Cablegate: Colombia's Double-Digit Unemployment -- Business As Usual

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TO RUEHC/SECSTATE WASHDC 2635
INFO RUEHBO/AMEMBASSY BOGOTA
RUEHC/DEPT OF LABOR WASHINGTON DC
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UNCLAS BOGOTA 000163

SENSITIVE
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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

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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

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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

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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

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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

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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

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