New IMF Recommendations for Colombia and Their Implications

October 20, 2016

The International Monetary Fund (IMF) recently concluded the annual Article IV Consultation with Colombian policymakers, which took place from March 3rd-13th.2The IMF mission was headed by Valerie Cerra, who concluded that Colombia had a strong macroeconomic policy framework and was able to weather the global financial crisis through an inflation-targeting regime, maintaining a flexible exchange rate, and regulating financial markets effectively.1 Colombia is projected to grow at 4.3% in 2014, and should have no problem maintaining the inflation targets established by the Central Bank of between 2-4%.1 However, the public sector debt is currently at USD $51.235 billion, which comprises 13.6% of GDP, and this is not predicted to improve within the current fiscal policy framework.

The IMF has advocated deficit reduction strategies through fiscal reform in Latin America and elsewhere since the 1980s as part of the Washington Consensus, a series of reforms that aim to reign in public spending and diminish the role of the state. However, Ms. Cerra’s press release from March 14th signals important shifts in the emphasis of IMF reforms. She notes:

“As in other countries in the region, Colombia’s key medium-term challenge is to sustain stable and inclusive growth. From this perspective, the framework for sharing oil royalties across regions and the 2012 reform to rationalize the tax system and make it more equitable have been positive steps. The mission also supports the objective of increasing coverage and equity of the pension system, while maintaining its fiscal sustainability, as well as initiatives in the financial sector to foster inclusion.”2

The attention to creating a more equitable, inclusive, and socially just system through fiscal reform and pension reform is a positive development in IMF recommendations that part ways with the restrictive, standard Washington Consensus policies that many believe exacerbated problems of inequality and underdevelopment throughout Latin America. Cerra notes that, to meet the twin goals of reducing the budget deficit and promoting a more inclusive and equitable society, Colombian authorities will have to focus on “non-oil fiscal revenues” which mean either tax increases or tax code reform, both of which are difficult policy initiatives.1

Even if Colombian policymakers are able to pass these recommendations in the near term, there are challenges that come along with macroeconomic policies that reduce budget deficits. Budget deficits can only be reduced through several measures: tax increases, spending decreases, and inflationary policies that reduce the value of the deficits. In the short term, both tax increases and spending decreases reduce growth prospects and lower productivity. Over the medium and long term, tax increases further damage productivity, although the economy eventually adjusts to lower levels of public spending and is generally thought to be better off in the long run. Pursuing inflationary policies as a means to reduce the deficit (or the value of the deficit) is never a good idea, as the history of Latin American macroeconomic policy blunders illustrates. This is all to say that raising livelihoods of the poor and marginalized in Colombia while simultaneously reducing the budget deficit will be a difficult task for Colombian policymakers, and is fraught with tradeoffs.

The neoliberal policy wave throughout Latin America, as a reaction to the economic crises caused by the inherent stability in import-substitution industrialization (ISI) and other populist macroeconomic policies, has its own implications for the quality and sustainability of democratic governance in Latin America. Kurt Weyland’s Neoliberalism and Democracy in Latin America: A Mixed Record aims at summarizing how the globalized economy has affected democratic regimes, both positively and negatively, and helps to frame the recent IMF recommendations to Colombia.3 He notes how neoliberalism has promoted the sustainability of democracy in Latin America by tempering radical leftist movements, which has eliminated the justification for more conservative governments to cause an erosion from democratic regimes to authoritarian regimes. Globalization has also opened up Latin American governments and markets to international forces that favor democracies and free enterprise. Simultaneously, neoliberalism has made democratic regimes in Latin America more shallow by placing external constraints on elected officials to enact generous redistributive social programs. This remark in particular applies to these new IMF recommendations.

So what should we make of the IMF recommendations to generate non-oil revenues in order to pay down the budget deficit and promote more inclusive growth? While these goals exist in tension, they both certainly seem at face value to be positive developments for Colombians. By making sacrifices to short term growth, deficit reduction will promote productivity and investment in Colombia in the long run, and all the better if policymakers are able to promote equity throughout the process. Tax reform is difficult. Latin American countries have a long history of being caught in the vicious cycle of not being able to provide public goods as a result of insufficient tax revenue, which provides justification for taxpayers and voters to reject tax increases, because after all, the government hasn’t proven they can meet the needs of the people. Therefore, it is my opinion (and one that would be amenable to the IMF and the center-right Santos administration) that Colombia should focus on more efficient collection of taxes, rather than a politically difficult and unlikely campaign to increase rates.

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Works Cited

1) Latin American Weekly Report. Colombia: IMF Calls for Fiscal Reform. From 20 March, 2014. http://latinnews.com/media/k2/pdf/scsvi.pdf

2) International Monetary Fund. IMF Concludes 2014 Article IV Consultation with Colombia. Press Release No. 14/101. March 14, 2014. http://www.imf.org/external/np/sec/pr/2014/pr14101.htm

3) Weyland, Kurt ”Neoliberalism and Democracy in Latin America: A Mixed Record” Latin American Politics & Society – 46: 1.  Spring 2004, pp. 135-157

 

About Author(s)

Eamonn Berry
Eamonn Berry is a 2nd year graduate student at University of Pittsburgh's Graduate School of Public and International Affairs, where his major is International Political Economy and he is seeking a certificate in Latin American Social and Public Policy. He previously attended the University of Vermont, where he majored in Political Science and minored in Spanish. Eamonn has political and legal experience, and is pursuing a career in public policy.