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Beyond war and revolution: Dramatic developments in the Andean Region.


* Colombia is making ambitious plans for implementing a historic peace agreement to end a go-year conflict with leftist guerrillas. Ensuring the guerrillas end their lucrative drug trafficking and creating economic opportunity in post-conflict zones are crucial to success.

* The economic chaos, political unrest, and potential refugee crisis brewing in neighboring Venezuela can be minimized by advocating an orderly transition of power.

* The same energy and creative leadership required to support complex transitions in Colombia and Venezuela can simultaneously help reinvigorate the Andean integration process and propel the region into a higher economic orbit.

* The United States should continue to provide substantial material support to Colombia, but leveraging investment and private-sector development is more important than foreign aid.

A promising peace accord in Colombia and the imminent collapse of the regime in Venezuela represent historic opportunities to transform these countries and invigorate the Andean region as a whole.

Anticipating a negotiated end to the war with the Revolutionary Armed Forces of Colombia (FARC) by late March, Colombian authorities already have programmed high-impact, community-based development activities and security measures to absorb the impact of demobilized forces and address the structural inequalities in rural areas isolated by decades of armed conflict. The international community has an important role to play in monitoring compliance with the peace accords and supporting robust and equitable growth.

Venezuela's democratic majority is pressing the Nicolas Maduro regime on all fronts--demanding measures to address worsening shortages of food and medicine, exposing corruption, and clawing back political space. The Maduro government will soon find itself unable to import basic staples, let alone service its debt. It remains to be seen if Maduro will seek an orderly exit or provoke a confrontation with an increasingly desperate population. Either way, a transition to a more responsible government can usher in the country's economic recovery and reconstruction.

With Colombia's peso losing one-third of its value, oil revenue declining sharply, and Colombian President Juan Manuel Santos vowing not to raise taxes, a dramatic infusion of private capital will clearly be needed to generate growth, jobs, and stability in areas of past conflict. The political unrest, economic chaos, and potential refugee crisis brewing in neighboring Venezuela could complicate Colombia's grand plans-particularly if elements of the FARC continue drug-trafficking operations from a safe haven across the border. Friends of both countries must find a way to help them grow together, literally--reinvigorating the Andean integration process to attract, leverage, and distribute the $150 billion to $350 billion needed to satisfy the high hopes in Colombia and recover from a failed revolution in Venezuela.

The same energy and creative leadership required to manage these complex transitions can simultaneously help reinvigorate the Andean integration process and propel the region into a higher economic orbit. Like never before, this integration process should engage the private sector to pull together as a unit to aggregate capital, develop an efficient internal market, break down barriers to intraregional trade, build multinational commercial partnerships, unlock value in strategic sectors such as mining, and attract global investment in transformational infrastructure. The Andean Community of Nations must surge toward its full potential, becoming a dynamic, innovative economy that proves the efficiency of free-market solutions.

Colombia: Managing Great Expectations

President Santos launched negotiations with the FARC in 2012, hoping to reach a negotiated end to a 50-year armed conflict that has cost 220,000 lives and displaced 6.(85) million Colombians, including about 350,000 refugees in other countries. (1) With the self-imposed deadline of March 23 approaching quickly, Santos is lining up international support for the implementation phase, which will demand substantial investment of public resources as the state demobilizes 8,000 FARC guerrillas and 9,500 supporters and begins to improve public services and security in rural zones isolated by decades of war. (2) The United Nations Security Council's unanimous decision in January to deploy a mission to monitor an impending cease-fire was a crucial milestone. (3)

The politics of the peace are complicated. Public-opinion polls have found the country divided on the negotiations process, with many skeptical of the FARC's good faith. A respected poll last November found optimism for an agreement rising to 52 percent, up from just 39 percent in August. However, only 43 percent agreed with "sacrificing some degree of justice" to reach an accord, with 55 percent opposed to so-called "transitional justice" schemes: arrangements whereby guerrillas can avoid jail time by admitting their offenses and cooperating with investigators. That November poll also found that 81 percent rejected the idea of an ex-guerrilla seeking public office without first serving time in prison. (4)

Critics of the peace negotiations--led by former President Alvaro Uribe of the Democratic Center Party and former President Andres Pastrana of the Conservative Party--continue to question whether demobilized guerrillas will face credible trials and penalties, pay reparations to their victims, end their criminal drug trafficking, or actually surrender their weapons. (5) At least one international human rights group contends that the justice meted out under the planned accord would create impunity for gross human rights violations committed by both sides of the conflict. (6)

Santos will find it difficult to win public approval for the provisions on transitional justice or FARC political participation, which the guerrillas have pressed as key demands, so he must maneuver around those issues for the sake of preserving a settlement. The president has the upper hand because of his parly's absolute control of Congress and rising popular expectations for peace. However, his critics fault him for muscling through changes in congressional procedures to ensure fast-track approval of constitutional amendments and other legislation required to implement the peace accords. They also claim that his plan for a nonbinding plebiscite--perhaps merely eliciting support for a negotiated peace-falls short of his commitment to submit the agreements to a popular referendum.

As long as a majority of Colombians generally support a negotiated end to the war, Santos will find a way to rally popular approval of a final agreement--even if some major issues are left unresolved. To implement the peace accords and maximize the "peace dividend," it will be vital to confirm that the FARC has ceased its involvement in the lucrative drug trade--from which the FARC garners an estimated $600 million annually. The government also must quickly demobilize ex-guerrillas, ensure state control and public order in areas of past conflict, and generate jobs and basic social services to ensure stability.

As long as a majority of Colombians generally support a negotiated end to the war, Santos will find a way to rally popular approval of a final agreement.

Santos has named veteran Cabinet Minister and Senator Rafael Pardo as post-conflict minister, responsible for all aspects of implementing the settlement, including economic development and justice in conflict zones. Pardo will manage "Colombia in Peace," a post-conflict fund that Santos created last November, which aggregates national funds and contributions from international donors, the World Bank, Inter-American Development Bank, European Union, and United Nations. (7) Pardo estimated that $3 billion from international donors could be channeled to post-conflict projects in the next five years. (8)

Pardo explained that project management would be decentralized, developed with intense consultation with communities, and implemented in coordination with local authorities. In addition, he said he would coordinate "citizen security" issues and oversee the fight against criminal organizations. (9)

According to published reports, Pardo's ministry will move quickly upon signature of a peace plan, expected in late March, to deliver the first of $470 million of assistance under a "Rapid Response Strategy" for post-conflict activities. Urgent programs will focus on justice, development, and governability to build confidence with local communities; the initial phase will include "ground-truthing" proposed projects with mayors and governors.

Work has begun on demining, agricultural technical assistance, and the deployment of university volunteers. After the accord is reached, activities will expand to schools, food security and nutrition, and formalization of property titles. By June, the government will add the formation of local justice committees, reform of comprehensive security plans, and work with police services. (10)

The costs of consolidating peace and security will begin to mount just as the Colombian economy has slowed to about 3 percent growth. One analysis, prepared by Bank of America Merrill Lynch Global Research and obtained by BBC, estimates the total costs associated with the peace process--including reparation of victims, justice activities, resettlement of displaced persons, agrarian reform, and rural reconstruction--are between $53 billion and $187 billion over a 10-year period. (11)

Financing this ambitious plan will require a significant realignment in the national budget, particularly because Santos has committed to not increasing taxes and because citizens are coping with the plummeting value of the peso, which has lost one-third of its value in the last year. The peso's decline is partially attributable to the steep drop in the price of oil, which accounts for one-half of the country's exports and one-fifth of the government's revenue. (12) In other words, the state coffers have suffered as well.

"The [Colombian] economy is on track for its slowest expansion since 2009... after prices fell for its oil, coal, coffee and gold," according to Oscar Medina and Andrea Jaramillo in a Bloomberg Business profile last September. "Still, construction output rose 8.7 percent in the second quarter from a year earlier, while mining expanded 4.2 percent and agriculture 2.5 percent. Manufacturing output contracted 1.3 percent." (13)

The peace process is not the only transformational initiative underway in Colombia today. In 2011, President Santos launched a $50 billion infrastructure-modernization plan to address barriers to competitiveness and productivity--with about $25 billion aimed at improving the nation's substandard highway network, $10 billion for railways, $8 billion for urban transportation and airports, and $3 billion for ports. Some of these rural projects are feasible only with the improved security situation, and they will help link once-conflicted zones to the region's transportation and logistics chain. (14) These projects also should be aimed at knitting together Andean markets, and Andean firms should seek to capture such contracts.

One concern about the Colombian government's planning is the insufficient attention to leveraging investment (with international financial institutions and the state sharing the risk) and encouraging private-sector development in post-conflict zones. Pacifying and rehabilitating these areas in Colombia should not be regarded as a grandiose development project to treat the problems of isolated, disadvantaged regions. Rather, it should be part of a broad and ambitious strategy for transforming the Colombian economy as a whole. And because Colombia sits at the heart of an Andean region, its transformation can impact neighboring countries returning to free-market remedies after a decade of failed populism and big-government policies.

Venezuela: Implosion, Transition, and Reconstruction

The turmoil in Venezuela could have very negative repercussions for many of its South American neighbors. Political instability, social upheaval, a possible refugee crisis, and unchecked criminality pose a particular threat to Colombia's efforts to implement a historic peace. Nevertheless, an intelligent and coordinated effort to mitigate food and medicine shortages, stabilize the country during a political transition, and eventually reconstruct Venezuela's crumbling infrastructure will produce tangible benefits for the region as a whole.

In addition to the political instability caused by 18 years of leftist authoritarian rule, Venezuela's economy has been wracked by corruption, mismanagement, and profligate spending by Hugo Chavez and his hapless successor, Nicolas Maduro. The democratic opposition won a landslide victory in legislative elections in December 2015, giving it the authority in the National Assembly to set the date for a recall election in the months ahead.

However, the economic collapse may be moving faster than the regime's political decline. The precipitous drop in oil prices in the last year, rampant corruption, and low productivity in the petroleum industry have driven the country to the brink of bankruptcy. According to analysts with access to real-time data, the Venezuelan government may not have the cash on hand to purchase enough food and medicine to cover February's needs. In other words, servicing the country's international bond debt of $125 billion--plus the state-oil company's debt of an additional $50 billion--may be the least of the regime's worries, with the possibility of desperate demonstrators challenging the Maduro government in the next few weeks. (15)

Antonio de la Cruz, executive director of the consulting firm Inter American Trends, predicts that the Venezuelan government will likely pay the bond debt (interest and principal) due in February. However, his team also notes that Maduro's economic team has exhausted most of its options to raise cash, including running up a $50 billion debt to private companies for services to state-run enterprises. (16) Maduro's successor will inherit an intolerable debt burden of at least $175 billion, requiring at least $50 billion of new capital immediately to continue state operations and finance needed imports, even at meager levels.

Another economic challenge in Venezuela is the country's crumbling infrastructure. Highways, bridges, power generators and the distribution grid, telecommunications hardware, and the state-run oil and gas industry all are in deplorable shape because of mismanagement, misplaced priorities, lack of accountability for government decision makers, and corrupt contracts to unqualified firms. In 2012, the head of Venezuela's construction association called for spending no less than $60 billion to rehabilitate the nation's public infrastructure. (17) Although current data are not available, the deficit in infrastructure spending must be even more significant today.

The Urgent Need for Andean Integration

The key to successful transformations in Colombia and Venezuela will be mobilizing private-sector solutions and capital: for example, encouraging integrated multinational business partnerships to develop and fund employment-generating projects in pacified areas of Colombia, delivering food and medicine and rebuilding infrastructure in Venezuela. In both these scenarios, private enterprise will be most efficient in engineering solutions, establishing supply chains, and acquiring capital.

Although the United States, China, and the European Union cast imposing shadows in Colombia and Venezuela, Andean firms are natural potential partners in these transformational ventures. If Andean governments and national business groups work together, they can capture some of the momentum from the billions of dollars in public and private investment that surge into two neighboring economies.

The foundation already has been laid. Andean integration was the fruit of post-World War II planning, as Latin American states sought to advance their social, industrial, and economic development. (18) In the 1960s--with political leaders rather than technocrats or entrepreneurs in the driver's seat--the Andean Development Corporation, the first subregional entity, was created to finance regional projects.

The Cartagena Agreement, signed by Bolivia, Chile, Colombia, Ecuador, and Peru in 1969, formed the so-called Andean Pact, which Venezuela joined in 1973. With the goals of promoting traditional import substitution policies and protecting regional industries, the group agreed in 1985 to harmonize trade policies and create a free-trade area and customs union. (19)

The Andean community's evolution was stunted by border conflicts among its neighbors in the 1970s and the debt crisis of the 1980s. In 1992, the member states pressed forward, establishing a free-trade area and a common external tariff scheme. They also advanced common policies touting privatization, financial deregulation, and liberalization of markets and foreign trade. (20) By 1995, intraregional trade surged to 12.7 percent, more than double prior levels. However, according to analyst Giovanni Molano Cruz, "The increase in intraregional trade remained quite weak in relation to the members' extra-regional trade." (21)

By 1990, the Andean Pact process focused on redressing the social and economic woes caused in the region by the US-fueled drug trade. In 1991, in response to an appeal by Andean presidents, the United States established the Andean Trade Preference Act to grant duty-free entry for merchandise from Bolivia, Colombia, Ecuador, and Peru. (22)

The Andean integration process lost momentum again in 2005-06, when then Venezuelan President Hugo Chavez and then Bolivian President Evo Morales disagreed with the other states when they endorsed the US initiative to launch a Free Trade Area of the Americas. When Colombia and Peru opened negotiations for bilateral free trade accords (FTAs) with the United States in 2006, Venezuela withdrew from the Andean Pact.(23) In the wake of the adoption of US FTAs with Peru and Colombia, and with the advances of the Union of South American Nations (UNASUR), of which all the Pact members are signatories, the Andean process lost relevance.

Private enterprise will be most efficient in engineering solutions, establishing supply chains, and acquiring capital.

Not withstanding the flurry of activity behind UNASUR, which was driven by Chavez's anti-US agenda, Latin American integration has fallen far short of expectations. For example, intraregional trade (exports within the subregion as a percentage of total exports) in North America in 2013 was 49.6 percent; in the European Union, 59.1 percent; and in Southeast Asia, 49.8 percent. In Latin America and the Caribbean, intraregional trade was a mere 19.2 percent. (24) The region can and must do better--not to build barriers or protect economies, but to take advantage of comparative advantages, efficient supply chains, and economies of scale.

Focusing on an integrated, efficient, and larger Andean economy--fashioned by private-sector partners--may help attract and deploy the roughly $150-300 billion needed to support peace and infrastructure improvements in Colombia and to rescue and rebuild Venezuela. Putting such capital behind truly integrated multinational projects will do more to promote a prosperous, stable, and peaceful Andean Community than four decades of diplomacy.

A 2011 report by the Inter-American Development Bank (IDB) describes the compelling arguments behind modern integration schemes:

Integration is not an end in itself, but a strategic platform to maximize the benefits of globalization and harness functional cooperation for growth and development. In [Latin America and the Caribbean], the policy framework for integration has shifted radically from the Old Regionalism of the 1950-6OS that supported state-led import-substitution strategies within regional blocks, to the New Regionalism of the 1990S-2000S meant to promote market scale and efficiency through global and regional trade liberalization. As the drivers of global competition changed dramatically, joining together regionally to better navigate the world economy is more necessary than ever. (25)

The IDB report argues that integration can help promote the optimal blend of sound policy and regulatory frameworks (referred to as "software") and investments in physical integration that facilitates growth ("hardware"). Typical "software" includes policy reforms, regulatory upgrades, institutional strengthening, and better integration of country systems with private operators. "Hardware" includes activities to enhance the connectivity of national infrastructure investments (in transport, energy, and communications).

The IDB also notes that today's integration plans are "private sector-driven rather than state-led," favoring practical market forces over "geopolitical considerations." (26) The IDB study asserts that global and regional integration help countries overcome the disadvantages of small market size, producing a larger integrated market that drives the development of regional production networks. An integrated market also is more attractive to foreign direct investment and facilitates access to the global marketplace, the IDB report asserts. Subregional integration also promotes transnational transportation corridors and cross-border production networks. (27)

Integration can facilitate access to project financing, both from the IDB and a consortium of private banks. For example, the IDB's Trade Finance Facilitation Program supports private-sector integration and infrastructure investments through a network of 200 international and local banks. The IDB also has a program for the integration of regional infrastructure to facilitate physical integration among 12 South American countries. Additionally, the Multilateral Investment Fund and Inter-American Investment Corporation have promoted smaller enterprises' ability to expand across borders. Each of these funding sources could be tapped to animate projects to consolidate peace in Colombia and overcome the crisis in Venezuela.

The Way Forward

Even as Latin American economies are slowing, private firms are seeking markets where policymakers are pursuing innovative growth strategies, promoting integrated and larger economies of scale, bolstering capital markets (including stock exchanges or enterprise funds) to fund more ambitious projects, adopting new technologies, eliminating obstacles to growth, educating human capital, and diversifying products and services. In addition, a period of low commodity prices should lead economies in the region to bolster their internal productivity; seek synergies with other Andean partners; or modernize oil, gas, and mining laws to prepare for a market rebound.

The Colombian economy will have to ride out the repercussions of a disruptive transition in Venezuela. In the short run, international financial institutions must work with Maduro's successor to restructure the country's debt and buy time, during which the liberation of the private sector and reconstruction of public infrastructure can begin. In the long run, private capital--most of it from Colombia and other Andean neighbors--can take part in and benefit from the recovery, reconstruction, and reform of Venezuela.

President Barack Obama hosted President Santos at an official working visit in Washington, DC, in early February 2016, during which he pledged support to Colombia's ongoing peace efforts. Henceforth, the process needs arbiters more than cheerleaders. Obama must convince his counterpart that he can count on US political and material support as Santos presses the FARC to accept and comply with a tough, verifiable agreement to definitively end the conflict and the FARC's lucrative criminal activities.

President Obama should establish an interagency task force to step up its global campaign against transnational organized crime, with particular attention to sanctioning any ongoing criminal activity by the FARC and identifying and freezing illicit FARC assets and sharing them with impacted countries, particularly Colombia.

President Santos should pledge to open up Colombia's economy to more competition, capital, and innovation, so that an even more robust private sector can play its indispensable role in transforming the regional economy. The two leaders should convene a regional summit--with the participation of the European Union and multilateral organizations--to direct international financial institutions to take the lead and share the risk in funding transformational projects in Colombia and Venezuela, in order to incentivize private ventures and capital. That summit also should launch a dialogue among the CEOs of Andean-based firms to give new impetus to regional integration, one deal at a time.

Finally, President Santos must make the case that the United States has an interest in the postwar recovery--making the most of the opportunity created by decades of US-Colombia solidarity and cooperation. Much of this work will be left for the successors to Presidents Obama and Santos, who may have to be convinced--along with the US Congress--to sustain US investment in a more peaceful and prosperous Colombia.


(1). UN High Commissioner for Refugees, "2015 UNHCR Country Operations Profile--Colombia,"

(2). UN Regional Information Centre for Western Europe, "The Guerrilla Groups in Colombia," According to this UN fact sheet, the FARC force has dwindled to 8,000, although the FARC commanders claim to have a force of 14,000.

(3). Cara Anna, "UN OKs Mission to Monitor Future Cease-Fire in Colombia," Associated Press, January 25, 2016,

(4). "Aumenta el apoyo de los colombianos al proceso de paz con las Farc," [Colombians' Support of the Peace Process with the FARC Grows], El Tiempo, November 11, 2015,

(5). Federico Hoyos (Colombian congressman), interview by the author, January 29, 2016.

(6). Sergio Gomez Maseri, "Human Rights Watch critica acuerdo de justicia de Gobierno y Farc," [Human Rights Watch Criticizes Justice Accord of the Government and FARC], El Tiempo, December 22, 2015,

(7). Lorena Beltran, "El gobierno no piensa en impuestos para el posconflicto," [The Government Is Not Thinking of Taxes for the Post-Conflict], Nacional Agencia Colprensa, January 17, 2016,

(8). Tomas Betin del Rio, "Gobierno crea el fondo 'Colombia en paz' para canalizar recursos destinados al posconflicto," [Government Creates 'Colombia in Peace' Fund to Channel Post-Conflict Resources], El Heraldo, November 25, 2015,

(9). Beltran, "El gobierno no piensa en impuestos para el posconflicto."

(10). Felipe Morales Mogollon, "470 millones de dolares, la primera tajada del posconflicto," [$470 Million, the First Slice of the Post-Conflict], El Espectador, January 4, 2016,

(11). Natalio Cosoy, "Cuanto cuesta, como se paga y que se puede ganar con una eventual paz en Colombia," [How Much, Who Pays, Who Gains with an Eventual Peace in Colombia], BBC Mundo, July 20, 2015, economia_cuanto_cuesta_paz_nc.

(12). "Colombian Peso Crashes to New Low," Financial Times, January 20, 2016,

(13). Oscar Medina and Andrea Jaramillo, "Exceeding Forecasts," Bloomberg Business, September 10, 2015,

(14). "Colombia's Big Bet on Infrastructure," JLL Real Views, 2015,

(15). Stephen J. Lubben, "The Coming Mess in Venezuelan Debt," New York Times, January 28, 2016, Information regarding the acute cash shortage is from the author's interviews with several Venezuelan sources who have access to data and intimate knowledge of the government's cash management.

(16). Antonio de la Cruz, Maduro pagara la deuda soberana en febrero, [Maduro Will Pay Sovereign Debt in February], Inter-American Trends, January 29, 2016,[beta]p=pub-maduro-pagara-la-deuda-soberana-en-febrero-es.

(17). "Camara Venezolana de Construction reclama $60 mil millones para infraestructura," [Venezuelan Construction Chamber Urges $60 Billion for Infrastructure], EFE, April 24, 2012,

(18). Giovanni Molano Cruz, "The Andean Integration Process: Origins, Transformations and Structures," Integration and Trade Journal 15, no. 33 (2015): 35-45.

(19). Ibid., 37.

(20). Ibid., 38.

(21). Ibid.

(22). Foreign Trade Information System, "Nonreciprocal Preferential Arrangements: Andean Trade Preference Act (ATPA)," These preferences were supplanted by bilateral trade agreements with Colombia and Peru. Bolivia was deemed ineligible in 2008, for failure to meet antidrug benchmarks; Ecuador lost these preferences when the law expired in 2013.

(23). "Venezuela Quits Andean Trade Bloc," BBC, April 20, 2006,

(24). Economic Commission for Latin America and the Caribbean, "Foreign Trade in Latin America and the Caribbean,"

(25). Inter-American Development Bank, "Sector Strategy to Support Competitive Global and Regional Integration," March 22, 2011,

(26). Ibid.

(27). Ibid.

By Roger F. Noriega
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Title Annotation:Colombia and Venezuela
Author:Noriega, Roger F.
Publication:AEI Paper & Studies
Article Type:Report
Geographic Code:3COLO
Date:Feb 1, 2016
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