Competitiveness and Growth in Guatemala

1. Competitiveness and Growthin Guatemala D. Artana, S. Auguste, M. Cuevas, and J. Diaz Washington DC, September 2007 CIEN - FIEL

2. Slow Economic Growth 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

3. Slow Growth Across the Board… Potential growth of GDP by economic sector CIEN - FIEL

4. 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

5. As a Consequence…Low Capital Accumulation 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 Finance? (i.e. aggregate financial constraint) 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? CIEN - FIEL

10. Local Financing Better than Comparator Group: Cluster Analysis 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? CIEN - FIEL

13. Literacy Rates Lower-Middle Income LAC CIEN - FIEL

14. Net Enrollment Ratio Secondary School Lower-Middle Income LAC CIEN - FIEL

15. Gross Enrollment Ratio Tertiary Education Lower-Middle Income LAC CIEN - FIEL

16. Public Expenditure in Educationas Percentage of GDP (year 2004) Lower-Middle Income LAC 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 high 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

19. 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 Indigenous Groups Non-Indigenous Groups CIEN - FIEL

20. 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

21. Open Forest is not so bad • 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

22. 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

23. General ConclusionsandPolicy Recommendations CIEN - FIEL

24. 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

25. 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