F/ LMQRQ-ECONOMEC IMPACTS OF FUBUC LAW 4&0‘. TETLE E {N COLQMRIA Then: €019 {fie Bum of pit. D. MECHEGAN STATE UNEVERSITY Phifip- F. Warn-ken E966 THSsIs This is to certify that the thesis entitled MACRO-ECONOMIC IMPACTS OF PUBLIC LAW 480, TITLE I IN COLOMBIA presented by Philip F. Warnken has been accepted towards fulfillment of the requirements for Ann—degree i11-.Agar-£et.t-lrt«ra1 Economics Major professor Date July 8, 1966 0-169 ._ __ H-..— N1 N: ~ an “U MACRO-ECONOMIC IMPACTS OF PUBLIC LAW 480, TITLE I IN COLOMBIA By .- 'lr'iii‘“ Philip FILWarnken A THESIS Submitted to Michigan State University in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Department of Agricultural Economics 1966 ABSTRACT The principle objective of this study was to determine what effects Public Law 480 Title I programs have had on important macroneconomic parameters in the Colombian economy. Of primary concern were the impacts of the programs on: 1) monetary parameters, including money supply, velocity and prices, 2) the rate of new investment, 3) the volume of new employment, 4) the foreign exchange and balancemof-payments position, and 5) the rate of increase in real national product. The effects of P.L. 480 Title I programs on various monetary parameters were analyzed using both a theoretical and empirical basis. It was determined that the method of generating and handling P.L. 480 pesos has generally had no impact on the magnitude or rate of growth of Colombia's money supply. The principle price effects of P.L. 480 imports have been that food price and aggregate price increases have been somewhat less than they would have been in the absence of such importations. No empirical or theoretical evidence existed to argue that Title I programs have had any measurable effect on the magnitude or rate of change of Colombia's monetary velocity. About 300 million pesos of P.L. 480 generated currency were loaned to agricultural and industrial firms in Colombia. These investment funds provided a type of credit that was markedly superior to that which had been available in the country. Interest rates were lower, repayment terms were better, and the money was available for longer periods. Title I investment funds did not substitute for existing credit sources in Colombia; rather they supplemented these sources, complemented national investment policy and provided for significant additions to the country's capital base. P.L. 480 peso loans and grants created both permanent and temporary employment opportunities in Colombia. Between 3,300 and 3,500 new permanent positions and between 8,000 and 8,500 temporary jobs resulted from local currency disbursements. One new permanent position was created for each 95,000 to 100,000 pesos disbursed while temporary employment increased by one worker for each 23,000 to 25,000 pesos disbursed. Title I financed investment projects, through import substitution, yielded a net foreign exchange saving of not less than 35 to 40 million dollars per year since 1960. The net long-term foreign exchange impact of the programs could not be accurately determined since exchange savings will be partially canceled if the United States uses the recovered Title I pesos as substitutes for normal dollar conversions. Through depreciation of the peso, however, the actual foreign exchange cost of the original P.L. 480 imports will be but a fraction of what commercial imports would have been. Three effects operated simultaneously to augment Colombia's national income. First, through the importation of Title I goods, the country obtained additional real product valued at more than 70 million dollars. Second, the local currency sales proceeds from these imports have been utilized for expanding gross investment, thereby creating additional income. Third, the saving of foreign exchange allowed increased importations and consequently, permitted an expansion of national income. Although the P.L. 480 program has enhanced Colombia's aggregate consump- tion and expanded investment, employment and national income, United States policy regarding the program has been shortasighted. What has potentially been a very effective tool to aid Colombia's long-term development has been viewed only as an interim short-term solution for correcting a deficit in the country's agricultural output. In the future, Public Law 480 should be regarded as an integral part of the long~term program to stimulate economic growth in Colombia. ACKNOWLEDGMENTS The research for this study was carried out during the period September, 1962, to December, 1963, while the author was located at the University of Los Andes, Center for Economic Development Studies in Bogota, Colombia. Most of the financial support for this study came from a fellowship provided by International Programs at Michigan State University. Additional funds were made available through a Public Law 480 local currency contract between the Foreign Agricultural Service of the U.S. Department of Agriculture and Michigan State University. Special appreciation is extended to Professor Lawrence W. Witt, who acted as major professor and thesis advisor. It was through his guidance and assistance that the author became interested in the present field of study. Sincere appreciation is also extended to Professor Richard G. Wheeler, Project Leader in Colombia for Michigan State University. The comments and suggestions given by faculty members and fellow graduate students at Michigan State University are also gratefully acknowledged. The author is indebted to the Department of Agricultural Economics for financial assistance during graduate study at Michigan State University. A final and special note of gratitude is due the author's wife, Denice, who not only typed preliminary drafts of this study but also exhibited remarkable confidence and patience throughout the graduate study period. Any errors of fact or logic are the sole responsibility of the author. v p-~'l _;, ”x .5“ r. ImonCI‘I PurpC: Econa‘ Procei ‘J r 1:. PLBLIC W Masha? mport Finant Disbur Sectio Sectio Disbur Ill. MONE IARY I} PROGRA Money An AV Pric« Iran INVESThEQi IN C Inve CHAPTER I. II. TABLE OF CONTENTS INTRODUCTION 0 O O O O O O O O O O O O 0 O O O O O O 0 Purpose and Objectives . . . . . . . . . . . . . Economic Research in Colombia . . . . . . . . . . Procedure, Methodology and Format . . . . . . . . Approach of the Study . . . . . . . . . . . Relation to Other Studies . . . . . . . . . Format . . . . . . . . . . . . . . . . . . . PUBLIC LAW 480 TITLE I PROGRAMS IN COLOMBIA . . . . . Mechanics of Title I Operations in Colombia . . . Importation of Title I Commodities . . . . . . . Financial Transactions . . . . . . . . . . . . . Disbursement of Title I Funds . . . . . . . . . . Section 104 (g) Disbursements . . . . . . . . . . Section 104 (e) Disbursements . . . . . . . . . . Disbursements for U.S. Uses . . . . . . . . . . . III. MONETARY IMPLICATIONS OF THE COLOMBIAN P.L. 480 IV. PROGRAM 0 O O O O O C O O O O 0 O O O 0 O O O O '3 Money Supply Impacts . . . . . . . . . . . . . . Impacts of Undisbursed Funds . . . . . . . . Funds Drawn From Deposits . . . . . . . Funds Derived From Loans . . . . . . . Impacts of Disbursing Funds . . . . . . . . Funds Used by the United States . . . . Funds Used by the Caja Agraria . . . . Funds Used by AID (Cooley Loans) . . . Money Supply Impacts—~A Summary . . . . . . An Alternative Definition of Money Supply . . . . Pricelmpacts...........o...... Transactions Velocity Impacts . . . . . . . . . . INVESTMENT IMPLICATIONS OF P.L. 480 PROGRAMS IN COLOPIBIA O C O O O O O O C I O O O O O 0 O O 0 Investment Policies and Institutions in Colombia Policy Control Institutions . . . . . . . . Official and Semi-Official Banking Institutions . . . . . . . . . . . . . Commercial Banks . . . . . . . . . . . . . . Other Financial Institutions . . . . . . . . Privately Financed Credit . . . . . . . . . Terms of Credit . . . . . . . . . . . . . . iii 25 27 29 30 31 32 33 34 34 35 36 37 44 48 48 50 51 52 53 55 56 “,1-”- Ag (1‘) reg t P.L. 4 L EMPLOYMENT PROGRA Proce: EmPIO) I l“‘ . .1. P.L. TABLE OF CONTENTS-Continued CHAPTER P.L. 480 Local Currency Investments . . . . . . . Loans to Public and Semi-Public Institutions . . . . . . . . . . . . . Loans to Private Enterprise . . . . . . . . The Loan to Aluminio de Colombia . . . . . . Impacts of the Loan . . . . . . . . . . . . The Loan to Abbott Laboratories de Colombia Impacts of the Loan . . . . . . . . . . . . The Loan to Gillette de Colombia . . . . . . .Aggregate Impacts of P.L. 480 Loans to Private Industry . . . . . . . . . . . . . . P.L. 480 Investment Impacts-~A Summary . . . . . V. EMPLOYMENT IMPLICATIONS OF THE COLOMBIAN P.L. 480 PROGRAM 0 O O O I C O O C C O I O O O O O O O O 0 Procedure of Analysis of Employment Impacts . . . Employment Impacts of Title I Financed Projects . Disbursements Under Sections 104 (a) and 104 (k) . . . . . . . . . . . . . . Disbursements Under Sections 104 (h), (i) and (j) . . . . . . . . . . . . . . Disbursements Under Section 10 (g) . . . . Disbursements Under Section 104 (e) . . . . Aggregate Employment Impacts of P.L. 480 Disbursements . . . . . . . . . . . . . . . VI. BALANCE-OF-PAYMENTS AND FOREIGN EXCHANGE IMPLICATIONS OF THE COLOMBIAN P.L. 480 PROGRAM . . . . . . . . Direct Foreign Exchange Effects . . . . . . . . . Foreign Exchange Effects of Title I Financed Investment Projects . . . . . . . . . . . . Loans to Colombian Agriculture . . . . . . . Loans to Public and Semi-Public Institutions . . . . . . . . . . . . . Loans to Private Industry . . . . . . . . . Cooley Loan Substitution Effects on Foreign Exchange . . . . . . . . . . . . . . . . . . Peso Expenditures by the U.S. Government . . . . Balance-of-Payments Impacts--A Summary . . . . . VII. P.L. 480 IMPACTS ON COLOMBIA'S ECONOMIC GROWTH . . . . Real Effects . . . . . . . . . . . . . . . . . . Financial Effects . . . . . . . . . . . . . . . . Balance-of-Payments Effects . . . . . . . . . . . Summary of Aggregate Impacts . . . . . . . . . . iv PAGE 58 59 60 61 62 65 66 68 70 73 75 76 79 79 81 82 86 88 91 94 96 97 98 101 107 108 112 114 115 118 121 122 L l S ‘ ~VYY ’latt ‘7" v ' ‘L.&GR.'1PHY .lD TABLE OF CONTENTS-Continued CHAPTER PAGE VIII. SUMMARY AND CONCLUSIONS . . . . . . . . . . . . . . . . . . . . . 125 Principle Findings . . . . . . . . . . . . . . . . . . . . . 125 Price Impacts . . . . . . . . . . . . . . . . . . . . . 126 Transactions Velocity Impacts . . . . . . . . . . . . . 126 Investment Impacts . . . . . . . . . . . . . . . . . . . 127 Employment Impacts . . . . . . . . . . . . . . . . . . . 127 Balance-of-Payments Impacts . . . . . . . . . . . . . . 128 National Income Impacts . . . . . . . . . . . . . . . . 128 Policy Implications . . . . . . . . . . . . . . . . . . . . . 129 BIBLIOGRAPHY O O O O O O O O O C O O O O O O 0 O O O O O O O O O O O O O 132 The Agricult ingress authoriz 1'22 hungry world- as Ablic Law 480 rated at more t-L' . 1 stun world- Quotlng from '23 increase the ‘ ‘tc improve the f< sclared that it E Trafaited States tenancy, to promc aural welfare, imcdities in fur tart-rage econ ' OTRIC Ino rder t as .k“ are SEParate tit 29“: L“ 9f and Other A CHAPTER I INTRODUCTION The Agricultural Trade Development and Assistance Act of the United States Congress authorized the disposal of surplus American Agricultural products to the hungry world. Since the 1954 inception of the Act, more commonly known as Public Law 480, the United States has disbursed agricultural surpluses valued at more than 13 billion dollars to some 100 different countries through- out the world.1 Quoting from the original legislation, the purposes of the Act were... "to increase the consumption of United States agricultural commodities” and "to improve the foreign relations of the United States..." Congress further declared that it shall be the purpose: "To expand international trade among the United States and friendly nations, to facilitate the convertibility of currency, to promote the economic stability of American agriculture and the national welfare, to make maximum efficient use of surplus agricultural commodities in furtherance of the foreign policy of the United States,...to 2 encourage economic development abroad...and, to promote collective strength." In order to accomplish these objectives, the program was broken into 0 three separate titles: Title I--Sa1es for Foreign Currency; Title II--Famine Relief and Other Assistance; and Title III-aceneral Provisions. An extension to the original act, in 1959, provided for Title IV--Long Term Supply Contracts. 11964 Annual Report on Public Law 480 activities submitted to 89th Congress, March 1965, House Document No. 130-89/1 U.S. Government Printing Office, Washington, D.C., pp. 14 and 119-154. 2Ibid., p. 9. ”he merits . Q. "'1‘. 0f {LC you .31”. ‘ eminent, after mutant instru:~ after: view P.L. L- ‘1' teams accept th up...‘ ”allies experie at sincere grat stressed by a Cc We cer1 States, bUt the wheat '1 Dollars can At the meme we w("11d ta Although 0‘ '7 ”m 480 was it. 2 The merits of Public Law 480 have been widely disputed. From the view- point of the U.S. Congress it is probably the ”best" of various methods thus far considered for diSposing of costly American surpluses. The U.S. State Department, after early opposition, now seems to consider the program an important instrument of foreign policy. Competing agricultural export nations often view P.L. 480 as a gigantic dumping program. {And while recipient nations accept the goods, they do so with somewhat mixed emotions. For those countries experiencing serious food shortages, P.L. 480 products are received with sincere gratitude. More often, however, the view is similar to that expressed by a Colombian bank official... :we certainly appreciate the wheat we receive from the United States, but we would much prefer dollars to wheat. We can only grind the wheat into flour for bread, which when eaten is forever gone. Dollars can't be eaten, but they can buy wheat and other goods as well. At the moment we need both wheat and dollars, but if we had the choice we would take more dollars and less wheat." 3] Although objections of the type noted above have been frequent since P.L. 480 was initiated, little empirical analysis of the program and its effects on recipient countries and competing exporters was undertaken until about 1960. Since thmw,however, several major studies have been completed by university, USDA and international agency economists.4 Yet many questions remain unanswered and many problems remain unresolved. Hopefully, this study will make a modest contribution to knowledge in this area, will extend and complement previous studies and stimulate further study of the P.L. 480 Title I program. 3Translated from Spanish by the author. 4For a bibliography of publications dealing with P.L. 480, see Preliminary Bibliography, Food For Peace Project, Department of Agricultural Economics, Michigan State University. Tnis study e ;::-g:ms in Color I :ives which are r zsvrn only to study are: 1) To deter: important 2) T0 quanti 3) I0 assess 4) To evalué regardin: years. To form programs both the The specifi< ’egzitude of the ::luding money 3lithe volume of 21? ECG of payme Em. A i“;ct . 1 Fr ne proble .‘tia no t ed 0 WE th e um 3 Purpose and Objectives This study examines the macro-economic effects of P.L. 480 Title I programs in Colombia. There are two sets of objectives: a) general objec- tives which are relevant to the entire study, and b) Specific objectives relevant only to individual sections and topics. The general objectives of the study are: 1) To determine what effects P.L. 480 Title I programs have had on important macro—economic parameters in the Colombian economy. 2) To quantify and determine the magnitude of these effects. 3) To assess the effect of these impacts on Colombia's economic growth. 4) To evaluate critically both United States and Colombian policies regarding P.L. 480 Title I program operations during the past ten years. 5) To formulate suggestions for altering future P.L. 480 Title I programs so that greater mutual benefit can be derived from them by both the United States and Colombia. The specific objectives of the study are to determine the effects and magnitude of the Colombian P.L. 480 Title programs on: 1) monetary parameters, including money supply, velocity and prices, 2) the rate of new investment, 3) the volume of new employment, 4) the country's foreign exchange and balance of payments position, and 5) the rate of increase in real national product. Economic Research in Colombia The problems of economic research in developing countries have frequently been noted. What many economists take for granted, working in economies such as the United States, Great fidfiain or Western Europe, economists working :: an em'ironmer: ting these diftf :2 the difficult?" :i :tierdeveloped ;: the intensity :rs:r.;ct may lea Thus, while 1.252 or an overt}: Egroper medicat Le economics, as are: in diagnos :z' the remedy g “P5 at this P - o a: tile 5317.18 b; 4 in an environment such as Colombia, find very troublesome in their work. Among these difficulties are the scarcity of data, the unreliability of existing data, and the lack of basic economic studies. Problems of this sort, however, are relatively insignificant as compared to the difficulty of applying modern economic theory and policy to the problems of underdeveloped economies. While inaccuracies of data may lead to errors in the intensity to which a policy is pursued, an inaccurate theoretical construct may lead to serious errors in policy prescription. Thus, while a patient may satisfactorily recover if given an under- dose or an overdose of the appropriate medication, a small dose of the improper medication, prescribed because of faulty diagnosis, may be fatal. In economics, as in medicine an inappropriate prescription deriving from an error in diagnosis is likely to be more harmful than an error in the intensity of the remedy given an accurate diagnosis of the problem. But the analogy stops at this point. While identical remedies may be universally appropriate for the same human physiological disorders, this is not necessarily the case for economic disorders. Yet many, if not most, economists working in under- developed areas continue to rely on the economic theories and policies developed by and for the advanced economies of the world. It must be recognized that many elements of modern economic policy were developed in industrial countries to solve the problems of industrialized economies. Since such policy subsumes the institutional and structural features of advanced nations, it is questionable whether the same policy would be appropriate for underdeveloped nations given the dissimilar institutional and structural characteristics of these areas. As a case in point, the theoretical basis for the use of deficit financing to stimulate an economy rests upon the assumption of elastic supply conditions {roughest the S'. tarts or produ. is insufficient I :2 be valid for armies where 1 minus inelastic rsz‘rer than stint atly lead to infl Likewise, co L: an environment Fears noted. . . 5 "...is only the followin in the marks of both inve distributior labour; and GIT-Q COHSUTH] they are no1 .Latin Amer Argument 5 222713,: 1C Profess 5 throughout the system so that expenditures can be increased without increasing imports or production costs. This assumption holds true when aggregate demand is insufficient to fully employ available resources. While this assumption may be valid for advanced countries, it is often invalid for underdeveloped countries where imports are an important source of aggregate supply and where various inelasticities in the economy are frequently encountered. Thus, rather than stimulating aggregate demand, a policy of deficit financing may only lead to inflation and/or a balance-of-payments deficit. Likewise, contemporary monetary policy is often frustrated when applied in an environment of an underdeveloped economy. Modern monetary policy, as Seers noted...5 "...is only likely to be a successful regulator of the economy where the following conditions apply: an integrated economy with competition in the markets for the factors of production and products; responsiveness of both investment and savings to changes in the rate of interest; a distribution of income that reflects human needs; full employment of labour; and exports which can be promoted or discouraged by changes in home consumption. Merely to list these assumptions is to indicate that they are not particularly applicable in the countries of the region (Latin America)." Arguments of the sort noted above have not been readily accepted by the economic profession. Rather, such arguments have challenged economists to defend vigorously the theoretical basis on which they stand. Recent work by T. W. Schultz is, by and large, a reply to economists who have forsaken some of the doctrines of modern economic theory and policy.6 But in refuting the 5Seers, Dudley, "Inflation and Growth: The Heart of the Controversy." A paper presented to the Conference on Inflation and Growth in Latin America, Rio de Janeiro, Brazil, January 3-11, 1963. 6For example, see T. W. Schultz, "Transforming Traditional Agriculture, A Research Agenda, Some New Evidence, and Policy Implications." A paper presented at the A/D/C Conference on Subsistence and Peasant Economies, February 28-March 6, 1965, East:West Center, Honolulu, Hawaii. 'ctels, Schultz sscielegical are m contenp or at 7 :':.ese areas. ilcre closel~ the statement by is: economic res " "1t is and “Mercia tive; IESOu] there exist “Vine. re. aCCEpted, t has Some Cl‘ the Popular more devele {1180:}, may and direg: eCOnOmic p Again evid .Cél'e is a Ufii\ slate this Wi‘ ct: 01‘ . MoreOver. attitudfis 3 he 6 rebels, Schultz chooses to overlook overwhelming evidence from the multitude of sociological and anthropological studies in underdeveloped areas which indicate that contemporary economic theory is often both inappropriate and invalid for these areas.7 More closely related to this study, but in the same vein as Schultz, is the statement by Goering regarding the applicability of modern economic theory for economic research in Colombia. He states:8 "It is assumed that institutions differ much more between developed and underdeveloped areas than do attitudes. Man is everywhere acquisi- tive; resources are generally limited; more is preferred to less; and there exists a universal desire to maximize one's utility or level of living. These are basic postulates of economic theory; if they are accepted, the elementary principles of economics follow. While Colombia has some characteristics of underdeveloped countries, the attitudes of the population are generally similar to those held by the populace of more developed countries. In this environment contemporary economic theory may be usefully employed. Institutional differences may limit and direct certain economic activities but do not invalidate basic economic principles." Again evidence from sociologists and anthropologists is ignored. That there is a universal desire to maximize utility cannot be refuted, but to equate this with the desire to maximize one's level of living is a gross error. Utility is always maximized; the level of living need not be. Moreover, when Goering assumes that institutions differ more than do attitudes, he ignores the close relationship of social values and attitudes to the institutions that arise within a society. For in fact, the immense institutional differences between developed and underdeveloped countries are only a reflection of the even greater differences in values and attitudes. Everett M. Rogers refers to more than 500 different sociological studies in both developed and underdeveloped countries regarding this point in his book, Diffusion pf Innovations, New York: The Free Press of Glencoe, 1962. 8Goering, T. James, “United States Agricultural Surplus Disposal in Colombia" (Unpublished Ph.D. thesis, Michigan State University, East Lansing, 1961), pp. 4-5. ~ . . 7 Colombia is an underdeveloped nation. Attitudes, values and institutions differ significantly from those of developed nations. These differences in turn influence to a great extent economic activities and hence the degree of applicability of modern economic theory. Hopefully, some of these factors are taken into consideration in this study. Yet, this study, like others undertaken in underdeveloped areas clearly suffers from the lack of a relevant and appropriate theoretical framework. The problem has thus been recognized but not solved. Hence, in the absence of other alternatives, the analyses in the following chapters utilize, to some extent, modern economic theory. This is done, however, with full realization that the derived conclusions may not be totally applicable to the Colombian economic system. Procedure, Methodology and Format Approach 3f the Study There are two possible approaches to the measurement of Title I program impacts on an economy: a general approach and a Specific approach. As noted by Ginor:9 "The general approach would deal in aggregates, measuring the overall contribution of the program to aggregate imports and investments in order to arrive at an estimate of its impact on investments, national product, income, employment, consumption, trade and the balance-of- payments. The specific approach would determine the contribution of the program to specific imports and supplies and to specific investment programs." The analyses in this study rely largely on the specific approach, supple- mented by the general approach. Projects financed by Title I funds are analyzed on a project by project basis and the individual impacts are then 9Ginor, Fanny, "Analysis and Assessment of the Economic Effect of the U.S. Public Law 480 Title I Program in Israel." Bank of Israel, Tel-Aviv, October 1961, pp. ll-lZ. « 1 Q -‘ I 'i 8 aggregated. Hence macro-economic parameters are estimated by aggregating derived micro-economic parameters. The general approach is then utilized to assess the relevance of these macro-economic impacts for the Colombian economy and to arrive at estimates of the overall impacts of the Title I programs in Colombia. Regardless of whether only the specific approach or the general approach or some combination of the two is utilized, specific assumptions must be made in order for the study to be meaningful. Underlying both of these approaches is the assumption that, in the absence of Title I programs, the goods would not have been imported and the local currency investments would not have been undertaken. Hence, assuming that Title I imports represent a net addition to total resources, it is then possible to assess the maximum effect of Title I programs. The "maximum effect" proposition thus implicitly assumes that in the absence of the program, total imports would have been less by the amount of Title I imports and total investments would have been less by the amount of Title I local currency investments. But as Ginor noted, such a proposition "...has implications as to the rate of growth of the national product, which again influences the level of consumption, investments, exports and imports."10 This proposition is thus questionable, for Colombia might have succeeded in tapping other sources of imports and investment financing had there been no Title I program. This then suggests a ”minimum effect" proposition which would assume that the value of imports and the volume of investments would have been the same in the absence of the Title I program. According to this proposition the program could be considered to have had essentially no effect. 101bid., p. 11. [he ”minim! smiles, for 1 Lima had not him on the res Far the purl) Iitle I program 'I. :rinipal emphasi :‘zisassmption i alternative sourc prsgram. 0f tour: iisregarded and w eifect assumption iezemine the “ma 31:1 6 I ptografixs . This Study 1 n9 1' A am in COlOm I ) 0") H25: . 95 have dea me had 0n th e 9 The Hminimum effect" and the "maximum effect” propositions are not easily reconciled, for it can only be conjectured what might have been the case if Colombia had not had access to Title I imports. And this imposes a heavy burden on the researcher, since individual subjectivity must be introduced. For the purposes of this study, it will be assumed that imports under the Title I program have represented additional resources to Colombia. The principal emphasis will then be on what the Title I program accomplished, if this assumption is valid, rather than an emphasis on the various hypothetical alternative sources that Colombia might have tapped in the absence of the program. Of course, some of the aspects of alternative sources cannot be disregarded and will be discussed in parts of the study, i.e., the maximum effect assumption will be relaxed. However, the central concern will be to determine the "maximum effect" rather than the "minimum effect" of the Title I programs. Relation £9 Other Studies This study is the fifth major research effort concerned with the P.L. 480 11 With the exception of Adams' work, the previous program in Colombia. studies have dealt with the general economic effects that P.L. 480 programs have had on the Colombian economy. Adams' study was concerned primarily with effects of the program on the agricultural sector and was therefore narrower 11By date of publication the four previous studies are: a) Witt, Lawrence W., and Richard G. Wheeler, Effects pf Public Law 480 Programs 13 Colombia 1955-62. Department of Agricultural Economics, Michigan State University, October 1962. b) Goering, T. J., and L. W. Witt, United States Aggicultural Surpluses i2 Colombia: 5 Review E; Public Law 480, Technical Bulletin 289, Michigan State University, Agricultural Experiment Station, Department of Agricultural Economics, East Lansing, Michigan, 1963. c) Adams, Guerra, kbmken, Wheeler, Witt, "Public Law 480, Colombia's Economic Development," Department of Agricultural Economics, Michigan State I; 10 in scope than the other three studies. This study like Adams' work, has more narrowly defined limits than the general studies, yet it deals with many of the broad questions considered in the general studies. These studies were concerned with a wide range of P.L. 480 program impacts and hence left unanswered questions and unquantified conclu- sions. The present study attempts to fill this void by a detailed probing of some of the P.L. 480 impacts on macro-economic parameters in the Colombian economy. Ideally, a study of this type should include an analysis of P.L. 480 impacts on all of the important macro-economic parameters. This would include the effects the P.L. 480 program has had on Colombian investment, saving, national product, employment, consumption, balance-of-payments, fiscal revenues, money supply and demand, income and transactions velocity, as well as other variables including the distribution of income. The ideal, however, was neither feasible or possible due to data, time and financial limitations. Moreover, the present study did not attempt to deal with questions that had been adequately answered in other research. Thus, it was delimited to researching the impacts of the Cohnnbhanitle I program on the parameters noted previously. Since this study is the most recent of the group of research projects concerned with the P.L. 480 program in Colombia, it relies heavily on the prior studies for background information, descriptive detail and general data regarding the Colombian economy and the operation of the program. Such information, descriptive material and tables of data are not, therefore, included in this study. General information and background data have been University, March 1964. . d) Adams, Dale W., "Adjustment Possibilities on Colombian Farms Under Alternative Levels of Public Law 480 Imports"(Unpublished Ph.D. thesis, Michigan State University, 1964). 11 included when such material are necessary for understanding or clarifying the analysis. Format Special attention in this study is directed to the effects of Title I local currency on important macro-economic parameters in the Colombian economy. The existence and magnitude of such effects depend largely on the manner in which the local currency is managed by both the United States and Colombia. Chapter II is therefore devoted to a brief description of the operational aspects of the Title I program in Colombia. It is included to contribute to a better understanding of the analysis which follows in the remaining chapters. Although somewhat similar material is available elsewhere, it is scattered through several studies and is not presented in a manner appropriate to this study. The effects of Title I imports and the resulting generation of local currency on some of the more important macro-economic parameters are analyzed in Chapters III through VI. Chapter III considers the monetary implications of Title I programs with special emphasis on money supply, transactions velocity and price effects. Chapter IV focuses on the impacts that Title I local currency-financed projects have had on the volume of new investment in Colombia. Micro data gathered for this chapter are also utilized to help estimate the employment and balance-of-payments effects discussed in Chapters V and VI. These data are supplemented with more Specific material regarding the employment and balance-of-payments effects of the Colombian Title I program. Chapters III through VI are largely independent analyses of specific impacts with little attention given to the complexity of interrelationships among the several variables considered. Chapter VII then draws upon these 12 four analysis chapters to determine the overall effect of Colombian Title I programs. Of primary consideration in this chapter are the interrelationships of the various effects and a determination of the net aggregate economic impact that the Title I programs have had on Colombia’s economic development. The final chapter summarizes the preceeding seven chapters. It concludes with comments on the overall value of the program and with policy recommenda- tions as to how it might be altered to be more effective in achieving the objectives established by both the United States and Colombia. Colossia was is :80 Title 1 i iii-2251‘ by threw agreesents provi‘; ”3.9 million doll TLITEIC‘J. Fteat and vii mats on both a eiirle oils were “3? prod: t. CHAPTER II PUBLIC LAW 480 TITLE I PROGRAMS IN COLOMBIA Colombia was one of the early participants under the United States Public Law 480 Title I Program. The first two agreements were signed in 1955, followed by three others in 1957, 1958 and 1959.1 In total, these first five agreements provided for imports of U.S. agricultural commodities valued at 70.9 million dollars--the equivalent of nearly 350 million pesos of local currency.2 Wheat and wheat flour accounted for more than half of the total Title I imports on both a value and tonnage basis. Sizable quantities of cotton and edible oils were also imported, as well as relatively small shipments of dairy products, tobacco and feed grains.3 The mix and composition of these imports changed considerably over time. Shipments of cotton were terminated in 1958 and of flour in 1961. Tobacco was not included among Title I commodities until 1958. And edible 1This study is concerned only with the first five Title I agreements and will not deal with any agreements signed after 1959. As a matter of interest, however, a Title IV agreement was negotiated in late March 1963, authorizing the shipment of commodities valued at 6,930,000 dollars and on October 8, 1964, the sixth Title I agreement was signed authorizing imports amounting to nearly 23 million dollars. Since the shipment of goods under the latest two agreements had not been effected at the time research was undertaken, it was not possible to assess the impacts of these agreements. It can generally be expected, however, that the impacts of these two agree- ments will be much the same as the five previous agreements. 2Semiannual Report of Collections Under Title I, P.L. 480 Sales Agree~ ments, June 30, 1965. United States Department of Treasury Division of Central Accounts and Reports, p. 25-27. 3For details concerning the quantities and values of Title I imports see Adams, et.a1., Public Law 480 and Colombia's Economic Development, p. 92. L ;;1 aparts incra htle l imp: :i agricultural 35, er. an annual Zambian agricu‘. :21: m term-s of :srtam c-modit' - :2 percent of do: ''''' a c a e '1‘ h. \ "\ : ‘Iltc‘. kt '3‘? ‘ “ of §~ I 1 RV 0. 14 oil imports increased with the signing of each new agreement. Wheat imports remained at relatively high levels in all five agreements. Title I imports have comprised only a marginal addition to total supplies of agricultural output in Colombia. Since 1955, the value of these imports has, on an annual basis, amounted to less than one percent of the value of 4 Although the program has been insignifi- Colombian agricultural production. cant in terms of total domestic production, this has not been the case for certain commodities. Title I wheat and wheat flour imports have averaged 39 percent of domestic production, edible oils 32 percent and cotton (until 1958) 6.5 percent.5 Since these are all important commodities to the welfare of the Colombian society, the Title I program can scarcely be termed insignificant even though it has supplemented the total agricultural output by only one percent annually. Mechanics of Title I Operations in Colombia6 Before Title I commodities are actually imported by Colombia a number of preliminary measures are required. The first step is the signing of the P.L. 480 Title I agreement by both the United States and Colombian Government. This agreement stipulates: a) the terms of sale, b) the maximum dollar value of the imports, c) the estimated quantity of commodities to be purchased, d) the quantities of goods to be commercially purchased during the agreement period, e) the rate of exchange of the peso to the dollar, f) the distribution 4Based on Colombian agricultural production from the Economic Research Section of the Banco de la Republics. 5Derived from data supplied by the Economic Research section of the Colombian Ministry of Agriculture. 6This section is based on interviews with George Van Den Berghe, P.L. 480 officer of U.S. AID, Colombia, and on Foreign Agricultural Economic Report No. 17 of ERS, USDA, entitled, "Financial Procedures Under P.L. 480." Published in Washington, D.C., May 1964. :5 sales procee‘is fizle I 96505 t° An agreement i;s:ussion with L’ 5115 the requeSt :czhe U.S.D.A., a into account such possible circumver final review, adj-z imittee in Wash: :fficials of the t Colombia that sailorization. I? Ilich stipulates t lad dollar amount ‘7‘ ‘0 be made. A I""ailabillty of 51 imiderations in The Colombia attual PUTC'hase 0 1;: letter of C0 '3" «ins agents wl titredit from th tithe “Witter. The U.S. QXp 15 of sales proceeds for U.S. and Colombian uses and the terms of repayment of Title I pesos to the U.S. Government. An agreement is initially requested by Colombian authorities through discussion with U.S. Mission officials. After reviewing the factors under- lying the request, members of the U.S. Mission submit the formulated request to the U.S.D.A., which in turn evaluates the request and modifies it taking into account such criteria as the availability of surplus products, the possible circumvention of dollar sales and other factors. Following the final review, adjustments and modificiations by the Interagency Staff Committee in Washington, the agreement is formally signed by government officials of the two countries. Colombia then applies to the U.S. Agricultural Attache for a purchase authorization. In effect, this is simply a more specific authorization which stipulates the grade or type of commodity to be purchased, the quantity and dollar amount of the imports and the time span during which deliveries are to be made. Attempts are made to consider such practical matters as the availability of shipping lines, port and storage facilities and timing considerations in the Colombian economy. The Colombian Government then contracts with a U.S. eXporter for the actual purdhase of the commodities. This involves two additional steps: 1) a letter of commitment from the CCC which names the U.S. and Colombian banking agents which hull handle the financial transactions and 2) a letter of credit from the Colombian bank which agrees to honor drafts drawn on it by the exporter. The U.S. exporter then purchases the commodities from regular commercial sources or the CCC and arranges for ocean shipping. For those commodities which carry export subsidies, the exporter is reimbursed by the CCC. The 16 shipments are then made with transportation costs being largely borne by the Colombian and United States Governments. Importation of Title I Commodities8 The Colombian Government has delegated to the Instituto Nacional de Abastecimientos (INA) the major responsibility of importing, disbursing and distributing P.L. 480 commodities. Upon receipt of the goods at port, INA transfers them by rail and/or truck to central storage facilities scattered throughout the countryo Sale and distribution of the goods from storage then takes place as the need fer specific commodities arise. INA then sells the goods directly to processors and manufacturers which utilize them in the making of finished products. In the case of wheat, for example, most of it is sold directly to millers which in turn re-sell the flour to bakers. The finished bakery goods are then sold in the retail market in the same manner as are goods produced from local production. Financial Transactions9 No actual financial transactions take place until the sale by INA to the Colombian processing and manufacturing firms. At the time of sale, INA deposits the predetermined peso value of the goods in a U.S. account in the Bogota Branch of the First National City Bank of New York (Citibank)-- 7The bulk of the transportation costs are presently borne by the Colombian Government. But the U.S. Government pays half of the additional costs of transporting the goods on American-owned shipping lines. 8This section is based largely on interviews with INA officials in Bogota during 1963. 9Information in this section obtained from interviews with John Edds, Assistant Manager of First National City Bank of New York, Bogota Branch, and with officials in the United States Disbursing Office, American Embassy, Bogota, Colombia. 17 the bank designated by the U.S. Government as treasurer for P.L. 480 funds. Generation of the Title I pesos therefore does nor take place immediately on arrival of the goods in Colambia, but rather after the goods are actually purchased by private firms. This time lag may be as long as one year, although more frequently it is a matter of a few weeks or at most several months. As treasurer of the Title I funds, the Citibank holds the pesos until they are disbursed or expended by the U.S. Mission in Colombia. Approximately 90 percent of the funds are held as time deposits on which the bank pays an interest rate of one percent annually. The remainder is held in a special checking account which can be utilized by authorized agencies of the U.S. Government. Since disbursements of the P.L. 480 pesos are made infrequently, the funds tend to accumulate in the special U.S. accounts of the Citibank. At various times since the inception of the program in Colombia, the bank has held up to 120 million pesos for the U.S. Government. Because of the multitude of special U.S. accounts, the exact quantity of accumulated P.L. 480 pesos held on deposit was difficult to ascertain; however, one Citibank official estimated that this account has held an average of 55 to 65 million pesos since 1955. For the size of the Colombian program the accumulation of this quantity of P.L. 480 funds is rather substantial. Since 1958, the P.L. 480 account has consistently amounted to more than 50 percent of total Citibank deposits and has at times reached as high as 65 percent. In most respects, the Citibank regards the P.L. 480 accounts in the same manner as other accounts. The funds are distributed to commercial loans, required investments and reserves in the same way as are other l8 deposits. However, since a single large withdrawal could quickly upset the bank's reserve position, a larger than normal proportion of the bank's total deposits are invested in special Banco de la Republica bonds which can be converted to cash on call.10 All Title I local currency transactions therefore take place within the private financial sector of the Colombian economy. The only function of the Colombian government is to negotiate for the Title I commodities with the U.S. Government and serve as the import agency for the goods. Thus, no official funds enter the transactions mechanism at any point; rather all of the funds are derived from the private sector of the Colombian economy. Even after the funds are deposited to the U.S. account in the Citibank, they are not in any way segregated from other bank deposits. The bank is entirely free to utilize them just as they would any deposit from regular domestic sources. Thus, in no sense are the funds sterilized or isolated from normal private financial transactions. Disbursement of Title I Funds The disbursement of P.L. 480 Title I currency is authorized under Section 104 of the law. There are 19 different categories under which the funds can be disbursed, but in practice, usually about 25 percent are allocated for "Cooley loans" to U.S. subsidiary firms operating in the country, 25 percent is allocated for United States use, and the remaining 10The P.L. 480 funds held by the Citibank can be regarded as an indirect subsidy from the U.S. Government. While the bank pays only one percent interest to the U.S. annually, it is free to loan the eligible funds at the going interest rate. Even though these funds account for fifty percent of the bank's profits from investments, they are viewed with mixed emotions by bank officials. On the one hand considerable profit can be realized from the deposits, but on the other, the funds tend to be volatile in that single withdrawals frequently amount to several million pesos. ,— wC I51. - it‘s - 19 50 percent for recipient country use. The list on page 20 indicates the various categories under which the funds may be disbursed. In Colombia, local currency has been disbursed under twelve of the nineteen categories. About 55 percent of the funds have been alloted for loans to the Colombian Government under section 104 (g). Another 18 percent has been allocated for Cooley loans by authorization of section 104 (e). And the remaining 27 percent has been distributed to various agencies of the U.S. Mission in Colombia under sections 104 (a), (b), (c), (d), (f), (h), (i), (j), (1), and (r). Of the finds alloted to the U.S. Mission, 51 percent have been utilized under section 104 (f), 22 percent under section 104 (a) and 17 and 9 percent under sections 104 (h) and (j) respectively. Only about one percent has been used under the remaining categories.11 The following section very briefly describes the utilization of Title I funds. Section 104 (g) Disbursements The utilization of Section 104 (g) pesos is determined by a project agreement negotiated between the U.S. Agency for International Development and officials of the Colombian Ministry of Agriculture, the gala'dg Credito légrario, Industrial y_Minero, (Caja Agraria) and the National Planning ‘Commission. Four such agreements have been negotiated, allotting nearly 200 million pesos to the Colombian Government for economic development loans. The terms of these loans have been very favorable. The repayment period is 25 years at an annual interest rate of four percent.12 And repay- Inent may be made in either dollars or pesos. 11Based on information from the Status of P.L. 480 Funds 7/311Q2, U.S. JAID Bogota, and the Semiannual Report of Collections under Title I, P.L. 480 Sales Agreements, U.S. Treasury Department, June 30, 1965. 12§£g£gg‘g£‘£g§n Agreements, U.S. Agency for International Development, Office of the Controller, March 31, 1965, pp. 10-13. 20 DISBURSEMENT CATEGORIES FOR LOCAL CURRENCY 1. Section 104 (a): Development of markets for U.S. agricultural commodities by cooperative programs with trade and agricultural groups, trade fair activities, and utilization and marketing research grants to foreign institutions--Department of Agrflnflture. 2. Section 104 (b): Purchase of strategic and other materials for the supplemental stockpile--Office of Defense Mobilization. 3. Section 104 (c): Procurement of military supplies, facilities, and services for the common defense-~Department of State (AID). 4. Section 104 (d): Purchase of goods and services for other friendly nations--Department of State (AID). 5. Section 104 (e): Foreign currency grants to foreign governments for economic development--Department of State (AID); Loans in currencies to private business firms, to U.S. firms for business development and trade, and to U.S. firms and firms of the host country to establish facilities to help consume and market U.S. agricultural products--formerly administered by Export—Import Bank of Washington, now administered by AID. 6. Section 104 (f): Payment of U.S. obligations abroad (including military family housing)--any authorized U.S. Government agency. 7. Section 104 (g): Loans to promote economic development in participating countries--Department of State (AID). 8. Section 104 (h): International educational exchange--Department of State. 9. Section 104 (1): Translation, publication, and distribution of books and periodicals--U.S. Information Agency. 10. Section 104 (j): Assistance to American-sponsored schools, libraries, and community centers-~Department of State and U.S. Information Agency. 11. Section 104 (k): Translation and dissemination of scientific publications and programs of scientific, agricultural, medical, cultural, and education cooperation--U.S. Information Agency, U.S. Department of Agriculture, and other U.S. Government agencies as authorized. 12. Section 104 (1): Acquisition of sites and buildings for U.S. Govern- Inent use abroad--Department of State. ' 13. Section 104 (m): Participation in agricultural and horticultural fairs and trade fair centers--U.S. Information Agency. 14. Section 104 (n): Acquisition, indexing, and dissemination of foreign ‘publications--Library of Congress. 15. Section 104 (0): Expansion of U.S. educational studies--Department of State. 16. Section 104 (p): Supporting workshops and chairs in U.S. studies;; iDepartment of State. 17. Section 104 (q): Purchase of nonfood items for emergency relief ‘purposes--Department of State (AID). 18. Section 104 (r): Audio-visual informational and educational Inaterials--Department of State (AID). 19. Section 104 (3): Sales of currencies for dollars to American tourists--Treasury Department. Source: Agricultural Economic Report No. 17, Economic Research Service, IJ.S.D.A., "Financial Procedures Under P.L. 480," Washington, D.C., May 1964, Append ix A. 21 Section 104 (g) funds are loaned directly to the Colombian Government. The Government, in turn, reloans the funds to private, public or semi-public firms and institutions in the country. Actual re-loaning operations are handled by the Caja Agraria, an agency organized to provide credit to the agricultural sector of the Colombian economy. These loans are extended at terms varying from 3 to 7 years with interest rates ranging from 6 to 9 percent annually.13 In total, the Caja Agraria has utilized the Title I funds to grant about 450 loans amounting to over 250 million pesos.14’15 The Caja Agraria has loaned the Title I funds for a diverse group of projects. About 40 percent of the extended funds have been utilized in the financing of a new nitrogenous fertilizer plant. Another 20 percent has been loaned to the Cauca Valley Corporation for use in irrigation, drainage and electrification projects. And the remainder has been distributed to various other projects, including drainage and irrigation projects, cement and lime production projects, coal washing facilities, port improvements, edible oil production projects and agricultural access roads. In total, about 75 percent of the funds have been loaned to public or semi-public institutions and the remaining 25 percent to privately-owned firms.16 13Information obtained through interviews with officials of the Caja .Agraria in March 1963. 14Although the Caja Agraria has granted more than 450 different loans, about 400 of these were extended to firms and individuals specifically for the purchase of stock in the new nitrogenous fertilizer plant. For the purposes of this study these loans are grouped and considered as one loan. 15The Caja Agraria has actually received about 200 million pesos of 'Title I currency, however, as loans are repaid, the receipts are used to grant 'neW'loans. This, then,accounts for the inconsistency between the amount ‘received and the amount loaned by the Caja Agraria. 16For a detailed listing of projects by Caja Agraria Title I funds, see (Seorge Van Den Berghe, The Status of P.L. 480 Funds in Colombia, U.S. AID, JBogota, Colombia. 22 Section 104 (e) Disbursements17 Twenty local currency loans, amounting to a total of nearly 60 million pesos have been made to wholly or partially owned subsidiaries of U.S. corporate firms. These loans have been extended under the authority of the P.L. 480 Cooley Amendment passed by the U.S. Congress in 1957. Ten of the loans were granted prior to 1960 under the administration of the U.S. Export- Import Bank and the remainder were granted after January 1962 when the U.S. Agency for International Development assumed responsibility for administering the funds. The loan terms have generally been for five years at an annual interest rate of eight or nine percent. One loan, however, was extended for 15 years at an interest rate of four percent. And three loans had terms of four, seven and ten years. All of the loans are repaid to the U.S. Government on an installment basis. The initial intent of the Cooley Amendment was to utilize surplus accumulated P.L. 480 currencies to provide local currency loans to U.S. enterprises operating abroad. In Colombia this intent still holds, although the U.S. AID has found the funds to be a useful tool in advancing economic development by assisting key industries in the country. Generally, the loans ‘have been spread widely through the industrial sector of the economy. However, special assistance was provided to the pharmaceutical industry which received three loans totaling 11.8 million pesos and the glass and cornstarch industries ‘which received 10 and 8 million pesos respectively. In all, fifteen different industries were represented among the 20 Cooley loan recipients.18 17Information in this section based on interviews with the Cooley loan recipients and on the Status of Loan Agreements, U.S. AID, Office of the Controller, March 31, 1965. 23 Disbursements for U.S. Uses19 Somewhat more than half of the Title I pesos available to the United States have been utilized under section 104 (f) for payment of U.S. Mission obligations in Colombia. These obligations have included such items as housing allowances for embassy personnel, hiring of local staff, renting of office space and the purchase of necessary goods and services in the country. A portion has also been used to purchase land for a new American Embassy. In general, the U.S. Treasury has used Title I funds whenever it required pesostn meet financial obligations in the country. The next largest use of Title I pesos has been for market development activities under the authority of section 104 (a). These funds, amounting to about 20 million pesos have been administered by the U.S. Agricultural Attache representing the Foreign Agricultural Service and the Economic Research Service of the U.S.D.A. During the period examined, the market development activities were aimed at maintaining or expanding existing markets and developing new Inarkets for U.S. agricultural products in Colombia.20 Several U.S. agricultural promotion organizations have undertaken most of these activities as a part of their world-wide effort to promote the consumption of U.S. farm products. The greatest effort has been made in the promotion of U.S. wheat, feed grains 18A listing of the firms which have received Cooley loans can be found in the Status of Loan Agreements, U.S. AID, Office of the Controller, iMarch 31, 1965, pp. 10-13. 19This section is based on interviews with various officials in the 'U.S. Embassy, Bogota, including the Disbursing Officer, the Commercial Attache and the Assistant Agricultural Attache. 20More recently 104 (a) funds are convertible to other currencies for use in market development activities in any country or area in the world. 24 and edible oils with somewhat less attention given to the promotion of the U.S. livestock industry.21 The U.S.D.A. has also received Title I funds for research activities. In total, about one million pesos have been granted for three different research projects. Two of these dealt with the demand, supply and production of agricultural commodities in Colombia and the third assisted in an evaluation of P.L. 480 programs in the country. Biological research has also been assisted by grants to Colombian universities and experiment stations. The remaining 10 percent of the Title I pesos have been utilized for a diverse group of U.S. activities. The Fulbright program has absorbed nearly 15 million pesos, the U.S. Information Agency almost 8 million pesos and smaller amounts have been expended for mutual defense activities, congressional travel and projects of the U.S. Department of Health, Education and Welfare. 21Interview with Richard Smith, Assistant Agricultural Attache, February 1963, Bogota. CHAPTER III MONETARY IMPLICATIONS OF THE COLOMBIAN P.L. 480 PROGRAM A long-continuing controversy has revolved around the issue of Title I monetary and economic effects in recipient countries. On the one hand it is claimed that the secondary monetary effects of a Title I program can be decidedly detrimental to a receiving country. And on the other, it is claimed that the net monetary effect can be very favorable or at "worst" neutral for a recipient country. Much of the uneasiness regarding the program has derived from a fear that Title I funds may be generated and expended in such a way that the recipient country's money supply will be increased, thus leading to inflation. Another concern is that the local currency accruing to the United States from Title I sales, may substitute for normal dollar-local currency conversions, hence reducing the country's foreign exchange earnings. And still another concern is that prices of agricultural goods in the recipient country may be depressed to the point where domestic production is discouraged. The basis for these fears is not totally unfounded, for given certain conditions, all these effects could conceivably occur. Yet, there is little available evidence to indicate that any serious detrimental effects of this nature have actually occurred. Modifications of the above arguments are used to support the Title I program. It is argued that if the imports represent a net addition to the supply of goods without an accompanying addition to the money supply and/or an increase in transactions velocity, then purchasing power will be absorbed. Such an effect would be particularly desirable in a country experiencing inflationary pressures. If a Title I program stabilizes farm prices, then 26 agricultural production in the recipient country may be stimulated. Moreover, with stable and lowered food prices, consumers will have additional income to spend on non-food items. Depending upon the relative elasticity or inelasticity of the aggregate supply function, national income may increase with or without a corresponding increase in the general price level. And still another beneficial effect that could result from a Title I program is a significant saving of foreign exchange for the recipient country. Such a saving would allow the country to purchase additional capital from abroad, thus permitting greater industrial development. Actually, however, relatively little is known about how a Title I program affects various monetary parameters in a recipient country. Mason, in 1960, posed several general questions regarding possible monetary effects; of Title I programs, but did not subject the questions to a thorough analysis.1 Khatkhate discussed some of the money supply impacts of Indian Title I programs, but disregarded other relevant considerations.2 Perhaps the most rigorous analysis was developed by Elrod of the USDA.3 His study, however, is rather confusing since he attempts to compare the monetary effects of both Title I and Tflfle IV programs. In short, no complete analysis of Title I monetary effects has been undertaken and no positive conclusions have been derived. This chapter examines some of the monetary effects of the Colombian Title I program. Of primary concern are the effects of the program on 1Mason, Edward 8., "Foreign Money We Can't Spend," Atlantic, Volume CCV, May 1960. 2See Deena R. Khatkhate, "Money Supply Impact of National Currency. Counterpart of Foreign Aid: An Indian Case," The Review of Economics and Statistics, Vol. XLV, February 1963, No. 1, pp. 78-83. 3Elrod, Warrick E., "Monetary Effects of Financing Agricultural Exports,” Foreign Agricultural Economic Report No. 12, Economic Research Service, Development and Trade Division, United States Department of Agriculture, November 1963. 27 Colombia's money supply, transactions velocity and price leve1--the internal effects. External effects, including balance-of-payments and foreign exchange impacts are discussed separately in Chapter VI. And the total monetary and economic effect of the import program is analyzed in Chapter VII. The conclusions of this chapter are thus partial conclusions, i.e., the net monetary impact cannot be accurately determined without reference to the balance-of-payments and national product effects discussed in Chapters VI and VII. Money Supply Impacts As in many countries experiencing a continual price inflation, Colombia has had a rapid increase in the total money supply. During the twelve year period from 1952 to 1965, the total stock of money in the country increased 4 Of this increase, 35 percent can be accounted for by the by 550 percent. increase in bills and coins issued by the Banco de la Republica and the remaining 65 percent by the increase in deposits of the commercial banking system.5 Given the rapid increase in the Colombian money supply, and the rather large amounts of counterpart pesos generated by P.L. 480 operations in Colombia, it is useful to determine what, if any, relationship exists between these two events. Before analyzing the money supply impacts of P.L. 480 pesos in Colombia, careful attention must be given to the difference between momentary and long run effects and between definitional and real effects. The distinction between momentary and long run effects must be made because of the large :number of financial transactions which arise between the time the P.L. 480 4Revista del Banco de la Republica. Various issues from December 1952 to March 1965. 51bid. 28 goods are imported and when the funds are finally disbursed by the United States Government. One transaction, if looked at singly, may appear to have a very definite short run expansionary or contractionar effect on the money supply. However, there may be a later offsetting transaction that canpletely neutralizes the previous effect. Therefore, for the sake of clarity, the analysis discusses all intermediate financial transactions and their immediate effects on the money supply and then summarizes the total long run aggregative effects of the P.L. 480 pesos in Colombia. The problem of distinguishing between defintional and real effects is similar to that of distinguishing between momentary and long run impacts. However, rather than being a matter of the time period involved, definitional problems arise because of the semantic definition of a country's money supply. The definition of the Colombian money supply used by the Banco de la Republica conforms to the one used by the International Monetary Fund. It consists of: 1) total currency with the public excluding cash on hand of commercial banks and cash held by the Banco de la Republica and 2) total demand deposits excluding interbank deposits, commercial bank deposits held in the Banco de la Republica and checks in process of paying in commercial banks. Because time deposits are not included as a part of the total supply of money in Columbia, a transfer of funds from a demand deposit to a time 'will have the immediate effect of reducing the money supply. However, if a bank loans out time deposits which find their way to new or existing demand deposits, the money supply will increase just as though the funds were being loaned from demand deposits. Thus, when considering the transfer of funds from one type of deposit to another, careful attention must be given to a short run definitional effect and a long run real effect. 29 The preceeding chapter outlined the generation of P.L. 480 pesos in Colombia. The following section will spell out the conditions under which the money supply impacts of these funds will be expansionary, neutral or contractionary as well as which effect has been and will probably continue to be the more likely situation in Colombia. Because the disbursement of P.L. 480 funds is delayed for a considerable time after the funds are accumulated, the analysis has been divided into two general parts. Part one is concerned with the effect on the money supply of the undisbursed funds held by the first National City Bank of New York and the second part discusses xnoney supply impacts as the funds are disbursed. IWBEEE§.9f Undisbursed Funds It must first be reoemphasized that the generation of P.L. 480 pesos occurs entirely within the private sector of the Colombian economy. Although a semi-official government agency (INA) is responsible for the importation and distribution of the commodities, its capacity is only that of an importing agency. While INA is involved in financial transactions, it is the private firms which first give rise to the P.L. 480 currency. It is assumed that in order to pay for the imported commodities, the private buyers draw from two sources: 1) company reserves (assumed to he held as demand deposits in commercial banks) or 2) loans from commercial banks. Because the P.L. 480 goods constitute a normal operating cost to the buying firms, it can generally be expected that the firms would not seek 'new finance in the form of stocks or bonds. Although occasionally firms may seek finance other than through commercial banking channels, the occurrence of these actions is probably so infrequent that a separate analysis is 'unwarranted. Therefore, the analysis is broken into two sections: 1) P.L. 480 peso impacts when buying firms draw funds from existing company 3O bank deposits and 2) impacts when funds are obtained through commercial bank loans. EEE§§.EEEZE_EEEE:EEPEEIE§° If at the time of purchase of P.L. 480 goods the buying firm desires to finance the transaction by drawing from existing company bank deposits, the following effects can be expected. First, deposits in the firm's bank will fall by the amount of the withdrawal. If the bank held no excess reserves at that moment, it could be expected that certain of the bank's assets would need to be monetized in order to maintain the required reserve position with the Banco de la Republica. In this case the immediate effect would be a contraction of the total banking assets and liabilities assuming that the banking s'stem held no excess reserves. To the extent that there were no "leakages," total assets and liabilities of the banking system would contract to the theoretical maximum. However, it is more likely that "leakages" would take place, resulting in a contraction somewhat less than the theoretical limit. Upon receipt of payment for the goods, INA deposits the entire amount in one or more commercial banks. A.greater amount is transferred as time deposits to the Citibank while that portion which represents a markup by INA is usually deposited in a current account at some other commercial bank. Thus the money supply contracts by the amount deposited in the time deposit of the Citibank because such deposits are not included in the definition of the money supply. However, as soon as these funds are loaned by the Citibank, demand deposits of the banking system expand, via the banking expansionary Inultiplier, to near the original amount. Therefore, the long run effect on the Colombian money supply of these several transactions is essentially neutral. Although it can generally be assumed that under the conditions outlined 31 above, the effect of P.L. 480 pesos will be neutral, there exisrs some possibility for an expansionary effect. This effect will result it the following assumptions hold: 1) the buying firms withdraw their funds from a demand deposit, 2) the banking system holds no excess reserves, 3) all loans made from the transferred funds are eventually deposited as demand deposits, and 4) the reserve requirement for time deposits is less than for demand deposits. It must then follow that there will be some monetary expansion, the degree depending upon the difference between the reserve requirements for the two types of deposits.6 One of the explicit assumptions of the preceeding analysis was that the banking system held no excess reserves. Dropping this assumption and substituting one that all of the banks of the system hold excess reserves, either by choice or by lack of demand for their funds, it can be shown that the money supply impact of P.L. 480 pesos will be contractionary. This must result because demand deposit liabilities of the banking syStem fall by the amount of the buying firm's withdrawal and time deposit liabilities increase by the amount that INA deposits in the Citibank. However, it must be made clear that this contractionary effect can only take place if the banking system has excess reserves and no loans are made from the time deposits in the Citibank. Funds Derived From Loans. If a buying firm is unable or unwilling to draw upon its own bank deposits and must borrow from a commercial bank in 6The additional money created if these conditions hold can be expressed 852 M—==2x-xa+x(1"a) (“0 .. E b b where: M is the additional money created. X is the original amount transferred. a is the reserve requirement for time deposits. b is the reserve requirement for demand deposits. 32 order to pay for the imported goods, then the following effects can be expected. First, the creditor bank extends the loan to the buying firm which in turn pays INA for the goods. INA then deposits the amount in one or more commercial banks as noted on page 30. Because new demand deposits have been created, it can be seen that the total money supply will expand. A further expansionary effect will take place as the Citibank loans funds from the time deposits. Thus, the money supply will expand to the amount of the buying firm's loan plus the amount of money created by the loans from the time deposits of the Citibank. Upon repayment of the loan by the buying firm, the money supply will contract by some multiple of the original loan because demand deposit liabilities of the banking system will have been reduced. However, the money created by the Citibank will still be in circulation because their time liabilities will not have been changed. It can be expected that the contraction of the money supply caused by the reduction in demand deposit liabilities will just offset the expansion in the money supply brought about by increased tbme liabilities of the Citibank. Therefore, the total long run impact on the money supply will be neutral. Again, it must be under- stood that this effect will result only if the Citibank chooses to loan funds from their P.L. 480 account time deposits and that all other banks do not hold excess reserves. Impacts 2f Disbursing Funds As noted in Chapter II, Colombian P.L. 480 pesos are allocated to three general groupsuuthe American Embassy, the Caja Agraria, and the Agency for International Development. Approximately 27 percent of the funds are utilized by the Embassy, another 55 percent by the Caja Agraria and the remaining 18 percent by the.Agency for International Development for loans 33 under the Cooley Amendment. The preceeding section was concerned with eifimfis of P.L. 480 pesos on the Colombian money supply from the time they were initially generated until the time they were deposited in a time deposit in the Citibank. This section discusses the money supply impacts of these funds as they are disbursed by the three groups noted above. Funds Used by the United States. The Embassy utilized P.L. 480 funds for many types of peso expenditure in Colombia. Each agency of the Embassy has its own allocated fund at the Citibank and draws upon these funds as needed. The effects of the withdrawal and eventual expenditure of the funds can be easily traced. First, the liability position of the Citibank is lowered by the withdrawal of the funds. If the bank does not hold sufficient reserves to cover the withdrawal, loans or other assets must be monetized in order to meet the deposit withdrawal. A.momentary contraction in the Citibank's reserve position would then take place unless the funds were deposited in the same bank by the payees of the Embassy. Generally, however the Citibank 'would loose deposits to other banks, although the total asset-liability position of the banking system would remain the same. Therefore, it would be only a bookkeeping transaction for the commercial banks and the effect on the Colombian money supply would be entirely neutral. Likewise, it can be Seen that if the Citibank and all other commercial banks of Colombia held excess reserves, the effect would be neutral. A contractionary effect could take place only if the Citibank did not possess excess reserves and all other commercial banks held such reserves. Further if the situation were reversed, i.e., if the Citibank held excess reserves and all other banks had no excess reserves, the effect would be expansionary. Both of these situations appear to be highly unlikely as past observation 34 indicates that when one bank has excess reserves or inadequate reserves, the condition is shared by nearly all other banks of the system. £2E£§.E§E§.RX.EEE.Eéli.§§§§£i§° The United States Government makes available to the Colombian Government large amounts of funds derived from P.L. 480 operations in Colombia. These funds are loaned by the U.S. Govern~ ment to the Caja Agraria which in turn remlosns them to Colombian enterprtse. Again, the steps involved in this process are not complex and the end effect is the same as in the preceeding case. The funds are withdrawn from the Citibank in rather large amounts of several million pesos. In order to cover these large withdrawals the Citibank calls in loans and/or cashos Banco de la Republics bonds to the exeent that their reserve position again meets requirements. This results in a contraction of the money supply. These funds are then loaned by the Caja Agraria to individuals and firms which utilize them for needed current operating expenses and capital purchases. The funds are quickly deposited in commercial banks which results in o money supply expansion. Thus, as soon as the banking system‘s reserve position increases, the multiple expansion results in a neutral effect on the money supply. As the loans are repaid, the exact opposite process takes place with the same resulting neutral effects. It can therefore be seen that loaning the funds through the Caja Agraria has exactly the same effect as if the Embassy itself made a direct expenditure. Eggd§.§§§g_§y_§12(£§ggl§y'gggggl. Because the Cooley loans are essentially no different than Caja Agraria loans, except that the ICCQlVlng entities are Anmrican rather than Colombian, a separate discussion is unwarranted. These loans may have significant impacts on the Colmnbian balancemofmpayments position, but the effects on the total money supply 35 will be neutral as in the case of the Caja Agraria loans.7 E2222 maul lessees ~56: PL‘EEPEE’I The analysis in the preceeding section considered the money supply impacts of P.L. 480 pesos in Colombia. Of the three effects considered, i.e., contractionary, neutral, and expansionary, it was found that all three could exist, given different assumptions. The expansionary effect could take place under two conditions: 1) when funds were transferred from demand to time deposits given the four assumptions noted on page 31, and 2) when the Citibank chose not to hold excess reserves while all other commercial banks held such reserves. Both of these conditions depend upon somewhat unrealistic assumptions which generally could not be expected to apply to the Colombian situation. It was shown that a contractionary effect was brought about when funds were transferred from demand deposits to time deposits, providing that the banking system held excess reserves. In order to determine whether such an effect could have taken place, it is necessary to review the reserve position of commercial banks during the relevant time period. From 1952 to 1965, the reserve requirement on deposits up to thirty days changed frequently. Only during a few months of this twelve year period did banks possess excess reserves and in several months they were deficient in their compliance with reserve requirements. Thus, it is highly unlikely that any substantial contractionary effect occurred from.a movement of P.L. 480 funds from demand to time deposits. Because both the contractionary and the expansionary effect could occur only under rather unu ual conditions, it must be concluded that in -¥~~~w 7See Chapter VI. 36 general, the method of generating and handling Colombian P.L. 480 pesos since the inception of the program has had no effect on the money supply in Colombia. An Alternative Definition of Money Supply A continuing controversy has revolved around the issue of what items to include when defining a country's money supply. Friedman and others have at times added time deposits to currency and demand deposits in their definition of money supply. Others have further broadened the definition by including postal savings accounts, savings and loan shares and short term government bonds.8 Accounts other than time deposits are relatively insignificant in the Colombian monetary system as compared to the United States. Hence, there is little value in including these items in an alternative definition of the country's money supply. However, since time deposits are an important element in the handling of Colombian P.L. 480 funds, it is worthwhile to enlarge the definition of Colombia's money supply to include these deposits. Such a definition will eliminate the definitional difficulty noted earlier and will allow the preceeding analysis to be extended to its logical conclusion. By defining the Colombian money supply as currency in circulation plus demand and time deposits, it can be seen that P.L. 480 fund transactions can affect the money supply only if credit is created or destroyed in the process. Initially, the money supply will expand if firms borrow from commercial banks in order to finance the purchase of P.L. 480 goods. However, upon repayment of these loans, the newly created credit will be destroyed, and the money supply will shrink to its original level. Hence, over the 8See H. G. Johnson, "Monetary Theory and Policy," American Economic Review, June 1962, Vol. LII, No. 3, pp. 335-384. 37 long run, the money supply impacts of P.L. 480 fund transactions will be neutral as the previous analysis. Likewise, the impacts of P.L. 480 fund utilization will be neutral. No new credit is established over the long run as the funds are simply trans- ferred from the U.S. Government account in the Citibank to the accounts of loan recipients. It is a balance sheet transaction for the commercial banking system and the money supply neither expands nor contracts. Thus, the aggregate long run money supply impact of P.L. 480 funds is entirely neutral, irregardless of the way in which the money supply is defined. PRICE IMPACTS A previous study of P.L. 480 impacts in Colombia has indicated...”that the introduction of additional commodities into Colombia at a time when the general price level was advancing five to ten percent per year, had the effect of holding down the price increase for these commodities and their close substitutes."9 There is little question that this has been the case; however, it is difficult to determine the magnitude of the price stabilizing effect of P.L. 480 imports. Since wheat and wheat flour have been the major P.L. 480 imports, it could be expected that the primary price effect would be manifested in stabilizing Colombian cereal prices. It appears that such an effect did occur. Tables 111-1 and 111-2, indicate that between 1952 and 1954, when no P.L. 480 wheat was being imported, cereal prices advanced by nearly 24 percent and aggregate food prices by over 21 percent while the general whole- sale price level excluding food rose by only 2 percent. With the importation 9Witt, Lawrence W., and Richard G. Wheeler, Effects of Public Law 480 Programs in Colombia: 1955-62. A progress report to the Economic Research Service of the U.S. Department of Agriculture under contract No. 12-17-0017-52, Medellin, Colombia, October 1962, p. 149. ‘, 38 Table III-1. Index of general price levels and important P.L. 480 imports in Colombia 1950m65. a] (1952:100) General Wholesale General Wholesale Price Index Item Wholesale Price Index Wholesale of Cereals Price Excluding Food Price and Cereal Year Index Food Index Preparations 1952 100.0 100.0 100.0 100.0 1953 105.8 100.3 109.8 108.9 1954 113.2 102.3 121.4 123.7 1955 114.1 108.8 118.0 116.9 1956 123.7 121.8 125.2 128.8 1957 153.7 153.1 154.1 160.5 1958 180.3 187.8 174.7 177.2 1959 197.6 205.7 191.5 191.2 1960 205.9 214.9 199.1 198.2 1961 219.4 225.7 214.7 225.5 1962 225.2 235.7 217.2 212.2 1963 284.4 294.1 277.1 273.0 1964 334.1 320.7 344.0 343.6 1965 341.6 331.5 349.2 358.8 SOURCE: Various issues 1950~1965 Revista Del Banco de la Republica, Bogota, Colombia. E/All but 1965 based on December prices. 39 Table III-2. Principal sources of wheat and wheat flour supply in Colombia, 1950-64. 3] Sources Domestic Commercial P.L. 480 Year Production Imports Imports Total 1950 102 74 -- 176 1951 130 1 65 -- 195 1952 140 57 -- 197 1953 145 58 -- 203 1954 146 87 -- 233 1955 167 55 22 244 1956 160 51 56 267 1957 157 58 63 278 1958 129 82 28 239 1959 131 24 86 241 1960 145 62 63 270 1961 142 82 82 306 1962 162 74 65 301 1963 N.A. 612/ 3213/ -- 1964 N.A. 1052/ 309/ -- .E/The wheat equivalent of flour was calculated and included by assuming an extraction rate of 72 percent. .E/Estimated from preliminary data. SOURCE: Production data from I.N.A., Bogota, Colombia, imports calculated from data of USDA, FAS, Washington, D.C., and from worksheet data provided by I.N.A. ff" 40 of P.L. 480 products, including 22 thousand metric tons of wheat in 1955, cereal prices and aggregate food prices declined while the general price index excluding food advanced. All price indices rose sharply in 1956 and 1957, even though an average of almost 60 thousand metric tons of P.L. 480 wheat were imported. However, the wholesale price index excluding food advanced by more than 40 percent from 1955 to 1958, while cereal prices and aggregate food prices rose by 37 and 30 percent respectively. From 1958 to 1964, P.L. 480 wheat imports averaged almost 60 thousand metric tons annually. During this period, the general wholesale price index exceeded both the cereal and aggregate food price indices. Thus, the high level of P.L. 480 wheat importations, plus the imports of other P.L. 480 commodities, apparently held food prices increases below those of other goods and services in Colombia. In 1964 and 1965, cereal prices as well as aggregate food prices advanced more rapidly than did the general wholesale price level excluding food. P.L. 480 wheat imports during these two years were, however, only half that of the preceeding seven years. This brief analysis of price and wheat import data thus indicates the existence of an inverse relationship between the quantity of P.L. 480 wheat imports and the prices of cereals, cereal preparations and aggregate food- stuffs. Conceptually this is what would be expected so long as Colombian per capita consumption, production and importation of non-P.L. 480 agricul- tural goods remained constant and institutional price manipulation did not exist. If significant changes occurred in any of these variables, then it would be difficult to attribute all of the price effect to P.L. 480 imports. Some changes in per capita consumption, production and importation of non-P.L. 480 goods did occur. And likewise, some changes in institutional 41 price manipulation occurred. Whether these changes weighed heavier in influencing food prices than did the additional food supplies derived from P.L. 480 imports, is difficult to determine. Between 1950 and 1962, net per capita food supplies available in Colombia declined slightly.10 Total cereal supplies, other than wheat re- mained relatively constant on a per capita basis during the same period.11 Wheat supplies increased from 176 million metric tons in 1950 to more than 300 million metric tons in 1962--most of this increase being due to larger wheat imports, primarily those of P.L. 480 (see Table 111-2). Thus, with the exception of the additional wheat supplied through P.L. 480, food consumption, production and importation remained relatively constant on a per capita basis from 1950 to 1962. The institutions and institutional policies that influence and at times determine Colombian agricultural commodity prices perhaps underwent a more pronounced change than did per capita rates of food consumption, production and importation.12 The establishment of maximum retail price levels for important food commodities during and after the 1956-1957 rapid inflationary period may have helped hold down price advances for most foods. Yet, in 1964 and 1965, when a greater degree of price control was exercised, food prices advanced sharply. It is thus difficult to determine how important price controls were in holding down food prices in earlier periods. Prior to 1962, the relatively weak economic and political position of cereal producers, particularly wheat, bean and corn producers, may have contributed to the lower price levels for these commodities. If this was 10Computed from data supplied by the Banco de la Republica, Bogota, COlmnbiao lllbid. 2 For a discussion of the various commodity organizations, see Witt and Wheeler, Ibid., pp. 40-47 42 the case, then all food prices may have been affected through the substitution effect. Produceruoriented commodity gr-ups have been very important elements in determining the price relationships among various agricultural commodities in Colombia. As Witt noted:13 HThe particular level of support often is based partly upon the economic power of the industry members...An organization with substantial political power will establish a price that is relatively high. Resource competitors will then try to close the gap. The results are unstable prices and unstable production patterns in those geographical areas where product substitution is possible and where producers shift rapidly to the crop which is momentarily most profitable...The lag of wheat and bean prices behind other agricultural prices may be one of the contri- buting factors behind the establishment of the Instituto de Cereales...” Taking all of these factors into consideration, it is difficult to attribute all of the aforementioned price effect on cereals and aggregate foodstuffs to the additional supplies of wheat and other commodities imported under P.L. 480. Undoubtedly P.L. 480 wheat imports had a definite impact on Colombian wheat prices and this impact may have carried over, via the substitu- tion effect, to the prices of all other foodstuffs. However, to state that all of the noted price effect was due to P.L. 480 imports would probably be an exaggeration of the actual effect. In all liklihood, the primary effect of P.L. 480 imports has been that food price increases have been less than they would have been in the absence of P.L. 480 importations. Lower food prices, in part due to P.L. 480 imports, have implications for the prices of non-food goods and services and well as for Colombia's economic growth. These effects, along with related considerations are subjected to a detailed analysis in Chapter VII, however, a brief discussion of the questions involved in the analysis will be reviewed here. Because several diverse and unquantified cause~effect relationships must be taken into account simultaneously, it is not possible to accurately 13Witt and Wheeler, gplcit., p. 45. 43 determine how the Colombian aggregate price level has been affected by lower food prices. In the first place, lower food prices imply that more consumer income is available for additional food purchases, non-food purchases or greater saving. How the increased purchasing power is utilized then, in part, determines the impact on the aggregate price level. If the demand for non-food items shifts (demand increases) and the aggregate supply curve for these goods is upward sloping, prices will rise. Over time, however, aggregate supply will also tend to shift in response to higher prices, thus resulting in a downward readjustment in the price level. If consumers reSpond to their greater real income by purchasing more food, then the aggregate price level will probably remain unaffected. And if the additional real income is saved and invested, both the aggregate demand and aggregate supply will shift, resulting in an indeterminant impact on the general price level. Whether the aggregate price level rises, falls or remains constant with lower food prices, hinges on the demand and supply elasticities for food and non-food goods. Another very important consideration is the relative weighting of food prices as compared to non-food prices in the aggregate price index. Ideally, this weighting would accurately reflect the proportion of total expenditures in the economy going for food purchases. In Table 111-1, food expenditures are weighted by a factor of 0.56. This factor therefore implies that 56 percent of total expenditure in Colombia goes to purchase food. While any such figure is open to question, it appears plausible and probably reflects expenditure patterns fairly accurately. If it is accepted as fact, somewhere near 56 percent of all expenditure in Colombia goes for food purchases, then any change in food prices will significantly affect the aggregate price level. Given evidence that Colombian 44 food price increases have been less than they would have in the absence of P.L. 480 importations, it can be postulated that the aggregate price level has also increased at a slower rate than it would have in the absence of the program. To briefly summarize this section, it appears that the following price impacts have resulted from imports of P.L. 480 goods: 1) the additional wheat supplies have definitely had the effect of holding down the price increase of Cereals and cereal preparations, 2) this impact has apparently carried over, via the substitution effect, to aggregate food prices, and 3) since food expenditures constitute a relatively high proportion of total expenditure, the general price level may have advanced at a slower rate than it would have in the absence of P.L. 480. These conclusions are only tentative, however, and will be reconsidered in Chapter VII. TRAN SACT IONS VELOC ITY IMPACT S The impact that Title I financial transactions have had on Colombia's monetary velocity cannot be accurately determined. In part, this is due to the relative insignificance of the Title I program as compared to total economic activity in Colombia. But perhaps more importantly, any impacts that Title I programs may have had on monetary velocity have been masked by a pronounced decline in Colombia's transactions velocity over the past 15 years (see Table III-3).14 Since it is not possible to determine empirically velocity, it is necessary to turn to deductive and theoretical considerations. 14The decline in transactions velocity is apparently unrelated to the existence of P.L. 480 programs in the economy, since the parameter has trended lower over the past two decades. Why this decline has come about will not be explored in this study. Some economists argue that velocity tends to decline with economic development. This, however, seems an unlikely explana- tion of the Colombian case. Rather, most of the decline could probably be attributed to the rapid increase of the country's money supply during this period (see Table III-3). 45 Table 111-3. Colombian money supply, transactions velocity, and commercial bank deposit velocity, 1950-1964. Money Supply Index of Commercial in Money Bank Item. Thousand Supply Deposit Transactions Year Pesos (1950:100) Velocity Velocity 1950 962,393 100 4.21 8.17 1951 1,119,920 116 4.30 7.98 1952 1,309,365 136 3.94 7.37 1953 1,548,679 161 3.83 6.93 1954 1,846,935 192 3.66 6.91 1955 1,933,795 201 3.98 6.85 1956 2,415,344 251 4.08 6.15 1957 2,744,431 285 4.76 6.48 1958 3,317,975 345 4.11 6.23 1959 3,715,913 386 4.13 6.32 1960 4,102,600 426 4.17 6.44 1961 5,112,423 531 4.14 5.88 1962 6,168,759 641 4.20 5.69 1963 6,922,544 719 -- -- 1964 8,369,691 870 -- -- ==============fl SOURCE: Money supply, index of money supply and commercial bank deposit velocity from various issues of Revista Del Banco de la Republica. 1950-1965. Transactions velocity computed from money supply data above and undeflated national income data provided by Economic Research Section, Banco de la Republica. 46 Perhaps the most suitable framework for determining P.L. 480 impacts on Colombia's transactions velocity is the well-known equation of eachange. This equation can be expressed as MVwPY; where M denotes the supply of money. V the transactions velocity, P the price level, and Y the national income. Assuming all four parameters variable, the expression is tautological rather than behavioral, i.e., MVEPY. Though the expression is merely definition, it can be used to deduce the relative magnitude of change and the direction of change of the other three variables. The way in which the expression will be used here is somewhat different than the manner in which it is normally used. Generally, the equation expresses the changes in the variables that necessarily must result in order to nmintain equilibrium at all points in time. Here, however, the equation will be used to determine the changes in the four parameters resulting from P.L. 480 operations within the aggregate moving equilibrium. This means that, for now, the overall changes in the four parameters will be disregarded and only the P.L. 480 impacts on the variables will be considered. Given this background, the impact of the P.L. 480 program on Colombia's transactions velocity can now be analyzed. As noted in the preceeding sections of this chapter, the Title I import program: 1) has not affected the magnitude nor the rate of change of Colombia's money supply, and 2) has helped to hold down food price increases 'which in turn have tended to slow the advance of the aggregate price level. Thus, M as expressed in the equation of exchange, has remained unaffected by Title I programs while P has tended to be somewhat lower than it would have been in the absence of the program. This leaves Y, national income, as the only parameter to be estimated before the program impact on V, transactions velocity, can be estimated. 47 Although the total impact of Title I on Colombia's national income is fully discussed in Chapter VII, it will suffice here to say, simply, that Colombian national income has been augmented by the importation of Title I goods. In brief, this conclusion must result primarily because the Title I imports represent a net addition to Colombian national product. It is postulated that the increase in national income (Y), offsets the decline in the aggregate price level (P). And since the money supply (M), remains unaffected by the P.L. 480 program, transactions velocity (V) will also remain unaffected. Using the symbols (~) to denote constancy, (f) to indicate an increase and (+) to show a decrease in the magnitude, i.e., the direction of change, of the parameters, the postulated effect can be shown in the following manner: Where: P+, Y+, and M, and MV=PY or V=PY/M then: M V = P+Y+ or V = P+Y+l M It is possible, however, that the increase in Y may more than offset the decrease in P, or that the decline in P may more than offset the increase in Y. Velocity (V), must then necessarily be affected; falling in the former case and rising in the latter. On purely theoretical grounds, there appear to be no valid arguments which would explain why Colombia's transactions velocity should be affected by the existence of a P.L. 480 program in the economy. Likewise, no empirical evidence exists to argue that velocity has been affected. Thus, it must be concluded that P.L. 480 Title 1 programs have had no significant effect on the magnitude or rate of change of Colombia's transactions velocity. CHAPTER IV INVESTMENT IMPLICATIONS 05 P.L. 480 PROGRAMS IN COLOMBIA This chapter is concerned with an examination of the impacts that P.L. 480 investment funds have had on Colombia's economy. Attempts are ‘made to answer the following questions: 1) have P.L. 480 loans met a need for certain types of credit not obtainable from other sources in the country? 2) have these loans supplemented or substituted for other available sources of credit? 3) have P.L. 480 investments been compatible and complementary to national investment policies? To answer these questions it is first necessary to understand the environment in which the funds are being utilized. Their impacts must be viewed not in a micro framework, but rather as a part of the macro economic system of which they are a part. Hence, before discussing the investment impacts of the P.L. 480 programs, Colombian investment policies and financial institutions are briefly described and discussed. Title I investment loans are then analyzed under two separate categories: 1) loans to public and semi— public institutions, and 2) loans to private enterprise. The aggregate investment impacts are then summarized in the final section. Investment Policies and Institutions in Colombia Investment credit in the Colombian economy is derived from a myriad of sources. Although accurate data are not available, the best estimates indicate that about 50 percent of all new investment is financed by recognized official, semi-official and private and semimprivate financial institutions 1 including direct and indirect government investment. The remainder is 1Adler, Robert W., Transferable Savings in Colombia, unpublished research study, Department of Economics, University of Oregon, June 1963, p. 78. 49 financed through internal investment of profits, private l-nding, bond and stock sales, foreign inveSEment and other like sources. During the past 15 years, Colombian policy makers have been giving increasing attention to directing new investment to projects of economic and social importance. Forced investment policies which initially were indirectly manifested through moral suaSion and general fiscal monetary policy have become conscious and deliberate policies affected through congressional laws and decrees.2 Since not more than half of all new investment financing falls under the jurisdiction of the central government, the control of investment credit is far from being absolute, Nevertheless, the policies of directed investment have been modestly s=ccess£ulo Without such deliberate policies, the agri« cultural sector may have received only half the new investment and production credit which it has received in the past decade.3 Public and private invests ment in transportation faCLlities presently being utilized probably would not have been constructed had not a deliberate policy of directed investment in this sector been in effect. Likewise, numerous and varied investments in other types of social overhead capital unquestionably owe their present existence to conscious policies of forced investment.4 In short, forced investment has filled many investment voids which in all likelihood would not have been filled in the absence of such policies. 2;§gg., pp. 97n109. 3loc..§_i.t_:'. 4.1.9.9 2.1.9.» £311£y_ggntrol Institutigngs The Banco de la Republica, together with the SJperintendencia Benticta and the Cons ejo Nacional de Politica Economica y Planeacion largely desczqur the allocation of institutional investment credit in Colombia. The broad authority under which these three organizations operate res ul Le in a eystem of directed transfer of inveetment funds, Such a system of forced invest~ ments is an effective means of allocating institutional credit to projects of economic and social importance, but has little impact on the allocation of noninstitutional credit” The 1att;er type of investment credit (d15cuuee:d below) is, however, inilu e_:ced to some degree by geni3'ra1 moneta azy and l3C.1 policy, Of the three agencies, the Banco de la Republice is the most important and influential instit.ution in the Colombian fiua.c system. As the .ountry's central bank, the Banco has the res wibility for formula*_ ing and if stigating monetary policy, sopportin g government security issuee, is :Jiug currency and carrying on numer no order monetary and financial functions, In many respects, the Banco resembles the Federal Reserve System of the United States. However, due to the nett ie of the Colombian economy, it has, at the same time, both greater and lesser influence over economic com.iiiione than does the Federal .Reeerve in the Unit.:ed SLa es A11 commercial banks and official banking institutions are subject to the policies of the Banco, thus its sphere of influence on the banking sector is more complete than that of the Federal Reserve, On the other hand, however, the Colombian banking sector is of lesser importance in terms of the total economy than it is in the United States. Thus, alth ugh the control of institutional 5This section is based on interviews with officials of the Banco de la Republica, the Centre de Eetudios sobre De ' rrollo Economico, Universidad de 108 Andes, Bogota and on diecue sions with Robert Adler and George He dley, visiting economists at the Universidad de los Andes during 1963. .0‘ III .4 pt. ’9 - :3 \ ... Po A Q}! _ t a n . :u‘ “.1 . . ‘w t \‘~ ‘0‘ L‘ l 51 credit is nearly absolute, the role of the institutional banking system in Colombia's economy is not as great as that in the United States. The influence of the Banco on aggregate investment and investment policy in Colombia is particularly pronounced. It controls the sale and purchase of foreign exchange; it regulates differential exchange rates; and utilizes its broad authority to distribute institutional credit to the various sectors of the economy. But perhaps more important, it controls the credit terms of the major institutional lenders, the size of loans, interest rates, repayment schedules and loan durations. Three major groups of financial institutions fall under the forced investment policies of Banco de la Republica. They are: 1) official and semi-official banking institutions such as insurance companies, savings institutions and financial corporations. Official and Semi-Official Banking Institutions6 Some of the more important official and semi-official financial institu- tions are the Caja Agraria, the Banco Cafetero, the Banco Ganadero, the Banco Popular, the Banco del Estado, the Banco Central de Hipotecario, the Instituto de Credito Territorial and the Instituto de Fomento Industrial. The first three of these deal largely in agricultural and agricultural- industrial credit. As a group, they provide nearly 75 percent of the institutional investment credit going to the agricultural sector.7 The Banco Popular and the Banco del Estado function as commercial banks. The former, however, specializes in commercial and industrial loans to small 6This section is based on the official publications of the various agencies and on material from various issues of the Informe gnual del Gerente ‘5 12_Junta Directive, Banco de la Republica. Bogota, Colombia. 7Computed from data in the 1963 issue of the Informe Anual del Gerente .5 l§_Junta Directive, Banco de la Republics, Bogota, Colombia. czizies, while t,‘ graze cmarcia igszecario and t :siit to low cos saliential and c Tue Institut 2:32:16“ for t‘. 1.1951 and set. 11115 very limi framigl Batik“ lilting Sector 1 ‘.'. 1th the 55:“. 1F; n ,. aryiql bank 52 entities, while the portfolio of the latter is distributed as widely as private commercial banks. Mortgage credit is provided by the Banco Central Hipotecario and the Instituto de Credit Territorial. The latter limits its credit to low cost housing loans and the former to relatively high cost residential and commercial building loans. The Instituto de Fomento Industrial is an institution financed by the Government for the purpose of providing industrial credit. Of the group of official and semiaofficial institutions, it is perhaps least effective due to its very limited capital base. Commercial Banks8 Seventeen privately owned commercial banks make up the commercial banking sector of the Colombian financial system. In general, they operate in much the same manner as commercial banks in the U.S. However, their investment portfolio is subject to considerably more control than U.S. commercial banks. For example, they are not allowed to extend more than 10 percent of their sight and time deposits for terms of more than one year. The maximum term of any single loan is limited to five years.9 Numerous laws and decrees have brought about strict obligatory investments. Both savings and time deposits are subjected to forced investment require» ments in government debt bonds9 Caja Agraria bonds and Banco Ganadero bonds. In addition, commercial banks are required to loan a portion of their deposits for certain specified agricultural activities. Since 1959 this requirement has been 15 percent of total demand and term deposits. These requirements 8This section is based on various issues of the Revista del Banco de la Republics and the Informe Anual a la Junta Directive, Banco de la Republica. 9Presidential Decree 384 of 1950. Articles 4 and 6. 53 are, of course, in addition to usual stipulations on reserve requirements and discount operation policies. Other Financial Institutions Until recently life insurance and general insurance companies were a relatively minor source of institutional investment credit in Colombia. Now, however, there are more than 100 different firms operating in the country with assets exceeding one billion pesos. These companies are subject to a rather far—reaching regime of obligatory investments. For general insurance companies, 35 percent of their capital and 54 percent of their technical reserves are subject to these requirements. Life insurance companies must invest 25 percent of their capital and 61 percent of their technical reserves in obligatory investments. Total obligatory investment is distributed among bonds of mortgage banks, central, departmental and municipal governments, financial corporations, the Caja Agraria and other official banking institutions.10 Capitalization companies were formed during the past decade for the purpose of selling capitalization certificates. In general, these companies operate in much the same manner as life insurance companies, except that no life insurance is issued. The purchaser agrees to make periodic payments which totaled with interest equal the face value of the cedula. At maturity these are redeemed at face value. An additional bonus is included in that purchasers who maintain their premiums, automatically participate in a lottery system offered as an incentive. Some companies offer an additional bonus paid at maturity for those maintaining all premium payments. While total assets of these companies presently amount to less than 500 million 10Adler, op.cit., p.33. 54 pesos, the higher interest rate obtainable (six percent versus four percent on savings accounts) make them a potentially large source of investment credit. Like insurance companies, capitalization companies are subject to forced investment requirements. An amount equivalent to 40 percent of their technical reserves must be extended to governmental units, and housing and mortgage bonds.11 Savings accounts are maintained by only three of the private commercial banks in Colombia. However, other savings institutions are operated by the Caja Agraria, the Banco Cafetero, Banco Popular, Banco del Estado and the Circulo de Obreros.12 They have not been popular with savers since a maximum of only four percent interest can be paid. Likewise, private institutions have been reluctant to venture into this type of activity where 80 percent of the deposits are subject to forced investment in various types of official or semi~officia1 bonds or cedulas. With the growth of the capitalization companies which pay a higher rate of interest and offer other benefits, it is unlikely that savings accounts will expand as rapidly as they have in the past. A relatively new type of financial institution has recently evolved in the form of corporaciones financieras. These institutions are private business corporations which sell their own bonds and stocks and lend to industrial borrowers. As of June 1963, aggregate paid—in capital exceeded 200 million pesos for the four firms operating in the country.13 To what extent these firms will be subjected to investment control is presently not determined. However, there is little question that if their present 11Ibid., p. 34. 12Informs Anual, Banco de la Republics, various issues 1950-1962. 13Adler, op.ci£., Appendix C. 55 rate of growth continues, their very raison d'etre may be circumvented through the instigation of forced investment policies of the Central Government. Privately Financed Credit Non-institutional credit, is an important element in the Colombian economy. Unfortunately no studies are available to determine the magnitude of non-institutional credit in the country inn: there are indications that it 14 may exceed the amount advanced by all recognized official banking institutions. Certainly presamistas (private money lenders) provide a very substantial portion of agriculture production and investment credit.15 And much of Colombia's small industry is dependent upon private loans for funding current production as well as new investment. Even many larger firms must rely to a considerable extent on credit from friends and family. In addition to the nonmrecorded loans, the stock exchanges in Colombia provide an important and expanding source of investment credit for medium to large commercial and industrial firms. The number of shareholders of the lOO-plus firms listed on the Bogota Stock Exchange is now more than ten times that of a decade back and authorized paid~in capital and assets of the tnember companies have expanded similarly.16 There are good indications that this type of financing will become an even more important element in the Colombian industrial and commercial credit scene as the economy matures and people become more familar with the purpose of bond and stock sales by private firms. 141b1d., pp. 97~109. 15Martin, Eugene, Unpublished Research Studies on Agricultural Credit in Cundinamarca and Boyaca, Colombia. University of Oregon, August 1963. lggl Mercado Bursatil, various issues 1952 to 1965, Bolsa de Bogota, Bogota, Colombia. I215. 2i. Easels. The forced investment policies in Colombia have not only specified the allocation of institutional credit to the various sectors, but in addition have dealt with the terms of all institutional credit extended. Interest rates, loan size, repayment schedules and loan durations are, in varying degrees, controlled through policy actions. The basic control tool available to the Central Bank is, of course, the rediscount policy. But in addition, the Central Government together with the Superintendencia Bancaria and the Banco de la Republica has not hesitated in passing laws and decrees which esrablish the terms of credit extended by financial institutions. Interest rates have received the most attention by policy makers. All official and seminofficial financial institutions have a legal interest rate range in which they loan funds. The lowest rate ch rged by any institution is the 6 percent rate of the Caja Agraria. However, this rate is not available to all borrowers. Moreover, it is available only on loans of less than one year. Minimum rates of 7 percent and 8 percent are charged on loans of longer duration.17 The highest effective interest rate charged by an official banking institution is the 14 percent rate for 15 year loans by the Banco Central l‘iipotecario.18 All other rates tend to fall within these two extremes. Generally, however, rates of 9 to 12 percent are the most common for loans of less than one year extended by official and semi-official banking institutions.19 —‘v—~ —_—— 1/aned on official publications of official banking agencies and on interviews with Caja Agraria officials, June 1963, Bogota, Colombia. 181nterview with Dr. Jorge Cortes Boshell, Gerente General, April 19h}. 19Informs Anual, Banco de la Republica. arious issues, 1952 to 1963. ‘\ -. 57 Commercial banks are not subjected to any legal maximum rate of interest on non-rediscountable loans. However, any loan presented. for rediscount at the Central Bank is subject to a maximum legal interest charge of 7 to 10 percent. For loans not presented for rediscount, rates of 9 to 14 percent are typical.20 In 1963, 41 percent of all commercial bank loans were extended at a rate of 12 percent and over 90 percent of all loans fell in the range between 8 and 14 percent.21 The average rate of return for commercial banks is, however, considerably less than these rates might indicate since they are required to invest a significant part of their assets in various govern- ment agency bonds. The average rate of return varies from bank to bank, ranging from 7 to 10 percent.22 For private loans, interest rates vary widely. Prestamistas in the agricultural sector seldom charge less than 3 percent per nuonth and may charge as much as 50 percent monthly. Outside the agricultural sector much the same situation prevails with rates ranging from 18 percent for low risk short-term loans to several hundred percent for high risk longer term loans.23 All financial institutions are subject to some type of control regarding the duration of their loans. This control takes two forms: 1) laws and decrees establishing maximum loan duration by type of institutions and 2) Central Bank rediscount policies which discriminate among various loan terms. With the exception of the Caja Agraria and the mortgage banks, financial institutions are generally limited to shorter term loans. Not more than 10 percent of the sight and time deposits of commercial banks can be extended for 2ORevista del Banco d3 13 Republics, various issues 1952 to 1965. 21Informe Anual, Banco de la Republics, p. 123. 22Computed from data in various issues of the Informs Anual d3 lg Superintendencia Bancaria, Bogota, l958~l963. 23Martin, op.cit., pp. 18-21. '. - n_‘ 58 periods exceeding one year. The official banking institutions, other than those mentioned above face similar restrictions. The result of these policies is that about 60 percent of all credit extended in Colombia is of shortuterm (one year or less) duration. Another 20 percent is loaned for medium term (one to three years) duration and the remaining 20 percent for long-term (three year plus) periods. Nearly 90 percent of all long term credit is 24 Hence, for all practical purposes, no long extended by mortgage banks. term institutional investment credit is provided for purposes other than residential and commercial building construction. Among official and semieofficial Colombian financial institutions, repayment schedules are strictly controlled. Frequently both small and large loans are repaid on an installment basis rather than the whole amount at the expiration date of the loan. Commercial banks are subject to less direct control, but indirectly are controlled through rediscount policy of the Central Bank. P.L. 480 Local Currency Investments Investments financed under the Colombian P.L. 480 Title I program have fluctuated widely from year to year since the first loans were made in 1956. During the past decade, however, total P.L. 480 fund investments have averaged about one percent of annual gross investment in Colombia.25 While Title I investments have not comprised a significant part of new investment in the country, they have augmented the institutional credit system of the 24Informe Anual, Banco de la Republics, 1963, p. 125. 25Computed from data in Cuentas Nacionales 1950-1964, Banco de la Republics, Departamento de Investigaciones Economicas, Bogota and Status of P.L. 480 Funds U.S. AID, U.S. Embassy, Bogota, Colombia. !. 'u . I 59 country to a considerable degree. Since 1956 an average of slightly more than 4 percent of all institutional credit has been financed by Title I funds. Between 10 and 12 percent of all institutional credit extended to agriculture and agricultural industry and about 3.5 percent of all institu- tional credit to industry has been financed by Title I pesos.26 The Caja Agraria has been the recipient of nearly 200 million pesos-- some 77 percent of all Title I investment funds. In turn, this agency has reloaned the money to Colombian agriculture and agriculturally related industry. During the past decade these funds have provided an important source of loanable funds for the Caja. An average of about 11 percent of the agency's capital base and nearly 20 percent of its outstanding loan portfolio have been provided by Title I generated currency.27 Cooley loans to U.S. subsidiary firms have accounted for the remaining portion of Title I credit. Nearly 60 million pesos have been loaned to 19 different firms. Since these loans have been administered by a U.S. agency, they cannot strictly be considered as being within the Colombian credit system. However, these loans have augmented industrial credit in Colombia by about 5 percent annually since 1959.28 Loans £2 Public and Semi-Public Institutions The P.L. 480 funds extended to public and semi-public institutions have been utilized for a diverse group of projects. Included among these have been irrigation and drainable projects, the construction of fertilizer 26Informe‘dg Gerencia, Caja de Credito Agraria, Industrial y Minero, 1955-1964, Informe Anual, Banco de la Republica 1955-1964, and Status of P.L. 480 Funds U.S. AID, U.S. Embassy, Bogota, Colombia. 27IEEEEEE.§E.§EEEEE£§: Caja Agraria various issues 1955-1964. 28Informe Anual, Banco de la Republica, various issues 1955-1964, and Status of P.L. 480 Funds, U.S. AID, Bogota, Colombia. 60 plants, coal and cement production, grain storage facilities, port improvement projects and agricultural access roads. In total, over 150 million pesos have been loaned to public and semi-public agencies.29 From the preceeding section describing the Colombian credit system, it is apparent that there has been a paucity of intermediate and long-term invest- ment credit in the country. Moreover, the credit that is available often comes at a high price. Recognizing this problem, the responsible agencies have attempted to channel most of the P.L. 480 funds into intermediate and long-term loans. The results have been satisfying. Interest rates have been maintained in the 6 to 8 percent range and the loans have been granted for periods of 5 to 15 years.30 P.L. 480 loans to public and semi-public institutions have clearly supplemented existing credit sources. And in no sense can the loans be regarded as substitutes for credit from other sources: no credit of this type is available anywhere in the Colombian economy. Moreover, the utiliza- tion of the funds in this manner has complemented national investment policy. .E222§.£2 Private Enterprise Most of the information concerning the impacts of P.L. 480 loans to private enterprise was gathered in the summer of 1963. Attempts were made to obtain additional data during 1964 and 1965, through correspondence with recent loan recipients, but this proved to be rather unsatisfactory. Thus, the conclusions derived in this section rest largely on the conditions as they were in mid 1963. 29$tatus of P.L. 480 Funds, Ibid, p. 1. 30Interview with Alfredo Velez, Caja Agraria official, June 1963, Bogota. 31Portions of this section are from the author's contribution in "Public IJHW¢48O and Colombia's Economic Development." Department of Agricultural iEconomics, Michigan State University, March 1964, Chapter IV. 61 Using a prepared questionnaire, information was obtained by personal interview from 23 private firms which received either Cooley or Caja Agraria loans. In addition to general data concerning the institutional and mechanical aspects of the loan transactions, answers were sought for the following questions: 1) did the loans meet a need for certain types of credit not available from other sources? 2) did the loans supplement or substitute for other sources of credit? 3) what factors contributed to the initial application for the loans? 4) what impacts did the loans have on the firm's operating capacity, gross and net asset position? Because many different types of firms were represented in the sample, it is somewhat difficult to present the findings of the study. A firm by firm.discussion would perhaps be the most informativr: solution, but this would be rather lengthy and result in considerable repetition. Hence, the alternative of presenting in-depth case studies was chosen. In no sense can the three cases selected be considered representative or typical of the group of loan recipients. It would not be possible to select such cases given the diversity of the sampled group. However, the three in-depth case studies do illustrate to a considerable degree, representative effects which resulted from the Cooley and Caja Agraria loans to private industry. The Loan.£2 Aluminio d3 Colombia32 Aluminio de Colombia,located in Barranquilla, is a subsidiary of JReynolds International Company producing fabricated aluminum products for the Colombian market. At the time of the interview, the company was satisfying a large portion of Colombia's aluminum needs except for tubes larger than 32Based on interviews with James R. Constable, Controller of Aluminio de (Solombia, August 1963, Barranquilla, Colombia. 62 four inches in diameter and some of the aluminum foil. Reynolds first began Colombian operations in 1956 by absorbing a small aluminum plant that had been established in 1941 by a French company. Until late in 1960 the company was producing a line of sheet aluminum, including flat sheets, coil sheets, and corrugated sheeting. After receiving the P.L. 480 loan in 1959, the company installed equipment for producing extruded products and aluminum foil, both of which were previously imported. The loan amount was 2 million pesos, with a repayment period of five years and an annual interest rate of 8 percent. The company was to pay 200,000 pesos each six months, plus interest on the unpaid balance. Service charges for legal documentation and bank fees amounted to 12,000 pesos. To a great extent the company was able to use existing plant space for the new fabricating processes, therefore, the adied investment Specifically associated with the new plant was primarily for the importation and installation of ‘machinery. Secondhand equipment valued at about 3 million pesos was obtained on favorable terms from the parent company as a result of modernization changes in a North American plant. With additional purchases from Germany, the new investment totaled 5 million pesos, of which the P.L. 480 loan represented about 40 percent. Impacts 2f the Loan Aluminio de Colombia seems to have applied for P.L. 480 funds for two principal reasons. First, a restriction of credit to Colombian industry in 1959, hindered the company in obtaining large loans from Colombian commercial banks; second, the P.L. 480 loan repayment terms were preferred over those of other possible credit sources. According to the respondent, Aluminio de Colombia found it "very difficult" to obtain credit from Colombian sources in 1959. The maximum 63 amount available to the company was a bank loan of 500,000 pesos, carrying an interest rate of 8 percent, with a three-year repayment schedule. Given this situation the company applied for Title I funds in order to make the investment in the new foil and extrusion plant. Although the loan required payment of 8 percent interest, the "going rate" for bank loans to industry in 1959, the additional two-year term and the larger amount available made the loan markedly superior to loans available from Colombian commercial banks. Given that industrial credit from Colombian sources was restricted and available loans were of relatively short term in 1959, it appears that the P.L. 480 loan to Aluminio de Colombia fulfilled a definite need for a particular type of credit which was unavailable in Colombia. However, one may reasonably ask if the parent company could not have provided funds for expansion. Since Reynolds International is the majority stockholder in Aluminio de Colombia, it may seem unlikely that the lack of two million pesos would have prevented completion of the new plant. In reality, however, the parent company has not made a practice of extending long-term credit to its foreign subsidiaries, but has, as in the case of Aluminio de Colombia made various concessions in supplying rameaterials and equipment. Thus, a sizable part of the aluminum.foil equipment was made available on favorable terms, and all crude aluminum shipments have been supplied on lZO-day credit. In other respects, however, the subsidiary has had to depend on outside sources of credit, and the 2 million peso P.L. 480 loan seems to have been a crucial factor in going ahead with the new plant in 1959. Had the loan not been available, according to the respondent, the new investment would have been postponed until 1960 or 1961 when credit could have been obtained more readily from Colombian sources. 64 Furthermore, use of the available commercial bank loans to build the new plant would have exhausred the company's limited line of credit. Because P.L. 480 funds were utilized for the new plant, continued shortmterm bank borrowing was possible to meet current operating expenses. In other words, the P.L. 480 loan did provide funds above the limit available from Colombian commercial banks. This allowed the company to operate normally, without experiencing a shortage of working capital as a result of the increased expenses of beginning a new production process. The company's progress is shown in its profit and asset position during the four-year period from June 1959 to May 1963. In that period, gross assets grew by 120 percent, net assets by 375 percent, and profits by 53 percent. In summary, the following points can be cited as specific results of the 1959 loan to Aluminio de Colombia: 1) The loan did not actually substitue for credit available to the company from existing channels, but fulfilled a need for a type of credit which was unavailable from other sources. 2) Because the P.L. 480 funds were used specifically for new plant investment, the line of credit available from commercial banks for shortnterm credit was not reduced. This permitted the company to maintain sufficient working capital for the increased expenses of opening and operating the new plant. 3) Owing to the availability of intermediateuterm P.L. 480 credit to supplement short-term bank credit, the company was able to make significant increases in gross assets, net assets, and profits over the four-year period after receiving the P.L. 480 loan. 65 The Loan to Abbott Laboratories d3 Colombia33 Abbott Laboratories de Colombia, S.A., Ltda., received the largest of three P.L. 480 loans to U.S. pharmaceutical companies. The Abbott loan accounted for almost 13 percent of the Cooley funds disbursed, while loans to Pfizer Corporation and Parke-Davis Inter-American Corporation accounted for an additional 7 percent. Since three firms from one industry received about one-fifth of all Cooley loans, one of them was chosen for presentation as a case study; the selection being based on the completeness of available data and on the possibility of tracing loan impacts. In contrast with the situation for Aluminio de Colombia, the three drug firms face competition from several other companies, including firms from Europe, Canada and the United States. This competition is expressed in terms of product, rather than in terms of price, since drug prices are closely regulated by the Colombian Government. Abbott first began operation in Colombia in 1944, in a small plant located in Cali. After restrictions were placed on the importation of finished pharmaceuticals, the company found the Cali plant inadequate to produce the line of products desired for maintaining its competitive position in the industry. A decision to build a completely new plant near Bogota was ‘made in 1958, and construction was started in 1959 with help from the P.L. 480 loan. Part of the equipment in the Cali plant was transferred to Bogota supplementing new machinery purchased from the United States. When the plant began operations in mid-1961 it was one of the most modern and efficient in the country. The Abbott loan amounted to 7.7 million pesos, received in four 33Based on interview with C. S. Montero, Gerente Financiero of Abbott Laboratories, S. R. Ltda., Bogota, Colombia, August, 1963. 66 installments beginning in late 1959 and ending in early 1961. Although the loan was basically a five-year contract, the first repayment was not required until February 1962. Beginning at that time, one-tenth of the principal was to be repaid every 6 months, together with 8 percent interest on the unpaid balance, plus an administrative charge of 1.5 pesos per thousand on each payment. The loan met approximately 44 percent of the total cost of the Bogota plant, including site purchase and development, architectural fees, administra- tive costs, erection of buildings, and purchase of office and plant equipment. In total, the loan financed about 70 percent of the peso expenditure for constructing and equipping the new plant. Impacts g; the Loan In the case of Aluminio de Colombia, it was noted that the P.L. 480 loan did not substitute for other lines of credit available to the company but fulfilled a need for credit which was unavailable from other sources. In the case of Abbott Laboratories, the reapondent stated that had the P.L. 480 loan not been available, funds could have been obtained from other sources-~primarily from the parent company. There is little question that this would have been the case as it was almost imperative for Abbott to undertake large investment in Colombia in order to maintain their competitive position in the pharmaceutical industry. .Abbott could not continue to sell the same line of products as before import restrictions were imposed without investing in new plant facilities to produce their products in Colombia. If the company had ready access to other credit, why did it seek a P.L. 480 loan? The answer to this question can be found by examining the alternative credit sources of the company. First, the respondent felt that 67 the company might have obtained loan funds from several Colombian commercial banks. The minimum interest rate on bank loans would have been 8 percent per annum, and a more probable rate would have been 9 to 10 percent. Further- more, it is highly doubtful that banks could have offered the favorable repayment terms of the P.L. 480 loan. If the company had received a number of two or three-year bank loans and then attempted to renew them at the termination date, the interest rate would doubtlessly have been increased. The other source of credit for the company was from the parent company in the United States. A loan from the parent company would have involved a conversion of dollars at the existing free exchange rate of about 7.70 pesos per dollar. Repayment of a million dollar loan at the present free exchange rate of near 20 to one would then have involved an outlay of 20 Inillion pesos instead of 7.7 million pesos. In retrOSpect, the company realized a maximum savings of 12.3 million pesos, not including interest charges, by borrowing P.L. 480 funds. Although company officials were aprobably unable to predict the exact saving to be realized from receiving a P.L. 480 loan, economic trends in Colombia prior to 1959 left little doubt that the peso would continue to depreciate during the next few years. Abbott therefore had two reasons for preferring to seek a P.L. 480 loan instead of credit from other sources. First, loans from Colombian «commercial banks would have been somewhat more expensive under a situation characterized by rising interest rates; second, a dollar loan from the parent company would have involved higher peso repayment costs to the subsidiary. The respondent had no doubt that the company would have incurred the additional cost of borrowing from other sources in order to undertake the new investment if the P.L. 480 loan had not been available. Thus, it ¢:an be seen that the loan substituted for more normal credit sources of the 68 company, primarily owing to the fact that it provided less expensive credit. Lhe Loan 3.9. £1.11: its is 921*- mrbiaj“ The third case study involves a loan to Gillette de Colombia, located in Cali. Gillette was chosen as a case study because it represented.0maof the companies which applied for a Cooley loan in late 1958, but did not actually receive the funds until 1963. Thus, to a paint, it serves as a ”test case" to illustrate the reactions of a firm which was denied the use of P.L. 480 funds for a period of nearly five years. Gillette first began production in Colombia in July 1960. Output from the new plant has been limited to two types of razor blades which formerly had been imported from England. Although Gillette is selling safety razors as well as razor blades in the Cdlombian market, the former continue to be imported. The respondents estnmated that Gillette now supplies about 85 percent of all razor blades sold in Colombia. The remainder is produced by a single national firm. In addition to supplying 85 percent of the Colombian market, Gillette exports about 10 percent of their total production to Ecuador and Paraguay. Gillette applied for the P.L. 480 loan in September 1958, but did not actually receive the funds until March 1963. The amount received was 4 million pesos, repaysble over a five—year period in ten equal installments with interest at the rate of 9 percent annually. Although the loan was originally intended to help finance construction of the new razor blade plant, the facilities were completely built, equipped, and had been producing 34Based on interviews with Robert T. Eckfeldt, Gerente General and Oistein Tueten, Gerente Administrativo, Gillette de Colombia, August, 1963, Cali, Colombia. 69 at full capacity for nearly three years before the loan funds were finally received by the company. Therefore, the P.L. 480 funds were converted to dollars to repay a loan received from the parent company in 1959. The dollar loan was made at a time when there was some assurance that the Cooley funds would eventually become available. With this assurance, the parent company had prospects of recovering part of its original dollar investment more rapidly than would have otherwise been possible, through conversion of the P.L. 480 funds to dollars. At the same time the subsidiary would be con- verting its dollar obligations to peso obligations. The economic advantages of converting debt obligations from dollars to local currencies are fairly obvious in countries such as Colombia, which has been undergoing spurts of inflation. If the local currency depreciates in relation to the dollar, repayment of long-term dollar debts with pesos becomes more expensive, while repayment of long-term local currency debts becomes less expensive. Over a five-year period, there was a good possibility that total credit costs to the subsidiary would be less for a peso loan than for a dollar loan, even if the dollar loan were available at no interest. The prospect of a P. L. 480 loan, therefore, could have served to stimulate action on both the original Gillette investment plans and the dollar loan. 0n the other hand, investment in razor blade production in Colombia in 1959 appears to have offered a favorable outlook for profits. There was only one small razor blade plant in the country and import restrictions were in effect from time to trme on many consumer goods, including razor blades. Thus, it appeared advantageous for the company to open the subsidiary, rather than risk the loss of its entire Colombian market. Two major factors, therefore, appear to have influenced Gillette's 7O investment in Colombia. First, the favorable profit outlook probably led to the plan for establishing manufacturing facilities, even before the loan application was made. 'Second,the prospect of a P.L. 480 loan reinforced the attractiveness of the investment by indicating that the company could recover a portion of its initial dollar investment rapidly, leaving part of its out- standing obligations in peso form. Although the latter factor certainly provided encouragement for the Gillette investment in Colombia, the final results can scarcely be attributed to the P.L. 480 loan, since the investment ‘would probably have been made even if the Title I funds had not been available. Aggregate Impacts of P.L. 480 Loans to Private Industry As a group the recipients of P.L. 480 funds expanded their operations rapidly after the receipt of the loans. As of August 1963, total gross assets had increased by nearly 100 percent, net assets by 140 percent and profits by 80 percent. These figures are, of course, undeflated. Likewise, not all of the growth can be attributed solely to the loans. However, even if the figures were to be rather arbitrarily deflated by 66 percent to account for these two factors, the residual could be termed as a significant impact. In general, there appear to be four reasons why the 23 firms sought P.L. 480 loans instead of loans from other sources. According to the number of times they were mentioned in the interviews, they are: (times mentioned) Better repayment terms 18 No other funds available 15 Lower interest rates 11 Less "red tape" 4 This listing, of course, only roughly indicates why the firms applied for Title I loans. In reality, a combination of several factors, several 71 not explicitly noted above, appear to have influenced the decisions of private firms to seek out P.L. 480 fund. For the Cooley loan recipients the primary factor was undoubtedly the prospect of "cheap money." Although seven of the respondents stated that their companies would not have been able to obtain loans from other sources, this is open to question. There is evidence that the availability of in- expensive P.L. 480 credit induced new investment that otherwise might not have been undertaken immediately, given more normal circumstances. The loans Inay have been "simply too good to pass up" as one respondent candidly remarked. Thus, it is possible that several firms which had no definite plans for plant expansion quickly formulated new investment plans in order to take advantage of the inexpensive (ex post, negative cost) credit. It is therefore possible that several of the firms replied that no other source of credit was available at that time because they had not consciously sought out other credit sources, since they were aware that such advantageous terms ‘were not readily available elsewhere. For those firms which did have definite investment plans the avail- ability or unavailability of P.L. 480 funds did not appear to be a crucial factor in whether or not these plans were carried out. Abbott and Gillette are cases in point. However, because Title I loans were available, there was really no other economically feasible source of credit: the loans offered better repayment terms, lower interest costs and greater profit possibilities than did any other credit source. It therefore appears that the Cooley loan recipients sought out P.L. 480 credit largely because it offered very attractive repayment terms, low interest rates and the substitu- tion of dollar liabilities for peso liabilities. 72 The availability of P.L. 480 credit undoubtedly hastened and to a degree stimulated the firms‘ investment decisions, but it is questionable whether the funds could be considered as a necessary and required condition in the final decision. Profit potential, import restrictions and growth possibilities 'were probably more important considerations in the decision equation of the recipient firms. The firms receiving Caja Agraria industrial loans sought Title I credit for the same reasons as did the Cooley loan recipients: the terms were much Inore favorable than credit from Colombian sources. All of the firms receiving Caja Agraria loans indicated that the P.L. 480 credit was markedly superior to that of alternative sources. And all but one claimed that no credit was available from other sources. In contrast with the Cooley loan recipients, the interviews with the Caja loan recipients left the distinct impression that credit sources were ‘much more limited for these firms than for the Cooley loan recipients. While the U.S. subsidiaries could turn to their parent companies to co-sign Colombian bank loans and/or to extend direct credit, no such alternative existed for the Caja Agraria loan recipients. Estopped from tapping these sources, the firms had to rely entirely on funds from Colombian creditors. And with the exception of limited amounts available through regular Caja .Agraria loans, no credit was available in the country that compared to the favorable terms of the Title I loans. Thus, while the Cooley loans probably were not a necessary condition to induce investment by the recipient firms, it appeared that just the opposite was the case for the Caja Agraria loan recipients. Whether or ‘not they undertook new investment depended very substantially on the avail- ability of the type of credit offered by the P.L. 480 loan operation. The 73 Title I funds did not, therefsre substitute to any degree for existing credit sources, rather they supplemented the credit system of the country. Moreover, to the extent that a substitution effect did take place, this resulted in the freeing of existing shortermterm credit for other purposes in the economy. P.L. 480 Investment ImpaCtSm-A Summary In summary, P.L. 480 investment funds have yielded a substantial impact on the Colombian economy. If it is assumed that the funds would not have been available in the absence of the P.L. 480 program, then nearly 300 million pesos of new investment can be attributed to the program. Even in the absence of any multiplier effect, this is a significant impactn-amounting to about 4 percent of all institutional credit extended in the country. In all respects, the loans advanced from these fund offered obvious advantages to the borrowers. And in reality a new type of credit was created which had previously not been available in Colombia. As compared to existing credit, the P.L. 480 loans offered lower interest rates, better repayment terms and perhaps more importantly, the money was available for longer periods. Clearly the Title I loans provided a type of credit that was markedly superior to that which has been available in the economy. In addition to these obvious advantages of the P.L. 480 loans, an additional bonus accrued to the Cooley loan recipients. Their credit cost was substantially reduced from what it would have been if the parent company had extended dollar credit. Because of this, the Cooley loans may have been superfluous in that some, if not most of the Cooley loan recipients might have undertaken the new investment even if the Title I funds had not been available. For the recipients of Caja Agraria industry loans, this clearly was not 74 the case: the loans did not substinne to any great extent for existing credit sources as the firms did not have access to any other similar credit. The P.L. 480 investment funds, therefore, did not substitute for existing credit sources in Colombia, rather they supplemented these sources, complemented national investment policy and provided for significant additions to the country's capital base. In addition to these effects, the new invest- tnents expanded employment, reduced balancenof—payments problems and contributed to Colombia's economic growth. These effects and their inter-relations will be discussed in the following three chapters. CHAPTER V EMPLOYMENT IMPLICATIONS OF THE COLOMBIAN P.L. 480 PROGRAM Information concerning the employment effects of P.L. 480 programs in recipient countries is limited. Although several comprehensive studies on the economic impacts of P.L. 480 imports have been completed, only two of these have derived estimates of the employment effects of local currency disbursements. The study of P.L. 480 impacts in Israel reported that nearly 8,000 new permanent jobs were created by Title I investments--about one new job for each IL 23,500 of new investment. Temporary employment in Israel was augmented by more than 2,000 workers per year for a five year total of nearly 10,500.1 In Colombia preliminary estimates indicated that one new permanent position resulted from each 50,000 pesos of new P.L. 480 investment.2 This figure was later revised upward to 100,000 pesos in the final report.3 Such additional employment may be generated by a P.L. 480 program in several ways. First, if the goods are additions to total imports and do not substitute for normal importations, additional labor may be required to handle the goods. Second, as Title I funds are disbursed, temporary employ- ‘ment will be created during the course of capital formation. Third, new permanent employees will be required to man the new investment projects. 1Ginor, Fanny, "Analysis and Assessment of the Economic Effect of the U.S. Public Law 480 Title I Program in Israel." Bank of Israel, Tel-Aviv, October 1961, pp. 58-69. 2Witt, Lawrence W., and R. G. Wheeler, "Effects of Public Law 480 Programs in Colombia, 1955-1962," A progress report to ERS, USDA, Department of Agricultural Economics, M.S.U., October 1962, Mineo, p. 158. 3Adams, Guerra, Warnken, Wheeler, "Public Law 480 and Colombia's Economic Development," Dept. of Agr. Econ., Michigan State University and the Departamento de Economia y Ciencias Sociales Facultad de Agronomia e Instituto Forestal, Universidad Nacional de Colombia, Medellin, Colombia, March 1964. 76 And fmnih, induced employment, both temporary and permanent, will result from the above three types of employment creation. This chapter is devoted to an evaluation and analysis of the latter three types of employment impacts. No data were gathered on the first type of employment effect since on a tonnage basis, P.L. 480 imports have not comprised a significant addition to Colombia's importations. Procedure of.Analysis of Employment Impacts 0f the nineteen different categories under which P.L. 480 funds can be disbursed, nearly all could conceivably yield some impact on the employment level of recipient countries. However, in the case of Colombia, only five of the disbursement categories appear to have yielded any significant impact on Colombian employment levels. These categories have been Sections 104 (3), export market development activities; 104 (e), loans to private enterprise; 104 (3), economic development loans; 104 (h) and (j), educational assistance activities; and 104 (k), scientific, medical, cultural and educational grants and research activities. Because about 75 percent of the Colombian local currency has been disbursed under Sections 104 (e) and (g), the study concentrated on the employment impacts of these disbursements. The remaining 25 percent of the funds have been disbursed for a diverse group of United States uses. Since only a small part of the amount allocated for U.S. uses was disbursed under Sections 104 (a), (j) and (k), employment impacts were slight. Consequently, only limited attention was given to these disbursement categories. The problems of obtaining accurate estimates of employment impacts of Colombian P.L. 480 operations were several. In order to have obtained the most accurate estimates of these impacts it would have been necessary 77 to assess each and every project financed by local currency grants and loans. Since more than 100 different projects have been supported by Colombian P.L. 480 funds, it was not feasible to do so. Thus, the alternative approach of selective sampling was utilized. Attempts were made to obtain employment data from all major projects financed by P.L. 480 funds as well as a representa- tive group of smaller projects. Data collection and interpretation posed the most serious problem in evaluating the employment impacts of the Colombian P.L. 480 program. For ‘many of the projects studied, employment data were incomplete and at best only rough estimates could be obtained. This difficulty was further com- pounded by the problem of determining what portion of a project's employment increase could be attributed to the receipt of P.L. 480 funds. This became particularly acute when the. funds accounted for only a marginal financial addition to a project. Data collection problems also made it difficult to obtain estimates of the employment impacts of P.L. 480 disbursements on temporary employment. While the number of new permanent positions created could be determined with some accuracy, the number of temporary positions created was more difficult to ascertain. In most cases studied, a significant number of temporary workers were employed during periods when new investments were being undertaken. However, the tenure of these positions varied from a few days to several months. Thus the estimates of temporary employment effects are of questionable value. An estimate of man years of labor created would have been a more desirable indicator of temporary employment impacts. But since most of the new construction work was performed by construction companies working under contract, it was not possible to obtain data of this type. 78 The major portion of the data were gathered during the last six months of 1963 through personal interviews with officials of the United States Embassy in Colombia, the Colombian Government, Colombian and American subsidiary firms operating in Colombia as well as numerous other groups and institutions. In all, nearly fifty different individuals representing about thirty-five separate entities were interviewed. In some cases data have been updated to 1965, but generally, the conclusions rest on the conditions as they were in late 1963. For the recipients of Section 104 (e) and (g) loans, written questionm naires were used. Respondents were requested to report total permanent employment: (a) just prior to receiving their loan, (b) immediately after the loan had been expended, and (c) after all employment adjustments had been made and the new investment was being Utilized at the desired capacity. In.order to avoid extraneous factors which might have entered during the period between receipt of the loan and its utilization, the respondents ‘were also asked to estimate the number of additional workers employed because of the new investments made with the funds. The questionnaire also included several questions concerning variations in the payrolls of the recipient companies. These data proved to be of rather limited value for three reasons: (a) the "quality” of employees changed over time, (b) payrolls increased due to normal salary increases, and (c) continual inflation in the cost of living forced increases in the total payroll. For every case studied, the payroll increased between 1959 and 1963, but the portion of the increase due to new employment could not be determined. The information on Section 104 (a), (h), (j) and (k) employment impacts was obtained from numerous sources. The diverse nature of the projects 79 carried on under these three categories precluded the use of written questionnaires. Hence, employment data are based largely on the estimates obtained through interviews and correspondence with individuals concerned with some aspect of these disbursements. The discussion and analysis of employment impacts are broken into four sections. Since the utilization of the disbursements was similar, disbursen ment categories 104 (a) and (k) as well as 104 (h) and (j) have been grouped. Disbursements of section 104 (e) and 104 (g) funds, because of their magnitude are discussed separately. The aggregate impacts of all disbursements are then discussed and summarized. Employment Impacts of Title ImFinanced Projects Disbursements Under Sections 104 (a) and 104 (k) About 20 million pesos have been disbursed under Sections 104 (a) and 104 (k). More than half of this amount has been expended by the Foreign Agricultural Service of the United States Department of Agriculture for ‘market development activities and research projects to assess Colombia's agricultural economy. Although accurate data were not available, it appears that the major portion of F.A.S. expenditures were for market development work through contractual agreements with United States agricultural promotion groups. Among the organizations which have received funds are the U.S. Soybean Council, Great Plains Wheat, Inc., the U.S. Feed Grains Council as well as 'various livestock breeder associations. The former three groups depend almost entirely on P.L. 480 funds for their activities in Colombia. In total they employ around 10 full-time people. During trade fairs, three or four temporary employees are hired to staff their exhibitions. 80 Research activities carried on under F.A.S. contractual agreements are generally of a short term basis. A 1962 contract with Michigan State Univer~ sity provided local currency for a comprehensive study of the economic effects of P.L. 480 in Colombia. This agreement supplemented the dollar salaries of three M.S.U. economists and provided funds for the hiring of numerous part-time employees. It is estimated that the equivalent of about ten full- time man years of employment were provided by the contract. An earlier contract to the University of the Andes in Bogota, provided funds for the study of demand and supply conditions for Colombian agricultural commodities. In total some 25 man years of employment were furnished by the research grant. Although the work was a temporary arrangement for the numerous employees involved in the project, the education, training and experience obtained during the course of the study later enabled many of the employees to move on to responsible positions in private'and public institu- tions. Thus, while the intent of the project was to obtain additional information on Colombia's agricultural economy, a major long-run contribu- tion may well have been the educational investment in the employees involved in the study. A more recent research contract with the National University in Medellin is providing funds for a study of corn production in Colombia. It is estimated that the project will involve about three man years of employment for Colombian nationals. In addition to the activities of F.A.S., the Agricultural Research Service of the U.S.D.A. has sponsored various agricultural research projects in the country. Because these activities are somewhat diverse, an accurate estimate of their employment effects was difficult to determine. However, the Assistant U.S. Agricultural Attache in Colombia estimated that about 81 ten full-time research positions have been financed by A.R.S. expenditures of P.L. 480 funds.4 Disbursements Under Sections 104 (h), (i) and (j) About 15 million pesos have been expended under sections 104 (h), (i) and (1). Little is known about how these funds have been utilized although a substantial part appears to have been used to provide funds for Fulbright scholars studying in Colombia. The remainder has been granted or loaned to American schools, bi-national centers and USIA libraries operating in the larger cities of Colombia. Most of the latter group of grants and loans have supported building programs, equipment and book purchases as well as a part of the administra- tive staff salaries. Although no official data was available, one bi- national center administrator estimated that P.L. 480 local currency supported the salaries of perhaps 25 administrative and secretarial personnel in the several bi-national centers in the country.5 Temporary employment has been augmented with section 104 (j) funds during periods when new American schools or bi-national centers were under construction. While no accurate estimates were available, total temporary employment in the construction of the new Centro-Colombo in Bogota, probably reached a peak of about 100 employees.6 4Interview with Dick Smith, Assistant Agricultural Attache, Bogota, May 1963. 5From an interview with Ruth Metcalf Romero, Director of Courses, Centro Colombo-Americano, Bogota, Colombia, December 1963. 6Based on an informal interview with the foreman of the construction company, December 1963. 82 Disbursements Under Section 104 (3) As noted in Chapter II, Section 104 (g) loans have been administered by the Caja de Credito Agrario, Industrial y Minero--Colombia's agricultural credit bank. As of April 1965 nearly 200 million pesos had been loaned to the Caja. In turn, these funds were reloaned to Colombian firms, individuals and institutions. In all, the Caja has loaned more than 250 million pesos under Section 104 (g) authority.7 The largest single project financed by the Caja has been the Industria Colombiana d5 Fertilizantes--a large new fertilizer plant primarily devoted to the manufacture of nitrogenous fertilizer. Although the plant had not yet reached capacity production, by late 1963 about 530 plant workers and 50 supervisory and administrative personnel were being employed. At full production--expected in late 1965 or early l966--the plant is expected to employ a total of about 750 people.8 The number of temporary employees hired during the construction of the new plant has varied considerably. During 1962, when the major construction took place, total temporary employment was estimated to be near 1,500 ‘workers. Since then construction and equipment installation has slowed reducing the number of workers required. However, at no time since the initiation of construction has temporary employment fallen below about 200 workers. Since only about one-third of the investment funds for the new fertilizer 7New loans were granted as old loans were repaid, hence total Caja loans as of January 1964 exceeded P.L. 480 disbursements by about 50 million pesos. , 8Interview with Dr. Julio Cesar Gaitan M., Asistente Tecnico Gerencia, Industria Colombiana de Fertilizantes, S.A., October 30, 1963, Bogota, Colombia. ‘ ' ' 83 plant have been derived from P.L. 480 loans, not all of the employment impact can be attributed to the loans. There is some question, however, if the plant would have been built or if it would have been built at the present rated capacity had P.L. 480 funds not been available. Thus, it is not possible to accurately state what portion of the employment impact can be directly attributed to P.L. 480 loans. In view of this difficulty, perhaps the best estimate would prorate the employment increase on the basis of the contribution made by P.L. 480 funds to the total investment. Utilizing this method of estimation, about 250 new permanent positions and about 500 temporary jobs could be attributed to P.L. 480 loans. The largest group of loans by the Caja aided in the development of the Cauca Valley through the administrative facilities of the Cauca Valley Corporation (CVC).9 Numerous projects ranging from land reclamation activities to rural electrification programs have been financed by the several Caja loans of P.L. 480 pesos. In total over 76 million pesos were loaned to the CVC for projects within the Cauca Valley. Because of the diversity of the projects carried onjby the CVC, considerable difficulty was encountered in collecting and evaluating employ- iment data. Although no accurate estimates of the number of temporary workers employed on the projects were available, CVC officials indicated that perhaps as many as 1,000 workers had held temporary jobs during the peak of project activities.10 The greatest employment benefits have been derived from the more intensive use of land and agricultural resources in the area. Goering noted 9For a detailed description of CVC activities, see T. J. Goering, "U.S. Agricultural Surplus Disposal in Colombia," Unpublished Ph.D. thesis, M.S.U. 1961, pp. 95-101. 10Interview with several CVC officials and technicians, July 1963. 84 that one 220 acre farm--formerly in grassland and furnishing employment to one worker was transformed to an irrigated vegetable and truck farm which employed 160 full-time laborers.11 This is no doubt an atypical case, but there is little question that total employment in agriculture had increased markedly due to P.L. 480 financed CVC projects. Over 40,000 acres of formerly idle or semi-idle land is now utilized for sugar cane, corn or vegetable production. Amui while estimates vary, as many as 2,000 laborers may be employed full-time in these activities.12 Moreover, several projects near Cali have significantly increased the value of former swampland for resi- dential housing and industrial sites. To what extent employment has been augmented by new construction on these lands is difficult to discern; however, about 2,400 new low cost homes now occupy a former swamp on the outskirts of Cali.13 It is thus not unlikely that temporary work during the construction of these units may have employed 2,500 workers. In aggregate the CVC projects financed by Caja Agraria loans have had a significant impact of employment levels in the Cauca Valley. Estimates of increased temporary employment range widely from several hundred to a few thousand, while new permanent employment created may have actually exceeded the number of temporary workers employed. The employment impact of small industries receiving Caja loans varied widely. Four examples indicate this inconsistency from one loan to another. A.3.5 million peso loan to a coal processing enterprise increased permanent employment by 56 workers. A one million peso loan to a logging operation 11Goering, op.cit., p. 100. 12Estimated by several CVC officials and technicians, July 1963. 13Interview‘with Humberto Gutierrez, official with the Instituto de Credito Territorial, Bogota. 85 augmented permanent employment from 110 to 230 workers. Employment increased from 178 to 345 employees largely as a result of an 800,000 peso loan to a canning and fruit packing firm near Cali. And in the case of a cement producing firm, total employment was left generally unaffected by a 5 million peso loan. No relationship appeared to exist between the type of operation carried on by small industry loan recipients and the impact of the loan on the firm's employment levels. In some cases loans were used to purchase new equipment which replaced manual labor. In other cases the funds helped expand the scale of an existing operation, thereby increasing the need for additional workers. In none of the cases studied did employment levels fall after expendi- ture of a Caja Agraria loan. For those firms which did not expand their employment levels, the average "quality" of workers employed was upgraded; new equipment and modern manufacturing and processing techniques required a higher level of skills for employees. Hence, unskilled laborers were frequently replaced by skilled equipment operators and supervisory employees. Consequently, total payrolls expanded as new processes were put into operation. Among the small industries studied, employment expanded at the rate of one new permanent worker for each 35,000 to 40,000 pesos of P.L. 480 funds invested and one temporary worker for each 10,000 to 12,500 pesos of new P.L. 480 investment. Assuming that the cases studied were representative of all small industry Caja loan recipients, around 500 new permanent positions and about 1,500 temporary positions were created. The actual contribution of Caja loans to employment increases, however, was perhaps half the apparent contribution as investment funds from other 86 sources generally supplemented the P.L. 480 loans received by the firms. Thus, about 250 new permanent jobs and around 750 temporary positions can be directly attributed to Caja Agraria-~P.L. 480 loans. Numerous small Caja Agraria loans have been advanced to individuals for the improvement of farms and ranches in Colombia. In total, about 12 milion pesos-—less than five percent of all Caja Agraria--P.L. 480 loans, went directly to farm and ranch owners. As most of these loans had been expended during 1957 and had been substantially repaid at the time of study, most respondents had difficulty in recalling exactly how the funds had been utilized. Apparently the employment impact of these loans was relatively insignificant. For the most part, if any impact on employment levels did take place, it was only a temporary condition and did not involve large numbers of workers. Because of the loans, resource use may have been intensified to some degree, but little evidence was available to determine if resource utilization was, in fact, intensified. Hence, long run permanent employment was not substantially augmented. Disbursements Under Section 104 (e) Section 104 (e) loans, commonly known as Cooley loans, have been made to 19 different Colombian subsidiaries of U.S. corporations. Since 1959 nearly 60 million pesos have been disbursed as Cooley loans in Colombia.14 As in the case of the Caja Agraria loans to industry, the employment impacts of the Cooley loans have varied considerably from one firm to another. In some cases the impact was relatively slight or non-existent and in other cases a marked increase in employment resulted from the expenditure 14For a detailed case study of three Cooley loan recipients see Adams and others, "Public Law 480 and Colombia's Economic Development," Chapter IV. 87 of the loans. However, of the thirteen cases studied, all but two of the recipient firms increased permanent employment after receiving their loan. The employment increase can generally be attributed to enlarged productive capacity which resulted from the expenditure of the loans. However, much of the new investment tended towards greater automation of existing techniques and labor saving new processes. The overall capital intensity of the Cooley loan recipients thus tended to increase, resulting in a diminished employee to gross asset ratio. In spite of the diminished labor intensity of their operations, the firms increased permanent employment. Just prior to receiving the loans the 13 firms employed about 3,200 workers. After the loans had been expended and the productive capacity was in operation, employment had risen to about 4,000 employees--an increase of some 25 percent. Not all of the increase in employment can be attributed to the added capacity brought about by the Cooley loans: numerous other factors contributed to the employment increase. However, the best estimates indicate that around 60 percent of the total increase in permanent employment can be directly attributed to Cooley loans. The number of temporary positions created by Cooley loans are difficult to estimate. Based on incomplete data, it appears that one new temporary position resulted from each 10,000 to 12,500 pesos loaned. Thus, 5,000 to 6,000 workers may have been employed for short periods of time while the new investment was being undertaken by the recipient firms. Since about 60 percent of the new permanent employment can be attributed to Cooley loans, it is assumed that this figure also represents a reasonable estimate for the portion of temporary employment attributable to the loans. Therefore, between 3,000 and 3,500 temporary jobs were created by the new investment activities financed by Cooley loans. 88 AGGREGATE EMPLOYMENT IMPACTS OF P.L. 480 DISBURSEMENTS P.L. 480 peso loans and grants have created both temporary and permanent employment opportunities in Colombia. In total, between 3,300 and 3,500 new permanent positions and between 8,000 and 8,500 temporary jobs resulted from local currency disbursements. As about 350 million pesos have been loaned or granted under Sections 104 (a), (e), (g), (h), and (k), one new permanent position was created for each 95,000 to 100,000 pesos disbursed.15 Temporary employment increased by one worker for each 23,000 to 25,000 pesos disbursed. Hence, the marginal capital to employment ratio of temporary employment was roughly four times that of permanent employment. Certain types of disbursements appeared to have had a more significant impact on employment than did others. Loans to the smaller industrial firms were more efficient employment creators than were loans to larger industrial firms. Industrial loans in aggregate, however, had a greater employment effect than did loans to the agricultural sector. And although data were incomplete, it appeared that larger agricultural loans were more efficient creators of employment than were the smaller agricultural loans. Reasons for the varying employment impact of different types of disbursements are several. In general, the smaller industrial firms appeared to have less latitude in substituting capital for labor than did the larger industrial firms. But in aggregate, the operations of industrial firms were more labor intensive than were the activities of the large agricultural projects financed by P.L. 480 funds. And while larger agricultural loans 15As of January 1965, collections of P.L. 480 currency in Colombia totaled about 350 million pesos. Not more than 325 million pesos had been disbursed. However, as noted in footnote 7, Chapter V, the Caja Agraria has granted about 50 million pesos in new loans as old loans were repaid. 89 were utilized for widenranging investments in lard ard wate resources smaller loans to agriculture frequently appeared to bay e been used as production loans. The above stated employment impacts were those directly attributable to P.L. 480 disbursements. Io wha t tartar additional positions have been created through the multiplier foEC‘ is difficult to ascertain. As pointed out by Rao, four conditions must be met in order for the multiplier principle to operate in an underdeveloped country.16 There must be: 1) involuntary unemployment, 2) a less than perfectly inelastic aggregate supply function, 3) an excess capacity in the consumption-goods industries, and 4) an elastic supply of working capital. If these four conditions are not met, the investment multip er is discharged through price inflation. Hence, nominal inccme increases, but real income, investment and employment remain unchanged. In some respects cou_itions in the Colombian economy are not compatible with the operation of the investment and employment multipliers. Yet, it is nearly inconceivable that the multiplier could not 0 erate to a limited extent. For marginal employment increases such as resulted from P.L. disbursement, the employment multiplier probably did not exceed 121, and may have been considerably less. However, even if one new job resulted from every 5 or 10 new positions cr sated by P. L. 480 disbursea ments, the impact could be termed significant. Data on this as set of the aggregate employment impacts of local currency uses could not be obtained. Thus, it must suffice to say that in all probability some multiple expansion of employment resulted from the peso expenditures, but it probably did not lésee V. K. R V. Rao, "Investment, Income and the Multiplier in an Under- developed Economy, ' The Trdian §_9“RTEE ESE£CY9 Eebr uary 1952. Reprinted in the Economics of Urderdevc opment, by Agarivala and Singh, Oxford University 90 exceed the number of new positions that could be direCCly attributed F.l. 480 program. i‘.‘ O m CHAPTER VI BALANCEQOFmpAYMENTS AND FOREIGN EXCHANGE IMFLICATlfiNS OF THE COLOMBIAN P.Lo 480 PROQRAM One of the common problems facing most developing nations is a lack of sufficient foreign exchange to purchase the needed capital from more advanced countries. Colombia is no exception. And in fact, the constant and continued scarcity of foreign exchange could well be considered one of the major economic obstacles to rapid growth in the country.1 In nearly all respects the foreign exchange roblem and the consequent balance-ofnpayments problem of Colombia represent a classic example of the Myrdal-SingernPrebisch-E.C.L.A. model for underdeveloped countries.2 A high proportion (nearly 75 percent) of its exports are of a single commodity (coffee).3 The major export faces relatively low income elasticity (0.55) and a low price elasticity («0.25) in markets of purchasing countries.4 And world markets do not indicate an optimistic future for increased earnings from the commodity. On the import side, demands for both imported capital 1For an excellent discussion of recent Colombian balancenof-payments and foreign exchange problems, see Chapter VII in "Effects of P.L. 480 Programs in Colombia: 1955-1962,” by Lawrence W. Witt and Richard G. Wheeler, Depart- ment of Agricultural Economics, Michigan State University, October 1962, pp. 111-129. 2Variations of this model have been grouped together and termed the “structuralist” model. One of the better sources of information concerning the work of the structuralists is the Economic Bulletin for Latin America, published by the Economic Commission for Latin America of the United Nations. 3Compiled from the Anuario d3 Comercio Exterior de 1962, Departmento Administrative de Estadistica, Bogota, Colombia, pp. 8-12. 4Estimated by the United Nations, Department of Economic and Social Affairs: Analysis and Projections of Economic Development, III. The Economic Development of Cglpmbia, E/CN, 12/365 (Geneva: 1957), p. 3. 92 goods and imported consumption goods are high and compete for the necessarily limited amounts of foreign exchange. To control the demand for exchange reserves, numerous and varied steps have been taken by the Central Government. The balance-of-payments problem is, of course, only a manifestation of a more serious structural imbalance in the economy. Unfortunately, problems of this nature are not easily nor quickly overcome, for both internal and external factors heavily influence the short and long term success of major resource shifts. It is thus problematical whether this difficulty can be corrected in the near future. The nature and magnitude as well as the possible solution of Colombia's foreign exchange and balance-of-payments problem, is not, however, the central issue of this chapter. Rather of primary concern is the question of what impacts P.L. 480 programs have had on the country's foreign exchange holdings and balance-of—payments position. The relevant questions to be considered are: l) have the Colombian P.L. 480 pragrams had an adverse or beneficial effect on Colombia's balance-ofmpayments position? 2) what has been the magnitude of these effects? and 3) what is the most probable long-term effect of these programs on the country's foreign exchange holdings and balance-of—payments position? Balance-of-payments effects obviously have implications for Colombia's economic growth, via income, employment and investment effects. This last item, however, will be discussed in the following chapter. A P.L. 480 Title I program may exert a number of diverse effects on a country's foreign exchange holdings and balance-of-payments position. These impacts can, in general, be classified as: a) those which contribute toward the saving of foreign exchange and hence yield a beneficial effect on the economy, and b) those which contribute to a loss of foreign exchange, thus exerting an adve erse effect on the economy. A listing of major influences within these two types of effects follows; I. Beneficial Effeccs a) b) d) e) If the P.L. 480 imports substitute either partially or totally for commercialp rchase es, an immediate saving of exchange, equal to the value of the subatituted imports, will result. P.L. 480 Title I invesrment funds m—y f1nr1nee pro “jetts which yield 3.vices formerly imported by the country. Thus, a 00 0 0 CL {11- D Q. (Q \r) , J "Lg equal to the value of the substituted imports ’b m g: <. H '3 foreign exchang” can be realized. A P.Lo 480 program.may induce greater U.S. program expenditure in the receiv1ng count ry, thereby augmenting the country's foreign exchange earnings. P. L. 480 loans with interest payable in loea currency will yi=.3ld a foreign exchange saving if such loans substitute for equivalent foreign loans with interest payable in hard currency. A receiving country can realize a saving of for sign exchange if, over time, its currency devalues from what it was at the time the program agreement was signed. This will result if all Title I loans are denominated to the U.S. Government in local cu rency. II. Detrimental Effects 8.) A loss of potential dollar exchange earnings can result if the U.S. Government locally expends P.L. 480 generated currency in place of dollars. This loss can be expr :.ese ed as: l) a short- term loss resulting from direct substitution of inmmdiate P.L 480 earnings for dollars. and Z) a longnterm loss if the local currency is experd by th e U.S. as investment loans are repaid. 94 b) Projects financed with Title I loans may be of such a nature that an increased shorts or long-term demand for exchange reserves is created. c) A potential loss of foreign exchange will result if the Cooley loans substitute directly for dollar loans from U.S. parent companies. The resulting loss will equal the exchangenrate dollar value of the Cooley loanso d) If the currency of the recipient country appreciates relative to the dollar, or several other unlikely circumstances occur, the receiving country could realize a net foreign exchange loss. The net effect of a POL. 480 program on a recipient countryls foreign exchange holding can therefore be expressed as a function of the above variables. Time, of course, also enters the function since all the effects are not necessarily exerted simultaneously. The above noted factors do not apply to all P.L. 480 receiving countries since the program is handled differently from country to country. In Colombia, however, all of the factors are relevant in determining the net effect of past and present P.L. 480 programs. Therefore, the following analysis considers each of these effects independently and then summarizes the findings in order to determine the aggregate net effects of the P.L. 480 program on Colombia's foreign exchange holdings and balance-ofapayments position. For purposes of simplification and clarity, some of the points are grouped and discussed as joint effects. Direct Foreign Exchange Effects As noted by Witt,"the first and most obvious direct effect of (Colombian) Title I programs has been that imports could be increased without using 95 additional exchange.“5 Tile problem, however, lies in determining the magni- tude of the foreign exchange saving that resulted from the importation of P.L. 480 goods. Unquestionably, some saving did occur, but the extent of this saving depends largely on the assumptions underlying the analysis. For example, if it is assumed that Colombian P.L. 480 imports directly substituted for commercial imports, then the exchange saving would equal the value of the displaced imports. On the other hand, if it is assumed that in the absence of P.L. 480 imports, Colombia would have relied entirely on domestic production, then no exchange saving would have been realized. Between these two extremes lie other plausible alternative assumptions. After a careful consideration of various plausible alternatives open to Colombia if Title I goods had not been available, Witt concluded that the most fruitful hypotheses and the more likely results of policy decisions would have been:6 a) Higher prices and more aggressive technical programs to expand wheat production in Colombia. b) An earlier attainment of sekfsufficiency in cotton production with smaller total imports, and probably with some reduction in commercial imports. c) Probably somewhat larger commercial purchases of edible oils, in a total volume somewhat less than actual combined purchases (commercial plus Title I). Perhaps a third of the actual Title I imports would have been purchased commercially assuming the Same level of increase in national income. d) A more erratic purchase of imported wheat, with commercial below actual levels in some years and above actual levels in some other 5Witt and Wheeler, Effects of P I. 480 Programs in Colombia: 1955—1962. —.—.o—~.—.-- w—n pm-..” ~.—q—u Department of Agricultural Economics, M. S. U., October 1962, p. 124. 61bido, pp. 128“].290 96 years. Some commcercial imports of barley would have occurred, essentially in place of Title I wheat. e) By expanding domestic production, by operating with critically short inventories, by expanding the consumption of wheat substitutes through higher prices and episodic shortages of bread, and by more careful handling of domestic wheat, the aggregate wheat imports would have been reduced by a major fraction of Title I imports. Witt, therefore, leaves the magnitude of direct foreign exchange effects largely unquantified. However, there appears to be no other alternative since one can only conjecture what Colombian policy might have been in the absence of the P.L. 480 program. The above hypotheses thus reflect the most realistic and practical approach to estimating the magnitude of direct foreign exchange effects of the Colombian P.L. 480 program. Foreign Exchange Effects of Title I Financed Investment Projects As noted in points I(b) and II(b), two opposing effects may result from the financing of domestic projects with Title I investment funds: a) the projects may be import substituting processes, thereby saving foreign exchange formerly expended for imported goods and services, and b) the projects may be of such a nature that an increased demand for foreign exchange is created. Between these two extremes, numerous variations and combinations of the two effects may occur. In Colombia, Title I investment projects have yielded significant impacts on the country's exchange reserve and balance-of-payments position. These effects have been both positive and negative for all projects in aggregate as well as for individual projects. The net foreign exchange effect of Title I financed projects was 97 estimated on a project by project basis from data gathered during mid-1963. All of the larger loan projects as well as a sample of the smaller loan projects were studied. While the information obtained was not totally complete, the projects studied absorbed nearly 90 percent of all Title I investment funds disbursed. Since a large number of projects were studied, it is not feasible to present data from each of these. The loan projects have there- fore been grouped as to type of project and from these groups selected case studies are briefly discussed. Loans to Colombian égriculture In general, the loans to privately owned farms and ranches in Colombia yielded no measurable effects on the country's balance-of-payments position. In part this was due to the small average size of the agricultural loans, but perhaps more importantly, it could be attributed to the way in which the funds were utilized. The building of a few access roads to ranches, the drilling of several water wells and the purchase of breeding stock simply cannot yield a very profound short-term impact on the foreign exchange reserves of the country. Some impact could, of course, result due to increased agricultural production which might eventually substitute for imports or contribute to exports. But among the loan projects of this type studied, no measurable impact could be detected. This does not, however, imply that projects of this nature could not result in significant foreign exchange effects; rather it reflects the relative insignificance of these loans as compared to loans of other types. In total only about 8 million pesos were loaned to private farms and ranches, while almost 300 million pesos were loaned for other activities. 98 Loans to Public and Semi-Public Institutions The foreign exchange impacts of Title I loans to public and semi-public institutions are rather difficult to quantify. Much of the difficulty arises because a large share of the funds have been invested in social overhead capital, although lack of data also prevents accurate estimations of net effects. In spite of these problems, however, sufficient data were gathered to indicate that these types of loans have yielded some significant impacts on Colombia's foreign exchange and balance-of-payments position. The most profound effect resulted from the 70 million pesos loaned to the semi-public Industria Colombiana d3 Fertilizantes. Although the plant has not yet been completed.it is presently producing ammonia, urea, and other types of nitrogenous fertilizers used for mixing with various other plant nutrients.8 In the initial stages of construction, a sizable quantity of foreign exchange--some 20 to 30 million dollars--was required to purchase equipment. While this constituted a substantial drain on the country's foreign exchange holdings, it now appears that only about 5 year's production will be required to compensate for this expenditure. Between 1955 and 1959, the cost of all imported fertilizers averaged about 9 million dollars. In 1961 and 1962, fertilizer imports rose to an average of about 13 million dollars. One-third of these imports have been various types of nitrogenous fertilizer.9 Since the capacity of the new 7Status of P.L. 480 Funds 7/31/62. U.S. AID, Bogota, Colombia. 8Information and data on the Caja Agraria loan to Industria Colombiana ‘was obtained during an interview with Dr. Julio Cesar Gaitan M., Assistente Tecnico of the company, Bogota, October 30, 1963. 9Computed from various issues (1955 to 1962) of the Anuario de Comercia Exterior, Departmento Administrativo de Estadistica, Bogota, Colombia. 99 plant exceeds former annual nitrogen fertilizer imports, the plant could plausibly save as much as 5 to 6 million dollars annually in foreign exchange. Given the increasing demand for fertilizers in the country, future foreign exchange savings will undoubtedly be greater. Irrigation and drainage projects in Colombia have absorbed about 50 million Title I pesos. Most of the projects have been undertaken in the Cauca Valley--one of the most productive semi-tropical areas in the country.10 While accurate data concerning the type of agricultural utilization of these lands were not available, most of the land apparently is being used (or will be used) for the growing of fruits and vegetables, cotton, soybeans, corn and sesame. At the present time, no significant foreign exchange or balance-of- payments effects have resulted from these projects. The potential effect is, however, very great. Given the improved land resources made available, the country now has a choice of several alternatives, all of which would yield some effect on the balance-of-payments position. The country could choose to utilize the improved land to: 1) become self-sufficient in the production of edible oils, 2) expand cotton production for export, 3) produce larger quantities of feed grains (primarily corn and grain sorghum) for increased livestock and poultry production, 4) expand fruit and vegetable production and/or 5) follow a mixed policy of increasing the production of some or all of these crops. Considering both internal and external markets and some of the more pressing domestic food production difficulties, the moremlikely.and economically feasible alternative would be to concentrate on expanding the acreage of edible oil producing plants. Such a policy would largely 10Status of P.L. 480 Funds, op.cit., p.1. 100 eliminate present importations of edible oils, and would also improve the diets of the population. Moreover, it would complement the recent P.L. 480 and other investments in edible oil plant production. The magnitude of the potential foreign exchange saving to be realized from following such a policy is somewhat difficult to estimate. Over the past few years, edible oil imports have absorbed some 8 to 10 million dollars of the country's foreign exchange.11 This does not, however, indicate the true potential of foreign exchange savings resulting from an import substitu- tion policy for edible oils, since internal consumption is largely governed by the quantity of imports permitted into the country. If no import controls were in effect, importations of edible oils probably would be considerably greater than at present. The lowest estimate of potential foreign exchange savings is thus about 10 million dollars annually. A more realistic estimate, however, would probably be on the order of 20 to 25 million dollars per year. Other projects financed through P.L. 480 investments funds will probably not yield significant short or long run effects on Colombia's balance-of- payments position. A 13 million peso investment in grain storage facilities and a 10 million peso port improvement project will undoubtedly contribute to greater economic efficiency but will not directly affect the country's balance-of-payments position. Likewise, a 6 million peso reforestation project, while it may affect Colombia's balance-of-payments position twenty or more years in the future, will not yield any measurable effect over the next few years. 11Anuario de Comercio Exterior (1955-1962), op.cit. 101 Loans £3 Private Industry12 _‘-——. Both the Caja Agraria and the Agency for International Development extended Title I funded loans to private industry in Colombia. Although data were gathered from both types of loans, the latter group--the Cooley loan recipients, received the greatest attention since more varied foreign exchange impacts were possible. While all but two of the Caja Agraria loan recipients were Colombian owned, all of the Cooley loan recipients were subsidiaries of U.S. corporations. Hence, special attention was given to these firms due to their foreign ownership. The impacts of Cooley loans on the Colombian balancenof-payments position could be expected to depend upon use of the loans by the receiving firms. The available alternatives open to these firms and the resulting implications are as follows: 1) The recipient of the Cooley funds could convert the loan to foreign currency in order to import capital equipment or raw materials. This would result in an immediate foreign exchange loss to the Colombian economy, assuming no balancing exports were made by the company. This 1053 might be permanent, or it might be offset by a long~run saving of foreign exchange, resulting from import substitution. 2) The Cooley loan recipient could expend the loan for Colombian produced goods and services, utilizing these purchases for the production of import substitutes. Such an action would yield a foreign exchange saving without an offsetting foreign exchange loss. 12Portions of this section are from the author's contribution in Public Law 480 and Colombia's Economic Development, Chapter IV. 102 3) The recipient company could convert the loan to foreign currency in order to repay the parent company for a prior loan. This would not involve a net foreign exchange loss to Colombia if an actual currency flow was involved in the earlier loan, but there would be a loss if the earlier loan involved a shipment of machinery or equipment to the subsidiary firm. 4) Cooley loans could also affect the amounts of profits repatriated by wholly owned subsidiaries of foreign companies operating in Colombia. In some cases the profits repatriated by the subsidiary could be greater than the savings in foreign exchange brought about by import substitution. When importation of the product is pro» hibited, when a high proportion of the raw materials are imported, when the firm enjoys monopoly profits, and when all profits earned in Colombia are repatriated, it is particularly conceivable that the Colombian economy could suffer a loss in foreign exchange, due primarily to the fact that the company uses foreign exchange for the purchase of raw materials and then repatriates its peso profits in foreign exchange. Although the manner in which the Cooley funds are used may have an immediate impact on Colombia's balancenofupayments position, perhaps of greater importance are the long-term effects of the loans. Thirteen of the fifteen firms which had received Cooley loans by late 1963, were engaged in some type of industrial manufacturing or fabricating process that produced import substitutes. There was considerable evidence that the Cooley loans enabled the firms to finance initial capital costs of new plants for this type of activity. Respondents were therefore asked about: a) the initial foreign exchange cost of building and equipping such plants, b) the total v"— 103 annual foreign exchange cost of the raw materials and other items used in the production process, c) the selling price of the domestically produced finished product, d) the selling price of the imported finished product including transportation but not import duties, and e) the annual amount of profits repatriated in foreign exchange by the firm. While complete informa- tion of this type was not obtainable from all of the 15 loan recipients, sufficient data were gathered to indicate the general nature of the loan effect on Colombia's balance-of-payments position. One of the more interesting of the cases studied was the loan to Aluminio de Colombia. Since data are relatively complete, the findings are presented as follows:13 1) About 5 million pesos including the 2 million peso Cooley loan were converted to dollars during late 1959 and early 1960 for importation of capital equipment for a new aluminum foil and extrusion plant. The initial expenditure of foreign exchange therefore amounted to about 780,000 dollars. 2) The new plant was designed to produce a group of products which were being imported at the time the company received the loan. 3) Nearly all of the raw materials used by the new plant are imported from the United States. 4) As of August 1965, the company had not repatriated any of the profits earned from the new plant; rather, it had accumulated a reserve for importing new equipment when import restrictions are relaxed. 13Information and data obtained from interview with James R. Constable, Controller of Aluminio de Colombia, August 1963 in Barranquilla, Colombia. Updated in August 1965, through correspondence with company officers. 5) 6) 7) 8) 9) 10) 104 The products of the new plant have been sold in the Colombian market and no significant amounts have been exported. The company is the sole Colombian supplier of aluminum foils and one of two suppliers of aluminum extrusions. The importation of foils and extruded products is subject to the import system of licencia previa. Under this system, the company gives an estimate to the Superintendencia de Importataciones noting the total quantity of a certain product that it can supply during a given time period. If this quantity is less than the Superentendencia deems necessary for Colombian needs, importations of the product are then permitted to make up the difference. The Colombian-produced foils and extrusions sell for some 20 to 30 percent more than the C.I.F. prices, excluding taxes and duties, for comparable imported products. The cost of the crude aluminum used in the new plant was estimated to represent about 25 percent of the average selling price of the foil and extruded products produced in Colombia. The value of the imported crude aluminum was probably equivalent to about 30 percent of the average selling price of imported foil and extruded aluminum products. Marked changes in the composition of Colombia's aluminum imports took place soon after operations began in the new plant late in 1960. Although the combined imports of crude, semi-processed and processed aluminum increased by 63 percent between 1960 and 1962, the imports of two groups of foil products declined by 61 percent.14 Importations of aluminum extrusions no 14Anuario de Comercio Exterior, issues of 1960, 1961 and 1962. 105 doubt also declined, although the statistical classification system did not permit tracing the exact changes. Importing raw materials obviously requires smaller expenditures of dollars than importing the quantities of finished foil and extrusions that are presently being produced in the new plant. It is estimated that three to four kilos of aluminum ingots can be imported for the price of one kilogram of a finished product. The total foreign exchange saving resulting from import substitution of foil and extruded products was therefore estimated at about 100,000 to 150,000 dollars per month. During the past five years, the total foreign exchange saving has probably averaged about 1.5 million dollars annually. In total, the Cooley loan to Aluminio de Colombia has clearly yielded a considerable saving of foreign exchange for Colombia, since the maximum initial expenditures for importation of equipment probably did not exceed 780,000 dollars, while saving of foreign exchange due to import substitution amounts to about 1.5 million dollars annually. Had the company converted its profits to dollars and sent them out of the country, the saving would have been somewhat smaller, but this policy has not been followed. Although the new plant appears to represent a worthwhile addition to the industrial development of Colombia and a means of saving foreign exchange, these benefits have not been realized without some cost to Colombian consumers. In 1963 cigarette makers paid 15.46 pesos per kiIOgram for a domestically produced type of aluminum foil paper used in their packing operations versus 1.129 dollars per kilogram (C.I.F.) for a similar imported product‘s At the then existing exchange rate of 10 to 1, manufacturers had to pay some :- -' ~r L_k -_ 4 .__A A__ ~ a. - 4L", _-__ -._.‘ 1;; -h—M‘m 15Interview with Israel Mekler 0., President and owner of Protobaco, SsAo, BO‘Ot" Anglllt 27, 19630 106 27 percent more for the domestic product. The higher costs for packaging cigarettes was largely passed on to consumers. While this may be viewed as a justifiable quasi-tax on cigarettes, large quantities of aluminum foil were also used in the packaging of drugs and medicines~~a group of products less likely to carry excise taxes in most societies. In any event, the new plant may have provided consumers with a volume of foil and extrusion products that would have otherwise been unavailable, owing to the need for husbanding the available foreign exchange. Rather involved arguments could thus be developed about the various welfare implications for the Colombian public. The 7.7 million peso loan to Abbott Laboratories also resulted in substantial foreign exchange impacts. The respondent estimated that the company is presently saving Colombia about one million dollars per year in foreign exchange.16 While this estimate may tend to overstate the actual exchange saving by 20 to 25 percent, there is little question that the plant's production has long ago repaid the initial 900,000 to 1,000,000 dollar cost of imported equipment. The interviews with the other Cooley loan recipients indicated that effects similar to those resulting from the loans to Aluminio de Colombia and Abbott Laboratories took place. In none of the cases did an adverse impact on Colombia's foreign exchange result, and all but two firms utilized their loans in such a manner that the country's long term balance-of-payments position was enhanced. Although the initial effect of the loans was to create an increased demand for foreign exchange, the longer term effect was an expanded production of import substituting goods. It is estimated that 16Interview with C. S. Montero, Gerente Financiero, Abbott Laboratories de Colombia, August 1963, Bogota, Colombia. 107 the initial effect of the Cooley loans caused a tOtal drain of some 20 to 22 million dollars of foreign exchange. And estimates of the aggregate savings effect of the loans indicate that the Cooley loan recipients now save Colombia a minimum of 15 million dollars annually. Hence, the net long term effect of the Cooley loans has clearly been a pronounced saving of Colombia's scarce foreign exchange. The effects of the Caja Agraria loans to private industry were not, in general, as significant as those of the Cooley loans. In part this could be attributed to the smaller average size of the loans, but perhaps of greater importance was the manner in which the funds were utilized. While a million peso loan to a lumbering firm enabled it to earn over 2 million dollars of foreign exchange annually from exporting wood to the U.S., this firm was an exception.17 Most firms were engaged in relatively small operations producing consumption goods for domestic demand. In a sense they were producing import substitutes, but in all likelihood the goods would not have been imported in large quantities had the firms not been in operation. In total, the annual net balance-of-payments effect of all Caja Agraria loans to industry is estimated to amount to a 3.5 to 5 million dollar saving of Colombian foreign exchange. Cooley Loan Substitution Effects on Foreign Exchange In Chapter IV, it was concluded that the Cooley loans to U.S. subsidiary firms tended to substitute for investment funds from other sources-~primarily dollar loans from parent companies. If this was the case and the firms would 17Interview with James E. Fancher, Gerente General, Empress Madera del Atrato, S.A., August 6, 1963, Medellin, Colombia. 108 have undertaken the new investments in the absence of the Cooley loans, then a potential inflow of foreign exchange to Colombia was circumvented. At maximum this "unreceived" flow of foreign exchange could not have exceeded 8 million dollars--the dollar value of all Cooley loans, and it is question- able whether the "1058" amounted to more than 1 or 2 million dollars. There are two reasons why the possible substitution of Cooley loans for parent company dollar loans did not yield the maximum effect. First, if the firms had not had access to the Cooley funds they might have obtained part of the investment funds from regular credit channels in Colombia. Although such credit would have been expensive and of relatively short duration, it probably would have been less costly over a long period of time than parent company dollar loans. Second, even if it is assumed that all of the investment credit could have been obtained from the parent company, it is likely that the subsidiary would have repaid the dollar loan--with interest,to the parent company at a later date. It is therefore unlikely that any significant foreign exchange effect resulted from the possible substitution of Cooley loans for parent company dollar loans. If such an effect did occur, it was relevant only over a short period of time and not over the long run. Peso Expenditures by the U.S. Government Approximately 25 percent of the pesos generated under the Colombian P.L. 480 Program have been alloted for United States uses. Since the five agreements with Colombia have generated almost 350 million pesos, 88.6 million pesos--the equivalent of 16.7 million dollarsa-have been directly available for local expenditure by the U.S. Government. In aggregate, about 60 percent of these funds have been utilized for meeting normal local 109 currency needs of the U.S. Mission while the remaining 40 percent have been used for special projects by the State Department, the U.S.I.A., the Depart- ment of Health, Education and Welfare, and the U.S. Department of Agriculture.18 To the extent that P.L. 480 pesos have substituted for otherwise normal dollar-peso conversions by the U.S. Government, an adverse effect has resulted on Colombia's foreign exchange reserves. The magnitude of this effect is, however, somewhat difficult to estimate. Witt argues that...19 "...a large share of these (pesos) have gone for expenditures the United States would have made anyway. Without a P.L. 480 agree- ment, pesos would have been bought daily for routine purposes. To this extent, the Title I agreements resulted in some reduction in Colombian foreign exchange earnings. At the same time, some of the U.S. expenditures would not have been made in the absence of Title I pesos. Some of the market development activities, for example, repre- sented additions to aggregate U.S. activity in Colombia; moreover, some additional dollars were brought to Colombia by these projects. Finally, not all of the U.S. pesos were spent immediately; some are still being held for specific programs. Thus, it is likely that the current loss (October 1962) of dollar earnings to Colombia is in the order of 12 to 15 percent of current Title I imports." Witt's conclusions therefore imply that the cummulated current (1965) loss of dollar earnings to Colombia amount to about 7.5 to 9.5 million dollars. Considering the manner in which the funds have been utilized by the U.S. Government, this estimate probably reflects the present dollar loss fairly accurately. The long-term foreign exchange effect of U.S. Title I peso expenditures is somewhat more difficult to determine. With the eventual amortization of peso loans to the Colombian Government and the U.S. subsidiary firms, the U.S. Government will be repaid an amount totaling more than 400 million 18Status of P.L. 480 Funds in Colombia, op.cit., p. 1, and the Semi- annual Report of Collections Under Title I, P.L. 480 Sales Agreements, June 30, 1965. U.S. Treasury, Division of Central Accounts and Reports, pp. 25-27. 19Witt and Wheeler, op.ci£., p. 124. 110 pesos.20 Since the U.S. will expand these recovered pesos, Colombia could conceivably suffer a significant loss of potential dollar earnings. The exact foreign exchange loss to Colombia hinges upon whether the recovered pesos are used as substitutes for dollar-peso conversions to meet normal local currency requirements or whether the pesos are used in U.S. program expenditures that are above and beyond what would be expended in the absence of P.L. 480. At the one extreme, the maximum possible loss of Colombian foreign exchange would equal total P.L. 480 Title I sales plus interest paid by the Colombian Government for the use of the Title I investment funds, assuming: a) no peso devaluation from the date the initial agreement was signed to the date of final amortization of the last loan agreement, and b) the expenditure of recovered pesos by the U.S. Government did not represent any expenditure above and beyond that which would be made in the absence of a P.L. 480 program. If it is further assumed that Colombia could have been in a position to undertake an outright purchase of commercially marketed goods, then the total dollar loss resulting from the "purchase" of P.L. 480 goods would exceed the value of the commercially purchased goods by an amount equal to the interest paid on the peso loans. Expressed in terms of cost to the Colombian economy, this means, simply, that the total long-run dollar cost of P.L. 480 imports would exceed the cost of commercial imports by the amount of interest the Colombian Government paid the U.S. Government for the use of the Title I investment funds. In this instance, rather than relying on Title I imports, Colombia would, in the long run, have been better off if it had purchased the food imports 20The exchange rate at the signing of the first agreement was 6.70 to 1, while the present exchange rate is approximately 20 to 1. 111 through commercial market channels. The only advantage resulting from Colombia's participation in the P.L. 480 program would be that payment for Title I commodities could be distributed over a period of time, while commercial imports would probably have had to be purchased on a cash basis. A foreign exchange loss of the magnitude outlined above has not and will not occur in Colombia since the conditions under which the maximum loss could occur have not been present. In the first place, the peso has been devalued by 200 percent since the date the initial agreement was signed to the present time.21 Moreover, it is likely that further devaluations will occur between now and 1984 when the last peso loan to the Colombian Government is to be amortized. And in the second place, a portion of the expenditures of recovered pesos by the U.S. Government have, and will probably continue to represent expenditures above and beyond those that would have been made in the absence of a P.L. 480 program. Thus, the aggregate long-run effect of P.L. 480 programs on Colombia's balance-of- payments position depends largely on the extent of future peso devaluations and on how the U.S. Government chooses to utilize the recovered pesos. According to Witt, about half of the pesos available to the U.S. Government between 1955 and 1962 were utilized for programs that likely would not have been undertaken in the absence of Title I pesos. This implies that Colombia's short-run foreign exchange loss has been only half the maximum possible loss that could have occured. While this is probably a reasonable estimate of Colombia's shortarun foreign exchange loss, it may not be an appropriate procedure for estimating long~term foreign exchange loss. Witt's estimate applied only to the portion of Title I p l r. 112 sales proceeds immediately available to the U.So Government-~an amount equal to about 25 percent of total sales. In the long run, however, the U.S. Government will have recovered the remaining 75 percent of the sales proceeds, plus interest. Thus, if the United States continues to expend about half of the available pesos for programs that would not exist in the absence of Title I currency, it will have to expend some 200 million pesos on these programs in the next two decades. And this means that the annual rate of expenditure for additional programs will have to be more than ten times that of the past decade. In view of the types of additional programs carried on in the past, it appears unlikely that the United States will continue to expend half of the available Title I pesos for similar programs in the future. The implication is thus that either the U.S. Government will need to develop new local~ currency absorbing projects or will have to use the recovered pesos as substitutes for normal dollar conversions. If the former occurs, Colombia's long-term foreign exchange loss from U.S. peso expenditures will be reduced, while in the latter case, the foreign exchange loss from unrealized dollar earnings will be considerable. Thus, the long term dollar loss due to P.L. 480 cannot be accurately estimated; it will depend on how the U.S. utilizes the recovered pesos as well as the relative peso-dollar depreciation. Balance-of-Payments Impacts-~A Summary Given all available evidence, there is little question that P.L. 480 programs have greatly benefited Colombia's balance-o£~payments position in the short run. Since 1957, the investment projects financed by Title I funds have created a total demand for foreign exchange amounting to an estimated 45 to 55 million dollars. Peso substitutions for dollar expenditures 113 by the U.S. Government have caused an additional exchange loss of 7.5 to 9.5 million dollars. Thus, total foreign exchange loss, to date, has probably not exceeded 65 million dollars. Not including the period prior to 1960, P.L. 480 financed investment projects, through import substitution, have yielded an annual saving of foreign exchange equaling not less than 35 to 40 million dollars annually. Clearly, the P.L. 480 programs have benefited Colombia's balance-of-payments position in the short run. The net long«term effect of the programs cannot be quantified. While the present saving through import substitution by P.L. 480 financed projects will continue, these savings-will be partially canceled if the United States uses the recovered Title I pesos as substitutes for normal dollar conversion. The latter effect will, however, be less pnmunmced if the peso continues to devalue relative to the dollar. As it now appears, the peso will likely continue to depreciate for some time. And it also seems likely that the United States will continue to spend a portion of the recovered pesos for programs that would not exist in the absence of P.L. 480. But since not all of the recovered pesos will be used for programs of this type, i.e., some will be used as substitutes for normal dollar conversions, the long-term benefit to Colombia will be somewhat less than optimal since future dollar earnings from U.S. Mission expenditures will be lower than if the P.L. 480 programs did not exist. However, through depreciation alone, the actual foreign exchange cost of the original P.L. 480 imports will, in the final analysis, be but a fraction of what commercially purchased imports would have been. In addition, a bonus in the form of exchange savings from import substitution by Title I financed projects will accrue to the country. Unquestionably, the long-term effect P.L. 480 programs in Colombia will be beneficial to the country's balance-of-payments position. CHAPTER VII TITLE I IMPORTS AND COLOMBIA'S ECONOMIC GROWTH The preceeding four chapters examined the major impacts that the Colombian P.L. 480, Title I programs have had on some important macro economic parameters of the Colombian economy. For the most part, the impacts on each parameter were analyzed independently with little attention being given to secondary effects on other parameters, particularly the effects on economic growth. Thus far then, no serious attention has been given to the possible interactions and interrelationships of the several effects that have resulted. Since it was not feasible to discuss all of these various secondary effects, interactions and interrelationships within the four preceeding chapters, the present chapter is devoted to this purpose. Little new material is presented in this chapter. Rather the conclusions derived in preceeding chapters are drawn together, reassessed and analyzed in aggregate in order to determine the total effect of the P.L. 480 programs on Colombia's economic growth. The problem of presenting and explaining the aggregate economic impact of Title I programs in Colombia is not dissimilar to that of verbally presenting a set of simultaneous equations of a general equilibrium model. Generally, mathematicians and econometricians ignore such verbal presenta- tions of equilibrium models and resort to algebraic presentations to express the interaction and interdependency among parameters. It would be highly desirable if the aggregate economic impact of Colombian Title I programs could be presented and explained in a set of simultaneous equations; however, the data and general operation of these programs preclude such a 115 presentation. Thus, a verbal explanation, unwieldy as it may be, must be utilized to assess the total impacts that the Title I programs have had on Colombia's economic growth. For purposes of simplification, the Colombian Title I program can be viewed as having three major impacts: 1) the impact resulting from the increase in real goods within the economy, 2) the impact of the investments financed by Title I sales proceeds, and 3) the impact resulting from a long- term foreign exchange saving to the Colombian economy. Each of these effects is separately discussed with particular emphasis on the secondary effects that result as the Title I commodities and/or money flow through the Colombian economy. All of these effects are then integrated and discussed to determine the aggregate effect of the Title I programs on Colombia's short and long term economic growth. Real Effects The flow of Title I commodities is quite direct and easy to follow. The goods are imported into Colombia, stored for a period, sold to private food processors and manufacturers and then re-sold in a processed or semi-processed form to the public which consumes the goods. Put simply, the major effect brought about from the importation of Title I goods is an increase in Colombia's food supply. Since the goods represent an addition to the country's total supply of goods and services, real national product must necessarily increase. Expressed in monetary terms, gross national product increases by an amount equal to the assigned monetary value of the imports. The real effect resulting from additional supplies, however, has ramifications on two other variables: a) the price level of food as well 116 as nonfood goods and services, and b) the rate and level of consumption of both food and nonfood goods. Changes in these variables in turn result in impacts on other parameters including feedAback effects on national income. In theory, an addition to aggregate supply such as that resulting from P.L. 480 imports will lower the general price level if the aggregate supply function is less than perfectly elastic and if the aggregate demand curve does not shift. While there is little question that Colombia's aggregate supply curve is certainly less than perfectly elastic, it is not so certain that the additional supply of food has left the aggregate demand curve unaffected. As noted in Chapter III, there is reasonably good evidence that food prices have advanced at a slower rate than would have been the case in the absence of Title I imports. Because this has occurred, real consumer income has been enhanced, allowing consumers greater income for additional food purchases, additional purchases of nonfood goods and services or larger savings. The problem lies in determining how the increase in real income has affected aggregate demand and its components--the demand for food and the demand for nonfood goods and services. The possible and plausible reactions to enhanced real income are several. With the increase in the supply of food, the aggregate supply function for food will shift, thereby establishing a lower equilibrium price, i.e., a larger quantity of food will be taken at a lower price. While a change in the price of food will not affect the demand for food, but only the quantity demanded, the demand for nonfood goods will be affected. Moreover, realistically assuming that the price elasticity of demand for food is less than one, total expenditure for food will fall with a decline in the price level of food. This leaves a larger part of nominal income available for expenditure on nonfood goods and services and/or a greater savings. 117 Two factors will therefore influence the demand for nonfood goods and services and the level of savings: 1) the increased real income brought about because food prices are lower than would be the case in the absence of Title I imports, and 2) the increased nominal income available to consumers due to a reduction in total expenditure for food. It is postulated that, given the relatively low per capita income of the Colombian populace, most of the impact of these two income effects will be manifested in a shift in demand for nonfood goods and services rather than in a higher level of consumer savings. The shift in demand will then result in either or both of the following effects: 1) higher prices for nonfood goods and services, and/or 2) increased nominal or real national income. If the aggregate supply function for nonfood goods and services is inelastic, prices will increase proportionally more than nominal income, and real income will fall. If the supply curve is elastic, nominal income will increase proportionally more than the price level, resulting in a rise in real national income. In Colombia, the former effect has probably resulted, since the aggregate supply function for nonfood goods and services is undoubtedly inelastic. This implies that inflationary pressures have increased over the short run. In the long run, however, it could be expected that higher prices would tend to increase profits, thereby inducing greater investment which in turn would result in an increased supply of nonfood goods and services. Aggregate supply will then shift, bringing about a stabilization and/or a downward readjustment in prices. If this occurs, employment levels and real national income will be enhanced. Unfortunately, none of these effects can be readily quantified. Probable effects can be postulated, but the actual impacts cannot be identified. 118 Financial Effects The flow of Title I generated currency is more complicated than the flow of Title I commodities. No financial transactions take place until Colombian food processors and manufacturers purchase the imported goods from the Colombian Government. The Colombian Government then turns over the sales proceeds to the United States Government, which deposits the funds in a special account at the Bogota branch of the First National City Bank of New York. The U.S. Government then draws funds from this account for three general purposes: 1) to meet some of the local currency needs of the U.S. Mission in Colombia, 2) to make peso loans to U.S. subsidiary firms, and 3) to make peso loans to the Colombian Government. The pesos withdrawn for the first purpose are expended by the U.S. Mission in much the same manner as if the pesos had been converted from U.S. dollars. Pesos withdrawn for the second purpose are loaned directly to American subsidiary firms and are subject to repayment within a given time period. And those pesos withdrawn for the third purposea-loans to the Colombian Government, are in turn re» loaned to Colombian public and private entities. At due date, these entities repay the loans to the Colombian Government. And eventually the Colombian Government in turn repays the pesos to the U.S. Government. The U.S. Government then utilizes the pesos to meet a part of the local currency requirements of the U.S. Mission in Colombia. It is generally contended that the local currency generated from Title I sales does not represent additional resources for the country receiving the P.L. 480 goods. This conclusion results because it is contended that the currency generated from Title I sales could simply be created by the recipient country's government. The implication of such a conclusion is that the economic effects of 119 financing development activities by creating new money and utilizing Title I sales proceeds will be exactly the same. In Colombia, however, this is most definitely not the case, for there is a significant difference between the simple creation of new funds used in the financing of economic development and the generation of Title I funds which are used for the same purpose. As shown in Chapter III, no new money has been created in order to finance the local currency purchase of Title I commodities. Rather the funds have been derived from the private sector of the Colombian economy. Thus, the Title I currency has provided the Colombian Government with a source of funds that can be expended or loaned without inflationary consequences. This is in contrast to the expenditure or loaning of newly created money; such funds would generally be inflationary since the country's money supply would expand by the amount of new money created. In the strictest sense the pesos generated from Title I sales do not represent additional resources for the Colombian economy. Rather, the Title I funds are simply an amount of money paid by the private sector to the public sector in exchange for real goods. Since the Colombian Government can loan or expend these Title I funds without inflationary consequences, they are similar to funds raised through taxation or condemnation. Yet, Title I funds differ very significantly from taxation or condemnation funds since a) the payer receives real goods in return for his payments, and b) no compulsory payment is required. Additional revenue is therefore available to the Colombian Government with none of the inherent disadvantages of taxa- tion and condemnation and with none of the inflationary consequences of simple money creation. While the Title I funds represent additional income for the Colombian Government, the funds do not represent additional income for the economy as a 120 whole. This conclusion must result because the addition to the money holdings of the Government is just offset by the subtraction from the money holdings of the private sector. When the Government expands or loans these funds, however, private money holdings are restored to their original level. Thus, even though the monetary resources of the economy remain the same over time, the economy benefits from a P.L. 480 program because real resources in the economy increase by the amount of the goods Title I goods imported. Although Title I funds cannot be strictly considered as an additional resource for the Colombian economy, in reality, they have contributed rather significantly to the country's economic development. The primary reason this has occurred is that a high proportion of the funds have been used to finance socially and economically important projects that probably would not have been carried out in the absence of Title I funds. As noted in Chapter IV, about 300 million pesos of new investment in Colombia can be directly attributed to Title I loans. At least an equal amount of new investment can be indirectly attributed to the loans since Title I funds seldom financed more than half of the total new investment for each project. Moreover, additional investment no doubt resulted from the operation of the investment multiplier in the economy. This new investment in turn has created new employment opportunities, for as estimated in Chapter V, some 3,300 to 3,500 new permanent positions and between 8,000 and 8,500 new temporary positions can be directly attributed to Title I investment loans. National income has therefore been augmented by at least the amount of the Title I financed investments and perhaps more if an invest- ment multiplier has operated in the economy. 121 Balance-Of-Payments Effects As discussed in Chapter VI, the net long term balance-of-payments impacts of the Colombian Title I program cannot be readily quantified. It is therefore difficult to assess accurately how Colombia's national income has been affected through changes in the availability of foreign exchange. To date a significant saving of foreign exchange has resulted since the peso has devalued relative to the dollar. And it is therefore apparent that for the same reason, a long run exchange saving will be realized. This saving will, of course, be partially offset if the U.S. Government utilizes the recovered pesos as substitutes for normal dollar conversions. However, a long-term foreign exchange saving must result and for this reason Colombia's national product will be enhanced. Such a conclusion necessarily follows since the foreign exchange saved can be utilized to purchase imported goods *which otherwise could not have been purchased. National product is therefore augmented by the amount of the additional goods purchased. An additional effect on Colombia's national income has been realized because a high proportion of Title I funds have been used to finance the production of import substitutes. The analysis of Chapter VI estimated that such projects have yielded an annual foreign exchange saving amounting to not less than 35 to 40 million dollars. Thus, this has allowed the country to purchase, each year, 35 to 40 million dollars worth of imports that would not have been purchased in the absence of Title I financed investments. This effect has, however, been partially cancelled since the new Title I invest- ments created an increased demand for foreign exchange. Even so, there is little question that the net effect has been beneficial for the Colombian economy. 122 Summary of Aggregate Impacts It is now possible to summarize the preceeding analyses and to arrive at an estimate of the total effect of Title I programs on Colombia's economic growth. Fundamentally, Title I programs have yielded three basic impacts on the Colombian economy: 1) a real effect deriving from an augmentation of food supplies, 2) a financial effect resulting from the increased availability of non-inflationarylnanable funds, and 3) a balance-of-payments effect caused by a reduced expenditure of foreign exchange. All three of these effects have augmented Colombia's national income. Through the importation of Title I goods, Colombia has obtained additional real product valued at more than 70 million dollars. The local currency sales proceeds from these imports have been utilized for important invest- ments, which in the absence of P.L. 480 probably would not have been carried out. The economy's productive capacity has thus enlarged, creating new employment and generating additional income. A further addition to income has been brought about by the saving of foreign exchange. This saving has allowed increased importations and consequently has permitted income to expand. The threeeffects have operated simultaneously. Because of this, complementarity of the effects has, to some extent, resulted. As noted in the discussion of real effects, with the increase in food supplies there is a tendency for the aggregate demand for nonfood products to increase, thereby driving up the prices of these goods. Now unless the producers of nonfood goods have access to additional investment capital to expand productive capacity, inflation will likely result. To a point, this needed investment capital has been supplied through the loaning of Title I sales proceeds. Inflation has thus been less serious than it might have been in the absence 123 of these funds. The real effect and the financial effect have therefore been complementary, resulting in an expansion of consumption, investment, employ- ment and income. ‘ The balance-of-payments effect has, in turn, complemented the financial effect. As noted in Chapter VI, the Title I fund investments have created an increased demand for foreign exchange amounting to 45 to 50 million dollars. This could have been decidedly detrimental to the economy if it were not for the increased availability of foreign exchange resulting from the reduced cost of Title I goods. To a large extent, the increased demand for foreign exchange was supplied through the exchange saving brought about by the importation of P.L. 480 goods. The depreciation of the peso from 1955 to 1965 has already reduced Colombia's long run actual cost of Title I commodities by one-half. At maximum, therefore, Colombia will "pay" not more than 35 million dollars for goods valued at 70 million dollars. This will probably be reduced even further since it is unlikely that the United States will use more than half of the recovered pesos as substitutes for normal dollar conversions. Thus, the long-term "cost" of Title I goods to Colombia will likely be not more than 17.5 million dollars. If the peso continues to depreciate, the "cost" of the goods will be reduced even further. Over the long run, then, Colombia's foreign exchange saving resulting from Title I programs will likely exceed 50 million dollars. The estimated amount of foreign exchange saving will thus about equal the increased demand for foreign exchange brought about by Title I invest- ment projects. While this is no doubt a coincidence, it does serve to illustrate that no net detrimental balance-of-payments effects have resulted. 124 In total, it is clear that P.L. 480 Title I programs have markedly benefited Colombia's economic growth. No significant detrimental impact has resulted. Rather, aggregate consumption has been enhanced and invest- ment, employment and national income expanded with little real cost to the Colombian economy. CHAPTER VIII SUMMARY AND CONCLUSIONS The principle objective of this study was to determine what effects P.L. 480 Title I programs have had on important macro-economic parameters in the Colombian economy. The study focused on five areas of inquiry: In order, these were the impacts of the Title I programs on: 1) monetary parameters, including money supply, velocity and prices, 2) the rate of new investment, 3) the volume of new employment, 4) the foreign exchange and balance-ofmpayments position, and 5) the rate of increase in real national product. This chapter is divided into two parts. The first section briefly reviews and summarizes the principle findings of the preceeding chapters and the second section discusses some of the policy implications of the derived conclusions. Principle Findings Monetary Impacts The effects of P.L. 480 Title I programs on the various monetary parameters were analyzed using both a theoretical and empirical basis. Of primary concern were the effects of the program on Colombia-s money supply, transactions velocity and price level. Money Supply. Utilizing two alternative definitions of money supply, it was determined that the method of generating and handling P.L. 480 pesos, has generally had no impact on Colombia's money supply. It was shown that an expansionary or a contractionary effect could occur, but only under unusual conditions in the commercial banking sector of the economy. Because 126 these conditions could be expected to occur only rarely, it was concluded that the aggregate short run as well as long run money supply impact of the P.L. 480 program has been and will likely continue to be entirely neutral. Price Impacts. Because of a number of diverse and unquantifiable cause—effect relationships, it was not possible to accurately determine how the Colombian aggregate price level has been effected by the P.L. 480 program. The analysis indicated, however, the existence of an inverse relationship betweerl the quantity of P.L. 480 wheat imports and the rate of increase in the prices of cereals, cereal preparations and aggregate foodstuffs. Thus, the principle price effect of P.L. 480 imports has been that food price increases have been somewhat less than they would have been in the absence of such importations. Since more than 50 percent of all expenditure in Colombia goes for food purchases, it was postulated that the aggregate price level has advanced at a slower rate than it would have in the absence of the P.L. 480 program. Transactions Velocity Impacts. As with price impacts the effect that Title I financial transactions have had on Colombia's monetary velocity could not be accurately determined. In part, this was due to the relative insignifi-. cance of Title I programs as compared to total economic activity in Colombia and in part it was due to a pronounced secular decline in Colombia's trans- actions velocity. Thus, any impact that Title I programs may have had on monetary velocity has been masked by other more significant elements. No empirical evidence existed to argue that velocity has been affected. And on purely theoretical grounds, there appeared to be no valid arguments which would explain why velocity should be affected by the existence of a P.L. 480 programtin the economy. It was therefore concluded that P.L. 480 Title I 127 programs have had no measurable effect on the magnitude and/or rate of change of Colombia's monetary velocity. Investment Impacts Between 1957 and 1965 about 300 million pesos of P.L. 480 generated currency were loaned to agricultural and industrial firms in Colombia. This amounted to approximately 4 percent of all institutional credit loaned during this period. P.L. 480 investment funds provided a type of credit that was markedly superior to that which has been available in the country. Interest rates were lower, repayment terms were better, and the money was available for longer periods. It was determined that P.L. 480 investment funds did not substitute for existing credit sources in Colombia. Rather, they supplemented these sources, complemented national investment policy and provided for significant additions to the country's capital base. Employment Impacts P.L. 480 peso loans and grants have created both permanent and temporary employment opportunities in Colombia. It was determined that between 3,300 and 3,500 new permanent positions and between 8,000 and 8,500 temporary jobs resulted from local currency disbursements. Since about 350 million pesos have been loaned or granted under the various categories of Section 104 of the law, one new permanent position was created for each 95,000 to 100,000 pesos disbursed. Temporary employment increased by one worker for each 23,000 to 25,000 pesos disbursed. These employment impacts were those directly attributable to P.L. 480 fund disbursements. To what extent additional employment opportunities were created through a multiplier effect could not be accurately determined. 128 Balance-of-Payments Impacts P.L. 480 programs have greatly benefited Colombia's short-run balance-of- payments position. It was estimated that P.L. 480 financed investment projects, through import substitution, yielded a net foreign exchange saving of not, less than 35 to 40 million dollars per year since 1960. The net long term foreign exchange impact of the programs could not be accurately quantified. Although the present saving through import substitution will continue, these savings will be partially cancelled if the U.S. uses the recovered Title I pesos as substitutes for normal dollar conversions. This effect, however, will be offset if the peso continues to devalue relative to the dollar. Thus, through depreciation alone, the actual foreign exchange cost of the original P.L. 480 imports will, in the final analysis, be but a fraction of what commercial imports would have been. It was therefore concluded that the effect of P.L. 480 programs in Colombia will be beneficial to the country's short term as well as long term balance-of-payments position. National Income Impgcts Three effects operating simultaneously have served to augment Colombia's national income. First, through the importation of Title I goods the country has obtained additional real product valued at more than 70 million dollars. Second, the local currency sales proceeds from these imports have been utilized for augmenting gross investment, thereby creating additional income. Third, the saving of foreign exchange has allowed increased importations and consequently has permitted an expansion of national income. In total, it was concluded that P.L. 480 Title I programs have markedly benefited Colombia's economic growth. No significant detrimental impact has resulted. Rather, aggregate consumption has been enhanced, and investment, employment, and 129 national income expanded, with little real cost to the Colombian economy. Policy Implications Considering current United States Government thinking and projected food needs in underdeveloped areas, it appears that the United States will continue some type of concessionary food export program during the next several decades. Regardless of the form these programs take, it is likely that the present P.L. 480 program will serve as the foundation on which to build future programs. Assuming this is true, the findings of this Study offer some guidelines for the possible reformulation of future U.S. concessionary food export programs. Fundamental to any reformulation of existing concessionary food export programs, is a statement of the desired objectives of a new program. These objectives may be viewed from the standpoint of either the recipient country, the donor country, or both countries. The problem becomes immensely more complex, however, when the last case is considered, yet the only feasible program is one that both parties find the most agreeable or conversely the least disagreeable. As a basis for discussion, it will be assumed that future programs will hold to the broadly stated objectives of the existing P.L. 480 program. The question thus becomes what type of concessionary food export program could the United States undertake in Colombia in order to better meet these objectives than have past and present P.L. 480 programs. One of the apparent benefits accruing to countries which presently receive P.L. 480 foodstuffs is the reduced real cost of these goods as compared to commercial imports. In fact, it is generally believed that P.L. 480 commodities are acquired by recipient countries at near zero cost. 130 This study however showed that Colombia would have paid nearly the full commercial value of the imported P.L. 480 goods had it not been for the marked devaluation of the peso. And it is quite clear that if the Colombian peso stabilizes, the country will in the long run pay somewhere near the full commercial value for the P.L. 480 imports. The implication is that Colombian policy makers should be aware of what the real cost of Title I commodities will be in the future if the peso stabilizes. They would then be in a position to consider alternative importa- tion schemes. That two Title IV agreements have been signed in the past two years to some extent reflects this consideration lay Colombian policy makers. At the present time, Colombia cannot afford to import food under Title IV, or through commercial channels. And if the peso stabilizes, the country will not be able to afford Title I food imports. Clearly, the needs of Colombia call for an approach different from that used in the past. This conclusion therefore suggests a modification in the present Colombian Title I program. All Title I generated pesos should be utilized for direct grants to the Colombian government rather than for Section 104 (e) and 104 (g) loans. Such a modification would require no change in the law since a provision for grants under Section 104 (e) presently exists. This modification would also result in several secondary benefits. First, it would eliminate the controversy presently revolving around the Cooley loans to U.S. firms. Second, these firms would then have to finance new investment with dollar loans, thus bringing in additional foreign exchange to Colombia. Third, the U.S. Government could continue to specify how the Title I funds were to be utilized. In practice, the granting of these funds could follow the same general pattern as has been followed in past loan operations. 131 The only difference would be that funds would remain in Colombian government institutions rather than be repaid to the United States. Fourth, and most important from both the Colombian and the United States viewpoint, the total cost of foodstuffs imported in Colombia could be reduced. This would permit the country to utilize its scarce foreign exchange for importing additional capital, including agricultural capital inputs. Since Colombia's agricultural and industrial sectors could become more productive with the additional capital, the long run foreign-aid cost to the United States could be reduced. In summary, it must be noted that United States policy regarding the P.L. 480 program in Colombia has been rather shortsighted. What has poten- tially been a very effective tool to aid Colombia's long term development, has been viewed only as an interim short-term solution for correcting a deficit in the country's agricultural output. Clearly, it should have been, and should in the future, be regarded as part of a long-term program to stimulate the development of Colombia's economy. BIBLIOGRAPHY 133 Books Anganawala, A. N., and Singh, S. P. The Economics 2f Underdevelopment. Oxford University Press, New York, 1963. Asher, Robert E. Grants, Loans and Local Currencies--Their Role 13 Foreign Aid. washington: Institute, 1961. Currie, Lauchlin. 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"Monetary Theory and Policy," American Economic Review, June 1962, Volume LII, No. 3. ' Khatkhate, Deena R. "Money Supply Impact of National Currency; Counterpart of Foreign Aid: An Indian Case," The RGViEW’2£ Economics and Statistics, Volume XEV, February 1963. . "Some Notes on the Real Effects of Foreign Surplus Disposal in Underdeveloped Countries," The Quarterly Journal 2f Economics, May 1962, Volume LXXVI, No. 2. Mason, Edward S. "Foreign Money we Can't Spend,ll Atlantic, Volume CCV, Olson, Russell 0. "Impact and Implications of Foreign Surplus Disposal on Underdeveloped Economies," Journal gf Farm Economics, Volume XLII, December 1960. 134 Schultz, Theodore W. ”Value of U.S. Farm Surplus to Underdeveloped Countries," Journal pf Farm Economics, Volume XLII, December 1960. Public Documents Banco de la Republica, Departamento de Investigaciones Economicas. Cuentas Nacionales 1950-1961. Bogota, 1963 (Mimeograph) Banco de la Republica. Revista del Banco dgul§_Republig§. (Various issues.) Bogota, Colombia. . Informe Anual del Geren£g_§ lg Junta Directive. (Various issues) Bogota, Colombia. . Informe Anual d3 la Superintendencia Bancaria. (Various issues.) Bogota, Colombia. Caja de Credito Agrario, Industrial y Minero. 'lgforme dg_§§£§ncia. (Various issues.) Bogota, Colombia. Consejo Nacional de Politica Economia y Planeacion, Departamento Administrative de Planeacion y Servicios Tecnicos. Colombia-Plan General d§_Desarrollo Economico y Social,_§art I. Bogota, Colombia, 1962. Consejo Nacional de Politics Economia y Planeacion. Plan Cuatrienal _c_1_e_ Inversiones Publicas Nacionales-l96l-l964. Bogota, Colombia, December 1960. Departamento Administrativo de Estadistica. Anuario dg Comercio Exterior. (Various issues.) Bogota, Colombia. . Anuario d3 Estadistica General. (Various issues.) Bogota, Colombia. . Boletin Mensual. (Various issues.) Bogota, Colombia. Economic Commission for Latin America. Economig Bulletin for Latin America. (Various issues.) Santiago de Chile, Chile. International Bank for Reconstruction and Development. .Thg Basis gfflg Development Program for Colombia. washington, 1950. Mason, Edward S.,'g£_ al. The Problem of Excess Accumulation of U. S. Owned Local Currencies: Findings and Recommendations Submitted to the Under~ secretary“ of State the Consultants International Finance and Economic Problems. washington: U. S. Government Printing Office, 1960. United Nations. The Economic Development of Colombia. Department of Economic and Social Affairs: E/CN,12/365. (Geneva, 1957). United States Agency for International Development.‘ Status of Loan Agreements As of March 31,1965. Office of the Controller,A I. D., “Washington. 135 . Status 2f P.L. 480 Funds. (Various issues.) United States Mission in Colombia. Bogota, Colombia. United States Department of Agriculture. Food Balances for 24 Countries of the western Hemisphere, 1959- 61. ERS Foreign 86, Foreign Regional Analysis Division, Economic Research Service, U. S. D. A., August 1964. United States House of Representatives. 1964 Annual Report 33 Public Law 480 Activities. 89th Congress, House Document 130-89/1, U.S. Government Printing Office. Washington, D.C. March 1965. United States Treasury Department. Report on Foreign Currencies in the Custody_ of the United States for the Period July 1, 1964 throu ugh December 21, 1964. Fiscal Service, Bureau of Accounts. Washington. . Semiannual Report of Collections Under Title I, P. L. 480 Sales Agreements, June :9, 1964. Division of Central Accounts and Reports. Washington. Other Sources Adams, Dale W. "Adjustment Possibilities on Colombian Farms Under Alternative Levels of Public Law 480 Imports." Unpublished Ph.D. thesis, Michigan State University, 1964. Adams, Dale W., gt a1. Public Law 480 and Colombia's Economic Development. Department of Agricultural Economics, Michigan State University, Medellin, Colombia. March 1964. Adler, Robert W. "Transferable Saving in Colombia." Unpublished research study, Department of Economics, University of Oregon. Eugene, Oregon. June 1963. Bogumill, John P., and Halbert O. Goolsby. Financial Procedures Under Public .L ! flég. Foreign Agricultural Economic Report No. 17, Economic Research Service, Development and Trade Analysis Division. U.S. Department of Agriculture. May 1964. El Tiempo (Newspaper). Bogota: (various issues.) Elrod, Warrick E. Monetary Effects 2f Financing Agricultural Exports. Foreign Agricultural Economic Report No. 12. Economic Research Service, Development and Trade Analysis Division, U.S. Department of Agriculture, November 1963. Ginor, Fanny. Analysis and Assessment of the Economic Effect of the U. S. Public Law 480 Title I Program in Israel. Bank of Israel, —Tel-Aviv. October 1961. Goering, Theodore J. "United States Agricultural Surplus Disposal in Colombia.'' Unpublished Ph.D. thesis, Michigan State University, 1961. {F 136 Goering, Theodore J., and Lawrence W. Witt. United States Agricultural Surpluses in Colombia: A Review of Public Law 480. Technical Bulletin "m —m—-— 289, Michigan State University, Agricultural Experiment Station, East Lansing, 1963. Martin, Eugene. "Agricultural Credit in Colombia; Departamentos of Cundinamarca and Boyaca." Unpublished research study, University of Oregon, Eugene, Oregon. August, 1963. Menzie, Elmer L.,‘g£_ a1. Policy for United StatesA gr ricultural Export Surplus Disposal. University of Arizona, Technical Bulletin 150, Agricultural Experiment Station, Tucson, Arizona. August 1962. Preliminary Bibliography, Food for Peace Project. Department of Agricultural Economics, Michigan State University. (Mimeograph.) December 1965. Seers, Dudley. "Inflation and Growth: The Heart of the Controversy.” Paper presented to the Conference on Inflation and Growth in Latin America, Rio de Janeiro, Brazil. January 1963. Schultz, Theodore W. "Transforming Traditional Agriculture, A Research Agenda, Some New Evidence, and Policy Implications." Paper presented to the A/D/C Conference on Subsistence and Peasant Economies. February 28 to March 6, 1965, East-West Center, Honolulu, Hawaii. Schutjer, Wayne A. "The Relationship Between P.L. 480 Title I Imports and Domestic Agricultural Production in Six Receiving Nations." Unpublished Ph.D. thesis, Michigan State University, 1964. Witt, Lawrence W., and Carl Eicher. The Effects of United States Agricultural Surplus Disposal Programs_ on Recipient Countries. Research Bullet: No. 2, Michigan State University, Agricultural Experiment Station, Department of Agricultural Economics, East Lansing, Michigan, 1964. Witt, Lawrence W., and Richard G. Wheeler. Effects of Public Law 480 Programs in Colombia, 1955-62. Department of Agricultural Economics, Michigan State University, October 1962. 1m