COLOMBIA'S DOUBLE-DIGIT UNEMPLOYMENT -- BUSINESS AS USUAL

UNCLAS BOGOTA 000163 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON ELAB PGOV CO SUBJECT: COLOMBIA'S DOUBLE-DIGIT UNEMPLOYMENT -- BUSINESS AS USUAL REF: A) 09 BOGOTA 1829; B) BOGOTA 143; C) 09 BOGOTA 4120 D) 09 BOGOTA 3236 ¶1. (SBU) SUMMARY. Colombia's unemployment rate reached 12 percent in 2009, the highest in Latin America. This is the second consecutive year Colombia received this dubious distinction. Even in the heydays of 5.7, 6.9, and 7.5 percent economic growth from 2005-2007, respectively, Colombia still averaged double digit unemployment. Complicating this matter is the large informal sector, which employs roughly 60 percent of the workforce. The GOC's strategy to lower unemployment and reduce the informal workforce has several key components: initiate massive infrastructure projects, encourage more renewable energy development, increase the number of free trade zones, and implement a scaled labor tax payment system. However, it does not solve the core problem -- the high cost of hiring formal sector workers. END SUMMARY. Highest Unemployment in Latin America -------------- ¶2. (U) The Economic Commission for Latin America and the Caribbean of the United Nations (ECLAC) ranks Colombia's unemployment rate as the highest in Latin America, followed by Chile and Argentina. Furthermore, Colombia is the only country in the region with an average unemployment rate in the double digits. ¶3. (SBU) Unemployment for 2009 started out at 14.2 percent, hovered around 12 percent throughout the year, and fell to 11.3 percent in December, according Colombia's National Department of Statistics, DANE. Although trending downward, analysts at a prominent local think-tank, Fedesarrollo, told us that unemployment will remain on average in the double digits for 2010. The main reasons are the high payroll taxes and imposed social welfare programs (parafiscales) that employers are required to pay (reftel A). ¶4. (U) Colombia has fought a structural unemployment problem for decades. The average monthly rate for the last ten years, however, has been 13 percent, with a high in January 2002 of 17.9 percent in ¶2002. Double digit unemployment persisted despite high economic growth rates of 5.7, 6.9, and 7.5 percent from 2005-2007, respectively. This economic boom achieved only three monthly periods (out of 36) of single digit (9 percent) unemployment. High Taxes Expand the Informal Sector -------------- ¶5. (SBU) In the last ten years, the informal sector has grown from 48 to 58 percent of the workforce. Growth of the informal sector leads to a variety of problems, the most pressing being a lack of tax collection, a drain on the government-financed health care system, and a potentially large populist movement, according to Mauricio Cardenas, senior fellow at Brookings Institute and former Minister of Transportation. ¶6. (SBU) The informal economy in Colombia consists of all economic activities that circumvent the costs and rights associated with commercial licensing, labor contracts, financial credit and the social security system (reftel A). The GOC categorizes the informal workforce into three groups: 1) informal workers with no specialization (e.g., street vendors, maids, nannies); 2) workers with specialized technical jobs (e.g., plumbers, cab drivers, artisans); and 3) independent professionals (e.g. consultants, individual medical and legal practices, contractors). Fedesarrollo calculates that 93 percent of informal workers belong to the first two categories. ¶7. (U) Although the first two categories do not pay taxes, they do receive subsidized social security benefits and limited healthcare, but no pension or worker compensation. To cover the unfunded costs, the GOC imposes subsidies through taxes on both large businesses and the formal sector. Recently, the GOC raised the value-added tax on beer, liquor and cigarettes from 3 to 14 percent to cover the gap in healthcare costs. Unemployment and Crime: An Unfortunate Marriage -------------- -- ¶8. (U) Analysts note that high levels of unemployment lead to sustained levels of criminal activity. Colombia's 12 percent unemployment rate leaves 2.5 million people out of work and desperate for money. Although the uptick in homicides in 2009 can be mostly attributed to gang violence (reftel B),the lack of jobs provides few alternatives to joining gangs, drug cartels, and guerilla groups. High Unemployment Doesn't Pierce Uribe's High Ratings -------------- -------------- ¶9. (SBU) President Uribe came into office in 2002 with the goal of increasing security throughout the country, which would lead to increased economic development. Security is significantly better, the economy has improved, and Colombia has attracted record foreign direct investment. But double digit unemployment still remains. Currently, Uribe has around a 70 percent approval rating, based largely on his successful Democratic Security policy. However, a December Gallup poll of Colombia's four largest cities shows that 70 percent of respondents think unemployment is getting worse and 70 percent disapprove of President Uribe's handling of the issue (his worst score of all the topics covered in the poll). ¶10. (SBU) Former Minister of Defense and potential presidential candidate, Juan Manuel Santos, has stated publicly that the security situation has progressed enough that the country should focus primarily on the economy and job creation. (Note: Santos will be a presidential candidate, and a leading contender, only if Uribe does not run for reelection. Santos is well regarded in economic circles due to his experience as former Finance Minister and Minister of Foreign Trade. End Note.) A Possible Way Out -------------- ¶11. (SBU) Two major economic think tanks in the country, Fedesarrollo and the National Association of Financial Institutions (ANIF),highlighted two key measures to stimulate formal employment: 1) reduce payroll taxes and parafiscal costs for the employers, which currently adds 60 cents to every peso paid to an employee; and 2) reduce the subsidy program, which would enable companies to hire more workers. ¶12. (U) The GOC's strategy to lower unemployment and reduce the informal workforce has several components: 1) invest in massive infrastructure projects (reftel C),including 160,000 new housing units; 2) promote renewable energy development to achieve 20 percent ethanol and biodiesel mixes in gasoline and diesel, respectively (currently Colombia provides 10 percent ethanol and 5 percent biodiesel - reftel D); 3) increase the number of free trade zones to attract more private companies and create more formal sector jobs; and 4) implement a scaled labor tax payment system that allows companies to report the number of hours an employee works per month as a percentage of full-time employment, and pay the equivalent percentage of labor taxes, (a "second-best solution" next to eliminating parafiscales - reftel A). Comment: High Unemployment is the Status Quo -------------- ¶13. (SBU) Colombians have grown accustomed to double digit unemployment and have not staged large protests, in part because the social net is sufficient to keep the public at bay. Uribe's favorable ratings are still impressively high in his eighth year in office, as he remains focused on improving security. While a raise in the minimum wage is popular among the work force, companies are less likely to hire because of the associated high payroll taxes and subsidized social benefits. GOC officials often state they want to reduce unemployment levels, but until they reduce the burdensome taxes on the formal sector, unemployment is likely to stay in double-digits. BROWNFIELD