Diagnosing the Binding Constraints on Economic Growth

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Diagnosing the Binding Constraints on Economic Growth Towards a Sustainable and Efficient State The Development Agenda of Belize Dougal Martin | Osmel Manzano Editors Inter-American Development Bank © Inter-American Development Bank, 2010 www.iadb.org The views and opinions presented in this publication are entirely those of the author(s), and do not necessarily reflect those of the Inter-American Development Bank, its Board of Executive Directors, or the countries they represent. This publication may be freely reproduced provided credit is given to the Inter-American Development Bank. Towards a Sustainable and Efficient State: The Development Agenda of Belize Publication Code: IDB-MG-100 Inter-American Development Bank 1300 New York Avenue, N.W. Washington, DC.20577 United States of America Editors Dougal Martin, Osmel Manzano Design Miki Fernandez Printed Washington, D.C., September 2010 Contents Acknowledgments. v Foreword . vii Part I. BINDING CONSTRAINTS ON GROWTH. 1 1. Diagnosing the Binding Constraints on Economic Growth . 3 2. Anchoring Fiscal Policy for Growth . 27 3. Challenges in the Financial Sector. 47 Part II. CHALLENGES AND OPPORTUNITIES IN THE PRODUCTIVE SECTORS. 59 4. Trade Sector: Exporting for Growth . 61 5. Infrastructure: Current Situation and Challenges. 79 6. Tourism: Achieving Balance for Sustainable Growth . 95 7. Agricultural Sector: Assessment and Priorities for Public Investment and Policy . 107 8. The Challenges of Managing the Oil Sector. 133 Part III. ENVIRONMENTAL SUSTAINABILITY. 149 9. Integrated Disaster Risk Management—Challenges and Opportunities. 151 10. Towards Environmentally Sustainable Development. 169 iii Part IV. SOCIAL DEVELOPMENT. 189 TS N 11. Protecting the Poor and Vulnerable in a Tight Fiscal Environment . 191 12. A Health Sector in Transition . 201 CONTE 13. Education Sector: Analysis and Options for a Policy Agenda . 221 14. Indigenous Peoples: Cross-Cutting Concerns and Needs . 235 15. The Growing Threat to Citizen Security. 255 iv Acknowledgments Towards a Sustainable and Efficient State: The Development Agenda of Belize is a production of the Inter- American Development Bank’s Country Department of Central America, Mexico, Panama, and the Dominican Republic, led by General Manager Gina Montiel and Regional Economic Advisor Ernesto Stein, with the participation of all Bank sectoral departments. The volume was edited by Dougal Martin and Osmel Manzano, who were also responsible for the general coordination of the production. We give special thanks to Caroline Clarke, IDB Representative in Belize, for her support of the project. We also want to acknowledge Isabel Nieves, Michele Lemay, Nathalie Alvarado, and Beatriz Abizanda Miro, IDB sectoral specialists, for their peer review of the health, social protection, environment, and citizen security chapters. Finally, we want to acknowledge Gina Montiel, General Manager, the main driving force behind this project, who gave us all her support and allowed us to carry it forward in a climate of trust and freedom. Michael Harrup edited the entire volume, Gerardo Giannoni of the Office of External Relations col- laborated on the production of the book, and Melina Campos Ortiz helped with the graphics and pro- vided research assistance in various chapters. Miki Fernandez of ULTRAdesigns designed the layout of the book. The chapter authors were: ● Chapter 1: Ricardo Hausmann and Bailey Klinger, with updating provided by Dougal Martin ● Chapter 2: Dougal Martin and Gangadhar Shukla ● Chapter 3: Dougal Martin ● Chapter 4: Matthew Shearer, based on a paper by Samantha Chaitram, Cristina Dengel, Timothy Mills, Jesse Mora, Matthew Shearer, and Kati Suominen ● Chapter 5: Laura Alonso ● Chapter 6: Michele Lemay, based on a paper by Michele Lemay, Harold Arzu, Dougal Martin, and Laura Alonso ● Chapter 7: John Horton and Roger Norton ● Chapter 8: Osmel Manzano ● Chapter 9: Cassandra Rogers, based on a paper by Cassandra Rogers, Edward Anderson, Liliana Martha Carreño, Harold Arzu, and Dougal Martin ● Chapter 10: Melina Campos Ortiz ● Chapter 11: Michelle Perez Maillard and Daniela Philipp ● Chapter 12: Daniela Philipp and Michelle Perez Maillard ● Chapter 13: Emma Naslund-Hadley ● Chapter 14: Kristyna Bishop and Ellen-Rose Kambel ● Chapter 15: Mariko Russell v Foreword Towards a Sustainable and Efficient State: The Development Agenda of Belize represents a tangible expres- sion of the Inter-American Development Bank’s commitment to generating knowledge as part of its assistance to its borrowing member countries and illustrates the Bank’s willingness to accompany Belize in its efforts to overcome its development challenges. This intellectual contribution to some of the most important issues regarding Belize’s economic and social development is directed primarily at two audi- ences. First, it is directed at Belizean policymakers, offering a technical and internationally comparative perspective. Second, it is aimed at the wider public who are interested in Belize’s economic and social development but who find little material available on the subject. Based on its record over the last half-century, Belize could be considered a relative development success. In 1960, it was the second-poorest country in Central America; now it is among the “top-tier” coun- tries, with a gross domestic product per capita behind only that of Costa Rica and Panama. However, economic growth and social progress have slowed over the last 10 years. Regaining earlier dynamism, improving social conditions, and reducing poverty, and at the same time preserving its rich but fragile environmental endowment, therefore constitute important development challenges for Belize. The job of policymakers in grappling simultaneously with an array of complex challenges is never easy. And it is not made any easier when policy advisors proffer long, unprioritized laundry lists of policy reforms that a government should undertake. This book strives to err in the opposite direction and offer policymakers an intellectual framework, called the “Growth Diagnostics Methodology,”1 for thinking about how to prioritize development challenges. While necessarily selective, this book therefore covers a number of development topics of interest and relevance to Belize. Although many of the topics are seemingly disparate, the book strives for consis- tency and coherence in order to enhance its value to policymakers. Above all, it seeks to contribute to and stimulate a dialogue on Belize’s development challenges, in the hope that Towards a Sustainable and Efficient State: The Development Agenda of Belize will become a cornerstone in increased interest and research on policy options for Belize. — Gina Montiel General Manager Country Department of Central America, Mexico, Panama and the Dominican Republic 1 R. Hausmann, D. Rodrik, and A. Velasco, “Growth Diagnostics” (Center for International Development, Harvard University, Cam- bridge, Massachusetts, 2004, unpublished). vii Part I Binding Constraints on Growth 1 2 Diagnosing the Binding Constraints on Economic Growth CHAPTER 1 Diagnosing the Binding Constraints 1 on Economic Growth 1.1 Introduction Belize’s long-term growth performance has been comparatively good.1 It is not clear what comparator group is relevant, given Belize’s status as both a Caribbean and a Central American country. Compared with its Central American counterparts, Belize has been a growth star. In 1960, it was the second- poorest country in the region; now it is among the “top tier” countries, with gross domestic product (GDP) per capita (Figure 1.1) near that of Costa Rica and Panama. Moreover, much of this growth was achieved after independence. Among its Caribbean peers, however, Belize’s performance has been aver- age, and it has not been able to close the gap with the better-performing economies in the region. And since 2004, economic growth has been sluggish, barely above the rate of population growth, implying that reactivating economic growth is a central development challenge for the country. FIGURE 1.1. GDP peR CapIta (logs, 2000 US$) 9 11 10.5 8.5 10 8 9.5 7.5 9 7 8.5 8 6.5 7.5 6 7 5.5 6.5 5 6 1974 1972 1978 1970 1972 1976 1978 1975 1987 2002 2005 2000 2002 2004 1963 1981 1984 1993 1962 1964 1982 1984 1992 1994 1960 1966 1969 1990 1996 1999 1960 1966 1968 1980 1986 1988 1990 1996 1998 BLZ CRI GTM HND BLZ BHS DMA GRD LCA NIC PAN S LV ATG BRB VCT DOM JAM Source: World Bank, World Development Indicators. Note: ATG = Antigua and Barbuda, BEL = Belize, BHS = The Bahamas, BRB = Barbados, CRI = Costa Rica, DMA = Dominica, DOM = Dominican Republic, GRD = Grenada, GTM = Guatemala, HND = Honduras, JAM = Jamaica, LCA = St. Lucia, NIC = Nicaragua, PAN = Panama, SLV = El Salvador, VCT = St. Vincent and the Grenadines. 1 The authors would like to thank the staff of the Belize Country Office for their assistance in the fact-finding mission to Belize on September 24–26, 2007, as well as all the government and private sector officials who were kind enough to share their time and offer their insights during that mission. They also thank Dougal Martin and Matthew Shearer for their participation in the mission, and Rodrigo Wagner for assistance in data collection and analysis. 3 1.2 The Growth Diagnostics Figure 1.2 illustrates in a very intuitive way one Methodology of the fundamental ideas behind the GDM: R 1 factors that may contribute to the growth of an TE The Growth Diagnostics Methodology (GDM) economy are not necessarily perfect substitutes. HAP offers policymakers a guide to policymaking that Panel A of the figure presents a world in
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