Do government policies distort relative factor prices: evidence from Colombia
Developing countries have a variety of governmental and trade policies which are intended to affect the return to capital. In an estimation of the return to capital in Colombia an attempt is made to account for taxes, both direct and indirect, governmental subsidies, and trade taxes and subsidies. The economic income that accrues to Colombia's capital stock is estimated by estimating the growth of the capital stock and the net cash flows generated by that capital. Additionally, the average annual effective rate of protection to the manufacturing sector is estimated; then using these effective rates of protection, a test is made to determine if in fact protectionism affects the return to capital. Results reveal that there is a significant positive relationship between trade protection and the rate of return to capital in Colombia. Furthermore, support is found for a Stopler-Samuelson effect of higher prices in the labourintensive agricultural sector leading to decline in the return for capital. Therefore, government policies do in fact cloud market signals and distort relative factor prices resulting in the misallocation of resources.