RE'ruFN JoRESTRICTED

FE TS E CIRCULAIG COPY Report No. WH- 188a

OWT N TO E RETURNED TO REPORTS DESKNE Esg IN GENERAL FILES

This report was prepared for use within the Bank and its affiliated organizations.They do not accept responsibility for its accurocy or completeness. The report maynot be published nor may it be quoted as representing their views.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

INTERNATIONAL DEVELOPMENT ASSOCIATION

CURRENT ECONOMIC POSITION

AND PROSPECTS

OF

COLOMBIA

(in five volumes)

VOLUME I

MAIN REPORT

December 30, 1968

Western Hemisphere Department

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CURRENCY EQUIVALENTS

(as of November 4, 1968)

1 U.S.$ 1 l 6 .77 PesosI Peso (Ps.) = US$0. 0596

.1 Million Pesos US$59, 630

TABLE OF CONTENTS

Page No.

PREFATORY NOTE

THE MISSION

BASIC DATA i - ii

SUMMhARY AND CONCLUSIONS v

VOLUME, I: THE MAIN REPORT

I. THE COLOMBIAN ECONOMY 1945-1968 1

A. Introduction 1B. Economic Growth since World War II 5C. The Present Position 6D. Conclusion 11

II. THE OUTLOOK FOR 1969-1973 14

A. Development Goals 14

Introduction 14Capital Formation 15

B. Public Finance 16

Tax Reform 16The Domestic Effort 18

C. Monetary Program 25

D. Balance of Payments 28

The Problem 28The Prospects 29Export Promotion 36

E. Creditworthiness 40

III. AGRICULTURE 43

A. Recent Performance 43B. Public Services to Agriculture 44C. Agrarian Reform 48D. Coffee Diversification 49E. Export Potential 51F. Fbreign Financing and Public Invest-

ment 56G. Conclusion 56

TABL3 OF CONTENTS - Page 2

Page No.

IV. IANUFACTURING INDUSTRY 57

A, Introduobion 57B. 'Main Characteristics 59C. Import Substit-ution and Export

Promotion 63

W, OTHER SECTORAL DEVELPMENTS 68

A. Transport 68B. Powe r 71C. Telecomwunications 73D. Water Supply and Sewqerage 73E, Education 74F. Health 76C. HlIousing 77

VOITUE II: STATISTICAL APPENDIX

General Note

Part I - National AccountsPart II - Balance of PaymentsPart III - Public FinancePart IV - Money, Credit and Prices

Part V - External FinancingPart VI - AgriculturePart VII - Industry

VOLUME III:

ANNEX I: INDUSTRYAlNEX II: POWERANNEX III: TRANSPORTAN1EX IV: WATER AND SEWERAGE

A14NEX V: HUM4AN RESOURGES

PopulationEducationHealthHousing

VOLUME IV: ANNEX VI: TECHIICAL ASSISTANCE

VOLUAE V: PROJECTS FUR EXTERAIL FINANCING IN 1969

PREFATORY AOTE

This report deals only briefly with subjects already analyzedand reported on in the rather extensive reporting to the ConsultativeGroup witthin the past 18 months. Its main purpose is to re-examineColombia's longer ter-n development problems and prospects and theirpolicy inplications for the next three to five years. The first twochapters of the main report surmnarize briefly the long-tern trends andpresent position of the Colombian economy and, against an explicitframework of projections through 1973, update present judgments aboutmajor financial and economic policy issues and external capital require-ments for this period. The last tlbree chapters focus on sectoral issuesin agriculture and industry, on whose fortunes Colombia's economic pros-pects ultimately depend, and on the other major sectors in the pUblicinvestnent program.

The report reflects the findings of a mission wzhich visitedColombia during Hay 19 to June 21, 1968 and discussions of these findingsiitth representatives of the Colombian Gcvernraent in mid-October.

THE MISSION

Mervyn L. Vt;tiner je Chief of the Mission

Jose D. Teigeiro oeceos ea.oeaeeoe**o Chief Economist

Anthony A. Churchill Fiscal Economist

Lorne To Sonley . Agricultural Economist

Alexander Nowicki *O*Sb*tSbo.@o,ee. Industrial Economist

Charles A. Morse 4000****O***OOOOOSgS Sanitary Engineer

Sel-Young Park o TransDort Economist

ManuQel C. Zenick .... Power Advisor

George C. Zaidan *o..e..o.e.. o eeee* Human Resources Economist

BASIC DATA

Area 439,825 square miles

Populationr (mid-1968) 20,0 millionGrowth Rates: Total 3.2

UrbanQJ 5.5

Gross Domestic Product

(1967 est.) Ps 80.3 billion

Real rate of growth: 1947-67 5.01945-50 6,o1950-54 5.61954-58 3.21958-62 5e31962-67 4.4

Per capita GDP end 1967 est, US$251

Gross Domestic Product by Origin 1950 1967

Agriculture 37.8 29.3

Manufacturing 14e8 19.2Others 47.4 51:5

Million % ofPublic Finance (1967) Pesos GDP

Current Revenues of the Central Government 6676 8-3

Current Expenditures of the Central Government 4293 5e3Surplus on Current Account of the Central Government 2383 3.0Surplus on Current Account of the Public Sector 3613 4.6

Public Sector's Investment Expenditure 5157 63-4Net Borrowing 1544 1.9

Money Supply iillion Pesos % Change

December 1964 8370 20.9

December 1965 9680 15.7December 1966 11035 14.0December 1967 13450 21.9

Balaice of Payents 1966 1i967(us$ milT?

EWports f.o,b. 525.1 554.9Imports f.o 0 b. -6389 -480.2Invisibles, excl. factor income -63.3 -25.6

Investment income -83.4 -78.3Balance on current account -2O0.5 -29.2

1J Includes all cities with more than 100,000 inhabitants in 1964.

Public transfers 10.2 2.1Short-term private capital 77.3 -1.4Long-term private capital 42.6 i6.3Official disburserments 121Q9 i45.oOfficial amortization -63.9 -54.7Change in international reserves of the

Banco de 1a Republica (-increase) 42.0 -57.4Errors and omissions 30.4 -20.7

Current Account 3eficit as Percentageof Inmvestent c1967 estr) 3.4

Commodity- Concentration of Excports 2967

Coffee 58.1Pe troleuri 11.0Banana 4.5Cotton 2,7Sugar 2 .dO thers 21.17

Change overNational Cost of Li i. Index fEor Workero previous period (

December to AnnualDecember Average

1963 35.L 27.31964 8.5 17.71965 14.3 7.D1966 12.7 16,71967 7.0 82.

aternal Debt Outstanding (inc. uundisbursed)December 31, 1967 Us$1,0850 8 m-illion

Debt Service Ratios t1967} 14.2% total. comnodityexports

11,3 % exports of goodsand services

Certificate 2.chang! e Rate (November 4, 1968) Selling US$1.00 equals Ps 16.77

M1F Position (as of July 31, 1960) Quota US$125 millionFund holdings of currency

US$220,4 million

Holdings as percent of Quota 176

Net International Reserves US$1.0 million as of end-Sep-tember 1968

SUMAARY AND CONCLUSIONS5

1. The purpose of this report is to identify, against a backgroundof long-term trends, the major financial and development policy issuesfacing Colombia in the next three to five years and their implicationsfor Colombia's development prospects and external capital requirements inthis period. Its principal conclusion is that if the quality of Colombiarsresponse to problems continues to be as good as it has been in the pasttwo years, substantial external support of its accelerating developmenteffort continues to be warranted. This support, which would make possibleofficial loan disbursements of between US$250 million and US$300 millionannually during the next four years, would represent obligations whichColombia could, with good policies, prudently undertake. They would beincurred as part of a well-conceived effort to sustain a more rapid growthof income and employment than has been possible since coffee prices collap-*sed in the mid-1950's.

2. Colombia is a country of 20 million people, relatively poor(average per capita income of $251) but with less extremes of wealth thanin many other countries in Latin America. The population is growing rapidlybecause of declining mortality rates - by some 3.2 percent annually - andis becoming increasingly urbanized. A well-designed family planning pro-gram was recently initiated; but with the best of effort Colombia will mostprobably still have a fairly rapid rate of population growth ten to fifteenyears from now. Accelerating economic growth to support this large andgrowing population will thus remain a central goal of public policy for along time.

3. The resource base for faster growth is good. But in the past therequired supporting policies have been poor, with the result that economicdevelopment efforts were not sustained, economic growth was uneven, balanceof payments problems were chronic and many distortions were introduced intcthe economy as a result. Since the end of 1965, however, and particularlysince early 1967, major efforts have been launched in support of an acceler-ated development effort. They have already produced impressive changes.The public investment effort has increased markedly. After decliningsteadily in real terms between 1962 and 1965, it increased by 17 percent in1966, 15 percent in 1967 and almost 19 percent in 1968. To support thiseffort, the Government is improving the management of public agencies, thequality of sectoral policies, and, most important, the quality of its finsn.-cial policies. Since 1966, the financial situation of the public sector,which was chronically in difficulty in the previous four years, improvedremarkably. As a result of new revenue measures and strict control of ex-penditure, the current account surplus of the Central Government increasedby 60 percent in 1966 and 25 percent in 1967, and another 24 percent in-crease is in prospect in 1968. Monetary policy has improved, with the re-sult that domestic price increases of 16 to 17 percent annually during1962-66 have been cut to 8 to 9 percent during 1967 and 1968. Balance ofpayments management also improved with the break early in 1967 from thepast tendency to maintain exchange rates that were overvalued in relationto the need to provide incentives for non-coffee exports, for petroleumdevelopment and to restrain the demand for imports.

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Put Colombia still continues to confront major uncertainty aboutits ability to sustain its present and planned development effort; for itsbalance of payments cantnot yet support this effort without extraordinaryassistance for anoth;er few years, U.hile non-coffee exports are increasingrapidly, under the best of circumrstances they will not be able for somewhile yet to provide for the enlarged import flowns which sustained growthw-ill require. The realization of Colombia's conside&'able growth prospectswill thus remain for a few more years unusually depen 5ent on1 continruedmutuality of effort between the external financing agencies and the ColombianGovernmernt.

5. The framework for such assistance has not yet been defined indetail beyond 1269, b-ut the rain outlines are clear.

6. To realize tihe national investnent effort that is planrned insupport of a sustainied 6 percent annual growth rate (similar -o the earlypostwar years but considerably above the performance of recent years", -hepublic sector will have to increase its resources for investment by some10 percent annually in real terms over the next few years. Anticipatingthe substantial effort that this would call for, the Government appointedearly in 1968 a high level commission to make proposals for an overall taxreform. The recommendations of the Commission are eycpected before the endof the year in the form of draft legislation designed to reform the exist-ing tax structure to make it more efficient and equitable and to increase

erevenuesa A tax reform that would expand reven.ues by at least 15 percentannually after 1970; the gradual elimination, beginning in 1969, of the ex-change rate subsidy to domestic fuel consurption;and the elimination of mostoperating subsidies on public utility services by the introductioni in 1969of a new system for the pricing of these services - these are the principalmeasures now planned. They would ensure that public savings, which areOurrently financinig two-thirds of public investment, would increase morerapidly than inveetment and finance some 75 to 80 percent of total publicinveEtment after 1970. This effort, coupled with the likely availabilityof other financing, including counterpart funds from program. loans, shouldsatisfy the public sector's financial requiremnents through 1972. Some pro-gram support will continue to be required for the Government feels, withreason, that the additional fiscal effort planned is about as much as itcarT add immediately to the very considerable revenue effort of the past fewYears and that if external support were to be cut abruptly, it wculd havelittle ontion but to make sharp cuts in its on-going development effort,It does not intend to satisfy public sector financing needs by borrowingfrom the banking system at the expense of the private sector. To comple.mentthis fiscal effort, the Goverrunrent is taking paral-lel steps tc increasesavings flows through the banking system, to support a growing private in-vestment effort. The measujres recently taken and under consideration wouldpermit total bank credit to increase adequately over the next fiew years,writh an increasing share of this credit going to the private aector.

7. Coffee exports continue to dc-minate thhe export picture, curently

acccunting for 60 percent of total ccrmodity exports4 Inadequate growth ofexchange earnings and import capacity accordingly continue to constitute aserious barrier to sustained overall economic growth. If GDP has been able

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to grow; even slightly in excess of population, it has been possible onlybecause of the extraordinary balance of payments support that Colombiahas been receiving for a number of years. Between 1961 and 1967, dis-bursements of official loans averaging US$110 million annually financedsome 22 percent of all merchandise imports; one-third of this assistancewas in the form of program loans. Program loan assistance has now reachedan all-time high, financing 11 percent of all merchandise imports in 1967and 14 percent in 1968; it has constituited 40 percent of all gross officialcapital inflows in the last three years, a period in which total gross in-flows wiere financing 27 percent of all merchandise imports. The problemColombia faces now is how to negotiate the next few years that it will takefor non-coffee exports to rise enough to eliminate this dependerce on ex-traordinary aid without sacrificing the development momentum that has beenbuilt up in the past two yea-s.

8. The prospects for the balance of payments through 1973 are forprogressive improvement resulting from the Government's export promotiondrive which started in 1967. This drive, which is on target to date, aimsto raise the annual growthi of "lminor" exports to 25 percent through 1970and around 20 percent thereafter. Its realization will require formidableand sustained effort; but with appropriate incentives, there is no reasonat this time to conclude that the target is not feasible. If successful,total export earnings would increase from US$555 million in 1967 to almostUS$900 million by 1973, or by an annual 8G3 percent, and represent a sharpbreak from the pattern of the past twelve years when total exports fluctua-ted widely, but without any consistent upward trend. However, even thissubstantial expor-L effort would not by itself provide Colombia with adequateimports to support growing investnent and activity levels. During the tran-sitional period in which exports, as well as public savings, would be in-creasing to levels which would reduce Colombiats dependence on externalresources, the need for external assistance will thus rise rapidly. Theexternal deficit on current account is expected to increase from 2.3 percentof GDP in 1968 to over 4 percent of GDP in 1970 and 1971, although it woulddecline rapidly toward the 1968 proportions thereafter. Gross disbursementsfrom official loans would have to increase very sharply in this period,from US$188 million in 1968 (already well above the 1961-67 average) to someUS$300 million in 1971 to sustain the planned increases in investment. Asa result of recent improvements in the effectiveness of investing agencies,in sector policies and in the availability of domestic funds for investment,all of the increase in disbursements should be forthcoming through projectloans, which are scheduled to rise from US$110 million in 1965 to US$235million in 1971. But even with this impressive increase in project loandisbursements, the planned phase-out of program lending will have to begradual if Colombia is to be enabled to sustain her present developmenteffort.

9. Any exact estimate of the import "requirements" on which thisconclusion rests is, for an econemy of the size and complexity of Colombia,open to challenge. However, when one considers that Colombia's capacityto import goods and services was not significantly greater in 1967 than in1954, even though GDP had increased by 70 percent and population by 50 per-cent, and that actual merchandise did not increase during the 1960's (exceptin 1966), the conclusion that import capacity has been restraining cverall

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growth is difficult to avoid. Even on the basis of observed relationsbetween imports and GDP in the 19601s, a period in which imports wereseverely constrained by administrative controls, estimated import require-ments for 1968 through 1973 exceed projected import capacity. If economicgrowth is not to be scaled back sharply toward the 4.5 percent average forthe 1960's, i.e., cut by one-fourth overall and by one-half on a per capitabasis, this import gap must be filled somehow. Raising external cost-sharing of project financing underway and in sight from its present averageof 61 percent to even 100 percent would not fill the gap unless an impossi-bly large addition were immediately made to the project list. The project--izable proportion of the Colombian program, which has increased considerablyin recent years, could undoubtedly be increased further - the total value ofprojects to which external financing is attached currently represents some55 percent of the total public investment program - but this could not bedone overnight.

10. The Governments effort to enlarge and diversify non-coffee ex-ports, to which it attaches the highest priority, consists of three mainelements: adequate financial incentives, including in particular an adequateexchange rate, to permit Colombian products to compete increasingly abroad;more effective institutional support for exporters; and domestic credit andinvestment policies that would encourage increasing productivity in and theprovision of adequate irfrastructure for production for export. The maininstrument for providing adequate financial incentives is the flexibleexchange rate policy which was ini-tiated in March 1967. Since that time,the certificate market rate depreciated gradually by some 24 percent, con-siderably more rapidly than the increase in prices in this period. Thelargest part of this depreciation took place during 1967. The adjustmentduring the first nine nonths of 1968 has been slightly slowfer than themovement in domestic prices, eroding some of the gains achieved in 1967.Iiowever, the Government does not regard the adjustment process as completed.It firmly intends to monitor minor export performance closely and takewhatever additional measures may be necessary to ensure the realization ofits minor export goals.

11. The newr external borrowing now being planned would doubleColombiats external public debt outstanding from its present US?jl.l billionto US$2.3 billion by 1973. Because around 70 percent of the present debtis to official agencies, and a large proportion of it has been incurred forsoft-term program loans, the average terms of this debt are 'very favorable.Even if terms harden slightly in future, as they might, the burden of thisdebt should remain reasonable. If exports develop as intended, the debtservice ratio would increase from 12.7 percent in 1968 to between 16 and 17percent in 1973. This increase in the debt burden would be accompanied bymajor improvements in the international liquidity position and a consider-able broadening in the export base. Minor exports would no longer be 11minot "and the 1973 share of coffee in total commodity exports would have fallento around 40 percent. However, the long maturities of most of this debtmeans that the increase in debt service obligations would not be temporary.If the debt burden is not to increase indefinitely but is to level offduring the 1970's, the pace of new borrowing on conventional terms after1973 would have to be reduced considerably below the annual US$260 milli3n

level envisaged through 1973. Such a sharp reduction in the commitnentrate would imply a corresponding reduction in net inflows of official cap-ital from around 3.4 percent of GDP in 1971 to 1.8 percent by 1973, evenbelow the 2.2 percent estimated for 1968. Import capacity need not becomeagain a bottleneck to sustained growth, even with this reduced capital in-flow. However, domestic savings would have to be increased correspondinglyif the national growth objectives are not to be compromised.

12. The external development support now underway and being planned

and the related policy framework outlined above are in support of a well-conceived development effort. More than half of the public investmentprogram consists of projects to which external financing is attached and

which accordingly already satisfy critical external lenders. The majorinstitutional and sectoral policy issues relating to the public investment

program, which are discussed in the main report, have been identified,

and preparations are being made to deal with those problems which are not

already in hand and being resolvedr The overall thrus-t of the program is

appropriatn. Perhaps the most critical issues for the future lie in the

more general policy environment in which private agricultural and indus-

trial investment and production decisions are to be made in the coming years.

Beyond all the specifics discussed in the main report lies the basic question

of making Colombian agriculture and industry more outward-looking, by im-

proving specific sectoral policies and institutions and by providing appro-

priate incentives to this end on a more sustained basis than Colombia has

known over the past decade. It is to this change of emphasis at the margin

that the Colombian Government has been turning its attention, to realize

the export goals on which justification of the planned external support for

its ambitious de-velopment effort largely rests,

T. TEE COiLOBIwl ECOIf-WIX 1945-1968

A, Ixtroduct:1c

1. rolcnbia is a country of 20 rnilior. ne ople, relatively poor(average Der capita incomie of $25]) butu with lass exzreies of wealth thanin mary-DtIher courtries in Latir- kmr-ica. The population is growirgrapidly. It grew at a rate of -aotroxiriately 2 percent per year betweenL1940 and 1950 and has since accelerated to about 3.2 percent, due largelyto the 26 percent decline in mortality rates between 1253 and 1965• Thisacceleration in population grow-;th has been accorpaiiied by a dramaticlowering of the average age of the population0 The 19964 census showsthat 47 percent of the population is under the age of 14K, as compared to43 percent in 1951 and, for example, 30 percent in Argentina. Emigrationfrom rural to urban areas has also been taking place at a fast pace. The196L population census shows that the proportion of urban to total popula-tion now ex-ceeds 50 pervent, compared to less than 43 percent in 1950.These developments have required increasing investment in urban infra-structure and increasing expenditure tc feed, house, dress and educate thelarge percentage of the population outside the labor force; they have alsogiven rise to increasing concern about employment cpportunities. Unemploy-ment is already a serious problem in cities-like Bogota where it rangesbetwJeen 9 and 15 percent of thi labor force. The current annual increasein the job-seeking labor fcrce is about l9o,OOCO

2. A family planning program was recently initiated, and is beingcarried out by the Colombian Iedical Association. Last year the Govern-ment initiated and the Gongress has since approved a lau providing for"responsible parenthood," designed to reduce the high rate of illegitimatebirtls 0 However, with the best of' efiort, Colcmbia ;will nost probablystill have a fairly rapid rate of population gro-wrth ten to fifteen yearsfrom now, During the decision-.eaking horizon of this and several admini s-trations still to come, -major effort will accordingly have to continue tobe directed towards acceleratinag eccciic growth to support Colombia1 slarge and rapidly growing population.

3. Colombia enjoys many advantages in this effort. A large varietyof soils and climates means that virtually any kind of crop can be grcwm.Less than one-quarter of the land area is being expleited for agricultureor cattle raising; there is still much room for agricultural e-xpansioninto new areas. Large forests and ocean fishing have been hardly touchedfor large scale cornrercial operations0 The principal knoown mineralresource is petroleum, which supplies national consumaption and between12 and 16 percent of total exports; substantial new deposits, recentlydiscovered, will start to be exDloited next year. There are also kno:ndeposits of laterites, of apparently good nickel c-ntent, and phosphates.Low-cost hydroelectric resources and potential are abundant 0 Difficultgeography, which nade transport difficult and costly in an earlier stageand led to the developnent of several fairly separate centers of economicactivity, is nou being overcome by improvements in the transport systen,mraking possible a more integrated and more efficient national economy,

Colombia's institutional development is quite advanced, and there is afairly large and growi4ng number of well-trained entrepreneurs, both inprivate and-public enterprise, to lead and manage. The development offinancial intermediaries is relatively good and along modern lines.Non-traditional exports, especially of manufactured products, i-ere ini-tiated in some scale only recently; however, they have already demonstra-ted their responsiveness to financial incentives. and promise to compensatesoon for the stagnation in coffee earnings which has so severely affectedColombia's overall growth.

4. Perhaps the most important element in the present picture isthe increasing emphasis being given in Colombia to economic development.This emphasis is the result of a process initiated in the second half ofthe 19301s, Thich can be roughly divided into three ten-year stages. Thefirst decade, up to the late forties, wras marked by an awakening ofeconomic preoccupations which resulted in the introduction of LatinAmerica's first far reaching tax reform (the income tax had already beenintroduced in the early nineteenth century), the first Colombian blueprintfor industrialization including the creation of the Industrial DevelopmentInstitute, the forty-eight hour -week, wiorkmen's compensation, unemploymentbenefits, provision for land reform. This stage sa-wz its promise frustrate'bY the Second World War. The second stage, which covers the late forties trthe late fifties, was marked by the intense rivalries between the two majorpolitical parties, the liberals and the Conservatives, ended with violentcivil disorders knot-n as "Bogotazo"l and the start of rural violence, thedeterioration of constitutional government and the interruption of thenormal political process by a military dictatorship, the years of thecoffee boom, and major steps toward the establishment of an adequatenational surface transportation system. The third stage dates from the fa!lof the dictatorship in late 1957. It was characterized bW the establishmbnrtof the current National Front political system, which is a coalition ofLiberals and Conservatives, and by efforts to protect the domestic economy7from the external shocks originating in the deteriorating internationalcoffee market. Since 1958 the National Front system has provided for theelection of alternating Liberal and Conservative presidents. The principJleof parity between liberals and Conservatives is preserved throughout Govern -

ment, from the Cabinet do-rn, and in the administrative bureaucracy of allpublic agencies. The National Front is designed to last sixteen years an(.has demonstrated the ability of Colombians of differing political affilia-tions to work together. The first administration of the National Front comi-pleted its term in 1962, and its main achievement ras to re-establish theunity of national political purpose and to introduce the austere and orderlymanagement of the econonp that was reqaired to repay the large short-termexternal debt accumulated by the military dictatorship in 1953-57. Thesecond National Front ad-binistration completed its term in 1966, and itsmain accomnplishment was the achievement of almost complete pacificationof the countryside. The third National Front Government, now in pinner,

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has undertaken the tasks of providing for an orderly political evolutionbeyond the National Front's 1974 termination date and of accelerating therate of economic growth within conditions of financial stability.

5. This Government has already demonstrated its resolute intentionof succeeding on both counts. It, has established a remarkable record oflegislative action; and has also submitted a far reaching constitutionalreform to Congress. To become effective this reform needs to be approvedin two separate Congresses, It received its first approval in June, 1966dthe second approval is currently being debated. The reform lays down theprinciples that would guide the political system after 1974 and containsimportant provisions for future economic management. These provisions,as approved in the first reading: (i) transfer from Congress to theexecutive the initiative for amending the annual expenditurebudget; (ii) eliminate the power of Congress to regulate employment andremuner-ation of public employees and to create new social benefits forthem; (iii) transfer from Congress to the executive branch the power todefine incentives for industria. development; (iv) create a new congres-sional economic committee to review, and approve or reject, the annualbudget as a whole and not on a line by line basis, and establish that ifCongress does not act on the committeels recommendations within 120 days,the budget as a whole is automatically-approved; (vi) create a technicalstaff for the ner economic committee; and (vii) recuire the President tosubmit two annual messages to Congress: one on the political state ofthe Republic, and another on the implementation of the annual economricplan. PlanniLng is to be indicative for the private sector and normativefor the public sector.

6. This Government is also seeking power to reform the administra-tion and finance of state and local Government. This reform, to be basedupon the recommendations of a Tax R.efora Comnission composed of high levelnational and international experts, will: (i) define which servicesshould be rendered by the national government and which by States awdMunicipalities; (ii) define how public revenue sources should be allocatedamong the national and local governments; (iii) prohibit the nationalgovernment from initiating exemptions from munraicipal taxes, and (iv)establish the legal basis fcr creating regional development corporations,

7. Over the years, the economic role of Colombia's public sector hasgrown significantly in pragmatic response to particular-needs as theyarose. It is important as developer, owner, and operator of all majorpublic services: e.g. telecommunications, irrigation, power, water andsewers, railways, highways, ports and airports. But it is perhaps evenore important in the pervasive influence it exerts over the activities

of the private sector. In agriculture, it sets directly or closelyinfluences most agricultural product prices; it establishes mandatorypurchases of agricultural products by domestic industry; it operates afairly far-reaching land reform program. In industry, it sets manyindustrial prices; it provides industrial development incentives; throughthe Government-owned development bank, it is an innovator and entrepreneur;and it owns and operates a number of industrial facilities, the largest

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of which are in petroleum refiningQ Transactions iith the rest of theworld are subject to comprehensive influence through devices such aslicenses for exports and imports. prohibition on certain types of imports,required prior exchange deposits, special prices for surrendering exchangeearnings from certain commodity exports, and subsidies for exports.

8 As these activities, and others not listed, have grown, effortshave been made from time to time to rationalize, coordinate and directthis complex system of economic administration to serve Colombia's develop-

ment needs more effectively, But the efforts of past Governments tointroduce effective economic planning at the national level were not verysuccessful, It is not surprising, tlerefore, that many distortions havebeen introduced into the economy. A few examples illustrate the point.

The ratio of diesel to gas powered trucks in operation is very low, inspite of the comparative advantage of the former, because of the combinedeffect of subsidized gasoline prices and extraordinarily high ad valoremduties on diesel vehicles, Inputs necessary for agriculture, the sectorwith the largest development potential, are priced well above internationalmarket prices because of import licensing and price controls. The system

of administrative price controls, contrary to its declared objective, has

served to keep some prices artificially high - prices of some products

have fallen after being freed; officially estabilished trucking rates have

become floor prices in low activity seasons and disregarded when demandexceeded locally available capacityt, Exploration for natural gas and

petroleum was stopped when largely overvalued exchange rates prevailed,

The use of wood moldings in the construction industry has been reduced to

negligible significance by the controlled price at which steel substitutesused to be available.

9. The present Governmient has made improved coordination of thedifferent elemenrts of economic policy and more systematic planning of thepublic sector a major objective, and has registered impressive advance in

both of these fields in the past two years. The key to its success inthis effort is to be found in the way the President has seen fit to use

the National Council of Economic Policy. This Council, which is chairedby the President of the Republic, consists of all the ministers in chargeof economic matters plus the head of the Planning Department. The managers

of the of the Central Bank the Land Reform Agency (INCORA), the IndustrialDevelopment Institute (IFI5, and the Coffee Growers Federation, and the -

Advisors to the Monetary Board also attend most of the CouncilYs meetings.

The Council meets weekly, nonrally to debate policy papers prepared for

it by the Planning Department which serves as the technical secretariatof the Council, and has become the central economic policy formulatingorgan of Government. The effective operation of this Council is the

administrative expression of the central role being given by the ColombianGovernment to rational decision-making in economic matters.

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B. Economic Growth since WI,Jorld War II

10. Colombia has made considerable ecoriomic progress since the end

of World War II. During the tiienty-two year period between 1945 and 1367,

GDP grew at an annual rate of 5.3 percent, in real-terms. However, ths

rate of growth has not been uniform over the years. It was slightly

higher than 6 percent for the 1945-54 period; declined to just over 3 per-

cent during the subsequent four years; and then rose to 5.3 percent in

195842. Durig the last 'Live years, the anLnual growth rate of GDP has

been fluctuatingtbetween 3 and 6 percent. For 1968, it is estimated at

around 5 percent, Over the period, the major influence on the country's

overall economic nerformance has been the world market for coffee,

Colombials principal export. The inter tional price for coffee, which

in 1954 at Us$,8o per pound was six times higher than the US$.23 per pound

average for 1930-L5, declined to an average US$Q60 per pound in 1955-50and to USb.39 in 1963, Since then it has been fluctuating betwseen Us$.40

and US$Q5O per pound. To appreciate the effect of these fluctuations on

the damestic economy, it is sufficient to note that, at today's levels of

incone and population, the decline in the average price from 1966 (US27.$)

to 1967 (US41.9W) was equivalent to a one percent decline in Colombials

per capita income.

1:. During these two decades, the structure of production changed

considerably. Agriculture, which in the late forties had accounted for

about 38 percent of GDP, by 1967 had fallen to 29 percent. Gn the other

hand, the relative share of manufacturing industry increased by one-third,

from less than 15 percent to almost 20 percent; and the relative share of

electric power, gas and water more than doubled, from about half a per-

centage point to above one percent of GDP.

12. The causes for the relatively rapid average growth rate and its

sharp fluctuations during the period are complex and interrelated, but a

few stand out. Reference was already made to such basic factors as a

favorable resource endowment, an intelligent and grct-ring entrepreneurial

class, generally well-developed public agencies, a widespread awareness

of developmental problems, and an excessive dependence on exchange earnings

from coffee. The latter, which up to 1954 had been the main factor con-

tributing to economic growth, has since beceme the principal restriction

uporn develoment. Not only have ccffee export prices fallen from almost

USMISrO per pound in 31554 to around US$.40 currently, but also the volume

of coffee exports is restricted to the quota fixed by the International

Coffee Agreement, which is still some 2 to 5 percent below the average

volume of coffee exports in 1953-54. Thus, in spite of a rapid increase

in exchange earnings from other sources, Colombia's capacity to impart

goods and services was not significantly greater in 1967 than it had been

in 1954, even theugh GDP had increased by 70 percent, populatien by 50 per-

cent, and the economy ts import requirements to support its much enlarged

industrial activity grew markedly during these years. The result was

chronic balance of payments difficilties, periodic exchange crises axnd

devaluations. Between 1954 and 1958, when coffee earnings declined sharply

and large commercial arrears abroad were accumulated by the military

- 6 -

dictatorship and th'en repaid by its successor Govenment, the difficultieswere most severe. The pess devalued by 62 percent in late 1957 and56 percernt in nid-19 5, impcrt-ts 'sre rstricted severely - in 1958 to alevel one-third below the average of the five preceding years - and specialexport taxes were introduced. After 1958, izport capacity increased slowly,

but did rot recover to the 195'L level until 1966, twelve years later, evenafter taking account of an increase in the gross inflow of public andprivate capital from less than US$110 million in 194 to JS$170 million in1962 and to US$250 tluion in 1966, and a tsubstantial deterioration in thenet international reservre po):sition, whic-h reached. alnost rinus US$l15r0trillion by N,Tovember 1966

C. The Present Position

13. The record since the end of the coffee boom, and more particularlybetmeen 1962 and 1965, suggests tdhat Colombian gover-ments have not untilvery recently been successful in their efforts tc manage and iriorove theweak balance of paymnents, or to prepare and execute a development programwhich could serve as the means for attracting and utilizing large amountsof external assistance on a sustained basis. It wTas not until 1961 thatColombia tried to tackle these tasks by deliberate expenditure plarnning

'ithin the framework of a ten-year development program. Through 196%, theexecUtGion of tiis development program Was not successful. It was hamperednot only by recurrent balance o payments prcblems, but also by Seriousdefic-.encies in investment planning, in project preparatLion and execution,in sectoral policies and in fiscal, coffee, uJages and credit policies0 The

external assistance that had been mobilized to support the developiaentprogram was largely left uncommitted; hiere committed, it was utilized withundue delays.

i4. Since the end of 1965, however, and narticularly since early1967, mna,,or eficris have been lanzhched in Support of an acceleratad deveB-opment effort. They have already produced impressive changes, which havemad,e possible a much higher 3level of external support for Colombian dervel-Opment. With the help of tLE Consultative Group, new external co=(ittment.

for about US$350 million are likely to be obtained by Colombia during 1968,over twice the US$160 million annAual average for the period 1961-67.

n5. To support -4s increased investment effort, the Gcvernment israpidly improving the managey4ent of public: agencies and naking fmch neededchanges in sectoral policies, institutions and priorities. Agriculture,the sector both of major employment and major development potential, hadnot received sufficient attenation in the past. in 1967 the Govermentincreased by 50 percent the previolus yearis allocation ofT budgetary re-sources to finance investnent in this sector, and in 1966 it increasedthisi aZocation further by 35 percent, Agriculture is also now receivingank increasing share of development credit from banks and financial inter-mediaries. While increasing its budgetary contribution to transpert by

almost 5D percent between 19i6 and 196?, the share of this sector in totalinvestment has declined correspotrLingly. In its desire to expand and

improve education, the Goverranent has increased by tao and a half timesbetweea 1966 and 196ix3 its financing of investients in this sector.

Table 1: BfPORT CAPACITY, 1950-1968

(Millions of U.S. Dollars)

1950 1954 1958 1962 1966 1967 1968

Coffee Exports / 307.9 550.2 354.5 332.0 328.3 322.4 338.6

Other lNerchandise Exports!/ 87.7 121.3 142.6 13Le4 195.8 239.3 22765

Non-Monetary Gold 12.3 13.2 12.0 13.9 9.8 9.2 8.0

&xport of Services 29.7 78.3 98.7 95.6 128.1 143.5 157.8Gross Capital inflow frm,.

Private Sources 1365 73.4 9 9 78.3 127.1 49.9 95.0Official Sources 8.o 34.9 130.3v 91.0 121.9 145.0 188.3

PAYVNNTS CAPACITY 459.1 871.3 748.0 742.2 911.0 909.3 1,015.2

Minus:Factor Payments -36.7 -31.1 -61.5 -57.3 -86.1 -76.8 -99.0

Amortization of:Private Capital - 6.4 - -43.9 -35.2 7.2 -35.o -50o.

Official Capital - 7.5 -22.3 -115.0 -271 -43.4 -44.3 -61.2

Increase in International Reserves +19.8 - 0.7 - 11.6 +43.1 +42,0 -57.4 -45.0(+ Decrease)

Errors and omissions -27.8 -71.7 - 10.4 + 9.2 +13.6 +37.4

f4PORT CAPACITY 456.1 (45.5 505.6 674.9 829.9 7312 76o,o

7J Inoludes petroleum exports.2/ Includes US$40.4 million issued by the Government in the form of IOUts to consolidate short-terr debt.

SourCe: 1950-58 Planning Office1962-67 Banco de la Republica

COLOMBIA: INTERNATIONAL COFFEE PRICE FOR MANIZALES COFFEEAND MERCHANDISE IMPORTS, 1950-1968(INDEX, 1954= 100)

120r ' --- ' i__ - 120

10} -t. _ .. , 100

MERCHANDISE IMPORTS Ifob) -X

80 80

60 , 60

MANIZALES COFFEE PRICE

40 40

20L j i _20

0 l L'' '50 '51 '52 '53 '54 '55 '56 '57 '58 '59 '60 '61 '62 '63 '64 '65 '66 '67 '68

IBRD-4138 _

16. There is other evidence of the more vigorous development effortunderway0 The allocation oL credit to the industrial sector is beingfocused increasingly on accelerating the growth and diversification ofexports 0 In the electric power sector, interconnection of the majorsystems is about to start, which will provide the basis for better planning,administration and savings in investment costs. The management of therailway and highway investment programs is being greatly improved. Theavailability of local currency resources for highway investment has beenensured by a sevenfold increase late in 1966 in the earmarked gasoline tax.In marked contrast to the past, the Government has been making timelybudgetary contributions to the railway investment program. In education,the Government has converted some primary schools to a two-shift basisfrom the one shift previously used, which has already made possible anincrease of 260,000, or 16 percent, in the number of children attendingschool. The Government is also initiating the construction of ten newcomprehensive high schools for 48h,QC students in six major areas ofspecialization - two academic and four technical.

17. Since 1966 the financial situation of the public sector, chron-ically in deficit in the previous four years, has also improved remarkably.The Central Government introduced new tax and administrative measures whichhave resulted in a very rapid increase in current revenues. In 1966 totaltax revenue of the public sector reached an all time high, 11.6 percentof GDP, and estimates for 1965 indicate that this share will be exceeded,reaching over 12 percent of GDP. Jointly with a strict control of currentexpenditure, the revenue increase resulted in increasing the current accountsurplus by 60 percent in 1966 and 25 percent in 1967; estimates for 1968indicate the likelihood of another large (24 percent) increase.

18. This recent strengthening of the Central Government's financialsituation has already reflected itself in the performance of the publicsector as a whole. Public investment, after declining steadily in realterms between 1962 aad 1965, increased by 17 percent in 1966, 15 percentin 1967, and almost 19 percent in 1968,

Table 2: PUBLIC SECTOR TAX REVEIlUE AND SAVINGS AS PERCENTAGEOF GROSS NIATIONAL PRODUCT, 1950-1968

TaxRevenue Savings

1950 8.3 i.81954 107 4.01956 10.5 4.o1962 9.8 2.81966 116 4.51967 11.6 5.01968 12.1 5.0

Source: 1950-58: OAS/IDB, Fiscal Survey of Colombia1962-68: Tables III-1 and 2

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Table 3: PUBLIC INVEMSTENT, 1961-1968(Millions of Pesos)

Current 1 C58Prices Prices

1961 1,913 1,5431962 2)466 1,9071963 2,813 1,7091964 2,858 1,475i965 3,048 1,4691966 4,169 1,7221967 5,157 1,9711968 6,679 2,343

Source: Table II-1

19. Other financial policies have also been considerably improved,particularly the management of the monetary program. In marked contrastwith earlier years, the monetary authorities have been able since late1966 to keep the expansion of domestic credit from exceeding that requiredby the expansion of domestic economic activity, except for a brief periodin late 1967 and early 1968 when a large inicrease in international reservestemporarily threatened to upset the monetary program. The authoritiesresponded quickly by iincreasing bank reserve requirements, and brought thesituation rapidly under control.

20. The improvement in the financial management of the economy isreflected in the fact that during 1967 the average level of domesticprices increased considerably less (8 percent) than the averages for 1966(16.7 percent) and 1962-66 (17¢2 percent). The expectation for 1968 isthat prices ill increase between 8 and 9 percent, i.e., at the same rateas 1967.

21. Early in 1967, the Government began to correct one of theprincipal causes of the balance of payments problems in the past: thetendency to maintain exchange rates that wrere overvalued in relation tothe need to provide incentives for non-coffee exports, for petroleum devel-opment, and to restrain the demand for imports. The overall result of thenew exchange rate flexibility and related policies has been dramaticimprovement in the exchange situation during the last two years. Netinternational; reserves increased by US$57 million in 1967 and, on currentestimates, will rise by another US$45 million in 1966 after allowing foran increase of almost 20 percent in imports over 1967. This means thatby late 1968 Colombia will ,for the first time since 1960, move from anegative to a positive net international reserve position.

22. One of the main factors contri-buting to the balance of paymentsimprovement has been the success of the policies introduced early in 1967to accelerate the growth of minor exports, which are defined in Colombia

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as exports other than coffee and crude petroleum. These exports,, whichgrew between 1959 and 1965 at an annual rate of almost 19 percent, fromUS$38.5 million to US$107 million, did not register any significantincrease in 1966 (only 1.5 percent). In 1967 they increased again by16 percent and it is expected that this year they will increase by some25 percent. A key element in the accelerated growth of these minorexports has been the real depreciation of the exchange rate achieved sinceApril 1967 to date (some 10 percent) and the fiscal incentives now beingoffered to exporters: a 15 percent export bonus in the form of a certifi-cate that is traded in the stock market and can be used to pay incometaxes, sales taxes and custom duties; and exemption from custom duties ofimports of raw materials and intermediate products to be incorporated inexport products-./-This real depreciation and incentives, together withmuch improved domestic financial policies, are inducing a visible responsefrom those engaged in export activities (see Graph 2).

23. Exports of crude petroleum have ranged between Us$60 and US$80million over the last two decades, with a clear declining trend in the lastthree to four years. Since Colombia is a high cost producer, it needs toprovide adequate incentives to attract investment by the internationalpetroleum companies; but tax and exchange policies acted as disincentivesinstead with the result that since 1960 investment in e?plorations declinedsharply. However, since 1963-65 important tax issues have been satis-factorily solved, and in 1967 the discriminatory treatment of oil transac-tions contained in the exchange system was largely eliminated. Thereremain some problems, though, such as the prohibition to revalue assetsand the exchange rate applicable to sales of crude to refineries fordomestic consumption.

D. Conclusion

24. Colombia is finally beginning to develop a body of generaleconomic policies reasonably well-suited to its post-coffee boom developmentneeds and, to help implement these policies, obstacles that have hamperedeffective decision making on economic matters in the past are rapidly beingremoved. 'rhe new exchange system, new taxes, better control of tax evasion,intensified agrarian reform, a modern mining code, far-reaching adminis-trative reform in Central Government, more effective procedures for theformulation and approval of the Government s annual budget - these are onlya partial list of the new legislation approved by Congress in the last twoyears to support the Government's economic development effort. The proposedConstitutional Reform would initiate even more basic improvements in thepublic administration. These developments, jointly with improved balanceof payments management, good fiscal policy and rapidly rising public

1J A detailed discussion of these fiscal incentives is cmtained inSection E, Balance of Payments, of the following Chapter.

j See Appendix B, Policy Performance, in Economic Report WII-172a,May 27, 1967.

CHART 2

COLOMBIA: MINOR EXPORTS' RESPONSE TO CHANGESIN THE EFFECTIVE EXCHANGE RATE(PERCENTAGE CHANGE)

60 ~60

EFFECTIVE MINOR EXPORTEXCHANGE RATE

5 0 - _ _ - _ _ _ _ -

40 _ -- _ -_ - - 40

3°08\X \ MINOR EXPORTS -

-10 _ _ . _ 1 10

10 1 _______-10

1960 1961 196 193 164 16 196 97 i6

I /~~~~~~~~~~~IBD43

- 13 -

investment expenditures aave begun to lay a sound basis for achieving a

higher rate of economic growth, similar to that prevailing during the

1945-54 decade. Of perha-s even rmore lasting significance are the parallel

changes that are taking p' ace in Colombia's political institutions to heal

the divisions created by thie civil unrest-of the early 1950's and

lay the basis for more stalle political evolution in future.

25. But if Colombia han begun to address itself more deliberately

to its development problems, it continues to confront major uncertainty

about its ability to sustain r:ts present and planned development effort.

For Colombia's balance of paym3nts is still far from being able to support

this effort without extraordinary assistance. This uncertainty, which

will continue to dominate the oitlook for the next few years, makes the

realization of Colombiats consiCerable growthl prospects unusually dependent

on continued mutuality of effort between the external financing agencies

and the Colombian Govermnent.

II. THE OIUTLOOK FOR 1969-1973

A. DevelComent Goals

Introduction

26. The Colombian Government's economic development objectivesfor the medium-term future continue to be the same as described in thetwo previous economic reports (WH-172a and WH-177): (a) to raise public

investment to levels which should permit a sustained annual growth rateof GEP of 6 percent in real terms and thereby reduce unemployment in thecities as well as disguised unemployment in the countryside, and (b) toachieve these objectives within an overall framework of economic policiesthat will bring to an end the past inflationary and balance of payments

pressures.

27. A crucial element underlying the Government's growth target ispopulation, which appears to be increasing by about 3.4 percent each year,

even faster than the average annual rate of 3.2 percent for the 1951-64intercensal period. The family planning program recently started isdesigned to ease the pressures created by this demographic growth. Its

target is to reduce the annual population growth rate for the five-yearperiod 1969-73 to around 3.0 percent. There are reasons to believe thatit will be extremely difficult to reach this target, but even if it were

to happen, it would still mean that at an annual 6 percent growth rate ofGDP, it would take about 24 years for the present income per capita ofabout US$251 to double,M i.e., to reach the current level of Miexico. If

the effect of the family planning program were to be simply to preventany further acceleration in the growth rate of population, it would take

Colombia about 30 years to reach a per capita income of US$500. Demographicgrowth of these orders underlines the urgency with which the Governmentviews the need to raise the rate of overall economic growth.

28. The inherent productive capacity of the economy resulting froma favorable endowment of natural resources and a fairly high rate ofcapital formation suggest that a 6 percent growth rate should be quitefeasible0 The labor force has been growing by some 3 percent per yearand productivity has been growing by about 2 percent per year. With theproJected increases in investment and the observed and continuing movementof economically active population from agriculture to sectors of higherproductivity, the increase in productivity which a 6 percent growth ratewould require does not appear to be unreasonable. The key condition is that

balance of payments constraints do not prevent these potentials from beingrealized.

1/ These illustrative calculations assume that the "successful' 1 familyplanning program would reduce the current growth rate of populationfrom 3.4 percent in 1968 to 2.9 percent as an average for the period1969-89. (See Annex v).

- 15 -

29. These development objectives, and the strategy and policy

instruments to attain them, have not as yet been formally articulated inanly single document by the Colombian Government. The following discussioniof the outlook for the coming years is thus based on a variety of documentssuch as Presidential messages to Congress, Government working papers onfiscal, monetary and balance of payments projections, on sectoral develop-ment programs and on other papers on specific economic policy issues) andextensive conversations with Colombian officials about them. Excplicit

projections have been prepared for 1909-73 to illustrate the type and orderof magnitude of issues that Colombia faces; there is as yet no fully defineddevelopment plan for this entire period.

Capital Formation

33. The achivement of Colombia's quantitative development goals wouldappear to require that gross capital formation average 20 percent of GDPduring the 1969-73 period (Table 4). Rates of capital formation of thismagnitude have not been achieved in Colombia since 1956, the last year of

investment inspired by the coffee boom. However, the 20 percent investmentrate does not appear implausible. In spite of the relatively low levels of

capital formation during 1965-67, which were years of particularly acute

balance of payments crises, the average historical rate of capital formationfor the 19-year period 1950-68 was 18.6 percent.

Table 4: GROSS FIXED INVESTMENT AS PERCENTAGE OF GDP, 1950-1973

(Average for the period)

195o-58 211959-60 i61961-64 181965-67 15Est. 1968 18Proj. 1969-73 20

Source: Statistical Annex, Part Ie

31. Public financing of investment since 1951 has accounted foraround 38 percent of the total gross capital formation in Colombia.i/ TheGovernment considers that a similar (4- percent) public sector share offinancing of total investment should be consistent with its overall growthobjectives. This proportion, which would be equivalent to maintainingthrough 1973 the ratios for 1967 and 1968, would imply that public financingof investnent would have to increase in real terms at an average annualrate of about 10 percent. Such a rate of increase would be considerablybelow that of 1967 (14 percent) and 1968 (19 percent). But even so, con-

siderable effort will be required to mobilize resources for a public invest-

ment effort growing at an annual average rate of 10 percent in real terms.

lJ See Table I-6.

- 16 -

B. Public Finance

32. The Government recognizes this need for additional resources.Early in 1968 the Government appointed a very high level ccmmision to makeproposals for an overall tax reformn. This ccmnission, which includesnational and foreign experts, is scheduled to submit its recommendationsbefore the end of the year in the form of draft legislation designed,among other things, to achieve specific increases in revenue. The mainiszues facing the commission are those identified in the fiscal anmex ofthe Hay 23, 1967 Bank economic report (WTI-172a). They consist of increasingrevenues and at the same time reforming the existing tax structure to makeit more efficient and equitable. The following paragraphs point to thehighlights of these issues.

Tax Reforrn l/

33. The Colombian tax system has been characterized by a relativelyhigh dependence upon income taxes, although indirect taxes have becomeincreasingly important because the-income tax system has not been adequateto meet the expanding needs of the Governmernt. As a first step towardsreform of tl- income tax, a system of retention at the source was introducedin 19671, requiring all persons and businesses to withhold specified amountsCrom salary, -wlage and dividend Dayments. This system of retentions isbeing applied gradually, to bring income tax paymrents on a current basisby 1972. But this will correct only one aspect of an income tax systemwhose administration is difficult., whose incidence is unclear, and wjhoseresponsiveness to inco-me is 'lowi. A basic reform of the inoan,e tax couldestablish the base for a system that will prove mnuch more responsive tochanges in income in the future. Because a meaningful reform ofD thesetaxes will require fairly radical changes, it is doubtful that significan'tinicreases in their yield will be able to be introduced at the same time.

Table 5: CENTRAL GOVERNI4ENTS TAX REVENUES, 1961 Am) 1968

IlillionL Pesos Percentages5161 196d 1961 19td

Total 2,199 8,087 100 100

Income taxes 990 3,231 45 S0Custom duties 592 1,925 27 2-Sales tax - 836 - 10Fuel taxes - 617 - 8

Stamp taxes 88 474 4 6Other 529 1,004 24 12

Source: Table III-c

J For a detailed discussion of taxes in need of reform, see Section A,Chapter TI, Public Finance Lnnex of economic report VWH-172a, datedPIay 23, 1967.

- 17 -

34. Property taxes have long been singled out as a direct tax with

great revenue potential. The maini obstacle to their more efficient use

is political. If their proceeds could be more closely related to expendi-

ture in the locality of the taxpayers, e.g., fo-r education, they might gain

in political acceptability. There does not appear to be any merit in

continued limitation by the Central Government of the rates at which muni-

cipalities tax local property.

35. Most of the indirect taxes also need reform. Custom duties are

the largest of these indirect taxes. The present system of import duties

has arisen out of ad hoc measures imposed over the years and little consis-

tency is to be found in their application. The Government has set up a

commission to make recommendations on improving the levels and structure

of protection and the now excessively complicated administration of customs

duties. The Commission's task is peculiarly complex since the impact of

any tariff will also depend on the effect of important non-tariff obstacles

to imports such as prior import deposits, licensing, exchange controls, etc.

The complexity of this problem, combined with the existence of large vested

interests in the existing structure of tariffs and other controls on trade -

especially in the highly protected consumption goods industry - do not point

toward quick and easy changes in the near future.

36. The sales tax is a relatively new tax in Colombia (1966). Its

administration leaves much to be desired, but this will probably improve

with experience. There are, however, structural changes that could be made

to expand both the base and the equity of this tax. Inclusion of some

services is one exanple. It could become a major source of revenue.

37. One item that could contribute much to raising public revenues

are the taxes on fuels. At present there is a large exchange rate subsidy

on sales of crude oil for domestic refining. The oil exchange rate is

Ps 9.00 per US$1.00, much below the Ps 16.77 certificate market exchange

rate. By eliminating this subsidy and raising fuel prices correspondingly,

existing ad valorem taxes on gasoline and fuel oil would yield large addi-

tional revenues.

38. To sum up, the sales tax, property and fuel taxation and, perhaps,

customs duties are the large potential sources of rapidly expanding revenue.

The remainder of the tax system needs to be simplified. For example, many

of the large group of miscellaneous stamp taxes and license fees cost more

to collect than they yield in revenue. Fees could be substituted for the

cumbersome stamps applicable to many services and may even gain in accept-

ability by this change. But these other changes are not likely to yield

much in the way of new revenue in the short run.

39. Colombia's tax reform problem is more than a matter of increasing

revenue, efficiency and equity, however; for reform resulting in a large

overall increase in the tax burden is unlikely to receive serious support

without also addressing itself explicitly to the question, nolw under active

debate, of how much centralization of Government there should be.

- 18 -

40. It cannot be taken for granted that further increases in Central

Government revenue, whichl would imply further concentration of revenue and

expenditure functions in the Central Government, will be acceptable, or is

even desirable, in the face of Colombia's geographically widespread popula-

tion, historically strong regional identities, and financially weak local

governments. The tax base of the departments (mostly liquor and tobacco

taxes) has proved increasingly inadequate to finance the growing needs in

education, which have remained a departmental responsibility. Departmental

governments have thus become increasingly dependent on Central Government

transfers out of general revenue to carry out their present functions. A

similar trend is observable at the municipal level of government. Only a

few municipalities are important in terms of population and economic activ-

ity; but the large ones are growing fast. By 1975 Colombia is expected to

have at least three cities with population of more than a million inhabitants

(the capital, Bogota, will have 3.6 million) and eight cities with over

250,000 inhabitants. The development of these large urban areas has placed

severe strains upon the municipal finances; indeed, on the entire system of

municipal government which is largely responsible, among other things, for

providing services such as water, power, street garbage collection, etc.

Only in the larger urban centers are these services provided on even close

to adequate scale. In the many smaller municipalities (over 800 in all),

public services have had to be provided principally by national agencies

such as INSFOPAL (water), TZLECU4 (telephones), and ELECTRAGUAS (power),

financed in large part by transfers from the Central Governmentts budget.

41. How to allocate responsibility, and revenue to match, among the

Central, departmental and municipal levels of Government is one of the most

important and most difficult issues facing the Tax Reform Commission. One

possibility might be to concentrate in the first instance on making the

largest municipalities largely self-sufficient, in effect expanding on the

Bogota model. Bogota, as a special district, now has much greater taxing

powers and responsibilities than other municipalities. Similar changes

have taken place in other Latin American countries where rapid urbanization

has led to changes in the traditional pattern of government. A large part

of Colombiats population lives in these major urban centers. The small

municipalities, though large in number, have neither the revenue nor admin-

istrative potential to provide effective services in any near future and

will probably have to continue to rely on others for most of these services,

as they have in the past.

The Domestic Effort

42. Improvements in the tax system together with a better division of

taxing powers and expenditure responsibilities are one major objective of

the tax reform now under study. The other major objective is to raise more

revenue. Present estimates for the next five years of public sector expen-

diture plans, of revenues under the existing tax system and of external and

domestic credit availabilities point to an urgent need to raise public

sector resources beyond those now in prospect (Table 6). By 1973 the

existing tax system would yield some Ps 14.0 billion, or 73 percent more

than the estimate for 1968. But since investment would increase by 123 per-

cent in the same period, total expenditures would exceed the foreseeable

sources of finance by some Ps 7.6 billion in 1973.

- 19 -

43. The precise amounts and timing of additional revenue requirementswill differ depending on what one assumes about the prospects for program

loan assistance to Colombia, the coumterpart of which continues to be an

important source of Government finance. But the need for the revenue

increase is ambiguous. Current projections, reflecting expected declining

program assistance (see Section D below), are that counterpart funds would

gradually decline from 18 percent of public investment in 1968 to 5 percent

in 1972 and just one percent by 1973. Similarly, the amounts and timing

of additional revenue requirements will be affected by what one assumes

about the evolution of Government current expenditures. Austerity in cur-

rent expenditure to free the maximum amount of resources for investment has

been the rule for a number of years now and there is an understandabletendency in some quarters to continue this policy in the face of continued

shortage of funds for development. But there are grounds for suspecting

that some essential current development expenditures may have been cut

excessively. Investments in hospitals and health centers, for example, have

exceeded the availability of funds for staff and operating expenses. Because

current expenditures on health have consistently been among the first can-

didates for cuts when funds were short, without reference to what was happen-

ing on the investment side, new facilities have been built but not fully

utilized. Such instances of poor coordination between investment and current

expenditure planning in Colombia suggest that the present allocation of

responsibilities in Government does not provide for easy development-orientedreconciliation of current and capital expenditure claims on limited Govern-

ment funds.

44. Perhaps more serious in its longer term consequences is the fact

that the real wages of public servants have been systematically restrained

over a number of years. Salary levels for public employees were raised in

1967 and 1968 sufficiently to offset the real decline of Government salaries

that took place between 1962 and 1966. However, a sizeable differential

between public and private sector wage levels still exists, such that the

Government has been hard put to retain competent offlicials, let alone attract

career servants of the quality that Colombia's aggressive development effort

increasingly requires. This is a matter of grave concern to the Government,

and administrative reforms have just been introduced to make possible sub-

stantial salary increases for key categories of personnel.

45. With respect to the next few years, a continuing improvement of

public salary levels is probably an essential ingredient for carrying out

successfully the Government's public sector improvements and development

plans. The current expenditure projections outlined below (Table 6),

assume such improvement in salary levels. They also assume minimal con-

tinued increases in current expenditures for education, health and social

security, which Colombia's rapidly growing population requires.

46. Under the present tax system, these expenditure projections,

together with the termination in 1971 of the surcharge effect of moving

the income tax to a pay-as-you-go system, imply that the Central Government'ls

surplus on current account, which trebled between 1965 and 1968, will start

- 20 -

declining in 1972. Given the importance of Central Government savings in

total public savings, the share of planned iiivesments that could be financed

with public sector savings would also decline sharply from the current two-

thirds to one-third by 1973.

Table 6: PUBLIC SECTOR INVESThENT AND ITS FINANCZIG, UNiERPRESENT TAX SYSTThI, 1965-1973

(Millions of Pesos)

Central Government Total Public Sector

Curren t External Internal Counter- To be

Reve- Expend- Invest- Credit Credit part financed

nue iture Surplus Surplus ment Net Net Funds (+)

1965 3,948 3,010 938 1,912 3,048 569 467 100 _

1966 6,027 4,120 1,907 3,267 4,169 538 39 330 _

1967 6,676 4,293 2,383 3,613 5,157 722 34 7a3 -

j.968 8,087 5,400 2,687 4,372 6,679 907 200 1,200 -

1969 9,542 6,200 3,342 5,203 8,186 1,748 229 1,200 -1941970 11,149 7,605 3,544 5,608 9,615 2,195 260 1,400 +1521971 12,901 8,836 4,065 6,343 11,189 2,397 292 1,o00 +1,157

1972 14,041 10,168 3,873 6,368 12,898 1,934 325 600 +3,671

1973 14,047 11,653 2,394 5,076 14,880 1,588 362 200 +7,654

Source: Tables III-1 and 2.

4,?. This prospect of declining public savings unfortunately coincides

with the prospect of declining finance frcm all other sources, from over

Ps 3 billion in 1969 to under Ps 2 billion by 1973, reflecting rising amortiza-

tion payments on external debt a&;d the expected disappearance by 1973 of

program loan counterpart fundsI.1 The result is a serious financing gap. On

present estimates, this gap more than aoubles every year from 1971 on, and by

1973 approaches Ps 8 billion or 51 percent of the investment expenditures

projected in that year. These prospects underline the urgency of undertaking

as soon as possible a large effort to raise additional resources. Finarncing

problems may emerge even sooner if the uncertainties currently surrounding

future program lending to Colombia crystallize in ways that imply even more

rapid reduction in counterpart funds than now projected.

48. Given the magnitudes of the revenue effort made over the last four

years and of the additional effort now being planned, the Government feels,

with considerable reason, that cointinued extraordinary support will continue

to be necessary for a few years; the additional revenues required cannot all

be mobilized at once. To cut off external support abruptly during the adjust-

ment period would require extremely sharp cuts in the on-going development

effort.

1/ Counterpart generations in 1973 would correspond only to the tail end of

disbursements of the 1972 program loan (see Table II-14).

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49. The Government has already identified the principal measures

by which it could obtain the needed additional resources. One measure is

to eliminate the exchange rate subsidy to domestic fuel consumption. No

tine schedule has yet been defined for this, but given the sharp increases

made last year in fuel taxes, a reasonable schedule would be to eliminate

the subsidy in three steps, reducing it one-third by the end of 1968, two-

thirds by the end of 1969, and the remainder by the end of 1970. The

decision to eliminate the subsidy does not require new tax legislation but

only that the Monetary Board change the corresponding exchange rate. There

are thus no legislative obstacles that need interfere with the schedule

being suggested here. If all the other fiscal estimates prove to be exact,

the effect of the increased fuel tax collections would be to eliminate the

gap through 1971. But additional measures will be required thereafter.

Table 7: FISCAL EFFECT OF ADDITIONAL FUEL TAXATION, 1969-4973

(Millions of Pesos)

Investmient

Investment Additional still to be

to be Fuel Tax Financed

Financed Receipts

1969 -194 361 -555

1970 +152 534 -382

1971 +1,157 1,213 + 56

1972 +3,671 1,691 +1,980

1973 +7,654 1,777 +5,877

a/ From Table 6.

50. A second change in prospect relates to charges for public services.

Preparations are now underway to change completely the present system for

setting public utility rates some time towards the end of 1969. The main

criterion to be used under the new system will be a rate of return on fixed

assets valued at current market prices. Rate of return calculations will

be based on uniform accounting procedures for all enterprises, and be carried

out periodically to ensure that rates are not permitted to lag behind costs.

The fiscal implications of this new policy have not yet been worked out,

but it is expected that the large transfers being made today by the Central

Government to public utilities such as the Cauca Valley Corporation, the

Municipal 3nterprises of Medellin, the Atlantic Coast Power Corporation,

Electraguas, Insfopal, etc. will be able to be reduced very substantially.

The Government intends to eliminate operating subsidies to all enterprises

other than those which provide rural services on largely social grounds.

51. The third important source of additional revenues is the tax

reform. As the Commission's recommendations are known only to the Govern-

ment at this time, no comment is possible now. But the followming table

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suggests that, in order to complete the public sector financing planthrough 1972, the tax reform would have to aim at least at a 15 percentincrease annually in tax collections after 1970. The effort implied issubstantial. But given the record established by this Government and thefact that it has begun to prepare the ground with ample time, there is noreason to consider this effort unlikely at this time. A domestic effortof the magnitudes outlined would imply that public sector savings, whichare currently financing two-thirds of public investment, would financebetween 75 and 80 percent of total public investment after 1970., Thisdomestic effort, coupled with the likely availability of other financing,including counterpart funds, should satisfy the public sector1s financialrequirements through 1972.

Table 8: FISCAL EFFECT OF TAX REFORM, 1971-1973

(Millions of Pesos)

Investment to befinanced after Alternative annual incrementaladditional,fuel revenue objectives beginning 1971

taxes j/ 5%_ lo% -15%-

1971 56 645 1,290 1,9351972 1,980 718 1,436 2,154

1973 5,877 799 1,598 2,397

a From Table 7

Table 9: PUBLIC INVESTMENT AIND ITS FINANCING, AFTER NEWl REVENUEMEASURES, 1965-1973(Millions of Pesos)

(1) (2) (3) (4 (5) tPublic Current External Internal Counter- TotalInvest- Account 2:1 Credit 3:1 Credit 4:1 part 5:1 Financin,ment Surplus % Net % Net ci Funds /J (2+3+4+1) )

1965 3,048 1,912 63 569 19 467 15 100 3 3,0481966 4,169 3,267 78 538 13 39 1 336 8 4,17U;1967 5,157 3,613 70 722 14 34 1 788 15 5,1571968 6,679 4,372 65 907 14 200 3 1,200 18 6,67?

1969 8,186 5,564 68 1,748 21 229 3 1,200 15 8,74-i.1970 9,615 6,142 64 2,195 23 260 3 1,400 15 9,9971971 11,189 8,517&a 76 2,397 21 292 3 l,00'J 9 12,,2c1972 12,898 10,213 8B 1,934 15 325 3 6o) 5 13,0721973 l4,880 9,250 63 1,588 11 362 2 200 1 11,40C

a Assumes that in the first year of operation the tax reform yieldsonly half the revenues estimated in the 15 percent column of Table ;.

Source: Tables 6, 7, 8.

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52. T !ithin the limits of their accuracy, which decrease over time,tho above estimates suggnst that the revenue measur.s planned should bemore than adequate>-to complete the public sector financing plan for thenext three years andthuIs not only make unnecessary the not recourse tointernal credit shown in the table but also permit added support of theprivate sector development effort by transfer of surpluses to private in-vestors through the banking system.

53. The 1969 program of Ps ¾2 billion (Table 9), represents a 13 per-cent increase in real terms over 1968, but does not introduce any importantchanges in the broad directions of expenditures. As a result of theincreased availability of domestic resources through the Highway Fund anda parallel increase in external financing for transport,the share of invest-ment in transport will increase slightly, after declining in 1967 and i968.The share of investment in agriculture and in power will decrease slightly,not due to any change in priorities but to a slowing down of the rate ofexpansion of largely ongoing programs relative to other sectors. W4hileexpenditures in industry and education do not change from 1968 as a propor-tion of the total, the 1968 and 1969 programs reflect conscious moves towardsaccelerating the rate of total investment in industry and widening thecoverage and quality of education services (see Chapters IV and V)8 Inwater and sewerage, increases in investment reflect primarily the programs

in the large municipalities. Not much change in this broad pattern of ex-penditure is now in sight after 1969 although, as the more detailed dis-

cussion of individual sectors elsewhere in this report points out, thevarious sector programs may be expected to change somewhat over the nextfew years: in transport, to greater emphasis on secondary roads; in agri-culture, to lesser relative emphasis on irrigation; in power, to greateremphasis on distribution; in health, to greater emphasis on providing for

more intensive use of facilities; in education, to greater emphasis on

more vocationally-oriented facilities; in housing, to greater emphasis onlow-cost housing; in water and sewierage, to greater emphasis on the smallermunicipalities and rural areas.

Table 10: STRUCTUPE OF PUBLIC INVES4MENT, 1966-1969(Percentages)

1966 1967 1968 1969

Transport 33 29 24 27

Agriculture 23 24 24 22Power 13 17 14 12Telecommunications 2 2 2 3

Industry 7 8 10 10Education 4 4 10 10Health 2 3 3 3Housing 5 5 6 4Water and Sewerage 5 4 5 6

Other 6 4 7 7Total 100 100 100 100

Source: Planning Office

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54. Virtually all of these sector programs have external financingattached to them (Table 11), On average, project loan disbursementscomprise about half of tle total expenditures on projects to which suchfinancing is attached.1 This proportion understandably varies amongsectors, reflecting different percentages of project expenditures onimports and different shares of local e-penditures financed by outsidelenders. However, despite this fairly high average cost-sharing onprojects, these external project loan disbursement represented only aboutone-sixth of total investment expenditures during 1966 through 1968; andeven after increasing sharply in 1969, they will constitute only one-fourthof total public investment. Only in power and telecommunications, wlichare heavy users of imported equipment, is the externally fin.anced proportionof total sector investmients consistently slubstantial0 These proportionshave important implications for the external financing of the Colcmbianprogram, which are discussed in Section D below,

Table 11: DTERNAL PI-JECT FINA'PNCING AS A PROPORTIONOF INVES-_- NTJMT 2O66-1969

(Percen tage s)

_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 1. 967 19 58 1 96 9

Transport A 37040 42.69 45.31 60.09B 10,69 11,17 19,97 24.59

Agriculture A 82,65 38,01 40836 40.42B 17.70 4.,79 8.02 17.48

Power A 59087 59-72 5997 59.95B 37.15 39,88 43,28 4.14

Telecormmunications A 70.97 83,82 77.61 69.54B 24.18 55,88 49<52 64,02

Industry A 72.73 75.21 2 'Koi 51,83B 35.82 20,95 16 27 31.65

Education A 100.00 81.82 72.79 49.48B 4.91 4.35 25.97 37.21

Heal th A - - - -

B _ -_

Housing A 23.78 30.82 19.57 7.8B 22.00 30.20 17.48 7.8

Water and Sewerage A 58.93 22.32 27.08 47.8oB 17.46 19.84 16.50 27e35

Other A 50.00 36.84 55.00 30.52B 2.43 2.75 6.40 13.30

TOTAL A 53.40 48.83 43.64 48.55B 17.74 16.24 17.89 26.11

A: DZternal project financing as percentage of total e:;penditures onprojects being finarnced.

B: External project financing as percentage of total investment in sector,

Source: Planning Office

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55. It would be very difficult to increase much further in the shotit

run the proportion of the public investment program consisting of projects

to which external finance is attached beyond the 55 percent level expected

for 1969. This proportion has already increased much,from 33 percent in

1966 and 1967 and 41 percent in 1968, as a result of the more than doubli-rng

of the rate of external project loan commitments in the past 18 months.

The 1969-73 project list, which is attached to this report and reflects a

maximum effort in project identification and preparation at this time,

represents a continuation of the current external project commitment level

of about US$250 million anmually.

C. Monetary Program

56. If the fiscal effort outlined above does not materialize, a

capital formation effort of the magnitude described above will claim an

exaggerated part of the banking system resources that would othenrise be

available to finance private investment. But even with such a fiscal

effort, lack of discipline in credit management could result in excessive

pressures on the balance of payments, as happened in 1966. The Government

is already anticipating these problems.

57. Early this year, the M1onetary Board introduced important simplifii-

cation in the system of reserve requirements, effective since mid-1968, to

make it a more effective instrument of monetary management. The most im-

portant changes were the elimination of (i) the provision whereby the banks

could fulfill part of their reserve requirements with bonds of the Fondo

Financiero Agrario (Agricultural Financing Fund) and (ii) the automatic

rediscounts which previously had made effective monetary management very

difficult.

58, Another important measure will make it possible for the first

time for the monetary authorities to influence the level of excess reserves

of banking institutions. The Banco de la Republica has been authorized

to make an initial issue of up to Ps 100 million of special 14 percent

interest-bearing notes (titulos de reserva), which will be freely negotiable

and redeemable on demand at a discount, but not be countable as part of a

bankts legal reserves. These notes will have a 4 percent coupon but will

be issued at a discount to ensure a market for them. The Monetary Board

will determine periodically the maximum and minimum discounts for their

sale and redemption. This measure, which is a first step toward the

introduction of open market operations in Colombia, is expected to become

operational soon.

59. The monetary authorities should thus be able increasingly to make

monetary policy responsive to Colombiats needs. Projections of the re-

sources of the banking system (Table 12) do not suggest that they need

anticipate persistent problems in this task. Overall economic activity -

as measured by the monetary increase in GDP - is expected to increase by

about 80 percent between 1968 and 1973; resources of the banking system

are expected to increase by about 90 percent over the same period. Within

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this overall increase, the distribution of credit among the Government, thecoffee sector, and the private sector should change in favor of the private

sector, which is expected steadily to increase its current 70 to 75 percentshare to 85 percent by 1973.

Table 12: BANKING SYSTEM CREDIT, 1966-1973(Millions of Pesos at year's end)

Percentage SharesTo Public To Coffee To Private Total Public PrivateSector Sector Sector Credit Sector Coffee Sector

1966 5,249 1,003 14,431 20,683 25 5 701967 5,419 789 16,601 22,809 24 3 731963 5,619 820 18,973 25,412 22 3 75

1969 5,848 720 22,923 29,491 20 2 781970 6,lo8 520 27,284 33,912 18 2 801971 6,400 320 31,693 38,413 16 1 831972 6,725 120 36,698 43,543 16 - 841973 7,087 - 41,430 48,517 15 - 85

Source: Table IV-1

60. These prospects reflect the Government's deliberate intention toincrease the flow of private savings through the banking system. The firststep was taken in 1967 with the introduction of a scheme to tap the savingsof the official social security institute by requiring it to invest its

reserve increments in constant value bonds issued by the Government. The

next step is to establish a National Savings Fund, which will pool reservesfor employee severance payments ("cesantia"l) now being held by individualprivate and public employers. Legislation to create this Fund is welladvanced in Congress and is expected to be approved before the end of theyear. The resources to be raised by these devices will be managed by

specific institutions. For example, BO percent of the constant value bonds

are being divided equally between the Central Mortgage Bank (BCH) and IFI,

the Government's industrial development bank. The allocation of the

lNational Savings Fund has not been defined yet. The quantitative importance

of these schemes can be appreciated by noting that by 1973 they will beaccounting for some 25 percent of the increased resources expected to beaccruing to the banking system.

61. Questions have been raised in Colombia with regard to whether

these new schemes- especially the National Savings Fund - will actually

mobilize new savings or will merely divert already existing savings from

their present uses to new ones through the banking system. While there isnot much hard information about the current uses of the severance reserves,

it is widely thought that these reserves are now being used primarily to

finance personal consumption through loans to workers, the rest adding to

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the working capital of firms. The Ministry of Labor estimates that about75 percent of the reserves be+ig acr,r:1uulata.d now is being allocated topersonal consumption. aould tlhis be t'e c -,e, tie National Savings Fundwould represent a significant net addition to present savings flwis. Anaddition of at least this magnitude to the existing private savings flowthrough the baniking system would. be needed to support the hoped for 6 percentgrowth rate in the next few years (Table 13).

Table 13: AINUAL CHAHGES IN RESOURCES OF TH-E BANKING SYSTE4, 1966-1973

1966 1967 1968 1970 1973

Annual Changes(Yillions of Pesos)

1. Total resources withoutnew savings schemes 2,262 _ 3,290 3,216 3,980 4,454

2. New Saaings Schemes - 135 246 1,023 1,494of which:

(National Savings Fund) (-1 (-) (-) (781) (1,012)(Constant Value Bonds) (-) (135) (246) (342) (482)

3. Total Resources 2,262 3a425 3,462 5,003 5,948

Percentages

2,C3 4 7 7 25

Source: Tables IV-1 and 2

62. A sustained effort to mobilize transferable savings will alsorequire change in the existing inadequate structure of interest rates.Interest rates in Colombia range between 4 percent, payable on savingsaccounts held by the Caja Agraria (Agrarian Development Bank), and 14 per-cent for normal canmercial credit. During 1967 the weighted average interestrate on loans for the banking system as a whole was around 12 percent, upslightly from about 10 and 11 percent in 1965 and 1966. When domestic priceswere increasing at an average of around 17 percent between 1961 and 1966,real interest rates were negative. Since 1967, prices have been increasingby 5 to 9 percent annually, making the average real interest rates on loansslightly positive, but leaving the real rate on savings negative. TheMonetary Board is now reviewing the level and structure of rates on thebasis of which changes in present iinterest rate policy should begin to beimplemented in 1969.

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D. Balance of Payments

The Problem

63. Colombia's structural balance of payments problem remains itsmost persistent barrier to sustained accelerated grovwth. This has foryears been the major theme of reports on the Colombian economy, byColombians as well as by outsiders, and it continues to be so. Coffeeexports continue to dominate the export picture, currently accounting for60 percent of total commodity exports. Subject since 1963 to the quotasand prices set by the International Coffee Organization, they have notgrown much, and are not likely to do so in the next few years. Petroleumexports have shovm a declining trend over the last five years, altlhoughsubstantial increases are now in sight as the Putumayo fields begin to comeinto production in 1969. iMinor exports, defined in Colombia as all othlercommodity exports, are the only category that has been growing rapidly,but they still total less than US$150 million annually and are thus stillappropriately described as "'minor" in relation to Colombia's exchange require-ments. Import substitution does not provide easy reconciliation of Colombia'sinadequate exchange earnings and growing import requirements. Imports ofconsumption goods have for all practical purposes been fully substituted,and now; account for only about 5 percent of total imports (Table 18). Fur-ther import substitution in intermediate and investment goods is possible,but not quickly or without very heavy capital investment. Colombia thusremains chronically short of resources to maintain the steady flow of importsneeded to keep the economy functioning smoothly and to grow. Even short-termflexibility is virtually non-existent: gross liquid international reservesare currently equivalent to about two months of imports and net reserves arenegligil3eeven after substantial improvement over the recent past). If GDPhas been able to grow even slightly in excess of population, it has beenpossible only because of the extraordinary balance of payments supportthrough program loans that Colombia has bean receiving for a number of years.This type of assistance has now reached an all time high, financing 11 per-cent of all merchandise imports in 1967 and 14 percent in 1968.

Table 14: DISBURSEIENTS FDM OFFICIAL LOANS AS A PERCENTAGEOF TOTAL vIPORTS, 1961-1968

1961 1962 1963 1964 1965 1966 1967 1966

1. Total merchandiseimports (US$ million) 531 537 498 575 424 640 480 570

2. Disbursements fromprogram loans (US$rmiillion) 45 30 47 53 - 49 54 78

3. Percentage 2:1 8 6 9 9 - 8 11 144. Disbursements from

project loans 38 61 76 91 93 73 91 1105. Percentage 4:1 7 11 15 16 22 11 19 19

Source: Thtbles II-1, 13 and 14.

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64. The problem Colombia faces now is how to negotiate the next fewyears that it will take for export earnings to rise enough to eliminatethis dependence on extraordinary aid wTithout sacrificing the developmentmomentum that has been built up in the past two years. The future ofprogram assistance in its present forms and amounts is increasingly un-certain. Yet its disappearance would require readjustments of a speed andmagnitude that would require major cutbacks and delays in most major publicsector programs and in the pace of activity thlroughout the whole economy.Even present import levels, including those financed with program aid, arebraki-ng Colombian growth (para. 74).

The Prospects

65. The prospects for Colombiats balance of payments over the period1969-73 are for progressive improvement resulting from the Goven3nent'sexport promotion drive which started in 1967. This drive aims to raise theannual growth rate of minor exports to 25 percent through 1970 and around20 percent thereafter. This target may not appear ambitious if compared tothe 16 percent average annual growth in minor exports during 1959-¼7. Butits realization will require very considerable effort. The past increaseswjere on a very small base, US$39 million in 1959, aria in absolute tenrswere therefore small. The future absolute increments will be very muchlarger. These target growth rates imply increasing annual minor exportsfrom US$126 million in 1967 to US$235 million by 1970 and US$400 million by1973. Data through the first three quarters of this year suggest that the1968 target of US$150 million wlill be achieved.

Table 15: KiEfOR EXPORTS, 1959 AND 1967(IlMillions of US$)

Increase GrowthRate

1950 1967 Total Percent 1959-67

Bananas,cotton, sugarand textiles 13.9 65.8 51.9 59 22

Other minor exports 24.6 60.5 35.9 41 12

Total 38.5 126.3 87.8 100 16

Source: Danco de la Republica

66. Tne present composition of minor exports (Table 15) underlines theformidable magnitude of the effort implicit in these targets. Four items -bananas, cotton, sugar and textiles - comprise half the 1967 minor exportstotal and account for most of the growth in this total in recent years.Given the uncertain prospects for increasing exports of these agriculturalcorodities much further and the trade barriers which textiles are confront-ing increasingly abroad, much faster rates of growIth than in the past in

- 30 -

other minor exports will have to be initiated for the overall target to berealized. Witl appropriate incentives, there is no reason at this time toconcLude that this target is not feasible. The Colombian economiy is diver-siified and well endowed with resources and entrepreneurial talent. TheColombian Export Promotion Fund has even more optimistic expectations forthe growth and diversification of minor exports in tle next few years.(Table II-4).

67. Since petroleum exports are also e.xpected to increase during thisperiod, total exports of goods are expected to increase from US$555 millionin 1967 to almost US$900 million by 1973, or by an annual 8.3 percent. Thisexpected steady increase in export earnings would represent a marked depar-ture from tihe pattern of the past twelve years when total exports fluctuatedwidely between US$460 and US$600 million in response to the swings in inter-national coffee prices, without any consistent upward trend. With appropiate

Table 16: MERCHANDISE EXPORTS, 1966-1973(Millions of US$)

Coffee Petroleum Minor Unregistered Total

1966 328.3 71.6 108.7 16.5 525.11967 322.4 61.2 126.3 45.0 554.91968 338.6 42.5 150.0 35.0 566.1

1969 315.9 67.8 187.5 35.0 606.2

1970 336.9 90.1 234.4 35.0 696.4

1971 345.0 79.0 281.2 35.0 740.2

1972 353.3 102.0 337.6 35.0 827.9

1973 361.8 91.6 405.1 35.0 893.5

Source: Table II-2

policies, tle rapid growth of exports projected by the Colombian Governmentshould be realizable, and would go a long wiay towards breaking the foreignexchange bottlenectc of the past decaue. Hotiever, even this substantialexport effort would not be enough by itself to provide Colombia iiith animport capacity tlhat could sustain an annual GDP growtn rate of 6 percent,even after taking into account projections for ini'lows of private andofficial capital directly related to investments in either the private or

public sectors. Colombia will thus continue to depend for some years more

upon substantial - if declining - program assistance to sustain her presentdevelooment effort. These conclusions derive from Colombia's balance of

payments prospects, import capacity and import requirements.(Table 19) -which

are discussed below.

63. Three groups of estimates uniderlie these conclusions: the first,

export earnings, has already bcen touchied upon, and is developed furtlher inparagraphs 77 to 86 dealing wiith export promotion; the second, import

- 31 -

requirerments, is dealt with in para. 74 ; the third, capital inflows,is reviewed in the folloni-ing paragraphs.

69. The projection for increasing private capital inflous reflectsthe Government1s intent to attract private capital for priority developmentactivities in petroleuLm and non-ferrous minerals development and in manu-facturing. The rapid and businesslike way in which applications for privatedirect investment are being dealt with in the Planning Office and in which

the registration of past investments at the Banco de la Republica is being

completed, permitting a normal flow-7 of remittances again, are beginning tohave a favorable impact upon the attitudes of formerly skeptical foreigninvestors. If this favorable attitude towards foreign private investmentpersists, net inflow from private capital should increase steadily from

less than US$20 million in 1967 to an estimated USQ5O million in 1962 and

around US$100 million by 1973. This favorable outlook reflects specific

prospects for major investments in petroleum and nickel. The Government's

desire to attract private capital was demonstrated early in 1968 when it-

raised the annual profit remittance limit from 10 to 1 4 percent. Accordingto Colaubian Government studies, this percentage compares favorably witha

returns on investments currently being obtained in the United States and

other major alternative investnent areas. The Government has stated that

should this increace in permitted annual remittances not prove sufficient to

attract private capital in the order of magnitude show*n in the balaLce of

payments projections (Table 17), it Mill consider new measures.

70. Snall net outflows of short-term flows of private capital areexpected by the l4onetary Board, largely due to the expected gradual reduc-tion in the large short-term external debt of the Coffee Federation. This

debt was contracted by the Coffee Federation between 1962 and 1266, together

w-ith large amounts of domestic debt, in order to support the domestic price

of coffee above the level of tle international narket.t/ By the end of 1967

this debt, which is in the form of several acceptance lines whose maturity

ranges between 3 and 12 months, stood at around US3o0 million, and repre-

sented a heavy financial burden, estimated at around Us$20 million per

year. This level of debt is equivalent to about one-third of the coffee

exports handled annually by the Federation, much larger than needed for

rormal working purposes.

71. Disbursements from official loans are expected to increase sharply.Project loan disbursements, which averaged US$75 million in 1961-67, should

reach US$110 million in 1968, rise to a peak of about US$235 million by

1971, and fall back to around US$200 million again by 1973. This patternreflects the concentration of commitments for large projects in 1968 and

1969. Disbursementus from program loans, on the other hand, are expected to

decline gradually to almost zero by 1973, reflecting the Government's desireto end its dependence on this type of assistance as rapidly as possible.

i,J See section on Coffee Policy in the Appendix- B of econormc reportWH-172a, dated May 23, 1967, for further detail..

- 32 -

72. The projected acceleration in project loan disbursements has twoimportant implications. The first is that the speed up in the preparationof projects achieved in 1968, when Colombia is receiving project loan conmiit-meents at a peak annual rate of some US$250 million, can be sustained tosupport commitments in subsequent years at least at a level of US$200 millionper year. There are reasons to believe that such an annual rate of newcommitments is attainable. Over the past two years, major administrativeand financial bottlenecks for project preparation and execution at the levelof individual agencies have been eliminated, and qualified personnel arebeing sought more aggressively vwhere needed, A large list of projects suit-able for external financing has already been drawn up, for wlhich commitmentsof between US$1.2 and US$1.5 billion for the period 1968-73 will be sought(see Annex VII). This list includes projects in different stages of prepara-tion. The part covering 1969 is well advanced and realistic. Preparationsare being made to bring the rest of the project list into comparable readinessfor commitment. In 1967, a special branch of the Planning Office (FONADE)was established to promote and finance pre-investment studies. By the endof March 1968, FOKADE had already extended US$3.3 million equivalent offinancing for 30 pre-investxnent studies.

73. The second implication of the projected acceleration in projectloan disbursements, which relates to the additions to the debt servicebutdenthat this high rate of borrowing will imply, is discussed in paragraphs87 to 91 below.

74. But even assuming that the Colombian Governmentis etforts to en-large and diversify exports and to prepare and negotiate new external loansto finance projects in the amounts just indicated are fully successful,Colombiats import capacity will continue to be deficient in relation to her"requirements" throughout the 1969-73 period. Any exact definition ofimport "requirements" for an economy of the size and complexity of Colombiais open to challenge. However, when one considers that Colombia's capacityto import goods and services was not significantly greater in 1967 than in1954, even though GDP had increased by 70 percent and population by 50 per-cent (Table I-1), and actual merchandise imports did not increase duringthe 1960's (except in 1966) (Table 1I-1), the conclusion that import capacityhas been restraining overall growth is difficult to avoid. In the one recentyear (1966) in which imports were permitted to flow fairly freely, thecomposition of imports, which were overwhelmingly raw materials and capitalgoods, points to the existence of substantial suppressed import demand forneeded development imports; consumption goods remained negligible. Whenimports were cut back sharply again in 1967, the bulk of the reduction wlasin industrial raw materials, This presumption of inadequate import capacityis supported by an-analysis of the relation betwreen the main categories ofimports and of GDP. (Tables II-5 to II-7). Even on the basis of observedrelations between imports of consumption, intermediate and capital goods andGDP and investment in the 1960's, a period in which imports were severelycontained by administrative controls, estimated import requirements for 1968through 1973 exceed Colombia1s projected import capacity (Table 19).

Tarle 1-7: BALANCE OF PAYMENTS 1966-1973(Miillions of US$)

Estimate Projections1966 1967 1968 1969 1970 1971 1972 1973

I. Current Account1. Exports FOB 525.1 554.9 •66.1 6o6.2 696.6 740.2 827.9 893.5

2. Imports iOB -638.9 -h48.2 -570.2 -677.1 -781.t -840.0 -681.2 -907.33. Non Monetary Gold 9.5 9.2 8.0 8.o 8.0 8.8.c 8 .o4. Freight, Net -12.5 17.2 9.0 -1.4 -4. -6.1 -5.9 -4.55. Tourism, Net 4.6 6.7 16.0 14.1 18.2 23.3 29.6 37.3o. Net F&?ctor Income Paymennts

to the Rest of the v4orld -83.4 -78.3 -99.0 -119.9 -139.3 -156.6 -173.1 -187.4

7. Other, Net -65.2 -58.7 -59.6 -59.6 _59.6 -59.6 -59.6 -59.6

Balance on Current Account -260.5 -29.2 -129.1 -229.7 -262.1 -290.8 -254.3 -220.4

Il. Capital Account1. Central Government Transfers,

Net 10.2 2.1 2.0 2.0 2.0 2.0 2.0 2.0

2. Short-Term Private Capital, Net 77.3 -1.4 -7.0 -7.0 -7.0 -7.0 -7.0 -7.0

3. Long-Term Private Capital, Net 42.6 16.3 52.0 62.0 72.0 82.0 92.0 102.0

4. Disbursements from Official Loans 121.9 145.0 188.3 248.8 275.7 295.2 2514.0 213.0Of which:a. From Program or Sector Loans 49.0 54.0 78.0 100.0 30.0 60.0 40.0 10.0

b. From Project Loans 72.9 91.0 110.3 148.8 198.7 235.2 214.0 203.0

5. Amortization of Official Loans -63.9 -514.7 -61.2 -56.1 -63.6 -61.4 -66.7 -69.6

6. Errors and Omissions 30.4 -20.7 - - - - - -

7. Change in Net InternationalReserves of the Banco de laRepublica (-increase) 40.2 -57 .4 -45.0 -20.0 -20.0 -20.0 -20.0 -20.0

Balance on Capital Accounts 260.5 29.2 129.1 229.7 262.1 290.8 254.3 220.4

Source: Table II-1.

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75. If Colonibia t s economic growth is not to be scaled backsharply toward the 4.5 percent average for the 19601s, i.e., cut by one-fourth overall and by one-half on a per capita basis, this import gap mustbe filled somehow. Continued program loans for a few more years appear tobe the only reasonable method now in prospect.

Table 18: TIIPORT REGISTRATIONIS BY ECONOMiIC DESTINATION, 1966 AND 1967(Xillions of US$, CI')

1966 1967

Non-durable comsumption goods 27.9 18.9Durable consumption goods 5.3 5.4Arms and military utensils 2.4 1.3Fuels 2.8 2.6Raw materials for agriculture 19.0 5.9Raw materials for industry 315.4 221.7Building materials 7.8 12.9Capital goods for agriculture 13.5 10.3Capital goods for industry 124.4 133.9Transport equipment 93,4 89.6Taxicabs 6.5 6.7Private transport equipment 15.0 10.3Others-, n.i.e. o.6 0.9

Total 634.0 520.4

Source: Banco de la Republica

Table 19: lMPORT CAPACITY AND REQUIREMENTS(Millions of US$)

(1) (2) (3) (i4) (5) (6) 7)Import Import Disbursements from ImportRequire- Capacity Program Assistance Capacityments before including Per- Per- Per-

Program From exist- From new Program centage centagecentageAssistance ing loans loans Assistance (2):(1) (4):(l)(3):(h)

1968 732 492 78 - 570 67 78 14

1969 781 577 65 35 677 74 87 151976 835 701 - 80 781 84 94 10

19 1' 894 780 - 60 840 87 94 71972 957 841 4E 881 88 92 5197-3 1C,025 B97 _ 10 907 88 90 1

Source: Tables II-6 and 14.

- 35 -

76. Additional project lending could not fill this gap, for tworeasons. One is that project loans are regularly disbursed over a period

ranging between 3 and 6 years. Thus, to provide in 1969 US$35 million of

disbursements from new loans would require new project loan cammitments

for about US$350 mrillion over and above the US$225 million already projected

for next year. To obtain new project loan commitments in this amo.nt in

this time period would be impossible since the US$225 million now projected

virtually exhausts that portion of the program which is "projectizablet at

this time, The second reason is that the Colombian Project List ai.ready

implies a high proportion of external financing of project costs. ;IJost of

the projects in the present 1968-73 project list have a high imported

component or, in the cases of education and agriculture, contemplate con-

siderable financing of local currency expenditures. External financing now

contemplated for these projects exceeds 50 percent in all sectors except

housing, wr7hich is very small, and averages 61 percent for the total list.

Raising the external cost-sharing to everi 100 percent of these projects

could not generate the additional disbursements needed without adding im-

mediately another US$200 million of projects to the present list; this would

also be quite impossible. The rather low proportion of project financing to

total investment expenditures in most sectors, (para. 54 and Table 11) even

with the above cost-sharing and with the unusually broad involvement of

project lenders in Colombia, suggests,not surprisingly, that the projec-

tizable proportion of the Colombian program cannot readily be increased at

short notice, however well justified the overall program is.

Table 20: SUDMtARY OF TIhE 1968-73 PROJECT LIST: £XTERNAL

FINANCIliG AS PROPORTION OF TOTAL COST OF INVESTMENT v

(Millions of US$)

(1) (2) (31)Planned

Total cost External Percentage

of investment Financing (2):(1l)

Power 432 302 70

Transportation 481 255 53

Water and sewer 295 163 55fducation 50 26 52

Housing 25 9 36

Agriculture 440 224 51

Industry 524 365 70

Consunications 94 82 87

Total 2,341 1,426 61

a/ To compute this summary table, averages were used wThere the Project

List shows ranges.

Source: Plannling Office

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Eport Promotion

77. The Government's effort to enlarge and diversify non-coffeeexports, to which it attaches the highest priority, consists of three mainelements: (1) adequate financial incentives, including in particular anadequate exchange rate, to permit Colombian products to compete increasing-ly abroad; (2) more effective institutional support to make existing insti-tutions more responsive to exporter problems; and (3) domestic credit andinvestment policies that would encourage increasing productivity in andthe provision of adequate infrastructure for production for export.

78. (i) Financial incentives. The Govermnent considers that themain instrument for providing adequate financial incentives is a flexibleexchange rate. Since the new exchange policies were established inMarch 1967, the certificate market exchange rate gradually depreciated bysome 24 percent from Ps 13.50 per US$1.00 at the end of March 1967 toPs 16.75 per US$1.00 at the end of October 1968. (See Tables 21 and 22.)The largest part (over 17 points) of this depreciation took place during1967. The adjustment during the first nine months of 1968 has beenslightly slower than the movement in domestic prices, eroding some of thegains achieved the previous year. However, the Government does not regardmore rapid rate movement in one period than in another as being inconsistenxGwith its declared policy of rate flexibility, nor does it regard the adjust-ment process as completed. It firmly intends to monitor minor export per-formance closely and take whatever additional measures may be necessary toensure the realization of its minor export goals (Table 16).

Taole 21: EXCHANGE RATE AlND D014FSTIC PRICES(March 22, 1967 - 100)

(l) (2) (3)Exchange Rate Domestic Prices Ratio

(Certificate market (Cost of livingselling rate) for workers) (1):(2)

1967 March 22 100.0 100.0 100.0June 28 107.5 102.9 10o.5September 30 113.7 102.9 110.5December 28 117,2 lo4.9 111.7

1968 March 29 11808 107.0 111,0June 26 120.9 110.0 109.9August 21 122.0 111.5 109.4September 27 123.0 110.5 111.3October 29 124.1 n.a. n.a.

79. Since the new exchange rate policies were introduced, majorsimplifications of the exchange rate system have taken place. In November1967, petroleum transactions were shifted to the capital market, except

- 37 -

for 25 percent of purchases of crude oil for refinery for domestic con-

sumption to which the Ps 9.00 rate still applies (Table 22). After the

certificate market exchange rate reached the level of the capital marketrate in May 1968, all exchange transactions were transferred to the

certificate marlket, thereby unifying the exchange market. In April 1968,

a list of goods covering about 20 percent of reimbursable importsT was

freed from quantitative controls; however, all other exchange transactions

are still subject to administrative control.

Table 22: EXCGHANG RATES, 1967 AID 1968(Colonmbian Pesos per US$)

ExchangeCertificates Capital Market Petroleum

Exchange salesfor exploration Purchases of& exploitation crude oil forby petroleum domestic con-

Date Buying Selling Buying Selling companies sumption

March 22 13.50 13.50 16.25 16.30 7.67 9.00

April 29 13.89 13.94 16.25 16.30 7.67 9.00

May 31 14.19 14.21 16.25 16.30 7.67 9.00

June 28 14.46 14.51 16.25 16.30 7.67 9.00

July 31 14.70 14.73 16.25 16e30 7.67 9.00

August 31 14.98 15.02 16.25 16.30 7.67 9,00

September 30 15.30 15.35 16.25 16.30 7.67 9.00

October 28 15.50 15.56 16.25 16.30 7.67 9,00

November 25 15.69 15.75 16.25 16.30 a a

December 28 15.77 15.52 16.25 16.30 jJanuary 27 15.77 15.83 16.25 16.30 a/ a

February 24 15.87 15.93 16.25 16.30 a/ !March 29 15.94 16.04 16.25 16.30 a /April 26 16.09 16.15 16.25 16.30 ja/Hay 31 16.24 16.30 16.25 b/16,30 j j a

June 26 16.26 16.32 b/ 'a

July 30 16.35 16.42 b J a!

August 21 16.40 16.47 bJ b/ a/

September 27 16.54 16.61 J b a/ iOctober 29 16.68 16.75 ba bJ a!

/ Shifted to capital mzarket except for 25 percent of purchases of crude

oil for refinery for domestic consumption, to which the 9.00 rate still

applies.

bJ Shifted to certificate market in June 1968.

Source: Banco de la Republica

1/ Defined in Colombia as imports not financed by external project loans.

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do. There are two other financial incentives for exports: the

15 percent tax bonus and Ute "draw-back' on customl duties payable on

imports. The tax bonus was established in March 1967 as a percentage of

the value of minor exports, replacing the fiscal incentive existing pre-

viously under wihich 40 percent of export earnings were defined as income

for tax purposes and exempted from income tax. The new 15 percent bonus

has been well received by the exporting commurnity because its incentive does

not vary with the tax bracket of e,xporters as the former one did, and can

be used to pay not only income taxes but also sales taxes and custom duties.

At the current exchange rate of Ps 16.77 per USP'1.00, the bonus pa-mits ex.-

porters to receive Ps 19.29 for each dollar's worth of exports. Mloreover,

the 15 percent bonus is tax free, raising its actual worth to the exporter

to around 20 percent. However, it has two principal shortcomings. One is

that the law establishing it gave the Government the authority to change it

at will, creating uncertainty about the duration of the incentive. The

second is that the actual incentive to the exporter is less than the nominal

incentive because the tax bonus does not becomle effective until after one

year of issuance; it thierefore either has to be traded at a discount, ranging

between 2 and 3 percent per month, or be eroded by inflation. This second

ef'fect works against those whom the Government wants to favor most - the

exporters who are just entering the export business, or are small. The

Gover-nment recognizes these shortcomings. Should the minor export growith

objectives appear at any time in danger of not being fully met, it would

consider how best to enlarge the incentive offered through the tax bonus.

Thus far thie Government has been unwilling to make the tax bonus certifi-

cate usa;ble less than one year after issue because it fears the revenlue

loss implied i-n putting the payment of thie 1• percent on a current basis.

Some small once-for-all loss would be incurred in thVe short run; but, if

a more effective incen-tive indLces additional exports, each additional

dollar of export earnings would pemit 70 cents of additional inports on

which the average effective custom duty is 27.68 percent ad valorem

(30 percent of merchandise imports enter d-uty free), thereby generating

more tax revenue than would be foregone in bonuses.

81. The system of "Idraw-back," under the name of "Plan Vallejo" was

established in 1960 to exempt from custom duties imports of rawl materialsand intermediate products to be incorporated in export products. This

system works well for established exporters who operate on the basis of

secure and stable external markets, but discriminates against those who are

trying to enter new) markets or e:pand existing ones: again, the very ones

thie Government is trying to help most. The reason is that in order to make

use of the "Plan Vallejo," exporters have to coimnit themselves by contract

to the Superintendency of Foreign Trade to make the exports in question

and exoose themselves to legal sanction if for some reason these e.xports

fail to materialize. Because of the inherent difficulties of making firm

advance contracts in new markets, many exporters do not regard the "Plan

Vallojo"' privileges as meaningful incentives for them. There is an addi-

tional related bias against the new or small exporters in the present

system. Given the shortage of qualified personnel at the Superintendency,

applications for import licenses submitted by established exporters or

firms who are knoxm to the examiners tend to receive priority treatment

over those of lesser or unknown new exporters.

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82. There is, unfortunately, no readily available firm data onprices and costs of representative products to permit precise comparisonof Colombian and international prices and thus unequivocal quantitativecomment on the adequacy of these various financial incentives. However,relevant sections of the chapters on industry and agriculture below sug-gest that still further adjustment may be required if present targets forminor exports are to be achieved. Cotton exports are providing over halfthe total increase in 1968 minor exports (sone US$15 million out of atotal of US$25 million.) If the 1969 target for minor exports, wihichimplies an increase of US$37.5 million over 1968, is to be achieved, evenassuming a further 20 percent increase in cotton exports over 1968 the growJthiin non-cotton minor exports in 1969 will have to exceed 30 percent, more thandouble their 15 percent increase in 1967.

83. ii. Institutional Support. The second main element of the Govern-ment's export promotion drive is to design and establish an institutionalframework that effectively supports those engaged in export activities.Today, exporters must deal routinely with twenty-seven different institutions,from the Ministry of Foreign Relations to the Central Bank, whose responsi-bilities for particular aspects of required export procedures are notclearly defined and are sometimes conflicting, thus making the exportprocess time-consuming, uncertain and therefore expensive0 Decree 444of March 1967 attempted to clarify this situation by designating the ForeignTrade Board as the top governmental body in charge of programming and co-ordinating official export promotion policy0 The record suggests that thisbody - composed of the Minister of Foreign Relations, who chairs it, theMIinisters of Finance, Agriculture and Development, the Chief of the PlanningDepartment, and the managers of the Banco de la Republica and the CoffeeFederation - is not operationally effective0 There is accordinzgly nobodyin the Government who now has direct respoonsibility for evaluating on acontinuing basis the adequacy and results of existing export promotionpolicies and recommending new approac.hes wLere necessary. The experienceof thie Foreign Trade Board stands in shalp contrast with that of theMonetary Board, which meets regularly once each week, has the full timeservices of highly qualified advisors to prepare monetary programs andpolicies, keep them under constant review^ and keep the Government con-stantly abreast of developments. The Government is now aware that a realproblem exists and must be dealt with. It is actively considering theprovision of a full time qualified staff for the Foreign Trade Board andthe introduction of measures to improve the effectiveness of the Super-intendency of Foreign Trade.

84. iii. Credit and Infrastructure. The third element of theGovernment's export promotion effort is the provision of adequate creditand infrastructure for production for export. Two examples can illustratethe considerable advances already made. One is the increase in cottonexports during 1967 and 1968 resulting from the improved allocation ofagricultural credit through the Fund for Agrarian Credit (Fondo FinancieroAgrario) established in 1967. In the face of relatively stable internationalprices, which fluctuated between 26 and 28 cents per pound between 1962 and1966, cotton exports had been steadily declining, from a peak of US$15.6 mil-lion in 1962 to a low of US$2.2 million in 1966. In 1967, however, with

- ho -

cotton prices still at some 26 cents per pound, cotton exports reachedUS$20.0 million and are estimated at around US$35 million for 1968.Another example is credit channelled by the Private Investment Fund tothe industrial sector. Exports by nanufacturing industries financed bythe PIF rose frcm US$6 million in 1963 to US$29 million in 1967, or from10 to 23 percent of all minor exports. As for infrastructure, it is dif-ficult to relate specific improvements directly to export performance.However, it is clear that the expansion and improvement of transportfacilities - especially ports - has had much to do with making possiblethe export growth of recent years.

85. But several important problems in these fields of infrastructureand credit remain. As pointed out in later chapters, transport is nolonger a major bottleneck for economic development, but high transportcosts contribute to the presently high prices of high bulk low valueproduction inputs like fertilizer which could affect importantly the costand hence the supply of exportable products. In the field of credit, themajor problems relate to its allocation for maximum export effect withinthe restraints of tight overall monetary programs.

86. The National Council of Economic Policy has been devoting muchtime in recent months to considering ways to improve present export pro-motion policies, the inadequacies of which have been clearly recognized.The Government has made clear that the test of adequacy is a simple one:to permit minor exports to increase annually by at least 25 percent through1970 and 20 percent thereafter.

E. Creditworthiness

87. Colombia currently has Us$1.1 billion of external public debt.The Goverrmnent is now planning to obtain new commitments in the arnount ofUS$1.6 billion over the six-year period 1968-73. After the repayments onexisting and new debt to be made over the period, Colombials external debtwould double by 1973 and reach US$2.25 billion. Some 70 percent of thedebt outstanding at the end of 1967 was held by official agencies - IDB,AID, IDA and IBRD.

88. This debt has been contracted on very favorable terms, not onlybecause of the large proportion held by official agencies but also becausea large proportion of it was incurred for very soft term program loans.In the face of no consistent upward trend in exports, these favorable termshave made it possible for Colombia's debt service ratio to increase onlymodestly in the past years. Between 1561 and 1968, while debt outstandingincreased by 120 percent, debt service payments increased by 62 percent andthese payments as a ratio of exports of goods and services increased by25 percent, from 10.1 percent in 1961 to 12.7 percent in 1968. If the maincategories of external financing in prospect through 1973 - program assis-tance, long-term project lending, and supplier financing - continue to beon terms similar to the past, the debt service ratio would increase to15.9 percent by 1973. If all of the new program assistance were to be con-tracted at conventional terms (6.5 percent interest rate, 5 years of graceand 25 years maturity) the debt service ratio would approach 17 percent

- 41 -

by 1973. ouch "conventional" terms would represent a hardening of therecent weighted average terns obtained by Colombia. For 1966 and 1967,new debt was contracted on average at 4.2 percent interest, and 24 yearsmaturity including 6.2 years of grace0

89, An increase of 3 to 4 percentage points in the debt serviceratio need not be cause for immediate concern. It would be accompanied bymajor improvements in the country's international liquidity position. By1973, gross liquid reserves should reach some US$230 million, equivalentto around three months of merchandise imports, compared with US$133 millionat the end of September 1968, and US$80 million at the end of December 1967.Furtlhermore, the export base would be considerably diversified. Minor ex-

ports would no longer be "minor", and the 1973 share of coffee in totalcommodity exports would have fallen to around 40 percent.

90. However, given the long maturities of most of this debt, thisincrease in Colombia's debt service obligations would not be temporary andthus has rather important implications for Colombian policy in the 1970's.The sorvice in 1980 on the US$@.3 billion of external debt existing at theend of 1973 would absorb some 13 percent of exports of goods and servicesat that time if total exports of goods and services grow at an averageannual rate of 5 percent between 1973 and 1980. This 5 percent rate is nota modest target: it implies that minor exports would double in value between1973 and 1980, from US$>400 million to US$800 million, i.e., continue toincrease after 1973 at the equivalent of an average 10 percent per year.The 8 percent average annual export growth projected for the 1968-73 period

is assumed for purposes of this comparison not to be sustainable becauseit would imply minor exporjts continuing to increase by around 20 percentannually from a 1973 base of US$40o million, reaching US$165 billion by1980; this seems excessively ambitious at this time.

91-, Exports of goods and services growing at only 5 percent after1973 would not necessarily imply that import capacity would again becomea bottleneck for growth. Since import capacity should be much closer to"requirements" in the early 1970's than now, imports have been projectedat a declining rate of growth after 1970; with industrial and agriculturalpolicies to encourage further economic import substitution, there is noreason why it should not stabilize at or slightly below the rate of growthof GDP in that period. It is difficult to be precise on this subject, butit is not necessary to be precise to draw clear implications from thesetendencies. If Colombia's debt service ratio is not to exceed 20 percentof exports of goods and services by 1980, these projections imply thatafter 1973 Golombia would have to limit new borrowing to some US$160 millionper year on conventional terms, considerably below the US$260 million levelenvisaged for 1968 and 1973. Since such a sharp reduction in the annualrate of commitments would imply a corresponding reduction in net inflowsof official foreign capital from around 2 percent of GDP in 1968-73, Colonbia'srate of domestic savings would have to increase beyond the 18a8 percent of

- 42 -

GDP projected for the 1968-73 period if its growth objectives are not tobe compromised. This means that the efforts currently being made toincrease domestic savinlgs, through the tax reform and improved mobiliza-timn of private savings, would have to be pursued on a sustained basis.

III. AGRICULTURE

92. The importance of agriculture in Colomlbia needs no emphasis.Agriculture accounts for about 30 percent of Colombia's gross domestic

product, 75 percent of total exports, 95 percent of food supply, and over50 percent of the supply of industrial raw materials. Agricultural activity

absorbs about So percent of Colombia's economically active population, and

more if related activities in transport, handling, production of agriculturalinputs, and processing of agricultural Droducts are included.

A. Recent Performance

93. Quantitative evidence about Colombian agriculture is impreciseand often contradictory. Mowever, official statistics 1/ indicate that

output grew by some 3 percent annually between 1950 and 1967, an inadequate

pace when vieved alongside population growth. Until 1958 agricultural output

increased somewhat faster than population, but since then agriculture hasbeen growiing somewhat less rapidly than population. The official figureslook somewhat better when adjusted for coffee, wJhich has been deliberatelykept from growing rapidly. Until 19t58, coffee production, representingbetween 25 and 30 percent of total agriculture, had been increasing by 3.4

percent per year under the stimulus of the buoyant conditions prevailingin the international market until 195h 2/; during this period,the rest of agriculture grew at an annual rate of 3 percent. Since 1958,non-coffee agriculture seems to have accelerated its growth to about 4.3percent per year while coffee p-oduction has remainied practically stable.But the potential is considerably greater;and the needs are, too. In the

light of the growing domestic needs for food and fibers,the need to increase

exports and the startling growsth in the number of rural poor, the Colombian

Government has been reviewing critically all aspects of public policyaffecting agriculture. Only the main directions of change have been definedthus far - they are described in Section B below-but they promise constructive

response to the major problems confronting Colombian agriculture at thismomenlt.

94. One important problem is to increase yrields. The bulk of theincrease in farm output appears to have resulted from expansion in acreage

under cultivation and in the agricultural labor force. Much of the potentialin mcdern agricultural technology remains to be exploited. Farmers areusing more improved seed, but mechanization does not appear to have increased

significantly. The consumption of fertilizers and pesticides has increased

in total, but application per cultivated acre appears to have declined inrecent years (this may be due in part to new lands initially requiring little

or no fertilizer). Another problem is to improve access to technical knowiledge

and finance, as wqell as to assure cost-price relationships remunerative to

farmers.

l/ - The National Accounts of the Banco de la Republica.2/ - Coffee trees have a gestation period of some five years, and plantings

made while international prices were strong kept coming into productionuntil 1958.

95. In the past these problems had not been considered critical sinceColombian agricultural objectives were to keep pace with population, not to

generate surpluses. Ho-wever, urnder the new objectives - to outpace the

growth rate of population and develop exportable surpluses - they underline

the need for far more aggressive technical assistance to farmers through

improved extension services and supervised credit and for a more deliberate

use of price policy - both for inputs and output - to induce production.

96. These new objectives raise a number of questions: how can new

techniques best be developed and disseminated and farmers induced to adopt

them; what is the proper role of agrarian reform; how is dependence on

coffee to be reduced; what is the agricultural export potential; what is the

proper orientation of public expenditure in agriculture. These issues are

discussed in turn below.

B. Public Services to Agriculture

97. In response to the first question, that of upgrading agricultural

technology on the farm, the Government carried out in September 1968 an

institutional reorganization aimed at consolidating the almost 30 publicinstitutions having to do with agriculture into about ten, each with clear-cut lines of responsibility. This reorganization creates a three-tierhierarchy. At the top is the PMinistry of Agriculture, which becomes the center

of planning and coordination. In the middle, there are four operationalinstitutions: the Agriculture and Livestock Development Institute (ICA),

the Agrarian lMarketing Institute (IDEMA), the Ai3rarian Reform Institute

(INCo11), and the Caja Agraria. The third tier includes all other supporting

agencies: the Coffee Bank, the Livestock Dank, a new Institute for theDevelopment of Renewable Natural Resources (INDEiiNA), a new NationalMeteorology and Hydrology Service, an enterprise for the production of

veterinarian products, and a Financial Corporation for the Agrarian Sector

(COFIAGRO).

98. An Executive Agricultural Committee was created, whose members are

the Minister of Agriculture, wqho will chair it, and the managers of ICA,

IDIAI, INCORA, Caja Agraria, Livestock Bank, INT)ERENA, and the Coffee Growers

Federation. The technical secretariat for this Executive Committee is to

be the Planning Office of the Ministry of Agriculture. Policy papers for

early discussion deal with price policy, credit policy, the location and

capacity of new storage facilities, identification of exportable surpluses,

identification of import substitution possibilities, and a review of

which agency or agencies can best channel external financing into the agri-

cultural sector in general and livestock in particular. This Committeeshould help to improve coordination of the different agencies dealing with

agricultural matters.

99. Within this structure, ICA and IDEMA are to be the two principal

institutions in contact with the farmer, ICA helping to modernize production

and IDEMRA helping to market at home and abroad. Their activities will be

directly supported by credit programs, handled principally by the Caja

Agraria and the Livestock Bank.

- 45 -

100. The reorganization assigns to ICA the major responsibility formodernizing Colombian agriculture. It will absorb all the agencies operatingin the field of technical research and extension and will operate a service for

the quality control of agricultural inputs including vaccines, fertilizers,and pesticides. ICA will carry out these functions in all non-coffeeagriculture, including cotton and tobacco.

101. ICA has alreadyr contributed much through research and propagation

of new technology. Improved seed is only one of many examples. Colombia

is envied by many countries for the agricultural research capacity which it

already has in ICA. However, the reorganization by itself will not insure

success in making this knowledge available to farmers. Two problems haveto be solved first. One is to insure that ICA's research is relevant. Inthe past, it gave relatively little attention to tropical and subtropical

crops, which constitute the mainstay of Colombiats agriculture. Almost

75 percent of ICA's investment resources are now being devoted to researchin "hot climate" stations, a marked change fron the 4h percent proportionof the previous three years.

102. The other problem that has to be solved is to make sure that the

technology developed by ICA reaches and is used by the fanmer. To do thisICA has now taken over the extension services that wfere previously underdifferent development institutions and merged them with its own. Extension

services will now be provided as an integral part of credit from the credit

agencies. Colombian farmers have already demonstrated their willingness touse, and even pay, for technical advice,and private management consulting

firms are now starting to operate in this field. Credit extended undertechnical supervision for which prior appraisal by agronomists and othertechnical specialists is required, has already reached 25 percent of allagricultural finance from official institutions; it is the Government'sintention to enlarge this proportion as rapidly as possible.

103. On the marketing side, ID2TA succeeds the old National Supplies

Institute - INA - but with considerably enlarged responsibilities. In

addition to being responsible for orderly domestic pricing and distribution

of farm products, it will be responsible for facilitating non-coffee agricul-tural exports. It will do this by building up stocks which, besides helping

to stabilize domestic prices,will constitute a pool for export. Special

commodity boards will be established for this purpose; the first ornes willbe for cereals and livestock. In the past, INA did not have enough storagefacilities, cash, or skills to reduce extreme seasonal movements in farm

product prices. Prices paid farmers still vary more widely within the yearthan INAts published prices should have permitted. As a result of this

incapacity to implement its pricing policies, farmers have become reluctant

to allow INA pricing to influence their operating decisions. IDEVIA will haveto persuade farners that it can be more effective in the future. Fortunately

the need to improve performance has been widely recognized, and some changehas already begun. INiA purchases from farmers early in 1968, for example,

were some nine times greater than in the corresponding period of 1967:

- 46 -

INA PURCO ASES

January and February196F 15967(tons) (tons)

Ri ce (paddy) 5,310 10Corn 5,113 1,525Sesame 151 h1Sorghum 2,699 0Beans 480 0Soybeans 496 0

Total 14,248 1,576

104. The greatly increased marketing responsibilities of IDEIA willrequire correspondingly larger storage facilities. This has also been recog-nized by the Government and IDEMA has now taken over INA's request for anexternal loan of US$15 million to finance the construction of storage facili-ties. To support these expanded functions, IDE4A will have to improve thequality of the analysis on which important expenditure and pricing decisionsare to be made. In commenting on the analysis supporting the above loanreqluest, the Planning Office (DAP) has stressed the urgent need for improvedcost-benefit analyses before making decisions on this, as well as other,agricultural investment proposals. DAP has also urged that IDEMA price itsservices high enough to meet its costs and forego the gains it has beenreceiving from its monopoly of imports of farm products.

105. The Government is aware that the whole system of financialincentives - pricing of inputs and commodity pricing - has to be changed iffarmers 1 decisions are to be influenced in particular directions. TheGovernment recognizes, for example, that ICA may need to absorb losses inpromoting the use of improved seeds and new types of fertilizers and is readyto subsidize this process in its initial stages. The Government is equallyaware that IDEMA may have to operate for a while with subsidy prices todevelop adequate stocks for export. The Government is prepared to absorbthese development costs because it feels that before being able to reducecosts and improve productivity, it has first to induce greater output thanexists today. Quantitative estimates of these new operations and of theirbudgetary impact have not yet been prepared. However, Ministry of Agricultu'aofficials consider that most of the cost of subsidizing production forexport could be absorbed by a blend of hone and export prices through whichexports are subsidized by domestic consumers of the particular commodity,a practice that is currently being followed in sugar and cotton withconsiderable success. There is no budget subsidy for either of these twocommodities in spite of the considerable (some U.S.$50 million) exports nowbeing made. (The textile industry still remains competitive internationally.)The Ministry of Agriculture feels that large exportable surpluses can bedeveloped in this way in rice, corn, sorghum, and that the growth of livesto-kexports can be accelerated. The Government does not intend to permit DRT•Ik's

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operations overall to create substantial claiLs oni the budget.

106. Because the introduction of modern technology will require thatfarmers increase their purchases of industrial products, the Governmentrecognizes that agricultural credit will have to continue increasing atleast at the rate observed since 1963 - almost 10 percent per year inreal terms - and considerably more rapidly if resources permit.

New Loans to Agriculture(Billion Pesos)

Year Current Pesos 1958 Prices Index, 1960=100

1960 1375 1203 1001961 lalL 1L63 1221962 1951 1509 1251963 2317 1h08 117196h 3099 1599 1331965 3315 1598 1331966 L126 1705 1S21967 8lL4 lOL,o 153

Source: Asociacion Bancaria, Inform,acior n Financiera, Agosto 1968.

107. Voimne-wise the Caja Agraria provides about half this credit andthe commercial banks, one-third. Tne latter are required by Law 26 of 1959to lend to agriculture the equivalent of 15 percent of their deposits. Boththe comumercial. banks and the Caja Agraria participate in the FondoFinanciero Agrario,which v!as established in 1966 as a Central Bank-managedrediscount facility for short-term loans in agriculture. The Fondo isalready handling credit in amounts equivalent to more than 20 percent of thetotal of necr loans in agriculture. But even wiith these facilities,institutional credit now reaches only about one in four farm operators. Itreaches less than 2 percent of small laindholders and as yet virtually noneof the farmers who are ineligible for INCORA supervised credit but cannotyet qualify for ccmmercial bank credit. The Government is endeavoring tofill this gap.

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C. Agrarian Reform

108. Whereas the initial impact of the new ICA and EEMA. will centeron the so-called "commercial'" farmer, INCORA's program will continue tobe directed to its twin objectives of getting land and related resourcesinto the hands of the rural poor and increasing agricultural productionin the areas in which it operates. So far INCORA has reconciled theseobjectives by emphasizing pxoduction wjhenever its goals conflicted. Itis the Government's policy to maintain this orientation.

109. In the past five years, INCORA settled 70,000 families. As aColombian farm family unit contains between 7 and 10 people, these figuresmean that INCORA has thus far affected the lives of some 5 percent ofColombia's rural population. Its program calls for settling 60,000 fami-lies more in the next two years. In Colombia, as in any other developingcountry, there are opposing views as to whether such a pace of movementtowards social objectives is too fast or too slow. The Colombian authori-ties apparently feel that Colombiats rural poverty problem is too big tobe solved by agrarian reform, and that the large sums spent on this programshould therefore be production oriented, even if it means that the propor-tion of population affected by the agrarian reform program remains small.The proportions are not at all small, by the waay, in terms of land area.Out of a national total area under crops of some 5 million hectares,INCORA's projects occupy slightly over 2 million hectares, or 40 percent.Currently INCORA has some 40 projects in operation located in varioussections of the country, at least one in each Department. Classified inaccordance with the major activity in eaclh, they consist of 14 land recla-mation projects, 10 colonization projects, and 16 farm improvement orsupervised credit projects. Studies are underway on new projects, butthese are still in a preliminary stage.

110. Funds available to INCORA have increased by 55 percent over thelast three years, to some 600 million pesos in 1968, so that 32 percentof total public investment expenditure in agriculture is currently beinghandled by INCORA. INCORA is thus a dominant factor in Colombian agri-cultural development. Fourty-four percent of these funds were for farmimprovement projects, primarily supervised credit for the development ofexisting small farms; about 40 percent were for capital-intensive landreclamation projects--irrigation, drainage, and flood control; theremaining 16 percent were for colonization projects. All projects nor-mally include expenditures for land acquisition and supervised credit.

111. During the five years in which it has been in operation, INCORAhas established an effective organization and assembled a dedicated staff,functioning under progressive leadership and a central management generallyrecognized as being both competent and flexible. INCORAts investment

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program seems to have been too heavily oriented in the past toward capital-intensive projects, including some with lower estimated returns than onother types of agricultural investment. But INCORA is now planning tocomplement its ongoing land reclamation efforts with greater emphasis oncolonization, which would permit bringing new areas into efficient agri-cultural production at relatively low cost. INCORA also intends to broadenits study of alternatives when considering new starts in future. It hasfound that activities carried out in the frontier of settlement do notrequire as much expenditure on land clearing, roads, etc., as had beenpreviously thought because land clearing is often carried out by thesettlers themselves without heavy machinery and because roads can be builtinitially at quite low standards, INCORA has also found that its arrange-ments for supervised credit are an even more effective, and certainly lessexpensive, means of making farmers production-oriented than organizing themin irrigation districts.

D. Coffee Diversification

112. In Colombia one cannot think about modernizing agriculture,changing financial incentives for farmers, or even land reform, withoutconsidering the extremely difficult problem of coffee diversification.

113. For some years now, Government policy has been to reduce the rateof growth in coffee production. This policy is still in force. Since 1958there has been no appreciable growth in the production of coffee. Thisstabilization of output was achieved with measures that were introduced inthe mid-1950's in the wake of the collapse of prices in the internationalmarkets and which have since changed from time to time. The key deterrenttoday is taxation. The coffee sector pays around 50 percent of the exportprice in taxation: a direct export tax of 20 percent of the value ofexports; a 20 percent retention tax (which is the amount of coffee or itscash equivalent that exporters have to surrender to the Federation pereach bag of coffee sold to it); and a margin between actual export pricesand an officially fixed exchange surrender price. The Government has alsolimited the volume of credit for expansion of coffee and, especially incoffee areas, has established preferential credit lines to finance non-coffee activities.

11i. This system of deterrents and diversification incentives has beensuccessful in preventing coffee production from increasing. However, pro-duction has not fallen in absolute terms. As a consequence, and alsobecause of reductions in exports pursuant to the quotas fixed by the Inter-national Coffee Agreement, Colombia has accumulated substantial stocks; asof late 1967, these were estimated at around 4 million bags, worth aroundUS$210 million at current export values.

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115. Under the new exchange system established in early 1967, thepenalty exchange rate for coffee exports was replaced by a percentage tax.This tax, originally 26 percent of the value of exports, has now beenreduced to about 20 percent. This tax reduction, together with the adjust-ment of the exchange rate, means that at the September 1968 certificateexchange rate of Ps 16.50 per US$1.00, exporters had to pay Ps 2.70 pereach dollar worth of coffee exports instead of Ps 3.51 that they had to payin March 1967. Their peso income per dollar of exports was thus Ps 13.80in September 1968, as compared to Ps 10.00 in March 1967. Fearing thatexporters would be induced by their increased peso income to sell abroadat cheaper prices, the Coffee Federationts domestic support price wasraised to push up the price at which exporters had to buy from the growers.But coffee growing has been made more attractive as a result, even thoughthe Federation's price of Ps 905 per 125 kilos in September 1968 was stillsome 15 percent lower than the real price which prevailed in 1962. TheGovernment feels that as long as the real price of 1962 is not exceeded,there will not be any incentive to increase production. However, with aflexible exchange rate policy and a coffee price to farmers approachingthe 1962 real price level, some new combination of policies on taxes, prices,and exchange may soon be necessary if present deterrents to increasing pro-duction are to remain effective.

116. This problem of avoiding st-muli to production is especiallyacute because average coffee yields - some 600 kilos per hectare - are lowin relation to potentials0 They could be increased drastically, perhapsas much as 10 times, and quickly witlh known new methods of production.Recognizing this, the Coffee Federation has just completed a coffee diver-sification pilot study for the main coffee area of the country0 This studyhas identified areas suitable for other crops and the credit, technicalassistance, marketing and transportation needed to support any change; italso contemplates rural industrialization where this appears to be economical.The objectives of this pilot program are: (i) to eliminate some 55,000hectares of coffee and (ii) to reduce annual coffee production by some320,000 bags (green) or some 4 percent. The principal devices to be usedin the diversification program are supervised credit, technical assistance,and marketing and price guarantees for the crops to be substituted for coffee.

117. The problem of coffee diversification is not an easy one. Some

70 percent of Colombian coffee is produced on steep mountainous terrain.Financial returns on coffee are, evern under the present deterrents toproduction, much higher on this land than on most other technically feasiblesubstitutes. Dramatic reductions in output accordingly do not appear to bein prospect in the short run.

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E. Export Potential

11B. As coffee exports will continue to be subject to the exportquotas authorized by the International Coffee Agreement, they cannotreasonably be expected to increase faster than the long-term gro-th trendof world consumption. Assuming prices remain at around US42 per pound,this means that coffee exports in the forthcoming five years would increaseas follows;

(US$ Million)

1969 3161970 3371971 3L51972 3531973 362

Colombia will clearly have to continue to look to other segments of heragriculture for significant increases in exports of farn products. Un-fortunately, the immediate outlook does not appear bright.

119. Exports of bananas reached US$25 million (352,000 tons) in 1967.These were by far the highest figures in history, and about double the 1964levels. The outlook is for a levelling off and probable decline in exportearnings from bananas because growing world supplies, coupled with a slow-growing demand, are expected to weaken prices through the next several yearsand thereby discourage operating and investment outlays in the banana areas(Uraba (Turbo) in the Northwest near Panama, and the Coastal region belowSanta Marta). Under these circumstances, exportable supplies will not ex-pand rapidly.

120. W,ork to open up Uraba for banana production began in 1962.

Farimers were offered contracts which guaranteed a remunerative price,technical assistance, and ample credit on reasonable terms. These contractsare now about to expire. Farmers must now look forward to leaner pricesand higher rejection rates for fruit as ample world supplLes enable con-suLmers to place greater premiums on quality. Farmers must alsc anticipatea higher cost of credit for expansion, as this will novw be at the farmers'risk.

121. The Santa i4arta region is of much less importance than Uraba in

the banana industry. It has been a high-cost area, in decline for manyyears, but an effort is now being made to bring it back into production.INCORk is renovating the irrigation system, disease resistant varietiesare being promoted, and it is hoped that cooperatives able to handlemarketing can be developed, Nonetheless, the area is subject to naturalhazards and high labor costs. To improve the quality of the fruit (nowvery poor), as well as find markets and marketing skills in the face of

ample world supplies, will be difficult.

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122.. The outlook is accordingly for earnings from bananas over theseveral years to fall by around one-half to one million dollars a yearfrom the 1968 figure of about US$25 million. Natural disasters andweather conditions could, of course, produce sharp fluctuations in inter-national supplies, as in the past, and the rate of growth in demand could

exceed expectations. But the long-term trend appears to be downwards.

123. Government planners foresee a sharp upturn in exports of cattleand beef. Tentative data put these exports at US$17.5 million in 1969(double the previous high of US$8.7 million attained in 1965), and in-creasing to US$36 million by 1972. These are optimistic targets. Thedevelopment of an export capability is in its initial stages. The scarcityof management capacity is critical and it cannot be expanded rapidly.Disease control and improvement of pastures, stock and ranch facilitiestake time. Capital availability and incentive prices may 'b!come problems.The typical rancher fin;ds t}ut modern production technologiss require agreat deal of capital compared to the negligible inputs he (like his father)has been accustomed to provide. And he has learned that governments sensi-tive to poverty do not readily allow cattle prices to move up faster thanother staple products.

124. Colombia exports cattle in three ways. One is contraband toVenezuela, which may run from 120,(000 to 200,000 head per year and yielda sizable sum if valued at 1,000 pesos per head. This substantial tradeshould persist, as beef at retail there is priced three to four times as

high as in Colombia. The second channel for exports is the legal movementof live cattle. This began in 1963, and has been:

Head (No.) US$ (o000)

1963 1,726 1801964 3,083 3611965 56,527 6,3)A1966 45,828 5,9971967 9,801 1,423

Export in live form is costly, makes disease-free certification more dif-ficult, and it is likely to become less important in the future. The thirdcomponent of the export flow is beef. This began in 1965, and has been:

Tons 1/ US$ (c00o)

1965 4,537 2,h351966 2,893 1,3631967 2,772 1,503

1/ Four head of cattle yield roughly one ton.

T'hese nurrers do not pciLt to buoyant beef or cattle exports in the

mmcdiatie fu-ture. Sustained incenti-ves through. imaproved excaange rate

and relatea policies will be needed to reach a rate of groth in cattle

output wihich will permit a significant upturn in exports in the years

ahead.

125. The long-term potential in cattle is substantial, and has en-

abled Colombia to negotiate US$40.7 million in public loans from abroad

for livestock develkpment, as of mid-1968. ICA is also planning to intensify

its programs to improve technical efficiency- improve calving rates, reduce

mortality, and speed up fattening. These improvements, plus the build-up

of the national herd now reported to be underTbway, should cause marketings

to go ap by 1969 or 1070, But this incremental supply will face a growing

domestic demand. Per capita consumption of red meat is now at around

28 kilos per year and should increase as incomes go up. Adding population

growth, demand is probably new growring at around five percent per year.

HIot much of this demand is likely to be diverted to other products,though pork

and chicken could help if it wiere possible to expand the feed supply, par-

ticularly corn, faster than has been the case. Fish prices are too high to

abscrb much of the additional demand in sight.

126. On the side of external demand, Colombia is trying to establish

stable outlets for beef in Eurrope. This mayr not be easy to do, given the

nature of the Eiuropean market. Comrnon iyarket countries have tended to bar

imports as soon as the foreign supplies start to force prices downward. In

additicn, there is an underdeveloped export strength in the Argentine

cattle industry vis-a-vis Europe. Argentina will also continue in the

Peravian market, which took 75 percent of Colombiats beef and cattle exports

in 1967. As for the U.S. market, only processed meat will gain entry from

Colombia until the aftosa problem is solved.

127. To sum up, the Colombian cattle industry- with its iimpressive

pasture resource clearly merits continuing attention to develop an export

capacity, But it would be optimnistic to expect this to occur overnight.

Legal exports of beef projected from a base equivalent to 25,000 to 30,000

head per year, at an annual cumulative rate of groTrth of 10 to 15 percent

for the years just ahead«, would raise exports of beef and cattle from

IUS$6 million in 1965-66 to some US$10 million by 1970. This volume,

incidentally, is less than the existing modern-type processinu capacity

(including chilling and freezing space) could handle.

128. Cotton production grew at a rate of 10.9 percent per year betwjeen

1950 and 17VTho other important farm commcdity approached this growth

rate. Cotton exports Kin tonnage) in 1967 were about seven times those of

1966. They were valuet at US$15.4 million in 1967, iThich was about equalto that ir 1962, b-u almost twice as large as the anmual average in the

196 4-1966 period. Record production (and exports) are exzected for 1968.1y

1/ The INational Cotton Federation in Biy of 1968 published a production

forecast of 195,800 tons of seed cotton for 1968 (including the December-

sown coastal crop), and an export forecast for 1968 of 56,150 tons of

fiber valued at US$33 million. (The export of cotton textiles and

cottonseed meals was forecast at UTS$8 million.)

This is partly because higher prices (negotiated by farmers and the textileindustry under Government auspices) were announced last December, andpartly because cotton farmers have found it easier to get credit andteclnical assistance than in the past.

129. The outlook for cotton exports over the longer term is difficultto define. There is no doubt that Colombia can increase production. How-ever, it is not clear what will be required to draw more resources intocotton and hold them there. Sharp shifts in acreage and yields from yearto year have characterized the Colombian cotton industry. For example,acreage in the interior dropped from arcund 108,000 hectares in 1962 toabout 39,000 in 1965. Meanwhile, the Coast and lleta increased acreage fromabout 60,000 to around 90,000 hectares. A similar picture is show-n in theacreage and yield change in crop year 1967-68 as compared to 1966-67: theregion of Espinal increased cotton acreage by 68 percent, whereas Palmiracut back by 34 percent; the yield of lint per hectare dropped 19 percentin Roldanillo and vwent up by 31 percent in Guamo. Pest infestations andother special circumstances may explain part of these changes. But thispattern of regional and temporal shifts suggests that costs and returns incotton have not been stabilized. Heavy year-to-year variations in produc-tion are likely.

130. Competitive supply also affects export prospects. The U.S., the

major producer and principal exporter of cotton, expects production in 1968to be sufficient to bring stocks up to the one-year use level (includingexports). Stocks fell sharply in 1966 and 1967. About 60 percent of U.S.production is now over one inch in staple, the trend tovward the longer staplevarieties is being encouraged in the U.S., and price premiums over shortstaples have widened greatly in the last year or two. These tendencies donot improve the Colombian export outlook.

131, All these considerations suggest that Colombian forecasts ofcotton exports reaching as highi as US$4 7 million for the year 1970, orabout 50 percent more than in 1968, may be on the high side.

132. Partly in response to the favorable prices of the early sixties,Colombia sharply expanded its sugar production capacity in recent years.Exports in 1967 reached a new high of US$11.3 million, in spite of the factthat the low prices of free (non-contract) supplies have made exportearnings sensitive to the U.S. quota. The 1967-68 crop year brought recordproduction and yield. Some 620,000 MT of centrifugal sugar were produced,an amount more than one-third above the annual average for the previousfive years. In calendar 1967, exports totalled slightly more than 200,000tons, as compared to 114,000 in 1966. Quota exports to the United Statesaccounted for about 25 percent of export tonnage; about an equal percentageentered the United States on a quota-exempt basis at world prices.

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133. The increased out-turn of sugar in 1967-68 was a result ofimproved cultural practices, along with plant expansion and modernizationand good weather. There is now ample cane processing capacity, and sharpincreases in sugarcane and sugar yields are technically feasible. But thethe outlook for export demand is less bright. In 1967 Colombia sold aboutthree-quarters of its sugar exports at the "world" price of around US$0.0215per pound FOB. According to studies by the Ministry of Agriculture, ittakes some US$0.03 per pound FOB to make Colombiats sugar competitive.The potential for growing sugar exports will thus depend upon the Govern-ment's ability to continue to provide the industry with an adequate "'blend"of domestic,U.S. quota and world market prices.

134. Exports of tobacco have been trending downward; the total wasUS$4.4 million in 1967, as compared to US$7.2 million in 1965. Prices havebeen wjeakening in response to increased supplies from Brazil, the Dominicar.Republic, Central America, Indonesia and the Philippines. Export volumeis also in decline. In 1964, around 16,249 tons were exported. In 1967,the comparable figure was 11,944 tons.

135. The Tobacco Development Institute, now part of ICA, estimatestobacco for export as follows (in thousand of tons):

Production Export

1968 14.5 10.81969 15.2 11.31970 15.9 11.9

On this judgment, the volume of exports in 1970 will approximate the 1965-67annual average. There is no apparent reason to expect prices of exports inthe years just ahead to significantly exceed current levels, nor exports tomove above US$5 million per year.

136. To sum up: exports of the commodities discussed above, whichtotalled US$379 million in 1967, accounted for 70 percent of all mer-chandise exports. The prospects for these particular exports growingrapidly and helping to relieve Colombia's foreign exchange shortage in thenext few years do not appear bright. The fact that these products (otherthan coffee) currently constitute 47 percent of all minor exports under-lines the effort implied in reaching the Government's minor export targetsfor the next few years. Substitution of agricultural imports, like cacao,wool and vegetable oil, is not likely to provide appreciable relief inthis period. These indifferent agricultural export prospects point sharplyto the need to accelerate the growth of manufactured exports, as discussedin the following chapter, and to move ahead quickly with the new IDD4A plansfor promoting export capacity in rice, corn, sorghum and other products forwhich potential exists but which are not being exported nou.

F. Foreign Financing and Public Investment

137. In recent years Colcmbia has been drawing upon finance fronofficial external sources to help develop its agriculture. Foreign financingfrom these sources totalled US$99 million in the seven-year period 1961-67,or about 10 percent of external financing for all purposes. (See Table V-1).Total foreign financing in the final two years of the period was twice aslarge as the total for the first five years, and the Government now hopesto increase this flow.

138. The detailed public investnent prograim for agriculture co-veringthe neriod 1969-73 is still being prepared by the Government. It is likelyto be delayed until the institutional recrganization is completed and respon-sibilities clarified. But the list of pro-ects now at an advanced stage ofpreparation and consideration provides sclid basis for an ongoing program.This list inclucds loans for the agricultural sector amounting to almostUS$210 million between 1968 and 1973, with half this amount to be contractedbefore 1970. The loans for 1968 and 1969 are directed towards livestockdevelopment, land colonization programs, access roads, grain storage andfarm credit, and coincide with broad sector priorities.

G. Conclusion

139, Colombia has a high-cost agriculture in which many of the gainsfrom technical chance and economic organization have yet to be exploited.Farmers are responsive to price incentives, but nanagement skills are inshort supply. This means that the capacity of agricuilture to help solve theforeign exchange probleir by exporting more of its farm production is probablylimited, especially in rCle ne-.x-t 2-3 years3 its capacity to reduce signifi-cantly imports of agricrl.tural products such as cacao, wool, w-:heat, barley,or vegetable oils appears even more limited in the short run. For the moredistant future, sianificant upward trends in exports or import substit+utionwill require sustained incentives to induce the investaents needed toincrease pasL rates of groLth in production and productivity.

140. The reorganization of public services to agriculture now going onis the Government?s response to this situation, It is designed to bringmodern technology to the farmer and to provide the required incentives.These changes certainly go in the right direction. But they will place aheavy burden an the official decision-making machinery and recuire economicstaff wiork and orogran management o2 the highest order. They will requireparticularly careful inplementation to avoid large claims for budget sub-sidies, which the Government -wants to avoid, and to ensure that, wyheregranted, subsidies are ccnsciously used to induce desired changes inresource use and not simply to support expansioni of activities that havelittle prospect of becoming self-supporting.

IV. MANUFACTURING INDUSTRY

A. Introduction

11. Manufacturing induistry has long been established in Colombia,and some of its branches have developed to the point where they comparewell in efficiency and quality with comparable industries in other coun-tries (Annex I). It has also been growing faster, on average, than therest of the Colombian economy. However, the degree to which it has de-veloped in some directions and less in others and the conditions underwhich the present structure has evolved reflects a complex of influencesinherited from the past, which now seem to be interfering with orderly andrapid growth. These policies and practices have affected observed perform-ance increasingly in recent years, and do not appear to be consistent withthe objective of accelerating industrial expansion to support the growthof the Colombian economy and, especially, the growth of minor exports.

142. Colombian industrial output grewJ at an annual rate of 7.7 percentbetween 1957 and 1966.2/ This growth has been decelerating, howiever.Between 1957 and 1962, value added by Colombian industry increased by9.5 percent per year; it increased by only 5.5 percent per year between1962 and 1966 and by an estimated 4 percent in 1967.

143. The principal reasons for these trends seem clear. Colombiaentered the late 1950's with substantial industrial capacity installed duringthe boom period of the early 1950's. This new capacity permitted sustainedand rapid expansion of industrial output even after the collapse of thecoffee boom, as long as import policies assured uninterrupted supplies ofbasic imported inputs. With the passage of time, however, this capacityhas become more fully utilized. Industrial performance has thus begun toreflect, increasingly, the pace and pattern of new industrial developmentand the effects of public policies on this development.

ILL. The most important of these policies wiere introduced at the endof the coffee boom, largely as ad hoc measures to confront difficult foreignexchange and related internal financial problems. They include importrestrictions through licensing and tariffs, prohibitions against revaluingassets, and widespread price controls which at times took the form of ageneral prohibition to change prices and are still widely used to preventcontinued import restrictions from affecting adversely the cost of living.

1/ This growth rate, computed by the mission takes into account changesin the product mix and is accordingly higher than the ones shown bythe official national accounts (6.2 percent) and the Planning Office(6.7 percent), which do not.

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These measures, wahich were initially intended to be temporary, remainkey features of Colombian policy, and have had largely negative effects.That they conti,nue to be important reflects the absence to date of aconsistent and explicit industrial development strategy with supportingpolicies.

145. Perhaps the most serious commentary to be made on the existingsituation is the pervasiveness of apparently perverse influences onColcmbian industrial developtment. Incentives appear to be greater forinvestment in production for the domestic market than for export. Capitalintensive investment appears to be more attractive than labor intensiveinvestment. Industrial self-financing appears to be discouraged ratherthan encouraged, and the small firm disadvantaged alongside the largefirm not onily because oL differences in size and resources but alsobecause of the institutt onal and policy envirornwent in which it has tooperate. These biases all point in the wrong direction.

146. The Government has become concerned with accelerating industrialgrowth and developing aggressivelyr Colcmbia's industrial export potential,on which balance of poLynents improvement in the next few years so largelydepends. The prir. e co ucern of the Colormbian authorities at this timeis to reorient t;!ese negative effects of tax laJs, laboxr law-s, customsduties, import controls, price controls, overvalued e-change rates andfinancing clhannels in order to help improve the environment for investmentdecisions, resource mobilization and the direction of future industrialgrowth in Colombia.

147. It should be emphasized that Colombia is not saddled with agrossly inefficient and uneconomic industrial structure that only substan-tial and suistained suprort from the rest of the econo7my could make viable.Among the reasons which figure prominentl, -wYere the prudldence of its busi-ness leader s and the scarcity of finalnce in the unsettled economic environ-ment of the past decade. Th-e oxoblem is really of the future, to satisfythe Gcvernmentls ambitilous overall grow.th targets, employnent objectives,and manufactured exports targets.

148. The following paragraphs, which discuss some of the main featuresof industrial change between 1957 and 1965 and the present (1965) structure,

higlight the priricipal policy issues currently under debate. These ob-servations are based on data and anrlysis in the Annex on ManufacturingIndustry. The broad conclusions are consistent with the qualitativejudgments of Colombian officials know-ledgeable in this field.

3. Main Characteristics

149. Stracture. The mnodezn investment goods industries are the leastdeveloped segment cf Colombian industry. They have been groging rostmpidly in recent years, because the basa was suall; hut they still accountfor less than 20 percent of' industrial output, compared vitR 36 percentfor intermediate goods and 45 percent for consumer goods.! Comparedtc- other coxntriss of ccmparable population and ir.ce, this irndustrialEtricture is relatively ndiardeve1oped, aven after ntl:ing al1cwc-nce boroc.parat.ive advantages wihich Colonbia may have in scme consumer and inter-mediate goods industries, such as fcod, beverages and textiles. One majorreason has undcubtedly been the price relationships that have maea mnvest-mexnt goods iriacstries relatively unattractive tc Er-trepreneurs. Thrmioallyovervalued exchange rates combined with low duties on impCrted capita:Loocds and pearts and iigh dities on finished consu!umer goods made ot-her- branchesof industry much more atbractive. Colombian tariffs on imported investmentgoods are only about i} percent of those of other major Latin Americancountries but over 200o percent of the average tariff's in these countrieson food ar1d tobacco. The comarisons with other latin Azerican countrieshas been to Colombia ts advantage to date in that Colombia does not now.ffind itself, as sone other countries do, with large uneconomic heavyindustries dominating the industrial picture. But this highly dit-ferentiated tariff in favor of consumer goods may well have preventedColombia from benefiting through Irbackward linkages" and developing newlines or enlarging the val1ze added cormonent of a number of engineeringindust"ry prodtcts where there are good prospects for becomeing coapetitive,C9loEnb_alS iroort licersing system naas reinfrced these biases.

J. 3 ziyent. Tis pattern of incentives may also have contributedto the rather slow grcnw-t2- in ndustrial etployment. In tte perIod undarreview, industrial employment gre by only 3.3 percent per annum, consid-erably less rapidly than urban population, which has added so heavily inrecent years to urban uneemployment. Almost half of the 60 thousand newworkers hired between 1957 and 196$ were atsorbed by the investment goodsindustries, which are the roost labor intensive in Colombia. By 196,5 thisleast Thi. &evelR-d ,gr&p Tf' Coelstiai -minustriss itas 2LrAng T2 :r.4ren:

of ail industrial manp-ower.

1/ Intermediate goods industries include such industries as textiles,wood, paper, rubber, chemical and petroleuzm and coal products; invest-ment goods, building naterials, metal and metal products, and nechanicalindustries; consumer goods; food and beverages, tobacco, clothingand footwear, furniture and printing.

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151. Because of the inflexible labor legislation and the under-utilized capacity inherited fromn the nid-1950's, growth in laborproductivity was high - 4.3 percent per arnnum - and accounted for morethan half of the total 1957-65 increase in industrial output. Realwages, including fringe benefits, increased sonewhat more, by 4.8 percent.and labor costs are still low. Wage costs plus benefits still do notexceed one-third of value added in industry, and appear to have declinedslightly relative to total value added as a result of the inflation ofthe last decade. Unfortunately, the advantages of cheap and easilytrainable manpower are largely offset by existing labor legislation.Severance payments are very high. The mandatory surcharge for night wvorkis 35 percent and for work on Sundays and holidays 100 percent, makingfull utilization of production capacity prohibitively expensive. Firmscannot close or curtail production without government permission. Sincein many situations wage costs, although low, are thus more fixed thanvariable, where choice of production techniques is possible capitalintensive techniques are therefore frequently preferred.

152. Size of firm. The average size of firm has been growing. In1955 there were only few industries in which large firms (over 200 workers)accounted for over half the output of that industry, textiles, tobacco,rubber products, petroleum, basic metals and non-metallic minerals. In1965, the list was larger, and accounted for over 65 percent of all inter-mediate goods, 50 percent of investment goods and 47 percent of allconsumers' goods production. Productivity in large firms does not appearto be significantly different from that in medium-sized firms (50 - 199workers), perhaps because the advantage which large firms seem to enjoyover smaler firms in freedom from domestic and foreign competition andin access to imported inputs and to finance may place a lesser premiumon their maximizing efficiency.

153. Small firms as a group, which in 1965 employed almost one-thirdof all industrial workers, were, as might be expected, the least efficient.That this size or firm accounts for an important proportion of output i-na number of industries (non-electric machinery - 45 percent; wood products -44 Fercent; furniture and fixtures - 47 percent; footwear and clothing -

34 percent) goes far to explain the fact that these are the industries inwhich Colombia appears to have a narked comparative disadvantage.

154. It is in the larger and (for Colombia) more highly capitalizedindustries, which combine modern managenent and technology with lo w laborcasts, that Colombia's comparative advantage appears to be highest. Acomparison of value added per worker in the United States and Colonbia infixed U.S. dollar prices, sector by sector, indicates that the value added

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per U.S. worker in general is about five times the value added per Colombianworker; in investment goods industries, in which the U.S. investment perworker is relatively much higher than in Colombia, the U.S. advantage is7; however, in textiles, petroleum, leather, rubber and tobacco the U.S.advantage is only 3.

155. The Colombian tax system also favors large firms. This aspectof the system is being reviewed by the Tax Reform Commission. Today, mostenterprises must pay, among other taxes, an excess profits tax on net inconeat a rate which depends on the relationship between profit after incometax and net worth. Of two corporations with the same after-tax profit butwith different net worths, the corporation with the smaller assets basepays a considerably larger excess profits tax.

156. Finance. Colombian industry is not unique in having to get alongwith inadequate supplies of investment capital, an underdeveloped capitalmarket, and (in firms which are not closely held) shareholder preferences fordividends rather than capital appreciation through reinvestment of profits.Prohibitions against revaluing fixed assets have aggravated the difficultyof generating adequate finance within the firm by overstating profitssubject to tax and to shareholder pressure for dividends. WJorking capitalhas also been short, particularly so in recent years. Selected data indi-cate that the share of financial to total assets of manufacturing corpora-tions increased from 30 percent in 1961 to 35 percent in 1966; more thantwo-thirds of this increase represented accounts receivable. In financingthis growing debt, borrowing at high interest rates from non-bank sourcesappears to have been increasing much more rapidly than from banks. Theratio of loans received from outside the banking system to loans receivedfrom banks doubled between 1961 and 1966. Another measure of the growingshortage of working capital for industry is that, between 1957 and 1965,the volume of current payments of industry (measured by the value ofpurchased inputs plus wages) increased more rapidly than outstandingliabilities to commercial banks.

157e Industrialists have been helped to confront these difficultiesby a fairly complex and sophisticated network of inter-sectoral transfersof funds and financing institutions. Consumer goods industries, thelongest established, most highly protected and slowest growing group ofindustries in Colombia, were as a group the largest generators of internalfinance. Internal finance for this group appears to have been of the sameorder of magnitude as their investment in fixed capital and stocks, unlikeintermediate goods industries (other than petroleum) where the ratio ofinternal finance to investment was 50 percent, and investment goodsindustries where this ratio was only 31 percent. This unequal internalgeneration of funds led to important inter-industry financing. As forinstitutional finance, apart from commercial banks the principal finan-cial intermediaries consist of a well-developed network of private in-dustrial finance corporations (Ifinancieras') - there were 14 in mid-1968; the Private Investment Fund (PIF), a Central Bank channel forexternal finance to industry, agriculture and mining ventures, establishedin 1963; and the recently revived government-owned industrial develop-m(ent bank (IFI), to which increasing streams of public funds are nowbeing chamnelled, makcing it a major, soon perhaps the major, source

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of term finarcing for Colombian industry.

156. The role of these intermediaries is a quantitatively importantone. The tfinan-cierast have until naw been the main source of termfinancing for industry. Half of their funds have been obtained through PIP.In its first threa years of Dperation IF Tnay have finanaed as much as25 percent of all net fLneci invest-nent in Colombian industr;y, Since l965,however, its lending has fallen to abcut ..3 percent of the 1963-65 level.PIP funds have been distributedi widely, largely through comrnercial banks,semi-official developnent banks as well as financieras.

159. The most striking aspect of PIP's industrial financing, in partreflecting the preferences of the financieras which distributed its funds,is that it appears to have been directed principally toward large estab-lished firms, i 0 e., towiard the same finns which are most assured of importlicenses and finance frcm internal and other sources. There was andoubtedlygood reason for this concentration in its early operations, since theprincipal objective of PIF is to support proposals which promise to saveor earn foreign exchange. These large, well-known firms are knowledgeableabout export markets and fexible in production, PIF was initially success-ful in its objectives, for its borrowers contributed US$24 'million out ofthe US$56 million increase in all minor exports between 1962 and 1967eHalf of this increase was generated by three large firms, which also re-ceived a considerable share of PIF's total recourses to finance about one-third of each of their expansion programs. This concentration ot financingand eXport response among large fimns does not appear to be sustainable,and there are indications that PIF and the financieras are searching moreactivey £for new export-oriented clients among the smaller firms.

l63, In this ;ush to expand enoort production) a key role can be playedby the Government-owned finance company, IFI, Since it was founded in 194$,IFI has been associated with major initiatives in a number of importantfields - steel, rubber, petrochemicals, mining, shipyards. It continuesto have the role of innovator and developer, breaking important groundwhere private firms for one reason or another are unwilling to venture.Given the general concern about Colombia's external viability, IFIIshighest priorities are to search out and support projects which havepositive balarnce of payments effects. To this end, as well as to contri-bute to more balanced development in Colombia, TFI is being generouslyendowed with funds and promises to become the largest term lender forindustry in Colombia, The Government is planning to allocate to TIa substantial portion of the resources of the proposed National SavingsFund., whch together with its share of constant value bond proceeds,(paras 60) would generate over the next five years some 1.5 billion pesosof new resources, about five times IFI's total conmitments outstandingin mid-1968. IFI is, in addition, borrowing heavily abroad. It hasreceived or is about to receive lines of credit from Belgium, Denmark,

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Germany, Netherlands and the United States totalling US$26 mnllion andis negotiating a US$10 million loan with the Inter-American DevelopnentBank. IF also has rediscount privileges i4th the Central Bank.

ll6. Among the major projects IFI is actively considering are plantsto produce caprolactam, a petroleum derivative used to produce syntheticfibers, pig iron, railrday cars and automobiles; and investments in fishingboat pro3ucticn and the in exploitation of recently discovered phosphoricrock depcsits and the production of cheap phosphate fertilizers from it.Little is publicly known about the plans for an automobile plant at thistime. These are large projects for Colombia, and are being carefullystudied before conmitment. Some of them, like the caprolactam and theautomobile plants, which could become high cost and uneconomic venturesif initiated on too small a scale, are being formulated in the context ofspecific agreements with other member countries of the Andean regionalgroup, under which complementary investuents and free trade in the comple-mentary products are to be assured.

162. At this pcint in time, IFIIs most inmortant activities are stillbeing planned and its role in ColoTmbia as an industrial lender of lastresort is accordingly still evolving. There are some Colombian industrial-ists and 'ifinancioras' wvho fear that IFI may preempt certain fields andeventually compete with, if not dominate, private initiatives. They alsofear that in seeking out low return projects which are not interesting toprivate iivestors who discount future returns more heavily than IFf, IFImay end up with poorly justified projects which are really not worth doing,and thereby have deprived the private sector of resources that might havebeen used more effectively. The present IFI management is keenly awareuhat the very large resoErces now being pooled in IFI places a very highpremium on careful project evaluation and wiise decision-making. IFf mustalso assure itself that the pricing flexibility open to its large borrowerswho are fully protected from compelition is not used to ensure adequateretinras on 121's investment at the exoense of cther sectors of the economy.The rate of return on the caprolactan plant, -or example, is reported tnobe quite high, largely because its ammonia phosphate fertilizer productswill sell at present high domestic prices, It would be unfortunate ifsignificant Colombian farm development potential is sacrificed by thispattern of product pricing.

C. Import substitut.ion and export promotion

163. In the light of the analysis in Chapter II, perhaps the mosturgent objective of Colombian industrial policy is to develop and enlargethe export potential of manufacturing industry, for if this cannot bedonc. fairly quickly, the realism of the Government's minor export targetsand hence the appropriateness of its ambitious development and externalborro,wng plans need to be reconsidered.

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16k. This is not to deny the appropriateness of continuing importsubstitution where justified and where the balance of payments effectsare clearly positive. The import substitution process has been continuingsteadily for many years in most branches of industry. Only 36 percent ofColombian purchases of all industrial products were imported in 1965,compared with 45 percent in 1957. The share of imported to total indus-trial inputs has also declined, from 25 percent to 20 percent in thisperiod. With the help of high tariffs and import prohibitions, theprocess has gone farthest in consumerst goods, where orly about one per-cent of the market is now supplied from abroad. Two-thirds of importedindustrial products consist of investment goods. This process has notproduced many "white elephants" thus far. Subsidized finance and publicfunds have not until now been available in such scale as to distort theindustrial structure inherited from the mid-1950's. Tax exemptionsavailable to industries declared to be "basic" if 60 percent of theirinputs are domestic raw materials have not been widely claimed becausethe privilege is of uncertain duration since the certification ofeligibility must be reconfirmed each year; imported raw materials areoften sufficiently cheaper than local materials to more than offset thetax inducement to buy local materials.

165. But Colombia cannot possibly expect to become viable externally

mainly by concentrating on further import substitution. Promotion ofmore, and more varied, exports of manufactured goods must be an essentialpart of Colombia's overall development policy. A most critical questionis thus whether prevailing incentives are giving appropriately strongsignals to produce more manufactures for export markets.

166. The question is a difficult one to answer. There are some in

Colombia who look at the high past rates of increase in manufacturedexport totals - they increased eleven-fold in nine years, from $3.7million in 1958 to $Lo.6 million in 1967, or by over 30 percent per annumon average (Annex I - Table 2k) - and conclude that existing incentives are

adequate to sustain these rates even as the absolute amounts grow larger.However, the financiGras who are involved with exporting firms, the industrial-ists and commercial firms who lave to balance the risks, uncertainty andadministrative difficulties of investing in capacity for export ratherthan for the more assured home market, and the policy makers who areaware of what is implied in Colombia achieving external viability in theearly 1970's are less certain.

167. One reason is that, as the totals have growPn, the observed ratesof increase in these totals have tended to decline, as might have beenexpected. Another reason is that some of the important export items maynot be as rapidly expandable in future as in the past. Textiles, whichaccounted for one-fifth of all minor exports in 1967, had already peaked

in 1965 and have since declined below their 1964 level, largely becauseof increasingly stiff quotas being encountered in major markets. But the

most important reason relates to the adequacy of existing financial in-centives.

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168. The most strilking aspect of Colombia's manufactured export list

is that, except for two items - tex:tiles and cardboard cartons for bananas -

the list continues to be made up of a very large nunber of' fairly smal-l

items which probably represent marginal production for many of the produ-

cers, i.e., they are available for expDrt when relative prices are attractive

and partially or wholly withdrawn from export when they are not. Neither

exports of textiles nor banana boxes is currently expected to li rease

much in value beyond their 1967 level. Since the doubling of industrial

exports now expected by the Ecport Promotion Fund to talte place in the

next twxo years consists of a multitude of items, also in rather small

amounts, most of which are not now being exported at all but for which

capacity exists or is under construction, adequate price relationships to

ensure that these many small streams of exports will actual-ly materializeare clearly required. In loo.cing at the recent past, houever, one finds

many items declining instead of increasing, and many of these declinescoinciding with the 25 percent deterioration between 1965 and 1967 in

the effective real exchange rate for minor exports. It waslargely due to the coming into full producticn in tis period of the

banana box facilities that total exoorts of manufactures did not decline.

Comparing actual 1965 and 1967 domestic costs and prices and export prices

for several items on the manufactured exports list suggests that items

which in 1965 were profitable to export, or at least no less profitable

to export than to sell domestically, were no longer attractive to export

in 1967; indeed, some of these items are no longer being exported.(Table II-4).

169. This eviderce is neither coiprehensive nor precise enough to

"prcvel? that incentives need tc be iTnreased by sore precetermined amount

to ensure the sceady gro:wth of new maanufactured exports. iluch more, acnd

more cetailed, information about os0ts and prices vould be needed c-n a con-tinuing basis, information that is, unfortunately, neither available nor

being compiled. But the inferences to be dranm from the evidence at hred

do raise questions about the adequacy of existing incentives to generatethe -very substantial industrial export growth required if' Colombia'soverall m-inor exports targets are to be mriet.

170. The Colombian authorities are fully aware of the problem. Ir

the short run, they envisage (i) more aggressive implementation of the

Governmentts flexible exchange rate policy so that, with the tax bonus,incentives at the margin provide stronger signals to actual and potential

exporters; and (ii) appropriate complnemntary improvements in the insti-

tutional environment to support exporters more diectively and thereby help

reduce cost and uncertainty, especially for the smaller and newer fins.

In tlhe longer run, rather fuindamental reconsideration of the presentprotective structu-re would seem to be implied, not just to encouragewhere appropriate further deepening of the inla strial structure by making

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imported inputs more expensive relative to final products than they aretoday, but to expose gradually the more highly protected (both by tariffsand quotas) industries, especially consumers' goods industries, to increasiLgprice comoetition from imports of final gcods. Such competition from importswould both contain the price of domestic wage goods more effectively andrationally than present price controls do and induce producers to searchmore actively for export markets. Colombian industry should be able tostand up well to increased competition at home and in foreign markets.

171. The Colombian autt rities are now engaged in a major review ofthe existing protective structure. But they are reluctant to contemplateimmediately the increased liberalization of imports that increased compe-tition from imports would imply. However price elastic imlport demaridmaybe, uncertainties surrounding the balance of payments and importers'awareness of past failures to sustain more liberal import policies would,they fear, provoke an unsupportable speculative demand for imports. Thisconcern with protecting the balance of payments in the short run isunderstandable; but it could become self-defeating if it were in the longrun to inhibit efforts to make Colorabian industry more competitive ex-ternally. The present licensing system, which is administered by a ver,ysmall staff, not surprisingly cperates in the first instance to ensure thesustained operation of kmown established production facilities. In thiisrespect, it has been supporting the basic industrial structure inheritedfrom the 1950's and has not given rise to major distortions or provokedmajor complaints intermally. But in so doing, it may, unintentionally,be preventing important structural evolution at the margin. Importedinputs are reportedly much more difficult to obtain for new activitiesor for smaller firms less well known to the adninistrators off the system,regardless of their production or export potential; and among the establishedfirmrs there do not appear to be penalties for the less efficient. In brief',the basic advantage of flexible pricing in a developing economy - totransamt proper signals to industrialists in their investment and productiondecisions - is being denied Colombia by the present licensing system. Thebenefit of' changes in the tariff structure that nay emerge from the presentreview would be severely limited as long as the licensing rather than thepricing system continues to be the principal device for allocating scarceforeign exchange.

172. This discuesion suggests that as long as uncertainties remainabout the broad thrust of Colombian industrial policy, especially inrespect to the relative advantage to be given to outiard-looking vs. irward-looking development, external. lenders might seek to relate their lendingmore directly to export-oriented initiatives than they have in the past.MIeanuhile, consideration might usefully be given to specific measures to helpsmaller firms overoome the risk-, cost- and information barriers that makeit hard for them to gain access to export markets. Tndustry-wide exportselling organizations, production-sharing arrangements with foreign firmswhich would allow the Colombian producers to take advantage of their lower

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labor costs, and expansion of the entrepot or free-port system underwhich domestic and foreign firrs could establish production facilitiesin designated zones in the port areas - these are examples of the kindsof specific measures which have contributed to successful nationalexport promotion drives in other countries.

V. OTMER SECTORAL DEVELCPhRTS

A. Transport

173. As a consequence of the ruggedness of the Colombian topography,transport development took place late and slowly. Although the railwayswere started in 2892 and the construction of national highways started in1925, until recently transportation was a major bottleneck for econormicdevelopment. This had a definite influence in the fornmation of five majorindependent regional centers of economic activity,r which, in order of im-portance, are Bogota, Medellin, Cali, Barranqui3la-Cartagena, and Bucarananga.As of 1950 the volume of goods moving between these regions was quite smalland, because trarsport charges vere high, this movement was limited toproducts of relatively high value.

174. Also as of 1950 there were no complete independent railroad,highway or inland watenjay transport systcwms to connect the major centersof economic activity. For example, traffic between Cartagena or Barranquilla,the major ports in the Atlantic Coast, and Bogota or FMedellin, the principalcenters of economic activity, in the interior, had to be hauled part way byriver and part by railwiay or highway. Traffic between Buenaventura, the majorport in the Pacific Coast, and Bogota had to move part way by rail and partby road. The situation of the main mcdes at that time was as follows. Therewere seven rail systems with 1 lines, of which 5 were not connected with theother 9, with a total track length of under 3,000 kms, of two different gauges.There were some 20,000 kms of national and departmental highways, of which onlyunder 800 kms had concrete or asphalt surfacing. River navigation, althoughcarrying about the same volume of cargo as the railways, never developedintensely, partly because the location of the main economic centers was in-fluenced more by climatic conditions than access to rivers, and partly becaus,the river beds were still changing. In these circumstances it is not sur-prising that air transportation developed early and fast. By 1950 air trans-port accounted for twice as many passenger/km as first class railroads andfor 10 percent of the total freight carried by railways and highways.

175. Over the past 17 years, the development of transport infrastructureand facilities has been substantial. However, it should and could have beenfaster. Investment in infrastructure, principally highways and railways,which has been carried out by the public sector, was beset by a variety ofproblems. In highways, there gas an excessive dispersion of funds amongtoo many projects. In 1964 the outstanding cost of the projects under waywas nearly Ps. 3 billion, but the annual rate of expenditure on projects wasonly about Ps. 300 million, i.e., a oace at whilch these projects would nothave been completed until 1975. Excessively complex administrative arrange-ments constituted another serious impediment to the investment program.Contractors and consultants had to go through about 30 different steps atthe Ministry of Public Works in order to obtain a contract. Financing wasalso uncertain, reflecting the precarious overall fiscal situation and the

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Table 23: TRAIPSPORT 3ITUATION IN 1950 AI1D 1967

1950 1967

]liglways (kms) 204400 laOOoof which: Paved (@) 3.0 9.8

Trucks and buses (units) 22,580 98,0COPassenger cars (units) 38,400 280,000Railways (kms) 2,903 3,45Freight rail cars (units) n.a. 5,8C0Passenger rail cars (units) n.a. 1475Azrworts (units) 57 •0

of which: for jet service (units) -- 9Oil pipelines (kms) n.a. 3,290

Source: 1967, Planning Department. 1950, "The Basis of a DevelopmentProgram for Colombia," IBRD.

uniduly low level of user charges. In the national railways, there was alarge and permanent deficit as a result of excessive overhead, low rates,and uneconomic branch lines. For these same reasons, maintenance of alreadybuilt infrastructure or equipment in both highways and railh-ays wias seriouslydeficien t.

176. This situation is now being radically improved. The total of 634road projects irn 196 T.ias reduced to 130 in 1967. Revenues from gasoline anddiesel oil taxes were increased sevenfold in 1967 and a large part of themL.ere earmarked for expenditures on the highway network. MZaintenance ex-penditures have boeen given higher priority. ResponsibiliLy for constructiona-id mainL Lenance nom- belongs to the Higlhway bUnd, establishied in 1567; andadmi,nistrative procedures have been sirplified in the process. As indicatedclsewhere in this report, the improved fiscal situation now permits theGove1rnrent to make timely contributions from its budget to the investmentprograms in both highways and railwiays. The national railways finances areimprcving to the point where net operating income instead of large deficitsare being projected for the near future: there has been both a reduction inoverhlead expenditure, and increases in operating income resulting from higherra:tes (up sorme 25 percent early in 1968) and improved customer relations.

177, However, several problems still remain unsolved. Ihe road systemis not well balanced. There are only some 3,000 kms of feeder roads, wlitchcompares to 41,0o0 kms of national and departmental highiways. Furthermore,a number of roads with daily traffic of 200 velhcles and up, considerablymore than the 100 to 150 vehicles per day w-hich normally warrants paving,are still unpaved.

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178. Between 1961 and 1967 the Government obtained cormitments for neweternal loans fc-r the uhole of the transport sector in the amounta of U3SS101million, of which US$89 million were contracted in 1961 and 1563, with onlyUS$310 million in the remainder of the period. Thle main reason for thisdeceleration was the shortage of local funds. The Government is now planningto step up external loan cornmitncnts for transport projects to around lUS`2502loin over the 1968-73 pericd. Thie newi external firancing would be basically

directed to cornstruction of certain hignMayas (around lU-$1DD millicn) in thenat-ional high-way prograLm a-nd rehabilitatiorn of the railways (U%;3s7 million).

179. Detailed investment planning for highways exists now only zhrough

the end of 1569 (see Table 2, Transport Ann;e77-his is because these in-vestments represent the completion of on-going projects, vwhich Is to say, tAemain network of trunk-north/scuth and tranz-versal-eastkvest rationaI higvways4Investnent planning for 1970 and beyond is still tentative, awaiting coripletxonlater this year of the Transport investment Survey, wihich the Colombian Govern-ment is carrying out with assistance from 1arvard University. Given thepresent imrbalance in the highway network, it seems lkaelyr that increasedemphasis will be given to the construction of access and feeder roads. Sudla change in emnphasis will raise sharply the question of how much money s.lhouldbe earmarked by law to road construction, for the secondry road program i'swell funded wi th local resources. Should the Government decide to increasefuel tax revenues by raising the exchange rate for purchases of petroleum fcrdomestic refinery, (see para. ) continued earmarking of these taxes for theHighway Fund may becone unnrecessary, if nct undesirable. As far as externalfinancing is concerned, acieqaate financ_ng is in prospect for the prjcjetsfor which the oovernment is planning to seek such finance.

180. Tte raiBlays invastrent pro-ram for 1969-73 is a continuation ofthe 10-year rehabilitation program started in 1963. It consists of rehabilita-tion of tracks, dieselization of locomotives, replacerent and increase in thenumber of freight cars, and eXpansion and modernization of existing workshops.The purpose of this prorgrarm is to improve service and the economic viabilityof the system. Phis program has already received exteral Ican ccmnlitrertsfor most of its external fifnancing requirements. With the new tariff ratesapproved early in 1968 and timely budgetary contributions from the Govern-rent'ls budget, lccal finance should be sufficient to match disburserentsfrom externaal loans, if continued progress is made in reducing overhead arndelimirating uneconomical branch lines.

181. To provide adequate outlets for the .hihwa.y and railway networks,th-e Govervmlent's seapcrts agency is completing its work t3o exp;land, rehablia-atand mnodernize the Buenaventura, Tumaco, Santa M-arta, Barranquilla and Cartakeraports. This program includes dock construction, the impprovement of the ex t.infacilities for handling cargo, and the modernization of equipment and servicefor maintenance operations. To generate income sufficient to provide localfinance to complement the external financing it has obtained for its investa,entprogram, the seaports agency has raised handling rates substantially th'irougha conbination of changes in tariffs and wozting schedules, These rates havenow reached a level which ccprise a substantial element of costs for many

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export Droducts. Since the bulk of this agency's investment program isexpected to be completed in 1969 - only some major work wi'll remain to bedone up to 1971 in Barranquilla and Buenaventura - the appropriateness ofthe present rate levels is being reviewed.

182. There is no vell prepared inland waterways or airports investmentprogram. However, the only component of these two programs receiving ex-ternal financing seems to be well justified. It is for the acquisition ofnew air navigational facilities for the Bogota, Barranquilla and Cali air-ports. The facilities existing in these international airports, as well asin some of the major domestic airports, such as Medellin, Bucaramanga andCucuta, are inadequate.

B. Power

183. Developments in the electric power sector have been the most im-pressive. Over the past 17 years, installed generating capacity has increasedat annual rates of almost 12 percent, although in the past several years therate of increase has decelerated as the backlog of demand has been met in themajor urban centers. As a result the availability of electricity in percapita terms has increased markedly. But rapid as it may look, this develop-

Table 24: INSTALLED PUBLIC GENERATING CAPACITY

1950 1956 1967

Installed Generating Capacity (thousand Pi) 270 493 1,681

Watts per capita 23 36 85

ment has not yet been sufficient to eliminate shortages which are still feltin a number of communities, including some large cities, particularly on theAtlantic Coast. These shortages have been overcome, though, in the threelargest cities, Bogota, Iedellin and Cali, where planning is of high quality.The need for installing small thermal plants to take care of emergency situa-tions in these cities, as had been common before, has been virtually elimi-nated. In these three areas, where most of Colombia's population and in-dustrial production is concentrated, power supply is now keeping up withdemand and, when temporary shortages occur, power is supplied from neighbor-ing systems.

18k. Still further improvements in planning can be expected in thiscentral area in the near future as a result of the recent establishment ofan interconnected grid. A national private company was created in 1967 to

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de'velop and manage this interconnecticn system. Tnis systen is a naturalconsequence of the historical pattern of Dower development, chiaracterizedby rapid expansion of the systems serving the major urban centers. It willnot cover the whole country for sonw time to core yet, but it includes thefour major existing producing companies in the central part of the country,

185. :3xcept for tae regional corporation serving the Atlant-ic COast(lCORc), other urban centers and rural areas are provided with electricpower by departmental companies affiliated with an autonomous agency of theGovernment, Electraguas. Planning for power development and execution ofexnansion progransin these less developed centers is still inadequate, highcost solutions are still comron, poor adiinistratiDn has delayed the com-pletion of new facilities and existin- facilities have frequently sufferedfrom poor mairtenance.

186. Notwithstanding the rapid growth of power generation, Ue country'spotiential has been hardly tapped.. With abundant rainfall, large mountainrang,es ard vaLle,s ca.able of storing great volumes off wfater, Colcaobia'spoten-ial fron knows. Eites has been estimated ranging between Xc and 40million M4 or 25 to 30 times installed public generating capacity. Hydropower currentl:y accounts for somne 65 percent of total generation, and willprobabh2, continue to nredominate in future. Thermal capacity is concentratedprincipally in the northLern coast and the north-eastern part cf the zountry.rn tthese areas coal and petroleum resources are abundant and also offeradequate basis for future expansion.

137. The main objective of the public investment program in this sectoris to complete by the end of 1971 the central interconnection grid and laterproceed with -nterconnecting the central grid with the northeast. Thre progranalso contemplates building tw. large hydroelectrIc plants to supply the nte-r-connection system and a major thermal plant on the Atlantic Coast. 'With thisproiram, total generating capacity would increase by 1973 to almost 3,O9C J1JQcompared to 1,681 in 1967, thereby continuing hlistorical growth in generatingcapacity of 12 percent per year.

183. The Government will be seeking betwkeen Ut$280 and '330 million ofexternal finance for this program and to initiate construction of furthergenerating capacity and transmission facilities required until 19?6, Commitment.sfor about 'US5)90 million have already been secured, and the projects to whichthe remainder of external financing is to be attachied are being actively pre-pared. The new na:-er rate policy intertions anncunced by -he Government,alth.ough not yret )ut in force, should prove adequate to generate the domesticfinancing required for the program. This policy, which is expected to beimplemented during 1969, would adjust po-wer rates as required to yield atleast a 9 percent rate of return on assets valued at current market prices.The new rate policy will mark an important break in the tradition of slow andlate rate adjustments vihichl prevailed in the past, iwhich had resulted in powerexpansion financing requiring substantial national budget support.

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C. Telecommunications

189. fy contrast to power development, telecommuni.cations hasregistered slow improvement. _n 1966 there were 24 telephones installedper 1,000 inhabitants, compared to 19 in 1948h only a 25 percent increasein 18 years. Also in 1966 some 25 percent of the requested long-distancecalls were cancelled because of overloaded circuits. There is thus stillurgent need for expanded facilities.

190. Local service is provided by independent municipally-ownedcompanies, about which the mission has no information. The operation ofthe long-distance service is carried out by the lNational TelecommunicationsCo. (TELECOM), which also handles the national and international onerationsof telegraph and telex. Over the years, TELECOMI - which was organized in1947 - has been taking over a limited responsibility for providing localservices. The principal local telecommunication companies, 33 in all,have now. formed an association which is playing an important role in find--ng solutions to common problems such as standardization of operating pro-cedures, coordination of expansion plans, system interconnections anddivision of revenues from toll calls.

191. In 1967 TELECOM initiated an eight-year investment program toimprove the national and international long-distance systems and convertfrom manual to automatic the operation of its local telephone services.TELECOM's investment program appears technically and financially sound.External loan commitments have alJeady been obtained for the first stageof the eight-year progran, and the projects in the remainder of theprogram are now being prepared for future execution and financing.

D. Water Supply and Sewverage

192. Water supply and sewierage faciliLies in Colombia are on the wholeinadequate, especially in the smaller communities. The sanitEary qualityvaries but is often poor. In 1965 more than three-fourths of the ruralpopulation of 9.1 million lacked adequate water supply and disposalfacilities.

193. Almost all cities with population above 50,000 have orgalizedmunicipal companies, called empresas, to provide water supply and otherservices. The largest empresas give relatively good service, cover theircosts and manage reasonably well, although they need outside financial help.How-ever, these empresas cover only the largest cities. The smaller e.presasdo not give good service, have substantial operating problems and seriousfinancial problems, and need technical and financial assistance. Th.eseempresas also offer the greatest potential for improvement. Some of thesmaller cities have affiliated with Departmental companies, called acuas,which administer and operate their water supply systems. The Mmuicipal

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Development Institute (INSFOPAL), a national institution legally responsiblefor all domestic water supply, provides most of the funds to and is a majoritystockholder in the acuas. Operating quality and finances vary considerablyfrom one acua to the next, but are more poor than fair. The Ministry ofHealth also controls a few rural water supply systems and is enlarging itsactivities in this sector in the face of the serious difficulties inherentin providing adequate service in small and dispersed rural towns.

194. A major problem in Colombia is the lack of systematic planning inwater supply and sewerage more than a year in advance. Because of the manyagencies involved, consolidation of the various activities into a totalnational program is difficult. Program planning by agency is virtually non-existent; what exists is mostly catalogues of projects. The National PlanningDepartment could begin the preparation of a national program by working withthe larger empresas, INSFOPAL and the Ministry of Health, and insisting cnprogram planning by these agencies.

195. Other major problems are low water rates, an excessively complicatedrate structure, a rate approval mechanism which results in delaying rateadjustments excessively, and resultant weak finances of most acuas and smallermunicipalities; operating weaknesses of the acuas and smaller municipalities;and unsuitable design practices and sanitary control of water supply operations.

196. For long range investment planning to become possible, a comprehensivestudy of the sector's needs and problems is necessary. This study shouldestablish the goals, annual investments, and priorities within the sector.In defining priorities, the study should consider urban and industrial needsfor water supply and sewerage, the desirability of decentralizing industryand population, the social and health justification of safe water supply andexcreta disposal in slum areas, and conventional domestic service demands.A review of the national objectives of INSFOPAL and the means for theirachievement should also be undertaken, perhaps as part of the overallsectoral study.

197. The urgent need for this study does not mean that investments inwell prepared projects in the larger cities are not well justified in theirown right, with adequate rates and suitable institutional improvements whererequired.

E. Educati on

198. Colombia is making impressive progress in education. Between1955 and 1965 enrollment doubled in primary education and trebled in bothsecondary and higher education. This has meant that an increasing proportionof the relevant age groups are at present being enrolled. Progress in theeducational systen can be measured by the decline in illiteracy rates forthose over 15 years of age from 38 to 27 percent between 1961 and 196L.Illiteracy is much higher in rural than urban areas. Nvo-thirds of the

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rural population over 60 is illiterate. But even here there has been markedprogress: for the 15-24 age group in the countryside the illiteracy rateis only 30 percent.

199. Although primary education in Colombia has been mandatory since1886, real efforts to give Drimary education to all did not start until1949. Since then, enrollment has increased at about 7 percent per year, and,as a consequence, by 1965 over 70 percent of primary school age children werein school0 Enrollment in higher schools has increased even faster, by almost

Table 25: PRIMARY ENROLLMENT('000)

1950 1965

Enrollment 808 2,270

Population 7-12 years of age 1,863 3,180

Enrollment ratio 43.4 71.4

12 percent per year; but it was still inadequate to absorb all of thosegraduating from primary education. Rising retention rates, although stilllow, have compounded the problem of inadequate school facilities.

Table 26: RETENTION RATES BY LEVELS OF EDUCATION

Class NationalStarting Graduating Retention Rate

in in _(percentage)

Primary 1955 1959 151961 1965 23

Secondary 1955 1959 241960 1965 27

University 1955 1959 371961 1965 46

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200. R-ural schools pre sent a special problem. While the primarylevel retention rate in 1964 in urban areas was 44 percent, the comnparablerate in rural schools was only 3 percent. The majority of rural schoclsonly provide the first three or four years of school.

201. Effort is nou 'oeing nade to e.xtend primary education to all inthe relevart age group. In 1967 a new program was started, under the nameof "Plan Libertador", which establishes a double shift operation in anumber of schools. When in full operation, this program will provide400,000 additional primary school spaces (an increase of 20 percent);250,000 of these spaces have already been taken up.

202. The most cenon problems besetting the Colombian school systemare imbalance in its stricture, inadequate systems of promotion, deficientcurricula, lack of vocational orientation, inadecuately trained teachers,and inadequate teachers' salaries (most teachers in Colombia have to havetwo Jobs to make a decent living).

203. The Government is now completing the preparation of an educa-tional investnent program for the next few years. The largest single itemin tlis program is thle construction of nineteen high schools (rJUI) w-iitrhmore comprehensive curricula than has been the norm to date; foreignfinancing has already been secured for the first ten. Other parts of theprogram, mrLost of wuhich are already underw-ay, are the continuation of theconstruction of primary schools and the conpletion of the program Icruniversity development. Efforts are being made at the same time to raisethe qualification of teachers, provide for increased expendit-ues onfacilities such as libraries, laboratories, etc., improve curricula,especially at the secondary level, and increase the vocational orientationof all schools through the INil1 program.

204. Colombials family planning program will affect expenditures ineducation, although not in the next fi-ve years. Savings in expenditureson education wjould begin in 1976, and by 1980 could reach between 7 and12 percent of what they would have been without fatily planning (seeAn-nex V ).

F. Health

205. Health conditions in Colombia have improved, judging by the30 percent reduction in the mortality rate between 1951 and 1964; but thedeath rate among young persons is still high. The causes of death suggestthat cne-fifth of these deaths could be easily prevented witlih more ade-quate water facilities and vaccinations. Some 80 percent of the ruralpopulation now lacks adequate water supply and disposal facilities. Diseaseprevention is also inadequate, except for malaria, w;hich has been almostcompletely eradicated. Vaccinations against small pox have been given toSo percent of the population; vaccination against polio, T3, wrhoopingcough, measles and diphtheria have been given only to 15 percent. A con-tributing alement to this poor public health situation is the imbalance

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in the educational system, which does not provide for adequate micdle leveltechnicians in any field. In 1965 Colombia had 7,400 physicians, but only1,618 graduate nurses and 3,5C0 auxiliary nurses. Furthermore, between1955 and 1965 the absolute number of students enrolled in medical sciencesdeclined slightly.

206. The role of the public sector in health is a very important one.It is responsible for disease-prevention through vaccination campaigns, forgeneral sanitary conditions through water and sewer facilities, and forhospital and other health facilities. The public sector provides over75 percent of all hospital beds available. However, the Governmentts ex-penditure programs in this field have been seriously deficient. Hospitalsand centers have been built without equipment or personnel to operate them.The Ministry of Health is now carrying out an inventory, which should becompleted by the end of the year, to determine the availability of facili-ties, the equipment needs, and revise its public health facilities invest-ment program accordingly, This program, which covers a 10-year period, aimsto provide around 3.3 million people with water supply and disposal facili-ties. But in spite of the increased effort this program would represent,over half the rural population will still be without adequate facilitiesat the end of the program. The program also contemplates building somenew hospitals and equipping old ones, just to prevent the existing lowratio of 2.5 hospital beds per 1,OW0 inhabitants from declining. Thisratio compares poorly with 4.3 in Chile and 4X0 in Jamaica.

G. Housing

207. The housing situation has been deteriorating. The housinginstitute (ICT) estimates that the housing deficit increased from 87,000units in 1951 to 313,000 in 1964. This situation is primarily the resultof two factors. One is the combined effect of a rapid population growthwith an accelerated migration movement toward the cities, producing growthrates in the main cities ranging between 4 and 7 percent per year. Thesecond factor contributing to this worsening situation is the slow rate ofhousing construction, wjhich in turn resulted from a progressively weakeningof the financial position of the ICT. ICTis financial position has dete-riorated because interest rates on ICT loans were kept too low to protectICT's capital against inflation and because of its poor collection experience:around 60 percent of ICT's portfolio is in arrears.

Table 27: INTERCENSAL GROWTH RATE OF THE LARGEST CITES

Annual1951 1964 Growth Rate

Bogota, D.E. 715,250 1,697,311 6.9Medellin 358,189 772.,887 6.1Cali 284,186 637,929 6.4Barranquilla 279,627 498,301 4.6Cartagena 128,877 242,085 5.0Bucaramanga 112,252 229,748 5.7Manizales 126,201 221,916 4.4

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208. The basic objective of the public housing program is to stepup the construction activity of ICT from a current annual average ofaround 12,000 units to about 30,000 by 1970. This new level of construc-tion, if achieved, would still fall short of the 90,000 housing units peryear which Colombia should be building (Annex V ). A further objectiveof the program is to cut the unit price of housing by roughly half, froma current average of between Ps 40,000 and 45,000,to Ps 24,000 throughstandardization in designs and materials. Under present arrangementswhereby ICT's interest rates vary in relation to the unit price of thehousing unit, reducing housing costs will have the unfortunate effect ofreducing the average interest rate on ICT loans. The Government hasaccordingly decided to change the rate structure on ICT's loans, raisingit from an average of less than 9 percent to between 12 and 17 percent,and also provide for a more rapid turnover of ICTis portfolio by reducingthe amortization period for high income borrowiers.