Road to Riches: Will a new $14.5 bn road network boost Colombia’s economic growth?
Colombia is pushing forward on a $14.5 billion road-building project to boost domestic and international trade. As businesses draw on a well-trained workforce and bet on e-commerce to expand sales, the project is key to growing Latin America’s fourth-biggest economy.
If you stop in at any florist in Chicago or New York, you’ll most likely find the carnations and roses are from Colombia – and were picked the day before.
This shouldn’t come as a surprise. Colombia is the world’s biggest flower grower and its second-largest flower exporter (after the Netherlands), and the business is literally flourishing. Colombia’s exports of fresh flowers, along with plants, reached a record $1.5 billion in 2018, up 50% from an average of $1 billion per year over the previous decade, according to data from the National Administrative Department of Statistics (DANE).
This growth of agribusiness – as well as the automotive, pharmaceutical, technology and textile sectors – is a sign of how Colombia has advanced as an economic power in Latin America. In the early 1990s, it was the fifth-largest economy in the region, measured by gross domestic product; today it’s fourth after Brazil, Mexico and Argentina.
But unlike its larger cousins, Colombia’s expansion has been a lot steadier, an anomaly in a region where political leadership tends to swing between left and right, and economies vacillate between boom and bust. Colombia’s per capita GDP has more than quintupled – from $1.2 billion in 1990 to $6.3 billion in 2017 in constant U.S.-dollar terms – and GDP on the whole is poised to grow by above 3.5% a year through 2021, making it one of the fastest-growing economies in Latin America, according to the World Bank.
Consistency pays off
What’s driving the constant growth in Colombia? John Price, managing director of Americas Market Intelligence, a consultancy specializing in Latin American markets, says it’s the stability in economic policies. Over the past two decades, he asserts, Colombia “has had two of the best leaders in Latin America for promoting business and investment.”
That doesn’t mean that it’s been easy for these two former presidents – Álvaro Uribe and Juan Manuel Santos. When Uribe took power in 2002, he had to restore national security after decades of civil war and violence – a process completed by Santos. This has brought back many wealthy Colombians who had fled in the 1980s and 1990s, fueling an economic recovery.
Road to improvement
The recovery paved the way for Santos to take on one of the biggest challenges for the economy: improving the poor road network used to move most of the cargo in the country – excluding coal and oil, which are moved by train and pipeline.
This has proved to be no small job. Not only is Colombia the size of France and Spain combined, but much of the 48 million population lives in mountainous terrain. Bogotá, home to a sixth of the population, has – at 2,625 meters above sea level – the third-highest altitude of any capital in the world.
Because of this, explains Sergio Olarte, chief economist at Scotiabank Colpatria, it takes an average of 3 1/2 days to move cargo more than 1,000 kilometers overland from Bogotá to the port of Cartagena.
“Colombia needs to improve its infrastructure so that companies in Bogotá can get their goods to the coasts easily so that the country can spur exports,” Olarte says.
To do this, Santos unveiled the Fourth Generation Toll Road Program in 2012, the most ambitious infrastructure plan in the nation’s history. It calls for investing some $14.5 billion in building and upgrading more than 8,000 kilometers of roads – including nearly 1,200 kilometers of four-lane highways – and digging 159 tunnels, all by 2021.
The goal, Olarte explains, is to cut transport costs by at least half by making it easier, faster and safer to drive on the roads.
In 2014, however, international oil prices lost half their value, evaporating revenue from the country’s biggest export – oil and refined products. The currency lost 55% of its value against the U.S. dollar, dulling investor appetite for road projects.
The 2014-2015 currency devaluation helped restore some of Colombia’s competitiveness, fueling a 17% increase in manufacturing exports – from $15.9 billion in 2015 to $18.6 billion in 2018, according to DANE. And the country has 15 free trade agreements in force, with three in process, according to the Colombian Ministry of Commerce. But to take full advantage, the infrastructure upgrade must still be completed.
There has been progress. Not only are the main shipping ports – Buenaventura and Cartagena – being expanded, but also the main airports. Bogotá’s airport, for example, is now – at the equivalent of more than 25 soccer fields – one of the largest in Latin America, and the busiest for cargo.
And at the start of 2019, the country’s president, Iván Duque, said that 4G road-building was back on track after the setbacks from the currency devaluation, with 70% of the projects financed and underway.
Challenges remain. Corporate taxes are higher in Colombia than in much of the region, and there’s more red tape, says Price. What’s more, a long history of cocaine exports has tightened customs controls on exports, hampering clearance. And the country has received more than 1.3 million refugees from crisis-torn Venezuela, according to the United Nations High Commissioner for Refugees. This weighs down the economy and public finances.
Even so, Daniel Viteri, country manager of DHL Global Forwarding in Colombia, says the government is taking steps to speed up trade. It has created free trade zones that are attractive for international companies when it comes to repacking products for selling across Latin America. Companies can stock products in what is a central market for the region – it is closer to the U.S. and Europe than Argentina and Brazil, for example – so they can react quicker to regional demand shifts. “It’s becoming the door to Latin America,” says Viteri.
Colombia’s location and its economic stability are helping to attract more foreign direct investment, making it the third-biggest recipient of FDI in Latin America between 2015 and 2017 after Mexico and Brazil, according to the United Nations Conference on Trade and Development (UNCTAD). It has continued to grow, shooting up a year-on-year 68.4% in the first quarter of 2019, according to Colombia’s Central Bank.
The investment has been spread across industries. Globant, a global software maker based in Buenos Aires, employs more than 2,500 in Colombia. Amazon, the world’s largest online retailer, has opened a customer service center in the country, and plans to establish a cloud computing service. U.S.-based GreenFruit Avocados has expanded into Colombia, and Japan’s Isuzu Motors has set up a plant for rebuilding used vehicle engines. Italy’s Enel and Germany’s Siemens are investing millions of dollars in energy projects, while China’s Foton Motor is manufacturing SUVs and 4x4 trucks.
One driver of the investment is the country’s burgeoning economic growth potential. Indeed, new car registrations are on track to rise a year-on-year 7.5% to 276,000 units this year, according to the National Association of Sustainable Mobility. Outputs of beverages, cars, clothing, paper and pharmaceuticals have been leading a recovery in manufacturing from a contraction in 2017, according to DANE.
The attraction is not only the country’s economic stability, but also the domestic workmanship, says Allan Cornejo, President, DHL Express Colombia. “Colombian producers are making products with very high quality and at competitive prices,” he says.
One reason for this, according to Price, is that Colombia has one of the best education systems in Latin America. “It continuously puts out talented people,” he notes. In the past, a lot of talent left because of the violence and shaky economy, yet over the past 15 years, the brain drain has no longer been an issue, he says. This provides the skilled workers needed by industries such as health services and pharmaceuticals, which in sales is led by U.S.-based Abbott Laboratories and France’s Sanofi, according to PharmaBoardroom.
The wealth of talent is also fueling a surge in entrepreneurship, facilitated by a reform that allows pension funds to invest in venture capital and startups.
“It’s still pretty nascent compared with Brazil and Chile, but it’s impressive and it’s growing,” Price says.
The country has its first unicorn, or startup with a valuation of more than $1 billion: Rappi, a delivery app. And Colombia’s second largest city, Medellín, has gone from one of the world’s most dangerous in 1993, according to Time Magazine, to a hotspot for entrepreneurship, earning recognition from the U.S.-based bank Citi and The Wall Street Journal in 2013 as the world’s most innovative city. Ruta N, an innovation center in the city, has supported dozens of startups such as Mesfix, a small business crowdfunding site. Andrew Ng, founder of the Google Brain research project, recently set up a center in Medellín to help artificial intelligence startups in customer service, education and healthcare to get off the ground.
The rise of e-commerce
The surge in entrepreneurship is spurring e-commerce in Colombia. “If companies aren’t yet in e-commerce, they’re taking steps to get into it,” says Viteri. “Retailers and supermarkets see it as an alternative that can increase sales and the coverage of the goods they are selling.”
Indeed, the government has made e-commerce a priority so as to spur exports to the country’s main markets in Europe, the U.S. and elsewhere, says Cornejo.
Flower growers, for example, are using e-commerce to target U.S. customers directly, and their efforts are paying off, Cornejo notes. “Brides in the U.S. are now very interested in receiving fresh flowers from Colombia. This is a way to add final value to the product. It’s a more premium product than sending the flowers by freight.”
Investors look for countries with pro-market governments, Olarte concludes. “Colombia is one of them. Foreign direct investment is coming in, and it’s going to keep coming in.” — Charles Newbery
Published: November 2019
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