The Colombian government and the Revolutionary Armed Forces of Colombia (FARC) recently announced the outline of a peace agreement they hope to sign within the next six months. For the first time since the formal initial negotiations were launched in 2012, the two sides have reached an agreement on four out of the six points under discussion. However, under the terms of the negotiations, these points will not be acted upon until a final peace deal has been signed.

The four points agreed to in La Havana:

1. Land reform: Economic and social development of rural areas, and the provision of land to poor farmers
2. Democratic participation: Full political participation of rebels once a peace deal is reached
3. Illegal drugs trade: All illicit drug production will be eliminated
4. Transitional justice: Amnesty for combatants, excluding those who have committed the most serious crimes

The successful negotiation of the remaining points of the peace agreement is likely to have a significant positive impact on three fronts:

1. Economic growth via private investment

While Colombia’s economy has grown at an average rate of about 4 percent in the past decade, recent studies from the Universidad de Los Andes suggest that growth could have been twice this amount if it had not been for the armed conflict. The Colombian Research Centre for the Analysis of Conflict also forecasted that a peace agreement would strengthen formal employment, accelerate poverty reduction and improve quality of life. In a very assertive statement, President Santos recently said, “Peace alone will bring almost two percentage points annually to our already booming economic growth.”

FSG believes that an end to the armed conflict would boost investment, particularly in the regions with high levels of mineral and agricultural output. Risk-adverse investors have so far avoided these regions because of the strong violence associated with the FARC. However, the arrival of private investment could be delayed until the government sets clear rules regarding land distribution, registration and exploitation.

2. Improved security via reduced drug trafficking

One of the most relevant points on which the government and the FARC have reached an agreement is the elimination of the illegal drug trade.

This is a critical point for Colombia. The experiences of several countries prove the existence of a negative relation between violence-linked insecurity and investment growth. With regions plagues by drug trafficking receiving little productive investment, and therefore offering few productive employment opportunities, economic growth tends to be 48 percent lower than growth in similar regions that are free of drug-related violence.

The Centre on Drugs and Security believes that a final peace accord will significantly improve security by diminishing the drug trade and violence in Colombia, provided that the government manages to widen the state presence in areas that have been neglected for decades while successfully implementing the points it has agreed upon with the rebels regarding rural development.

Improved security could create a much more favorable operating environment for multinationals, which could then expand their footprint into Tier-2 and Tier-3 regions, particularly on the western side of Colombia.

3. Additional spending on social services and infrastructure via resource allocation

As security improves in Colombia, the government is likely to reduce its almost US$ 12 billion in annual spending on military activities, redirecting almost 30 percent of these funds, which are currently used to combat the FARC, to priority sectors such as education, healthcare and infrastructure.

This reallocation of resources could help reduce logistics costs and raise labor productivity in the Colombian economy, improving the business environment and creating additional opportunities for multinationals.

Assuming a successful peace negotiation occurs, the likelihood of having these three events taking place at the same time is very high. As peace negotiations draw to a close, multinationals should work with their local teams to re-assess the size of their addressable market in Colombia and revisit their go-to-market strategy to capture emerging opportunities from the peace process.

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