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Business environment refers to conditions that are not controllable but are encountered in the process of undertaking a business activity. Such conditions are determined by factors that range from politics, territorial economies and regulations. Foreign investment in a country, on the other hand, refers to the capital that is brought into a country from another country with the aim of acquiring control of business enterprises in the recipient country.
Economic growth is the increase in a country’s productivity level which is indicated in the country’s increased gross domestic product. Economic growth is the primary increase in produced goods and services in a country. This paper seeks to discuss the relationship between the business environment in Colombia and the foreign investments and economic growth. The paper will look at the improved business environment in relation to the economic changes that have resulted from such changes.
History of Colombia’s economy
The history of Colombia’s economy is characterized by features that had negative impacts on the economy. Events such as political instability and illegal businesses were some of the factors that hindered economic growth in Colombia. Political instability in the country can be traced to the middle of the twentieth century after the assassination of the country’s president in the year 1948.
This sparked a lot of violence in the country thereby disrupting activities including economic activities. The country was then majorly under military government following a coup in the year 1953 until a movement called “the national front” assumed power in the year 1958 (Infoplease 1). It was after the end of the movement’s rule in the year 1974 that Colombia started recovering from its economic recession that was a result of political stability.
Illegal businesses that involved drugs and crude weapons however picked its roots after the 1970s to again pose new threats to the country’s economic growth. Rebel groups also established centers in many parts of the country lead enhancing violence thereby undermining economic growth. Such instabilities specifically discouraged foreign investments in the country (Infoplease 1).
Improved business environment
Some of the significant reforms that were undertaken by the country were done in the year 1996. Reforms such as “Colombia’s market-opening measures, its implementation of the Uruguay round commitments and its six year effort at sound macroeconomic management” (world Trade 1) were some of the features that contributed to the shift that was realized in the country’s economic growth (world Trade 1). These moves actually linked the country’s economy to the international market thereby diversifying the country’s trade to being in line with globalized aspect of economics.
The results of these moves saw the liberalization of the Colombian market system leading to “lower tariffs, fewer non tariffs measures and a number of market access commitments in professional and financial services” (world Trade 1). Reduction or total elimination of tariffs in an economy has a direct impact of facilitating international trade together with its resulting benefits.
When tariffs are reduced, for example, the cost of importation or exportation of commodities across a country’s boundaries is reduced. Consequently, raw materials are easily accessed from their cheap sources and finished products are as well easily sold at any market that can yield the maximum profits to producers.
The overall result is that producers will be more willing to operate in a territory where trade limitations are minimized. The steps that were taken to reduce tariffs, therefore, had the potential to positively influence the country’s economic growth. The 1990 policy review specifically improved the level of the country’s participation in international trade (world Trade 1).
The reform also led to the enactment of a new constitution by the country that provided further reforms that were favorable to business. Another review was also undertaken in the country in the year 1993 with special interest in strengthening small scale domestic producers in the country.
Steps that included, “subsidized loans, debt recovery or support, price support and stabilization mechanisms, marketing arrangements and modernization subsidies” (world Trade 1) were affected. These moves were specifically aimed at motivating Colombians to join the private sector in contributing to the country’s economy.
A reform in Colombia’s trade policy that was undertaken in the year 1990 was significantly felt in the country’s economy. Following the reforms, an almost steady growth has since been reported in the country. Such growths have also been reflected on the inflation in the country that realized a reducing effect after the year 1990. It is reported that the country’s inflation rate reduced from over thirty percent in the year 1990 to below twenty percent in a span of five years (world Trade 1).
Though the reform process which started in the year 1990 was meant to create a favorable environment for commercial activities, it was not primarily based on making economic policies in the country.
One of the steps that were identified to be necessary in facilitating business was the enhancement of security and political stability that was still challenged by the presence of rebel groups and other groups that dealt in drugs. A sufficient economic base was being sought to ensure the country’s economic stability by reforming structures that were identified to be supportive to a business environment.
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This was particularly because the country had survived economic crises not because it had a strong economic basis but just because it was able to avoid economic strains. Political reforms that included the steps of enacting a new constitution was thus part of the trade reform process. A solution was therefore to be sought by curbing the problem of rebel groups that had been a burden to security in some parts of the country (Aviles 3).
As part of the reform agenda in the Colombian economic environment, the reform process in the year 1990 as was undertaken by the government also included privatization of some sectors in the economy. Service proving sectors such as the “banking and telecommunications” were for example privatized (Holmes, Pineres and Curtin 42).
Such privatization was meant to bring the competitiveness in the industries for better service provision as compared to the governments’ provisions which are normally based on ensuring service provision. Such efficient provision of services that are supportive of business activities was therefore a positive contribution to the business environment.
Following the authority that was granted to the then Colombian president, Gaviria, over economic reforms, the president instituted a lot of changes in economic policies that ranged from international trade policies to domestic policies. Apart from measures to reduce tariffs that were imposed on international trade activities, the president also reduced non tariff barriers to international trade.
Other economic reforms that were instituted at the time included “reduction and rationalization of reserve requirements, freeing of most interest rates, abolition of exchange controls, reform on labor legislation, relaxation of control over foreign direct investment” (Holmes, Pineres and Curtin 42).
All these measures liberated the ground for conducting business by reducing governmental control measures that restricted business operations. Reducing the level of control over foreign direct investments, for example, had the potential of increasing the inflow of investment capital into the country which in turn would be translated into the country’s increased productivity level.
Other measures such as reduced control over sectors of the economy such as financial sector also provided the opportunity for a free market, in such sectors, that was then only dependent on the market forces of demand and supply. With these direct economic reforms, the country expected to increase its level of importation, its technological knowhow as well as operational efficiencies (Holmes, Pineres and Curtin 42).
Though with subsequent side effects, the country succeeded in increasing its level of exports at the international market. Immediate increase in foreign direct investment was also realized following liberalization of interest rates. As a result of capital flow into the country, wage rates were triggered to rise thus increasing the incomes of individuals who found employment opportunities (Holmes, Pineres and Curtin 45).
According to Edwards, the move to stabilize the country’s economy involved massive retrenchment by the Colombian government. As part of the reform agenda, reduction of government’s expenditure was a necessity in the realization of this stability. As a result, the inflation rate in the country was significantly reduced at the expense of increased unemployment rate.
However, the business environment was enhanced as a result of the economic stability that was attained. The country has since then depended on the reforms that were made in the country in the period between the year 1990, 1993 and 1996. No further significant reforms have been made by subsequent governments (Edwards 84).
Following the reforms that were instituted, modalities and formalities of processes involved in starting and running a business in Colombia have been made easier. Processes of obtaining formal necessities as well as undertakings of business processes have been simplified in terms of the short time durations that are taken. Most of applications only take one day to be processed by relevant bodies (Doing Business 1).
The reforms that were taken by Colombia government have enlisted the country as one of the best in terms of investor protection. Rating that relates to investor confidence has also favored the country with indications that investors can easily put their long term investment capital in the country without much worries over risk factors.
Consequently, foreign direct investment in the country has, for example, greatly increased to about four times its level in the year 2003. The changes that were undertaken by the country in the name of reform policies therefore had positive impacts in improving the country’s economic environment in terms of business activities. This as a result reflects increased productivity levels and a potentially attractive environment for foreign investment (Proexport 1).
Foreign direct investments and economic growth in Colombia
As Colombia underwent political, legal and economic reforms in the early years of 1990s, a lot of changes were realized in the country’s operational systems. Economic issues that were deemed to be critical to the country were, for example, included in the country’s constitution that was enacted during that time period.
One of the provisions of the enacted constitution stipulated that “the government will promote the internationalization of the economy and the economic, social, and political integration with Latin America and the Caribbean” (Gomez 13).
The internationalization of the economy required the removal of barriers to forms of international trade that restricted foreign investors to the country’s market. The government was thus able to undertake measures of enhancing foreign investments and trade.
Regional integration of the country with its neighbors was also a step to promoting good relations that could then be reflected in economic relations in countries that traded with Colombia. The next constitutional provision was that “foreigners have the same civil rights as nationals” (Gomez 13); this established a leveled ground under which everyone would be treated.
The country then totally abolished regulations that were put to govern foreign direct investments into the country (Gomez 13). Following the measure to promote foreign direct investment in the country, investors yielded to the incentives and consequently resources were directed into Colombia.
Significant increase in the level of foreign direct investment has been reported in the country over the past years with a direct proportionality being realized with respect to gross domestic product. Such investments have increased the country’s productivity level. The Colombian economy has in the past been registering improvements with an increasing trend in per capita income in general consideration of the country’s economy.
Contrary to the condition prior to the 1990 reforms when foreign investment was majorly felt in the mining industry, diversification has been implemented occurred and foreign investment is currently significantly experienced in a variety of sectors that include “manufacture, finance service, electricity, and telecommunications sectors” (Melo 6).
Prior to the liberalization, about sixty three percent of the country’s foreign direct investment was directed to the mining industry with the remaining percentage being shared among other industries. Currently, finance and manufacturing sectors commands forty one percent of the country’s foreign direct investment (Melo 6).
Change in direct investment in Colombia
It is important to note that the changes were not with respect to fixed foreign investment but an increase in investments in other sectors of the economy. The overall impact of the liberalization was therefore increased participation in the sectors of the Colombian economy that induced efficiencies in productivity thus contributing to the country’s increased productivity level (Melo 6).
The increasing trend of foreign direct investment in Colombia has continued to grow since then. A comparison between data in the year 2000 and the year 2008 for example indicated an increasing trend. Stock value of foreign direct investment was for instance sixty seven billion dollars in 2008 and grew to seventy four in the year 2009 reflecting the increasing trend that has over the past been realized (Betancourt 1).
Columbia was faced with a history of political and economic instability. It however struggled to establish its political stability in the 1980s. Economic environment of the country was left behind as the world moved to a globalized market system. Economic transformation was then undertaken in the country during the 1991 reform process that liberalized the country’s market creating a favorable business environment. As a result, direct foreign investments with corresponding economic growth have been realized in the country.
Aviles, William. Global Capitalism, Democracy, and Civil-Military Relations in Colombia. New York, NY: SUNY Press. Print.
Betancourt, Miguel. Inward FDI in Colombia and its policy context. Vale Columbia Center, 2011. Web.
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Edwards, Sebastian. Colombia. Paris, France: OECD Publishing, 2011. Print.
Gomez, Julian. Foreign direct investment in Colombia. Georgian, 2011. Web.
Holmes, Jennifer., Pineres, Sheila and Curtin, Kevin. Guns, drugs, and development in Colombia. Texas, TX: University of Texas Press, 2008. Print.
Infoplease. History. Encyclopedia- Colombia, 2011. Web.
Proexport. Improved business environment. Proexport Colombia, 2011. Web.
World Trade. Colombia: September 1996. Trade policy reviews, 2011. Web.