This report is restricted to use within the Bank.

No. E-185a RESTRICTED

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

ECONOMIC POSITION AND PROSPECTS OF COLOMBIA

A Report by

Jacques Tort's

On the Conclusion of His Mission to Bogota

October 18, 1951

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Exchange Rate

U.S. dollar

1 peso

•

=

1 million P~zF)S ..

2.50 pesos

40 cents

$400,000

COLOMBIA

BASIC STATISTICS

.Area

Populatio~ (1950) Rate of Increase

Currency Unit Parity Effective Rate of Exchange

(After March 20, 1951)

National Budget

E.A-pendi tures Revenues Balance

National Income ().950) Total Per Capita

Trade

Exports Imports

External Debt Total Disbu.rsed, December 1950 Undisb1;l l ::ied, llicember 1950

IBRD Highway Program Loan, April 1951

1951 Service on Disbursed Debt as % of 1950 Exports

Cost-of-Living lndex (Bogota (1937 - 100) December 1948 December 1949 December 1950 July 1951

Central Bank Gold and Exchange Reserves December 1948 . December 1949 Becember 1950 June 30, 1951

450,000 square miles

11,300,000 2.2% per annum

Peso 1.95 pesos equals US$ l~OO

2050 pesos equals US$ 1.00

Million Pesos 1949 1950 ~ 525 406 tJ50 -42

Ps. 5,447 million US$ 245

f:1il1ion uS$ !949 1~5g

)03 39 260 334

US$ 128.5 million US$ 86.6 million US$ 215.1 million US$ 16.5 million US$ 231.6 million US$ 17.8 million

4,5 %

US$ 84 million uS$ III million US$ 101 million US$ 97 million

9/20/51 No. 513

COLOMBIA POPULATION (IN MILLIONS)

12------~----~----~------~~--~----~------~----~~ 12 YEARLY

10 10

8 8

6 6

EXPORTS PER CAPITA (u. S. DOLLARS 1M 1949 PRICES)

30~----~----~----~------~----~-----~------~--~~~30 YEARLY

20 20

10 10

O~~~~~~~~~~~~~~~~~~~~~~~~~~~~~O

1910 1915 1920 1925 1930 1935 1940 1945 1950 '53

CEMENT: PRODUCTION ELECTRICITY: PRODUCTION (VOLUME INDEX, 1937 = 100) (VOLUME INDEX, 1937 = 100)

600~------------------------~~------------------------~600

400

200

YEARLY YEARLY

--------------- ,*" ---REST OF LATIN AMERICA

SUSAR: PRODUOTION GASOLINE: PRODUCTION

400

200

(THOUSANDS OF TONS) (MILLIONS OF BARRELS) 3CO~---------------------------' ~--------------------------~3

YEARLY YEARLY

200 2

100

o 0 '37 '39 '41 '43 '45 '47 '49 '51 '53 '39 '41 '43 '45 '47 '49 '51 '53

I.B.R.D. - Economic Dept.

9/20/51 No.514

BALANCE OF PAYMENTS (MILLIONS OF U.S. DOLLARS)

1938

R~CEIPTS­

PAYMENTS

1946

RECEIPTS

PAYME~JTS

1947

RECEIPTS

PAYMENTS

1948

RECEIPTS

PAYMENTS

1949

RECEIPTS

PAYMENTS

1950

RECEIPTS

PAYMENTS

1951

RECEIPTS

PAYMENTS

1952

RECEIPTS

PAYMENTS

o

COLOMBIA

100 200 300 400 500

CAPITAL ACCOUNT

I ERRORS AND OMISSIONS

I.B.R.D. - Economic Dept.

COLOMBIA GOLD AND FOREIGN EXCHANGE ASSETS

50 50

o

1000

MONEY SUPPLY AND COST OF LIVING (INDEX, 1937= 100) 1000

9/20/51 No.515

800

600

400

200

YEARLY MONTHLY

---.-~-' -.-­... - ""~--"""- ----_.' 800

MONEY SUPPLY (END OF PERIOD) 600

400

200

a '38 '46 '48 '50 '52 J

1949 D J D J D J DO

1950 1951 1952

COFFEE PRICES IN U. S. COFFEE EXPORTS (MILLIONS OF METRIC TONS)

2.0 R (CENTS PER POUND)

.---..----....----. r--r-r--T"--,---r-T"""""'T--r---r-T"""""'T--' 80 YEARLY 14 LATIN AME ICAN ~

COUNTRIES~ , , l 5 , ." ..... ~, '" ",,"" ,~ .-1.0 ...... .....,..,~ ~.~~~~7.~.······ ~"'"

-..... .4· ". •••• COLOMBIA .5 ..... ~--------------

ANNUAL AVERAGES QUARTERLY AVERAGES

1/ COLOMBIAN : MANIZALES .. '

I ..... ···· .. , .,.' BRAZILIAN

f~ " SANTOS 4

60

40

20

OL...-~~~~~~~~~~~~~~ ~~....L..-IL..-.L..-J L...~L.-.I.--J...~J.....J.....-L.......L.-"--"....J a '38 '40 '42 '44 '46 '48 '50 '52 '38 '46 '48 '50 '52 I II III IV I " III IV I II III IV

1950 1951 1952

NATIONAL GOVERNMENT REVENUES AND EXPENDITURES l MilLIONS OF COLOMBIAN PESOS)

800~--~--~--~--~--~--~----~--~--~--~--~--~--~800 YEARLY

600 600 TOTAL EXPENDITURES*lfTOTAL REVENUES

INVESTMENTS .:.:. PUBL Ie DEBT

EXPENDITURES m (END OF PERIOD) 400 400

200 200

o 1940 1941 1942 1943 1944 IS45 1946 1947 1948 (949 1950 1951 1952 0

*Excludes debt retirement. tBreokdown not available.

I.B.R.D. - Eccnomic Dept.

DEPARTMENTS

l. ATLANTICO

2. MAGDALENA

3. BOLIVAR

~. ANTlOQUIA

DEVELOPMENT MAP OF COLOMBIA

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8. CALDAS

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8. CALDAS

9. CUNDINAMARCA

10. BOYACA

1 I. VALLE DEL CAUCA

12. TOLIMA

13. META

14. CAUCA

15. HUILA

16. CAQUETA

17. NARINO

18. PUTUMAYO

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UNJA

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,.' ~ ... " , I . + +.+ + INTERNATIONAL BORDERS

: "",. .... ,--, , '1,/ ; ------- DEPARTMENTAL BORDERS

....... _"*, " ++-+-+- EXISTING RAILWAYS ......... , / ,,-

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, , OLD RAILWAY PLAN (NOW SUPPRESSED)

DEVELOPMENT PROJECTS NOW FINANCED AND lJND£RWAY

--- IBRD 3 YEARS HIGHWAY PROGRAM

::::;:::::::::::;::' IBRD AGRICULTURAL MACHINERY LOAN

"'EXIMBANK ~MS

HYCt?D .;t;v,lf:1f' Pl:ttI'4TS

\' ................ ,. ............ .. ~,J' , .... ,' .... -

'vi 1f ~

, (IBRO WHERE NAME UNDERLINED)

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RRES I 18 ,-.--..... -.. ." \ QUE ,I "." \" ••• '_;',

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111. .." . . ..... " . R o

PORT WORKS

,," "'" IRRiGATION PRC!JECTS

Ecce LIFTING-UP OF RAILWAYS

[=:=J INDUSTRIES

NEW PROJECTS ilEOlJ1RfN~ F'NANCE

IBRD 5 YEMS HIGHWAY PROGRAt.; AND CEO PENETRATIOH ROAD AU)foIG IWA~LEIII(.!.

-++++- MAGOAU~NA FMILWAY

PIPE LINES

, • , ••••. " ZONES REO\.n~ti ':::'::::::', AGRICULTURAL MACHINERY

~'~""'ZONES; TO BE IRRIGATED

1t J)

HYDRO ELECTRtC PLA~TS

PORT WO~KS

c==J SPECIFIC PROJECTS

OONTENTS

Page

I. SUMMARY • . . . . . . . " " " . " . . " . . . " . " " . " " . 1

II. POLITICAL SITUATION • . . . " . . " " " . " ., . .' . · . . " " 3

III. :illCONOMIC lEVBLOPMENT

A. Recent Output Trends . • , • • .. • " . .' • • . .. • B. Development Problems mld Prospects " . " " " • " • •

C~ Import Substitution Projects , " " " " • " . " • ri • " D. Diversification of E~orts " " . • • • • • " • " " " ·

IV. IOMESTIC Fn'IAl'JCE

A. Inflation Be Budget " • C. Prospects

. " " . . . . . " . . . . . . , . . . . " . . . . . " " . , . . " " " , . " , · . " " . . " . " " " . ~ " . ~ . " " . " " " .

V. 13.8LANCE OF PAYIv[ENTS .MID CBEDITTJORT"dlNESS

A. Recent Developments ". " , " " • • • • , Q

B. Prospects " • • • • • • " • • , • " " ~ " " C. Short-Term Prospects " • • " , • " • • " • • D. Long-Bun Prospects • " " • " • • • , ~ • t "

Receipts "".""..".. • " • • Petroleum " " " " " • " • " • , " • • " " Other Exports end Current Receipts .".

E. Creditworthiness Appraisal • " " • ~ • , • •

" . " , . " " , " . · . . .. " · . " . . " " " . , • " II • "

• • • • • • " , • r;.

APPE1:,JDIX ON .£~.CTIVITIES OF '!'HE CONl1JIITTEE FOR ECONOMIC DEV1}LOPMENT

A. Recommendations of the Committee

4 h 5 6

7 9 9

1:0 11 12 13 j-3 15 15 17

I, ReGommendations on the Environment • ." 18 II. Secto+ Programs " " " • • • • • " " • , • •• 19

III. Overall Investment Progfam • • " • • • " " • c 21

B. The Work of tn-e Committee and the IBED Mission Report 22

c. Reaction of the Government to the Committee's Recol1lI.qenda.tions • " • • • " • • " • • • •

D. Evaluation of Achievements To Date " " . . . . ~ . • • •

. " • II

23

2.4

I" SUMMARY .AND CONCLUSIONS

Colombia has good natural resources. In the last decade, both agri­cul tural and industrial output have increased substantially more than popu­lation. Neither the political troubles of the last four years, 'nor the 1'."

weather which proved partictiLarly inclement in 1950 and early 1951 have sig~ nificc.ntly i.~paired the coU:ntry~s economic growth ..

Inflation and multitudinous controls have recently been efficiently suppressed or reduced. A number of development projects ar~ being implemented in the fields of power, irriga.tion, agricultural mechanization, highways and harbors. Many industrial plants are be;ing ip.stalled. It would seem that given some international stability and some appeasement in national politics, Colombia could look forward to decades of harmonious development.

Two major economic problems must, poweve~, "be solved befo~e this could materialize Q ~1e first, now being met. is the misdirection of invest­ment. Inflation, ~xcl1PDge controls, restrictions upon capital movements, and low rates of taxation have resulted in an -Ilndue stimulation of commercial, real estate, and speculative operations,. and in large expenditures on luxury consumer goods to the detriment of social investment and long-term investment in production facilities.

Seeking methods to improve production cmd the standard of living. the Colombian Committee for Econqmic :cevelopment, organized in September 1950, reco~~ended a series of refor.ms 1 designed to ~rove the economic environment withi~ which productive activities are purs~ed.

The recommendations concerned with the financial and monet~J struc­ture have already been impl~mED. ted by the Government. The ot.ner recommep.da­tions are embodied in a five-year program of economic development. The shor~run aims of tl:is program are to improve distribution (highwf,lYs, rail .... wa~is, air transport, rivers and ports. silos, warehouses) and power supply (hydro-electric power,.coal mining, oil refineriee). The long-run objectives are to improve living conditions ~~d productivity through better education, nutrition, housing and community facilities.

The second economic problem is the struct-ural weakness of the balance of p~ents, Colombia's major source of foreign receipts is coffee. It is unlikely that the volume of coffee exports will increase in the long run, while prices will probably decrease. Coffee exports to a great extent deter­mine the size of Colombian imports. Unless corrective measures are taken, Oolombia could e}..'Perience an actual reduction in foreign exchange receipt s at the same time that the constant growth of population and national inco me could create an increased demand for imports. This coulq. make futu:re economic

-l-

- 2 -

development somel-Jhat more difficult and simultaneously reduce credi tvJorthi­ness.

This problem could be solved by stimulating agricultural and indus­trial production, "t'rith special attention to import substitutes and promotion of export goods. Colombia has the resources to carry out such a program, and the present government is certainly aware of the problem.

The balance of paJ~ents problem cannot be solved unless a proper en­vironment is created for economic expansion. Financial assistcnce which may be requested from abroad during the next f81'J years should be for that pur­pose. Spec::"fically , it 1;-Jill be needed to implement part of the program of the CorrillUttee, ~mich calls for a total investment, ~rivate and public, of the equivalent of usC 2,200 million over the next five years. The Committee estimates that this rate of investment could be maintained in conditions of economic stability provided that about usC 190 million of foreign financial assistance is made available during this period. Roughly half of this amount could be expected from private direct investment. Imports of capital, in­cluding loans, are needed to alleviate balance of payments pressures and to supplement savings during implementation of the program. Loans l;-Jould also ensure the execution of key projects and encourage adoption of governmental policies consistent 1-ri. th the Committee's programs 8.nd recommendations.

1'Jhile it should not be expected that all these recommendations 1-8.11 be implemented, or that all policies now adopted in response to suggestions by the Committee uill be consistently pursued, very substantial improvement to the present economic structure is likely during the next five years if the foreign financial assistance referred to above is in fact made available.

The outstanding foreign debt of Colombia is 1101>1 US,.· 129 million, while loans contracted but still undisbursed (other than the IBRD high~vay program loan) total US() 87 million. Assuming these are disbursed by the end of 1952, runortization pa~nents on the debt of US$ 215 million totals usi

. 77 million over the five years 1952 through 1956. NeH loans of the mag­nitude called for by the Committee's program Hould thus raise Colombia'S ex­ternal debt only slightly, and the somewhat, higher service pa;nnents should be within Colombia's capacity even if coffee prices fall from their present high level.. Their currency denomination is not relevant, as most of Colom­bia's foreign exchange recei9ts 8.re dollars. Local capital and resources are avaj.lable which 't'Jould enable Colombia to absorb nel-J loans.

Short of a distinct decrease in the standards of Colombian econo!nic and financial policy, or of a major political upset Hhich seems neither :mmi­nent nor unavoidable, extension of ne~v loans over the next five years which ~vould only moderately increase current foreign debt service seems both pru­dent and desirable. Risk would be reduced if major efforts are made in Colombia to implement the recommendations of the Committee for Economic De­velopment, of which the most important are:

(1) The transport programs; (2) The projects and suggestions regarding fuels, power, land use,

agricultural credit, the use of fertilizers, land clearing, coloniza­tion, cooperatives and crop storage;

(3) The maintenance of anti-inflationary policies.

II. POL!TICAL SITUATION I .

Political struggles have continued unabated since the riots of April 1948. Since the beginning of this year both the overthrol.J'n Liberals and the Conservatives have made sincere attempts to reconciliate their dif­ferences. Dr. Alfonso Lopez, former Liberal President, has tried to lead the Liberal leadership a1-Jay from passive resistance. After the last Liberal cOl1ventj.on (at the end of Nay 19,1) overtures "t-rere made to the pre­sent Conservati~e Government. A sector of the Conservative Party, however> seems opposed to the idea of a political truce. The attention of the opponents has been somE-whc.'.t diverted from their irrJnediate rivalries by the publicity being given to the probable creation by 1953 or 1954 of a bi­partisan assembly intended to study revision of the Constitution_

Poli-c,ical insecurity, however, is still marked. Parliamentary elec ... tions, which had been postponed, "t°Tere held in September 1951, but the IJiberal Party again boycotted the elections, though some Liberals Darticipated in it. Acts of vto1ence are still frequent, particularly in the eastern plains, but they often lack their former political character. In many instances Liberal rebels have been joined by brigands and marauders, who have taken thic ini­tiative and use political issues as a justification for their unlawful operations.

The current tense political situation and general rural insecurity have seriously affected agricultural output. ':rhousands of farmers have' abandoned their hold.ings, and have found refuge in the large cities. Since the country's credi t1Jorthiness depends greatly on its agricultural prospects, continuation of this situation could have serious consequences.

The present political scene contains ::!erhaps the seed of graver dis­sensions. A reconciliation betvreen the heads of the t~JO parties Hould re;.. quire considerable political skill to avoid "tvidespread popular mistrust of any such arrangement. There are some suggestions that a g8.p is being created betHeen the political leaders of both parties and their respective folloHers. This, in the long run, might lead to a regrouping of political forces along lines defined by income groups al1d not by traditional rival .. ries. Should this situation develop and become clearly defined, 2. major upheaval could be feared, in vJhich the fruits of decades of economic pro­gress c01.11d be lost ..

_.:.1; ,_",I

4+ 4 ...

Ill.,., ECONOMIC lEVELOPMENT" ~-.~~---------

Ao· Recent.Output.. Trends

From 1939 to 1950, Colombian output 'increased 67% or about· 4 3/4% per year e, Population gl"ew at a rate of' 201% per, year 0,' !>er cap! ta income and over-all prod1,lcti vi ty thus increased ":OY more than 2 ,.1/4% annually. .

Import'volumes in ~950 were 70% above their 1939'level. ' This' parallel', growth of foreign trade~ due to sizeable increases in prices and volumes of coffee exports ~d of national output,' proved a. very favo'rable deve],opment which enabled Colombia to maintain high. rates of capj. t~ formation. "

Output increased. considerably in all fields, especially after 1945. Industrial production increased by more than 13% per ye~ from ~945 to 1950.' Ric~ and sugar crops almost doubled in the same period, ' Electric power and cerusnt consumption were three times higller in 1950 than in 1937, : end -more than seven times higher than in 1934.

~his spectacular }/erfol'Ill~Ce can be: attribu.ted to four major faetors: : '

(1) A population shift from the Ande~ slope$ towards four well-' endowed regions, The Cauoa, Magdalena and Sinu Valleys, and Oundinar- ' marca.

(2) r~gration of rural populations to the towns., (The 1951 cen~ sus sets rural populat;'on at 6afo of the total against 70% in 19380)

(3) Agricultural output kept up with the growth in population. Colombia is effecting a progressive transition from primitive culti­vation in the mountains towards mech8fl~zed farming in the plainso '

(4) Human productivity being extreruely low at the outset of this evolution~ and under-employment wide~read; any small increase in availability of capital goods or improvement of 'techniques brought about large increases in pro.J.uctivityo

B.. revelopment, Problems l7ud Prospects' .

~ansion can, cont inue., There are still large unexploi ted or, under":"",· expl.oited resources (coal, timber, oil and hyo.ro-e:Lectric power)', and regions {center Magdalena, upper Llanos, lower, Pacifio Coaat, Sari Jo-,:ge Valley).", Under-employment is still extensive,. and productivity of much of the manpower,. is stUl extremely low-.,. There are, however. two major difficulties confront-· ing continued rapid development.

As pointed out in the Report of the Sl,lrvey Mission,Y. Colombia's· finan­oi.al st:ructure has been warped", partic\+larly in the last five years," byinfl&­tion" currency over-valuation. exchange controls,. an in.sU'fficiently strong

, , ----------.---'----y~u.ly. 1950 .. _,

-~-

central i0anking policy and inadequate taxation. Until 1948-49. these in­fluences wefe not fully felt except in the field of agriculture. In 1950 they also became a threat to further development of industIi a1 capacity.

In addition, structural 'defects such as poor transport, hea~J freight rates. low human productivity. inadequate use of soil resources, power shortages and a general inadequacy of social investment have further slowed do'Wn economic progress in. the last few years,.

The Colombian Committee for ~onomic Development, organized in Sep­tembe , 1~50, dedicated most of it~ efforts to the elimin.ation of these ob­stacle·s .. ::t First of all, far-reaching recommendations we~e made on money. exchange, credit and controls. They will be described ::"n Chap";er IV" Invest­ment programs were then drafted, primarily for transport, health and education. Suggestion~s were made on needed structurel changes in agriculture, industry and publit,~ l.\tilit:ie s. Implementation of these sector pro~ams ought to pro­vide an irnl1roved, econonUc environment for further development. In order to avoid dislocations which might be brotl-ght about by over-investment and to make sure that in the I\lture sufficient funds are channeled into proper economic sectors, the Conmittee finally recommended the execution of an overall in­vestment program.. to be administered by a planning office .•

Conformi ty. o! actual investment to the program should not be diffi­cult to obtain in the public sector" In the private sector, it is expected to be achieved through qualitative and .quantitative credit controls adminis­tered by the Central Bank and implemented by direct action of State controll~d banks and entities and by changes in regula.tions concerning commercial bank operations. In gen.eral, implementation of the overall program should have the effect of diverting private credit from commercial invento~iesf high-cost hou.ses and building, and luxury investment t towards industry.; agriculture, public utilities and social investment.

The second fora seeable di!ficul ty ari ses from the expectation that export values will not continue to expand as they have in the past. and might even decrease. Past economic development llaS been facilitated by a rapid expansion of import volumes. In the future the situation mew be dif­ferent; both developmental and balance of payments difficulties could arise unless early measures be taken. The most practicable and effective solution would consist in giving first priority to industries or activities reducing imports and increasing exports, and simultaneously ensuring normal satisfac­tion of grow~ng consumers requirements.

In order to achieve this change of past growth trends, it may prove necessary to draft more precise programs of agricultural and industrial ex­pansion ,,'lith greater emphasis on the former.

Co ~ort Substitution Proje~ta .................. - _. prq ...... .-.......

If unprogrammed projects currently under way are completed, m~or

~--~------------~------------~------Y See Appendix on"Activities of the Committee for Economic Development. It

industries will be created within the next seVen years whiCh will substitute for 11% of all imports. These industries are.': steel, caustic soda, soda ash, bottles ~ window p~es t sanitary appliances, bicycles ~ refined gasoline, pig­ments and paints. A multiplicity of small plants m~ also substitute for an additional 470 of such imports as batteries;, light chemicals and drugs·, sulfur, kitchenware, etc. In all, it seems that immed.iate substitution possibilities in primarily industrial fields lIl8y be estimated at around 15~b of the value of imports, and that at least 75% of the substitution will be accomplished within a relatively short time, whether a development program is adopted or not.

By increasing production of some selected crops and establishing the necessary processing plants. ~t would be possible to substitute for another 20-25% of the value of imports. Wheat, edible oils, cacao .. malt, rubber,cot­ton. lumber t wool , tobacco and fi sh are all produced, or could easily be pro­c.uced in Colombia. Very little is being done in this direction .• although present iIDI=orts of these items are large either in the raw state or processed into canned fish, flour, chocolate, tires, rayon and paper pulp, medium and high quality textiles, newsprint, paper and ",American taste lf cigarettes -­commodities which are also produced in insufficient quantities in Colombia.

The competent execution of a dynamic ~nd well-balanced program of de­velopment of agriculture, forestry and fisheries would thus go a long w~ toward remlcing these imports. Of particular interest in the promotion of these activities is the development of the ~Iagd.alena Valley, with its large resources in timber and lands, and of the Sinu Valley, particularly suited to cotton and cattle. The execution of the transport program recommended 'by the Coromi ttee, and the implementation of its agricultural plans will much facilitate the execution of future production programs in these areas.

D. Diversification of E:xports

Colombia exports many products besides coffee and petr"leum. The value of these exports, by articles or in the aggregate, is small. Rubber, di vi-di vi., ipeca1 medicinal herbs, mangrove and other typically "tropical If products are primarily sold to Europe and the United States. The expansion of these lines is possible but does not seem particularly desirable, since the price of these commodities in the form of raw materials is low. Gold, platinum and banenas sold to the USA., and raw tobacco sold primarily to Hol­land. are bettel" export products, but technical limitati()ns prevent any sub-stantial increase in the volume of thf,se eJq)orts. .

In the last decade Colombian industries have managed to attain some degree of efficiency in selected fields. Manufactured products. such as pharmaceuticals, cotton textiles., leather goods,' sil ve~,l']are. furniture, cigars are nop being exported to neighboring countries. primarily Venezuela, Curacaot Panama, Ecuador and Cu.ba. Food shortages in thE; Maracaibo oil fields area in Venezuela have led to exports of onions. potatoes, cattle. meat and other food~ stuffs from the neighboring Colombian departments of Santander and Boyaca, Colombian hides and skins and shark liver (used in the manufacture of Vitamins)

have found a small market in Europe end the United States.

Colombian exports along these lines could be sizeably expanded. Pros­pects seem particularly favorable for manufactured goods processed from local raw materials, n.:ch as drugs and pllarmaceuticals, leather and skins goods, clgarettes and ci~crs~ cotton textiles. The potential of Western Venezuela as a market for all types of foodf;)tuffs and vegetables is far from exhausted.

But perhaps the most promising lines are those which have not been exploi ted at all, or whose exploitation has only just started. Colombia should be able to sell large amounts of cacao, sugar, rice, lumber, coal, meats, dairy products, fruits end cement to neighboring countries, the USA, or to Europe. In lumber and in paper and pulp products alone, the export potential apparently exceeds US$ 30 million per year. Venezuela could easily absorb far more than US~ 50 million worth of food.stuffs. Exports of sugar, coal, rice and cacao could amount to US$ 10 million each per year.

IV. IniESTIC FINbNCE

A. Inflat ion l

In the postwar years Colombia suffered many financial difficu1 ties. The resumption of '~rld trade activities and the in'Iprovement of coffee prices opened many investment opportunities, both private and public. Because private savings, tax resources and fOl"eign investment were inadequate to meet planned capital expenditures, and were difficuj.t to increase rapidly, capital require­ments were met out of bank credit e~ansion.

This resulted in a considerable increase in money supply (from 582 million pesos at the ena. of 1946 to 1,060 million pesos in September 1951, an increase of 8~b) and a concomitant increase in the cost of living (about 92%). Inflation was generated through several main s~rces. Government deficit fi­nancing was of prime importance 1n ),947 and 1948. A balance of p~ents sur­plus increased inflation in 1949. Central Bank re-discounts to banks and loa..Yls to private people provided throughout the period a continuous basis for monetary expansion.

Major Factors Contributing to Inflation (Million Pesos) -

ForeigIl Asset s .................. 1l ••••••

Central Bank Loans to Government ••• , ••. ~ ••••...•.•. , , ... to private , •.• " .••••.•• " .•• ,,", •.•• ' •• to banks •• " •• ,,, •••• ,,,,., •••••••••••••

Money Supply .•.•••.......• " .. , ........ . Same in % of precedlng year ••••••••• ,. Cost of l.i ving, in 7b of preceding year

1947-

-114.0

1950

- 31 f 53 - 20

~ 33 t 16 - 38 t. 19 f. 3 f. 2l

~16~ ~l~§ ~ a~ t 17% t. 22% t. 5% t 16% f 6% t 21% -----------------

--8-

Comne~ci al banks al so accelerated inflat ion by lending as much as they could 1:rithin their legel reserves. For a while, the 'stimulus yielded favorable result s which seemed to outweigh the normal disadvantages of the inflationary prOces£? In 1946 and 1941, all income classes could feel that their real income was increasing. Progressively. ho~ever. thts situation changed: economically strong sectors of the population (the owners and managers) improved their position. while urban 1JITorkers' real incoJes stayed almost stationary and rural incomes declined. Infl~tion result ed also in in­creased pressures on the balance of payments., vrhich the operation of exchange controls did not al\"~ays prove able to chec~ Deficits exceedin,g'long-term capital inflows marked the current account of the balance in 19Lt7, ,l948 aTlQ. 1950; the relative success in cQntrolling excessive import demand in 1949 re­sulted from the combined effect of a small devaluation (from Ps.$ 1.75 to 1.,95 to the dollar) and a temporary strengthening of import 00 ntrols.

While investment was maintained at a re1atively high proportion of output (about 1?J6), the quality of investment, in 'terms of future produc­tivity. declined. The share of high-cost housing, office bulldings, 'bank premises. commercial inventorie~. automobiles, and other 1~~. investment increased progressively in capital formation statistics. By ~he end of 1950, the financial structure of Golombia was warped by inflation to a point where positive action was definitely called for.

The Colombian Co~~ittee for Economic Development gave first priority to the solution of these problems, as it felt that no program dedicated to the long-run improvement of economic conditions and welfare could be success­fully started in conditions of financial instability.

In line with its recommendations. all commercial b~~ers by gentle­men)s agreement undertook to limit their future .lending operations to the level of the portfolio outstanding on September 30, 1950. Simultaneously the Banco de la Republlca committed itself to restrtctive policies. and the Govern­ment expressed its determination to stop deficit financing, and to avoid tr~ secondary e~-pansion \7hich could be based upon Government cash held in commer­cial bankss

These measures :r;ut a quick stop to inflation.

.+ Ai

1950 1951 Aug. Sept. Oct. Nov. bec. Jan. Feb. MaT. Al?rll May Jun~

.j

Money ~pply end month (IMF series) million pesos ...........••.•• 1047 1059 1005 998 962 955 945 927 940 950 950 Cost of living, aver-age for month (1937 a

386 406 415 416 100) ................ ~ •• 385 399 395 398 397 393 398 New redi scount s (mil-

-43 4 lion pesos) .¥ •• .I! ••••••• 0 38 13 8 2l -20 -5 8 20 New central batik loans to Government and en-

/3-3 f2 tities (million pesos) -10 - 2 -6 -1 1-6 0 -1 fl

-9-

The Committee also recommended that: (1) the Government should control the policies of the Cent~al Bank; and (2) that these policies should be guided solely by techIlmal considel"a.tions. The first suggestion V!as quickly adopted; the Minister of Finance was gt ven a veto power 1n the Board of the Banco de la Republica.

Both the Central Bank: and the COUlIIlercial. Banks have shown geat firm­ness in maintaining anti-inflationary policies from October 1950 to liarch 1951. but they became disturbed ~vhen many business failures and a mild depressi on in trade occurred in January. This was accentuated in 1~arch and Ap:fi1 by p~ crops, wr.J.ch simultaneously provoked an increase in the cost of living.!! and a large de~d for agricultural credit.

The result of these press~e~ 'lKJas the eliminat ion of portfolio ceil­ings and the setting up by the Banco de la Republica of a more automatic sys­tem of rediscounts.

B~ Budget

In recent years,. the greater part of the fiscal deficit has not origi­nated llVith the National Government, but has CO,lS from Departmental and Y!lUl.ici­pal budgets, and also from autonomous agencie~. All these entities so far have acted somev.het independently, and the central authorities have had little control over them. The Government seems to share the views of the Conmi ttee that if new expenditures become necessary new taxes should not be levied, but that instead the present system of tax administration should be revised end simplified in o~der to obtain higher revenues from more efficient collection •. Immediate improvement in revenues was, however,. sought in higher tariffs which were put in force January 1, 1951. There is a good chance that 1951-like 19501'till shew a surplus in the central government r s accounts, but in view of the general position of local budgets, this su.rplus IIlQY well be ab­sorbed by other governmental deficits. Slight errors in budgetary estimates could even bring about a net deficit in the total of all Govemment accounts in 1951.

c. Fro spect s

~"1hether the new policies are likely to be continueci will not depend wholly upon the will of the National Government~ As will be shown in the chapter dealing with the balance of pa;yments, considerable 17' essure on foreign exchange reserves m~ ensue if the 1951 coffee crop is below official expecta­tions.

On balance, it is doubtful whether long-term financial stability has yet been established in Colombia., The measures taken, however, have given both Government and the public a greater awareness of the nature ot the prob­lem, and their swift success has shown the simplicity of corrective measures. The monetary and financial reforms of 1950-5], ~lll remain a guidepost for

!I Co st-of-~i ving index reached 409 in April, and 417 ;n May.

¥ -

further policies which; even vrithout seeking peri:ection, might very well come much closer" to desirable standards than !'r. the past. The effect has been felt throughout the country. profit margins in industry, commerce and Pa!'t icularly impor.t trade have declil1ed and the real incomes of urban workers and farmers may have increased relati'V·ely. Indice.tions are that investment is choosing new chmL~el$. These events alone would have justified the ef:orts made; they augur well for the success of further efforts.

V. BALANCE OF PAYMENTS AND eBEDITWOI4lT1JIn-mSS

A. ~ecent Developments

The balance of payments of Colombia (current account) has shown a deficit in 1947. 1948 and 1950. It is likely to close wi tb a deficit in 1951. In each of these years, current account deficits excee4ed long-term capital inflows e A small surplus was recorded in 1949-

While deficits in 1947 and 1948 could be partially ascribed to the replacement of the stock of capital equipment which had been depleted during the war, they also reflected the reaction of the new Colombian income level to increased availabilities in foreign consumers' goods. The situation was par­tiallj.- corrected in 1949, when tile value of coffee and petroleum export,s, and thus exchange availabilities, increased further. The final balance of payments s'..lrplus would not, l1owever~ have occurred if exchange mntrols had not been considerably tightened.

Further rises in coffee prices in 195o!f led to the expectation of balance of payments equilibrium. Unfortunately, h01!Tever, the year was marked by large income transfers by petroleum companies, which until then had been net c&pital importers. These out\1l1Srd tral1sfers, probably made in antid. pat ion of the e~iration of the concession on the de Mares fields, do not sean to re­flect lasting tren~~. The volume of coffee e~orts also fell to the lowest figure since 1948 • .21 Other crops also proved small, ?Ild exchange deficit er.,·­sued~ The deficit in 1947 and 1948 had been financed by the use of foreign exchange and gold reserves accumulated during the war. In 1950 •. however, "hile

1/ Prices of coffee (Manizales) ,- US¢ per pCluud eIF New York

1948 ........ ' .... · · · .. 32.57 1949 ........ ' •. , ". . .. 37.61 1950 •• ' •• • · • · • • • • . .. 53.25 April 1951 e' •••••• .., 59.16

?J Coffee exports - Mill~ .. on bags of 60 kgs.

1947 .............. 5·.34 1948 ....•..•.•..• 5.59 1949 ........... ' .•.• ' 5 .. 41 1950 ••••••••.•..•• 4.,47 Est. 1951 .... ,' ... , e' 4.75

gross official exchange holdings decreased but slowly, the net exchange posi­tion deteriorated more sharply. because short-term exchange liabilities of Colomb ian commerci al banks increased markeCly.

The Colombj.an peso was devalued in March 1951 fl'"om 1.95 to 2.5 pesos per UcS. dollar. Import and e~ort control s were suppressed, al.though trade transactions were ~till subJlitted to registration. Maintenance of controls on all other exchange transactions and the inauguration of a list of prohibited ~orts were ~cted to check excessive pressures on exchange availabilities. In August foreign capital and profits were given full freedom of movement un­der a regj.stration system.

Prospects for 1951 are not very favor8ble~ The coffee e~ort crop is not expected to reach Of1:l ci81 estimates of five million bags. A large back­log of outstanding remittances abroad had to be attended at the beginning of the year., Petroleum investment might not be ~s high as in 1947~g. Import pres~es have not been materially checked by tne devaluation. for retail prices of most imported goods have not increased.

Bo Prospects i

The prospects for Colombia. s balance of payments are closely related to the availability of foreign capital during the next fem years. The tech­nical staff of the Commdttee for Economic Development has estimated that in order to carry out it s program of development and structural changes in con­ditions of financial stabilitYr Colombia should borrow or othe~se attract US$ 187.5 million in foreign capital within the next five years.

Petroleum companies are expected to contribute US$ 37,,5 million (net) to this total. Investment by other private firms is estimated by the Commit­tee at US$ 50 million. The remaining US$ 100 million would have to be bor­rowed. This increase in external debt, if accompanied by the forecast inflow of equity capital, would be sufficient to cover the annual current account deficit of 'US$ 2.0 million which is expected to prevail untj,l 1956 as follows:

Balance of Payments

Capital Account (~1iUion US$) (Annual average for next 5 years)

Receipts

Loans ••...... ~ ...•.•• ~ •• 20.0 Private Equity .••.•••••• 10.0 Pet roleum Companie s ...... ..1.:.2

37.5

I.

P~ents

Amort i zation .told" public debt . .,. Amortization "new" public debt •.. Capital transfers abroad ••••••••

11.5 4.0 2.0 -----17.5

Thc'6e ~5timates of total exchange requirements hiI"..ge on projections of past performance and tre~ds in national accounts. Vlhether these projec­tions aI'e correct or not, the exchangl' requirements cited also correspond to the foreign expendi tUl;es involved j.ll major development projects and are therefore doubly relevant.

- 12 -

c. Short-Term Prospects

The technical staff of the Comadttee for economic development has en­gaged in a rather extensive analysis of the short-run prospects of the balance of payments (1952 to 1957 approximately).

The Cornm5."ttee based its analysis upon the following assumptions.:

(1) The five-year development program recommended by the Committee, involving the maintenance of a rate of investment of 1,100 million pesos annually, w.ill be implemented;

(2) There will be no further inflation; (3) Five and one-half million bags of coffee will be sold per year.

at an average price of US$ 0.55 per pound; (4) All other elements influencing the balance of payments will

operate as they did in the past; (5) Gross capital inflows will reach US$ 37.5 million per year.

Upon these assumptions, a balance of payments for 1953, an "average prOgl"2lIl year, n is projectedo According to this projection, Colombia would be able to maintain the level of imports required for the execution of the pro­gram (US$ 200 million per year), and 11Vould be able to meet all its foreign commitments at a rate of exchange of Ps .. $ 2050 per IT.So dollar vdthout the help of controls, ~~hile leaving an exchange margin of roughl.y US$ 30 million still una.llocated to specific expend.i tures.

Most of the a:::sumptions made above are presu.mably reliable if an overall investment p;:,(:.grarn is being implemented, but "the assumptions about coffee deserve car~·lll·i. sc!UtiI"..y. As will be shomn later, disti.nct increases in the volume of coffee exports are unlikely. A conservative f3stimate would set export vOlume available on average for tb.e next five years closer to five million bagsn :2:ciee forecasts also suggest the Committee is over-optimistic; it is more lil':ely that the average will be US¢ 50 per pound than US¢ 5'?

UnclE::!' such conditions, coffee exports for the period 1952-56 are un­likely to 2..V"srage more than. uS$ 320 million, or US$ 80 million less than ex­pected by the Committee's staff. Allo~ing for the fact that the COIIlIlll ttee' s estimates of current invisibles include an unallocated safety margin of US$ 30 million" and that capital goods requirement may be overstated by US$ 20 mil­lion~ i~j ;-;till seems probable consumers' goods imports eS'&imated at US$ 240 m:.ll ion w01 .. Lld have to be reduced by US$ 30 million if balance of payment s equ.:Llibrium is to be reached in the short run.

Doubtless this reduction will be achieved if a list of prohibited iz:~orts is maintained, and would not greatly affect consumers I goods levels if a~icultural production is swiftly promoted, as also advised by the Com­m::.t·Lee.

It is clear that some stresses may easily be felt even under "opti ..... mum" conditions. It follows that if a program is not implemented, if inf~&­tion is allowed to resume its course (which would ipcrease demand fo~ con­sumers goods imports), or if foreign capital is not forthcoming. payments are

- 13-

like~ to exceed receipts. This does not imply that Colombia, confronted with this situation, runs the risk of using up its reserves, or of defaulting on its present foreign obligations. This would occur only if pressure on con­sumption levels were such that it would provoke distinct and sustained de­creases in the standards of the masses. But Colombia nnght have to have re­course again to controls, or resort to devaluation 9 or botho The situation \~Tou1d nei ther be better. nor worse, than in 1950.

D. Long..-Run Prospects

A discussion 0.<;' long-term trend.s in the balance of payments obviously cannot bear on all irJ'l'.'\Ancing factors, m r can the trends be formul,ated in precise quantitative terms o What cen be attempted is a. guess as to the pro­bable behavior of the main variables. In the Colo!Jlbian case.. t,'\'O of the prin­cipal sources of receiIt s, coffee and petroleum, are not likely to expand, while the major payment item - imports - should in nor;nal circumstances show an almost continuous growth. Judgment on Colombia's future creditworthi­ness and balance of payments prospects will therefore rest on all evaluation of tbe extent to which thi s si tLlation can and will be met by corrective mea­sures.

Receipt s

Coffee. -.... Coffee has for the last dec6.de represented the largest source of foreign exchange for Coloobia, accounting for 75%..., 80% of all ex­ports,

Gro',~lth in sales volumes has been stead.y for the :1:'10 decades preceding 1948, and has had little relation to price fluctuations.~ This insensitivity can be ascribed primarily to three factors; (1) relative lack of mobility of the coffee farmer; (2) the prof~ tabi1i ty of coffee cul ti vat ion. relati va to other crops; and (3) the fact tnat coffee trees take four to six years before coming into production, and that therefore long-range price expectations are more meaningful to the grower them current market conditions, In this in­stance~ it SGems that until 1945 growers kept on hoping for a return to Pfe-1930 pric6s j which actually materiali~ed in 1~4g.

The vol1lrl~e of exports declined from 1948 onward. While prices in­creased to all-time highs, exports fell to 5.4 million bags in 1949 and to 4v5 million bags in 1950. In 1951 they may not reach 5.0 million bags.

l' ~ -==~==~-==~======~~~~~~~~~~==~==~~~~~~~~~

Export volume Prices (Manizales)

1928 1935 1940 1948

million bags US¢ per pound

27.26 10 .. 26 8.34

32.57

.. ··14 -

While to a large exte:nt thls decrease can be attributed to bad weather. to the troubled political ~ituation ~hich provoked large migrations from the farms to the t01wns, . and to seve;re transpor1iation breakdowns •. it can also be ascribed to changes in long-term expectations of the growers and in the socio-econonU.c structure of the country. i.e •. to a gradual turn towards a diversification which Should in the end prove a stabilizing factor ~n the country's econo~.

Available information is scanty and not fully reliable, but it seems that new plantings in the period 1946 to 1950 (which will determine the size of the crops between 1950 and. 1954) have taken place only on small coffee farms and that, on the whole, they have not corq>ensated for trees going out of production, or for lower yield~ in ~ng plantations.

The rate of new plantings fell af? soon as new and different invest­ment opportunities opened to the omers of 1a.rge coffee haciendas, i.e~ as soon as large imports of capital equipment bec~e available in 194~6. The oppor,.. tuni ties for employment in the ~ndustria1. field increased simultaneously I an<i the sons and daughters of small .. ,farm owners left small coffee farms~ It is un­likely that the exceptional prices of 1950 and 1951 have reversed this trend. Two crops which are usually complementary to coffee - panela (semi-refined sugar) and aniseed....., have been hard hit by the nrohibition imPosed since 19ijg on the manufacture of chicha and other hard liquors, and 'by the progress made in industrialization of sugar. Small growers m~ weil have found tha.t while in the last five years prices of coffee have increa$ed relatively more than tr.ose of most other crops, the total income yielded by a coffee finca has increased less than that of a farm gro'tJ'Jing other crops •. For this reason large coffee crops are unlikely in the next ii ve years, and U ~ S ~ Depcr tment 'of Agri.~ culture and official Colombian estimates setting the export at 5,5 mi11~on bags by 1953 may have to be revised downwards.

The long-run prospec·t f(~r c~offee prices cannot be ~scertained with any p~ecision. ~rts were rather optimistic in 1950, and forecasted a slow :rate of growth in supply throughout the world and stable high prices; now it s.eems that. principally owing to new price-suprort pol ~cies in Brazil. and to the considerable crop increase which can be anticipated. to take place there, wi thin a feV! years supply m~ exceed d~Dland at current pri~s, particularly' if coffee stocks become difficult to finance. World c1.,ffee p-ices afte. 1953-5+ may progressively fall to say 50¢ exld'later IJossibl!' ewn lower.'

If this gradual dec~ine in Pfices is clearly t~Stt by 1955 further re­ductions of the Colombian coffee crop will be unavoidable atter 1959, a~thougn not of large ello-ugb magnitude to affect v:orld coffee pr~ces. It has already been pointed out that enthusiasm for coffee growin~ is already on the decline in Colombi.a. even though ~orld prices are very high. ~orces currently operat­ing adversely upon the coffee economy would obviously be even stron~r were prices to decrease. Other influencing factors, whose impact will be more fUlly felt in the near fut~re, are the mechanization of agriculture in the plains of Colombia, and the progressive subdivision of large ho~dings, both of which may soon render JllOst crops more attrL:tctive than coffee. Better educatioJlal fac~lities will draw more of the younger generatton away from s~l coffee farms in the Andes, where not ~ven the most elementary forms of p1,lblic facil~,.. ti~s and services are or could economicallf become av~Uable., It is tberefore

~ 15 -

doubtful whether coffee crops will be larger in fifteen to twenty ye~s than at present. On the contrary. vol'UIIl.e reductions are likely even if·prices do not decrease signif:ic antly. Relati ve to current performance, a fall i..n cof~ fee receipts by US$ 50-100 million should be an.ticipated.

Petroleum

Little is known about the long-term prospects of Colombian petroleum •. Proven reserves are estimated at 400 Illillion barrels, or enough to maintain the present rate of output for twelve years. l1hat might hs.ppen after thes.e years is difficult to forecast.

While the geological configuration of the country seems favorable, ex­ploratory drillings in the past few years i~ve not yielded very satisfactory results except in regions ~vhere regular production was already under way. , . .

~s far as can be determined, output of crude oil will increase slowly in the coming decades o Nation~ conswnption of refined oil products, how­ever. may we~l grow at a much faster rate. Were nothing new to occur on the s·Llppl~7 side, Colomoia migpt ultimately consume the wbo:).e of i.ts oil output.

Petroleum statistics for 1950 are:

Crude output •.• , •••••••••••••• 34 million barrels Crude exports •.••••••••••••••. 28 million ~arrels Oil refinei locally ...•••••••• 9 million barrels Imports of refined products ••• ~roximately 2 m!lllon barrels National consul1Iption of .. .

refined products .....•. " ..•.. approximately 11 million barrels

Within ten years crude oil output might re~ch 40 million barrels. If the new refinery contemplated by the Colombian Government and the International. Petrole\lIn is installed i import s of all oil product s will stop-. Local consump­tion may by then have reach~d 20 Plillion barrels. Assuming that prices of oil do not change, the value of Colombian oil exporta will thu~ decrease ..

Other E~orts and Current Receipts

As sbown in Chapter II!, the prospects of expans:ion of old and new exports are closely rela.ted to government politics. Before e~rt di versi­fication ca""'1. become a fact. transport programs will have to Oe implemented., freight rates revised, foreign investment encouraged, agricultural pursuit~ and industriaLization stimulated, and standardization in th~ quality of goods ensured, New markets should be opened by efficientprofDotion cartpcAgtlS and sustained efforts will have to be made to encourage new exports. .

If th.i,s occurs, and if successive governments stay "di versificf).tlon conscious. If increase in Uotherrt e~orts ICay well compensate for loss~s in­curred in tne cotfe~ field. Together w~th prospect~ of growing receipts for the Gr~a.ter CQlombi·an Merchant Fleet. such di versificat ion could ·maintain cur,.. rent balance ot ·payments receiIt s at rougilly the~r prese;n.t leveJ,.s,

- 16 -

E. Creditworthiness Appraisal • f , •

Were all the opportunit ies afforded by the improved econo~ic environ­ment and by the numerous resources ofI Colombia effe·cti "iTely ap.pl~ed to the solu.­tion of forecast balance of payments di~equilibria, Colombi~ could~ook fonvard to balance of . payment s surpluses partly through increased exports. but mainly through a considerable reduction i~ importso Such prospects would permit a sizeable increase in current foreign indebt ednes$. However,' it· ,vould not be realistic to expect optiIIlUIIlper.formanc~8 . .

. !,~at is much more likeiy is t~at· the rate of import substitution'and export promotion, though improved through the execution of the Commit tee r s program, will not quite match 'the demand for imp<;>rts, 'which will. tend to grow parallel to domestic output and inco~es •. Under ~llcll ccnditi.ons some restric-tions in import vol1,1Illes will ~v~· td ~e ~rought about. c·

This should not be 'cause for great concern because the eJq:>ected annual deficit· between actual 1mports and ilnport demand woUld be more ~han compensated . by increases in the availability of consumerS 1 goods produced locally. IIi other terms, import shortages may force people ~nto buying pr~sentlY less. de- '. sirable goods tOot not necessarily a conatantly decreasing total amount of goods. Further, tbe ~tabilizing effect of monetary reforms advocated by the Co~ttee I;I1a:! redistr j1:Jllte income somewhat and so progressively decrea$e 'the ()verall pro~ pensity to import.

Exchange shortages could only have grave con$equeooes it cap! tal goods imports were decreased through controls, a prospect whi.ch past history makes unlikely. If this were to happen local output ~uld decrease within a few. years~ and this would S0011 force decreased levels of consumption. Only if substantial declines in Ii ving standards occ1.l,rred vTould the. sex-vice of for~ign debt become second in importance to the satisfaction of popular deman~ for needed imports, and default on outstanding forei@l indebtedness therefore ap-pears most unlikely. . .

As shown above j the Committee's program is b.ased upon an expected capital inflo\i1 of US$ 37.5 IIlillion annually over the next five years, of which US$ 10 ~illion WQuldbe'foreign direct investment other than in petroleum, and US$ ZO million ~uld be in th.e form of lopns. Owing to the favorable en­vironment wm.ch has recently peen c:re~teQ. for foreign cap~tal in Colombia, the estimate of private equl tyinflo~! is' probablY reliable provided. th(.re is no deter~oration in the pol~tical situation in the next few years. Loans ate, however. also needed to enable. Colombia to carry out key investxnents in t.he progrem.

Service charges on Colombia' ~ outstanding foreign d,ebt do not yet represent a major or determining it~m in her balance of 'Paym~nts. The e~­ternal debt of Colombia is as summarized in the folloVling table •.

(In million dollars or equivalent)

uS$

HOld Debt U (settled with bondholders) ,., •• 11 78,3 U.s~ Gover~.ent Loans •...••• _ •• ~ ••••••••••• 39~5 lBIll Loans •.•.•.• " ••••••••••• fJ •• It •••••• ,. li.1

'f

Total Sterling

5.8 84.1 - 39.5 ..,. 11,l. ~ 80,4 Private Loans •• ~ •••••• ~ •••• ,. ••••••••• ,.,. ••• _8_0_.;,...4 _______ ~~~.....,....~

5.8 215.1 ... t.

Total :Debt .• , It • ~ • ~ ......... " ••••• , • • • •• 209.3 ~~-------~----~~-~~--

5.8 128.5 ... 86.6

Disbursed • It ••••••••••••• It It •••••• "0 ............ ~ 122~ 1 Und~sbursed "ll." CI;, •• ~ ••••• " ............ ~'" 86.6

~ ~ includ.ing highway progrem loan ($16.5 lllilliop; April 11. 1951)

Assuming that all present commitments (other than lBRD hip~ loan) are disbursed by the end of 1952, heaviest service schedule on the debt of $215 million (between 1952 and 1956) would not e:xceed US$ 24 million per year. or 1es$ than 6% of c.nticipa.ted current receipts at present coffee pricesk> In­terest payments are at; all times less than 2fo of curren'ti receipt s.JJ Inasmuch as the amorti~a.tion. schedule of current Colombian deb~ calls for principal repayments of US$ 71 million d\lring the five years 1952 through 1956. the net increase in externsl indebtedness conteIlJ>lateq. by the Committee is small. The somewhat higher service payments should be ~tithin Colombiats capacity even if coffee prices fall from their present high level.

\1.hi~e Colombia is not expected in the short- or the long run to pos­se9S alIiPle e~change r~venues? it is believed that the pressure OJ). imports wUl never become grave enough to endanger service of loans which wOlld only moderately increase current foreign debt service. This ~tatement, however, as­sumes ~~was ment10ned before that the political situation will not degenerate and that economic polioies will not fall below past standards. w,he implemen­~ation of the most important features in the Committee's economic program may prove the best ass~ance of Colombia's long-term crem. tworthiness.

II ;

!I See "Summary of External Debt of Colombia" ~ No. E-150, April 10, 1951.

Y Excluding the m;RD highwSf loan of uS$ 16.5 miliion made in Ap:ri). J.95l to finanoe the foreign e;x:change costs of the Committee's tnreEjl-year high"", way p:rogfatr:l.

APPENDIX ON

ACTIVITIES OF THE CO~'il\.111'TEE FOR ECONOMIC DEVELOH'iENT " -

A. REC01\:1lv1E1WATIONS OF THE COMMITTEE

The ma.jor recommendations oi the Committee, listed below, bear on tp~ee different subjects:

(1)

(2)

(3 )

Reforms of the financial 'and econom.ic environment.

Development programs for various sectors of economic activity, including specific projects.

Overall investment program and national economic policy"

Recommendations which are too general or vague to serve as a firm basis for Government policy, or wh:ic h express "pious "hopes" and not workable suggestions have been el~inated from the list below.

I. ReCOlnMendations on the Economic Environment I

(a) Central Ba~k (Banco de ~a Republica,)

(1) It should be given the powers needed to i.T!lplement specific monetary policies correlated with the general economic program of the Government.

(2) It shou~d attempt to avoid both inflation and deflation and should channel savings towards productive uses oY' means of proper rediscount and interest rate policies.

(3) In the short-run, it shov.ld stop inflation.

(b) :Foreign Exchange

(1) The peso should oe allowed to fluctuate freely and to seek its ovvn leve4-. F or about two y ea~ s , a di~inis h:i ng spread should be maintained between the new rate and the exchange rate applying to eo.ffee ex:ports. 1ihis would cushion possible inflationary effects of the devaluation.

(2) Exchange profits thll~ generated should be used in development projects.

(3) Complete freedom of exchange transaction (both current and capital) should be established.

(0) Fiscal Policies

(1) The budgets of the nation, the departments and the municipalities should be balanced without resorting to incre~se in the internal d,~bt.

~18 .,..

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(2). Tax rates should not be increased.

(3) Larger revenues should be obtained by a more efficient tax ad­ministration. Tax legislation should be simplified and inte£rated.

(J.J) The excess profits ta,",{ should be suppressed.

(d) Intervention of Government in Busll1ess

(1) Government should, whenever possible, refrain from engaging in commercial operations. In particular tce alcohol monopoly should be suppressed.

(2) Government intervention in the economic life of the country should be as indirect and automatic a.s possible. Frice, exchange, imrort, e~ort and other controls shoUld be suppressed.

(3) Internal movements of goods should be completely free of customs and controls.

(4) An attenpt should be made to de~rease the burden represented by social benefits e~pecially in agricultural and industrial pro­duction.

(5) National statistics should be improved.

110 .Sector Programs

(a) Transport

(1) Highv;ays

(a) The G~vern~ent should dedicate its hibhway resources to the execution of an integrated national highv:ay program.

(b) The I.1inistry of Public '";orks should be reorganized in order to gear it to proper transport planning.

(2) Railways

(a) Construction should stop on all new lines.

(b) The ldagdalena River should be surveyed by air, and if prac­ticable, a railway should be built between La Lorada, Puerto Berrio and Puerto dilches (or Gamarra).

(c) New railway repair shops and a new station should be b~t in Bogota.

(d) The gauge of the Northern and Northeaster-n railways should be standarQized w~th that of other Colombian l~es.

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(e) The administration of the railroads should be improved and a competent man should be chosen to run them. The railroad should be put on a sound financial condition.

(f) SmallJ uneconomical railroads should be eliminated.

(3) Ports and Rivers

(a) The mouth of the Magdalena River near Barranquilla should be open to heavy cargoes. The work on the "Bocas de Ceniza" should be completed.

(b) The port of Barranquilla should be modernized and mechanized.

(c) The docks of Buenaventura should be expanded.

(d) The Canal del Dique should be dredged.

(e) The administration of ports and rivers should be improved.

(4) Pipe Lines

(a) Pipe lines should be completed between the refinery at Barranca-Bermeja, Bogota and Hedellin.

(b) Pipe lines should not be built be~Neen Buenaventura and Cali and between La Dorada and Cartago.

(5) Air Transport

(a) A corporation finanGed by the Government and partially by the air lines should pool and administer common ground facilities of national airlines~

(b) New airports and new flying and ground equipment should be purchased or built.

(c) The administration of air transport should be improved.

(b) Agri~ tur~

(1) Some fiscal ffi'ethod should be adopted in order to discourag'e the under-utilization or land, or encourage its full use. (The land tax scheme suggepted in the IBRD ~'li~sion heport was discussed exten~ivelYJ but finally abandoned.)

(2) r.:Iore cred~t should be given to agriculture.

(3) The department and munic~palities should build penetration ~nd f~rm-to-market roads.

(4) Cooperatives, colonization and the use of fertilizers~ the purchase of land clearing equipment and the construction of silos should be encouraged.

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(c) Education

(1) The number of teachers should be increased •.

(2) Their salaries should be increased.

(3) A specific program of school construction, calling for invest­ment of Ps. :;~ 8 million per year should be executed.

Cd) Ptfulic Health

(1) An ei£:;hteen-y(aar program of construction of health centers, c'..lstodial institutions and hospitals should be embarked upon. By 1970, health centers should be available to the entire population, aLnd there should C2 five hospital beds per 1,000 inhabitants. The number of custodial institutions and beds should be doubled.

(e) Public be:rvices and Housing

(1) A I1inistry should be in charge of the development planning of public services includip~ electricity, and housing. Relevant credit institutions should be under its control~

(f) Industry

(1) The Government should ~tudy the possibility of building a small integrated steel mill.

III. Overall Investment Frogram

(a) Private investment and all government expenditures should be kept v:ithin the framework of a general investment program oriented towards substantial improvements in living standards o

(b) This program contemplates an average rate of investment of Ps.!: .. l~.lOO million over the next five years. (Private Ps.~ 760 nullion; Government Fs.$ 340 million.) Of this grand total, US$ 37.5 million or Ps.~~ 93.75 million per year should be financed by loans from abroad. (US$ 20 million fram lBRD, US$ 10 million from private interests and US$ 7.5 u~llion from petroleum interests.) Studie~ of national accounts and of the balance of payments of Colombia indicate that the country is fully creditworthy for this additional indebtedness provided:

(l} The overall program is implemented J and

(2) The lnternational and internal political situations do not deteriorate any further.

(c) The program reconllnends maintenance of specific rates of investment per economic sector. 6ector allocations, however, are flexible; they indicate an order of magnitude rather than a rigid target. The major philosophy of the program is that investment should be divertEd from luxury housing, commercial buildings, stockpiling of inventories, and directed towards investment of social signifi­cance such as health, education, public works, transport, agri­culture and industry.

(d) The Committee recommends that a Planning Office be established in the Office of the President which would up-date the program, advise the Government on its implementation, and also coordinate all foreign assistance.

(e) All Goverr~ent entities and the Banco de la Republica should orient their policies towards the execution of this program.

B. THE 1TORK OF THE cor flI'TITTEE AND THE IBRD ~.1ISS ION REPORT

On the whole, the recommendations of the Committee follow closely the lines of the Development Program described in the IBRD hlission report.

(1) Recommendations on foreign exchange are very specific.

(2) T~e Conmittee refused to consider the pOpsibility of increasing taxes.

(3) The Committee was much more vocal in its criticisms of the legislation on social benefits.

(4) The Committee rejected the land tax scheme suggested by the report but accepted its philosophy.

(5) The Committee was much less specific than the report on programs dealing with agriculture, industry, public utilities and housing.

(6) F:rograms for education and public health of the Commit"~.ee are more concrete than those of the report.

(7) The Committee rejected the iIission's scheme for a steel industrYJ but it did not approve entirely of the Paz de Rio Project.

(8) The overa~ investment program of the Committee is approximately 10% higher than that of the Bank n:ii,:;sion. This takes into aCCQunt cost increases since 1949.

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C. REACTIONS CF THE GOVER~1ENT TO '!HE COI.:rJI'ITEE r S RECOL2.:El\1DATIOi~S

(1) Many of the Committee's sessions were attended by members of the Cabinet who often presented their ovm suggestions j or commented on recommendations made to them.

(2) The Colombian Gover~.'~ment accepted and implemented many of the Committee's recommendations, in most cases with some modifications.

(3) It adopted its anti-inflationary policy, increased the participation of the Government in the C~ntral Bank, decided upon a policy of moneta~J stabilization.

(4)

(5)

(6)

(7)

(8)

(9)

(10)

It examined the reconunendations of the Committee on exchange, asked for an IMF mission," decided to devalue the peso from Ps.$ 1.95 to the dollar to Ps.$ 2.50 to the dollar. It established a spread betvreen coffee rates and the new rate of Ps.$ 2.50. Most of the resulting exchange profit so far has been used to cover the in­creased peso costsro! government commitments in foreign exchange. The Government also suppressed import and export licenses (it inaugurated a list of prchibited imports) and intends in the long-run to give complete freedom to exchange movements.

The Government emphatically stated its determination not to increase taxes and has managed so far to balance the budgets without resort­ing to new internal borrovrings.

The Government as yet has not attempted to improve the administration of taxe~ neither has it suppressed the excess profits tax or internal barriers to trade. The Government has not stopped competing with private enterprise nor has it modified the legislation relative to social benefits.

In the field of transport, the lJiinister of Public Works, Mr. Leiva, adopted practically all the recommendations of the Committee and is busy implementing them. However, he does not intend to suppress the whole of the railroad going up from Tumaco and he has not yet decided on whether to stop the construction of the pipe lines between Buenaventura and Cali and bet1.veen La Dor-ada and Cartago ..

The ~inister of Agriculture seems desirous of solving th~ problem of under-utilization of land and has proposed tax incentives for those who improve their rural properties.

The Minister of 1ducation is ~nterested in the Committee's program and intends at least to implement its reco~~endations on salaries.

The Minister of Health's reaction to the Committee's plan is not known.

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(11) The Minister of Development is busy organ~z~ng the planning and financing of public utilities (electric, water supply, sewers, markets, and slaughter houses). However, his intentions regarding housing are still vague.

(12) As far as industries are concerned, the Cabinet has decided to go ahead with the Paz de Rio project and is examining the possibility of reducing tariffs for raw Inaterial imports and otherwise helping manufacturers.

(13) The Minister of Finance has shown a great interest in the creation of a Planning Office which could carryon the work of the Committee for Economic Development, draft annual programs, and advise the Government on economic and financial policies.

D. EVALUATION OF ACHIEVEMENTS TO DATE

The Committee has made substantial, and generally sound recommendations on reforms of the financial and monetary environment, has formulated clear programs for transport, education and health, and has sketched the pattern of an adequate and practical investment program. Government has already adopted J or intends to adopt, most of the more specific recommendations on environmewt and sector programs.

The Committee did not draw up specific progra~s for agricultural, public utilities and industrial sectors.

The drafting and implementation of such programs is essential to the completion of an overall plan. It is likely that the Hinister of Agriculture will attempt to formulate some specific economic scheme, along the general lines described by the Committee. The I.iinister oJ: Development is already engaged in Public Utilities programming. \ihat will be done about housing and industries is still lli'"1knOVYn. In these fields, the help of U .H. and FOlint Four experts will prove of great value as it will be in those areas where specific recmnmend­ations of the Committee have been adopted but where skill is required in devising means of implementation. The smooth functioning of technical assistance should, therefore, be considered an important requisite to the succe~s of the whole Colombian program.

The Pl~1ning Office to be created within the Office of the President of the Republic would have the following functions:

(1) Gather and organize up-to-date information on national accounts, investment, money supply, balance of payments.

(2) Periodi~ally revise and modify the sector and overall programs drafted by the Committee.

(3) Advise the Government and the Central Bank on economic and financial policies based on (l) and (2).

(L) Help the ~.linistries in formulating Sector programs.

(5) Help the II.'Iinistries and private interests in the preparation and presentation of loan applicat~ons to the IBRD and other investors.

(6) Conrdinate and direct all technical assistance activities.