Colombia internal war conflict comes from unfair income distribution, this unfair income distribution is deepened by three main sources, they are narcotic production (people want easy money due to high narcotic prices abroad), crude oil production and coal extraction (society watch how few people get rich through public resources and the majority of people are in poverty still). The Government Taking in crude oil sector is about US$23.4 billions in 2011 or 25% of total government revenues or 40% of total crude oil production or 6.84% of total Colombian GDP, this government resource is huge but it is mismanagement due to lack of proper Cost and Benefit analysis, for example new infrastructure without proper accounted budget to future operation. The income distribution from crude oil sector is unfair, my proposal is 30% of total income for capital owners and 70% for employees and government instead of 50%-50% as it is nowadays. To reach this share, government has to charge a rate of 20% on profits repatriated by crude oil firms, moreover this tax is fair due to better security and government spending on crude oil sector promotion, one can calculate an increasing of 0.159% in foreign capital as kidnaping shows a reduction of 1.0%.
Author: Humberto Bernal,
Economist,
e-mail: zhumber@gmail.com
In the last ten years, crude oil’s GDP in Colombia shared with 6% in Colombia total GDP and the main commodity exported by Colombia was crude oil with 50% of her total exports value. This economic sector is important in terms of monetary income for crude oil firms and government budget but in terms of valued added such as new permanent employment vacancies and income distribution is miserable. About 50% of total crude oil income goes to owners of crude oil firms, 40% of total crude oil income goes to government in forms of taxes and royalties (including profits from state firm called Ecopetrol) and 10% goes to direct employees in the sector, there are about 50 crude oil firms in Colombia which counts with 14,500 direct employees, therefore the income distribution in crude oil sector is sad. The total Government Taking from crude oil sector accounted US$23,387 million or 6.84% of GDP in Colombia in 2011 and it has showed an increasing trend since 1921 as figure 1 shows (it accounted taxes and royalties through whole Value Chain from concession contract for exploration to final products such as gas and diesel fuel passing through transport taxes), this Government Taking shared in about 25% of total government income (total government income includes central government and regions income), the big issue is these resources show a mismanagement, they are taking without long run Cost-Benefit analysis, for instance scholarships for university education without job centers, new hospitals without a future budget to give proper services and new recycling plants without future budget to proper operation, therefore these investments are waste of resources.
Figure 1. Government taking crude oil sector Colombia 1921-2011
(as percentage of GDP, %)
There is other issue to deal, many people say that government has to increase the Government Taking rate from crude oil sector and they are right due to 50% of total crude oil income is for owners of capital and 50% is for government and employees, a fair rate can be 30%-70% respectively with a production of a million of barrels per day. Figure 2 shows how Government Taking has increased as the crude oil production has, this increasing in Government Taking is due to more production but no due to higher tax rates or royalties, therefore the rates from Government Taking has to be modified in favor of Colombian society. A proposal is to increase taxes from crude oil profits which are taken to source country, the profit income can be around 20%, and it is easy, Central Bank of Colombia knows the value of these profits due to crude oil firm must report them to be repatriated to source country.
Figure 2. Annual crude oil production and government taking 1921-2011
It is fair to charge a tax of 20% on profits repatriated for crude oil firms, Colombia internal conflict is due to unfair income distribution, this unfair income distribution is deepened by three main sources, they are narcotic production (people want easy money due to high narcotic prices abroad), crude oil production and coal extraction (society watch how few people get rich through public resources and the majority of people are in poverty still), therefore this tax is supported by better internal security, for instance a reduction of kidnaping in about 1.0% lets an increasing of 0.159% in foreign capital in crude oil sector as table 1 shows, moreover Colombia government has spent huge resources to improve crude oil extraction, for instance the Laws in 1978 and 2003 which let higher production as table 1 shows (the sign of coefficients is positive) but taxes rates are unfair as it was pointed above.
Table 1. Three Last Squares Model of Foreign Direct Investment as stock in crude oil sector in Colombia 1970 to 2011**
(values at 2011 prices, in natural logarithms)
Variables
|
Coefficient
|
Labor rate
(percentage%)
|
-0.171*
(0.091)
|
Ln[Crude Oil Production]
(Annual volume)
|
0.575*
(0.086)
|
Ln[Crude Oil Utilities]
(US$ million at 2011 prices)
|
0.166*
(0.046)
|
Ln[Kidnaping]
(number)
|
-0.159*
(0.070)
|
Dummy 1978
(0-1 variable)
|
0.509*
(0.188)
|
Dummy 2003
(0-1 variable)
|
0.301*
(0.137)
|
Constant
|
3.375*
(0.897)
|
*all coefficient are statistical significative, strictly less than 0.1.
** The other equations are foreign crude oil utilities and kidnaping.
Source: Bernal. 2013. Foreign Direct Investment in Colombia through XX century and beginnings of XXI, for coming.
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