An interview with Rudolf Hommes

An interview with Rudolf Hommes, Colombia's Former Treasury Minister, on the state of the Colombian economy

May 2011

Edward Davey, The City Paper

1. What are the strengths of the Colombian economy and how has the 'Emergencia Invernal' affected these strengths?

I think the Colombian economy is very resilient. It has absorbed the shock of the global economic crisis, the closing of the Venezuelan market and the internal instability due to violence with surprising endurance. I am concerned that the floods and the present winter emergency will make a dent but I may be one of the few who are troubled. Most people and analysts do not appear to be worried and there are even some who think that this tragedy is a blessing in disguise because it will make investment surge and force the government to face the reality that Colombian infrastructure is less than subpar and very poorly conceived.

2. Will recent corruption scandals affect foreign direct investment?

I think foreign companies will not be overly deterred by corruption. They often contribute to it and some European firms are still notorious for it. In this country they have promoted political corruption and financed guerrilla activities.

3. Does Colombia rely too much on its natural resource base for income, instead of developing other sectors of the economy; how will Colombia avoid the resource curse and unacceptably high environmental externalities?

Countries develop whatever they can develop and they often prefer the low hanging fruit. We need industrial and export based output, but the present opportunity is in mining, which had lagged because of insecurity and a diminished exploration. While I remain an advocate of industrial and agro-industrial development, I do not share the concept that mining is a bad option. If you look at Chile or Peru, they have been doing extremely well because they chose the right policies and stuck to them, but also because of mining which has been the hidden factor behind the recent economic success of those countries. They also have managed very well the exchange rate effects of the mining boom through fiscal restraint and special institutions to graduate the inflow of export revenues.

4. There is criticism that Colombia's infrastructure is still lacking to meet the potential of a Free Trade Agreement and to compete regionally...what does Colombia need to do urgently to improve the state of its roads, ports etc..?

Colombia's infrastructure is lacking in quantity and in quality according to surveys of the country's competitiveness in comparison with others. Its roads, ports and overall transportation infrastructure are rated at the bottom of a list of many other countries, while air transportation is at the top of the list, which is not however an achievement. It is a reflection of how bad the rest of the infrastructure is.  I believe there are two reasons why this development has been so poor: the political system in Colombia is based on patronage and public works have been plagued by it. Second, infrastructure conception, planning, investment and execution lack scale. The country has been accustomed to scratch roads into the side of the mountains, to avoid tunnel construction, to conceive roads for trucks of the past and rarely undertakes a project that has the dimensions and scope that are required. There has been an overreliance on truck transportation and railroads have been relegated to niches. This is a big conceptual design mistake; it determines the mix of Colombian exports, limits the potential to expand the national market, and severely restricts the transportation capacity of people and cargo.   

5. Why isn't Colombia taking more advantage of its agroindustrial possibilities?

Colombian agriculture has suffered from insecurity and violence, extreme protectionism, overreliance on subsidies for the rich and insufficient research and agricultural extension. There is also a problem of extreme poverty in rural areas and a very unequal distribution of land and opportunities. The development of agro-industry would require a 180 degree change in policies, more reliance on research and a land distribution program that would increase productivity and entrepreneurship. Land is overly expensive in Colombia, in part due to subsidies for the land owners and protectionism (the effective import tariffs of sugar and other commercial agricultural products are above 80%).

6. Has Colombia's image really had a turn for the better, in terms of investor confidence, or does the lack of peace process with illegal armed groups still affect the country's international fortunes?

Colombia is benefiting from something that usually happens in economics but not in politics: the world has already internalized that Colombia has ceased to be a semi-failed state and assumes that it is only a matter of time that the government will be in full control of the country. If progress continues in this direction, we will keep on benefitting from this perception.

7. What are the roots of all the recent corruption scandals, and what should the government do to tackle this issue?

The corruption was always there, in part due to clientelism in patronage, but it was kept “within reasonable boundaries”, as one of our political leaders used to say. Through time, with the advent of drug trafficking and due to fiscal and political decentralization, it ceased to be reasonable. During the second term of President Uribe it seemed to accelerate because there was an attempt to actually buy a third term for him and because the style of government during his administration weakened institutions, the judiciary system and controls (checks and balances). What we are seeing now is the result of all this, and I hope that it is not just the tip of the iceberg.

8. Colombia remains a country with a high taxation rate for small businesses and few incentives...is a tax reform necessary in this country?

I believe that a thorough tax reform is needed that would lower tariffs of both income and value added taxes, would reduce exemptions for the rich and would increase the tax base. It also requires a simplification of processes and separating the administrative functions of the DIAN (tax authority) from its judiciary functions. Having both functions in one institution loads the system heavily against the taxpayer. It would also require a simplified system for small firms that would encourage them to cease being informal.