1. INDUSTRIAL POLICIES IN COLOMBIA Marcela Meléndez Guillermo Perry FEDESARROLLO September 2008

2. 2 1. THE PDP PROCESS IN COLOMBIA: Interventions

3. 3 1. THE PDP PROCESS IN COLOMBIA: Summary Until recently: –Schizophrenia of public speech: fiction that there was no industrial policy targeting incentives to particular sectors, though trade policies and tax incentives are highly sector specific. –Significant horizontal PDPs: export promotion, support to SME’s, training, some R&D and innovation support –Policy rigidity, multiplicity of interventions and absence of evaluation. Recent years: –Attempt to formalize sector targeted PDP’s through participatory Sector Competitiveness Agreements and the Domestic Agenda (to accompany the FTA with the US), which include a wider variety of interventions –Still, ad hoc un-transparent process subsists (explosion of tax incentives and Free Trade Zone benefits)

4. 4 1. The PDP Process in Colombia: Proposed Analysis 1.Organized Competitiveness Agreements and the Domestic Agenda Scope: productive chains. Institutional setting: actors, representativeness, frequency, effectiveness. Instruments (public goods provision, tariffs, trade support, tax incentives, subsidies, coordination, training, R&D support): do they respond to market and coordination failures or to rent seeking? Domestic Agenda PDP demand matrix Assessment of adequacy of the process and results (through surveys and interviews) 2.Ad-Hoc process of tax, budget, subsidies and tariff incentives: Differences between manufacturing and agriculture From priorities derived from 1 above to the reality of the budgetary political process: i.e. the case of roads. Institutional setting.

5. 5 1. The PDP Process in Colombia: Proposed Analysis 1.How did PDPs change with liberalization? From tariffs towards other PDPs (specially tax incentives). Test: Spearman rank correlations. Sectors will be ranked by level of tariffs (nominal and effective) and by tax benefits (income and VAT taxes) before and after liberalization. 2.Relation between sector level demands and actual PDPs (tariffs/tax incentives/subsidies) and productivity dynamics: are winners in the political process losers when it comes to productivity? Test: Spearman rank correlations. Sectors will be ranked by performance (productivity, output, exports, investment) and by use of PDPs (targeted and other) over time.

6. 6 2. Sector Case Studies: selection

7. 7 2. Sector Case Studies: methodology Overview of sectors’ performance over time. Inventory of vertical PDPs and use of horizontal PDPs available (see below) overtime. Matching of PDPs and market failures. –Domestic Agenda PDP demand matrix. –Surveys and Interviews. Assessment of results –Panel regression to test whether the impact of protectionist PDPs on growth and productivity dynamics differs significantly from that of ‘directly-productive’ policies such as training or financial resources for R&D. Estimation will have to deal with potential endogeneity and selection biases. –Surveys and Interviews

8. 8 3. Horizontal PDPs: Export promotion InstrumentRationale Duty drawback (PV: 1958) VAT rebate (1974) Avoid taxes on inputs Subsidies: CAT(1967:15%) CERT (1983/98: diff. %) CERT (2008: 4%) General subsidy (subst. tax incentives) Approx compensation for taxes on inputs; ended to conform with WTO Compensation for overvaluation! Free Export Zones (1985) General Free Trade Zones(2007) Avoid taxes on inputs, tax exemption, transaction costs, policy stability To conform with WTO; investment incentive (tax rate 15% vs 33%) Export credit and Services: Proexpo (1967) Bancoldex & Proexport (1991) Resolve credit market failures Coordination, first mover costs in opening markets, diversifying clients

9. 9 3. Horizontal PDPs: methodology (exports) Overview of export performance (and TFP effects) Change in instruments overtime and rationale How horizontal are horizontal policies? Assessment of sector neutrality: evidence of sectorial concentration (links with case studies) Quantitative estimates of effectiveness: –Export performance –growth and diversification- as a function of external demand, REER and PDP’s. Aggregate time series and sector/panel regressions with level of disaggregation dictated by availability of PDP data by sector. Issues: endogeneity, selection biases (eg, more competitive sectors demand more export credit; in contrast, subsidies might have been lower for the more competitive sectors) –To be explored: Firms export performance with matching procedures. We have export data by firm from the Manufacturers Survey and Proexport has data of export services PDP’s by firm but we don’t know yet if there is data on other PDP’s by firm (export credit, CERT, Plan Vallejo, FTZ’s) Perceived adequacy of instruments and problems: (see below) –Proposed Surveys –Interviews

10. 10 3. Other Horizontal PDPs ObjectiveInstrumentsRationale SME access to credit Specialized Public Bank (CFP: 1968/98) Guarantees (FNG: 1983) Rediscount lines Mipymes (IFI 1990’s, Bancoldex 2003) Microcredit (regulations) Banca de oportunidades No access to Commercial banks (financial repression) Colateral Maturities,cost Regulatory failures, SR Local market failures, SR TrainingOfficial provision: SENA, 57 SENA Reform (1990’s) Externalities Limited competition in provision InnovationMatching grant: (Colciencias) Public provision R&D in Agriculture (ICA/Corpoica) Start ups: Incubadoras, Private Equity Externalities Credit market failures, Externalities

11. 11 4. Proposed Survey: additional modules to the Fedesarrollo EOS (draft) Fedesarrollo EOS is a monthly survey representative for the manufacturing sector at the national level and sampled to provide robust results by size (large versus medium and small firms) and by international exposure (exporters versus non-exporters). For this particular project, Fedesarrollo would adjust its sampling procedures to produce, in addition, representative results for our sectors of choice (Textiles, Petrochemical products, Printing and publishing, Palm Oil, and Sugar). Exception would be Software, for which Fedesarrollo cannot commit to provide sector-level representative results, due to lack of a complete directory of producers for proper sampling. Survey would include basic questionnaire and thematic module with up to twelve questions. Time schedule: September: questionnaire design. October and November: survey application. First week of December: results available.

12. 12 4. Proposed Survey: additional modules to the Fedesarrollo EOS (draft) 1.Perceived market failures –Aggregate data on recent and expected investments, exports and training –Perceived Investment Restrictions –Public programs/actions that are (could be) helpful in lifting restrictions 2. Policy formulation –Participation in Competitiveness Agreements, and Domestic Agenda consultations –Lobbying with Government and congress: channels –Results –Adequacy of instruments of participation 3. PDPs used/received –Table with benefits/ instruments used –Problems that led to use of PDP instrument –Instructions to proceed to other modules (depending on use of PDP’s and export and training data)

13. 13 4. Proposed Fedesarrollo Survey (suite): Information and opinion on instruments used and impact on investment, finance and profits) 4. Investment module 1.Detailed data on Instruments used Trade Protection Data Tax Incentives and Subsidies Official Credit programs Other 2.Effects on Investment Decisions Levels of Investment Would Some Investment(s) have not taken place without the Incentive? Project(s) TIR Projects Structure of Finance Overall Ebidta and Profits

14. 14 4. Proposed Fedesarrollo Survey (suite: Information and opinion export promotion and training instruments) 5. Exporters module –Detailed export data (sales, number of products and markets) –Problems limiting expansion –Use of specific instruments. If not, why? –Effects of instruments on sales, number of products and markets, investment –Adequacy of design of instruments –Complementary support programs 6. Training module –Detailed training data –Use of SENA, other providers and in house training. Reasons for choice –Why was training undertaken? (expansion, productivity, technical changes) –Impact of training on objectives –Would investment and technological change have been implemented in absence of training support?

15. 15 4. Proposed ANIF/SME Survey Option 1: –Similar questionnaire to Fedesarrollo’s –More detail on specific SME credit instruments Option 2: Exclusively focused on specific SME credit instruments and their effects

16. 16 4. Proposed Interviews Public sector (tentative list of interviewees): –National Planning Department: Director, Deputy Director, Director of Entrepreneurial Development, Advisor for Competitiveness, Director of Public Policy Evaluation. –Ministry of Industry and Trade: Minister, Vice Minister for Entrepreneurial Development, Director of Productivity and Competitiveness. –Ministry of Agriculture: Minister, Vice Minister of Agriculture and Rural Development, Director of Sector Policy. –Bank Superintendency: Superintendent. –Ministry of Finance: Viceminister –Presidents of Bancoldex, Proexport and Sena.

17. 17 4. Proposed Interviews Private sector (tentative list of interviewees): –Private Competitiveness Council: President and Vice President. –Asociación Nacional de Empresarios de Colombia (ANDI): President and Representatives of selected sector chambers. –Sociedad de Agricultores de Colombia (SAC): President and representatives of selected agricultural sectors. –Asociación de Exportadores (ASOEXPORT) –Asociación Colombiana de Pequenas Industrias (ACOPI) Academics (tentative list of interviewees): –Universidad de los Andes, Department of Economics: Dean and selected faculty. –Fedesarrollo:Director and Associate Researchers –A group of independent experts, former Ministers of Finance and Trade and ex directors of the Planning department and Central Bank that Fedesarrollo convene regularly to discuss different topics –A selected group of Congressmen that Fedesarrollo convenes occasionally under the ongoing project Economía y Política