Nowadays, Colombia deindustrialization is a fact, it started in 70’s. There are many socioeconomic variables that explain this deindustrialization, some of them have been pointed before in these notes. Therefore, Colombia society has to work hard to be competitive in this global economy. Free Trade Agreements do not bring economic growth by themselves, Colombians has to develop an agenda where external economies of scale are the main issue to develop. It means central government and local governments have to pay attention to the excess of agglomerations of big firms in main cities such as Bogotá, Cali, Medellín and Barranquilla. The future of Colombia industry is located close to other cities such as Bucaramanga, Manizales, Pereira, Leticia, Villavicencio, Cota and so. Infrastructure such as public transport will let reaching this economies of scale, it is time to develop a strategy where metros for big cities and trains that connect towns with industrial parks are the priority.
Author: Humberto Bernal,
Economist,
e-mail: zhumber@gmail.com
Twitter: Humberto_Bernal
Deindustrialization in Colombia is a fact, it stated in 70’s of XX century. There are a set of socioeconomic variables that can explain it, most of them have been pointed in previous notes, for instance the internal war, Law 444 of 1967, Decision 24 from Andean Pact of 1970, local government corruption and so. However, society and most of local businessmen tend to think that Free Trade Agreements (FTAs) by themselves can bring the desired economic miracle, but the reality is that colombian society has to work hard to achieve this “economic miracle”, it does not come attached with FTAs, but FTAs are a necessary condition to get economic progress, therefore they are a target that colombians have to carry on.
Figure 1. Agglomeration of big firm from industrial sector in Colombia 2012
(%, of total big firms from industrial sector)
Source: Superintendencia de Sociedades Colombia and own calculations Stata 12.1.
Industrial agglomeration under planed agenda can be the beginning to start to be competitive both at local market and foreign market, but this agglomeration has to be organized to reach the external economies of scale. Nowadays, Colombia shows a deep industrial concentration in Bogotá and there are some place such as Calí, Medellín and Barranquilla that are getting a saturation of big firms from industrial sector. Bogotá counts with 48.2% of total big firms from industrial sector in 2012 (there were 4,351 big firms in industrial sector in Colombia in 2012), Medellín counts with 9.7%, Cali counts with 5.8% and Barranquilla counts with 3.9% as figure 1 shows, these cities counts with 67.6% of total big firms from industrial sector in 2012. As one can see, there is high concentration of big firms from industrial sector, mainly in four cities. Agglomeration lets getting external economies of scale, but the number of firms that have to be agglomerated is limited by market demand state. Figure 2 shows a typical market under external economies of scale. The market demand follows the Law of Demand and the market supply shows the effect of economies of scale as a consequence of agglomeration effect. The equilibrium highlights that there are an optimum number of firms and the market environment lets getting an efficient price; see (Bernal 2013 the Annex).
Figure 2. Market supply and demand under external economies of scale
Therefore, If Colombia wants to be a global competitive economy, she has to set an industrial agenda where infrastructure such as public transport, highways, electricity and other public services have to be according with global needs. Central and local governments have to pay attention to public transport, for instance main cities and towns in Colombia call for a developed public transport such as metros for big cities and high speed trains for towns. Moreover, the industrial organization has to be thought under external economies of scale, it means a well organized market places (industrial places), where firms can develop their activities. These places have to be located in cities that are not congested to achieve this type of economies, for instance Bogotá, Cali and Medellín are places crowded of big industrial firms. Places where agglomeration effect can take place under well developed agenda are places close to Bucaramanga, Manizales, Cartagena, Cota, Villavicencio and many others but public transport is one of the main variables that colombians have to work on.
As example, the Basic Plastic Sector in Colombia shows this type of external economies of scale, nevertheless Bogotá is already crowded of this type of firms. Therefore, this industry has to get an agenda where government and businessmen agree on places where agglomeration effect can take place, for instance a place close to Cartagena, but again public transport is so important to achieve a successful agenda. Table 1 shows the agglomeration effect on market supply in Basic Plastic production in Colombia. The market supply’s slope is negative (-1.85), it means external economies of scale (see Bernal 2013 the Annex). This number means as volume increase in 1.0%, then price shows a decline in 1.85%, moreover as the number of firms increase in 1.0%, then the price shows a decline of 1.05% also, but the number of firms is limited by market demand needs.
Table 1. Market supply and demand under external economies of scale for basic plastics in Colombia
(3SLS model*, variables in natural logarithms)
Variables
|
Volume supplied
|
Volume demanded
|
Price
|
Price
|
-1.85
|
-1.14
|
|
Input price
|
1.72
|
||
GDP
|
1.69
|
||
Number of firms
|
-1.05
|
||
Constant
|
14.18
|
6.90
|
|
R2
|
0.88
|
0.99
|
0.85
|
Probability Chi2
|
0.0
|
0.0
|
0.0
|
Observations
|
20
|
20
|
20
|
*Statistically significative under 1,500 Bootstrap replications.
Source: Superintendencia de Sociedades Colombia, Bureau of Statistics DANE and own calculations Stata 12.1.
Bernal, H. 2013. Agglomerates and economies of scale a model and evidence from Colombia. PDF.
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