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Colombian national flags are hung on the statue of Simon Bolivar the Liberator during a march at the central square in Bogota September 5, 2012. Thousands of students and teachers marched in a nation-wide protest against the government's education reforms for public universities, student organizations reported.  REUTERS/John Vizcaino (COLOMBIA  - Tags: CIVIL UNREST POLITICS EDUCATION) - RTR37JB2
Report

Digital Colombia: Maximizing the global internet and data for sustainable and inclusive growth

Joshua P. Meltzer and Camila Pérez Marulanda

Colombia has experienced strong economic growth and reductions in poverty over the last decade. The government has also embarked on an ambitious plan to increase the uptake and use of digital technologies, expanding internet access, promoting the development of local online content, and emphasizing government use of the internet and data to improve service delivery, transparency, and governance. Despite the uncertainty generated by the results of the October 2, 2016, plebiscite, peace agreement with the Revolutionary Armed Forces of Colombia, or FARC as the group is known, is another reason for optimism about Colombia’s economic and social prospects. However, challenges still loom. The commodity boom that fueled large increases in Colombia exports is over and unlikely to return, leaving Colombia with a commodity weighted economy. Income inequality remains one of the highest globally and poverty is still widespread.

Authors

As the internet goes global and data becomes an increasingly significant driver of economic growth, data flows are estimated to have contribute $7.8 trillion to global economic activity during the last decade—approximately 10 percent of global GDP. Moreover, the internet economy could double for G-20 between 2010-2020, employing a further 32 million workers.

The pervasive use and impact of the internet across economic sectors means that the internet and data are best understood as general purpose technologies (GPT)—technologies that have the potential to reshape economies and boost productivity. Other GPTs include railway, internal combustion engine, and electricity. Deepening and broadening the capacity of government, business, and people to use these technologies will be a key determinant of economic prosperity. In fact, maximizing the use of the internet and data across Colombia’s economy will provide a basis for sustainable and inclusive growth in the 21st century.

This report analyzes the ways that the internet and data flows are improving the productivity, efficiency, and competitiveness of the Colombian economy. For instance, businesses are using access to digital services such as cloud computing to reduce IT costs and thereby increase their competitiveness in domestic and global markets. Internet platforms are providing small and medium-sized enterprises in Colombia with access to consumers globally and providing an opportunity to expand participation by Colombians in international trade.

Businesses are also using the internet and data to provide digital services as part of more traditional goods offerings, thereby increasing their overall value.

The internet is also increasing the importance of services in international trade. Trade in digitally deliverable services—services that can be provided online already represent over 12 percent of Colombia’s total exports and this increases to over 17.5 percent once digital services embodied in goods exports are included. Businesses are also using the internet and data to provide digital services as part of more traditional goods offerings, thereby increasing their overall value. This includes using sensors and data analytics to trace agricultural products and improve the efficiency of mining and manufacturing operations. The follow figure captures the opportunities for economic growth, jobs, social inclusion, and better government from an effective use of the internet and data flows.

The figure underscores how realizing the opportunities of the internet and data requires Colombia to establish a comprehensive enabling environment. This includes expanding internet access, lowering costs, and building a skills base that can maximize the opportunities of the internet for innovation and production. Colombia also needs to strengthen consumer trust in using the internet, such as by ensuring the security and privacy of personal data and implementing regulatory protections for consumers engaged in online commerce. Competition in the telecommunications market is another important factor that affects internet cost and availability, and this extends to ensuring competition across the economy so that new online businesses can grow. A balanced set of intellectual property laws is also key—one that protects digital content and addresses online privacy while not overburdening internet service providers or stifling the innovative opportunities of the internet. In turn, success here can deliver a broad range of economic and social gains, including economic growth, more and better paying jobs, new opportunities to improve governance and government services, and broader levels of inclusion as the internet enables often marginalized communities in rural areas to engage more fully in their countries social and economic life.

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Progress has been made on expanding digital access and use, including growing Colombia’s content industry, and using the internet to improve the transparency of governance more broadly. Despite these gains Colombia still faces a number of challenges to creating a digital economy. In particular, Colombia needs to address the following limitations in its enabling environment:

• There is limited internet access, particularly in rural areas, high costs of internet services and mobile devices, as well as relatively slow internet speeds compared to the region.
• Not enough competition in various markets, including in the telecommunications market stifles innovation and the uptake of digital opportunities.
• Insufficient local online content reduces the usefulness of the internet for Colombians.
• There is a lack of consumer trust in making purchases online, in part reflecting a relatively underdeveloped e-commerce environment, including delays in having goods delivered or accepting returns and receiving damaged goods at rates higher than in other countries in the region.
• A patchwork of regulation supports e-commerce, including laws on electronic signatures and consumer protection online.
• Colombia’s large informal economy is a broad structural constraint to expanding online transaction. For instance, low levels of financial inclusion—such as the lack of bank accounts and use of credit cards—leads to the use of cash on delivery, reducing the efficiency and attractiveness of online commerce for consumers and creating logistical challenges for businesses.
• Colombia’s privacy laws have been modelled after the European Union, placing limits on the ability to transfer personal data outside of Colombia and thereby restricting how companies can use data for business purposes, including international trade.
• Colombia has failed to implement the full set of intellectual property laws needed to grow a digital economy, including intermediary liability protection.
• Access to capital, particularly for startups, is limited; regulations restrict the capacity for innovative financing options such as crowdfunding; and high levels of market concentration in the financial sector stifles innovation.
• Colombia lacks the skills needed to build a digital economy, including in information technology but also lacks the skills needed in different economic sectors to take advantage of the opportunities of the internet and data. The Colombian education system, while improving, is not addressing this challenge, and in the short term Colombia is having trouble attracting overseas talent.
• Regional disparities still exist with low levels of capacity in many government departments to promote digital technology.

Given these challenges, this paper proposes a comprehensive range of policy reforms. The main ones are as follows:

Expand internet access and reduce costs

• Expand internet access, particularly for micro, small, and medium enterprises (M-SMEs).
• Increase competition in Colombia, including in the telecommunications sector, which will require better enforcement of competition laws and clarification of regulatory jurisdiction between the Superintendency of Industry and Commerce and Communications Regulation Commission. This includes avoiding regulating internet platforms in ways that would limit competition.
• Consider building another internet exchange point to reduce cost and latency.
• Consider removing the 16 percent value-added tax (VAT) on smart phones and the 4 percent tax on mobile services.

Improve use of digital services

• Educate business and government about new digital services such as cloud computing.
• Avoid data localization laws that would raise the costs of digital services for the economy.

Strengthen Colombia’s digital commerce environment

• Build infrastructure to facilitate the movement of goods within Colombia and international trade.
• Update the regulatory environment, including laws on digital signatures and protection of consumers for online transactions.
• Develop mechanisms to improve trust in online commerce, such as trust marks.
• Review Colombia’s application of its privacy law and its impact on digital commerce, including how to obtain consent for processing personal data and the conditions under which personal data can be transferred out of Colombia.
• The requirement to register databases should be repealed or made more flexible to better reflect how business uses and maintains such information.
• Ensure a balanced set of intellectual property laws, including implementation of intermediary liability protection and balanced use of copyright protection, which should be combined with more effective enforcement of existing intellectual property laws to address online piracy.

Expand access to financial services and capital

Greater competition in the financial sector and lighter-touch regulation could unleash innovation and improve access to capital.

• Greater competition in the financial sector and lighter-touch regulation could unleash innovation and improve access to capital. This could require more bank licenses and lows fees for small clients.
• The regulation that limits companies to collecting finance from more than 19 people should be repealed as it is a barrier to crowdfunding.
• Increase the usury rate, which should increase financing available for higher risk (often small and medium enterprises) business.
• There should be more creative use of government funds and innovative financing to reduce risk and crowd-in private finance into supporting tech startups.

Develop a digital trade policy

As outlined in the report, the implications of the global internet and data flows for digital trade requires government trade policy to be aimed at maximizing these opportunities. This should include the following:

• Address regulatory barriers, such as the need for exchange declaration that hinder the ability for online platforms to process international payments and the Central Bank restriction on paying for imports in a foreign currency.
• Raise the de minimus duty above its current level of $200.
• Join the Trans-Pacific Partnership at the earliest opportunity.
• Improve customs administration to reduce the time it takes to move goods across the border. Colombia has made progress digitizing this process, but gaps remain. The country should also consider joining the World Trade Organization Trade Facilitation Agreement.
• Reduce barriers to imports of digital services.

Strengthen Colombia’s human capital

• Work with all levels of government and business to map Colombia’s skills needs for a digital Colombia, and assess the capacity of the education system to meet these needs over time.
• Align training with a skills maps and develop centers of excellence for each core area of expertise in the university system.
• Engage business in the design and teaching of courses.
• Expand programs for students to study overseas with a focus on getting access to the key skills Colombia needs to build a digital economy.

Maximize government use of the internet and data

As outlined in the paper, this has three components—improving services design and delivery; expanding democracy and building trust; and supporting growth of a digital Colombia. While the government has made significant progress here, additional steps could include:

• Expand Crystal Urn to make it interactive in real time and allow use of mobile phones or texting messaging.
• Use the internet and data to improve government responses to natural emergencies.
• Collect data to better design government services and target delivery to where need is highest, which could include giving citizens scope to contribute to design of government services using social networks.
• Support development of apps that increase government awareness of local issues and improve ability to respond, such as reporting crime and identifying where road repairs are needed.
• Improve access to government data and strengthen the capacity of regions to use government data to design solutions to local challenges in areas from health to education.
• Use the government procurement process to drive demand for local digital content and to align digital standards, e.g., online health apps.

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