John Vizcaino / REUTERS Colombiab President Juan Manuel Santos declares a definitive ceasefire with FARC in Bogota, Colombia, August 2016.

The Economics of the Colombia-FARC Peace Accord

Why Selling the Deal Based on Expected GDP Gains Is Shortsighted

The signing of a peace accord between the Colombian government and the Revolutionary Armed Forces of Colombia (FARC), the leftist guerrilla group, in November 2016 might mark the beginning of the end of a 53-year-old conflict. In its efforts to sell the ongoing peace process, the government has focused in large part on the deal’s economic merits. Government officials and research papers have emphasized that a strong and lasting peace will bring key benefits. But for the past two years in Colombia, discussions about the benefits have seemed to focus on one key element: the number of percentage points it is likely to add to the national gross domestic product (GDP).  

Implementing the deal will be far from easy. De-escalation of the conflict was followed by a cease-fire in August 2016, and demobilization of FARC fighters accelerated in early 2017. But opponents of the country’s peace deal are set to make it a pivotal issue in the 2018 parliamentary and presidential elections, and a testing security environment in some of Colombia’s regions will likely challenge the full establishment of peace for years to come.

Given the various obstacles the deal has and will continue to face, emphasizing its economic advantages makes sense from the government’s perspective. These are effects from which most of the population can potentially benefit. But claiming that peace will bring specific additional percentage points to Colombia’s GDP ignores the vast array of components that contribute to a country’s economic growth over time. Moreover, it has dangerously staked the agreement’s legitimacy on how much the Colombian economy grows over the coming years.

GROWTH EXPECTATIONS

Economic forecasting is notoriously difficult. Yet in the heat of discussions about the peace agreement’s merits, Colombian officials and economists have put forth specific growth figures. Colombia’s National Department of Planning (DNP), for example, published a report in December 2015 estimating that peace will increase Colombia’s annual GDP growth by 1–1.9 percent. A report by the National Association of Financial Institutions (ANIF) estimated between 0.5 and one percentage points of extra growth. Others have claimed that the benefits of durable peace could translate into as much as an additional 4.4 percent in GDP expansion annually.

The most surprising thing about the government’s case is its contention that the economic benefits of peace will continue to materialize endlessly across time. During a regional gathering in Panama in 2015, Colombian President Juan Manuel Santos went as far as to say that the peace agreement could bring the country at least an additional 1.5 percent in annual GDP growth “for life.” This may have merely been a moment of rhetorical flourish, but the idea that the peace deal will continue to increase GDP forever is questionable, to say the least. More critically, it adds another level of messianic belief in the power of peace to improve the Colombian economy. Countries rarely, if ever, sustain high growth rates for long periods of time.

Such optimism about the peace agreement is not shared by all. In June 2016, Marc Hofstetter, an economist and associate professor at the Universidad de Los Andes in Bogotá, published an article in which he addressed the Colombian establishment’s obsession with post-conflict GDP growth rates. “It is clear,” he wrote, “that the one percent to two percent range in additional growth has established itself and obscured, perhaps because of the simplicity or directness of its message in the public debate, all the other good reasons why ending to the conflict is a generational imperative.” The essay deflated many of the beliefs that the proponents of a peace-driven economic growth scenario have put forth since the final agreement began to take form.

In justifying their rosy economic predictions, proponents of this line of argument often point to Colombia’s agricultural sector. The peace accords, they propose, will expand production by providing security to large areas of rural land. This is partly true. The conflict between the government and the FARC has been an essentially rural conflict, keeping major areas of the country out of state control and thus in the informal economy. Insecurity had also encouraged farmers to focus on short-term crops to reduce the risk of losses in case they were forced to move away from their lands.

These same proponents, however, ignore the fact that agriculture currently accounts for only around seven percent of Colombia’s GDP. In addition, the economic benefits of bringing new areas of agricultural production into the formal economy will depend on how well authorities can combat organized crime, which has flourished alongside Colombia’s military conflict.

Others, including the president, argue that the peace deal will bring a large increase in foreign direct investment (FDI). Yet international firms have long seen Colombia as a relatively safe place to invest. Between 2001 and 2016, for example, FDI increased by 500 percent, according to figures by Colombia’s Central Bank. Total FDI stock jumped from $6.4 billion to $13.5 billion from 2006 to 2016. Last year alone, FDI expanded by 22.3 percent for the banking sector, 19 percent for agriculture, and 36.8 percent for transport and telecommunications. Indeed, Colombia’s main population centers have been secure enough to attract FDI for over a decade now, as the government has pushed guerillas out of its main cities. Even the more exposed sectors, such as mining and oil production, which have a considerable amount of infrastructure in more isolated areas, have been able to attract large volumes of foreign investment. “Investors have typically been used to dealing with the risks associated with Colombia,” Hofstetter told me.  

The implementation of the peace agreement has led to improvements on local investment conditions, however, especially since the cease-fire severely reduced the level of violence and confrontations between the state and the guerrillas. Jorge A. Restrepo, director of the Conflict Analysis Resource Centre (CERAC), a Bogotá-based think tank, argues that the cease-fire that began in mid-2016 has not only reduced the level of violence but has already translated into localized economic gains. One example of these improvements is the rise in rural land prices between 2016 and 2017, visible in regions such as Cauca, Huila, Bolívar, and Nariño, pointing to an overall improvement of investment conditions. If security gains prove sustainable over time, other areas in the country are likely to see similar progress.

Thus, although the peace has brought improvements in local investment, it is unlikely that it will open the floodgates of new FDI. The price of oil and other natural resources in international markets will likely have a more direct impact on the country’s economic performance over the coming decade than the implementation of the peace agreements is likely to have on its own.

COUNTING THE COST

And although the potential economic gains from peace may be hard to gauge, the cost of Colombia’s civil war is to some degree measurable. Restrepo believes that since 1988, the first year for which complete data is available, the Colombian conflict has cost the country between 0.5 percent and four percent in annual GDP growth. This, however, does not mean that an end to war in Colombia will immediately translate those losses into economic gains. “These are opportunity costs,” Restrepo points out.

Although the potential economic gains from peace may be hard to gauge, the cost of Colombia’s civil war is to some degree measurable.

Less debated, but equally relevant, are the costs involved with implementing peace. In late 2014, the Colombian Congress’ Peace Commission came out with its own estimates: peace would cost the Colombian state as much as $45 billion for the coming decade. The figure represents a massive amount of money, especially for Colombia, which has been badly affected by decreasing oil prices and lower demand for some of its other commodities. “The Colombian government received one-fifth of its income from oil exports,” says Hofstetter. “The fall in prices opened a hole in our public finances.”

Whether or not the estimated $45 billion figure is accurate, the deal certainly encompasses several programs that go well beyond the implementation of peace itself, many of which could have a positive economic impact on their own. Besides paying for the reintegration of former guerrillas and the establishment of special courts to enforce transitional justice, funds are also set to finance the development of the agriculture sector, improve rural land registration, and strengthen the presence of the state in areas previously under FARC control. An improved security situation, for one, could drastically reduce Colombia’s defense expenditure, one of the highest in the region.

On the bright side, some of the high implementation costs are likely to be mitigated by rapid economic impacts. “If you take the peace deal as a production proposition, it generates a large extent of the resources that are needed to implement those development projects,” Restrepo said. A clear example of this is the creation of a land registrar. Bringing rural land into the formal economy will encourage regional and local authorities to collect taxes from a large amount of property that was outside state regulation. (In early 2017, only about 50 percent of rural lands in Colombia are registered, according to figures by CERAC.)

Despite the overall economic and social improvement that these investments are likely to bring, the government has admitted that overall cost of implementation may well be higher than initially expected. Land registration, for one, is expected to be one of the most expensive endeavors connected with the peace agreement. Providing compensation and social support to victims of the conflict is also likely to represent a considerable amount of cost over a long period of time. Still, some of that investment began well before the signing of the peace agreement, both through reparation programs that started during President Alvaro Uribe’s tenure and were expanded under the Juan Manuel Santos administration and through the allocation of housing and other social services to Colombians who had been displaced by war.

Eradication of coca plantations will also require continued effort and investment. Total cultivated areas are believed to have increased from 98,000 hectares in 2015 to between 140,000 and 160,000 hectares in early 2017. Although aerial crop-spraying was suspended in 2015, Colombian authorities are now engaged in manual crop eradication and substitution programs. The government aims to destroy up to 100,000 hectares of illicit plantations in 2017 alone. Both manual eradication and substitution efforts are expensive undertakings. Manual eradication has typically required the use of large military contingents to provide security. Substitution, which involves paying subsidies to farmers to encourage them to switch crops away from coca, includes subsequent assistance to help farmers secure land titles and adapt to growing other crops. If security gains become permanent, both manual eradication by the government and crop substitution programs will become less expensive.

Because the costs of establishing peace will depend greatly on how well the different phases of the deal’s execution are implemented, a final price tag is practically impossible to determine. But it will likely be big enough for the government to request financial support from the international community. Some amount of international goodwill is expected, with the World Bank and the European Union having pledged assistance. But the Colombian government will understandably pay most of the cost.

Two new tax measures, introduced in 2014 and 2017 in response to lower oil prices, have so far helped to avoid a fiscal crisis and maintain the country’s positive investment rating. But with less than a year and a half in office, it is unlikely the current government will be able to implement additional tax increases to shore up financial capacity for the coming decade of peace expenditure. Furthermore, Colombia adopted a fiscal rule in 2011 mandating that the fiscal deficit be brought down to a maximum of one percent of GDP by 2022 and never surpass that figure from then on. “The government can’t increase debt that much in order to finance the post-conflict,” Hofstetter said. 

ESTABLISHING SECURITY

Above all else, the peace agreement will be judged by whether or not its security gains can be made permanent. The biggest challenge is for the Colombian government to fully reclaim control of the areas previously under FARC control and bring them into the formal economy. By surrendering their weapons and merging with the rest of Colombian society, FARC guerrillas are giving up their profitable participation in the cocaine trade as well as the control of large swaths of territory in which they have typically benefited from extortion and illegal mining. “These areas have valuable resources to extract,” Hofstetter told me. “Some FARC members will want to continue doing that; other criminal groups will take advantage of the situation to appear.” A smaller insurgent group, the National Liberation Army (ELN), has also been negotiating a cease-fire with the government and has expressed the willingness to chart its own comprehensive peace agreement.

Unless military and police forces can quickly reinstate the state’s strength, other criminal groups will likely take advantage of the FARC’s withdrawal. Colombia’s attractive resources have long been a boon for criminal groups keen on protecting their illegal profits. Although the implementation the agreement has been accompanied by a rise in targeted political violence, mostly focusing on leftist activists, so far there has not been a full-on violent response from organized crime. “Large-scale criminal entities in Colombia are aware that if they emerge violently against the peace deal, they will be met directly by the public force. So for them it is convenient to go unnoticed at the moment,” Restrepo said.

Preventing this type of backlash will be key to extracting palpable economic benefits from peace.Whether a successful agreement adds 0.5, one, or three percent to Colombia’s annual growth is, to a certain extent, irrelevant. Economic benefits do not affect the case for a lasting peace deal based on the inherent benefits of reduced violence and greater security for rural populations.

But by fixating so much attention on the economic advantages of peace and promising growth that is by no means guaranteed, the current government has left more space for the peace agreement’s opponents to undermine it. The deal was defeated at the ballot box in October 2016 and was only pushed through Congress in a modified form in November 2016. That protracted ordeal weakened its legitimacy, and an excessively GDP-oriented focus on the deal’s core benefits will weaken it further. Presidential elections are scheduled for 2018, and the implementation of the peace accords, including the way transitional justice is dealt and how the influence of organized crime is reduced, will be major topics. Talking about GDP points has helped distract from the main reasons why ensuring a lasting peace will be critical for Colombia’s future. 

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