369 billion GDP in 2012 came from oil and mining. With the economy growing at 4 percent, the oil and mining boom has left Colombia with enough wealth to make a big difference in its development.

“Part of that growth is coming from a commodities supercycle that has clearly helped Colombia and other Latin American countries,” says Jamele Rigolini, Andean region economist at the World Bank. But growth does not always mean development. For Colombia, structural limitations behind its shining oil and mining sectors could hold development back if the country doesn’t put its energy wealth to good use.

One of those limitations is infrastructure, particularly an outdated transportation network that is eroding Colombia’s competitiveness. Manufacturers pay more to truck their products from the interior to port than it costs to ship those products from port to markets halfway around the world. Julian Trujillo, an executive at industrial adhesives manufacturer Saint-Gobain, says that the government has neglected infrastructure development, letting costs fall on businesses and in turn denting industry’s ability to compete globally.

Jorge Restrepo, professor of economics at Universidad de la Javeriana, agrees. He says that going forward, Colombia has to learn how to use its wealth to develop not just infrastructure, but also education, observing, “Those are major bottlenecks. We’ve tried, but failed. We still don’t know how to do it.”

The key, says Restrepo, is how royalties from the oil and mining sectors are managed. He says that rent-seeking behavior on the local level has gotten in the way of opportunities to reinvest royalties into development. Moving forward, a 2012 reform promoted by President Juan Manuel Santos that moves the control of royalties from local politicians to central authorities could reverse that.

In addition to the need for reforms, Colombia should feel a sense of urgency to diversify its economy. Earlier this year, the International Monetary Fund cautioned that Colombia was particularly vulnerable to a downturn in oil prices, warning the energy-rich country of “overdependence on the volatile commodities sector.” More than 80 percent of Colombia’s exports are commodities right now. If commodities prices take a dive, that overdependence could come back to haunt Colombia.

Where other countries in the region, like Peru and Chile, have taken advantage of China’s commodities binge over the past decade, Colombia seemed to miss the boat. Now, even as China keeps steady with 7 percent growth, Colombia still only exports 5.5 percent of its commodities to the world’s second-largest, and energy-hungry, economy.

Rigolini says that as the commodities supercycle comes to an end, Colombia will have “to find new sources of growth to expand. And moving from a time of growth in commodities to different sources of growth is the most challenging part.”

As for Colombia’s ability to meet that challenge, there are some hopeful signs on the horizon. First, Colombia is a member of the Pacific Alliance, a regional trade bloc made up of Chile, Peru and Mexico that promotes regional free trade. As a member, Colombia is looking to benefit from expanding trade with its partners beyond commodities. If the trade bloc is as good in practice as it sounds in its leaders’ rhetoric, the alliance might be part of the solution for getting Colombia’s shrinking industrial sector going again and spurring growth in other sectors.

It might not be too late for Colombia to take advantage of China as well. China’s appetite for energy is changing, shifting away from high levels of coal consumption toward oil and natural gas, according to Beijing’s 12th Five-Year Plan. That could be an opportunity for Colombia, as right now Colombia’s energy sector is strongly positioned toward the petroleum market, with 50 percent of its commodities exports coming from crude. Last year, President Juan Manuel Santos signed preliminary agreements with China Development Bank for financing a pipeline that would link Venezuelan and Colombian oil with the Pacific coast.

“Infrastructure has to keep up with oil production,” observes Christian Gomez, director of energy at the Americas Society. “So China’s looking at this as an interesting opportunity.”

But feeding China’s new energy appetite is unlikely to be the saving grace for Colombia’s development in the long term. The other crucial ingredient for Colombia’s long-term development is whether the government arrives at a peace deal with the FARC, the country’s largest and longest-standing rebel group. Peace with the rebels would likely mean more security for Colombia’s entire economy, not just its energy infrastructure; guerrilla attacks still set back production. A peace deal could also mean less military funding and more spending on transportation, health and education in the future.

In the meantime, one country in the region Restrepo says Colombia could look to as a role model is Chile, which manages its mining royalties in a way that lets Chileans save for a rainy day and invest in development. Chile has figured out “how to transform their mining royalties into development in science, technology and infrastructure,” says Restrepo. “We envy that here in Colombia.”

Colombia’s boom is still strong, and it still has the potential to open a new chapter for the country’s development. But if Colombia fails to make smart investments and seed new sources of growth, the country’s renewed fortune could slip, making for a lost opportunity and adding regret to envy.

2 thoughts on “Colombia Looks to Turn Commodities Wealth into Development

  1. Wes, great article detailing the source of Colombia’s fortune over the past decade and the point in the road it faces now. Am also intrigued by the Chilean model you mention at the end and what makes it work. Perhaps would be an interesting topic to explore in another article

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