Download Guatemala

Competitiveness and Growth
in Guatemala
D. Artana, S. Auguste, M. Cuevas, and J. Diaz
Washington DC, September 2007
CIEN - FIEL
1
Slow Economic Growth
Per capita real GDP
Real
GDP
1950-1980
2.2
5.0
1980-1990
-1.5
0.9
1990-2006
1.1
3.2
1950-2006
1.3
3.9
Remark: After the lost decade and civil war, other countries in the Central
America region recovered or exceed pre 80s growth rates. Guatemala did
not. Why? What has changed in Guatemala or the world?
CIEN - FIEL
2
Slow Growth Across the Board…
Potential growth of GDP by economic sector
0.12
0.10
0.08
0.06
0.04
0.02
INDUSTRY
AGRICULTURE
CIEN - FIEL
2004
2001
1998
1995
1992
1989
1986
1983
1980
1977
1974
1971
(0.04)
(0.06)
1968
(0.02)
1965
-
SERVICES
3
Low Investment in Guatemala
• GFCF/GDP
– Guatemala: =13%
– Latin American Average= 23%
– Fast growing economies in East Asia=22%
• Average private GFCF/GDP 1970-2003
– Latam=16%
– Guatemala= 10%.
CIEN - FIEL
4
Private Gross Fixed Capital Formation as a ratio of GDP
(constant prices)
As a Consequence…Low Capital Accumulation
35%
30%
25%
Costa Rica
20%
Chile
15%
El Salvador
Guatemala
10%
5%
0%
1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
CIEN - FIEL
5
Poor TFP Growth
• Standard growth decomposition
-Average annual TFP growth close to 0% over five decades
(Loening, CIEN)
-Method may be overestimating HK contribution and thus
underestimating true TFP growth
• Harberger´s “real cost reduction”
-RCR yields positive annual trend growth (1.7% 1986-2001)
-HK contribution source of divergence…
• Compare with Costa Rica (over 2%),
Chile (over 3%)
CIEN - FIEL
6
Is it Costly International Finance?
(i.e. aggregate financial constraint)
Low I & Growth
Barriers to investment
Costly International
Finance
Lack of Opportunities
Costly Local
Finance
* Aggregate Financial * Financial constraints
Constraints
* Weak Regulation
* Poor Debt
* Banking system
Management
and regulations
Low
Appropriability
Low
Social Returns
* Corruption
* 'Forex' Risks
* Tax pressure
* Tax regulation
* Too-little self
discovery
* High Cost
(infr. costs)
* Externalities
* Spillovers
* Coordination failure
* Crime
CIEN - FIEL
Low Competitiviness
Low Supply of Compl.
Inputs (HK and Infr.)
7
Not Costly International Financing
• Strong BOP and dynamic international
resource flows…
• …but resource inflows mostly
consumed (not invested).
• External financing not likely to be a
binding constraint from macro
perspective.
CIEN - FIEL
8
Is it Costly Local Finance?
Low I & Growth
Barriers to investment
Costly International
Finance
Lack of Opportunities
Costly Local
Finance
* Aggregate Financial * Financial constraints
Constraints
* Weak Regulation
* Poor Debt
* Banking system
Management
and regulations
Low
Appropriability
Low
Social Returns
* Corruption
* 'Forex' Risks
* Tax pressure
* Tax regulation
* Too-little self
discovery
* High Cost
(infr. costs)
* Externalities
* Spillovers
* Coordination failure
* Crime
CIEN - FIEL
Low Competitiviness
Low Supply of Compl.
Inputs (HK and Infr.)
9
Local Financing Better
than Comparator Group: Cluster Analysis
Unweighted Averages
Repressed
High
Guatemala
Cost
Low
Cost
Percentage
Spreads
66.6
13.0
10.0
6.3
Real Interest Rate
-16.8
13.3
8.5
5.6
8.2
10.4
13.8
25.0
2
48
--
79
Saving/GDP
Number of countries
Source: Author’s calculations on the basis of WDI data (corresponding to 2004/2005)
CIEN - FIEL
10
Domestic Financing
not a Binding Constraint
• From an aggregate perspective, terms
and availability of domestic financing
are adverse,…
• …but no worse than comparator
countries.
• Domestic financing not likely to be a
binding constraint at this moment.
CIEN - FIEL
11
Is it Low Social Returns?
Low I & Growth
Barriers to investment
Costly International
Finance
Lack of Opportunities
Costly Local
Finance
* Aggregate Financial * Financial constraints
Constraints
* Weak Regulation
* Poor Debt
* Banking system
Management
and regulations
Low
Appropriability
Low
Social Returns
* Corruption
* 'Forex' Risks
* Tax pressure
* Tax regulation
* Too-little self
discovery
* High Cost
(infr. costs)
* Externalities
* Spillovers
* Coordination failure
* Crime
CIEN - FIEL
Low Competitiviness
Low Supply of Compl.
Inputs (HK and Infr.)
12
Literacy Rates
LAC
110
105
100
100
95
90
Literacy Rate
Literacy Rate
Lower-Middle Income
80
70
Guatemala
60
90
85
80
75
70
50
Guatemala
Gua
65
40
60
0
1,000
2,000
3,000
4,000
5,000
GNI per capita
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
GNI per capita
CIEN - FIEL
13
8,000
Net Enrollment Ratio
Secondary School
LAC
100
Net Enrollment Ratio, Secondary
School (%)
Net Enrollment Ratio, Secondary
School (%)
Lower-Middle Income
90
80
70
60
50
40
30
Guatemala
20
10
0
1,000
2,000
3,000
GNI per capita
4,000
100
90
80
70
60
50
40
30
20
10
0
5,000
CIEN - FIEL
Guatemala
0
1,000
2,000
3,000
4,000
5,000
GNI per capita
6,000
7,000
14
8,000
70
Gross Enrollment Ratio, Tertiary
Education (%)
Gross Enrollment Ratio, Tertiary
Education (%)
Gross Enrollment Ratio
Tertiary Education
60
50
Lower-Middle Income
40
30
20
Guatemala
10
0
0
1,000
2,000
3,000
4,000
70
60
50
LAC
40
30
20
10
5,000
GNI per capita
Guatemala
0
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
GNI per capita
CIEN - FIEL
15
8,000
Public Expenditure in Education
as Percentage of GDP (year 2004)
LAC
18
16
14
12
10
8
6
4
2
Guatemala
0
0
1,000
2,000
3,000
GNI per capita
4,000
5,000
Public Expenditure in Education as a
% of GDP
Public Expenditure in Education as a
% of GDP
Lower-Middle Income
7
6
5
4
3
2
Guatemala
1
0
CIEN - FIEL
0
1,000
2,000
3,000
4,000
5,000
GNI per capita
6,000
7,000
16
8,000
Conclusions about stock of HK
• Low stock of human capital
• Strong gender and racial differences in
education
– Illiteracy rate higher among women and
indigenous groups
– 60% of illiterate people belong to indigenous
groups and 67% of them are women.
• Some Recent Improvement. Part of the lack of
human capital is due to older cohorts (inherited)
CIEN - FIEL
17
If a factor is scarce its compensation should be high
Thailand
Guatemala
Ecuador
Brazil
Paraguay
Peru
Mexico
Chile
United States
Colombia
Panama
Latin America Average
Bolivia
Nicaragua
El Salvador
Honduras
Costa Rica
Argentina
Venezuela
Uruguay
Dominican Rep.
Taiwan
0
0.05
0.1
0.15
0.2
0.25
Guatemala has the Highest Returns to Education in LATAM. Private
returns have not declined during the last 20 years in spite of strong
increase in schooling (showing that HK is still scarce)
CIEN - FIEL
18
Poor Quality Education
• Bratsberg and Terrell 2002), Guatemala 64 out of 67
countries in terms of “quality” (only Haiti, Mexico and
Dominican Republic have lower quality)
And Inequality in Education
Non-Indigenous Groups
0
0
.2
.5
.4
Density
Density
.6
1
.8
1
1.5
Indigenous Groups
6.5
7
7.5
Fitted values
8
8.5
6
CIEN - FIEL
7
8
Fitted values
9
10
19
Infrastructure
• Some successful reforms (electricity,
telecommunications).
• Low penetration of Internet seems more related to
HK than infrastructure.
– Cross subsidies in electricity pricing
• There are some problems in ports and
transportation, as well as problems with electricity
pricing.
• Although, it does not seem as critical as HK
CIEN - FIEL
20
3,000,000
2,500,000
2,000,000
Open Forest is not so bad
1,500,000
1,000,000
500,000
BRA
SLV
ARG
GTM
CHL
COL
GUY
NIC
PAN
ECU
JAM
(*)
TTO
• Klinger and Lederman (2005) Guatemala 5th from 73 countries
in new discoveries. 106 new products exported in 1997-2002.
• CONCLUSION: actual export basket does not seem to be a
binding constraint to growth
• So, why export growth is weak? Same factors affecting
investment and GDP growth
CIEN - FIEL
21
Informality
• Striking figure in Guatemala is the high level of informality
(around 75% of workers)
• In terms of value added, the informal sector in 2006 was
around 34.4% of the total economy
• High informality can affect economic growth, because it
affects the production technology, sector composition of the
production, capital structure, R&D investment, human capital,
etc.)
• Informal activites in Guatemala: Demand less qualified
workers, Wages are much lower (showing productivity is
smaller) and Capital accumulation is slow and more volatile
CIEN - FIEL
22
General Conclusions
and
Policy Recommendations
CIEN - FIEL
23
• Constraints:
– Stock and quality of education, health
– Weak enforcement of property rights and laws /
dysfunctional justice
– Certain types of infrastructure (with high public-good
component)
• Common thread in binding constrains is low supply of
public goods to complement private investment.
– Financing expansion in the supply of public goods is
difficult without raising tax revenues and improving
quality of expenditures.
– Note that public sector has no important sources of
revenue, debt financing not recommended.
CIEN - FIEL
24
• Policy reforms to address binding constraints on the economy
have been considered…
• …but financing expansion in the supply of public goods is
difficult without raising tax revenues and improving quality of
expenditures (policy constraint…not economic constraint).
• Therefore:
– Taxation (for example, VAT and Excises to raise tax revenues with
progressivity through public outlays)
– Focus on reducing informality and continue with efforts to improve
HK (investment in education and health)
– Complete reforms that are “less intensive” in public money (for
example, PPPs, regulation of utilities, regulation of the financial
system, labor regulation)
– Picking the winners demands stronger public institutions
(addressing issue of “state capture” by powerful interest groups)
CIEN - FIEL
25