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Can Colombia cope with a Global Low Carbon transition?
AUTHOR S
Antoine Godin
Agence Française de Développement Paris (France)
Centre d’Economie et de Gestion
Université Sorbonne - Paris Nord Paris (France)
Devrim Yilmaz
Agence Française de Développement Paris (France)
Kadir Has University Istanbul (Turkey)
Jhan Andrade
Universidad Nacional de Colombia - Sede Bogotá Bogotá (Colombia)
Santiago Barbosa Departamento Naciona de Planeacion Bogotá (Colombia)
Diego Guevara
Universidad Nacional de Colombia - Sede Bogotá Bogotà (Colombia)
Gustavo Hernandez Departamento Nacional de Planeacion Bogotá (Colombia)
Leonardo Rojas
Universidad Nacional de Colombia - Sede Bogotá Bogotà (Colombia)
Abstract
This paper aims to understand the long-term consequences for the Colombian economy of a global low-carbon transition. The paper proposes an empirical Stock-Flow Consistent model for Colombia, encompassing relevant dynamics for the economy: details regarding the trade balance such as fossil fuel exports or propensities to import out of consumption, intermediate goods or capital goods, dependency to international financial flows to cover a trade balance deficit, and more generally financial feedback loops for all institutional sectors. We envisage different scenarios regarding fossil fuel exports and show the dramatic impacts that Colombia could face in the case of a rapid decline in such exports. We then consider policy responses consisting in industrial policies to diversify the export base and show they can help mitigate the Colombian vulnerabilities but only after a certain period of time indicating the urgency of implementing such policies in Colombia.
Keywords
AFD, Agence française de développement,Research papers,Colombia,lowcarbon transition,fossil fuelexports
Acknowledgments
The authorswishtothank SebastianValdecantos,Christos Pierrosandtheparticipantsto the international research conferenceofAFDforuseful comments andsuggestions.As alwaysallremainingerrors are ours.
Originalversion
English
Accepted June 2023
COORDINATION
Antoine Godin (AFD)
Devrim Yilmaz (AFD)
Résumé
Cet article vise à comprendre les conséquences à long terme pour l’économie colombienne d’une transition bas-carbone mondiale. Nous proposons un modèle empirique Stock-Flux Cohérent pour la Colombie, englobant les dynamiques pertinentes pour l’économie : détails concernant la balance commerciale tels que les exportations de combustibles fossiles ou les propensions à importer hors consommation, biens intermédiaires ou biens d’investissement, la dépendance à l’égard des flux financiers internationaux pour couvrir un déficit de la balance commerciale, et plus généralement les boucles de rétroaction financière pour tous les secteurs institutionnels. Nous envisageons différents scénarios concernant les exportations de combustibles fossiles et montrons les impacts dramatiques que la Colombie pourrait subir en cas de baisse rapide de ces exportations. Nous examinons ensuite les réponses politiques consistant en des politiques industrielles visant à diversifier la base d’exportation et à montrer qu’elles peuvent aider à atténuer les vulnérabilités colombiennes, mais seulement après un certain temps, ce qui indique l’urgence de mettre en œuvre de telles politiques en Colombie.
Mots-clés
Colombie, transition bas-carbone, exportation de combustibles fossiles
1. Introduction
OneofthekeypointsforachievingtheobjectivesestablishedintheParisAgreementisto rapidlyinitiateade-carbonisationpathwayofglobalconsumptionandproductionpatterns, especiallyinhigh-incomecountries.Despitetheslowpaceofthisprocessduetomoderate ambitionandpoliticalconstraintsaffectingglobalmitigationactions,thereductioninglobal demandforfossilfuelswillemergeasoneofthemainoutcomesofthisforthcomingstructuralchange.Whilethisgloballow-carbontransitioncouldbenefitnetfossilfuel-importing countries,othereconomieswithexport,financial,productiveand/orfiscaldependencieson fossilfuelindustrieswillhavetocopewiththenegativeimpacts(seee.g.Daumas,2023; Cahen-Fourotetal.,2021;VanderPloegandRezai,2020)
AnexampleofsuchadverselyaffectedcountriesisColombia;amiddle-incomecountryfor whichcoalandoilexportshaveaccountedfor51%oftheexportbasketofgoodsforthe period2015-2022.Theoilandminingsectorhasalsobeenanimportantsourceofforeign exchangeprovisionfortheeconomy,bothviahighlevelsofexportsandastherecipient of24%offoreigndirectinvestment(FDI)duringthisperiod.Intermsofproduction,theoil andcoalminingindustrycontributedaround5%tothetotalvalueaddedbetween2015and 2022.Finally,theindustryhasalsobeenanimportantsourceoffiscalrevenues,contributing royalties,dividendsfromEcopetrol(themajoritystate-ownedoilcompany)andincometax atanaverageof1.4%ofGDPperyearfortheperiod2015-2021.
TakingColombiaasarepresentativecaseofotherdevelopingeconomies,thispaperseeks toanalysesomeoftheimplicationsthatthegloballow-carbontransitionmayhaveonits economyduringtheperiod2023-2050.BasedonanempiricalStock-FlowConsistentmodel, reproducingthemainregularitiesoftheColombianeconomyandcalibratedfor2019,we simulatedifferentscenariosofoilandcoalexportprojectionsandanalysetheirrespective medium-andlong-termimpacts.Then,weconsidertheeffectsofanindustrialisationpolicy thatcontributestodiversifyingtheexportbaskettoassesspolicyalternativestoreducethe vulnerabilitiesarisingfromadecliningpathoffossilfuelexports,
Thus,ourpaperthuscontributestotheliteratureonmacroeconomicandfinancialvulnerabilitiesthatmayemergeindevelopingeconomiesinthecontextofthegloballowcarbontransition.Semieniuketal.(2021);Boltonetal.(2020);BernalandOcampo(2020), amongothers,haveexaminedthepotentialeffectsthatmovingtoalow-carboneconomy mayhaveonfinancialstabilityfromamorequalitativeapproachandwithoutresortingto modellingtoolstoexplorecross-channelinteractions.Magachoetal.(2023)havequantified themacroeconomicexposureofdifferentcountriestothegloballow-carbontransitionusing input-outputanalysisandclusteringtechniques.Whilethisapproachallowsforadeeper explorationofmulti-sectoralissues,itsstaticnatureandemphasisontherealsideofthe economyomitfinancialdynamicsandstock-flowrelationshipsrelevanttoamoreholistic viewofvulnerability.Bernal-Ramírezetal.(2022)haveestimatedtheeffectsofphysicaland transitionrisksonasetofmacroeconomicandfinancialvariablesinColombiabasedonthe NetworkforGreeningtheFinancialSystem’sscenarios.Althoughitisapioneeringstudyfor thecountry,theuseofpartialequilibriummethodologiesandaccountingprojectionsomits interactionsandadjustmentmechanismswithinandbetweentherealandfinancialspheres
oftheeconomythatmayaffectthesimulatedpaths.
Hence,unlikethesecontributions,thispaperempiricallyanalysestheconsequencesof suchastructuralchangeusingafullyintegratedStock-FlowConsistentapproachthat simultaneouslymodelstherealandfinancialdynamicsofaneconomyunderdifferent scenarios,whileallowingfordynamicsofdisequilibriumandendogenousresponsesof institutionalsectorstochangesintheirbudgetconstraintsandbalancesheets.Inthisway, bycapturingtheinteractionsandfeedbackloopsbetweenbothspheresovertime,wecan obtainmoreaccurateandrealisticdiagnosesoftherisksandopportunitiesthatthelowcarbontransitionmaybringforwardfordevelopingcountrieslikeColombia.
OurresultsindicatethatadeclineinfossilfuelexportswouldleadColombiatogreater macroeconomicandfinancialfragility.Moreprecisely,thewideningtradedeficitandlower FDIinflowsinduceasharpdepreciationoftheColombianpeso,which,dependingonthe timingofthetransitionandpolicyresponses,couldleadtoacurrencycrisis.Inturn,the economyexhibitsalowergrowthrate,resultinginhigherunemploymentandhigherinflation duetotheexchangeratepass-through.Fallingoilandcoalexports,currencydepreciation andhigherinflationwidenthefiscaldeficitandleadtoahigherlevelofpublicdebt,whilethe deteriorationinpublicfinancesandthedis-accumulationofinternationalreservesincreases thecountryriskpremium.Inthelongrun,theeconomy’sabilitytomitigateorreversethese impactswilldependonthemagnitudeofthefavourableresponseofthetradebalanceto pesodepreciation,ontheimplementationofindustrialisationpolicies,andontheinsertion intoglobalvaluechainsthatwoulddiversifytheexportbasket.However,itisaprioritytostart implementingsuchpoliciesearlybecausethesuchstructuraltransformationstaketimeto materialiseandtobeeffective,theyrequiretoovercomemultiplebottlenecks.
Thepaperisstructuredasfollows.Afterthisintroduction,section2presentsabriefbackgroundoftheColombianeconomyandtheliteratureonmacroeconomicmodellingin Colombiatoshowwherewestand.Section3describesthestructureandmainblocksof theempiricalSFCmodel.Then,section4presentsthedatasources,brieflydescribesthe calibrationofthemodelanddiscussesthescenariosthatwillbesimulated,contrastingthe BaselinescenariowithsomeprojectionsoftheColombianMinistryofFinanceforthenext decade.Section5presentstheresultsofthemodelsimulationsforsomeofthescenarios, showsthepossibilityofacurrencycrisisanddiscussessomepolicyresponses.Lastbutnot least,section6presentsthefinalreflectionsofthispaperandconcludes.
2. MotivationandContext
2.1. Colombia
TheColombianeconomyischaracterizedbytheso-called”balance-of-paymentsdominance”thatimposesaceilingonlong-termgrowthandmakesexternalshockslargelydeterminetheshort-termbehavioroftheeconomy.Thiscanrendermacroeconomicdynamicsprocyclicaltobalanceofpaymentsperformanceandhaveambiguouseffectsonthe exchangerate(PrebischandCabañas,1949;Thirlwalletal.,1979;Ocampo,2016).Inessence,
cyclesofexternalfinancingflowsandtheprocyclicalbehaviorofriskpremiumshavebeen themaincausesofimbalancesandrealvolatilityinLatinAmericancountries(Titelmanand Pérez,2015).The”structuralheterogeneity”amongproductivesectorsinhibitsthediffusion ofintersectoraltechnicalchange,slowsdownproductivitygrowth,andreducesthespeed oftheconvergenceprocesses.(AbelesandPérezCaldentey,2022;PérezCaldentey,2015). Specializationinnaturalresourcesandprimarygoodscreatesa“rent-seeking”societyand distortstheallocationofresources,furtherreducinggrowthprospects.TheDutchdisease andincomeandwealthdistributiondeteriorationarealsocontributingfactorstothisprocess (Bottaetal.,2016;GodaandTorres,2013).
From2003to2014,theColombianeconomyexperiencedapositivegrowthtrenddrivenby themining-energysectorduringthecommoditysuper-cycle.Inthisperiod,thefinancial Dutchdiseaseresultedinre-primarization,withtheminingsector’sgrowthleadingtodeindustrializationandtherapidgrowthofnon-tradablesectorssuchasservicesandconstruction.Additionally,publicsectorexpenditureswereasignificantdriverofeconomic growthinthisphase.Themining-energysectorsufferednegativegrowthratesfrom2014 to2018duetofallinginternationalcommodityprices.Despitethisslowdown,economic growthremainedpositiveuntiltheCOVID-19pandemic,butthehealthcrisisledtoa7%fall inproduction,resultinginthelowesteconomicgrowthrateofthelastdecades.
Colombianexportsareheavilydependentonthemining-energysectors,particularlycrude oilproduction,whichaccountsfor26.2%oftheexportbasket.Services,mainlytourismand transportation,andagriculturalgoods,suchascoffee,flowers,andbananas,arealsovital ingeneratingexportrevenues.Incontrast,theimportbasketisdiversified,withsectors likechemicalsandmachineryaccountingforthelargestshares.Comparedtoitsexports, Colombiatendstohaveahighervalue-addedcontentinitsimportedgoods,suchas vehicles,electronicproducts,andcapitalgoods.Thistradeimbalancepartlyexplainsthe country’scurrentaccountdeficit,whichhassteadilyincreasedsince2005.Non-financial firmsandthegovernmenthavecontributedmosttothecurrentaccountdeficit,whilehouseholdshaveremainedinsurplusduetoremittancessentbyColombianslivingabroad,which accountsforanaverageof2.1%ofGDPeachyearsince2015.
ThefinancialaccountsurplusinColombiabetween2000and2014waslargelydrivenbyFDI andportfolioinvestment,whichwereinfluencedbytheinternationalcommoditypriceboom andtheabundanceofliquidityinglobalmarkets.Theoilsectorreceivedthehighestshare offoreigninvestment,followedbytheminingindustryandthefinancialsector.However, foreigndirectinvestmentishighlyvolatileandsensitivetointernationalcommodityprices andinternationalliquidity.Bothexternalanddomesticflowstofinancetheprivateandpublic sectorsareonanupwardtrend,whilethenetdebtoftheCentralNationalGovernmentrose toalmost61%ofGDPin2020duetotheCOVID-19pandemic.
TheColombiancentralgovernment’srevenuesincreasedprogressivelyfrom11.4%in2000to 16.2%in2019.Themajorityofstaterevenuescomefromtaxcollection,withvalue-addedtax, incometax,andthelevyonfinancialtransactionsrepresentingalmost80%oftaxrevenues. Ontheprimaryexpendituresideofthecentralnationalgovernment,thisalsoincreasedfrom 12.7%ofGDPin2000to15.9%ofGDPin2019.Withinthiscategory,publicinvestmenthasbeen quitepro-cyclical,reachingapeakof3.1%ofGDPin2013intheyearsofhighestgrowthandoil
revenues,beforegraduallydeceleratingto1.8%ofGDPin2019.Precisely,publicinvestment normallyactsasanadjustmentvariableduringyearsoffiscalconsolidation.Additionally, thecentralgovernmentbudgetissubjecttoafiscalruletargetinga55%netdebttoGDP ratioandlimitedbya71%netdebttoGDPratio.Althoughtherulewaspostponeddueto theCOVID-19crisis,atransitionpathintheprimaryfiscalbalanceiscurrentlyestablishedto reachthetargetoftherulein2026whenitwillfullyenterintoforce.
ThemaintargetofColombia’smonetarypolicyistomaintainthepurchasingpowerofthe currency,whileachievinggeneraleconomicpolicyobjectivessuchaseconomicgrowthand fullemployment.However, BancodelaRepública,Colombia’scentralbank,hasplayeda passiveroleinachievingotherobjectivesapartfromcontrollinginflation.Thelinkbetween thecentralbankpolicyrateandlendingrateshavebeenstrong,albeitwithveryhigh premiumschargedbythefinancialsector.Whiletheaveragemonetarypolicyratebetween 2000and2022was5.9,theaveragelendingrateforthesameperiodwas13.88%,implying aspreadof798basispoints.Theconsumercreditrateontheotherhandwasastaggering 1,310basispointsabovetheaveragepolicyrateinthisperiod.
Colombia’sproductionregime,characterizedbyarentiermodel,hasresultedinahighly unequalsociety,withindicatorsofincome,wealth,andlandownershipdistributionperpetuatingtheproductionregime(GuevaraCastañeda,2015).Theeconomyisalsocharacterized byalabourinformalityrateofaround50%andapersistentunemploymentratethatrarely fallsbelowtwodigits.Whileeffortstoreduceinequalityhavenotyieldedsubstantialresults, taxationhasalsoplayedaroleinperpetuatinginequality,withthetaxsystembeinghighly regressive(GarayandEspitia,2020).Inequalityofincomeisreinforcedbyunequalaccessto land,whichhasbeenfueledbyinstitutionalcharacteristicssuchastheabsenceofstructural agrarianreformsandthepresenceofillegalactorsinthearmedconflict(Botero,2016). Disaggregatedbygender,indicatorsworsen,withwomenreceivingasmallershareofpretaxlaborincomeandhavingunequalopportunitiestoaccessthelabormarketduetothe burdenofcarework.Thepandemichasalsoreversedtheprogressinpovertyreductionand increasedpovertylevels,particularlyinruralareas.Thesecharacteristicsgeneratetensions inboththesocialandpoliticalarenasinColombia(Archilaetal.,2018).
2.2. LiteraturereviewonexistingmacromodelsforColombia
AccordingtoEspinozaetal.(2017),themacroeconomicmodelsdevelopedinColombia todatehavetwomaincharacteristics.First,mostfollowanorthodoxapproachwiththe utilizationofComputableGeneralEquilibrium(CGE)models,DynamicStochasticGeneral Equilibrium(DSGE)modelsandmorerecentlyNewKeynesianSemi-StructuralState-Space models(seee.g.Guarinetal.,2020)).Second,mostofthemaredevelopedbythetechnical departmentsoftheCentralBank,theNationalPlanningDepartmentandtheMinistryof Finance,aswellasbyresearchersattachedtouniversities,thinktankssuchasFedesarrollo andconsultanciessupportedbymultilateralorganizations.
CGEmodelshavebeenusedextensivelysincethe1980s(Suescúnetal.,2017)andarebased onSocialAccountingMatrices(SAM),whichtendtoemphasiserealtransactionsinthe economyandexcludefinancialflowsinmoststudies.Theobjectiveofmostofthesemodels
hasbeentoanalysetheeffectsofdifferentmacroeconomicandpolicyshocksandscenarios atthenational,regional,sectoralandincomegrouplevels.
AmongthemostrecentCGEmodels,Haddadetal.(2022)analysetheregionaleconomic impactsofroyalties,Velasco-MartínezandCárdenas-Hurtado(2015)constructlong-run macroeconomicscenariosfortheCentralBankandHernández(2012)analysestheeffects ofpayrolltaxesonthelabourmarket.Itisworthmentioningthatthesemodelshavealso beenusedinColombiatoanalysethedistributionaleffectsofcarbontaxes(Romeroetal., 2018),themacroeconomiceffectsofColombia’sfirstNationallyDeterminedContributionto theParisAgreement(Álvarez-Espinosaetal.,2017)andtheeconomicimpactsofclimate change(Tapascoetal.,2015).
RegardingDSGEmodels,theirapplicationinColombiastartedtogrowinthelate1990sinline withcomputationaladvancesanddevelopmentsintheNewKeynesianliteratureregarding theintroductionofnominalandrealrigiditiesandotherfrictionstoRealBusinessCycle models(RodríguezRevilla,2011).Thesemodelshavebeendevelopedmainlybycentralbank researcherstobuildscenariosandsimulatemacroeconomicandpolicyshocks,calibrated torepresentonaveragethecharacteristicsoftheColombianeconomy.Theseinclude thePolicyAnalysisToolAppliedtoColombianNeeds(PATACON)developedbyGonzález etal.(2011)whichaimstosupportmonetarypolicydecisionsandtheDSGEFiscalModelfor Colombia(FISCO)developedbyRincónetal.(2017)fortheanalysisoffiscalpolicyandits interactionswithmonetarypolicy.
Withthisinmind,theempiricalSFCmodelpresentedherefollowsatraditionofmacroeconomicmodellinglittleexploredinColombia.Ontheonehand,incontrasttothewidely usedCGEandDSGEmodels,wepresentamodelofamonetaryanddemand-ledeconomy withoutresortingtomicro-foundations,intertemporaloptimisationassumptionsandmechanicalequalizationofinvestmenttosavings.Here,realandfinancialspheresoftheeconomyaremodeledexplicitlyandcomprehensivelyaswellasthedifferentfeedbackloopsthat emergebetweenthem.Theroleofbanksascreatorsofmeansofpaymentsisconsidered beyondbeingsimpleintermediariesbetweenborrowersandsavers,andfinancialflows areanalysedautonomouslyratherthanbeingseenasamirrorimageofrealflows.1 Last butnotleast,thecontinuous-timespecificationallowsfortheemergenceofdisequilibrium dynamicsinsteadofpurelyequilibriummodellingapproaches.2
Ontheotherhand,althoughtherehavebeenpreviouscontributionstoSFCmodellingin Colombia(Escobar,2016;GuevaraCastañeda,2015),themodelpresentedherediffersin severalrespects.First,itdetailsthemainfeaturesandinteractionsofallinstitutionalsectors oftheeconomy,whileGuevaraCastañeda(2015)analysesaclosedeconomyandEscobar (2016)aggregateshouseholdsandfinancialandnon-financialcorporationsintoasingle privatesector.Second,itisanempiricalandcontinuous-timemodelwithahighlevelof disaggregationandasignificantnumberofrealandfinancialtransactions,whileaforementionedstudiespresentratherstylisedmodelswithasmallnumberofvariablesandin discretetime.Thirdly,thecalibrationofthemodel,theconstructionofthematricesandthe analysisoftheresultsarecarriedoutonthebasisofobserveddata,whileintheprevious
1FormoredetailsregardingtheSFCliterature,seeGodleyandLavoie(2006)andCaverzasiandGodin(2015); NikiforosandZezza(2017)forrecentliteraturereviews.
contributionssuchexercisesarenotcarriedoutornotpresented.
3. Model
ThemodelderivesfromthebenchmarkSFCmodelofasmallopeneconomydeveloped byYilmazandGodin(2020),adaptedforthecaseofColombiavia(amongothers)the inclusionofFDIflowsandpublicbondsinforeigncurrency,adaptationoftheexportsfunction torepresentfossilfuelexportsandtheirconnectiontoroyaltiesgeneration,amoredetailed representationoftaxationandpricingandrationinginforeignexchangemarkets.
Recently,SFCmodelinghasbeenutilizedtoexaminetheimpactofclimatechangeonglobal macro-financialdevelopmentsandmacroeconomicstability,(Dafermosetal.,2017,2018; Bovarietal.,2018),aswellastheeconomicimplicationsofrapidenergytransitionpaths (Jacquesetal.,2023).Ouruniqueapproachcombinesamulti-sectorproductionstructure withtheSFCframeworkandthecontinuous-timedynamic,macrofoundationsapproach oftheBielefeldschoolofmacroeconomics(ChiarellaandFlaschel,2006;Flaschel,2008; Flascheletal.,2008;Charpeetal.,2011;Chiarellaetal.,2012,2013).Wespecificallyfocusondynamicdisequilibriumprocessesandemphasizethesignificanceofcapitalinflowsforsmall openeconomieslikeColombia(Frankel,2010;BorioandDisyatat,2015).Furthermore,we analyzehowtheseinflowsaffectthedomesticeconomythroughchannelslikeinternational trade(Blecker,2016),liquidity(Kaminskyetal.,1997),andbalancesheeteffects(Bernanke andGertler,1995).
Themodel’sstock-flowstructureiswell-suitedforexaminingexternalimbalancesanda country’ssusceptibilitytofinancialcrises,aswellasthemacro-environmentalchannelsthat canpropagatetheinitiallossinfossilfuelexports.Thisisduetothefactthatthemodel notonlymonitorsthecurrentaccountimbalancesandthefirst-roundnegativeeffectsof aglobaltransitiononthetradebalance,butalsothegrossexposuretoexternalfinancial risks,whichistypicallyoverlookedwhenevaluatingexternalimbalances(BorioandDisyatat, 2011,2015).Theendogenousinternationalinvestmentpositionandthedynamicsofavailable foreignexchangereservesexplicitlymonitorthelatter.Additionally,themodel’sstructure facilitatesathoroughinvestigationofhowsuchfinancialrisksaredistributedwithinacountry throughtheaccumulationofexternaldebtinthebalancesheetsofallinstitutionalsectors. Themodelalsopermitsdetailedfeedbackeffectssuchaspriceeffectsthroughtheevolution ofinterestratesandquantityeffectssuchasthequantityrationingintheforeignexchange marketandtheoverallindebtednessoftheColombianeconomy.
3.1. Structure
Table1showsthetransaction-flowmatrix(TFM)thatcharacterizestheColombianmodel. Eachcolumnrepresentsaninstitutionalagentandeachrowrepresentsatransaction.There aresixinstitutionalagents(onepercolumn):non-financialcorporations(NFC),households, financialcorporations(FC),thecentralbank(CB),thegovernmentandtherestoftheworld. Threeofthem(NFC,FCandCB)aredivided,foreaseofpresentation,intotwocolumns
representingthecurrentandcapitalaccountsofthesesectors.
Thetransactions(i.e.therows)oftheTFMaredividedintothreemainblocks,separated bysolidlines.ThefirstpartoftheTFMpresentsthenon-financialtransactions,forwhich apositivesign(+)representsreceiptsandanegativesign(-)representsoutflows.The secondpartoftheTFMshowstheaccumulationofnon-financialassets,i.e.capitaland inventories,representedasmemoitem(hencewithinsquarebrackets).Thethirdpartof theTFMrepresentstheflowoffinancialfundsforeachinstitutionalagent.Apositivesign(+) indicatinganaccumulationofliabilities(i.e.asourceoffunding)andanegativesign(-) indicatinganaccumulationofassets(i.e.auseoffunds).
AsintheSystemofNationalAccounts(SNA),thesequenceofnon-financialtransactionare groupedintodifferentaccounts,delimitedbydottedlines.Thefirstaccountisthegoodsand servicesone,containingthemaincomponentsofdemandandproductionofgoodsand services.Itisfollowedbytheincomegeneration(consistingmostlywagesandprofits),and primaryincomedistribution(interestsanddividendspayments)accounts.Thelastaccount isthesecondaryincomedistributionone(taxes,socialandothertypesoftransfers).The sumofallthesetransactionbyinstitutionalagentleadstothenetlending/savingposition, representedonlyforthethreeagentsforwhichthereisanexplicitdistinctionbetweenthe currentandcapitalaccounts(representedbytheretainedearningsline).Forthethreeother agents(households,governmentandrestoftheworld),thesavings/borrowingneedsare implicit.
TheTFMhighlightsthetightaccountingstructurebyshowingthatontheonehandeach linessumsuptozero,henceensuringthateachexpenditurebyaninstitutionalagentis matchedbyanincomeforaninstitutionalagent(possiblythesame).Notethattheonly transactionwherethisruleisnotrespectedreferstothememoitemsofnon-financialassets accumulation(capitalandinventories).Ontheotherhand,thesumofeachcolumn,includingthecurrentandcapitalones,isalsoequaltozero,representingthebudgetconstraints ofinstitutionalagents.
Table2displaysthebalancesheetofeachinstitutionalsectorresultingfromtheaccumulationoffinancialandnon-financialflowsshowninthebottompartoftheTFM.Thefirstpartof thebalancesheetshowsthestockofcapitalandinventories,constitutingthestockofnonfinancialassetsandresultingfrominvestmentdecisions,precautionaryreasonsandunsold merchandise.Thesecondpartofthebalancesheetpresentsthestocksoffinancialassets whereeachasset(+)isaliability(-)forsomeoneelse,thesumofthefinancialassetsforall thesectorsishenceequaltozero.Finally,thewealthornetworthisequaltothesumofnet financialandnon-financialassetsforeachagent.
3.2. ProductionandAggregateDemand
Production3 decisionisbasedonexpectedsalesand(dis)investmentininventories.Expectedsalesfollowactualdemandandincludesatrendgrowthtermthatisdetermined bycapitalaccumulation.Investmentininventoriesaimstoattainaspecificinventoriesto
expectedsalesratio,takingintoconsiderationthecurrentlevelofinventories.Inventories (dis)accumulatetoabsorbthedisequilibriumbetweendemandandsupplyofgoods.
Totalsupplyiscomposedofdomesticproductionandimports.Importdemandisgivenby time-varyingpropensitiestoimportconsumption,intermediateandcapitalgoods.Import propensitiesdependontherealexchangerate,theimporttaxrate,andthegapbetween domesticandforeignproductivity,followingArmington’sspecification.
Aggregatedemandisdefinedasthesumofintermediateconsumption,finalconsumption, investmentandexports.
• DemandforintermediateconsumptioncomesfromtheNFCs,FCsandthegovernment. ItisafractionoftotalproductioninthecaseofNFCs,whileitdependsonthelevelof employmentinthesectorforFCsandthegovernment.
Table2:BalanceSheetoftheColombianEconomy.
• Fourinstitutionalsectorsinvest:NFCsinvestmentdependsonanautonomousterm andtheprofitrate.Householdinvestmentisaconstantshareofdisposableincome. Government’sinvestmentisaconstantfractionofitscapitalstockandFCsinvestment isaconstantfractionofitslevelofproduction.
• HouseholdsandthegovernmentsconsumethegoodsandservicesproducedbyNFCs. Householdconsumptiondependsontime-varyingpropensitiestoconsumeoutof disposableincomeandwealth.Theconsumptionofmarketgoodsandservicesbythe governmentisaconstantfractionoftheGDP.
• Exportsaredividedintotwocomponents.Thefirsttermreferstooilandcoalexports whichfollowanexogenouspath.Thesecondtermcorrespondstonon-oilandcoal exportswhichisafractionoftradingpartners’GDP.Asforimports,exportpropensity followsArmingtonspecificationanddependsontherealexchangerate(i.e.,price competitiveness)andthegapbetweendomesticandforeignproductivity(i.e.,nonpricecompetitiveness).
FCsproduceondemandtwotypesoffinancialservices:insuranceservices,andcommissions4.InsuranceservicesarepaidbyhouseholdsandNFCsasafractionoftheircapital stock,whilecommissionsareafractionoftheirstockofdomesticcurrencyloans.The demandforinsuranceservicesandcommissionsistreatedasfinalconsumptioninthecase ofhouseholdsandintermediateconsumptioninthecaseofNFCs.
Finally,thegovernmentconductsnon-marketproductionwhichreferstothegoodsand services,suchaseducationandhealth,providedbythepublicsectortohouseholdsfreeof chargeoratapricewellbelowtheirmarketvalue.WefollowtheSNAapproachandcompute thevalueofnon-marketproductionatthecostofproductionwhichisequaltothesumof wagesandemployers’socialcontributions,intermediateconsumptionanddepreciationof publiccapitalstock.Accordingly,thegovernmentconsumptionofnon-marketgoodsand
4IntheNationalaccount,athirdtypeoffinancialserviceisincluded:FinancialIntimidationServicesIndirectly Measured(FISIM).Itrepresentstheserviceprovidedbybanksbyeithercollectingdepositsorbylendingtoother agentsintheeconomy.InthenationalaccountstheseFISIMarecomputed,followingtheloanablefundtheory, byconsideringthespreadsbetweenlendingrates(ordepositrates)andareferencerate,typicallythepolicyrate ortheinterbankrate.Giventheendogenousnatureofmoneycreation(seeMcLeayetal.,2014,forexample),we decidedtoabstractfromthisandhaveincludedinterestpaymentsinfullinthesecondaryincomedistributionand didnotconsidertheproductionofFISIMinourmodel.Asaconsequencethevalueaddedofthefinancialsectorand ofthetotaleconomyisslightlylowerthaninreality.NotethatourtreatmentofFISIMdoesnotchangethebudget constraintsbysector.
servicesisequaltothevalueofnon-marketproduction,which,althoughaccountedforin GDP,doesnotaffectthenetlending/borrowingpositionbecauseitispaidandreceivedby thegovernment.
3.3. Prices
Themodeldistinguishesbetweenproductionpricesandconsumerprices.Thefirstrefersto theproductionpricewhichismodelledasamark-upoverhistoricalunitarycost(Godleyand Lavoie,2006).Thismark-upreactstothegapbetweentheactualandtargetinventory-tooutputratioinordertogeneratedemand-driveninflationandeliminatethedisequilibrium ingoodsmarkets.Inturn,thehistoricalunitarycostgraduallyadjuststotheactualunit costofproduction,whichconsistsofwagesandemployers’socialcontribution,intermediate consumptionandtaxesonproductionpaidbytheNFCs.
Therearethreedomesticconsumerprices,oneforeachcomponentofdemand(final consumption,intermediateconsumption,andinvestment),toreflectthedifferentimport contentofeachelement.Thesepricesarecalculatedasaweightedindexofimportcosts (importpriceplusanyimporttaxes)andthedomesticproductioncosts(productionprice), ontowhichVATandothernetproducttaxesareaddedwhenapplicable.Finally,thereare twoexogenousexportprices:oneforfossilfuelsandonefortheothertypesofexports.
3.4. Non-FinancialCorporations
GrossprofitsinNFCsaregivenbythedifferencebetweenaggregatedemandandintermediateconsumption,wagesandemployers’socialcontributions,distributionofmixed-income andgrossoperatingsurplus,netinterestpayments,royalties,andtaxesonimports,onvalueadded,onproductsandonproduction.Then,oncecorporateincometaxispaid,aconstant fractionofnetprofitsissavedasretainedearningsforinternalfinancingofinvestmentand theremainingisdistributedasdividendstohouseholds,thegovernmentandtherestofthe world.
NFCs’financingneedsaregivenbythesumofthenominalvalueofinvestmentandaccumulationofcashandcurrentaccountdepositsindomesticandforeigncurrency,after deductingretainedearnings.Thesefinancingneedsarecoveredbyborrowingdomestic andforeigncurrencyloansfromFCs,foreigncurrencyloansdirectlyfrombanksabroad,and FDI.5
3.5. FinancialCorporations
GrossprofitsinFCsresultfromthedifferencebetweenrevenuesandoperatingoutflows.On theonehand,FCsproducefinancialservicesandreceiveinterestonhouseholdandNFCs loans,publicdebtholdingsandFXreserves.Ontheotherhand,FCspayforintermediate
5Moredetailsonhowthesearetreatedinsection3.9.
consumption,wages,socialtransfers,employers’socialcontributions,taxesonproduction, andinterestsondeposits,liquidityadvances,andFXloans.Then,oncecorporateincome taxispaid,partofthenetprofitsaresavedasretainedearningstocomplywithcapital adequacyregulationswhiletheremainderisdistributedasdividendstohouseholdsand therestoftheworld.
Regardingtheflowoffunds,thevariationinFCs’assetsisgivenbyloanstohouseholds indomesticcurrency(consumptioncreditandmortgages),loanstoNFCsindomestic andforeigncurrency,purchaseofgovernmentbondsindomesticcurrency,accumulation ofFXreserves,andaccumulationofdomesticcurrencyreservesatthecentralbank.In turn,thevariationinFCs’liabilitiesisgivenbyFXloansborrowedfromabroad,FDItothe financialsector,depositsaccumulatedbyhouseholds,NFCsandthegovernment,andthe accumulationoftechnicalinsurancereservesbyhouseholds.Finally,FCsborrowliquidity advancesfromthecentralbankwhentheyhavepositivefinancingneeds.Onthecontrary, ifFCshaveexcessliquidity,theyaccumulateinterest-bearingdeposits(excessreserves)at thecentralbank.
3.6. CentralBank
TheassetssideofthecentralbankbalancesheetconsistsofliquidityadvancestoFCsand FXreserves,whiletheliabilitysideiscomposedofdomesticcurrencyreservesofFCsand governmentdeposits.Accordingly,thecentralbankreceivesinterestonFXreservesand liquidityadvances,transferringtheprofitstothegovernment.Lastbutnotleast,thecentral bankfollowsasimplepureinflation-targetingTaylorruletosteerthepolicyrate.
3.7. Households
Households’disposableincomeiscomposedofwages,mixed-income,grossoperating surplusredistributedbytheNFCs,dividends,remittances,interestondeposits,andsocial transfers,lessoftaxesonincome,interestpaymentsonloansandnetsocialcontributions paid.Householdwealthismadeupofcapitalstock,cashanddeposits,andtechnical insurancereserves.
Wemodelbehaviouralrulesforhousehold’sdecisionsontheirassetsholdingandliabilityaccumulation.First,householdstakeoutconsumerandmortgageloanswithFCs.Theformer isafractionofdisposableincomeaffectedbyinterestratesandeconomicgrowth,while thelatterisafractionofhousinginvestment.Second,householdsaccumulatetechnical insurancereservesasafractionofwageincome,whichareusedbyFCsasasourceof liabilities.Finally,householdsaccumulateallremainingsavingsintheformofcashand deposits.
3.8. Government
Thegovernmentblockismadeupofrevenues,expendituresandpublicdebtdynamics.Fiscalrevenueisdividedintotaxandnon-taxrevenue.Taxrevenuesincludestaxesonimports, onvalueadded,onproduction,onincome(wageandNFCandFCprofits),andothertaxeson products.Non-taxrevenuescompriseroyalties(relatedtofossilfuelexports),dividendspaid byNFCs(representingpublicparticipationinprivatecompanies),grossoperatingsurplus redistributedbyNFCs(representingthegrossoperatingsurplusgeneratedbystate-owned enterprisesconsideredasprivatecompaniesinSNA),workers’socialcontributionspaid byhouseholds,profitstransferredbythecentralbank,andinterestondomesticcurrency depositspaidbyFCs.
Wedistinguishbetweenprimaryandnon-primaryexpendituresofthegovernment.Thefirst includeswages,employers’socialcontributions,intermediateconsumption,finalconsumptionofmarketgoodsandservices,publicinvestment,andsocialtransferstohouseholds.The secondcomprisesinterestpaymentsondomesticandforeigncurrency(FX)debttoFCsand therestoftheworld.
Thegovernmentdeficitisequaltothedifferencebetweenfiscalexpendituresandrevenues.
Thevariationinpublicdebtisequaltothefiscaldeficitplusthegovernment’saccumulation ofcashanddepositsindomesticandforeigncurrency.Then,publicdebtissuanceisdivided intodomesticcurrencybonds,FXbondsandFXloans.
Theinterestrateondomesticcurrencydebtdependsonthemonetarypolicyrateanda publicdebtriskpremium.Similarly,theinterestrateonFXdebtdependsonaninternational referencerate,thepublicdebtriskpremiumandthecountryriskpremium.
3.9. ExternalSector
WedistinguishcurrentaccountdynamicsfromfinancialaccountonesintheBalanceof Payments.Inthecurrentaccount,inflowsareequaltothesumofexports,remittances, modelledasaconstantshareofforeignGDP,andinterestpaidtothecentralbankandFCs onFXreserveholdings.Ontheotherhand,currentaccountoutflowsareequaltothesum ofimports,dividendspaidbyNFCsandFCstoforeigninvestors,interestpaidbyNFCs,FCs andthegovernmenttoforeignbanksonFXloans,andinterestpaidbythegovernmenton FXbonds.
Concerningthefinancialaccount,inflowsaregivenbyFDItoNFCsandFCs,FXloansborrowedbyNFCs,FCsandthegovernment,andFXbondsissuedbythegovernment.ForFDIin NFCs,wedistinguishbetweengreenfieldFDI(i.e.,addingtogrossfixedcapitalaccumulation) andnon-greenfieldFDI(i.e.,onlyasasourceoffunding),whileweconsiderallFDIinFCsto benon-greenfield.Inturn,financialaccountoutflowsaregivenbytheaccumulationofFX reservesbythecentralbankandFCsandtheaccumulationofFXdepositsbyNFCs,FCs andthegovernment.Lastly,thenominalexchangeratedynamicsdependsonthedemand andsupplyofforeigncurrency.Inthissense,acurrencydepreciationreflectsapositive excessdemandforforeigncurrency,whileacurrencyappreciationindicatesanexcess supply.
Source Data-set
DepartamentoAdministrativoNacionaldeEstadística (DANE)
BancodelaRepública
Superintendencia FinancieradeColombia
MinisteriodeHacienday CréditoPúblico
IntegratedEconomicAccounts(IEA),MacroeconomicAggregates,InternationalTrade,andLabourMarketStatistics
FlowofFunds(FoF),FinancialAccount(FA),BalanceofPayments(BoP),InternationalInvestmentPosition(IIP),Central Bank’sBalanceSheet,ExchangeRates,PricesandInterest RatesStatistics
HouseholdLoans,Non-FinancialCorporationsLoans,and AggregateInterestPaymentsStatistics
PublicDebt,FiscalBalance,andRoyaltiesStatistics
Table3:MaindatasetsusedtodeveloptheSFCempiricalmodel
4. Calibrationandscenarios
4.1. Datasources
DevelopinganempiricalSFCmodelisdata-intensiveandrequiresintegratingmultipledata sourcesandcomplyingwithaccountingconsistencyprinciples.Table3presentsthemain data-setsusedalongwiththeirrespectivesources.AppendixAdescribesthedifferent challengeswehadtoaddresswhenbuildingtheempiricalTFMandBSofthemodel.
TheIntegratedEconomicAccounts(IEA)oftheSNAprovideimportantinformationforconstructingtherealsideoftheTFMregardingtoproduction,incomegeneration,primary incomedistributionandsecondaryincomedistributionaccounts.AlsofollowingtheSNA guidelines,theFlowofFunds(FoF)andtheFinancialAccount(FA)provideinformationon theflowsandstocksoffinancialassetsandliabilitiesforthedifferentinstitutionalsectors, respectively,whichisakeyinputfortheconstructionofthefinancialsideoftheTFMandthe balancesheet.
AlthoughusingadifferentmethodologyfromtheSNA,theBalanceofPayments(BoP)also containsinformationonrealandfinancialflowsbetweenresidentsandnon-residentswhile InternationalInvestmentPosition(IIP)presentsthestockoffinancialassetsandliabilities ofresidentsandnon-residents.Similarly,the SuperintendenciaFinancieradeColombia (Colombia’sfinancialregulator)compilesdataonloans,depositsandinterestpayments betweenthebankingsectorandtheprivatesector(i.e.,HouseholdsandNFCs).Finally,the MinistryofFinanceandPublicCreditprovidesdetailedinformationonpublicdebtandthe fiscalbalanceofthegeneralgovernment.
4.2. Calibration
ThecalibrationprocessoftheempiricalSFCmodelconsistsofdeterminingthevaluesof theinitialconditionsandparametersinthesystemofequations.Thisisdoneinsuchaway thatthemodelsimulationsreproduce,onaverage,thedynamicsofthemainmacroeco-
nomicvariablesoftheColombianeconomyinawaythatisconsistentwiththeregularities observedinthedata.SeeAppendixEformoredetailsontheparametersandinitialvalues.
Duetothedynamicnatureofthemodel,thevariablesthatrequireinitialvaluestocarryout thesimulationsarethestocksoffinancialandnon-financialassetsandotherstatevariables whosebehaviourisgivenbyadifferentialequation(e.g.,priceindexes,wages,theexchange rate).Theseinitialvaluesweredeterminedbytaking2019asthereferenceyear,basedon theinformationpresentedinsubsection4.1andcontainedintheTFMandtheBS.
Asfortheparametersdrivingthesystemofequations,thesewerealsocalculatedfrom thedatasourcespresentedinsubsection4.1takingasareferencetheperiod2014-2019. Whileasignificantnumberofparameterswerecalibratedassimpleaveragesinthecaseof variablesthatgrowataconstantrate(e.g.,labourproductivity)orthatarearatiobetween twoknownvariables(e.g.,taxrates),otherswerecalculatedconsideringreferencevalues intheliteratureandinsomecasesbymakinguseofanalgorithmforoptimisingnonlinearcontinuous-timedynamicsystemsknownasCMA-ES6.Finally,thevaluesofsome parameterswerealsodeterminedtobeconsistentwiththeassumptionsmadetobuildthe Baselinescenario.
Then,oncethesystemofequationswiththeirrespectiveparametersandinitialconditions arecalibrated,thenumericalsimulationsofthedifferentscenarioscanbecarriedoutin thestatisticalsoftwareRforagiventimehorizon.Forthispurpose,anumericalsolution methodknownasRunge-Kuttaoforder4(RK4)isused.AlthoughRKalgorithmsdonot provideanalyticalsolutionsduetothelargenumberofvariablesandthenon-linearityof thesystem,fourth-orderRKgenerateaccurateresultsinacomputationallyefficientway. Forinterestedreaders,theRcodesareavailablefromtheauthorsuponrequest.
4.3. Scenarios
Weassumepopulationtogrowataconstantrateof1%,domesticandworldproductivityto growataconstantrateof2%(henceassumingawayanycatching-up),worldGDPinreal termstogrowatconstantrateof3%andworldinflationissetat3%.Weassumefurtherthat FDIinflowsasashareofNFC’investmentslowdownfromtheirpeakvaluein2019,fallingfrom 38%ofinvestment(i.e.4.5%ofGDP)to26%(3%ofGDP)by2050.Wealsoassumeareversal inobservedtrendsofpropensitytoexportnon-fossilfuelgoodsandservicesandrevertit toitsaverageoverthelastfifteenyearsbyslowlyincreasingthelineartermintheexport propensityequationby20%between2019and20507 .
WeconstructthreescenariosforoilfossilfuelsinColombia,basedonvariousexistingscenariosforpetrolandcoalexports8.(seeappendixB).
Apartfromanypolicyresponses,whichwewilldescribeinsection5,wethushavethree scenarios:
6CovarianceMatrixAdaptation-EvolutionaryStrategy,seeHansenandAuger(2011);AugerandHansen(2012)
7Seeequations207and208inappendixfortheexactspecificationofthetimevaryingparameters.
8q
• ABaselinescenarioencompassingallpreviousassumptionsandoftheneutralscenario regardingfossilfuelexports(i.e.constantfossilfuelexportsfrom2023).Thisscenario isverysimilartothebaselinescenariooftheFinanceministry’smedium-termfiscal frameworkof2022.
• AConservativescenarioencompassingallpreviousassumptionsandoftheConservativescenarioregardingfossilfuelexports(i.e.constantdecreaseof3%offossilfuel exportsfrom2023).
• AGlobalTransitionscenarioencompassingallpreviousassumptionsandoftheConservativescenarioregardingfossilfuelexports(i.e.constantdecreaseof8.5%offossil fuelexportsfrom2023).
Werunthemodelfrom2019to2050andpresenttheresultsstartingfrom2023sincethe modelpresentssomevolatilityduetotheinitialpointcalibration.Allscenariosstartin2023 exceptforthepolicyresponsewhichstartin2024.
4.4. Baselinescenario-mediumtermoutcomes
BeforemovingtounderstandthemacroeconomicconsequencesoftheConservativeand GlobalTransitionscenarios,wewilldescribeourBaselinescenarioandcompareitwiththe baselinescenarioofMinisteriodeHaciendayCréditoPúblico(2022)fortheperiod2023to 2033.Figure1showstheprojectionsforselectedvariablesforthetwoscenarios:thispaper Baseline(blacksolidline)andMinisteriodeHaciendayCréditoPúblico(2022)baseline(red dashedline).Evidently,thetwoscenariosseemtoconcuronmostvariables.Ourbaseline foreseesslightlyslowerrealGDPgrowth(panela),similarbutmorestableunemployment rate(panelb),slightlyhighertradedeficit(panelc),similarcurrentaccountdeficit(paneld), similarnominaldepreciationrate(panele),slightlyhigherinflation(panelf),slightlyhigher foreignreserves(panelg),similarFDIgrowthrates(panelh),slightlyhigherfiscaldeficit (paneli),slightlyhigherpublicdebt(panelj)andsimilarinterestratesondomestic(panel k)andforeign(panell)publicdebt.
ThemainreasonbehindthedifferencesisrelatedtoahigherlevelofimportsinourBaseline scenario,leadingtolowergrowthratesandhighertradedeficit,leadingtoallvariables expressedasshareofGDPtobehigherduetoasmallerdenominator.
Asarobustnesstest,weusethetwoexternalscenariosconsideredinMinisteriodeHacienda yCréditoPúblico(2022)andcomparethemwithourresults.“FDI”assumesahigherlevelsof FDIinflowsenteringtheeconomy,while“EXP”assumesanincreaseinexportpropensitiesdue toastrongerintegrationinglobalvaluechains,(seeBox4.3startingonpage132ofMinisterio deHaciendayCréditoPúblico,2022).Figure2,panelaandbshowthetwoscenarios.
Panelcandddisplaythedynamicsofgrowthrateandnominaldepreciationratesfrom ourmodelandMinisteriodeHaciendayCréditoPúblico(2022).TheeffectsintermsofGDP growtharelowerfortheexportscenariosandnullforFDIinoursimulations,contraryto MinisteriodeHaciendayCréditoPúblico(2022).Thisisbecauseinourmodelonly48%of FDIinvestmentleadstocapitalaccumulation,i.e.aregreenfield,andonlyhasademand
Figure1:ComparisonbetweenBaselinescenario(blacksolidline)andthebaselinescenario (reddashedline)ofMinisteriodeHaciendayCréditoPúblico(2022)forselectedvariables. Source:MinisteriodeHaciendayCréditoPúblico(2022)andauhors’computations.
effect,i.e.doesnotnecessarilyleadtohigherproduction.Ontheotherhand,theincrease inexportsleadstoafallinthedepreciationrate(paneld)inourmodel,hencereducing thedropinimportsobservedintheBaselinescenarioandcausinglowergrowthratesin realterms.Thishighlightstheimportanceofhavingafullyintegratedmodelwithfinancial feedbackloops.
4.5. Baselinescenario-long-termoutcomes
Figure3presentsthelong-termoutcomesofourBaselinescenariofrom2023to2050for selectedvariables.OnecanseethattherealGDPgrowthratesettlesat2.8%(panela).It isimportanttonotethatourBaselinescenarioencompassesaprofoundstructuralchange inducedbyfixedfossilfuelexports,henceleadingtoareductionofitsshareintotalexports (panelb).Asaresult,theeconomyexperiencesastrongdepreciationofitscurrency, bothinnominalandrealterms(panelc).ImportsthusdecreaseasashareofGDPwhile
Figure2:ResultsofFDIandEXPscenarios:solidblackisourBaseline,reddashedistheFDI scenario,greendottedistheEXPscenario,bluedash-dottedisMinisteriodeHacienday CréditoPúblico(2022)baseline,cyanlong-dashedistheirFDI,andpinkdash-dashedistheir EXP.Source:MinisteriodeHaciendayCréditoPúblico(2022)andauthors’computations.
exportsincrease.9 Notethatbecausefossilfuelexportsremainconstantinrealterms,the aggregategrowthrateofexportsincreaseslessfastthatimportsfall.Asaconsequenceboth consumptionandinvestmentseeadecreaseoftheirshareinrealGDP(notshown).
Unemployment(panele)andinflation(panelf)arerelativelystable.Thefiscaldeficit(panel g)decreasesandstabilizesataround2.5%ofGDP.NFCtotaldebtdecreasestostabilizeat around27%ofGDPwhilehouseholds’debtpursuetheirhistoricalgrowthtoreachalmost32% ofGDP(panelh).Ontheotherhand,publicdebt,afteraslightincrease,startsdecreasing andreachesaround50%ofGDPin2050,whichisinlinewhitthetargetsetbythegovernment (seesection2).
PanelishowsthedifferentcomponentsoftheBalanceofPayments.Asaconsequenceof thepesodepreciation,thetradedeficitfallswhiletransfers(mostlyremittances)increase. InterestspaymentstotherestoftheworldremainrelativelyconstantasashareofGDPbecausewhiledepreciationincreasesthedomesticcurrencyvalueofFXdebt,thedeleveraging ofbothfirmsandgovernmentcompensatesforthisnegativeeffect.Finallythereduction infinancialinflows,partlyduetotheexogenousreductioninFDIflowsandpartlyduetothe generaldeleveraging,leadstoalowersupplyofforeignexchangeandasaconsequencethe economyexperiencesaconstantexcessdemandinforeignexchangemarkets,maintaining thedepreciationoftheColombianpesoovertheentiresimulation.Moreover,FXreserves declineasashareofGDP(panelj),leadingtoanincreaseinthecountryriskpremium(panel k).
9AlthoughthisoutcomeisstandardwithArmingtonspecificationoftradeshares,itshouldbemitigatedby questionsregardingthecapacityofthecountryexperiencingstrongdepreciationtoexpanditsexportproduction andsubstituteforthegoodsthatareimported.
Figure3:Long-termpropertiesoftheBaselinescenarioforselectedvariables.Source: authors’computations.
5. Results
Wenextmoveontoanalysetheoutcomeofourtwoalternativeexportscenarioswithrespect toourbaseline,beforeconsideringthepolicyresponsesthatcouldbeimplemented.
Figure4displaysthesimulationresultsunderthethreedifferentscenarioswedescribedin detailinSection4.3(Baseline,ConservativeandGlobalTransition-GTfromnowon)where fossilfuelexportsstartdecreasingin2024.Bothscenariosexhibitsimilardynamicswith largermagnitudesfortheGTscenario.Whilethelong-termconsequencesintermsofreal growthseemtoconvergeforallscenarios(panela),thisisnotthecaseformostofthe othervariables.Furthermore,themodeldisplaystheconsequencesofanon-equilibrium
5.1. Lossoffossilfuelexportswithnoexportdiversificationexchangeratedetermination.sinceitisbasedonanexcessdemandapproach,10 the exchangeratedoesnotconvergetoaspecificvalue,whichimpliesthatimportandexport propensitieswillalsonotconvergetospecificvalues.Thedifferentscenarioshenceleavethe Colombianeconomyinverydifferentshapes,dependingonhowmuchthepesodepreciated ornot.
Astheexportsoffossilfuelstartfallinginrealterms,thisaddspressureonthetradebalance (panelb),onthebalanceofpayments,andontheexchangerate(panelc).Thetradebalancedeteriorationexchangeratedepreciationisveryfast(lastthan6months)andthetrade balancequicklystartsimprovingduetotherealdepreciationimpactingthepropensitiesto importandexport.
Thenominaldepreciationofpesoleadstoinflationarypressuresforproductionprices(panel d)andconsumerprices(panele)duetoincreasesinthedomesticcurrencypriceofimportedgoods.Thisleadstoareductionbothinconsumption(viathereductioninmarginal propensitiestoconsume,panelf)andininvestment(duetothereductionofrealprofitrates, panelg).Thefallinconsumption,investmentandexportsisnotcompensatedfullybythefall inimports,leadingtoareductioninrealgrowthandanincreaseinunemployment(panel h).
Theincreaseinunemploymentleadstoanincreaseinsocialtransferswhileinflationary pressurespushuppublicexpenditures(bothmarketandnon-market)andinvestment.On therevenueside,royaltiesanddividendsdeclinewhiletaxesincrease,ensuringaslight increaseintotalrevenues.11 Overall,theincreaseinexpendituresislargerthantheincrease inrevenues,leadingtoaworseningofthefiscaldeficit(paneli)andanincreaseinpublic debt(panelj),furtheramplifyingthesedynamicsviainterestspayments.
Thebalanceofpaymentsseesanimprovementofthecurrentaccountinthelongrun(panel k),astheincreaseintransfersduetothedepreciationofthepesomorethancompensates fortheworseningoftheinterestpaymentsabroad.NotethatintheGTscenario,thecurrent accountremainsflatforawhile,indicatingthatremittancesbarelycompensateforthe increaseininterestpayments.Ontheotherhand,thefinancialaccountsurplus(panel l)fallsduetotwodrivingforcesalsoobservedintheBaseline:thereductioninFDIflows, anddeleveragingoffirmsreducingtheirdemandforFXloans(panelm).Thetwoexport scenarioshoweverexacerbatethesedynamicsviatheinitialreductionininvestmentand viastrongerdepreciation.Wethushavethreedynamicsathand:aconstantreductionin fossilfuelexports,aglobalreductioninfinancialinflowsandanimprovementofthecurrent account.Thefirsttwodynamicstendstoincreasethedepreciationofthepesowhilethe lastoneisnotsufficienttoovercomethefirsttwoones,atleastinthebeginningofthe simulations.Thesetensionsonthepesoslowlydisappearasthetradebalanceimproves andasremittancesplayanincreasingroleincoveringforimports(from13%intheBaselineto 16%intheGTscenarioby2050).Allofthesedynamicsleadtoareductioninforeignreserves accumulation(paneln)henceleadingtoanworseningofthecountryrisk(panelo)and increaseininterestpremiums(panelp)alongwithhigherrationingoninternationalfinancial
10SeeYilmazandGodin(2020)foralongdescriptionofthedisequilibriumapproachproposedinthismodel.
11Theseresultscouldbemodifiediftakingintoconsiderationthelatesttaxreforminwhichtheminingandoil sectorwillpaymoretaxes.Theconsequencewillbeastronglossintotalrevenueswhichwouldfurtheraggravate thefiscaldeficit.
Figure4:Baseline(blacksolidline),Conservative(reddashed)andGlobalTransition(green dotted)scenariosforselectedvariables.Source:authors’computations.
flows.
Thereversalofdynamicsisduetotheincomeeffectofremittanceleadingtoincreasein consumptionontheonehandandtoinvestmentpickingupduetopublicandhouseholds’ investment.Oncebothconsumptionandinvestmentrecover,unemploymentstartdecreasingfurtherfuelingtherecovery.
Asobservedinthegraph,therearelong-termdifferencesforeachscenario.Strongerreal depreciation(panelq)leadstomorestructuralchangeviaimportreductionandexport reduction.12 Furthermore,prolongedandmoreacutedeficitsleadtomoredebtaccumulation.Allinall,itiseasytoseethattheGTleadstoamoresevererecessionandtoamore fragileeconomyeitherfromapublicfinanceorfromaninternationalfinanceperspective. AninterestingindicatortolookatisthepercapitaincomeinUSD13 (panelr).Itreflects thefactthateveniftheeconomyisgrowinginrealtermsitdoesnotcompensatewith realdepreciationindicatingthatallinternationalconsumptiongoodsstartbecomingvery expensive,henceleadingtolowerstandardsofliving.IntheGTscenario,ittakesmorethan 20yearstorecoverthelivingstandardof2023.
5.2. Currencycrisis
ItisworthnotingthattheGTscenariocanleadtoacurrencycrisisbytheendof2039ifthe assumption,madeinsection4.3,thatexportpropensityrevertstoitslastdecadeaverage isnottaken,seesection4.3.Figure5showsthesesimulations.Inthisscenario,thetrade balancedeteriorationissostrongthatitleadstoanacceleratingdepreciation(panelb). Thiscurrencycrisisleadstostronginflationarypressure(panelc),andtocountryrisk(panel d),foreigninterestrates(panele),andpublicdebt(panelf)exploding.
5.3. Exportsdiversification
Inordertorespondtothedramaticimpactsofaglobaltransitionandavoidapotential currencycrisis,weconsiderapolicyresponseintheformofanincreaseofthepropensity toexportviatheintegrationoftheColombianeconomyinGlobalValueChains(GVCs),see DelCarpioetal.(2022).Thisissimulatedviaagradualincreaseinthelineartermofthe propensitytoexportnonfossilfuels,startingfrom2024.Weassumethatthisoutcomeis achievedviapublicorprivateinvestments.14 Wethusbuildtwonewscenariosfromthe GTone: G.T.privateinvestment and G.T.publicinvestment representingeachinvestment possibility.
Figure6showstheresultsofthesetwoscenariosalongwiththeBaselineandtheGT.Both policiesleadtoareductionofthepressureexertedontheColombianpeso(panelc)viaan
12Thisresultshouldbemitigatedbyquestionsregardingwhetheronlypriceeffectleadtostructuralchange.It wouldbeinterestingtoconnecttheactualincreaseinexportandreductioninimporttocapitalaccumulationin relatedsectors.Thisisoutsidethescopeofthispaperasitwouldrequireamultisectorialmodel.
13Percapitaincomewascalculatedinthemodelwithrespecttothelabourforceratherthanthetotalpopulation.
14Wedonothaveanyestimationwhatwouldcostsuchinvestmentsowejustassumedanarbitrary0.5%increase inthegrowthrateofprivateorpubliccapitalaccumulation,viaanincreaseintheparametervalue,seetable6in appendix.
Figure5:CurrencyCrisisforselectedvariables.Source:authors’computations.
increaseinexports.Theoveralleffectinthetradebalance(panelb)ishowevernegligible, comparedtotheGTscenariobecausethegaininexportpropensityiscompensatedby alowerrealdepreciation(panelq).Itisinterestingtonotethattheincreaseinprivate investmenthasastrongermultipliereffectatfirst(panela).Theimmediateincreasein demandduetoextraexportsandextrainvestmentleadstohigherinflationbutthisisquickly compensatedbythereductioninimport-driveninflation(paneldande).Bothscenarios leadstoarestructuringofaggregatedemandtowardsexportsandinvestment,leadingto alowerconsumptionshareinGDP(panelfandg).Theextrademandleadstoasignificant reductioninunemployment.
Thisfallinunemploymentleadstolowersocialtransfersandthehighergrowthratesof theeconomyincreasestaxrevenues,hencereducingthefiscaldeficit(paneli).Note thatinthe G.T.publicinvestment scenario,thefiscaldeficitbarelychangesfromtheGT scenarioduetotheincreaseinpublicinvestmentcompensatingforlowersocialtransfers andhighertaxrevenues.Thisishowevertemporaryandquicklythedecreaseinsocial transfersandincreaseintaxrevenuesmorethancompensatetheextrainvestment.Lower fiscaldeficitsmechanicallyamountstolowerpublicdebt(panelj).Inthecaseofthe G.T. privateinvestment scenario,theextrainvestmentbyNFCleadstohigherNFCdebt(panel m).Theextradebtcomingfromfirmsleadstohigherinternationalfinancialflows(panel l)intheformofFDIandcross-borderlending,helpingtoreducefurtherthepressureon theColombianpeso.Notethatthecurrentaccount(panelk)startsrecoveringfasterin bothscenarios,notwithstandingtheextradebtincurredbyfirmsandthelowervalueof remittancesinpeso.
Theextrafinancialinflowsalongwithlowertradedeficitleadstomoreforeignreserves(panel n)tobeaccumulatedatfirstandthendecreasingataslowerpace,particularlyforthe
G.T.privateinvestment scenario.Asaconsequenceoftheseimprovedmacroeconomic condition,thecountryrisk(pnaelo)doesnotriseasmuchasintheGTscenario.The
Figure6:Baseline(blacksolidline),GT(reddashed),GTprivate(greendotted)andGTpublic (bluedash-dotted)scenariosforselectedvariables.Source:authors’computations.
premiumpaidonforeigninterests(panelp)ishencelowerandalmostconvergingto theBaselinevalues.Whiletheeconomyperformsbetterunderbothpubliclyorprivatelyfinancedexportdiversification,Colombiastillgoesthroughageneralimpoverishmentofits populationinUSDterms(panelr).Thescenariosallowtogain6yearsinrecoveringGDPper capitainUSD,butthecrisisstilllastsmorethan15years.
6. Discussionandconclusion
WedevelopedanempiricalSFCmodelfortheColombianeconomytoanalysethemedium tolong-termconsequencesofdifferentscenariosoffossilfuelexportsovertheperiod20232050.Onthebasisofthreescenarios(Baseline,ConservativeandGlobalTransition),we envisagethatthedeclineinoilandcoalexportswillhavedeepimpactsontherealand externalsectorsoftheColombianeconomyandwilldeteriorateitsfiscalandfinancial conditions.Precisely,thefeedbackbetweenthesedimensionsthatisfullycapturedinthe modeldoesnotruleoutthepossibilityofacrisiswhenevertheproductivesystemandpolicy responsesdonotadequatelyrespondtothechallengesandconstraintsimposedbyaglobal low-carbontransition.
ImportantresultstohighlightintheConservativeandGlobalTransitionscenariosincludea slowdownineconomicgrowthandaconsequentincreaseinunemploymentinthemedium term,ariseintheinflationrate,thefiscaldeficit,publicdebtlevelsandriskpremiumsoverthe longterm,andapermanentcurrencydepreciationleadingtoafallininternationalreserves. Itisworthnotingthatthepesodepreciationiscomingfromtwoconnectedbutdistinct dynamics:aworseningofthetradebalance(givenbythescenarios)andaworseningof thefinancialaccountsurplus(givenbythereductioninFDI,whichislikelytobeworseinthe caseofareductioninfossilfuelexports).
Colombiahenceneedstorespondtobothdynamicsbydiversifyingitsexportsandreducing itsimportdependency(notsimulated)butalsoensureaconstantstreamofinternational inflows.ThiscanbedonebymeansofindustrialisationstrategiesandattractingFDI,with Colombiahavingagoodrecordinthelatterrespect.
Ourresultsthushighlightthatwhilefinancehelpsinmitigatingthenegativeimpactsof theGlobalTransitioninthelongterm,themaindriverofarecoverylieintheindustrial policiesaimingtoreduceimportdependenciesandincreasetheexportbasewithmore sophisticatedandhighervalue-addedgoodsandservices.However,insertioninGlobal ValueChainsisnotaneasytask,ashighlightedi,DelCarpioetal.(2022),andwillrequire coordinatedactionsbetweenindustry,financeandthegovernment,whilethecurrentlack ofsomeproductiveandtechnologicalcapabilitiesmayhinderthecompetitivenessingreen orsunriseindustries(seeMealyandTeytelboym,2022).
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A. DatachallengesofbuildinganempiricalSFCmodel
RepresentingatheoreticalTFMwithactualdataisnotastraightforwardprocedure.Given theinterestoftheSFCapproachinsimultaneouslymodellingtherealandfinancialspheres oftheeconomy,theTFMbehindthesemodelstendstobequitedata-intensive.Whiledata requirementsmayvaryfromoneexercisetoanotherdependingontheassumptionsand simplificationsmadeandthescopeofthemodelintermsofthenumberofrealandfinancial flowstobeanalysed(i.e.,TFMentries),developinganempiricalTFMdependssubstantially onthedataavailability.
Apartfromtheabove,evenwheninformationisavailable,thewayinwhichsomemacroeconomicvariablesarepublishedandmeasuredgeneratesotherchallengeswhenconstructingtheempiricalTFM.Thesedifficultiesresultmainlyfromdiscrepanciesbetweendata sourcesandbetweencurrentandfinancialaccounts,fromtheinsufficientlevelofdisaggregationanddetailwithwhichsomerealandfinancialtransactionsbetweeninstitutional sectorsarepresented,fromtheexistenceofaccountingimputationsinthedata,andfrom conceptualdifferencesbetweenthetheoreticalmodelandthemethodologicalprocedures followedbyofficialstatisticalsources
Oneofthemostchallengingissuesistheharmonizationoftherealandfinancialsidesofthe TFM.Unlikethetheoreticalmodel,thelending/borrowingpositionofeachinstitutionalsector calculatedbytheIEAusingrealflowshasdiscrepancieswiththenetlending/borrowingpositioncalculatedbytheFoFusingfinancialflows.Thisisbecausethesourcesandcoverage ofinformation,thetreatmentofthedataandthemethodologicalproceduresarenotthe samebetweentheIEAandtheFoF.
Similarly,theSNAhasconceptualdifferenceswiththeBoPandtheIIPintermsofhowsome realtransactionsandfinancialflowsandstockswiththerestoftheworldaregroupedand classified.Thus,althoughtheBoPandtheIIPmayprovidemoredetailedandaccurate informationonthedynamicsoftheexternalsectoroftheeconomy,thisdoesnotalways haveanexactcounterpartintheSNA,whichmakesitdifficulttocompareandintegrate bothmethodologiesintheTFM.
DifficultiesalsoarisefromtherawdatapublishedbytheSNA,whichdonotalwaysallowfor theidentificationofsomerealandfinancialtransactionsthattakeplacebetweensectors. Firstly,theIEAdonotprovidedisaggregateddataonsomeincomeandexpenditureflows betweensectors,soincertaincases,itisnotpossibletoidentifywhopayswhom.For instance,althoughtheIEAshowstheinterestreceivedbyFCs,itdoesnotdetailwhopaysit, nordoesitbreakdownthisincomebytypeofasset.Secondly,theFAandFoFdonotalways allowidentifyingwhooweswhom,whichisduetothelackofdisaggregateddataondebt andfinancingrelationshipsbetweensectorsbytypeofasset.Thus,forexample,whiletheFA accountshowsthevalueofdebtinstrumentsheldbyFCs,itdoesnotdetailwhatpercentage wasissuedbyNFCs,thegovernmentortherestoftheworld.
Asaresultoftheabove,anddespitetheimportantemphasisofSFCmodelsonthefinancial sphereoftheeconomy,therawSNAdatadonotshowinterestpaymentsacrosssectors andbyassettype.Whilesomeoftheseinterestpaymentscanbefoundincomplementary datasources,itisimportanttoconsiderhowtheSNAcalculatesinterestpaymentsinorder
toavoiddoublecounting.Unlikethemodel,theSNAcalculatesinterestpaymentsonloans anddepositsbasedonareferenceinterestrateinsteadofmarketinterestrates.Thus,a significantpartoftheinterestflowactuallypaidisconsideredasvalue-addedoftheFCs andisgroupedunderthenameofFinancialServicesIndirectlyMeasured(FISIM).
Othergapsbetweentheoryandpracticeemergefromthedifferentrolesplayedbythe institutionalsectorsintheSNA.First,theSNAincludesnon-profitorganisationsasasector despitebeinganalyticallyirrelevantinthemodel.Second,theSNAincludesthecentralbank aspartoftheFCsdespitetheimportanceofexplicitlyconsideringitasasectorinthemodel.
Third,despitethefactthathouseholdsplayonlyaconsumerroleinthemodel,intheSNA theyalsoplayaproducerrolebyengaginginmarket,non-marketandself-consumption production.Fourth,asinthepreviouscase,thegovernmentalsoperformsaproducerrole intheSNAbycarryingoutmarketandnon-marketproduction.
B. BaselineScenarioforFossilFuels
OneofthekeyissuewhendesigningabaselinescenarioforColombiarelatestotheevolution ofexportsingeneralandso-calledtraditionalexports(oilandcoalmainly)inparticular.This sectionwillpresentthedifferentscenariosfoundintheliterature,concentratingfirstinfossil fuelexportsandthenaddressingtotalexportsinparticular.
B.1. OilExports
Wepresentherefourdifferentexercisesregardingprojectionsofoilexports:
1. theonepresentedinthelatest(2022)medium-termfiscalframework(MarcoFiscal deMedianoPlazo)producedbythefinanceministry(MinisteriodeHaciendayCrédito Público(2022)),consistinginonescenariolabeled“MFMP”;
2. theonepresentedinareportwrittenbytheAutonomousCommitteeontheTaxRule (ComitéAutónomodelaReglaFiscal)ontheMacroeconomicandFiscalEffectsof anExplorationPolicyandthe2022TaxReformintheHydrocarbonSector(Comité AutónomodelaReglaFiscal(2023)),consistinginfourscenariosassumingnoreduction inpetrolproductioninvestment,labeled“CARF-BAU”,andthreescenarioassuming linearreductioninoilextractioninvestmentof5%(CARF-5),15%(CARF-15)and30% (CARF-30);
3. theonepresentedinareportwrittenbyFedesarollo,thelargestColombianeconomic thinktank,ontheEconomiceffectsoftheimpactofthetaxreformontheminingand energysector(Fedesarrollo(2022)),consistinginthreescenarios:onepotentialoil production(Fed-Pot),onewithlittleexploration(Fed-Low)andonewithlittleexploration andataxreform(Fed-Tax);and
4. theonepresentedinareportwrittenbyWillisTowersWatsonandLosAndesUniversity onUnderstandingtheimpactofalowcarbontransitiononColombia(WillisTowers Watson(2022)),consistinginonescenariolabelled“WTW”.
Figure7panelashowsthedifferentoilexportsprojectionsinmillionsofbarrelperyear (mbpy)aspresentedinthedifferentscenarios.Onecanseethreedifferenttypesof outcomes:
1. Anincreaseinexports(CARF-BAU,CARF-5andFed-Pot)withaverageannualgrowth ratesrangingbetween3%(CARF-5)and5%(CARF-BAU);
2. Astableexportlevel(CARF-15);and
3. Adecreaseinexport(CARF-30,MFMP,Fed-Low,Fed-TaxandWTW)withaverageannual reductionraterangingbetween3%(MFMP)and11%(Fed-Tax).
Figure7:OilandCoalexportsprojections.Source:MinisteriodeHaciendayCréditoPúblico (2022);ComitéAutónomodelaReglaFiscal(2023);Fedesarrollo(2022);WillisTowersWatson (2022),andauthors’elaboration.
Thegoalofourscenariobuildingisnottoprojectexactvaluesbutrathertodesignrepresentativescenarios,wethusproposetousethreescenarios:anoptimisticscenariowithan increaseof4%ofoilexportsinvalue,aneutralscenariowithnogrowthinoilexportsand aConservativescenariowithareductionof6%ofoilexportsinvalue,alsoshowninpanel a.
Thevalueoftheseexportsscenarioswillofcoursedependonfutureoilprices,whichis relativelycomplextoproject.Wewillthusassumeaconstantprice,forthesakeofsimplicity, knowingthatthereisastronginteractionbetweenthedemandforoil,productionofoiland priceofoil.
B.2. CoalExports
TherearefewerscenariosanalysisfutureexportsofCoalinthelong-term.Wethusrelyonly ontheWillisTowersWatson(2022)studyproposingtwoscenariofortheexportsofcoalin Colombia(inmillionsofUSD):aBusinessasUsual(BAU)scenarioandaWorldBelow2Degree Celsius(WB2C)scenario,seethefigure7panelb.TheBAUscenarioseesfirstanincreasein exportsuntil2034andthenadecreaseinexportsleadingtovalueofexportsin2048similarto 2021valueswiththenarapiddecrease.Weapproximatethisscenariobyaneutralscenario seeingnogrowthincoalexports.TheWB2Cscenarioseesarapiddecreaseofcoalexports until2032followedbyaplateauforthenextdecadeandthennoexportsafterwards.We approximatethatscenariobyaconservativescenariocharacterizedbyaconstantdecline ofcoalexportsof12%yearonyear.
B.3. FossilFuelexports
Wethushavethreescenariosforoilexports(optimistic,neutralandconservative)and twocoalscenarios(neutralandConservative).Combiningallofthesewouldleadtosix scenariosfortheexportoffossilfuelsinColombia,inmillionUSD.Wehoweverdiscard twoimprobablecombinations(theconservativecoalscenariowitheithertheoptimisticor neutraloilscenarios),leadingtofourscenariosfortheexportsoffossilfuelsinColombia. Theoptimisticscenarioseesanincreaseinoilexportsandconstantcoalexports,leadingto aconstant2.5%annualincreaseinfossilfuelsectors.Theneutralscenarioseesnoincrease ineitherfossilfuels.TheConservativescenarioseesnoincreaseincoalandreduction inoilexports,leadingtoaconstant3%annualreductioninfossilfuelexports.Finally,the GlobalTransitionscenarioseesdecreaseinoilandcoalexports,leadingtoaconstant8.5% decreaseinfossilfuelexports.
Inthispaper,wewillconsideronlythelastthreescenarios(Neutral,ConservativeandGlobal Transitionscenario,seepanelaoffigure8)becausetheoptimisticscenariowouldentail furtherinvestmentstoopennewoilfieldsfwiththelikelyoutcomeofgeneratingstranded assets.Usingaconstantinflationoffossilfuelsof3%,weobtainthreescenariosoffossilfuel
Figure8:OilandCoalexportsprojections.Source:authors’elaboration.exportsinnominalterms,seepanelb.
C. Nomenclature
NominalForeign
NominalDomestic DivF DividendspaidbyNFCs
DF DomesticdepositsofNFCs
NominalDomestic DivF,G
DividendspaidbyNFCstotheGovernment
NominalDomestic DivF,W DividendspaidbyNFCstotheRoW
NominalDomestic DivF,H DividendspaidbyNFCstoHouseholds
REF RetainedearningsofNFCs
TFNF TotalfinancingneedsofNFCs
LFX,B,d F DesiredFXloansofNFCswithFCs
LFX,B F FXloansofNFCswithFCs
LFX,W,d F DesiredFXloansofNFCswiththeRoW
LFX,W F FXloansofNFCswiththeRoW
NominalDomestic
NominalDomestic
NominalDomestic
NominalForeign
NominalForeign
NominalForeign
NominalForeign
NominalDomestic ratFX.B F
Ld F DomesticcurrencyloansofNFCs
RationingofFCstoNFCs’FXloansdemand ratFX.W F
RationingoftheRoWtoNFCs’FXloansdemand
GOSB GrossoperatingsurplusofFCs
LB
ICB
wB
EmploymentinFCs
IntermediateconsumptionofFCs Real
WagepaidbyFCs
NominalDomestic
iD Interestrateondomesticdeposits
NominalDomestic
NominalDomestic md Mark-downonmonetarypolicyrate
iL F InterestrateonloanstoNFCs
premT F TargetinterestratepremiumonloanstoNFCs
premF InterestratepremiumonloanstoNFCs
iL H InterestrateonloanstoHouseholds
premT H
TargetinterestratepremiumonloanstoHouseholds
premH InterestratepremiumonloanstoHouseholds
iFX,W B
premFX
iFX,B F
InterestrateonFXloansofFCswiththeRoW
PremiumonFXloans
InterestrateonFXloansofNFCswithFCs
iFX,W F InterestrateonFXloansofNFCswiththeRoW
iFX,R B
iP,T
InterestrateonFXreservesofFCs
Targetmonetarypolicyrate
iP Monetarypolicyrate
FCB CentralBankProfits
RFX CB
iFX,R CB
YDH
FXreservesheldbytheCentralBank
InterestrateonFXreservesoftheCentralBank
DisposableincomeofHouseholds
L Totalemployment unem Unemploymentrate
NominalDomestic
NominalDomestic AFC AveragefundingcostofFCs
NominalDomestic
NominalDomestic
NominalDomestic
NominalDomestic
NominalDomestic
NominalForeign
NominalForeign
NominalForeign
NominalForeign
NominalForeign
NominalDomestic
NominalDomestic
NominalDomestic
NominalForeign
NominalForeign
NominalDomestic
DG DomesticcurrencydepositsoftheGovernment
NominalDomestic
DCB,T G TargetdepositsoftheGovernmentattheCentralBankNominalDomestic
DCB G DepositsoftheGovernmentattheCentralBank
DFX G FXdepositsoftheGovernment
TFNG TotalFinancingNeedsoftheGovernment
BgFX FXbondsissuedbytheGovernment
LgFX FXloansoftheGovernment
ΩFX,T G TargetshareofFXdebtinnewpublicdebtissued
ΩFX G ShareofFXdebtinnewpublicdebtissued
Bg DomesticcurrencybondsissuedbytheGovernment
iB G InterestrateondomesticGovernmentbonds
NominalDomestic
NominalForeign
NominalDomestic
NominalForeign
NominalForeign
NominalDomestic
NominalDomestic
premT G TargetInt.ratepremiumondomesticGovernmentbondsNominalDomestic
premG InterestratepremiumondomesticGovernmentbondsNominalDomestic
iB,FX G InterestrateonFXGovernmentbonds
iL,FX G InterestrateonFXGovernmentloans
CAD Currentaccountdeficit
TB Tradebalance
NominalForeign
NominalForeign
NominalDomestic
NominalDomestic
NominalDomestic Rem Remittances
IA Incomeaccountofthebalanceofpayments
NominalForeign
FDI Foreigndirectinvestment
FDIF ForeigndirectinvestmentinNFCs
FDIB ForeigndirectinvestmentinFCs
FDIG F GreenfieldforeigndirectinvestmentinNFCs
FDING F Non-GreenfieldforeigndirectinvestmentinNFCs
BgW DomesticGovernmentbondsheldbytheRoW
LFX,W FXloanswiththeRoW
DFX FXdeposits
RFX FXreserves
SFX Foreignexchangesupply
DFX Foreignexchangedemand
eN Nominalexchangerate
eN,e Expectednominalexchangerate
eR Realexchangerate
rsk Countryrisk
iW Internationalreferenceinterestrate
D. ModelEquations
NominalDomestic
NominalDomestic
NominalDomestic
NominalDomestic
NominalDomestic
NominalDomestic
NominalForeign
NominalForeign
NominalForeign
NominalForeign
NominalForeign
NominalDomestic
NominalDomestic
NominalForeign
NominalForeign
D.2. Pricing
D.9. Scenario
E. Parametersandinitialvalues
Table5:Parametersvalueanddescription.
NameValueDescription
βy 3.00e+00Speedofconvergenceofexpecteddemand,equation1
δF 4.00e-02Depreciationrate,equation2
βIV 1.63e-01Speedofconvergencefordesiredinventoryaccumulation,equation4
αv 7.83e-02Ratioofdesiredinventoriestoexpectedsales,equation5
αx 3.00e-02Growthrateoffossilfuelexports,equation16
ϵX p 6.00e-01Priceelasticityforpropensitytoexport,equation18
σX a 2.50e-04Linearterminproductivityeffectonpropensitytoexport,equation18
ϵX a 1.37e+00Productivityelasticityforpropensitytoexport,equation18
βX 1.00e+00Speedofconvergenceofnonfossilfuelexports,equation19
σM p,C 1.30e-01Linearterminpriceeffectonpropensitytoimportconsumption goods,equation22
ϵM
7.54e-01Priceelasticityforpropensitytoimportconsumptiongoods, equation22
σM a,C 2.50e-04Linearterminproductivityeffectonpropensitytoimportconsumptiongoods,equation22
ϵM a,C 1.58e+00Productivityelasticityforpropensitytoimportconsumption goods,equation22
σM p,IC 1.01e-01Linearterminpriceeffectonpropensitytoimportintermediate consumptiongoods,equation23
ϵM p,IC 6.91e-01Priceelasticityforpropensitytoimportintermediateconsumptiongoods,equation23
σM a,IC 8.50e-04Linearterminproductivityeffectonpropensitytoimportintermediateconsumptiongoods,equation23
ϵM a,IC 2.06e+00Productivityelasticityforpropensitytoimportintermediateconsumptiongoods,equation23
σM p,I 3.05e-01Linearterminpriceeffectonpropensitytoimportinvestment goods,equation24
ϵM p,I 4.45e-01Priceelasticityforpropensitytoimportinvestmentgoods,equation24
σM a,I 2.20e-04Linearterminproductivityeffectonpropensitytoimportinvestmentgoods,equation24
ϵM a,I 2.41e-01Productivityelasticityforpropensitytoimportinvestmentgoods, equation24
βM,C 5.86e-01Speedofconvergenceofconsumptionimport,equation25
βM,IC 6.41e-01Speedofconvergenceofintermediateconsumptionimport, equation26
Table5–continuedfrompreviouspage
NameValueDescription
βM,I 1.78e+00Speedofconvergenceofinvestmentimport,equation27
αa 2.00e-02domesticproductivitygrowthrate,equation28
βHUC 1.50e+01speedofconvergenceofhistoricalunitcosts,equation34
µ0 5.91e-01Autonomousparameterinmarkup,equation36
µ1 1.32e-02Sensitivityofmarkuptoinventoryaccumulation,equation36
βp 7.50e-01Speedofconvergenceofprices,equation37
θIC,F 4.06e-01Intermediateconsumptiontechnicalcoefficientfromfirms, equation42
θIns,F 0.00e+00Insurancegenerationfromfirms’debt,equation43
θCom,F 1.37e-01Commissiongenerationfromfirms’debt,equation44
κ0 2.70e-02Autonomousparameterinvestmentfunction,equation45
κ1 5.00e-01Sensitivityofinvestmenttorealprofitrate,equation45
βIF 1.00e+00speedofconvergenceforinvestment,equation46
ωF,0 1.00e+00Sensitivityoffirms’wagecurvetoproductivity,equation50
ωF,2 8.80e-01Unemploymentrateasreferenceforwagecurve,equation50
ωF,3 1.00e+00Sensitivityoffirms’wagecurvetoprices,equation50
θMI 3.80e-01ShareofGOS’firmsdistributedasmixedincome,equation52
θG,H 9.72e-02Shareoffirms’GOSdistributedtoHouseholds,equation53
θG,G 5.75e-03Shareoffirms’GOSdistributedtoGovernment,equation54
βDF 1.00e+00Speedofconvergenceoffirms’deposits,equation58
ηD,F 3.50e-01Shareofwagebillusedforfirms’depositstargets,equation58
βFX DF 1.00e+00Speedofconvergenceoffirms’FXdeposits,equation59
ηFX D,F 1.40e-01ShareofFXloansusedforfirms’FXdepositstargets,equation59 sF 4.61e-01Savingrateoffirms,equation60
ζ0G -1.76e-01Autonomoustermondividenddistributiontowardsgovernment, equation61
ζ1G 2.75e+00SensitivityofdividendsdistributiontoFossilfuelexportstowards government,equation61
ζ0W -5.16e-02Autonomoustermondividenddistributiontowardsrestofworld, equation62
ζ1W 6.37e+00SensitivityofdividendsdistributiontoFossilfuelexportstowards restoftheworld,equation62
νF -3.90e-04ShareofnominalproductiondistributedasOtherflowstofirms (negativeflows),equation65
ηFX,B F 4.00e-02Shareoffirms’financingneedsaskedintheformofFXloansfrom banks,equation67
ηFX,W F 1.30e-01Shareoffirms’financingneedsaskedintheformofdirectFX loans,equation69
UBFX F 1.12e+00UpperboundforrationingoffirmsinFX,equation70
LBFX F 2.99e-02LowerboundforrationingoffirmsinFX,equation70
ϵFX F 3.00e+01Elasticityoffirms’rationingtocountryrisk,equation70
χFX B 8.00e-02Countryriskreferenceforfirms’rationing,equation70
Continuedonnextpage
Table5–continuedfrompreviouspage
NameValueDescription
λB 1.00e-02Growthrateofbanks’employees,equation74
θIC,B 7.52e+01Intermediateconsumptiontechnicalcoefficientfrombanks, equation75
ωB,0 1.00e+00Sensitivityofbankswagecurvetoproductivity,equation76
ωB,0 1.00e+00Sensitivityofbankswagecurvetoprices,equation76
κB 6.86e-02Propensityforbankstoinvestoutofbankingproduction,equation78
δB 4.48e-02Depreciationrateofbanks’capital,equation79 car 2.74e-01CapitalAdequacyRatio,equation82
βOF 1.00e+00Speedofconvergenceforcapitaladequacyratio,equation84
νB 7.27e-03ShareofnominalproductiondistributedasOtherflowstobanks (negativeflows),equation86 lr 1.59e-01liquidityratio,equation89
ηFX,L B 2.00e-01Shareofbanks’ownfundsusedforFXloansdetermination, equation91 UBFX B 1.08e+00UpperboundforrationingofbanksinFX,equation93 LBFX B 3.72e-01LowerboundforrationingofbanksinFX,equation93
ϵFX B 3.00e+01Elasticityofbanks’rationingtocountryrisk,equation93
χFX B 8.00e-02Countryriskreferenceforbanks’rationing,equation93
ηFX B 5.35e-02Shareofbanks’FXloansusedforbanks’FXdepositstarget, equation94
βFX DB 8.00e-01SpeedofconvergenceforBanks’FXdeposits,equation94 mdH 3.14e-01Mark-downondepositsinterestsforhouseholds,equation100 mdF 2.82e-01Mark-downondepositsinterestsforfirms,equation101
ρ0 5.30e-01Autonomoustermformark-downonpolicyratefordepositrate, equation102
ρ1 1.00e+00Lineartermformark-downonpolicyratefordepositrate,equation102
ρ2 1.00e+00Elasticityofmark-downonpolicyratefordepositrateonAdvancesoverDeposits,equation102
ρ3 1.00e-02TargetforAdvancesoverDepositsformark-downonpolicyrate fordepositrate,equation102
ϕPr F 0 9.15e-01AutonomoustermforRiskpremiumoffirms,equation105
ϕPr F 1 1.00e+00LineartermforRiskpremiumoffirms,equation105
ϕPr F 2 4.00e+00ElasticityofRiskpremiumoffirmsonAdvancesoverDeposits, equation105
βF Pr 8.51e-01Speedofconvergenceoffirms’premium,equation106
ϱFX,B F 1.85e-01MultiplieroffirmsFXdirectlendingratebasedontheirdomestic premium,equation107
ϕPr H0 1.55e-01AutonomoustermforRiskpremiumofhouseholds,equation109
ϕPr H1 5.00e-01LineartermforRiskpremiumofhouseholds,equation109
Table5–continuedfrompreviouspage
NameValueDescription
ϕPr H2 1.00e+00ElasticityofRiskpremiumofhouseholdsonDebttoincomeratio, equation109
βH Pr 1.23e+00Speedofconvergenceofhouseholds’premium,equation110
ι0 4.85e-02autonomoustermforpolicyrate,equation111
ι1 2.00e+00lineartermforpolicyrateoninflation,equation111
ι2 3.00e-02targetinflationforpolicyrate,equation111
βip 5.00e-01Speedofconvergenceforpolicyrate,equation112
θFX,M 7.40e-01ShareofimportstodetermineFXreservestargetofcentralbank, equation114
αp 1.00e-02populationgrowthrate,equation118
τW,B 1.88e-01Employercontributiononbanks’wages,equation120
τW,F 1.64e-01Employercontributiononfirms’wages,equation120
τW,G 2.72e-01Employers’socialcontributionrateofpublicemployment,equation120
τSC 1.59e-02Socialcontributionrateonwages,equation121
νH 1.51e-02ShareofnominalproductiondistributedasOtherflowstohouseholds(positiveflows),equation122
θIns,H 0.00e+00Insurancegenerationfromhouseholddebt,equation123
θcom,H 9.07e-02Commissiongenerationfromhouseholddebt,equation124
βC 1.00e+00Speedofconvergenceforconsumption,equation127
UBYD H 9.88e-01Upperboundofsigmoidalofmarginalpropensitytoconsume, equation128
LBYD H 8.70e-01Lowerboundofsigmoidalofmarginalpropensitytoconsume, equation128
ϵYD H -6.00e+00Elasticityonmarginalpropensitytoconsume,equation128
χYD H 1.30e-02targetrealdepositrateinpropensitytoconsume,equation128
κH,0 7.27e-02autonomoustermininvestmentpropensityofhouseholds,equation129
κH,1 0.00e+00Sensitivitytointerestrateofinvestmentpropensityofhouseholds,equation129
κH,2 0.00e+00Sensitivitytounemploymentrateofinvestmentpropensityof households,equation129
βIH 1.00e+00Speedofconvergenceforhouseholds’investment,equation130
δH 3.20e-06Depreciationrateofhouseholds’capital,equation131
βLdch 1.20e+01Speedofconvergenceforhouseholdsconsumptioncredit,equation135
ηLC 0.32e+00Shareofdisposableincometargetedforconsumptionloans, equation135
ηLI 1.27e-01Shareofhouseholds’investmentborrowed,equation136
ηTIR 3.47e-02ShareofwagebillsavedasInsuranceTechnicalReserves,equation137
τ I W 8.40e-02Incometaxonwages,equation141
Continuedonnextpage
Table5–continuedfrompreviouspage
NameValueDescription
τ I F 1.74e-01Taxrateonfirms’profits,equation141
τ I B 1.14e-01Taxrateonbanks’profits,equation141
τ M 6.41e-02Importduties,equation142
τ V 9.27e-02VATrate,equation143
τ P 2.44e-02Othertaxonintermediateconsumptionrate,equation144
τ Y F 1.73e-02Taxrateonfirms’production,equation145
τ Y B 3.00e-02Taxrateonbanks’production,equation145
θR 1.02e-01Propensityoffossilfuelexporttogenerateroyalties,equation146
νG 3.30e-03ShareofnominalproductiondistributedasOtherflowstogovernment(negativeflows),equation149
θG,C 2.25e-02ShareofGDPforgovernmentfinalconsumption,equation150
βCg 1.00e+00Speedofconvergenceforpublicinvestment,equation151
ωG,0 1.00e+00Sensitivityofpublicwagecurvetoproductivity,equation152
ωG,1 1.00e+00Sensitivityofpublicwagecurvetoprices,equation152
θG,L 8.70e-02Shareofpopulationemployedaspublicemployees,equation153
θIC,G 2.32e+01Intermediateconsumptiontechnicalcoefficientfromfirms, equation154
κG 7.00e-02Publiccapitalinvestmentrate,equation155
βIG 1.00e+00Speedofconvergenceforgovernment’investment,equation156
δG 3.50e-02Depreciationrateofpubliccapital,equation157
θG0,ST 5.05e-01Shareofwagespaidasunemploymentbenefit,equation158
θG1,ST 3.43e-01Shareofwagespaidassocialtransfer,equation158
ςST,G 9.29e-01Shareofsocialtransferpaidtothegovernment,equation159
βDG 9.65e-01Speedofconvergenceofgovernmentdeposits,equation162
ηDG 0.11e+00Shareofgovernmentexpendituretodeterminegovernmentdomesticdepositstarget,equation162
βCB DG 1.00e+00Speedofconvergenceofgovernmentdepositsatcentralbank, equation163
ηC DGB 2.47e-02Shareofgovernmentexpendituretodeterminegovernmentcentralbankdepositstarget,equation163
βFX DG 1.00e+00SpeedofconvergenceforpublicFXdeposits,equation164
ηFX DG 2.65e-02ShareofFXpublicdebttodeterminegovernmentFXdeposits target,equation164
ϕPr G0 1.20e-02Autonomoustermofpremiumofpublicbondrateoverpolicy rate,equation168
ϕPr G1 0.00e+00Lineartermofpremiumofpublicbondrateoverpolicyrate, equation168
ϕPr G2 0.00e+00ElasticityofpremiumofpublicbondratefromPublicdebttoGDP ratio,equation168
βG Pr 1.00e+00Speedofconvergenceforpublicpremium,equation169
αGW 3.00e-02worldgdpgrowthrate,equation170
Table5–continuedfrompreviouspage
NameValueDescription
αW 2.00e-02worldproductivitygrowthrate,equation171
αpW 3.00e-02worldinflationrate,equation172
θREM 2.36e-04ShareofWorldGDPdistributedasremittances,equation178
νW 4.92e-03ShareofnominalproductiondistributedasOtherflowstorestof world(negativeflows),equation179
ψFDI F 7.76e-01ShareofFDItowardsfirms,equation181
ψFDI G 4.84e-01Shareoffirms’FDIthataregreenfield,equation185
ηD GW 1.60e-02Shareoftradebalancetodetermineinternationalinvestmentin publicbonds,equation187
ηFX GW 6.00e-01ShareoftradebalancetodeterminepublicborrowinginFX (bondsandloans),equation188
ΩG0 2.00e-02AutonomoustermofshareoftradebalancetodetermineFX publicdebt,equation190
ΩG1 5.00e-01SensitivityofshareoftradebalancetodetermineFXpublicfrom CurrentAccountdeficitasashareofGDP,equation190
βFX,G 3.00e+00SpeedofconvergenceforpublicdebtissuanceinFX,equation191
βen 2.50e+00Speedofconvergenceofnominalexchangerate,equation197
ξ0 8.54e-03Lineartermincountryrisk,equation199
ξ1 2.00e+00ElasticityofcountryrisktoImporttoOfficialreserveratio,equation199
ϕFX 0 3.00e-03Autonomoustermforforeignriskpremiumofbanks,equation201
ϕFX 1 7.01e-01Lineartermforforeignriskpremiumofbanks,equation201
ϕFX 2 1.00e+00Elasticityofforeignriskpremiumofbanksonforeigndebttototal debtratio,equation201
ϱFX,W F 6.40e+00mark-uponfirms’directFXrate,equation202
ϱFX,R B 1.94e-02mark-uponbanks’reservereturnrate,equation203
ϱFX,R CB -3.15e-03mark-uponofficialreservereturnrate,equation204
ϱB,FX G 8.87e-01multiplierofriskonpublicbondsinFX,equation205
ϱL,FX G 7.78e-02mark-downforpublicborrowingrateinFX,equation206
σXp 0 1.43e-03Linearterminpriceeffectonpropensitytoexport,equation207
σXp New 1.00e+00Linearterminpriceeffectonpropensitytoexport(forscenario purposes),equation207
σXp Speed 4.00e-01Speedofvariationforexportscenarios,equation207
σXp Init 5.00e+00Initofvariationforexportscenarios,equation207
ψFDI O 3.86e-01ParameterdeterminingtheevolutionofFDIenteringtheeconomy(asashareoffirms’investment),equation208
ψFDI Speed 3.00e-01ParameterdeterminingtheevolutionofFDIenteringtheeconomy(asashareoffirms’investment),equation208
ψFDI Init 4.00e+00ParameterdeterminingtheevolutionofFDIenteringtheeconomy(asashareoffirms’investment),equation208
ψFDI New 6.80e-01ParameterdeterminingtheevolutionofFDIenteringtheeconomy(asashareoffirms’investment),equation208
Table6:Scenarioparametersvalueanddescription.
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