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Why Firms Are Fleeing Colombia

By: Javier Garay - @Crittiko - Jun 1, 2015, 3:58 pm
Colombia
Colombia’s tax burden is over 50 percent higher than the Latin-American and OECD average. (Vanguardia Liberal)

EspañolOver the last few months, a growing number of multinational firms have decided to close their factories in Colombia. The majority have moved their production lines to competitive jurisdictions such as Mexico, and started importing products from overseas to meet Colombian demand.

If this were a regular, everyday decision within a private company there would be no need for concern. When a company is incapable of outperforming the competition and meeting consumers’ expectations, society benefits when the capital is freed-up and used to produce other goods or services which may be in more demand.

Nevertheless, there’s a public debate going on about the “flight” of companies overseas. There’s always a debate. Human beings feel uneasy and frightened in the face of changes, and public discussion helps exorcise that fear.

Furthermore, the chatter in this case may be justified; the evidence suggests that those uprooting their operations in Colombia were not motivated by the market, but rather pushed by government intervention.

Two contrasting opinions have emerged about those manufacturers shutting down their factory floors in Colombia. On the one hand, some blame the move to the free-trade agreement signed with Mexico. If this is true, then it’s good news for Colombia. Free-trade agreements are working as expected: through strengthening bilateral trade, both countries are exploiting their comparative advantages. These decisions are out of the realm of politics — they are the result of the unpredictable dynamics of the free market.

On the other hand, some blame the exodus on onerous regulations that delay production in Colombia. The data would appear to back this position. According to the World Bank’s Doing Business 2015 index, Colombia is 34 out of 189 nations on the ease of doing business, an improvement of 19 places in respect to last year’s index. However, disaggregating the results would provide sufficient evidence to demonstrate why companies are leaving the country.

Out of the 10 categories that make up the index, Colombia only improved on four of them. For the remaining six, the 2015 rank is worse.

What makes this a serious issue is that the ranking measures the whole business cycle: incorporating a company, electricity access, judicial protection for private investors, the tax burden, contract enforcement, and bankruptcy law.

It’s precisely with regard to the tax burden that Colombia stumbles. This year’s index has Colombia at position 146, falling 7 places from last year, meaning its among the hardest and most expensive countries in which to pay tax. Every company must pay 75.4 percent of their annual earnings, while in Latin America the average is 48.3 percent, and 41.3 percent for OECD countries.

And people wonder why the country is fast becoming completely de-industrialized. An entrepreneur working the whole year only keeps 25 percent of his production. The remainder is siphoned off to feed the voracious appetite of Colombian politicians and bureaucrats, leeching off the country’s productive individuals.

This is not the only obstacle for Colombian wealth creators. The ranking puts Colombia 93 out of 189 countries in terms of ease of international trade. As such, another reason is presented for the exodus: companies are leaving Colombia to avoid exorbitant import and export costs.

Yet the Colombian government insists on making the same mistakes. To allay consumer fears, President Juan Manuel Santos spreads the partial falsehood that the companies are leaving simply due to cyclical occurrences in the business world. It’s true that these are everyday decisions for large companies, but it’s false that this is the simple law of the market in action, independent of any action or omission by the authorities.

Furthermore, instead of proposing to simplify the tax code and the tax burden in particular, as well as removing other obstacles to business, Santos presented a new bailout for industries dubbed the Productivity and Employment Boost Program (PIPE).

It’s how your typical bureaucrat logic works: first they set up the obstacles, and when these — invariably— have a negative impact on the economy, politicians play the heroic saviour in proposing a bailout. They fail to take responsibility for the underlying problems, deceive the public, and make the private sector dependent on the government.

The president has launched a new economic program, which he has no shame in calling Keynesian, and no one dares speak out. The state can do whatever it wants. Meanwhile, companies are required to get government and union authorization even to close their operations. It’s the world turned upside down.

Translated by Adam Dubove.

Javier Garay Javier Garay

Javier Garay is a professor at the Externado University of Colombia. He has written two books on international issues, such as development, after his doctoral dissertation focused on the same topic. Follow him on Twitter @crittiko and through his personal blog, Crittiko.