The economics of Colombia's Presidential Election

Good morning from New Economy Brief.

On 31 May, Colombians will go to the polls facing a fiscal crisis, an energy shock, and a question that goes to the heart of development economics: is there a way out of commodity dependency, or do you just keep digging?

 What's Happening?

As Colombians prepare to head to the polls for the first round of the 2026 presidential election, voters face a variety of candidates proposing very different visions for the country. With imported inflation driven by the US-Israeli war on Iran — reminiscent of the energy shock that defined the last election cycle when Russia invaded Ukraine — the economic question on the ballot is:  how to break out of a cycle of commodity trade dependency that has defined, and to a large extent crippled, the country's economy for the past 50 years.

Clashes over the minimum wage

Compounding this external shock is a fierce domestic argument over the current government’s decision to raise the minimum wage by 23.7% earlier this year, significantly boosting the share of GDP that goes to workers. This increase is framed by some as a reckless inflation trigger that will push inflation to 6.5% by the end of the year.  

Yet from a post-Keynesian perspective, this critique misses the forest for the trees. Heterodox economists argue that in an economy like Colombia’s where demand is chronically suppressed due to extreme income inequality and structural labour informality, higher wages aren't just a social "gift" — they are a macroeconomic necessity to drive growth. Colombia’s own data support this: inflation plummeted from 13.3% in 2023 to 5.1% by late 2025, even as the government pursued aggressive, above-inflation wage hikes. There was no ‘wage-price spiral’: the idea that higher prices lead to higher wage demands, which then push prices higher and so on. 

In fact, the real problem is a productive structure so hollowed out that any increase in domestic demand — whether from higher wages or public spending — leaks straight into imports rather than circulating at home. The money leaves the country instead of staying in it. That is the external ceiling Colombia keeps hitting, which reflects a symptom of an economy that doesn't produce enough of what its people consume. In this light, the inflation isn't a sign of an 'overheated' economy, but of a 'broken' one.

The Central Bank’s response

In April, faced with the collision of global shocks and domestic wage pressures, Colombia’s central bank, the Banco de la República, voted unanimously to hold its benchmark interest rate at 11.25% — one of the highest real rates in Latin America. These high rates do not just slow down growth; they act as a massive transfer of public wealth toward debt servicing. Colombia's 2026 domestic debt bill will hit a record COP$130 trillion, with COP$51 trillion in non-rollable interest payments. This means roughly one in every three pesos of tax revenue now goes straight to creditors rather than schools or infrastructure.  

Why Does it Matter?

Here is the central trap: Colombia's fiscal crisis is not simply the result of spending too much. It is the consequence of building a state whose revenues depend on selling oil and coal into global markets that — as the Iran war is now demonstrating in real time — can convulse without warning. As former finance minister Antonio Ocampo has noted, progressive taxation is insufficient if the structural engine of the economy remains unchanged. 

This is echoed even by credit rating agencies who contest that Colombia's economy is constrained by a high dependence on commodities. This vulnerability spurred by global price volatility forces the central bank to maintain high rates, which in turn widens the deficit, triggering austerity, and hence prevents the very investment needed to escape the dependency. It is a vicious cycle. And the three candidates leading recent polling offer three very different versions on how to escape it.

The Extractivist Gamble: De la Espriella’s Vision

Far-right Abelardo de la Espriella represents a gamble on the "old economy," proposing to solve the fiscal crisis by doubling down on extraction. His programme advocates for a total opening of the energy sector, including fracking. By accelerating licenses for unconventional reservoirs — deep rock formations, such as shale, that require hydraulic fracturing or "fracking" to extract oil and gas — he aims to lock Colombia into a 20th-century path that has historically failed to deliver structural change. Doubling down on fossil fuels means betting the nation's future on the continued volatility of the very markets currently strangling it. 

The Uribista Restoration: Valencia’s Hardcore Austerity

Paloma Valencia seeks to resurrect the economic vision of right-wing former president Alvaro Uribe, who led Colombia from 2002 - 2010: a leaner state and strict compliance with the fiscal rule. Her gamble is that bond markets will respond positively to austerity, eventually freeing up fiscal capacity. However, with fixed investment already well below pre-pandemic levels, compressing public spending risks the "paradox of consolidation"—austerity that suppresses the growth needed to actually reduce debt. Given Colombia's inequality, that is not just a social risk: it is a macroeconomic one.

The Mission-Oriented Structuralist: Cepeda’s Transformation

Iván Cepeda's answer is structural: break the dependency itself. The left-wing candidate's programme — mission-oriented industrial policy built around food sovereignty, agrarian reform, and a just energy transition — is routinely caricatured in the Colombian political debate as reheated communism, a shadow that follows him from his political past in the Communist Party. 

The caricature is politically convenient but economically illiterate. Communist central planning sought to abolish markets and subordinate private enterprise to state control. What Cepeda is proposing is categorically different: a state that sets strategic objectives — food security, energy independence, industrial diversification — and then uses public investment, procurement and regulation to create markets and pull private capital in that direction. 

Thus, his economic programme reads less like Marx and more like Mariana Mazzucato. Mazzucato’s central argument is that the state's role is not to replace private investment but to actively create and shape markets to achieve the conditions under which private capital will go where markets alone never would. It echoes Ha-Joon Chang's argument that states every rich country industrialised through strategic state intervention. And it carries the warning of Thomas Piketty: that without deliberate redistribution and public investment, returns to capital will simply compound inequality faster than growth can address it. Cepeda's economic policies argue for the need for green industrial inclusive growth that can make Global South countries ready for the challenges of the 21^st century.

According to this theory, if the country can build food sovereignty — reducing dependence on imported agricultural inputs whose prices spike every time a conflict disrupts global energy markets — it becomes structurally less exposed to the inflation shocks now being driven by the Iran war. The same applies for renewable energy, so the next geopolitically-driven energy shock does not become a national fiscal emergency. The challenge is how to sequence these transitions in a credible way. 

What Next?

The first round takes place on 31 May. A runoff is widely expected in June, between Cepeda and Valencia or Cepeda and de la Espriella. The new president takes office in August.

For the incoming administration, three imperatives will define the first year:

• Tax reform is non-negotiable. The fiscal gap cannot be closed without new revenue. The design of that reform — whether it targets wealth and commodity rents or shifts the burden to consumption — will be the first real signal of who this government is building the economy for.
• Restoring fiscal credibility without killing growth. Fitch has warned that the lack of detailed consolidation measures in current fiscal plans makes implementation prospects highly uncertain — and subsequently downgraded Colombia from BB+ to BB in December 2025, citing the absence of a credible fiscal anchor. 
• The structural question cannot be deferred. Colombia has managed commodity dependency through multiple crises. The Iran conflict is a reminder that the next shock is always coming. The 2026 election is the moment to decide whether the country begins building an economy that can withstand it, or waits for the next crisis to ask the same question again.