RESTRICTED
WORLD TRADE WT/WGTI/W/15
5December 1997
ORGANIZATION(97-5360)
Original: Spanish Working Group ontheRelationship
between Trade andInvestment
COMMUNICATION FROM COLOMBIA
Thefollowingcommunication,dated5December1997,wasreceivedfromthePermanentMission
ofColombia, withtherequest thatitbecirculated toMembers.
_______________
I. INTRODUCTION
Inaccordance withthe"Check-List ofIssues Suggested forStudy" drawn upbytheWorking
Group ontheRelationship between Trade andInvestment established bytheSingapore Ministerial
Declaration, Colombia issubmitting asummary ofitsdomestic investment policy below, including
incentives. Theaimistoassist discussion oftherelationship between trade andinvestment andits
impact oneconomic development.
II. STRATEGIC ROLE OFFOREIGN INVESTMENT
Asisthecaseinother Latin American countries, capital flows andforeign direct investment
inColombia haveincreased substantially inthecourse ofthisdecade. Thishasbeenduetoanumber
offactors including: theendofthedebtcrisis, structural reforms (liberalization oftradeandthecapital
account), lowinternational ratesofinterest, andtheslowing ofeconomic growth incapital-exporting
countries.
Inshort, fordeveloping countries suchasColombia foreign investment yields fourtypes of
benefits: firstly, andnodoubt themost important, isthetransfer oftechnology andtheconsequent
riseinproductivity. Secondly, thestock ofcapital intheeconomy increases. Thirdly, itcomplements
domestic savings. Andlastly, itgenerates aninflow offoreign currency earnings thatarebothpermanent
andstable.
InLatin America, therehasbeenempirical evidence ofapositive relationship between foreign
direct investment andpercapita GDP. Forexample "ifaverage flows offoreign investment overa
period ofsixormore years risebyapproximately onepoint ofGDP, percapita GDP willincrease
atarateofjustover1percentmore thanwould otherwise haveoccurred".1Itshould benoted,
however, thatassimilation ofthenewtechnology introduced byforeign investment depends toalarge
extent onthehuman resources available intherecipient country. Consequently, countries withmore
developed human resources aremore attractive toforeign investors andderive greater benefits from
theinvestment.
1GaviriaA,GutiérrezJ.A."Inversiónextranjeraycrecimientoeconómico"[Foreigninvestmentandeconomic
growth]. Macroeconomic Archives, 22December 1993.WT/WGTI/W/15
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Foreign direct investment hasyielded considerable additional benefits forColombia 'seconomy.
Inthefirstplace, ithasplayed theroleofacompensating mechanism when theeconomy slows down,
especially when there isnoroom toapply acounter-cyclical fiscal policy. Secondly, byreplacing
thepublic sector incertain areas ofinvestment, itcreates some budgetary space forsocial spending.
Finally, bypromoting productivity, itattenuates theeffects ofrevaluation.
Ineconomic integration processes, ithasbeenfeltnecessary toinclude regulations onforeign
investment inaddition tocovering trade aspects. When afree-trade zoneorcustoms union issetup,
markets expand andthusprovide anatural incentive fortheinflow offoreign investment because of
theopportunities theyprovide toexploit economies ofscale. Suchregional agreements aretherefore
alsoaccompanied byregimes topromote reciprocal investment andsometimes bycommon rules on
foreign investment. These provide astable legalframework because oftheirsupranational nature.
III. REGULATORY FRAMEWORK FOR FOREIGN INVESTMENT INCOLOMBIA
Colombia isconvinced ofthebenefits offoreign direct investment andhasthusoverhauled
itslegalregime toadapt ittointernational standards andsoprovide thenecessary guarantees toattract
suchinvestment.
Colombia 'slegalframework forforeign investment isbased ontheprinciples ofequal treatment,
universality andautomaticity. Thefirstprinciple implies non-discriminatory treatment forColombian
citizens andforeigners; thesecond makes itpossible toinvest inalmost allsectors oftheeconomy;
while thethirdestablishes thatnopriorauthorization isrequired, inotherwords, theformalities required
ofaforeigninvestorbeforeundertakingacommercialactivityinColombiaarethesameasthoseimposed
ondomestic investors (with afewexceptions). Theonlyadditional requirement isregistration ofthe
investment withtheCentral Bank inorder toguarantee exchange rights.
Asfarasexchange rights areconcerned, there arenoceilings ontherepatriation ofprofits,
reimbursement ofcapital andpayment ofcontracts forthetransfer oftechnology, andthese rights are
guaranteed throughout thelifetime oftheinvestment.
Inorder togiveforeign investors security intaxmatters, theymayconclude afiscal stability
contract. These contracts lastfortenyears andstipulate anincome taxratethatis2percenthigher
thanthegeneral rateprevailing atthetimethecontract wassigned, against aguarantee thatanynew
domestic taxorincrease intheratewillnotbeapplied totheinvestment concerned.
Attheinternationallevel,Colombiaispromotingandencouragingtheconclusionofinternational
agreements forthepromotion andprotection ofinvestment. Atpresent, agreements havebeensigned
withtheUnited Kingdom, Cuba, PeruandSpain. Similar agreements arebeing negotiated withthe
United States, Canada, Germany, Argentina, theNetherlands, France andSwitzerland. Furthermore,
Colombia hasbeenamember oftheMultilateral Investment Guarantee Agency since January 1996
andhassigned theICSID Agreement (International Centre forSettlement ofInvestment Disputes).
Themain features ofthebilateral agreements signed canbesummarized asfollows: (a)they
contain aclause onthefairandequal treatment offoreign investors intherecipient country; (b)they
provide fornational treatment withregard tothesecurity andprotection ofinvestments andmost-
favoured-nation treatment; (c)discriminatory taxmeasures ongrounds ofnationality areproscribed;
(d)special facilities orauthorizations areestablished fortransfers abroad according towhether these
concern realprofits, netinterest, dividends, totalorpartial liquidation oftheinvestment orcompensation
forexpropriation, nationalization orforother reasons; (e)ifthereisexpropriation ornationalization,
itisprovided thatcompensation mustbeprompt, effective andadequate; (f)provision ismade forWT/WGTI/W/15
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thesettlement ofdisputes between theStatereceiving thecapital andtheforeign investors andbetween
contracting States.
IV. CHARACTERISTICS OFFOREIGN INVESTMENT INCOLOMBIA
Economicopeningandtheimplementationofforeigninvestmentpromotionmechanisms,together
withthetraditional macroeconomic stability typical ofColombia, havemeant thatforeign investment
flows toColombia inthe1990s increased rapidly, rising from2.7percentofGDPin1990to3.3per
centofGDP in1996. Themajor partofforeign investment isintheexploitation ofnatural resources,
followed bymanufacturing. In1996, foreign investment inColombia amounted toUS$3 billion.
There arenostudies inColombia ontherelationship between trade andinvestment. Itis
nonetheless clearthattheobjective offoreign investment intheexploitation ofnatural resources was
tosupply foreign markets, andconsequently ithashadimportant trade effects. During theimport
substitution era,thereason forforeign investment inthemanufacturing sector wastosupply thedomestic
market, protected byhightariffs. Since Colombia 'sunilateral diminution oftariff protection atthe
beginning ofthe1990s, foreign investment inmanufacturing hascontinued tobedynamic. Thishas
beenlargely duetothecomparative advantages provided bytheavailability ofaskilled labour force
andprofessionals aswellasColombia 'sprivileged geographical situation, which facilitates theexport
ofsurpluses toneighbouring countries. Thishasallowed more efficient processing ofimported inputs.
Foreign investment inservices hasbeenanovel feature inthelastfiveyears. Thishascome
about through deregulation inthetelecommunications sector, liberalization ofthefinancial sector, and
thegeneral opening upofnewopportunities fordomestic andforeign private investment inservices
traditionally provided bytheState, forexample, electric power andbuilding andrunning thehighways
infrastructure.
Inaddition, there hasrecently beenaboom inforeign investment incommercial retail and
wholesale services, because theopening upoftrade hasallowed abetter supply ofgoods fordirect
consumption.
V. CONCLUSIONS
Colombia'sexperienceshowsthattheamountandtypeofforeigndirectinvestmentareresponsive
totrade policies. Asregional trade agreements havebeen strengthened, Colombia hasbecome a
production platform forsupplying expanded markets andthishasprovided opportunities forforeign
investors. Inaddition, thereduction intariffs hasmeant amore efficient supply onthedomestic market
through theprocessing ofimported inputs andtheimport offinished goods. Therising flowofforeign
investment toColombia hasmade apositive contribution toeconomic development, jobcreation and
technological progress.
Sound macroeconomic policies andastable foreign investment regime areelements thatmake
asignificant contribution tothemobilization ofproductive capital. International investment protection
agreements make animportant contribution toregulatory stability andthesecurity offoreign investors.
Thisiswhyweconsider theestablishment oftheWTO Working Group ontheRelationship between
Trade andInvestment tobehighly appropriate andweshallparticipate constructively initsactivities.