This Survey is published under the responsibility of the Economic and Development Review Committee of the OECD, which is charged with the examination of the economic situation of member countries.The economic situation and policies of Colombia were reviewed by the Committee on 3 December 2012. The draft report was then revised in the light of the discussions.The Secretariat’s draft report was prepared for the Committee by the Economics Department (ECO) and the Development Centre (DEV). The main authors are Isabelle Joumard (ECO) and Sebastián Nieto-Parra (DEV) with contributions from Juliana Londoño and Juan Sebastián Robledo, under the supervision of Piritta Sorsa. The Development Centre's main contribution is on the Chapter on productivity and economic growth. Research assistance was provided by Chantal Nicq and Valery Dugain.The previous Assessment of Colombia was issued in September 2010.

Colombia is Latin America's fourth largest economy and its short-term growth prospects remain strong by OECD and Latin American standards. Enhanced macroeconomic policy settings, the benefits of a commodity boom and better security conditions have yielded strong economic growth since the early 2000s. To ensure sustainable and inclusive growth over the medium-term, the Colombian authorities are faced with three key challenges: adjusting to the commodity boom, boosting productivity growth and reducing income inequality.

Colombia is Latin America’s fourth largest economy, as measured by 2011 GDP, and is endowed with abundant natural resources. Significant policy reforms since the early 1990s have led to a modernisation of the economy. Prudent macroeconomic management has helped Colombia weather the financial crisis remarkably well. Several ambitious structural reforms are now under preparation, including on taxes, labour, pensions and the health care sector. These reforms, together with the improved security situation, the ongoing peace process, rising mining activity and strong commodity prices, are underpinning strong growth.

Income inequality has declined since the early 2000s but remains extremely high by international standards. Income dispersion largely originates from the labour market, which is characterised by a still high unemployment rate, a pervasive informal sector and a wide wage dispersion reflecting a large education premium for those with higher education. Wealth, and thus capital income, is also highly concentrated. The tax and system does little to reduce income inequality. It is small and dominated by non-redistributive transfer schemes, in particular contributory pensions, and consumption taxes which tend to be regressive. Moreover, the progressivity of income taxes has been undermined by generous tax reliefs, which benefit the well-off most and increase tax avoidance opportunities. Reducing income inequality is a key government objective. To achieve this, labour costs should be reduced and education quality should be raised so as to boost employment creation in the formal sector. The tax system should be reformed to enhance progressivity and raise more revenue which could be used to expand social policies.

Economic growth in Colombia has been resilient, yet sluggish. The country has a large productivity gap with OECD countries, reflecting low levels of human capital, physical capital and total factor productivity (TFP). Furthermore, the country has experienced low and broad-based labour productivity growth, mostly due to an overall decrease in TFP since the 1980s. The commodity boom has recently boosted activity and affected other tradable sectors. Improved security conditions and prudent macroeconomic management in the last decade have spurred investment and growth, which should also benefit from recent reforms. However, reducing the productivity gap further and generating higher sustainable growth requires reforms to address key bottlenecks. The education system should be enhanced through bold reforms that promote accountability and a focus on skills and training. The large upcoming investment in transport infrastructure should involve improved prioritisation and planning, and a better involvement of the private sector. Access to finance needs to be increased through more efficient regulation, greater competition and a more active involvement of development banks. Moreover, regional disparities should be addressed by strengthening sub-national governments to reduce the incidence of corruption in regional development. It is also important to improve the business environment by promoting competition and facilitating firm creation. These policies should also help reduce informality, as they raise the benefits of formal activity.