Economic Analysis of Colombia

Introduction

Colombia is located in South American region, having an area of 1,138,915 square kilometers. Colombia's economy is gaining strength as a result of a surge in spending on infrastructure and record levels of foreign direct investment. This paper presents an analysis of the Colombia's economic conditions and policies impact on growth during the past 10 years.

Colombia's unemployment is the highest in Latin America. A high minimum wage and labor taxes hinder any recovery in employment (EIU, 2012b). Colombia's economy is gaining strength as a result of a surge in spending on infrastructure and record levels of foreign direct investment. Real GDP grew by 4.9% in 2011 and gains of 4.5% are expected in 2012 (Economist, 2012). Recent success against guerrillas has improved security and drawn more investors to Colombia.

Finance Deficits

In real terms, fiscal deficits rose by 17.0% in 2005-2010. In 2011, the public debt amounted to Col$217,814 billion - equivalent to 35.8% of GDP. Colombia's budget deficit widened to about 2.4% of GDP in 2009 when the government increased spending on infrastructure to bolster domestic demand. The consolidated budget deficit was 3.4% of GDP in 2010. Spending increases in 2011 pushed the deficit up to 4.1%. It should fall in the medium term as oil revenue rises (EIU, 2012a).

Economic Structure and Major Industries

Manufacturing makes up 13.4% of GDP and employs 13.8% of the workforce. The service sector makes up 50.9% of GDP. The banking system has undergone significant privatization. A consolidation of banking through mergers and acquisition is expected. Colombia's government plans to spend US$67 million to develop infrastructure for tourism (theme parks, docks, piers and convention centers). The government is also modernizing air terminals. The tourist industry is small but growing rapidly. The number of visitors in 2010 was 300% more than the 2003 total (Country Watch, 2012). Mining - mainly coal and oil -is one of the country's most important sources of exports. Oil is Colombia's top export product (followed by coal and coffee), accounting for about 25% of government revenues (EIU, 2012b).

Overview of the Economy

Growth of GDP averaged about 4% in 2004-2009, boosted by private investment and oil exports. During this period the poverty rate steadily declined to 49% (down from 57% in 2002). However, the economy's performance slowed perceptibly in 2009 when exports fell and private investment collapsed. The economy made a brisk recovery in 2010 when real GDP rose by 4.3%. In 2010, foreign direct investment reached US$9.6 billion (EIU, 2012a). Domestic demand was also an important contributor to growth.

Foreign Trade

In 2011, exports amounted to 17.4% of GDP. Exports grew by 39.8% in 2011, driven by various factors such as growth in oil and mining production as well as a boost from free-trade agreements with several markets. Colombia is primarily dependent on mineral fuel exports, which comprised 58.7% of total exports in 2011. The USA is the major market for exports, representing 43.0% of the total in 2011 (Economist, 2012).

The government hopes to increase the share of exports that contain value-added components ...