Posted: Tuesday, February 5, 2019. 4:35 pm CST.
The views expressed in this article are those of the writer and not necessarily those of Breaking Belize News.
This article was written by Richard Harrison, Belizean investor in production and services businesses in Belize. He holds a Master’s in Business Administration degree from Lancaster University.
By Richard Harrison: Competitiveness and productivity of the Belize economy is central to sustainably growing the wealth of the nation.
Without developing these, profits will stagnate or decline….and profit generation is what grows wealth.
This document will deal only with the issue of competitiveness.
The wealth generated by a nation is the sum total of the wealth generated by all its economic participants. Thus the competitiveness of each individual/business is what gives a country competitive advantage.
Competitive advantage is creating and sustaining superior performance relative to competitors.
Belize is not doing so well, importing almost four times what it exports….ranking 93rd in the world in terms of “ease of doing business”….public debt to GDP ratio of 90% (compared to USA 72%, Guatemala 30%, Trinidad 46% and Mexico 35%, 2012 est)….unemployment at around 20% (even if SIB says it recently fell from 16% to 14%)…and poverty rate at around 40%.
Competitive advantage can be achieved by differentiation, cost-leadership and/or segmentation….and a strategy that combines these usually yield better results.
This is a model suitable for the stage of development where Belize is.
Other, newer models have been developed for developed country economies….but those are not yet applicable to Belize. We need to do exactly what the now developed countries used to do when they were at our stage of development….but we can do it better, since we can learn from the mistakes they made.
Since Belize does not yet invest much in research and development (R&D)….differentiation and segmentation options are limited.
Thus, Belize MUST do everything it can to make participants in its economy produce goods and services at the lowest-cost possible.
Belize is unique in that it has a very small surface area, relatively small population (domestic market) and population density, and relatively large amount of valuable natural resources. It population is made up mostly of unskilled and semi-skilled persons at this stage in time….with half of the population still living in dispersed, rural areas.
To achieve the goal of making Belize’s economy more competitive by adopting lowest-cost strategies, economic structures must be put in place that take into account the bottom line (profits) of businesses and individuals.
The policies of a country can influence the profits that its economic participants make in various ways:
BY INFLUENCING the competition arena and price via various instruments, including the Customs Tariff Law (CTL)….for example, if the CTL sets import duties at ZERO….it is opting for NO barriers-to-entry, and making the price of imported competing goods and services lower….hence domestic producers of equal, similar or substitute products and services must price lower to compete…and make less profits. If it sets a higher barrier-to-entry, its economic participants can price higher, with a chance to make more profits or gain more market-share. When the US and other developed countries were at our stage of development, they used Effective Rate of Protection (ERP) models to set import duty rates that allowed for their economic participants to make optimal profits and grow their investments, with an enabling environment that encourage developers to reinvest profits in expansion, essentially by limiting import competition and facilitating low-cost import raw materials used in the manufacture of value-added products and services. Belize currently charges an average rate of import duty of 9%, calculated by dividing the amount of import duty collected by the total value of imports. Since it is known that there is a large percentage of imports that either evade or avoid the CTL, the real current average is actually lower than 9%. This average needs to be increased to 15%…with a higher capture rate….by lowering import duties on all inputs for production (no taxes should be levied on fuel, which is the foundation of every production chain) and most goods/services where we cannot or do not desire to compete….and raising import duties on select tariff headings in which we desire to produce and compete, either for domestic or export consumption….while electronically integrating customs services with our major trading partners. The CTL has been a “holy cow” for all governments since Independence, since it is a major contributor to revenue…all our governments have been cautious not to interfere with it….but this law is like a set of calibrating valves to control what flows into and out of our country….and at the moment, there is too much flowing in, and too little flowing out….and we should be willing and able to use this “equalizer” to fine tune our “music” by opening and closing valves, continuously taking into account the needs and ability of the country….we cannot live higher than our means….we cannot continue to spend more than we earn…because that means there will be growing poverty and higher debts, a negative feedback cycle….exactly the opposite of where we want to be.
By taking action to implement this, Belize will slow down the rate of growth of imports, and rapidly increase the rate of domestic production and jobs, reducing our deficits….it will be shifting Belize from an import-consumption economy to a production-consumption economy….and thus towards full employment, with decreasing foreign debts and more stable macro-economic fundamentals that are conducive to rapid growth in investments and savings.
BY INFLUENCING the cost-of-doing-business to be the lowest it can possibly be….while raising the optimal amount of revenues that are required for the government to provide quality services that are best provided by government…not for government to be all things to all people.
This means burdening the economic participants with the least amount of taxes, fees, and other costs so that profits are optimized. Social security, land/property taxes, license fees, BAHA fees, Border Management Fees, hotel tax, tour operators and tour guide licenses, Port fees, court fees, transportation (axle) fees, trade licenses, company registry, General Sales Tax, Business Tax, business facilitation fees (Beltraide), Environmental Tax (ET), special permits (central building authority, Fisheries permits, Forestry permits, Environment fees, Geology fees, Lands fees, Immigration fees, BTB, Trade import permits, etc).
Between privatization and formation of so many luxury-status statutory bodies that now charge fees for every little thing that they do (even though many of them still draw big government subventions from tax payers money, but do not come under public scrutiny nor are required to publish annual reports as is required from private corporations), many functions of government now charge these fees as “cost recovery” that pile up on top of the “cost-of-doing-business”….effectively taxing on top of taxes….and making investments in Belize less competitive and less profitable.
The four principal ones are GST, Business Tax, Import duties and Environmental Tax….because they bring in the bulk of public sector revenue….and the uneven way how these are distributed across the economy, is the principal cause why a favored few in the economy are doing extremely well, while most not-so-well.
If GST was reduced to 10%, from the current 12.5%, and charged across the board on ALL goods and services (no exemptions nor exceptions, no Hotel Tax)….Business Tax was reduced to 1%, from the current 1.75%, of sales of ALL businesses (no exceptions nor exemptions)….ET of 2% on ALL imports (no exceptions nor exemptions)…..Import duty average increased from 9% to 15%…then many of the other taxes and fees could either be drastically reduced or eliminated all together…..and the burden of taxes would fall evenly across all shoulders, each carrying a lighter burden….and winners and losers would no longer be predetermined by government favors or punishment….but rather left to be determined by ability, merit and integrity, as prescribed by our National Constitution….and the wealth of the nation would become more evenly distributed. ..we would have an oval-shaped economy, with the bulk of the population being in the middle-income group, and very little if any below the poverty line. Not that the rich should have less, but that the poor and middle income should have more!!
BY INFLUENCING providers of services outside of government to provide vital services at the least cost possible.
The principal of these include commercial banking services, home mortgage financing, insurance services, education fees, health service fees, energy services, telecommunications services, transportation services. For example, there is no greater benefit to Belize from having five commercial banks instead of two….there needs to be consolidation with reduction of administrative and overhead costs, which are passed on to the economic participants through reduction of cost of providing every service that these commercial banks provide….from setting up a loan, to money transfer costs, to liquidating via foreclosure.
There is no advantage to having 10 insurance companies, instead of two….there needs to be consolidation that yields cost benefits to buyers of insurance. There also needs to be facility for internet-based insurance service to be sold and bought, so that insurance costs are drastically reduced….essentially greater competition through deregulation /segmentation, of this important sector.
There is absolutely no benefit to Belize from having three brands of fuel distributors in the country…..two would be sufficient….and the domestic storage and distribution portion of fuel price should be reduced by a significant percentage. Few jobs would be lost in these oligopolies with regulated profits, and many thousands of new long-term jobs would be created from investments being more competitive and profitable in our productive sectors.
Belize should put in place COMPETITION LAW, BANKRUPTSY LAW, ANTI-DUMPING and ANTI-TRUST LAW….even if basic at start, and we develop them as our needs expand and as we learn from others, without reinventing the wheel.
In essence, what this is saying, is that there are too many regulated profit makers in the economy….arranged in oligopolies that price for super-normal profits….creating a few fat cats…and an environment that over-burdens the mass of individuals and businesses, making them highly inefficient and unprofitable…which is the reason why there is so few new investments in production taking place…growing levels of stagnation and default among existing investors….and so few new jobs being created in the economy.
BY PUTTING in place a justice system that is fair, balanced and impartial…..where justice is done, and seen to be done…expeditiously…and where the attainment of justice is not unduly prohibited by exorbitant costs that are way over and above what the average individual or business can afford, to abide by, and uphold the rule of law.
There is more to be said on this topic, but if government would consider and start to adopt these points of reference, individuals and businesses in Belize will see much bigger bottom lines in their PROFIT & LOSS STATEMENTS, and Belize would be well on its way to becoming the “bread basket of the Caribbean”, the “the bridge between the Central American and Caribbean sub-regions”, and the “little Switzerland of the Americas”….three realistic POTENTIAL that has long been touted….but which has been evading our REALITY since political Independence in 1981….due to lack of cohesive, pragmatic, objective-driven strategies, policies, practices and laws….and lack of the exercise of its rights and responsibilities as a politically and economically independent nation….to think and act in the best interest of Belize and Belizeans
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