Export Diversification in Colombia: A Way Forward and Implications for Energy Transition
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The new administration is seeking to reduce the economy’s reliance on oil and coal, two of Colombia’s largest exports, by expanding the production of renewable energy, and diversifying exports towards non-traditional higher value-added sectors. A well-designed and executed export diversification plan would be key to facilitate the energy transition, boost productivity, and thus, long-term growth. The transition would be challenging and would need to be gradual, as it would require significant improvements in infrastructure, a continued focus on providing high quality education, labor market reforms to further reduce informality, and the removal of non-technical non-tariff barriers. This note presents some stylized facts about Colombia’s exports basket and provides a brief literature review of factors and policies that could support a successful energy transition strategy.

Abstract

The new administration is seeking to reduce the economy’s reliance on oil and coal, two of Colombia’s largest exports, by expanding the production of renewable energy, and diversifying exports towards non-traditional higher value-added sectors. A well-designed and executed export diversification plan would be key to facilitate the energy transition, boost productivity, and thus, long-term growth. The transition would be challenging and would need to be gradual, as it would require significant improvements in infrastructure, a continued focus on providing high quality education, labor market reforms to further reduce informality, and the removal of non-technical non-tariff barriers. This note presents some stylized facts about Colombia’s exports basket and provides a brief literature review of factors and policies that could support a successful energy transition strategy.

Export Diversification in Colombia: A Way Forward and Implications for Energy Transition1

The new administration is seeking to reduce the economy’s reliance on oil and coal, two of Colombia’s largest exports, by expanding the production of renewable energy, and diversifying exports towards non-traditional higher value-added sectors. A well-designed and executed export diversification plan would be key to facilitate the energy transition, boost productivity, and thus, long-term growth. The transition would be challenging and would need to be gradual, as it would require significant improvements in infrastructure, a continued focus on providing high quality education, labor market reforms to further reduce informality, and the removal of non-technical non-tariff barriers. This note presents some stylized facts about Colombia’s exports basket and provides a brief literature review of factors and policies that could support a successful energy transition strategy.

A. An Overview: Composition of Colombia’s Exports

1. Commodity exports have gained prominence during the last two decades. While total exports increased from 15 percent in 2006 to 16.6 percent of GDP in 2022, commodity exports (oil, minerals, and food) rose from 8 percent of GDP in 2006 to almost 13 percent at the height of the commodity super cycle in 2013, then recede to 11.5 percent in 2022. Non-commodity exports have marginally declined. Comprised mainly of manufacturing products, non-commodity exports accounted for 7 percent of GDP in 2006 and 5 percent in 2022, although during the last five years they saw a small rebound. Interestingly, the share of services exports to GDP, a type of non-commodity exports, has doubled over the last decade, driven mainly by tourism and other services (health, IT, and marketing). Transportation services have remained unchanged at around 0.5 percent of GDP.

2. Colombian commodity exports have been concentrated mainly in hydrocarbons and a few agricultural products. In 2022, oil and mining exports (crude oil and coal) accounted for 55 percent of goods exports, 17 percentage points higher than in 2006. However, this large increase is driven by prices rather than volumes: Compared to 2015, current oil export volumes are 30 percent lower, and coal export volumes are 11 percent lower. While the importance of agricultural products (food products and other agricultural products) has fluctuated over time, it remained about the same –15 percent in both 2006 and 2022. The share of manufacturing exports relative to goods exports fell from 35 percent in 2006 to 18 percent in 2022. The decline reflects price effects, as the volume of manufacturing exports has remained broadly stagnant. At a more granular level, five products account for about 65 percent of goods exports (Table 1).

Table 1.

Colombia: Exports of Goods: Top Products

(Millions of US dollars; Share of Total Exports)

article image
Sources: DANE and IMF Staff Calculations.

3. Colombia’s high dependence on oil exports helps explain relatively high goods export concentration metrics when compared with other emerging market economies. With a Herfindahl-Hirschman index (HHI) of goods exports concentration above 0.3 for the period 2016-2018, Colombia’s export basket appears less diversified than those of manufacturing powerhouse countries of Central America and Mexico (CAM) or East Asian Emerging Markets (EAEM). Relative to South American peers, Colombia’s concentration index exhibited a gradual decline since the late 1980s, but this trend changed in 2008 due to the increase of oil exports, reaching the highest level among peers by 2014. The index exhibited a significant decline that coincides with the 2014-2016 oil price shock. By 2018, together with Chile, Colombia shows the highest concentration index relative to peers. The latter would raise questions regarding the progress of export diversification in the country.

4. However, Colombia has become significantly more diversified in exporting services. Colombia now has more viable service export industries, including travel and transport. The improvement is stark when compared to Latin America, Asia, or world averages. In terms of destination diversification, Colombia has been on a positive trend, with export incomes now relying on a wider set of trade partners instead of one key trade partner. This trend is displayed by overall exports as well as services-only exports.

5. That said, Colombia’s participation in Global Value Chains (GVCs) remains limited. GVCs participation can be measured either as the foreign value-added content embodied in a country’s gross exports (backward participation) or the domestic value-added content embodied in a foreign country’s exports as a share of domestic gross exports (forward participation). Even though Colombia’s backward participation is close to the South and Central America’s regional average, it falls short of peers (e.g., Chile and Mexico) as well as export-oriented countries (e.g., Korea). Colombia’s forward participation tends to be higher, as is the case for commodity exporters; however, it’s still significantly below peers (such as Chile and Peru).

B. Factors Affecting Export Diversification

6. Remoteness (proximity to markets). In line with the empirical international trade literature, Salinas (2021a) finds that distance to international markets is significantly associated with export categories that can diversify the typically commodity-dependent export baskets of developing countries. At the same time, this result is also supported by empirical studies in the Global Value Chain (GVC) literature which conclude that gravity equation variables are key determinants of GVC participation (see for example, Cadestin and others, 2016, and Raei and others, 2019). In physical distance, Colombia does not seem to be far from major markets. However, remoteness can also come from deficiencies in physical and/or, financial infrastructure, differences in language, culture, economic arrangements, among other factors, which could be affecting Colombia.

uA001fig05

Proximity to Markets

(US$/mn)

Citation: IMF Staff Country Reports 2023, 121; 10.5089/9798400238147.002.A003

CAM: Central America and Mexico, EAEM: East Asian Emerging Markets. Proximity to markets is the sum of GDP of partner countries weighted by their distance to the country.Sources: UN Comtrade; Salinas (2021).

7. Role of Policies. While distance-related variables are mostly exogenous, several others that can foster export diversification and raise value added in exports are determined by public policies of the exporting economy. Several studies (Ding and Hadzi-Vaskov, 2017; Giri and others, 2019; Salinas, 2021a) statistically associate export diversification and/or export complexity2 with higher educational attainment, stronger governance and institutional development, lower barriers to trade, and higher physical infrastructure development.3 Daude, Nagengast, and Perea (2014) explore a number of factors that could, a priori, have a positive effect on economic complexity, and identify energy availability, tertiary education, and foreign direct investment inflows as the most important variables. The April 2015 IMF’s Regional Economic Outlook: Asia and the Pacific uses a similar methodology to Daude, Nagengast, and Perea (2014), identifying trade openness and institutional quality as important positive correlates of complexity. In addition, geographic distance to markets and size of government are found to be negatively correlated with complexity.4 Studies on global value chains point out that increased participation in complex production networks requires supportive transportation and logistics infrastructure as well as modern information and communication technologies systems (Blyde, 2014).

8. Specialization. An argument against complete diversification is that countries have much to gain from specializing in a set of products with comparative advantages, either in technological progress (Ricardo) or in factor endowments (Heckscher-Olin). However, the level of specialization in each country changes over time. Imbs and Wacziarg (2003) find that, countries tend to diversify as they get richer, before specializing again after reaching a certain income threshold.

9. While policies supporting Colombia’s diversification have improved, there is room for further improvement. Over the last 25-30 years, Colombia has made important advancements that can foster export diversification like improving human capital, governance, infrastructure quality and trade openness. However, continued work is needed. As indicated by OECD et al. (2019), Colombia has taken steps to address the infrastructure gap, but more needs to be done to increase transport connectivity. Authorities’ data show the average logistics cost of the country’s companies, as a percentage of sales, stands at 12.6 percent (down from 13.5 percent in 2018), mainly represented by transportation costs. The cost to export a container could decline between 25 and 50 percent with advancements, which are in the authorities’ infrastructure agenda, in fluvial and railway infrastructure and trade facilitation measures. As discussed in the Internationalization Mission’s Report (2021), the last three decades have seen significant reductions in trade protections. However, tariffs remain higher than those of its regional peers. In addition, significant tariff dispersion remained after the period of trade liberalization. of the 1990s, which worsened in the last two decades. At the same time, the Report (p. 79) notes that “non-tariff measures that limit trade have proliferated, assuming equivalent levels of tariff protection, which reached a peak of 123 percent in 2000, and have remained close to that level ever since (García J., 2014; Botero, Garcia, and Correa, 2018).” Moreover, “Colombia stands out for its extremely widespread of non-technical non-tariff measures calls, in particular, quality and price control.”

uA001fig06
LA4: Brazil, Chile, Mexico, and Peru.Sources: Feenstra, Inklaar, and Timmer (2015)-Penn World Table (version 10.01); the Worldwide Governance Indicators 2022 (World Bank), Logistics Performance Index (World Bank), WITS (World Bank); IMF staff elaboration.

10. Further strengthening policy areas such as governance, education, infrastructure, and technological readiness would contribute to export diversification in Colombia. Based on the results of a gravity-model that also includes additional policy variables (Salinas, 2021a),5 it is found that, first, the level of Colombia’s non-hydrocarbon/mineral (NHM) and complex exports is in line with the country’s degree of remoteness or proximity to international markets. Second, after including policy variables related to infrastructure, educational attainment, governance and institutional strength, and tariffs (as a proxy for trade barriers), the level of NHM and complex exports show an additional expansion. However, further strengthening the implementation of horizontal policies would foster larger export diversification. The cases of Australia and Chile illustrate that despite the degree of remoteness, the implementation and strengthening of horizontal policies allowed them to expand their level of NHM and complex exports.6

uA001fig07

C. The Role of the Exchange Rate

11. Exchange rate flexibility will remain critical in supporting the growth in nontraditional exports. IMF (2017) finds that external adjustments to large and persistent shifts in terms of trade reflect mainly the increased flexibility of exchange rates. It finds that a real depreciation leads to a small boost to exports and a stronger reduction in imports than in the past, with demand shifting toward locally produced goods. Moreover, the study finds that, in terms of global shares, export performance responds more significantly to changing relative prices for non-commodity products and for exporters that trade manufactured goods more heavily. Staff analysis using local projection (Jorda, 2005) shows that this phenomenon is unique to commodity exporters: a 20 percent depreciation of the real effective exchange rate increases the market share of nontraditional exports by 5 percent for a commodity exporter, but lowers the market share of nontraditional exports for a non-commodity exporter by about 12 percent.

12. Developing non-traditional export sectors takes time. While exchange rate flexibility can support new export sectors to develop, many caveats remain. Firstly, the magnitude of the effect is small. Our analysis is in line with IMF (2018) in estimating a 5 percent increase in market share following a large real depreciation. Furthermore, it tends to take long (five years) to fully materialize the boosting effect. Additionally, in the case of Colombia, trade costs tend to blunt the export volume response (IMF, 2020). Casas et al. (2017) find that, in Colombia, manufacturing exports firms tend to absorb about half of the price changes arising from exchange rate changes, and by even more in the short run than adjusting production. Gopinath et al. (2020) pointed out that exports’ response may be muted when prices are sticky in a dominant currency.

D. What Are the Implications for the Energy Transition Strategy?

13. Climate related issues are at the center of the new administration’s policy agenda. The administration plans to boost productivity and long-term growth by diversifying the production structure of the economy, transitioning away from extractive industries into new economic activities and relying more on non-conventional renewable energy sources. The agenda has five pillars: 1) reducing land use and deforestation and expanding the agricultural frontier; 2) ensuring that territories are resilient to climate change and natural disasters; 3) incentivizing the re-industrialization of the economy and promote more environmental-friendly economic activities and the use of renewable sources of energy; 4) focusing on inclusive policy making to foster a more equitable and productive economy; and 5) developing a progressive energy transition strategy aimed at using surpluses from the oil and coal sectors to finance alternative industries.7

14. A key challenge would be to reduce the high dependence on energy and mining exports, which represent around 6 percent of GDP. As discussed at the beginning of the chapter, oil and coal exports comprise around half of Colombia’s export basket and most of the FDI in the country flows into the mining industry. Furthermore, fuel-related revenues represent an important source of fiscal revenues, and the dependence on the sector would increase in coming years as a result of the 2022 tax reform (more than half of the reform’s total yield comes from taxes on the oil and coal sector). Hence oil and coal are key for Colombia’s FX generating capacity and essential for safeguarding external and fiscal sustainability.

15. Uncertainties regarding the prospects for the oil and mining sectors could generate significant macroeconomic effects. For illustrative purposes, a no-replacement of oil/coal production scenario is presented below. Based on a partial equilibrium approach where oil production declines by about 90 percent by 2033, the results suggest that GDP would go down by 1.3 percent (based on the sector’s value added in GDP), the current account deficit ratio would hover at around 6 percent of GDP and fiscal revenues could fall by 2 percent of GDP. In addition, in the context of a general equilibrium approach (Jakab, 2023, forthcoming),8 the model-based simulations suggest that GDP could drop by more than 2 percent in 2-3 years and only gradually recover, and that the trade balance would deteriorate permanently by more than 1.5 percent of GDP.

16. An energy transition strategy, which involves developing alternative sources of energy and new export sectors must be carefully calibrated and implemented in a gradual manner. The energy transition would require a well-designed and communicated gradual strategy as the build-up and strengthening of policy fundamentals to boost export diversification, including services, would take time. With oil consumption at about 0.460 million barrels per day (mmb/d), including gasoline imports of about 0.110 mmb/d, a fast reduction in domestic production could generate external gaps.

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1

Prepared by Marco Arena, Vu Chau, Zoltan Jakab, Sergio Rodríguez and Juan Yépez Albornoz. Daria Kolpakova provided excellent research assistance.

2

Exports with Product Complexity Index above zero according to Hausman et al. (2013).

3

The scatterplot shows that the predicted variable is just slightly higher than the actual, suggesting that there is still room to improve diversification and complexity by further strengthening policy fundamentals.

4

See also IMF (2015).

5

We are thankful to Gonzalo Salinas for sharing the results of his work. As presented in Salinas (2021a), panel regressions are estimated based on Hausman and Taylor (1981) technique with groups consisting of all combinations of reporter and partner countries in UN Comtrade database. Observations are non-overlapping 5-year averages within the 1962-2018 period, depending on data availability. Dependent variable is the logarithm of the value of exports excluding hydrocarbon and mineral products (SITC2 codes 0-2999, 4000-6772, 6900-8999). Explanatory variables include gravity equation variables extracted from the CEPII gravity database constructed by Head and others (2010) and Rose (2004). 15 Variables measuring political stability and governance are extracted from Polity IV (2014) and World Bank (2020a), respectively. Educational attainment data was retrieved from the United Nations Education index (UNDP, 2020) and Barro-Lee (Barro and Lee, 2013). Tariff data comes from the World Integrated Trade Solution (World Bank, 2020b). Infrastructure quality and other measures of horizontal variables come from the Global Competitiveness Report (World Economic Forum and Harvard University, 2020). Labor market flexibility is approximated through related subindices in the Global Competitiveness Report and in International Monetary Fund (2019). Multilateral resistance terms and partner country’s policy variables are also included.

6

For an analysis of the case of Chile, see Salinas (2021b)

7

Historical Pact (2022): Programa de Gobierno. Colombia Potencia Mundial de la Vida.

8

A general equilibrium New Keynesian two country model is calibrated for Colombia following Erceg and Linde (2013) to gauge the indirect effects. In this model, agents gradually learn about how persistent the drop in production of oil. Expectations are based on a filtered path of future oil production path.

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