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Growth, 1970-2005 (1970=1)

Competitiveness and Growth in Latin America Revisiting economic growth in Colombia - A microeconomic perspective Marcela Mel é ndez and Arturo Harker September 21, 2007. Growth, 1970-2005 (1970=1). Source: DANE and GRECO (2002). Real GDP growth, 1970-2005 (%). Source: DANE.

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Growth, 1970-2005 (1970=1)

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  1. Competitiveness and Growth in Latin AmericaRevisiting economic growth in Colombia - A microeconomic perspectiveMarcela Meléndez and Arturo HarkerSeptember 21, 2007

  2. Growth, 1970-2005 (1970=1) Source: DANE and GRECO (2002).

  3. Real GDP growth, 1970-2005 (%) Source: DANE.

  4. Investment as % of GDP, 1960-2005 Source: DANE and Fedesarrollo.

  5. Public and private investment as % of GDP, 1994-2005 Source: DANE and calculations by the author.

  6. Investment by type of capital, as % of GDP Source: DANE and calculations by the author.

  7. Regional differences - GDP per capita by department, 1990-2005 Source: DANE and calculations by the author.

  8. Growth Diagnostics Exercise The following are not binding constraints for growth in the case of Colombia: • Low returns from poor human capital • Poor appropriability of returns from micro risks due to market failures resulting in low self-discovery • Poor appropriability of returns from government failures resulting in macroeconomic risks

  9. Growth Diagnostics Exercise Access to finance Evaluation: Access to finance has been a constraint for growth in Colombia in the past and there is evidence that it can still be a constraint for investment.

  10. Interest rates, 1986-2004 While recent growth in Colombia has been paired with falling interest rates, and this would signal that access to financing is not a constraint for growth… Source: IFS.

  11. The financial sector is still small and shallow..Bank credit, stock market capitalization and domestic debt as % of GDP, 2004 Source: Source: IMF (2005). Data for Colombia: Banco de la República de Colombia, Superintendencia Financiera.

  12. ..firms largely finance their activity through retained earnings..Firm liabilities by type (1997-2004) Source: Aguilar et al. (2006)

  13. .. banking credit is increasingly concentrated in the larger firms.Banking loans by firm size (1995-2002)  Poor intermediation is a concern Source: Superintendencia Financiera, calculations by the authors.

  14. Savings rate low by international standards, dynamics correlated with a lag to economic performance  cannot discard low savings as potential constraintGross National Savings / GDP, 1970-2004 Source: DANE and calculations by the authors.

  15. Uninterrupted access to foreign financing..External debt (as % of GDP) Source: Banco de la República de Colombia. Note: external debt includes leasing and securitization). *Provisional. **Preliminary.

  16. … but ability to attract FDI compromised in recent yearsForeign direct investment, 1994-2004 (as % of GDP) Source: Banco de la República and calculations by the authors.

  17. Growth Diagnostics Exercise Low appropriability - government failures - micro risks Evaluation: Uncertainty about private appropriability of investment returns due to poor protection of property rights, change of rules and weak competition policy is one of the most binding constraints for growth in Colombia.

  18. Protection of property rightsViolence, 1970-2004 (1994=100) Government’s inability to protect investors from lack of security from ongoing armed conflict is major source of poor appropriability of returns Source: National Police and calculations by the author.

  19. Protection of property rightsViolent events related to the armed conflict Source: Observatory of Human Rights, Vice-Presidency of Colombia and calculations by the authors.

  20. Protection of property rightsRegional distribution of violence * Source: Observatory of Human Rights, Vice-Presidency of Colombia and calculations by the authors. * Departments ranked by number of events between 1998 and 2006. Includes kidnappings.

  21. Protection of property rightsRegional distribution of paramilitary violence (%) * Source: Observatory of Human Rights, Vice-Presidency of Colombia and calculations by the authors. * Departments ranked by number of events between 1998 and 2006. Does not include kidnappings.

  22. Protection of property rightsCapital expenditures growth, by department * Source:Superintendencia de Sociedades and calculations by the authors. * Measured as Plant and equipment at (t+1) / Plant and equipment (t).

  23. Taxation / Changing rulesTax Reforms, 1990 to 2004 * Source: Misión de Ingresos and Tax Code.

  24. Taxation / Changing rulesTax rates dispersion, 1995-2004* Source: DIAN and calculations by the authors. * Net income tax/(Taxable income + Exemptions to taxable base).

  25. Weak competition policyRecord of Antitrust cases, 2000 – March, 2007 Source: Superintendence of Industry and Commerce.

  26. Growth Diagnostics Exercise Low social returns - Poor geography / Bad infrastructure Evaluation: High transport costs are a binding constraint for growth in Colombia.

  27. Poor Geography / Bad InfrastructureRailroad Infrastructure Source: CEPAL (2003) .

  28. Poor Geography / Bad InfrastructureRoad Infrastructure Source: CEPAL (2003) .

  29. Poor Geography / Bad InfrastructureNational road network Source: INVIAS .

  30. Poor Geography / Bad InfrastructureAverage kilometers per hour Source: Ministry of Transport of Colombia.

  31. Poor Geography / Bad InfrastructureCosts per ton per kilometer, 2004 (2004 pesos) Source: Ministry of Transport of Colombia.

  32. Microeconomic Empirical AssessmentEconometric Exercises • Probit model to explain investment decision. • Dependent variable 1: Dummy = 1 if firm investment rate >0 • Dependent variable 2: Dummy = 1 if firm investment rate > 10% • Dependent variable 3: Dummy = 1 if firm investment rate > 20% • Fixed effects panel regression to explain investment level choice of firms that choose to invest.

  33. Microeconomic AssessmentData • Firm-level panel database from Superintendencia de Sociedades: all firms with annual income or assets above 20,000 minumum wages from 1995-2005 (financial statements). • Firm change in plant and equipment - deflated using Fixed Capital Formation Index. • Firm operational income - deflated using ISIC 3-digit sector Producer Price Indices. Enters estimation lagged. • Herfindahl Hirshman indices of market concentration at ISIC 4-digit sector level.

  34. Microeconomic AssessmentData • Tax data from DIAN: un-coded firm-level tax data, 1995 to 2005 • ISIC 4-digit sector standard deviation over time of effectively paid income tax rate. • ISIC 4-digit sector difference between effectively paid income tax rate and mean over time.

  35. Microeconomic AssessmentData • Violent events by author by municipality, from Observatorio de Derechos Humanos de la Vice Presidencia. • Number of violent events by municipality. • Dummy Public order restored = 1 at time t if paramilitary violence in municipality at time t = 0 and paramilitary violence in municipality at time (t-1)>0, 0 otherwise.

  36. Microeconomic AssessmentData • Regulated transport costs by ton from department capitals to ports, from Ministry of Transport of Colombia. • Minimum transport cost alternative assigned to firms by location - enters estimation interacted with ISIC 4-digit sector measure of international exposure (exports + imports)/2 (Source: DANE). • Enters estimation instrumented to avoid endogeneity bias.

  37. Microeconomic AssessmentData • Lending interest rate from IFS. • Enters estimation interacted with firm leverage and lagged. • Department GDP growth, from DANE. • Enters estimation lagged.

  38. Microeconomic AssessmentInvestment choice Probit

  39. Microeconomic AssessmentInvestment choice Probit

  40. Microeconomic AssessmentInvestment choice Probit

  41. Microeconomic AssessmentInvestment choice Probit - elasticities

  42. Microeconomic Assessment - Investment level

  43. Concluding remarks • Among sources of poor appropriability, only variables associated to poor protection of property rights from government failure to control conflict survive across model specifications. This is one of the most binding constraints for investment and any effort directed towards reestablishing public order will see a reward in economic reactivation. • There is little new insight in recognizing critical role of conflict in connection to economic activity, but research advances in identifying channel through which effect materializes and order of magnitude of costs it represents through negative impact on private investment.

  44. Concluding remarks • Timing of investment decisions is explained more by restoration of some form of public order connected to the cessation of paramilitary violence than by reduction of violence per se. • From public policy perspective, most relevant result is confirmation that in Colombia investment decisions are negatively affected by costs of financing. Empirical results single out the provision of access to financing at fair prices as a policy priority for economic growth, relevant across country regions and independent of whether uncertainties about appropriability issues are resolved.

  45. Thank you!

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