Colombia - The economy

WH 33a REST RIC TED This report is restricted to use within the Bank. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT THE ECONOMY OF COLOMBIA October 25, 1954 Department of Operations Western Hemisphere  CURRENCY EQUIVALENTS Official Selling Rate U.S. $1.00 U Z.51 pesos 1 peso * $0.398 1 million pesos s $398,000 Official Buying Rate (Coffee) $1.00 a 2.3845 pesos(Oct. 1954)  TABLE OF CONTENTS PAGE BASIC DATA CHARTS SU.' 4ARY AND CONCLUSIONS i-iii CHAPTER I - General 1 CHAPTER II - Production 4 A. Agriculture 4 B. Oil 8 C. Manufacturing 9 D. Electric Power 12 E. Transport 13 CHAPTER III - External Trade and Payments 14 A. Exchange Rates 1l4 B. The Balance of Payments 15 C. Exports and Imports 16 D. Trade by Countries 18 CHAPTER IV -- Money Supply, Banking and Credit Policies 20 A. Money Supply 20 B. Banking and Credit Policies 21 CHAPTER V - Anti-Inflationary Measures and Public Finance 25 A. Anti-inflationazy Measures 25 B. Public Finance 26 CHAPTER VI - Prospects 33 A. Production 33 B. External Trade 34 C. Finance 35 ANNEX I - National Income 37 STATISTICAL APPENDIX Table 1 - Summary of External Public Debt 39 Table 2 - External Public Debt Service 40 Table 3 - Coffee Exports 141 Table 4 - Average Prices of Manizales Coffee -41 Table 5 - Agriculture and Livestock: Estimated Areas and Production of Selected Items 42 Table 6 -- Manufacturing: Index of Volume of Production in Selected Industries 42  STATISTICAL APPENiDIX (Continued) PAGE Table 7 - Production and Exports of Petroleum 43 Table 8 - Production of Selected Refined Petroleum Products 43 Table 9 - Electricity: Production of Public Enterprises 43 Table 10 - Summary of Balance of Payments 44 Table 11 - Gross Gold and Foreign Exchange Holdings of Bank of the Republic 44 Table 12 - Main Exports 45 Table 13 - Distribution of Trade 45 Table 14 - Money Supply 46 Table 15 - Analysis of Changes in Pioney Supply 46 Table 16 - Outstanding Loans of Caja Agraria 47 Table 17 - Outstanding Loans of Commercial Banks 47 Table 18 - Personal Savings (including lotteries) 48 Table 19 - National Government Receipts and Expenditures 49 Table 20 - National Government Expenditure 50 Table 21 - National Government Budgeted Expenditure 1954 51 Table 22 - National Government Intermal .Debt, December 31, 1953 52 Table 23 - Main Holders of Government Internal Debt 53  C_LOMVBIA BASIC DATA Area 439,825 square miles Population July 1954 - 12,377,000 National Income 1952 - 6,577 million pesos 559 pesos per head, or US $224 (at 2.50 pesos $1) Exports 1953 Imports 1953 Total value (f.o.b.) $596 m. Total value (c.i.f.) $552 m. Percent of total: Percent of total (1952): Coffee 82.6 Food, drink and tobacco 6.8 Petroleum 12.7 Petroleum products 4.5 Other 4.7 Other raw materials 22.2 100.0 Machinery and vehicles 38.6 Other 27.9 100.0 Budget 1953 m. pesos Gold and Foreign Exchange Revenue 812 held by Bank of the Republic Expenditure 936 Deficit 124 (US $ m.) End 1951 125 End 1952 155 End 1953 190 July 1954 257 Foreign Public Debt: August 1953 (US $ m. equivalent) U. S. Dollar Debt 262.360 Canadian Dollar Debt 1.792 Sterling Debt 6.327 Swiss Franc Debt .191 Belgian Franc Debt .818 271.488 Internal Government Debt: December 1953 (m. pesos) Bearer Bonds 285 Pagares (Promissory Notes) 72 Total Consolidated 357  COLOMBIA COFFEE EXPORTS (MILLIONS OF BAGS OF 60 KG.) 40 40 YEARLY l 14 LATIN AMERICAN COUNTRIES 30 30 20 20 I 0 ~~~~~~~~~~~~~BRAZILe COLOMBIAN'60 0 0 COFFEE PRICES IN U.S. (CENTS PER POUND) 100 I, 3 YEARLY 80 (MO 80 60 ~~~~~~~~~~COLOMBIAN 60 40 ~~~~~~~~~~~MA NIZALES S0 40 -40 20 20 0 , i I I l I FACTORY PRODUCTION (FROM STUDY BY ECLA MISSION) (VOLUME INDEX, 1953 100) 80 80 60 60 40 ~~~~~~~~~~~~~~40 20 ~~~~~~~~~~~~~~20 ELECTRICITY: PRODUCTION 6 0(VOLUME INDEX, 19'37=100)__ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ GO 40040 COLOMBIA-*-- 40C 200__ _ _ _ _ _ _ _ _2C 200 =__ __ __--STOF LATIN AMERICA 0 0 '38 '39 '40 '41 '42 '43 '44 '45 '46 '47 '48 '49 '50 '51 '52 '53 '54 q/94/r4  COLOMBIA INDICATORS OF TRANSPORT 660 i660 RAIL (Millions of ton-kilometers of freight) I 580 580 1.9 1.9 -RIVER (Millions of metric tons freighted on__ 1.5 Rio Magalna 1l.5 1.1 ~~~~~~~~~~~~~~~~~~~~~~~1.5 40 W4 ROAD (Thousands of trucks registered) 40 30 30 20 20 150 150 -AIR (Thousands of tons of 1-5-0 70 70 1948 1949 1950 1951 1952 1953 MONEY SUPPLY AND COST OF LIVING (INDEX, 1948 = I00) 250 Y 250 YEARLY _ _ _-- 200 _ -200 200 ~~~~~~~~~~SUPPLY (END OF PEIO)00, - 150 150 COST OF LIVING (BOGOTA) _ I 0 1948 1949 1950 1951 1952 1953 1954 (June) NATIONAL GOVERNMENT REVENUES AND EXPENDITURES (MILLIONS OF COLOMBIAN PESOS) 0 200 400 600 800 1000 I OTHERSL I 4:r-DEBT SERVICE I I I EXPENDITURES .CURRENT EXPENDit UlRES:/ ESTIMATED CAPITAL EXPENDITURES 1950 REVENUES EXPENDITURES.:-:-:'-... ..--.:- --- '.* . 1951 REVENUES l w-~~~INTERNAL DEBT (END OF YEAR) EXPENDITURES ; *...- *.. . .. REVENUES 3 EXPENDITURES *.:.:.:.:.':'.. .....:.. .-. .. . .. 1953 REVENUES 1954 EXPENDITURES .--.... .. ... ...-. (Budget) REVENUES _ 9/24/54 No. 936 IBRD- Economic Staff  COLOMBIA BALANCE OF PAYMENTS ON CURRENT ACCOUNT (MILLIONS OF U.S.DOLLARS) 0 200 400 600 800 COFFEE | OIL OTHER1 1949 L NONMONETARY GOLD RECEIPTS EXPORT5(f.ob.) PAYMENTS IMPORTS ( . . 1950 | S~~~~~~INVISIB LES (NET) RECEIPTS PAYMENTS 1951 PAYMENTS RECE IPT S .//////////H 1952 RECEIPTS PAYMENTS 1953 RECE IPTS PAYMENTS GOLD AND FOREIGN EXCHANGE ASSETS (MILLIONS OF U. S. DOLLARS) 250 1 1 25' 20END OF PERIO D/2 200 001- ~~~~~~~~~~~~~20 150 TOA-f-2 15i 100 :_______.. FOREIGN EXCHANGE ASSETS 10 100 1 0 50 50 0 1_9_5_ 4 1948 1949 1950 1951 1952 1953 1954  COLOMBIA SELECTED AGRICULTURAL PRODUCTS: APPROXIMATE ESTIMATES OF AREA AND VOLUME OF OUTPUT (FROM STUDY BY ECLA MISSION) AREA [ VOLUME OF PRODUCTION 1 (THOUSANDS OF HECTARES) (THOUSANDS OF METRIC TONS) WHEAT 200 150 150 125 100 100 MAIZE 900 1000 _____ _____ _____ ~~~ ~~~900 800 700 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 0 60___ _____ __ _ 700 600 1600 RICE 200 350 150 -300 00BREWING BARLEY -5 6 0 _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ -7 0 50 60 40 50 POTATOES 150 800 100\ t o/0 I 600 100 ~~~~~~~~~~~~~~400 50 200 YUCA 90 YUCA l 900 80So 70 7f9=\t 00 1949 1950 1951 1952 1953 1954 1949 1950 1951 1952 1953 1954 9/24/54 No.938 lBRD- Economic Staff  COLOMBIA SELECTED AGRICULTURAL PRODUCTS (CONTINUED) AREA [ VOLUME OF PRODUCTION (THOUSANDS OF HECTARES) (THOUSANDS OF METRIC TONS) SUGAR 30 250 200 20 ____150 10 BEN 100 BEANS I 00 1 -- 1 60 40 70 20 COTTON 60 40 50 30 40 20 30 10 CACAO 33 16 32 -= - 1 14 31 30 12 1949 1950 1951 1952 1953 1954 1949 1950 1951 1952 1953 1954 CATTLE (MILLIONS OF HEADS SLAUGHTERED) 1.5 1.5 1.45//-1 1 1.4 1.3 1.3 1949 1950 1951 1952 1953 1954 9/24/54 No.939 IBRD -Economic Staff  SUIMARY AMD CONCLUSIONTS 1. Colombia is rich in natural economic resources. The land-- agriculture and livestock--has been the basis of the economy since the first European settlers arrived in the sixteenth century, although gold was for many years the main export. In-ter the land provided other exports wfhich, each in its turn, replaced gold in importance: cacao, tobacco, quinine and, from the beginning of the 20th century, coffee. Now coffee accounts for 80% of all exports. The hillsides carrying coffee and other crops are only a small part of Colombiazs land resources. Among its three great ranges of mountains are valleys, plateaus and basins of fertile flat land at varving altitudes yet all near the equator, providing both temperate and tronical farming land. 2. Colombia has also petroleum, coal, hydroelectric potential, iron ore and timber. The population is rising rapidly. from their beginnings in the 1920's manufacturing, oil production and road transport have already advanced considerably. Both roads and the railway system (established early in this century) have suffered serious deterioration vrhich is now being overcome. Electric power capacity has expanded steadily over the past ten years. 3. Rising coffee prices since the end d the war have stimulated the economy and have allowed a generally rising volume of imports, especially og capital goods. Immediately folloving the war there was inflation (stemming from excessive bank credit) and a fall in gold and foreign exchange reserves. This experience caused changes in banking, exchange and import policies, which have been important in recent years, first in checking the fall in foreign exchange reserves and later in restraining inflation. 4. The basic strength of the economy is illustrated by the progress that continued in the years of political disturbance from 1948 to 1953. This does not mean that -political instability, or unsound government policies, cannot huarm the economy in the future. The economy is now becomixtg more complex and thus may be more susceptible than ir. the past tc government wealmesses and inefficiencies. 5. ?rospects for production increases are generally good. Coffee, howfever, is unlikelv to achieve more than a gently increasing volume of production under the influence of increased yields per tree rat-er than more plaating. Other agricultural nro:luction (mainly corn, potatoes, wheat, r ce, yucca, beans, sugar, barley, milk and meat), so far as can be seen from very inadequate information, has been progressing slowvly and seems to need special attention to stimulate output if it is to meet the needs of the growing population and make better use of the rich resources at its disposal. MIanufacturing, though protected by a high tariff and tax system, shows evidence of a virility that should sustain a good ra;e of increase. Electric power and transport are both vital to the country's economic development and must continue to advance to support the develooment of other sectors. 6. Coffee exports have increased in volume by almost 50% since 1950 (an unusuaLly low year). HIigah coffee arices have helped to produce a surplus in the balance of payments in each of the last three years. The gold and foreign exchange reserves have almost doubled in that time,  - ii- reaching at the end of 1953 a fignure equivalent to about 35/O of the 1953 value of imports. Since February, 154 there have been practically no direct import controls, and imports are nowi showing a tendency to rise, Ahich may cause somie reduction in the gold and f oreign exchange reserves over the coming year. 7. The steep rise in export receipts from coffee cannot be expected to continue in coming years and there is little prospect of other exports increasing rapidly. This represents an important chozge of trend for the economy. There are good possibilities, howrever, for replacing some imnorts by domestic production. in these changing circumstances effective monetary policies will be needed to restrain inflation and import demand. 8. Banking nolicy has become more effective since l950. Credit restrictions imposed when coffee prices rose sharply in early 1954 are having some effect in controlling: what otherwise could be a highly inflationary situation. As it is, domestic prices have been rising since the beginninng of 1953, indicatin; the need for continued vigilance by the Government and monetary authorities against the threat of inflation. These authorities have been not only restraining credit expansion in general, but have been trying, with some success, to direct credit into the fields vrlwere it is most needed for economic development. 9. Besides their monetary policy the Colombian authorities have a number of other weapons aimed at restraining inflation while assisting basic economic development: freedom from direct import controls and a high tax on less essential imports; a special lwer exchange rate for coffee export earnings and a smiall variable tax on coffee exports; and the introduction of taxation on incomes from dividends. 10. In the past few years public finance has not generally added to inflationary pressures, in that all government empenditures including cai3ital ex::i-enditures have been met by current revenues; but there was an e;ception Ln 1953 vwlen the government met a deficit from funds accumul-ated in previous years. The budget for 1954 nroposed a substan- tial deficit to be covered mainly by borrowing from tihe Central Bank- - an inflationary proposal, but one l'ihich may not be carried out, on present indications, because for the first six months of the year government accounts have sho'm a healthy surplus. 11. Public finance in 1953 and the budget for 1954 point to the inflationary dangers of attempting more public expenditure (including investment) than can be met from internal resources and external loans. The rate of public investment has risen since 1950 and it now seems desirable and practicable to maintain the 1resent rate (relative to national income) rather than to attempt to increase it. W'[ithin the present rate there is room for increasing the rate of investment in some sectors (e.g. agriculture and perhaps electric power) and decreasing it in others vhile maintaining the present high level of investment in transport. There is scope also for improving the effectiveness of public expenditure on investment by raising the efficiency of nublic operations. 12. Based on its natural resources and the nrogress already made Colombia's prospects for further economic advance are good. The  - iii - likelihood of fluctuating coffee prices, and the possibilityr that even with steady coffee prices export earning wvill not increase greatly, presents something of a challenge for the future, but a challenge whlich can be met if the country is determined to avoid inflation cnd make -the best use of its productive resources. ivIuch scope for iriprovement can be seen ini productive hiethods, especially in agriculture, and in public finance ard public operations generally. &.ternal public debt is not excessive, on reasonable export assumpivtions, and it wfould be justifiable for a country vith the economic record and nrospects of Colombia to assume a greater burden of external debt.  I. GENERAL 1. In area Colombia covers 440,000 square miles stretching across the equator from about 12 degrees north to a few degrees south. It i6 a little smaller than Peru and somewhat larger than France and Spain taken together. Almost all the 12 million people of Colombia live in about 40% of the country in the north and west. In this area three mountain ranges, the Western, Central and Eastern Cordilleras, run from the border of Ecuador in the southwrest towards Colombia's northern coast, rising as high as 19,000 feet. Among the ranges are high plateaus and basins of flat farming land, and the hillsides carry food crops, notably coffee which provides over 80% of all earnings from exports. 2. Settlement has been mainly in a few separate regions which for many years had only slight contacts with one another. Bogota, the capital and long the main centre of politics and intellectual interests, lies among high plateau farming country of the Eastern Cordillera; the Cauca Valley's fertile plains and the town of Cali, lying between the Central and Western Cordilleras at a lower altitude than Bogota, have a semi-tropical flavor quite different from the capital. On the slopes to the north of the Cauca Valley is the region of Antioquia which was settled by an unusually enterprising and hardworking group of Spanish settlers in the seventeenth century, one hundred years after the first Spaniards entered that region. The new settlers lived in a community that for many years was isolated and self-supporting and founded the town of Medellin which became the cradle of Colombia's manufacturing industry and is now a town of many modern factories and buildings surrounded by one of the country's most important coffee-growing regions. There is a thickly-populated region by the Caribbean coast round the towns of Barranquilla, Santa Marta and Cartagena, where the first Europeans settled; and settlements along the Magdalena River, which carves a deep path for a thousand miles between the Central and Eastern Cordilleras and out to the Caribbean Sea. 3. In this profusion of mountains, river valleys, tropical lowlands, plains, forests and j-ngles are widely varying climates, crops and possibilities. There are also many natural resources important for economic development. Besides the rich farming lands there is petroleum (the export next in importance to coffee), coal and hydroelectric potential. There is iron ore and great resources of timber; and while the development of some of these resources, such as petroleum and hydro- electricity, is well advanced, some of the others-the forests, coal and iron ore- have been barely touched; and even the land, although some of it has been in use for centuries, has still a great potential. There are natural handicaps, however, in the mountain barriers which make transport difficult and expensive, and although a highly developed air transport system now links the regions that formerly were isolated from one another, more links by road and rail will continue to be vital to the country's development. 4. The population is increasing at the rate of 2.23% per year, and at this rate will reach 14 million by 1960. Because of this rapid increase a large pro- portion of Colombia's population are children-30% are under ten years of age and 52% under twenty. Education is relatively backward, more particularly in the rural areas, where two-thirds of the people live. According to figures gathered by UNESCO, Colombia, Haiti, Guatemala and Bolivia are the four countries in Latin America with the lowest percentage of children attending primary school. It is said in Colombia that the literacy rate is about 55%, and although this cannot be regarded as an accurate figure it illustrates the limited spread of education.  - 2 - 5. With such natural resources and a rising population the stage is set for further economic advance. The land-agriculture and livestock--has been the basis of the economy since the first Europeans arrived in the sixteenth century, although gold was significant as an attraction to settlers and as the main export for per- haps 300 years. Other exports later became more important than gold-cacao, tobacco, cinchona bark for quinine and, fifty years ago, coffee; and other basic activities besides farming began to emerge in the 1920's when petroleum production and manufacturing were established. Now, according to rough indications given by national income figures, just over 40% of the national income comes from agricul- ture and livestock, and about 16% from manufacturing. Between 3% and 4% comes from minerals and construction, and the remaining 35% to 40% comes from various services such as commerce, transport and government. 6. So far as can be judged from statistics which are not very reliable because of the lack of basic information on much of the economy, real output rose by roughly 22% between 1948 and 1952, an annual average of about 5%. Real national income rose by roughly 29% over this period, an annual average increase of about 62X%. This is a high rate of advance, and although these statistics are somewhat suspect, there are other indications which confirm that the economy has been progressing at a comparatively rapid rate. The greater rise in real national income than in real output is accounted for by favorable terms of trade. Due mainly to the rise in wrorld prices for coffee the terms of trade were 40 or 50% more favorable in 1952 than in 1948, accounting directly for about one-quarter of the rise in real incomes. The indirect effects of the rise in coffee prices, especially in stimulating industry, must have been considerable in these years. Other agricultural and livestock production also increased and these together with manufacturing were probably responsible for about one-third of the rise in real incomes. The remaining 40% of the total rise must be put down to growth of commerce, trqnsport and services of many kinds, as well as the relatively small but important elements of mining and construction. 7. This general advance in the economy took place during a period of politi- cal disturbance. From early in 1948 until the middle of 1953 there were outbreaks of localized violence, and generally an uncertain political atmosphere. The economic strength of the country lay, hovwever, in fields where Government activity did not play a large part-in the land, and especially in coffee, where rising world prices, the work of private coffee growers and the Coffee Federation (the growers' own organization) combined to maintain production; in manufacturing, where apart from a temporary setback in 1951 there was steady progress; and in banking and exchange rate policies which in the later of these years aimed at controlling credit and establishing a simpler exchange rate system which vould minimize direct import controls while encouraging a balance in external payments. Banking policies, it should be noticed, were decided more by the Bank of the Republic than by the Government. In some fields of Government responsibility there was, not unexpectedly, a lack of progress during these troubled years, especially in road and rail transport, which deteriorated. This imposed physical handicaps on the economy but serious financial inflation which might have arisen had Government expenditure far outstripped revenue was avoided. As it was the budgets were generally balanced, and Government external expenditures, at least until 1951, were a comparatively small item in the balance of payments.  - 3 - 8. The economic progress made during these years of political instability illustrates the basic strength of the Colombian economy. On the other hand, however, in considering future economic development, the factor of political weakness must not be ignored, for the economy is becoming more complex and future governments may have to, or may wish to, intervene more than in the past. At present there is a stable government, but with its legacy of past instabilities and especially the lack of experienced permanent government administrators it is not yet fully equipped to cope with difficult and changing economic problems. Looking ahead some years, it cannot be easily assumed that the present political stability will necessarily continue. 9. During 1953 and the first half of 195i Colombia's economy has shown an even more remarkable advance than in previous years. Coffee exports have been higher than ever, both in qiantity and price, and the higher incomes thus generated have raised demand, including demand for Colombian manufactured goods whose output has expanded. Imports also have risen steeply, but export receipts have been so high that the gold and dollar reserves have continued the increase of the years 1950 to 1952. In this situation of rapidly rising export incomes there is a danger of inflation based upon a money supply expanding faster than the supply of goods and services from domestic production and imports. That danger exists now in Colombia, but a series of anti-inflationary measures taken during the past year by the Government and the Central Bank seems to be having the effect for which they were designed. Although the cost of living has been rising it cannot be said that the economy is in the grip of inflation. The effectiveness of these measures must be attributed to them all in combination, rather than to any single measure. Controls on bank credit, changes in income taxes, removal of import controls and imposition of a high tax on certain imports, a coffee exchange,rate having the effect of a small coffee tax, and a small direct coffee tax--these were all of some importance. A government deficit in 1953, however, had a tendency opposed to these measures and there is a danger that government expenditure in 195b may add to inflationary pressures, although government finance for the first few months of 195) has been well in surplus. 10. In its present situation, therefore, the economy is at a rather critical point in its advance. Its basic resources are good, and development of most of them, though not all, is well under way. It enjoys the present blessing of large coffee exports at high prices wvhile facing the more challenging future of a limit to the expansion of coffee production and possible fluctuations in its price. It is dealing with the threat of inflation in a manner so far encouraging for the future management of similar short-term problems; but it must expect problems of a different and perhaps even more complicated nature as the economy advances. The advance is on many fronts--agriculture and industry, transport and foreign trade, government policy and banking, and its pace must be maintained if the increasing population is to enjoy rising standards of living in the years ahead. Since the basic resources are plentiful the key to the pace of advance is their efficient development, and while the outside world can supply techniques, advice and finance where it is needed, fundamentally it is only the Colombian people who can achieve the ends they desire.  - h - II. PRODUCTION 11. The broad picture of production shows, in general, an expansion of agricultural and manufacturing output since the end of the Second WSorld War. The availability of suitable land and a growing demand from the rising population provided basic encouragement for agricultural production. In some branches of agriculture, however, progress has been slow in recent years. In agriculture as a whole (less in coffee than in other branches) there is still scope for greatly improved results from applying better techniques, from more mechanization, from better transport in farming areas and from better agricultural policies generally. Shortages of manufactured consumer goods in the war years stimulated manufacturing which then continued to expand at an increasing rate except for a lag in the year 1951. Output of electric power has increased steadily and progress has been made within the last year in improving transport, which had been deteriorating for some years. A. Agriculture (1) Coffee 12. Colombia is the second largest coffee producer in the world and has been providing about one-sixth of total world exports. Over the five years 1949- 1953 coffee has averaged nearly 80% of Colombia's exports, and there are at present little prospects of new important sources of foreign exchange emerging to replace it. It thus holds a key position in the economy as the main provider of foreign exchange and as a force which can expand or contract money supply and income within the country. The value of coffee exports represented about 10% of the national income in 1948 and about 15% in 1952 and 1953. It is surprising, in view of coffee's importance, that there is so little reliable information about its production. There has been no comprehensive survey of farms, yields, new planting, age of trees, or indeed any of the basic information that could throw light on the prospects for the future. Impressions can be gathered, but these are sometimes contradictory and impressions of a particular region may not apply to other coffee- growing regions. It is believed that production is largely on small hillside holdings by family labor. A rough estimate made by the National Coffee Federation says that 87% of all Colombian coffee farms have under 5,000 trees to a farm, and the average area is about five acres. The number of farms has been estimated at about 400,000. Assuming five people to a family, the population on coffee farms would be 2 million, or one-sixth of the total population, which illustrates how significant coffee growing is as a livelihood. 13. The average New York price for Manizales coffee was 322 cents a pound in 1948, rising to 60 cents in 1953. There was a steep increase in 1954 to over 90 cents in M;;arch and prices remained above 80 cents until August brought a break in the market to just over 70 cents. In 1950 exports were lower in volume than in any of the previous seven years, but they have since been increasing and in 1953 were 6.6 million bags, or almost 50% higher than in 1950. Exports for 195. are expected to be as high as in 1953 and may even reach the record total of 7 million bags. As a result of higher yields rather than more plantings production should increase for some years ahead, but it is quite impossible to say how great  that increase might be. It is thought, for eyample, that the average yield per tree in Colombia might be about 1L kilos of coffee berries, yet at the Federa- tion's experimental station a very good tree produces 12 kilos. This last figure is exceptionally high and obviously could not be reached by many trees. Never- theless it indicates scope for improved yields. It is thought also that at present production may be increasing by about 5% a year; based on average exports for the years 1950 to 1953 this would represent an annual increase of about 250,500 bags. This could be kept up for some years by the use of better varieties and more fer- tilizers which so far have not been applied very widely on coffee farms. Produc- tion based to a large extent on family labor is likely to continue even if prices fall substantially; but if other forms of agriculture should still be profitable when coffee prices fall heavily, there vrill probably be some movement of labor awvay from coffee growing into other branches of agriculture. 14. The coffee growers' organization, the National Coffee Federation, has a powerful influence on the growers' outlook and is doing a great deal to encourage higher productivity. The Federation helps to stabilize prices to the grower by its policy of fixing prices at which it is willing to buy. The proportion of the crop that the Federation buys varies from season to season and probably averages around about one-fifth. The Federation has its own coffee research stations developing methods of combating diseases in coffee and improving the yield of coffee trees by distributing selected seeds to Colombian farms. The stations are also publicizing the need for measures against land erosion, 'which is a grave danger on Colombia's steep hillsides. There are some seventeen extension stations throughout the country but even with this number the work is limited and their influence could be expanded a good deal. The Federation assists with housing on coffee farms and has some vocational schools to improve the technical education of coffee growers' families. It also provides credit to growers both directly and through the rural credit bank (the Caja Agraria) and generally represents the producers' interests in discussions with the Government. Its funds come from a small levy made on coffee exports and from the profits it makes in its buying and selling operations. In addition, it receives a sh8re, amounting to 09%, of the exchange profits resulting from the purchase by the Bank of the Republic of ex- change earnings from coffee at 2.38 pesos to the U.S. dollar and selling those dollars at 2.50 pesos. From these funds the Federation has been able to contribute capital of 50 million pesos to a new Coffee Bank, which will be described in Chapter IV. (2) Other Agricultural Products 15. Apart from banana exports, which make up about 2% of the total, other agricultural products do not figure prominently in Colombia's exports, although small quantities are exported from time to time. Over the last five years agri- cultural products such as sugar, tobacco, hides and rice have varied in total from 1% to 3% of all exports. Agricultural production, other than coffee and bananas, is thus important at present to satisfy home demand and to minimize agricultural imports rather than as a source of export earnings. 16. Colombia's hills and plains have abundant fertile soil, and with a variety of climates from tropical lowlands to snomr-covered peaks, the country is capable of growing many different types of crops and fruits. The main food crops are corn, potatoes, wheat, rice, yucca, pulses, sugar and barley. Cattle produc- tion both for milk and meat is important, and on the tropical lowlands bananas  and cacao and many varieties of fruit grow readily. There has been a dearth of accurate information about agriculture but a census now being carried out should provide more basic information. It is thought that 2% of the whole area of the country is under crop, including coffee. Since coffee grows mainly on steep hillsides, to which it is more suited than are most other crops, it cannot be said that coffee competes with other crops for the use of land resources. 17. Table 5 gives estimates of the area sown and the volume of production of selected agricultural and pastoral products since 1949. These show in general some increase in both the area and the volume of production since 1949 and 1950, although in some cases there has been no increase over the level of 1949. According to these figures, which are the best available but even so are only approximate, barley, sugar, cotton, milk and rice have increased fairly steadily for such of the last three or four years as have been measured. Wheat, cattle and yucca pro- duction increased slightly. Maize and pig production have fluctuated, and beans and cacao have shown no real increase over the past few years. These estimates cannot be relied upon completely, but when they are reinforced by consideration of the rising population, the need for a more varied diet, and by the fact that some agricultural products now imported could be produced in Colombia, they point to the need for better use of Colombia's fertile lands. Imports include cacao, wheat, flour, cotton, barley, dried milk, copra and, in some recent years, beans and potatoes. In 1953 such agricultural products accounted for 7% of total imports, and vrhile these could not all be replaced rapidly by domestic production most of them eventually could be. Another indicator that food production is not meeting the demand is the steep rise in food prices (as measured by the food element in the cost-of-living index of the working class in Bogota) by 19% over the twelve months ending June 1954. This last indicator is partly confirmed by some other considerations: both wholesale and retail food price indices rose during these twelve months-wholesale rather steeper than retail, which suggests that the rise is not due to pushing up retail margins--and the rise in towns on the Caribbean coast, where much of the food is imported, was much smaller than in the towns inland, whose main foods come from the areas surrounding them. These points lead to the conclusion that a large part of the recent rise in food prices was due to the insufficient supply for the demand from a rising population (rising probably more steeply in the towns than in the country as a whole, because of the influx to new industries, shops and services). This conclusion, and the other points mnentioned earlier in this paragraph, support the impressions of many ob- servers of Colombian agriculture--that it is not developing fast enough to supply the country's needs. And Colombian agriculture, in this broad generalization, means not only production on the farms, whose improvement involves public policies,. but also more roads between farming areas and the main markets to reduce transport costs and to provide a better distribution of food thus avoiding local gluts and scarcities. 18. It should not be assumed that there is a simple remedy which, once ap- plied, will quickly transform the agricultural scene. Some of the problems, that of land-use for example, go back to the traditions of the first European settlers and are now deeply embedded in the agricultural economy. What is needed first, therefore, if some action is to be taken to stimulate agricultural development, is a thorough examination of Colombian agriculture to identify the problems clearly and to seek solutions. That being done, the solutions will have to be applied persistently and patiently, probably over a long term, and probably in  - 7 - many different forms. To say that solutions will have to be applied seems a very obvious observation; but it is made here because in recent years Colombia has been presented with a spate of reports on different aspects of its economy (including recommendations on agriculture), and while in some cases these reports have been followed by constructive and valuable action--in the field of transport for example--in many cases they have achieved nothing because the recommended solutions have not been implemented. Agriculture is one of the keys to Colombia's economic advancement, and at this stage of the country's development it must be given the most serious consideration. The remarks in the next paragraph are intended to outline some of the obstacles that must be dealt with, without claiming to describe these obstacles completely nor to prescribe for their removal. 19. The traditional emphasis on cattle grazing is preventing the best use of much land suitable for crops, which have to be grown on the slopes where cultiva- tion and mechanization are more difficult. Suggestions have been made in the past for a tax to be based on the potential, rather than the actual, output of land so as to encourage either the more efficient use of the land for cattle, or the sale of part of it for cropping. Whether such a tax would be effective requires more study, for some opinion in Colombia holds that its discouragement would outweigh its encouragement. Another obstacle to progress is inadequate transport to link markets with areas of production; this calls for combined work by the Ministries of Agriculture and Public Works and the Departments. There is great scope for more production by using higher-yielding seeds and more fertilizers, and from irrigation and drainage. Advice to farmers on the control of soil erosion is also most important. Very little effective assistance in these matters is reach- ing the farmers from government-controlled agricultural extension services; their work must be greatly expanded. As in many other countries, stability of farm prices, to avoid sharp short-term fluctuations, will probably be needed, and, as in other countries, interference with the normal market processes will involve the danger of penalizing the consumer in the interests of the producer; but this problem will have to be tackled. There is now an institution (the Corporacion de Defensa de Productos Agricolas) with storage facilities and a small program of price supports, but apparently without any coherent policy. Protection for many agricultural products seems to be unnecessarily high. Credit for farmers is important, and here there is a well-established channel in the Caja Agraria and the commercial banks. Outstanding loans to farmers from these institutions in mid-1953 were 60% for livestock, 15% for coffee and 25% for other types of agriculture, illustrating the prominent position that livestock farming holds. 20. It is significant that an increase in cotton production has been stimu- lated by action of the Government and the Cotton Development Institute with the object of providing the local textile industry with more home-grown ctvton. This direct stimulus includes restrictions on imported cotton and controllad prices for local-grown cotton roughly 25% higher than for imported, which is not as high protection as that given some other agricultural products but is of doubtful necessity. The production of barley also has been stimulated by the demand from local breweries whose beer production more than trebled over the years 1945-1952. 21. In general, if effective steps are taken there are good prospects of increasing agricultural production. The immediate need is for production for home consumption. It will probably take some years of successful effort before the rate of increase in production is adequate to satisfy growing home demand and  replace imports to the maximum efficient extent; after that stage a greater rate of increase in production would have to seek export outlets. Already compara- tively small quantities of such products as sugar, tobacco, hides and rice are exported, and tropical products such as cacao would probably find a ready market. It should not be easily assumed, however, that the prospects for exporting impor- tant amounts of all agricultural products are promising, in view of present world conditions and trends. There is now protection of domestic agriculture in some developed countries and a trend of technical advances for agriculture in other underdeveloped countries, and so long as this continues there will be difficulties for countries trying to find permanent export markets for large quantities of certain agricultural products. There is a belief in Colombia that an important meat exporting industry is waiting to be developed; but although cattle will probably continue to be exported to the West Indies and other nearby countries there is at present little prospect of a very large meat export industry able to compete in price and quality in the limited markets open for large imports of meat. However, small quantities of agricultural products will no doubt continue to be exported and some of these may well grow in importance. Agricultural policies should therefoe not lose sight of the need for encouraging the producer to respond readily to relative price changes, so as to secure the maximum advan- tage from any export opportunities there may be. B. Oil 22. Oil has been produced in Colombia for some thirty years and the value of oil exports now comes next in importance to coffee exports. Last year the gross value of oil exports was 13% of total exports and in the previous four years had varied from 15% to 18%. The output of oil refineries inside the country is also important to the balance of payments, for without these refined products imports would be correspondingly greater. Production has been expanding, and in 1953 was about one-third greater in volume than in 1949, after large increases in 1950 and 1951. The output of refined products from the publicly-owned refinery at Barranca Bermeja has been increasing steadily as Table 8 shows, and another refinery is expected to be established on the Caribbean coast by a foreign oil company. This should mean a further saving in imports, for in 1953 refined oil products were imported to the value of $21 million or 4% of the total value of all imports; a large part of this import would be replaced by the output of a new refinery. 23. If Colombia could anticipate substantial increases in oil production it could look forward to a more stable inflow of foreign exchange than is possible with the present dependence upon coffee; but there are not at present any grounds for anticipating a great increase in oil output. There have been no new important oil strikes for some years, although surveys have been proceeding steadily and the oil companies are hopeful of finding new deposits. If more companies were opera- ting in the country the chances of finding more oil would be increased, and the companies operating at present would welcome the participation of others. Costs of producing Colombian oil are comparatively high, so that in time of plentiful world supply there is less inducement to increase output in Colombia than in other countries. The Government has under consideration at present the possibility of allowing the companies a more favorable depletion allowance; if this is done it would make Colombian oil more attractive to the oil companies. The outlook for the next few years is for little change in the present level of crude output.  -9- C. Mianufacturing 24. Manufacturing of a few consumer goods, mainly food-processing, had begun in Colombia some years before the First World War, and it was stimulated further during that war when some manufactured goods became hard to get from abroad. Fuel was available, especially coal and later oil and hydroelectricity; there was ample labor for the less complex factory tasks, and demand from a large enough population for production on a reasonably economic scale. Local materials were no doubt used in the early industries such as beer and cotton textiles, but for many years imported barley and cotton have supplemented local raw materials in these industries, and similarly with the chocolate industry--imported cacao is used, as well as locally grown; so that the availability of raw materials produced locally has not been essential to continued industrial development, although it probably helped in the first stages. It is significant that manufacturing went through a rapid expansion in the early 1930s, which coincided with exchange depre- ciation and the introduction of exchange and import controls imposed vrhen coffee prices fell and export receipts contracted. The exchange controls apparently prevented Colombians from following their former practice of exporting their profits derived from commerce, cattle, coffee, and perhaps sugar, and thus providec capital for starting new industries, while the import controls protected the new industries from outside competition. These controls continued until early in 1951, so that most of Colombia's industry has developed under direct protective controls. Now that they have been removed protection is given by tariffs and a 40% tax on many manufactured goods, making total duties in many cases over 100%. This is a high figure, and the fact that a highly developed country like the U.S.A. has some duties as high does not mean that it is necessarily in Colombiats best interests. 25. But protection by direct controls and duties has been only one of several stimulants. The Second World War with its shortages was another, and the high costs of transport from the coast have always given an advantage to local industry, especially for such bulky goods as beer, cement and bricks. The pro- tection given by import controls and duties has nevertheless been important to industrial expansion and will continue to be important. There is always a danger under such circumstances of a misuse of resources by the fostering of uneconomic industries; but it is difficult to judge, without making a thorough study of the country's industries, the extent to which this is happening in Colombia. There are in Colombia some industries whose costs are no higher than those of efficient industries in the U.S.A. and other countries, and although the protection given to some of these industries can result in high prices to the consumer and high profits, such profits can be a source of new finance for industrial expansion. The extent to which manufacturing should be protected in an underdeveloped country with the natural resources which Colombia possesses cannot be precisely stated, and sound judgments upon it cannot be given from superficial observations. The position in Colombia at present has been imp'roved by the removal of direct import controls, but protection remains very high. As industry continues to develop the level of protection should be considered by the Government more closely than it has been in the past. 26. Since the Second World War the increase in manufacturing output has continued at a high rate. There is no really accurate measure of total industrial expansion, but on the basis of incomplete censuses taken in 1945 and 1953 the number of workers has risen from 115,000 in that year to 183,000 in 1953, or  - lo - about 60%. This measure understates the expansion however, because new industries have grown up since 19h5 and have not been taken into account in the survey made in 1953. The volume of industrial production rose 40% or 50% between 1945 and 1953 according to the survey, but this also is probably an understatement. According to figures prepared by an ECLA Mission production rose 60% from 1948 to 1953 which is about the same rate of increase as in the years 1939 to 1948. Over the last five years the ECLA indices show that the output of the food processing industries went up by about 27%; soft drinks by nearly 80%; chemicals by 130%; and textiles by 40%. Table 6 gives examples of industrial expansion since 1945, based on official Colombian statistics. Processing of vegetable oils, milk, sugar and flour has doubled or trebled between 1945 and 1952. The output of rubber footwear in 1952 was four times as great as in 19045. Beer and soft drinks have trebled in that time. Cement production has almost doubled. Towel production has expanded to five times the 1945 output and blankets to seven times. There had been a temporary recession in 1951, but output recovered in 1952 and expansion continued in 1953, although few figures are available to measure it. Cement output, for example, rose by one-fourth in 1953 over 1952. 27. Manufacturing began in Colombia with consumer goods and most of the development has continued to be in such goods. They probably now account for about 90% of the value of factory output. Among the 10% which are classed as capital goods, small metal working industries are growing rapidly. The new Paz de Rio steel works is expected to begin production at the end of this year and it is believed by outside observers that already, although the steel works has not yet begun production, it has had a stimulating effect in encouraging iron and steel-using industries in Colombia. Apparently the experience of steel shortages in two world wars, and after the Korean war began, had retarded these industries, but now, in the belief that supplies will be regular and that ordering will per- haps be simpler, small metal-using industries, especially those making steel furniture, are beginning to expand. As a point casting some doubt on this generalization, however, it should be noticed that the demand for sheet steel is particularly high for furniture-making, but the new steel industry will not pro- duce sheet steel in its first stages. It seems that a large part of the output of the new works will be constructional steel which will not be much used by small industries. 28. It has already been noticed that the industrial expansion of the early 1930s was probably financed largely by Colombian funds which, but for exchange controls and exchange depreciation, would have gone abroad; and it seems very likely that the recent industrial expansion has been financed to a great extent by the retained profits of industry itself, as well as profits from cattle, coffee (by the larger growers), and commercial activities in Colombia. Credit from commercial banks has also played a part, but it does not seem to have been very important in the last few years, for new bank loans to industry were lower  - 1l - in 1953 than in 1951. The amount mf foreign capital in manufacturing is not known precisely; according to the available information it is less than 10% of all capital in manufacturing, There are reasonably good prospects, however, for attracting more foreign capital. Profits are generally high and company income tax rates are not so high as to neutralize this attraction. Prmfits from registered foreign capital may be remitted abroad and such capital may be repatriated. On the whole the atmosphere for foreign capital is favarable. 29, Finance for new or very large enterprises, such as an oil refinery or a steel works, and for small industries, is more difficult to raise at present in Colombia than for medium-sized industries because the latter have access to industrial and commercial profits seekinr investment opportunities. There would be some difficulty in financing, for example, a rolling mill as an addition to the Paz de Rio steel works. Although finance for the very large and the very small industries is not likely to be easily available, and even though other industries also may find finance difficult, there is not at present any obvious case for setting up new institutions for financing industrial development. This situation could, however, change rapidly. 30. The prospects for continued industrial advance should be regarded' as good. Demand from a rising population and rising incomes should continue. to increase as development in other economic fields advances. In some of these fields development is essential to a developing manufacturing industry- especially in the field of power, for more electric power is needed now in industry and an expanding industry will require expanding supplies of elec- tricity. Technical education may also have to be expanded, for although local labor is of a good standard for most factory work it cannot satisfy the need for higher technicians. Foreign technicians have helped to fill this deficiency, and also deficiencies of management. Indeed, the contribution of techniques from foreigners has probably been more important than the contri- bution of financial capital, and this willingness to welcome outside knowledge is encouraging for Colombia's industrial future..  - 12 - D. Electric Povrer 31. Wtith her rivers for hiydroelectricity, and coal and oil for thermal plants, Colombia is well placed for sustaining powver output, and since the end of the war there has been considerable expansion of installed capacity. Before the war the public service plants were privately-owned, and very few in number. In addition there wvere many small plants supplying industry, and this tendency for industries to have their own small plants still exists, no doubt because in the past there has not been sufficient power from the public service plants to meet the demand, the result being tnreliable service for industry. The development of public utility power since the war has been mainly of nublicly-owned plants, and some privately-onmed plants have been taken over by oublic management. These public plants are usually managed either by runicipal authorities or by comnanies vwhose stock is orned by m7nicipalities, departments and the national government. In 1946 the national Povernment set up a National Institute of W7ater Utilization and Electrical Development to plan and promote electric power development on a national scale, and this institute looks after the government's interest in the public power services. The publicly-owned plants have been financed by the contributions of the national government and the municipal and departmental authorities together with external canital from the IERD and the Export-Import Bank. That power development has become largely a public enterprise has been due to -overn-ment policy, aided by the fact that there has been little inducement for local private enterorise to enter this field - profits could be made in industry more easily than in public utilities where there was government supervision of rates. Private foreign plants already established in Colombia have recently been given more inducement to expand by exepntion from departmental and municipal taxes and duties. This new imieasure applies to all Private electricity comrpanies supplying power for public services and its object is to attract local as vrell as foreign investment. Its result may be some exnansion of the foreign-owned plants. 32. As industrial, conmercial and domestic demand has increased during the last few years total installed capacity has grown from 270,000 kw. in 1950 to 440,000 1a. in 1953 - a rise of over 60c. These figures include the estimated capacity of private plants in industry, wvhich has grown from about 30,000 kw. to about 90,000 kwf., accounting for a third of the 6o% increase. This in itself illustrates that pover from the public services for industry has not been sufficient, for generally it is more economical for a factory to buy powTer from the public services than to generate its ovn. Total consumption, which had risen by nearly 90% between 194L-L5 and 1950, rose by another 40%' between 1950 and 153. The use of pow,Yier in industry rose in these three years by something over 47A, and according to a tentative estLimate, industry used about 35% of all power consumed last year. Domestic consumers used about 45% and commercial and other users, such as municipalities, 20/. 33. Demand for power continues to grow with the country's development. Projecting past trends, demand in 5 years time will probably be somethting between 50 and l10So greater than at present.  - 13 - Even now demand for industrial power exceeds capacity, especially in Cali. A more exact picture of the expected demand Trill appear vfith the report of a mission of Colombian, French and United States enaineers, who are novf in Colombia at the invitation of the government making a comprehensive survey of the country's needs and potential. Th;eir survey will provide the basis for the future plans of the iTational Institute. E. Transport 34. It wrould be hard to overemphasize the importance of trmasport in Colombia's economic development. The nature of the country wvith its high mountain ranges, 'ralleys and rivers inakes land transport unusually difficult and costly. Lack of transport, and poor transport facilities, irnpede the openinc up of new country andrin high costs in linking producer writh consumer. Tt is not surprising, in view of the di&ficulties of surface transoort, that air transoort has become highly developed. A Colombian comipany which claims to be the oldest co=mercial airline in A1.erica has been operating a network of air services for thirty-five years. Last year this company, and the other Coloimbian cor.manies ->rhich have begun operating since the wrar, carried over one million nassengers. The nur.ber has been rising in the last two years by an average of 6. a year. The volume of cargo carried by air, on the other hand, has recentvly been reduced, -which reflects the imrprovement made to the roads. 35. Most of Colomilbia's roac, construction has taken place dcuringy the past thirty yea-'s. Considerin- the ty-)e of country covered, the road system has been remarlkal;ly --ell developed; bout UP to 1cl51 the extent to which many roads had been lest to deteriorate --Aithout adequate mainte ance had been aJriost as rermarkable. Three-fifths of the country's roads are national hii.:hways ane two-fifths are uncder the control of the departmental authorities, who receive contributions from the national -overnment towaros exnenditure on road construction and maintenance. An ianortant road maintenance and extension program, aided by an IDBRD loan, is nonw under vay and has already imLroved the hiphwaay system to a noticeable degree. ahpenditure on roads is a large prooortion of gross vlublic investment - over the thiree years l950 to 1952 about 30,, and only about 4C% of this wFas for construction as distinct from maintenance and paving. Of all the 7rublic foreign debt outstanding at the end of 1952, loans for roads (all from -the 1FBD anid the EKport-Lriport Bank) accounted for 1%. Something of the recent increased use of road transport can be indicated byr the rise in the number of trucks registered from 22,000 in l950 to an estimated 40,000 in 1953. 36. Foreign loans for another for:; of surface transport, railvas, accounted for 12% of the public external debt at the end of 1952 - again mainly loans fron the IBTRD and the Mcport-Inmort Bank. The railway system, originally privately-omned, has since 1912 almost all come under puplic omnersihip. The standards of service provided and of maintenance of equiument have been low; but a major reorganization of aiLtinistration is nowvr under way to chlange fundanientally the methods of the past. The number of passengers carried by the railways has fallen in each of the  - 14 - last three years, cnd tho tonn,.e of freight moved by r.il fell in 1951 and 1952, recovering in 1953. A railway extension financed partly by an IBRD loan is now under construction in the h1agdalena Valley wThere a stretch of the i.Kagdalena River provides a slov and hazardous route for cargo. WVhen this extension is completed the;e ;vill be a river and rail link open at all times of the year between the Caribbean Coast and centers of the interior. This will save considerable time in transit and should reduce transport costs. A further extension of the railroad, now under study, would complete the rail connection all the way to the Caribbean coast. III. EXT?RNAL TRADE AND PAYMEITTS A. Exchange Rates 37. In the 1920's and early 1930ts the exchange rate vas a little over one peso to the U.S. dollar, but after 1932, with coffee prices and foreign exchange earnings low the peso depreciated until in 1935 it was 1.7 pesos to the U.S.dollar, at vwhich point it stayed until 1948. Delayed wartime demand and inflation based on excessive bank credit encouraged a high level of imports in the years irmmediately after the war and reduced the gold and foreign exchange reserves, in spite of high export receipts. For a time payments to external creditors were in heavy arrears. EKch.nge .nd import controls were tighteded, the peso depreciated to 1.95, and multiple exchange ra.tes introduced. There was soon a. range of rates from 1.95 to 3.86 besides a varying black market rate. Strict import controls and rising export receipts brought trade into balance in 1949 and 1950, and the gold and foreign exchalnge reserves recovered from their low level of 1948. 38. In Mlarch 1951 the structure of exchange rates was simplified round a rate of 2.50 pesos; and at the present time there seems to be no good reason for a change. This rate applies to dll imports, although some imports which had been prohibited until February 1954 are nov subject to a tax of 40% which means in effect an exchange rate of 3.50 for such imports. A special export rate for coffee had been 2.17 in October 1951 and was to be devlied month by month until it reached 2.50. The gradual devaluation weas stopped in January 1954 to avoid adding to inflationary pressures that were already threatening as coffee prices rose. The rate was then 2.38, which still rules for coffee exports. The profits arising from buying the coffee proceeds at 2.38 pesos to the dollnr and selling pesos to importers at 2.50 pesos are divided up among Government revenues (30%), the Caja Agraria (21%) and the National Coffee Federation (49%). In order to encourage new exports a "voucher" system has been in force to give a preferential exchange rate for the proceeds of certain exports, for example, tobacco and rice. Exporters of these goods were originally entitled to import goods on the prohibited list or to sell their right to import such goods. They may still do this, but since the prohibited list is no.w eliminated, and a tay of 40% levied on these imports, the new tax has the effect of fixing the premium enjoyed by the exporters of "voucher" commodities at one peso per dollar, making an effective rate of 3.50. This is not a very important rate, as last year less than 1% of all exports were covered by this system. 39. Foreign exchange earnings from gold may be sold on the free market.  - 15 - This market's activities are now limited, since almost the only demand for free foreign exchange comes from people seeking funds for travel and the export of Colombian-owned capital in excess of that allowed by the exchange control. It so happens that some of the proceeds from coffee exports may be sold in the free market, as the coffee exchange surrender value is fixed from time to time but not always coinciding w,lrith changes in actual export values. Thus when the surrender value is below the actual ex,.ort value the exporter has an excess of dollars which he can sell in the free market. On the other hand, when coffee prices are falling the time lag can mean that the exporter has to surrender more dollars than the export proceeds and he vrill then have to buy such dollars in the free market. B. The Balance of Payments 4o. In the postwar years l945 to 1948 the high level of imports in relation to exports resulted in a series of trade deficits and a reduction of the gold and foreign exchange holdings from $180 million in 1945 to $88 million ir 1948. Import controls and rising export receipts combined to w,ipe out the trade deficit, and since l950 the gold and foreign exchange holdings have been rising. At the end of 1953 they were $190 million, or about 35% of the value of that year's imports, and by July 1954 had risen to $257 million. Imports now have a strong upward trend, however, and may cause the gold and foreign exchange holdings to fall within the next year. At their present level the external reserves are adequate to allow some short term deficits in the balance of payments. 41. Since 1949 the pattern displayed by the external accounts has been a trade surplus with exports f.o.b. exceeding imports c.i.f., and an addition to the surplus by exports of non-monetary gold. This surplus has usually been outweighed by current payments for such items as travel, transport, insurance, interest and dividends on foreign investments in Colombia and government transactions. The result has been usually a current deficit, more than covered in recent years by the inflowr of capital. The favorable trade balance has occurred while export prices have been rising faster than import prices. Over the three years 1950-53 export prices have risen about 40% wvhile, according to the National Departm.ent of Statistics, import orices have risen about 20%. (This measure of import prices covers a limited selection of goods and may understate the rise that actually took place). The favorable trade balance probably owes a good deal also to the special measures that have been in force to restrict imports. Between 1951 and early 1954 many imports were prohibited, and although the prohibitions have now been lifted the h0% tax on these goods has some effect in restricting demand. More important recently have been credit restrictions -wrhich, without doubt, are restraining imnports. 42. The inflow of long-term capital has been significant in the balance of payments. The net inflow, that is after deducting amortiza- tion, in the four years 1950-53 has been estimated to total about $80 million of which one-third has been private and two-thirds official. The private capital inflow has been mainly direct investment in petroleum and shipping, petroleum accounting for two-thirds of the net private capital inflow. The official capital inflow wllas mainly drawings on loans  - 16 - from thie BRDf, the Export-Import Bank and the Banque .de, Paris et des Pays-Bas. The gross inflow of long-term capital, ignoring amortization, has been of some importance in the bhlance of payments, equivalent to almost 8% of the value of exports over the past four years. To illustrate its significance as a source of foreign exchange, this gross long-term capital inflow was roughly equivalent to half the value of petroleum exports in those four years. C. Ecports and Imports 43. In each year since 1946 the value of Colombials exports has risen; expressed in dollars the value of exports in 1953 was three times the 1946 value, or expressed in pesos, nearly four times the 1946 value. Correcting the rise by the rise of about 65% in import prices, it can be said that this rise in export values increased Colombia's capacityr to import, expressed in real terms, by roughly 140%. This was a very great increase, and it made a great contribution to the rapid development of Colombia during these years. It would not be prudent to expect this rate of increase to continue during the years immediately ahead as it was largely due to rising coffee Prices. The implications of this changing outlook for exrnort earnings will be considered in paragraphs h9 and o0. hh. From 1950 to 1953 exports almost doubled in value, due mainly to the doubling of cofi*ee exuort receints. The volume of coffee exports in these years rose by 50% from the unusually low level of 1950. In 1