Silver market in Colombia and World economic activity

The silver market has been small in Colombia since the end of XIX century; other countries in the region produce higher volumes of silver such as Bolivia, Brazil, Chile and Peru. Colombia has given 0.14% of total World silver extraction since 1900, so “El Dorado” is just a myth. Moreover, the silver market can be taken as a predictor of economic activity; these two variables are countercyclical, and in Colombia case as GDP faces an increase of 1.0%, the silver market faces a decrease of 0.57%. This result can be extended to World economy; as one realises the international gold and silver prices have shown an important reduction since the end of 2013, so it is expected that investors make their job in real sector. This scenario takes place because of gold and silver are taken as deposit of value for investors when economic crisis take palace.

Author: Humberto Bernal,  

Economist,

e-mail: zhumber@gmail.com

Twitter: Humberto_Bernal

It can be download @ PDF

Colombia as others countries in the region such as Peru, Chile and Bolivia have taken the international attention for their precious metals such as gold and silver. However, the huge volume of these precious metals that were expected through the last half of XIX century and the first decades of XX century was disappointed for Colombia case; foreigners were expected to find huge volumes of these precious metals, but they did not find the place called "El Dorado”. This note can be taken as the second document about precious metals extracted in Colombia during XX and XXI century; the first document was about gold, see my weekly note April 21 of 2013. The point of this note is to show the main statistics of silver extraction in Colombia, and highlight the counter-cycle movement of silver market in Colombia and Colombian economic activity.

Colombia is a small country in silver production. Colombia has produced 1,577 tons of silver since 1885; it means an annual average production of 13.3 tons; this volume of silver can be valued in US$293 millions in 2013; it means 0.1% of Colombian GDP in 2013. The total volume of silver extracted from Colombia since 1900 shares in 0.14% of total World silver extraction since 1900; it means that Colombia is not a main supplier of silver such as the United States, Bolivia, China, Mexico, Russia and Australia. 

Colombia used to extract high volumes of silver at the end of XIX century and beginning of XX century. Antioquia, Bolívar, Chocó and Córdoba are the main regions in Colombia where silver is extracted, but at the the end of XIX century and beginning of XX century were Antioquia, Chocó  (Cauca region in that days) and Tolima. The total volume extracted  between 1885 and 1902 was 50% of total silver extracted until 2013  as one realised in figure 1. Moreover, it takes attention that as international economic crisis started, the volume of silver extraction increased; for intense, after 1929 crisis and 2008 crisis.

Figure 1. Silver production in Colombia 1900-2012

(annual production, Troy once) 

Source: 1900-1910: Ocampo,A. 2013 (1984). Colombia y la economía mundial; 1913-1921: Mineral statistics of British Empire and foreign countries 1913-1922; 1923-1930: Poveda, R. 2005. Historia económica de Colombia en el siglo XX; 1931-2012: UPME, Colombia webpage.

Silver price has shown an important increase in the last years, but this trend is changing. The average silver price since 1900 is US$8.2  per troy ounce in 2013 prices; however, after 2008 crisis the silver price increased to reach US$31.2 per troy ounce in 2012. In 2013, this price decreased to reach US$23.8 per troy ounce as figure 2 shows. This dynamic can be explained by the desire of society, mainly financial markets, to keep their  wealth under dollar depreciation. Moreover, the silver-gold relative price has shown an important decline since 1980; by 1980 the silver relative  price was 0.036 troy ounces of gold, and in 2013 this price was 0.017 troy ounces of gold; this can be explained by huge silver reserves; while gold World reserves were 52 thousand in 2012, the silver reserves were 540 thousand in 2012.

Figure 2. Silver international price

(annual average price, US$ constant prices of 2013 per Troy once) 

Source: USGS and KITCO.

The global economic crisis is ending 

The price of silver and gold showed an important decline in 2013, so this is an  economy signal that global economic crisis is ending. The international silver price was US$31.2 per troy ounce in 2013 and US$23.8 per troy ounce in 2012, and the international gold was US$1,668.9 per troy ounce in 2012 and US$1,411.2 per troy ounce in 2013; moreover, through the first moths of 2014 these prices have shown lower values; for  intense, silver price was US$21.8 in february of 2014 and gold price was US$1,323.6 in february of 2014. If one takes this information and applies an econometric model of supply and demand for Colombia silver market, one realises that economic growth and silver market are countercyclical. It means as the volume of silver demanded shows a decline, the economic activity takes an upward path or the other way around; in Colombia case, an increase of 1.0% of Gross Domestic Product, the silver market shows a decline of 0.57% as table 1 shows (green row). This table shows the positive supply slope and negative demand  slope; moreover, the supply is inelastic while the demand is elastic; the elastic demand can be explained by close substitutes such as gold. One realised that FDI in mining sector in Colombia pushed up the silver production in about 1.0% when this type of investment increases in 1.0%; finally, gold is a substitute of silver; as gold price increased in 1.0%, the silver demand increased in 4.8%. 

Table 1. Supply and Demand for silver in Colombia 1900-2012

(annual data, variables in natural logarithms, econometric model under 3SLS)

Variables	Supply	Demand
Silver price	0.73%	-4.74%
FDI in mining	1.00%
GDP	-0.87%	-0.57%
Gold price		4.80%
R2	0.65	0.98
Observation	108	108

Source: Own calculations Stata 12.1.

Economic openness in Colombia?

Colombia has been going with economic openness since her independence. However, there have been moments when Colombia increased her tariffs in order to protect her internal market production. Nowadays, Colombia has signed many Free Trade Agreements; for instance, Canada, the United States, European Union and many other countries. Nonetheless, it appears that Colombia instead of reducing her tariff in the last 4 years, she is increasing them; this statement is validated through local data and World Trade Organisation's data. The problem of protectionism is that it makes the local production lazy and unproductive, moreover local consumers have to pay higher prices for goods that can be cheaper whether economic openness works really. Therefore, it can be a call for local authorities to improve their work on better programs for productive industry and to make a really economic openness where consumers enjoy high quality and cheap goods.

Author: Humberto Bernal,  

Economist,

e-mail: zhumber@gmail.com

Twitter: Humberto_Bernal

It can be download @ PDF

Colombia is a country that depends on huge volume of imported products as many countries in the World, so she has been working on her economic openness since her independence at the beginning of XIX century. However, in some cases she has taken decisions against this objective; moreover, in the last years she has been signed many Free Trade Agreements; nevertheless, the average tariff instead of going down, it has gone up. This note shows the main periods when Colombia has increased her tariffs in order to protect her internal market, and the contradictory behaviour against Free Trade.

At the end of civil internal war called the Thousand of Days' War in 1902, Colombia decided to increase her tariffs in order to promote internal production; after this war, Colombia was in a deep economic crisis, and one can say that this decision was correct in oder to promote internal production. Years latter, Colombia had an economic crisis because of international commodity prices were down, so the the volume of foreign reserves went down also, and government decided to increase the tariff for imported goods to recover the volume of reserves. This increase is showed in figure 1; therefore, through 20’s and 30’s Colombia faced high tariffs; it can be explained by the economic crisis of 1929 also; this crisis brought scarcity of foreign currency (dollars) and Colombia had gotten a huge debt with the United States and the United Kingdom mainly; therefore, it sounded good to increase tariffs to sort out the Balance of Payments Crisis (B.P.C) on 1931. Same situation was by 50’s; Colombia faced again a B.P.C and increased her tariffs. However, the tariff tendency through these years was downward; it means that Colombia was opened to foreign products in general although there had moments when tariffs were higher. This policy was wrapped up with Colombia new economy model started in 1991; the new economic model was in favour of economic openness.

Figure 1. Average tariff in Colombia 1910-2012

(%*)

* It is calculated as the share of value of taxes for imported goods divided in total value of imported goods in percentage.

Source: Central Bank Colombia; Bureau of Statistics Colombia and own calculations.

However, the tariff in the last years, after signed many Free Trade Agreements, are showing  an upward tendency. Again, figure 1 shows that the tax charged for imported goods as a share of total value of  imported goos went from 5.8% in 2009 to 6.2% in 2012; it means more charges for imported goods. This data goes with World Trade Organisation’s information also; this organisation broadcast that the average tariff  in Colombia increased form 8.4% in 2011 to 8.8% in 2012; of course years before this tariff was higher, but nowadays the tendency is changing.

Colombia has to be part of a World free of frontiers

Colombia as all countries has her foreign immigrant policies; these policies have improved from high restriction when the Spain Crown blocked high volume of foreigners because smuggling in XVI century to ask VISA to some countries in XXI century. In XXI century, as many western countries such as the United States and countries of the European Union are reviewing her foreign immigration policies to get a World free of frontiers, Colombia has to review it also. Colombia has an old immigration policies where some World citizens need VISA to visit Colombia without clear argument. Colombia has to think on a long run foreign immigration program where foreigners no matter their nationality are welcome to work as employees or businessmen, or as a students or tourists; moreover giving the welcome to refugees and asylees also. Colombia missed important foreigners because of internal war conflict, so it is time to call them again through a proper immigration policy. Therefore, Colombia has to contribute on getting a World free of frontiers as many countries are doing.

Author: Humberto Bernal,  

Economist,

e-mail: zhumber@gmail.com

Twitter: Humberto_Bernal

It can be download @ PDF

Colombia has not been an important country for foreign immigrants such as the United States, France or the United Kingdom; moreover, Colombia did not get an important volume of foreign immigrants at the beginning of XX century as many others countries did in the region such as Argentina, Brazil or Uruguay. However, many foreigners have taken Colombia as a home because they have found economic opportunities and gotten on well with locals. As many countries, Colombia has promoted foreign immigration policies and she has blocked foreign immigration also. Therefore, this note deals with foreign immigration in Colombia since Spain Crown colony; it is a short summary about immigration policies in Colombia and foreigners that found Colombia as a home.

During colony period when Spain was the owner of some places in Latin America included Colombia, the policy for foreign immigrants was high restricted. The Spain Crown did not let many foreigners to visit Colombia; they were worried about gold and silver smuggling, and spices and slavery smuggling also. However, there were few foreigners that lived in Colombia because of they had high professional skills in mining extraction and slavery trade approved by the Crown; of course these foreigners that traded species and slaves paid taxes. The foreigners that lived in Colombia by that time (1530-1816) were from Portugal, England, Italy, France and Jews as Vila (1979) says.

As soon Colombia started her fight to get her independence, foreign immigration increased. Colombia got support from approximately 7,000 foreign legionaries to get her independence; these legionaries came from England, Ireland, France, and Poland; they got a salary and recognition of local people as Colonel Rooke from Ireland got. However, some of them were charged by breaking the Law as Brown (2004, 2005) says. 

Because Colombia faced low population after her independence in 1819, the government decided to promote foreign immigration, but it was an unsuccessful policy. By 1823, Colombia counted with 1.2 million of people that was considered low, so local authorities decided to promote foreign immigration; nonetheless, this policy was selective because local authorities thought that just people from Western Europeans and North Americans could improve the local breed!; so they gave incentives such as lands and money to get these foreigners in Colombia. This policy was active until the end of 1920 decade. However, few foreigners from other countries came to Colombia avoiding these policies through illegal access or under immigration officer approval. This selective immigration policy was unsuccessful because Western Europeans and North Americans found tropical diseases, non-arable land, difficult tropical weather, poor infrastructure to run a business and in some cases breach of incentives given by local authorities. The few foreigners that stayed were from England, France, Italy, North America, Germany, Syria, Libya and Palestine; they can be taken as people with businessman thinking. There were some Japanese, Indians, Chinese and Africans that came to improve the labour force also; these foreigners got a salary also, but in some cases they faced discriminatory treatment by few people such as church members and local conservative people. Nevertheless, they could get on well with most of Colombian people at the end.

After the end of 1920 decade, Colombian government changed her immigration policy because of deep industrial development. Since 1920 Colombia started to face an important urban development, so local people started to move from rural areas to cities; this internal immigration brought low work force to grow lands, so government decided to promote foreign immigration to improve agricultural production. Moreover, after 1930 the industrial sector in Colombia started to grow at high rates, so professional people from abroad were needed to improve this development.  Therefore, Colombian government changed her foreign immigration policy giving lands  and economic incentives to people who could contribute with agricultural and industrial development; in this foreign immigration policy, the nationality no matters; moreover, the rights for foreign immigrants improved through Constitution reform in 1936; they got civil rights equal of Colombian’s rights, but they could not vote still. However, Colombia started to ask for a VISA since 1927 because local authorities thought that  foreign people with Law problems or political thinkers could make disorders through local population. During the Second World War (WWII), many countries that agree with Grand Alliance's view blocked immigrants from Axis countries; Colombia decided to do it between 1940 and 1948; from 1949 the promotion of foreign immigrants came back, and this policy went until the end of 1950 decade when Colombia decided to follow international Law about foreign immigration through International Organization for Migration (IOM).

Figure 1. International immigration stock in Colombia as a share of total population 1925-2012

(%)

Source: Bureau of Statistics Colombia (DANE), DAS, World Bank, IOM and Palgrave International Statistics. 

During 1960 and 1980 Colombia faced high emigration because low salaries and better economic condition in Venezuela and Ecuador, so Colombia faced an important reduction of foreign immigrants also. Unfortunately, Colombia faced low economic growth and political crisis between 1960 and 1980; these events started at the beginning of 1950 decade, but people started to emigrate to other countries at the beginning of 1960 because things did not go better. However, there were few Eastern Europeans that came to Colombia because communist thought pushed them out of their countries, and Colombia was member of IOM that were clear about refugees and asylees treatment. As soon local government realised this emigration broadcast a set of Laws that gave incentives to Colombians and foreigners to come back to Colombia, and few of them did it; however, the program was unsuccessful at the end because internal war started to be more intensive. 

Between 1985 and 2004 the number of foreign immigrants show an important decrease because  internal war. The internal war in Colombia started to get worst since 1980 because illicit drugs started to support it, so foreign immigrants decided to leave Colombia. Foreigners from Asia, Europe and North America leaved Colombia because of kidnaping started to be a politic and finical instrument for illegal groups; the number of foreignness kidnaped between 1984 and 2004 were 895 cases at least, and between 1971 and 2011 were 1,051 at least; therefore, the 85% of foreigners kidnaped were during 1984 and 2004. However, Colombian government improved the Law for foreign immigrates through the right of vote in local elections and popular queries through new Constitution in 1991 and  following Laws.

Figure 2. Foreigners kidnapped in Colombia 1971-2012

(number of people)

Source: Cífras y Conceptos, Centro de Memoria Historica, and  País Libre.

Since 2004 Colombia improved the foreign immigrants because better security and economic growth. Colombia improved her internal security and foreign immigrants came back, but the cost was high because last years insecurity. These new foreigners have come since 2004 and have the duty to contribute to Colombia economic development and local government has the duty to support them under fair income distribution. Therefore, Colombia has to work hard on a clear immigration policy where all World people are welcome no matter her nationality, and local government can start to review the Colombian VISA policy for those World citizens that want to visit and work in Colombia.

Brown, Matthew. 2004. “Esclavitud, castas y extranjeros en las guerras de Independencia de Colombia”. Revista Historia y Sociedad, No. 10, Universidad Nacional de Colombia.

Brown, Matthew. 2005. Militares extranjeros en la independencia de Colombia, nuevas perspectivas. Museo Nacional de Colombia.

Vila, Enriqueta. 1979. “Extranjeros en Cartagena (1595-1630)”. Jahrbuchfür Geschichte von Staat, Wirtschaft und Gesellschaft Lateinamerikas, Bd. 16, Colonia. Also, it can be read in: Vila, Enriqueta. 2001. Aspectos Sociales en América Colonial, de extranjeros, contrabando y esclavos. Editorial Universidad Jorge Tadeo Lozano.

The Nominal Exchange Rate issue and the Big Mac Index for Colombia

Economic globalisation brings that countries depend on Nominal Exchange Rate values for their economy development. In the last years this Nominal Exchange Rate in Colombia was revalued (Col$ per one dollar), but since the end of 2013 this Nominal Exchange rate has changed to be devalued. This information comes from Big Mac Index; this index is taken seriously in Colombia in order to take economic policies decisions. Although this Big Mac Index shows problems about labour cost adjustments, it makes its work. This note shows how this index is calculated and takes Colombia Big Mac Index as example.

Author: Humberto Bernal,  

Economist,

e-mail: zhumber@gmail.com

Twitter: @Humberto_Bernal

It can be download @ PDF

The Big Mac Index is an easy way to check if the nominal exchange rate is revalued (appreciated) or devalued (depreciated). Although this index does not take into account the cost of living from each country, it is a good way to understand the theory of Purchasing Power Parity (PPP); the labour cost in each country is different, so the cost of living is different. In Colombia case this index is taking seriously for doing economic policies, so this note explain in detail how this index is calculated. 

Nominal vrs Real Exchange Rate 

Nominal Exchange Rate is the price of foreign currency in terms of local currency; for instance, in Colombia case this Nominal Exchange Rate is Col$1,983 per dollar in January of 2014; the capital letter that economic theory takes to represent the Nominal Exchange Rate is E. The Real Exchange Rate is the price (cost) of foreign goods in terms of local goods; for instance, the MacBook Pro computer real price (cost) is 25 barrels of colombian crude oil; this real Exchange rate can be represented by the lower letter e; moreover, it can be calculates as:

e = Ep* / p 

where E is the Nominal Exchange Rate; p* is the nominal price of foreign good; and p is the nominal price of local good.

The Exchange Rate under Purchasing Power Parity is related with one price for every good around the World, no matters the type of currency of each country; this exchange rate can be taken as the Nominal Exchange Rate that lets one price for a good around the World. Therefore, it means that a Big Mac hamburger in Colombia must have equal price as a Big Mac hamburger in States. In terms of above equation, we have a States Big Mac and Colombian Big Mac, but both hamburgers are the same; it means that their prices must have equal no matter the country where people stay. The equation related with this theory is:

1= Ep* / p

However, this equality is not held at all because of different labor costs in countries and Nominal Exchange Rate fluctuations. Therefore, the Exchange Rate under PPP calculated by the Economist researchers is that one that lets that this equality holds:

 E'= p / p*

Taking information from the Economist magazine, the Big Mac price in Colombia was Col$8,600 in January of 2014, and the Big Mac price in States was US$4.6 in January of 2014, so the Exchange Rate under PPP is:

E' = (8,600 / 4.6) = Col$1,870 per dollar

The Big Mac Index 

The Big Mac Index with above information gives information about the state of Nominal Exchange Rate compared with the Exchange Rate under PPP in percentage terms. The Big Mac Index formula is:

Big Mac Index =  
[(Exchange Rate under PPP - Nominal Exchange Rate) / Nominal Exchange Rate]*100

If this index is positive means that the Nominal Exchange Rate is revalued (appreciated); if it is negative means that Nominal Exchange Rate is devalued (depreciated); if it is zero means the right Nominal Exchange Rate.

The Big Mac Index for Colombia has shown years of negative values and years of positive values, but on this short time it appears that no converge to zero. The Big Mac Index for Colombia was negative between 2004 and 2006, so the Nominal Exchange Rate was devalued; nevertheless, it went to revalue state in 2007 and 2008. By 2013 and beginning of 2014, this index gave information that Colombian Nominal Exchange Rate was  devalued as figure 1 shows. As  one can see, it appears that there is not evidence of convergence to zero, but it is too soon to assert this statement because time data is too short still, there are 10 years for Colombia.

Figure 1. Big Mac Index Colombia 2004-2014

(Annual data)

Source: The Economist web page.