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Determinants of Economic Growth: The Case of Guatemala Maria Sophia Aguirre Department of Economics The Catholic University of America Washington, DC FADEP Guatemala, Guatemala October 11, 2007 Purpose of the Study To understand the relevance of population and family to the economic growth process in Guatemala. To investigate how the family engages in the process of economic growth. To empirically identify what model of economic growth best fits the Guatemalan reality. To facilitate and strengthen the present and future population and family policy design and implementation in Guatemala. Data Used and Framework Three databases • Macroeconomic Variables compiled from 1950-2006: yearly. • ENEI 2004 and Census of 2002: by “lugar poblado.” Framework • Test of Economic Growth Theory • Other explanatory variables have been added as fitting. • Analysis of Family Dynamics on wealth, income and human capital. We know from economic analysis that in economic development There is a positive correlation between human capital, infrastructure and economic growth healthy institutions and economic development health and income per capita These positive correlations reflect an essential causal link running from human capital to healthy institutions (social capital) infrastructure and technology Life expectancy is a significant predictor of economic growth Role of the Family in the Economy Basic Activities Means Used Role of the Family Purpose Production Resources Human Capital Basic Needs Exchange Market Human, Moral, Social Capital Profit Consumption Optimization and Distribution Appropriate distribution Wellbeing (welfare) Economic Theories of Growth Neo-Classical Theory Embraces Malthus’s inverse relationship between population growth and real growth but acknowledges the key role of investment and thus savings in the process of growth. Human Capital Theory Human capital is an important source of economic development that depends on advances in technological and scientific knowledge. Increasing returns to scale. Malthusian • Inverse Relationship between population and consumption. Neo-Malthusian Theory: Ehrlich and Hardin • Population depletes resources and damages the environment. Environmental Health, Welfare and Living Conditions in Guatemala, 2004 Indicator % access House Connection: water 89/ 99 House Connection: sewerage 59/ 99 House Connection: electricity (rural-urban) 50-62 / 100 Water consumption (liter per person) 50/100 / 600 Improved Water (urban-rural) 88/98 / 100 Improved Sanitation Access to Basic Essential Drugs Immunization 90/100 85-90/ 91 92/100 Under-five mortality (per 1000) 49/6 Life Expectancy 65/85 Public Expenditures on Health (%GDP) 5.7 / 6.2 Paved Roads 87/94 Telephones Mainlines (per 1000) 77/597 Cellular Subscribers (Per 1000) 165/ 605 Literacy 69.1/100 Sources: Human Development Report, 2005 and Millennium Development Goal Indicators, 2005. Leading Causes of Death and Health Services in Guatemala Adults Total Non-communicable diseases (per 100 000 population) Maternal mortality ratio (per 100 000 live births) Cardiovascular diseases (per 100 000 population) 562.0 240 188.0 Non-communicable diseases other than cardiovascular, injuries and cancer (per 100 000 population) 183 Injuries (per 100 000 population) 98.0 Cancer (per 100 000 population) 93.0 HIV/AIDS (825 infected and 77.8 new cases every year) (per 100 000 population per year) Tuberculosis (109 infected) (per 100 000 population) 21 13.1 Children (% of death among children) Neonatal causes rate 37.3 Other causes rate (54.2% of children are undernourished in rural areas. 32% in urban areas.) 29.8 Pneumonia rate 15.0 Diarrhea diseases rate (58% access dehydration therapy) 13.1 Injuries rate 1.5 Malaria rate 0.4 Measles rate 0.1 HIV/AIDS 2.7 Services Antenatal care coverage - at least one visit 86 Antenatal care coverage - at least four visits (%) 68 Births attended by skilled health personnel (rural/urban) 25/66.1 Contraceptive prevalence rate 43.3 Hospital beds (per 10 000 population) 7.0 Poor health is highly correlated with low levels of education and poverty Prevalence of Child Death (%) 70 60 65.3 64.4 50 40 30 20 12 7.5 10 0 Lowest wealth quintile Highest wealth quintile Lowest education level Sources: Care Health Indicators for Guatemala Highest education level Families face serious health and poverty problems • Lack of income and assets to attain basic needs: Human assets Natural assets Physical assets Financial assets Social assets Aging security • Vulnerability to adverse shocks are linked to an inability to cope with them I. Aggregated Level: Models The openness of the economy: + The Neo-Classical model seems to perform best. • Investment and Technology: + • Population Growth: 0 • Domestic Research and Development: + • Foreign Research and Development: 0 • Foreign Technology: + Formal and Total Real GDP 1950-2006 MILLION OF QUETZALES 10000 9000 REAL GDP 8000 TOTAL REAL GDP 7000 6000 5000 4000 3000 2000 1000 2004 2001 1998 1995 1992 1989 1986 1983 1980 1977 1974 1971 1968 1965 1962 1959 1956 1953 1950 0 YEAR Sources: Banco de Guatemala, Urizar, Carmen , Julio Cole, Pablo Schneider and Caroll R. de Rodríguez “La Economía Informal en Guatemala”, CIEN, 1992, and CIEN (2001) 500 14 300 250 200 150 8 6 4 Real Total GDP Per Capita 2 0 0 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984 1983 1982 1981 1980 1979 1978 1977 1976 1975 1974 1973 1972 1971 1970 1969 1968 1967 1966 1965 1964 1963 1962 1961 1960 1959 1958 1957 1956 1955 1954 1953 1952 1951 1950 Years 100 POPULATION 50 Real GDP per Capita 350 10 Total Population (Millions) Population and GDP Per Capita 1950-2006 12 450 400 Speed of Population Aging Number of years for % of population aged 65 and over to rise from 7% to 14% Colombia Brazil Thailand Tunisia Sri Lanka Jamaica Chile Singapore China Azerbaijan Japan Spain United Poland Hungary Canada United Australia Sweden France 20 21 22 23 23 24 25 27 27 41 26 Source: US Census Bureau, 2000 45 45 47 53 65 69 73 85 115 Speed of Aging Population 1982-2006 2006 59 64 64 64 64 64 64 62 61 61 65 60 2003 2000 Year 1997 1994 1991 48 51 57 62 59 52 52 59 1988 69 73 74 1985 83 1982 0 20 40 60 80 Number of Years Sources: Raw data obtained from INE. 130 100 120 140 Estimation of the Aging Population Path Given Current Population Trends (Base year: 2006) 30 Percentages 25 20 15 10 5 0 1 9 17 25 33 41 49 57 65 73 81 89 97 105 113 121 129 137 145 153 161 Number of Years Estimation of Gross Domestic Product Per Capita Under Various Assumptions (Base year: 2006) 0.25 Log GDP Per Capita GDPPC59 0.2 GDPPC74 GDPPCCT 0.15 0.1 0.05 0 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 Number of Years Sources: Author Estimations GDPPCCT was estimated based on the current trend of aging population acceleration. GDPPC59 captures the per capita GDP path for the present population structure. GDPPC74 captures the per capita GDP path for a 2% population growth. 49 52 55 Wealth Composite Distribution for Head of Households (2004) 12 COMPOSITE 10 8 1% 8% 60% 6 8% 4 13% 2 10% 0 Sources: ENEI, 2004 Income Composite or NBI Distribution for Head of Households, 2004 180 160 0.04% 140 COMPOSITE 29% 120 100 59.96% 80 10% 60 1% 40 20 0 Sources: ENEI, 2004. Accentuated disparity in both income and wealth distribution • • • • • • Access to credit: + Years of education: + Remittances: + Per capita income: + on Inequality Openness of the economy: + on Inequality Political Stability/Rule of Law: + Human Capital • Education (measured as average years of education): 0 • Experience and stock of capital: + • Increasing returns to scale on human capital: + • Average years of education: 3 • Inefficiencies found in the social return of education. 200.00 180.00 160.00 140.00 120.00 100.00 80.00 60.00 40.00 20.00 0.00 MBS MCS 19 50 19 54 19 58 19 62 19 66 19 70 19 74 19 78 19 82 19 86 19 90 19 94 19 98 20 02 20 06 Quetzales Marginal Benefit and Cost of Schooling, 1950-2006 Years Sources: Own Econometric Estimation In Summary The Empirical Evidence Supports openness in the economy. Emphasizes the importance of investment and technology as well as education for growth. Indicates increasing returns to scale to human capital Lends no support for policies directed towards population control. III. Disaggregated Level Wealth Household Characteristics Contribution to Wealth Household Characteristcis (% Increase/Decrease) Sex of head of household -18 Type of occupation 2.4 Age of the household’s head 6.1 Number of children 6.8 7.5 Higher level of education Remittances 25 Urban vs. rural 26 Marriage -30 -20 -10 29 0 10 Increase/Decrease of Welath Sources: Own Econometric Estimation 20 30 40 Contribution of Marriage to Wealth (% Increase) Increased on Welath (%) 35 30 25 20 15 29 24 10 28 5 0 Total Ladino Race Sources: Own Econometric Estimation Indigenous Percentage of Head of Households that Report Owning Property and Holding Savings 70.00% Own Home 60.00% Hold Savings 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% Unions Married Source: ENEI (2004) Separated Divorced Widowed Remittances The probability of receiving remittances increases by 18.6% when it is headed by married women. In other type of family structures it decreases by 2.7%. III. Disaggregated Level: NBI Household Characteristics Contribution to Income (NBI) Hosuehold Characteristics (% Increase/Decrease) Married 0.6 Higher level of education 1.2 Urban vs. rural 2.9 0 0.5 1 1.5 2 2.5 3 3.5 Number of times that Increases/Decreases Source: ENEI (2004) Level of Income (NBI) and Wealth of the Head of Household by Family Structure COMPOSITE 16 13.84 14 NBI 12 WEALTH 10 8.95 35% lower 8 5.51 6 5.48 4 2 0 MARRIED Source: ENEI (2004) NOT MARRIED Average Wealth and Income Composite per Family Structure and Race Average Value of Composite 20.00 15.14 18.00 16.07 16.00 15.08 13.20 12.55 12.28 12.00 10.97 10.00 8.00 14.26 14.15 14.22 14.00 17.92 15.84 5.47 6.00 5.50 5.10 4.78 5.55 5.39 5.94 5.31 5.60 5.27 5.85 5.71 4.00 2.00 0.00 Wealth Poverty Wealth Poverty Wealth Poverty Wealth Poverty Wealth Poverty Wealth Poverty Unions Indigenous Married Ladinos Sources: ENEI (2004) Separated Divorce Marital Structure Widows Single Parents Impact of Marriage by Race 80 Percentage Increase 70 60 69 Ladino 70 Indigenous 50 40 30 26 22 20 10 0 Wealth Income Family Structure by Race 66 Percentage of Households 70 56 60 Indigenous Ladino 50 40 30 26 22 20 7 10 3 8 8 3 1 0 Unions Married Separated Family Structure Sources: ENEI (2004) Divorce Single Parents Human Capital Educational levels are affected by family structure. Attendance to school is higher among married households than others. It is also reinforced by remittances. Factors Affecting Child Schools Attendance Area -5 8 Race: Indigenous Income 4 Wealth 4 Parents Education 11 Marriage -6 -4 -2 10 0 2 4 Percentage Increase 6 8 10 12 Percentage of Households Level of Education of the Head of Household per Race and Family Structure 90 80 70 60 50 40 30 No-education Grade School High School Terciary College Graduate 20 10 0 LAD INDIG Unions LAD INDIG Married LAD INDIG Separated LAD Divorce Family Structure Sources: ENEI (2004) INDIG LAD INDIG LRACE INDIG Widows Single Parents Children School Attendance by Family Structure Head Count 8000 7000 Indigenous 6000 Ladino 5000 4000 3000 2000 1000 0 Unions Marriage Separated Divorce Family Structure Sources: ENEI (2004) Widows Why is family structure information relevant? Increase savings, and these are needed for investment Decreases poverty and there is a large portion of the population who live in poverty Access to wealth facilitates social mobility Relevant for the determination of human capital Broken families are a burden on public finances For policy design purposes IV. Policy Recommendations Continue to deepen the opening of the economy while reinforce institutions at both national and local levels. • Rule of law • Transparency • Property rights • Education system • Strengthening of the family structure should be priority. Expand access to economic opportunity for low income households. Promote legislation that supports families vis a vis other types of living styles. Promotion and protect healthy families as a means to eradicate poverty, especially the feminization of poverty. Reform the public and private education system in Guatemala to improve the coverage and quality of educational services. The government can assist lower income families to choose among these alternatives through a voucher system or another demand-oriented financial mechanism. Improve efficiency in the use of government funds now allocated to population Redirect the present efforts towards population control and sexual education programs Develop labor legislation that facilitates and provides incentives for the harmonization of family life and professional activity for all family members. Conclusions Economic Development is an outcome of more than economic processes. It is an outcome of economic, social, and political processes. To attain it, opportunities need to be promoted, empowerment at all levels facilitated, and stability ensured. Conclusions Neo-Classical Model is supported in Guatemala. The openness of the economy has been positive for economic growth. Experience rather than education is significant for economic growth. There is evidence for lack of efficiency in the education system. Rate of growth of population is not significant for economic growth. Fertility rate is significant and positive. Family structure is relevant for wealth. This happens to be the case after other characteristics are controlled by.