Blog
How conflict and illicit economies undermine fiscal stability in Colombia

In post-conflict settings, the ability to collect taxes is essential for building a strong government and supporting long-term development. In Colombia, a country shaped by decades of internal conflict, several factors—such as historic land disputes, political violence, and the presence of illicit economies—reduce local tax revenues and weaken the state’s financial base. Our recent study, with Patricia Justino, Martín Vanegas-Arias and Juan Vargas—examines how these factors affect Colombia’s ability to raise revenue in its municipalities.

Colombian municipalities with a history of land conflicts—often caused by disputed land claims between settlers and large landowners in the early 20th century—experience significant losses in tax revenue. Our findings show that, on average, municipalities affected by these conflicts had 32% lower per capita tax revenue in the past decade compared to those without such conflicts. This reduction underscores how unresolved disputes set a lasting pattern of weakened local government capacity, which continues to limit tax collection.

Figure 1: Average tax revenue per capita per municipality, by exposure to early land conflicts

Note: the figure depicts the evolution of the average trade and production tax per capita revenues, property tax per capita revenues, and both together, per municipality per year. The sample is split by municipalities exposed to early conflicts (continuous line) and not exposed (dashed line). Figures are in 2020 US dollars, adjusted for purchasing power parity.

Source: authors’ compilation.

Political violence in the mid-20th century also plays a significant role in Colombia’s fiscal challenges. During La Violencia (1946-1966), violent clashes left over 190,000 Colombians dead and displaced millions. Municipalities exposed to this violence showed an 18% drop in per capita tax revenue, highlighting how sustained violence can undermine a community’s ability to support local governance. This history shows the long-term damage political instability can have on public finances and institutional strength.

Examining the period of modern conflict, we find that municipalities affected by guerrilla and paramilitary violence in the 1990s and early 2000s saw a 6% decline in tax revenues. While our study does not prove cause and effect, the trends are clear: areas facing frequent attacks by insurgent groups struggle to build local fiscal strength.

The most severe impact on tax revenue, however, arises from the presence of coca cultivation, which has spread widely across Colombia. Coca-growing regions, often controlled by organized criminal groups, suffer an overall decline in fiscal performance. Municipalities with any level of coca cultivation reported 34% lower per capita tax revenues. As coca cultivation expands, tax revenues decline even further, creating a cycle that keeps these regions locked in economic instability and reliance on illicit economies.

Our findings suggest that Colombia’s illicit economies weaken the state’s financial capacity, with serious implications. For example, municipal governments that rely on local property and production taxes face a major problem: the loss of legitimacy and authority where illicit actors control the economy. These results show that violence and illicit economies shape not only the immediate security situation but also the financial health needed to build a stable government.

The path to strengthening fiscal capacity in conflict-affected regions is challenging. Formalizing land ownership, improving legal economic opportunities, and reducing coca cultivation through more sustainable approaches could help restore local tax bases. Colombia’s decentralization reforms, introduced in the 1980s, also hold promise for empowering local governments—though their success depends on broader support to enforce tax policies and uphold state authority in contested regions.

Future research could use more precise data to establish causal links, providing clearer evidence on how specific policies might lessen the negative impacts of conflict and illicit economies on tax revenue. Understanding these pathways will be essential for designing interventions that can rebuild fiscal strength and support long-term stability in Colombia and other conflict-affected regions.

Santiago Tobón is a Professor of Economics at Universidad EAFIT in Medellín, Colombia, and a Non-Resident Senior Research Fellow at UNU-WIDER.

The views expressed in this piece are those of the author(s), and do not necessarily reflect the views of the Institute or the United Nations University, nor the programme/project donors.