OECD Membership - Too Much Carrot Not Enough Stick ?

NEWEST MEMBER OF THE CLUB

Back on the May 25th the OECD formally invited Colombia to become the 37th member of the group, this after the usual in-depth review that has been years in the making with revisions by 23 separate committees with a lot of focus on labour issues, the reform of its justice system, corporate governance of state-owned enterprises, anti-bribery, trade as well as new national policies on industrial chemicals policy and waste management.

There are still some administrative steps to take but effectively the job is done.

We had the usual 'bienvenido' from OECD Secretary-General, Angel Gurría : “We are very pleased to welcome Colombia as a member of the OECD. Accession to our Organization was set as a priority by President Santos when he assumed office and we are glad that the process could be completed during his mandate " This is a huge step for Colombia to take, this an exclusive club, however the benefits despite the fanfare are likely to be longer term. Several studies have been undertaken but in terms of the economy they are somewhat inconclusive and depend as much on the moment of accession as anything else. Whilst Chile appears to have benefited greatly it joined in 2010 and was in the midst of an economic boom, Mexico on the other hand joined in 1994 mid-crisis and suffered somewhat - there is though a broad correlation to improvement when it comes to the Doing Business report. In the end the benefits are as much social as they are to business and they will not happen overnight - that said Colombia's commitment to the values of OECD is very welcome. But there was arguably even more interest in the follow-on comment : "The accession of Colombia will contribute to our efforts to transform the OECD into a more diverse and inclusive institution, which will ensure our relevance in the years and decades ahead."

The question arising from this comment is clearly whether Colombia deserves to be the guinea pig of this new OECD methodology - but as a country do we deserve the status or has the organization overstepped in offering membership to Colombia at this juncture ? To draw an analogy with the World Cup taking place in Russia - has expansion of the tournament to include more teams from Africa and Asia enhanced football in those regions even though it is at the cost of lowering the average standard of the tournament ? Clearly the idea here is to close the gap between the bottom of the OECD and the rest of the world which is very commendable as opposed to waiting until all requirements are met however is Colombia still too far below the threshold - it is a question that can be debated 'sin fin' but the graphic below perhaps explains as well as any the concerns of many. In effect Colombia is not the only country suffering from inequality because as we can see below even if you reside in my motherland (UK) and are amongst the lowest 10th percentile it will take you fully 5 generations to achieve the mean income of the country, the last time I sat down with an expert in the field that means 100 years which is clearly unacceptable however there is a enormous difference between being in that situation in the UK and in Colombia. If we look at Colombia's case it is an ugly chart - 220 years of catch-up are required if you are unfortunate enough to be born amongst the have-nots - totally unacceptable doesn't even get to close to describing it. But perhaps that is precisely the point to encourage such advancement and even perhaps to accelerate the improvement - as mentioned before President Duque needs to work hard in order to close the gap if Colombia isn't to take a step to the left in 2022. So what does the OECD most recent review reveal, what do they see as the strengths of Colombia and on the other side of the equation where do they conclude that there is work to do. [if supportFields]><span lang=EN-GB style='font-size:11.0pt;font-family:"Times New Roman",serif;mso-fareast-font-family: "Times New Roman";background:yellow;mso-highlight:yellow;mso-ansi-language: EN-GB;mso-fareast-language:ZH-CN;mso-bidi-language:AR-SA'><span style='mso-element:field-begin'></span><span style='mso-spacerun:yes'> </span>MACROBUTTON NUMBERING <span style='mso-element: field-begin'></span><span style='mso-spacerun:yes'> </span>SEQ<span style='mso-spacerun:yes'>  </span>dpara<span style='mso-element:field-separator'></span><span style='mso-no-proof:yes'>7</span><span style='mso-element:field-end'></span>. </span><![endif][if supportFields]><span lang=EN-GB style='font-size:11.0pt;font-family:"Times New Roman",serif; mso-fareast-font-family:"Times New Roman";background:yellow;mso-highlight:yellow; mso-ansi-language:EN-GB;mso-fareast-language:ZH-CN;mso-bidi-language:AR-SA'><span style='mso-element:field-end'></span></span><![endif]Overall the OECD are pretty impressed with the evolution of how the economy has been handled going back to the 2008-09 global financial crisis and the subsequent commodity price shock, as they say "shows that the monetary policy decision-making process is working well in Colombia "

Equally the use of inflation targeting which has been handled with discipline whilst the flexible currency rate has allowed for the accumulation of reserves whilst the fiscal rule is highlighted as a sound mechanism.

"The fiscal and monetary policy frameworks are in line with OECD policies and practices. The resilience of the economy to the global financial crisis and commodity price decline has shown also that its fiscal policy framework and financial regulations are solid" There is of course room to improve the public finances - whilst the body are happy enough with the moves made with the December 2016 tax reform which raised VAT and lowered slightly the tax burden on the corporate sector the organization want more. They had recommended that the tax base was expanded (which got lost in post-plebiscite horse trading) and that corporate taxes were lowered even further as the "gains from shifting a substantial part of the capital income tax burden from firms towards individuals would be significant in terms of investment and equity." Overall revenues need to increase to cover the infrastructure roll out as well as an ambitious social programs such as education, child care, health care & non contributory pensions. that is without counting expenses related to the peace process, especially in the agriculture sector. Just touching on the pension system briefly where everyone locally can see the need for reform the low coverage level is seen as leaving many elderly people in poverty - measures such as the BEPS have already been implemented but no doubt the OECD will be watching carefully how the coming adminstrations handle the subject, especially as raising the retirement age is such a hot potato, historically Colombia has been guilty of raising the threshold age and increasing premiums when in reality a complete overhaul is required. The organization feel the overall business climate has been improved but with further administrative simplification, trade facilitation and infrastructure enhancement efforts could bring additional benefits to the economy. Colombia has already seen advancement in recent years in the field of intellectual property rights but there is still a call for a new copyright bill in order to prosecute infringements - Colombia isn't China but it is hard to get away from the counterfeiting of many goods, it is hard to nail down but legislation is a good start. The banking system came in for praise and is described as "sound, based on solvency, liquidity and asset quality (non-performing loans, for example) indicators. Prudential regulation, including instruments such as dynamic provisioning, has helped to contain credit cycles" Colombia has seen a deepening of the banking system over recent years but there needs to be an improvement in both efficiency & competition going forward in order to lower the cost of finance and improve access further still because currently the country underperforms versus their surpriseers. One area where they are supporting the local regulators is when it comes to the banks recent expansion into Central America, they approve of the planned on-site visits of foreign subsidiaries of Colombian conglomerates and agreements with supervisors in the relevant jurisdictions to exchange information on a regular basis.

In terms of competition the law implemented in 2009 has improved the situation rapidly with the committee stating " that Colombia has made important and rapid progress in moving towards standards in the field of competition. Many reforms have been implemented such as the reform of the merger control system..." As ever there is more to do in this area especially in the public sector which is made mention of however despite Colombia's deteriorating level global surveys when it comes to competition things are moving in the right direction overall. There is no real suprise that the justice system comes in for extensive commentary by the organization There are mentions of the continuing scurge of cocaine, the unacceptable violence towards union members & social leaders amidst other areas where the system is coming up short - the committee identified "four key public governance priority areas on which Colombia needs to make progress in pursuing reforms to close gaps with certainlycies and practices: the effectiveness and efficiency of justice institutions; transparency and accountability; integrity and anti-corruption frameworks and institutional arrangements; and sub-national administrative capacity" Whilst the recognition of steps to modernise the judiciary and the overall justice sector, including the 10 year justice plan they have nevertheless asked those responsible to report back to the committee with regards to the progress in the four priority areas as it is one aspect where there is much to do. Corruption is the other area where there are doubts and that can be no surprise - if it was a secret before it wasn't after a Presidential Campaign which focused on the ongoing problems to be found in in Colombia, again the committee identifies progress but that the country continues to rank lowly on a global basis, in essence much more needs to be done as it affects all aspects of society as well as business competitiveness. SUMMARY

One could continue at verbatum, unemployment protection, specific social programs and especially inequality get plenty of space in the update reports but the point is made. As mentioned above the merits of Colombia's acension to the Organisation can be debated at length but the fact that certain requirements have 4 or even 8 years before compliance is required shows that today in 2018 the country is very much short of the benchmarks required in many areas. That said when we take a look in Russia and see Australia sharing the pitch with Argentina and doing well, when we see Iran winning their first ever game at a World Cup finals and even Japan defeating our own Colombia surely the benefits will come provided the next two administrations take the bull by the horns and follow the advice of the OECD committee to the letter and capitalize on the hard work of President Santos as opposed to being the odd one out in the club.