Culturally and economically Belize is more closely linked to the Caribbean than to its Central American neighbors. However, Belize's participation in Caribbean economic integration has not come about easily.
During the 1950s, British Honduras rejected repeated attempts by Britain to incorporate the colony into the proposed West Indies Federation. There were several reasons behind this resistance. One was the fear of being locked into a Caribbean arrangement at the expense of ties with the rest of Central America. Moreover, because wages in British Honduras were higher than in most other British Caribbean territories, the British Hondurans feared that participation in the West Indies Federation might trigger an influx of immigrants from other member states. Indeed, Britain was planning on such on influx.
In 1968, British Honduras began to see the merits of integration with the British Caribbean when the country's ongoing territorial dispute with Guatemala led to rejection of its application to join the Central American Common Market. In 1971 British Honduras joined the Caribbean Free Trade Association (Carifta), which in 1973 became the Caribbean Community and Common Market.
During the Great Depression of the 1930s, British grants were necessary to keep British Honduras economically viable. However, economic ties with Britain gradually were replaced by a growing trade relationship with the United States. This economic link to the United States was seriously weakened by the devaluation of the British pound sterling in September 1949. Respecting the wishes of the middle class, labor, and the colonial legislature, the governor at first refused to devalue the British Honduras dollar and instead kept it at par with the United States dollar. However, three months later, bowing to pressure from Britain and powerful economic interests in British Honduras, the governor overrode the Legislative Council and devalued the colony's currency (see The Genesis of Modern Politics, 1931-54. Imports from the United States then decreased sharply, and imports from Britain rose until they amounted to 35 percent of the total during 1952-54, exceeding the country's imports from the United States. Living costs increased dramatically as a result of the devaluation, and the colony was thrown into turmoil. Anti-British sentiment was widespread and fueled resistance to the British-sponsored West Indies Federation. Imports from the United States did not recover until the late 1950s.
During the 1960s and 1970s, the colony's economy grew rapidly, thanks in large part to the extraordinary success of the sugar sector. During the 1970s, sugar accounted for almost 70 percent of all export revenues. As a result of this high level of dependency, the Belizean economy, although prosperous, entered the 1980s insufficiently diversified and highly susceptible to external shocks.
Saturday, January 12, 2008
Growth during 1980-85
In 1980 the average world price of raw sugar had been US$0.13 per kilogram. By 1984, that price had fallen to US$0.02. As sugar prices collapsed, Belize's terms of trade deteriorated, and from 1980 to 1985 GDP grew an average of only 1.2 percent per year. The crisis was compounded in 1982 when, for the first time since 1974, the United States government implemented a sugar quota system. The result was a reduction in total sugar exports from about 5 million tons in 1980-81 to about 1 million tons by 1987.
Also contributing to the worsening of Belize's balance of payments was the sudden collapse of the country's reexport business. As a reexporter, Belize imports goods and then resells them in neighboring countries (primarily Mexico), or merely transports them, collecting fees for port and road facilities. The arrangement is attractive because of Belize's relatively low shipping costs. However, Mexico's economic payment crisis of 1982, which reduced Mexican imports, put a dent in Belize's foreignexchange earnings as well. Reexports had amounted to 37 percent of export earnings in 1981 but fell to 16 percent in 1983, contributing to a 35-percent drop in total export earnings during that period.
The economic crisis of the early 1980s brought with it escalating trade deficits. In 1981 Belize's net international reserves had stood at US$1.1 million. By the end of 1984, the country had a trade deficit of US$13.6 million.
The economic crisis was a factor in the defeat of the People's United Party government in 1984; it also led to implementation of a standby arrangement with the International Monetary Fund in December of that year. The IMF agreement marked the beginning of the country's adjustment process. The agreement provided access to 7.1 million units of special drawing rights over a sixteen-month period and called for a reduction of the publicsector deficit and a tightening of the country's credit policy by means of higher reserve requirements and higher interest rates. Credit had expanded at an annual rate of 15 percent from 1981 to 1984 because of escalating government debt.
A small open economy is dependent on developments in external markets and generally experiences few domestically generated inflationary pressures. Belize's currency, the Belizean dollar, had been pegged to the United States dollar at a rate of US$1=Bz$2 since 1976. Belize's rate of inflation, therefore, was likewise pegged to that of its major trading partner. Between 1980 and 1983, consumer prices increased by 25 percent in Belize. During the same period, they went up 21 percent in the United States. This modest inflation contrasted sharply with the hyperinflation that pushed prices up by more than 1,000 percent per year in many other countries in the region. Yet, the 4-percent difference between United States and Belizean inflation during those years resulted in a real effective exchange-rate appreciation and, consequently, a worsening of Belize's relative position in the export sector. This trend was later reversed when the Belizean inflation rate fell slightly below that of the United States.
Also contributing to the worsening of Belize's balance of payments was the sudden collapse of the country's reexport business. As a reexporter, Belize imports goods and then resells them in neighboring countries (primarily Mexico), or merely transports them, collecting fees for port and road facilities. The arrangement is attractive because of Belize's relatively low shipping costs. However, Mexico's economic payment crisis of 1982, which reduced Mexican imports, put a dent in Belize's foreignexchange earnings as well. Reexports had amounted to 37 percent of export earnings in 1981 but fell to 16 percent in 1983, contributing to a 35-percent drop in total export earnings during that period.
The economic crisis of the early 1980s brought with it escalating trade deficits. In 1981 Belize's net international reserves had stood at US$1.1 million. By the end of 1984, the country had a trade deficit of US$13.6 million.
The economic crisis was a factor in the defeat of the People's United Party government in 1984; it also led to implementation of a standby arrangement with the International Monetary Fund in December of that year. The IMF agreement marked the beginning of the country's adjustment process. The agreement provided access to 7.1 million units of special drawing rights over a sixteen-month period and called for a reduction of the publicsector deficit and a tightening of the country's credit policy by means of higher reserve requirements and higher interest rates. Credit had expanded at an annual rate of 15 percent from 1981 to 1984 because of escalating government debt.
A small open economy is dependent on developments in external markets and generally experiences few domestically generated inflationary pressures. Belize's currency, the Belizean dollar, had been pegged to the United States dollar at a rate of US$1=Bz$2 since 1976. Belize's rate of inflation, therefore, was likewise pegged to that of its major trading partner. Between 1980 and 1983, consumer prices increased by 25 percent in Belize. During the same period, they went up 21 percent in the United States. This modest inflation contrasted sharply with the hyperinflation that pushed prices up by more than 1,000 percent per year in many other countries in the region. Yet, the 4-percent difference between United States and Belizean inflation during those years resulted in a real effective exchange-rate appreciation and, consequently, a worsening of Belize's relative position in the export sector. This trend was later reversed when the Belizean inflation rate fell slightly below that of the United States.
Economic Growth after 1985
After 1986 the Belizean economy improved dramatically, in part because of the adjustment program implemented by the government. These adjustments cut public expenditures and created incentives for diversification of the economy. The country's foreign-exchange receipts from banana and citrus exports multiplied, and tourism became a major contributor to growth. Internal reform coincided with the recovery of the world economy, in particular the revival of the sugar market. Between 1986 and 1990, the Belizean economy grew at an average annual rate of more than 10 percent.
Inflation remained low from 1986 to 1990, averaging 2.8 percent and allowing for an effective depreciation of the Belizean dollar relative to the United States dollar. The positive effect of low inflation on Belize's exports was enhanced by the depreciation of the United States dollar during the second half of the 1980s. The more favorable exchange rate enjoyed by the Belizean dollar was central to the vigorous growth the country experienced during the period.
In 1991 estimates showed growth slowing to an annual rate of less than 5 percent. This deceleration was the result of significant shortfalls in banana production following an outbreak of black sigatoka disease and a reduction in citrus production resulting from bad weather. As in most of the Caribbean, tourism was also affected by the recession in the United States and Britain.
Inflation remained low from 1986 to 1990, averaging 2.8 percent and allowing for an effective depreciation of the Belizean dollar relative to the United States dollar. The positive effect of low inflation on Belize's exports was enhanced by the depreciation of the United States dollar during the second half of the 1980s. The more favorable exchange rate enjoyed by the Belizean dollar was central to the vigorous growth the country experienced during the period.
In 1991 estimates showed growth slowing to an annual rate of less than 5 percent. This deceleration was the result of significant shortfalls in banana production following an outbreak of black sigatoka disease and a reduction in citrus production resulting from bad weather. As in most of the Caribbean, tourism was also affected by the recession in the United States and Britain.
Peripheral Factors
Two small but significant factors must be mentioned in any discussion of Belize's economy: the role of British troops and the illegal drug trade. At independence, Belize and Britain agreed that the latter would maintain a garrison of 2,000 soldiers in Belize to deter possible aggression by Guatemala. As of 1991, Guatemala had established diplomatic relations with Belize but continued to claim an undefined part of its territory. The economic impact of the British garrison, than numbering about 1,500 troops, was substantial in the early 1990s. Because of their relatively high incomes and the support services they required, the troops have had a significant impact on the level of employment and the Belizean economy in general. Some analysts have estimated that the British garrison directly or indirectly generated about 15 percent of Belize's GDP.
The drug trade was not factored into the country's GDP statistics, and the impact of this illegal activity on the economy was difficult to measure. Belize played three roles in the drug trade in the early 1990s; the country served as a marijuana producer, as a transshipment route for other drugs, and as a moneylaundering center. In the early 1980s, the United States Drug Enforcement Agency placed Belize on its list of leading marijuana producers. Aerial spraying of pesticides was begun in 1984, but was ended that same year because of Belizean concerns about the safety of spraying on legal crops and on the population. The United States government estimated that annual marijuana production in Belize subsequently rose from 35 tons to 850 tons, with an approximate street value of US$120 million. Spraying was resumed in 1985 with different chemicals, and marijuana production declined substantially thereafter.
Belize remained an important transshipment site for drugs other than marijuana in the early 1990s. For instance, in September 1990 Mexican federal judicial police seized approximately 457 kilograms of cocaine, which they suspected had been smuggled into Mexico through the border area between Belize's Hondo River and Santa Teresa, Mexico. The shipment apparently was destined for the United States.
Finally, concerns existed that Belize served as a center for money-laundering. The Central Bank of Belize had the authority to trace large transactions, as well as all foreign-currency transactions. However, the nation's investment law allowed offshore banking in Belize and specifically exempted such activity from the regulatory oversight of the Central Bank.
The drug trade was not factored into the country's GDP statistics, and the impact of this illegal activity on the economy was difficult to measure. Belize played three roles in the drug trade in the early 1990s; the country served as a marijuana producer, as a transshipment route for other drugs, and as a moneylaundering center. In the early 1980s, the United States Drug Enforcement Agency placed Belize on its list of leading marijuana producers. Aerial spraying of pesticides was begun in 1984, but was ended that same year because of Belizean concerns about the safety of spraying on legal crops and on the population. The United States government estimated that annual marijuana production in Belize subsequently rose from 35 tons to 850 tons, with an approximate street value of US$120 million. Spraying was resumed in 1985 with different chemicals, and marijuana production declined substantially thereafter.
Belize remained an important transshipment site for drugs other than marijuana in the early 1990s. For instance, in September 1990 Mexican federal judicial police seized approximately 457 kilograms of cocaine, which they suspected had been smuggled into Mexico through the border area between Belize's Hondo River and Santa Teresa, Mexico. The shipment apparently was destined for the United States.
Finally, concerns existed that Belize served as a center for money-laundering. The Central Bank of Belize had the authority to trace large transactions, as well as all foreign-currency transactions. However, the nation's investment law allowed offshore banking in Belize and specifically exempted such activity from the regulatory oversight of the Central Bank.
GOVERNMENT POLICY
Economic Diversification
The narrow base of the national economy was recognized as a problem by the Belizean government after the sluggish growth of the early 1980s. In response, the government started a comprehensive program during the second half of the decade focused primarily on eliminating export biases and creating a favorable environment for investment, both foreign and domestic, especially in the nontraditional export sector. The creation of a favorable environment for investment meant eliminating internal and external imbalances and upgrading infrastructures. This process was facilitated by external incentives such as the United States Caribbean Basin Initiative. The private sector reacted positively to these changes, and economic growth took off.
The Belizean economy was still insufficiently diversified at the beginning of the 1990s, but major changes in the composition of GDP and exports had provided a basis for sustained growth. The two major changes in the GDP took place in agriculture and tourism. Agriculture declined from a 20 percent share of GDP in 1980 to a 15 percent share in 1990, whereas tourism expenditures increased from a 4 percent share to a 9 percent share.
The percentage share of each crop within the agricultural sector gave further evidence of how the composition of GDP was changing. Sugar-export receipts had lost half their share of exports by 1990, whereas tourism had tripled its portion, to the point where it nearly equaled receipts from sugar exports. Citrus products also had made remarkable progress, almost doubling their share of exports by 1990. The share of GDP provided by bananas increased, although less steadily.
The narrow base of the national economy was recognized as a problem by the Belizean government after the sluggish growth of the early 1980s. In response, the government started a comprehensive program during the second half of the decade focused primarily on eliminating export biases and creating a favorable environment for investment, both foreign and domestic, especially in the nontraditional export sector. The creation of a favorable environment for investment meant eliminating internal and external imbalances and upgrading infrastructures. This process was facilitated by external incentives such as the United States Caribbean Basin Initiative. The private sector reacted positively to these changes, and economic growth took off.
The Belizean economy was still insufficiently diversified at the beginning of the 1990s, but major changes in the composition of GDP and exports had provided a basis for sustained growth. The two major changes in the GDP took place in agriculture and tourism. Agriculture declined from a 20 percent share of GDP in 1980 to a 15 percent share in 1990, whereas tourism expenditures increased from a 4 percent share to a 9 percent share.
The percentage share of each crop within the agricultural sector gave further evidence of how the composition of GDP was changing. Sugar-export receipts had lost half their share of exports by 1990, whereas tourism had tripled its portion, to the point where it nearly equaled receipts from sugar exports. Citrus products also had made remarkable progress, almost doubling their share of exports by 1990. The share of GDP provided by bananas increased, although less steadily.
Balance of Payments
Balance of payments figures also improved in the mid-1980s. From 1980 to 1984, Belize incurred a balance of payments deficit. Effects of the government austerity plan coupled with a rise in exports produced a balance of payments surplus from 1985-90. Between 1988 and 1990, the deficit between exports and imports of goods and services widened again. However, this time the gap was caused by large increases in private-investment expenditures. At the same time, the public sector was accruing surpluses so the overall balance of payment still showed a surplus.
Investments
The heavy investment in Belize from 1988 to 1990 funded both private-sector and public-sector activity. Public-sector capital investments that were domestically financed, for example, increased from US$3.4 million in 1986-87 to a planned US$38.8 million in 1991-92. Although the domestically funded portion of capital expenditures was budgeted to decrease in 1992, an expected increase in funding from external sources was projected to cause a net gain in new capital expenditures.
Private-sector investment increased from approximately US$17.7 million in 1985 to US$63.7 in 1989 then declined in 1990. Helping make a high level of private-sector investment possible was the increased availability of domestic credit. Analysts estimate that net domestic credit extended to the private sector increased 15.3 percent in 1989, and 17.8 percent in 1990.
The improved health and apparent stability of the Belizean economy also encouraged a surge in foreign direct investment. In 1984 Belize had suffered an outflow of foreign direct investment in equity capital of US$7 million. During the period 1988-90, annual foreign direct investments averaged US$17 million. Contributing to this development was the government's decision to eliminate export biases through various legislative measures. The 1990 Fiscal Incentives Act provided tax holidays and duty exemptions for investments that would benefit the economy. The 1990 Income Tax Act granted tax relief to nontraditional exporters. The legislature in 1990 also approved the Export- Processing Zones Act, which exempted eligible firms from requirements concerning import licenses, quotas, import and export taxes, export licenses, price controls, and other regulatory mechanisms. The first export-processing zones (EPZs) were scheduled to become established in 1993. The concept required designation or development of a physical facility (the zone) similar to an industrial park. As part of the effort to provide a more favorable environment for investment, Prime Minister George Cadle Price also introduced legislation that would lower corporate taxes from 45 percent to 35 percent in fiscal year 1992.
Private-sector investment increased from approximately US$17.7 million in 1985 to US$63.7 in 1989 then declined in 1990. Helping make a high level of private-sector investment possible was the increased availability of domestic credit. Analysts estimate that net domestic credit extended to the private sector increased 15.3 percent in 1989, and 17.8 percent in 1990.
The improved health and apparent stability of the Belizean economy also encouraged a surge in foreign direct investment. In 1984 Belize had suffered an outflow of foreign direct investment in equity capital of US$7 million. During the period 1988-90, annual foreign direct investments averaged US$17 million. Contributing to this development was the government's decision to eliminate export biases through various legislative measures. The 1990 Fiscal Incentives Act provided tax holidays and duty exemptions for investments that would benefit the economy. The 1990 Income Tax Act granted tax relief to nontraditional exporters. The legislature in 1990 also approved the Export- Processing Zones Act, which exempted eligible firms from requirements concerning import licenses, quotas, import and export taxes, export licenses, price controls, and other regulatory mechanisms. The first export-processing zones (EPZs) were scheduled to become established in 1993. The concept required designation or development of a physical facility (the zone) similar to an industrial park. As part of the effort to provide a more favorable environment for investment, Prime Minister George Cadle Price also introduced legislation that would lower corporate taxes from 45 percent to 35 percent in fiscal year 1992.
Subscribe to:
Comments (Atom)