Trade, exchange rate, and agricultural pricing policies in Colombia

8123 WORLD BANK COMPARATIVE STUDIES I The Political Economy of Agricultural Pricing Policy Trade, Exchange Rate, and Agricultural Pricing Policies in Colombia Jorge Garcia Garcia Gabriel Montes Llamas Po2,pw   The Political Economy of Agricultural Pricing Policy Trade, Exchange Rate, and Agricultural Pricing Policies in Colombia Jorge Garcia Garcia Gabriel Montes Llamas WORLD BANK COMPARATIVE STUDIES The World Bank Washington, D.C.  Copyright i 1989 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433 All rights reserved Manufactured in the United States of America First printing October 1989 World Bank Comparative Studies are undertaken to increase the Bank's capacity to offer sound and relevant policy recommendations to its member countries. Each series of studies, of which The Political Economy of Agricultural Pricing Policy is one, comprises several empirical, multicountry reviews of key economic policies and their effects on the development of the countries in which they were implemented. A synthesis report on each series will compare the findings of the studies of individual countries to identify common patterns in the relation between policy and outcome-thus to increase understanding of development and economic policy. The series The Political Economy of Agricultural Pricing Policy, under the direction of Anne 0. Krueger, Maurice Schiff, and Alberto Vald6s, was undertaken to examine the reasons underlying pricing policy, to quantify the systematic and extensive intervention of developing countries in the pricing of agricultural commodities during 1960-85, and to understand the effects of such intervention over time. Each of the eighteen country studies uses a common methodology to measure the effect of sectoral and economywide price intervention on agricultural incentives and food prices, as well as their effects on output, consumption, trade, intersectoral transfers, government budgets, and income distribution. The political and economic forces behind price intervention are analyzed, as are the efforts at reform of pricing policy and their consequences. T he findings, interpretations, and conclusions in this series are entirely those of the authors and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. The material in this publication is copyrighted. Requests for permission to reproduce portions of it should be sent to Director, Publications Department, at the address shown in the copyright notice above. The World Bank encourages dissemination of its work and will normally give permission promptly and, when the reproduction is for noncommercial purposes, without asking a fee. Permission to photocopy portions for classroom use is not required, though notification of such use having been made will be appreciated. The complete backlist of World Bank publications is shown in the annual Index of Publications, which contains an alphabetical title list and indexes of subjects, authors, and countries and regions; it is of value principally to libraries and institutional purchasers. The latest edition is available free of charge from Publications Sales Unit, Department F, The World Bank, 1818 H Street, N.W., Washington, D.C. 20433, U.S.A., or from Publications, The World Bank, 66, avenue d'Iena, 75116 Paris, France. Jorge Garcia Garcia is an economist in the Agricultural Operations Division of Country Department II in the World Bank's Latin America and the Caribbean Regional Office. Gabriel Montes Llamas is general manager of the Instituto Colombiano Agropecuario and a consultant to the Bank. Library of Congress Cataloging-in-Publication Data Garcia Garcia, Jorge, 1945- Trade, exchange rate, and agricultural pricing policies in Colombia / Jorge Garcia Garcia, Gabriel Montes Llamas. p. cm. -- (World Bank comparative studies. Political economy of agricultural pricing policy) Includes bibliographical references. ISBN 0-8213-1360-6 1. Agricultural prices--Colombia. 2. Agriculture and state- -Colombia. 3. Food supply--Colombia. 4. Foreign exchange administration--Colombia. I. Montes Llamas, Gabriel. II. Title. III. Series. HD1882.75.G37 1989 338.18--dc2O 89-36687 CIP  Abstract The economy of Colombia grew at a rate of 4.7 percent per year between 1950 and 1983. During that period, agriculture generated more than 25 percent of the country's gross domestic product (GDP) and more than half of the country's foreign exchange earnings, and made the country self-sufficient in food. This monograph examines the impact of direct and indirect government intervention in Colombia's coffee, cotton, rice, and wheat markets between 1960 and 1983 and compares it with the situation that would have prevailed in the absence of intervention. The effects of intervention on prices, production, consumption, net foreign exchange earnings, the real income of producers and consumers, and transfers of income between agriculture and the rest of the economy are evaluated. During the study period, direct intervention in the market for coffee, Colombia's main source of foreign exchange, reduced the price received by coffee producers by 10 percent, while direct and indirect intervention combined reduced it by 34 percent. Direct intervention in the cotton market increased producers' prices by 2 percent, but indirect intervention reduced those prices by 25 percent on average. In the case of rice, direct intervention increased its price by 14 percent, but indirect intervention caused the average producer price to fall 16 percent. Direct intervention increased the producer price of wheat by 13 percent, but indirect intervention reduced it by 17 percent. As a result of these interventions (direct plus indirect), production of all four commodit:es fell below its potential level: a difference of 20 percent for coffee and rice, a difference of 40 percent for cotton, and a difference of 15 percent for wheat. One important reason to intervene is to help consumers. However, the results presented here show that the real annual incomes of the poorest consumers of rice and wheat-derived products never increased by more than 3 percent. Direct intervention, however, successfully isolated the domestic from the international market and thus prevented the transmission of variations in international prices to domestic prices. These interventions were maintained even though they hurt agricultural producers. One reason is that industrial producers were helped by the tactic of import substitution. A second was the growing size of the urban population and its increasing political importance. Intervention also continued because it generated revenue to the government -- revenues to the central government in the case of direct taxation of coffee, and revenues to the Colombian Agricultural Marketing Institute (IDEMA) through its monopoly on imports of wheat.  Acknowledgments We wish to thank James Henderson, Marcelo Selowsky, David Franklin, Bong-Soon Kang, and Pal-Yong Moon for their comments on earlier drafts of this study, and also the project co-directors, Anne Krueger, Maurice Schiff, and Alberto Valdes, for their comments and suggestions. We are grateful to Lia Guterman, our principal research assistant, for her invaluable help during the process of preparing and correcting initial versions as well as the final manuscript. We thank Ricardo Candelo for gathering information on government expenditures on agriculture and for calculating the effects of direct intervention on output, foreign exchange, and the government budget. We also thank Franca Casazza de Galante for data processing and for gathering basic information for the study. Finally, we thank Adolfo Meisel Roca for his assistance in the preparation of the chapter on political economy. Although the general responsibility for the study was a shared one, there was a division of labor. Chapter 1, Sections A and Bl, Chapter 3, Section A, and Chapters 4, 5, 6, and 7 were done by Jorge Garcia Garcia. Chapter 1, Section B2, Chapter 2, and Chapter 3, Section B were done by Gabriel Montes Llamas. Chapter 8 is the joint output of Garcia and Montes. Gabriel Montes Llamas was appointed head of the Instituto Colombiano Agropecuario (Colombian Agricultural Research Institute) in 1986, and the revised draft of the final version was also the work of Jorge Garcia Garcia.  Table of Contents Page Introduction and Summary 1 Effects of Direct Intervention in Relative Prices 2 Effects of Indirect Intervention on Producer Prices 2 Effects of Direct and Total Intervention on Consumers 3 Effects of Intervention on Output 3 Effects of Intervention on Foreign Exchange Earnings 4 Effects of Intervention on the Government Budget 4 Effects of Intervention on Resource Transfers 4 Effects of Intervention on Income Distribution 5 Political Economy of Agricultural Pricing Policies 7 Chapter 1: An Overview of Colombia's Economy and Agricultural Sector 9 Overview of the Economy 9 Colombia's Agricultural Sector 15 Chapter 2: Colombia's Agricultural Policies 28 The Impact of the Great Depression 31 The Impact of World War II 32 The Postwar Period 35 The Modernization Drive: 1950-1967 36 The Export Promotion Period: 1967-1974 38 The Coffee Boom: 1975-1981 39 Conclusion 40 Chapter 3: Government Intervention in the Agricultural Sector 45 General Exchange Rate Policies 45 Policy on Coffee 46 Agricultural Pricing Policies 47 The Institute for Agricultural Marketing (IDEMA) 49 Government Intervention in Agricultural Inputs 50 Fiscal Treatment of the Agricultural Sector 53 Policies on Agricultural Inputs 54  - vi - Chapter 4: The Effect of Intervention on Relative Prices and the Exchange Rate 59 Comparing Prevailing, Border, & Border-Adjusted Relative Prices 60 Equilibrium Exchange Rate & the Adjusted Consumer Price Index 64 The Adjusted Price Level in the Nonagricultural Sector 70 Analysis of Results of Direct & Indirect Price Intervention 71 Chapter 5: The Effects of Price Intervention on Output, Foreign Exchange Earnings, the Government Budget, and Prices 99 Effects of Price Intervention on Output 99 Effects on Output 101 The Effect on Foreign Exchange Earnings 104 The Effect of Price Intervention on Consumption 105 Effect on Foreign Exchange Earnings 105 Effect on the Government Budget 108 The Question of Government Bias in Agriculture 110 Effects of Intervention on Price Variability 113 Chapter 6: The Effects of Intervention on Transfers 139 Methodology Used to Measure Real Transfers into and out of Agriculture 139 Real Transfers from Nonprice Intervention 142 Real Transfers into and out of Agriculture by Commodity 143 Real Transfers Due to Price Intervention 146 Real Transfers due to Nonprice Intervention 147 Chapter 7: The Effects of Intervention on Producer Income and Real Agricultural Wages 161 Estimating the Effects of Intervention on Producer and Consumer Income 161 The Effects of Intervention on Producer Income 162 The Effects of Intervention on Consumers of Rice and Wheat 166 Real Wages in Agriculture 168 Chapter 8: The Political Economy of Agricultural Pricing Policies in Colombia 191 Principal Conclusions 192 The Political Economy: Some Hypotheses 193 Producer Associations and Economic Policymaking 198 The Influence of Topography 200  - vii - The Influence of Consumers 201 Other Important Factors 202 Pricing Policies for Cotton, Rice, and Wheat 202 Determinants of Agricultural Prices: A Regression Analysis 207 Conclusion 209 Bibliography 221 Appendix 1 236 Appendix 2 259 Appendix 3 279 Appendix 4 301 Appendix 5 313  - viii - LIST OF TABLES TABLE 1.1 EVOLUTGON 0F THE POPULATION 1964-19831 TABLE 1.2 ANAL 6Ni AND RELATED.COMPONENTS TAB Ue 1.3 CENTRAL. SOVERN*EST AND CONSOLIDATED PUBLIC SECTOR OPERATIONS AS A PROPORTION OF GDP ToaLE 1.4 THE ROLE OF AGRICULTURE IN 6NP, IMPORTS AND EXPORTS TABLE 1.5 INDICES OF AGRICULTURAL OUTPUT FOR FOOD AND NON-FOOD PRODUCTS. TAXLE 1.6 INDICES OF AGRICULTURAL OUTPUT FOR TRADED AND NON-TRADED PRODUCTS TABLE 1.7 AGRICULTURAL FOOD PRMOUCTION AND COSUMPTION. 1968-1983 TABLE 1.8 INVESTMENT EXPENDITURES IN IRRIGATION AND DRAINAWE AND VALUE ADDED IN AGRICULTURE TADLE 1.9 NBER MND AREA OF AGRICULTURAL EXPLOITATIONS BY SIZE: 1968, 1970 AD PROJECTION 1983-1984. TALE 2.1 COM IA: SPECIFIC TARIFFS (AVERAGE) FOR DIFFERENT ECONOMIC SECTORS: 1886, 1913, 1931 TABLE 2.2 INCOME, SROWTH AND ECONOMIC STRUCTURE: 1939,1947 TABLE 2.3 RELATIVE WHEIST (Wi) OF AGRICULTURAL PRICE POLICY: 19dO-198Q TABLE 3.1 IMPILICIT SUDSIDIES IN AGRICULTURAL CREDIT: 196-1964 ABLE 4.1 EQUILIBRIUM EXCHANGE RATE AND DIVERGENCE FROM EQUILIBRIUM: 1968-1983 TABLE 4.2 PREVAILING RELATVE PRODUCER PRICES TABLE 4.3 RELATIVE PRICES IN THE ABENCE OF DIRECT PRICE INTERVENTIONS TABLE 4.4 RELATIVE PRICES IN ThE ABSENCE OF DIRECT AND INDIRECT PRICE INTERVENTIO51 TABLE 4.5 PREVAILING RELATIVE PRODUCER PRICES/RELATIVE PRICES IN THE ABSENCE OF DIRECT PRICE INTERVENTIONS TABLE 4.6 PREVAILING RELATIVE PRODUCER PRICES/RELATIVE PRICES IN THE ABSENCE OF DIRECT AND INDIRECT PRICE INTERVENTIONS TABLE 4.7 PREVAILING RELATIVE CONSUMER PRICES TABLE 4.8 RELATIVE CONSUMER PRICES IN THE ABSENCE OF DIRECT PRICE INTERVENTIONS TABLE 4.9 RELATIVE CONSUMER PRICES IN THE ASSENCE O' DIRECT AND INDIRECT PRICE INTERVENTIONS TABLE 4.18 PREVAILING RELATIVE CONSUMER PRICES/RELATIVE PRICES IN THE ABSENCE OF DIRECT PRICE INTERVENTIONS TABLE 4.11 PREVAILING RELATIVE CONSUMER PRICES/RELATIVE PRICES IN THE ABSENCE OF DIRECT AND INDIRECT PRICE INTERVENTIONS TABLE 5.1 LOGARIThMIC REGRESSIONS FOR ESTIMATIONS OF SUPPLY RESPONSE OF COTTON, RICE AND WHEAT TABLE 5.2 ESTIMATED SHORT TERN IMPACT OF DIRECT AND TOTAL PRICE INTERVENTIONS ON OUTPUT T*Cz- 5.3 ESTIMATED LONG TERM IMPACT OF DIRECT AND TOTAL PRICE INTERVENTIONS ON OUTPUT TABLE 5.4 LGOARITHMIC REGRESSIONS FOR ESTIMATIONS OF DEMAND FOR DOMESTIC COTTON FIBER, RICE AND WHEAT TABLE 5.5 ESTIMATED SHORT TERRM AND LONG TERM IMPACT OF DIRECT AND TOTAL PRICE INTERVENTIONS ON CONSUMPTION TABLE 5.6 ESTIMATED SHORT AND LONG TERM EFFECT OF DIRECT AND TOTAL PRICE INTERVENTIONS ON 6ROSS FOREIGN EXCHANGE ERNI.NaS TABLE 5.7 ESTIMATED SHORT AND LONG TERM EFFECT OF DIRECT AND TOTAL PRICE INTERVENTIONS ON NET FOREIGN EXChAN6E EARNINGS TABLE 5.8 ESTIMATED EFFECT ON THE BUDGET OF PRICE INTERVENTIONS ON CJTPUT OF COTrON, RICE, WHEAT AND COFFEi AN IND UTS USED BY THEM TABLE 5.9 ESTIMATED GOVERNMENT REVE?ES AND EXPENDITURES PER UNIT OF OUTPUT FROM PRICE INTERVENTIONS ON OJTPUT 0: CJTTCN, COFFEE, RICE AND WiEAT AND INPUTS USED BY THEN TABLE 5. 10 INDEX OF GOVERNMENT EXPENDITURE BIAS TABLE 5.11 PREVAILING AND BORDER RELATIVE PRICES: VARIANCE AND VARIABILITY TABLE 5.12 CORRELATION COcrFICIENTS AND VARIANCE TABLE 6.1 ESTIMATED REAL TRANSFERS DUE TO DIRECT aND TOTAL PRICE INTERVENTIOS ONY OTPUT OF CJFFEE AND INPUTS USED Bf 17 TABLE 6.2 ESTIMATED REAL TRANSFERS DUE TO DIRECT AND TOTAL PRICE INTERVENTIONS ON OUTPUT OF COTTON AND INPUTS USED BY It 7ABE 6.3 ESTIMATED REAL TRANSFERS DUJE TO DIRECT AND TOTAL PRICE INTERVENTIONS ON OUTPUT OF RICE AiD INPUTS US_D BY 17 TABLE 6.4 ESTIMATED REAL TRANSFERS DUE TO DIRECT AND TOTAL PRICE INTERVENT'ONS ON OUTPUT OF WHEAT AND INPUTS USED BY IT TABLE 6.5 ESTIMFATED REAL TRANSFERS INTO (+) OR OUT I-) OF AGRICJLTURE DJE TO DIRECT AND TOTAL PRICE INTERVENTIONS IN COFFEE, COTTON, RICE AND WHEAT AND INPUTS USED BY THEM ABLE 6.6 Er,STrED RzAL TRANSFERS (DIRECT AND TOTAL) INTO (+) / OJT t-) O; ASRICULTURE DJE TO NON-PRICE AQD PRICE INTERVE?TIONS IN COFFEE, COTTON, RICE AND WHEAT AND INPUTS LSED  -iX- LIST OF TABLES (continued) TABLE 7.1 ESTIMATED REPL INCOPE EFFECTS DUE TO DIRECT AND TOTAL PRICE INTERVENTIONS ON OUTPUT OF COFFEE AND INPUTS USED BY IT TaBLE 7.2 ESTIMATED REaL INOMME -FECTS OJE TO DIRECT AND TOTAL PRICE INTERVENTIONS ON OJTPUT OF CDTTON AND INPUTS USED BY Ir TABLE 7.3 ESTIMATED REAL INCOME EFECTS UE TO DIRECT AND TOTAL PRICE INTERVENTIONS ON OUTPUT OF RICE AND INPUTS USED BY IT TALE 7.4 ESTISMATE REAL INCOME EFFcCTS DUE TO DIRECT PAND TTAL PRICE INTERVENTIONS ON OUTPUT OF WHEAT AND INPUTS USED BY I7 TABLE 7.3 ESTIMATED REAL INCOME EFECT ON COTTON PRODUCERS OF DIRECT PRICE INTERVENTIONS ON OUTPUT AND INPUTS TAME 7.6 ESTIMATED REAL INCOME EFFrCT ON COTTON PRODUCERS OF TOTAL PRICE INTERVENTIONS ON OUTPUT AND INPUTS TABLE 7.7 ESTrMATED REAL INCOME EFFECT ON COTTON PRODUCERS OF DIRECT PRICE INTERVENTIONS ON OUTPUT AND FERTILIZERS TABLE 7.8 ESTIMATED REAL INCOME ErFECT ON COTT0N PRODUCERS OF TOTAL PRICE INTERVENTIONS ON OUTPUT AND FE.RTIL.ZERS TABLE 7.9 REAL INCOPE ET.-CT IN URBAN AREA (FIVE CITIES) OF DIRECT PRICE INTERVENTIONS IN RICE BY INCOME GROUPS TAp F 7. IS REAL INCOME EFFECT IN URBAN AREA (FIVE CITIES) OF TOTAL PRICE INTERVENTIONS IN RICE BY INCOME GROUPS TABLE 7.11 REAL INCOME EFFECT IN URBAN AREA (FOUR CITIES) OF DIRECT PRICE INTERVENTIDNS IN MOEAT BY INCOM.E GROUPS TABLE 7.12 REAL INCMME E-FECT IN URBAN AREA (FOUR CITIES) OF TOTAL PRICE INTERVENTIONS IN WEAT BY INCOMM GROUPS TABLE 7.13 REAL AGRICULTURAL WAGE EQUATIONS TABLE 7.14 PREVAILING RJRAL WAGES AND W6GtS IN THE ABSENCE OF DIRECT AqD TOTAL PRICE INTERVENTIONS TABRE 8.1 LOGARITHMIC REGRESSIONS FOR REAL PRODUCER PRICE TA'LE 8.2 EVALIATION BY REPRESENTATIVES OF THE PRODUCER ASSOCIATIONS OF THE INFLUENCE ON POLICY MAKING ON THE PART OC THEIR RESPECTIVE ASSOCIATION TABLE 8.3 PRESENT YALU- OQ TRANSFERS IN AND OUT OF AGRICULTURE AS A RiSULT OF GJVERNMENT INTERVENTIONS TABLE L.4 THE THREE MOST INFLUENTIAL PRODUCER ASSOCIATIONS IN ECONOMIC POLICY MAKING: EVALUATION OF REPRESENTATIVES FRcm SEI.CTED AGRICULTURAL PRODUCER ASSOCIATION 7aW" a.5 EVALLaTION BY REPRESENTATIVES OF AGRICULTURAL ASSOCIATIONS OF THE IMPACT OF CO?EERCIAL aND EXCA ANGE RATE PCL:ZY IN THE LAST THREE DECADES ON THEIR SECTOR  -x - LIST OF ABBREVIATIONS I;DP GROSS DOMETIC PRODCT GDPA AGRIQLTUR.L 6ROSS DOMSTIC PRODCT QRs QLPNTITATIVE RSTICTIMS CPS C2ONSLER PRICE INDEX PNA PRICE OF NO*-Q6RICU.TURAL VALUE ADDED PA PRIC. F A6RICLLTURS . VO..E PDDE GE 60VEDT EXPENDITUGE MSA GOWENf EXP0QITURE IN AGRICLTURE 63B SV6ERNPTE EXPENDITURE BIAS E OMINAL EXCHANGE RATE E* NOMNAL EQUILIBRIUM EXCAGE RATE LIST OF SYP6OLS Prim (C) INDDICATES THE ABNCE OF DIRET PRICE INTERVENTIOK Asteisk (i) INDICATE THE ABSENE OF TTAL (DIRECT AND INDIRECT) PRICE INTERVENTIN  - xi - LIST OF ACRONYMNS ANDI ASOCIACI N.NACIONAL DE INDUSTRIALES NATIONAL RSS0CAITION OF WINDSTRIALISTS ANIF ASOCIACION NACIONAL DE INSTITUCIONES FINRNCIERAS NATIONAL ASSOCIATION OF FINANCIA. IS-I7U1IONS ASOBANCARIA AS3CIACION BANCARIA BANKING ASSOCIATION AS0CANA ASDCIACION COLOGIANA D: PRODUCTORES D0 CANA COLOMBIAN ASSOCIATION OF SJGAR CANE G;OWERS CAJA AGRARIA CAJA D0 CRE ITO ARRARIO INDUSTRIAL Y MINERO AGRICULTURAL BANW CAT ICERT) CERTIFICADO X ABONO TRIBUTARIO TAX SAVINGS CERTIFICATE CEC CDUTA ESPECIAL DE CAMSIOS SPECIAL EXCHANLE ACCOUNT CEGA CORPORACION D0 ESTUDIOS SAGNDEROS Y AGRICMLAS CORPORATION OF AaRICALTURAL STUDIES CONAL0DO-N CONFED'ERACION COLOMBIANA DOL AL6ODON CMO1B IAN COTTON CONFEDERATION DANE DEPARTAMENTO ADMINISTRATIVO NACIONAL DE ESTADISTICA NATIONAL STATISTICS DEPARTMENT DIAGONAL DISTRIBUIDMRA D