ABSTRACT

Plan for a high-tech manufacturing sector. Factors and

objectives to have into consideration to develop it.

Karen Liceth Barros Alfaro

COLOMBIA AND THE HIGH- Prof: Raul Caruso. Economics and Globalization

TECH MANUFACTORING
SECTOR
You are the minister of a developing country, and you are willing to
implement a development plan for a high-tech manufacturing sector. What
factors and objectives have to be considered in the medium and long-run?
As many know, most of the countries with high investment in technology and
innovation to improve any of their sectors, especially the manufacturing industry,
are the developed ones. Countries like Japan, United States, China, Germany, and
so on have achieved a competitive advantage in comparison with the other ones.
As implementing a development plan for high-tech manufacturing, I have chosen
Colombia despite being the place where I was born and raised, among the years; it
has become one of the most stable countries economically and politically in Latin
America. I want to try to develop a plan that I believe could help my country to be
better in this aspect in the future.
In South America, Colombia is the fourth largest country, and the third one in terms
of population, having substantial oil reserves, and being a significant producer of
gold, silver, emeralds, platinum, and coal.
It has suffered years of internal conflicts related to the outlawed armed groups,
drug cartels, and violations of human rights. However, since 2002, the country has
been making significant progress in improving security. Like many other Latin
American nations, has a highly stratified society where the traditional wealthy
families of Spanish descendant have benefitted from this to a far higher degree
than the majority mixed-race population, providing a ready constituency for left-
wing insurgents.
The current president Ivan Duque Marquez began his presidential term on August
7, 2018, and it will end on August 7, 2022. Duque, from the Democratic Center
party, has chosen, as the main pillars of its government the legality,
entrepreneurship and equity, with transversal axes in terms of infrastructure,
environmental sustainability, and innovation.
Colombia has recently received a massive and accelerating inflow of migrants from
Venezuela. Approximately 1.4 million Venezuelans arrived to Colombia as of
September 2019, according to Colombian official statistics. The government has
taken a leading role in adopting an open borders policy and implementing good
practices in the provision of services to Venezuela migrants and returned
Colombians in areas such as education to health, services of employment and
humanitarian aid.
 GDP ANNUAL GROWTH
3.5 3.3
3.2
2.9 3
3
2.6 2.7
2.5 2.3
2
2

1.4 1.5
1.5 1.3 1.2
1

0.5

0
January 2017 July 2017 January 2018 July 2018 January 2019 July 2019

Source: Tradingeconomics.com | Dane, Colombia

Colombia can be recognized for its prudent macroeconomic and fiscal

management, and despite economic downturns has maintained its investment-
grade rating since 2013. Taking into account the graph above, after slowing down
to 1.4% in 2017, following a 3% growth in the previous period and beating market
expectations of 2.9% expansion. This 3% was due to robust private consumption
and stronger investment. Colombia’s economy advanced by 3.3% in the third
quarter of 2019. This increase was due to stronger investment growth,
accommodative monetary policy, and the dissipation of some transitory factors that
affected the increase in the first semester.
The inflation in Colombia between January and September of 2019, measured by
the Consumer Price Index (CPI), is 3.26%. According to the National
Administrative Department of Statistics (DANE), the behavior during the year was
principally for the increase of the price of food and non-alcoholic drinks, education,
accommodation, water, electricity, gas, and others.
Another economic factor to keep in mind while analyzing Colombia’s economy is
the company taxes. According to the National Directorate of Taxes and Customs
(Spanish: Direccion de Impuestos y Aduanas Nacionales, DIAN) starting from 2019
until 2022, the tax will gradually decrease from 33% to 30%. The new fiscal reform
states that the general tax will apply over the company’s revenues whether they
are national companies or Colombian companies established abroad, or foreigner
companies that have offices in Colombia, and must pay this tax, it will be 33% for
2019, 32% for 2020, and 31% for 2021 and, finally for 2022 will be 30%.
According to the Bank of the Republic (Spanish: Banco de la Republica), which is
the central bank of Colombia, the board members decided to keep a stable interest
rate of 4.25%, which lays into the estimated by the analysts. The bank has agreed
to continue for a longer time the cost of the money to foster the recovery of the
economy.
According to the National Administrative Department of Statistics (Spanish:
Departamento Administrativo Nacional de Estadistica, DANE) shown in the graph
below, for October of 2019, the unemployment rate was 9.8%. In the same month
of 2018, this one was 9.1%. The labor force participation was 64.1%, which
represented a diminution of 1.0 percentage points against October 2018 (65.1%).
The activity rate was 57.8%, which means a decrease of 1.4 percentage points
compared to the same month in 2018 (59.2%).

Labor force parti cipati on, acti vity and

unemployment rates
October 2018 October 2019
65.1

64.1

59.2

57.8

9.8
9.1
L ab o r fo r c e A c ti v i t y r a t e U n em p l o y m en t r at e
p a r ti c i p a ti o n

Source: DANE

The reason for such a high unemployment rate compared to the previous year
could be that the companies are not creating jobs but completely the opposite. The
GDP shows that the companies are growing, but this growth is not levering the
creation of more jobs. A reason could be the massive immigration wave coming
from Venezuela, which is putting intense pressure into the labor market at different
levels, especially in the commercial sector, and with a particular emphasis in the
informal jobs.
According to a research done by DANE, it showed that Venezuelans who have
arrived in Colombia searching for a job only represent 1.5% of the total workers in
the country. Another factor that could be affecting the unemployment rate is the
cost structure of the companies regarding the increase of minimum wages. Many
companies have started to adjust to their working places by reducing job offers.
After considering this economics information, I can conclude that, in general,
Colombia continues to have a solid macroeconomic frame. If it’s compared to the
other countries of the region, it is one of the few that is growing. Even if it is doing
well in general, there are still several tasks to be done in the investment aspect,
especially in Research and Development.
Colombia is excessively far to reach the average investment in R&D like the
members of the Organization for Economic Cooperation and Development (OECD,
in which Colombia is willing to become a member. Currently, the investment in
R&D of countries like Brazil (1.2%), Argentina (0.53%), or Mexico (0.49%) are
higher than Colombia, which is currently investing below 0.5% of their GDP.

Colombia - Expense in R&D, % GDP

0.35
0.3 0.31
0.29
0.25 0.27 0.27
0.23 0.24
0.2
0.15
0.1
0.05

0
2012 2013 2014 2015 2016 2017

Source: The Global Economy | United Nations

As we can see in the graph above, over the years Colombia has not done its best
to improve the expense in R&D. In 2014 during the government of Juan Manuel
Santos, the investment in R&D increased, reaching its highest peak of 0.31% in the
last five years. It was because of the interest of the former president Santos to
become a member of the OECD. One of the requirements was to have 4% of the
GDP in R&D, but during his government, he established the objective to reach at
least 1%, which he could not achieve since it is still below 0.50%.
Moving from R&D, another area that is important to mention and analyze is
education. According to the OECD in Colombia, 42% of the population in the range
of 25 to 64 years old have at least a high school degree, a proportion much lower
than the average of the OECD of 75%. Even if this percentage is small, 22% of
adults in Colombia obtained a bachelor's degree in 2012. This percentage is lower
than the OECD average (38%).
This research done by the OECD recognizes that Colombians that have at least a
bachelor's degree can expect an essential performance in the labor market. For
instance, adults with a post-graduate degree (from 25 to 64 years old) earn more
than double than people who have a high school degree (136% more).
In Colombia, between 25 and 34 years old, 33% of men do not have a high school
degree, compared to 27% of women.
Women represent 68% of the graduates in the teaching field (the average of the
OECD is 78%). However, women only get a lower percentage of degrees in the
engineering field, manufacturing, construction, and information technology. As
reported by the OECD, Colombia is one of the few countries where at least a third
part of the graduates in engineering, manufacturing and construction are women
(OECD average 28%). 29% of graduates in information technology are women
(OECD average 20%). Even if there is equality among the genders in the field of
services, on average, in all the countries of the OECD (51% of graduates are
women), in Colombia, only 23% of graduates in this field are women.
According to the information found in the Ministry of Education website, the level of
graduates with a bachelor's degree in 2018 was 226.508 students. Meanwhile, the
ones that got a certificate of higher education were 130.681. The number of
students who graduated from a master was 27.151, and finally, the ones who
obtained a Ph.D. were only 803. It is telling us that the majority of the population in
Colombia stays only with a bachelor's degree. There are not many graduates with
a specialization degree; this could be for the high costs of getting a post-graduate
degree. Another reason could be that many graduates decide to start working
immediately and not continue to study.
For the medium run, I consider the three most important factors that must improve
to achieve the objective of a more developed country in all sense, especially in the
improvement of the high-tech manufacturing sector.
After analyzing all the data shown before regarding the education, and the number
of graduates in different educational levels. I consider the first objective would be to
increase the necessary investment amount from the national budget on formal
education with an essential priority in the established policies to ensure continuity.
It has been shown that countries with high levels of education are better in
technology, innovation, manufacturing, construction, etc. Because the higher is the
educated population with more than one degree, the better the country could be in
several aspects.
Colombia must increase the investment in education and make an essential effort
in reducing the enduring gaps regarding education and the quality of it. These
efforts must be set out gradually. It could mean setting short and long-term goals
and that these become a priority that is viable in a restrictive fiscal context, and that
are based on a better cost assignation.
The government should explore alternative ways to fund post-secondary
education, and set a gradual investment priority in the first years due to the higher
performance and the potential to get equal opportunities of the least advantaged
children. The change in education will take time, but to guarantee that the
improvement happens in all the country, a dedicated unit or organization should
focus on education in rural areas. This bureau must make a strong effort to close
the rural-urban area gap in terms of education, like the implementation of a
particular plan to the countryside education.
Colombia must increase the total public resources available for formal education,
using different ways of funding. This financial effort should be permanent; a fiscal
reform must be considered that enables the recollection of more resources
nationwide, including specific incomes in each region. The government should also
include some mechanism of solidarity among the areas regarding education so that
there is more equality within the provinces and cities.
Another thing that secretaries of education in each region should focus on is the
lack of interest in education. It is one of the main reasons why adolescents do not
go to school. The educational aspirations tend to be lower among the youth
population in rural areas. Education Secretaries in collaboration with National
Training Service (Spanish: Servicio Nacional de Aprendizaje, SENA), employers,
and universities need to improve the educational offer in rural areas, meanwhile,
there is a synergy with the policies created to improve the opportunities for the
youth population, to motivate them to stay in the rural areas or move to the urban
areas.
Colombia also should introduce a legal guarantee regarding the policies approved
by the government and that these one's area supported financially in an
appropriate way with additional resources. It should help to solve the inequality
existing in the implementation of policies and the lack of resources to put them to
work in every specific region. Additionally, some national policies like the program
of meals that consists of giving daily food services like breakfast, lunch, snacks,
and dinner to students with low resources. Besides, transportation, educational
material like books, etc. should expand gradually in all the country.
In conclusion, regarding the education, provide additional resources for the
education sector and that these go to each school and develop an information
system in which can seem the transparency of the available resources to avoid the
misappropriation of these funds.
The second factor is Research and Development. The investment in R&D activities
is fundamental for the productive sectors of a country. It could decrease the future
requirements for capital, cost of operation and the generation of more innovative
products according to the condition of the market, in the sense that also the
productivity will improve, reducing the resources and environmental problems,
which will help enterprises to be more efficient and economically viable increasing
the productivity of the nation.
The technological innovation, its implementation can differ within the secondary
sector (manufacturing and industry) as of the risk perception, investment to be
done, profitability, and expected returns. These elements affect the demand for
R&D and the incentives that influence its application where it is essential to design
public policy instruments and raise awareness of the real sector about the
importance of R&D investments and their multiple benefits.
The investment in R&D will be fundamental in the generation of technological
advancements and innovation produced in the sector that is being the leader in the
growth of productivity. Through the improvement of the productive processes and
the introduction of better quality standards and added value to the products and
services benefiting the satisfaction of social needs and better life quality.
The third factor to consider in the medium run is a gradual reduction of the
company taxes. Lowering the corporate tax could lead to several positive economic
effects. The benefits of a lower tax rate include encouraging investment in the
country and discouraging profit shifting. As additional investment grows the capital
stock, the demand for labor to work with the new capital will increase, leading to
higher productivity, output, employment, and wages. In addition, increase rewards
for improving technique and technology. It expands the compensation for taking
risks and the entrepreneurship. Normally people would focus on the effects of
these tax cuts could bring in the short run. It is a comparison of the earnings of rich
people, when will actually obtain benefits that are anticipated better into the future,
against virtually none of the gains for workers because they have not occurred yet,
and no market price reveals those future effects now. Even if it is measured that
should start being applied in the medium run, the better results will seem in the
long-run.
For the long run:
Education is not the only factor that should be considered. The interest rate is one
of the most important aspects to have into consideration if a country wants to
attract Foreigner Direct Investment (FDI). If the interest rate is high, there will be a
decrease in the consumption and investment; but if it decreases, the financing cost
decreases. More available financing will mean better levels of investment and
consumption, car loans, mortgages, and any other kind of loans that people
frequently get. In the meantime that the financing cost decreases, there will be a
stimulus in the economic activity, hence the investment and the consumption.
The most notable effects of FDI are a better economic increase and the creation of
better quality jobs. Nevertheless, some of the benefits of the FDI sometimes are
indirect. Transference of technology could occur in this way: when businessmen or
employees of a multinational franchise acquire specialized knowledge in the
managerial processes and productive things of the multinational company. After a
while, when they quit their job there, they could open their own business, with other
employees to which they will teach the processes. These employees will benefit
from the new knowledge they are getting and could take it with them to work in
other companies related or not to the industry where they were before. Through the
effect of demonstration and the labor mobility, the FDI increase the productivity and
competitiveness of the country.
Another type of effect happens when the entry of multinational companies to a
market increases the demand for intermediary goods for the final product. At the
same time that the local companies compete to do business with the multinational
companies, improve not only the number of goods but also the quality.
Multinational companies will not only get benefit from this but also the national
ones that are using the same intermediate products will get benefit from the
availability of a variety of better quality goods than before.
On the other hand, the enterprises can also get some benefits from the proximity
between them, which will make it easy to develop more specialized intermediate
goods. The presence of links between local suppliers and buyers stimulates the
companies to establish themselves closer to the other ones and will encourage an
investment and productivity circle; in other words, the creation of clusters.
Besides the noticeable effects of the FDI over the economic growth and
employment, its direct effects contribute in an essential way to the role of foreigner
investment as the development engine. With the implementation of proactive
policies to attract more foreigner investment that achieves the objectives of
national development, the FDI can have a positive and sustainable impact in the
country.
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