The unfair income distribution in Colombia is well known in international scenario, everybody knows it but few papers deals this issue. This note shows the main economic variables to improve income distribution in Colombia and its trade off with economic growth. The main variable to improve income distribution are fair minimum wage (it is low to afford main goods, US$4,983 per year), taxes in industrial sector (they are low, it is just 33%-35% of profits), high unemployment rate (9.2% in 2012) and royalties mismanaged (they are about 8% of GDP), moreover FDI in industrial sector contributes to economic growth but it does not to improve income distribution, this issue has to be dealt between government and multinationals.
Author: Humberto Bernal,
Economist,
e-mail: zhumber@gmail.com
Colombia shows a high unfair income distribution, according with the GINI coefficient, Colombia took the 11th place in 177 countries in 2011 where first places are for those countries with the worst income distribution. Figure 1 shows the dynamic of this index in Colombia between 1970 and 2011, one can explain this path through two main periods: 1970 to 1990, through this period Colombia faced the lower GINI index, it was due to low unemployment rate, it reaches the lowest value of 7.0% in 1981; moreover Colombia exported huge volume of coffee, she reached an average of 13 million sack of 60 kilograms per year, nowadays Colombia exports as much 8 millions of sacks; violence and government corruption showed low levels but with positive trend, the homicide rate was 21 per thousand of people in 1970 and kidnappings were 43 cases on same year. Unfortunately these indicators went worst and started to make effect on incomer distribution after 1991 when starts the second period, Colombia missed the International Coffee Agreement in 1989; the crude oil contracts (contract of type association) were inefficient and the production went down at the end of XX century; moreover Colombia went into the worst internal war ever; and corruption took the Estate on the first decade of XXI century when Colombia faced the third wave of crude oil production through concession contracts. This facts can explain partially the dynamic of the GINI index.
Figure 1. GINI coefficient in Colombia 1970-2011
(0-1 index)
Source: Bureau of Statistics Colombia and own calculations.
As a citizen, one is interested on woking to get a better income distribution, literature and advices say that Foreign Direct Investment (FDI) improve the society welfare, then I tested this issue in Colombia through economic indicator from 1970 to 2011 (annual data) and econometric tools. The first conclusion was most of FDI in Colombia goes to crude oil and mining sectors as figure 2 shows, this type of FDI does not improve income distribution directly, however it can be improved indirectly through well managed royalties. Nevertheless, I decided to work with FDI as stock in industrial sector, this FDI shared about 20% of total FDI as stock in 2011, it used to share about 25% in 70’s. The results are reported in table 1. I took GINI index (in natural logarithm) as variable that I want to explain through minimum wage growth, Industrial taxes, unemployment, FDI as stock in industrial sector and so. The results were as I expected, as minimum wage grows about 1.0%, then GINI index improves about 0.1%; increasing in 1.0% taxes in industrial sector (profits taxes) improves this GINI index about 0.3%; crude oil and coffee production were significative due to they bring wealth through exporting them and royalties but there is an point to highlight, their contribution are tiny; the FDI in the industrial sector does not improve the GINI index, according to these results as FDI in industrial sector increases about 1.0%, then GINI index increases about 0.14%, therefore although foreigners improve the economic growth through their multinationals, they do not work hard to improve the income distribution in Colombia. Same situation is when GDP shows a growing of 1.0%, the GINI index increases about 0.7%, it can be explained by the principle of trading off between efficiency and distribution.
Figure 2. Foreign Direct Investment as Stock by economic sector in Colombia
(% of total FDI stock)
Source: Bureau of Statistics Colombia and own calculations.
The main conclusion is the delivering of economic variables which government and privates agents can take to improve income distribution in Colombia, the main ones are fair minimum wage (at the moment this wage is unfair as media and this note has broadcasted), increase industrial taxes (profit taxes), proper management of royalties and putting eye on FDI in industrial sector to bring fair income distribution.
Table 1. Explicatory variables for GINI in Colombia 1970-2011
(GINI is in natural logarithm, method of 3SLS)
Variable
|
Coefficient*
|
Minimum wage growth (%)
|
-0.001
(0.001)
|
Industrial taxes (% Industrial GDP)
|
-0.003
(0.001)
|
Ln[Real FDI stock industrial sector]
|
0.142
(0.039)
|
GDP growth (%)
|
0.007
(0.004)
|
Unemployment rate (%)
|
0.005
(0.004)
|
Ln(Volume of coffee)
|
-0.119
(0.040)
|
Ln[Education*)
|
-0.117
(0.068)
|
Ln[Crude oil]
|
-0.046
(0.023)
|
Constant
|
0.046
(0.514)
|
R2
|
0.742
|
*coefficients are statistically significative at 0.1. The 3SLS takes into account endogeny and multicollinearity problems).
(...): Standard Deviation.
Source: Bureau of Statistics Colombia and own calculations Stata 12.
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