Source: PANAM Post.
Colombian President Gustavo Petro introduced a new element of political risk into investment decision-making for institutional investors and other funds. The myriad of social reforms the government seeks to pass—either immediately or in the medium-term, such as the pension, healthcare, and labor reforms—have made Colombia too risky for some investors. Petro’s insistence on weaning the Colombian economy off of oil and gas exploration and production has not helped either. However, while traditional investors are put off, other investors—including those with questionable practices in their home countries and with a greater appetite for risk—now see Colombia as a more attractive destination for their capital, as it can bring along high rewards.
Much like several other middle-income and emerging economies, Colombia is increasingly becoming a recipient country of capital hailing from non-democratic countries, such as China, Turkey, Saudi Arabia, the United Arab Emirates, Vietnam, and Venezuela, among others. This is partly due to the global nature of capital investments from sovereign wealth funds, a concerted diversification strategy from some Asian and Middle Eastern countries which President Petro encouraged.
Capital investments from these origin countries can be corrosive or constructive to the recipient country’s development, depending on the recipient country’s oversight, traceability, and supervision mechanisms. Corrosive capital is characterized by opaque capital flows that seek to disrupt recipient countries’ institutions to influence or disrupt their economic, political, or social fabric. These investments can flow to ensure access to critical minerals such as copper, lithium, gold, ferronickel, or rare earth, as well as strategic sectors like oil and gas, critical infrastructure, and digital technologies.
There are strong incentives for countries to accept these investments. This is particularly true of Chinese investments which are often offer below-cost financing and speedy construction that may be too generous for emerging economies to ignore. Moreover, these authoritarian countries’ perceived disregard for political, integrity, or security risks makes them well-suited for investment into tricky jurisdictions where populist presidents and frequent regulatory changes make other investors increasingly skeptical.
Recent research from Colombia Risk Analysis into investment flows and growing trade relations with authoritarian countries draws light on important vulnerabilities in Colombia’s procurement and oversight mechanisms. Improvements to these areas could mitigate the corroding potential of investment from authoritarian countries. There are three main vulnerabilities which could be mitigated without significant resources and could significantly strengthen available information about capital flows from authoritarian countries into Colombia:
- Colombian public institutions are unprepared to properly track, monitor, and oversee foreign direct investment in general, including from authoritarian regimes. There is no single institution fully dedicated to investigating these issues. Instead, there are overlaps and gaps of information between Banco de la República, the Ministry of Finance, the Ministry of Trade, and the National Statistics Agency. There is a growing interest in making spending patterns visible and the process more participatory by engaging civil society.
- Data asymmetry, regulatory loopholes, and excessive confidentiality generate negative outcomes. This erodes the capacity to make fact-based public policies that raise the standards for foreign investment and public procurement. These actions would incentivize accountability practices.
- There is a lack of knowledge and understanding about public debt, foreign capital flows, and the particular business protocols and practices of authoritarian regimes entering the Colombian market. Proper research and due diligence is often overlooked. This knowledge gap comes at a cost for the Colombian business environment.
This information would allow Colombia to understand and establish better procurement policies to more effectively identify the origin of funds and determine whether they constitute a threat to national security. Among Colombian public officials, there is generally little awareness regarding what corrosive capital is and how it affects and reflects on the wider society as a whole. It can be argued that this inadvertent ignorance has the potential to risk and lessen the effectiveness of public policies, economic growth, and positive social outcomes.
A systemic lack of transparency can foster corruption, but civil society engagement can help increase awareness and promote co-creation efforts to promote accountability in the public and private sectors, Support from civil society can also help create mechanisms that provide proper oversight to turn inflows of capital from questionable nations and minimize the effects of corrosive capital. Investigative journals and portals already work on a limited budget in Colombia. Authorities should make it easier, not more difficult, to obtain information about how taxes are spent. These limitations are precisely what makes Colombia vulnerable to corrosive capital. Based on our research, these vulnerabilities require a comprehensive approach, but also political will, to address. This task does not lie solely within the realm of government. The private sector and civil society must establish clear guidelines for reporting and analyzing capital flows and assessing their risks or opportunities for Colombia.
President Petro has made it clear that he envisions a more prosperous and equal Colombia and that he will need foreign direct investment and capital to achieve that vision. For the government, it does not seem to make a difference whether that capital comes from authoritarian countries or institutional investors as long as projects get underway. While there is a campaign from the United States and other Western countries for recipient countries, including Colombia, not to receive Chinese investment, we believe that efforts to provide more information, strengthen institutions, ensure competitive bidding processes, and foster transparency will go further than threats or conditionalities to debt or aid.
Sergio Guzmán is the Director of Colombia Risk Analysis, a political risk consulting firm based in Bogotá. Follow him on Twitter @SergioGuzmanE and @ColombiaRisk.
Sara Torres is the Communications Coordinator at Colombia Risk Analysis. Follow her on Twitter @saratorres_r.
Martha Aguilera is an Analyst at Colombia Risk Analysis. Follow her on Twitter @miaguilerac.
All opinions and content are solely the opinion of the authors and do not represent the viewpoints of Global Americans.
