Economic benefits from improving infrastructure to import crude oil at the end of the next 7 years, Colombia case

This note deals with economic benefits from crude oil products’s demand such as petrochemicals and  pipeline crude oil transport in Colombia. These benefits are evaluated according to five main economic sectors’ supply increase and a comparison to building sector. The main conclusion for Colombia case is that an increase of 10% of each demands, colombia will face a  total domestic supply annual increase between 0.32% and 0.37% in the short run. In the long run, this development in these crude oil products will bring high employment and economic growth. A second conclusion is colombia shopping rooms’ rents is too high for tenants and it makes a final product price too high, it is valuable that government call for a Law which makes regulation on this sector to reach a fair rent.

Author: Humberto Bernal,

Economist,

e-mail: zhumber@gmail.com

It can be download in PDF format here.


In 1973 the Nobel Price Committee awarded Wassily Leontief “for the development of the input-output method and for its application to important economic problems”. After 40 years his methodology is still used by researches to evaluate positive and adverse chocks in the economy, for instance Blair and Miller (2009) deal this methodology in detail.

Through Leontief’s methodology one can give information about economic sectors’ growth due to increase in specific sector demand. For Colombian economy is interesting this mythology because public resources and efforts can go to those activities where higher growth is in the short run. Table 1 shows the economic impact due to final demand increase of 10% from five economic sectors. Table 1 shows results after dealing with data set from colombian input-output transactions table from 2000 to 2010. The first sector is crude oil extraction demand and an increase of 10% of this final demand, then agriculture supply will face an expected increase of 0.2% in a year and the total domestic supply will face an increase of 0.32% in a year. In the case of increase of 10% in pipeline crude oil transport demand, the mayor sector affected will be manufacture’s supply in 0.25% in a year. One can see that increases in crude-sector will show similar increase in domestic supply (final row table 1). Nevertheless an increase of 10% construction demand will bring an expected growth of 0.71% in total domestic supply. Therefore, government will make sense if it increases any of these demands but it has to be aware that Colombia has crude oil reserves for the next seven year only. Therefore if it wants to increase pipeline crude oil transport or petrochemical's demands, it must be aware that Colombia must have an infrastructure to deal with imported crude oil, the closer supplier is Venezuela. In consequence Colombia best strategy is to start to develop infrastructure which pulls petrochemical and pipeline crude oil transport, mainly for imported crude oil.  it is right to highlight that government can pulls up any economic sector demand through public spending.

Table 1. Increase of final demand in 10%  from selected economic sectors and their effect in sectors supply, Colombia case. (annual increase %)

Supply by sector	I. Crude oil extraction demand	II. Pipeline crude oil transport demand	III. Petrochemicals demand	IV. Building demand
Agriculture’s supply	0.02	0.14	0.07	0.40
Mining’s supply	0.01	0.06	0.04	0.26
Manufacture’s supply	0.03	0.25	0.10	0.62
Public services’s supply	0.03	0.10	0.17	0.15
Services and commerce’s supply	0.07	0.16	0.08	0.12
Total domestic supply	0.32	0.36	0.37	0.71

Source: National Bureau of Statistics of Colombia (DANE) and own calculations. 

Moreover, building sector is one of the economic sectors that brings more economic growth but the problem is the  rent of finished homes and shopping rooms which face final consumers. In Colombia a shopping rent is to high, landlords wants to get a return of the total investment in approximately three year!!!. It lets high costs to those who want to develop a business, therefore there is a claim to regulate shopping room rents through Law. The idea is a rent which takes into account market interest rate (CDT’s rate) plus no more than 3 percentage points. 

Venezuela should be our next economic target as national security priority

Venezuela does not face a economic problem through next two hundred of years, she produces 2.5 millions of barrels per day, after this period probably there will be other energy source. Therefore Colombia must have a good economic and politic relation with Venezuela, the other way around it will cost to much to colombians. Colombia will run out of crude oil in the next seven years, after this Venezuela will be our main supplier if we build a good relationship. It must be a colombian national security target in the next years.

Author: Humberto Bernal,

Economist,

e-mail: zhumber@gmail.com

Click to download at PDF


Colombia has faced an important inflow of venezuelan citizens between 2007-2012. The total inflows of citizens that arrived to Colombia in february of 2011 were 127,453 where 16,618 came from Venezuela, it means from total migrants those who belongs to Venezuela shared with 13.0% of total migrants. These migrants are tourists, relatives of colombians and businessmen who face difficulties in venezuela, most of them come back to Venezuela but others decide stay for long. Venezuelan migrants in Colombia showed an important increase, from 12,551 in 2007 to 19,087 in 2012 as figure 1 shows, it means an annual average growth rate of 8.7%, this fact can be due to political issues and low Gross Domestic Product (GDP) growth as figure 1 shows. Nowadays one can meet a venezuelan at school, university or at job and they are welcome to our country. 

Figure 1. Inflows migrants from venezuela to Colombia and Venezuela GDP growth 

2007 - 2012

*Inflows in february of each year

Source: Bureau of migration Colombia and Venezuela Central Bank.

Through my point of view Colombia could take advantage of it. Venezuelans who arrive to Colombia can be part of our economy activity, for instance in crude oil industry or manufacture industry. In the long run they and venezuelan in their country can bring opportunities to them and colombians. One tends to think when Venezuela runs out of crude oil, their economy and people will face deep crisis due to dependence of it as figure 2 shows, nevertheless what wrong this thought is. According to British Petroleum Review of 2011, Venezuela counts with 211.2 billions of barrels as a reserve what means more of two hundred years of production (200 years!!!), therefore when Venezuela runs out of crude oil, probably the source of energy will be other. 

Figure 2. Venezuela exports

2006 - 2011 (%)

Source:  Venezuela Central Bank.

Venezuela does not face a unemployment problem, she shows a unemployment rate of 7.8% in 2011 and last five years it has not been more than one digit as figure 3 shows, what luck of venezuelans. In long run Colombia must increase its economic activity with Venezuela, there is a huge mistake if Colombians begins to argue with our most important neighborhood. 

Figure 3. Venezuela unemployment

2007 - 2011 (%)

Source: OCEI and José Huerta webpage.

Making a dollar valuable after 2008 crisis

The Estates’ monetary policy shows an increasing trend since 2008. This policy is according to economic theory to go out of 2008 financial crisis. Nevertheless, there can have a cost in short run other countries’ exports due to cut down of dollar’s price. Although local monetary authorities are fighting against it through increasing monetary reserves and interest rates, the final effect will be a dollar devaluation as most economies start to face. The main economic channels to bring a dollar devaluation are factors payments abroad and transfers payments from the Estates’ citizens, therefor there is a real economic movement behind this policy. An interesting relation between the Estates’ monetary policy (dollar’s price devaluation) and other countries’ FDI inflows is a positive correlation, this means that foreign assets get value due to well directed monetary policy. The second issue on this note is the coming crisis in 2012 which is just a sequel of 2008 financial crisis, which has not been well sorted in European countries due to monetary austerity.

Author: Humberto Bernal,

Economist,

e-mail: zhumber@gmail.com

It can be download at:

Making a dollar valuable

2008  was the beginning of the last world financial crisis, it was close to a global economic depression. This crisis started in the Estates (the United States of America) financial system with complicity of other financial systems around world. After this mad fact, the Estates began to give monetary liquidity to whole world economy. Figure 1 shows the increase of the Estates’ money supply (M1) as share of its GDP since 1960 to 2011. This share pointed 9.8% in 2007 and increased to reach 14.4% in 2011. Fortunately the Estates’ monetary authorities realized the importance of increasing money supply, the other way around world economy would have faced a deep crisis as 30’s crisis or worst. According to media, this monetary policy will be carried until 2014 at least. This information brings a fact to deal if we want a better society after this mad. This liquidity will bring a decline in dollar's price, in other words dollar devaluation, therefore the question is: what are the main channels through this liquidity will cut down dollar’s price around world?. The answer is straight through econometrics’ tools: productive factors payments and monetary transfers from the Estates’s citizens to foreigners. 

Figure 1. M1 as share of GDP for USA 1960-2011(%)

Source: Bureau of Economic Analysis and Board of Governors of the Federal Reserve System.

From 106 economies and span data from 2000 to 2010, the result is: through transfers such as income from the Estates’ residents to foreigns will bring a cut down of dollar’s price about 6.3%; from Estates’s factor payments such as fees for researching with abroad labor and payments due foreign capital used inside Estates will bring a cut down of dollar’s price about 18.8% as table 1 shows. There is an important point to highlight, Foreign Direct Investment inflows (FDI) into other countries does not cut down dollar’s pice as public servants some times broadcast through media. FDI inflows makes an increase in dollar price about 3.9%. This result is important due to the Estates’ foreign assets (FDI) bring power of purchasing to their citizens around the word, therefore they will take advantage when they go for truism and import merchandise. This fact can be explained by each local monetary and fiscal policy, for instance an increase of monetary reserves lets dollar’s price faces an increase about 12.4%. There are other factors that make dollar’s price fluctuate, for instance speculative attacks through interest rates, it means brokers take advantages when interest rates goes up or down due to monetary policy decisions, in this case an increase of 1.0% ( in one percentage point) in deposit interest rate lets an increase of dollar’s price about 0.6%. I made several econometrics runs and the results are same in most of cases. 

Table 1. Exchange rate Random Effects model 

2000 to 2010

(Local currency per one dollar, all variables in logarithms but not deposit interest rate)

Exogenous variables*	Coefficient
Private current transfers (payments)	-0.063**** (0.039)
Income payments	-0.188** (0.036)
FDI inflows	0.039*** (0.020)
Total reserves	0.124** (0.038)
Deposit interest rate	0.006**** (0.004)
Constant	4.913** (0.662)
Hausman test: Chi2 = 0.055

 

*106 countries. 995 observations. Period from 2000 to 2010.

** P-Value less than 0.01.

*** P-Value less than 0.05.

**** P-Value less than 0.11

Source: Data from World Bank Indicators. Own calculation through Stata 12.1.

Although nowadays the Estates’ economic policy is to cut down its currency to pull up its demand through its exports, they can payback this cut down to other countries’ export through increasing the Estates’ FDI outflows. This FDI outflows will bring more foreign employment and development in these countries. Nevertheless countries are looking for manufacture FDI instead of mining, crude oil extraction or natural resources extraction FDI. It is right to carry with natural resources extraction but it must be under country development criteria instead of misery and poverty criteria as we realize in Colombia where the majority illiterate people live where crude oil extraction take place (regions such as Putumayo, Casanare and others). 

Fortunately the Estates realized this fact and its FDI outflow through countries are increasing as figure 2 shows. Since 2008 its FDI outflows increasing from 2.2% of its GDP to 2.7% in 2011, moreover the long run trend is positive passing from 0.6%  in 1960 to 2.7% in 2011.

Figure 2. FDI outflow as share of GDP for USA 1960-2011(%) 

Source: Bureau of Economic Analysis.

The second issue to deal is the aware of a slow down of world economic through 2012. This  slow down is just a sequel from 2008 crisis. Markets are watching Europe countries and they realize that European economic policy is bringing austerity to their citizens, this means lack of money to spent, therefore short run foreign assent start to fly to best places such as the Estates. Figure 3 shows the effect on these short run assets in 2008, they went to the Estates in about 8.4% as share of its GDP. Now, by 2011 this assets share 0.8%, it means a yellow light but not red light as Colombian treasury minister broadcast by media. This yellow light can be sorted out through flexible monetary polices in Europe which pulls up spending and more valued added FDI in developing countries such Colombia. World economic policies must be focused on finishing speculative short run assets movements, it can be reached through Basel III agreement, high taxes and fines for those who do not bring added value to economies. 

Figure 3. Other private american assets outflow as share of GDP for USA 1960-2011(%)

Source: Bureau of Economic Analysis.

A call for a better world society

 Colombia faced unfortunately two big hard shocks last week, first a political terrorism act what brought two deaths and second the alleged complicity of a “victim” in one of worst kidnaping and genocides faced by Colombia in 2002 which took place in public offices  at Cali and finished with the death of 11 hostages in colombian mountains. What society we have, my thought is that these events are a call to world society to work together to finish violence no matter who is: low income people or in most cases wealthy people in complicity with low income people. If we want to grow up as world society and be part of this space called life, we have to take fair actions  according to Law against terrorism. My point of view to mend this out of track is through a better education for everybody, specially in neighborhoods at main cities where income is low and work out in strong emphasis about democracy meaning for government leaders. Education for low income people has to be first class education no matter the paper money cost, at the end it is just paper money. Second we have to review monetary and financial sector recipes in order to bring real opportunities to people that face middle and low income, it must be ended the era of loans to close government friends and job opportunities to close government friends also, it will bring a cost but it is just paper money cost. The benefits of this, I think, is a better society which deserves better opportunities.

Author: Humberto Bernal,

Economist,

e-mail: zhumber@gmail.com

It can be download at:
https://docs.google.com/open?id=0BzkhS13UydIHNk5yazk2ZFE1VjQ


Colombia was a victim of terrorism act last week, there were two deaths (body guards), this irrational act does not belong to a world society which looks for recognition that can live without kill each others. Moreover, it was broadcast by media last week that the only politician alive of massive kidnapping at Cali (Colombia) in 2002 was an accomplice of this fact and the death of their coworkers. Therefore, it is call to colombian authorities and international community to review our policies to reach a better world society which let us to be part of this period called live. 

As a citizen which looks for a better place to live and is open to critics, I can say that one of main facts what rides us to this violence road is lack of education and opportunities to develop our dreams, for instance Colombia faces 0.55 from the poverty index called GINI and spend on education just 7.3% of GDP according to official figures but it can be less if one make the proper measure due to most of this spending goes to administrative duties instead to real investment such as more skilled teachers, better technology for learning and better infrastructure, as example the main library in Colombia named Luis Angel Arango does not have subscriptions to main world data bases ( in my field as economist  I will expect that this library counts with FDI market (www.fdimarkets.com), Jstor (www.jstor.org), ScienceDirect (www.sciencedirect.com) and The New Palgrave Dictionary of Economics (www.dictionaryofeconomics.com) but unfortunately counts with limited subscriptions such as Pro Quest, e-libro and E-ebrary. Moreover, this library shows a thousands of guests through month and it has an old tables and uncomfortable chairs, therefore what can we expect from a society which grows up in middle of this misery education?.

The most ironic is Colombia faces exponential economic growth and increase of resources from crude oil and mining extraction which could be invested in education but the real result is terrorism acts and more corruption in public sector as we already know. The right path must be more institutions for education in neighborhoods at main cities such as Bogotá, Cali and Medellín where most violent people grow up. In addition high education must go to rural areas and less developed regions no matter cost. We must be carefully, the actual economic principles are bringing us to this sad point, in other words: high economic growth and lot of extraction of resources brought us perverse income distribution and violence, these principles must be changed. 

The core of violence in democratic countries is a result of monetary and financial sector recipes mainly, monetary policy set that the main target is just inflation without income distribution, this is the first mistake, Central Banks have to look for income distribution under a well developed research, in addition this public servants have to focus on it without private incentives which take them out from this target. Second, Central Banks, Financial Sector and Government have to open opportunities to every body through easy loans (low interest rate, it must be close to inflation), these loans are usually given to government’s close friends and private banks’ owners which lend most of their resources to people who has lot of assents and few loans to low income people, of course this policy based on high coverture in credits will bring an increase of defaults but we have to work out on it through educational system, Greece is aware of it and due to old economic recipes forced by Monetary Union, this country will take the right decision to go out of this group.

Colombia goes to Dutch disease straight

Colombia is going straight to Dutch disease economic problem and public servants are doing anything to sort out this issue, Dutch disease is a long run problem, therefore when a economy is in this state, it is too painful to go out in terms of unemployment and slowdown of industry progress. There are three facts that confirm this statement. First: Colombia faces a crude oil boom exports where most of its foreign currencies come from it; second: Colombia faces a FDI inflow that shows as final destination crude oil sector, this FDI shows an increased share in total GDP; and third: there are lot of people who earn their income from crude oil sector, there were 14,089 direct job places given by crude oil sector in 2011. Moreover, crude oil reserves shows a limit of 7 years.

Author: Humberto Bernal,

Economist,

e-mail: zhumber@gmail.com

It can be download in PDF format at:

https://docs.google.com/open?id=0BzkhS13UydIHYjhfWk85NHFGV0U

Colombia will be face a big problem if economic policy continues promoting extraction of crude oil sector without promoting policy for crude oil derivates such as polymers, plastics and more valued products such as computers and technology, moreover Colombian government wants to promote crude oil transport sector to reach a million of crude oil barrels per day without paying attention to economic problem called “Dutch disease”. Dutch disease comes when an economy is intensive and depends too much from extractive industries such crude oil extraction,  gas extraction and others, the main problem is when the economy runs out of this natural resource and lots of economic resources depends from this activity, mainly lot of labor force.

Figure 1. Main exports as a share of total exports in Colombia 1926-2011 (%)

Source: Bureau of statistics (DANE), Central Bank and National Planing Department (DNP).

Dutch disease is a long run problem and public servants realize this problem when it is present, too late. To go out from this disease will take long time and it is costly in terms of unemployment and a deep slowdown in development. Colombia is running fast to Dutch disease path without any warning from researches and society in general, crude oil boom is such as narcotic that blast off society without feet on earth and the landing will bring high cost. The evidence of this issue comes up from tree facts. First: Colombia’s exports are manly from crude oil as figure 1 shows, the red area shows how crude oil exports are getting more place inside total exports until reach 49.1% of total exports in 2011. Others products such as coffee, bananas showed a decline as a share of total exports. Total commodities exported from Colombia shares with a 13.4% of GDP in 1999, this share showed an increase until reach 17.1% of GDP in 2011. Therefore, from this paragraph one can point out a conclusion that Colombia gets lot of foreign currency from crude oil exports and this type of export are growing exponentially.

Second: Most of Foreign Direct Investment (FDI) inflows are going to crude oil sector and mining sector, by 2011 Colombia faced US$13,234 million from FDI inflows where 38.4% showed as a final destination crude oil sector and 19.8% showed as a final destination mining sector, this means 58.2% of total FDI inflow are going to extractive sectors in Colombia. Moreover, FDI inflows shows an increasing trend as a share of GDP in Colombia as figure 2 showed, one can see FDI inflows shared 4.0% of GDP and domestic investment shared 19.0% of GDP in 2011, the red area is getting more room as time goes. It is ironic that in 2011 Colombia won a place in OECD FDI countries group due to its foreign investment liberalization, when most of this FDI inflows went to extractive sectors that will bring the seed of Dutch disease if government does anything. To start to prevent of this disease, Colombia must to promote secondary sectors such as polymers, plastics and others which use  high added value. 

Figure 2. FDI and domestic investment as share of GDP in Colombia 1926-2011 (%)

Source: Bureau of statistics (DANE) and National Planing Department (DNP).

Third and no less important: Nowadays there are lot of people that their income come from crude oil sector as figure 3 shows. There were 11,934 direct jobs that this sector gave in 1995 where Ecopetrol, the main crude oil company in Colombia, shared with no less than 47% of total jobs. Total crude oil jobs increased to 14,089 places in 2011 what means a share of 0.15% of total places in main cities in Colombia in 2011 as green bars shows. Therefore, there are many people who depends of this sector. In addition, Colombia’s crude oil reserves is for 7 year, then what is going on with this people when crude oil runs out after 7 years?, people of 35 and 40 years old who the only thing that known is working on crude oil sector.

Figure 3. Total employment from crude oil sector and its share in total employment according to main cities in Colombia 1995-2010 (places and %)

Source: Bureau of statistics (DANE), Superintendency of Companies and National Planing Department (DNP).

Summarizing, Colombia is going to Dutch disease and public servants do not pay attention to this issue, There are three facts that confirm this statement. First: Colombia faces a crude oil boom exports where most of its foreign currencies come from it; second: Colombia faces a FDI inflow that shows as final destination crude oil sector with an increasing share in total GDP; and third: there are lot of people who earn their income from crude oil sector, there were 14,089 direct job places given by that crude oil sector in 2011.

Poverty line in Colombia: what perverse is

Last months colombian government broadcast the results of the new methodology to measure the poverty in Colombia, as usual there were two measures: Extreme Poverty Line and Poverty Line, results from these measures are 12.3% of total population are in extreme poverty and 37.2% in poverty by 2010, nevertheless these measures are wrong due to the money value from these lines are growing less than official inflation rate in 2010 what means that poverty line value growth is not fitted with the growth of the cost from official basic basket through Consumer Price Index, a better measure of poverty in Colombia is through people who is eligible to government program called Sisbén, from people who is in this program one can make an approximation of 75% of total population in Colombia is in poverty. the main conclusion is  what wrong poverty lines from experts!!!

Author: Humberto Bernal,

Economist,

e-mail: zhumber@gmail.com

Download PDF file from:

https://docs.google.com/open?id=0BzkhS13UydIHdFFkeWo0ZXhjbjg

Colombia is one of the poorest countries around the world, according with World Bank poverty GINI index, Colombia is on 146th place out of 157 countries around the World with an index of 0.56, better places are Denmark and Japan with an index of 0.25 each, the UK showed an index of 0.36 and the States showed an index of 0.41 as figure 1 shows. Moreover Colombia is in the small group of countries that face population that earn less than US$2 per day, there is a share of 3.8% of total population that has to sort out this unfair issue, in absolute terms there are 3.6 million of people that have to live on with US$2 or less, other countries which face same problem are Congo, Liberia and Madagascar, countries which do not face this issue are Japan, USA and UK.

Figure 1. GINI index around the world

Source: World Bank, Stata 12.1, Mathematica WolframAlpha.

Socio economic policy in Colombia: really unfair.

According to official data, public servants are aware of poverty in Colombia but the solutions worked by them is not fair, the economic indicators hide the real situation of Colombia, if one had done the proper job, the poverty line and extreme poverty line would show a critical situation in Colombia, one can make a projection through Sisbén program, this socio economic program is for those who are really poor in Colombia, through this program they can get subsides (transfers of services and goods from government) in education, food, health and others, if one work with this data, people in poverty are not less that 75% of total population in Colombia, therefore there is lack of criteria to set up who is in poverty in Colombia but by sure people under this state is more that official data.

Wrong measure of extreme poverty line and poverty line in Colombia.

Recently Colombian government spent public resource in a research to set up a proper Extreme Poverty Line and Poverty Line in Colombia, this research was posted on the internet through bureau of statistics (DANE) webpage. Of course, these lines look like a proper work but is it?, apparently it is not a proper methodology to measure poverty in Colombia due to the growth of money values of these poverty lines do not fit with  inflation rate as economic welfare theory says: “income must growth at least the inflation rate”, figure 2 and 3 shows Extreme Poverty Line annual growth, Poverty Line annual growth and inflation rate. By 2010 Extreme Poverty Line annual growth was lower than inflation rate, same situation is showed for Poverty Line on figure 3, in the first case while inflation showed a value of 3.2% in 2010, the annual growth of Extreme Poverty line was 0.7% in 2010, results were similar for Poverty Line, its annual growth was 2.5% and inflation rate was 3.2%, what wrong thing from researchers!!!!.

the main conclusion is methodology of poverty lines must be reevaluated under welfare theory and fair adjustment which shows the reality of Colombia, moreover poverty lines is not an instrument to make politics as public servants broadcast their results as a big target when colombia faces no less that 75% of population in poverty.

Figure 2. Extreme poverty line annual growth and inflation rate 2003-2010

Source: National Planing Department (DNP) and Bureau of statistics.

Figure 3. Poverty line annual growth and inflation rate 2003-2010

Source: National Planing Department (DNP) and Bureau of statistics.