Moderate parties’ resistance will likely force a softening of the proposed reforms, but some of the administration’s disruptive policy goals will remain
March has marked a major push for President Gustavo Petro’s agenda, with the administration sending labor and pension reform proposals to Congress in quick succession, following on the heels of a health reform proposal. The controversial proposals have been met with strong pushback from Congress despite concessions from the Petro administration. The strong resistance from Congress will force even further moderation of Petro’s disruptive legislative agenda. MNCs should expect this scenario to favor broad continuity for the operating environment with still some room for unfavorable, though less dramatic, policy shifts. Should this scenario continue to play out, this will also support private investment and more stability for the Colombian peso. While signs point to moderation, companies should closely monitor legislative developments around the labor, pension, and health reforms given the disruptive nature of the proposals and their likely partial implementation.
The administration’s recent labor, health, and pension reform proposals have already seen strong and vocal opposition from within the ruling coalition, particularly from some of its largest and more moderate parties, the Liberals and Conservatives. The health reform, initially presented in February, has seen major pushback and is in danger of failing after negotiations with the Liberal party have fallen through. The Conservative Party also recently came out against the labor reform proposal citing concerns about its impact on job creation and businesses.
Labor Reform: The government’s labor reform would make substantive changes to Colombia’s labor regulations, including reducing the work week from 48 to 42 hours, increasing overtime pay, reducing daytime working hours from 10 p.m. to 6 p.m., while also increasing the “just cause” requirement for dismissal of employees. Beyond this, the reform seeks to force firms in the “gig economy,” such as the delivery service Rappi, to make their delivery workers full employees with benefits.
As proposed, the labor reform would substantially raise labor costs for firms, with the National Trade Federation of Colombia estimating a cost increase of 30-35%. At the same time, the reform would raise barriers to formal employment and increase informality in the country.
Pension Reform: The administration’s pension reform seeks to dramatically increase the role of the public pension system Colpensiones by requiring all contributions on wages up to three times the minimum wage to go to the public fund. At this level, such a requirement would implicate the contributions of over 80% of workers. The reform would also create a new non-contributive pillar of the pension system to cover the poor and elderly populations that lack pension coverage.
The proposed pension system overhaul would create substantial fiscal risks for Colombia by shifting funds away from private funds, which are the second-largest holders of public internal debt in the country. At the same time, the creation of a new, non-contributive pillar of the pension system will also lead to a permanent increase in public spending as shortfalls occur.
Without moderation, the labor and pension reforms would lead to peso depreciation and have substantive and negative effects on Colombia’s employment levels, private investment, and fiscal stability. While President Petro maintains a majority coalition in the Colombian Congress, the administration’s disruptive reform agenda will continue to see active resistance from the coalition’s moderate parties. This resistance will likely force further moderation of the proposed reforms, while still preserving some of the administration’s disruptive policy goals.
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