Colombia: Implications of Domestic Economic and Security Policy

Commentary by Kimberly BreierandAntonio Leal Holguín

Published October 16, 2024

Colombian president Gustavo Petro has changed the country's foreign policy. In May, Colombia broke diplomatic relations with Israel, a longtime ally. In June, President Petro canceled plans to attend a conference in Ukraine and meet with President Volodymyr Zelensky, complaining that the conference's outcome was predetermined and calling for talks to end the war, not continue it. The Petro administration has also sought to reframe relations with the United States and, in October, announced plans to join China's Belt and Road Initiative. Most critically, President Petro quickly moved to reestablish relations with the Maduro regime in Venezuela and has sought to play a key role in the Venezuelan crisis. In the aftermath of the July 28 election, the Colombian government continues to mediate in the crisis and has called for an end to U.S. sanctions.

The implications of the Petro administration's economic and security policies have garnered less attention. Although the administration has struggled to get key bills through Congress, it has made progress in transforming significant sectors of the economy by increasing government control and reducing private-sector participation. Its peace and security policies seem to have backfired and have so far resulted in the expansion of criminal organizations. These efforts to remake the Colombian economy into a more statist one and the effects of the new security policy have high stakes for Latin America's fourth-largest economy and could have implications for U.S.-supported efforts to strengthen Colombia's economic and security stability over the past two decades.

Change of Economic Model

Since taking office on August 7, 2022, President Petro has sought to transform Colombia's economy, lessen the country's dependence on extractive industries, and reduce the country's high levels of inequality and violence. Tax, pension, and land laws are the signature legislative achievements of the Petro administration. However, its health, labor, and education bills have struggled in Congress, where the government lacks a clear majority.

But beyond the success or failure of its legislative initiatives, the Petro administration has made progress in transforming significant economic sectors through a mix of policy initiatives and regulatory action (or inaction). At the center of this transformation is the view that the private sector should not be doing business with government funds, that the prevailing economic model puts profit before rights, and that the neoliberal model is responsible for the climate crisis. The administration's economic policy is often at odds with the model built after the adoption of the 1991 Constitution, which favors a market economy. This model led to significant private-sector investment in industries including healthcare, pensions, energy, utilities, transportation, and mining. A look at the Petro administration's policies in some of these industries shows the transformation currently underway.

Changing the health system from a market-driven model to a state-run one has been a priority for the administration. The system had been considered a mostly successful public-private model built over three decades. In 1990, it covered about 17 percent of Colombians. By 2016, it covered 97 percent. It also had low out-of-pocket spending and access, although still unequal, was higher than the Organisation for Economic Co-operation and Development average. The system also faced structural financial issues, corruption scandals, and an access gap between urban and rural communities. In early 2023, the Petro administration introduced a bill in Congress to replace the private insurance market with a government-run system. So committed was the administration to this goal that President Petro sacked moderate ministers over opposition to the bill and prematurely broke his governing coalition in Congress.

Immediately after the bill failed following 15 months of debate, the administration announced it would take control of a major private insurer and issued executive orders implementing some of the measures in the bill. It also allegedly delayed payments to private insurers. Critics blamed the administration for deliberately aggravating the crisis in order to justify changes to the model and increase government control. The government is now responsible for health services for more than 25 million Colombians, about half the country's population, consolidating the administration's plan to reduce private-sector participation in the system. It recently introduced a new bill that is substantially similar to the one that failed.

The government may be following a similar playbook for the energy sector. President Petro has been critical of energy generators and has called for an end to intermediation in the energy system. He has even compared their profits to those of infamous drug lord Pablo Escobar. He has complained that the rules governing the independent energy regulator, the Energy and Gas Regulatory Commission, favor the private sector to the detriment of users. The administration has announced a bill to reform the utilities law "to balance the rights of corporations and citizens" and give the government the power to regulate energy prices. It also launched the Energy Communities program to decentralize energy generation and promote self-generation by local communities.

Like private health insurers, energy generators face financial challenges resulting from, among other factors, government delays in making payments. At the same time, the energy regulator's ability to adopt critical measures has been limited by the administration's delays in appointing its members and disputes surrounding the president's authority to take control of the agency's functions. Delays in payments and a failure to adopt regulatory measures could aggravate the crisis, laying the groundwork for implementation of the government's plans.

In contrast to the health bill, Congress did approve the pension reform. Consensus had been built over the years that reform was necessary to expand coverage and fix an unequal distribution of pension benefits. However, one of the administration's key goals was to reduce private fund participation in the market. Once the reform is implemented, private funds will manage only a fraction of the assets they currently manage, while the government-run pension fund will be greatly expanded. The pension fund association has warned that private players will see a steady decline once the reform is put in place. When Congress approved the bill, President Petro tweeted, "We are beginning to emerge from neoliberalism and begin to build a social state of law and peace."

Coupled with regulatory uncertainty and a rhetoric that often demonizes the private sector, these policies may lead to an economy with declining private-sector participation and less open to investment. Companies are taking the cue: private investment fell 25 percent in 2023 and businesses have paused investments.

Shortcomings of "Total Peace"

President Petro's ambitious "Total Peace" policy has failed to deliver the desired results and may have backfired. Under this policy, the government pursued simultaneous negotiations with illegal armed organizations while seeking a quick reduction in violence. The government has opened negotiations with close to ten criminal organizations, including the National Liberation Army (ELN), Segunda Marquetalia, Revolutionary Armed Forces of Colombia (FARC) dissidents, and other drug gangs. The United States has designated some of these groups as terrorist organizations. So far, the negotiations have failed to produce meaningful results and face significant practical and legal challenges. In September, President Petro suspended negotiations with the ELN following an attack that killed two and injured 25 soldiers. During the 2022 campaign, Petro said a peace agreement with ELN would come three months after taking office.

Critics accuse the government of having no security policy and weakening the armed forces. More than 50 generals have been fired. Early in the negotiations and with an aim to quickly reduce violence, the government adopted ceasefires. Managing ceasefires with different criminal organizations in different stages of negotiations has brought operational challenges for the armed forces. In addition, mistrust of the armed forces runs deep in the administration. President Petro often repeats claims that he was tortured by government forces when he was a guerrilla and celebrates the symbols of his former rebel group's fight against the state.

Although the deterioration in security conditions predates the Petro administration, data suggests criminal organizations have used the negotiations and the ceasefires strategically to expand their reach. Fights among these groups for control of territories and revenue from illegal activities have led to an uptick in violence. According to the Minister of Defense, kidnappings are up 70 percent and extorsions 29 percent since the beginning of the administration. Continuing a trend that started before President Petro, cocaine production reached historic records in 2023. Statistics from Defensoría del Pueblo show that illegal armed groups have significantly expanded their presence in Colombia, once again weakening the government's hold on the territory. This raises concerns about a reversal in Colombia's progress on security over the past two decades.

The Next Two Years

The Petro administration has spent the past two years redirecting policy and the government apparatus to match its priorities. In the next two years, it will build on these efforts to deepen the transformation of the economy and expand its policies to other sectors. With the announcement of a new battery of bills, the administration has shown little appetite for compromise on its plan to fundamentally transform Colombia. It has renewed its push to change labor laws and remake the health system. It also announced plans to limit private participation in education and the utilities market and favor community organizations over international corporations for mining activities.

The administration's plans for the economy may inevitably lead to additional confrontation with the private sector. Given the vast power of the executive, companies in highly regulated industries may face tough choices between accommodating the administration's plans or confronting financial or operational challenges. The changes resulting from these struggles may be profound and not easily reversed.

On the security front, the government will persevere on its Total Peace plan. But absent changes to the security strategy and a clear legal path forward, criminal organizations may continue to expand their operations and fight each other for control of illegal economies. Security conditions may deteriorate further. The ELN's consolidation as a binational criminal organization and the expansion of the Gulf Clan and FARC dissidents are particularly worrying. The government's ideology and its distrust of the military make it an unlikely champion for a counteroffensive.

Despite legislative and judicial setbacks, the Petro administration has made progress in transforming key sectors of the economy. At the same time, its peace and security policies have weakened the military and, so far, have resulted in the expansion of criminal organizations. After two decades of growing prosperity and security, Colombia's move away from a market economy and deteriorating security conditions raise concerns about the country's future stability.

Kimberly Breier is a senior adviser (non-resident) with the Americas Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Antonio Leal Holguín is a public policy and Latin America advisor with Covington & Burling LLP.

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