Colombia Has Reached Peace at Last but the Short-Term Economic Benefits Will Be Limited

After more than five decades of fighting the Revolutionary Armed Forces of Colombia (FARC), the government has reached a peace accord with the largest guerrilla insurgency in Latin America. While an approval of the accord via plebiscite, likely in October, is still necessary to seal the deal, the dawning of a new day will be immediate throughout society.

Photo: Colombian President Juan Manuel Santos addresses the nation after government negotiators in Havana reached an historic peace agreement with FARC guerrillas. (Credit: Presidencia de la República)

In economic terms, however, peace is expected to show few immediate benefits. The administration of President Juan Manuel Santos has boasted that the end of war could add 1% to annual GDP growth — with some economists even suggesting as much as 2%. If new oil fields are discovered in areas that were once not explorable, agribusiness can make use of now-safe rural lands, tourism spikes, and every other best-case scenario comes to fruition, such ambitious projections may be achievable.

But all that is a long ways off, if it ever becomes reality. For the rest of 2016, at least, low oil prices and slow growth mean that not much will change in the weeks and months to come.”The security situation in Colombia has been steadily improving for more than a decade,” said Adam Collins, an analyst at London-based research group Capital Economics, today in a note to investors. “As such, most of the economic benefits of peace in terms of increased investment and tourism have already been felt. Accordingly, we still expect the economy to continue slowing this year as it adjusts to lower oil prices.”

Moreover, the accord is not a surprise. Late last year, President Santos set a March 2016 date for a final agreement. That came and went without any signatures. Then, in June, the Colombian government agreed to a bilateral ceasefire. That day effectively end the conflict — which had already been cold for the better part of a year anyway.

Some foreign direct investment and a rise in tourism could come soon from those playing catchup on the news cycle. But the immediate financial effect of peace is likely to be more negative than positive. Now that everything is set in ink, the focus must turn to paying for peace. Bogotá now must start actually paying for the many post-conflict programs negotiated in the accord.

The national budget is reeling from 24 months of slumping oil revenue and will need to start dumping money into victim compensation, land reform, and many other social and development commitments contained in the agreement. Some of this is budgeted for already. And international donors have pledged to offer support. But finding the funds will not be easy, with tax reform being the likely solution.

Regardless, today is still cause for celebration for most across the nation, no matter the short-term economic issues. And even if much of the so-called peace dividend of improved security has already been baked into recent growth, the long-term prospects are vast.  For now, however, peace means that officials in Bogotá are facing more fiscal challenges than windfalls of cash.

“The different estimates that have been made are indication of what peace might mean for the country’s economic growth, competitiveness, and productivity,” said Camilo Reyes Rodríguez, executive director of the Colombian American Chamber of Commerce in Bogotá. “Although there are many and very diverse approaches to this, not even those who are most negative dare predict that peace is worse than war.”