Decoding Honduras' Growth towards a Sustainable Development through PDIA Reading and Research Presentation José Arocha, Jorge Jiménez, Marco Midence
Building a Method: From Volatile to a Diversified Economy…
Overcoming the Growth Challenge… Starting point. Several efforts to diagnose and define a growth route • McKinsey study (2014) / Plan 2020: • 6 strategic sectors: • Tourism, Textiles, Intermediate Manufacturing, Services, Agroindustry, Housing • Broad recommendations: Where to head on? Next steps? Challenge Given Honduras’ volatile economy and non-tradable dependence the country needs to develop: A clear, tailored methodology for a targeted sector selection based on Honduras’ capabilities • Applying problem-driven pushes w/ first level decision makers in the Public and Private Sector • (i.e., A-team)
Our Approach… 1. Growth Diagnostics: Binding Constraints o Economic Complexity Index Analysis o 2. PDIA to Construct and Deconstruct the Problem: Fishbone o Triple A o Industrial Targeting o 3. Diversification Strategy (3 Study Cases) Climbing the Value Added Ladder: “Solutions to Evolve Honduras’ Coffee” o Formalizing Economy & Women Inclusion: “Paseo de las Baleadas” o Changing the Game in Honduras: “Digital Empowerment” o
Part 1. Growth Diagnostics
1. Growth Diagnostics: Exports • Honduras exports ($17.2B) are concentrated: Basic Agriculture & Textiles • This results in a negative trade balance of $7.91B • Undiversified economy focused on non-tradables Source: http://atlas.cid.harvard.edu/
Product Space & ECI • Low complexity economy (small dots, few letters) • Few neighbors in more complex sectors today Based on ECI, there is growth room “ climbing the ladder” into more complex products & services Source: http://atlas.cid.harvard.edu/
What Hinders Growth In Honduras? Problem: Non-diversified economy vulnerable to external shocks and dependent on non-complex/non-tradable sectors Low return to economic activity High cost of finance Low domestic bad local finance Low social returns Low appropriability savings + bad international finance government BINDING market failures failures CONSTRAINS Weak Low governance competition information coordination poor bad infra- externalities: externalities geography structure “self-discovery” ! ! Limited micro risks: macro risks: High risk High cost low human access for property rights, financial, monetary, capital firms corruption, taxes fiscal instability, debt service
Part 2. PDIA… Digging Deeper
Experiential Iterative Learning… • In-depth literature review: World Bank Growth Diagnostics (4 studies), Economist Intelligence Unit, IADB, Doing Business, IMF • Honduras 2020 Development Plan, National Development Plan 2010-2038 (Past Administration) • • Field interviews with key decision makers (private & public sector): 7 Economic Cabinet Ministers; 3 SOEs Heads; 2 Mayors; 3 leaders of Chambers of Commerce; 3 Top Business Leaders • Public Sector Private Sector
Big Learning: “A Whale Fishbone” Our Learning Process Total Iterations: 5 pushes ● Decomposition: 26 bones ● Main Binding Constraints: 5 ● Entry Points: 18 bones ●
Space for Change… Triple-A Change Space Analysis 10 Political Instability AAA Estimation Category 1 State Capability AAA Estimation Category Entry Point Lack of or weak electoral legislation and no enforcement 3 Entry Point Permits/Red Tape 1 Authority 5 M Authority 8 H Acceptance 9 H Acceptance 5 M Ability 6 M Ability 7 M 11 Economy focused on low productivity sectors AAA Estimation Category 2 State Capability AAA Estimation Category Entry Point Industrial targeting 2 Entry Point No Professionalized Civil Service 1,3 Authority 9 H Authority 8 H Acceptance 9 H Acceptance 5 M Ability 9 H Ability 7 M 12 Economy focused on low productivity sectors AAA Estimation Category 3 State Capability AAA Estimation Category Entry Point Current Accounts Deficits/Financing 3 Entry Point Lack of PPP Expertise 3 Authority 8 H Selection Criteria Authority 9 H Acceptance 8 H Acceptance 7 M Ability 8 H Ability 8 H 13 Trade AAA Estimation Category 4 Investment Climate AAA Estimation Category Categories Entry Point Not enough investors/FDI 3 Entry Point Lack of clear fiscal and commercial rules 3 1 Things already been solved… low hanging fruit Authority 8 H Authority 5 M Acceptance 8 H Acceptance 8 H 2 Things we think we can solve quite quickly Ability 8 H Ability 7 M 3 Things that are solvable but concerned about timeline 14 Trade AAA Estimation Category 5 Investment Climate AAA Estimation Category 4 Unsolvable Entry Point Not enough buyers/trade agreements 3 Entry Point Lack of Fiscal Incentives for Private Sector 3 Authority 9 H Authority 5 M Acceptance 9 H Acceptance 10 H Priority Level Ability 9 H Ability 8 H High 8 to 10 15 Low Endowmen of Human Capital AAA Estimation Category 6 SOE AAA Estimation Category Medium 4 to 7 Entry Point Limited supply of skilled labor 3 Entry Point Poor Management and Performance 3 Low 1 to 3 Authority 6 M Authority 7 M Acceptance 5 M Acceptance 9 H Ability 6 M Ability 8 H 7 SOE AAA Estimation Category 16 Low Access to Capital AAA Estimation Category Entry Point Credit Ratings/Country Risk/Debt Restructuring 3 Entry Point No Corporate Governance 3 Authority 5 M Authority 8 H Acceptance 5 M Acceptance 7 M Ability 7 M Ability 8 H 8 Corruption AAA Estimation Category 17 Low Access to Capital AAA Estimation Category Entry Point Coordination with International Sources of Capital 2 Entry Point Bad Procurement Practices 2 Authority 8 H Authority 5 M Acceptance 6 M Acceptance 9 H Ability 6 M Ability 8 H 9 Political Instability AAA Estimation Category 18 Informal Economy AAA Estimation Category Entry Point Weak Electoral Authority 3 Entry Point Credit Sharks 3,600% interest rate 1 Authority 5 M Authority 8 H Acceptance 7 M Acceptance 9 H Ability 8 H Ability 5 M
PDIA: Selected Entry Points ● The following two entry points were selected given their High Space for Change ● Honduras presents high vulnerability to external shocks 1) Dependence on oil prices (IMPORTS) 2) coffee price shocks(EXPORTS) ● Most labor belongs to informal sector (49% of underemployment) 11 Economy focused on low productivity sectors AAA Estimation Category Entry Point Industrial targeting 2 Authority 9 H Acceptance 9 H Ability 9 H 15 Low Endowment of Human Capital AAA Estimation Category Entry Point Limited supply of skilled labor 3 Authority 6 M Acceptance 9 H Ability 6 M
Part 3. Industrial Targeting
Diversification Strategy: Industrial Targeting
Climbing Up the Ladder: Narratives for Success 3 Study Cases: Climbing the Value Added Ladder: “Solutions to Evolve Honduras’ Coffee” o Formalizing Economy & Women Inclusion: “Paseo de las Baleadas” o Changing the Game in Honduras: “Digital Empowerment” o
Climbing the Value Added Ladder: “Solutions to Evolve Honduras’ Coffee” Financial Strategies Debt re-structure for large producers • Microfinance solutions for small players • Auction of top quality harvest in high-end markets (Europe and U.S.) • Improving Quality, Value Added in Production Managing price risk and volatility (e.g. price risk management markets • Climb up from green beans to upstream transformed processed coffee products (Costa Rica’s • Café Britt, Colombia soluble coffee and soft drink products) Marketing & Origin Denomination Geographic Indicators of Origin (GIOs), eco-friendly & sustainable certifications & country • branding E-trade, roasters and trade shows “Cup of Excellence”; Brazil, Guatemala (2001) and Nicaragua • (2002)
Formalizing Economy & Women Inclusion: “Paseo de las Baleadas” Infrastructure Revitalize city site: “English Town” at the heart of historic center • From an abandoned XIX century rail track to a XXI century pedestrian walkway • People • Women inclusion by benefiting families w/ single mothers as family heads currently in informal sector • Training in management skills, customer service and high-quality products by Chamber of Tourism and private sector coalitions (NGOs, businesses, local government) • A social spillover for 300+ families in La Ceiba Gastronomic Tourism • Exquisite traditional dishes prepared from century-long family recipes • Visit La Ceiba and enjoy tasting of Baleadas and other Honduran cuisine in a family-friendly environment
Changing the Game in Honduras: “Digital Empowerment” Building infrastructure • Universal Access • Digital inclusion Education and empowerment • Digital literacy • Enriching Knowledge Social enterprises • Grassroot markets • Digital interactions (Marginalize digital excluded communities) Knowledge hub and networks • Common platform • Best practices in the field of ICT
Next Steps - Present in site & gain sponsorship with A-team - Identify and build capabilities with T-team - Implement recommendations in selected targets w/ balanced sector risk mix (new & established sectors)
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