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:

o Binding Constraints

o Economic Complexity Index Analysis

2. PDIA to Construct and Deconstruct the Problem:o Fishbone

o Triple A

o Industrial Targeting

3. Diversification Strategy (3 Study Cases)o 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”

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/

High cost of financeLow return to economic activity

Low social returns Low appropriability

government failures market failures

poor geography

low human capital

bad infra-structure

micro risks: property rights,

corruption, taxes

macro risks: financial, monetary, fiscal instability,

debt service

information externalities:

“self-discovery”

coordination externalities

Low domestic savings + bad international finance

bad local finance

High risk High cost

Low competition

Limited access for

firms

!!

Weak governance

BINDINGCONSTRAINS

What Hinders Growth In Honduras?Problem: Non-diversified economy vulnerable to external shocks

and dependent on non-complex/non-tradable sectors

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

Pu

blic

S

ec

tor

Pri

va

teS

ec

tor

Big Learning: “A Whale Fishbone”

Our Learning Process● Total Iterations: 5 pushes

● Decomposition: 26 bones

● Main Binding Constraints: 5

● Entry Points: 18 bones

10 Political Instability AAA Estimation CategoryEntry Point Lack of or weak electoral legislation and no enforcement 3Authority 5 MAcceptance 9 HAbility 6 M

11 Economy focused on low productivity sectors AAA Estimation CategoryEntry Point Industrial targeting 2Authority 9 HAcceptance 9 HAbility 9 H

12 Economy focused on low productivity sectors AAA Estimation CategoryEntry Point Current Accounts Deficits/Financing 3Authority 8 HAcceptance 8 HAbility 8 H

13 Trade AAA Estimation CategoryEntry Point Not enough investors/FDI 3Authority 8 HAcceptance 8 HAbility 8 H

14 Trade AAA Estimation CategoryEntry Point Not enough buyers/trade agreements 3Authority 9 HAcceptance 9 HAbility 9 H

15 Low Endowmen of Human Capital AAA Estimation CategoryEntry Point Limited supply of skilled labor 3Authority 6 MAcceptance 9 HAbility 6 M

16 Low Access to Capital AAA Estimation CategoryEntry Point Credit Ratings/Country Risk/Debt Restructuring 3Authority 5 MAcceptance 7 MAbility 7 M

17 Low Access to Capital AAA Estimation CategoryEntry Point Coordination with International Sources of Capital 2Authority 5 MAcceptance 9 HAbility 6 M

18 Informal Economy AAA Estimation CategoryEntry Point Credit Sharks 3,600% interest rate 1Authority 8 HAcceptance 9 HAbility 5 M

Space for Change…1 State Capability AAA Estimation Category

Entry Point Permits/Red Tape 1Authority 8 HAcceptance 5 MAbility 7 M

2 State Capability AAA Estimation CategoryEntry Point No Professionalized Civil Service 1,3Authority 8 HAcceptance 5 MAbility 7 M

3 State Capability AAA Estimation CategoryEntry Point Lack of PPP Expertise 3Authority 9 HAcceptance 7 MAbility 8 H

4 Investment Climate AAA Estimation CategoryEntry Point Lack of clear fiscal and commercial rules 3Authority 5 MAcceptance 8 HAbility 7 M

5 Investment Climate AAA Estimation CategoryEntry Point Lack of Fiscal Incentives for Private Sector 3Authority 5 MAcceptance 10 HAbility 8 H

6 SOE AAA Estimation CategoryEntry Point Poor Management and Performance 3Authority 7 MAcceptance 5 MAbility 8 H

7 SOE AAA Estimation CategoryEntry Point No Corporate Governance 3Authority 8 HAcceptance 5 MAbility 8 H

8 Corruption AAA Estimation CategoryEntry Point Bad Procurement Practices 2Authority 8 HAcceptance 6 MAbility 8 H

9 Political Instability AAA Estimation CategoryEntry Point Weak Electoral Authority 3Authority 5 MAcceptance 7 MAbility 8 H

Triple-A Change Space Analysis

Categories1 Things already been solved… low hanging fruit2 Things we think we can solve quite quickly3 Things that are solvable but concerned about timeline4 Unsolvable

Priority LevelHigh 8 to 10Medium 4 to 7Low 1 to 3

Selection Criteria

● 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)

PDIA: Selected Entry Points

11 Economy focused on low productivity sectors AAA Estimation CategoryEntry Point Industrial targeting 2Authority 9 HAcceptance 9 HAbility 9 H

15 Low Endowment of Human Capital AAA Estimation CategoryEntry Point Limited supply of skilled labor 3Authority 6 MAcceptance 9 HAbility 6 M

Part 3. Industrial Targeting

Diversification Strategy: Industrial Targeting

Climbing Up the Ladder: Narratives for Success

3 Study Cases:

o 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”

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)