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Advisor to the Minister of Finance of Colombia. The paper was written while the author was a Visiting Scholar in the Research Department. The views expressed in this paper are the sole responsibility of the author, who would like to thank, without compromising, the comments made by A. Calderon, M. Bonangelino, A. Caetano, L. Duran-Downing, F. Fernandez, J. Jaramillo, R. Velloso, and P. Wickham.
See “El Salto Social 1994-98” (Presidencia de la República-DNP) for an overview of the social goals in Colombia and for a recent assessment on poverty in Latin America, see World Bank (1994) and Psacharopoulus et al. (1992).
Santiago accounts for nearly 45 percent of Chile’s population, whereas Bogota accounts for only 16 percent of Colombia’s population.
The Congress of Chile made permanent most of the extraordinary tax increase measures adopted in 1990, which were to expire in early 1994. In particular, the VAT rate stood at 18 percent during 1994-95, instead of reverting to the 15 percent level that prevailed in July 1990. However, the Executive Branch has been empowered to modify this rate by 1 percentage point in either direction.
In Chile, the Minister of Finance has non-voting participation in the five member board of the Central Bank, while in Colombia the Minister of Finance currently chairs a seven-member voting board, including the Governor of the Central Bank and five additional members appointed by the President of the Republic.
The growth rate for 1995 is a projection rather than an actual.
For more details see Bolsworth et al. 1994.
Recent studies suggest that FDI is an important vehicle for the transfer of technology, contributing relatively more to growth than what domestic investment does. This is especially true when the host country has a good threshold stock of human capital (see Borensztein, et al., 1994).
In Chile nearly 60 percent of the export value is generated by the primary sector, mainly mining products, while in Colombia that figure is nearly 50 percent, represented mainly by coffee and oil.
However, it is too early to assess the possible damaging effects the severe drought that occurred in early 1995 and some recent public wage negotiations may have had on the inflation target. Unfortunately wage negotiations surpassed the 21 percent nominal target (composed of 18 percent inflation and 3 percent for productivity increases). The recent increase in real interest rates should have helped to reduce the pace of economic growth down to 5.5 percent by the end of the year, but in the first quarter the economy was growing at an annual rate of more than 6 percent.
Government revenues from the first round of privatization (1975-80) amounted to nearly 6.2 percent of GDP and divestitures during the second round (1981-89) represented another 6.8 percent of GDP. For more details on privatization in Chile, see Hachette and Luders (1993).
The divestiture process in Colombia has been of a lesser scope than in Chile measured either by the government revenues from privatization (3.6 percent vs. 13 percent of GDP, respectively) or the net-worth of the enterprises involved in each case. The nationalization of enterprises that took place in Chile during the early 1970s, which practically doubled the share of state-owned enterprises to 39 percent, and the debt crises of the early 1980s somehow induced divestiture as a crucial part of the adjustment program in Chile.
Since the expected rates of return are not readily available, and depend on how one models expectation, here we look only at the stylized facts in the form of ex-post returns. See Calvo, et al. (1992, p. 9) for a more complete analysis.
Chile and Colombia are the only Latin American countries which have recently received investment grade ratings and have currently good footing to gain a better position as emerging markets (see Burki and Edwards, 1995 p. 5). So another argument used, particularly in Chile, to maintain selective capital controls, has to do with avoiding volatility in domestic financial markets as foreign investors look for portfolio diversification opportunities. See also Grilli, (1995, p. 5) for an interesting discussion on this topic.
The present value of recent oil discoveries in Colombia has been estimated at representing nearly 25 percent of the current GDP value (about $16 billion) in a time span of nearly 10 years. This is equivalent to having a chain of small coffee bonanzas during the next decade. The recent implementation of an oil stabilization fund, based on the long-term experience related to coffee, and the approval of a Mineral Royalties Law should permit Colombia to efficiently administer this windfall resource.