Colombia - Industry

Industry

Colombia's industrial sector--including manufacturing, assembly, and construction--was mostly developed after World War I using resources accumulated by the coffee and tobacco industries in the nineteenth century. Industry grew slowly but steadily up to the 1970s, then declined until the mid-1980s. Initial manufacturing efforts followed the import substitution industrialization model prevalent throughout Latin America during the Great Depression. Production focused on meeting domestic demand previously met by imports and emphasized consumer rather than capital goods. Because it delayed intensive industrialization until the 1950s and was a relatively open society politically and economically, Colombia did not suffer as severely from the negative protectionist effects usually associated with the import substitution strategy of national development.

By the late 1960s, however, protectionist policies had caused balance of payments problems, forcing policy makers to opt for an export promotion strategy. Industry responded by developing both consumer and capital goods industries, although emphasis was still placed on consumer goods. Particularly from 1967 to 1975, the success of the industrial sector resulted from the combined efforts of entrepreneurs and government planners. Private business leaders accepted the export promotion strategy as a way to expand output, and government officials devised a comprehensive plan to help Colombia compete in external markets.

Two policy decisions critical to the development of an exportoriented industrial sector were the creation of Proexpo and the adoption of a "crawling peg" exchange rate system. In the first case, Proexpo effectively marketed Colombian exports to the outside world. The second strategy proved even more effective at making Colombian exports more attractive. By constantly devaluing the peso against major traded currencies, the government ensured competitive prices for Colombian goods abroad.

The result of this coordinated economic strategy was a substantial increase in industrial output, which peaked in 1976 at 24.2 percent of GDP. The success of the export strategy was evident in the value of manufactured goods sent abroad, which rose from 8 percent of total exports in 1967 to 28 percent in 1975. Although it appeared that this coordinated approach had changed the nature of Colombia's economy, its success was questioned when growth halted in the late 1970s and early 1980s. The downturn once again demonstrated Colombia's dependence on the international coffee market.

From 1976 to 1983, Colombia went through a phase of deindustrialization in which manufactured output fell to 21 percent of GDP, the equivalent in real terms of production in 1970. Manufactured exports as a percentage of total exports also fell dramatically, attaining only a 15 percent share of total exports in 1983. Many variables--including the dependence on domestic demand and production of consumer goods, failure to diversify, insufficient investment, and public sector (tax) policies-- contributed to the decline. The crucial factors, however, were the appreciating exchange rate and the reallocation of economic resources to the agricultural sector that occurred during the coffee boom.

In the late 1970s, Colombia experienced what some analysts refer to as "Dutch disease," in which a boom in the primary export market adversely affects other sectors of the economy. Production and export of coffee reacted to market incentives in the late 1970s, nearly doubling output and sales from 1967 levels. The export boom generated a large increase in foreign exchange, which had the effect of increasing the value of the peso and the price of domestic goods. This caused Colombian manufactured products to become less competitive in world markets, a decline that lasted until 1984.

Recognizing the problems brought on by "Dutch disease," the government took direct action to mitigate adverse effects when the next coffee boom began in 1986. A windfall tax on coffee receipts restrained domestic spending and purchases of exports. Domestic price increases that would have accompanied an influx of foreign cash failed to materialize. The fact that "Dutch disease" did not recur and the manufacturing sector expanded in 1987 indicated the apparent success of the government's strategy.

In 1984 the industrial sector experienced real growth for the first time since 1980. Although analysts expected production to grow slowly following the coffee boom of the late 1970s and the subsequent global recession, government programs supporting a coordinated industrial policy once again emphasized diversification and growth through exports, which brought renewed life to Colombia's industry in the late 1980s.

In 1987 manufacturing grew more than 7 percent; it constituted 21.7 percent of GDP and employed about 35 percent of the urban labor force. Output still favored consumer goods, which composed 50 percent of total production. Intermediate and capital goods represented 37 percent and 13 percent of manufactured products, respectively. Despite increased industrial output, Colombia still imported many industrial goods because of its inability to produce competitively many manufactured items it needed to sustain economic growth. This suggested that a number of areas might be ripe for industrial expansion, particularly if Colombia could increase its capital goods production.

Colombia's industrial core developed around four urban areas: Bogot�, Medell�n, Cali, and Barranquilla. More peripheral industrial centers emerged in the departments of Boyac�, Magdalena, Nari�o, and Santander. These areas became more dependent on exportbased production and were the sites of numerous small and mediumsized firms that sprouted in the late 1970s.

The industrial sector in the late 1980s had a broad structure consisting of large conglomerates engaged in massive projects for the production of oil, food, ceramic products, building materials, beverages, clothing, machines, and tools, as well as smaller cottage industries competitive in the manufacture of wooden furniture, leather goods, and footwear. Although labor productivity and profits tended to be higher in the larger industries, the small and medium-sized factories continued to play an important role in industrial development. In 1986 they accounted for 36 percent of manufacturing production and employed 51 percent of the industrial labor force.

Food, beverages, textiles, and chemicals contributed the largest shares of GDP from the manufacturing sector. Total value added by this group constituted 52 percent of manufactured output. After consumable products, chemicals were the most important industrial products in the mid-1980s. In addition to pure chemical products, such as acids and petrochemicals, Colombia produced numerous chemical derivatives, such as fertilizers, insecticides, detergents, and paint, used in other sectors of the economy. Colombia also ventured into automotive assembly and had plants affiliated with Mazda, Chrysler, and Renault, as well as motorcycle firms attached to Japanese multinational companies such as Yamaha, Suzuki, Honda, and Kawasaki.

The manufacturing sector also supported the relatively small but vital construction industry. Colombia produced metal, cement, wood products, plastic, and steel in increasing amounts in the late 1980s. Construction itself accounted for nearly 4 percent of GDP and 6 percent of the work force. Public sector emphasis on transportation infrastructure and low-income housing encouraged construction in the early 1980s; the Barco administration decided to continue this emphasis in 1987.

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