Attracting investments and growing the economy

“Even though the Statistical Institute of Belize issued a press release in February correctly cautioning that GDP growth has no direct correlation with unemployment rate, we still need to ask where new jobs will come from when the economy is growing very little or not at all.

“Keeping in mind that the September Labour Force Survey gave an official unemployment figure of 14.2% or approximately 21,000 people, how can an economy growing at only 0.7% create jobs for that many unemployed?

“Bear in mind that the Government of Belize already hires almost 15,000 people at a total annual wage bill -footed by taxpayers- of just over $332 million, so it cannot create 21,000 more jobs within its own ranks. This leaves the private sector to do the needful, but how best to do it? One quick way to create sustainable jobs is to encourage foreign investors to bring new money and business activity into the economy.”— (Kay Menzies, president of Belize Chamber of Commerce).

The quote from Kay Menzies above—taken from this week’s “It’s Your Business” piece, Menzies’ biweekly column in this newspaper— once again brings into the spot light the age-old question on how to improve the growth rate of the economy and reduce the more than 14 percent unemployment rate in the country.

Coincidentally, Menzies’ premise resonated with the direction that this week’s “Our Economy” was taking—a happenstance, in my view, that further proves that these questions (and their possible solutions) weigh heavily on everyone’s minds.

Her prescription for “new money” and new business activities entering the country from foreign investors is indeed a viable option (and as stated earlier, the coincidental focus of this article).

But, as we’ve heard often thrown out as political rhetoric, foreign investment has not been as strong as we’d like, and the most sensible question to ask is “why?”

Not just a Belizean Problem
The first thing that needs to be stated at this point is that the relatively low rate of capital flow (investment) into The Jewel isn’t unique to us. It’s a common phenomenon among developing countries that has attracted droves of economic researchers to look at empirical data and compare them to what traditional economic theories (and models) suggest.

One such economists is James Lothian, who, in his 2006 research paper entitled “Institutions, capital flows and financial integration”, reminded that “[c]loosely related to the question of why capital does not flow from rich to poor countries is the question of why poor countries do not grow much more rapidly.”

In terms of answering the intra-country growth question, he referred to other work that tested growth accounting formula against statistical data and found that the conventional factors (i.e. Labor and Capital) were not the only contributors to growth.

They found that a substantial portion of growth (or lack thereof) is attributed to a component of growth that is unexplained by those shares of the factors. (This unexplained component has been dubbed the “residual”).

Lothian writes: “Initially, explanations of what [the residual] represented centered around two factors: technological improvements and human capital accumulation.”

But one economists, Arnold Harberger, in his 1998 address to the American Economic Association, took the idea of this unexplained factor a step further: he argued that a better way to interpret the residual is to think of it in terms of “real cost reduction”, because then one is thinking “like an entrepreneur, or a CEO, or a production manager”.

Good policies—not just a good idea
Lothian elaborates: “What factor or factors typically account for these real cost reductions? Why do those factors operate more strongly during some time periods and in some places than in others?

“Haberger’s answer is in terms of economic incentives and the government policies and societal institutions that affect them for better or worse.”
He adds: “Good policies—price stability, an absence of distorting government intervention at the levels of the firm and the household, open international trade and the like—and good institutions, enforcement of private property being key—enable growth.

“They also raise the rate of return to investment and thus increase income via that channel. Bad policies and bad societal institutions have reverse effects [emphasis added].”

This point was echoed by economics professors Robert C. Feenstra and Alan M. Taylor in their book on international trade. While they looked at the question from the point of view of productivity levels (which stands as a principal concern for would-be investors), their conclusion was the relatively the same.
They write: “Economists believe that the level of [productivity] may primarily reflect a country’s social efficiency, contrasted broadly to include institutions, public policies, and even cultural conditions such as the level of trust.”

Feenstra and Taylor go on to conclude—like Lothian—that low productivity “might then flow from low levels of human capital (poor education policies) or poor-quality institutions (bad governance, corruption, red tape, and poor provision of public goods including infrastructure). … there is some evidence that, among poorer countries, more capital does tend to flow to the countries with better institutions.”

Belize and the Economic Freedom of the World Index
So, if there is this consensus that the poor-quality institutions and low levels of human capital—which is directly related to education policies—we have to ask this question: where is Belize in all of this?

Well, one quick way to get a general understanding of where Belize is in this regard is to refer to the Economic Freedom of the World Index (EFW).
The index—which measures the degree to which policies and institutions of countries are supportive of economic freedom—rates countries annually according to five BROAD categories (that are further broken down into 42 variables): Size of Government, Legal System and Property Rights, Sound Money, Freedom to Trade Internationally, and regulations.

Belize with scores such as 6.54 in 2000, 6.96 in 2003 (the highest since the year 2000), 6.93 in 2005 and 6.69 in 2011, falls within the range of countries that have EFW scores above 6 but less than 7.5.

According to Figure One above, countries within this range have FDI-to-GDP ratios of less than 20 percent.
Belize’s score and FDI rates
Figure One is, of course, representative of a study of 64 countries, but does its results hold true for Belize?
Interestingly, Belize’s FDI data shows that investment inflows peaked in 2008 at 12.44 percent of GDP.

As can be seen from the graph “Foreign Direct Investment, net flows (% of GDP)”, Belize’s rate of FDI has fluctuated significantly over the last 44 years (since 1970).

From the years 2007 to 2011, the figures were as follows: 10.99, 12.44, 8.07, 6.90, and 6.59.
All of these figures are well below the marker that Lothian’s research had predicted. It is also clear that there is a strong correlation between EFW scores for Belize and the rate of FDI in the country
Since 2005, for example, EFW scores for Belize have been on a steady decline, with 2010’s and 2011’s scores being 6.72 and 6.69, respectively. At the same time, FDI rates for those two years were 6.90 and 6.59, respectively.
Policy shifts needed
Coming back to the general theme of this article, empirical studies have consistently shown that if developing countries (like Belize) are indeed serious about addressing the problems of job and economic growth, we need to shift our focus on those policy hindrances that have been highlighted time and time again.

The policy makers and those who put them there ought to raise the bar on the conversation on this matter FAR beyond the political rhetoric that seems to have trivialized this issue.

It’s not rocket science. If decades’ worth of data from a myriad of researchers are pointing out that poor-quality institutions (bad governance, corruption, red tape, and poor provision of public goods) and low levels of human capital development (reflected in poor education policies) are at the core of the growth issues that Menzies talks about in the quote above, then it is relatively conspicuous what needs to be done in this country to achieve the desired growth levels.

But the conversation has been far too politicized for it to have matured in the public sphere. And while the politicians (BLUE and RED) “entertain” us—to their benefit only— in their “spirited” budget debates, issues like these are tossed aside.

Issues like these and more need to become the center piece of the Belizean discussion on growth, and it’s up to the people of this country to make sure that it becomes just that.

Comments are closed.