Knowledge & Opinions
05 Feb 2019

The peace agreement in Colombia and its implications

Up until recently, Colombia was the only country in the Western Hemisphere with a severe armed conflict, which was having both an enormous impact on infrastructure, physical capital, human lives and natural resources, as well as an indirect effect on productivity, local and foreign investment, and, ultimately, economic growth. Fortunately, after decades of failed negotiations, a peace agreement to put an end to such an extended period of violence was finally signed on the 24th of November 2016 between the Colombian government and the FARC —the principal guerrilla group in the country. In general terms, the peace agreement outlines the FARC's pledge to renounce arms and the government's commitment to give them fair opportunities to participate in the country's democratic politics. MSI's Colombian accounting member TBA Total Business Administration provides further insight into the implications of the peace deal.

While the signing of the agreement was an important step, the implementation of the peace agreement is the greatest challenge for the country in 2018/2019, as several complex related issues must be addressed simultaneously:
  1. To carry out a comprehensive rural reform, which seeks that peasants participate in the planning of their regions, have access to land and have a way to get it to produce while living on it.
  2. To look for a democratic way to build peace, which allows more citizens to participate in public affairs so that they never mix arms and politics again.
  3. To uphold the end of the armed conflict by reintegrating the guerrillas into civilian life.
  4. To provide a solution to the problem of illicit drugs, so that growers move to a legal activity, consumers are treated and rehabilitated, and the entire chain of drug trafficking is tackled.
  5. Reparation of victims of the conflict, thus ensuring that such actions are not repeated.
  6. Process supervision and compliance with international monitoring requirements.
And the estimated investment that Colombia will have to make in the next 10 years to consolidate peace will amount to:
  1. Comprehensive Rural Reform: 110,6 billion pesos (aprox. US$36.000 million)
  2. Political Participation :4,3 billion pesos (aprox. US$1.400 million)
  3. End of the conflict: 1,9 billion pesos (aprox. US$630 million)
  4. Illicit drugs: 8,3 billion pesos (aprox. US$2,700 million)
  5. Victims: 4,3 billion pesos (aprox. US$1,400 million)
 TOTAL:  129,5 billion pesos (aprox. US$42.130 million) To finance the peace process, the Colombian government is carrying out several reforms, both to its finances and to the justice system, aimed at lowering official spending, fighting corruption, combating tax evasion, reducing the cost and number of days required to start a business in the country, and temporarily increasing some taxes in order to cover the aforementioned costs. For instance, the Government is currently processing a tax reform in the Congress, the main objective of which will be to obtain resources by raising the taxation of natural persons and reducing the taxation of companies in such a way as to encourage foreign investment. Furthermore, given that the economic benefits of the implementation of the peace agreement will materialize through productive and social investments in the most vulnerable post-war zones, the National Government —through Decree 1650 from October 2017— established a progressive income tax rate for those entities that develop their economic activity in the Areas Most Affected by the Armed Conflict (ZOMAC). This rate will be valid for a period of ten years starting in 2017 and depends on the size of the company. Thus, in addition to reducing national costs in the long term, ending the conflict provides Colombia with multiple opportunities in different sectors and creates better conditions for development and investment. Specific socioeconomic benefits are evident and include an improved standard of living for its citizens, reduced social costs due to loss of human life, reduced costs of rebuilding the country's infrastructure, improvements in distribution and transportation networks, increased business opportunities, better security conditions and reduction of associated costs, accelerated economic growth, and higher foreign investment, among others. Moreover, several economic and financial experts from different countries around the world agree that Colombia will be the country with the highest growth and economic stability in Latin America in the near future as it has been statistically proven that countries with an armed conflict grow 2.2 per cent less than countries in conditions of peace and that countries that have ended armed conflicts through agreements have had a rebound in long-term economic growth rates as compared to the rest of the countries in the same region.  

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