A Country called Banana Republic faces a high dependence of natural resources or/and high volume of harvest controlled by local firms and multinationals, in addition royalties and taxes from these sectors are mismanagement by government. Colombia is inside of the group of countries called Banana Republic due to high dependence of mining sector (crude oil and coal production) and mismanagement of royalties evidenced by high unfair income distribution and diseconomies of scale in tradable goods. The total export’s value of mining sector shared 33.7% in the total exports’ value in 2001 and it reached 65.6% in 2011. Moreover employees are moving from Tradable goods sector to Nontradable goods sector and the contribution of mining’s growth rate in total GDP growth rate showed an increasing trend from -0.65% in 2001 to 1.04% in 2011, therefore Colombia faces her second Dutch disease due to crude oil and coal production, the first was due to coffee production in 1970-1980. To sort out this Dutch disease government has to work hard to reach economies of scale in Tradable goods with fair income distribution. To get it, resources which comes from royalties from mining sector must have a proper Cost-Benefit analysis that includes long run sustainability.
Author: Humberto Bernal,
Economist,
e-mail: zhumber@gmail.com
Dutch disease comes from a mismanagement of abundant and finite natural resources such as crude oil, coal and natural gas, there are other sources to get this disease such as huge volumes of agriculture commodity which faces high international price such as coffee or bananas. Countries which face these issues of plenty of natural resources or plenty of harvest with high international prices and mismanagement of their profits are called Banana Republics. Some facts which let thinking on a Dutch disease are nominal exchange rate appreciation; increasing of Nontradable goods’ price in terms of tradable goods; and there is lower production of Tradable goods than before of Dutch disease, nevertheless the last two facts are under diseconomies of scale (under economies of scale these facts change).
Colombia can be called a Banana Republic, unfortunately this country has faced two Dutch diseases, the first one was between 1970 and 1980 due to high coffee harvest and her high international price as Kamas, L (1986) pointed. Nowadays colombian coffee sector is in a deep crisis due to her diseconomies of scale which came from lacking of investment in Research and Development. Coffee exports used to share about 82% of total exports’s value in 1954, nowadays it shares with 4.3% as table 1 shows. The second Dutch disease started on 2003 with a high crude oil and coal production, these natural resources have faced high international prices and they share with high values in colombian exports as table 1 shows, the mining sector (crude oil, coal, gold and emeralds) shared in colombian exports' value in 33.7% in 2001 and 65.6% in 2011, moreover crude oil reserves will go until the end in 2019.
Table 1. Share of colombian exports by main sectors
2001, 2005, 2011
(%)
Sector / Year
|
2001
|
2005
|
2011
|
Mining
|
33.7
|
40.4
|
65.6
|
Coffee
|
5.3
|
6.3
|
4.3
|
Other goods
|
45.8
|
42.0
|
22.2
|
Services
|
15.2
|
11.4
|
8.0
|
Total
|
100.0
|
100.0
|
100.0
|
US$million
|
14,444
|
23,486
|
61,072
|
Source: Bureau of Statistics (DANE, DNP, Central Bank).
Actually, there are other facts which confirms this second Dutch disease in Colombia. The appreciation of colombian nominal exchange rate in the last 5 years which come from a massive dollars supply from the Unites States and high international prices and local production of crude oil and coal. Other fact is the movement of labor supply from Tradable goods to Nontradable goods as table 2 shows, for instance there was 34.6% of total employees working in tradable goods in 2001 while this figure declined until 32.8% in 2011, it means that employees find attractive those economic sectors where government spend royalties from mining sector, for instance real state, health, education and so. However, manufacture goods with strong path to export have to sack employees due to lack of economies of scale.
Table 2. Share of colombian employment by sectors 2001, 2005, 2011
(%)
Sector / Year
|
2001
|
2005
|
2011
|
Tradable
|
34.6
|
33.1
|
32.8
|
Nontradable
|
65.4
|
66.9
|
67.2
|
Source: Bureau of Statistics (DANE, DNP, Central Bank).
Other fact is the economic growth contribution of mining sector in total GDP growth, this contribution has faced an increase since 2001 as table 3 shows. The total economic growth was 1.46% in 2001 where mining sector contributed with a negative rate of 0.65% but this contribution increased to 1.04% in 2011 when the total economic growth was 5.93% in Colombia. The main conclusion is Colombia faces a Dutch disease without doubt.
Table 3. Contribution to GDP growth in Colombia by tradable and nontradable goods 2001, 2005, 2011
(Growth rate %)
Sector / Year
|
2001
|
2005
|
2011
|
1. Mining (included crude-oil)
|
-0.65
|
0.26
|
1.04
|
2. Manufacture
|
0.39
|
0.63
|
0.53
|
3. Other tradable goods
|
0.37
|
1.17
|
1.27
|
Subtotal (2+3)
|
0.77
|
1.81
|
1.80
|
4. Nontradable goods
|
1.12
|
2.22
|
2.11
|
5. Taxes
|
0.23
|
0.42
|
0.98
|
6. GDP growth (1+2+3+4+5)
|
1.46
|
4.70
|
5.93
|
Source: Bureau of Statistics (DANE, DNP, Central Bank).
The medicine for Dutch disease
When countries faced a plenty of natural resources but short run limited such as Colombia (on the other hand Venezuela faces 200 years of crude oil reserves, therefore, it is difficult to she faces Dutch disease in the sort run), they have to work hard to get a proper management of royalties which come from these natural resources, figure 1 shows the Production Possibility Frontier (PPF) for a typical underdeveloped country, when country faces plenty of a natural resource, she goes from 1 to 2, therefore there is more consumption and current account is balanced but when natural resource goes to the end, the country can face point 1 again if government mismanagement her royalties, moreover this country can face a point inside of PPF due to international market missed. On the contrary, if government does her proper job with royalties, after finishing natural resources, the country can face point 3 (more consumption and trade), this point shows economies of scale on tradable goods. The point to highlight is countries which face plenty of natural resources have to work on better Real State and technology to let reaching economies of scale in Tradable goods. To reach point 3 a proper Cost-Benefit analysis has to be done, it means long run economic sustainability.
Figure 1. Production Possibility Frontier (PPF) under plenty of natural resources and proper royalties management
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