Determinants of Economic Growth: The Case of...

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Determinants of Economic Growth:

The Case of Guatemala Maria Sophia Aguirre Department of Economics

The Catholic University of America Washington, DC

FADEP

Guatemala, Guatemala October 11, 2007

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Purpose of the Study Ø To understand the relevance of population and

family to the economic growth process in Guatemala.

Ø To investigate how the family engages in the

process of economic growth. Ø To empirically identify what model of economic

growth best fits the Guatemalan reality. Ø To facilitate and strengthen the present and future

population and family policy design and implementation in Guatemala.

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Data Used and Framework Ø  Three databases

–  Macroeconomic Variables compiled from 1950-2006: yearly.

–  ENEI 2004 and Census of 2002: by “lugar poblado.”

Ø  Framework –  Test of Economic Growth Theory

–  Other explanatory variables have been added as fitting. –  Analysis of Family Dynamics on wealth, income and

human capital.

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Ø  There is a positive correlation between ü  human capital, infrastructure and economic growth ü  healthy institutions and economic development ü  health and income per capita

Ø  These positive correlations reflect an essential causal link running from human capital to ü  healthy institutions (social capital) ü  infrastructure and technology

Ø  Life expectancy is a significant predictor of economic growth

We know from economic analysis that in economic development

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Role of the Family in the Economy

Basic Activities Means Used Role of the

Family Purpose

Production Resources Human Capital Basic Needs

Exchange Market Human, Moral, Social Capital

Profit

Consumption Optimization and

Distribution Appropriate distribution

Wellbeing (welfare)

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Economic Theories of Growth

n  Neo-Classical Theory ü  Embraces Malthus’s inverse relationship between population growth and

real growth but acknowledges the key role of investment and thus savings in the process of growth.

n  Human Capital Theory ü  Human capital is an important source of economic development that

depends on advances in technological and scientific knowledge. Increasing returns to scale.

n  Malthusian •  Inverse Relationship between population and consumption.

n  Neo-Malthusian Theory: Ehrlich and Hardin

•  Population depletes resources and damages the environment.

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Environmental Health, Welfare and Living Conditions in Guatemala, 2004 Indicator % access

House Connection: water 89/ 99 House Connection: sewerage 59/ 99 House Connection: electricity (rural-urban) 50-62 / 100 Water consumption (liter per person) 50/100 / 600 Improved Water (urban-rural) 88/98 / 100 Improved Sanitation 90/100 Access to Basic Essential Drugs 85-90/ 91 Immunization 92/100 Under-five mortality (per 1000) 49/6 Life Expectancy 65/85 Public Expenditures on Health (%GDP) 5.7 / 6.2 Paved Roads 87/94 Telephones Mainlines (per 1000) 77/597 Cellular Subscribers (Per 1000) 165/ 605 Literacy 69.1/100

Sources: Human Development Report, 2005 and Millennium Development Goal Indicators, 2005.

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Leading Causes of Death and Health Services in Guatemala

Adults

Total Non-communicable diseases (per 100 000 population) 562.0

Maternal mortality ratio (per 100 000 live births) 240

Cardiovascular diseases (per 100 000 population) 188.0

Non-communicable diseases other than cardiovascular, injuries and cancer (per 100 000 population) 183

Injuries (per 100 000 population) 98.0 Cancer (per 100 000 population) 93.0 HIV/AIDS (825 infected and 77.8 new cases every year) (per 100 000 population per year) 21

Tuberculosis (109 infected) (per 100 000 population) 13.1

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Children (% of death among children)

Neonatal causes rate 37.3

Other causes rate (54.2% of children are undernourished in rural areas. 32% in urban areas.) 29.8

Pneumonia rate 15.0

Diarrhea diseases rate (58% access dehydration therapy) 13.1

Injuries rate 1.5

Malaria rate 0.4

Measles rate 0.1

HIV/AIDS 2.7

Services

Antenatal care coverage - at least one visit 86

Antenatal care coverage - at least four visits (%) 68

Births attended by skilled health personnel (rural/urban) 25/66.1

Contraceptive prevalence rate 43.3

Hospital beds (per 10 000 population) 7.0

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Poor health is highly correlated with low levels of education and poverty

7.512

64.465.3

0

10

20

30

40

50

60

70

Lowestwealthquintile

Highestwealthquintile

Lowesteducation

level

Highesteducation

level

Prev

alen

ce o

f Chi

ld D

eath

(%)

Sources: Care Health Indicators for Guatemala

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Families face serious health and poverty problems

•  Lack of income and assets to attain basic needs: ü Human assets ü Natural assets ü Physical assets ü Financial assets ü Social assets ü Aging security

•  Vulnerability to adverse shocks are linked to an inability to cope with them

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I. Aggregated Level: Models

•  The openness of the economy: +

•  The Neo-Classical model seems to perform best.

–  Investment and Technology: + –  Population Growth: 0 –  Domestic Research and Development: + –  Foreign Research and Development: 0 –  Foreign Technology: +

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Formal and Total Real GDP 1950-2006

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

1950

1953

1956

1959

1962

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

YEAR

MIL

LIO

N O

F Q

UET

ZALE

S

REAL GDPTOTAL REAL GDP

Sources: Banco de Guatemala, Urizar, Carmen , Julio Cole, Pablo Schneider and Caroll R. de Rodríguez “La Economía Informal en Guatemala”, CIEN, 1992, and CIEN (2001)

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Population and GDP Per Capita 1950-2006

0

2

4

6

8

10

12

14

195019511952195319541955195619571958195919601961196219631964196519661967196819691970197119721973197419751976197719781979198019811982198319841985198619871988198919901991199219931994199519961997199819992000200120022003200420052006

Years

Tota

l Pop

ulat

ion

(Mill

ions

)

0

50

100

150

200

250

300

350

400

450

500

Real

GDP

per

Cap

ita

POPULATIONReal Total GDP Per Capita

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Speed of Population Aging

Number of years for % of population aged 65 and over to rise from 7% to 14%

11585

7369

6553

474545

2641

2727

25242323222120

FranceSweden

AustraliaUnited

CanadaHungary

PolandUnitedSpainJapan

AzerbaijanChina

SingaporeChile

JamaicaSri Lanka

TunisiaThailand

BrazilColombia

Source: US Census Bureau, 2000

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Speed of Aging Population 1982-2006

62

656161

60

5762

51

5248

52

59

59646464

646464

13074

83

69 7359

0 20 40 60 80 100 120 140

1982

1985

1988

1991

1994

1997

2000

2003

2006

Yea

r

Number of Years

Sources: Raw data obtained from INE.

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Estimation of the Aging Population Path Given Current Population Trends (Base year: 2006)

0

5

10

15

20

25

30

1 9 17 25 33 41 49 57 65 73 81 89 97 105 113 121 129 137 145 153 161

Number of Years

Perc

enta

ges

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Estimation of Gross Domestic Product Per Capita Under Various Assumptions (Base year: 2006)

0

0.05

0.1

0.15

0.2

0.25

1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55

Number of Years

Log

GD

P Pe

r C

apita

GDPPC59GDPPC74GDPPCCT

Sources: Author Estimations GDPPCCT was estimated based on the current trend of aging population acceleration. GDPPC59 captures the per capita GDP path for the present population structure. GDPPC74 captures the per capita GDP path for a 2% population growth.

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Wealth Composite Distribution for Head of Households (2004)

0

2

4

6

8

10

12

COM

POSI

TE

1%

8% 60%

13%

10%

8%

Sources: ENEI, 2004

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Income Composite or NBI Distribution for Head of Households, 2004

0

20

40

60

80

100

120

140

160

180

COMPOSITE

0.04%

29%

1%

10% 59.96%

Sources: ENEI, 2004.

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•  Accentuated disparity in both income and wealth distribution –  Access to credit: + –  Years of education: + –  Remittances: + –  Per capita income: + on Inequality –  Openness of the economy: + on Inequality –  Political Stability/Rule of Law: +

•  Human Capital –  Education (measured as average years of education): 0 –  Experience and stock of capital: + –  Increasing returns to scale on human capital: + –  Average years of education: 3 –  Inefficiencies found in the social return of education.

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Marginal Benefit and Cost of Schooling, 1950-2006

0.0020.0040.0060.0080.00100.00120.00140.00160.00180.00200.00

195019541958196219661970197419781982198619901994199820022006

Years

Quetzales

MBSMCS

Sources: Own Econometric Estimation

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In Summary The Empirical Evidence

n  Supports openness in the economy.

n  Emphasizes the importance of investment and technology as well as education for growth.

n  Indicates increasing returns to scale to human capital n  Lends no support for policies directed towards population

control.

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III.  Disaggregated Level Wealth

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Household Characteristics Contribution to Wealth

(% Increase/Decrease)

Sources: Own Econometric Estimation

29

26

25

6.8

6.1

2.4

-18

7.5

-30 -20 -10 0 10 20 30 40

Marriage

Urban vs. rural

Remittances

Higher level of education

Number of children

Age of the household’s head

Type of occupation

Sex of head of household

Hou

seho

ld C

hara

cter

istc

is

Increase/Decrease of Welath

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Contribution of Marriage to Wealth (% Increase)

2924

28

0

5

10

15

20

25

30

35

Total Ladino Indigenous

Race

Incr

ease

d on

Wel

ath

(%)

Sources: Own Econometric Estimation

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Percentage of Head of Households that Report Owning Property and Holding Savings

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

Unions Married Separated Divorced Widowed

Own HomeHold Savings

Source: ENEI (2004)

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Remittances

•  The probability of receiving remittances

increases by 18.6% when it is headed by married women.

•  In other type of family structures it

decreases by 2.7%.

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III. Disaggregated Level: NBI

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Household Characteristics Contribution to Income (NBI)

(% Increase/Decrease)

2.9

1.2

0.6

0 0.5 1 1.5 2 2.5 3 3.5

Urban vs. rural

Higher level ofeducation

Married

Hosu

ehol

d Ch

arac

teris

tics

Number of times that Increases/Decreases

Source: ENEI (2004)

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Level of Income (NBI) and Wealth of the Head of Household by Family Structure

8.95

13.84

5.51 5.48

0

2

4

6

8

10

12

14

16

MARRIED NOT MARRIED

COM

POSI

TE

NBI

WEALTH35% lower

Source: ENEI (2004)

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Average Wealth and Income Composite per Family Structure and Race

Sources: ENEI (2004)

15.08 16.07 14.15 14.26

15.84 17.92

5.85 5.60 5.94 5.55 5.50 5.10

14.22 12.55 13.20

15.14

5.71 5.27 5.31

12.28

5.39

10.97 5.47

4.78

0.00 2.00 4.00 6.00 8.00

10.00 12.00 14.00 16.00 18.00 20.00

Wealth Poverty Wealth Poverty Wealth Poverty Wealth Poverty Wealth Poverty Wealth Poverty Unions Married Separated Divorce Widows Single Parents

Marital Structure

Aver

age

Valu

e of

Com

posi

te

Indigenous Ladinos

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Impact of Marriage by Race

26

69

22

70

0

10

20

30

40

50

60

70

80

Wealth Income

Perc

enta

ge In

crea

se

LadinoIndigenous

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Family Structure by Race

26

56

7 83

22

66

38

10

10

20

30

40

50

60

70

Unions Married Separated Divorce SingleParents

Family Structure

Perc

enta

ge o

f Hou

seho

lds

IndigenousLadino

Sources: ENEI (2004)

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Human Capital

•  Educational levels are affected by family structure.

•  Attendance to school is higher among

married households than others. •  It is also reinforced by remittances.

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Factors Affecting Child Schools Attendance

10

11

4

4

-5

8

-6 -4 -2 0 2 4 6 8 10 12

Marriage

Parents Education

Wealth

Income

Race: Indigenous

Area

Percentage Increase

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Level of Education of the Head of Household per Race and Family Structure

0102030405060708090

LAD INDIG LAD INDIG LAD INDIG LAD INDIG LAD INDIG LRACE INDIG

Unions Married Separated Divorce Widows Single Parents

Family Structure

Per

cent

age

of H

ouse

hold

s

No-education Grade School High School

Terciary College Graduate

Sources: ENEI (2004)

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Children School Attendance by Family Structure

0

1000

2000

3000

4000

5000

6000

7000

8000

Unions Marriage Separated Divorce Widows

Family Structure

Head

Cou

nt

IndigenousLadino

Sources: ENEI (2004)

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Why is family structure information relevant?

n  Increase savings, and these are needed for investment

n  Decreases poverty and there is a large portion of the population who live in poverty

n  Access to wealth facilitates social mobility n  Relevant for the determination of human capital n  Broken families are a burden on public finances n  For policy design purposes

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IV. Policy Recommendations •  Continue to deepen the opening of the

economy while reinforce institutions at both national and local levels. – Rule of law – Transparency – Property rights – Education system – Strengthening of the family structure should

be priority.

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•  Expand access to economic opportunity for low income households.

•  Promote legislation that supports families vis a vis

other types of living styles. •  Promotion and protect healthy families as a means

to eradicate poverty, especially the feminization of poverty.

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•  Reform the public and private education system in Guatemala to improve the coverage and quality of educational services.

•  The government can assist lower income families to choose among these alternatives through a voucher system or another demand-oriented financial mechanism.

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•  Improve efficiency in the use of government funds now allocated to population

•  Redirect the present efforts towards population control and sexual education programs

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•  Develop labor legislation that facilitates and provides incentives for the harmonization of family life and professional activity for all family members.

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Conclusions

•  Economic Development is an outcome of more than economic processes.

•  It is an outcome of economic, social, and

political processes. •  To attain it, opportunities need to be

promoted, empowerment at all levels facilitated, and stability ensured.

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Conclusions •  Neo-Classical Model is supported in Guatemala.

•  The openness of the economy has been positive for economic growth.

•  Experience rather than education is significant for economic growth. •  There is evidence for lack of efficiency in the education system.

•  Rate of growth of population is not significant for economic growth. Fertility rate is significant and positive.

•  Family structure is relevant for wealth. This happens to be the case after

other characteristics are controlled by.