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The Colombian Economy : Business Competitors

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Question:

Describe about The Colombian Economy for Business Competitors.

 

Answer:

Introduction:

In the case of a competitive advantage, a country can produce a good or a service at a lower cost than those of the competitors. This ensures the price of the commodity to be less than the prices in competing countries. This creates more sales and high margins of profit. A competitive advantage can occur due to many reasons like cost structure, brand, production quality, product distribution, support from the customers, and others.

The concept of five stages of economic development was first given by WW Rostow, in the year 1960. According to him, development for the developing countries requires substantial investment in capital. The stages are as follow:

1st stage: The stage one represents a traditional society, where a country is yet to begin the development process. According to Rostow, these countries have allocated most of the resources to non-productive processes like military, arsenal, and others.

2nd stage: This is called the transitional or pre - take off stage. Initiatives are taken by the economic agents like entrepreneurs and investors to boost up the economic activities of the country. New infrastructure is provided by the authorities. New technologies of production are introduced.

3rd stage: This is called the take off period. Here, growth in investment, equal growth throughout all the tiers of economy, changes in political scenario towards development friendly environment occur. The social, political and economic institutions face development.

4th stage: This stage is called “Drive towards maturity.” This stage consists of innovation of new technologies, diversification of products, and more investment in the production process. Reliance on imports reduces by this time. The economy starts to export goods in open economy. Workers become more skilled and specialized by this time, which increases production (Li and Hung 2013).

5th stage: This is the stage of mass consumption. Here, consumer oriented economy prevails. A dominant service sector is a feature of this type of economy. “The economy shifts from heavy industry to consumer goods.”

Comparative advantage over a good occurs in a country, when the opportunity cost regarding that good is lower than the competing countries. The low opportunity cost implies producing that commodity makes the country lose less of other possible goods than its competitors. A country can produce a good or a service at a lower cost than those of its competitors. This is done by ensuring the price of the commodity to be less than the price in competing countries. This creates more sales and high margins of profit. A competitive advantage can occur due to the reasons like efficient cost structure, brand, production quality, product distribution, and support from the customers, and others (Nunn and Trefler 2013).

In a way, comparative advantage is a component of competitive advantage. Comparative advantage shows the ways in which a firm benefits from lower opportunity cost, whereas, competitive advantage shows how a country’s lower cost helps improving its profitability (Williamson et al. 2013).

Main Body:

The Colombian economy is currently in the second stage of development. This is the transitional or pre take off stage. The economy of Colombia has been to stage one and the transition period from one to two which brought it to the pre take off stage. In the first stage the country was in traditional period, with most of its government investments in non productive production process. Investment in economic production by the entrepreneurs and the government has pushed Colombia’s economy into the second stage. Now the economy is efficiency driven. If this trait goes on, soon the country will be in the transition period of two to three. This means, in the near future, the country will be in the third stage of development, which is the take off stage. After that the country will take off towards maturity, where, the economy will be innovation driven. This will be achieved by more investment in research and development. The role of the policy makers is also vital, as the plans needed to be country specific.  Colombia needs a proportionate inclusive growth. It is the policy makers’ responsibility to make sure that all the stake holders of the economy are included in the way of development (Ocampo 2015).

Indicator Signalling Competitive advantage

Located in Pillar #

3.03 Inflation, annual % change*

Pillar # 3

8.06 Soundness of banks

Pillar # 1

10.01 Domestic market size index, 1–7 (best)*

Pillar # 10

10.03 GDP (PPP$ billions)

Pillar # 10

6.01 Intensity of local competition

Pillar # 6

Table 1: Indicators of competitive advantage.

Source: (As created by the author.)

The country is showing competitive advantage in these five indicators. The inflation rate in Colombia is ideal for the transition period which is nearing the country’s economy. The banks of the country are standing well guarded, which ensures the capital flow in the market. This strengthens the country’s economy. The domestic market of the country is pretty big than most of the neighbor countries, which gives Colombia the opportunity of extending the economy. The purchasing power parity also shows competitive advantage, which ensures easy import of raw materials. The intensity of local competition can help the domestic industries to reduce their price and increase their quality of products over time (The Global Competitiveness Report 2016).

Three most important factors which can help economic development in Colombia are as follows:

 

Market size:

The market size of Colombia is ranked higher than that of the other Latin American and the Caribbean countries. This attribute has the potential to help the country to grow its demand and supply. This will in turn increase the country’s total output and increase the national income. The Gross Domestic Product will get higher. Investors doing their job looking at the market size will yield positive results for all the economic agents in the country. The large market size with proper purchasing power has the ability to increase the country’s aggregate demand. To meet the increased demand, the supply will rise to get the equilibrium. A sustainable equilibrium will be reached when the employment process absorbs the skilled and unskilled unemployed workers. Hence, the market size can be used to get an overall expansion of the economy (Smith 2015).

  1. Financial market development:

The financial market of Colombia is ranked higher than the other Latin American and Caribbean countries. This will ensure more investment in Colombia’s industries and businesses. With more investment the nation’s Gross Domestic Product will increase. The export market of the country incorporates a huge portion of minerals. The country is well known for its oil coal and other mineral exports. The agriculture sector has also changed in the last ten years. Exports in industrial sector are third in line. The financial market of the country has the potential to expand more with planned investments in these three export areas of Colombia. The industrial sector holds the real key for the expansion of financial market’s development (Ledgerwood, Earne and Nelson 2013).

  1. Macroeconomic environment:

            The macroeconomic environment refers to the all the economic conditions of the country as a whole. It includes the trend of Gross domestic Product, inflation, employment, government spending, monetary and fiscal policies by the government of the country. Colombia’s macroeconomic environment is relatively better than the other neighbors. This ensures that the country is pretty close for the transition period for the third stage of development. The inflation rate in the country is at a development favorable position. With the expansion policies by the government of Colombia can reach out to increase the rate of employment. The increased employment rate will ensure more national income. The government of Colombia has a great grip over the monetary and fiscal policies. This means the government can take a monetary or a fiscal policy in order to expand or retract the market. Given the situation of the country’s economy, the government can use these policies to increase the output of the country, which will increase the volume of the net exports (Mankiw 2014).

Conclusions:

Inclusive growth theory suggests that there is a direct connection between the macroeconomic and microeconomic determinants of a country. The structural transformations for economic diversification are addressed by microeconomic dimensions. The macroeconomic determinants are the country’s Gross Domestic Product, Total inputs’ productivity, and many others.

Inclusive growth in a country ensures new employment opportunities and it helps in reducing poverty in turn. It also suggests essential health services and education for the poor are ensured by the authorities. This will reduce inequality in the country, and increase equality of opportunity. Inclusive growth empowers the citizens of a country through basic education and skill development process, which generates skilled labor.

It also means incorporating all the stakeholders of the market on the way of development. All the economic agents lying marginally on the edge of the economy are also included in case of an inclusive growth. This way, one can ensure an overall development in the country. Absence of inclusive growth can lead to inequality of great margin for Colombia. That will decrease the growth rate of the country.

Inclusive growth is characterized by a well built connection between a country’s microeconomic and macroeconomic environments. When most of the economic agents are included in the growth process of a country, it is called ‘inclusive.’ This means there will be less inequality in the economy. “The high tax rate in the country, corruption, inadequate infrastructure, complex tax regulations” is not favorable for doing business in Colombia, yet the country managed to show inclusive growth in the last decade. Colombia is one of the countries in Latin America which have reflected inclusive growth. Public health and stability of the government has ensured growth which advocates equity. The inflation rate in the country is better than most of the neighbor countries. The market size of the country has increased over the last ten years. Due to this phenomenon aggregate demand will increase. To achieve an equilibrium demand and supply at first, the price will rise and then there will be efficient allocation of the resources. Research and development will also increase to face the market size. This ensures growth in Gross Domestic Production (Cubillos and Quevedo 2016).

“Financial market development and macroeconomic environment” of the country has improved drastically over the last ten years. The financial market of the country has the potential to expand more with planned investments in the markets. The government has to make policies which will target the growth rate. The government can use monetary policy or fiscal policy to expand the economy. The country, at present, is operating in the second stage of Rostow’s five stages of development. With a little more push through these channels, the country can reach to the take off stage. The financial market is mainly steered by the private investments, whereas, macroeconomic environment, though incorporates all the economic agents, are mainly steered and monitored by the government of the country. These are the reasons the country is facing an inclusive growth (Gwynne and Cristobal 2014).

 

References:

Cubillos, H.Q. and Quevedo, M.N., 2016. Income distribution in the Colombian economy from an econophysics perspective. Cuadernos de Economía, 35(69), p.691.

Gwynne, R.N. and Cristobal, K.A.Y., 2014. Latin America transformed: globalization and modernity. Routledge.

Ledgerwood, J., Earne, J. and Nelson, C. eds., 2013. The new microfinance handbook: A financial market system perspective. World Bank Publications.

Li, R.Y.M. and Hung, R., 2013. Rostow’s Stages of Growth Model,'Urban Bias' and Sustainable Development in India. Li, Rita Yi Man and Hung Ronald (2013) Rostow’s Stages of Growth Model,“Urban Bias” and Sustainable Development in India, Journal of Contemporary Issues in Business Research, 2(5), pp.170-178.

Mankiw, N.G., 2014. Principles of macroeconomics. Cengage Learning.

Nunn, N. and Trefler, D., 2013. Domestic institutions as a source of comparative advantage (No. w18851). National Bureau of Economic Research.

Ocampo, J.A., 2015. Performance and challenges of the Colombian economy. Colombia’s Political Economy at the Outset of the 21st Century: From Uribe to Santos and Beyond. Lexington Books: Lanham, MD.

Smith, M., 2015. 1 Historical growth modelling. Development Economics in the Twenty-first Century, p.14.

The Global Competitiveness Report, (2016). Annual Report 2015-2016. [online] World Economic Forum. Available at: https://www.weforum.org/reports/annual-report-2015-2016 [Accessed 9 Oct. 2016].

Williamson, P.J., Ramamurti, R., Fleury, A. and Fleury, M.T.L. eds., 2013. The competitive advantage of emerging market multinationals. Cambridge University Press.

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