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
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) $e=\frac{EP^*}{P}$
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.
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