Imagine you are the CEO of a big multinational who wants to start operating in Latin America. You want to open one branch in a large South American country to plan for your expansion in the region. Colombia quickly appears as a strong candidate for your pick. Yes, the country has had a difficult recent history, with all the drug lords, the guerrillas and the insecurity, but you know that the situation has improved to a great extent. You have read that fewer people are killed in Bogota than in Sao Paulo or Washington DC. You also know that the number of kidnappings in Colombia has gone down 87% since the year 2000. Today, the probability that you are kidnapped in Venezuela is two times greater than the probability that you are kidnapped in Colombia. You have also heard about the many foreign firms who are investing in Colombia, and how great they are doing. Foreign Direct Investment was around US$10 billion in 2008, and Colombian FDI seems surprisingly resilient even in the middle of the world recession. So perhaps you should invest in Colombia, too, and open your branch in one of those nice glass buildings being constructed in Bogota.
Well, hang on a minute.
All of a sudden you find out about something that bothers you. One of your associates points out that Colombia’s tax system is very complex –and expensive. She invites you to take a closer look. The Doing Business report by the World Bank says there are other 114 countries out there where it is easier and cheaper to pay your taxes than in Colombia. While the average tax rate in OECD countries (mostly developed) is 44 per cent of profits, in Colombia this same rate is a staggering 78.7%. In comparison, the tax rate for the average Latin American nation is 48.4%. You ask whether it is really that bad. Well, your associate responds, when you hire workers in Colombia you have to pay an extra 76% of the payroll for social security, including health care, pensions, a severance pay fund, and various mandatory payments to both public and not-for-profit private institutions (SENA, ICBF and Cajas de Compensación Familiar). This fact means that Colombia is the country with the highest labor costs in South America.
In addition, your associate points out that the Colombian corporate income tax is 34%, and that there are eight (!) different types of Value Added Tax, ranging from 7% to 45%, although the standard rate for most products is 16 %. Moreover, a 0.4% tax is charged on debit transactions in the financial system. By now, you do not seem as happy with the idea of opening your branch in Colombia. But there is more. You soon realize that the cost of importing and exporting merchandise to and from Colombia is high: the cost per container for each of these operations is around US$1,750, way above the average cost (around US$1,300) in the average Latin American nation. Perhaps your company would do better in another country.
But if the above has not totally convinced you, another look at the Doing Business report will do. Colombia is an incredibly bad place to enforce commercial contracts. There are 151 countries in the world where the judicial system will serve you better on this issue. It will take about four years (1,346 days!) for you to have the enforcement of a judgment on any contract. The trial alone can take about 913 days. For sure this is not an environment that can make you feel confident that the state will be on your side if your contractors do not keep their word. The risks of investing in Colombia just got much higher than you thought at first.
In comparison, take two other South American countries: Chile and Peru. The total tax rate in the latter is about 40% of profits, while companies working in Chile pay a mere 25.3%. Labor costs are also considerably lower in both of these countries. For example, social security contributions are about 9% of the payroll in Peru. Moreover, the cost of importing/exporting one container is about US$750 for Chileans, while in Peru you would pay US$875. Finally, in both Peru and Chile it takes an average of 450 days to have a contract enforced, about a third of the time it takes in Colombia. Needless to say, both Peru and Chile are safer than Colombia in terms of homicide, kidnapping and extortion levels. Where would you prefer to open your business?
Of course, the Uribe administration is aware of these realities (Minister of Commerce Luis Guillermo Plata is an avid reader of the Doing Business report) and has attempted to improve the situation. Just last year, Colombia climbed twelve positions in the Ease of Doing Business ranking, positioning itself as one of the top 40 economies for doing business. This is the result of reform, the reduction of paperwork, and greater protection to investors. The government has also created several Free Trade Zones (Zonas Francas), where corporate income tax is 15%. And of course, these FTZs are booming, for lower taxes seldom fail to attract more investors. But this is a bad solution for the overall high costs of making difficulty in Colombia. The nation as a whole needs a much lower corporate tax rate (say, about 20%), not only focused on a few FTZs prone to corruption and cronyism. More importantly, Colombia’s judiciary needs much larger funds so that it can become more efficient in enforcing contracts: in 2009 the judiciary received 1,5 billion pesos of the 134,5 billion pesos government budget. That means that the government spends a mere 1% of its money in the judiciary branch –and we still wonder why the rule of law is so elusive.
So, by all means, please invest in Colombia. As it was pointed out in an excellent column last week, there are fantastic opportunities in many sectors of the economy. I will thank you for the fact that your investment will help create jobs in a country that has South America’s highest unemployment rate, and you may even get juicy profits. I just think you should be mindful of the several obstacles the Colombian state will put before you along the way.
tomtom33
said:
 |
... The headline is not correct. Colombia wants and needs foreign investment. However, there are many government policies that act to severely impede that investment. Your comparison of labor costs misses one big point-the average wage itself. But I completely agree with your point. If Colombia could only get out of its own way, we could really have something here. The dysfunctional legal system worries me the most. Tax and employment laws can easily be changed. |
cococo
said:
|
... Investing in Colombia is actually not as dire as you make out. Pro Export are doing an amazing job and offer help and assistance at every step of the way. You do not even refer to Pro Export, yet they are the envy of many other nations with offices worldwide and a level of passion and competance that is unrivaled. There are also a number of tax breaks to foreign investors which you have not mentioned in your article. Colombia is one of the big success stories in foreign investment in Latin America, compared to say Venezuela or Peru and one of the main reasons for this is the quality of the human capital. Colombians generally have an excellent work ethic, many are well educated and can conduct business in a polite and professional manner. Yours sincerely a very happy foreign investor. |
tomtom33
said:
|
... I'm damned glad that some foreign investor is happy. The only reason that I have a dime here is that I live here. The things that have bothered me include a lousy work ethic(Costeños) and lack of respect for my time. The time aspect includes Medellín. No one apparently ever taught a Colombian to read a clock. |
Laureles191
said:
|
... Title of the article is funny considering that Colombia is ranked #5 for "Protecting Investors", of the 183 economies researched in the world. That ties with the US, Canada, Ireland, and Israel. Which is ranked above every other Central and South American country (and the UK). |
gringo76
said:
|
... Work ethic when there are 18 holidays? How could a business make any money when every month there is a puente?A company most fearful month is June when you get 3, 3 day weekends, sorry Colombia no more holidays with free trade. Time is $$$$$ so get to work!! |
cococo
said:
|
... Dear tomtom33, you come across as being rather rude and abrupt from the many submissions you have left on this website. Of course Colombians can read a clock but like most Latin Americans they choose the live at a different pace which is frankly preferable to the madness of Japan, Germany and other societies I could mention. I previously lived in Florida and found that time keeping there was much worse than Medellin. I now live in Colombia and tend to find that a polite manner works wonders. Yes the Costeñans have a different work ethic, but then that applies to many different parts of our varied and beautiful World. I meet many foreign investors in Colombia and most of them prefer to do business in Colombia than many other South American nations because of the quality of the workforce and also the lifestyle. Cordialmente |
cococo
said:
|
... Postcript: public holidays are not an obstacle to success. Look at France and Germany they don't come too far behind Colombia in the total amount of holidays their workforce enjoys. A German worker on average gets 6 weeks holiday a year and on top of that they have numerous public holidays, yet a worker in Germany is more productive per head than his or her counterpart in France the UK or the USA. Go figure! |
gringo76
said:
|
... Workers in Europe only work 37 hours, but in the USA only a week of vacation is the norm. Colombia wants to be like the USA. |
cococo
said:
|
... Colombia may aspire to be more like the USA but they do not want to be exactly like the USA. This is a massive difference, subtlely expressed. They do not want their culture to be compromised by a lack of time for the family and the public holidays in Colombia are time for the familiy to be together. Workers in Europe do not only work 37 hours. You should not generalise as it depends on the country and the industry. A workers productivity is much higher if they have decent holidays and a happy family life. |
tomtom33
said:
|
... The devil made me do it.  At the risk of seeming rude and abrupt, why do you generalize while telling others not to generalize, all in the same paragraph? No society knows what they want to be. And, if they did, they would never get there. As far as investing goes, it is mostly individual tolerance for risk and bullshit. There is a lot more bullshit in Colombia than there is in the US, Europe, or the Pacific rim. There is money to be made everywhere if you have the stomach for it. |
cococo
said:
|
... oh tomtom33 I did not tell you not to generalise. I was referring to gringo76 and his 37 hours of work in Europe. I just thought you were rude by making the following statement "No one apparently ever taught a Colombian to read a clock" . You also seem rather niaive as bullshit is everywhere and most common in the nation from where the term is derived. I really wonder why you remain in Colombia as you really don't have too many good things to say about her. I agree that any given society is never in complete agreement on its direction, but one thing I do know that is that the sense of family in Colombia at all levels of society is much stronger than in many other so called "developed" nations and this is more important to the average Colombain than being like the USA! I am a memeber of a large ,crazy and beautiful Colombian family with little material wealth, and it is a happier place than than the loneliness and isolation experienced by many in Europe and the USA, which I have also personally experienced. |
tomtom33
said:
|
... I am sorry that you experienced loneliness and isolation in the US or Europe. And I am glad that you found happiness in Colombia. However, problems of all sort are inevitable in life no matter where you live. And you find happiness and contentment within yourself independent of where you may happen to live. And, believe it or not, it is possible to have a discussion without making personal attacks. So far you have called me rude, abrupt, and naive. Care to add to that list? And maybe you can tell me why you feel the need to resort to such attacks. |
Adriaan
said:
 |
... or not You both are using fine arguments. Just stick to an exchange of arguments without involving the other person and you'll actually have fun debating. Both of you have made very valid points so far. |
J. Rebel
said:
 |
... I have lived and worked on thenorthern coast of Colombia for 15 years. I apy all of my taxes and they are nowhere near what the author suggets. Costeños are the best workers that I have found also the best educated and depndable. I would take a Costeño any day over a Paisa or Cachaco. I run several businesses and feel that it is a lot easier here than in the US. |
Adriaan
said:
|
... @ J. Rebel, you realize you are on hostile territory? The writer's a rolo and the editor is in Paisalandia  |
tomtom33
said:
|
... Mr. Rebel, have you ever lived and worked in Medellín or Bogotá? I lived in Cartagena for 4 years and Medellín for the last 3. Based on my personal experience in both places, I much prefer Paisas in many respects including work ethic, timeliness, and use of good Spanish. That is not to say that Costeños don't have their fine points. You must realize that Colombia is very regionalistic. The Paisas speak poorly of the Rolos, and vice versa. All Cachacos speak poorly of Costeños, and vice versa. And all Colombians speak poorly of Pastusos. |
gringomedellin
said:
|
... tomtom33 it is more like the Costenos dislike Paisas and vice versa, a Costeno would take a Cachaco as a friend before a Paisa, I have lived both on the coast and Medellin, Colombia is regionally which is sad as they are all Colombians after all. Those on the Coast are more laid back ,similar to those in Cali, Paisas tend to be more serious, Coming from the States it took a little time to adjust to Colombian's sense of time. I have not heard people speak poorly of Pastusos, The are more old school there than I have seen in other cities, I do have some good friend from there and love the city of Pasto. I persoanlly have no use for Cartagena and see it as nothing more then a tourist trap, visited it once for 4 hours and will not return there again. |
tomtom33
said:
|
... Cachaco, in my example above, carried the broader meaning of everyone who is not Costeño. Although Rolos are sometimes called Cachacos, many Colombians, especially Costeños, call all the people who are not Costeños Cachacos. It took me 4 years in Cartagena before I had had enough. |
running shoes
said:
|
... tomtom33 ... Cachaco, in my example above, carried the broader meaning of everyone who is not Costeño. Although Rolos are sometimes called Cachacos, many Colombians, especially Costeños, call all the people who are not Costeños Cachacos. |
