The Negative Implications of The High Levels of Inequality in Colombia

Territorial Inequalities in Colombia: Realities and Prospects

By Ramiro López-Ghio - Laura Giles Álvarez - Ekaterina Cuéllar - Cristhian Larrahondo

Territorial inequality comes at a cost: it significantly reduces economic efficiency and hinders productivity in the most vulnerable regions...

Colombia, like many countries in Latin America and the Caribbean, has high levels of inequality, in both in terms of income and the country’s geography.  This characteristic has negative implications for its economic growth and the quality of life of its population.

Severe income inequality at the national level requires, among other measures, progressive fiscal policies to generate greater equity.  Yet territorial inequality presents a significant challenge: we lack measures of territorial inequality over time that are comparable to those at the national level.  This limitation hinders evidence-based diagnosis that could support the development of effective policies.

Measuring Territorial Inequality in Colombia

In order to better understand inequalities between Colombia’s different regions and consider public policies to address them, the IDB published on a study in which it developed a multidimensional index of territorial inequality.  This index measures seven determining factors in the lives of Colombians, from childhood to old age.  It also provides an objective measure of the phenomenon that can be replicated over time.  The results outline four broad categories when it comes to the different departments of Colombia.  These groupings, which together we can call the Multiple Colombias (see Figure 1) are:

1. Consolidated Colombia: The most prosperous departments, where a robust and diversified economic model has been consolidated.
2. Emerging Colombia: Departments that, although lagging in some dimensions, have the conditions to consolidate improvements in the well-being of their inhabitants.
3. Colombia in Transition: Departments facing significant structural challenges, but able to partially mitigate social shocks.
4. Vulnerable Colombia: Departments where multiple factors that inhibit citizens’ well-being and quality of life converge.

The results show that the differences between these regions are equivalent to the disparities between countries of vastly different wealth and development.  There are regions in Colombia with social and economic indicators equivalent to high-income countries, other areas resembling upper-middle-income and lower-middle-income ones, and others with results similar to those of low-income countries.

The Implications of Territorial Inequality

Territorial inequality comes at a cost: it significantly reduces economic efficiency and hinders productivity in the most vulnerable regions.  The concentration of resources in favored areas not only limits the development of disadvantaged regions; it keeps them in a state where the lack of opportunities and investment perpetuates a vicious cycle of poverty and exclusion.  This dynamic negatively impacts productivity and economic growth, hindering inclusive development.

In fact, the departments in the Vulnerable Colombia have shown a negative gap of one percentage point in real GDP growth over the last decade compared to the national average.  In contrast, the departments in the Consolidated Colombia show a positive gap, which reinforces their competitive advantage.  Likewise, departmental competitiveness indices reveal significant disparities: while departments in the Vulnerable Colombia score an average of 3.1 out of 10, those in the Consolidated Colombia  have almost double this score with an average of 6.4 out of 10.

Social mobility is also negatively affected by these gaps.  Compared to other countries in the region, Colombia has lower social mobility, as revealed by studies that consider both years of education and other wealth indicators.  This lack of access to equitable opportunities, exacerbated by territorial inequalities, perpetuates poverty over generations, restricting the possibilities for socioeconomic advancement and maintaining these disparities over time.

Strengthening territorial work

Counteracting regional disparities is essential.  At the IDB, we emphasize the importance of designing evidence-based territorial development policies that can respond to the specific needs of the Multiple Colombias. These policies should address the economic, social and environmental particularities of each region and be integrated into national development plans.

The use of multidimensional inequality indices and measures of social mobility is an important advance in this sense.  These instruments provide a more complete and nuanced view than traditional metrics and are crucial to the design of effective strategies to address inequalities in a comprehensive manner.  Strategies to improve the quality of education and cash transfer programs, for example, will be effective to the extent that they consider territorial realities.

In addition, it is essential to strengthen territorial entities with programs that increase their capacity to generate their own resources and formulate projects of public investment and social support projects.  This support will not only improve the effectiveness of regional policies but will also reduce inequalities and help promote equitable development.  After all, every citizen, regardless of where they live, should have the opportunity to benefit from inclusive growth: to prosper and contribute to the country’s development.

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Polarization in Latin America and the Caribbean

"Reducing polarization, building consensus, building governance, makes it possible to design and implement public policies that make it possible to break out of the vicious circle into which several countries in the region have fallen recently and which end in protests and conflicts."

"The consequences of polarization are eventually the greatest risk facing the region because they impact governance, predictability, social peace, integral development and democratic institutions."

Vulnerabilities, Lack of Resilience and Polarization: Latin America and the Caribbean at the Crossroads 

By Adrián Contursi and Luis Porto

Latin America and the Caribbean face recurrent external shocks and the uncertainties and challenges of today's world: geopolitical struggles, the techno-productive labor transition (4th industrial revolution and the work of the future), the challenges of climate change, increased migratory flows, security problems and organized crime, and inequality, among others. 

To face this scenario, resilience is needed, but the multiple vulnerabilities, sometimes fragilities of States, leave countries trapped in vicious circles that do not make it possible to develop capacities.  If international prices help, exports can cushion some shocks, but this is not enough to reduce vulnerabilities and develop capacities. 

This is due to the well known reflection that economic growth does not mean development.  Increasing poverty, informality and inequality are a constant threat to the countries of the region. 

Investments are needed to facilitate structural change and export diversification (infrastructure, technological preparation, institutional strengthening), investments in sustainable development and investments to reduce vulnerabilities (education, housing, health, social safety nets).  In short, investments are needed in public goods and services that increase social returns and increase the attraction of private investment. 

This requires governance and consensus.  However, in some of the countries of the region, polarization is high and/or increasing.  To observe the current polarization in the Americas, one can turn to the Digital Society Project, which focuses on studying the interactions between politics and social networks.

The Digital Society Survey asks 35 questions to experts.  One of them allows us to observe social polarization: - How would you characterize the different opinions on major political issues in society? 

The categorization of the response considers the value 0 (zero) as high polarization and the value 4 (four) as a society with no polarization at all.  The question helps to measure social polarization, as it is a perception of the position of the parties.

Figure 1 shows that only Canada (2.75) is the country in the region that is close to a limited polarization (reference value = 3), where differences of opinion are only on some political issues, resulting in few clashes of views. 

Meanwhile, values 1 (one) and 2 (two) refer to a moderate polarization, differing in opinions on most political issues, and a medium polarization, where differences are found around half of the existing issues. 

Finally, the countries with values equal to 0 (zero) or close to it, are highly polarized, due to the fact that in almost all political issues there are differences of opinion, with constant clashes in the points of view.  It is also observed that the countries that are close to these values have been showing it for several years and, therefore, social polarization has been recurrently established. 

The first observation, as old as Hermetic philosophy (principle of polarity), is that polarization is a matter of degree.  Being a matter of degree, it can be stated that the absence of polarization can be due to either unanimity (a single pole) or perfect pluralism (multiple poles coexisting), with perfect polarization (in theory) being that where there are two homogeneous poles of similar size and diametrically opposed positions. 

Being a matter of degree, it is necessary to define a reference for the purpose of being able to determine when it is high or low and in reference to what.  In this sense, it can be defined with respect to, for example, a consequence of polarization. 

For example: What degree of polarization can lead to conflict, or uncertainty about the rules of the game and reduced investment?  The second observation that emerges from the graph is that there were some changes in social polarization in the year 2021 taking 2020 as the pivot axis, which coincides with the development of the pandemic and the renewal of authorities in the countries that express changes in their reference values. 

We do not have enough information to know whether these changes are linked to perceptions of cooperation between political parties to address the pandemic or to other causes, but it begs the question of the importance of small changes.  Can small changes in polarization lead to large changes in its consequences? 

To continue with the examples above, what is the change in polarization that is needed to reduce the risk of conflict or increase investment?  Note that this is not an indicator of polarization of populations but the perception that the surveyed experts have of the polarization of political parties. 

The polarization of populations, however, need not be as high as the polarization of (political) elites.  In general, the population tends to be less polarized than the elites, but can be strongly influenced by them. 

And when the social and economic situation is perceived with dissatisfaction by the population, indignation, protests, and conflicts are triggered and polarization prevents the construction of consensus, of a collective identity.  

The inability of formal and informal institutions to maintain social cohesion due to the lack of collective identity and consensus feeds back into polarization and potential or real conflict.  Reducing polarization, building consensus, building governance, makes it possible to design and implement public policies that make it possible to break out of the vicious circle into which several countries in the region have fallen recently and which end in protests and conflicts. 

Not doing so reproduces polarization and its consequences on the population, particularly on the most vulnerable.  This is the crossroads. The consequences of polarization are eventually the greatest risk facing the region because they impact governance, predictability, social peace, integral development and democratic institutions. 

To reduce polarization, it is necessary to delve deeper into its dimensions (economic, beliefs, moral, political) and its causes, and how it spreads from the political, economic and social elites to the population. 

And, although the difference of opinions is healthy and necessary for a democracy, it is also necessary to build bridges between the different options in a society.  Polarization is reduced by strengthening these bridges. 

The inability of formal and informal institutions to maintain cohesion at the economic, social and political levels, as well as the morphology of the structure of social, economic and political relations, are the causes of polarization. It is important to fill the gaps, it is important to strengthen the networks in the three arenas: economic, social and political. 

It is important to build bridges between actors from different poles.  Bridges to reduce polarization, build consensus, collective identity, governability, predictability for private investments, quality in public goods and services for greater social return. Bridges for democracy and development.

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The global economy has lost momentum in the wake of Russia’s war of aggression in Ukraine

OECD Interim Economic Outlook warns of pervasive global economic slowdown

 

"The global economy has lost momentum in the wake of Russia’s unprovoked, unjustifiable and illegal war of aggression against Ukraine..."

The global economy has lost momentum in the wake of Russia’s war of aggression in Ukraine, which is dragging down growth and putting additional upward pressure on inflation worldwide, according to the OECD’s latest Interim Economic Outlook.

The Outlook projects global growth at a modest 3% this year before slowing further to just 2.2% in 2023.  This is well below the pace of economic growth projected prior to the war and represents around USD 2.8 trillion in foregone global output in 2023.

The war has further pushed up energy prices, especially in Europe, aggravating inflationary pressures at a time when the cost of living was already rising rapidly around the world due to lingering impacts of the Covid-19 pandemic.  With businesses across many economies passing through higher energy, transportation and labour costs, inflation is reaching levels not seen since the 1980s, forcing central banks to rapidly tighten monetary policy settings faster than anticipated.

The inflation and energy supply shock stemming from the war has led the OECD to revise its previous growth projections downward worldwide.  Annual GDP growth is projected to slow to around 1/2% in the United States in 2023, and 1/4% in the euro area, with risks of deeper declines in several European economies during the winter months.  Growth in China has also been hit and is expected to drop to a projected 3.2% in 2022.  Except the 2020 pandemic, this will be the lowest growth rate in China since the 1970s.

Inflation is projected to recede gradually through 2023 in most G20 countries as tighter monetary policy takes effect and global growth slows.  Headline inflation is projected to ease from 8.2% this year to 6.6% in 2023 in the G20 economies, and fall from 6.2% this year to 4% in 2023 in the G20 advanced economies.

“The global economy has lost momentum in the wake of Russia’s unprovoked, unjustifiable and illegal war of aggression against Ukraine.  GDP growth has stalled in many economies and economic indicators point to an extended slowdown,” OECD Secretary-General Mathias Cormann said during a presentation of the Outlook.  “Inflationary pressures that were already present as the global economy emerged from the pandemic have been severely aggravated by the war.  This has further driven rising energy and food prices that now threaten living standards for people across the globe.”

The OECD points to substantial uncertainty about the economic outlook, with significant downside risks.  These include the possibility of further food and energy price spikes, which could push many people into poverty, as well as the possibility of gas shortages as winter progresses in the Northern hemisphere.  Reducing energy consumption and diversifying supply sources will be critical to avoid shortages, which would push global energy prices up, damage confidence, and likely worsen financial conditions and require a temporary period of enforced reduction of gas use by businesses.

Taken together, these shocks could reduce growth in the European economies by over 1¼ percentage points in 2023, relative to the Outlook’s central projection, and raise inflation by over 1½ percentage points.  This would push many countries into a full year recession in 2023, while GDP growth would also be weakened in 2024.

Other key risks are that the ongoing adjustments in Chinese property markets - combined with the high level of corporate debt in China and continuation of the country’s “zero-Covid” policy - could generate a more severe slowdown in the world’s second largest economy than projected.  This risk comes on top of continued costs from global supply chain pressures, and possible debt crises and financial contagion in many emerging-market and low-income economies.  

Further monetary policy tightening will be needed in most major economies to ensure that inflation pressures are reduced durably.  This will need to be calibrated carefully given uncertainty about the speed at which higher interest rates will take effect and spillovers from tightening in the rest of the world.

Fiscal support can help cushion the impact of high energy costs on households and companies, but should be concentrated on aiding the most vulnerable and preserve incentives to reduce energy consumption.  Fiscal actions to cushion living standards must avoid persistent stimulus at a time of high inflation.  Means-tested transfers to households broadly meet this criteria.

Managing the energy crisis requires renewed efforts to secure alternative supplies while ensuring all sectors of the economy are incentivised to reduce demand.  There is also an urgent need for governments to accelerate investment in energy security and invest in the green transition.

For the full report and more information, visit the Economic Outlook online. Media queries should be directed to the OECD Media Office (+33 1 4524 9700)

26/9/2022

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