Appendix 4 Rates of Return to Physical Capital and the Efficiency of Public Investments

191 Pages·2001·8 MB·English

by  World Bank Group

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W 0 R L D B A N K
COMPARATIVE MACROECONOMIC STUDIES
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JO R GE GAR C I A GAR C I A
S I S I R A J A Y A S U R I Y A
THE WORLD BANK, WASHINGTON, D.C.
© 1997 The International Bank for Reconstruction
and Development / The World Bank
1818 H Street, N.W., Washington, D.C. 20433
All rights reserved
Manufactured in the United States of America
First printing May 1997
The World Bank Comparative Macroeconomic Studies series emerges from a research
project that reviewed the macroeconomic experiences of eighteen developing countries
over a period roughly from 1965 to 1990. The findings, interpretations, and conclusions
expressed in this publication are those of the authors and should not be attributed in
any manner to the World Bank, to its affiliated organizations, or to the members of its
Board of Executive Directors or the countries they represent.
The material in this publication is copyrighted. Requests for permission to reproduce
portions of it should be sent to the Office of the Publisher at the address shown in the
copyright notice above. The World Bank encourages dissemination of its work and will
normally give permission promptly and, when the reproduction is for noncommercial
purposes, without asking a fee. Permission to copy portions for classroom use is
granted through the Copyright Clearance Center, Inc., Suite 910, 222 Rosewood Dr.,
Danvers, Massachusetts 01923, U.S.A.
The complete backlist of publications from the World Bank is shown in the annual
Index of Publications, which contains an alphabetical title list and indexes of subjects,
authors, and countries and regions. The latest edition is available free of charge from
Distribution Unit, Office of the Publisher, The World Bank, 1818 H Street, N.W.,
Washington, D.C. 20433, U.S.A., or from Publications, The World Bank, 66, avenue
d'Iena, 75116 Paris, France.
Cover design by Sam Ferro.
Jorge Garcia Garcfa is a Senior Economist in the World Bank's Resident Mission in
Jakarta, Indonesia. Sisira Jayasuriya is a professor at Latrobe University in Australia.
Library of Congress Cataloging-in-Publication Data
Garcia Garcia, Jorge, 1945-
Courting turmoil and deferring prosperity : Colombia between 1960
and 1990 / Jorge Garcia Garcia, Sisira Jayasuriya.
p. cm. - (World Bank comparative macroeconomic studies)
Includes bibliographical references and index.
ISBN 0-8213-2656-2
1. Colombia-Economic conditions-1970- 2. Colombia-Economic
conditions-1918-1970. 3. Colombia-Economic policy.
I. Jayasuriya, S. K. II. Title. III. Series.
HC197.G33 1997
338.9861'009045-dc2l 97-1458
CIP
Contents
Foreword vii
Acknowledgments ix
Acronyms and Abbreviations x
Data notes x
Introduction xi
Chapter 1. Political and Policy History I
The Development of Modern Colombia I
The Return to Civilian Rule 7
Sustained Growth and Higher Inflation: 1970-75 11
The Coffee Boom: 1975-79 12
The End of the Coffee Boom and the Onset of Recession: 1980-83 14
The "Orthodox" Adjustment Strategy: 1984-85 15
Overview 16
Chapter 2. A Profile of the Economy 19
The Land and Its Geography 19
Population, Growth, Economic Structure and Trade 20
Agricultural Sector 22
Manufacturing Sector 24
Employment, Unionization and Real Wages 25
Capital Markets 27
Savings, Investment, Balance of Payments and External Debt 31
Fiscal Policy, Monetary Policy and Inflation 33
Exchange Rate Regime and the Real Exchange Rate 36
Chapter 3. Crises and Policy Responses 41
The Current Account Crisis of 1966 41
Adjustment and Growth to the Coffee Boom: 1967-1975 50
The Coffee Boom: 1975-79 52
Reversal of Policy: The National Integration Plan 56
v
vi Courting Turmoil and Deferring Prosperity: Colombia Between 1960 and 1990
The End of the Export Boom 57
Adjustment: 1985-86 63
Chapter 4. Crisis Management and Long-Term Growth 71
External Developments and Domestic Fluctuations: 1950-86 72
Rate of Investment 75
Efficiency of Investment 75
The 1966/67 Episode and Its Long-Term Impact 79
The 1976-86 Period and Long-Term Impact 81
Chapter 5. Conclusions 85
Why Did Policymakers Behave as They Did? 85
Did Macroeconomic Policies Accelerate or Retard Growth? 87
What Lessons Can Be Drawn from Colombia's Experience? 90
Chapter 5 Appendix. The Determinants of Productivity Change 93
Appendix 1. Estimating the Public Sector Deficit and Its Financing 103
Appendix 2. Sources of Growth of the Money Base 107
Appendix 3. The Investment Function 110
Appendix 4. Rates of Return to Physical Capital and the Efficiency
of Public Investments 112
Rate of Return to Physical Capital: 1950-86 112
Efficiency of Public Expenditure 113
Bibliography 119
Statistical Appendix 129
Index 170
Foreword
This volume by Jorge Garcia Garcfa and Sisira Jayasuriya is one product of a World
Bank research project that has reviewed the macroeconomic experiences of eighteen
developing countries since the mid-1960s. This period encompassed two oil shocks,
two world recessions, a sharp rise in world interest rates, the debt crisis, and changes
in exchange rate regimes. Many countries encountered severe crises, though their
responses varied greatly, and often the crises were essentially home-grown or, at
least, the result of unwise domestic policies combined with external shocks.
The objective of the project was to glean instructive lessons by analyzing the
stabilization and adjustment policies pursued by these countries and assessing the
outcomes. The authors of each country studied were asked to deal with a common
set of questions concerning the nature of shocks; their origin and degree of seri-
ousness; the fiscal, monetary and trade policies adopted in hopes of preventing
permanent harm to the economy; and the results of the policies. While no single,
rigid structure was imposed on the studies, they were conducted within the frame-
work of the open-economy macroeconomic model to ensure consistency in gen-
eralizing about results.
The intensive study of many episodes generated ideas and suggested relation-
ships showing the causes and effects behind policies, the nature of shocks and cri-
ses, and governmental responses to them. The major findings of the project are
presented in a synthesis volume by I.M.D. Little, Richard N. Cooper, W. Max
Corden, and Sarath Rajapatirana, Boom, Crisis, and Adjustment: The Macroeco-
nomic Experience of Developing Countries, published by Oxford University Press
for the World Bank.
Within the set of study countries, Colombia provided an almost unparalleled
example of steady long-term economic growth, despite its exports having been
dominated by coffee, a commodity with high price volatility, and its political en-
vironment plagued by persistent civil strife and traumatic violence. The unusual
stability of its growth performance was in no way due to an absence of serious
shocks to the economy. On the contrary, as this book details, a number of major
domestic and external shocks have confronted the Colombian economy since the
early-1960s. Historically, given the central role of coffee in Colombian exports,
the major external shocks have been associated with the relatively frequent and
sharp fluctuations in world coffee prices, and this was also the case during the
study period; in addition, the growing importance of illicit drugs has introduced a
vii
viii Courting Turmoil and Deferring Prosperity: Colombia Between 1960 and 1990
new and volatile factor into the economy in more recent years. This period was not
only one of major economic shocks; it also witnessed major policy changes, in-
cluding a long-term shift in the country's development strategy from an essentially
inward oriented strategy, based on industrialization through import substitution, to
an outward oriented export-led strategy.
How and why Colombia managed to avoid any major, prolonged economic
crisis during such a period is a major issue addressed in this study. However, the
analysis presented here goes beyond this issue and differs from most existing lit-
erature on the Colombian economy in two important ways: first, it evaluates policy
responses to shocks not only in terms of their success in achieving short-run sta-
bilization, but also in terms of their impact on long-run growth; second, it explores
the intimate links between economic policies and the specific, historically
evolved, political and social ideologies, institutions, and structures in Colombia
that conditioned government policymaking.
The role of prudent macroeconomic policies for crisis avoidance is highlight-
ed. The links between fiscal policy, trade policy orientation, nominal exchange
rate, and the real exchange rate are analyzed to show that a lack of appreciation of
these links has hindered the growth of a dynamic export sector and long-term
growth. Successive Colombian governments, however, have shown a remarkable
capacity for adopting flexible responses to evolving macroeconomic imbalances
and to implement necessary stabilization measures before they developed into
full-blown crises. Gradualism and moderation, rather than sharp swings, have
characterized the broad thrust of government policy. It is argued that this was
made possible by the domination of the political system by two elite-based polit-
ical parties that, with minor differences of emphasis, share a common political and
economic outlook. While the potential threat of widespread popular opposition
has always been an important factor in shaping economic policies, it has been a
constraint on the choice of policy options rather than the driving force as in many
other countries.
The exclusion of the masses from the legal political arena has also been a
source of instability. It has perpetuated distributional inequities and driven people
to support extra-constitutional political movements. This combination of rigorous
economic analysis with a sensitivity to the broader political and social dynamics
makes this book an important contribution not only to the literature on the Colom-
bian economy, but also to the broader literature on economic development.
Sarath Rajapatirana
Director "Macroeconomic Policies, Crisis, and Growth
in the Long Run" Research Project.
Economic Adviser,
Operations Policy Group