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export-dynamics-colombia

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export-dynamics-colombia

  1. 1. Export Dynamics in Colombia: Firm-Level Evidence ∗ Sami Haddad March 3, 2016 1 Summary In 1995 President Bill Clinton released the first version of the ”Clinton list.” In hopes of curbing the laundering of Colombian drug money, the Clinton administration fined U.S. firms and U.S. Citizens (also permanent residents) who did business with companies and individuals on this famed list. This will serve as our backdrop as Eaton et al∗ research entry and exit in the Colombian export market. In this paper, our authors have both investigated aggregate export growth and de- composed export growth. Their decomposition, researching the decision to export at all versus how much to export, reveals some patterns to note. • Aggregate export fluctuation can be explained solely by the behavior of firms who have been exporting for at least one year. • Firms who export in years t and t+1 grow rapidly after. • There is a ”right” way to expand exports. Firms that export to Latin American mar- kets first (notably Ecuador and Venezuela) end up expanding into the United States and other foreign markets. The inverse does not hold true. ∗Eaton, Eslava, Kugler, Tybout (2007) 1
  2. 2. 2 Theoretical Comments While this paper does not seek to expand our theoretical understanding of export dynamics, it does attempt to apply external validation to the results by Eaton, Kortum and Kramarz (2004) (henceforth EKK). EKK address Melitz (2003) theory and expand upon it by researching the anatomy of trade among French firms. While EKK did not reconstruct the model verbatim, their explanation of the model was succinct and made the empirical results tractable within the framework of the model. If Eaton et al could follow suit by adding a brief discussion concerning the pertinent economic theory in this paper, it would prove helpful to the reader. 3 Empirical Comments This paper addresses an important topic in both the fields of trade and economic de- velopment. Policy makers would do well to take heed of their conclusions; if a ”winning” strategy to exporting existed, Colombia’s private sector would benefit from inducing all firms to execute this strategy (much like what happened in Chile) and, less obviously, an increase in foreign exchange reserves (serving as a macroeconomic buffer). However, the research methodology gives me pause. I have the following concerns. • Internal Validation – It has been well documented in the growth literature that country effects mat- ter (Barro 1989, Asiedu 2006). As prefaced in the summary, Colombia went through decades of political instability which led to notable effects of uncer- tainty. The drug war waged between the Colombian government and the king- pins lead to terrorist acts across the country. Firms who are willing to under- take the large sunk costs associated with exporting would only do so if they believe their firm would remain intact the next day (this assurance could have been guaranteed through protection bribes to the mafia or the military). If this were to occur, even once, it would not be accurate to claim that all firms have perfect, or equal, foresight and only those with ”better” vision, those who pur- chased informal insurance, will export in time t and t + 1. – Country instability in its most general form, may not go far enough to address firm export behavior. From the 1980s until recently Colombia has struggled to quell a booming drug business, fueled by international consumption of con- trolled substances such as cocaine. President Clinton was the first of many presidents to ask the Treasury to monitor firms who are associated with the illicit drug trade. Therefore, due to unique conditions in Colombia, firms faced differentiated trade barriers associated with reputation that would explain the empirical findings. This potential source of selection bias leaves me to question the internal validity of these results. 2
  3. 3. – In 1999 Colombia experienced severe inflation as the Central Bank decided to allow their currency to float for the first time since the institutionalization of the Peso. It is possible that only firms who had assets denominated in other cur- rencies, most likely the dollar, were the ones to weather the storm. As Kamil writes in How Do Exchange Rate Regimes Affect Firms’ Incentives to Hedge Cur- rency Risk in Emerging Markets? (2009) firms react to a floating exchange rate by reducing foreign borrowing and hedging a higher share of their dollar liabili- ties by increasing export revenues and assets denominated in foreign currency. Since only large firms may have the resources to do so, this would call into question the authors’ interpretation of the data. – Having a beautiful mountain scenery comes with great cost to the Colom- bian transportation infrastructure network. Only 20% of roads in Colombia are paved, and for such a mountainous country that means one must choose between flying manufactured goods to the nearest port, the expensive option, or sending the goods through a poorly maintained dirt road network, differ- entiating trade costs given the location of your business in Colombia. In Who’s Getting Globalized (Atkin and Donaldson 2012) within country trade costs for Ethiopia and Nigeria can range between 7 and 15 times more than trade costs between the US and Canada. Firms may face different trade costs based on location within country. This could explain their differential export participa- tion. Even further, different regions experienced varied intensities of the drug war throughout the sample years. These two effects would call into question the cross-sectional and the time pattern export participation results. • External Validation – As a matter of geography, Colombia is the only country in South America which borders both the Pacific and the Caribbean Ocean. This allows firms to export to either ocean without incurring the fee associated with utilizing the Panama canal. If this holds true for only Colombia. How could we generalize this result to their South American neighbors? – Many of these questions can be addressed via robustness checks of Colombia’s South American neighbors. If these results hold in the Ecuadorian or Venezue- lan export market, we can throw out geographical and historical constraints, allowing us to expand our results to the rest of the continent. To conclude these remarks, I believe that this paper needs to acknowledge the existence of Colombia specific factors in the empirical analysis. Otherwise, one should question the external and possibly the internal validity of the conclusions. Colombia, Venezuela and Ecuador are all virtual neighbors, but by having such a distinct geography and history, one could argue that these conclusions will not hold for Colombia’s neighbors. 3
  4. 4. 4 Bibliography Asiedu, Elizabeth. ”Foreign Direct Investment in Africa: The Role of Natural Re- sources, Market Size, Government Policy, Institutions and Political Instability.” United Nations UNiversity. United Nations University, 2006. Web. 25 Feb. 2016. Atkin, David, and Dave Donaldson. ”Who’s Getting Globalized? The Size and Impli- cations of Intra-national Trade Costs.” (2015): n. pag. Web. Eaton, Johnathan, Samuel Kortum, and Francis Kramarz. ”An Anatomy of Interna- tional Trade: Evidence From French Firms.” Econometrica 79.5 (2011): 1453-498. Web. Kamil, Herman. ”How Do Exchange Rate Regimes Affect Firms’ Incentives to Hedge Currency Risk? Micro Evidence for Latin America.” IMF Working Papers 12.69 (2012): 1. Web. Melitz, Marc J. ”The Impact of Trade on Intra-industry Reallocations and Aggregate Industry Productivity.” Econometrica 71.6 (2003): 1695-1725. 4

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