Colombian Economy and Family

Business
Annabel Lundy
 Table of Contents
Introduction

Economic Indicators

Foreign Trade

Industry Forecasts.

Family Business & the Economy

Conclusion.

Work Cited

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Introduction

Colombia is a large country located in the North-west of South America. It has over 3000

kilometers of coasts that border two bodies of water, the Pacific Ocean and the Caribbean Sea.

Because of Colombias location it is has the most important port in the South Pacific,

Buenaventura. The population of Colombia is over 47 million people, with a majority of them

living in the North and west where there are agricultural opportunities and natural resource sites

which is why the major cities of Colombia are found in this area. With the majority of the

population living in these coastal cities, a major part of their output is concentrated there.

Buenaventura is located in the Valle De Cauca region which is a part of the Cali Region and it

aggregates 55% of the nations GDP and 45% of its population (Cali Chamber of Commerce,

2017). This indicates that this region is a major contributor to Colombias development and GDP.

Colombia is Latin Americas oldest democracy, and is currently lead by President Juan

Manuel Santos. Colombia has been involved in a five decade long civil war between the

Colombian government and left-wing guerrillas, such as the Revolutionary Armed Forces of

Colombia or FARC and the National Liberation Army which has caused hundreds of thousands of

casualties (Index of Economic Freedom, 2017). There has been a Peace Plan for over 15 years and

in November of last year a peace accord was signed by the President of Colombia and FARC to

end the longest running civil war. They now face the task of reintegrating the former fighters into

the communities as well as the displaced people of the war that has left the country divided.

According to the World Bank the country is upper middle income and enrollment in primary

school was 90% in 2009 (Alfonso, 2013). The political climate and geography of Colombia play a

large role in their economy. The purpose of this Case Study is to analyze the Colombian Economy

and the challenges it faces, as well as the contribution of family businesses to their economy. I will

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start by evaluating the economic indicators such as Gross Domestic Product, unemployment rate,

inflation and corruption then continue with foreign investment and industry forecasts and finish by

analyzing the family business role.

Economic Indicators

Although Colombia has been dealing with internal conflict for over fifty years, it has

maintained steady economic growth. In 2016, the economy suffered from a shock in oil prices

which decreased the rate of growth and lead to increased unemployment and inflation which

temporarily slowed consumer spending. Though it is expected that an increase in oil prices and

increased investment on public infrastructure will improve growth this year. The signing of the

Peace Accord is also expected to boost tourism in the area further improving the economic

recovery and boost industries not related to oil such as the service sector.

As shown in Figure 1, GDP annual growth has been positive for the last 15 years, but in the

last three years their growth has declined. This can be attributed to the oil price shock that the

market incurred. The Colombian GDP is composed of three main sectors, the service sector which

contributes a 56% share to GDP, the industrial sector which contributes 38% and the agriculture

sector which contributes 6%. While agriculture has historically fueled the Colombian economy, it

has consistently decreased its share due to slow growth and a shift of focus to manufacturing and

other sectors. The industrial sector is made up of a number of small businesses as well as a few

bigger businesses and is expected to continue to expand its share. In 2014 Colombia was the third

largest oil producer in Latin America and one of Americas top 10 exporters of crude oil. The

service sector is the major contributor to GDP due to the rapidly expanding tourism sector and its

consumer driven economy. The economy has grown in large part due to strong private and

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household spending.

Figure 1: GDP Growth Rate in Colombia Sourced from Trading Economics 2017.

The unemployment rate was also effected by the shock to oil prices and dip in the GDP

growth. The unemployment rate as shown in Figure 2 is at 10.5 % with the rate of employed

people being less than 60% (Trading Economics, 2017). Colombia is currently ranked 52nd in the

world for unemployment. The service sector makes up a majority of Colombias workforce

providing 64% of jobs in 2014 followed by industry which provides 19.6% of employment and

lastly the agricultural sector which makes up 16.3%. With more migration from the rural areas to

bigger cities, agricultures share of employment is expected to continue to decrease. According to

the Central Bank, the major cause for unemployment is a mismatch between the skill requirements

and the skill level of the labor force (Alfonso, 2013).

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Figure 2. Unemployment Rate in Colombia over the past 10 years. Sourced from Trading

Economics 2017.

Another important economic indicator is inflation. Inflation coupled with the increase in

unemployment has temporarily decreased consumer spending in the area. In July of last year

inflation reached 9% which was a multiyear high, but has fallen for a consecutive eight months.

Currently the inflation rate is at 4.69%, but the target rate is 3% (Trading Economics, 2017). The

Consumer Price Index has three main components which are housing, food, and transports

(Trading Economics, 2017). The large increase in inflation last year was due to the droughts effect

on food supplies and the weak currency exchange rate of the peso, but food supplies has increased

and the peso has improved its strength (Bristow, 2016).

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Figure 3: Colombia inflation rate over the past 10 years. Sourced from Trading Economics 2017.

Although economic growth has been steady in Colombia, corruption remains a substantial

issue in the country. Colombia scores a 37 on the Corruption Perceptions Index which is on scale

from 0 to 100. With 0 being highly corrupt and 100 being very clean. Colombia is currently ranked

90th least corrupt out of 175 countries and due to this and other factors there is a mistrust in

government which is why it is reported that a large portion of the population does not pay taxes

and there is still a large informal sector. In 1999, it was estimated that corruption cost the country

1% of its overall GDP each year and corruption has only improved slightly since then

(Transparency International, 2017). This is a significant challenge that their economy faces and

although laws have been put in place to curb it, corruption persists heavily.

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Foreign Trade

Trade is important to Colombia and makes up approximately 39 percent of total GDP ( ) .

Colombia is a part of three trade organizations which are the Pacific Alliance, Communidad

Andina, and the Union of South American Nations. The Pacific Alliance is an intergovernmental

agreement between Colombia, Chile, Mexico and Peru and accounts for 7.7% of exports and

10.1% of imports (Trading Economics, 2017). Communidad Andina is between Colombia, Bolivia,

Ecuador and Peru and makes up 7.61% of exports and 3.8% of imports. The Union of South

American Nations which includes all the South American countries in the other two trade

organizations as well as Argentina, Brazil, Guyana, Paraguay, Suriname, Uruguay and Venezuela

constitute is around 16.5% of exports and 11% of imports (Trading Economics, 2017). It is also a

part of a free trade deal with the U.S which is the consumer of 28% of Colombias exports and

producer of 28% of its imports (Trading economics, 2017).

Colombias major exports are mineral fuels, oils and distillation products which account for

53% of their total exports. In 2015 oil exports were valued at $18.86 billion USD. The other

industries leading in exports are the coffee, tea, mate and spices which is 7.2% of exports followed

by plastics at 4%. Colombias major imports are machinery, nuclear reactors, and boilers at 13% of

the total imports, electrical, electronic equipment at 10%, and mineral fuels, oils and distillation

products at 9.5%. As of February 2017 the balance of trade is at -$0.99 billion USD, which means

that they are importing much more than they are exporting, but exports are increasing much faster

than imports from last year to this year. Figure 5 shows that the deficit has been trending to a larger

gap reaching its most extreme in 2015 at nearly $2 billion USD. Foreign trade relies heavily on

extractive industries such as oil and minerals and therefore the shock to oil prices was impactful

although industry forecast predict growth

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Figure 4: Colombias Balance of trade over the past 10 years.

Industry Forecast

Colombia is predicting more growth and with the help of the Chamber of Commerce,

incubators and other organizations is continuing to expand their economy. According to the Oxford

Economics report, manufacturing output is expected to increase by 4.0% in 2017 (Leonard, 2014).

In the manufacturing industry, the fastest growing sectors will be special purpose machinery, ships,

rolling stock and aerospace while the slowest growing sectors will be pesticides and

agrochemicals, pulp and paper utilities. Consumer goods share in total manufacturing output will

increase from 51.3% to 51.4% by 2025 and services are expected to grow by 2.8% in 2017

(Leonard, 2014). The Nations economic performance is expected to increase due to the rise in oil

prices since Colombias external trade is largely dependent on oil. According to Oxford Economics

2014 Industry Forecast, the fastest growing industries over the next five years are ships and rolling

stock, aerospace, other special service machinery and motor vehicles and the slowest growing

industries are pesticides & other agrochemicals, coke and refined petroleum products, utilities, and

man-made fibers (Oxford, 2014). Each of these industries are a part of the manufacturing sector.

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 While manufacturing and the service industries are overall expected to grow this year, the

Chamber of Commerce in Cali has identified six industry clusters that they have decided to focus

on in order to achieve this growth. Cali is a part of the Valle de Cauca region which generates over

half of the Nations GDP therefore the growth of industry in Cal is very important. The six industry

clusters that The Chamber of Commerce has identified as leaders for growth are clinical

excellence, bioenergy, macro snacks, wellness and cosmetics, white animal protein, and their

fashion system. Clinical excellence is companies related to clinical and medical services. They

currently have two of the leading hospitals in Latin America. Bioenergy is companies related to

electric power generation and biofuels. Macro snacks which are package processed foods and non-

alcoholic beverages. Then there is wellness which refers to beauty and personal care such as

cosmetics. The next cluster, white protein, is the production of eggs, chicken and pork, and lastly,

they are focusing on their fashion system which is all textiles, apparel, footwear etc. All of these

industries have experienced significant growth in the last 5 years which is why the Chamber of

Commerce has decided to focus on them.

Family Business and Economics

There are many different ways that family businesses are classified. The two classifications

that the data I will present here come from are the Global Family Business Index and the Mckinsey

Consulting firms definition. The Global Family Business Index defines a family business as when

a family controls more than 50% of the voting rights for a private firm and for a public firm they

most hold at least 32%. (Global Family Business Index, 2016). The Mckinsey Consulting firms

definition is a firm whose founders or their families have the biggest stake of at least 18% and the

power to appoint the chief executive (Economist, 2014). A more general definition that the book

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Family Business: Key Issues presents is from a study done by the Stockholm School of

economics and declares that a family business must have one of these three characteristics (1)

three or more family members all active in the business, or (2) two or more generations of family

control or (3) current family owners intend to pass on control to another generation of family

(Kenyon & Ward, 2005). Family businesses make up a large portion of the world market and

founder families control large parts of the worlds largest multinationals such as Walmart,

Samsung and BMW (Economist, 2014). In 2014 family firms made up 19% of the companies in

the Fortune Global 500 and around 75% of business that are larger $1-billion in Latin America are

family run. While family businesses are economically important throughout the globe, Latin

Americas economy depends even more heavily than the global average. According a report done

by Business in Emerging Latin America 80% of private economic activity comes from family

businesses and 85% of companies are family owned.

Since Colombia still has a large informal sector information on the number of family

businesses in the country are rough estimations. According to the Cali Chamber of Commerce

around 70% of the businesses that they deal with are owned by families which is compared to the

85% of Latin American companies being family owned and the world percentage at around 60%.

According to the economists the biggest business groups in Colombia are diverse family owned

empires. It is estimated that family businesses contribute 45-70% share of total GDP. While this is

a large range even at the lower end of the spectrum at 45% is still a major contributor to GDP.

It is estimated that family businesses employ nearly 70% of the Work force in Latin

America. This is an indication that family businesses are represented in a diverse range of

industries. Strong family businesses are contributing greatly to many of the economic indicators

that have been discussed such as the GDP and the unemployment rate.

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Conclusion

This case study has looked in depth at the Colombian economy by analyzing the economic

trends and indicators such as the GDP, the unemployment rate, CPI, corruption foreign investments

and studied the most recent industry forecasts and analyzed the importance of family businesses to

their economy. The presence of family businesses has a large impact on GDP and employment

and there for play a vital role in development. The Colombian economy is unique in its strengths

and weaknesses. An important strength of the country is the two coastlines containing one of the

most important ports in the area. The large population is also a strength because it creates a large

labor force. Colombia also abundant natural resource such as oil which is essential to the nations

GDP and economy. The country is beautiful and with the signing of the Peace Accord at the end of

last year safety has improved and there is large potential for increased tourism. There is also

institutional stability in the country which makes for a good economic environment. Although

Colombia has many assets there are weaknesses in its economy. Road ad port infrastructure are

lacking. Since they have an important port that is the intermediary between the rest of the continent

infrastructure constrains their growth. According to the world bank governmental programmes are

being put in place to improve infrastructure, which will improve ports and roadways (World Bank,

2017). Another weakness of their economy is issues relating to drug trafficking and it is estimated

that the large informal sector makes up 60% of jobs (Coface, 2017). These jobs are unregulated

and therefore not represented in much of the economic data. Lastly, Colombia is economic success

is hindered by the corruption.

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 Work Cited

Alfonso, Viviana A. "The Cyclical Behaviour of Separation and Job Finding Rates in Colombia." Paris
School of Economics (2013): n. pag. Web.

Bristow, Matthew. "Colombia Inflation Surprises Analysts Again With Sharp Drop." Bloomberg
Markets 5 Oct. 2016: n. pag. Web

Colombia. Coface. Coface, Jan 2017. Web

Family Business in Latin America. Business in Emerging Latin America (2014): n Pag. 2014. Web

Family Firms: Business in the Blood Economist 1 Nov. 2014: n. pag. Web.

Gomez, Santiago Alejandro Gallon; Portilla, Karol Gomez (September 2000) El fenomeno de la
corrupcion y su influencia en la economia colbiana entre 1960 y 1999. (translated to English)
OCASA

Heritage Foundation. "Colombia Economy: Population, GDP, Inflation..." Colombia Economy:

Population, GDP, Inflation, Business, Trade, FDI, Corruption. Heritage Foundation, 2007. Web. 30
Mar. 2017

"Invest Pacific." Invest Pacific - Invest Pacific. Invest Pacific, n.d. Web. 31 Mar. 2017.

Kenyon-Rouvinez, Denise, and John L. Ward. Family Business: Key Issues. Houndmills, Basingstoke,
Hampshire:Palgrabe Macmillan, 2005. Print

"La CCC." Cmara De Comercio De Cali. Camara De Comercio De Cali, n.d. Web. 31 Mar. 2017.

Leonard, Jeremy. Industry Forecast Colombia. Rep. N.p.: Oxford Economics, n.d. Print.

Trading Economics "Colombia Crude Oil Production | 1994-2017 | Data | Chart | Calendar." Colombia
Crude Oil Production | 1994-2017 | Data | Chart | Calendar. Trading Economics, n.d. Web. 31
Mar. 2017

Transparency International. "CORRUPTION PERCEPTIONS INDEX." Transparency International,

2017. Web.

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