Dividends, Benefits, and Costs of Colombia's Peace Process

Abstract

This paper was written with the objective of contributing in the analysis, from an economics perspective, of the Colombian Peace Agreement considering these three issues: i) peace dividends that may result from reducing budgetary allocations to the Colombian Armed Forces (= military expenditure law enforcement expenditure, which is close to 3.5% of GDP); ii) benefits from reaching an accelerated growth rate of real GDP on account of an improvement in the business environment; and iii) additional budgetary costs resulting from the “short-term implementation” of the Agreement and costs related to the “economic sustainability” in the medium term of productive conditions in rural areas.

The following main conclusions can be drawn: i) there is little space for reducing budget allocations to the defense sector, therefore peace dividends are inexistent; ii) benefits resulting from guerrilla demobilization and a reduction in drug-trafficking could result in an estimated growth potential of 0.5% to 1% per year, during the next decade; iii) the implementation of the Peace Agreement will convey “immediate” budgetary costs of 2.23% of GDP per year during the next half-decade (2017-2022) and post conflict “sustainability” costs (tertiary roadwork, rural financing and education) will add another 3% of GDP per year, hence peace-budget costs will range from 2.23% of GDP to 5.23% per year throughout the following decade; and iv) additional fiscal pressure (apparently not taken into consideration by the government) will amount to 2.7% of GDP in 2018 and increase to 4.8% of GDP in 2020, where tax replenishment of 1.3% of GDP would help in reducing the fiscal shortfall to 3.5% of GDP in 2020.

JEL Classification: F51, H62