APPENDIX III No. E llla RESTRICTED Public Disclosure Authorized This report is restricted to use within the Bank.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

•Public Disclosure Authorized

RECENT DEVELOPMENTS IN THE ECONOMY OF COLOMBIA

October 19, 1950 •Public Disclosure Authorized Public Disclosure Authorized

Economic Department Prepared by: Jacques Torfs COLOMBIA

ESSEa~IAL STATISTICS

Area: 450. 000 square mile s. Populat_ion (1949): 10.5 million. Rate of increase: 2.1% per annum. Currency: Unit: Peso. furfty: 1 .. 95 pesos equals US$. (51.3 cents equals peso). Trade: I Impo rt s 1948: ( c • i . f • ) US$ 346.0 million. Imports 1949: (c.i.f.) uS$ 252.0 million. E&Ports 1948: (f.o.b.) uS$ 286.0 million. Exports 1949: (f.o.b.) US$ 303.0 million • Budget: • --TOtal expendi tures 1948: Ps.$ 427 million. Total expenditures 1949: Ps.$ 449 million Total revenues 1948: Ps.$ 339 million~ Total reV'enues f949": PS.$ 403 million. External Debt: (IJec. 31, 1949) (including undi sbursed commitment) Principal, National Bonded Debt: .. : - US$ 47.9 million. (of '~hich Sterling bonds US$ 6.2 million) Prlncipal, otnel' National: US$ 56.1 million. (including Exim-IBRD) llipartmental and 1:".nicipal, ~ong-term debt: US$ 42.2 million. E.xport-Impo;·~ Bank Debt: (Sept. 30, 1950) Authorized (not including past operat ions) : uS$ 54.1 million. • Disbursed: US$ 36.9 million. "OUtstanding: US$ 2203 million. Balance not yet di sbursed: US$ 17.2 million, Co st-of-L1 vinE; I ndex: (Raga ta) (FeD. 1937 equals 100) December, 1948~ 285 Y December, 191.~9: 304 July, 1950: 386

Tot a1 Gol d and Exchange Be serve s: December, 1948: US$ 88 million. December, 1949: US$ 111 million. June, 1950: US$ 108 million.

Y Average of eleven months. TABLE OF CONTEJ:.Jars

Page n{T]1.1N8.TIOlfAL TRANSACT IONS ...... 2 A. Foreign Trade ...... " 2 1. Exports • • • • 2 Coffee • • • 2 Petroleum •••• ...... Other l!!J~o~ts . . . ~ • 2. Imports • • • • • • • . . . . . 5 B. Trade Agreements and Tariff ...... 5 c. External I;ebt • • • • • ~ • • • • • • • ':8 • • • • • 6 D. Balance of P~ments ...... 7

IHTEi.~\I.~ FI1T.A1TCIAL CO:'TDITIOES .• • • • • • • • . . . 9 A. Fi seal - Th~", National Goverrment .Bu.dget ...... 9 B. Money Supply • • • • II • • • • • • • • • • • • .'l- 00 10 c. Production . . · . . ~ ...... 12 D. Development . . • · ...... 12 POLITIOAL SITUATION • • • • • • • • • • Q • • , • BEGnlT DEVELOPMDJTS IN THE ECONOIvlY OF COLOMBIA

The economic situation of Colombia has been the subject of an

Economic Department report to the Board of Directors (No. 3~56A) dated August 11, 1949 and a report by the IBRD Mission to Colombia} headed by Dr. L. Currie, issued in July, 1950.

• The main trends in the Colombian econorrw have not changed since these reports. By and large, they are favorable; industrial and agricul­ tural production is increasing steadily and foreign exchange reserves ,are

at al1. adequate wax-king level. Unfavor~ble factors are: th~ political si t­ uation, the tendency on the part of the Goverl1IDent to impose inappropriate

economic and financial controls and to engage in capital e~enditures of low prjority, the confused leg81 situation confronting foreigu equity in­

vestment, and the denendence ''"'f the country on the e~ort of one commodity. coffee. The introduction of some of the reforms suggested in the report of • the IBRD Mission to Colombia may eliminate sr.".ae of these deterrents to economic progress.

The volume of coffee production and e~orts declined during the 1949-50 season as a result of political disturba~ces as well as heav,y rainfall, but export receipts did not suffer ot-!ing to the considerable in­ crease in coffee prices at the end of 1949- Coffee still accounted for 75% of export earnings in ~949. It is clear that Colombia must promote other export lines in order to meet the antici:r:ated future demand for -2-

imports. The prospects of oil exports (18% of the total in 1949) are

still depend~nt on Government policies with re~ect to foreign equity in­

vestment in the petroleum industry. If there 'is no increase in prolluction,

a reduction in oil export volume is expected by the second half of this decade, owing to the growing internal demand for refined products.

International Transactions A. Foreign Trade • 1. ~"Cpo rt s C(1ombia' s export trade is improving steadily. o~ing to a succes­ sion of increases in coffee prices in 1949 and 1950, and intensified dril­ ling in major petroleum concessions in 1949. ¥rom a total value of $254 million in 1947, exports grew to $286 million in 1948 and reacned $303 mil­ lion in 1949. The Un.ited States took 81% of all Colombian e:X'P01'ts in that year.

Coffee -- From 1928 to 1948, the volume of coffee exports grew at • a rate of 31~ per yeex, and reached 5.6 million bags of 60 kilos in the latter ~Tear. In 1949 t this trend was broken; exports fell to 5.4 million bags, and in the year ending in June 1950 were probably 5.3 million bags. The recent decline in output can be ascribed to political unrest, and to

heavy rainfall in the rrinter 19'+9-'50. However, exports in the calendar year 1950 should not be much below 5.5 million bags, and from the scant

data available on plantings. it is expected that the former rate of growth in export volume will be resumed after this year. -3-

The price of Colombian coffee is at a~ all time high. In 1947. tile price climbed above JO¢' c.i,~f. Nev: York for the first time since the

twenties, and han advanced to 50¢ by the end of 1949. After a brief de- cline it climbed again eteeply after the outbre9k of the Korean war. On October 19, 1950, the price of Colombian coffee in New York was 56¢. While • the present peak may not be maintain~d, even at an average price of 47¢t the value of coffee exports in 1950 could reach $330 million, or more than • the total value of al~ exports in 1949. The current high prices of coffee are clearly due to ~'Vorld shortage, and the long-run prospects are less favorable, Since 1949. major producers;. sucn as Brazil, Guatemala and Colombia have e}.'Perienced droughts, floods,

aud political upsets which have kept production down. It is reported, how-

ever, that new planting of coffee trees has taken place in Brazil, and to a

lesser extent in CentrAl America and Africa, and that the rate of planting

has been at least maintained at former levels in Colombia. While it takes • new trees four years to produce. world coffee output is likely in time to expand faster than world demand for coffee at current prices. In this case,

Colonbia and Central American c01mtries, 1.,"lJhich have Ii ttle but coffee to

export. may experience serious balance of p~ents difficulties.

Petroleum -- E~orts of petroleum reached a new ~igh in 1949~ Pro­ duction Was 29.7 million barrels of crude compared with 23.8 million bar­ rels in 1948, and exports attained 24.2 million barrels valued at $58 mil-

lion. ~he principal reasons for this increase were the intensified dril-

lings on the Barco, Yondo and IUficil concessions, and the fact that the -.4 -

De Mares concession and the Barco experienced virtually no labor difficul­

ties. It is not believed that this volume of exports can be maintained

after 1950. One reason is that foreign companies e~"ploiting petroleum in

Colombia lack confidence in the treatment accorded to private foreign capi­

tal and, are ei theI' leaving the country or reducing exploration acti vi ties.

Althou@l decrees aimed at improving Colombia's petroleum legislation. were

issued in 1949, they were not satisfactory to the companies. A E;)econd rea­

son is that the internal demand for refined products has increased to such • an extent that Colombia Jl1Ust cUJ.~rently import more than 50% of its requ.ire­ ments. Hence; a new petroleum refinery is to be built, and internal con~

sumption of crude oil may attain 10 to 15 million barrels per year 1!iithin

the next decade o Even assuming maintenance of crude output at the 1949 levels, this would reduce crude e:x.ports to roughly 15 million barrels a

year.. However, Colombia will c;.t the same ttme realize important savings on lILported refined products.

Other Exports - Coffee and petroleum exports accounted for about • 93% of all Colombian export s in 1949. Bananas, gold, platinum, hides and skins constituted most of the remainder. The most promising fields in which

other exports might be developed are ~ood products, cattle, cement, sugar,

and perhaps textiles. Also certain areas bordering Venezuela and Panama

could beGome suppliers of foodstuffs and light industrial goods to those

countries~ Ho~evert considerable structural cbanges in production, market­

ing and t r a.'1sportation will have to occur before exports to these countries

become po ssible .0 2. Imports

Imports into Colombia in 1949 amounted to only US$ 252 million, or

almost US$ 100 million below the 1948 level. In the first six months of

1950 they amounted to US$ 140 million. The great success achieved by Colombia in securing this drastic reduction is clearly not due simply to 1/ ' the moderate devaluation of the peso at the end of 1948,-'- and can be only partially ascribed to the introduction of heavy exchange taxes on non-

essential categories of import$. Essentially, it resulted from the imposi- • tion of strict import control regulations, and these, in turn, proved enforceable oruy because of large increases in local output of important

raw materials or foods, such as sugar, rice, cotton and r,rheat. This il~

lustrates one of the most favorable short·-run features of the Colombian

economy: Colombia has such a wea.1t;h of available internal resources that,

if neCeSSfll'Y, it can reduce its imports to some essential raw materials and machines without undue strain on the population,

• B. Trade AE?~~ements and Tariff

Durir:.g 1949, Colombia entered into clearing and trade agreelilents with Ecuador, Finland, the Netherlands and Western Germany. These agree-

ments were intended primarily to expand and diversify Colombia's foreign

trade and, t'J a limited extent, to assist in ir~roving Colombia's trade

balance vli tIl the countries concerned!, Tb~ iilOst important is that signed

on June 14 'with the ~.:ili tary Government s of T7estern Germany. It 00 ntem-

plates Colombian exports of coffee, bananas, tobacco, hides Rl1.d skins, corn,

1/ From 1.75 to 1.95 pesos to the U.S. dollar. -6-

rice, sugar and other products to a total value of $15. 000, 000, against a

. corresponding quantity of German exports of machinery, electrical equip-

ment, iron and steel, chemicals, etc.

The Uni ted States-Colombia Reciprocal Trade Agreement was tel'mi"'!"

nated by mutual consent on November jO, 1949. A::< a result, the effective

Colombian import d~ties on a wide range of items were increased appreciably and additional customs revenue estimated at more than 10,000,000 pesos per

• year will be collected. A neVI tariff law, iss'Ued in July 1950, is strongly protectionist.

c. External Debt The current position of the external debt of Colombia is described 1/ in an Economic Department report (E .... 96) dated June 30. 1950.-1 It will be

noted that the total outstanding external debt amounted to the equivalent

of US$ 146" 2 million at the end of 1949. Anticipated service will be uS$ 12.8 million in,1950, and will decline after a peak of US$ 14.0 million in • 1952. Addi tionally, Colombia contracted in 1950 provisional. comrni trnents and ooligations totalling uS$ 45 million. including US$ 37 million for the Steel £vi:i.ll at Paz de Rio. Including these i terns, the external debt Vlould

total U~::~) ]·90 million (mostly in U.S. currency) t requiring armual service

during the next f1 ve years of US$ 20 - US$ 22 million per yeax, or 6~ 7% of expacted exchange receipts on current account.

y 11he History and Present Position of the External Debt of Colombia. - 7-'

D. Balance of Payments

Colombia accumulated forei~1 exchange during the vv.ar and in Decem­

ber 191+.6 foreign exchange and gold reserves amounted to US$ 176 million. They were then largely expended on war-time backlogs, and fell to a low of US$ 63 million in April 1949. Stringent import controls were then imposed

fild, thaP~s also to the considerable increase of coffee prices, reserves in- creased again and rec;"ched US$ 111 million in December 1949. After a peak • of US$ 128 million in February 1950, theJr fell back to US$ 108 million on

June 3D, 1950. Following the example of many other Latin American coun­ tries, Colombia is now likely to use part of these reserves to stockpile goods in short supply. in anticipation of major international difficulties .. · It is believed, however, that Colombia will be able to manage its reserve

position without undue difficulty during the next few yeaJ's, because of the

short-run cOh~ressibility of imports discussed earlier,

Recent movements in reserves can be accounted for roughly as fol~

• lowf (million U.S. dollars):

Jan-June 1949 1950

1) Trade balance ...... - 60 f. 51 Ir 3l 2) Gold production •.••. ~ ... , ....•.• 8. f 12 t 13 f 5 3) Capi tal imports - petroleum com- Q?-l panies 4O ••••••••• '" ••• ~ ...... f 23 - ~ 4) Other ...... •..... ~ ~ 2 - 33 - 39

5) Total ...... c ••••••• ~ ••••• ,. - 27 f 27 - 3

~ On the basis of first six months. EJ Estimate. No information available '" -8-

It is difficult to explain the large residual item under (4) in 1949 and 1950. In normal circumstances, flinvisibles" should yield only a slight

deficit. in view of the substantial earnings of Avianca and the Gran-

Colombiana Fleet. There appear~t therefore, to have been a substantial

capi tal outflow over and above the cessation of new investment by the

foreign oil companies. Another factor may have been Government operations • not officially recorded, presumably military e~enditures.

Receipts from coffee exports are likely to increase in the short run. Oil exports v[il1 decrease u:L1less foreign capi tel is ready to expand

exploration considerably. A. decade at least will be needed until "other

exportsll carl be develope 0_ in quantity. The investment program suggested

by the IBRD ~":issiol1 to Colombia requires a level of imports that would in­

volve a trade deficit of about $25 million a.YJ.nuallY,Y of which half would

be covered by ne't}J gold production • To cover the remaining trade deficit plus amortization of debt, the Mission envisaged total capital inflow • r in ave ag 6 US$ 50 - US$ 60 million a year,. of which about one-~alf is ex- pected to be foreign direct investment. The ability of Colombia to at-

txact private capi tal will be, of course, largely dependent on its atti.....

tude towards fo~eigp. investors.

!/ ~ort asswnptions were for continuance of the growth trend in cof~ fee e~ort volum~s, and an f.o.b. coffee price of 50¢ falling to 45¢ in fi ve years. -9 -

Intern@1. Financial Conditions

A. Fisca~ The..2:!~tional Government ~dget

~ring to the special type of presentation used in Colombia, it has always been extremely difficult to establish the true facts about its national budget. The following table indicates that on the basis of

official figures, the budget was in deficit in 1948 and 1949, however, the reported borrowings by the Government bear little relation to the

• needs indicated by the budget figures. A close study by the IBRD Hission

in Colombia has ~ndicated that an adequate interpretation of the fiscal

situation cannot be made unless a new statistical presentation of bu.dgets

is adopted. However, it can be said that Government budgets in Colombia have never been high compared to the level of national income and that

the Goverr.ment deficit and debt a~:'e relatively small.

COLOl~JrnIAN NATIONAL BUDGETS I • (million pesos) 1948 1949 1950 (Actual) (Actual) (Budgeted)

Expenditures ~ ...... 427 449 422 Revenues ...... 399 403 422 Balance ~ ...... - 28. - 46 0 Changes in Public Debt ...... f 42 - 10 n,a • Borrowings from Banks ...... ;. 33 f 16 n.a •

The 1950 budget calls for receipts and expenditures balancing ~t

Ps. ~:; 422 million, b~t. ~ct~al expenditures viil'l probably he above Ps.;~ 500 million. Hmvever, this is not expected to lead to a major deficit, ... 10 .,;

because income tax receipts will be boosted by inflation and the yield

of import duties ,,·,ill be increased both by higher tariffs and higher

imports than had been allowed for. The fiscal policies pl~sued by former

Govern~ents of Colombia have, in general, been conservative, although

the new administration has sho'Wn some tendency to embark upon expenditures

without adequate consideration of their fiscal consequences •

\. .B • j :oney Supply

The cost of living index (for Bogota) became stabilized in 1949 and

• gave grounds for hope that the Colombian 'inflation, which had started

in 1942, had rlm its course. Unfortunately, a new inflationary influence

was provided by the Government's wage law of December 1949, vyhich established. a minimum wage and decreed blanket wage increases and bonuses for low

and middle income labor groups. Simultaneously, conunerc~al banks stepped

up credit to business enterprises. Honeta.ry circulatj,.on increased sharply,

and the cost of living index rose by about l8f~ from January to }:ay, 1950.

As seen in the following table, most of the expansion in money supply

in the last three years is accounted for by increases in cormmercial bank • loans to the public:

MAJOR SOURCES OF FLUCTUATION OF HONEY SUPPLY (million pesos) Jan-iray 1948 1949 1950 Central Bank 31 .;. 53 II .;. 33 .;. 16 "'" 35 .;. 19 .;. 2 ,L 64 --;r21 7 71 I 18 Commercial Banks Loans to publiQ ., .. ., ...... ~ ...... ~ .. f 56 ,L 56 .;. 93 "!"" 11 -

Tlrroughout the period, the operations of the Central Bank served to

promote this process by building up commercial bank reserves, but this

does not seem to have been the result of a deliberate financial policy.

The expansion of the credit base occurred in 1948 through Central 3ank

loans to the Government and some rediscounts; in 1949, through the

acquisition of foreign assets by the Central Bank and in 1950, through

increased rediscounts alone. The attitude of the Central Bank appears

to have been passive; in any case it has clearly not reflected ar.y firm

~ anti-inflationary intentions.

Hhat the effects of a neT¥ inflation would be at this time is difficult

to forecast. I'rom 1942 to 1949, inflation ran a moderate course and did

not sesn to impair the improvement in the standard of living of the

Colombian people; over a period of years, the additional savings it

generated appear to have flowed into investments which brought rapidly

to the market a substantial amount of nevY consumers' goods. At any given

time during the inflationary period, the pressure of rising prices on

real income was apparently more than compensated by increases in • productir~ ty and in co .. !sumer goods output brought about by inflation- induced investment in preceding periods~ The process was greatly

facilitated by the introduction of improved techniques during the war

period, and by large illlports of capital equir:Jlnent immediately afterwards,

both of 1i.... hich stimulated the increase in productivity. In these circum­

stances, despite the inflationary development, there was a continuous

increase in the level of consumption, possibly even at a rate above that

'which viould othervrise have prevailed~

Nonetheless, looking to tIle future, inflation remains a serious

threat to economic progress in Colombia. An inflationary process, once - 12 -

under way, can easily get out of hand. The consequences would then be

the diversion of investment from productive channels and a fall in the

productivity of both managers and Y{orkers, in the first case because

profits will be increasing too rapidly, and in the second, because real

wages 'will be decreasing. It therefore remains very impori1iant for the

investment program. in Colombia to be accompanied by a judicious amninis- tration of monetary and fiscal affairs. c. Production

The increase of agricultural and industrial output in 1949 vras as • remarkable as in the nine preceding years. There were unusually good crops of cereals and other basic foodstuffs in 1949, partly because rain- fall was adequate during most of the year and partly because there was

an increasE) in crop acreage as l,~ell as in the use of machinery, fertilizers,

insecticides, etc. 'Ihe corn crop of 64.5,000 tons and the rice crop of

130,000 tons were each 10,000 tons higher than in 1948. 'fhe wheat crop

was the highest in nearly a decade and wheat ~ports dropped to an al:-t~e

• low. The potato crop of 480,000 tons equa.lled the 1948 production;

sugar production, estimated at 138,000 tons, was 30~; above 1948; and cotton output increased very substantially, especially in the Sinu.

In the industrial field, cotton textile production is estir.1ated to have

been almost 10% higher in 19h9 than in 1948. The capacity of rayon yarn plants increased, as did the output of rubber tires. In the 1949 calendar

year, Colombia. produced 470,000 tons of cement as against 3~4,ooo in 1948. In all other fields, equally satisfactory progress was reported. D. Development

Distinct changes have taken place during the past VffO years in the

Government's development policy. The state has embarked upon relatively large projects, and upon activities which had previously been left to

private entel"Prise. At the same time, it invited a ll'lission from abroad to

make recommendations regarding an overall investment program. Major

Gove~~ent-sponsored projects now under way or proposed are:

(1) Port improvements at Tumaco, Barranquilla, Buenaventura.

(2) Flood control and irrigation at Neusa and Sisga, near Bogota

and at Coelho and Saldana in Tolima.

(3) Hydro-electric pomer plants at Anchicaya, n6'ar Cali; at Lebrija,

near Bucaramanga; at La. Insula near r:anizales; and at Rio GraD"Je, near • Idedellin.

(4) Railroad construction bet'~een Barbosa and Bucaramanga and between

Armenia and Ibague.

(5) steel rrdll at Paz de Rio.

The IERD lvi.ission Re}Jort concluded that some of these projects, in

particular the last two, do not appear to warrant the high priority vlhich

they had been given. In consequence, 1."orl~ under item (4) has been sus-

~ pended, and the steel rrdll proposals are undergoing re-examination by the

COfC11littee mentioned below. The Government has appointed a bi-partisan Committee of Economic De-

velopment, consisting of six members to study the IBED Mi ssion Report, and to make recommendations regarding its implementation. The Committee will be assisted by an econorrdc section, Bn.d a public administration mission under the leadership of Dr. Currie, and application has been made to the Uni ted Nations for technical assistance under Point Four.

Political Situation The political situation in Colombia is still unsettled. The Liberal members of the coalition Government which 1:;as formed following the dis­ turbances of April 9, 1948 resigned after a few months in office. An ,..

-14-

all-Conservative Government decreed a state of siege on November 9, 1949. Eleven days later presidential elections were held in y.;hicli only the

Conservative party' participated, the Liberals abstaining on the grounds

that elections could not be held constitutionally under a state of siege and that prevailing conditions gave no assurance of fair elections.

Dr~ Laureano Gomez was elected President and assumed office on August 7th of this yearo The state of siege continues and the Congress has not convened since November 1949, although it has not been officially dis­ • solved. It is reported that at a recent meeting of the parliamentary members

of the Liberal party, it was decided that the party's members should not

participate in the Government or accept responsible political positions

in the administration.

The present situation is a serious test of Colombia's ability to

preserve its democratic institutions which have worked satisfactorily

during a long period of its history. The return of the country to • normal political life, which would eliminate the danger of forcible political solutions, vrould of course have a benef:lcient effect upon its economic, financial and administrative conditions.