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The Great Depression in Colombia: A Stimulus to Industrialization, 1930-1953

This paper analyzes the role of the Great Depression and protectionism in the Colombian industrialization of the early 1930s as well as the role of other determinants in the rapid industrialization that took place during the period 1934-1953. We conclude that the market pushed industrialization by reducing costs, generating economies of scale, learning by doing, giving place to agglomeration economies, and rapid technological change. This paper also examines the structure of the Colombian manufacturing sector in 1945, which was the result of the deep socio-economic transformations that took place in the previous decade. The results indicate that the industrialization process was uneven across regions, and that it was spatially concentrated. Estimations of a production function for industry in 1945 show that there were important differences in factor elasticities and productivities among sectors and regions, which led to different regional patterns of industrialization. In addition, the results indicate that labor productivity in 1945 was positively and significantly related to education and capital, whereas it was negatively related to the unskilled workers and the age of the firms.


I. Introduction
The growth of industry in Colombia was a slow and rather late process, compared to other Latin American countries such as Brazil and Mexico. During the nineteenth century, Colombian industry was very backward, mainly due to the lack of a transportation infrastructure and very low levels of total exports per capita. It was only in the 1930s when industrialization took off.
From 1930 to 1953, industrial production in Colombia grew at an average annual rate close to 6% per capita in constant pesos. This was one of the highest rates of industrial growth in this period among the largest economies of Latin America. It was a structural break with what had been the development of industry in Colombia before 1930. In the early 1930s, the devaluation of the peso in real terms, the Great Collapse in US exports, and the increase in protection from foreign trade were the main stimulus for industrial growth. All these variables changed negatively for the Colombian industry after 1934. However, in spite of these changes, Colombian industry continued to grow at unprecedented rates. Why did this happen?
The purpose of this article is twofold. First, we analyze the main factors that drove industrial development after 1930. In particular, we examine whether the industrialization process that occurred during this period was state or market-led. We conclude that it was the market that pushed industrialization by reducing production costs, generating economies of scale, learning by doing, giving place to agglomeration economies, and rapid technological change. Second, with the information collected from the first industrial census (which was carried out in 1945) we examine quantitatively the type of industry that resulted from the profound socio-economic transformations and external shocks that took place from 1930 to 1945. With this information we also estimate econometrically both a production function and the determinants of labor productivity for the Colombian industry, taking into account regional and sectoral differences. The analysis of this data is important because before the publication of the first industrial census there was no detailed or consistent information to enable an in-depth study of the behavior of the country's manufacturing sector. Our results indicate that in that time the Colombian industry was highly concentrated in a few regions and sectors, with important differences in factor elasticities and productivities among both sectors and regions.
The paper is divided in three sections, in addition to this introduction. The second section discusses the main factors that determined the Colombian industrialization process during the period . Section three examines the structure of Colombian industry in 1945, and estimates econometrically both factor elasticities and productivities, and the determinants of labor productivity for the manufacturing sector. The last section concludes.

1930-1953
This section discusses the overall impact of the Great Depression on the Colombian economy and industry, with a particular emphasis on GDP growth, exports, flows of foreign investment and loans, as well as monetary and fiscal policies. Next, an analysis of the evolution of manufacturing, the sector which underwent the most profound economic transformation in this period, is presented. We emphasize the determinants of rapid industrialization during these years, within the context of the debate on whether this was a process generated by relative price changes or whether it was state-led. Finally, some of the general aspects discussed about industrial growth from 1930 to 1953 will be illustrated through examples and experiences drawn from the textile sector.
Colombia was one of the Latin American countries that were least affected by the Great Depression. In fact, in the period 1930-1953, the annual average growth of real GDP per capita was 1.6%, one of the highest in the region. From peak to trough real output only fell 2%, the smallest drop among a group 26 countries around the world, similar to the reduction experienced by India. 2 In fact, real GDP only fell in 1929, 1930, and 1931, for a total drop of 2%. However, beginning in 1932, its growth jumped to 6.6%, and thereafter continued to expand every year during the period under study (Meisel, 1990, p. 291).
Why was the impact of the Great Depression on the growth rate of the Colombian economy so moderate and short lived? One of the main reasons was that Colombian coffee exports did relatively well during these years. Although coffee prices fell, the volume of bags of coffee exported grew at an annual average rate of 2. 8% between 1930 and1953. Thus, after 1933 the import capacity of Colombian exports was growing again (Graph 1). Also, the relative price change induced by the fall in the terms of trade stimulated a very quick process of import substituting industrialization, since the growth of the industrial sector had been negligible in the nineteenth century and very slow in the period 1905-1929. 3 For example, in 1927/1928, 80% of all textiles consumed in Colombia were imported (Wogart, 1978, p. 59). Thus, there was a large space for import substituting industrialization.

Graph 1 Import Capacity of Colombian Exports, 1925-1953*
Note: * Import Capacity is defined as terms of trade multiplied by export volume. Source: CEPAL, El desarrollo económico en Colombia, Table 3.
Another reason why the Colombian economy was able to overcome the contraction generated by the Great Depression fairly successfully was that the peso was significantly devalued with respect to the US dollar. The nominal devaluation of the peso occurred in 3 The total value of investment of the industrial firms established before 1900 represented only 15% of the value of investment of the industrial firms that existed in 1945. For details see Contraloría General de la República (1947), p. 20.  1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 1952 1953 Millions of pesos 1950 year 1933 and 1934, and, as a result, the real exchange rate increased by 22.5% and 25.9%, respectively (Meisel, 1990, p. 295 (Meisel, 1990, p. 295). This significant relative price change stimulated a marketdriven process of import substituting industrialization. The Great Collapse in production and exports of the United States, the country's main source of imported industrial goods, and increases in overall protection from foreign competition were additional stimulants for  19251926192719281929193019311932193319341935193619371938193919401941194219431944194519461947194819491950195119521953 year 0% 10% 20% 30% 40% 50% 60% 1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 1952 1953 Manufacturing The two other sources of stimulus for industry in the early 1930s, the Great Collapse and protection from foreign competition, gradually reversed after the mid 30s. 6 Some authors, among them Ocampo (2000), have argued that the main stimulus after the mid-1930s was the state's active promotion of industry: "After 1934…a whole new series of interventionist policies were implemented...and direct promotion of new industries, among others (p.111)." Furthermore, in their economic history of Latin America, Bertola and Ocampo (2012) characterize the period 1930-1980 as one of state-led industrialization. In contrast, and referring to Colombia, the historian Palacios (2009) argues that: "…in this period of industrialization, 1930-1945, the role of the state was indirect and weak. With this we want to say that in general it did not invest directly, neither did it orient its policies so that the country would industrialize as a priority, although there was an industrialist rhetoric... (p.

433)." 7
The evidence suggests that, in the case of Colombia, from 1930Colombia, from to 1953 was no direct promotion of industrialization by the state. Instead the industrialization that took place during these years can better be described as market-led. Brando (2012) (Brando, 2012, p. 196 That there was no state-led industrialization in the years 1935-1953, when the initial stimulus of the devaluation, the Great Collapse, and higher tariffs had dissipated, leads to the obvious question: Why was industrial growth so dynamic in this period? The evidence suggests that the positive shock of the early 1930s served as an inducement mechanism that broke the obstacles for industrial investment. Hirschman (1961) argued in his classic book, The Strategy of Economic Development (first published in 1958), that: "…development depends not so much on finding optimal combinations for given resources and factors of production as on calling forth and enlisting for development purposes resources and abilities that are hidden, scattered, or badly utilized (p. 5)." As a result of that initial stimulus for growth in industrial production, the most dynamic sectors, such as textiles, experienced the benefits of economies of scale, learning by doing, agglomeration economies, and incentives for technical change. We will illustrate these issues for the case of textiles, which was one of the fastest growing sectors. However, we will first discuss the important role of indirect state policies in providing a positive economic environment for industry, even if it did not directly promote it.
During the period 1930-1953 macroeconomic policies were fairly orthodox and stable, except for the devaluation that took place from 1933 to 1934, and the suspension of foreign debt payments in the early 1930s with its subsequent renegotiation in the 1940s. 9 On the topic of the organization and influence of coffee growers see Palacios (2009), pp. 429-464. Participation of the public sector in GDP did not increase in the period, remaining close to 6.5%. Additionally, the fiscal balance of the central government showed a surplus during half of the years of this time period, and when there was a deficit it never exceeded 1.7% of GDP. After the devaluation of 1933-1934, the Central Bank adhered to a fixed exchange rate; the average annual inflation rate for 1935-1953 was 8.7%.
What the state did do effectively in the period   One of the major successes of government policy in this period was the growth in infrastructure for the generation of electricity, mostly hydroelectric. Production of electricity grew at an annual average rate of 9.9% between 1935 and 1955 (Cepal, 1957, p. 122). Since hydroelectricity is cheaper than thermoelectricity, industry benefitted from cost reductions. In 1945, the industrial sector consumed 31.3% of all the electricity produced in the country. 10 From 1930 to 1953, the manufacturing sectors that grew most rapidly were cement, beverages, shoes, leather, and textiles (Cepal, 1957). However, the most important one, because of its contribution to total industrial output, was that of textiles. This sector provided more than half of the increase in industrial value added during the 1930s and two thirds during World War II (Chu, 1972, p. 55). The average annual growth rate of its output in constant pesos from 1930 to 1953 was 10.6% (Graph 5). As a result, Colombian imports of textiles went from close to 30% of total imports in 1930 to around 8% in 1953 (Graph 6).
This success was possible due to the rapid technological change in textile production in the 1930s. According to Echavarría (1999, p. 83) the main innovation was the substitution of mechanical looms by automatic looms. Their introduction allowed for a reduction in costs of as much as 80% in some products. 11 It also led to large economies of scale and the concentration of production in a few firms.

Participation of Imports of Textiles in Total Colombian Imports
Source: Anuario de Comercio Exterior, several years.

III. Colombian Industry in 1945
In this section, we examine quantitatively the type of industry that resulted from the socioeconomic transformations and external shocks that occurred during the period under study.
To this end, we analyze the data collected in the first industrial census of 1945. This census gathered detailed and consistent information about production, income, expenses, value added, capital, employment, including human capital of the workers, and financial data, among other aspects of the Colombian manufacturing sector.
In particular, we examine the composition and structure of industry by describing its main indicators by departments and sectors. We also estimate econometrically a production function for the industrial sector and the determinants of manufacturing labor productivity, taking into account regional and sectorial differences.

A. The Structure of Colombian Industry in 1945
By the mid-twentieth century, the industrial sector of Colombia was concentrated in a few  1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 1952 1953 regions. In fact, value added generated by industry was spatially concentrated in the departments of Antioquia, Cundinamarca, Atlántico, Valle del Cauca, and Caldas. This concentration generated higher wages in these regions. According to the Primer Censo Industrial de Colombia, in 1945  The determinants for these regional patterns of industrialization of Colombia have been well studied by economic historians, especially for the case of Antioquia. For example, Brew (2000), Montenegro (2002), and Bejarano (2007) have argued that coffee expansion and gold production were essential factors for the accumulation of capital needed for industrial development in Antioquia. España and Sánchez (2010), on the other hand, state that a previous accumulation of human capital was the main factor explaining regional differences in the industrialization process. And Echavarría (1984) claims that it was the regional difference in investment in new technologies and technical changes that produced the regional differences.
We also consider that infrastructure developments played a major role in determining the spatial patterns of industrialization. In fact, by 1945, the departments of Antioquia, Cundinamarca, Santander, and Valle had the highest amount of kilometers in roads, which facilitated access to their domestic markets (Table 1).

Map 1 Departmental Industrial Value Added as percentage of National Industrial Value Added, 1945
Source: Elaborated using information from the Primer Censo Industrial de Colombia, 1945.

Map 2 Departmental Industrial Value Added as percentage of National Industrial Value Added , 1953
Source: Data from the Anuario General de Estadística, 1955. The main characteristics of the Colombian industry in 1945 are presented in Tables 2 and   3. 13 Table 2 summarizes the key indicators by department. Cundinamarca, Antioquia, Atlántico, and Valle del Cauca not only employed a significant amount of labor, but also had the largest number of establishments and highest capital, equity, and energy purchased.
Regarding human capital, on average, nearly 85% of the workers in manufacturing could read, indicating that industry demanded a relatively educated work force, in comparison to the total Colombian population in that period. 14 In particular, the departments with a higher proportion of literate workers were Cundinamarca and Antioquia, the departments with the highest level of industrialization. By 1945, on average, more than 85% of all raw materials in manufacturing were domestic. The departments located in the Caribbean Coast had the smallest percentage of domestic raw materials used in industry. Lastly, the coefficients of specialization, which measure regional manufacturing specialization, show that the regions with a higher coefficient (i.e. regions with sectors that have few firms or regions with few sectors) were less industrialized (e.g., Meta, Chocó and Caquetá). 15 Table 3 presents a summary of the main statistics for major Colombian industries in 1945.
The textile, food, beverage, and mineral sectors had the largest share of value added, energy purchased, capital, and equity. Conversely, rubber and plastic products, pulp, paper and its products, and oil for industrial use were the less dynamic sectors. 16 The largest share of employment was in textiles and food, followed by minerals and apparel. As to human capital, in all sectors most workers could read. In particular, the sectors with a higher percentage of literate workers were minerals, wood and its products, and tobacco and oil; the lowest percentage was found in food and rubber products.
13 For a detailed description and analysis of the industrial census of 1945 and some industrial indicators for 1953, see Arango (1983). 14 In 1940, the illiteracy rate in Colombia was 43%, and in 1950 was 38%. 15 Table A2, Appendix A, shows some selected indicators of manufacturing for the main cities in 1945. Bogotá, Medellin, and Barranquilla were the most industrialized cities in the country, which coincides with the regional patterns. In addition, the data in Table A3, Appendix A, indicate that the regional distribution of industry in 1953 was very similar to that in 1945, with Antioquia, Cundinamarca, Valle, and Atlántico the most industrialized departments in the country. 16 Table A4, Appendix A, shows selected indicators for manufacturing by sub-sectors in 1953. Beverages, food, and textiles remained the leading sectors. 2/ Measures the regional specialization and shows the degree of similarity of the regional industrial structure. The index varies between 0 and 1, when it gets close to 1 indicates greater specialization. Source: Primer Censo Industrial de Colombia, 1945. Colombia, 1945. As expected, the sectors with a higher percentage of imported raw materials were publishing and printing, pulp, paper and its products, metallurgy, manufacturing of machinery, and basic metals. These sectors imported raw materials which were not available in the country. On the contrary, food, wood, minerals and precision instruments and processing of precious metals used mostly local raw materials.
In general, manufacturing sub-sectors were also spatially concentrated (Table 4). For example, 57% of value added in the textile industry came from Antioquia. 17 Cundinamarca had 39% of the value added in beverages, 43% in nonmetallic minerals, and 44% in publishing and printing. Also 64% of value added in oils for industrial uses was produced in Valle, and 70% of value added in metallurgy, machinery and basic metals was produced in Antioquia, Cundinamarca, and Atlántico.
Lastly, important differences in labor and capital productivity among sectors are also observed (Table 5). Average labor productivity (VA/L) was larger for derivatives of mineral fuels, beverages, rubber and plastic products, publishing and printing, and minerals and metallurgy. On the contrary, tobacco, other manufacturing and apparel, had the lowest average labor productivity. In the case of average capital productivity (VA/K), it was larger for rubber and plastic products, wood and its products, publishing and printing, and leather, and lower for derivatives of mineral fuels, beverages, and food. 17 The process of industrialization in Antioquia and the boom of the textile sector has been studied in detail by Montenegro (1982), Montenegro and Ocampo (1984), Echavarría (1999), and Villamizar and Echavarría (2007).

B. Determinants of Labor Productivity in 1945: an Econometric Exercise i) Factor Elasticities for the Manufacturing Sector
In this section we estimate a production function for the Colombian manufacturing industry to calculate both factor elasticity and productivity indices, taking into account the regional and sectorial differences that prevailed in 1945. To this end, we also use the information from the First Industrial Census of Colombia carried out that year. 18 As described in the previous section, there are significant regional and sectorial differences that should be taken into account in the analysis.
We first estimate factor elasticities and factor productivities by manufacturing sub-sectors.
For our calculations we follow Iregui et al. (2007), who estimated total factor productivities and factor elasticities for the Colombian manufacturing industry by metropolitan area and industrial sector for the period 1975-2000. We estimate a Cobb-Douglas production function with constant returns to scale (restricted model), including information for 17 territorial units and 17 sectors for the year 1945. 19 In a second exercise we remove the assumption of constant returns to scale (unrestricted model).
Specifically, we start with the following equation: Where Y is value added, K is capital 20 , L is the labor force, A is productivity (TFP), is a positive parameter, and i and j indicate territorial units and manufacturing sectors, respectively. Taking logs from (1) we have the equation to be estimated: Initially, we estimate equation (2) for the complete sample (pooling the information from the 17 sectors and 17 territorial units).  (Pombo and Cortes, 1991). The estimation results using fixed assets are very similar to the results when capital reported by the firm is used. These results are not reported here but are available upon request. Given that information for industry before the industrial census of 1945, is very scarce, it is very difficult to construct a series of capital stock for the first half of the twentieth century. Pombo and Cortes (1991) calculated the capital stock for total industry for the period 1955-1988 using the methodology of the perpetual inventory.
by the data. In particular, labor elasticity (E l Table 7 shows factor elasticities by industrial sector. 22 As observed, there are important differences among them. The elasticity of labor varies between 0.470 in metallurgy, machinery and basic metals, and 0.887 in the apparel sector, and 0.886 in beverages. In all cases, labor elasticities are larger than capital elasticities, except for metallurgy, machinery and basic metals, indicating that in this sector the marginal productivity of capital is higher than that of labor. If we remove the assumption of constant returns to scale, we obtain 21 Interestingly, in general, factor elasticities calculated using the 1945 Industrial Census are quite similar to those estimated using surveys for later periods. The study of the evolution of these elasticities is beyond the scope of this paper, and will be subject of further research. 22 Factor elasticities per sectors are only calculated for those sectors having complete data. similar results (Table 8). Increasing returns to scale are present in beverages, leather, minerals, and chemicals; the other sectors show constant returns to scale.
Heterogeneity is also important to determine factor elasticities by territorial units. 23 As shown in Table 9, both labor and capital elasticities differ significantly among departments. 24 The more labor-intensive departments were Atlántico, Bolivar, and Cundinamarca, while the less labor-intensive were Antioquia, Caldas, and Tolima.
Interestingly, factor elasticities for Antioquia (E L =0.72; E K = 0.28) and Bolivar (E L =0.82;  Table C1, Appendix C, shows the results for the unrestricted model. 24 In the case of Valle del Cauca, contrary to our expectations, we obtain a negative elasticity of capital, for which we cannot provide an economic explanation.  From the estimation of equation 2, which includes fixed effects by sectors, we also calculate the productivity parameters by manufacturing subsectors. To obtain the productivity parameters by sectors, we calculate the antilogarithms of the fixed effects coefficients, which result from the estimation of equation 1. For details of this methodology, see Iregui et al (2007, p.39). Table 10 shows that the most productive sectors were precision instruments and processing of precious metals, beverages, rubber and plastic products; in contrast, the least productive sectors were textiles, apparel, and food. These results are similar to those by Iregui et al (2007) for the period 1975-2000, who found that the most productive sector was beverages and the least productive were apparel and textiles.
In sum, the results show that there were important differences in factor elasticities and productivities for both sectors and regions, which led to different regional patterns of industrialization.

ii) Determinants of Labor Productivity in 1945
In order to determine the main factors that affected manufacturing labor productivity, we estimate the determinants of labor productivity for Colombian manufacturing in 1945. To carry out the empirical analysis we pooled the information from the 17 territorial units and 17 manufacturing sectors included in the Census. This allows us to have 289 possible observations. However, for some variables there are missing values, so we ended with 199 observations.
Specifically, we estimate the following equation 25 : Where VA, L, and K were defined above; X is a set of control variables that could affect labor productivity, such as worker education (number of workers that could read / total workers) as a proxy of human capital; the share of domestic raw materials in total raw materials (in order to capture some of the effects of import substitution), the share of unskilled workers to type of employment, and the average age of firms. We also included fixed effects per sectors.
The results of Table 11 show that there is a positive and significant relationship between education and labor productivity, indicating that better educated workers had higher productivity. Similarly, the elasticity of capital is positive and significant as shown in the previous section. On the contrary, the share of unskilled workers and the average firms' age by sector has a negative and significant relationship with labor productivity. In the first case, the results suggest that sectors with more unskilled workers will tend to have lower labor productivity. In the second case, labor productivity is lower for older firms, suggesting that the industry that emerged after the Great Depression was more productive.
Finally, the coefficient of the share of domestic raw materials in total raw materials is not significant in the determination of labor productivity.

IV. Conclusions
In this paper we first analyzed the overall impact of the Great Depression on the Colombian economy, in particular its role in the country´s industrialization. We also examined other determinants of rapid industrialization during the period 1930-1953, namely state-led (e.g. protectionism, and provision of public goods) and market led (economies of scale, learning by doing, agglomeration economies, incentives to technical change).We conclude that the market induced industrialization by reducing costs, generating economies of scale, learning by doing, and by rapid technological change.
We also examine the structure of Colombian manufacturing in 1945, which emerged as a result of the profound socio-economic transformations of the previous decade. The industrialization process was uneven across regions. It was spatially concentrated, mainly clustered in the departments of Antioquia, Cundinamarca, Atlántico, Valle del Cauca and Caldas. Similarly, industrial value added was concentrated in a few sectors: textiles, food, beverage and minerals. In addition, manufacturing sub-sectors were also highly spatially concentrated.
The production function estimated for the industrial sector, shows that in 1945 there were important differences in factor elasticities and productivities for both subsectors and among regions. The results show that the industrial sector as a whole was highly labor-intensive. In addition, the estimations indicate that labor productivity was positively and significantly related to education and capital, whereas it was negatively related to the share of unskilled workers and the age of firms.
V.   Nominal value (in Colombian pesos) of total raw materials offered for manufactures (i.e., after paying all costs inherent to the same expense).

VA Value Added
The value added by industry is obtained by deducting from the cost of goods manufactured the sum of the values for the raw materials used, fuels and lubricants consumed, and purchased power and the amount spent each year in salaries, wages , insurance, leasing and depreciation (nominal value in Colombian pesos) K Capital Two alternative definitions: capital reported by the firm, and fixed assets reported by the firm.

ENECOM Electric energy purchased
Electricity purchased by the establishments from July 1, 1944 to June 30, 1945 (nominal value in Colombian pesos) L Labor Employees: Skilled workers. Anyone who works for a monthly salary and who performs preponderantly intellectual work. Worker: Unskilled workers. Any person who works piecework or earns a wage or salary daily or weekly, and whose activity is mainly manual.

Share of females in total workers
Ratio of females among the total number of persons employed.

ESTAB Establishments
Total industrial establishments to June 30, 1945 Age_firms Average age of firms.
Average age of the firm by department or sector in 1945.
VA/L Labor productivity Ratio between value added and the number of total workers (skilled plus unskilled workers).

K/L Capital/Labor
Ratio between capital and the number of total workers (skilled plus unskilled workers).

Unskilled workers
Share of unskilled workers.

Ratio of unskilled workers to total workers
Source: Primer Censo Industrial de Colombia, 1945. Appendix C