Okun’s Law and decline of FDI inflows at main added value sectors in Colombia

Colombia faces a structural high unemployment rate, this high rate brings a high cost evaluated through high sensibility between GDP growth and changes on unemployment rate, this high sensibility can be pointed on a GDP growth of 3.8% if the unemployment does not show any change; and a GDP growth of 4.2% if unemployment rate declines about 1.0%, therefore Colombia government’s target is to keep growing GDP on a rate above of 3.76% if she wants to decline unemployment rate.  This target will be difficult if government carries promoting FDI in crude oil and coal sector as Balance of Payments for the first semester of 2012 pointed out. On the other hand,  FDI inflows for manufacturing sector showed a decline between first semester of 2011 and 2012, similar situation faces real state, transport and agriculture sectors. Colombia government should be aware of this FDI decline at high added value sectors.

Author: Humberto Bernal,

Economist,

e-mail: zhumber@gmail.com

It can be download @ click.

Okun’s Law and the cost of high unemployment rate in Colombia

Colombia faces an structural problem in her unemployment rate. Unemployment rate has been too high since 1976, it has showed values between 7.0% and 19.9%!!!, nowadays this rate is around 9.7%. Through this information arises a natural question: what is the cost of high unemployment rate?. To answer this question it is fair to use the Okun’s Law, this economic Law points out the relation between Gross Domestic Product (GDP) growth and change in unemployment rate. Through this Law, Colombia shows the following relation: 

• If unemployment does not show any change, then Colombia GDP will growth about 3.76%,
• If unemployment rate declines about 1%, then Colombia GDP will face a growth about 4.2%,
• If unemployment rate increases about 1%, then Colombia GDP will growth about 3.4% as figure 1 shows.

Figure 1. Okun’s Law* in Colombia 1977 - 2011

(annual data %)

*GDP growth = 3.76 - 0.41(Change in unemployment rate).
Source: Bureau of Statistics Colombia and own calculations. 

Therefore, the answer to this questions is a highly sensitive relation between change in unemployment rate with GDP growth. Therefore, Colombia government faces a big issue, her target should be to keep growing Colombia’s GDP above 3.76% if government wants to reduce the unemployment rate, the other way around unemployment issue will be worst. 

The Foreign Direct Investment in Colombia: first semester of 2012

Foreign Direct Investment in Colombia is registered in the Balance of Payments (BoP) as International Monetary Found (IMF) suggest, there are other accounting sheets where FDI is resisted but they do not cover the whole of transactions. Last week Colombia Central Bank broadcast the BoP’s data for the first semester of 2012. Unfortunately FDI in Colombia is led by crude oil and coal investments with a share of 61.2% of total FDI in the first semester of 2012. Other sectors shared with 38.8% where financial sector shared with 10.4%. The added value sectors showed a low share, for instance manufacturing showed a 4.3% of total FDI in this first semester. 

In terms of growth rates, the FDI in Colombia showed an increase of 18.3% if one compares first semester of 2011 with first semester of 2012 as table 1 shows. Crude oil and coal inflows contributed with 8.49% while the other sectors contributed with 9.78%. Unfortunately there was a decline growth in manufacturing, transport and agriculture sectors. This decline in FDI growth at main added value sectors should take the attention of government to change their trend.

Foreign Direct Investment inflows first semester of 2011 and 2011

(US$ million)

	First semester
Sector	2011	2012	Growth (%)
Total	6,593.5	7,797.7	18.3
Crude oil sector	2,923.1	3,357.7	6.6
Mines and Quarries (including coal)	1,292.9	1,417.9	1.9
Other sectors	2,377.4	3,022.1	9.8
Financial Institutions	-13.7	682.1	10.6
Electricity, gas and water	245.3	451.9	3.1
Trade, Restaurants and Hotels	609.1	810.9	3.1
Community Services	-76.5	-11.7	1.0
Agriculture, Hunting, Forestry and Fishing	84.0	71.6	-0.2
Manufacturing	387.5	336.8	-0.8
Real state	230.6	61.9	-2.6
Transport, Storage and Communications	911.1	618.7	-4.4

Source: Central Bank Colombia, Balance of Payments.

How easy is to miss a market and how difficult to recover it: the eggs case in Colombia

Colombia used to sell lot of products to Venezuela at high prices if one compares them with international prices. After Colombia faced a political issue with Venezuela in 2008-2009, her trade declined dramatically at point to reach 7th place in main colombia’s trade partners in 2011, Venezuela used to take the second place after USA. Nowadays Colombian government broadcast that Colombia-Venezuela trade is improving but the true is the other way around. Venezuela can get her imported commodities at lower prices at international market. This note shows eggs case, Colombia used to export high volumes of eggs to Venezuela but not anymore. How can Colombia be competitive at international marker?, by sure it is not enough to sign lot of Free Trade Agreement (FTAs) as government points out, the solution has to be linked to real opportunities for farmers and guerrillas deserters.

Author: Humberto Bernal,

Economist,

e-mail: zhumber@gmail.com

it can be download @ PDF

Colombia is signing lot of Free Trade Agreements (FTAs) as many countries do and she does not realize that we are poor in suppling commodities with high added value. The main products where Colombia has trade advantage are crude oil, coal, precious stones, coffee, flowers and bananas. Most of these commodities are natural resources, it means limited supply and low added value. Crude oil and coal exports shared with 65% of total colombian exports in 2011 and these 6 commodities pointed shared with 80% of total colombian exports exports in 2011.

It will be difficult that Colombia supplies high added  value products due to lack of productive programs (Colombia has these type of programs but they are bureaucratic job places), lack of fair credits (the interest rate is too high), and the most important a lack of government awareness about Colombia reality in economic topics and how to sort them. This note points out how Colombia is missing her eggs trade and government does not realize it. Colombia used to export at least 1,000 tonnes of eggs before 2009 as figure 1 shows. There was a peak in 2008 with 15,117 tonnes mostly exported to Venezuela, this country showed US$ exchange rate chaos in 2008 and it let businessmen use exports between Colombia and Venezuela to make profits through exchange rate differences, however Venezuela government realized it and stop it with high losses for Colombians speculators. If one takes out this 2008 outlier, Colombia showed eggs exports average of 1,750 tonnes per year between 2001 to 2009. After 2009 Colombia missed lot of eggs foreign trade market, the eggs exports reached 72 tonnes, 6 tonnes and 88 tonnes in 2010, 2011 and 2012(january to july) respectively, what bad for this economic sector.

Figure 1. Eggs exported by Colombia 2001-2012 (July)

(Tonnes)

Source: TradeMap.

This decline in eggs’ exports is due to Colombia missed Venezuela market in 2010 as figure 2 shows. Venezuela used to take the second place in main colombian’s exports partners after the United States but nowadays this country is on 7th place with 3.1% of total colombian exports in 2011. Venezuela is one of Colombia’s border countries and this country payed colombian exports at high prices if one compared them with international prices, for instance this country used to pay US$3,100 per tonne of eggs in 2008 while at international market the big suppliers such as Netherlands, Turkey, Poland and the United States charged between US$1,500 and US$2,000 per tonne of eggs. 

Due political issues between Colombia and Venezuela in 2008-2009, Colombia’s eggs exports declined to reach 6 tonnes in 2011 and 88 tonnes in 2012 (january to july). Nowadays, the few eggs exported go to Ecuador as figure 2 shows, other border country. The worst thing is Ecuador is paying a high price for these eggs, US$4,600 per tonne in 2012, when this country realises that eggs are cheaper at international market (US$1,200 per tonne in 2011, this price is lower than years before prices), then Colombia will miss her total international eggs market !!!. Moreover it could be cheaper to Colombians imports eggs for local supply!!!, one can get a egg for US$0.16  at local market (egg-weight 55 grams) while at international market its cost at FOB prices is US$0.07.

Figure 2. Eggs exported by Colombia according to country of destination 2001-2012 (July)

(Share%)

Source: TradeMap.

This failure can be changed if Colombia led by central government makes real opportunities for farmers and guerrillas deserters. Eggs production does not require high knowledge, therefore with a bit of effort these people will bring eggs production at low prices to sell at international market. The main eggs importers are Germany, Iraq, Singapore and Belgium as figure 3 shows. Germany imported 407,255 tonnes of eggs in 2011, therefore there is market out there.

Figure 3. Main countries that import eggs in 2011

(Tonnes)

Source: TradeMap.

Employees does not have to pay unemployment insurance, it must be payed by government and Central Bank

Colombia has reached her long run unemployment rate, it is too high, it is between  9.0% and 11.0%, this assessment is evidenced through annual data from 1976 to 2011 and it is the result of Central Bank low inflation target started in 1991 and labour Law 789 of 2002. Colombia reached a low inflation rate around 2.0% and 4.0%, this low inflation brought high unemployment rates, this high unemployment rate was the cost faced by society due to Colombia Central Bank low inflation rate target. Therefore, Colombia employees does not have to pay this long run high unemployment cost through financing the unemployment insurance with their labor obligatory saving called in Colombia “Cesantias”, this insurance must be payed by Central Bank and government incomes such as  those received by crude oil or coal royalties. It is fair to remember that this high unemployment was reached due to Central Bank low inflation rate target and Law 789 of 2002 and it is not  the fault of employees.

Author: Humberto Bernal,

Economist,

e-mail: zhumber@gmail.com

It can be download @ click

Colombia unemployment reached 9.8% at the end of 2011 but it increased to 10.9% on july of 2012. Therefore, there is a question about what’s going on with this high unemployment rate?. The last  two years colombia has faced hight Gross Domestic Product (GDP) growth rates, for instance she reached 4.0% in 2010 and 5.9% in 2011, moreover this GDP growth has been positive before these dates, the only negative value was reached by 1999 when GDP growth reached -4.2%, it can be pointed as the worst economic crisis in Colombia since ever. The main argument to explain this high unemployment is through economic theory and empirical evidence. The first lesson on economics for everybody who takes principles of economics lecture is about 12 principles if one follows Krugman’s book called Fundamental of Economics or 10 principles if one follows Mankiw’s book called Principles of Economics. Both authors as many others point that there is a trade off between inflation and unemployment in the short run and a natural inflation rate and natural unemployment rate in the long run. It means that if inflation is driven down by Central Bank in the short run, therefore there is a cost on high unemployment rates. In the long run there is a steady-state  between inflation rate and unemployment rate called Non-Accelerating Inflation Rate of Unemployment (NAIRU), at firs glance, Colombia has reached this last state but with high unemployment rate.

This relation between unemployment rate and inflation rate in short and long run can be evidenced in Colombia. After 1991 Colombian Central Bank has as a target to reduce the inflation rate and it has been reached, figure 1 shows that there was a negative slope relation between unemployment  rate and inflation rate between 1976 to 2002 (blue points). Colombia showed an employment rate of 9.20% with an inflation of 24.68% in 1976 and an unemployment rate of 12.10% with an inflation rate of 6.99% in 2002, therefore unemployment rate increased and inflation rate declined. At the end of 2002, Colombian government approved the Law 789, this Law made its work to help to reduce unemployment rate  but there was a high costs,  this Law deteriorated employees welfare, for instance transitory contracts instead of permanent contracts for everybody and working hours payment that deteriorated employes’s income in favor of employers’ profits as many newspapers has pointed out since then. 

Figure 1. Colombia Phillips curve 1976 - 2011

(%)

Source: Bureau of Statistics Colombia (DANE).

Due to this two facts, Central Bank target and Law 789, Colombia has reached a long run unemployment rate too high as figure 1 shows (red points), it was 9.80% at the end of 2011 and 10.80% in 2012 (july), the last 9 years this unemployment rate was around 9.80% and 12.10%, nevertheless inflation rate reached is lower values ever, it was 3.73% at the end of 2011. Table 1 shows the statistical evidence of a short run Phillips curve for Colombia and the impact of Law 789, one can read this table 1 as if inflation rate increases in about 1.0%, then unemployment rate should face a decline of 0.39% or, the other way around, if inflation rate shows a decline in about 1.0%, then unemployment rate should increase in about 0.39%, moreover this table shows the Law 789 impact was positive but not enough to reduce unemployment under 6.0%, its impacts was a decline in unemployment rate around 6.47% when it was about  21.10% and 19.90% before 2002 (short run scenario). Therefore colombian unemployment is still high due to structural facts instead of short run facts.

Table 1. Colombia Phillips curve 1976 - 2011

(OLS methodology)

Unemployment (%)	Coefficients
Inflation (%)	-0.39*
Dummy Law 789 of 2002	-6.47*
Constant	19.34*
R2	0.60

*P-value less than 0.01.

Source: Own calculations Stata 12.

This structural unemployment around 11.0% can be sorted out between Labor government department and Central Bank. These two government bodies have to work together in order to reduce this high unemployment, for instance through the unemployment insurance that has to be afforded by these two bodies. This insurance does not have to be payed by employees obligatory savings called “Cesantias”, this scenario will bring a worst welfare for employees as Law 789 brought.

Unemployment insurance can be afforded with crude oil and coal royalties. For instance if government spending increased in 1.0% due to labor insurance payment, it can bring a decline of 0.7% in unemployment rate as table 2 shows, this results are significative, moreover these results do not differ from those of table 1.

Table 2. Colombia Phillips curve adjusted by central government spending 1976 - 2011

(OLS methodology)

Unemployment (%)	Coefficients
Inflation (%)	-0.36*
Government spending growth (%)	-0.7**
Dummy Law 789 of 2002	-6.36*
Constant	19.34*
R2	0.60

*P-value less than 0.01; **P-value less than 0.05.

Source: Own calculations Stata 12.

The main conclusion is of this weekly note is Colombia faces a structural high unemployment which must be sorted out through better opportunities supplied by private sector (long run contracts, fair payments and so), moreover labor department has to work with Central Bank for financing unemployment insurance, it does not have to be payed with employees savings as government wants.

Colombian external debt shows a higher cost than it use to be, what is going on?

Colombia has reduced her external debt since 2003 until point to reach 9.9% of her GDP in 2011, nevertheless Colombia pays higher interest rate for her external debt than it used to be. This interest rate used to be lower than Prime Lending Rate before 2001 but after this year Colombia pays more until point to reach a difference between interest rate charged and Prime Lending Rate of 2.9% in 2010, this is a fact to review for government authorities in order to maximize social welfare.  

Author: Humberto Bernal,

Economist,

e-mail: zhumber@gmail.com

it can be download @ click

Some of main targets of colombian central government should be to keep an affordable external debt and a fair interest rate for this loan. The first target is reached by Colombian authorities, Colombia in the last 50 years has reached an affordable external debt. This liability reached 4.7% as a share of GDP in 1961, there is a peak in 2003 when it reached 21.7% of GDP, then it declined until 9.9% of GDP in 2011 as figure 1 shows. However the interest rate charged for this liability has not be the optimal in the last four years. If one calculates the implicit cost of colombian external debt (interest divided by total debt, this figure in %) from 1960 to 2001, one realizes that Prime Lending Rate was higher or equal that colombian external debt implicit cost, it means that colombian government did a proper deal in international financial market as figure 2 shows. However since 2003 the cost of this external debt is higher than Prime Lending Rate!!!, it means that Colombians through colombia authorities have been paying a higher cost than it should have be, for instance this difference reached 2.9% in 2010. Therefore it can be a call for local authorities to review their mechanisms through they get this external debt, the best agreements are those that are close to Prime Lending Rate.

Figure 1. Colombian central government external debt as share of GDP 1961-2011

(short and long run debt, %)

Source: Colombian Central Bank and World Bank.

Figure 2. Central government external debt implicit cost and Prime Lending  Rate 1960-2001

(%)

Source: Colombian Central Bank and World Bank.

There can be arguments for charging higher interest rate to Colombia, they are macroeconomic environment, a high risk due to internal war conflict and be in a position of developing country, nevertheless Colombia has improved  them in the last 10 years. In addition, one can calculate colombia’s risk through Risk Premium Rate (this rate takes into accounts exchange rate movements). This premium rate shows an average of 10.4% over last months. If one takes into account a mobil average of 6 moths of this risk premium rate, one can say that 81.7% of this monthly data is between 5.0% and 15.7% as figure 3 shows. Therefore, there have not been an important change through last 10 yeas to paying higher interest for external debt, moreover Colombia reached a better international grade in 2011 (Moody’s pointed  Baa3, S&P pointed BBB- and Fitch pointed BBB-). 

Figure 3. Colombia premium risk rate six months mobile average 1998-2012 

(%)

Source: Colombian Central Bank and World Bank.

Colombia has won 19 medals in Olympic games since 1931 where 8 were won at London 2012, there is hard work to Coldeportes and Culture department to keep this path

Colombia has won 19 olympic medals since 1931, the last 8 were won at London Olympic Games 2012, therefore government has a hard work to keep this trend in the next Olympic Games in 2016 at Brazil. Coldeportes and Culture department, both government bodies, have to make their spending more efficient through professional coaches and proper infrastructure around Colombia, moreover Culture department has to increase her work to reach better citizens through education and programs around Colombia mainly those cities where people do not enjoy our culture as musical events, theater and so. There are 45 million of citizens in Colombia and Central Government spending on culture and sports is too low to the point to have reached a government spending of US$3.08 per capita and US$2.98  per capita respectively in 2012, moreover there was a real growth in culture and sports central government spending about -5.1% in 2011, in other words there was a decline in the real spending in these two activities or one can say that inflation was higher than nominal growth of central government spending on these activities. 

Author: Humberto Bernal,

Economist,

e-mail: zhumber@gmail.com

It can be download @ PDF click

Colombia has won 19 medals in Olympic Games since 1932 when she started to participate, these medals can be classified as 2 of gold, 6 of silver and 11 of bronze as table 1 shows. This result can be classed as poor, for instance Argentina has won 70 medals, Mexico has won 61 medals, of course there are countries in the region that have not won medals as Colombia did such as Chile that has a record of 13 medals. This result of 19 medals, where 8 were won in this 2012 Olympic Games, is the result of improvement of government spending since 2008 but there is still a lack of well developed sport system and well developed culture education system in Colombia. For instance the government spending on sports was US$0.24 per capita and US$0.59 per capita in culture in 2000, what sad. One can say that government did not care about healthy citizens by that year, this spending was regular until 2008 when it increased to reach US$1.87 per capita in sports and US$1.87 per capita in culture as figure 1 shows. Through this spending appears that Colombian government does not care about well educated people. This low spending is shown at cities where infrastructure for sport training is old, few culture promotion and neglected historical centers as floor and church at main squares in Bogotá and other cities. One hopes that cities develop better programs where young find rooms for training sports and citizen learn about our culture through musicals and theater.

Figure 1. Central government spending per capita on culture and sports in Colombia 2000 - 2012

(US$ current*)

*Data is calculated under official exchange rate and under total population.
Source: Government annual budget spending (government financing department).

Although in nominal terms there is an increase of government spending on sports and culture programs, in real terms there is not a regular trend as must be, for instance there was a decline of government spending on sport and culture about 5.1% in 2011 as figure 2 shows.

Figure 2. Real growth per capita in government spending on culture and sports

(% under PPP at 2005*)

*Real growth is calculated under international  Purchasing Power Parity at 2005 prices (PPP at 2005).
Source: Government annual budget spending (government financing department).

Table 1. Colombian medals in Olympic games 1932 to 2012

(number of medals)

Year	Host City	Gold	Silver	Bronze	Total
1932	Los Angeles, United States	0	0	0	0
1936	Berlin, Germany	0	0	0	0
1940	Tokyo, Japan	Cancelled because of World War II
1944	London, United Kingdom	Cancelled because of World War II
1948	London, United Kingdom	0	0	0	0
1952	Helsinki, Finland	0	0	0	0
1956	Melbourne, Australia and Stockholm, Sweden	0	0	0	0
1960	Rome, Italy	0	0	0	0
1964	Tokyo, Japan	0	0	0	0
1968	Mexico City, Mexico	0	0	0	0
1972	Munich, West Germany	0	1	2	3
1976	Montreal, Canada	0	0	0	0
1980	Moscow, Soviet Union	0	0	0	0
1984	Los Angeles, United States	0	1	0	1
1988	Seoul, South Korea	0	0	1	1
1992	Barcelona, Spain	0	0	1	1
1996	Atlanta, United States	0	0	0	0
2000	Sydney, Australia	1	0	0	1
2004	Athens, Greece	0	0	2	2
2008	Beijing, China	0	1	1	2
2012	London, United Kingdom	1	3	4	8
	Total	2	6	11	19

 Source: London Olympic Games web page and Wikipedia.