national competitiveness report executive summary 2011

8/13/2019 National Competitiveness Report Executive Summary 2011

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2011 2012

NATIONALCOMPETITIVENESS REPORT

EXECUTIVE SUMMARY

TOWARDS COLLECTIVE PROSPERITY

COLOMBIAN PRIVATE COUNCILON COMPETITIVENESS


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MEMBERS

ASSOCIATES


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Julin Jaramillo Alpina

Jos Alberto VlezGrupo Argos

Carlos Ral YepesBancolombia

Ricardo ObregnCarvajal

Carlos JacksCemex

Nayib NemeChaid NemeHermanos

Felipe MontesColombit

J. Mario AristizbalConconcreto

Carlos EnriqueMorenoOrganizacinCorona

Guillermo TrujilloFederacin Nacionalde Cafeteros

David BojaniniGrupo deInversionesSuramericana

Carlos EnriquePiedrahitaGrupo Nutresa

Carlos Arcesio Paz

Harinera del Valle Francisco ThiermannIBM de Colombia

Rose Marie SaabIndependenceDrilling

David GonzlezIntel

Ernesto FajardoPintoInversiones Mundial

Harold EderInversionesManuelita

Jorge SilvaMicrosoft

Antonio CeliaPromigas

Jaime GutirrezPTESA

Carlos Andrs Uribe

Ladrillera Santa FeJos AlejandroCortsSociedades Bolvar

Bernardo GuzmnSmurt KappaCartnde Colombia

Luis Alberto Botero Alianza Team

Rosario Crdoba GarcsPresident and CEO

Board of DirectorsDavid BojaniniPresidenteConsejo DirectivoGrupo de InversionesSuramericana

Ricardo Obregn VicepresidenteConsejo DirectivoCarvajal

Jos Alejandro Corts

Sociedades BolvarRose Marie SaabIndependence Drilling

Jaime GutirrezPTESA

Associates

Luis Carlos Villegas ANDI

Rafael Meja

SACJulin DomnguezConfecmaras

Andrs CadenaMckinsey&Company

Camilo GranadaFTI Consulting

Gustavo MutisCentro de Liderazgo y Gestin

Carlos AnguloUniversidad de los Andes

Francisco PiedrahitaUniversidad ICESI

Jorge Humberto Pelez S.J.Universidad Javeriana de Cali

Hans-Peter KnudsenUniversidad del Rosario

Jaime Bueno

Ramn de la Torre


Members

Colombian Private Council on Competitivenesswww.compite.com.coCra 9. No. 70 A 35 4 th FloorBogot-ColombiaCopyright 2011Tel: (571) 7427413

Staff

lvaro Jos Moreno Garca Associate Researcher

Angie Alexandra Rodrguez Associate Researcher

Clara Patricia Martn Castro Associate Researcher

Felipe Serrano Pinilla Associate Researcher

Marco Llins Vargas Vice president

Natalia Fernndez Corts Associate Researcher

Omar Andrs HerreraResearch Assistant

Danny NewmanResearch AssistantIntern, HarvardKennedy School


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TOWARDS COLLECTIVE PROSPERITY

2011 2012

NATIONALCOMPETITIVENESS REPORT

EXECUTIVE SUMMARY

CONSEJO PRIVADO DE COMPETITIVIDADCOLOMBIA


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Since its inception in 2007, the Colombian Private Council on Competitiveness committeditself to putting together the Informe Nacional de Competitividad (National CompetitivenessReport) on a yearly basis. Te objective was and continues being having a working documentthat would let the country know the state of its competitiveness in its different dimensions,not only from a local perspective, but in relation to the rest the world; in particular, in relationto those countries with which Colombia directly competes. As a result of this diagnostic, theReport also delivers a series of proposals aiming at improving the countrys competitivenessand productivity.

Te Informe Nacional de Competitividad 2011-2012 is the Colombian Private Councilon Competitiveness 5 th consecutive report and has at its core the idea of a Productiveransformation for the country. Each chapter, in addition to delivering up to date and relevantinformation on the lags and progress in each of the topics addressed, includes elements aimingat accelerating this productive transformation process that the country urgently needs.

Te National Competitiveness System, nowadays the National Competitiveness andInnovation System, has made great progress in terms of developing a sound institutionalframework, which is role model around the world, as well as in identifying an integralcompetitiveness agenda that includes both a horizontal axis made up of the set of policiesthat affect all the sectors in the economy across the board and a vertical onewhich makesreference to those policies focused on some concrete sectors, either new or already existingones, with the objective of changing drastically what Colombia currently produces. Up till now,however, efforts have concentrated mainly on the horizontal axis, doing rather marginal effortsin the vertical front, which could be summarized by the implementation of the Productiveransformation Program.

Notwithstanding, if Colombia wants to make real progress towards attaining the goals set by years 2032 vision being one of the three most competitive economies in Latin America, witha middle-to-high per capita income, through an economy that exports high value added goodsand services and that has lower poverty levels, it cannot continue producing what it has been producing all along, neither in the way that it has been producing it through decades. In order togrow in a continuous and sustained way at the high growth rates the country needs, Colombianeeds to submerge itself in a constant process of structural change that leads it to increasing theeconomys productivity and, in particular, to innovate.

For the construction of the Global Competitiveness Index, the World Economic Forum (WEF)ranks countries in three stages of development. Te rst one, highly basic, based on factorsof production, where competition is based on natural resources and low levels of workforcetraining. Te Second, one in which, to preserve the income level reached, the economy dependson the efficiency with which the country uses its factors and on the manufacture of high added value products. In this type of economy, increases in competitiveness are reached throughimprovements in education levels, higher efficiency in the goods market and labor markets,development of nancial markets, capacity to absorb technology and creation of a wide market,either local or international. Te third, on in which the only way to sustain the income levelreached is through the creation of new and different products, on the basis of sophisticated andinnovative production processes.

o rank countries in each stage of development, the WEF takes into account the GDP percapita, adjusted by the exchange rate, but also the degree of dependency from natural resourcesof the country. Colombia, in terms of GDP per capita, is ranked in the second state, but becauseof its exports with low levels of innovation (primary products, based on natural resources andlow technology), that in 2010 reached 88% of total exports of the country, one could say that itis ranked in the rst.

Foreword


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Colombia must change the composition of its exports and advance towards an export modelof high added value products and services. Tis applies to traditional sectors of natural resources,as well as to new sectors in which Colombia may eventually have a competitive advantage.

Tis structural change will only be possible through a productive transformation policythat combines both a horizontal agenda and a vertical agenda, or industrial policy, focusingon specic sectors. A policy that, in addition, does not involve protectionism through tariffs orsubsidies, and that encompasses public-private efforts at the national and local levels.

As depicted throughout the Informe National Competitiveness Report 2011-2012, theconsolidation of this kind of vertical agenda is urgent, even more if we take into account themining-energy boom that is approaching and the risk of suffering the so-called Dutch disease,and the subsequent deindustrialization of the country.

Fortunately, the timing to make this structural change is adequate. Te resources fromroyalties will double in the next eight years, when compared to the previous ten, and may beused as provided by the Legislative Act establishing the New General System of Royalties- forthe development of all regions. Hereupon, the role performed by the Comisiones Regionalesde Competitividad (Regional Competitiveness Commissions) will be crucial, as coordinators ofthe public-private efforts involved in the productive transformation agenda at the local level,and as one of the main participants in the projects that will be nanced with royalties. On howeffectively the regions use the resources to support the productive transformation process, willdepend the country we will have in 15 years.

I hope that the Report will be a key piece for maintaining the focus of our vision aboutcompetitiveness. Te big challenge towards the future is to guarantee the continuity of theSistema Nacional de Competitividad e Innovacin (National System of Competitiveness andInnovation) and to deepen the efforts done until now, consolidating the institutional frameworkthat has been put in place, and transforming competitiveness policy into a State policy.

For their effort in the elaboration of his document, I thank the team of Consejo Privado deCompetitividad: to Marco Llins, vicepresident; to the researchers Alvaro Jos Moreno, editor ofthe Report, Felipe Serrano, Clara Patricia Martn, Natalia Fernndez, Angie Rodrguez and OmarHerrera, and to the administrative staff.

Similarly, I wish to recognize the public and private sector team that has worked with us in theSistema Nacional de Competitividad e Innovacin, for their compromise in the implementationof our work agenda: to Catalina Crane, High Counselor for Public and Private Management;Sergio Daz-Granados, Minister of Commerce, Industry and ourism,; Hernando Jos Gmez,Director of the National Planning Department; Jaime Restrepo, Director of Colciencias; JulinDomnguez, President of Confecamaras; and specially to the President of the Republic, JuanManuel Santos, for always opening channels of discussion for the agenda and priorities of thePrivate Council on Competitiveness.

Lastly, to all Members of the Private Council on Competitiveness, thank you for the trustand generous support. Your interest and steady participation have enormously contributed tothe institutional strengthening of this entity in the last years, and to the consolidation of a workagenda with clear and pertinent priorities, and to the concrete results so far attained by thecountry.

Rosario Crdoba GarcsPresident and CEOColombian Private Council on Competitiveness


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8 COLOMBIAN PRIVATE COUNCIL ON COMPETITIVENESS

Introduction

Education.Social security.Formalization and labor market.Science, Technology and Innovation.Infrastructure, Transportation and Logistics.Information and communication technologies.Financial System.Tax system.Competition.Justice.Corruption.Sustainability.

It is the agenda that seeks to change Colombias productive structure by makingstrategic bets on different sectors.

Covers any sector (not only industrial).It does not involve protection: through tariffs or direct subsidies.Involves a public-private efforts with local actors.

ProductiveTransformation

HORIZONTAL AGENDA

V E R T I C A L A G E N D A

A mlittle over five years ago the NationalCouncil on Economic and Social Policies(CONPES, in Spanish) issued document3439 of 2006 creating the National Competi-

tiveness System; some months later, this system, throughits National Competitiveness Commission, approvedthe long-term vision that has served as a beacon for thecountrys competitiveness agenda:

In 2032, Colombia will be one of the three most competitive countries in Latin America and will have an in-come per capita level equivalent to that of a country witha medium-high income, through an economy that exportshigh value added and innovation intensive goods and ser-vices, with a business environment that incentivizes localand foreign investment, favoring regional convergence,improving opportunities for formal employment, elevatingthe quality of life and notably reducing poverty levels.

A lot of work has been done since then in an effort toattain this goal. However, a balance of how the country

is doing in relation to this vision shows a bleak lands-cape. Tis is not surprising given that different resultscannot be expected if the country keeps on producingthe same goods and services. It is through a process ofconstant structural change or productive transformationthat countries can increase their competitiveness levels.Colombia is in dire need of implementing this process of productive transformation. Te need becomes more ur-gent as the country faces an imminent mining and energyboom that will put pressure against the country s produc-tive diversication.

Te competitiveness agenda is the roadmap to attainthe productive transformation that the country requires.Tis agenda contains two main axes, a horizontal and a vertical one (see diagram). Te horizontal agenda involves the set of policies that affect all sectors of the eco-nomy across the board.

On the other hand, the vertical agenda, or industrial policy, refers to the set of policies focused on some spe-


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9INTRODUCTION

cic sectors, either new or already existing ones, with theobjective of catalyzing productive diversication. Tis policy, whose main driver must be a profound innovationagenda, has as its main purpose addressing bottlenecksand distortions (primarily those related to coordinationfailures or appropriability problems) that limit the pro-ductivity or the mere entry of said sectors.

In the last few years, the Sistema Nacional de Com- petitividad (National Competitiveness System) and, in particular, the Consejo Privado de Competitividad -CPC-(Colombian Private Council on Competitiveness), havededicated themselves primarily to address the horizon-tal axis of the competitiveness agenda. Tough therehas been progress on this front, many challenges still lieahead. In terms of the vertical axis, it is merely taking off.

However, this year some progress has been donein relation to the latter agenda, following many of theCPCs proposals on this regard. Firstly, the National Go- vernment launched its National Strategy for Innovationand Competitiveness (ENIC, in Spanish). Secondly, theGovernment re-launched the Programa de ransforma-cin Productiva (P P), 1 announcing, amongst others,that investment agship projects are being identied tosupport productivity growth in sectors included in this program; and that the P P will nally be implemented atthe local level through the coordination of public-privateefforts, via the Comisiones Regionales de Competitividad

A little over ve years agowas created the NationalCompetitiveness System; somemonths later, this system, throughits National CompetitivenessCommission, approved thelong-term vision that has servedas a beacon for the countryscompetitiveness agenda. A lot ofwork has been done since thenin an effort to attain this goal. However, a balance of how the

country is doing in relation to thisvision shows a bleak landscape.

Te competitiveness agendais the roadmap to attain the productive transformationthat the country requires.

Tis agenda contains twomain axes, a horizontal anda vertical one. Te horizontalagenda involves the set of policies that affect all sectors ofthe economy across the board.

1 The Programa de Transformacin Productiva -PTP-(Productive Transformation Program) is a governmentprogram designed to increase the productivity andcompetitiveness of certain key sectors in the Colombianeconomy, so they can become world class sectors.

-CRC- (Regional Competitiveness Commissions). Tirdly,it is important to highlight the role that the Plan Nacio-nal de Desarrollo (National Development Plan or PND inSpanish) Law gives to the CRC, as local coordinators ofdifferent organizations and venues that currently workon regional competitiveness-related issues. Lastly, thePND Law also gives Bancoldex (Colombias Foreign radeBank) a new role as a development bank.

In view of the need to speed up the pace towards attai-ning the goals of year 2032, the concept of productivetransformation is at the core of this years Informe Nacio-nal de Competitividad -INC- (National CompetitivenessReport). In particular, this years INC focuses mainly onthe deepening of the vertical agenda within the competi-tiveness agenda. Te INC report offers recommendationson how to implement said policy, for the Government,the private sector, and other relevant parties.

Despite progress was made during the last year in thedesign of this type of policies, implementation is the truechallenge for the country. Particularly because the implementation of this kind of policies implies institutionalarticulation of different Ministries, agencies, and publicentities, as well as public-private coordination, both atthe national and local level.

As in previous years, it is expected that this report be-comes an important input for the design and implemen-tation of policies by the Government. Moreover, it is alsoexpected for it to provide guide to other agents of society,in particular the private sector, about the challenges thatentail the implementation of a productive transforma-tion policy for the country, in which all the agents mustdo their part. Only in this way will the country start totake quantitative leaps to increase its competitivenessand be able to attain its goals for year 2032.


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Education

A m productive transformation will depend onthe country having a human capital that isqualied, relevant and inclusive. Qualied,meaning that the imparted instruction re-

sults in a real positive impact on peoples skills. Relevant,in the sense that the skills they acquire respond to theneeds of the productive sector, of society, and the envi-ronment in which they interact. Inclusive, implying thatthis human capital attainment should be available to allagents of society. Currently, the Colombian educationsystem is not prepared to produce human capital withthe above characteristics. Tis will only change if educa-tion becomes the top priority for all agents of the Colom-bian society.

One of the major advances is that policies on earlychildhood integral assistance (children between the agesof 0 and 5) have become a priority, positioning this topicat the highest level in the Presidents Agenda, through thestrategy called de Cero a Siempre (From zero onwards).In order to guarantee this policys impact, its implemen-tation process has to be accelerated.

Although improvement of gross overall coverage at primary and high school levels are worth noting, de-ciencies still persist in net coverage, reecting problemsof over-age and desertion from the education system.Likewise, a decit in education quality is reected in theresults of international tests such as the Program for In-ternational Student Assessment (PISA) and the rends inInternational Mathematics and Science Study ( IMSS), in

which Colombian students rank among the lowest achie- ving countries, not only in the region but in the world. Ifthe country wants to improve, resources must be placed where they might have the greatest impact; for example,in improving the human capital that goes into teaching, which is currently characterized by its low performance.

Lastly, it is noticeable that labor skills and competen-cies in Colombia are not ideal for the countrys present andfuture needs, in particular for those sector bets under itsindustrial policy. Te low level of productivity of human capital is explained to a great extent by the lack of pertinen-ce of instruction provided by the education system, whichhas historically formed human capital for those sectors thecountry has been traditionally involved in, and very littlefor areas related to potentially new sectors.

With regards to human capital demand, while incountries like Malaysia, Korea, and Portugal around20% of the labor force is concentrated in qualied occu- pations scientic professionals and intellectuals andtechnicians and mid level professionals (see graph),Colombia only lls 10% of its vacancies with this type of personnel. As shown in the graph, when this informationis disaggregated one can notice that technical and te-chnological professionals account for more than 50% of professionals in most of the countries, reaching levels of70,9% in Malaysia. On the other hand, Colombia presentsa surplus of university graduates (55,3%) relative to thatof technicians and technologists - & - (44,7%).

Employment distribution of technicians and professionals, 2008 (selected countries)

Source: International Labour Organization. Created by CPC

0%

10%20%

30%

40%

50%60%

70%80%

90%

100%

S p a i n

P e r u

P o r

t u g a l

I s r a e l

T u r k e y

K o r e a

B r a z i

l

S i n g a p o r e

G e r m a n y

M e x

i c o

S o u

t h A f r i c a

C z e c h

R e p u b

l i c

N o r w a y

M a l a y s i a

R e l a t

i v e p r o p o r t

i o n o

f e m p

l o y m e n

t

b y o c c u p a t

i o n

( % )

Country

Technicians and associate professionals professionals

4 8 , 7 %

5 1 , 3

%

24,9%

4 9 , 5 %

5 0 , 5

%

18,1%

5 0 , 8 %

4 9 , 2

%

18,3%

5 2 , 7 %

4 7 , 3

%

33,8%

5 3 , 3 %

4 6 , 7

%

13,3%

5 3 , 5 %

4 6 , 5

%

20,1%

5 3 , 5 %

4 6 , 5

%

14,5%

5 6 , 3 %

4 3 , 7

%

36,9%

5 8 , 6 %

4 1 , 4

%

35,4%

5 9 , 0 %

4 1 , 0

%

16,5%

6 6 , 2 %

3 3 , 8

%

16,2%

6 7 , 1 %

3 2 , 9

%

33,9%

6 8 , 3 %

3 1 , 7

%

37,8%

7 0 , 9 %

2 9 , 1

%

19,8%

% Total employmentper country

allocated in qualiedoccupations

(technicians andprofessionals)


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11EDUCATION

Even though steps have been taken during the pastfew years to balance out this proportion primarily dri- ven by growth in the Servicio Nacional de Aprendizaje-SENA- (National raining Service program supply), thecountry is far away from the distribution of professionalsshown by more developed economies.

Tis distribution in human capital is just one of thesignals of the lack of relevance. In addition to this, thereis a lack of skills in areas such as bilingualism and use ofInformation and Communications echnologies (IC );both of which are fundamental in the development ofsectors under the productive transformation agenda thecountry requires.

Some policyrecommendations:Education is just too important to be left solely in thehands of the Government. All agents of society should esta-blish a commitment in favor of education and put togethera participative alliance (like Brazil did with the movementEverybody in favor of Education), with short, medium,and long-term goals and quantiable indicators that in-crease accountability for investments made in this area.

Early childhood integral assistance Resources to guarantee universal integral assistan-

ce to vulnerable populations must be safe guarded;therefore, Government should include preschool andearly childhood education as part of the General Par-ticipation System (national budget transfers to de- partments);

It is necessary to strengthen the active participationof the private sector in the implementation of thede Cero a Siempre policy; Tus, the Early ChildhoodIntersectorial Commission should include a repre-sentative from the private sector such as someonefrom the program Empresarios por la Educacin (Bu-sinessmen for Education) as a permanent guest tothis commission.

Coverage

A percentage of the parascal charges that are cu-

rrently allotted to SENA must be used for promotingrelevant programs at the regional level by public and private certied technical and technological institu-tions;

In order to minimize academic desertion, in additionto increasing credit supply, monitoring and guidancemechanisms for students should be implemented,including psychological counseling that may detectand take action on those students that may be more prone to abandoning their education.

Quality of basic and secondaryeducation It is necessary to strengthen and give more rele-

vance to the Basic and Secondary Education Qua-lity Index of the Ministerio de Educacin Nacional-MEN- (National Ministry of Education). Apartfrom the average results in the Saber 5th, 9th, and11th grade State Exams, this index should includethe graduation rate, as well as the teachers perfor-mance evaluations results;

Compensation and incentive plans that reward allagents that meet quality improvement goals mustbe established. Tese should include secretariats ofeducation, as well as schools and teachers;

It is important to increase the teaching career pres-tige in order to recruit the best students to becometeachers, by giving special compensations to thebest students, as well as implementing a massivemarketing campaign in which the teaching careersis given more recognition;

Progressively eliminate the double-shift schoolstrategy and replace it with a full-time one, offeringextracurricular activities so that students can makegood use of their free time.

Quality of Higher Education Te percentage of full time faculty staff must be in-

creased; It is necessary to incentivize internationalization and

make it a criterion to obtain the qualied register re-cognition for programs and Instituciones de Educa-cin Superior -IES- (Higher Education Institutions);

An independent national ranking must be designedto assess the quality of IES;

Te Saber Pro State Exam results should be morebinding.

Relevance A complete portfolio of incentives must be desig-

ned to attract qualied domestic and foreign per-sonnel into the country, and procedures to obtain visas, as well as payment mechanisms and require-ments for foreigners, should be simplied;

Pilot programs should be implemented on strategicsectors to validate the National Qualications Sys-tem, in order to start its gradual implementation. Additionally, a strategy to guarantee the appropria-tion of the National Strategy for Management ofthe Human Resource by the private sector shouldbe dened;

It is necessary to measure functional illiteracy of workers in order to establish training courses thatimprove productivity in the short term.


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A mcountry that protects its populationagainst consumer shocks related to unem- ployment, health, and old age increases, andsolidies its productive bases and therefore

its competitiveness.Empirical evidence shows the economic and social

benets of having adequate health and pension systems.On one hand, the healthiest individuals have greater la-bor productivity and generate more income, which im- pacts national productivity. On the other, saving in pen-sions generates a positive impact on the economy, notonly because the savings of young generations translateinto the accumulation of capital that can be invested, butbecause it also contributes to the macroeconomic stabi-lity of the country. A badly managed pension system, thatloses capital due to the lack of nancial coverage, affectscompetitiveness by generating less savings, scal decit,less investments, and greater taxes that do not translateinto well being.

In health, the reforms of the Colombian Health System(SGSSS, in Spanish) have positively affected the coverageand quality of the services, yet still a lot of faults persist.

First, it presents problems of nancial sustainabilitythat rely on multiple causes, such as the recent provisionsissued by the Constitutional Court in which fulllment ofthe equity principle is attempted. Second, the country stillshows substantial aws in the provision of public healthbecause there isnt an adequate prevention and health

Social Security

Additional scal cost due to decisions by the Council of State

Note: NPV = Net present value.Source: Departamento Nacional de Planeacin, Direccin Nacional de Regalas.

All factors included(last six months average)

2 0 1 0

2 0 1 5

2 0 2 0

2 0 2 5

2 0 3 0

2 0 3 5

2 0 4 0

2 0 4 5

2 0 5 0

2 0 5 5

2 0 6 0

2 0 6 5

0,05%

% o

f G D P

0,10%

0,00%

0,15%

0,20%

0,25%

(NPV 3,8% of GDP)($20,1 Billions)

(NPV 2,2% of GDP)($11,7 Billions)

All factors divided(last six months)

promotion. Tird, the SGSSS generates counter-incentives to formalization: the Contributive Regime is nancedby taxes on wages, fact that produces strong counter-incentives to access the formal sector, and at the sametime increases the number of people that form part of theSubsidized Regime. Fourth, the Colombian health systemcreates incentives for moral hazard and adverse selection problems that generate inefficiency in the system: on onehand, some individuals, by being insured, are more likelyto use the medical services though they may not need it.On the other, the SGSSS clusters most of the high-risk in-dividuals (people with higher probability of getting high-cost illnesses) in the Health Services Promoters that have public participation.

In pensions, the Colombian situation is more alluring.On the one hand, as a product of various decisions madeby the Courts that changed the nature of a reform in 1993,the Colombian pension system has become nancially un-sustainable (see graph). On the other hand, the country hasnot made enough progress in terms of equity and coverage.Currently, only 1,2 million people are pensioned in Colom-bia, 3% of the total population and 25% of the populationat retiring age. Even more worrisome, approximately 60%of the requests for retirement to the private insurance re-gime do not end up constituting the benets because theaffiliates do not meet the weeks of contribution requiredto be eligible for a minimum pension, a requisite of the Co-lombian system.


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13SOCIAL SECURITY

Added to the aforementioned is the change in thecountrys demographic composition. In the last 50 years,the population pyramid has drastically changed, increa-sing the proportion of adults over 60 years compared tothe younger generations, a trend that will continue duringthe next 50 years. Tis change threatens the sustainabilityof the pension system.

Some policyrecommendations:

It has to be revised the circumstances and effects im- plied by the vertical integration between Health Ser- vices Promoters and Health Providing Institutionsover the quality and presentation of health services.It is important for health plans to concentrate on promoting health and illness prevention. New incen-tives must be generated, these could be created bymodifying the calculation of the Unit of Payment perCapita (UPC), which apart from being based in itemslike the number of affiliates, should include preven-tion and promotion;

It is proposed that the functions of the administra-tion of nancial risk inherent in the operation ofhealth plans be regulated and accountable to theFinancial Superintendent so that the National De- partment of Health can concentrate exclusively in itsown functions;

For the nancing of the SGSSS, it must be conside-red the possibility of alternative contribution sourcesdifferent to taxes on wages. One nancing alternative could be via resources from the General NationalBudget. In this way, all the individuals would pay thistax in proportion to their income, but the benets would be equal for all;

Tis system would not have any distinctions betweenemployees on the contributing plan or subsidized plan, and it would be the State that would redistributethe resources to the different Health Services Promo-ters through a new structure of the UPC;

Te Mandatory Health Plan, would be one for allindividuals and should be dened according to thecountrys public health policy and based on a list todetermine the prescriptions and procedures that would be excluded.

A badly managed pension system, that losescapital due to the lackof nancial coverage,affects competitiveness by generating less savings, scaldecit, less investments, and greater taxes that do nottranslate into well being. Empirical evidence shows theeconomic and social benetsof having adequate healthand pension systems.

Pension policy recommendations

It is proposed to eliminate the public pay-as-you-gosystem as it was stipulated in the reform of 1993. Forthat, the entry of any new affiliates must be haltedimmediately and any new transfers from the privateindividual savings plan must be prohibited;

Limiting the high pensions granted by the publicscheme to the maximum allowed by law is recom-mended, even for people who already receive theirretirement pension;

It is relevant to increase and match the retirementages for men and women, as well as to increase thecontributions, not only of employees but also of em- ployers, and the number of weeks required for eligi-bility;

It is time to eliminate the minimum pension require-ments and the obligation of increasing the minimum pension annually, according to the minimum wageincrease.


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The Colombian economy shows a great hetero-geneity in labor productivity amongst the sec-tors that comprise it (inter-sector) and withineach of them (intra-sector), setting up the sta-

ge for the country to risk undergoing a negative structu-ral change. Tis heterogeneity is explained, to a great ex-tent, by the high levels of informality in the economy thatreach levels of around 60%. Despite the country having periods of important economic growth during these pastten years, informality levels have stayed constant, whichshows that the causes of informality are structural in na-ture (see graph).Even though some progress has been made through theissuance of the Law of Formalization and EmploymentGeneration (Law 1429 of 2010), there is still a lot of groundfor improvement.

Formalization and Labor Market

Evolution of the labor and business informality levels in Colombia

Source: Departamento Nacional de Planeacin Great Integrated Household Survey and Microenterprise Survey

57,6%

63,7%58,3%

55,0% 56,0%

61,5%

53,7% 51,6%57,1%58,2%

56,9% 58,7%

57,4%

57,7% 58,3% 58,3%

Business- No formal accounting process

Labor - DANE (employment without social security)

Entrepreneurial - Did not renew or obtain the registry of commerce

49,6%

43,8% 45,1%41,5% 42,5% 41,8% 39,4% 39,2%

P e r c e n t a g e o f

i n f o r m a l

e m p

l o y m e n

t o r m

i c r o e n

t e r p r i s e s

( %

)70

60

50

40

30

20

2 0 1 0

- I V

2 0 1 0

- I I I

2 0 1 0 -

I I

2 0 1 0 -

I

2 0 0 9

- I V

2 0 0 9

- I I I

2 0 0 9 -

I I

2 0 0 9 -

I

Period (quarter)

10

Te Colombian economyshows a great heterogeneityin labor productivity amongstthe sectors that comprise it(inter-sector) and within eachof them (intra-sector), settingup the stage for the countryto risk undergoing a negativestructural change.


14/34

15FORMALIZATION AND LABOR MARKET


Make the Colombian labor market more exible:

Reduce non-salary labor costs: the proposal is togradually change the nancing of the Instituto Co-lombiano de Bienestar Familiar -ICBF- (ColombianInstitute of Family Welfare) and the Cajas de Com- pensacin Familiar (Social Compensation Funds),towards being nanced via general national budgetresources, and start dismantling the seven percenta-ge points these parascal contributions represent interms of non-salary labor costs. In addition, a healthreform is proposed to detach the actual 12.5 pointsassociated to salaries within the contributive regimeand let health be nanced by the State through gene-ral taxes;

Reduce redundancy costs: while some sort of unem-

ployment insurance is implemented, redundancycosts in Colombia must be reduced. Additionally, thering regime should be revised, as it is considered tobe within the top 40 most expensive regimes among183 countries, according to the World Bank.

Continue altering the cost-benetrelationship in favor of formality:

Establish control mechanisms and additional sanc-tions for running a business without the mercantileregister: amongst others, some of the proposals are:i) to create in the Labor Inspection, Surveillance andControl (IVC) Division of the Ministry of Social Pro-tection, a strategy to do rigorous monitoring and toapply sanctions to informal businesses that do notcomply with labor norms; ii) to increase the num-ber of labor and business surveillance inspectors allacross the country; and iii) to undertake periodicalmonitoring of businesses that have received preven-tive training by the IVC team and apply the respectivesanctions in case of noncompliance.

Increase human capital:

Re-skill and retrain the labor force: in order to maxi-mize the probabilities of nding job for the unem- ployed or the informal worker, it is necessary to de-sign active re-skilling and re-training policies for thecountrys strategic sectors.

Deepen the countrys Industrial Policy

Develop new sectors: with the objective of inducinglabor transfer from low productivity sectors to those with a higher productivity, it is necessary to deepenthe countrys industrial policy, in order to foster theemergence of new sectors. In this sense, the countrymust prioritize sectors and areas, with the risk of ma-king mistakes along the way hopefully at the lowest possible cost, under its National Strategy for Innova-tion and Competitiveness.

Bring the Micro, Small and MediumEnterprises (Mipymes, in Spanish)closer to the efcient production

frontier:

Apply best practices in Mipymes: replicate the experience of other countries like India, in which theGovernment has offered Mipymes a portfolio of best practices in management, accounting, innovation,and market access, amongst others, in order to provide them with tools that allow them to increase their productivity levels;

Establish clear protocols for entry and sunset clausesfor Mipymes support: in order to guarantee that Go- vernment programs and policies do not become arti-cial respirators for businesses that will never improve their productivity, it is recommended establishingclear protocols for entry and sunset clauses for Mi- pymes coaching and support; in this way, support and public resources for businesses that do not fulll withcertain performance requisites (indicators, goals, andtime tables) should be taken away by national and lo-cal governments.


15/34


The science, technology and innovation (C eI,in Spanish) agenda is at the heart of a produc-tive transformation policy. In this sense, theColombian Government has made it central to

its economic strategy through the implementation of thefollowing ve actions: the continuation of the implemen-tation of the C eI Law, Law 1286 of 2009; the articulationbetween the Sistema Nacional de Competitividad -SNC-(National Competitiveness System) and the Sistema Na-cional de Ciencia ecnologa e Innovacin -SNC I- (Na-tional Science, echnology and Innovation System); thedevelopment of a National Strategy for Innovation andCompetitiveness (ENIC, in Spanish); the decision to allot10% of energy and mining royalties to C eI investment;and the creation of the Development Unit at Bancoldex,Colombias Foreign rade Bank.

However, there is still a lot to do. Investment in re-search and development projects (R&D) in Colombia represents just 0,16% of GDP, which is very low comparedto some reference countries (see table). From the publicsector standpoint, there is a big dispersion of resourcesand little innovative results with regards to publicly nan-ced C eI projects. Tis situation translates into a low useof intellectual property in the country. Additionally, thereis an enormous deciency in the development and accu-mulation of skills to innovate and the quality of scienticinstitutions is very low. Furthermore, there are weaknessesin the adoption and transferring of technology and there isa precarious technological extension service.

Science, Technology and Innovation

Investment in R&D as percentage of GDP, benchmarking countries, 2009

3,36

1,66

1,381,23

0,92 0,85 0,840,67

0,37

0,15

0,0

0,5

1,0

1,5

2,0

2,5

3,0

3,5

4,0

Kor ea P ort ugal Spain Br azi l SouthAfrica

Turkey Malaysia Chi le Mexico Colombia

%

o f G D P

Country

0,000,05

0,10

0,15

0,20

0,25

0,30

0,35

1 9 9 5

1 9 9 6

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

Year

Colombian Investment in R&Das percentage of GDP, 1995-2010

% o

f G D P

Investment in researchand development projectsin Colombia represents just 0,16% of GDP, whichis very low compared tosome reference countries.

Regarding the private sector, private investment inR&D is well below the public one, representing in 2009only 0,04% of GDP. Tis situation translates into a low in-novative capacity. In addition to this, there is scarce abili-ty in the private sector to identify and formulate projects. Additionally, the ability to absorb technology is limited,as a result of both the lack of a technological extensionservice and unawareness of ways to access new technolo-gies. Te link between university and enterprises is still inan incipient stage and the absence of technology transferoffices limits the generation of business spin-offs. Tesedeciencies are reected in the scarce production of hightechnological content goods or intangible goods suscep-tible of being protected by intellectual property rights.


16/34

17SCIENCE, TECHNOLOGY AND INNOVATION


Te ENIC is an important step to promote innovationas the main driver of the countrys productive trans-formation and competitiveness agenda. It is criticalto determine a strategic prioritization of resources, todene their scope, and to design the stages and me-chanisms to implement this policy;

In the case of resource prioritization, three fun-

ding strategies are proposed: one should be directedtowards nancing knowledge development; anothershould be oriented towards nancing knowledgeapplication; and the last one should concentrate inthe nancing of open research. At least 60% of resou-rces coming from energy and mining royalties andfrom the Departamento Administrativo de Ciencia,ecnologa e Innovacin -Colciencias- (Administra-tive Department of Science, echnology and Inno- vation) should go to the knowledge application stra-tegy. Te rest of these resources should be assignedin the following way: at least 75% for the funding ofknowledge development and the remainder for openresearch;

Public agencies in charge of nancing C eI projectsshould undertake coordinated tenders in order togenerate economies of scale. Tis will allow, amongothers, to increase resources, their potential impact,and avoid the overutilization of this mechanism. AMixed echnical Committee under the SNCeI shouldbe created to coordinate public agencies involved inthe nancing of C eI activities;

Colciencias resources for nancing PhD trainingshould concentrate on areas of knowledge that are re-levant for the development of the countrys long-termsectorial bets;

Te relationship between university and enterprisesshould be strengthened through the implementationof a strategy for the creation of technology transferoffices and the promotion of mechanisms that en-courage business spin-offs. Furthermore, a uniquesystem that divulges technological services and exis-ting incentives for the private and academic sectorsshould be in place. In addition to this, a technologicalextension service which could be directed by SENA,should be established to facilitate technology transferand adoption by the private sector;

In order to foster CeI investment it is necessary toestablish matching grants mechanisms, as non reim-bursable co-nancing resources. Additionally, it isimportant that Bancoldexs Development Unit kicksoff in order to promote early stage nancing, such asangel investors networks and venture capital funds;

In order to improve the quality of research and development project proposals there should be a training pro-gram that teaches businessmen how to develop theirbusiness ideas and how to attract investors. Te Mixedechnical Committee proposed above could design this

program and coordinate its implementation;

At the local level, it is important that sectorial road-maps are designed and implemented to foster clusterdevelopment, given that it is well known that agglo-meration economies encourage C eI investment. Additionally, the Regional Competitiveness Commis-sions (CRC, in Spanish) should be the channel for proposals to be presented to the CeI Fund decision-ma-king board of the General Royalties System. Terefore,this function should be made explicit in the Law that will fully develop the Royalties Legislative Act;

Te Colombian intellectual property system shouldbe revised in order to achieve better institutional ar-ticulation and, thus, facilitate the granting of proper-ty rights. In order to promote the use of intellectual property, it is necessary to design and implementtraining programs so that the private sector becomesmore knowledgeable about the available tools for pro-tecting intangibles goods.

Te ability to absorbtechnology is limited, as aresult of both the lack of atechnological extension serviceand unawareness of waysto access new technologies.Te link between universityand enterprises is still inan incipient stage and theabsence of technology transferoffices limits the generation of

business spin-offs.


17/34


Infrastructure, Transportation and Logistics

0

10

20

30

3934

29282523

41

49 50

6772

40

50

60

70

80

K o r e a

R a n

k i n g

Country

S p a

i n

S o u

t h A f r i c a

M a

l a y s

i a

P o r t u g a

l

T u r k e y

B r a z i

l

C h i l e

M e x i c o

P e r u

C o

l o m

b i a

Logistics Performance Index, 2010

Source: World Bank.

One of the most important bottlenecks forthe countrys productivity is found in thedeciencies related to its infrastructure,transportation and logistics (I L). Regar-

ding infrastructure, the country appears to be laggingbehind according to international indicators that assessconditions of roads, ports, airports, rivers navigability,and train infrastructure. Te lack of planning and prio-ritization of infrastructure projects and the lack of ar-ticulation between different transportation modes are just some of the characteristics of the countrys currentI L situation. Tis, combined with the weakness of ins-titutions in charge of these matters, such as the InstitutoNacional de Concesiones -INCO- (National Institute ofConcessions), has resulted in failures in contracting andin the implementation of concessions schemes, as wellas in numerous contract renegotiations and corruption problems.

Additionally, there are great weaknesses in termsof the countrys logistics, which are made clear, amongothers, by the excessive inspections and trade proceduresin ports and airports, coupled with the lack of competitiveness of the freight transport sector.

Given the above, the country does not rank well in in-ternational key performance indicators (see graph).

Te country is starting to change this situationthrough major investments in infrastructure and thestrengthening of institutions in charge of these matters.However, given that this area is so critical to achievea productive transformation, any effort on this mattermust be deepened and accelerated.


Prioritizing infrastructure projects and implementinglogistical optimization: although the country has aransport Master Plan, it is important to guaranteeits implementation and prioritize logistical pathwaysthat integrate different transportation modes, identi-fying and resolving bottlenecks that hinder effectivefreight ow along these prioritized pathways. In orderto achieve this, it is necessary to design a policy forthe implementation and development of multimodaltransport;

Likewise, operation management offices for these pathways should be established in order to guaranteetheir efficiency and maintenance;

Regarding freight inspection, it is required to imple-ment not only mechanisms for institutional coordi-

One of the most importantbottlenecks for the countrys productivity is found inthe deciencies relatedto its infrastructure,transportation and logistics.Te country appears to be

lagging in internationalindicators that assessconditions of roads, ports,airports, rivers navigability,and train infrastructure.


18/34

19INFRASTRUCTURE, TRANSPORTATION AND LOGISTICS

nation, but also control mechanisms supported byinformation and communication technologies;

Strengthen the countrys concession policies: thecountry cannot continue nancing infrastructure projects just through the National General Budget.In order to attract the private sector to develop thecountrys infrastructure, some adjustments must bemade in terms of the sectors institutions, the imple-mentation of best practices in concessions, and thestructuring of nancial assets that would be attractivefor investors;

It is essential to give the Agencia Nacional de Infraes-tructura -ANI- (National Infrastructure Agency) theexclusiveness and independence to structure, promo-te and dene mechanisms to nance infrastructure projects for all transportation modes. With regards toconcessions, there should be clear and efficient proce-dures for tenders and the awarding of projects, as wellas an effective regulatory framework that identiesthe risks and obligations of parties. Lastly, regardingstructuring attractive nancial assets, the use of project nance should be promoted, as well as the adop-tion of a system introducing maximum protabilitylimits for pension funds. Te latter in order to reduceincentives for herd behavior towards the same lowrisk portfolios by institutional investors that couldbring in resources for infrastructure;

Te lack of planningand prioritizationof infrastructure projects and the lackof articulation betweendifferent transportationmodes are just some

of the characteristicsof the countryscurrent infrastructure,transportation andlogistics situation.

Tere are greatweaknesses in terms of the

countrys logistics, whichare made clear, amongothers, by the excessiveinspections and trade procedures in ports andairports, coupled with thelack of competitiveness ofthe freight transport sector.

It is critical to have a world-class freight transportsector. Even though the elimination of the freight price table was a good rst step towards developingthis sector, there is still much progress to be done. Es- pecially when a world-class freight transport sector will positively impact all the sectors of the Colombianeconomy. In this sense, the Ministry of ransporta-tion should continue the process for improving andadapting the existing mechanisms to replace the ve-hicle eet, and must assure that the countrys freighttransport supply adjusts itself in a exible way tochanges in demand conditions. Additionally, with re-gards to multimodal policy, it is necessary to generatethe incentives to promote the integration of freighttransportation rms of different modal nature. For itsimplementation, it will also be necessary training thelabor force of the different modes, and remove all ofthe regulatory barriers that discourage the develop-ment of different transport modes;

Te implementation of a productive transformation policy will imply addressing a series of I L relateddistortions and bottlenecks that are specic to eachsector or industry. Moreover, many of these issues respond to local characteristics, making them specic toa geographical context. Terefore, this kind of obsta-cles must be addressed by the agency responsible forthe implementation of the productive transformation policy, with the support of national level institutionssuch as the Logistics National Committee, under theNational Competitiveness and Innovation System. Fur-thermore, these specic issues should be addressed byclusters managers at the local level, who must seek toarticulate the relevant institutional offer towards sol- ving these issues, through the CRC.


19/34


The use of information and communication te-chnologies (IC s) in Colombia is fundamentalto close the existing gaps in labor productivity.Te intra-sectoral gaps show that Colombias

productive sector is not using these types of technologiesand, therefore, nds itself far from the efficient produc-tion frontier. On top of its usage, IC appropriation is akey element to increase productivity in areas such as edu-cation, medicine, justice, and the public sector, amongstothers, and to increase the countrys productivity as a whole.

Regarding IC absorption, during 2010 the countrykept ranked on intermediate positions in internationalrankings of IC use, absorption and development. Co-lombia ranked 49th amongst 66 countries in the I Com- petitiveness Index, reecting the low performance of ICR&D in the country. Te country also moved back on theechnological Readiness pillar of World Economic Fo-rum (WEF) Global Competitiveness Report, indicating

Information and Communication Technologies

Broadband subscriptions per 100 inhabitants, 2010.

Source: International Communication Union - UIT

Country

0

10

20

30

40

50

60

70

80

90

100

C o

l o m

b i a

M e x i c o

C h i l e

P e r u

S o u

t h

A f r i c a

B r a z i

l

T u r k e y

M a

l a y s

i a

S p a

i n

P o r t u g a

l

K o r e a

5,710

3

107

1

107

2319

37

7 7 8 11

17 18

27

56

73

91

Fixed (wired)-broadband

Mobile-broadband

P e r

1 0 0 i n h a

b i t a n

t s

5,6

that it is essential to strengthen the promotion and useof IC s in daily activities and in productive processes, inorder to achieve a higher level of competitiveness in theeconomy; it is also critical to increase levels of productivity and efficiency.

Te increase in the use and appropriation of IC s de- pends on tackling in restrictions both from the supplyand the demand side. For example, in terms of supply,despite sustained growth, Colombia lags behind on mo-bile and xed broadband penetration compared withother countries (see graph); there is also an importantdigital gap between rural and urban areas. Additionally,matters such as low household PC penetration, high feesalong poor service quality, have limited the general andefficient use of broadband in the country. Te govern-ment has been working on generating tax and regulatoryincentives to counteract these limitations, as a way toreach the goal of universalizing IC services, mainly inthe broadband side.


20/34

21INFORMATION AND COMMUNICATION TECHNOLOGIES

On the demand side, the use and appropriation ofIC s also depend on the needs and skills of potentialusers. Colombias results on the 2009 OECD PISA surveyof digital literacy indicate that about 70% of students arebelow the minimum level required in digital reading as tosurf the web in an efficient and effective way. Tis showsthat Colombian students are not yet able to benet fromdigital tools, limiting their access to educational, employment and social opportunities characteristic of the di-gital age.

Studies show that IC s incorporation and appropriation develop through different phases, according tothe particular growth and evolution dynamics of eachcompany. However, the productivity impact for busines-ses able to incorporate IC s to enhance their innovative processes is more striking. In the case of MSMEs, it isimportant to highlight the benets in terms of buildingsocial capital at low cost, which often triggers new so-cio-economic relations resulting in new businesses ornew ideas of good practice in order to expand and bemore productive.


Widespread diffusion of broadband

It is critical to extend the supply and use of prepaidbroadband in the country. Current high internet rates prevent the increase in service penetration, especiallyin low-income population. Te proposal is to extendthe existing prepaid plans offering with affordable ra-tes and attractive packages suitable to the low-inco-me population;

It is important to offer consumers the possibility to package their PC purchase with broadband access plans that link the user to the service from the verybeginning;

Te inclusion of s computer within every unit of so-cial interest housing purchased is suggested. Tis proposal would increase PC household penetration,representing just an additional marginal cost for newhomeowners.

Use and adoption of ICTs to enhancepublic and private sector productivity :

Universalize the scope of Gobierno en Lnea (Govern-ment Online) Strategy at regional level, taking advan-tage of the economies of scale in the development ofrelated virtual services of the national system;

Include Cloud computing trainings for MSMEs withinthe Plan Vive Digital (Live Digital Plan). Cloud usage will allow cost reduction for companies using it, bols-tering in that way the use of IC s.

ICTs application in cross-cutting areasof competitiveness

e-Learning: It is important that regional governments

take advantage of the resources from royalties to pro-mote projects that increase the use of information te-chnologies in public education.

e-Justice: It is critical to promote the digitalization ofcourt records and administrative proceedings, in or-der to optimize courts management. Tis will speedup nal decisions in judicial proceedings.

Te increase in the useand appropriation of IC sdepends on tackling inrestrictions both from thesupply and the demandside. For example, in termsof supply, despite sustained growth, Colombia lagsbehind on mobile and xedbroadband penetrationcompared with othercountries.


21/34


Financial System

12

2023

27

31

42 43 44

46 47

Financial Access

Note: Access by individuals and businesses to different forms of capitaland nancial services. 1-to-7 scale (1 and 7 correspond to the worstand best possible outcomes, respectively).

Source: World Economic Forum - The Financial Economic Report 2010 .

S p a

i n10

M a

l a y s

i a

C h i l e

B r a z i

l

T u r k e y

M e x i c o

S o u

t h A f r i c a

C o

l o m

b i a

P e r u

K o r e a

15

20

25

45

30

40

50

35

R a n

k i n g

Country

In order to achieve the productive transformationthe country needs, progress must be made in termsof the access the Colombian population has to nan-cial services, the capacity to nance entrepreneurs

throughout all the entrepreneurship stages, and the useof risk management strategies against adverse shocksthat might compromise productivity.

Te country has been making progress in terms of -nancial inclusion, mainly due to the growth of non-tradi-tional channels. However, the high levels of informality,the limits on interest rates, the high costs associated tobancarization (i.g. 4x1000 tax, handling fees, etc.), andthe low levels of basic knowledge on nance-related is-sues, continue to hamper the countrys further progress.

Proof of this is that Colombia is still lagging behindin several of the international indicators on this matter, when compared to other countries. An example of this isthe WEFs indicator on people and businesses access tocapital and nancial services, in which the country ranks47th out of 57 countries and last amongst some countriesof reference (see graph).

Te situation regarding access to nance throughoutthe different entrepreneurship stages is no different. Anincipient early stage nancing industry (angel investors,seed capital, and venture capital) is just budding.

In this regard, it is important to highlight the crea-tion of Bancoldexs Development Unit, which will have,among others, the task of increasing the offer of early sta-ge nancing. Regarding bank credit, the country needs toincrease lenders rights protection, so that credit does notonly ow toward collaterized projects, but also towardthose with expected higher returns. In terms of capitalmarkets, despite there have been major advances regar-ding market deepening, the country is still lacking an in-tegral policy to foster the markets real take-off.

With regards to risk hedging, insurance penetrationlevels in Colombia are still low 2.3% of GDP. Te samehappens in terms of development and use of the deriva-tives market.

All of the above must be coupled with the implemen-tation of a comprehensive strategy of nancial education,aiming at improving the countrys existing deciencies inthis area. Fortunately, Fogan (Colombias Financial Insti-tution Guarantee Fund) is leading an effort to dene andimplement a Financial Education National Strategy.

Te country has been making progress in terms of nancialinclusion, mainly due to the growth of non-traditionalchannels. However, the highlevels of informality, the limitson interest rates, the high costs

associated to bancarizationand the low levels of basicknowledge on nance-relatedissues, continue to hamper thecountrys further progress.


22/34

23FINANCIAL SYSTEM


Broaden access to nancial services

Generate incentives to induce payments through thenancial system. Tus, the country should considerintroducing tax reductions ( for example VA dis-counts) and other type of incentives to transactionsusing plastic money and to those made through elec-tronic channels;

Eliminate limits currently set on interest rates, which

only restrict credit access to part of the population. Onthe other hand, as long as the scal situation allows it,the possibility of accelerating the 4x1000 gradual taxelimination must be explored.

Financing throughout the differentstages of entrepreneurship

Implement the Innovation and Competitiveness Na-

tional Strategy and, in particular, bring into operationBancoldexs Development Unit, which will be in char-ge of deepening the early-stage nancing offer;

Design strategies towards improving and strengthe-ning contractual terms, aiming at guaranteeing len-ders rights and facilitating enforcement;

Design a comprehensive capital markets develop-ment policy including, amongst others, greater inves-tor protection; measures to increase the quality of themarkets regulation and surveillance; denition and prioritization of areas in which to improve and a revi-sion of existing demand vehicles;

Accelerate the harmonization of accounting stan-dards to international standards. Despite the Public Accountancy echnical Council has already startedthis task, in compliance with the Accounting Law(Law 1314 of 2009), it is well known that this processis going at a very slow pace.

Regarding bank credit, thecountry needs to increaselenders rights protection, sothat credit does not only owtoward collaterized projects,but also toward those withexpected higher returns. Interms of capital markets,despite there have been majoradvances regarding marketdeepening, the country is stilllacking an integral policy to foster the markets real take-off.

Risk Hedging

Deepen the use of derivative markets. A strategy to in-crease the use of these mechanisms must be twofold.In the rst place, it should include measures to stren-gthen the countrys derivatives market, as well as its wider use. Second, it should include a set of measuresaimed at divulging the existence of these tools, as wellas their potential risks and benets;

Strengthen the insurance sectors institutions and re-gulation. Progress must be made in key regulation forthe insurance industry, such as updating the reservesregime.

Financial Education

Implement a comprehensive nancial educationstrategy that articulates all the relevant public and private agents. In this regard, the implementation ofFogans Financial Education National Strategy mustbe backed. Te National Competitiveness and Innova-tion System could be used as a public/private coordi-nation organ for the implementation of this strategy.


23/34


Tax System

The tax structure of a country directly inuen-ces its economic growth and competitiveness.Trough a good tax system, the State not onlyguarantees the generation of sufficient resou-

rces to satisfy the needs of its people and maintain thestability of public nance; it also shapes private incentives to invest, generate employment and explore businessalternatives in new economic sectors, directly inuen-cing the possibilities for a productive transformation ofthe country.

Colombia`s tax system is far from aligned with thecountrys competitiveness agenda. First, several taxesdistort the decisions of investors and workers. Indeed,Colombia has a very high corporate tax rate that notonly makes the country less attractive to local investorsand foreigners, but it also promotes evasion and affectsthe gross savings of the production. It also has very high payroll taxes, which halts the generation of formal employment. Moreover, it has badly designed capital taxes(in Spanish, impuestos al patrimonio), which discourageinvestment, promote economic dwarsm and act as abrake for productivity and savings (see graph).

Trough a good tax system,the State not only guaranteesthe generation of sufficientresources to satisfy the needsof its people and maintain thestability of public nance; italso shapes private incentivesto invest, generate employmentand explore business

alternatives in new economicsectors, directly inuencing the possibilities for a productivetransformation of the country.

Total tax rate , 2010

Note: This variable is a combination of prot tax (% of prots), labor tax and contribution (% of prots), and other taxes (% of prots).

Source: World Bank/International Finance Corporation, Doing Business 2011: Making a Difference for Entrepreneurs

20

40

60

80

C

h i l e ( 2 1 )

K o r e a

( 3 2 )

S o u

t h A f r i c a

( 3 6 )

M a l a y s i a

( 4 9 )

P e r u

( 7 0 )

P o r t u g a l

( 8 5 )

T u r k e y

( 8 8 )

M e x

i c o

( 1 1 0 )

S p a i n

( 1 1 9 )

B r a z

i l ( 1 3 3 )

C o l o m

b i a

( 1 3 5 )

% o

f p r o

t s

Country

25,029,8 30,5

33,7

40,543,3 44,5

50,5

56,5

69,0

78,7


24/34

25TAX SYSTEM

Second, Colombia`s tax system is complex; fulllingtax obligations is cumbersome and expensive, which is why the level of tax distortion is major and the collec-tion level for the State is poor. Colombia has eight diffe-rent VA rates, two tax regimes (common and simpli-ed) and a high divergence between the nominal rate of withholding tax and the tariff effectively charged to thetaxpayers. Moreover, it has a high number of tax exemp-tions which contribute to the complexity of the tax sys-tem, reduce the productivity of taxes and constitute a violation to the principle of horizontal equity.

Tird, Colombia shows a big concentration of tax bur-den. ax payment falls on a reduced number of taxpayers,generating a much reduced real tax base.

Tough there have been some advances like Law 1430of 2010, which eliminated tax deductions for investmentin capital goods, and the recent tariff reforms that havereduced average tariffs in general, Colombia is still farfrom having a tax system in line with the aspirations ofthe country. If Colombia wants to be competitive, it is im- perative to modify the tax system.


It is proposed to reduce the corporate income taxrate from 33% to 20%. Tis reduction would be com- plemented through the introduction of a xed tariff of 13% for the distribution of dividends, keeping the progressive tariff for income of natural persons;

It is convenient to consider reducing the tax burdenover payrolls; in particular, the elimination of para-scal contributions associated to the CompensationFunds and the ICBF, and the contributions to the con-tributive health regime, searching for alternative sou-rces of nancing for these items;

It is necessary to reduce the number of VA tariffsto two: 0% and 16%. Te rst rate would apply in anexceptional manner to the goods and services thatdue to their economic and social functions should beexempt from the VA, and also to those goods and services that are exported and consumed outside Colom-bia. Te second would apply for the rest of goods;

Is recommended to reduce the number of taxpayerscovered by the simplied regime by reducing thegross income eligibility threshold from 4,000 to 1,000tax value units (UV , in Spanish);

It is appropriate to eliminate, or at least reduce to itssmallest expression, the presence of tax exemptions inthe Colombian tax system;

Te number of natural persons paying taxes mustbe increased through the reduction the thresholdas of which natural persons start to pay income andsupplementary taxes.

Colombia`s tax system iscomplex; fullling tax obligationsis cumbersome and expensive,which is why the level of taxdistortion is major and thecollection level for the Stateis poor. Colombia has eightdifferent VA rates, two taxregimes (common and simplied)

and a high divergence betweenthe nominal rate of withholdingtax and the tariff effectivelycharged to the taxpayers.

Colombia's tax system is far from aligned with the countryscompetitiveness agenda. Severaltaxes distort the decisions ofinvestors and workers. Indeed,Colombia has a very highcorporate tax rate that not onlymakes the country less attractiveto local investors and foreigners,but it also promotes evasion andaffects the gross savings of the production.


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Business rivalry in local markets is one of thefactors that most affects a nations` degreeof competitiveness. Where competition between companies exists, there lies economic

growth, innovation, productivity and competitiveness.Tat explains why countries that progressively increasemarket competition experience a higher growth in theirGDP per capita.

Even though Colombia has laws that promote and protect competition since 1959, its markets are still con-centrated, with low rivalry and high barriers of entry (seegraph). In addition, the perception about the effective-ness of Superintendencia de Industria y Comercio (SIC)Colombia`s Competition Agency- is not as strong as itshould be.

M a

l a y s

i a ( 1 4 )1

M e x

i c o

( 1 2 4 )

S p a

i n ( 2 9 )

S o u

t h A f r i c a

( 3 7 )

B r a z i

l ( 4 0 )

T u r k e y

( 4 1 )

C h i l e ( 8 8 )

P e r u

( 8 9 )

C o

l o m

b i a ( 9 4 )

K o r e a

( 1 1 4 )

P o r t u g a

l ( 1 1 5 )

2

3

4

6

7

5

I n d e x

Country

Extent of market dominance

How would you characterize corporate activity in yourcountry? (1 = dominated by a few business groups);7 = (spread among many rms)Source: World Economic Forum, Global CompetitivenessReport 2011-2012

Promotion and Protection of Competition

Te absence of strong rivalry in Colombian marketscomes from multiple sources, amongst which are anti-competitive conducts performed by private agents in themarket (cartels, abuse of dominance and/or anticompe-titive mergers), and government regulations that restraincompetition in the market and protect specic sectors orbusinesses.

Tis shows how the enactment of antitrust laws is notby itself sufficient to promote competition. Effective competition policy requires, in addition, the existence of astrong, independent and transparent competition agencythat punishes anticompetitive conduct, and prevents theenactment of anticompetitive regulations. Indeed, thereis a direct relationship between the effectiveness of competition laws and the nature of the institutions entrusted with their application. For such reason, the institutionaldesign of the competition agency is the cornerstone toguarantee its effectiveness in the market.

Multiple efforts have been put in place to improvethe effectiveness of Colombias competition policy. Tisincludes the enactment of new competition laws; an in-crease in the promotion competition laws by the SIC; andan increase in the number of cartel and abuse of domi-nance investigations. Nonetheless, data shows that theeffectiveness of the Colombian Competition Agency hasnot been constant. On the contrary, it has depended onthe staff in charge of the Agency. Tis has resulted in a

Even though Colombiahas laws that promoteand protect competitionsince 1959, its marketsare still concentrated,with low rivalry andhigh barriers of entry. Inaddition, the perceptionabout the effectiveness theColombian Competition Agency is not as strong asit should be.


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27PROMOTION AND PROTECTION OF COMPETITION

very low repression of anticompetitive conducts in some periods of time, something that has affected Colombia`scompetitiveness.

Te establishment of a coherent and effective competition policy in Colombia requires the modication ofthe rules that regulate the institutional framework of theColombian Competition Agency. Stronger independence,clearer legal proceedings, sufficient budget, and betterlegal mechanisms to enforce competition laws, are someof the challenges that Colombia must face if it wants tocount on competitive, innovative, efficient markets.


The creation of a new Competition Agency, with at least the followingcharacteristics, is suggested:

Exclusively dedicated to the promotion of competi-tion in the Colombian market;

Tere is a direct relationshipbetween the effectiveness ofcompetition laws and thenature of the institutionsentrusted with theirapplication. For such reason,the institutional design ofthe competition agency is thecornerstone to guarantee itseffectiveness in the market.

Te establishment of acoherent and effectivecompetition policy inColombia requires themodication of the rules thatregulate the institutional framework of the ColombianCompetition Agency. Stronger

independence, clearer legal proceedings, sufficient budget,and better legal mechanismsto enforce competition laws,are some of the challenges thatColombia must face.

Divided in three branches: one dedicated to the inves-tigation of anticompetitive conducts and the analysisof mergers; one collegiate branch in charge of judginganticompetitive conducts and mergers that may les-sen competition, and of the general direction of thecompetition agency; and another dedicated to eco-nomic and market research. Te collegiate body incharge of judging the conducts should be made upby people that meet the minimum professional stan-dards, elected for xed and staggered periods of time, without the possibility of reelection, and whose cau-ses for dismissal are expressly stipulated by Law;

Have a right to veto regulations from public entitiesthat might affect free competition in the Colombianmarket. Alternatively, the competition agency shouldbe legitimized to le nullity actions before courts oflaw in order to remove anticompetitive regulations.

The enactment of a clear and specicregulation of private antitrust actions ishighly recommended.

Tis regulation should allow private parties to recoverdamages resulting from anticompetitive conduct per-formed by other market actors.


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One of the biggest disincentives to do busi-ness in a country is the lack of legal cer-tainty. When businessmen do not havecertainty about the rules that govern their

investments, or do not count with a fast, easy and predic-table mechanism to enforce them, they back their inves-tment efforts or assume a very high cost in doing them.

Colombias judicial system is still one of the mostinefficient in the world. Judicial proceedings are leng-thy and unpredictable; condence in justice and judgesis low; levels of corruption -according to citizens- arehigh; and the profession of being a judge does not havethe prestige it is due. According to Doing Business 2012, which measures the efficiency of judicial systems, Colom-bia obtained the 149th place out of 183 countries (see graph 1). Similarly, the WEF Global Competitiveness Report2011-2012, locates Colombia in the 88th place between142 countries, with regards to the indicator that measu-res the efficiency of the legal system.

Justice

K o r e a

0

230

415 420

600

731

1346

200

400

600

800

1000

1200

1400

1600

C o

l o m

b i a

M e x i c o

T u r k e y

428

P e r u

480

C h i l e

515

S p a i n

547

P o r t u g a

l

425

M a

l a y s i a

S o u

t h A f r i c a

B r a z

i l

N u m

b e r o

f d a y s

Country

Source: Doing Business 2012 .

Time (days) to enforce a contract Te difficulties of the Colombian judicial system donot come from the lack of economic resources. It is truethat the judicial system needs more investment; however,to improve the performance of Colombian courts, otherfactors need to be taken into account. oday, Judgesspend much of their time performing administrative du-ties that could be performed by other institutions; the Co-lombian legal system is extremely procedural (too muchsteps to make a decision), which lengthens judicial pro-ceedings; there is excessive use of the proceedings to en-force fundamental constitutional rights (accin de tutela,in Spanish); the transition from written to oral trials hasbeen very slow; lawyers employ dilatory ploys that arenot opportunely sanctioned; the legal branch does notuse the necessary IC s to speed up proceedings; the hu-man capital of the judicial branch is constantly questio-ned; the evaluation of judges does not seem to representthe users opinion; and the use of alternative mechanismsfor conict resolution is rather timid.

Although signicant progress has been made in thelast years, the country still requires multiple reforms toreach the legal certainty needed to be competitive. Judgesduties must be reorganized in such a way that they con-centrate only in those that need a legal decision; partiesmust play a more active role in judicial proceedings; thesystem of recruitment, training and evaluation of judgesmust be improved; IC s must be implemented, so that

One of the biggest disincentivesto do business in a countryis the lack of legal certainty.When businessmen do not havecertainty about the rules that govern their investments, ordo not count with a fast, easyand predictable mechanism toenforce them, they back theirinvestment efforts or assume avery high cost in doing them.


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29JUSTICE

absurd obligations, like having to go every day to thecourthouse to revise the status of a le can be eliminated;the oral trial system must be applied adequately; higher promotion for the use of alternative mechanisms for con-ict resolution is needed; legal mechanisms so that the judges can discipline the parties and their lawyers are re-quired; more important, the establishment of mandatory judicial precedent is pertinent.

As long as the country does not make a structural re-form to the judicial branch that implies a change in thestructure of proceedings and the litigation culture, it willcontinue to occupy low markers in the national and inter-national indicators.


Specialized executive courts must be created, dedica-ted solely to debt collection, in order to liberate therest of judges from attending these proceedings thattoday take up 80% of their time.

Te creation of executive courts must come in tandem with the creation of an Administrative Support Entity(EAA, in Spanish) for the Judicial Branch. Te propo-sed EAA would assume all the administrative tasksthat are currently taking up all the time and efforts ofordinary judges, such as: designation of experts, courtreceivers, liquidators, etc.

Te Colombian procedural system must be reformedin order to transfer to lawyers and parties certaintasks that today are being executed by judges. It is the-refore necessary to evaluate the implementation of adiscovery system that allows parties to collect eviden-ce without presence of a judge.

A system of mandatory judicial precedent should beestablished. Tis would require municipal and circuit judges to follow the jurisprudence of the tribunals oftheir judicial district and of the Supreme Court; and would require tribunals to follow the precedents setby the Supreme Court.

It would also be appropriate to create a bar or colle-giate exam for lawyers, so that all students graduatedfrom a law school that want to practice law have to pass this aptitude and knowledge test.

Colombias judicial systemis still one of the mostinefficient in the world. Judicial proceedings are lengthy andunpredictable; condence

in justice and judges is low;levels of corruption -accordingto citizens- are high; and the profession of being a judge doesnot have the prestige it is due.

It is necessary to further specialize jurisdictions andcreate specialized judges for topics such as bankrupt-cy, environment, competition, consumer protection,intellectual property, among others. Under the cu-rrent jurisdictional division, civil judges deal withlegal matters that bear no legal relationship witheach other. Te proposed specialization will improvethe quality of judicial decisions and the efficiency ofcourts.

It is pertinent to direct all the efforts and resourcesnecessary to effectively implement the oral systemin judicial proceedings. A prompt implementation ofthis system, which includes appropriate training to judges and magistrates in charge of applying it, willresult in a better allocation of human and economicresources in the justice system.

It is necessary to eliminate the procedural institutioncalled lawsuit reform, by which the parties may re-form their lawsuit at the beginning of the process.Tis institution,

national competitiveness report executive summary 2011

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