CIEN - FIEL 1
Competitiveness and GrowthCompetitiveness and Growthin Guatemalain Guatemala
D. Artana, S. Auguste, M. Cuevas, and J. Diaz
Washington DC, September 2007
CIEN - FIEL 2
Slow Economic GrowthSlow Economic Growth
Per capita real GDPRealGDP
1950-1980 2.2 5.0
1980-1990 -1.5 0.9
1990-2006 1.1 3.2
1950-2006 1.3 3.9Remark: After the lost decade and civil war, other countries in the Remark: After the lost decade and civil war, other countries in the Central America region recovered or exceed pre 80s growth rates. Central America region recovered or exceed pre 80s growth rates. Guatemala did not. Why? What has changed in Guatemala or the Guatemala did not. Why? What has changed in Guatemala or the world?world?
CIEN - FIEL 3
Slow Growth Across the Board…
(0.06)
(0.04)
(0.02)
-
0.02
0.04
0.06
0.08
0.10
0.12
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
INDUSTRY AGRICULTURE SERVICES
Potential growth of GDP by economic sectorPotential growth of GDP by economic sector
CIEN - FIEL 4
Low Investment in Low Investment in GuatemalaGuatemala
• GFCF/GDP GFCF/GDP – Guatemala: =13%Guatemala: =13%– Latin American Average= 23% Latin American Average= 23% – Fast growing economies in East Asia=22%Fast growing economies in East Asia=22%
• Average private GFCF/GDP 1970-2003Average private GFCF/GDP 1970-2003– Latam=16%Latam=16%– Guatemala= 10%.Guatemala= 10%.
CIEN - FIEL 5
As a Consequence…Low Capital AccumulationAs a Consequence…Low Capital Accumulation
0%
5%
10%
15%
20%
25%
30%
35%
1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003Priv
ate
Gro
ss F
ixed
Cap
ital F
orm
atio
n as
a r
atio
of
GD
P
(con
stan
t pr
ices
)
Guatemala
Costa Rica
El Salvador
Chile
CIEN - FIEL 6
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 7
Is it Costly International Is it Costly International Finance? (i.e. aggregate Finance? (i.e. aggregate
financial constraint)financial constraint)
* A g g re g a te F in a n c ia lC o n s tra in ts* P o o r D e b tM a n a g e m e n t
C o s tly In te rn a tio n a lF in a n c e
* F in a n c ia l c o n s tra in ts* W e a k R e g u la tio n* B a n k in g sy s te m
a n d re g u la tio n s
C o s tly L o c a lF in a n c e
B a rrie rs to in v e s tm e n t
* E x te rn a litie s* S p illo v e rs
* C o o rd in a tio n fa ilu re* C rim e
* C o rru p tio n* 'F o re x ' R isk s* T a x p re ssu re
* T a x re g u la tio n
L o wA p p ro p ria b ility
L o w C o m p e titiv in e ssL o w S u p p ly o f C o m p l.In p u ts (H K a n d In fr .)
* T o o -little se lfd isc o v e ry
* H ig h C o s t( in fr . c o s ts )
L o wS o c ia l R e tu rn s
L a c k o f O p p o rtu n itie s
L o w I & G ro w th
CIEN - FIEL 8
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 9
Is it Costly Local Finance?Is it Costly Local Finance?
* A g g re g a te F in a n c ia lC o n s tra in ts* P o o r D e b tM a n a g e m e n t
C o stly In te rn a tio n a lF in a n c e
* F in a n c ia l c o n s tra in ts* W e a k R e g u la tio n* B a n k in g sy s te m
a n d re g u la tio n s
C o stly L o c a lF in a n c e
B a rrie rs to in v e s tm e n t
* E x te rn a litie s* S p illo v e rs
* C o o rd in a tio n fa ilu re* C rim e
* C o rru p tio n* 'F o re x ' R isk s* T a x p re ssu re
* T a x re g u la tio n
L o wA p p ro p ria b ility
L o w C o m p e titiv in e ssL o w S u p p ly o f C o m p l.In p u ts (H K a n d In fr .)
* T o o -little se lfd isc o v e ry
* H ig h C o s t( in fr . c o s ts )
L o wS o c ia l R e tu rn s
L a c k o f O p p o rtu n itie s
L o w I & G ro w th
CIEN - FIEL 10
Local Financing Better than Comparator Group: Cluster
Analysis
Unweighted Averages
Repressed High Guatemala Low
Cost Cost
Percentage
Spreads 66.6 13.0 10.0 6.3
Real Interest Rate -16.8 13.3 8.5 5.6
Saving/GDP 8.2 10.4 13.8 25.0
Number of countries 2 48 -- 79
Source: Author’s calculations on the basis of WDI data (corresponding to 2004/2005)
CIEN - FIEL 11
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 12
Is it Low Social Returns?Is it Low Social Returns?
* A g g re g a te F in a n c ia lC o n s tra in ts* P o o r D e b tM a n a g e m e n t
C o s tly In te rn a tio n a lF in a n c e
* F in a n c ia l c o n s tra in ts* W e a k R e g u la tio n* B a n k in g sy s te m
a n d re g u la tio n s
C o s tly L o c a lF in a n c e
B a rrie rs to in v e s tm e n t
* E x te rn a litie s* S p illo v e rs
* C o o rd in a tio n fa ilu re* C rim e
* C o rru p tio n* 'F o re x ' R isk s* T a x p re ssu re
* T a x re g u la tio n
L o wA p p ro p ria b ility
L o w C o m p e titiv in e ssL o w S u p p ly o f C o m p l.In p u ts (H K a n d In fr .)
* T o o -little se lfd isc o v e ry
* H ig h C o s t( in fr . c o s ts )
L o wS o c ia l R e tu rn s
L a c k o f O p p o rtu n itie s
L o w I & G ro w th
CIEN - FIEL 13
Literacy Rates
Lower-Middle Income LAC
40
50
60
70
80
90
100
110
0 1,000 2,000 3,000 4,000 5,000
GNI per capita
Lite
racy
Rat
e
Guatemala
60
65
70
75
80
85
90
95
100
105
0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000
GNI per capita
Lite
racy
Rat
e
GuaGuatemala
CIEN - FIEL 14
Net Enrollment Ratio Secondary School
Lower-Middle Income LAC
10
20
30
40
50
60
70
80
90
100
0 1,000 2,000 3,000 4,000 5,000
GNI per capita
Net E
nrol
lmen
t Rat
io, S
econ
dary
Sc
hool
(%)
Guatemala
0
10
20
30
40
50
60
70
80
90
100
0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000
GNI per capita
Net E
nrol
lmen
t Rat
io, S
econ
dary
Sc
hool
(%)
Guatemala
CIEN - FIEL 15
Gross Enrollment Ratio Tertiary Education
Lower-Middle Income LAC
0
10
20
30
40
50
60
70
0 1,000 2,000 3,000 4,000 5,000
GNI per capita
Gros
s Enr
ollm
ent R
atio
, Ter
tiary
Ed
ucat
ion
(%)
Guatemala
0
10
20
30
40
50
60
70
0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000
GNI per capitaGr
oss E
nrol
lmen
t Rat
io, T
ertia
ry
Educ
atio
n (%
)
Guatemala
CIEN - FIEL 16
Public Expenditure in Educationas Percentage of GDP (year
2004)
Lower-Middle Income LAC
0
2
4
6
8
10
12
14
16
18
0 1,000 2,000 3,000 4,000 5,000
GNI per capita
Publ
ic Ex
pend
iture
in E
duca
tion
as a
%
of G
DP
Guatemala0
1
2
3
4
5
6
7
0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000
GNI per capita
Publ
ic Ex
pend
iture
in E
duca
tion
as a
%
of G
DP
Guatemala
CIEN - FIEL 17
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 18
If a factor is scarce its compensation should be highIf a factor is scarce its compensation should be high
0 0.05 0.1 0.15 0.2 0.25
Taiwan
Dominican Rep.
Uruguay
Venezuela
Argentina
Costa Rica
Honduras
El Salvador
Nicaragua
Bolivia
Latin America Average
Panama
Colombia
United States
Chile
Mexico
Peru
Paraguay
Brazil
Ecuador
Guatemala
Thailand
Guatemala has the Highest Returns to Education in LATAM. Guatemala has the Highest Returns to Education in LATAM. Private returns have not declined during the last 20 years in spite of strong Private returns have not declined during the last 20 years in spite of strong increase in schooling (showing that HK is still scarce)increase in schooling (showing that HK is still scarce)
CIEN - FIEL 19
Poor Quality EducationPoor Quality Education
• Bratsberg and Terrell 2002), Guatemala 64 out of 67 Bratsberg and Terrell 2002), Guatemala 64 out of 67 countries in terms of “quality” (only Haiti, Mexico and countries in terms of “quality” (only Haiti, Mexico and Dominican Republic have lower quality) Dominican Republic have lower quality)
And Inequality in EducationAnd Inequality in EducationIndigenous Groups Non-Indigenous GroupsIndigenous Groups Non-Indigenous Groups
0.5
11.
5D
ensi
ty
6.5 7 7.5 8 8.5Fitted values
0.2
.4.6
.81
Den
sity
6 7 8 9 10Fitted values
CIEN - FIEL 20
InfrastructureInfrastructure
• Some successful reforms (electricity, Some successful reforms (electricity, telecommunications).telecommunications).
• Low penetration of Internet seems more related to Low penetration of Internet seems more related to HK than infrastructure.HK than infrastructure.
– Cross subsidies in electricity pricingCross subsidies in electricity pricing
• There are some problems in ports and There are some problems in ports and transportation, as well as problems with electricity transportation, as well as problems with electricity pricing.pricing.
• Although, it does not seem as critical as HKAlthough, it does not seem as critical as HK
CIEN - FIEL 21
• Klinger and Lederman (2005) Guatemala 5Klinger and Lederman (2005) Guatemala 5thth from 73 from 73 countries in new discoveries. 106 new products exported in countries in new discoveries. 106 new products exported in 1997-2002.1997-2002.
• CONCLUSION: actual export basket does not seem to be a CONCLUSION: actual export basket does not seem to be a binding constraint to growthbinding constraint to growth
• So, why export growth is weak? Same factors affecting So, why export growth is weak? Same factors affecting investment and GDP growth investment and GDP growth
-
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
BRA SLV ARG GTM CHL COL GUY NIC PAN ECU JAM(*)
TTO
Open Forest is not so Open Forest is not so badbad
CIEN - FIEL 22
• 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
InformalityInformality
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General Conclusionsand
Policy Recommendations
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• 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.
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• 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)