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3. Chapter 3: Inclusive Growth Diagnostic of Nicaragua
This chapter aims to identify what is constraining economic growth in Nicaragua (NI) (namely, its capacity to repay debt). This will shed light on what elements are limiting their repayment. Furthermore, the Inclusive Diagnostic Framework developed by Ianchovichina and Lundstrom (2009) will permit us to identify what is restricting these countries' economic progress, and economic social indicators. Upon identifying the structural constraints to inclusive growth, I can suggest policies to monitor those which stands to hinder these repayment capacities. These findings will be contrasted with the Human Rights Based Approach (Chapter 3). The findings will also identify whether it can provide input to recommend means of addressing these problems; and, also, which elements should be closely monitored.
This tool conducts a growth-empiric analysis to find out what are causing low growth rates. This relates to poverty reduction, the perspective being that generating more jobs for citizens can benefit the population via economic growth. The makers of this analytical tool (Savvides, 1992, p. 4) state that “inclusive growth refers to both the pace and pattern of growth” in obtaining pronounced growth that a country can sustain in the long run. Its objective is to pinpoint the binding constraints on growth, and then propose recommendations to eliminate them. This framework tries to understand whether the low level of investment or entrepreneurship is due to the high cost of finance, low economic returns on investments, or problems in the labor market.
Ianchovichina's and Lundstrom's framework explains why the poor and the majority of the labor force are not contributing to and benefiting from growth. The policy changes then proposed seek to eliminate market distortions. This technique researches what will more likely raise the pace of growth and integrate more of the low-productive labor force into high-low-productive activities, thereby raising production and
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citizens' salaries.
My use of the inclusive growth analytic framework is best exemplified by the decision tree of Inclusive Growth Analytics (See Figure 3.1) and the Business Environment Analysis (See Figure 3.2). Both serve to “identify constraints from the perspectives of different economic actors.”(Ianchovichina and Lundstrom, 2009, p. 8).
Figure 3.1 Inclusive Growth Analytics
Source : (Ianchovichina and Lundstrom, 2009, p. 10) Income Increases
Through Productive Employment
Economic Growth Poverty Reduction Selfemployed
Business Environment
Analysis
Wage Employed
Employment Analytiics
Business Environment
Analysis
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Figure 3.2 Business Environment Analysis
Source: (Ianchovichina and Lundstrom, 2009, p. 10)
This part serves as a background analysis. It briefly revises the factors which explain the “country’s past growth and poverty reduction trends and trend breaks, overall productivity and employment dynamics in the country, major challenges and opportunities faced, and possibilities for economic transformation and diversification”(Ianchovichina and Lundstrom, 2009, p. 9).
Background Analysis
The first part of this background analysis briefly describes the evolution of the Nicaraguan economy in terms of its macroeconomic indicators. It analyzes NI's growth profile and how it helps to explain observed behavior relating to external debt sustainability. Economic growth is fundamental to the success of a country;
consequently, we should try to understand past sustained growth. NI has a low-middle-sized economy. In 2013, it had a population of 6 million citizens and its GDP was 8.3 billion US dollars. It has a per capita income of $1,366 at constant 2005 dollars(WB, 2015f). Output per capita has shown marginal improvement, with 0.35% average growth from 1961 to 2013. These results become worrisome when we consider the
Business Environment Analysis
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average evolution of key variables in the same time period, like GDP growth rates of 2.7% per year, population growth rates of 1.67% per year, 23% of its revenues being grants, the 14.5 billion dollars in debt relief(CBN, 2014a), and a 5.6% of remittances (as percentage of GDP)(WB, 2015f). See Figure 3.3.
Figure 3.3 Foreign Investment, Grants and Personal Remittances Received as percentage of GDP, Nicaragua 1960 to 2013
Source: (WB, 2015f)and authors calculations using (WB, 2015f)
NI's long-term growth has been poor, still below levels it had reached in 1977.
NI had a similarly large economy, with an $8.3 billion GDP, but a higher GDP per capita ($2100 at constant dollars)(WB, 2015f). This is shown in Figure 3.3. The country under-performs economically when compared to other developing countries in Latin America and the Caribbean. NI's GDP represented less in 2013 than it did fifty-three years before then. Also, the income gap within the region (as measured by GDP per capita) rose. In 1960, NI's GDP represented 0.5% of the GDP in the region. It represented 0.2% of it in 2013. GDP per capita was 46% below the average for the region in 1960. In 2013, it was 76% below the average (Figure 3.4). This indicates that NI’s standard of living is not catching up to those of neighboring countries. Instead, income differentials are widening. Why is NI performing below the average? Have
-10%
1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011
Foreign direct investment, net inflows (% of GDP) Grants (% of GDP) Personal remittances, received (% of GDP)
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political instability and HR issues affected Ni's growth performance?
Figure 3.4 GDP per capita and GDP per capita growth rates, Nicaragua 1960 to 2013
Source: (WB, 2015f)
Figure 3.5 Nicaragua GDP/ Latin America and the Caribbean GDP and Nicaragua GDP per capita / Latin America and the Caribbean GDP per capita, period 1960 to 2013
Source: (WB, 2015f)and authors calculations
I follow criteria from Barro (1996) and Dobronov and Iqual (2005) to illustrate divergence from, or convergence with, the average economic performance of its Latin American and Caribbean counterparts (LACs). The research identifies four phases between 1965 and 2013. A GDP per capita moving further under those of the LACs
-35%
1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
GDP per capita (constant 2005 US$) GDP per capita growth (annual %)
0.0%
1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
NIC GDP per capita/LAC GDP per capita NIC GDP/LAC GDP
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means divergence. Opposite movement indicates convergence. The research will discuss every phase, while emphasizing that the main interest is in developments during the final 2007-to-2013 period. NI's case demonstrates how HR issues intersect with major economic and political changes, which in turn affect NI's ability to honor its debts.
The country has lived under a Somoza family dictatorship (1936 to 1979), has undergone a revolution (1967 to 1979), has faced warfare (1983 to 1989), and transitioned to a democracy and market economy (1990 to the present). See Figure 3.5.
Figure 3.6 GDP per capita 5 year moving average, Nicaragua, Latin America and the Caribbean from 1965 to 2013
Source: (WB, 2015f)and authors calculations
Macroeconomic performance was favorable from 2007 to 2013, but slightly below the average growth of LACs. Over the last seven years, the country has experienced modest growth, averaging 5% from 2007 to 2013. The two debt relief initiatives, HIPC and MDRI, freed the country from relatively high debt service payments of 26.4% of NI's GDP in 1998 to 12.6% in 2013. Between 2007 and 2013, GDP per capita grew at an average rate of 3.3%. Additionally received resources from the international community averaged 583,000,000 dollars per year in aid between 2007 and 2012. Comparing these amounts relative to GDP and Government expenditures,
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
NIC GDP per capita LAC GDP per capita
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they represent 5% to 11% of NI's GDP and 33 to 77% of government expenses, which amounted to $122.6 per capita in total(WB, 2015f).
NI's economic structure has changed little during the period appraised. NI continues to primarily export agricultural products. Figure 9 shows the changes of components that constitute the value added in the years 1995, 2006, and 2013. From the Figure 3.6, one can see that the industrial sector made up a larger portion of the 2013 GDP, while the tertiary sector and agriculture contracted. Contribution of the tertiary sector declined to 52% in 2013, but still represents the majority of NI's employment at 51.2% of the workforce. Industry contributed 31% of the value added and employed 16.5% of the workforce, 19% of whom worked in manufacturing. In the meantime, agriculture accounted for 17% of the total value added and 32.2% of NI's total employment(WB, 2015f).
Figure 3.7 Economic Growth (value added) by Sectors, Nicaragua
Source: (WB, 2015f)
From 1995 to 2011, the production approach decomposed NI's GDP by employment, capital stock, and total productivity to NI's economic growth. Total productivity underwent a slight contraction, at an average of 0.2%, while labor
0% 10% 20% 30% 40% 50% 60% 70%
Agriculture, value added (% of GDP) Industry, value added (% of GDP) Services, etc., value added (% of GDP)
2013 2006 1995
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increased by 2% and capital increased by 2.1%. The growth decomposition conducted by Johnson (2013) presents a slight average(Johnson 2013, p. 7). Similar studies using alternative methods have also reached the conclusion that the country still has negative productivity contribution to its economic growth(Sosa, Tsounta, and Kim, 2013, pp. 21-22).
In analyzing NI’s exports of goods and services, however, the importance of the sectors' activities changed, goods accounting for 82% and services 18% of the 2013 total. Industrial goods generate a substantial segment of NI’s exports due to NI's having little in total merchandise exports, manufacturing goods making up 49% , fuel 0% and ores and metals 1% of them. Meanwhile, it represents a major share of the country’s imported goods due to their high contribution, including manufactured goods (62%), fuel (19%) and ores and metal (1%)(WB, 2015f). Agricultural goods represent the majority of NI’s exports (76.6% of merchandise exported), due to the contributions from food (49%) and raw agricultural materials (1%).
The concentration and diversification indices of NI’s merchandise exports and imports indicate a greater concentration on a few products. In one of them, the recent increase in concentration from 0.197 in 2007 to 0.212 in 2013 is apparent(UNCTADSTAT, 2015). Indexed change in growth of diversification between 1995 and 2007 was 3%. Between 2007 and 2013, growth was at 4.8%, revealing a greater deviation of NI from worldwide standings(UNCTADSTAT, 2015). See Figure 3.7. Comparing NI’s data from 2013 to the average performance of middle-income countries (MICs) and low-income countries (LICs) in same year, NI had had fewer products, but was performing higher in the diversification index, even though it was performing below average in the concentration index. The country expanded its export base; from 126 products in 1995 to 239 products in 2011, performing well below the
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average of 260 products in the average LICs and MICs. See Figure 3.7. An alternative measure of export concentration is the Herfindahl-Hirschman Index, and the latest data available from the WB indicates that NI's export base is highly dispersed, with 0.025(WB, 2015c). Generally, an index above 0.25 can raise anti-trust concerns.
Despite this positive data, the top 5% of exporters obtain 80% of the total export value.
The most lucrative export products are highly concentrated(WB, 2015c).
Figure 3.8 Degree of Nicaraguan concentration, diversification, No. of Products and Five Largest (share of merchandise exports)
Source: (UNCTADSTAT, 2015)
Ortega’s presidency (2007 to 2013) successfully improved the living standards of NI's most vulnerable citizens(Martí i Puig and Close, 2009). A non-state agency, Citizen Power Councils (CPC) delivers goods and services and implements governmental social programs. It provides housing to low-income families through its
“Vivienda Digna” program. Its literacy campaigns against lower illiteracy in rural and urban areas through the “Yo Sí Puedo” program. Credit to low-income families and businesses come from the “Zero Usura” program. Finally, it provides food baskets to low-income people through the “Hambre Cero” (Zero Hunger) program(Staten, 2010, p. 154). The CPC's functions have been controversial, since they represent “means to
0
Number of product Concentration Index Diversification Index
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enhance FSLN control over citizens and local governments” and unconstitutional intrusion of state agencies on “responsibilities of legally constituted local and regional governments”(Booth and Seligson, 2010, p. 13).
An Economic Profile of the Poor
This section looks at the poverty profile of NI's population, summarizing the recent evolution of the main poverty indicators. It presents a broad picture of poverty and how its structure compares with those from previous periods. It analyzes the profile of poverty reduction and the way in which it helps to explain the observed behavior of external debt sustainability. It uses data gathered from four national surveys and WB data. Nicaraguan National Surveys were household surveys conducted in 1993, 1998, 2001, 2005, and 2009. Poverty data will be complemented when necessary with external resources from Latin America Chronic Poverty 2015, among others. Poverty profiles aim to inform us regarding the evolution and variations of poverty given different criteria such as geography and community and household characteristics(Haughton and Khandker, 2009, p. 121).
Poverty is a multidimensional phenomenon (Klugman, 2002) explained by aspects such as income, consumption, educational conditions, and health(WB, 2001, p.
15). We may define it as a deprivation of basic capabilities(Sen, 1999, p. 20).
Educational and health issues of NI's population will be addressed in the text's forthcoming Employability Analysis. This section will research will focus on this issue via the headcount index, “which measures the proportion of the population counted as poor”(Haughton and Khandker, 2009, p. 68), utilizing incomes as a measures of well-being.
The data on International Pls are only at a national level and the national criteria were selected due to a lack of alternative statistics on poverty. The analysis recognizes
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the limitations of this measurement because it omits measurements of inequality among the poor and violations of the axioms of monotonicity and transfer(Sen 1976, p. 219).
Surveys use two methods to present poverty lines (PLs): the cost of basic needs approach and the method which uses the National PL and International PL. NI’s PLs stipulate a consumption bundle, one deemed adequate with food intake of 2268 calories.
It also stipulates nonfood components like housing, transportation, etc. A poor person, according to the National PL, earns below 1.558 dollars at nominal terms per day. An extremely poor person earn less than 0.917 dollars(INIDE, 2009, pp. 6-7). By the International PL, a poor person earns 2 dollars in PPP terms and an extremely poor person 1.25 dollars.
Household survey comparisons show that headcount poverty rates using the International PL standards were highest in rural areas and lowest in urban areas throughout the period analyzed. The estimates in Figure 3.8 indicate that the incidence of poverty and extreme poverty had declined considerably in NI as a whole, from 50.3%
to 42.5% and from 19.4% to 14.2% respectively, from 1993 to 2009. It also shows that generalized poverty affected approximately 26.8% of the population in urban areas and 63.3% of residents in rural areas in 2009(INIDE, 2009, p. 13). The big picture is that NI reduced poverty by 7.8% (0.45% annually) and extreme poverty by 5.2% (about 0.3% annually).
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Figure 3.9 Poverty headcount ratio at national poverty line, Extreme Poverty headcount ratio, Nicaragua 1993 to 2009
Source: (INIDE, 2009)
Analyzing poverty under the International PL, 21% of the population was poor in 2009, and 8.54% lived in extreme poverty then(WB, 2015f). See Figure 3.9. The gap between the PL and the average income of the poor and extreme poor decreased considerably in NI as a whole, from 16% to 3% and 26% to 7% respectively, from 1993 to 2009.
Figure 3.10 poverty headcount ratio at international poverty line, extreme poverty headcount ratio, Nicaragua 1993 to 2009
Source: (WB, 2015f)
1990 1995 2000 2005 2010
headcount ratio (% of population)
PPP (constant 2005 international $)
GDP per capita, PPP
Poverty at national poverty line
Extreme poverty at national extreme poverty line
Poverty at rural poverty line (% of rural population)
Poverty at urban poverty line (% of urban population)
1993 1998 2001 2005 2009
Poverty headcount ratio at $1.25 a day (PPP) (% of population) Poverty headcount ratio at $2 a day (PPP) (% of population)
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That means a narrowing of the poverty gap. This holds despite increased severity of poverty and extreme poverty compared to levels in 2005. See Figure 3.10.
The Gini Index also showed signs of improvement. It dropped from 57.36 to 45.73 from 1993 to 2009, suggesting that the gap between the rich and the poor is also narrowing, although it increased 13% from 2005 to 2009.
Figure 3.11 Poverty Gap, International Poverty Line, Nicaragua 1993 to 2009
Source: (WB, 2015f)
Poverty measured by household characteristics, gender, and education reveals that NI's poverty is largest among men at 62.1% of the population, while 61.1% of the female population is in poverty(ECLAC, 2009b). Also, the higher a citizen's education level, the less likely he is poor. Figure 12 shows that 82% of people with tertiary degrees are not poor. Also, 59% of NI's citizens who graduate high school are non-poor. The high poverty rates are among less educated people, as 41.8% of those who have not graduated from high school education were poor. Also, 67.8% of people without complete primary educations are poor(ECLAC, 2009a).
Changes in the poverty reduction strategy, such as free health and education services, increased transfers to the poor, and a series of poverty reduction programs,
0%
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10%
15%
20%
25%
30%
1993 1998 2001 2005 2009
Poverty gap at $1.25 a day (PPP) (%)
Poverty gap at $2 a day (PPP) (%)
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amounted to 5% of the GDP in subsidies and other transfers(WB, 2015f). New methods to combat poverty, implemented in 2007, as stated in the National Plan for Human Development Plan, included monetary transfers to the poor through programs like
“Hambre Cero” (Zero Hunger) and other complementary programs. One included free access to health and education in an attempt to reduce the number of people living in poverty (GRUN 2008 and GRUN 2012).
About 43% of the poor earn their incomes from wages, while 36.3% are self-employed, 10.1% depend on economic transfers, and the other 10% rely on other resources. The drop in poverty rates between 2001 and 2005 was driven by an increase in economic growth and a better distribution of wealth. The former raised consumption levels of the poor, accounting for a fall in poverty of 4.8%. The latter accounted for a 2.5% decline(Medina and Galván 2014, p. 51). Better wealth distribution can be illustrated by the decrease in the GINI Index, from 0.45 to 0.40 by 2005(WB, 2008a, p.
7). This index returns values between 0 and 1. Lower values indicate greater equality.
Figure 3.12 Household income shares of Nicaraguan Households 2009
Source: (INIDE, 2009)
The 2.5% decrease in poverty between 2005 and 2009 was motivated by better
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redistribution policies, wealth redirected to free education, health, and several government assistance programs. Strong growth in agriculture, exports, and the market overall during this period reduced poverty, and the definition of PLs accounted for a 5% increase in poverty rates(IDA-IFC, 2012, p. 3). The better distribution is illustrated by the fall in the GINI Index, from 0.41 to 0.37 by 2009(INIDE, 2009, p. 29). Overall the Gini Index fell to 0.37 in 2009 from 0.50 in 1993.
Figure 3.13 Decomposition of Changes in Poverty, Nicaragua 2005 to 2009
Source: (IDA-IFC, 2012, p. 3)
The antipoverty strategy between 2007 and 2013 was established by the Economic and Financial Program 2007-2010 (CBN, 2009) and the National Plan for Human Development 2008-2012(Nicaragua, 2012). They aimed at increasing consumption by the poor and increasing their capabilities to generate income.
Improvements of productive infrastructure and expansions of public services stand out.
During this period, expenditures to fight poverty has represented an average of 1.45%
of NI's GDP and 43% of NI's governmental budget expenditures. Since 2007, it has grown at an average annual rate of 3.5% and has cost a total of $7,576,600,000(Sandino, 2014, pp. 14-19). Sandino (2014) estimates that the elasticity of poverty expenditure to
-2.1%
-10.5%
5.6%
-7.0%
-11.0% -9.0% -7.0% -5.0% -3.0% -1.0% 1.0% 3.0% 5.0%
Redistribution Effect Growth Effect Poverty Line Effect Total Change
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GDP was 0.9. That means that an increase of 1% of NI's GDP poverty expenditure increases GDP by 0.9%.
The financial resources used for these purposes have relied less on donations and external loans, and more on government expenditures, compared to previous periods. The execution of the national budget reveals that 17.8% of poverty expenditures in 2007 came from donations. They were 7.1% in 2013. Financial resources from debt relief initiates kept a weight of 15%. Those from external loans decreased from 14.5% to 9.8%. Expenditures from government resources grew from 50.4 % to 63.3%. See Figure 3.13. The government's additional effort to maintain poverty expenditures was a result of fiscal reforms that expanded revenues (77% of its expenditure total) and reductions (for the remaining 23%) of non-poverty expenditure(Navarrette, 2012, p. 19).
Figure 3.14 Poverty Expenditure by Source of Finance, Nicaragua 2007 to 2013
Source:(MFC, 2013, p. 297), (MFC, 2012, p. 264), (MFC, 2011, p. 257), (MFC, 2010, p. 208), (MFC, 2009, p. 224), (MFC, 2008, p. 183),(MFC, 2007, p. 173).
Identifying the constraints to inclusive growth
This research analyses the elements that are constraining economic growth, with
50% 48% 51% 53% 57% 61% 63%
2007 2008 2009 2010 2011 2012 2013
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special emphasis on variables that affect private returns from economic activities and cost of finance, since they stimulate investments and entrepreneurial activities. Work by Ianchovichina and Lundstrom (2009) states that “private returns in turn are determined by social returns, which depend on complementary factors or inputs that individuals cannot or have very low incentives to provide, such as geography, technology, infrastructure, and human capital, and the private apropriability of these returns. Private apropiability reflects the extent to which social returns are translated into private returns and is negatively affected by government and/or market failures”
(7-8). The following section follows the organizational framework of Inclusive Growth Diagnostics, to identify the factors negatively affecting NI's performance.
(7-8). The following section follows the organizational framework of Inclusive Growth Diagnostics, to identify the factors negatively affecting NI's performance.