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.

Speculation, rational expectations and financial crisis in Colombia thanks to interbolsa and monetary policy

Last week this note talked about credit crunch in Colombia, this week this note is about financial speculation in Colombia, the big conclusion is straight, Colombia will start a financial crisis if monetary authorities do not take right decisions about lower interest rate and easier credit to citizens

 Colombian financial sector faced a shock last week, the government took in hands a private financial intermediate called Interbolsa who belongs to the international Group Interbolsa that has business in the United States, Panama and Brazil. The issue was lack of liquidity to pay her short run liabilities. Interbolsa seems to play speculation through huge debts from local banks and citizens savings. Interbolsa handles a nominal value of US$1,136 million in November of 2012 through 16 private and mutual funds (portfolios), it means 0.34% of total GDP in Colombia.  Government, private sector and citizens  are concerned about the real value of Interbolsa’s  funds, if the real value is that one pointed above, there is no problem but if the value of her funds are lower, then Colombia can face a financial crisis. Interbolsa is one of biggest financial intermediates in Colombia and she has many  customers. This note shows the 1.53% of Interbolsa fund is fair rated, this percentage belongs to Fabricato’s shares (textile factory) owned by Interbolsa, therefore government has a hard work to rate the remaining  98.47% of Interbolsa fund. Citizens are waiting for good news.

Author: Humberto Bernal,  

Economist,

e-mail: zhumber@gmail.com

It can be download @ click

Colombia faced a financial shock last week. One of main financial intermediaries named Interbolsa (collective investment schemes) was taken into public hands, this financial intermediate belongs to Interbolsa Group that has branches around Latin America and North America. It seems the financial institution does not have liquidity to pay her short run liabilities, although she has many assets as a collateral such as shares and short run financial assets, they seem to face high risk. The government body called Superintendencia Financiera is doing the real valuation of Interbolsa’s assets, meanwhile this note points that Fabricato’s share was not the reason of this crisis, moreover this share shows its real value in local stock exchange (it is fair to point that I do not have any financial assets, my only wealth is a laptop, my low teacher wage and my purpose to reach a better society). As soon government took Interbolsa, the media broadcast that this financial intermediate bought huge volume of shares from a textile factory called Fabricato, therefore it could be room for speculation due to this financial intermediate could try to increase Fabricato’s share price to sell them after and getting high lazy profits. 

Fabricato is a long history factory in Colombia, she started business around 1920 and through time she has improved her business with international capitalization and local debt, there is huge expectation for this factory due to Free Trade Agreement signed with the United States. This textile factory has 9,200,309,888 shares in local stock exchange market, each share shows a price of US$0.05 in November of 2012. Interbolsa (the financial intermediate) bought 3.79% of the total volume of Fabricato’s shares that means US$17.4 million in November of 2012 or 1.53% of Interbolsa’s fund value as table 1 shows. 

Table 1. Interbolsa’s mutual and private funds in November of 2012

(US$ million and GDP %)

Mutual funds	US$million	Private funds	US$million
Interbolsa credit	286.0	Tribeca energy fund	196.2
Interbolsa Renta Ya	138.1	Tribeca fund I	131.1
Comprar para arrendar interbolsa inmobiliaria	69.9	Tribeca home care	74.8
Interbolsa factoring	48.5	Tribeca terminal de carga el dorado	58.3
Interbolsa agro 60	34.3	Interbolsa inversiones de capital	45.6
Interbolsa acciones	14.0	Inmobiliario grupo interbolsa	20.6
Interbolsa renting III	12.2
Interbolsa gestion alternativa	3.3
Brasil renta variable	2.6
Interbosa alpha trading	0.4
Subtotal	609.2		526.5
Interbolsa’s fund total US$million	1,136
Fabricato’s shares in total Interbolsa’s  fund (%)	1.53
Interbolsa’s fund as a share in financial GDP Colombia (%)	1.84
Interbolsa’s fund as a share in total GDP Colombia (%)	0.34

Source: own calculations, Interbolsa webpage and Colombia stock exchange.

Interbolsa has 16 financial funds as table 1 shows, they reached a value of US$1,136 million in November of 2012. This value shows a share of 1.85% in Colombia’s financial GDP or 0.34% of Colombia’s total GDP, therefore Interbolsa dealt with huge volume of monetary resources and the most important is to know who bought shares from these funds (regular citizens, banks, rich people, foreigners,...). We hope that the real value of these funds are that one broadcast by the financial intermediate, in case that they face a lower value, it can be the start of financial crisis in Colombia. 

Start working: real value of Fabricato’s share

Fabricato’s share price shows two peaks in 2005 and 2011, the first one was due to share issue and the second one was due to strong capitalization through local debt and foreign capital as figure 1 shows. Fabricato’s share price shows a Compound Annual Growth Rate (CAGR) of 18.4% between 2001 and 2012. This textile factory faced Gross Profits of  9.6% of her total capital (assets minus liabilities) in 2011 and her Operating Profits was 2.0% of her total capital, these profits have showed a regular movement in last 10 years. 

Figure 1. Colombia stock index* and Fabricado share index 2001-2012

(daily data)

*IGBC: Índice General de la Bolsa de Colombia (Colombia stock index).

Source: own calculations and Colombia stock exchange.

Figure 2 shows Tobin’s q for Fabricato, this indicator gives information about Fabricato’s market value (in stock exchange market) and Fabricato’s books value, if this indicator is around 1, one can say fabricato’s shares are well rated by market, if this indicator is close to zero, the factory faces lack of projects to improve her future production and if the indicator is far from 1, the factory is over rated by the stock exchange market, in the last case it can be speculation. 

Through this information one can reach the conclusion that Fabricato’s share is fair rated and there is no evidence of speculation in its value.

Figure 2. Tobin’s q for Fabricato 2001-2012

(annual data)

Source: own calculations, Superintendencia de Sociedades and Colombia stock exchange.