The global financial crisis hit Colombia’s economy hard. Although the numbers have improved in recent months, the country’s unemployment rate remains above ten percent and is the highest among Latin America’s large economies. But perhaps an even bigger medium-term concern is balancing the budget. The government deficit this year is estimated at 4.4% of GDP, up from 4.2% in 2009. At a time when Colombia is eager to lure foreign investors, the government’s lopsided balance sheet is scaring them away.
The country’s top economic officials and president, Juan Manuel Santos, are taking fiscal responsibility seriously. One of Santos’s main legislative initiatives is a bill aimed at balancing the budget to allow for fiscal surpluses beginning in 2014. Recent estimates for next year’s budget deficit range from 4.1% to 4.3% of GDP. With these slightly improved numbers and clear political commitment, Colombia can reasonably hope that the world’s foremost credit rating agencies will boost government bond ratings one notch, which would officially qualify them as investment grade.
Efforts to reduce the deficit are sensible, if not urgently necessary, but the problem is that fiscal austerity is at odds with Santos’s bold political, social and economic agenda. Some much needed reforms – namely to healthcare and the tax system – may help reduce spending. But others, especially new or expanding social programs, will hurt the government’s balance sheet in ways that are difficult to predict.
One program that exemplifies this problem is Santos’s ambitious land reform proposal, which is symbolically and practically centered on giving back peasant land illegally seized by armed groups during decades of conflict. This initiative, though noble, would be hugely expensive for at least two reasons. First, the mere task of determining ownership of remote rural land is a bureaucratic nightmare. Even by the most conservative measures, over three million Colombians have been driven off their land by violence. Similarly, the first stage of the planned land restitution alone will involve redistributing over five million acres. This is only a small fraction of the total amount of land lost to illegal armed groups, which Colombia’s Constitutional Court estimates is closer to 14 million acres.
Second, getting peasants back to their land safely will requite an unprecedented surge in rural security. Although the country has driven illegal armed groups out of major cities and highways, many remote regions remain tense. Despite a mass paramilitary demobilization program, only a small fraction of paramilitary land has been handed over. Warlords and their associates continue to control large amounts of land, so protecting millions of peasants as they reclaim stolen property will require a huge surge in rural security. Indeed, the few bold peasant organizations have already tried to return home with little government support have faced consistent threats of violence. Over the past five years, forty-two of their members have been murdered.
Given that land restitution would strain Colombia’s bureaucracy and military budget, it may be worth considering some alternative policies. Anecdotal and empirical evidence suggests that many displaced people do not have an interest in going back to the countryside. Some of them have been able to take advantage of the economic, social and educational opportunities that Colombia’s major cities have to offer. Others have developed roots in urban areas; their kids were born in cities and go to school there. Many displaced people may also struggle to overcome the fear and trauma of returning home, even if the government offers credible guarantees of security.
These people may prefer to receive some form of compensation for their losses, as well as a subsidy them integrate into cities’ social and economic fabric. Colombia already has several social programs targeting displaced people and the urban poor. Boosting these initiatives and creating others may help reduce displaced peoples’ economic marginalization and offer them a more stable future in their new homes. It would, in theory, help Colombia avoid the immense short-term cost of full-fledged land restitution.
On the other hand, there are countless reasons to proceed with Santos’s proposal as it is. Returning peasants to their land would be a huge symbolic step in Colombia’s long struggle to leave behind decades of rural violence. Further, land reform would also reduce rural inequality, which continues to fuel violence. The reform would also be a necessary, if difficult, step toward justice. The fact that some warlords have held onto stolen property is not only unfair, but it also sends the dangerous message that crime pays. In this sense, the Santos initiative would help address both the root causes and the immense human costs of Colombia’s ongoing conflict.
Besides, although alternative compensation schemes are an attractive option, there are serious questions about their potential impact. Colombia’s existing social programs have largely been unable to provide displaced populations with real opportunities for economic advancement. Indeed, although many displaced people have lived in major cities for a decade or more, most of them remain marginalized in already overcrowded slums. Under current conditions, the challenge of absorbing millions of displaced people into urban economies may simply be insurmountable. At the very least, urban integration may not necessarily be more cost-effective than agrarian reform.
There are at least two other reasons why the land reform is likely to proceed. First, Santos is politically committed to the initiative. During and after his campaign, he has inspired both displaced people and average voters with his plans for land restitution. Moreover, Colombia’s constitution virtually guarantees social rights, so backing away from a promised social initiative is particularly hard.
Second, and perhaps most importantly, conflict-related land restitution is only one element of Santos’s land reform initiative. By most accounts, Colombia needs serious agrarian reform irrespective of the displacement crisis. Less than half of Colombia’s rural land has an officially verifiable owner. Most property has been handed down, stolen or sold under informal arrangements. A similar proportion of rural property does not have a credible value assessment, hindering the government’s ability to effectively tax it and reducing incentives to make productive use of rural property. Consequently, while some South American countries are experiencing agricultural booms, much of Colombia’s territory is made up of fallow land, large unproductive ranches and country homes for the rich.
In short, barring some kind of political crisis, both Santos’s land reform initiative and his spending cuts are likely to be implemented. Unfortunately, these extremely important policies seem headed for an inevitable confrontation. In the long run, Colombia – or, more specifically, Santos – will have to make some tough choices about the country’s priorities. This situation was not entirely unavoidable. Part of Santos’s problem is that has to compensate in policy areas neglected by previous governments. His predecessor, Alvaro Uribe, was virtually a single-issue president with no serious commitment to victims’ compensation, land reform or fiscal responsibility.
Santos’s dilemmas also reflect the fact that he inherited Uribe’s Democratic Security policy at an advanced and unambiguously more difficult stage. Uribe’s success in reducing violence earned him both political support and investor confidence. Now, after half a decade of relatively low homicide rates, both voters and investors are beginning to look past the war on the FARC and toward deeper underlying challenges. The former are increasingly concerned about urban unemployment and Colombia’s so-called “social deficit”. The latter are also worried about deficits, but of the fiscal sort. Santos wants to tackle both simultaneously, but it will be a herculean task indeed.