RErTUJRN To RESTRICTED REPORTS , Re:ont No. WH-200a This report was prepared for use within the Bank and its affiliated 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 The report may not be published nor may it be quoted as representing their views.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 ECONOMIC GROWTH OF COLOMBIA: PROBLEMS AND PROSPECTS (in XII Volumes) VOLUME I THE OVERALL VIEW November 1, 1970 South America Department CURRENCY EQUIVALENTS (Certificate Market Selling Rate of Exchange) End 1968 1 US$ = 16.91 Pesos 1 Peso = US$0.05913 End 1969 1 US$ = 17.90 Pesos 1 Peso = US$0.05586 End-March 1970 1 US$ = 18.20 Pesos 1 Peso = US$0.05494 End-June 1970 1 US$ = 18.48 Pesos 1 Peso US$0.05411 End-September 1970 1 US$ = 18.80 Pesos 1 Peso = US$0.05319 INTERNATIONAL BANK f'OR RECONSTRUCTION A ND) I)DEVEL0'.ENT FILE COPY RESTRICTED R70-227 FROM: The Secretary December 7, 1970 CCL0I1MIA 1. There is attached for information a copy of a report entitled "Economic Growth of Colombia: Problems and Prospects" (WH-200a), in 12 volumes, dated November 1, 1970, as follows: Volume I - The Overall View Volume II - Special Studies: 1. Population, Employment,and Unemployment 2. Coffee in Colombia 3. Growth, Capital Requirements, and External Debt, 1970-85 4. The Public Sector 5. Projects for External Financing, 1970 and 1971-75 6. Statistical Appendix Volume III - Preinvestment Study Program Volume V - Agriculture, Fisheries, and Forestry Volume VI - Tourism Volume VII - Trans-ort Volume PIII - Power and Telecommunications Volume IX - Water Supply Volume X - Education and Training Volume XI - Public Health Volume XII - Regional and Urban Development 2 Volume IV (Industry) will be distributed separately. 3. This report has been made available to the Consultative Group for Colombia (0OL 70-4). Distribution: Executive Directors and Alternates *President *6President's Council *Executive Vice President, IFC Vice President, IFC Department hleads, Bank and IFC *Without attachments PREFACE The members of the IBRD Economic Mission to Colombia wish to express their gratitude for the support received from the Government of Colombia during our stay in the country. The hospitality shown us was sincerely appreciated. Acknowledgement is also made of the excellent cooperation received from the International Labor Organization team sent to study unemployment in Colombia. Our efforts were greatly facilitated by the materials which the ILO team made available in draft form. Thanks are also in order for the help given by the United Nations Development Program resident staff in Colombia, which was particularly valuable in the preparation of the Preinvestment Study Program, Volume III. This is the first time such a program has been undertaken by a Bank mission. The Mission visited Colombia in February-March, 1970. The draft of the report was completed in July. It was discussed with the Colombian authorities in September and the present version takes into account their comments. The draft has also benefited greatly from the comments and suggestions of the secretariat of CIAP (Inter-American Committee for the Alliance for Progress), made in the spirit of increased cooperation between CIAP and the Bank. Among other subjects this report reviews the National Develop- ment Plan 1969-72, prepared by the former administration. The new administration, which took office in August 1970, is now preparing the new- plan 1970-73. This new plan, when published, will be reviewed in materials to be prepared for the next Consultative Group meeting scheduled for February 1971. The Mission Report consists of 12 volumes: I. The Overall View II. Special Studies 1. Population, Employment, and Unemployment 2. Coffee in Colombia 3. Growth, Capital Requirements, and External Debt, 1970-85 4. The Public Sector 5. Projects for External Financing, 1970 and 1971-75 6. Statistical Appendix III. Preinvestment Study Program IV. Industry V. Agriculture, Fisheries, and Forestry VI. Tourism VII. Transport VIII. Power and Telecommunications IX. Water Supply X. Education and Training XI. Public Health XII. Regional and Urban Development - ii - The following persons participated, full or part-time, in the Mission, which was headed by Dragoslav Avramovic, Chief Economist of the South America Department (numbers indicate volume containing individual's main contribution): Avramovic, D. (I - Xii) Balkind, J. (VIII) Calvo, D. - Consultant (VI) Darnell, G. (V) Dorich, L. - Consultant, World Health Org./ Pan American Health Org. (XII) Douglas, A. (VII) Duarte, I. - Consultant, Pan American Health Org. (IX) Dublin, T. - Consultant, US Public Health Service; Health, Education, and Welfare (Xi) Dumoulin, J. (V) Engelmann, P. (III, XII) Germanacos, C. - Consultant (X) Gillman, H. - Consultant (IV) Glenshaw, P. (IV) Hurlebaus, J. (IX) Hyde, G. (I, II-1, 2, 3, 6) Isla, M. (VIII) Jaffe, J. (IV) Lehbert, B. (I, II-4) Lipkowitz, S. (IV) McGarry, M. (v) Minton, A. (VIII) Myren, D. - Consultant, Ford Foundation (V) Naylor, G. - Consultant (IV) Neufeld, H. (IV) Paschke, J. (IV) Shields, B. (VII) Teigeiro, J. (I, II-5) Van der Meer, S. (VII) THE OVERALL VIEW TABLE OF CONTENTS PREFACE BASIC DATA SUMMARY AND CONCLUSIONS I. THE PROBLEM 1 II. BASES FOR GROWTH 2 A. Investment 2 B. Foreign Exchange Supply 4 III. THE EMPLOYMENT CHALLENGE 10 A. Urban Unemployment 10 B. Labor Force Growth 12 C. The Rural Problem 13 IV. MAJOR ISSUES OF RESOURCE ALLOCATION 15 A. Commodity Producing Sectors: Costs and Prices 15 (a) Agriculture 16 (b) Industry 20 B. Commodity Producing Sectors: Credit Allocation 22 C. Infrastructure: Transport and Power 25 (a) Transport 25 (b) Power 26 D. Social Sectors 28 (a) Education 28 (b) Public Health 30 (c) Water Supply 32 E. Regional and Urban Development 33 V. PUBLIC INVESTMENT AND FINANCE 34 A. 1970-72 Public Investment Program 34 B. Finance in 1970-72 36 C. Extrapolation 1973-75 40 VI. GROWTH, CAPITAL REQUIREMENTS, AND DEBT 42 A. Absorptive Capacity 42 B. 1970-75 43 C. Long Run 47 List of Tables Page Table 1. GROSS INVESTMENT IN FIXED CAPITAL, 1950-68 2 Table 2. PUBLIC AND PRIVATE INVESTMENT, 1966-69 3 Table 3. COMNITMENTS OF FOREIGN ASSISTANCE FOR DEVELOPMENT PROJECTS, 1961-70 3 Table 4. COLOMBIAN EXPORTS 5 Table 5. GROWTH OF NON-TRADITIONAL EXPORTS 5 Table 6. COFFEE: WORLD CONSUMPTION AND PRODUCTION 7 Table 7. URBAN UNEMPLOYMENT AND UNDEREMPLOYMENT, 1967 10 Table 8. UNEMPLOYMENT RATE IN BOGOTA 11 Table 9. PATTERN OF LAND DISTRIBUTION BY FARM SIZE, 1960 14 Table 10. CROP AREA IN RELATION TO FARM SIZE 17 Table 11. STRUCTURE AND GROWTH OF MANUFACTURING OUTPUT 20 Table 12. PORTFOLIO OF THE BANKING SYSTEM BY INTEREST RATES, 1968 23 Table 13. INDUSTRY AND COMMERCE: LOANS BY COMMERCIAL AND SPECIALIZED BANKS (OTHER THAN FINANCIERAS) 24 Table 14. SCHOOL ENROLLMENTS, 1960 AND 1968 28 Table 15. WATER SUPPLY SERVICES AND POPULATION SERVED 32 Table 16. PUBLIC INVESTMENT PROGRAM, ACTUAL 1966-69 AND PROJECTED 1970-72 35 Table 17. FINANCING OF PUBLIC INVESTMENT, ACTUAL 1966-69 AND PROJECTED 1970-72 37 Table 18. PUBLIC FINANCING GAP IN 1973-75 40 Table 19. 1970-75: SELECTED VARIABLES, RATES OF CHANGE, AND COEFFICIENTS 43 Table 20. BALANCE OF PAYMENTS, ACTUAL 1965-69 AND PROJECTED 1970-75 45 Table 21. CONMITMENTS OF NEW LOANS ON PUBLIC ACCOUNT, ACTUAL 1966-69 AND PROJECTED 1970-75 46 Table 22. PUBLIC BORROWING AND DEBT SERVICE, 1970-85 48 COLOMBIA: BASIC DATA Area 439,825 square miles Population Estimate, mid-1970: 21.6 million; Growth Rate 3.3 percent Gross Domestic Product Total GDP in 1968 Col. $ 96,384 million Approximate US $ Equivalent US $ 6,060 million Real Growth in 1968 6.1 percent Average Real Growth, 1964-68 4.8 percent Per Capita GDP in 1968 US $ 300 Percentage Contribution to GDP: 1958 1968 Agriculture 37.3 30.6 Manufacturing 16.2 16.8 Other 46.5 52.6 Saving.and Investment Gross Fixed Domestic Investment as Percentage of GDP: 1966 1967 1968 16.7 17.6 19.5 Percentage Composition of Investment and Saving in 1968: Gross Fixed Domestic Investment 92.2 Construction 57.4 Transportation Equipment 9.0 Machinery and Other Equipment 25.8 Inventory Change 7.8 Gross Domestic Investment 100.0 Corporate Saving 11.3 Personal Saving 6.2 Government Saving 26.6 Current Account Deficit 16.0 Capital Consumption Allowance 39.9 Central Government Finances 1967 1968 1969 Current Revenues 6,688 8,057 9,250 Current Expenditures 4,293 5,122 6,418 Current Surplus 2,395 2,935 2,832 Investment Outlays 2,626 3,646 3,987 Overall Deficit 231 711 1,155 - ii - Money Supply End End End 1967 1968 1969 Millions of Pesos: 13,450 15,435 18,448 Prices 1967 1968 1969 National Consumer Price Index (Annual Averages, 1958 = 100) 262 281 305 Wholesale Price Index (Annual Averages, 1958 = 100) 252 267 290 Exchange Rate End End End 1967 1968 L969 Principal Exchange Rate, Selling (Pesos per U.S. Dollar) 15.82 16.91 17.90 Balance of Payments in 1968 (Millions of U.S. Dollars) F.o.b. Merchandise Exports 609 (Of which, coffee) (368) F.o.b. Merchandise Imports 615 Net Services - 72 Factor Payments to Foreigners -113 Net Transfers 31 Current Account Balance -160 Net Private Capital 52 Net Public Capital 90 Errors and Omissions 12 Increase in Central Bank Reserves - 62 Decrease in Commercial Bank Reserves 68 External Public Debt (Millions of U.S. Dollars) End 1968 End 1969 IB3RD TO TBRD TOTAL Disbursed 290 948 318 1,083 Undisbursed 163 372 176 429 Total 4353 494 1, 512 Debt Service Ratio 1968 1969 12.8 11.6 Net International Reserves of the Central Bank (Mllions of U.S. Dollars) End End End 1967 1968 19659 -36 35 97 INF Position at end of 1969 Quota US $125 million Net Drawings US 3139 million Fund Holdings of Pesos Col $233 million Fund Holdings of Pesos as Percentage of Quota 187 percent SUTMMARY AND CONCLUSIONS 1. Colombia has made substantial economic progress in recent years, and many positive measures have been taken to facilitate development. The existence of deep-seated rural poverty and an extremely high rate of urban unemployment make it imperative, however, that this performance be not only continued but accelerated wherever possible. The economic misery found in the countryside is shocking, and every effort should be taken to improve opportunities for a better life. As for the cities, unemployment is dangerously high. Although there is partial evidence that the situation eased somewhat in the past 18 months, it is estimated that 10-15 percent of the urban work force is openly unemployed, with an additional 10 percent technically unemployed. The first figure refers to people who are actively seeking work, while the second takes in those who would like to work but have given up the quest and those who are working fewer than 32 hours per week but would like to work more. 2. An expected growth rate of 3.5 percent annually in Colombia's work force between 1970 and 1985 will keep the system under constant pressure to provide new jobs. In addition to the existing backlog of more than half a million frustrated job-seekers this growth will put nearly 4.4 million people into the supply side of the employment equation during this period. Thus the economy is somehow going to have to generate jobs for 5,000,000 workers between now and 1985 if urban unemployment is to be eliminated. Many thousands more will be needed if anything is to be done in the rural sector, where underemployment exists on a large scale. 3. It is fortunate that current economic prospects appear excellent for continued growth. Colombia's gross domestic product increased by 6.1 percent in 1968, 6.5-7.0 percent in 1969, and at present is growing at a rate of 7.0 percent or higher. If this 7.0 percent GDP growth rate were maintained for the next fifteen years Colombia would generate a GDP of US $19,195 million (constant 1968 prices) in 1985, more than three times the US $6,062 million level reached in 1968. With a p-pulation rising from approxi- mately 20.3 million in mid-1968 to 32.8 million in mid-1985 this would boost per capita GDP from US $300 in 1968 to US $585 in 1985. While there is a clear need to tackle the unemployment problem with a variety of measures, a high and sustained rate of output growth would go a long way toward providing needed jobs. 4. Both public and private sectors have raised their investment levels strongly in the past 2-3 years, with total fixed capital formation averaging 19 percent of GDP. There has been a marked improvement in the country's ability to prepare projects for submission to external lenders, and a program of preinvestment studies now under way will ensure a continua- tion of this flow of projects in future years. The public sector has made an impressive effort to increase the flow of resources available for capital spending, resulting in a sharp rise in public savings. Tn 1968-69 the latter reached nearly 6 percent of GDP compared to a long-run average of 4-5 percent. - ii - 5. Colombia is also to be commended for the vigorous effort it has made to expand non-traditional exports. These exports, taking in all goods other than coffee and crude petroleum, rose from just over US $100 million in 1964 to US $200 million in 1968 and an estimated US $240 million in 1969. The speed with which new products have been added to the export list is particularly impressive. It is most encouraging to see such results, for it is abundantly clear that export growth is a vital key to continued over- aLll GDP growth in Colombia. This importance stems from the fact that export earnings can be used to buy needed imports, imports which can permit full utilization of existing plant and equipment as well as build new capital installations. 6. Coffee is still the major export commodity of Colombia and will remain so for several years to come. The New York price for Colombian coffee, which averaged 42.6 and 44.9 US cents per pound in 1968 and 1969, respectively, is projected in this report at 60 cents per pound in 1970 and 1971. (Price averaged just under 58 cents per pound during first half of 1970, and is expected to rise in the second half.) The volume of shiDments, recorded at 6,478,000 bags in 1969 and estimated at 6,770,000 bags in 1970, is projected to increase by 2.5 percent annually, which would raise the value of coffee exports from the US $350 million level prevailing in 1968-69 to more than US $500 million in 1970-71. If world coffee prices hold at or near present levels -- or at least decline fairly gradually -- Colombiats non-coffee export -share can be raised to a point where an eventual price drop in coffee would not necessarily paralyze the country's growth process by requiring a drastic curtailment of imports. In short, one of the most severe constraints on Colombian growth in the postwar period to date, cyclical swings in the capacity to import, would be greatly reduced. 7. Even with a strong export performance Colombia will need s:Lzable amounts of external assistance in the 1970's to finance imports and service debt. Project loan conmitments to Colombia, which totaled about US $90 million in 1966 and 1967, US $180 million in 1968, and US $235 million in 1969, will have to average IJS $290 million per annum during the 1970-75 period.l/ Assuming reasonable utilization patterns, this total of US $1.7 billion in new project coxmmitments would lead to a disbursement of US $1,190 million during the period, roughly US $200 million per year. Adding these disbursements to the US $430 million expected from commitments made prior to 1970 gives a total gross project loan inflow of US $1.6 billion. Half of this gross inflow will be needed to make interest and amortization payments (due mostly on debt already contracted), leaving a net effective transfer of US $800 million or US $135 million per year. 8. Over the longer term Colombia will require higher levels of gross disbursements to offset projected service obligations and effect a net resource transfer: 1/ "Project Loans" defined as total commitments minus AID program/sector loans. Total required gross public capital inflow (disbursements; during the 1970-75 period is US $2.0 billion, or approximately US $335 million per annum. - iii - PJB.LIC EXTERNAL LONG-TERM DEBTZ (millions of U.S. Dollars) 1970 1975 1980 1985 Total Gross Disbursements 234 391 536 648 Amortization Payments 83 96 204 332 Interest Payments 42 94 181 283 Debt Service 125 190 385 615 Net Disbursements _ 109 201 151 33 /a Debt contracted or guaranteed by the public sector, including AID program loans. /b Gross disbursements minus debt service. 9. Assuming that Colombia meets its 20 percent annual growth target for non-traditionals in the 1970-75 period, followed by 15 and 10 percent average annual rates of growth in 1975-80 and 1980-85, overall exports of goods and services should rise by 7.0-7.5 percent annually during the 1970- 85 period. The earnings generated by these exports, together with the above net foreign capital assistance, would enable Colombia to obtain ample supplies of imported items essential to the growth process. Unless lending terms harden drastically, moreover, the country should be able to manage external debt service without serious difficulty: EXTERNAL RESOURCE TRANSFER AND DEBT SERVICE (Millions of U.S. Dollars) 1970 1975 1980 1985 Exports 1,085 1,420 2,160 3,145 Imports 1,206 1,585 2,275 3,143 Resource Transfer 121 165 115 -2 Transfer as % of GDP 1.7 1.7 0.8 -0.0 Disbursed Debt OutstandingLa 1,212 2,278 3,568 4,914 Debt Outstanding, Including UndisbursedZa 1,738 2,717 4,049 5,440 Debt Service Ratio-i 11.5 13.4 17.9 19.6 Disbursed Debt as % of GDP 17.5 23.5 26.2 25.6 /a Outstanding balances at end of year. 75 Debt service/exports of goods and non-factor services. - iv - 10. To maintain a 7 percent rate of GDP growth for a period of 15 years is no mean task, particularly for a country that averaged only 4.8 percent between 1950 and 1968. From 1958 to 1968 the average was 5.1 percent, however, and more recently it has exceeded 6.0 percent. It iEs important to recognize that the upswing of the past few years took place prior to the sharp increase in coffee prices. It is the Mission's belief that if such an improvement were possible during a time of low coffee prices, current prospects for high and sustained output growth are cer- tainly enhanced by the prevalence of coffee prices 4.0-45 percent above earlier levels. It is absolutely crucial, nonetheless, that the coffee! boom be exploited so as to foster lasting economic growth. It would be! disastrous if this golden opportunity were lost because of an unreasonable upward shift in the consumption of non-developmental goods and services. 11. A simulation exercise described in this report indicates that, a continuation of seven percent growth for fifteen years would require Colombia to raise domestic savings and investment from a fifth to nearly a fourth of GDP by 1985. Such an effort would undoubtedly require great determination and perseverance. It is not the intention of the Mission to suggest that a seven percent growth rate should constitute an upper-limit objective for Colombia, however; a somewhat higher growth rate might prove feasible and would be eminently desirable. The International Labor Organization inter- agency team that visited Colombia earlier this year concluded that it -would take an eight percent rate of GDP growth to eliminate unemployment by 1985. Such a target would call for larger foreign capital inflow than indicated for the seven percent case, as well as a greater domestic savings effort. If the required increment of external finance were provided entirely by the private capital market, it would lead to a debt service ratio of 31 percent in 1980 and 42 percent in 1985. These high ratios could be lowered if some or all of the increment could be provided by official lending agencies on favorable terms. 12. The IBRD Mission believes that the following steps should be taken by Colombia in order to facilitate the attainment of rapid growth in output, income, and employment during the nineteen-seventies and beyond: (a) Public sector income and savings should be increased. This will involve a variety of measures, from improved tax collection to higher public utility rates and elimina- tion of the preferential exchange rate for crude petroleum transactions. Taxes may also have to be raised and new ones added. It is imperative that peso finance be made available to cover local-currency costs of development projects, lest external lenders be frustrated in their desire to help Colombia to the maximum of their ability. Current coffee policies, including the recent price- sharing arrangement with its high marginal tax rate, should be continued. (b) Non-traditional exports should be promoted vigorously. This means that exchange rate flexibility should con- tinued, and existing export incentives maintained or - v - improved. Tourism should be encouraged, which will call for a well-organized national tourism administration and adequate levels of funding for studies, advertising, and related outlays. Infrastructure facilities should be created in priority areas such as the north coast near Santa Marta. (c) Tariffs on industrial and agricultural items should be studied to verify that development is being properly stimulated. Marketing information and assistance should be expanded. Credit mechanisms should also be examined carefully and rationalized, with an eye to the working capital needs of a rapidly growing economy. (d) Agricultural extension services, soil testing, trial plantings, seed research, storage, distribution, and price support programs should be stepped up as quickly as human resources permit. Commodities suitable for export or for import substitution should be given special encouragement; fertilizers, insecticides, and other inputs should be made available to the farmer at the lowest possible price. Colonization and land redistribution programs should be carried out apace with the government's ability to provide essential supporting services. Drainage and irrigation projects should be reviewed with particular attention to costs and benefits relative to alternatives. (e) In the field of electric power work should be accelerated on transmission and distribution links, interconnection of regional systems, and the provision of energy to rural areas. Rates should be monitored continuously to ensure their ade- quacy. In transportation efforts should be continued to improve railway operations and lower costs. As for highways, special attention should be given to the location of rural roads and their relationship to colonization areas. Municipal water authorities should be assisted and encouraged to adopt administrative reforms and raise rates. The Public Health Plan should be implemented as soon as possible, with attention given to the completion and equipment of unfinished structures and the training of adequate numbers of public health per- sonnel. The technical component of secondary education should be expanded, and steps should be taken to smooth the flow of students through the educational system. Rural areas should receive special emphasis in this ongoing educational reform. (f) Finally, the preinvestment studies program now under way should be strengthened and given all the attention it right- fully deserves, since these studies are the foundation stones of future investment efforts. If these studies are done properly there should be little difficulty in obtaining external investment resources on the desired scale, provided domestic financial support is forthcoming. I. THE PROBLEM 1. As a result of several factors operating in the internal economy and its international economic relations, Colombia is in a position to achieve in the next several years rates of growth in real income consider- ably above the historical average. This improved prospect coincides with a growing concern, within the government administration and in public opinion generally, for the high level of urban unemployment and the low standards of welfare in rural areas -- a major cause of urban drift. The question is whether the propitious economic circumstances now existing will be used to the best advantage for sustained growth in output and employment at an accelerated rate. The alternative is a temporary cyclical upswing, much of it absorbed by rising personal consumption, to be followed by a settling back of the system to a relatively low rate of growth and labor force absorption. 2. Chapter II reviews the present favorable circumstances. Chapter III discusses the employment challenge. Problems and resource allocation are analyzed in Chapter IV. Chapters V and VI discuss the issues of re- source mobilization. II. BASES FOR GROWTH A. Investment 3. A sharp increase has taken place in recent years in Colombia's capacity to undertake development projects. This has been reflected in an upward shift in the aggregate rate of investment, in a particularly sharp rise in public investment, and in a dramatic increase in the flow of projects submitted for financing to international lending agencies. 4. The proportion of fixed capital investment to GDP in the last, three years of around 19 percent is much higher than the historical average. It was attained before the effects of the upward movement in coffee prices of late 1969 were felt, moreover. Table I. GROSS INVESTMENT IN FIXED CAPITAL, 1950-68 (as percent of GDP) Average 195o-54 15.0 1955-59 16.5 1960-64 17.4 1965 -66 16.2 1967-69 /a 19.1 /~ Estimated for 1969. Source: Banco de la Republica. 5. This increase in aggregate investment was primarily a function of an upward shift in public investment. Table 2. PUBLIC AND PRIVATE INVESTMENT, 1966-69 (Indices, in constant prices, 1966 = 100) 1966 1967 1968 1969 Public Investment, (Public Finance Definition) 100 131 158 (178) Public Investment, (National Accounts Definition) 100 132 151 n.a. Private Investment (National Accounts Definition) 100 79 97 n.a. /a Public Investment as Percent of Total (National Accounts Definition) 20.3 28.3 26.8 n.a. /a Probably a significant increase. Note: The definition of public investment in public finance accounts is wider than in national income accounts. The former includes all investments of public funds which go through a government execut- ing agency, even if the final user of funds is private sector; the latter refers only to investments where the final user is public sector. Source: Volume II. 6. The increased capacity to prepare investment projects satisfacto- rily,from the engineering and economic viewpoints, has been reflected in a sharp upswing of project commitments of external lending agencies in the last two years: Table 3. COMMITMENTS OF FOREIGN ASSISTANCE FOR DEVELOPMENT PROJECTS, 1961-70 (Millions US $) Value of Project Year Commitments 1961 103 1962 89 1963 127 1964 91 1965 42 1966 89 1967 86 1968 179 1969 233 Source: Volume II, Projects for External Financing, 1970-75. 7. The prospects for future project availability are excellent. IThrough a special office in its Planning Department, the government has placed project preparation work and associated studies on a systematic and well-coordinated basis. This office, FONADE, has been well financed by the government and by a loan from the Inter-American Development Bank. T'he 1970 IBRD mission, jointly with FONADE and the UNDP Resident Repre- sentative Office in Colombia, has prepared a draft preinvestment stuidies program.!/ The total investment which may be initiated on the basis of all proposed studies could range in the order of US $2-3 billion. During the 1970's, public investment should show an improvement in quality and expansion in scope. With the acceleration of growth in real income and the associated increase in demand, prospects for private investment are also very good. The assumption for both public and private investment growth is that public policies in general will be conducive to sustained growth in capital expenditures. 8. The main problem which can now be foreseen concerns the avail- ability of local finance for investment, particularly in the public sector. From 1950-68 public savings averaged 4-5 percent of GDP. In the last two years they reached nearly 6 percent of GDP, as a result of a sharp increase in public revenue (40 percent in real terms in 1966-59). Despite this increase in savings the government had to resort to external borrowing to finance part of local currency cost of projects; and the latter has taken the form, in part, of program loans. In the last four years program loans have financed 15 percent of public investment, on the average. 9. As public investment expands the need for public savings will expand correspondingly; in particular, with the level of project cornmit- ments now contracted the demand for local savings to support the foreign- financed projects will increase sharply. The fiscal situation is discussed further in Chapter V. B. Foreign Exchange Supply 10. Two developments have led to a substantial alleviation of the foreign exchange constraint to growth: expansion of non-traditional exports and a dramatic turn in the world coffee market. 11. In the three years 1966-69 non-traditional exports doubled -- an average annual growth rate of 24 percent on a base which is not insig- nificant. 2/ S)eo Voliime 1ITT. Table 4. COLOMBIAN EXPORTS (Million US $) Non-Traditional Exports Coffee Petroleum Total 1960 52.3 332.2 80.0 464.6 1961 58.4 307.8 68.2 434.5 1962 70.8 332.0 60.6 463.4 1963 66.5 303.0 77.2 446.7 1964 78.9 394.2 74.9 548.1 1965 107.1 343.9 88.2 539.1 1966 108.7 328.3 70.6 507.6 1967 126.3 322.4 61.2 509.9 1968 170.6 351.4 36.3 558.3 1969 207.2 354.0 55.0 616.2 Source: Departamento Administrativo Nacional de Estadistica (DANE). 12. Non-traditional exports consist of a large variety of items, both agricultural commodities and manufactures. Among the former, the most important are cotton, bananas, sugar, tobacco,and livestock; among the latter, textiles, leather, glass, wood products, cement,and paper. Lately, machinery, chemical products,and pharmaceuticals have been exported. One of the most impressive achievements of the Colombian economy has been the speed with which new products have been added to the export flow. Table 5. GROWTH OF NON-TRADITIONAL EXPORTS (Thousands US $) 1963 1966 1969 Comiasdities existing in 1955-57 24,967 49,714 68,989 Commodities initiated in 1959 5,184 12,251 27,015 1960 6,212 4,954 36,413 1961 3,210 4,548 16,021 1963 3,323 4,872 31,441 1964 - 2,449 909 1966 - - 9,224 Source: Banco de la Republica. 13. The Colombian authorities? target for non-traditional exports in 1975 is $620 million -- an annual growth rate of 20 percent. Since world market outlook is not bright for bananas, sugar,and cotton (which accoumt for one-third of non-traditional exports), it is other agricul- turaL products and manufactures which have to expand very rapidly. To- ward the end of 1969 and in early 1970 there was evidence of a slow- down in the rate of growth of non-traditional exports, in part because of rising domestic consumption of some of the products concerned. Such slow-downs have occurred in the past and have proved temporary. Since the present slow-down occurs during an upswing in the coffee market and an associated expansion of foreign exchange earnings there is fear that it may blunt the incentive for a continuing effort to expand non-traditional exports at a maximum feasible rate. It would be unfortunate if this happtened --- see the long-run analysis in Chapter VI. Any significant loss of momentum in the expansion of non-traditional exports would be extremely difficult to make up for at the time when such exports would be most ne!eded. 14. One promising source of foreign exchange earnings that has been neglected in the past is tourism. In 1969 Colombia received 140,000 visitors and $16 million in exchange earnings; this compares with $65 million in Bermuda and $94 million in Jamaica. With 1,000 miles of Caribbean coast, Colombia has the potential for international tourism deveLopment on a substantial scale. It has the same characteristics as the rest of the Caribbean: short distance from the U.S. supplier market and therefore relatively cheap air fares, reverse climatic seasons,and exceptional beach assets. In addition, it has historical and cultural attractions, particularly in Cartagena, and ethnic and cultural ties with neighboring Venezuela, another supplier market. As a South American country, Colombia forms part of package tours to the area, and Bogota can offer additional tourist circuits -- the archeological remains in San Augustin, and the Popayan and Boyaca areas. Prices in general and hotel prfces in particular are at incentive levels compared with other Caribbean resorts. Recently, with the introduction of Group Inclusive Tour Fares, Colombia has become competitive in air fares with the rest of the Caribbean (see Volume VI, Tourism). 15. There is little doubt that in the coastal area, with perhaps the highest unemployment rate in the country (18 percent in Barranquilla), large- scale tourism development should command high priority. Investment costs per (nnployment unit are likely to be lower than in alternatives. Foreign exchange earnings will contribute to export diversification. A strong im- petus to tourist development in Santa Marta area will be given by the opening in late 1971 of the Caribbean Trunk Road linking Venezuela with the Colombian coast. Public sector support to tourist development will have to include improvement of infra-structure, particularly water supply and sewerage, on the coast and on the island of San Andres. In order to avoid overlapping in sector planning and associated investigations, it is suggested that the pre- sently planned preinvestment studies be modified and integrated into one global study.!/ 1/ 'See Volume VI, Tourismand Volume III, Preinvestment Study Program. - 7 - 16. The coffee upswing makes it possible to shift the economy to a higher rate of investment and growth during the next several years. Coffee still accounts for a third of Colombian agricultural pro- duction, a tenth of gross domestic product, a tenth of central government revenue and 60-65 percent of merchandise exports.!/ 17. Following the downswing in the coffee cycle from the mid-1950's to the mid-1960's, characterized by large over-production, surplus stock accumulation, and declining prices, the world coffee economy has been ex- periencing deficits of current production in relation to current consump- tion for a number of years and on a rising scale. Table 6. COFFEE: WORLD CONSMPTTION AND PRODUCTIONa (Millions of bags of 60 kgs) Surplus (+) Consumption Production or Deficit (-) Imports into Consumption Consuming in Producing Countries Countries Total 1961 44 13 57 67 + 10 1962 47 14 61 73 + 12 1963 49 14 63 69 + 6 1964 49 14 63 66 + 3 1965 47 15 62 59 - 3 1966 50 16 66 82 + 16 1967 49 17 66 58 - B 1968 56 17 73 69 - 4 1969 53 18 71 61 - 10 1970 54 /b 19 /C 73 /b 64 -9 /b 1971 55 /b 19 /C 74 A 56 / - is /a Calendar year for consumption; preceding crop year for production (i.e., 1971 means crop year 1970/71). /b Conservative estimates. /c Estimates. /d Preliminary for crop year 1970/71. Source: U.S. Department of Agriculture, World Agricultural Production and Trade, for production; George Gordon Paton & Co., Complete Coffee Coverage, for consumption, except 1970 and 1971 which are staff estimates. 18. The 1970/71 production deficit is expected to be largest in recorded coffee history (Chart I), equivalent to 25 percent of world consumption. l/ See Volume II, Coffee in Colonbia. COFFEE: WORLD PRODUCTION AND CONSUMPTION, 1900 TO 1971 (MILLION BAGS OF 60KG.) DO, FFT 1-r F1- 1 1 1 ThFTTiF -FFF ri- 100 30 80 WORLD PRODUCTION rw SO / -60 40 A t - 4 40 20 - 4 - 20 ,1V V 't ..WORLD CONSUMPTION O I " A, . 1 I I I I I I I I. 1 I. I I I I1. I I I I I I I I I I I 1_ 1 L L. I I.11 1 I I I I I I I I I I I I lI O 1900 1910 1920 1930 1940 1950 1960 1970 1975 NOTE: Before 1921, exportable production and net imports. IBRD - 4156(2R) - 9 - 19. World market prices of different grades of coffee rose by 40-50 percent between the fall of 1969 and the present. Prices would have risen ever, more if it had not been for massive stock disposals by the producing c oiurtriea . 20. Official projections anticipate that offers from coffee stocks should be sufficient to keep prices at the present level for a couple of years. Once the worst effects of the Brazilian frost are over prices may gradually decline, and new investment, induced by present prices, could generate sufficient new output to bring the price down some 20 percent by 1975. 21. Views are divided concerning these assumptions. Good quality stocks may already be virtually exhausted; low Brazilian output may reflect the effects of large disinvestments which took place in the mid- 1960's more than the effects of the mid-1969 frost; and new plantings and replantings may fall short of expectations if the governments in the pro- ducing countries, learning from past experience, pursue a policy of keeping producer prices down by increasing export taxes. If these conditions were to prevail a further major increase in the world market price of coffee could be in the making; moreover, the price could stay at such a higher level for a fairly long time. 22. Whatever assumptions are made, there is little doubt that over the next several years Colombia's exchange earnings from coffee will be substantially higher than at any time in the 1960's. In the three years 1970-72 they should average, at a minimum, $500 million per annum, com- pared with $340 million in 1967-69 -- an increase of almost 50 percent. If non-traditional exports grow at 20 percent p.a. total merchandise export earnings within a few years should exceed $900 million p.a.,compared with less than $600 million in 1967-69. For the first time since the mid-1950's, growth in domestic output and investment will not be seriously constrained by a shortage of exchange. III. THE EMPLOYMENT CHALLENGE A. Urban Unemployment 23. In its recently published study,!/ the ILO Inter-Agency Team has estimated open urban unemployment at 14 percent of the labor force in 1967. This is an average of sample surveys in eight cities, including the largest four. 24. In addition, there is underemployment and "disguised" unemp:loy- ment -- persons without work who would probably seek it if open unemploy- ment were lower. The ILO Team estimates these groups at 12 percent of the urban labor force on a full-time equivalent basis, again in 1967. Table 7. URBAN UNEMPLOYMENT AND UNDEREMPLOYMENT, 1967 (Percentage of active urban labor force) Total Males Females 1. Open Unemployment -- persons without work and seeking it 14 12 1? 2. Disguised Unemployment -- persons without work and who would probably seek it if unemployment were much lower (7)' 10 n.a. 3. Open UnderemploymentLa -- persons working less than 32 hours per week and seeking to work longer 2 2 1 4. Disguised Underemployment/a -- persons working less than 32 hours per week, and who would probably seek longer hours if the opportunity were available 3 2 4 TOTAL (25) 25 (25)/ /a The proportion of the labor force working less than 32 hours a week is larger than this figure which is obtained by expressing the number of hours of underemployment in units of 48 hours (i.e., in its full-time equivalent) before the percentage is worked out. lb No estimate possible but probably substantial. T Incomplete total; see footnote /b. Source: ILO, op. cit., p. 1S. 1/ ILO, Towards Full Employment, A Programre for Colombia, May 1970. The Inter-Agency Team was headed by Prof. Dudley Seers, Institute of Development Studies, University of Sussex. - 11 - 25. Partial evidence suggests that some decline in open urban unemployment may have taken place since 1967. Table 8. UNEMPLOYMENT RATE IN BOGOTA 1963/a 1967 March 8.4 April 16.0 June 8.7 June 12.7 September 7.4 September 10.6 December 7.1 December 9.5 Average 7.9 Average 12.2 1964/a 1968 March 6.7 March 13.5 June 7.2 June 11.6 September 7.4 September 11.2 Average 7.1 December 9.8 Average 11.5 1965 April 9.2 1969 June 8.8 March 11.0 September 9.7 June 11.6 December 8.0 September 8.9 Average 8.9 December 6.9 Average 9.6 1966 March 10.1 1970 June 11.5 March 8.8 September 9.7 December 9.1 Average 10.1 / In 1963 and 1964 the labor force includes persons of age 14 and over; in other years, 10 and over. Source: Centro de Estudios sobre Desarrollo Economico (CEDE), Universidad de los Andes, Sample Survey Bogota, June 1970. 26. There are no recent unemployment surveys for cities other than Bogota. On the average, their unemployment in the past was higher by 2-3 percentage points. If they have experienced a similar cycle as Bogota, open urban unemployment in Colombia now may average 10-12 percent. - 12 - 27. The massive increase in unemployment in the mid-1960's was associated with low output growth rates and depressed investment.l/ T:he apparent improvement in 1969 coincided with acceleration in output growth and investment2./ B. Labor Force Growth 28. For the next ten to fifteen years Colombia's labor force is pro- jected to grow at 3.5 percent p.a., one of the highest rates in the world. 29. The expected labor force growth rate is higher than in the past, primarily because of an acceleration of population growth. Even if the latter, at present estimated at 3.3 percent p.a., were to fall off in the immediate future due to a reduction in the birth rate the growth of labor force would be unchanged for the next 15 years, since the expected entrants into the labor force have already been born. But unless the birth rate falls faster than the death rate, the problem, already grave, will be coqDounded in later years.2!/ 30. During the last two decades employment rose by 2.2 percent p.a. This was associated with an output growth rate of less than 5 percent p.a. Conltinuation of these trends would lead to staggering numbers of unemployed, in view of the prospective labor force growth of 3.5 percent p.a. 31. With an average productivity (output per man-year) growth of 3.2 percent p.a., output has to increase at 6.7 percent to absorb new entrants into the labor force. Output has to increase at 7-8 percent if unemployment is to be reduced. This is a challenge common to most Latin American countries -- see Prebisch Reporty./ 1/ In 1965-67 aggregate output rose at 4.4 percent, industrial production at 5 percent, and gross fixed investment averaged 16.7 percent of gross product, all three below historical trend values. 2/ In 1969 aggregate output rose at 6.5-7.0 percent, industrial production at 8.5 percent, and investment reached 20 percent of gross product, all three above historical trend values. 3/ The other factor determining growth in labor supply is the degree of participation of population in active labor force (participation rate). This rate has fallen in Colombia to a very low level of below 30 percent, partly as a result of changes in the demographic structure of the population (rising proportion of the very young) and partly as a result of growing unemployment (reducing the incentive to seek work and thus be counted as a member of the active labor force). Further fall is not anticipated; to the contrary, - participation rates are now expected to start increasing. Hence,growth in labor supply exceeds the rate of population growth- over the next fifteen years. (For detailed analysis see Volume II, Part One, Population, Employment,and Unemployment; ILO, op. cit.; and CIAP, Domestic Efforts and the Needs for External Financing _or The Development of Colombia, Volume II, Appendix A, February 1977. 4/ Raul Prebisch, Change and Development, Latin America's Great Task, Santiago 1970. - 13 - C. The Rural Problem 32. Urban unemployment results in part from massive migration of the rural population. Between 1951 and 1964 the largest cities grew at 7 percent p.a., more than double the rate of natural increase; all cities grew at 5.4 percent per annum, while population in the rural areas in- creased at only 1.3 percent. More than one-half of the total population now lives in cities.S/ 33. A massive exodus from agriculture, in the face of insufficient employment opportunities in urban centers, is explained by miserable living conditions for much of rural population. It has been argued that agricultural real wages have changed little since 1935 -- a fall in the following 15-20 years being made up by a rise which ended in 1963, and that the bottom third of the rural population is probably no better off than in the 1930s.2/ The supply of basic facilities -- water, health care, electricity -- are vastly inferior in the rural areas.2! Almost two-thirds of the schools in the rural areas provide only one or two years of schooling. As a result, of the total number of children enrolled in the first grade of primary schools, only 3 percent complete the fifth grade of such schools, while secondary education and vocational training facilities are virtually non-existent in the rural areas.4/ 34. Low incomes in agriculture reflect low productivity and the extremely small size of the vast majority of farms (minifundias). In 1960 a fourth of all farms enumerated contained only one-half hectares (1.25 acres) and half had less than three hectares. Many of these were undoubtedly part-time farmers relying on other employment to assure livelihood. In contrast, three-and-a-half percent of large owners were recorded to hold two-thirds of all farm area. Some of the largest hold- ings are in frontier areas which are not accessible for near-term development. 1/ Cities are defined here to include centers of 1,500 and more inhabitants. For discussion of urban and regional problems see Volume XII, Regional and Urban Development. 2/ Unpublished estimates by Prof. Albert Berry. 3/ For details, see Volumes VIII, Power and Telecommunications, IX, Water Supply, and XI, Public Health. 4/ Volume X, BEucation. - 14 - Table 9. PATTERN OF LAND DISTRIBUTION BY FARM SIZE, 1960La Farm Size Number of Percent of Total Area Percent of (Hectares) Farms Total Number (Hectares) Total Area of Farms less than 1.0 298,071 24.7 131,993 0.5 1-3 308,352 25.5 545,964 2.0 3-5 150,182 12.4 561,019 2.0 5-10 1699,145 14.0 19164,749 403 10-20 1149231 9.4 1,572,076 5.8 20-30 44,049 3.6 1,043,554 3.8 30-50 42,740 3.6 1,595,147 5.8 50-100 39,990 3.3 2,680o,71 9.8 100-500 36,010 3.0 6,990,471 25.6 500-1,000 4,l41 0.3 2,73070o4 10.0 over 1,000 2,761 0.2 89321,619 30.4 Total 1,209,672 100.0 27,337,287 100.0 /a Since 1960, 2 million additional hectares have been put under cultivation and 300,000 farms established. Source: Agricultural Census, 1960. 35. According to officials of INCORA (the land reform agency), the figures in the above table tend to exaggerate the proportion of the land held in very large holdings: some 3-4 million hectares should be deducted from the category above 1,000 hectares and registered as reverted to the public domain, and under INCORA's control. This was mostly poor land, deserted by the owners, The quality of the land varies greatly, and while some of the large holdings are good arable land, it is maintained that the majority is not. Drainage and irrigation are apparently needed in many cases. 36. The problem is compounded by the improper utilization of good land, largely because of historical patterns of land ownership and use A/ Live- stock raising goes on in large holdings in fertile valleys that should presumably be planted to crops, while steep mountain slopes are frequently worked on and found denuded of their natural forests and therefore exposed to erosion, Many family farms are simply too small to support a decent level of living even where operated with reasonable efficiency. These issues are discussed more thoroughly in Chapter IV and Volume V. 1/ See on this ILO. op. cit., pp. 59-63. IV. MAJOR ISSUES OF RESOURCE ALLOCATION 37. A continuing emphasis on export diversification and a systematic policy of containment of the coffee sector represent necessary but not sufficient conditions for high rates of growth and employment. Rates of growth in industry and non-coffee agriculture will have to be stepped up substantially, infrastructure facilities will have to be created, and there is a great need for new facilities in education, health, and water supply. There is also a need for reasonable balance between capital and current expenditures. Public policy influences resource allocation decisions in three ways: through capital and current expenditures of the government and its decentralized agencies: through the management of credit; and through price policy, including here tariff protection, price support, subsidies, tax incentives,and foreign exchange arrangements. The Colombian authorities have made extensive use of all three devices. The latter two -- price policy and credit management -- have been particularly important in the commodity producing sectors -- agriculture and industry. A. Commodity Producing Sectors: Costs and Prices 38. In relation to international prices, the cost and price levels of Colombian production at present broadly fall into three categories. (a) Coffee is produced and sold on the world market at an effective exchange rate of 11 pesos per US $ (compared to the over-all exchange rate of 18 pesos per US $). The effective coffee exchange rate results from export taxes of 40 percent. (b) A variety of agricultural products and manufactures enter the export market at an effective exchange rate of 20 pesos per US $ or are competitive with imports at an effective exchange rate up to 23 pesos per US $. Among agricultural products, lowest cost items are bananas, cotton, soybeans, timber,and fish. Among manufactures, lowest cost are textiles, cement, glass, paper products, some chemicals, and processed foods. The effective export exchange rate results from the application of an export subsidy on non-traditional products,lz/ and the effective import exchange rate reflects a comparison of domestic and foreign prices for a large number of products. (c) Two staple foodstuffs, wheat and corn, have support prices 40-50 percent above world market prices, i.e., an effective exchange rate of 25-27 pesos per US $. 1/ Subsidy in the form of tax certificates equal to 15 percent of the value of exports, less a discount for one-year mandatory waiting period (20 percent of the value of the certificates), applied to the over-all exchange rate of 18 pesos per US $, equals an effective exchange rate of 20 pesos per US $. - 16 - (The situation in rice, the third major staple, is complex.&/) Among manufactured products, prices of consumer durables are very high; this partly reflects high duties on imported inputs, but it also results from low production volumes and perhaps high assembly costs. Some chemicals also have high prices -- an effective exchange rate above 27 pesos per US $. Domestically produced capital goods have an average duty of 40 percent, i.e., an effective exchange rate of 25 pesos per US $; this again is influenced by duties of similar magnitude on imported inputs. 39, It would follow from the above that Colombia has a clear com- parative advantage in coffee production since it can export coffee at an effective exchange rate of 11 pesos per US $, while almost all other activities call for an effective exchange rate above 20 pesos per US $. The implication is that costs in coffee, in relation to international pr:ice, are about one-half or less than costs in other sectors, again in relation to international prices. This comparative advantage cannot be realized and may be illusory, however; because of slow growth in world demand, the large Colombian share of the market, and sharing arrangements which help maintain the world price Colombia can channel only very limited additional resources into coffee production. The major outlets to growth have to be sought elsewhere. 40. Can Colombia achieve full employment on a sustained basis by channelling its resources into the next best group of activities -- those under 2(b) which are competitive with foreign producers at an effective exchange rate range of 20-23 pesos per US $? This question cannot be answered satisfactorily at the present time, but it is possible to suggest ways in which solutions can be sought. (a) Agriculture 41. The Colombian agricultural resource base is such that, judging from recent experience, it can assure satisfactory supply of most products both for home and export markets within the indicated price range. This is possible because of the extraordinary variety of soils and climates and chetap labor supply. It is puzzling why long-run output growth has been so sluggish (3.4 percent p.a.). With proper incentives since 1966, it has accelerated to more than 5.5 percent p.a. Agricultural trade balance (excluding coffee), on the average negative US $ 25 million p.a. in 19360-66 turned into a positive $55 million in 1969; agricultural exports other than coffee have lately been increasing at 25 percent p.a. Output expansion has been particularly rapid in grain sorghum, soybeans, cotton, sugar, and rice. 1/ The support price, at the over-all exchange rate, is $191 per metric ton, but the domestic market price is $150. The world market price in 1968-1969 averaged $185, but is expected to fall to $125 per ton by 1975. - 17 - 42. The key problem of Colombia's agriculture is low average yield. Its potential is indicated by high yields achieved on successful farms, yields which compare favorably with yields achieved in other developing countries, even those which have specialized in particular crops (see Volume V, Agriculture). 43. Two main policy questions must be faced in agriculture: (a) Which crops should be stimulated, through price support, credit, and government investment and research? (b) At what speed should land reform be carried out? 44. In principle, the decisive considerations in answering the first question are the differences in time and costs involved in raising yields of different crops: those crops should be stimulated for which time and cost requirements are likely to be lowest. A complication arises because property relations in agriculture differ considerably for different crops: stimulation of a promising crop grown primarily by large commercial farmers would not help the large majority of small farmers. And the other way around: a crop may not be particularly promising over the short run, but if grown primarily by large numbers of small farmers, might merit support on social as well as economic grounds. In some cases the conflict can be avoided: grain sorghum, which has shown rapid increases in output and which is badly needed as input for meat production, is primarily grown by small farmers; cocoa, which has excellent natural growing conditions and which is needed as a substitute for imports, is grown on medium-sized farms and its expansion is likely to be concentrated there as well. But cotton, a very rapidly expanding crop, is primarily grown by large commercial farmers; while corn and wheat, the least competitive of all crops, are found primarily in smaller farms. (There is, however, no reason why cotton cannot be grown by small holders or corn or wheat on commercial scale farms.) Table 10. CROP AREA IN RELATION TO FARM SIZE (Percentages) Farms Farms Farms Farms 0-5 5-50 50-200 over 200 Crop Hectares Hectares Hectares Hectares Total Cotton 3.9 18.8 28.6 48.7 100.0 Rice 7.1 26.2 28.2 38.5 100.0 Sorghum & Millet 35.3 41.3 14.3 9.1 100.0 Cocoa 17.1 53.8 18.6 10.5 100.0 Corn 26.2 42.3 18.0 13.1 100.0 Wheat 30.6 52.5 12.3 4.6 100.0 Source: Volume V, Agriculture. - 18 - 45. These circumstances preclude ideal solutions, but they still allow for intelligent solutions. Situations should be avoided in which support prices lead to such output expansion of a non-competitive crop that large financial losses are sustained by the government in exports, as happened with rice in 1969. Similarly, the objective of corn price support policy should not be to generate export surpluses, but to meet the rapidly rising domestic demand for feed (together with sorghum). While support to domestic wheat production will continue to be needed, it is debatable whether Colombia should strive for self-sufficiency if non-traditional exports grow rapidly (and therefore imports can be paid for). It is doubtful whether the policy of subsidized credit should continue with respect to large commercial farmers: social objectives would be adequately served if subsidized credit is available only to small farmers. (A dual support price system -- higher prices for small farmers and lower for large ones -- is difficult, but dual credit conditions are feasible.) Commercial farming appears sufficiently profitable to be able to afford the full cost of credit.i/ 46. The second question concerning the speed of land reform has been discussed extensively in Colombia and abroad, most recently by the ILO team. A powerful agency, INCORA, has taken a leading role not only in agrarian reform but in rural development generally: it is engaged in supervised agricultural credit, in large-scale irrigation and drainage works, colonization, and preparation of preinvestment studies..Z/ Further preinvestment studies, one covering an entire region, are proposed.-/ The organization is now able to carry out land redistribution and to support the beneficiaries much better than several years ago. 47. Over the long run, there is no reason to think that agrarian reform would adversely affect output. An individually operated farm is likely to enjoy a much larger labor input and can be planted to 1/ In a sample survey of fourteen export products in 1968, the highest profit margins were recorded in bananas and cotton, the chief non- coffee farm exports. Margins amounted to 16 percent of sales. 2/ See Volume V, Agriculture. (Drainage and irrigation works have proven to be quite expensive per family benefitted.) 3/ See Volume III, Preinvestment Study Program. - 19 - higher value crops than the farm worked by tenants and hired labor../ Over the short run, the critical question is how adequate are supporting services following the reform. The experience thus far is encouraging: the yields on small holdings in the INCORA projects, where adequate tech- nical assistance and credit are provided, compare favorably with yields on large commercial farms.Z/ If this pattern can be maintained fears of a short-run decline in output would not be justified, while social benefits of agrarian reform would be enormous. Income distribution in agriculture, which is more skewed than in the urban areas,l/ would improve, and so would rural living standards; while the migratory flow off the land would be slowed down, relieving the pressure of unemploy- ment in the cities. 48. As pointed out by various qualified observers, a major constraint on acceleration of the pace of land redistribution and colonization in Golombia is the Government's ability to provide adequate supporting services after settlement. The research, manpower training, and financing efforts needed to make land transfer an effective vehicle for rural improvement may already be near short-rin limits. To step up the tempo of land distribution far beyond the country's ability to furnish these essential services could result in the creation of thousands of new subsistence farmers barely able to eke out a living from their new plots. Since this is not a pleasant prospect it must be concluded that Colombia will do everything possible to train and recruit new agricultural extension people, soil scientists, crop experts, education and public health specialists, and, in short, do what is necessary to permit a more rapid and equitable utilization of the country's land resources. 1/ ILO, op.cit., pp. 64-65. There is an apparent inconsistency between the evidence shown in Volume V, Agriculture, which indicates that yields per hectare in a number of crops increase with farm size, and the evidence quoted by ILO which states that gross value of output per hectare on the sub-family farms is much higher than on the very large farms. One possible explanation may be that the very large farms normally use a large proportion of land for livestock grazing which has low output value per hectare or leave part of the land unworked, while sub-family farms use all the land for growing the highest value crop that is technically possible. The result would then be that even if large farms achieve higher yields in individual crops, they obtain lower gross value per hectare owned, on the average. 2/ See Volume V, Agriculture. 3/ In 1960 the five percent of the population in agriculture with highest incomes received 40 percent of total farm income, and had an average income which was twenty times as high as the median income of the agricultural population. In the cities in 1964, the corresponding figures are one-third and nine. (Albert Berry, The Distribution of Agriculturally Based Income in Colombia, 1960; Miguel Urrutia y Clara Elsa Villalba, La distribucion del ingreso urbano Dara Colombia en 196Ii Revista dei Banco de la Revublica. September I7969.) It is unlikely that the situation has changed radically since. - 20 - (b) Industry 49. Tariffs for Colombian manufacturing are relatively high: two- fifths of the items carry duties above 45 percent, implying an effective exchange rate in excess of 25 pesos per US $ for the products concerned. It is questionable, however, how representative this is for the cost and price level of the industrial sector as a whole. About one-half of Colom- bian manufacturing still consists of non-durable consumer goods where economies of scale are not important and where prices do not compare nm- favorably with foreign prices at the exchange rate range of 20-23 pesos per US $. Another third of industrial output consists of intermediate goods where economies of scale are relevant: in several major product groups in this category Colombia has become an exporter at the exchange rate of 20 pesos per US $. The key issue for Colombian manufacturing is not that, the present industrial structure is inefficient and high-cost, although inefficiencies exist, but what policies should be pursued in the future to avoid major misallocations of resources while still assuring rapid industrial growth. This question is particularly relevant for the inter- mediate and capital goods industries. Table 11. STRUCTURE AND GROWTH OF MANUFACTURING OUTPUT Gross Value Added, 1967 Annual Growth (millions of pesos)Za Rate 1953-1967 Non-durable consumer goods 8,430 5.3 Food 2,442 Beverages 2,072 Textiles 1,001 Clothing and footwear 644 Pharmaceuticals 1,183 Other 1,088 Durable consumer goods 1,004 8.o Intermediate goods 4,940 8.7 Textiles 1,001 Chemicals 866 Non-metallic minerals 794 Metal products 674 Petroleum and coal products 572 Paper and products, basic metals, leather, and wood 1,034 /b Capital goods4- 621 11., Other 412 13.3 15,406 6. 7 /a For conversion into dollars the exchange rate of 15 pesos per US $ should be used. /b Except appliances and motor vehicles. Source: Volume IV, Industry. - 2J. - 50. As for intermediate goods, Colombian prices are reasonably competitive with import prices in steel, for the limited range of pro- ducts that are domestically produced,!/ but this may not last when the world market weakens as now expected. Steel consumption is of the order of 600,000 tons and is projected to increase to close to 1 million by 1975. It is of crucial importance for the future of the Colombian engi- neering industries that they obtain as low-cost steel as possible, and the issue of phases of development and location of an integrated industry (interior vs. Atlantic coast) is suggested for a priority preinvestment study.J/ Domestic production of fertilizer, another key intermediate product, appears competitive with import prices, but distribution costs are very high and there is great uncertainty regarding specific mixes needed for the different crops in the highly varied soils and climates of Colombia. This complex of issues and the associated further development of the industry also call for urgent detailed investigation.2/ In other chemicals the production is new, technical efficiency is below international standards,and the scale of output too low. Prices are particularly high in synthetic fibres. It is suggested that further development of the industry be planned in the context of the Andean re- gional market../ Production of construction materials such as cement and asbestos products is quite competitive: these materials enter the export market. Also competitive are petroleum and coal products, paper, wood products and textiles. 51. The Colombian market for capital goods is now of the order of US $400 million p.a., and it should grow rapidly. The development of the domestic engineering industries would be stimulated if present high duties on imported inputs for these industries were reduced.2/ Given the relatively small size of the market, the industry should specialize in particular pro- ducts and in parts of particular production lines -- perhaps in interchange with major international manufacturers -- to the maximum extent possible. Planning growth of domestic engineering industry and associated adjustments in domestic tariff, licensing, and credit arrangements will be a novel experience. It is suggested that a special unit be established in the Government to carry out the needed market and production studies and to make recommendations concerning policy changes and specific licensing decisions. 1/ On the average, domestic prices f.o.b. plant are 20 percent above c.i.f. import prices Atlantic Coast, i.e., an effective exchange rate of 19.6 pesos per US $. Prices in the interior, however, are 23 percent higher than on the coast due to high internal transport costs -- "natural" protection of substantial importance in Colombia. 2/ See Volume III, Preinvestment Study Program. 3/ The duty on copper products is 35-40 percent, on parts for electrical machinery 40 percent and on parts for mechanical machinery 50 percent. - 22 - 52. The introduction of the flexible exchange rate and the across- the-board export subsidy on non-traditional products in 1967 has played a crucial role in shaping the Colombian industrial structure. By this measure Colombia has taken a major step to insure not only that rising domestic demand for imported industrial inputs will be matched by an ex- pansion of industrial exports and thus of import capacity needed to sustain rapid industrial growth, but also that specialized production for the world market can compete for productive factors with production for the protected domestic market, thus raising the efficiency in resource use all-around. It is of fundamental importance that this policy be continued, in one form or another. Thus, if in order to accelerate industrial growth it is nec- essary to raise effective protection on engineering and/or intermecliate goods and this cannot be achieved by reducing duties on imported inputs, the in- crease in protection should be accompanied by an increase in the export sub- sidy. This would obviate the need for extremely high protection and the associated increases in real costs and disincentives for capital investment, while still achieving the objective of rapid industrialization. 53. One of the major problems which will face Colombian industry, in common with other developing countries, is trade restrictions in major foreign markets. Colombia has developed an efficient, high-quality -textile industry, based on domestic raw materials, which is now emerging as a major exporter. Its export effor-t should be supplemented by a massive expansion of ready-made clothing, a field where other developing countries have made major advances. But if expansion is thwarted by foreign restrictions on trade, Colombia will be pushed into developing other sub- sectors where it is less efficient and where higher rates of protection and subsidy will be needed. The example of textiles is not unique. The objective of full employTmnt will be much more difficult to attain if the present climate in international trade relations persists. B. Commodity Producing Sectors: Credit Allocation 54. Colombian industrialists and bankers maintain that the major obstacle to industrial expansion at the present time is shortage of credit for working capital. This complaint can mean two different things: (a) credit to industry and commerce is more expensive than credit to other sectors; and (b) credit from the organized banking system is simply not available for certain classes of industrial borrowers. The statistical evidence confirms (a): credit is regulated in such fashion that industry and commerce pay substantially higher interest rates than other sectors. ',5. Lending to industry and commerce for working capital is done mostly by commercial banks at the nominal interest rate of 14 percent;;/ to this should be added commissions and there is also a frequent practice of requiring compensating balances, resulting in an effective interest rate IL/ The part of the portfolio of commercial banks at interest rates below 14 percent, shown in Table 12 is owed by privileged borrowers, mostly the agricultural sector, to which commercial banks have to lend a stated percentage of their resources. - 23 - of 17-18 percent. Lending to agriculture, mostly'through the Caja Agraria and the Livestock Bank, occurs predominantly at interest rates ranging from 8-11 percent. Similarly, lending for housing carries interest rates of 9-13 percent.&/ It is maintained that some industrial and cormmercial bor- rowers of lower credit standing have to obtain funds in the street market at 2 percent per month or higher; this market is allegedly fed in part from loans obtained by livestock raisers at low agricultural interest rates. Table _12. PORTFOLIO OF THE BANKING SYSTEM BY INTEREST RATES, 1968 (Thousands of pesos) Interest Commercial Caja Agraria & Rate Banks Banco Ganadero Mortgage Bank FinancierasL/ 0-6 186,407 173,444 72,287 - 7-8 919,579 1,272,564 44,985 5,746 9-10 1,139,826 949,398 428,80C 566,347 11-12 928,522 1,804,788 1,121,822 197,354 13-14 4,800,004 91,615 263,810 596,158 15-16 125,255 1,774 - 306,251 17-18 9,188 - 822,866 586,631 Total 8,108,781 4,293,583 2,754,570 2,271,000 /a 70 percent of the portfolio is owed by industry and another 25 percent by construction activities. Sources: Banco de la Republica, P.I.F. and I.F.I. 56. There is no direct evidence to confirm (b), inability of certain classes of industrial borrowers to obtain short-term credit. Credit to industry and commerce has risen at a significantly lower rate than the gross product of these two sectors, however, implying a credit shortage which may mean that commercial banks have tightened creditworthiness standards and restricted lending to other than prime customers. 1/ The exception is lending by the mortgage bank for general purposes (30 percent of its portfolio where the house is collateral); these transactions take place at 17 percent. - 24 - Table 13 INDUSTRY AND COMMERCE: LOANS BY COMMERCIAL AND SPECIALIZED BANKS (OTHER THAN FINANCIERAS) AND GDP, 1960-69 (Millions of current pesos) Credit Outstanding GDP Credit out- Industry Commerce Total Industry Commerce Total standing as percentage of GDP 1960 756 963 1,719 4,939 4,086 9,025 19 1961 933 1,128 2,061 5,655 ),)76 10,131 20 1962 977 1,276 2,253 6,708 4,799 11,507 20 1963 1,372 1,452 2,824 9,050 5,990 15,040 19 1964 1,662 1,397 3,059 10,320 8,033 18,353 17 1965 1,763 1,635 3,398 11,966 9,803 21,769 16 1966 2,088 1,798 3,886 14,213 12,800 27,013 14 1967 2,443 2,146 4,589 15,662 13,879 29,541 16 1968 2,711 2,559 5,270 17,550 16,711 34,261 15 1969 3,112 2,786 5,898 20,095 19,210 39,305 15 Source: Banco de la Republica. 57. Until recently it did not appear that there was a shortage of long- term funds for industrial investment: the industrial portfolio of the financieras rose from 981 million pesos at the end of 1967 to 2,281 million pesos at the end of 1969. Lately, the draw-down on financiera resources has accelerated and the applications for loans with the five larges-t financieras are now 35 percent above the last year's level. At the same time demand for short-term credit, responding to an acceleration of industrial activity, must have risen sharply, bringing to a head the complaints about its shortage. This shortage appears to be felt in the first instance at the level of commerce: the lag in banking accommodation to commerce (the share of commerce in total credit has fallen from 22 percent in 1960 to 15 percent in 1969) is apparently offset by industry extending credit to distributors, which then causes a liquidity squeeze in industry itself. ';8. Three conclusions follow from the above. First, given the demand for finance by the commodity producing sectors at an accelerated rate of economic activity, the room for government borrowing from the banking system during the next several years will be narrow. Second, foreign lend-ing agencies should consider allowing their credit lines to be used for lending for working capital. Third, a comprehensive reform of the Colombian credit system is needed. As a result of a series of regulations over the years, there is at present an array of landing windows for different classes of borrowers, each class enjoying different terms; a very large propor-tion of resources of the banking system is pre-assigned to favored borrowers; and the burden of adjustment, in terms of high interest rates and shortage of credit, falls with full force on the residual claimants. Credit management has not been pushed to the point at which there are signifi- cant classes of borrowers obtaining credit at negative real rates of interest, but while rates in real terms for industry are as high as 10-11 percent those for agriculture and housing range from 1-6 percent. As indicated earlier there is a case for low subsidized interest rates for small farmers and also for low-income housing; but it is difficult to find a case for such rates either for large commercial farmers or for middle-income and high-income housing. With respect to agriculture, there probably should be a transitional period in order to avoid the risk of dis- turbances to production. The authorities are aware of the imperfections and complexity of the present system and have been examining its operation and the possibilities of reform. This is an urgent issue requiring priority attention. C. Infrastructure: Transport and Power 59. Considerable progress has been made in assuring improved supplies of transportation services and electric power. In both sectors large invest- ments have been made in the past; public policy in both has faced the problem of integrating separate systems into national networks; both will continue to claim large public resources, although their proportionate shares, partic- ularly of transport, may decline; and in both there are unresolved issues of financial policy although in different degrees. (a) Transport 60. Colombia has coastlines on both the Pacific Ocean and the Caribbean Sea; but this transport advantage is offset by the difficulty of movement between the coasts and the interior. The three massive ranges of the Andes present formidable barriers to communication between the main areas of popu- lation and production, which until recently developed as separate and almost isolated communities. Transport investment policy over the past twenty years has been aimed at national integration and at overcoming the situation im- posed by geography. Within the next few years the task of establishing what might be termed the basic transport network of the country should be completed. 61. Investment in transport averaged 30 percent of public investment in the last four years, two-thirds of which was for highway construction and improvement. The emphasis has been on the main trunk system, and this component of expenditure will continue to loom large in the total during the next several years as projects now under way are completed. The emphasis will be gradually changing, however, with increasing attention being given to the subsidiary network, including feeder roads. It is suggested that planning of the latter be done in the context of specific schemes for agri- cultural improvement, to the maximum extent possible. This is the case in particular in the southern and south-eastern parts of the country (Narino, Caqueta and Meta) where colonization is taking place, as well as in the North (Cesar and Ariguanis Valleys). In constructing feeder roads, the possibility of maximum use of labor should also be examined. - 26 - 62. Colombia's railways have been experiencing declining passenger traffic and stagnating freight traffic for a number of years, and they will face further problems of adjustment as the trunk road system is com- pleted. About 260 km of apparently uneconomic lines (out of a total of 3,400 km) are being studied for possible closure. Rationalization of operations has enabled the railways to break even on operating account in 1969 -- the second time in their history. Needed investments include track rehabilitation, replacement of old rolling stock, and acquisition of addi- tional motive power. With this program it is expected that operating ratios will continue to improve in 1970-76. 63. Recent and scheduled investments are expected to provide adequate capacity in the major ports. The new ten-year investment program for air- port construction and improvement should enable Colombia to meet the present and prospective demand for air services, of substantial importance in Colombia. 64. A major financial issue concerns the pricing of fuels. The retail price of regular-grade gasoline is 15 US cents per gallon, apparently the lowest in the world. This results from the application of a special exchange rate of 9 pesos per US $ to refinery sales for domestic use. While very high irport duties on passenger vehicles serve as an offset, the latter is incomplete, particularly in periods when acquisition of new vehicles is small. A major reason for maintaining low gasoline prices is concern about the effect of higher gasoline prices on public transport, although it should be possible to find a way around this difficulty by subsidizing the transport companies directly. The gross fiscal effect of the unification of the exchange rate would be large, in excess of 800 million pesos in 1972, or one-fyrth of aggregate transport investment expenditures planned for that year. (b) Power 65. During the last twelve years, energy demand has been increasing at 11 percent p.a. This rate will be maintained and probably accelerated in the future. The resource base is excellent: large hydroelectric potential in the extensive central mountain system, oil in the north and southwest, natural gas in the north, and coal in several parts of the cordilleras. A large investment program is under way and additional investments are planned or are proposed for study../ 66. Steps have been taken since 1969 to interconnect the various regional systems in the central and southern parts of the country, which will permit the development of larger and more economical projects and joint planning of power utilization. Similarly, steps are now under way to inter- connect individual systems in the north. With these developments Colombia is approaching a fully integrated national power network: it is suggested that a preinvestment study be undertaken to examine alternative programs of transmission and generation projects to achieve such full integration. 1/ See IBRD, Appraisal of the Sixth Highway Construction Project in Colombia, April 25, 1970. 2/ See 7Vume VIII, Power and Telecommunications. - 27 - 67. Despite large investments in the past shortages of power have been frequent in particular areas, and they were especially noticeable in 1969 when demand accelerated. There have been gaps in both generating and dis- tribution facilities; present investments are expected to fill the deficits in power generation, while studies are under way to develop a comprehensive program of subtransmission and urban distribution projects. The latter have been particularly lagging. The standardization of types and sizes of equip- ment and materials for distribution facilities, expected from ongoing studies, will facilitate greater use of local manufactures. Domestic industry is able to produce a fairly wide range of equipment: small trans- formers, cables, insulators, conduits and fittings, noles, steel towers, minor switchgear and control boards, lighting fixtures, etc. Practically all of these local manufactures include foreign components or materials in various degrees, and their prices are usually higher than those of foreign supplies for public utilities which are exempted from import duties. Domestic producers will have to undertake capacity expansion and improve quality control to be able to meet the expected increase of demand, while adjustments in tariffs and in procurement practices of the utilities are needed to enable the domestic producers to compete with foreign suppliers within a reasonable margin of effective protection. 68. Rural electrification is in its initial stages in Colombia, and only 30 percent of the rural population has electric power. The one systematic program thus far has been carried out in the coffee-growing regions in cooperation with the Coffee Federation. There is an increasing awareness of the need to approach the program on a national scale. Solutions will have to be worked out through close coordination between the electrical agencies and agricultural entities, such as INCORA, the Caja Agraria and the Coffee Bank. Because of the magnitude and complexity of the issue it is suggested that a comprehensive preinvestment study be undertaken to prepare and evaluate alternative programs of rural electrification in priority areas, including preliminary designs, estimates of construction costs, and future financial position, which could then serve as a basis for determining the scope and the rate at which rural electrification can be undertaken. 69. The power sector suffers from inadequate and poorly structured rates in parts of the system. The establishment of a comprehensive and rational tariff policy has been needed for years; until recently, tariff adjustments have been granted on an ad hoc basis, and sometimes they have been too little and too late. In 1968 th7eGovernment established the Public Utilities Board (Junta Nacional de Tarifas de Servicios Piblicos) as part of the Planning Department to regulate public utility tariffs, including their restructuring and upward adjustments to cover operating expenditures and provide a reasonable return on revalued assets. A comprehensive system of analysis and procedure has been worked out, including national uniformity in accounting, reporting and valuation techniques. The Planning Department is now considering the revision of the basic structure of tariffs. The problem to be resolved by all these activities is of some significance: the National Government's budgetary subsidies to service the debt of the Instituto Colombiano de Energia Electrica, a holding company for 28 utilities, have increased from 4t6 illion pesos in 1968 to 73 million in 1969 and are programmed at 120 million for 1970 (US $6.5 million). Only a part of these amounts is channelled to rural electrification systems. - 28 - D. Social Sectors (a) Education 70. In the last decade, Colombia has been confronted with the problem of reconciling demands for school places and the need to improve and re- orient the education system. Under the pressure of growing social aspira- tions and the strain of the population explosion, expansion in practice received priority. Over-all enrollments between 1960 and 1968 increased on average at a rate of 6.2 percent, 11 percent and 14.2 percent per annum in primary, secondary and higher education respectively with enrollments in 1968 of 2.7 million in primary, 0.6 million in secondary and 64,00( in higher. Table 14. SCHOOL ENROLLMENTS, 1960 AND 1968 Level 1960 1968 As Percentage of As Percentage of Appropriate Appropriate Enrollment School Age Enrollment School Age in 000's Population in 000's Poplaation Primary 1,690 77 2,733a 94 a Secondary 254 9.8% 587 17% Higher 22 1.6% 64 3% Total 1,966 32.9% 3,384 4o.6% /a Including 737,000 of over-age pupils; of the total 7 through 11 age group 69 percent were enrolled in 1968, compared with 59 percent in 1960. Source: Volume X, Education and Training. 71. In quantitative terms, development has been impressive, but imbalances have remained in the distribution of educational opportunity and a tendency to retain the traditional types and levels of education. The illiteracy rate (27 percent on average) is almost three times higher in the rural areas (41 percent) than in the urban (15 percent); the average length of schooling in the former only 1.7 years as compared with the 5.1 years of the urban dwellers. Retention rates in the rural primary schools, most of which do not provide a full course, are only 3 percent. A major problem in primary schools, particularly in the rural areas, is a large proportion of over-age students. Capital construction is lagging. - 29 - 72. Government authorities are aware of the dificiencies which exist and a number of measures have been taken.l/ What is now needed is to formulate an over-all program of reform and expansion covering the next ten years, within which both a short-term project-oriented plan and the needed pre- investment studies can be determined.J/ The possible objectives of such program could be the following: (a) A smoothing of the flow of students through the primary education system. This would make possible achievement of universal primary education in the late 1970's, with special emphasis given to fulfilling needs in the rural areas; (b) A phasing out of first-cycle technical schools (which nave proved ineffective), but combining this with increased provisions for first-cycle comprehensive secondary educa- tion and assumption by SENA (a successful apprentice training system) of increasing responsibility for school leavers and drop-outs who have no employment skills; (c) A shift in the proportion of students in second-cycle technical education or technically-oriented education from 30 percent of total second cycle enrollments in 1968 to about 70 percent in 1980; (d) A shift in the proportion of students in technician level courses in higher education as compared with students in degree courses from 16 percent of higher education enrollments in 1968 to 30 percent in 1980; 1/ These include: development of more modern curricula; re-organization and rehabilitation of school facilities with particular reference to rationalization and consolidation at secondary and higher levels; increased pre-service and upgrading teacher programs; expansion of the multiple-grade schools to improve educational opportunities in the rural areas, combined with expansion of the tested ins-tructional television program; establishment of well-endowed, more centrally situated first cycle comprehensive schools and provision of text books; more systematic educational research activities. However, these activities are only recent, they have been applied piece-meal and their funding has not been sufficiently adequate to make the intended impact on improvement of quality and productivity of the system. 2/ For specific suggestions see Volume X, Education and Training. - 30 - (e) A giving of priority in the process of re-structuring and rationalization, to conversion and re-equipping over new construction, and always firstly providing improved facilities for the rural and rural-urban areas. 73. The expansion implicit in such a program would, in addition to achieving universal primary education, raise the enrollments in secondary schools from 17 percent of the relevant age group in 1968 to 45 percent in 1980, and those in higher education from 3 percent to 5.5 percent. A sub- stantial financial cost would be involved, both in capital and in current expenditures. Total education expenditures would rise from 4 percent of GDP in 1968 to 4.6 and 5 percent in 1975 and 1980, respectively, which the country should be able to handle. 74. The apparent alternatives, expansion or reforms, are mutually exclusive only for so long as expansion remains undirected and uncontrolled. Additional or expanded facilities have been and will be required for imple- mentation of some of the reforms -- for example, the IBRD-assisted diversified secondary education project; the UNDP/Unesco agricultural institut,ss project; the proposed centralization of industrial secondary facilities; expanded and improved facilities in educationally underprivileged areas; facilities for neglected or new skill courses. 75. In judging the desirability of expansion and reform, one more factor has to be taken into account: the impact of education on fertility and on population growth. "The urban pregnancy rate of persons with some primary (and up to three years of secondary) education is some 13 percent lower than for persons with no education, and a further 22 percent lower among persons with more than eight years of education. Differences of this order exist within both rural and urban areas, even though all the rural rates are higher. These differences are not alone sufficient to julstify a program of educational expansion ...; but in conjunction with other programs, education can play an important part...'Q/ (b) Public Health 76. Between 1961 and 1969, public health expenditures rose in real terms at 9.7 percent p.a. The main beneficiaries of this expansion of the public health system have been the relatively small fraction of the employed population covered by social security and other special programs. Per capita public health expenditures for the preponderant segment of the popula- tion outside these programs appear to have fallen in real terms. This has inevitably affected the rural population. It is in these areas that the availability of both health personnel and of health facilities is particularly low. 1/ ILO, 2p. cit., p. 191, based on Carlos Agualimpia et al, "Demographic Facts of Colombia," Millbank Memorial Quarterly, July 1969. - 31 - 77. The above situation notwithstanding, substantial advances have been made in the reorganization of the public health system, in the supply of health services and the institution of a comprehensive National Health Plan, 1968-77. Future advances will be faster and even more substantial than in the past if the priorities established by that Plan are followed and its objectives are met. Almost all specific programs included in the Plan -- improved environmental sanitation, mass vaccination against major epidemic diseases, widespread nutrition education and dietary fortification, tuberculosis prevention, malaria eradication, augmented maternal and child health services, and expansion of comprehensive health and medical systems -- call for rapid increases in current spending. A family planning program has recently been launched to cope with the urgent and mounting problems of a rapidly increasing population complicated by accelerated mass migrations to urban centers. 78. Tn the past, the building of health facilities was almost exclus- ively a responsibility of local authorities or local philanthropic groups. The absence of a clear assessment of needs and of national or regional plans, insufficiency of funds to complete construction and install equipment or to initiate and maintain operations, has resulted in a large proportion of unused capital resources. A recent inven-tory identified 865 partially completed and unequipped hospitals and other health care facilities scattered throughout the country. This compares with 1,800 facilities now in opera- tion. The National Health Plan has attached priority to completion and equipment of some of these umfinished structures, as well as modernization and re-equipment of the majority of existing hospitals, health centers and health posts; and it has for the first -time established a rational and syste- matic approach to future capital investments by creating the National Hospital Plan to set standards, review and approve construction plans and award funds on a competitive basis according to a national plan. 79. Shortages of all categories of essential health personnel and the maldistribution of the limited health manpower supply comprise the most difficult and demanding problems currently being faced by Colombia's health leaders. These manpower problenis require reorientation and augmentation of education and training at all levels, particularly for middle level per- sonnel -- auxiliary nurses, technicians and all types, medical and dental assistants, sanitarians, statistical assistants and higher level clerical workers. This will be feasible provided other educational institutions, in addition to the universi-ty medical schools, are fully mobilized for this purpose and their health manpower training programs are integrated within the framework of a national health manpower plan. Efforts in this direction are evolving but are handicapped by severe limitations in both capital and operational resources-VJ 1/ See Volume XI, Public Health. - 32 - (c) Water Supply 80. Since the mid-1960's the Colombian authorities have been expanding water supply facilities at an accelerating rate. At present about one-half of the population is connected to a water system or has access to water services; this compares with 40 percent five years ago. Table 15. WATER SUPPLY SERVICES AND POPUIATION SERVED Estimated Population Under Agency Estimated Population Percentage of Jurisdiction with Water Services Population Agency (millions) (millions) Served. 1965 1970 Increase 1965 1970 Increase 1965 1970 Empresas (larger cities) 5.8 7.2 1.4 4.0 5.9 1.9 69 82 Insfopal (medium and smaller cities) 4.6 5.8 1.2 2.0 2.8 0.8 43 48 Inpes (cities under 2,500 population and rural. areas) 8.0 8.6 0.6 1.5 2.2 0.7 18 25 18.4 21.6 3.2 7.5 10.9 3.4 41 51 Source: Volume IX, Water Supply. 81. Faster advance in the larger cities than in the rest of the courLtry is explained by their financial strength and better organization. In smaller cities the absence of long-range investment programs and very low internal. cash generation represent major obstacles to expansion. In the rural areas, additional factors are dispersal of population and, until recently, the absence of a national organization responsible for construction of rural water systems. Since 1968 such an organization, the National Institute for Special Health Programs (INPES), has been operating within the Ministry of Health. 8c. Between 1965 and 1969 investment in water supply doubled; it is expected, to double again by 1975. The planned expansion should meet 85-90 percent of the demand in the cities and 50 percent in the rural areas. Sub- stantial advance will also have been made in the supply of sewerage facilities where the lag has been much greater than in water supply. 83. The achievement of these objectives will call for a major organi.. zational effort, particularly in smaller cities and in their holding company, INSFOPAL, as well as in INPES for the rural systems. It will also call for an improvement in the financial position of the urban water systems. The national government's budget for 1970 includes subsidies to INSFOPAL for - 33 - operating expenditures and debt service of its subsidiaries in the amount of hO million pesos. The government intends to reduce and eventually to eliminate these subsidies, and to use authorizations for external credits and internal financing to induce the companies to adopt the criteria which govern the operations of the Public Utilities Board. The capacity of the companies to generate funds internally and thus to meet at least a part of local currency expensitures will be a significant factor in the implementa- tion of their plans to attract foreign finance. E. Regional and Urban Development B4. In all sectors mentioned in this chapter decisions concerning the location of investment projects will have an important bearing on the re- gional distribution of future economic activity and population in Colombia. The Government is aware of existing problems of regional imbalance within the country and of related deficiencies that can be remedied only by im- proved methods in the planning of sectoral resource allocation. An import- ant tool to this end will be the establishment of eight new "planning regions" with offices responsible for development coordination on a re- gional scale, in collaboration with the National Planning Office. The creation of such planning units should provide an important link between local and departmental governments and the various ministries responsible for sectoral planning at the national level.Ji 85. In most of Colombia's large cities physical growth has exceeded the boundaries of existing municipalities, and deficiencies are acute in a variety of urban services. The development problems of these cities are the subject of planning studies now in progress or proposed for the next two years. The implementation of these plans will depend on the existence of appropriate governmental machinery at the metropolitan level. Colombian authorities have accordingly initiated legislation to permit metropolitan areas with more than 300,000 inhabitants to form "metropolitan governments' with regulatory and planning powers needed for the effective guidance of urban growth. The proposed program of preinvestment studies contains recommendations intended to assist in the establishment of these metro- politan governments. 1/ See Volume XII, Regional and Urban Development. V. PUBLIC INVESTMENT AND FINANCE A. 1970-72 Public Investment Program 86. Toward the end of 1969 the Government of Colombia presented to Congress a Development Plan 1969-72. The plan includes a public investment program in low, medium, and high versions. These versions correspond to different assumptions concerning growth rates of output and exports. For 1970 the government has accepted the high version and it is this version which is discussed below for the period 1970-72. It is associated, according to the plan, with over-all growth rates ranging from 6.6 percent to 7.3 percent p.a. 8Z- For the purposes of the plan the public sector and public investment have been defined in a somewhat unorthodox form. The public sector excludes departments and municipalities but includes entities which "participate in foreign credit extended through the mech- anism of the Consultative Group." Public investment in turn includes debt amortization, admixnistrative expenditures of many decentralized agencies, gross purchases of products by IDEMA (the price support agency), and various current expenditures, mainly in the field of technical assist- ance, training, extension services and maintenance expenditures, as well as the entire portfolio of some specialized semi-official banks. 88. For the purposes of the analysis below the public sector has ~Tbeen redefined to agree with available historical statistics as well as to correspond to the more conventional concept of public investment. i/ Table 10 shows the redefined public investment program: it consolidates central, departmental, and municipal investments as well as those of de- centralized agencies; it includes budgetary transfers to the private sector; but it excludes current expenditures, amortization payments, banks1 portfolios, and the like. Table 10 also shows the Mission's adjust- ments to the redefined program. They are mainly in electric power, water suppLy, education, industry,and transport. Power projects firmly planned for the next few years will require larger investments than foreseen in the program; in water and sewerage, larger investments than planned would be needed to achieve the objectives stated in the plan; in industry, a rescheduling of expenditures is required in view of known and probable delays in project execution; and in transport, in addition to rescheduling, there is a suggestion for a reduction. In the aggregate, these adjustments of the redefined program call for an expenditure level h percent higher than programmed, over the three-year period. 89. In real terms the increase between 1969 and 1972 works out at 12 percent p.a. This is a deceleration from the 1966-69 period when publibi investment rose at the extraordinary pace of 21 percent p.a., but intvest- ment was starting then from a depressed level. With a 12 percent annual increase now projected, public investment will still be rising faster than gross product and total investment.2/ 1/ See Volume II, The Public Sector. 2/ This has been the long-run trend in Colombia. In 1950-68 public invest- ment rose at 9.5 percent, total investment 4.1 percent, and private in- vestment 3.2 percent p.a. The share of public investment was negligible in 1950; it is now nearly 30 percent. Table 16. PUBLIC INVESTMENT PROGRAM, ACTUAL 1966-69 AND PROJECTED 1970-72 (Millions of current pesos) /a 1966 1967 1968 1969 /b 1970 1971 1972 Program Adjusted Program Adjusted Program Adjusted Program Program Program 'ransport 1,205 1,826 1,957 2,300 3,321 2,974 2.931 2,989 3,076 3,139 Cnergy 596 776 944 1,180 1,951 2,226 1,671 1,959 1,909 2,473 'ommunications 1144 206 256 335 661 661 474 474 533 533 cater and Sewerage 365 422 591 737 765 888 1,095 1,187 1,335 1,422 lousing 269 385 577 640 724 724 720 720 861 861 iducation 180 241 374 365 478 504 567 634 649 690 iealth 69 142 148 260 228 228 326 326 303 303 %griculture 498 784 1,127 1,260 1,884 1,884 2,293 2,293 2,694 2,784 [ndustry 162 199 392 590 1,166 977 1,141 1,041 1,001 1,018 rourism - - 10 30 55 55 87 87 106 106 /c Studies and Research 4 13 25 50 101 101 132 132 /d 146 146 /d Dther 229 273 423 465 664 664 661 661 682 682 Total 3,721 5,267 6,824 8,212 11,998 11,886 12,098 12,503 13,295 14,157 /a For 1970-72, it is assumed that prices will increase at 7 percent p.a. /b Provisional. /c An increase likely if studies are accelerated. /d An increase likely on account of the Preinvestment Study Program. Source: Volume II, Public Sector. - 36 - 90. Most of the planned increase is concentrated in 1970. Although executive capacity has risen substantially in recent years it is doubtful that the 1970 schedule can be met. Slippages which can be clearly foreseen have been taken into account in the Mission's adjustments. B. Finance in 1970-72 91. Table 17 sets forth the pattern of financing for 1966-69 and the projections for 1970-72. 92. The basic assumptions underlying the projections are: (a) In the absence of new revenue measures current income of all levels of government and its decentralized agencies will increase in real tenns at 8.5 percent. The projec- tion is based on specific assumptions concerning individual major sources of revenue and an overall assumption that GDP will grow at 7 percent p.a. The projected revenue growth rate is lower than recorded in 1966-69 (11.5 percent), when new income sources were introduced and the system of collection accelerated, but it is much higher than the long-run growth rate of 5 percent p.a. (b) Current expenditures will increase in real terms at 9 percent p.a., a deceleration from the 12 percent rate of 1966-69, but again much higher than the long-run average of 4.8 percent p.a. The projection is a composite of a faster growth than in the recent past for the central government and departments and a deceleration for decen- tralized agencies. The former need more funds, particu- larly in education and health, while the latter have already undergone a major expansion. (c) Internal government borrowing does not exceed amortization of internal debt. The latter is quite large for Colombian conditions. The demand for credit by the commodity pro- during sectors is heavy and will continue so for the next several years; under these conditions, net government borrowing could raise interest rates and aggravate the already tight credit position of the manufacturing sector (see Chapter IV, B). Furthermore, the government in 1970 will already be engaged in a form of deficit spending by drawing on its cash balances. The assumptions concerning government borrowing should be re-examined if coffee prices go up sharply. - 37 - Table 17. FINANCINO OF PEULIC INVESTHENT, ACTUAL 1966-69 AND FROJECTED 1970-72 (in rillions of current pesos)LA 1966 1967 1968 1969 1970 1971 1972 Claims (1) Public Investment 3,721 5,267 6,824 8,212 11,886 12,503 14,157 (2) Debt Amortization (a) Erternal 375 615 659 768 870 890 995 (b) Internal (731) (146) (403) (153) 1,110 1,270 1,450 (3) Financial Investments 40 184 158 750 500 500 600 (b) Total Claims (1 + 2 + 3) 4,867 6,212 8,444 9,883 14,366 15,163 17,202 Sources (5) Current Budgetary Surplus 3,791 4,474 5,972 6,352 7,665 8,327 8,975 (6) Capital Account Resources (Internal) 342 3A8 559 663 935 800 800 (7) Internal Borrowing n.a. n.a. n.a. n.a. 1,110 1,270 1,450 (8) Draw-down of cash balances - - - 178 862 - - (9) Sub-total, Internal Resources (5 + 6 + 7 + 8) h,133 4,822 6,531 7,193 10,572 10,397 11,225 (10) Disbursemnts on Existing Project Loans 927 818 984 1,347 1,285 1,540 1,670 (11) Disbursements on Existing Program Loans 218 605 1,229 1,343 1,500 935 1no (12) Sub-total, Assured External Resources 1,145 1,423 2,213 2,690 2,785 2,475 1,770 (13) Total Resources in Hand (9 + 12) 5,278 6,245 8,744 9,883 13,357 12,872 12,995 (1h) Gap (4 - 13) (411)/b ( 33)A (3084 - 1,009 2,291 4,207 (15) Disbursements on New Project Loans Series A 8I5 1,00o 1,620 Series B 721 1,542 23291 '16) Remaining Gap 164-288 749-1,291 1,916-2,587 (17) Possible Sources of Finance Program Loans - 565 1,10o /a For 1970-72, it is assumed that prices will increase at 7 percent p.a. The following accounting exchange rates for US $ are used for external resource flows: 1966: 9.0; 1967: 12.75; 1968: 13.7; 1969: 16.3; 1970: 17.6; 1971: 18.8; 1972: 20.1. /b Accumulation of cash balances. Notes: (1) From Table 16. (2) From documents of the Planning Department and from external debt statistics. (3) Purchases of bcnds by the Social Security System, Incora, etc. (5) Projected by the Mission; see Volume II. (6) Income from and sales of assets; receipts of loan repayments. (7) For 1970-72 projected in the same amounts as amortization. (8) From budgetary documents. (10) From debt statistics. (11) From documents of the Planning Department. (15) Series A derived from Planning Department estimates. Series B represents a hypothetical draw-down on the foreign exchange component of public sector projects as listed by the Planning Department. (17) Program loans assumed equivalent to commdtments of $60 million in 1971 and $50 million in 1972. Source: Volme II, Public Sector - 38 - (d) There will be no delay in utilizing existing project loans, and continuing efforts will be made to resolve all problems faced in contracting new project loans. While a major advance has been made in project preparation and in contract- ing project loans, there have been occasional difficulties in arriving at satisfactory arrangements concerning avail- ability of matching peso funds and future operating conditions of the projects. This issue is particularly relevant for the projects of enterprises of municipalities and departments, which are now increasingly offered for foreign financing. 93. The major findings emerging from the projections are: (a) Without new revenue measures the current budgetary surplus continues to grow in real terms, but at a rate (4.8 per- cent p.a.) slower than real income. In 1972 it is ex- pected to account for 5.4 percent of GDP, compared tco 5.8 percent in 1969. (b) A very large proportion of aggregate capital claims (investment and amortization) continues to be met out of internal resources -- 70 percent in 1970-72. There is a decline in the proportion from the earlier period, but this is caused by a sharp rise in the amount of claims. (c) A financing gap is apparent in 1971 and it continues to grow in the subsequent two years (line 16 in Table 17). Its precise magnitude depends on the flow of disbursements on project loans to be contracted in 1970-72. A higher estimate of this flow (line 15, Series B) is based on the preliminary listings of project commitments prepared by the planning authsorities and adjusted by the mission to reflect the foreign exchange component of project disbursements; but this listing contains an element of target setting particularly in the years 1970 and 1971 and is therefore on the high side. The lower estimate (line 15, Series A) is derived from the planning authorities' aggregative esti- mate of disbursements (including a certain element of local cost, on the average of 8 percent of total project cost) and probably approximates reality closer.A/ The deficit may exceed 1,000 million pesos in 1971 and approach 2,500 million in 1972. 94. The Colombian authorities count on further U.S. program loans to help fill a part of the gap. If new program loans in 1971 and 1972 aimount to $60 million and $50 million, respectively (compared to $85million in ri Ki, 1/ Conceptually, any lower level of disbursements would lead to a reduc- tion in aggregate investments of the size approximately double the lag in disbursements (foreign financing on the average works out at 50 percent of total project cost). But in reality the relation is not so close, since construction activity goes on even when equipment is delayed. - 39 - and $70 million in 1970), peso disbursements would work out at 565 million in 1971 and 1,100 million in 1972.IJ 95. The gap which would remain would be moderate in 1971 (500-700 million pesos). It wrould tend to increase considerably in 1972. These findings are broadly consistent with the projections of the 1969-72 Development Plan that the gap to be filled by additional domestic savings will run at 80o million pesos in 1971 and 2,000 million in 1972.Y! CTAP in its analysis earlier this year places the gap at 200 million pesos in 1971 and 1,680 million in 1972 2 (In both projections after program loans). 96. Two implications follow. First, increases in tax revenue will be needed. It is not desirable to increase the budgetary surplus by cur- tailing current expenditures: both the functioning of the administration and the needed expansion of social sectors preclude this route. Fortun- ately, Colombia spends little on either defense or administration (on defense 8.9 percent of the central government budget in 1970 compared to 10 percent in 1966; on administration 7.5 percent in 1970 vs. 7.2 percent in 1966). Tax income, however, is low; despite the recent increase from 12.5 percent of GDP in 1966 to 13.2 percent in 1969, it is still much lower than the "norm" at Colombials level of per capita income.L/ Various ways in which tax revenues could be increased have been discussed in a special study (Musgrave Report).5/ The ILO team has also made fiscal suggestions. It should be further added that there is still a substantial lag between earning of income, self-assessment, and reassessment by the tax authorities: at the end of 1968, unliquidated income tax returns numbered 1.2 million cases and the amount that would be collected from the backlog has been put at 1 billion pesos. Considerable amounts of additional income taxes could be obtained if collections due to the move to a current payments system were fully made: recent indications are that at present only one-half of the amounts due are actually collected, i.e., the system is moved to the current basis of assessments, but actual collections are lagging behind this movement. Finally, there is the issue of subsidies: unification of the petroleum exchange rate with the certificate exchange rate could produce 800 million pesos, while the reduction of subsidies to public utilities could also yield significant amounts, judging by past increases in the income of municipalities following rate adjustments. 1/ It is assumed that one-half of the loan is disbursed in the year of coimmitment and the other half in the following year. 2/ Development Plan, p. VI, B. The plan used a coffee price projection of 50-52
Groupe de la Banque mondiale · Pre-2003 Economic or Sector Report
Colombia - Economic growth : problems and prospects (Vol. 1 of 12) : The overall view
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