Improving Trade Possibilities by Increasing Productivity in Guatemalan FirmsBy Scott Harrison Meadow (Secretary BritCham)
BritCham in Guatemala is dedicated to promoting trade and investment between the U.K. and Guatemala, bi-laterally. (1) Doing so, requires a critical look at the underlying obstacles which impede such developments. It seems that potential for the further development of imports is constrained by productivity issues, at the firm level, in Guatemala.
The U.K. competes in certain high value goods and capital equipment. Aside from world renowned beverages, and a significant presence in Fast Moving Consumer Goods, there are still a wide range of consumer goods, which are not marketed in Guatemala. (2) In addition, there are new services (such as software for education and medical attention) which would be available if awareness of these were created in Guatemala. (3)
To increase trade with the U.K. not only does awareness of the goods and services need to be augmented, but non-inflationary increase in wages are required to increase consumption. The importance of productivity to increase in wages is evident and will be further explained below. With the low level of wages in NSE Class C in Guatemala, there is insufficient disposable income for most products currently available from the U.K. producers.
If productivity is increased, then wages could rise, according to the marginal revenue productivity theory of wages. This states that wages are paid at a level equal to the marginal revenue product of labour, MRP (the value of the marginal product of labour), which is the increment to revenues caused by the increment to output produced by the last labourer employed. The marginal revenue product (MRP) of a worker is equal to the product of the marginal product of labour (MP) (the increment to output from an increment to labour used) and the marginal revenue (MR) (the increment to sales revenue from an increment to output): MRP = MP × MR. There are serious questions about the effect on increasing wages with higher productivity. Still, the conversation about higher wages is possible when productivity at the firm level is improved.
One question is, how can Guatemalan firms increase productivity, which ought to increase wages and thereby consumption of goods and services? A following question is, what can U.K. firms do to help improve that productivity in a way that promotes commerce between the two countries?
Research on the problem of productivity at the level of businesses in developing economies yielded some interesting observations. These may not come as a surprise to many observers living in developing economies. However, they must be acknowledged to reach solutions. These empirical observations were reported in a research article by Stanford University researchers who investigated why firms in developing countries have low productivity. (4) The major findings of this research are that many firms lack management practices which hold back productivity. Areas of requiring improvement are monitoring process (collection and processing of business information); creating coherent goals and objectives and incentive practices for merit based pay, promotion, hiring and firing.
Yet, there’s a lot of encouraging news, with regard to the potential for improvements in productivity. In the earlier part of this decade, an experiment where randomly selected textile plants in India received extensive consultations to introduce a common set of basic management practices in quality and inventory control and operational efficiencies resulted in productivity improvements which were measured in orders of magnitude. The use of Enterprise Resource Planning software (ERP) can certainly improve operations. Nevertheless, a lack of delegation of decision making from owners to senior managers results in obvious inefficiencies, due to constraints on the time available for owners/chief executives. The reasons for this lack of delegation range from poor rule of law, lack of management procedures and limited career development opportunities for managers. Although there is sufficient capital available in Guatemala, financing for business growth may be limited by inefficient management practices.
The remaining question is what can we do to improve productivity at the corporate level in Guatemala to set conditions where wages could be increased in a non-inflationary manner? Recent discussion in public policy organizations have pointed out areas of improvement that are relevant to Guatemala. (5)
There appear to be two areas where the BritCham could help increase productivity. These are in the development of (1) BETTER SKILLS: Opportunities to improve and add to the skills of the workforce being essential to raise productivity and (2) MORE COMPETITION: Competition promotes greater productivity through for innovation and staying power. Incentives to innovate and results in productivity will spur these economic developments.
Through the introduction of information services, educational materials U.K. based institutions and corporations can work with Guatemala private sector businesses (commercial and educational) to make education for available for both management classes (executive and middle level) that is deigned to improvement productivity enhancing practices.
Reducing barriers to trade has been on the agenda in Guatemala and over the last decade has improved the quality of products and competitiveness of national and regional companies. British investment in Guatemalan producers and consumer markets can ensure that the U.K. gets a place at the table of business development along with other giants in trade and commerce.
Future articles will explore these opportunities for business growth in Guatemala spurred by U.K. generated opportunities.
(1) The UK imports more than twice as much from Guatemala as they export. (Cite most recent information on UK and Guatemala balance of payments.)
(2) Unilever, is the U.K. based company in the top ten FMCG global manufacturers. (HQ’s in London and Rotterdam)
(3) The U.K. government’s Department for International Trade is an excellent resources for identifying U.K. firms that could expand trade with Guatemala https://www.gov.uk/government/organisations/department-for-international-trade?utm_source=staffsignature&utm_medium=email&utm_campaign=DIT
(4) “Why Do Firms in Developing Countries Have Low Productivity?” American Economic Review: Papers and Proceedings 2010 1002, (Pp619-623) Bloom, Mahajan, McKenzie and Roberts
An important result of this research deserves to quoted at length:
“…we find evidence that firms in developing countries are often badly managed, which substantially reduces their productivity. This appears particularly important in larger firms (100+ employees), which are operationally complex so that effective coordination and motivation require formalized management practices. We also find that financial constraints are a binding factor for growth, notably in smaller firms. In larger firms, which often appear to have already overcome financing constraints, another growth constraint arises in the inability of firms to successfully decentralize decision making. In developing countries owners tend to make almost all major management decisions because of fears of expropriation by their managers. But, because the owners’ time is limited, they have the capacity to make decisions for firms only up to a certain size. Thus, without delegating decision-making these firms find that growth becomes unprofitable, or even impossible, because decisions are constrained by their owners’ time. This suggests that the results of Eric Bartelsman, John Haltiwanger and Stefano Scarpetta (2009) and Chang-Tai Hsieh and Peter Klenow (2009) — that productive firms in developing countries like India and China do not expand as rapidly — due to a mix of financial factors (particularly for smaller firms) and organizational factors (particularly for larger firms).”
(5) “Four ways to speed up productivity growth”, Brookings Institute, September 2016 (Anna Malinovskaya and Louise Sheiner) https://www.brookings.edu/blog/up-front/2016/09/20/four-ways-to-speed-up-productivity-growth/