A Flowering Basketcase

When one thinks of welcoming investment climates, Colombia doesn't usually spring to mind. To foreigners, the country is more famous for its guerrilla warfare, kidnappings, drug production and narco-terrorism. So it might come as a surprise that the World Bank, in a report this month on "Doing Business in 2005," deemed Colombia the second most improved country in the world in which to do business. The magnitude of private-sector reform in Colombia over the past year is "unique" in Latin America, says the report's author, Simeon Djankov.

Colombia has long been unique for all the wrong reasons, as home to Latin America's most persistent Marxist rebels, and its largest drug cartels. But the emerging picture could not be more different. Since his inauguration in August 2002, President Alvaro Uribe Velez has made progress against the guerrillas. He has also brought inflation under control, in one of the last Latin American countries to tame the wild price swings that for decades frightened off investors. Intriguingly, Uribe has not only caught up to the Latin pack on "macro" reform, he has pulled ahead in a field many experts believe is the key to a lasting regional recovery: a second wave of reforms to create a vibrant private-business sector. The main reason Colombia performed so well in the World Bank study is the strides Uribe has made in areas like cutting the time it takes to open or close a business and making it easier to hire and fire workers.

It's all paying off: the GDP growth of Latin America's fifth largest economy is forecast at more than 4 percent this year and next and the country has enjoyed four quarters of sustained economic growth for the first time since 1995, as well as an inflation rate of about 6 percent, its lowest in 30 years. Private investment is expected to increase by more than 20 percent this year, while exports in June rose 16.6 percent compared with the same period in 2003.

From day one in power the new president has "really had it in his mind to create a spectacular [investment] environment," says Jennifer Satz, a Latin America expert at the New York-based Eurasia Group. Under Uribe, Colombia's kidnapping and murder rates have fallen, while the U.S.-backed war on drugs has driven narco-kingpins farther into the jungles, resulting in a 21 percent decline in Colombian coca cultivation last year. "The advances on the security front have instilled confidence in Colombians," says Carola Sandy, an emerging-markets specialist for Credit Suisse First Boston. Colombians--about 70 percent of whom approve of the president--are beginning to realize that their investments can actually pay off. "In the 1990s, people were afraid of buying cars--buying anything--because you didn't want to signal that you had money," says Sandy. "You would be kidnapped the following day." The new confidence is apparent from construction to car manufacturing and flowers. "There is definitely a different rhythm in doing business here," says Jaime Rodriguez, managing director of Jaroma Ltda., one of hundreds of Bogota-area plantations that grow roses for export. "Businesspeople are much more enthusiastic and optimistic now."

For a candidate who hardly mentioned economics in a campaign based on security issues, Uribe has proved an adept reformer. In 2002 he made aggressive budget cuts and introduced fiscal measures--such as a wealth tax--to bring the dismal fiscal deficit down a percentage point to 2.8 percent of GDP in 2003, meeting the target set by a $2.1 billion International Monetary Fund agreement he had signed earlier in the year. "The new administration put the house in order," says Fernando Losada, an emerging-markets specialist at ABN Amro. "Typically in Latin American countries, you need a stable, reasonable macro setup for the private sector to thrive. That's what Colombia was lacking until the new guys took over."

Uribe stocked his administration with businessmen and technocrats, who attacked the bane of Latin business: red tape. They made labor rules more flexible by lowering severance payments and the like, spurring the creation of 1.15 million new jobs and lowering the unemployment rate from 20 percent in 2002 to 13 percent. In the last year the administration has cut the number of days it takes to start a business from 60 to 43--still slow by global standards, but the rapid progress was enough to raise private investment by 18.7 percent in 2003.

So far, most of the money comes from Colombians at home and abroad. Last year Colombians outside of the country repatriated $3.2 billion, a 23 percent rise from 2002. And locals are the main reason Colombia's stock market is up 30 percent this year. But foreigners are starting to rediscover Colombia too. Earlier this month Philip Morris made the biggest foreign investment Colombia has seen in more than six years, buying the nation's largest tobacco company, Coltabaco, for $300 million.

Opening new doors is clearly on Uribe's agenda. Colombia's main exports, coffee and oil, have suffered in recent years, but other exports are picking up the slack. Textiles have made impressive gains in the U.S. market. Uribe is now negotiating new deals to diversify trade away from Colombia's main trading partners, the United States and Venezuela, and toward Europe and other Latin nations. He has also promoted innovative moves to revive the coffee industry, which is seeking to challenge Starbucks with a global chain of coffee shops named for Juan Valdez, the fictitious face of Colombian coffee.

Uribe is expected to win a bid for a constitutional amendment that would allow him to run for a second term in 2006. But one big stumbling block to economic progress looms. Colombia's public-pension system ran out of money last month. The government will have to make up a shortfall of $600 million this year and $1 billion next year unless Uribe's reform bill passes now. And many experts fear Uribe may sacrifice his plan to create a pay-as-you-go pension system to win votes for the amendment, which is currently in the final stages of debate in Congress. "Uribe's re-election interest is blocking serious reforms," says Sen. Antonio Navarro-Wolff of the Independent Democratic Pole party. If Uribe backs down on pension reform, spending could run out of control again. The irony would be bitter indeed: a man who is now arguably Latin America's leading next-wave reformer could be undone by the old scourge of macroeconomic chaos.