The Colombian Cleanup
An interview with Francisco Santos Calderón, vice president of Colombia
Francisco Santos Calderón was elected vice president of Colombia in 2002 and re-elected in 2006. During that time, Colombia has gone from a troubled country to a rising economic star of Latin America—due in no small part to the policies of Mr. Santos and Colombian President Álvaro Uribe Vélez. Improving security, instilling a sense of stability and confidence, and promoting free trade have fostered Colombia's resurgence.
IN 2002, COLOMBIA WAS A TROUBLED COUNTRY. Government forces were waging South America's longest-running armed conflict, some 40 years of fighting against left-wing insurgents and right-wing paramilitaries. Fueled by the drug cartels, the violence had escalated dramatically in the 1990s. As newly elected President Álvaro Uribe Vélez and Vice President Francisco Santos Calderón prepared to take office, their mandate was to take back their country—stipulating a focus on ending violence, kidnappings, drug trafficking and corruption. They also had the longer-term objective of establishing a system where democracy would not only prevail but also help the country flourish—opening the country to foreign investors, commerce and economic success. Today, just six years later, Colombia is one of the hottest emerging markets in the world, with foreign direct investment (FDI) jumping from $2 billion to between $8 and $10 billion a year, and an economy that grew by more than 7 percent in 2007.
How did Uribe and Santos reverse Colombia's downward slide? Recently, A.T. Kearney's Ricardo Haneine and Eulalia Sanín Goméz sat down with Vice President Santos to discuss how Colombia managed its unprecedented turnaround.
Ricardo Haneine: Mr. Vice President, in the past six years, we have witnessed a tremendous success story in Colombia. Tell us about your country's journey.
Vice President Santos: I think a good way to illustrate the Colombian success story is with an anecdote that took place about a year and a half ago when I met with Jeffrey Immelt, CEO and Chairman of General Electric. He had just come from São Paulo and a meeting with Brazil's captains of industry. He asked them, "If you had money to invest in Latin America, outside of Brazil, where would you invest?" Do you know what he told me? He said everyone in the room said they would invest in Colombia. That's what's happening. All of the work we've been doing has created the conditions for Colombia to move up and attract investments. I have no doubt that if we continue with our policies, in 10 to 15 years people are not going to be talking about Chile or Brazil; everyone will be talking about the Colombian miracle.
Our most important achievement has been something that seems very simple but is very difficult to achieve: trust.
Ricardo Haneine: What do you consider the major achievements of President Uribe's administration, and how has this been reflected in the country's economy?
Vice President Santos: Our most important achievement has been something that seems very simple but is very difficult to achieve: trust. Colombians have been able to trust again in their futures and their institutions. Today, Colombia is a viable country. Everything we are doing, day in and day out, is to build on and consolidate that trust. With trust, investment is returning, people are coming back to Colombia, and entrepreneurs are investing for the long term. You start to see a new vision of what people expect of the country.
Ricardo Haneine: You attribute Colombia's transformation to many of the policies implemented since taking office. What are the most important policies?
Vice President Santos: Our first objective was to ensure security, and in this sense the turnaround has been dramatic. The ship has turned 180 degrees from a country that people viewed as having no future and experts considered as almost a failed state, to a country with a security situation better than most Latin American countries. It is ironic. Today, our major cities, Bogota, Medellin, Barranquilla and Cartagena, have murder rates lower than Detroit. In Bogota, the murder rate is lower than Washington, D.C. And if you compare that with the rest of Latin America, where crime rates in most urban centers are increasing dramatically, the situation in Colombia is quite different and quite remarkable. That same thing has happened with kidnappings, which are down by 90 percent since 2002. Obviously, we have to remain aware of the situation and keep working on it, but we have solved some deep problems.
Our success is also attributed to government leadership and institutions. We have almost doubled the resources for the judicial system. We have nearly 50 percent more police on the streets and military personnel—Army, Air Force and Navy—on our roads and in the jungles and mountains. Institutional strength is key. Without institutions, you can put in money and leadership, but you cannot turn things around. Colombia today proves that the institutions that we have had for so many years—the country has been a democracy since 1837—are a critical part of our success.
Ricardo Haneine: And in terms of the impact on the economy, how have things changed?
Vice President Santos: We created economic incentives and policies that have been very successful. Today, Colombia is one of the top emerging markets in the world, with a rise in foreign investment and economic growth.
We are not a huge commodities country, yet we have been able to more than double our exports, and convert our debt to Colombian pesos.
We are not a huge commodities country, yet we have been able to more than double our exports and convert our debt to Colombian pesos. Debt as a percentage of GDP was reduced from 54 percent to 21 percent. All macroeconomic indicators of Colombia are becoming more solid.
Ricardo Haneine: With respect to the increase in FDI, what do you consider to be Colombia's value proposition? What makes Colombia more competitive relative to other countries for investing?
Vice President Santos: Colombia has been a bedrock of economic stability. While all of Latin America has had huge economic peaks and valleys, Colombia has not. Colombia grew less than most countries but it has never stopped growing in the past 50 years, with the exception of 1999. This is a quality that Colombia brings to the table. It has been a very serious, stable country that has never negotiated or defaulted on its debt. In the long run, stability is what a foreign investor looks for.
Also, investors will find a government and a society that is well prepared for foreign investment. In the World Bank's Ease of Doing Business Index, Colombia ranks number two in Latin America. We also rank second in Latin America for quality of managers, and in first place for quality of trained workers. We have jumped ahead because the government and the private sector work together to make the country more competitive— which is something we work on day in and day out.
Additionally, we have set a very aggressive agenda to promote national and foreign investment. For example, we have individual free-trade zones so foreign investors can establish a free-trade zone anywhere in Colombia, with a tax rate of 15 percent and no duties, no tariffs on imports, and with the possibility of also selling to the Colombian market. This last point is very important. You pay a 15 percent income tax on what you sell outside the country and the regular 30 percent income tax on what you sell to the internal market. These types of free-trade zones are for the long term because they comply with the World Trade Organization and they apply to both goods and services. This is why we are seeing, for example, the BPO [business process outsourcing] industry moving very aggressively into Colombia. Similarly, for investments in tourism, in building or remodeling a hotel or ecolodge, we offer a 30-year tax break. There is nothing like this in the world.
Eulalia Sanín Goméz: You have talked about BPO and tourism. What other sectors have you identified as attractive for investors?
Vice President Santos: I have spoken already of the macroeconomic strategy. The microeconomic strategy is focused on eight sectors. In four of these, we see huge possibilities for growth, because we have a base and because we have all the right conditions to be world-class competitors. The four sectors are BPO, software, medical tourism, and cosmetics and personal care. In fact, last month we granted two free-trade zones to medical tourism foreign investors in Medellin and on the Caribbean coast, and granted two free-trade zones to global BPO companies in Bogota and Pereira. The other four sectors—auto parts, energy, graphic industries, and textiles and apparel—are where we already compete but where we can improve. Let me put it this way—doing more of what we do, but doing it better. In textiles and apparel, we are not just referring to production, or máquila, but to improving the whole value chain from design all the way to production. So, you see, we have a full strategy of micro and macro policies.
Colciencias, our science and technology institute, has been promoted to the level of a ministry and the budget has been increased dramatically to more than $100 million. It has a fund to promote R&D that will increase in the next five to 10 years. For all of these world-class sectors that we want to promote, and for other sectors that might come up, this new institutional boost and budget for research and development is going to be of great support. All the institutional pieces are in place so that Colombia is poised for dramatic growth, and perhaps to become the number one country in the region.
Eulalia Sanín Goméz: Tell us about people. You mentioned the importance of having the right people with appropriate levels of education, and skilled managers. Is that enough for what you want to achieve?
Vice President Santos: Our availability of technically trained workers is number one in the region, and this is critical. Our flexibility in terms of contracts and policies is also high, and our managers are qualified, competitive and aggressive, so they rank among the top one or two in the region. Everything is set up for success, both in taxes and in terms of workers.
Another advantage is the size of our internal market now that we are opening up our economy. Companies can settle in Colombia, use the internal markets, but also become a platform for exports. We are close to having a free-trade agreement (FTA) in force with the United States, and we have signed free-trade agreements with Canada, Chile and various Central American countries. We are in an accelerated process of eliminating pending tariffs with Mexico, with whom we already have a free-trade agreement. We have integrated with Mercosur and are in a process of really decreasing tariffs between them and us, and are currently negotiating an FTA with the European Union. We are setting the conditions for Colombia to go from a country that has had a quite interesting internal market and some advantages in other markets, to having free access to a market of 1.2 billion people in 45 countries. It's a very well-structured policy that is producing the desired results.
Ricardo Haneine: Do you consider that the market and the major investors that you are trying to attract are aware of all these strengths?
Vice President Santos: No. And that's one of the problems we have. This is the job that we are doing. Colombia is the least-studied and the least-seen country of the region. People tend to look at Mexico and then go all the way to Brazil, Argentina and Chile. People don't yet understand that there is a country, Colombia, that plays a strategic role, a sort of a swinging door between Central America and the United States and North and South America. We have never played that role, but now we are starting to play it.
Companies can settle in Colombia, use the internal markets, but also become a platform for exports.
Let me give you an example of our strategic role. Colombia is going to become a very important hub of energy in the next five to 10 years. We are interconnected with Ecuador and Venezuela and we are getting a submarine energy interconnection with Panama that is going to allow us to sell energy all the way to Mexico. We are starting work on the largest submarine energy lines to Puerto Rico and to the Dominican Republic. And why is that a possibility? Because Colombia is full of energy. Colombia right now has 9,000 megawatts of hydroelectric power. The same mountains that used to have guerrillas five to 10 years ago now are wide open for the development of the cheapest renewable energy on earth: hydropower. We have 10 times that amount to develop in the short term. It's a huge amount of energy without even including our enormous coal reserves, or the other renewable resource that we can bring to the table—biofuels. In just five years, Colombia has become the number two country in ethanol production in the region.
So, everywhere you look in Colombia, there are huge opportunities for foreign investors, with a condition that I think is also unique. In Colombia, we don't have an anti-foreign investment message that you often hear from other countries in the region. Colombia is perhaps the only country in Latin America where public opinion is positive toward the United States, as measured by regional public opinion surveys. That just shows you how different Colombia is.
The same mountains that used to have guerrillas five to 10 years ago now are wide open for the development of the cheapest renewable energy on Earth: hydropower.
Ricardo Haneine: The relevance of the free-trade agreement with the United States is very clear from what you are saying. Beyond trade, why is it important to have an FTA with the United States?
Vice President Santos: Stable rules. A free-trade agreement sets rules of the game for many, many years. Colombia is always looking for stability; entrepreneurs are always looking for stability. The only thing that gives them the stability of an open market for years to come is an FTA. It is not the ATPDEA [Andean Trade Promotion and Drug Eradication Act], or the trade preferences, because you don't know what is going to happen in two, three or five years. These preferences move on the mood of Congress or of the administration. Instead, the FTA sets the rules of the game from now on. And that is basically the reason why it is so important for us. Because everything we are putting forward is to generate conditions for investors, national and foreign, to use Colombia as a platform for exports, as a gateway to South America, and to Central and North America. U.S. corporations have paid around $1 billion in tariffs that they would not have had to pay over the past two years if the FTA had been approved. A billion dollars less in tariff revenues certainly will open a hole in our budget, but we understand it and are ready to assume it,
because of the importance of stable rules.
Ricardo Haneine: What are the foundational elements that you need to ensure in order to make these aspirations sustainable over the next 10 to 15 years?
Vice President Santos: The strength of our institutions is very important. People see the swings in Latin America and they think, "Is Colombia going to go there?" The answer is "no" because we have a democracy and the institutions that generate stability. When you have a 170-year-old democracy, which never found populism, you have a range of options and policies, and don't experience the wild swings in policy-making that countries with weaker institutions do. The strength of our institutions in Colombia has allowed us to undertake these dramatic changes and produce fantastic results while also providing permanent stability to
make sure the policies endure for the long term.
That is what Colombia has always been. It is
not dependent on one man, which I think may
be another concern. “Is Uribe going to be there
forever?” Institutions are solid. Colombia has
an independent central bank, an independent
congress, and a judicial system that has sent 60
members of Congress to jail without causing
an implosion of democracy or an institutional
breakdown. That’s what Colombia brings to
the table, and is what investors are beginning
to see and understand.
Eulalia Sanín Goméz: Finally, what would
your message be to the CEOs who read Executive Agenda?
Vice President Santos: I’d say Colombia’s
attributes are far more than what you read in
the papers. Colombia is more complex, more
profound and richer than you know. It is a truly
unique story in Latin America. In this sense,
it provides huge opportunities for investors
because it’s a country that provides a transition
from Mexico to Brazil and Argentina and
Chile. Democracy in Colombia brings a level
of conversation, of sophistication in decision—making,
that generates stability. At a time when
the region is undergoing some immense difficulties,
we are an exception to the rule. That
adds to the immense possibilities of Colombia
and its people.
Interviewers
RICARDO HANEINE is a partner and head of the firm’s Mexico City office.
EULALIA SANÍN GOMÉZ is an associated consultant.
For more information, contact the authors.
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