Colombia: Extractives for Prosperity

Colombia is one of the fastest growing economies in South America. In recent years, with energy prices on the rise, Colombia’s export dynamics have shifted away from traditional agricultural trade towards heavier emphasis on crude oil, mining, and natural gas exports. Colombia has undergone some regulatory changes, emerging as an increasingly important destination for foreign direct investment in the extractive industries. The export earnings and royalty and tax revenue derived from these extractive resources have inevitably become an essential component of the country’s economic ascendance and infrastructure development moving forward.

From a domestic wealth management perspective, Colombia has already begun the process of addressing its exposure to the positive and negative extractive resource externalities through the royalty reforms of 2011 and the tax reform of 2012. While these reforms present a critical first step in addressing the potential socioeconomic repercussions of this growing segment of the economy, there are still institutional, social, environmental, and economic vulnerabilities that need to be addressed to prevent Colombia from falling into the resource curse, in which other tradable sectors loose competitiveness, the country’s exposure to volatile commodities’ prices increases and governance deteriorates. This presents great challenges for a developing economy that aims to diversify itself and build on its natural wealth to build other important productive sectors. As Colombia becomes more dependent on resource-related revenues, it must adopt comprehensive institutional reform, continue to formalize its mining sector, and solidify its fiscal regime in order to reduce exogenous pressures on the Colombian Peso (COP), and make the economy resilient against external shocks to the economy. Moreover, the government must work to ensure the wealth derived from the extractive industries is fairly distributed and translates into benefits for the entire Colombian population while preserving its unique environmental wealth.

The final report provides a comprehensive review of the critical economic, political, legal, social, and environmental variables that will affect and be affected by the rapid development of Colombia’s extractive resources. Each section proposes methodical and practical recommendations for the country’s policymakers aimed at enhancing the current institutional framework governing the activities of the extractive industries in the country. The recommendations proposed in this document are based on the analysis of information obtained through literature review, primary and secondary empirical data analysis, and fieldwork in Bogotá and mining regions in Colombia (i.e. Santander, Chocó, Santa Marta, La Guajira) which included interviews with lawmakers, government officials, academics, journalists, international donors, civil society, local affected communities, as well as the private sector.