As I have mentioned in previous Ripples, this writer supports the Inclusive Growth framework, of which growth is a pivotal cornerstone. But whether one adheres to the relatively young (and evolving) inclusive growth philosophies or to that of Pro-Poor growth, the common thread is that the country needs to grow.
In earlier Ripple Effects, we’ve discussed the 2007 Growth Diagnostic by Ricardo Hausmann and Bailey Klinger, who had concluded that primary hindrance to Belize’s growth (which they call a “binding constraint”) was the issue of access to finance. Making a long story short, Hausmann and Bailey (2007) pointed to the high costs of access business loans—along with the conditions that they believe caused those high interest rates—as the primary culprits behind Belize’s growth issues.
The thing is, however, the dynamics have changed significantly since then, with the weighted-average lending rate declining by 4 percentage points. In 2007, Hausmann and Bailey would have found that the weighted-average lending rate in Belize was about 14.3%; however, as of June this year, the Central Bank reported that the lending rate average is 10.25%. The accompanying screen shot of the weighted average lending rates from August 2007 to August 2015 depicts this downward trend.
Interestingly, during the period that the lending rates have been going down, the banks’ excess cash in the system have grown from about $60 million in December 2010 to well over $370 million as of the ending of June 2015. Said differently, the government requires the local commercial banks to hold $218 million at the Central Bank; however, the total (actual) cash balances as of June are more than $588 million.
Looking at the above, one could conclude that there’s less loans being demanded; therefore, the banks have excess “stock” of cash. The reasons people give for this phenomenon vary, but many folks seem to side with the investor-confidence argument. Some could view the banks’ beefing up of reserves as a strategy to increase their appeal and attractiveness to investors (and strengthen credit ratings); while some could argue that it’s a means for them to protect themselves from unexpected loan losses. In other jurisdictions where Central Banks pay interest on commercial banks’ excess reserve, it would be a little easier to infer the banks’ motivation for doing so.
For now, let’s avoid the assumptions on “why”, and stick to the observable fact that while lending rates have been going down, excess cash reserves have been climbing, and is currently more than five times what it was just under five years ago.
New Report’s take on the matter
In a sort of sequel to Hausmann’s and Klinger’s (2007) growth diagnostic, economist Dougal Martin’s recently released report, entitled “Rekindling Economic Growth in Belize”, reignites the engine on Hausmann’s and Klinger’s approach (officially the approach is the Hausmann-Rodrik-Velasco [HRV] Growth Diagnostic Model), and finds that access to finance is not the “main” constraint.
Martin (2015) stated that “the binding constraint to economic growth in Belize is a longstanding and unintentional anti-export bias of public policies.” He would go on to point out the “tax and trade policy framework” as effectively distorting the “incentives against exports and is the most important aspect of the anti-export bias”.
Now, don’t misunderstand; Martin does not totally disregard the access-to-finance line of thinking. He puts it this way: “Along with access to finance, tax rates are rated as the biggest obstacle in the economy.”
In a future Ripple, it would be good to look more closely at the HRV-Growth Model’s criteria; however, for now, the only criteria that I’d like to highlight relates to whether or not the private sector itself recognizes the variable as, indeed, a binding constraint to their business. Martin reported that “Fifty-seven percent of all firms identify tax rates as a major constraint, placing it as the second most frequently identified factor.”
In contrast, Martin noted that a significant portion of domestic finance had been channeled towards “non-tradable” sectors (i.e. construction, distribution, and personal loans). “This implies that the profitability of tradable sectors has declined relative to non-tradable sectors, which is an issue outside of the financial sector,” he added.
Martin (2015) also pointed to some gaps in the provision of export-supporting public goods (including infrastructure); however, that aspect of this conversation would be brought up in a later Ripple.
Why should we care?
Before going any further, to be fair, it’s important to note that one of the news coming out of the recently held Prelude to the Prime Minister’s forum is the fact that the government is currently in the process of executing a comprehensive tax review process, which is intended to address a wide area of concerns, including those raised by Martin (2015) and that of the private sector. Certainly, this is a step in the right direction.
However, why should even the non-exporters care about this issue? The answer to that question is found in the opening sections of Martin’s report:
“Belize needs to accelerate its economic growth. Since the initiation of more sustainable fiscal policies in 2004, economic growth has been subdued. Between 2004 and 2014 real GDP growth averaged 2.65 percent, and between 2007 and 2014 real GDP growth averaged only 2.4 percent.”
So what’s so problematic about a growth average of 2.4 percent? Nothing really, until one puts back into the picture that that figure is awfully close to Belize’s population growth rate:
“With economic growth slightly below the population growth rate of 2.65 percent, living standards have stagnated in absolute terms. In relative terms, Belize remains poor—particularly when compared with other Caribbean countries—and its income advantage over its poorer Central American neighbors has been diminishing” (Martin, 2015, p. 4).
To address this living-standards-related concern, Martin suggested that Belize must find a way to speed up its growth to “at least 5 percent in real terms per annum to stabilize living standards at 8.7 percent of the United States level”. That 8.7 percent of United States’ GDP per capita (which at the time Martin wrote his report was approximately US$54,000) represented Belize’s GDP per capita of US$4774.
“If economic growth were to continue at a rate of 2.5 percent, Belizean GDP per capita would decline to 7.6 percent of the U.S. level by 2020,” he added.
Looking at historical trends, Martin pointed out those periods in which Belize had achieved high “productivity growth” were linked to a period in which the country also demonstrated “rapid export growth and the development of ‘new’ exports.” He added: “Similarly, the apparent lack of productivity growth since 2004 coincides with the weakest period of export growth” (Martin, 2015, p. 12). (Yes, the “productivity” word is reemerging yet again. For a recap on those earlier Ripple Effect discussions on “productivity” and why it matters, please visit rippleeffectbelize.com.
Therefore, with this observation having been made, the focus, according to Martin, needs to be on things that promote Belizean firms’ ability and incentive to develop new goods for the export market—a recommendation that is common for small, developing economies.