Abstract
Selected Issues
The Outlook for Export Growth in Colombia1
Over the past few years, weak trading partner growth has offset the positive impact of a large real exchange rate depreciation and held back Colombian exports. Staff analysis shows that an improved global outlook and the lagged effects of the depreciation will push export growth higher over the coming years, especially if the authorities address long-standing bottlenecks in infrastructure and reduce non-tariff barriers to trade.
A. Introduction
1. The real exchange rate has depreciated 30 percent from its peak in 2012. This chapter sheds light on how much of a boost to exports this could represent by exploring the response of exports to fundamentals, the behavior of non-traditional exports in past large depreciations in commodity exporters, and Colombia’s structural bottlenecks to international trade. Estimates suggest that low trading partner growth has so far offset the boost to export growth from the depreciation to a large degree. But going forward, higher regional and world growth should support exports, including non-traditional exports which are found to react only with a long lag to depreciations. Reducing non-tariff barriers and improving transportation and infrastructure are key steps to support nascent export growth and diversification.
B. The Structure of Colombian Exports
2. Colombian exports are largely concentrated in oil and other commodities and are not very diversified (Figure 1).
Traditional products, broadly defined as oil, metals, and raw agricultural products, account for around 60 percent of nominal exports.
Colombia has a strong Revealed Comparative Advantage (RCA) in oil but is weak by LA6 standards in technology-intensive products (Ding and Hadzi-Vaskov, 2017).2 The complexity of Colombian exports, as measured by the Hausmann (2013) method, is in line with the LA6 average and has not changed much over the years.
The Herfindahl concentration index shows that Colombia was the least diversified country in LA6 in 2013, following the large increase in oil exports in 2007–13.
Despite the predominance of commodities and low-complexity products, the large real depreciation and moderate outlook for commodity prices offer an opportunity to grow nontraditional exports substantially.
The Structure of Colombian Exports
Citation: IMF Staff Country Reports 2018, 129; 10.5089/9781484357743.002.A001
Sources: Banrep, Ding and Hadzi-Vaskov (2017), Observatory of Economic Complexity.The Structure of Colombian Exports
Citation: IMF Staff Country Reports 2018, 129; 10.5089/9781484357743.002.A001
Sources: Banrep, Ding and Hadzi-Vaskov (2017), Observatory of Economic Complexity.The Structure of Colombian Exports
Citation: IMF Staff Country Reports 2018, 129; 10.5089/9781484357743.002.A001
Sources: Banrep, Ding and Hadzi-Vaskov (2017), Observatory of Economic Complexity.C. Recent Export Performance and Outlook
3. Despite the large depreciation, the increase in exports since 2016 has been moderate. This could reflect weak trading partner demand, a delayed response of exports to the depreciation, weak commodity prices, or structural impediments to export growth regardless of relative prices.
Real Exchange Rate and Exports
Citation: IMF Staff Country Reports 2018, 129; 10.5089/9781484357743.002.A001
Sources: Banrep and DANE.Real Exchange Rate and Exports
Citation: IMF Staff Country Reports 2018, 129; 10.5089/9781484357743.002.A001
Sources: Banrep and DANE.Real Exchange Rate and Exports
Citation: IMF Staff Country Reports 2018, 129; 10.5089/9781484357743.002.A001
Sources: Banrep and DANE.4. Staff modeled export volume growth as a function of commodity prices, the REER, and trading-partner growth to assess export performance more formally (Annex I details the methodology). Quarterly data since 2001 for 23 countries was used in order to put Colombia’s performance in international perspective. The coefficients in the model are estimated using data for 2001Q1–2014Q2 and used to forecast export growth in 2014Q3–2017Q4. The difference between this forecast and observed export growth is a measure of export over/underperformance relative to the historical relationship between exports and fundamentals.
5. According to the model, Colombia’s export performance in recent years has been broadly in line with fundamentals but somewhat weaker than suggested by historical relationships (Figure 3). A number of countries overperformed significantly but others, including other commodity exporters in Latin America fared worse than Colombia. In other words, weak export growth is not the result of strong underperformance. It reflects the relatively adverse external conditions Colombia has faced: commodity prices remained depressed and trading partner growth was weak, especially in Ecuador and Venezuela.
Export Growth Over- and Underperformance
Citation: IMF Staff Country Reports 2018, 129; 10.5089/9781484357743.002.A001
Sources: Authorities and Fund staff calculations.Export Growth Over- and Underperformance
Citation: IMF Staff Country Reports 2018, 129; 10.5089/9781484357743.002.A001
Sources: Authorities and Fund staff calculations.Export Growth Over- and Underperformance
Citation: IMF Staff Country Reports 2018, 129; 10.5089/9781484357743.002.A001
Sources: Authorities and Fund staff calculations.6. The export elasticities derived from the model suggest that weak trading partner growth has largely offset the positive effects of the real depreciation. The Colombia model elasticities of exports to trading partner growth and the REER are 2.2–2.6 and −0.1, respectively. Trading partner growth in 2015–17 was about a percentage point below pre-2008 values. This would translate into a 2.2–2.6pp decline in export growth. In contrast, the 30 percent real depreciation Colombia has experienced would increase export growth by about 3pp—with the two essentially offsetting each other.
7. Going forward, the model projects average quarterly year-on-year export growth of around 3 percent in Colombia for 2017Q3–2018Q4. This would be a substantial acceleration from the −1.7 percent growth rate observed in 2016Q1–2017Q2 and would support staff’s medium-term improvement in the trade balance.
D. A Deeper Look at Nontraditional Exports
Colombia lost nontraditional export market share in 2000-15 but the loss was due to very weak growth in Ecuador and Venezuela—two main nontraditional export destinations (Figure 4).3 The gap between the total market share and the market share excluding Ecuador and Venezuela is the largest for manufactures. Nontraditional trading partner growth is projected to improve in coming years but will remain substantially below total trading partner growth. However, this intensive margin excludes new markets that would be opened elsewhere (the extensive margin).
Nontraditional Export Market Share
Citation: IMF Staff Country Reports 2018, 129; 10.5089/9781484357743.002.A001
Sources: COMTRADE and IMF WEO.Nontraditional Export Market Share
Citation: IMF Staff Country Reports 2018, 129; 10.5089/9781484357743.002.A001
Sources: COMTRADE and IMF WEO.Nontraditional Export Market Share
Citation: IMF Staff Country Reports 2018, 129; 10.5089/9781484357743.002.A001
Sources: COMTRADE and IMF WEO.8. The real depreciation will be supportive of nontraditional exports. The April 2017 Western Hemisphere REO found that export performance responds more significantly to changing relative prices for noncommodity products, especially manufactures. Lanau (2017b) finds that a 10 percent depreciation increases value added growth of the nontraditional sector by about 0.8pp, mostly through the export channel. The effects are significant on impact but take three years to materialize in full.
9. Historical experience suggests that commodity exporters manage to increase their nontraditional export market share following large real depreciations (Figure 5).
Staff analyzed the behavior of nontraditional export market shares in a sample of 61 large depreciations (17 in LA) in 53 commodity exporters in 1985–2015. Large depreciations are defined as a REER depreciation of at least 20 percent in two years that is not fully reversed in the third year. Episodes where a second large depreciation occurs in less than five years are excluded.
The median commodity exporter improves its market share by 9 percent in the three years following a large depreciation but the gains dissipate somewhat for a cumulative gain of 4.8 percent in five years. For the median country, the real depreciation is largely permanent. These depreciations are generally accompanied by lower commodity prices but commodities continue to dominate the overall export basket (for the median country, the share of commodities in total exports falls by just two percentage points).
Response of Nontraditional Market Share to Large Depreciations 1/
Citation: IMF Staff Country Reports 2018, 129; 10.5089/9781484357743.002.A001
Source: COMTRADEI and IMF IFS.1/ Time in years. T=0 is the year when the large depreciation is completed.Response of Nontraditional Market Share to Large Depreciations 1/
Citation: IMF Staff Country Reports 2018, 129; 10.5089/9781484357743.002.A001
Source: COMTRADEI and IMF IFS.1/ Time in years. T=0 is the year when the large depreciation is completed.Response of Nontraditional Market Share to Large Depreciations 1/
Citation: IMF Staff Country Reports 2018, 129; 10.5089/9781484357743.002.A001
Source: COMTRADEI and IMF IFS.1/ Time in years. T=0 is the year when the large depreciation is completed.10. If Colombia tracked the median commodity exporter experiencing a large depreciation, cumulative nontraditional export growth in 2015–20 would reach 30 percent. This would improve the current account by about 0.25pp (assuming imports do not increase). The calculation is based on the 4.8 percent improvement in the market share mentioned above and the WEO assumptions for global trade growth. Nontraditional export growth and the resulting improvement in the current account could be substantially higher if Colombia performed better than the median episode and closer to the top quartile in the sample.
Projected Nontraditional Export Growth
(Percent)
Citation: IMF Staff Country Reports 2018, 129; 10.5089/9781484357743.002.A001
Sources: COMTRADE and IMF WEO.Projected Nontraditional Export Growth
(Percent)
Citation: IMF Staff Country Reports 2018, 129; 10.5089/9781484357743.002.A001
Sources: COMTRADE and IMF WEO.Projected Nontraditional Export Growth
(Percent)
Citation: IMF Staff Country Reports 2018, 129; 10.5089/9781484357743.002.A001
Sources: COMTRADE and IMF WEO.E. Structural Impediments to Export Growth
11. Factors other than relative prices and external demand are also relevant for export growth in Colombia. This section explores the role of tariffs and possible structural bottlenecks such as infrastructure and customs procedures.
12. Tariffs are low by regional standards, yet higher than the OECD average and heterogeneous across products (Figure 7). Average tariffs have fallen significantly in recent years to around 6.5 percent, narrowing the gap to the OECD average to about 1.5 percentage points. Tariff dispersion is relatively high across sectors but especially so in agriculture, where productivity happens to be low. Nominal tariffs on agricultural products average 18 percent but they are as high as 49 and 70 percent for dairy and beef products for example (Fedesarrollo, 2017).
Tariffs
Citation: IMF Staff Country Reports 2018, 129; 10.5089/9781484357743.002.A001
Sources: OECD, UN TRAINS.Tariffs
Citation: IMF Staff Country Reports 2018, 129; 10.5089/9781484357743.002.A001
Sources: OECD, UN TRAINS.Tariffs
Citation: IMF Staff Country Reports 2018, 129; 10.5089/9781484357743.002.A001
Sources: OECD, UN TRAINS.13. Nontariff costs account for three quarters of the cost of imports, acting as a barrier to exports since exporters often use imported inputs. Garcia and others (2016) find that the cost of importing was 36 percent of a product’s price in 2012. Three areas stand out in terms of nontariff costs.
Non-tariff barriers. Garcia and others (2016) document the existence of extensive nontariff measures on imports such as inspections and permits. The number of nontariff barriers per product category grew from four in 2001 to 16 in 2014. For categories such as textiles and wood products, 100 percent of the imported value is subject to nontariff measures. Establishing whether non-tariff measures are optimal is difficult but their case study on wine imports shows that measures such as departmental stamps likely restrict competition unduly.
Infrastructure and transportation. As discussed in Lanau (2017) the infrastructure gap in Colombia is significant, adding to the cost of transporting goods from/to the border. 4G infrastructure projects have the potential to close the gap considerably. Inefficient service providers also add to road transportation costs. The bargaining power of truck drivers is high, as are barriers to entry. Rules and regulations have resulted in an old truck fleet, many inefficient one-truck companies, and restrictions on truck ownership. Surveys of exporters confirm the importance of these issues. 75 percent of respondents say freight prices and bad roads are a top impediment to trade.
Customs procedures. Colombian customs are relatively slow according to World Bank data (Figure 8), especially when it comes to exporting. The authorities have been making progress, however, with new scanners in ports and accelerated processing times.
Time to Import and Export
Citation: IMF Staff Country Reports 2018, 129; 10.5089/9781484357743.002.A001
Source: World Bank.Time to Import and Export
Citation: IMF Staff Country Reports 2018, 129; 10.5089/9781484357743.002.A001
Source: World Bank.Time to Import and Export
Citation: IMF Staff Country Reports 2018, 129; 10.5089/9781484357743.002.A001
Source: World Bank.F. Conclusion
14. Colombian exports are heavily concentrated in commodities but the large real depreciation since 2015 offers an opportunity to grow nontraditional exports substantially. Colombia’s comparative advantage in noncommodity products was weak in 2013–15 and export diversification was low, partly due to the commodity price boom.
15. Exports grew moderately in recent years but in line with historical relationships given fundamentals. Weak export growth is not the result of underperformance. It reflects adverse external conditions such as low oil prices and weak trading-partner growth, especially in Ecuador and Venezuela. Weak trading-partner growth has largely offset the positive effects of the real depreciation, especially for nontraditional exports. The time needed to open new markets and reopen others lost during the commodity boom suggests a substantial delay in the pick-up of nontraditional export growth.
16. The export outlook is positive. Given global growth assumptions, staff’s models predict an acceleration in export growth. The historical experience of commodity exporters suffers large real depreciations also paints a positive picture. The median commodity exporter manages to increase its nontraditional export market share by 4.8 percentage points in five years. In Colombia, this would imply cumulative nominal export growth of 30 percent in 2015–20.
17. Structural factors may also be behind sluggish export growth. The main structural impediments to export growth are high tariff dispersion, proliferation of nontariff barriers, deficient infrastructure, inefficiencies in the market for road transportation, and slow customs procedures.
18. In sum, a rapid correction of structural impediments to export growth, combined with the authorities’ efforts to disseminate information about a number of trade agreements, would speed up and further support export growth in the medium term.
Annex I. Technical Details
Definitions of Export Metrics
Revealed Comparative Advantage (RCA) is calculated as the share of export; in total exports of country i over the share of product j exports worldwide in total worldwide exports.
Hausmann Complexity of Exports Index: The methodology captures the diversity (how many products) and ubiquity (do many countries produce this good) of country i’s exports. For details on the methodology see Hausmann et al. (2013).
Herfindahl Concentration Index is calculated as the squared sum of the share of export j in total exports of country i.
Export Performance Model
1. Similarly to IIF (2017), we estimate xit = αi + B(L)reerit + C(Q)cpit + D(P)pgit + εit country by country. xit is export volume growth in percent for country i in quarter t, B(L), C(Q) and D(P) are l, q and p-order lag polynomials, reer is the percentage change in the real effective exchange rate, cp is the percentage change in the commodity price index, and pg is export-weighted real GDP growth in partner countries. For Colombia, the regressions include dummies for 2013Q2 and 2014Q2 to capture the erratic large spike in the former and trough in the latter.
2. We estimate four different models and then obtain a final summary measure of export over/underperformance by taking a weighted average of the results of each individual model (weights are based on the root mean square error of the models). Last, we divide this number by the count of quarters we forecast to obtain the weighted average export forecast deviation by country. The models use the same lag structure for all countries but the structure changes between models.
References
Ding, Xiadodan and Metodij Hadzi-Vaskov, 2017, “Composition of Trade in Latin America and the Caribbean,” IMF Working Paper No. 17/42 (Washington: International Monetary Fund).
Hausmann, Ricardo, et al., 2013, “The Atlas of Economic Complexity: Mapping Paths to Prosperity,” 2nd ed., Cambridge: MIT Press.
Perfetti, Juan Jose, Jesus Botero, Sandra Oviedo, David Forero, Sebastian Higuera, Manuel Correa and Jose Garcia, 2016, “Politica commercial agricola: nivel, costos y efectos de la proteccion en Colombia,” Bogota: Fedesarrollo.
Garcia, Jorge, David Camilo Lopez, and Enrique Montes, 2017, “Los costos de comerciar en Colombia: aproximación basada en una comparación de precios,” Banco de la Republica Borrador No. 974.
Lanau, Sergi, 2017a, “The Growth Return of Infrastructure in Latin America”, IMF Working Paper No. 17/35 (Washington: International Monetary Fund).
Lanau, Sergi, 2017b, “The Sectoral Effects of Real Depreciations in Latin America”, IMF Working Paper No. 17/249 (Washington: International Monetary Fund).
Prepared by Sergi Lanau and Frederik Toscani (all WHD).
The analysis in this section is fully based on export market shares constructed from nominal export data as export volume data for nontraditional products are not available. The nontraditional export market share is the ratio of Colombia’s nontraditional exports to global nontraditional exports.
