By Michael Johnston, senior analyst for All Emerging Markets (www.allemergingmarkets.com).
Emerging from a dark history, Colombia has become the economic gem of South America.
In the minds of many Americans, Colombia is a lawless country with an economy built around a violent drug trade. In reality, however, Colombia has become a model for economic transformation and is perhaps South America’s most promising market.
It is poised to experience meaningful growth in the next several years, as a balanced economy continues to grow and develop. With a wealth of natural resources, a young population, and an increasingly effective government and police force, there are plenty of reasons to be optimistic about Colombia’s future.
Violence on the Decline
Colombia’s reputation for violence was earned through a brutal history; in the 1980s the country experienced a wave of homicides fueled by a runaway drug trade. During the last two decades, however, the government has aggressively cracked down on the drug market and reduced the number of murders considerably. The homicide rate dropped by nearly 35 percent between 2005 and 2014, which was the least violent year in nearly three decades (when Pablo Escobar was reaching the peak of his power in the country).
The declining homicide rate is not the only development indicator that has made meaningful progress over the last couple of decades; Colombians are making more money, living longer, and attracting more investments from international partners.
Ease of Business on the Rise
There is no shortage of socialist regimes or generally corrupt leaders in Latin America, but Colombia stands out as a home to a modern, pro-market government. In addition to becoming a much safer place to live, Colombia has also become a relatively easy place to establish and grow a business. It ranks ahead of nearly all of its neighbors in ease of doing business, and even ahead of countries such as Belgium and Italy.
The Heritage Foundation lists Colombia as a “mostly free” economy, the second highest tier in its ratings that also includes the U.S. and the United Kingdom. Colombia, in fact, falls in between Norway and South Korea and ranks ahead of many European countries.
As Colombia has reformed its economy and strengthened the rule of law, it has benefited tremendously from improved relationships with trade partners throughout the world. Perhaps the best illustration of Colombia’s robust economy is the growth in exports experienced over the last decade. Between 2004 and 2013 total exports grew by 250 percent, with exports to the European Union nearly quadrupling during that decade.
Although Colombia is far from the largest trade partner of the U.S., imports from the country now exceedthose from Sweden, Australia, and Spain.
Debt burdens have become a major story recently, as Greece and others have illustrated the potentially devastating impact of unsustainable interest payment on an economy. Colombia is a major exporter of oil, and the recent decline in crude prices has eroded some tax revenue. But the fiscal situation remains relatively stable; Colombia has more debt than some of its resource-rich neighbors, but far less than the U.S. and Greece.
Strong GDP Growth Ahead
The improvements Colombia has made during the past decades have set the stage for the economy to continue its growth in coming years. Between 2015 and 2017, the Colombian economy is expected to expand by more than 12 percent; only Peru will see higher growth among major South American countries.
Colombia is still a developing market, with relatively high poverty rates and relatively low per capita GDP. But the impressive strides made in reducing violence and fostering economic growth have resulted in huge strides forward and have set the stage for continued development.
This article first appeared on All Emerging Markets.
About the Author: Michael Johnston
Michael Johnston is senior analyst for All Emerging Markets, and also serves as chief operating officer of parent company Poseidon Financial. His investment expertise has been featured in The Wall Street Journal, Barron’s, and USA Today, among other publications. He resides in Chicago.