Unlocking Colombia’s Potential: The Imperative of Boosting Investment

by Paula Garda and Michael Koelle, OECD Economics Department

Investment fuels the engine of economic prosperity. It drives productivity, fosters innovation, and generates formal job opportunities, all of which are essential for improving living standards. In Colombia, the total investment rate has dropped since the end of the commodity boom from 23% in 2015 to 18% in 2023, now ranking among the lowest among OECD countries (Figure, panel A), according to the 2024 Colombia Economic Survey. This low investment rate hinders Colombia’s potential growth, estimated at below 3%, and is particularly troubling as the country faces urgent needs in infrastructure, education, innovation, peacebuilding efforts, social development, and transitioning to a green economy.

The weakness in investment is also a slowing down Colombia’s current GDP growth rate (Figure, panel B). Colombia experienced one of the strongest recoveries among OECD countries from the COVID-19 pandemic, but its consumption-led growth decelerated sharply in 2023 due to tight macroeconomic policies, slowing global growth, and rising borrowing costs. Although economic activity including investment began recovering in 2024, the investment rate remains low. Several factors contribute to the investment weakness, including high credit costs, low business confidence, and uncertainty.

Figure. Weak investment is dragging down growth

The government has an ambitious reform agenda to raise living standards and social justice through economic diversification, an energy transition, and fostering regional convergence, but all this requires higher investment. Improving infrastructure, innovation, education, public services and formal job opportunities are needed not only to reduce entrenched inequalities, especially in remote and marginalized regions, but also to boost long-term growth. Colombia’s natural resources and biodiversity offer unique opportunities to attract green investments. Given Colombia’s limited fiscal space, attracting private investment is crucial for stepping up investment.

To reverse the downward trend in investment, and achieve stronger, resilient, and inclusive growth, the 2024 Colombia OECD Economic Survey suggests policy action in several areas:

1. Maintaining a strong macroeconomic framework. This includes continuing fiscal consolidation and complying with the fiscal rule to support public debt sustainability and foster a business-friendly environment. Monetary authorities should also maintain a prudent, data-based, easing cycle of monetary policy mindful of inflationary risks, to bring inflation to target, which will gradually reduce borrowing costs.
2. Implementing a comprehensive tax reform: High corporate tax burden and the uncertainty generated by frequent piecemeal tax reforms have been a deterrent to private investment. Colombia needs a comprehensive and gradually implemented tax reform to create the fiscal space for social and productive investments. Lowering the corporate tax rate while expanding the base of personal income taxes, reducing unnecessary tax expenditures in corporate, personal and consumption taxes, and tackling tax evasion would enhance revenue collection while promoting a business-friendly environment. Raising spending efficiency is also crucial.
3. Lowering barriers to private investment: The recent record-high Foreign Direct Investment (FDI) influx of USD 17 billion in 2023 is a positive sign, but more needs to be done to sustain this momentum, capitalise on nearshoring trends and encourage domestic investment. The government should accelerate the implementation of public-private partnerships, particularly the new generation of infrastructure projects, ensure access to affordable credit, particularly for SMEs, and foster a more stable and predictable policy environment. Expanding the coverage of the simplified tax and insolvency regimes and online one-stop shops to more micro and small firms would significantly reduce regulatory compliance costs. Additionally, increasing investment in science, technology, and innovation is crucial for diversifying the economy and attracting higher value-added investments.
4. Strengthening subnational government fiscal and administrative capacities and improving intergovernmental coordination are necessary to ensure the successful implementation of public investment projects and regional convergence.
5. Reducing informality: High business and labour informality leads to low savings rates and inefficient capital allocation which have been major barriers to investment in Colombia. The government should implement a comprehensive agenda of reforms to reduce informality by lowering the costs formal firm creation, enhancing skills, strengthening the enforcement of labour and tax laws, and lowering social security contributions for lower-income workers. This, in turn, will enhance social protection coverage, improve tax collection, and boost inclusive growth. Improving education outcomes at all levels and aligning them with labour market needs would support creating formal job opportunities and attracting investment.

Boosting investment is not just a short-term priority for Colombia—it is fundamental for achieving sustainable economic growth and social development, unlock the country’s potential and laying the foundation for a more prosperous and equitable future.

References

OECD (2024). OECD Economic Survey of Colombia, OECD Publishing, Paris.