A Flowering Basketcase; From failed state to model reformer in just a few years, can it be Colombia?

Byline: Malcolm Beith (With Mark Duffy in Bogota)

When one thinks of welcoming investment climates, Colombia doesn't usually spring to mind. To foreigners, the country is more famous for its guerrilla warfare, kidnappings, drug production and narco-terrorism. So it might come as a surprise that the World Bank, in a report this month on "Doing Business in 2005," deemed Colombia the second most improved country in the world in which to do business. The magnitude of private-sector reform in Colombia over the past year is "unique" in Latin America, says the report's author, Simeon Djankov.

Colombia has long been unique for all the wrong reasons, as home to Latin America's most persistent Marxist rebels, and its largest drug cartels. But the emerging picture could not be more different. Since his inauguration in August 2002, President Alvaro Uribe Velez has made progress against the guerrillas. He has also brought inflation under control, in one of the last Latin American countries to tame the wild price swings that for decades frightened off investors. Intriguingly, Uribe has not only caught up to the Latin pack on "macro" reform, he has pulled ahead in a field many experts believe is the key to a lasting regional recovery: a second wave of reforms to create a vibrant private-business sector. The main reason Colombia performed so well in the World Bank study is the strides Uribe has made in areas like cutting the time it takes to open or close a business and making it easier to hire and fire workers.

It's all paying off: the GDP growth of Latin America's fifth largest economy is forecast at more than 4 percent this year and next and the country has enjoyed four quarters of sustained economic growth for the first time since 1995, as well as an inflation rate of about 6 percent, its lowest in 30 years. Private investment is expected to increase by more than 20 percent this year, while exports in June rose 16.6 percent compared with the same period in 2003.

From day one in power the new president has "really had it in his mind to create a spectacular [investment] environment," says Jennifer Satz, a Latin America expert at the New York-based Eurasia Group. Under Uribe, Colombia's kidnapping and murder rates have fallen, while the U.S.-backed war on drugs has driven narco-kingpins farther into the jungles, resulting in a 21 percent decline in Colombian coca cultivation last year. "The advances on the security front have instilled confidence in Colombians," says Carola Sandy, an emerging-markets specialist for Credit Suisse First Boston. Colombians--about 70 percent of whom approve of the president--are beginning to realize that their investments can actually pay off. "In the 1990s, people were afraid of buying cars--buying anything--because you didn't want to signal that you had money," says Sandy. "You would be kidnapped the following day." The new confidence is apparent from construction to car manufacturing and flowers. "There is definitely a different rhythm in doing business here," says Jaime Rodriguez, managing director of Jaroma Ltda., one of hundreds of Bogota-area plantations that grow roses for export. "Businesspeople are much more enthusiastic and optimistic now."

For a candidate who hardly mentioned economics in a campaign based on security issues, Uribe has proved an adept reformer. In 2002 he made aggressive budget cuts and introduced fiscal ...