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Third Growth Diagnostic study: Time to Improve Business Climate

Third Growth Diagnostic study: Time to Improve Business Climate
February 23
16:41 2019

In previous installments of the Business Perspective column, we have discussed the 2007 and 2015 Growth Diagnostic studies, which have identified, respectively, (lack of) access to finance and tax policy as being the major constraints to growth. Naturally, the aforementioned papers considered other variables as significant, but not to the same degree of being “binding”.

Fast forward eight years from the first and about four years from Martin (2015), the International Monetary Fund (IMF 2019) has now joined the list, having published a third Growth Diagnostic that also seeks to find answers to the question as to why investment is (relatively) low in Belize. The 2019 contribution finds “several growth constraints: cost of finance, public debt/high taxes, crime, skill gaps, [and] distortionary regulation”. However, like its predecessors, the IMF study also finds that “crime and education [are] not the most binding for growth.”

Looked at from this standpoint, it is possible to show that the most recent diagnostic agrees with the finding of Hausmann and Klinger (2007) as it pertains to the access-to finance, and it concurs with the second Diagnostic as it relates to high taxes. However, unlike the former and the latter, the IMF’s input places the regulatory environment on the major constraints list, a fact that corresponds to the Belize Chamber of Commerce and Industry (BCCI)’s continued call for improvements to the business climate.

Specially, the IMF working paper, speaking on “streamlining regulations”, states: “Accelerating and modernizing procedures for starting a business would support investment, especially by SMEs.” As was noted in the study, the tax levels are a bit slower to bring down given the symbiotic relation between tax revenues and Belize’s high debt burden. Particularly, the paper noted:

“With debt above 90 percent of GDP [Gross Domestic Product], Belize’s position is weaker than in a number of other emerging market economies. To reduce debt burden, Belize has to maintain high tax rates and tariffs. Higher taxes and tariffs inevitably have adverse effects on [the] business environment.”

Consequently, the way forward, as has been discussed in previous BP articles, has to be on two general fronts: reducing debt towards the ‘best practice’ threshold of 60 percent of GDP, and minimizing the degree of ‘red tape’. Obviously, considering that debt obligations add another layer of rigidity to tax amendments, the logical priority area would fall to making doing business easier.

On this point, the 2019 working paper adds: “Overall, Belize has higher Doing Business rating than many of its peers. However, such Doing business rating pillars as starting a business, registering property, protecting minority investors, enforcing contracts point to the areas where streamlining bureaucratic processes could bring positive results. World Governance Indicators of institutions, regulations, and bureaucracy support this conclusion.”

While the Doing Business Index (DBI), like any other measure, is not without its limitations, the avid reader would recall that out of 190 countries the most recent report has Belize ranked 162nd for Starting a Business, 135 for Registering Property, 132nd as it pertains to protecting minority investors, and 133 on enforcing contracts. Consequently, the room for improvement in these areas is significant. To this end, it is also useful to note that the Economic Development Council’s secretariat, the Department of Public-Private Sector Dialogue (DPPD), alongside other government entities such as the Central Information Technology Office (CITO), has embarked on an initiative entitled “Leveraging Digital Technology to Improve the Business”. This project is targeted at improving two service areas: starting a business and improving the process of obtaining construction permits.

Clearly, the objectives of this initiative, once achieved, would go a long way towards addressing this particular constraint as identified by IMF (2019), and is thus viewed as a step in the right direction. In addition to this, it is imperative that both the public- and private sector continue to look for practical ways to collaborate on alleviate the other areas of “binding constraints”.

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