Report: Colombia: Regional Disparities and the Road to Integration

A Story of Four Colombias

Colombia is made up of distinct economic and cultural regions shaped by a diverse geography, resulting in significant contrasts. This report analyzes how these contrasts affect aggregate outcomes and, in turn, reinforce spatial inequalities.

It classifies departments into four regions based on structural characteristics and development stage: at one end, high-income departments with more diversified economies (services and industry) and advanced institutional capacities; at the other, departments with natural wealth but low incomes and high public employment with limited management capacity. In between, a heterogeneous group shares traits of both; additionally, hydrocarbon departments have high incomes, less diversified economies, and high vulnerability to decarbonization.

• Region 1: More urbanized and connected departments, with diversified economies (Bogotá, Antioquia, Valle del Cauca, Cundinamarca, Risaralda, Quindío, Caldas, Atlántico, Boyacá, San Andrés y Providencia).

• Region 2: Hydrocarbon producers, with high incomes but vulnerable (Meta, Arauca, Casanare, Cesar, Putumayo).

• Region 3: Intermediate incomes, mixed characteristics (Cauca, Huila, Norte de Santander, Nariño, Tolima, Caquetá, Córdoba, Bolívar, Magdalena, Sucre).

• Region 4: Low incomes and high unmet basic needs, great natural wealth (Amazonas, Guainía, Chocó, La Guajira, Vichada, Guaviare, Vaupés).

The richest departments are better connected and more urbanized, but far from the coasts and face urban challenges that hinder agglomeration synergies. This produces a domestic market-focused economic model, with low competitiveness and dynamism, perpetuating low productivity, geographic fragmentation, and making it difficult to close gaps with aspirational countries. These dynamics also affect natural capital, as urban stagnation keeps wages low and drives extensive agricultural expansion, increasing deforestation.

Nevertheless, certain regions and sectors benefited from the reconfiguration of global value chains, revealing latent capacities that can be enhanced with appropriate policies. Colombia gained markets worth US$730 million due to trade diversion from China to the United States, with a positive impact of 0.3 percent of GDP. Although gains are concentrated in the richest departments, productive linkages allow other regions and sectors to take advantage of the context.

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How to Boost Growth Across Colombian Territory While Avoiding Inefficient Spending and Unsustainable Strategies?

1. Close opportunity gaps to level the playing field in all regions, strengthening human capital and halting divergence. The main transfer system from Colombia to subnational governments, the General Participation System (SGP), is key to equalizing conditions across the territory, but certain elements generate inefficiencies. Actions that could reduce these inefficiencies include clarifying which level of government is responsible for which functions and expenditures, strengthening the autonomy of subnational governments in managing their resources, and conditioning intergovernmental transfers to subnational governments on their performance.
   
   
2. Implement horizontal growth policies to remove constraints to broad-based growth and employment: macroeconomic stability, access to international markets with low tariffs, solid financial markets, and a favorable business environment.
   
   
3. Complement with place-based policies when necessary. These policies should be tailored to different regions after explaining their justification, estimating their net benefits, and ensuring key preconditions for success are met. Some examples of place-based policies for Colombian regions:
   
   a) High Income: Could boost integration into global markets and address congestion and housing affordability issues that undermine long-term growth, reduce transport costs to other Colombian cities and ports to strengthen competitiveness and trade participation.
   
   b) Hydrocarbon Regions: Diversify beyond hydrocarbons; strengthen management of natural resource revenues, train and retrain workers for transitions, reinforce social protection; also adopt strategies from Region 3
   
   c) Intermediate Regions: Highly heterogeneous, differentiated strategies depending on location; Caribbean: greater commercial integration; interior: improve infrastructure toward economic centers; address weak urban agglomeration (housing elasticity, commuting costs) with tailored urban approaches.
   
   d) Low Income: Due to geographic and demographic limitations, prioritize innovative approaches; promote digital services, ecotourism, and high-value agriculture; make forest protection profitable (carbon markets, sustainable non-timber forest products, payments for environmental services), advance land registry, expand Internet, and explore river transport to improve connectivity.

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