Okay! We’re economically vulnerable! Now What? Part 1

Okay! We’re economically vulnerable! Now What? Part 1

There are a few inescapable truths that the actors of the Belizean (or frankly any economy) will have to accept. First, there is a “new normal” that will have to be embraced; and second, if there was ever a time for economies to start reviewing their resiliency strategy it is now.

Picking up a cue from venerable economist Professor Lino Briguglio’s work on the importance of strengthening the economic resilience of small developing states, it is imperative that we bring the resilience conversation to center stage. But what is economic resilience anyway? That’s likely a valid question, the answer to which is a useful place to start.

As was said before, it is useful to structure the conversation in the context of Dr. Briguglio (and his colleagues)’s framework. Simply put, Briguglio et. al defined economic resilience as the “ability to recover from or adjust to the negative impacts of external economic shocks”. Elaborating further, resilience fundamentally looks at economies’ ability to either “avoid the shock all together”, “withstand the effect of the shocks”, and “recover [relatively] quickly from the external shock”. Any economy that has all three of those basically could rejoice in having the macroeconomic “Trifecta”.

However, it is very rare to come across developing economies that could ever make such a boast, because by definition developing states represent the quintessence of vulnerability. Apart from having most likely been dealt a “mixed” hand by Mother Nature as far as geographic location and climatic conditions are concerned, many developing economies could be described as being very open economies, possessing high levels of export concentration, and depending significantly on strategic imports.

Thankfully, however, the existence of high vulnerabilities is not where the story ends in the same way that being given the dark pieces in a chess game does not place the second-mover in an inherently unwinnable situation. Frankly, in both the economy and on the chess board it really comes down to strategy. This is the point that Dr.  Briguglio makes in his works, including the collaborative research article “Conceptualizing and Measuring Economic Resilience”.

How bad is it, Doc?

Of course, if we’re going to talk strategic policy making so as to boost resilience against external shocks, it makes sense to first comprehend just how “vulnerable” the Belizean economy is. Consequently, this first installment in this Economic Resilience dialogue will focus on assessing where we stand.

Let’s begin, first of all, at the end, and work our way backwards. In the accompanying image, taken from Briguglio et. al (2006), it is possible to identify four Vulnerability-Resilience categories: “Worst-Case”, “Self-Made”, “Prodigal Son”, and “Best-Case”.

Belize, unfortunately, falls into the “Worse-Case” scenario, where vulnerability is fairly high and coping mechanisms (measured by the Resilience Index) are low (closer to zero).

As stated earlier, vulnerability is treated as being outside the reach of policy under the Briguglio framework. Aside from geographic factors, the first point to recall is that Belize is largely a very open economy. Measured as a ratio of total trade and Gross Domestic Product (GDP), this metric easily ranks well over 100 percent of GDP.

As it pertains to Export Concentration, using the work-horse concentration ratio, the Herfindahl Hirshman Index (HHI), the International Trade Center (ITC) has placed Belize’s overall concentration for Merchandise Trade at roughly 0.2000. In terms of interpretation, it is important to recall that HHI scores above 0.1800 are considered to be highly concentrated. For example, in terms of Belize’s sugar exports, it is no secret that the bulk goes to the United Kingdom, followed by the United States. Combined, these two markets alone account for more than 80% of sugar purchases according to ITC data. While nothing is inherently wrong with exporting to the USA and UK, from the vantage point of vulnerability, these high levels of concentration to just two markets are not without their inherent risks.

This, however, isn’t only true for sugar, but rather many of Belize’s exports, including fruit juices or shrimp. A significant shock to any of these concentrated markets could potentially leave producers with excess supplies of goods and limited to no market for them, especially when it is recalled that the domestic consumer base is too small to absorb the surplus.

As a side note, it is of course possible to argue that export concentration can be considered as variables within the control and power of policy makers, and that argument would not be incorrect. However, in keeping with Briguglio’s approach at the very least this could be classified as a semi-permanent condition that is difficult to change in the short run.

Finally, there is the matter of dependence on strategic imports. Five-year averages of Belize’s trade data shows more than 50% of imports in 2019 were classified as either capital goods (13%) or intermediary inputs (39%). This, however, is not surprising, because it is well known that Belize, being small developing economy, does not produce a wide range of industrial products, including intermediary inputs. Consequently, essential inputs must be sourced from external markets. The challenge here, again within the context of vulnerability, is that if the supply chain is severed, production could be halted until new suppliers are identified.

Now, for much of the discussion here we have kept within the framework provided by Briguglio. However, it is important to establish that this is not the only model on Economic Resilience that exists. Other models do not necessarily employ the stringent assumption of vulnerability being outside the control of policy makers. For instance, entities such as the European Commission look at vulnerabilities by major markets such as the Financial, Product and Labour Markets. It is also not uncommon to see government sector and tax policies.