Economies of scale in soft drink market in Colombia. An advantage to be competitive through FTA

Colombia is getting more global in both ways exporting and importing good and services, therefore her industry has to reach foreign markets through headquarters in Colombia and factories abroad or exporting local products. If Colombia has economies of scale, her citizens must take advantages on them. Empirical evidence shows that Colombia faces economies of scale into soft drinks market, the average cost (average cost per unit of production) is lower as volume of production increase. This kind of technology is desired by society due to financial profits are higher  and suppliers can invest into science and technology, social programs to improve social welfare and promote culture as musicians and athletes. It must be highlighted, increase financial profits as a final target is not the objective, the objective is to increase financial profits to reach a better society.

Author: Humberto Bernal,  

Economist,

e-mail: zhumber@gmail.com

It can be download @

Colombia is increasing her Free Trade Agreements (FTA), some of them are with EFTA, Canada, Chile, Mexico, El Salvador, Guatemala, Honduras and the United States of America. Some people point out that Colombia is not ready to be competitive as above countries are. This assertion could be true but it can be false either. The most important is to search for economies of scale that the country can exploit when a country signs a FTA. It means that in high volume of production, the average cost (average cost per unit of production) shows a reduction. I did my homework and found that soft drinks market in Colombia has this type of economy of scale. From official data, I got interesting results. Soft drinks in Colombia contains production bottles of water, bottles of juice, sodas as Coca-Cola and Pepsi, it does not contents spirits and alcoholic drinks. There are 25 firms of soft drinks in Colombia in 2011 which give financial information but one can count approximately 79 according to 2010-2011 industrial census. The most important firms are Industria Nacional de Gaseosas S.A. (Coca-Cola) with 36.2% of total sales in 2011; Gaseosas Posada Tobon S.A with 17.9% of total sales; and Gaseosas Lux S.A with 9.6% of total sales. Coca-Cola is a foreign firm and the others are mainly locals.

Figure 1. Firms and employees in soft drinks market in Colombia 1992-2010

(natural logarithm scale)

Source: own calculations with local bureau of statistics' data.

Colombia can take this advantage of economies of scale in  soft drinks market and export them to Mexico, Honduras, El Salvador and other countries in the Caribbean. Figure 1 shows how technological change took place in this economic sector, there were less firms in 1992-1999 than 2000-2010 and more employees working in 1992-1999 than 2000 to 2010, therefore this sector faced a positive technological change form 1992-1999 to 2000-2010. This technological change gave as a result a lower average cost, this fact is highlighted in microeconomic textbooks when market shows economies of scale. Figure 2 shows empirical evidence for soft drinks market in Colombia, there is a decreasing relation  and negative slope between volume produced (million of liters) and average cost index. The average cost index is equal to total employees divided by total production. From figure 2 one can point out that as production increase the average cost shows a decline. This kind of technology is desired by any supplier in any market due to as volume increase, it is cheaper produce the latest unit (in this case the latest million of liters). Moreover the supplier’s target should be the market demand but to reach it, she has to play into a monopolistic competition game (to make product differentiation as marketing target) .

Figure 2. Decreasing Average Cost in soft drinks market in Colombia 1992-2010

Source: own calculations with local bureau of statistics' data. 

Soft drinks profits are high in Colombia. For instance Industria Nacional de Gaseosas S.A. (Coca-Cola) showed US$414 million profits before taxes (operating profits) in 2011 and the total soft drinks market showed US$1,4 billions (nine zeros) operating profits in 2011. The relation between operating income and operating costs is showed in table 1. This relation can be read as an increment of 1.0% in operating cost, the operating income is expected to increase in 0,8% and if the inflation shows an increase of 1 (for instance from 3.0% to 4.0%), it is expected that operating income shows a decline in 0.9% (0.009*100).  This model is significative through statistical tools. As a citizen, one waits too much from these sectors that have economies of scale, their target has to be increasing profits to reach a better social welfare. Increasing profits for making more financial profits as a target is not the solution for economic problem.

Table 1. Relation between operating income and operating cost for soft drinks market in Colombia 1995-2010

(Random effect model)

variable	Coefficients
Ln(Operating costs)	0.805
Inflation	-0.009
Constant	3.689
Observations	466
Hausman test (probability)	0.0206

Source: own calculations, Stata 12.1.

Minerals’GDP in Colombia, crude oil sector the main one

Colombia minerals’ GDP showed an increase as a share of total GDP. This share went from 5.5% in 2000 to 7.9% in 2010. The main minerals that took room in minerals’ GDP as whole were crude oil with 66.5% in 2010, coal with 19.7%, gold with 4.6% and natural gas with 2.9%.  Although these minerals contribute marginally in total GDP, when Colombia run out of them ,there will be a high social costs in terms of unemployment. For crude oil this cost will be around 14 thousand places accounted in 2012 and for whole sector will be 283 thousands, of course the short run problem is crude oil scenario, for the others minerals we have enough reserves still. 

Author: Humberto Bernal,  

Economist

e-mail: zhumber@gmail.com

It can be download @

Colombia Gross Domestic Product (GDP) reached US$286.5 billions (nine zeros after point) in 2010 at current exchange rate. It meant a GDP per capita of US$6.366,68 in 2010. Recently there have had lot of attention about how minerals contribute to GDP in Colombia. Figure 1 shows how minerals’ GDP is distributed. Left axes shows GDP for each mineral as a percentage of total minerals’ GDP. For instance Coal’s GDP showed a share of 13.3% in total minerals’ GDP in 2000, crude oil’s GDP shared with 73.1% of total minerals’ GDP in 2000, gold’s GDP shared with 3.6% and natural gas shared with 3.4%. This statistics showed a marginal change last ten years, coal’s GDP increased to reach 19.9%, crude oil’s GDP decreased to reach 66.5%, gold’s GDP increased to reach 4.6% and natural gas’ GDP decreased to reach 2.9%. 

The right axes shows how much minerals’ GDP shared in total GDP in Colombia. These seven minerals shared with 5.5% in 2000 and 7.9% in 2010, therefore minerals are getting room in total GDP in Colombia.  As I pointed weeks before, minerals’ GDP is marginal in the total GDP but these seven sectors give work to 283 thousand people, therefore colombian government have to be aware when they run out, there will be a high social cost evaluated in unemployment mainly. 

This type of figures are interested due to one can get how much of each mineral sector contributes to total GDP. For instance coal’s GDP shared with 1.55% of total GDP in Colombia in 2010, to make this calculation one has to multiply 0.197*0.079*100 and it is done. For crude oil’s GDP this share was 5.26%, gold’s GDP shared with 0.37% and natural gas’ GDP shared with 0.23%.

Figure 1. Minerals’ GDP in Colombia by main component

2000 - 2011

(percentage %)

Left: Minerals’ GDP by component as a share of total minerals’s GDP (%).

Right: Total minerals’ GDP as a share of total GDP in Colombia (%).

Source: Bureau of statistics and own calculations.

Private firms , government and society business due to Crude oil and natural gas’ exploration, production and transportation. Colombia case

Colombia has crude oil and natural gas to improve society welfare.This activity takes attention of  private firms  (locals and foreigns) due to high profits, it takes public servants’ attention due to possibility to do corruption with public resources and it takes attention of regular citizens due to a rich country does not have Metro lines and fair health system. This note shows the benefits from first two bodies (firms and government) and how government (government as central, regions and municipalities) can improve their revenues due to a better crude oil transport. Cenit, the new government body has lot of work to do to reach better revenues from crude oil transport. Colombia showed backward motion in this activity, by 2000 crude oil transport gave to government 15.8% of total crude oil revenues and 5.7% in 2011. The new Cenit has to work hart in giving results about environmental cost due to crude oil transport and she has to set up legislation that takes into account this cost. Moreover, this note shows the relevance of crude oil revenues to government, it reached 16.4% of total government income in 2011.

Author: Humberto Bernal,  

Economist

e-mail: zhumber@gmail.com

It can be download @

Colombia has crude oil and natural gas to make business with locals and foreigns firms. It is a fantastic business to private agents and local government but this business gives few added value to whole society as this note highlight. The value added of Crude Oil and Natural Gas Exploration and Production shared just 6.2% of total GDP in Colombia in 2010 as figure 1 shows (green line, right axis), moreover this percentage showed a increasing trend since 2000, it means these activities contribute a bit more to Colombia development but it is still lower than other activities as manufacture sector. The most important contribution is through foreign currencies for colombian government through trading these products abroad and when foreign firms pay taxes and production costs. From Crude Oil and Natural Gas Exploration and Production’s GDP, one can divide it into its own components, most of this GDP is due to crude oil production as figure 1 shows (bars, left axis). By 2010, crude oil production GDP shared 89.2% of Crude Oil and Natural Gas Exploration and Production GDP, this percentage has showed low variation since 2000 when it reached 93.9%. Exploration and natural gas activities shared few of this added value, it is right to point out that almost all natural gas is traded inside country to home uses and as a car’s gas.

Figure 1. GDP crude oil and natural gas distributed according to activity and as a share of total GDP in Colombia 2000 -2010 (%)

Left: Crude Oil and Natural Gas GDP according to its activities. (%).

Right: Crude Oil and Natural Gas GDP as a share of total GDP. (%). 

Source: CEntral Bank, Ecopetrol, DANE, DNP, UPME, Ministerio de Minas y Energía (They are official government (bodies).

The crude oil’s business is showed in figure 2. One can divide crude oil revenues according to main ends. From 100% of total revenue (as example, WTI price, US$95.1 per barrel in 2011), exploration cost was 1.6% of total revenue (WTI price as example); labor cost was 6.5%; royalties, taxes, government assignment rights were 39.4%; transport cost by pipeline was 5.7%; transport tax by pipeline was 0.1%; CIF cost was 10%, this CIF charge is the maximum, therefore it can be less; and capital and profits remuneration were 36.6%. These percentages did not show important changes as figure 2 shows but one has to recognize that the government’s revenues showed an increase, for example royalties, taxes and government assignment rights went from 22.2% in 2000 to 39.4% in 2011, this fact is due to higher crude oil prices and the new contracting scheme under Concession Contracts. However one must be highly critical to transport business, this activity shows a lower percentage as years pass (the green and purple areas figure 2), what sad, there are lot of pipelines through whole Colombia and the environment cost due to their building is high. One of main conclusion is highlight the work that the new government  body called Cenit has to do. Cenit has to improve crude oil transportation and get more percentage from crude oil revenues, the expectation is to increase its percentage from 5.7% in 2011 as figure 2 shows to 15.8%, as it was in 2000. Cenit must start to work hard in a real environment valuation due to pipelines buildings and be aware of market demand and supply of crude oil transport, Venezuela is a big market which needs to supply crude oil to Asia.

Figure 2. Crude oil barrel distribution in Colombia 2000 -2011 (%)

Source: CEntral Bank, Ecopetrol, DANE, DNP, UPME, Ministerio de Minas y Energía (They are official government (bodies).

Colombian government should be happy about revenues from crude oil activity but society is sad due to government revenues management. Revenues from crude oil activity showed an increase trend, this revenues shared 6.8% of total government revenues in 2000 and 16.4% in 2010, it is mainly due to higher prices and the new contracting scheme which was set up in 2003.  However, Colombia society is paying a high cost due to government corruption and lack of public resource management. Colombia faces lack of infrastructure as Metro lines, she faces poor in health system and lack of security due violence and narcotic dealers in Cauca, Chocó and  Antioquia , they are the main coast border lines in Colombia. 

Government revenues due to crude oil activity as share of total government revenues* ** 2000 -2011 (%)

*Government bodies accounted: central, regions and  municipalities.

**It takes into account all taxes, government right and royalties.

Source: CEntral Bank, Ecopetrol, DANE, DNP, UPME, Ministerio de Minas y Energía (They are official government (bodies).https://docs.google.com/open?id=0BzkhS13UydIHZWlaQmhPYXlvdVk

The world will face a car per capita in the future, developed countries solution is a high class public transport. Colombia faces a mess in this issue, what sad. I want my metro!!! is the society claim

There is a World fact: “each world citizen will have a vehicle in the future”. Developed countries are aware of it and they have efficient solution to improve mobility and traffic pollution, these countries have a first class public service as Metro or two floors buses for those who want to be out of this pollution. Colombian government is not clear on solutions about this issue. Main colombian cities are facing an increasing vehicle rate per 1.000 people, for instance Bogotá faced a rate of 199 in 2011, it is above of country rate which reached 78 in 2011. To built Bogotá’s metro and other metros in main cities as a solution to traffic pollution, the financial scheme is to take economic resources from crude oil income, increase vehicles' VAT rate from 25,0% to 40,0% to built metros as specific target and bring other tax rate on vehicles sales which must be dealt by each region in Colombia, it  can be called public transport tax. We hope at the end of this national and regional government period Bogotá, and others main cities in Colombia shows advances in metro lines.

Author: Humberto Bernal,  

Economist

e-mail: zhumber@gmail.com

It can be download at PDF

One of main problems around world is transportation, people needs travel to work, to visit their parents, to go shopping and to travel to countryside on holidays. Therefore citizens must have high class public transport service and private vehicles for those cases when public transport no make sense, for instance travel to countryside on holidays or due to work duties. How can we solve traffic congestion problem?, people want to own their car but they want to travel fast. Data around the World shows this fact, figure 1. For instance, at the United States almost each people has a car, her Motor Vehicles per 1.000 people (Vehicles rate forward) indicator reached 802 in 2010; for inhabitants from Monaco this indicator reached 908 in 2010; other countries that shows similar indicator are Iceland, Luxembourg and Australia. Colombia shows an indicator of 78 vehicles per 1.000 people in 2011, Peru and Bolivia show similar indicator as Colombia. 

Figure 1. Vehicles rate 

latest year information

 Vehicles rate: Motor vehicles per 1.000 people.

source: World Bank Data. 175 Countries.

It is difficult to restrict demand of vehicles in order to improve traffic congestion because vehicle makes people increase their social status. Nowadays the car is the first thing that young workers want to buy, it dos not matter if they have to take a high rate credit. Figure 2 shows the relation between vehicles rate and GDP per capita relation, both indicators are in natural logarithms, this information is from 174 economies. The main information from this figure is vehicle rate increase 0,9% if GDP per capita faces an increase of 1,0%, therefore one can conclude that as income increase people demand vehicles by sure. Therefore, as developed countries, world society will reached a car per capita. The economic target is to bring more welfare to citizens and it is reached through more consumption, vehicles are an example. However, vehicles bring pollution and stress due to congestion, therefore governments have to give transport alternatives. Developed countries are aware of this issue and for those who does not have a car and for those who does not want to face traffic problem, these countries give a high class public transport service as Metro (underground) and high standard buses, in some cities as London they have two floors buses. 

Figure 2. Vehicles rate and GDP per capita for 174 countries, latest year

(Data in natural logarithm)

 Vehicles rate: Motor vehicles per 1.000 people.

source: World Bank Data. 174 Countries.

Bogotá, Barranquilla, Cali, Villavicencio  traffic problem 

Colombia has a big traffic problem due to most of their main cities do not have Metro service, for example Bogotá with 7,5 million of population does not have it. Medellín is the only colombian city that has a Metro. Figure 3 shows Bogotá Vehicle rate, this rate shows an increase from 99 in 2003 to 199 in 2011, this rate is above to country rate, it means a Compound Annual Growth Rate of 9.1% through this period, approximately twice people have vehicle in 2011 than in 2003 in Bogotá, what mess. This exponential growth goes with World trend: “a vehicle per capita”. Colombia government have to pay attention to this fact. Nowadays, Colombia has economic resources from oil crude sales to built the Metro in Bogotá, moreover oil crude incomes  must be enough to built this public transport in others cities as Barranquilla, Cali and Villavicencio. But one must be aware that Colombia has a seven years crude oil reserves only, therefore this resources could not be enough to built public transport in Bogotá and others cities.Therefore, the fair financial scheme is to charge a high rate to vehicle sales for instance a VAT (Value Added Tax) of 40%. This tax can be supplemented with a regional tax rate charged to vehicles sales, this revenues must be dealt by each region. This financial scheme is fair due to those that make traffic congestion must give solutions and the solution  is to pay public transport. 

Figure 3. Bogotá Vehicles rate

2003 - 2011

                                               Vehicles rate: Motor vehicles per 1.000 people.

Source: Bogota Mayor offices (Veeduria Distrital).

Tax reform in Colombia: it is feasible but must be worked carefully to reach a better income distribution

Colombia does not show a high tax revenue as percentage of its GDP as other countries do. Colombia showed a tax revenue of 15.2% as percentage of its GDP in 2010%, most of it comes from central government tax revenue and less from regions and municipalities. Therefore, Colombia has space to increase tax revenues through a well worked tax reform where those who can pay more do it. From my point of view, Colombia has to register all its tax revenues (central government, regions and municipalities tax revenues) in a national entity which main duty is to work exclusively in getting a better income distribution in Colombia. Moreover, an econometric model shows that a high tax revenue as percentage of GDP brings better income distribution in Colombia, an increase of this variable in 1% comes with a reduction of GINI index in 0.054%. However, tax reform is not enough to improve Colombia income distribution, there are other things such as public servants corruption reduction and  better opportunities through economy openness for those who are located in low income rank.  

Author: Humberto Bernal,  

Economist

e-mail: zhumber@gmail.com

It can be download atPDF format

Free market is one way to solve socio-economic problem but some times it brings results that society do not desire, therefore it must be a public sector which works out to solve these market failures. The most important for getting the desired results by the society is a transparent work by public servants. Unfortunately Colombia faces high indicator of public servants corruption and lack of commitment by them to get a better society. Nevertheless, it is right to point out where Colombia is about tax revenues and what can be the best track to reach a better income distribution.  Colombia does not  show high tax revenue as a percentage of Gross Domestic Product (GDP), by 2010 Colombia reached a central government tax revenue of 12.3% as a percentage of its GDP, this value is under average of those faced by other countries as figure 1 shows. The world’ s average value was 16.6% in 2010 where the United Kingdom showed 25.9%, Ecuador showed 27.2% and Luxembourg showed 24.6%. Those countries that showed a lower indicator than Colombia where the United States with 9.3, Switzerland with 10.9 and Panama with 9.2% according to World Bank data. The total countries registered were 156.

Figure 1. Central government tax revenue around the world 2010

< 9.0

9.0 and 13.0

13.0 and 16.0

16.0 and 20.0

20 >

Source: World Bank Indicators and Magic Maps.

Colombia is divided in three political administrative divisions: first is the central government; second is the regions (departamentos in spanish); and third is municipalities (municipios in spanish). The highest tax revenues is reached by central government as figure 2 shows. Central government tax revenue was 12.3% as a percentage of Colombia’s GDP, this figure showed a positive average growth rate since 2000. Tax revenue collected by regions showed a positive average growth rate also, this value was 1.7% of Colombia’s GDP in 2010 as figure 2 shows. Finally, tax revenue collected by municipalities reached 1.2% of Colombia’s GDP, as the other two, it showed a positive average growth rate. The total colombia tax revenue reached was 15.2% as percentage of its GDP, this indicator showed a positive average  growth rate too, it was 11.6% in 2000 and 16.2% in 2006 as figure 2 shows. 

Figure 2. Colombian tax revenue as a share of GDP by government entity 

2000-2010 (%)

Source: Colombian Central Bank, DNP Colombia and DANE Colombia.

Colombia has approximately 30 taxes charged by central government, regions and municipalities including VAT, income tax, tax on financial transactions, tax on spirits (liqueur), gas tax and others. The main problem of these taxes is that they are low for those activities that harm to society, for intense the right thing is to charge a high tax to automobiles in order to reduce pollution and traffic jam problems. Somebody could say that automobile sector pulls up the economy when it is going down but the true is that the same sector working to get a better public transport can let same results. Other example can be applied to factories which get the highest profits, they must pay a higher income tax than small factories in terms of profits. All this information is available at low cost to make it possible.

Therefore, in order to reduce the perverse income distribution faced by Colombia as figure 3 shows, then Colombia has to work out in a national tax reform where central government, regions and municipalities charged hight taxes to those who can pay it. This reform must be balanced between these three political divisions and tax revenue payments must be reported and continually supervised by a central agency  where main objective must be income distribution.

Figure 3. Colombia GINI coefficient

2000-2010

*2007: Estimation.

Source: DNP Colombia.

This better income distribution target through well set up tax reform can be reached.  Colombia has an option to increase taxes from those who can pay it due to she is under the world average ratio tax-GDP. Table 1 shows that an increase of 1% of tax revenue as percentage of GDP, it lets a reduction of 0.054% in GINI coefficient. This conclusion come from 24 out of 33 regions in Colombia where the time period is from 2008 to 2010. There are other variables that help to improve income distribution, for instance if GDP per-capita shows an increase of 1%, the GINI coefficient will decline about 0.064%. Unemployment works in same direction, therefore if government  works hard through tax reform, better economic growth and low unemployment, then by sure Colombia will be a better place. There is a fact to be highlighted, the economy openness indicator (export plus imports divided into GDP %) does not show the right sing, it is positive what means that economy openness increase of 1% lets an increase of GINI in 0.009%. This fact means that most of benefits from economy openness is won by high income people, therefore central government and the other public divisions must work hard to let low income people win through Free Trade Agreements  too.

Table 1. GINI explained by taxes and other variables from 24 regions in Colombia. A Panel Random Model

2000-2010

Variable	Ln(GINI)
Ln(Tax as share of GDP %)	-0.054*** (0.028)
Ln(GDP per capita)	-0.064**** (0.022)
Unemployment rate (%)	-0.003* (0.002)
Ln(Economy openness %)	0.009** (0.005)
Constant	4.569**** (0.194)
R2	0.221
Observations	72
Hausman test probability+	0.720

(...): Standard deviation.

+ Hausmant test null hypothesis: random effects are consistent.

Source: own calculations, Stata 12.1.