From nominal problem to real problem, the Exchange Rate issue

Colombia pays attention to problems from local nominal exchange rate appreciation instead of paying attention of benefits from Real Effective Exchange Rate appreciation as have to be. The appreciation of local nominal exchange rate will continue until ending of 2015 at least, it is due to huge amount of US dollars around the World to avoid a deeper crisis. Therefore, both local nominal and real exchange rate will continue showing an appreciation. The advantage of this fact is to improve local technology through hiring foreign services and buying foreign investments goods, local economies must work hard to reach economies of scale to be competitive in this global economy and this nominal exchange rate appreciation will give the path to reach it due to cheap foreign services and goods. Moreover, government have to be ready to this economies of scale to guarantee fair income distribution and low unemployment rate. If flowers sector in Colombia does not improve their technology instead of just asking for subsides, they will face same situation of coffee sector which is sad. Nowadays countries such as Netherlands, Ecuador and Kenya are taking flowers market around the World and they are good doing it, therefore this market is a classic monopolistic competition market.

Author: Humberto Bernal,  

Economist,

e-mail: zhumber@gmail.com

It can be download @ click

Colombia as many other countries faces a nominal appreciation in her currency, this appreciation comes from a huge increasing of money supply from the United States Central Bank. This monetary policy was well thinking to avoid a huge economic disaster due to financial crisis in 2008 as figure 1 shows. This increase of dollars was spread around the World and they have taken many forms that pull up the World economic recovery such as Debt for developing countries, Foreign Investment in both types Direct and Portfolio and demand of products from/of the United States. Although developing countries and developed countries complaint about it due to local nominal currency appreciation and therefore declining in their exports, they do not point out the benefits from this increasing of dollars supply. To point out the benefits from this fact one has to think in real terms, in this case in Real Effective Exchange Rate (RER) $e=\frac{EP^*}{P}$

(price of foreign goods in terms of local goods) where E is the nominal exchange rate, P* is an index price of foreign goods and P is an index price of local goods. 

Figure 1. M1 as percentage of GDP in USA 1959-2012*

(quarterly data %)

*: From 1959-I to 2012-III

Source: Federal Reserve Board USA and BEA.

There are many ways to be competitive in a global economy, these two come from RER, first is to be competitive in the sort run through nominal depreciation of exchange rate and the second is to be competitive in the long run through lower prices and high volume of production (economies of scale). The first option is well dealt through media, it is interesting how local politicians and managers abuse of Central Bank intervention to depreciate or appreciate local nominal currency when this nominal exchange rate has to be a free market decision which lets reaching the Purchasing Power Parity situation (it is an arbitrage situation). On the other hand, they have to talk about how this cheap dollar can be a favorable situation for the economy. One can highlight benefits when dollar is cheap as figure 2 shows, factories from every sector have to improve their technology to reach economies of scale,  they can buy foreign services and technology at low prices, therefore it lets a lower price P of local goods and therefore a higher Real Effective Exchange Rate which favors local industries through higher exports and it does not hurt consumers as nominal exchange rate fluctuation does.

Figure 2. Real Effective Exchange Rate in Colombia* 1986-2012

(1994=100, from whole sales Index)

*: Real Effective Exchange Rate  $e=\frac{EP^*}{P}$.$e=\frac{EP^*}{P}$

Source: Central Bank Colombia.

Colombia coffee sector has faced many hard hits due to government and farmers just work on nominal exchange rate fluctuations thought direct subsides but they do not take advantages from low Real Effective Exchange Rate, therefore Colombia has faced a backlog in coffee production what means missing global market and a big issue for recovering. There is a economic sector which is following same steps of caffe sector, the flowers sector is one of most important in Colombia and they complaint about nominal exchange rate appreciation and government gives them subsides to calm down managers but they do not improve their technology to grow up flowers, then their prices will be not competitive and they will face same situation of coffee sector. Figure 3 shows the average cost related with volume of production from this sector, one can conclude that as the volume increases in about 1.0%, the average cost does in about 0.3%, therefore it is a necessary condition but not a sufficient condition of economies of scale. They have to work hard to reach this type of technology. The main countries which export flowers are Netherlands with 54.9% of total value exported around World, Colombia 13.8%, Ecuador 3.5% and Kenya 5.0%, Colombia has to pay attention to these countries to be in the market, the type of flowers market is monopolistic competition type, therefore technology and product differentiation are the keys to be in the market, nominal exchange rate plays a second roll.

Figure 3. Average Cost and volume of production for flower sector in Colombia 2001-2011

(Logarithmic labels)

Source: TradeMap. UN.

Foreigners as residents in Colombia, close to the golden period after internal war conflict

Colombia woks hard to put the end of internal war which has been expensive in terms of human life and economic development. Through right decisions, Colombia is close to finish this irrational internal war conflict and she will enjoy her golden age finally. One can say that the government's future agenda is  to keep security for all citizens in order to get a high economic development. Although Colombia faces problems in economic indicators such as income distribution (GINI about 0.548), unemployment rate about 9% and lacking of work opportunities for juveniles, there are economic sectors and residents who are enjoying Colombia as must be. 

Foreigners residents in Colombia are about 109,953 in 2010, they study, work, enjoy their last years as pensioners in Colombia, there are others who are waiting for their opportunity as unemployed. Most of foreigners residents work as employees but there are many that have set up their business, and the most important most of them are young people who are looking forward to get high quality of life in this Country. This note shows the main economic and social figures of foreigners residents in Colombia from 1960 to 2010-2011.

Some of the main conclusion are foreigners residents in Colombia are growing as well their business, FDI in Colombia faces high rate of profitability in about 14% of the total investment  and 80% of total foreigners residents are between 0 and 60 years old where the bulk is between 16 and 40 years old. Therefore Colombia is close to reach her golden age.

Author: Humberto Bernal,  

Economist,

e-mail: zhumber@gmail.com

It can be download @ click

Colombia works hard to be interesting for foreigners and to be integrated in the global economy, she spends economic resources through embassies, commercial offices to promote Free Trade Agreements (FTAs) and of course to promote Foreign Direct Investment (FDI). The results can be classed as acceptable, Colombia reached FTAs with Chile, Mexico, EFTA, United States, Canada and European Union (EU), CAN, Northern Triangle, GSTP, LAIA, some of these FTAs are partial as the EU. Exports from Colombian (only goods) showed an increase from 11.9% of her GDP in 1960 to 16.9% in 2011 and her FDI inflows showed a relevant increasing through 60’s to 70’s and in the first decade of XXI century. However, Colombia trades crude oil and coal as the main commodities in about 50% of her exports and 50% of her total FDI inflows goes to these sectors, this fact lets high dependency in no removable resources and its cost is huge if their prices goes down or when their reserves goes to the end (for crude oil this scenario will come at the end of the next six years). Therefore Colombia has to work in deep to improve their industrial sector through new technology and attraction of foreigners who can give added value to economy, as a objective Colombia has to reach economies of scale under fair income distribution. This note shows a novel analysis about foreigners in Colombia, although government has the statistical information (data), she does not work continually on it to produce reports to make attractive Colombia for potential foreigners residents.

There are 109,953 foreigners as residential in Colombia by the end of 2010, this volume of people has not showed a big change since 1993 when Colombia faced high violence and crude internal war as figure 1 shows. Before 1993 Colombia was so attractive to foreigners, for example in 1973 there were a positive net flow of travelers of 277, it means many foreigners found Colombia attractive, in contrast there were a negative net flow of travelers of -140,697 in 1998, it means many foreigners and colombians emigrated to other countries.   

Figure 1. Foreigners residents in Colombia 1960-2010

(quinquenniel data, number)

Source: Government Bureau of Statistics (DANE).

Nowadays Colombia shows a deep change in positive way in this field. Foreigners come to Colombia as a tourists, to set up business, to work as employees, to study or to spent the last years of their life as pensioners and they are so happy, therefore Colombia is coming back to her golden years faced in the 60’s and 70’s in terms of attractiveness for foreigners. Now, what are foreigners residents in Colombia doing?. Many foreigners are working in Colombia as employers and employees, for the first case about 11.6% of these foreigners in 2010 own a business and 19.9% work as employees, the 25.4% are students, pensioners reach 3.7%, as in contradiction of popular knowledge, there are few pensioners compared with foreign work force and of corse there is a foreigners’ unemployment rate of 2.8% in 2011, this rate is lower than national unemployment rate which is about 9%. Foreigners residents in Colombia settled in Bogotá with 21.8% of total foreigners in 2010; North of Santander 10.7%; Antioquia 6.6%; Bolivar and Valle both with about 6.3%. 

Those foreigners and multinational who decided to invest in Colombia have increased in the last years. Colombia increased her FDI as stock (foreign capital) from US$12,916 million in 1960 (at constant prices of of 2011) to US$137,852 million in 2011 (at constant prices of 2011) where the first decade of XXI century showed the highest annual growth rates. Figure 2 shows the number of foreign firms (according to FMI methodology) in Colombia, the number of these firms passed from 50 in 1960 to 1,879 in 2010-2011 (this number does not include firms from Panama due to lot of Colombians have registered their firms in this country to evade taxes, there were about 385 firms from Panama in 2011). 

Figure 2. Total foreign firms in Colombia*

(by decade, number)

Source: Government Bureau of Statistics (Superintendencia de Sociedades).

The vale added of these foreign firms was about 33% of the GDP in Colombia in 2011 and their main activities are Wholesales with 27.7% of total number of foreign firms, Real Estate with 19.9%, Manufacture with 18.9%, and Crude Oil and Mining with 10.7%. Their profitability is high, while it was 2.9% of total capital invested in 1960, it increased to reach 14.1% in 2011, therefore Colombia is good place to invest. The main regions where they do their economic activity are Bogotá, Cundinamarca, Antioquia, Valle and Atlantico respectively. In the last years big Multinational Enterprises (MES) arrived to Colombia, for instance SABMiller (UK, South Africa), Falabella (Chile), TACA (El Salvador), Corpobanca (Chile) and Cencosud (Chile) as many others.  The future economic sector what can be interesting for foreigners are fishing, agriculture, entertainment, real estate and retail sales due to Colombia and the World demand these types of goods and services.

Foreigners residents in Colombia are from everywhere but mainly from Venezuela with 34.0% of total foreigners residents in 2010, the United States 13.7%, Ecuador 10.4%, Spain 4.8%, Italy 2.0%, Germany 1.7% and the United Kingdom 1.0%. It is important to highlight that 80.0% of total foreigners residents are less than 60 years old as figure 3 shows, moreover 39.0% are between 16 and 40 years old. According to statistics, those foreigners from Latin America countries come as employees and those from the States and Europe come as employers, nevertheless there are Latin Americans as employers and the other way around also but in less volume. 

Figure 3. Foreign people in Colombia by age

(Cumulative percentage %)

Source: Government Bureau of Statistics (DANE).

Although Colombia has improved their number of foreigners residents, other countries in the region faced more inflows of foreigners residents, for example Chile with a total population of 17 million had 320 thousand of foreigners resident in 2010 and Argentina with 42 million of population faced a 1.5 million of foreigners residents in 2010. Therefore Colombia can face an unbalance in terms of foreigners flow what can be expensive in terms of economic development for the next years. 

The main Conclusions of this note are Colombia have improved indicators about global openness, for example her exports increased as percentage of her GDP; the number of foreigners residents increased and they are young work force; there are more foreign firms around Colombia. However, Colombia is lagging in fair income distribution, high unemployment and lack of security still. Hoping, Colombia will reach her golden age after finishing her internal war conflict. 

The three chronic diseases in Colombia

Colombia has faced three chronic diseases since long time ago, they are residential burglary and mugging; government corruption and unemployment. At first glance it appears that government is doing nothing for solving these issues, every day there are more cases of these types of illness, burglary and mugging show an increasing trend as well government corruption and unemployment is about 8% and 10% when it must be around 3%. The big problem is public servants just think in their own benefits and they do not be aware of the citizens economic welfare and security. To get better results all three powers of Estate have to be aware of social welfare instead of private befits such as their pensions, increasing their salaries, reelections and getting job places for their relatives, of course they can work on it but no all day through all year.

Author: Humberto Bernal,  

Economist,

e-mail: zhumber@gmail.com

It can be download @ click

Through daily news and statistics from Colombia one can point out the main problems that this society faces. These problems can be called the three chronic diseases of Colombia, they are: residential burglary and others types of robbery, government corruption and unemployment. This note shows how these diseases are getting more room in Colombia. It is fair to remember that Colombia has a population of 46 millions in 2012, this number lets making easier relative comparisons with other countries.

The residential burglary disease

The number of residential burglary cases showed an increasing trend from 2002 to 2011 as figure 1 shows. While in 2002 there were 16,093 cases of this type of violation of human right, this figure went up to reach 17,071 cases in 2011. The main problem with this type of crime is families lose their stuff such as computers, jewelry, TVs, clothing and so. The most ironic issue is families pay their taxes to be safe of this type of crime but central and local government do not take the proper actions against this issue. Other type of crime which is a pain to Colombians is mugging such as those in cash points. Mugging faced by Colombians went from 33,431 cases in 2002 to 63,308 in 2011.

Figure 1. Residential burglary in Colombia 2002-2011

(number of cases)

Source: Ministry of Defense Colombia.

The government corruption disease

Corruption is an issue that brings higher inequality income distribution, resources that must go to improve security such as lower rate of robbery or lower homicide rate are taking to private uses such as apartments abroad owned by corrupt politicians, luxury stuff what is not for social welfare and so. Unfortunately Colombia shows high levels of corruption and this is well known by international organizations. The index calculated by Transparency International Organization took Colombia in a place 94 out of 174 places in 2012, this index adjusted by the total number of places in the sample showed an increasing trend for Colombia between 1996 and 2012 as figure 2 shows. At first glance it appears that government is not working properly to eliminate this illness, the justice is slow, employees from this branch of government faces huge gap in salaries as other professions in Colombia and employees from justice power on their own benefits. It is a call for improving colombia justice in order to protect citizens rights as the Cost-Benefits theory demand.

Figure 2. Government Corruption Perceptions Index for Colombia 1996-2012

(Rank into total places %*)

* 0: no corruption; 100: highest corruption.

Source: Transparency International and own calculations.

The unemployment disease

Unemployment is a state of the society through people feel lack of social belonging, government must work on it to improve social welfare but this work is not well doing in Colombia in the last years as figure 3 shows. The unemployment rate in Colombia is around 8% and 10% when it must be around 3% and 4% as maximum. The government duty is to work on this issue through labour opportunities such as fair salary, social health and fair pension system. Unfortunately this opportunities are missing due to high rates of interest from banks, abuses of employers and education where the main target goes with the importance of private own benefits instead of working to get a better social welfare society.

Figure 3. Unemployment rate in Colombia 1996-2012*

(%)

*2012 the unemployment is for october while others years are for december.
Source: Bureau of Statistics (DANE and DNP).

From island calamity to Free Trade Agreement opportunity: San Andrés Case

Colombia faced a big issue in the Caribbean region due to ICJ decision about San Andrés. Government is making attendance to avoid public disorders from islanders, moreover she will give economic resources in about US$111 million to slowdown the situation, nevertheless these resources are a short run solution with low added value for island economy due to island fiscal situation is excellent and they can sort out their problems in water supply without any difficulty. However, islanders can really improve their welfare if government and private banks works on it through technical support and financial support to improve fishing activity (real opportunities to make business for islanders). Fishery industry in Colombia faces economies of scale, therefore an increase of volume of fishing production in about 1.0%, then the cost per tonne will face a decline in about 3.0%. Moreover gross profits from this activity showed a real annual growth of 9.0% since 1995. Colombia has 10 big firms that works on fishery industry and gave 3,623 work positions in 2011. Antillana is a firm that works in San Andrés island and Cartagena, she faces a good development and gives 400 work positions, she is a good example about how to improve fishery industry in Colombia. The idea is to increase exports of sea food and export them through Free Trade Agreements.

Author: Humberto Bernal,  

Economist

e-mail: zhumber@gmail.com

It can be download @ click

San Andrés is an island that belongs to Colombia since 1803 when she started to be part of Viceroyalty of New Granada.  This island went from 393 citizens in 1793 to approximately 70 thousand in 2012. Citizens from this island dependent on fishery resources and influx of tourists. Last days government faced an issue due to International Court of Justice (ICJ) issued a ruling where Colombia lost sea territory in about 75 thousand square km. San Andrés citizens feel without government who protect them. According to island citizens, this area of sea lost is full of economic resource for fishing (fishes, lobsters and craps). Government attended the calling of citizens last week and she announced a public investment of US$111 million (Col$200,000 million), these resources are going to be taken to improve water supply and as a compensation (subsides) for those who can not go to that area that ICJ banned for Colombians.

The government resources (US$111 million) can be thought as a very short run solution to avoid an emancipation from islanders from Colombia, moreover this money will not improve too much islanders economic welfare. Government direct investment in islanders has been high since 2007 as figure 1 shows, the per capita government  direct investment in San Andrés was about US$447 per year in 2011, one can compare this value with money received by two big regions in Colombia: Bogotá citizens who faced an investment of US$480 per capita in 2011 and Antioquia citizens who faced just US$189. Moreover, the fiscal situation of this island is well managed compared with other regions, she is on the place 25th out of 1,123 regions in whole Colombia. Therefore government is doing partially her job for the short run.

Figure 1. Government direct spending per capita

2007-2011

(US$constant prices of 2011)

Source: Government Department of Statistics (DANE and DNP) and own calculations.

How to improve economic development in San Andrés

San Andrés is an island that depends in deep from tourist flows, the percentage of her GDP that comes from this activity is 46% (it includes: hotel, trade and transport activities) and a 13% comes from government activities such as public services (electricity, water supply and others). There is a small fraction that comes from fishing, it is about 1.0% of her GDP. 

Now, if one goes in deep about fishing industry in Colombia, one realizes that it faces economies of scale (as the production increase, the average cost per tonne of fishes, lobster and craps goes down). Figure 2 shows this fact, one can look an average cost declining as volume increase, the lower average cost per tonne of frozen fish is about US$1,400 at FOB prices per tonne and for crustaceans is about US$4,900 at FOB prices per tonne. In international market these prices are higher than in local market, in the first case the international price is about US$1,980 at FOB prices per tonne and the second case it is about US$7,900 at FOB prices per tonne. Through econometric tools one can forecast that as the production increase in 1%, the the average cost faces a reduction of 3%. Therefore there is a big market to be exploited by islanders with support of government and private banks.

Figure 2. Economies of scale from fishing industry in Colombia 

Average Cost and total production 1992-2010

(US$constant prices of 2011)

*Through Random Effects Panel Data Model there is evidence of economies of scale for fishing activity , moreover it includes lobsters and crabs.

Source: Government Department of Statistics (DANE) and own calculations.

Colombia counts with 10 big firms that works in fishery industry and they face huge gross profits (before administrative cost and taxes) as figure 3 shows. This companies employ about 3,623 workers in 2011, therefore they add welfare to society. By 1996 they faced a gross profits in about US$5.1 million at 2011 prices and it increased to reach US$35.4 million in 2011, therefore gross profits faced an annual average real growth of 9.1%. 

Figure 3. Gross profits for fishing companies in Colombia 1995-2011

(US$thousands constant prices of 2011)

Source: Government Department of Statistics (Superintendenciade Sociedades) and own calculations.

In San Andrés island there is a big company working in fishing, she is called Antillana, this company works also in Cartagena city and employ 400 workers around colombia including those from San Andrés. Moreover, this company exported 70% of the  total frozen sea food exported through the island in 2011.

The conclusion is to work in real opportunities for islanders such as increasing the number of fishing production through technical criteria (environmental and profitability). Through credits and government technical support this opportunities can be real. Technical support must work on education through government bodies such as  SENA places and setting up economic research offices such as DANE branches in the island. Government has to make presence through technical support instead of money subsides. 

Colombia a better place to live when armed conflict finishes and corrupt politicians are in jail

Colombians  ask for results. Armed conflict in Colombia and government corruption brought a worst income distribution through 1990 to 2011, therefore colombian government has to work hard to finish both of them. There are about 28.5 million of colombian in poverty according to government social program called Sisbén, it mean 61.9% of total population. Moreover the GINI index shows an increasing trend since the end of 80’s when it reached 0.456 and employees enjoyed the 43.8% of total income. Nowadays the GINI index reached 0.548 and employees just share with 35.8% of total income. Through the end of internal war conflict between government forces and guerrilla, employees can enjoy 2% above of income distribution in the next years as soon conflict finishes. However, there is a big problem still with politicians who are corrupts, this fact worse off income distribution and government appears to ignore it, evidence is politicians who are still out of jail and financial institutions taking employees wealth through high interest rates.

Author: Humberto Bernal,  

Economist,

e-mail: zhumber@gmail.com

it can be download @ click

Income distribution (GINI index)  in Colombia through last 36 years shows a worse state in these last 3 years, it showed a value around 0.46 during 80’s and 0.55 in the last 20 years where it reached 0.55 in 2011 as figure 1 shows. This increasing trend can be explained by lacking of fair politics to work for those who earn low wages. Moreover, the armed conflict between government forces and guerrilla make a worst situation, one can easily calculate the impact of internal war conflict and the income distribution, the econometric result under data from 1976 to 2010 is a decrease of 2.0% of employees’s income when homicide rate face a increase of 1 point. This fact can easily supported  through figure 1 and figure 2. Figure 1 shows Colombians used to face better quality of live in 80’s but as soon the internal war conflict worst at the beginning of 90’s, then Colombians showed a worst income.

Figure 1. Income distribution Colombia (GINI index) 1976-2011

Source: Department of Statistics (DANE, DNP).

Figure 2 shows how income (Gross Domestic Product, GDP) is distributed between citizens through 1977 and 2010. Again, income distribution was better through 80’s but after that decade it showed worst results. By 1983 employees from Colombia reached 43.8% of total Colombia income (GDP), this percentage has been the highest  in the last 36 years (under statical evidence) but without statistical evidence I can say that it was the highest through XX century and beginning of XXI century. Unfortunately, nowadays employees in Colombia just share 35.8% of total income, what governments we have !!.

Figure 2. Income distribution Colombia 

1977-2011

(GDP distribution %)

Source: Department of Statistics (DANE). Form input-output matrix.

Colombia is a country that faces huge volume of people in poverty, through official information one can show how many they are. Government works under several indicators to point the number of people in poverty but there are two of them which are the most important. The first one is through Line of Poverty (people who do not have enough money to afford the basic good and services), this indicator point about 15.7 million out of 46 million in Colombia in 2011, it means a percentage of 34.1% as figure 3 shows (blue line). Thought this measure Colombia has showed a decline trend of percentage of poor people into total population. Nevertheless, this indicator called Poverty Line does not work properly, there is other indicator that shows the real number of poor people in Colombia. Colombian government has worked in social program called Sisbén which is designed for poor people, this program gives subsides to people who really need the assistance. The number of people who demand Sisbén’s benefits reached 28.5 millions in 2011 and more than 30 million in 2012 (August). Therefore, if one takes Sisbén information to built a poverty indicator, one can conclude that 61.9% of total population in Colombia face a poverty scenario. Figure 3 shows the percentage of population in poverty in Colombia under this measure (red dashed line).

Figure 3. Population in poverty 

(%of total population) 2002-2011

Source: Department of Statistics (DANE, DNP).

Colombian congress and the lack of information on FDI in agriculture sector

The World faces a big challenge in improving agriculture and hunting sector in order to reach Millennium Development Targets in 2015. Most of countries are aware of it and they improved their FDI policy to attract resources for this sector. The most relevant success cases are Brazil, Poland, Rumania and Mexico. However, there are huge fair barriers also, for instance environmental issues and local culture against FDI in agriculture sector, therefore FDI can be blocked if there is not a global policy of awareness of the importance of  FDI mainly in this kind of sectors. Colombia could face the last problem due to Congress lack of information. To put clear the point, Colombia has been opened to FDI since her independence, there are evince in 1886 Constitution, the Blue Book of Colombia printed in 1918 and the 1991 Constitution where colombians welcome FDI in this sector. But nowadays Colombia Congress ignores this fact, moreover they ignore the decreasing trend of FDI as stock in agriculture sector and hunting as a share of total FDI as stock (taking out mining and crude oil extraction FDI due to they share about 50% of total FDI), this percentage went from 57.7% in 1901 to 2.2% in 2011. Therefore, instead of blocking FDI for agriculture sector and hunting,  Colombia Congress has to improve the policies to attracting this type of FDI in order to reach the global target to eradicating extreme property and hunger. 

Author: Humberto Bernal,  

Economist,

e-mail: zhumber@gmail.com

It can be download @ click

Foreign Direct Investment (FDI) into agriculture and hunting sector has taken relevance in the last years due to achieve the eight Millennium Development Goals where eradicating extreme property and hunger must be reached. There are evidence of increasing FDI into agriculture and hunting sector through UNCTAD-WIR-2009 report and Investment Map data. The total onward FDI as stock into agriculture and hunting sector reached US$12,152 million in 2010, it means 0.2% of total FDI as stock around World in 2010. Figure 1 shows the main countries that invest in agriculture sector and hunting abroad. Australia is one of main countries that has invested in this sector with 24.8% of total FDI as stock into agriculture and hunting around the World, there are other countries that have invested high resources to reach this millennium target such as Canada, China and the Unites States. There are countries that realized the importance about this millennium target and started to invest into agriculture and hunting sector around the World recently, they are Republic of Korea, Saudi Arabia and the United Arab Emirates. In terms of number of foreign firms the United States leads the list with 109 big firms with business abroad out of 419 big firms from  other countries. The american firms abroad give 45,956 employees at least, the main american firms are Fresh Del Monte Produce Inc with 13,443 employees in Brazil, Mexico, Poland, Costa Rica and Chile in 2011 and Chiquita Brands International Inc with 20,733 employees in 2011 around the World.

Figure 1. Main source countries for FDI as stock in agriculture and hunting around World 2010

(% of total FDI stock in agriculture and hunting)

 Total: US$12,152 million

Source: Investment Map (ONU).

The inward FDI as stock into agriculture and hunting sector reached US$79,594 million in 2010, it means 0.4% of total FDI as stock. The main host countries which got this FDI into agriculture and hunting sector are China with 64.3% of total inward FDI as stock into agriculture and hunting sector in 2010. There other countries that got high volumes of FDI into this sector such as Ethiopia, Argentina and New Zealand as figure 2 shows. In terms of number of firms Brazil showed the highest number of foreign firms in agriculture and hunting sector with 55 big firms, the number of employees given by these firms are 6,782 at least at the end of 2011. There are other countries which face an important number of foreign firms such as Poland, Romania and Mexico. 

Figure 2. Main host countries for FDI as stock in agriculture and hunting around World 2010

(% of total FDI stock in agriculture and hunting)

Total: US$79,594 million.

Source: Investment Map (ONU).

Summarizing the FDI into agriculture and hunting sector around the World has showed an important increase due to hard work in most of counties to reach the millennium goals. Although there are problems in some cases due to environmental issues and local Law as WIR-2009 pointed in chapter III, the volume of FDI showed positive growth rates. There are no evidence of high volume of FDI to buy countries as some countries highlighted.

Agriculture and hunting FDI in Colombia 

Colombia has been open to FDI since her independence, there are many official documents where colombians give the welcome to FDI such as 1886 Constitution, the Blue Book of Colombia printed in 1918 and 1991 Constitution. FDI into agriculture sector in Colombia began since XX century with United Fruit Company in banana production, investments into coffee sector and most recently investment into cut flowers and feed cattle. Colombia counts with 106 foreign firms that work in agriculture and hunting sector, it means 4.9% of total foreign firm in Colombia in 2011 as figure 3 shows. The number of foreign firms in agriculture and hunting sector showed a decline in the last 2 years but as whole picture these type of foreign firms showed a increase from 59 in 1995 to 106 in 2011.

Figure 3. Total foreign firms in Colombia 1995 - 2011

(Number)

Source: Government body (Superintendencia de Scoiedades).

The agriculture and hunting FDI as stock in Colombia reached US$108 million at 2011 prices in 1901 and US$1,546 million in 2011 what means an annual real growth rate of 2,4% between 1901 and 2011 as figure 4 shows. In terms of flows, this inward FDI reached US$156.1 million in 2011, this is the second biggest value since 1901, the first was in 1914 with US$156.5 million at 2011 prices. By 1914 Colombia faced huge investment from the United States in agriculture sector, mining and crude oil extraction. Although Colombia is open to FDI, the volume reached in agriculture and hunting sector showed a decline trend if one looks its share into total FDI as stock without FDI in mining and crude oil extraction. The share of agriculture and hunting FDI as stock into total FDI without mining and crude oil extraction went from 57.7% in 1901 to 2.2% in 2011. This result shows the lack of government policies to attract FDI in this sector. 

Figure 4. Inward FDI stock in agriculture and hunting sector in Colombia 1901-2011

(US$million real prices of 2011)

Source: Own calculation with primary and secondary information.

Nowadays FDI in agriculture and hunting sector in Colombia shows lower share values that used to be at the beginning of XX century but there are more foreign firms in this sector than used to be, nevertheless most of these firms are from Panama, Cayman Islands and Bahamas, these countries are taken as Tax Heaven, therefore this FDI can show a grade of money laundry to evade local taxes. The biggest foreign firms according to sales value are International Trading Firms such as Bananos exportación S.A and firms that grow vegetables and other goods such as Agricola el Retiro. 

References

A close look to FDI in agriculture and hunting sector around the World:

Conference on Trade and Development (UNCTAD). World Investment Report (WIR). 2009. Transnational Corporations, Agricultural Production and Development, chapter III, IV, V.

A proper tax reform in Colombia but is government tax collector called DIAN working properly?

Colombia will face a new tax structure from 2013. There are many changes, one of the most important is the abolition of Payroll Tax called Parafiscal Tax, this tax is 9% of employees’ wage that means a total government revenue of US$4.3 billion (after evasion) in 2011 or 1.26% of Colombian GDP. This revenue is taken to invest in education and family health. However, this Payroll Tax shows huge evasion, it is about 50% between 2000 and 2011, moreover it allows large losses in social welfare accounting in 759 thousand of employees. Government took right decision in taking profits from firms to finance eduction and family health to keep their status quo due to abolition of Payroll Tax. Nevertheless there is a big issue about collecting taxes, Colombia faces a huge evasion of tax payments, therefore the government tax collector called DIAN has a big work to do. 

Author: Humberto Bernal,  

Economist,

e-mail: zhumber@gmail.com

It can be download @ PDF 

Colombia will face a tax reform for 2013, there are many issues to deal in this reform. This note takes into account Payroll Tax known as Parafiscal Tax. This tax is 9% of total employees wage and its revenue is taken to invest in social projects such as education and family health. The total revenue should have been about US$745 million per month in 2011 or in annual terms 2.51% as percentage of GDP in Colombia, however there was a revenue of US$349 per month in 2011 due to this tax, therefore there was evasion about 53% in 2011, this evasion was similar between 2000 and 2011. Moreover this Pay Roll tax generates social welfare reduction in about 759 thousands of employees and higher labor payments for employers and lower wages for employees as figure 1 shows.

Figure 1.  Labor market and Payroll tax (parafiscal tax*) in Colombia 2011

(monthly dada)

*Payroll taxes taken into account:

ICBF (Children health): 3% of wage,

SENA (Technical education): 2% of wage,

C.C.F (Family health): 4% of wage.

Source: Own calculations and government information.

Government is aware of investing in social projects decided to take money from other tax called profit tax (Renta Tax) to keep status quo in education and family health. In Colombia profits tax (Renta Tax) is 33% of firms’s  profits, this tax will be divided in two: 8% to keep the status quo as was pointed above and 25% to spend in other goods as government required. The most important to highlight is this profit tax does not push down social welfare as figure 2 shows. This tax is charged after production takes place, therefore firms maximize profits without take profit tax into account, one can say that this profit tax is progressive or pays more attention on those who earn high profits.

Thought this information one can say that government did a proper work on changing tax structure in labor market. 

Figure 2. New structure profit tax in Colombia 2011
(goods market)

Source: Own calculation and government tax collector (DIAN).

Hard work for government tax collector (DIAN)

Due to Payroll Tax government got about US$ 349 millions per month in 2011 or US$4.2 billion in annual terms, therefore the government tax collector will have to keep her eye on firms balance sheets to avoid evasion which is frequent and high in Colombia.

Through forecasts the New Tax will generate same revenue as before (under Payroll Tax), the revenue will be around US$5.4 billions in 2013 and US$ 6.3 billion in 2014. However, there is a big  issue that must be sorted, it is to avoid evasion, as example Payroll Tax faced about 53% of evasion from total revenue. Society will evaluate government tax collector (DIAN) at the end of next year.

Figure 3. Payroll Tax revenue and New Tax revenue on profits

2000-2014F*

(US$ billion)

Source: Own calculation and government tax collector (DIAN).

Benefits to banana multinationals through low tariff but host countries where they are grown are underdeveloped still

Last week  bananas’ industry got good news, the bananas’ tariff in European Union will face a decline from US$223 per tonne to US$145 per tonne, this decline will be in the next 8 years. The most interesting fact is Bananas’ production faces economies of scale, it means a decline in tariff will bring benefits to consumer and banana multinationals. Costumer will buy cheaper bananas and multinational will face higher profits. By 2011 banana multinationals faced a profits of US$58 per tonne before exporting the product and US$175 per tonne before putting them on shelves. The big issue is these multinationals do not give a high social value such as investments in host countries where bananas are grown, for instance technology, infrastructure and new products made in Latin America are scarce, therefore these multinationals are in debt with host countries still.

Author: Humberto Bernal,  

Economist,

e-mail: zhumber@gmail.com

It can be download @ click

Latin America bananas industry got good news last week, they will face a tariff reduction from US$223 to US$145 per tonne in the next 8 years. This is a right decision due to tariff to bananas make huge distortions in the international market. However, most of banana multinationals which grow bananas in Latin America do not have social compromise to improve the global economy in the long run, they invest in projects that are not profitable in the long run. For instance, Chiquita Brands, Dole Food Companny and Banacol do not work in big projects in Latin America such as expanding their activities to produce other high value products such as technology, services and relevant infrastructure to produce new product to the World. These multinationals just invest in short run projects to show off their social compromise, for instance Banacol invest in health, education and sports centers, of course these investments are welcome but the problem is they are not profitable by their own, these projects depend of subsidies from these multinationals, it is fair to highlight these multinationals work according with environment requirements. Society expects these multinational work actively to improve income distribution and economic growth. 

Why banana multinationals can improve income distribution and economic growth

Banana business has shown an impressive growth in the last 50 years as figure 1 shows, the volume of production increased from 21.3 million of tonnes in 1961 to 107 million tonnes in 2011 that means an annual average growth of 3.3%. Bananas exported around World increased from 3.7 million tonnes in 1961 to 19.3 million tonnes in 2011 that means an annual average growth of 3.3% also. 

Figure 1. Bananas total production and exports around the World 1961-2011

(Million of tonnes)

Source: own calculation with FAO and Trade Map data.

Moreover, bananas’ business is highly profitable, as the production increase bananas' price shows a decline as figure 2 shows, it means that bananas' production faces economies of scale (as production increases, price goes down and profits goes up). By 1961 a tonne of bananas showed an international FOB price of US$642.3 at real prices of 2011 while this tonne showed a FOB price of US$481.8 in 2011, in real terms banana’s price showed an annual decline of 0.5%. This declining in price and increasing bananas’ exports volume let higher income to banana multinationals, by 1961 the value of exports reached US$2,284 million at real prices of 2011 while this income reached US$9,296 million in 2011 as figure 3 shows. Through official information one can conclude that banana multinational’s profits are increasing, by 2011 they got  a profit of US$58 per tonne at FOB prices and US$175 per tonne before put them on shelves in supermarkets such as Walmart or Sainsburys’, therefore the total profits for banana multinational is not less than US$233 per tonne in 2011.

Figure 2. Bananas’ FOB price 1961-2011

(US$ real price of 2011 per tonne)

Source: own calculation with FAO and Trade Map data.

Figure 3. Banana exports value 1961-2011

(US$ million constant 2011)

Source: own calculation with FAO and Trade Map data.

Expectations due to bananas’ tariff reduction

Due to tariff reduction and economies of scale from bananas’ production, then the volume of production will increase, consumers price will decline and banana multinationals will face higher profits also. Production forecast is around 25.1 million tonnes by 2019, moreover a tonne of bananas can be bought at approximately US$623 per tonne at real prices of 2011 in 2019 as figure 4 shows. These results were calculated under econometrics tools and they are statistical significant. 

Figure 4. Economies of scale for banana production

(US$ constant of 2011)

P: Price

AC: Average Cost

MC: Marginal Cost

Source: Own calculation with official data.