Determinants of Determinants of Economic Growth: Economic Growth:

The Case of GuatemalaThe Case of Guatemala

Maria Sophia AguirreMaria Sophia Aguirre

Department of EconomicsDepartment of Economics

The Catholic University of AmericaThe Catholic University of America

Washington, DCWashington, DC

FADEPFADEP

Guatemala, GuatemalaGuatemala, Guatemala

October 11, 2007October 11, 2007

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

family to the economic growth process in family to the economic growth process in Guatemala.Guatemala.

To investigate how the family engages in the To investigate how the family engages in the process of economic growth.process of economic growth.

To empirically identify what model of economic To empirically identify what model of economic growth best fits the Guatemalan reality. growth best fits the Guatemalan reality.

To facilitate and strengthen the present and To facilitate and strengthen the present and

future population and family policy design and future population and family policy design and implementation in Guatemala.implementation in Guatemala.

Data Used and FrameworkData Used and Framework Three databasesThree databases

• Macroeconomic Variables compiled from 1950-2006: Macroeconomic Variables compiled from 1950-2006: yearly. yearly.

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

Framework Framework • Test of Economic Growth TheoryTest of Economic Growth Theory

• Other explanatory variables have been added as Other explanatory variables have been added as fitting. fitting.

• Analysis of Family Dynamics on wealth, income and Analysis of Family Dynamics on wealth, income and human capital.human capital.

There is a positive correlation between human capital, infrastructure and economic growthhealthy institutions and economic developmenthealth and income per capita

These positive correlations reflect an essential causal link running from human capital tohealthy institutions (social capital) infrastructure and technology

Life expectancy is a significant predictor of economic growth

We know from economic analysis that in economic development

Role of the Family in the EconomyRole of the Family in the Economy

Basic Basic ActivitiesActivities

Means UsedMeans UsedRole of the Role of the

FamilyFamilyPurposePurpose

ProductionProduction ResourcesResources Human CapitalHuman Capital Basic NeedsBasic Needs

ExchangeExchange MarketMarketHuman, Moral, Human, Moral, Social CapitalSocial Capital

ProfitProfit

ConsumptionConsumptionOptimization and Optimization and

DistributionDistributionAppropriate Appropriate distributiondistribution

WellbeingWellbeing

(welfare)(welfare)

Economic Theories of GrowthEconomic Theories of Growth Neo-Classical TheoryNeo-Classical Theory

Embraces Malthus’s inverse relationship between Embraces Malthus’s inverse relationship between population growth and real growth but acknowledges the population growth and real growth but acknowledges the key role of investment and thus savings in the process of key role of investment and thus savings in the process of growth.growth.

Human Capital TheoryHuman Capital Theory Human capital is an important source of economic Human capital is an important source of economic

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

MalthusianMalthusian• Inverse Relationship between population and Inverse Relationship between population and

consumption.consumption.

Neo-Malthusian Theory: Ehrlich and HardinNeo-Malthusian Theory: Ehrlich and Hardin• Population depletes resources and damages the Population depletes resources and damages the

environment.environment.

Environmental Health, Welfare and Living Conditions Environmental Health, Welfare and Living Conditions in Guatemala, 2004in Guatemala, 2004

IndicatorIndicator % access% access

House Connection: waterHouse Connection: water 89/ 9989/ 99

House Connection: sewerageHouse Connection: sewerage 59/ 9959/ 99

House Connection: electricity (rural-urban)House Connection: electricity (rural-urban) 50-62 / 10050-62 / 100

Water consumption (liter per person)Water consumption (liter per person) 50/100 / 60050/100 / 600

Improved Water (urban-rural)Improved Water (urban-rural) 88/98 / 10088/98 / 100

Improved SanitationImproved Sanitation 90/10090/100

Access to Basic Essential Drugs Access to Basic Essential Drugs 85-90/ 9185-90/ 91

ImmunizationImmunization 92/10092/100

Under-five mortality (per 1000) Under-five mortality (per 1000) 49/649/6

Life Expectancy Life Expectancy 65/8565/85

Public Expenditures on Health (%GDP)Public Expenditures on Health (%GDP) 5.7 / 6.25.7 / 6.2

Paved RoadsPaved Roads 87/9487/94

Telephones Mainlines (per 1000)Telephones Mainlines (per 1000) 77/59777/597

Cellular Subscribers (Per 1000)Cellular Subscribers (Per 1000) 165/ 605165/ 605

LiteracyLiteracy 69.1/10069.1/100

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

Leading Causes of Death and Leading Causes of Death and Health Services in GuatemalaHealth 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

Children (% of death among children)

Neonatal causes rate 37.3

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

29.8

Pneumonia rate 15.0

Diarrhea diseases rate (58% access dehydration therapy)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

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

7.512

64.465.3

0

10

20

30

40

50

60

70

Lowestwealthquintile

Highestwealthquintile

Lowesteducation

level

Highesteducation

level

Pre

vale

nce o

f C

hil

d D

eath

(%

)

Sources: Care Health Indicators for Guatemala

Families face serious health and poverty problems

• Lack of income and assets to attain basic needs:Human assetsNatural assetsPhysical assetsFinancial assetsSocial assetsAging security

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

I. Aggregated Level: ModelsI. Aggregated Level: Models The openness of the economy: +The openness of the economy: +

The Neo-Classical model seems to The Neo-Classical model seems to perform best.perform best.

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

Formal and Total Real GDPFormal and Total Real GDP 1950-2006 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

UE

TZ

AL

ES

REAL GDP

TOTAL 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)

Population and GDP Per CapitaPopulation and GDP Per Capita1950-20061950-2006

0

2

4

6

8

10

12

14

195019511952195319541955195619571958195919601961196219631964196519661967196819691970197119721973197419751976197719781979198019811982198319841985198619871988198919901991199219931994199519961997199819992000200120022003200420052006

Years

To

tal

Po

pu

lati

on

(M

illi

on

s)

0

50

100

150

200

250

300

350

400

450

500

Rea

l G

DP

per

Cap

ita

POPULATION

Real Total GDP Per Capita

Speed of Population AgingNumber 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

Speed of Aging PopulationSpeed of Aging Population1982-20061982-2006

62

65

6161

60

5762

51

5248

52

59

59646464

646464

13074

83

69 73

59

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.

Estimation of the Aging Population Path Estimation of the Aging Population Path Given Current Population TrendsGiven Current Population Trends

(Base year: 2006)(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

Per

cen

tag

es

Estimation of Gross Domestic Product Estimation of Gross Domestic Product Per Per CapitaCapita Under Various Assumptions Under Various Assumptions

(Base year: 2006)(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 P

er C

apit

a

GDPPC59

GDPPC74

GDPPCCT

Sources: Author EstimationsGDPPCCT 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.

Wealth Composite Distribution Wealth Composite Distribution for Head of Households (2004)for Head of Households (2004)

0

2

4

6

8

10

12

CO

MP

OS

ITE

1%

8% 60%

13%

10%

8%

Sources: ENEI, 2004

Income Composite or NBI Distribution Income Composite or NBI Distribution for Head of Households,for Head of Households, 2004 2004

0

20

40

60

80

100

120

140

160

180

CO

MP

OS

ITE

0.04%

29%

1%

10%

59.96%

Sources: ENEI, 2004.

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

Human Capital Human Capital • Education (measured as average years of education): Education (measured as average years of education):

00• Experience and stock of capital: Experience and stock of capital: + + • Increasing returns to scale on human capital: Increasing returns to scale on human capital: ++• Average years of education: Average years of education: 3 3 • Inefficiencies found in the social return of education.Inefficiencies found in the social return of education.

Marginal Benefit and Cost of Marginal Benefit and Cost of Schooling, 1950-2006Schooling, 1950-2006

0.0020.0040.00

60.0080.00

100.00120.00140.00

160.00180.00200.00

Years

Que

tzal

es

MBS

MCS

Sources: Own Econometric Estimation

In SummaryIn SummaryThe Empirical EvidenceThe Empirical Evidence

Supports openness in the economy.Supports openness in the economy.

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

Indicates increasing returns to scale to Indicates increasing returns to scale to human capitalhuman capital

Lends no support for policies directed Lends no support for policies directed towards population control. towards population control.

III.III. Disaggregated LevelDisaggregated Level Wealth Wealth

Household Characteristics Household Characteristics Contribution to WealthContribution to Wealth

(% Increase/Decrease)(% 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

Ho

us

eh

old

Ch

ara

cte

ris

tcis

Increase/Decrease of Welath

Contribution of Marriage to WealthContribution of Marriage to Wealth(% Increase)(% Increase)

2924

28

0

5

10

15

20

25

30

35

Total Ladino Indigenous

Race

Incr

ease

d o

n W

elat

h (

%)

Sources: Own Econometric Estimation

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

SavingsSavings

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

Unions Married Separated Divorced Widowed

Own Home

Hold Savings

Source: ENEI (2004)

RemittancesRemittances

The probability of receiving The probability of receiving remittances increases by 18.6% when remittances increases by 18.6% when it is headed by married women. it is headed by married women.

In other type of family structures it In other type of family structures it decreases by 2.7%. decreases by 2.7%.

III. Disaggregated Level: NBIIII. Disaggregated Level: NBI

Household Characteristics Household Characteristics Contribution to Income (NBI)Contribution to Income (NBI)

(% Increase/Decrease)(% 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

Ho

su

eh

old

Ch

ara

cte

risti

cs

Number of times that Increases/Decreases

Source: ENEI (2004)

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

CO

MP

OS

ITE

NBI

WEALTH35%lower

Source: ENEI (2004)

Average Wealth and Income Composite Average Wealth and Income Composite per Family Structure and Raceper Family Structure and Race

Sources: ENEI (2004)

15.0816.07

14.15 14.2615.84 17.92

5.855.605.945.555.50 5.10

14.22 12.55 13.20

15.14

5.715.275.31

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

Ave

rag

e V

alu

e o

f C

om

po

site

Indigenous Ladinos

Impact of Marriage by RaceImpact of Marriage by Race

26

69

22

70

0

10

20

30

40

50

60

70

80

Wealth Income

Per

cen

tag

e In

crea

se

Ladino

Indigenous

Family Structure by RaceFamily 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

Per

cent

age

of H

ouse

hold

s

Indigenous

Ladino

Sources: ENEI (2004)

Human CapitalHuman Capital

Educational levels are affected by Educational levels are affected by family structure.family structure.

Attendance to school is higher Attendance to school is higher among married households than among married households than others. others.

It is also reinforced by remittances.It is also reinforced by remittances.

Factors Affecting Factors Affecting Child Schools AttendanceChild 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

Level of Education of the Head of Household Level of Education of the Head of Household

per Race and Family Structureper Race and Family Structure

0

10

20

30

40

50

60

70

80

90

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)

Children School Attendance by Children School Attendance by Family StructureFamily Structure

0

1000

2000

3000

4000

5000

6000

7000

8000

Unions Marriage Separated Divorce Widows

Family Structure

Head

Co

un

t

Indigenous

Ladino

Sources: ENEI (2004)

Why is family structureWhy is family structure information relevant? information relevant?

Increase savings, and these are needed for Increase savings, and these are needed for investmentinvestment

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

Access to wealth facilitates social mobilityAccess to wealth facilitates social mobility

Relevant for the determination of human Relevant for the determination of human capitalcapital

Broken families are a burden on public Broken families are a burden on public financesfinances

For policy design purposesFor policy design purposes

IV. Policy RecommendationsIV. Policy Recommendations Continue to deepen the opening Continue to deepen the opening

of the economy while reinforce of the economy while reinforce institutions at both national and institutions at both national and local levels. local levels. • Rule of lawRule of law• TransparencyTransparency• Property rightsProperty rights• Education systemEducation system• Strengthening of the family structure Strengthening of the family structure

should be priority.should be priority.

Expand access to economic Expand access to economic opportunity for low income opportunity for low income households.households.

Promote legislation that supports Promote legislation that supports families families vis a visvis a vis other types of other types of living styles. living styles.

Promotion and protect healthy Promotion and protect healthy families as a means to eradicate families as a means to eradicate poverty, especially the feminization poverty, especially the feminization of poverty.of poverty.

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

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

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

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

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

ConclusionsConclusions

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

It is an outcome of economic, social, It is an outcome of economic, social, and political processes.and political processes.

To attain it, opportunities need to be To attain it, opportunities need to be promoted, empowerment at all levels promoted, empowerment at all levels facilitated, and stability ensured.facilitated, and stability ensured.

ConclusionsConclusions Neo-Classical Model is supported in Guatemala.Neo-Classical Model is supported in Guatemala.

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

Experience rather than education is significant for economic Experience rather than education is significant for economic growth.growth.

There is evidence for lack of efficiency in the education system.There is evidence for lack of efficiency in the education system.

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

Family structure is relevant for wealth. This happens to be the case Family structure is relevant for wealth. This happens to be the case after other characteristics are controlled by.after other characteristics are controlled by.