Competitiveness and Growth in Guatemala D. Artana, S. Auguste, M. Cuevas, and J. Diaz


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Competitiveness and Growth in Guatemala

  • D. Artana, S. Auguste, M. Cuevas, and J. Diaz

  • Washington DC, September 2007


Slow Economic Growth



Slow Growth Across the Board…



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%.


As a Consequence…Low Capital Accumulation



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%)



Is it Costly International Finance? (i.e. aggregate financial constraint)



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.



Is it Costly Local Finance?



Local Financing Better than Comparator Group: Cluster Analysis



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.



Is it Low Social Returns?



Literacy Rates



Net Enrollment Ratio Secondary School

  • Lower-Middle Income LAC



Gross Enrollment Ratio Tertiary Education

  • Lower-Middle Income LAC



Public Expenditure in Education as Percentage of GDP (year 2004)

  • Lower-Middle Income LAC



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)



If a factor is scarce its compensation should be high



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)



Infrastructure

  • Some successful reforms (electricity, telecommunications).

  • Low penetration of Internet seems more related to HK than infrastructure.

  • There are some problems in ports and transportation, as well as problems with electricity pricing.

  • Although, it does not seem as critical as HK



Klinger and Lederman (2005) Guatemala 5th from 73 countries in new discoveries. 106 new products exported in 1997-2002.

  • 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



Striking figure in Guatemala is the high level of informality (around 75% of workers)

  • 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



General Conclusions and Policy Recommendations



Constraints:

  • 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.


Policy reforms to address binding constraints on the economy have been considered…

  • 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)



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