Colombia - Current economic position and prospects (Vol. 3 of 5) : Annexes

RESTRICTED RETURN TQ CIRCULATAG COPY Report No. WH-188a REPORTS DEAW3E RETULNED TO REPORTS DESK WITHIN IGENEAL FI ONE M EEaK_ This report was prepared for use within the Bank and its affilioted organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION CURRENT ECONOMIC POSITION AND PROSPECTS OF COLOMBIA (in five volumes) VOLUME III ANNEXES TO MAIN REPORT I: INDUSTRY II: POWER III: TRANSPORT IV: WATER AND SEWERAGE V: HUMAN RESOURCES December 30, 1968 Western Hemisphere Department  CURRENCY EQUIVALENTS (as of November 4, 1968) I U.S.$ - 16. 77 Pesos 1 Peso (Ps.) US$0. 0596 I Million Pesos = US$59, 630  ANNEX I INDUSTRY  ANNEX I: INDUSTRY TABLE OF CONTENTS Page No. I. Growth and Structure of Industry ... . . . . 1 A. Growth .. . .... . .a. . . .*. 1 B. Structure .. . .. . .. . . . . . . 2 II. Costs and Prices . . . . . . . ....... 7 A. Cost and Productivity of Production Factors 7 B. Prices . . . 12 III, Finance *.. , , . 14 A. Internal Sources 14 B. Financing of Industry by the Domestic Banking System . . a . . 17 IV. International Trade . .. o 6 ..a.... ....... 21 A. Imorts ... . . *.. . 0........... 21 B. Exports . . . . . . . . . . 25 V. Notes on Some Industrial Sectors 27  PREFACE This Annex presents a quantitative perspective of Colonbian Industry. It is based on both published and unpublished data and dis- cussions with Colombian industrialists and officials. It provides the basis for the analysis of manufacturing industry in Chapter IV of the main report. The supporting statistical tables are contained in Part VII of the Statistical Appendix (Volume II).  ANNEX I: INDUSTRY I. GRWWTH ANqD STRUCTURE OF COLOMdBIAN INDUSTRY A. Growth 1. During the period 1957-1966 Colombian industry was growing at 7.7 percent per annum,.1 This compares favorably with rates of industrial growth in Latin America, and is almost exactly equal to the average growth of manufacturing production in developing countries in 1960-66 (7,3 percent p.a.). During the period 1960-1966 industrial growth of Colombia was 74 percent faster than growth of GDP in real terms, not much below the 89 percent calculated by the UN for 27 developing countries. 2. For purposes of the following analys 2 Colombian indust w tas classified into three main groups: investment , intermediate goodsJ, and consumer industriesj*. Their annual growth rates during 1957-66 were 9.3 percent, 8.3 percent and 6.6 percent, respectively. Growth of these groups correlates rather well with the growth of the main components of the GDP. During 1960-66, consumption goods industries grew faster than con- sumption as consumers bought more manufactured and fewer unprocessed consumer goods. Domestic production of investment goods increased at a moderate rate but faster than the slow growth in fixed investment. Even if imports of machines and equipment&' are added to the domestic produc- tion - most investment goods are imported - fixed investment still increased only 2,5 percent per arnnum. 3. Business cycles have markedly influenced these growth patterns. Output of investment goods industries slowed down in the years after 1963 because construction activity faltered. Intermediate goods industries, by contrast, fared better in the 601s than they did in the late 50's: lJ Calculations of Colombia's industrial growth rate vary. The Bank of the Republic has calculated it at 6.2 percent per annum for 1958-19665, while the Planning Commission gives 6.7 percent per annum for 1958- 1965. The mission's calculations show a higher rate, as it has adjusted for gradual changes in the product mix which simple Laspeyres- type indices ignore. d Building materials, metal and its products, mechanical industries. / Textiles, paper, petroleum and chemicals, and rubber and wood products. Processed food, beverages, tobacco, clothing, furniture and printing. 5] To avoid the distorting effect of sudden falls in imports resulting from quantitative restrictions, three-year averages of equipment imports were used for this comparison.  ANNEX I Page 2 textile production expanded to satisfy growing domestic demand and export orders, and new investment was made in paper and petrochemical products to replace imports in the expanding domestic market. Consumer goods industries grew at a fairly steady pace. B. Structure of Industry 4. Though manufacturing industry plays a substantial role in predominantly agricultural Colombia, the place of industry in Colombia is still less important than in most countries of similar population and income per head. Industry's share in GDP rose from 17.9 percent in 1960 to 19.2 percent in 1966. But in terms of the international comparisons made by Professor Hollis Chenery,lJ industry in Colombia is still rela- tively underdeveloped. If 1.0 represents the "norm", Colombia's industrial development coefficient was .8035 in 1960 and .8052 in 1965. 5. The share of investment goods industries in total industrial production rose from 14.9 to 18.5percent between 1957 to 1965 and the share of intermediate goods from 33.9 to 36.2 percent; the share of consumer goods industries decreased from 51.2 to 45.3 percent. Despite this evolution, the structure of industry in Colombia differs significantly from the average industrial structure for similar countries. iWhile invest- ment goods industries in 1965 accounted for only 18.5 percent of Colombian industry, in countries of comparable size and income they accounted for as much as 28.7 percent; the share of intermediate goods industries in Colombia was 36.2 percent and in countries of comparative size it was 31.7 percent; consumer goods industries accounted for 45.3 percent of Colombian industry but only 37.6 percent in other countries. 6. A major reason for the relative "overdevelopment" of the con- sumer goods industries, and the higher than average profits apparently earned by them?J, was the high tariffs and quantitative restrictions behind which they have developed, although some branches of these industries are long established and very efficient. Similarly, a major reason for the relatively low share of investment industries was the relatively low levels of protection. A study prepared by ECLA shows that, compared to other Latin American countries, in 1964 Colombia had the largest relative dif- ferential between tariffs on imported capital goods and imported food products and processed tobacco. With the average set at 100 for four j/ See a Study of Industrial Growth, United Nations, New York, 1963, Page 13. 2 The share of wages and salaries in value added of food processing industries in Colombia is 22.2 percent, compared to 38.9 percent in the United States. The relation between the two is therefore 1.75, while it does not exceed 1.30 for all other industries. (Table VII-8). j See the Process of Industrial Development in Latin America by the Economic Commission for Latin America, United Nations, New York, 1966), page 162.  ANNEX I Page 3 Latin American countries, Argentina, Brazil, Chile and Colombia, the relative incidence of custom tariffs on capital goods for Colombia was 40 while, for food products, it was 215. Thus tariffs on investment goods imported by Colombia were 2.5 times lower than the sample average while tariffs on food products and tobacco were over 2 times higher than the average. 7. Investment goods industries have recently been growing faster than consumer goods industries. Mechanical industries were growing during the period 1957-1966 at 12.7 percent per annum; food, beverages and tobacco, only by 6.9 percent per annum, By 1966, the share of mechanical industries increased to 10.7 percent of total industrial output while that of food, beverages and tobacco declined to 35.4 percent. This divergence is not surprising. Mechanical industries have been growing from a very small basis (their share in industrial production in 1957 was only 6.9 per- cent) while food, beverages and tobacco already accounted for as much as 39.4 percent of total industrial output in 1957 and were mature in relation to the Colombian market and the possibilities of further import substitu- tion. The recent growth of mechanical industries has also been encourag3sd by the divergence between tariffs on imported parts and imports of some final products, the low level of tariffs on parts encouraging local assembly for sale in a highly protected market. 8. Size - Colombia possesses more factors which encourage economies of scale than factors which would hinder it. Its urban population is large. Out of 18 million inhabitants in 1965, 5.4 million inhabitants live in the twelve largest cities of over 100,000 inhabitants each. There are accordingly concentrated markets which have made possible the tendency toward concentration of output in larger firms: 268 large firms, employing more than 200 persons each, now produce together a little over a half of the industrial production of the country and are responsible for 68 percent of total industrial investment. In 1958 there were only a few industries where more than 50 percent of output was concentrated in large enterprises (over 200 workers), namely textiles (87 percent), tobacco (73 percent), rubber products (91 percent), petroleum industry (94 percent), basic metals (65 percent) and non-metallic minerals (54 percent). By 1965, this list also included electric machinery, paper and paper products, beverages, leather, printing and publishing. At present, 50 percent of the production of investment goods industries, 65 percent of intermediate goods industries and 147 percent of the consumer goods industries is con- centrated in enterprises employing over 200 persons. In total, 54 per- cent of value added in manufacturing industry in Colombia is produced by enterprises employing over 200 persons. These enterprises employ only 45.6 percent of total personnel because of the more capital-intensive production techniques they use. 9. Despite this growth in large firms, medium-sized enterprises (between 50 and 199 workers) seemed to show almost the same level of labor productivity as large enterprises. In 1965 the value added per person in medium-sized enterprises of the investment goods group was 35.2 thousand pesos per person while it amounted to only 36.7 thousand  AYiD:. I Page 1 pesos in large enterprises. In medium-sized enterprises of the inter- mediate goods industries, value added per person was 49.8 thousand pesos, more than the 46.8 thousand pesos per person employed by large enterprises. In consumer goods industries labor productivity in medium-sized enterprises amounted to 61.1 thousand pesos compared to 68.9 thousand in large enter- prises. 10. Looking at industry as a whole, value added per person employed was almost equal in large and medium enterprises - a little over US$3,000 equivalent per person per year. In small enterprises (up to 50 persons) value added per person employed was almost US$1,500 per year. 11. Small enterprises, which employed almost one-third of industry workers in 1965, still accounted for a large share of production in such branches as non-electric machinery (45 percent of production was in small enterprises), wood products (44 percent of production), furniture and fixtures (47 percent of production), footwear and clothing (34 percent of production). The generally low efficiency of these industries is partly due to the small average size of firms. Comparison of value added per manhour between the U.S. and Colombia shows that this indicator is 13 times higher in the U.S. than in Colombia for non-electric machinery, ten times higher in the furniture industry, and seven times higher in the wood industry. In such highly concentrated industries as textiles, rubber, paper and tobacco, however, the U.S. indicator is never more than 3 - 4 times higher than Colombia's. 12. Regional distribution - Almost all manufacturing production is concentrated in the twelve largest cities. Industrial employment in these cities amounts to 89 percent of total industrial employment in Colombia. The main attraction of large Colombian cities is less the presence of man- power, which can be found and trained outside urban areas, but the fact that most of the large cities are well connected one to another by trans- port facilities; location of industry elsewhere would raise transportation costs sharply. 13. The present regional distribution of industry in Colombia reflects clearly existing costs of transportation, access to markets, and economies of scale in some types of production. Food, leather, clothing, building materials, furniture, and metal products industries are wide- spread and can be found in more than 90 percent of Colombia's cities. These are industries which either serve local markets (leather, clothing, and processed food industries, the latter benefiting additionally from deliveries of local agricultural inputs) or produce bulky and heavy goods, transportation of which represents a sizeable percentage of their price, as in the case of wood products or building materials. By contrast, paper, basic metals, petroleum, rubber, electrical machinery, and textile indus- tries are concentrated only in a few areas, making economies of scale possible. The lowest concentration coefficients are found, in increasing order, in the leather, building materials and wood product industries, and highest regional concentration coefficients are found in decreasing order, in petroleum, basic metals, tobacco, paper and rubber industries. Colombia  AHITD( I Page 5 is one of the few developing countries where at least four industrial 'Tpoles" already exist: Bogota, which accounts for 26 percent of total industrial production, Nedellin with 22.4 percent, Cali with 14.9 percent, and Barranquifla with 8.1 percent. At least three other smaller "poles' are slowly emerging. AVEAGE SIZE OF INDUSTRIAL FMi! IN 1965 VIALUE ADDED (tooo pesos current prices) Snall Mediu Large No. of No. of No. of Size Firms Size Firms Size Fiins Investment goods indchstries 151.5 2,738 3,081.0 227 15,102.7 75 Internediate goods industries 374.5 1,407 4,817.5 171 32,935.5 76 Consumer goods industries 157.2 $5955 5,75309 321 21,100.9 117 Total-industry 176.0 10,10o 4,687.3 719 22,778 268 Source: Missionte calculation  ANNEX I Page b DISTRIBUTION OF VALUE3 ADDED, 2PLOYIzE1,U IYVESTI'i3NT AND UlTEMIiEDIMWE EThUITS BE