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2015 OECD ECONOMIC SURVEY OF COLOMBIA

REFORMS FOR MORE INCLUSIVE GROWTH Bogota, 19 January 2015

Main findings

Colombia is among the fastest growing economies in Latin America, but it is vulnerable to commodity markets and inequalities remain high.

1. Growth has been led mainly by oil and mining.

2. Labour informality contributes to low productivity, (old-age and other) poverty and inequality.

3. The tax system raises little revenue, is unequal and not investment-friendly.

4. The pension system covers few people and subsidises the rich.

Key recommendations

1. Investment more in infrastructure and skills, and raise competition to increase competitiveness and diversify the economy.

2. Provide incentives to reduce informality.

3. Undertake a structural reform of the tax system to boost investment and raise more revenues.

4. Reform the pension system to reduce old-age poverty and inequality.

Colombia’s living standards have risen fast

But inequality remains high and well-being needs to be improved

Lower commodity prices bring challenges for sustaining growth and investment

• Growth has been supported by high investment.

• Lower oil and coal

prices will put pressure on investment and government revenues.

Macroeconomic policies are strong: The monetary policy framework is solid

• Inflation is stable and low.

• Inflation targeting and a flexible exchange rate regime have been successful.

The fiscal policy framework is robust to face short-term risks

• Public finances are healthy. • The debt of the public sector is low. • The fiscal rule ensures sustainability. • The fiscal situation of subnational governments is solid.

Structural reforms are needed to boost economic growth

In order to continue growing fast and become a major regional player, Colombia needs to:

• Reform the tax system to boost investment and growth • Reform the pension system to reduce poverty and inequality • Boost infrastructure investment

Tax reform to boost investment and growth

Taxes penalise investment

Statutory corporate tax rates are high in Colombia

• Corporate tax rates are too high. • Investment is further penalised by the VAT on investment goods and the net wealth

tax on firms. • The tax system is complex.

The tax system needs to do more for the poor

Gini coefficient at market income and after direct taxes and transfers

• The tax system does little to reduce Colombia’s high income inequality.

• Personal income taxation is low due to generous exemptions and deductions that benefit mainly the rich: high pensions and dividends are exempt

More tax revenues are needed

• Not everybody is paying taxes because of many exemptions and special regimes that also increase administration and compliance costs.

• Informality, the armed conflict and tax evasion have reduced revenues.

There is room to strengthen the tax administration

Environmentally related tax revenues is low

Recommendations on tax reform

• Undertake a comprehensive tax reform to boost investment and growth.

• Lower corporate income tax rates and make more firms pay taxes.

• Reduce tax evasion by strengthening the tax administration and by increasing penalties.

• Introduce a carbon tax. • Make the personal income tax more progressive by taxing

dividends and eliminating regressive exemptions.

Reform the pension system to reduce poverty and inequality

Poverty is high among the elderly

Poverty rate of the population older than 65 years (2010)

Well-being of people aged 65 and over

The coverage of the pension system is low

Percentage of people aged 65+ with a pension

• The low coverage contributes to inequality • The low pension coverage partly reflects the high level of informality • The minimum pension cannot be lower than the minimum wage,

which reduces coverage • The system comprises two plans (private and public) which are

competing instead of being complementary

The public pension system faces many challenges

The public system is generous and unequal: • The replacement rate is high. • The reference salary is based on few years of earnings. • The retirement age is low by international comparison, especially for women.

Gross pension replacement rates

Coverage and benefit levels of Colombia Mayor are low

• Benefits are below the extreme poverty line.

• Public spending on old-age income support represent only 0.02% of GDP.

• Coverage is currently low but is expected to double.

Recommendations on pensions

• Undertake a comprehensive reform of the pension system to reduce poverty and inequality.

• Expand eligibility to the Beneficios Económicos Periódicos programme.

• Increase coverage and benefit levels of Colombia Mayor. • Reduce the generous subsidies of the public pension

scheme. • Equalise the retirement age between men and women. • In the medium term, increase the retirement age and

link it to life expectancy evolution.

Additional structural reforms for a more inclusive Colombia

Invest more on transport infrastructure

• Colombia’s exporting costs are still twice the OECD average. • Investment in transport infrastructure still falls short of needs. • Better infrastructure is needed to create a true national market.

Paved roads (per cent of total roads)

More competition is needed

• Low competition and inefficiencies in the banking system increase the cost of credit.

The Colombian banking system needs more competition and efficiency

Product market regulations are above OECD average • Barriers to trade remain high. • More competition in food, retail

and telecommunication sectors is needed.

• The competition authority (SIC) needs more independence.

The labour market needs to be more efficient and inclusive

• The minimum wage is high relative to the median wage, which contributes to informality.

• Formal job creation increased following the 2012 tax reform, which lowered social security contributions.

Minimum wage as a per cent of median wage, 2012

Formal and informal job creation

Main recommendations for a more inclusive Colombia

• Maintain the strong macroeconomic framework.

• Create incentives to improve coordination of infrastructure projects across subnational governments within the National Development Plan.

• Adapt legislation to improve business environment, foster competition, and make the judiciary process more efficient to enhance the rule of law.

• Keep minimum wage growth close to inflation to increase the gap with average wage. In the medium term, differentiate the minimum wage by age.

More Information…

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