33199 INTERNATIONALBANK FOR WORLD BANK R E T C N O E N STRUCTION PM AND DEVELO April 2005 No. 67 A regular series of notes highlighting recent lessons emerging from the operational and analytical program of the World Bank`s Latin America and Caribbean Region UNDERSTANDING THE DRIVERS OF SUSTAINABLE RURAL GROWTH AND POVERTY REDUCTION IN GUATEMALA Jeffrey Alwang, Paul B. Siegel, Francisco Pichon and Martin Raine With over 11 million people, Guatemala is the most populous The combination of relatively high per capita income together country in Central America. It also has the highest proportion with low social indicators in Guatemala is attributable to high of rural residents and indigenous populations. Nationally, inequality in the distribution of wealth. Twenty percent of the about 56 percent of the population is poor and 16 percent is population controls 62 percent of income, and less than 1 extremely poor. The rural poor account for 81 and 93 percent percent of farmers own about 70 percent of the land. Because of all poor and extreme poor, respectively. of this inequality, the country faces major obstacles to stimulating broad-based economic growth and reducing pov- Although per capita income is relatively high compared to erty, even though the 1996 Peace Accords have provided a other Central American countries, malnutrition rates are more stable context to facilitate progress toward poverty among the worst in the world; life expectancy, infant, and reduction (see Box 1). Even though economic growth has maternal mortality rates are the worst in the Latin America been relatively steady for the past half-century (averaging 3.9 and Caribbean region; and educational attainment is very percent annually between 1950 and 2000), it has not pro- low--average education is 4.3 years and illiteracy exceeds 30 duced a substantial decline in poverty. National growth rates percent. Major social indicators more closely resemble those mask sectoral differences, problems in lagging rural areas and of Nicaragua and Haiti, where average incomes are far below areas affected by conflict prior to 1996. those in Guatemala. Box 1 - Rural Poverty in Guatemala Poverty in rural Guatemala is generally related to insufficient access to high-quality productive assets, and is characterized by three important features: First, geographic isolation, caused by varied topography and inadequate road networks, is an important correlate of poverty. Rural poverty rates increase with isolation. Poverty-reducing income-generating opportunities are more readily found in densely populated areas near urban centers. Many of these income-generating opportunities are found outside of agriculture in the formal and informal sectors. The second dominant feature of rural poverty is ethnic exclusion. Poverty rates are far higher among indigenous groups and groups whose primary language is not Spanish. The 23 ethno-indigenous groups in Guatemala suffer from historical exclusion from public services and economic opportunities, and are frequently geographically isolated. Exclusion results in weak asset bases, uncertain property rights, and limited ability to exploit economic opportunities. Access to land is a particularly serious problem of the indigenous in the Western Altiplano. Third, rural poverty has a particularly strong spatial dimension and is concentrated in particular areas. The "poverty belt" of Guatemala, spanning the Western Altiplano and the Northern region, contains approximately three-quarters of the country's poor. 1 The regional study "Drivers of Sustainable Rural Growth and Findings Poverty Reduction in Central America," carried out by the Environmentally and Socially Sustainable Development De- Economic potential has a strong spatial pattern (see Figure partment of the Latin America and Caribbean Region, uses an 1). Well-defined areas of higher economic potential exist, asset-based conceptual approach to investigate how broad- with good agricultural potential, relatively good access to based economic growth can be stimulated and sustained in infrastructure, and high population densities. In Guatemala, rural Guatemala. Drivers are defined as the assets and this combination is found in zones in the South Coast, combinations of assets needed by different types of house- scattered areas of the Western Altiplano, near Guatemala City holds in different geographical areas to take advantage of and along the Salvadoran border. In all countries in the economic opportunities and improve their well-being. region, growth has been concentrated in areas where agro- ecological conditions favor export agricultural production. The study does not identify particular enterprises or sub- Road networks and other infrastructure were built to serve sectors that might stimulate growth and poverty reduction. coffee and banana-producing areas of Guatemala and Hondu- Instead, it analyzes the quantity, quality, and productivity of ras, coffee and cattle-producing areas of Nicaragua, and other assets needed by households to improve long-term growth high export-potential areas around the region. and well-being under a particular enterprise or development path. Specifically, it looks at how households deploy their Economic potential does not automatically translate into assets--natural, physical, financial, human, social, political, improved well-being outcomes for all households. Despite institutional, and location-specific assets--within the context good economic potential in parts of the Western Altiplano, of policies, institutions, and risks, to generate a set of measures of well-being there lag far behind potential. Persis- opportunities. Households respond to opportunities, allocat- tent high rates of poverty show that this potential is not being ing their assets and selecting livelihood strategies that ulti- fully realized--and even where it is, the poor are not partici- mately determine well-being outcomes. pating because of missing assets, poorly functioning institu- tions, and policy shortcomings. An important issue for target- The study's focus on assets is appropriate for understanding ing public investments is to identify the combinations of the drivers of rural growth and poverty reduction given the productive, social, and location-specific assets that best en- historically stark inequalities in the distribution of productive, able households to take advantage of an area's growth social, and location-specific assets among households and potential and contribute to improvements in their well-being. geographical areas in the country. Such inequalities are likely to constrain how the poor share in the benefits of growth, The high degree of overlap between high poverty rates and even under appropriate policy regimes. Because of these high poverty densities in areas such as the Western Altiplano inequalities, policy and market-based reforms alone cannot means that investments there should reach significant propor- quickly level the playing field between the asset poor and tions of the country's rural poor. Poverty densities are highest those who possess the complementary assets necessary to in the Western Altiplano, in the areas around Quetzaltenango exploit economic opportunity. By examining the role of assets and Huehuetenango moving west toward the Mexican border. in achieving development objectives, we can help ensure that These areas have high proportions of indigenous populations policy has a sustainable impact on poverty reduction. and are also among the poorest regions in Central America. Conditions for growth often include better agricultural poten- To address these objectives, the authors combine graphical tial, higher population densities, proximity to intermediate mapping techniques, quantitative household analysis and and final markets, and relatively good access to transporta- qualitative analyses of the relationship between assets, liveli- tion. The geographic correspondence between high poverty hood strategies, levels of well-being and growth potential. rates and high poverty density in parts of the Western The household-level analyses draw heavily upon the nation- Altiplano indicates little or no tradeoff in targeting high ally representative 2000 ENCOVI sample survey of house- poverty areas for poverty-reducing interventions. Invest- holds, along with data from the recent Population and Hous- ments targeted to such areas will reach many poor people and ing Census and Agricultural Census. The qualitative exercises leakages to the non-poor will be minimal. contributed to understanding the role of assets in generating community and household well-being, perceptions of ob- To generate substantial gains in poverty reduction and broad- stacles to adoption of successful livelihood strategies, and based growth, complementarities between productive, social, priorities for investments. and location-specific assets must be realized. Education, infrastructure (especially access to roads), social capital, The main conclusions and operational implications of the landholding size, and other location assets are most important study suggest the need for greater spatial differentiation in the for poverty reduction, but other productive assets also play development of rural strategies (one rural strategy does not fit key roles. For example, lack of information about markets all) and the importance of asset complementarity and invest- and opportunities, and limited access to public services can ments with increased cross-sectoral cooperation. These are all constrain broad-based growth. Not all assets are equally necessary to realize project impacts and bridge the gap important; some are effective only in combination with other between conceptual strategies and their timely implementa- assets. As a result, public investment strategies should be tion, to obtain tangible and sustainable results. coordinated across sectors. Returns to assets vary substan- 2 and more intensive use of natural capital, have higher produc- tivity and cope better with crises. They are better able to innovate, participate and interact with external agents and coordinate demands to the government. Recommendations 1. Move from geographically untargeted investments in single assets to an integrated, geographically based approach of asset enhancement. Investments in single assets (e.g. roads, education) need to be complemented by provision of other assets. Otherwise their benefits can bypass households who lack these complementary assets. Investments in education, roads, and other infrastructure related to access to markets intensify the positive effects of investments in agriculture and other land- based production strategies, which by themselves have limited impacts on growth and poverty reduction. A multisectoral and spatially differentiated investment program is needed. The ap- propriate roles of the public and private sectors should be carefully considered. At a minimum, public actions should address market failures and information asymmetries and iden- tify barriers to asset accumulation. 2. To reach the largest number of poor, invest in a variety of tially depending on the household's location, suggesting that social and productive household assets in high potential a spatially differentiated "territorial" rural investment strat- areas with high rural poverty densities. Policymakers in egy is appropriate. Guatemala have the opportunity to invest where rural poverty rates and densities are high in parts of the Western Altiplano and Access to land affects well-being in rural Guatemala, but land other areas with relatively good agricultural potential and access quality and location are also important. Landless households to infrastructure. However, asset bases of the poor need to be experience higher rates of poverty, but landholding is not strengthened so they can benefit from growth-related spillovers. necessarily associated with lower poverty. Livelihood strate- For example, feeder roads are needed in many mountainous gies, especially if they include rural non-agricultural activities, municipios of the Western Altiplano to enable poor households also matter. The relationship between landholding size and to participate in the market economy. Access to technical economic well-being also depends on land quality, proximity to assistance and productivity-enhancing technologies could boost markets, and availability of complementary assets, especially agricultural growth. education and infrastructure. Education leads to increased productivity of land, and better-educated farmers are able to 3. Strategies are needed to address exclusion of indigenous reap benefits from larger holdings. The amount of land under people and their low levels of productive assets and returns irrigation and use of modern seed and chemical inputs were on assets. Mean consumption levels of indigenous rural house- also associated with higher levels of household well-being, holds are 30 percent lower than non-indigenous households, holding all else constant. controlling for education, language ability, land and other pro- ductive assets. This holds across all regions of Guatemala; an Assets complement and substitute for one another. No unique indication of persistent economic and social disadvantages of minimum or optimal asset bundle applies to every household or indigenous households. It underscores their longstanding exclu- region. For example, road access can substitute for landholding sion from public services and economic opportunities. Some size in remote areas, and distance from services makes educa- efforts, such as strengthening property rights and providing more tion even more important. Infrastructure investments are more transparent rules of access to institutions, will benefit all, but will effective in areas with better land security and widespread have a particularly strong impact on excluded groups. Other access to land. efforts should be targeted to excluded groups to overcome entrenched structural problems. Peace and a revitalized sense of Strong local institutions and social capital can compensate for cultural identity give former conflict areas potential for develop- lack of physical assets. Strong local institutions enable better ing ecologically and culturally sensitive tourism. This could be management of community affairs such as basic service provi- an important source of jobs and markets. sion, conflict mediation, regulation of natural resource use, and coordination of community development. Water committees, 4. In areas with higher agricultural potential and popula- school committees, credit associations, and churches are com- tion density and access to infrastructure, agriculture monly found throughout rural Guatemala. In the absence of should form an integral part of the rural growth strategy. formal institutions in isolated rural areas, these organizations High reliance of rural households on agricultural and related fill critical roles for growth. Strong communities make greater 3 income means that any rural strategy should build upon the role for local decision-making. The central government should economic base created by agriculture. For agricultural growth to guide investments and national priorities, but seek local input lower rural poverty, critical shortcomings must be addressed: and analysis before deciding on the final form of investments. unequal access to land, degradation of natural capital, absence Public investment programs should offer alternatives for each of technologies that enhance productivity, and weak institutions area to choose from, depending on local assets and regional for technical assistance and market information. Despite erratic conditions. past performance of the agricultural sector, bright spots exist, including non-traditional exports. If agricultural growth is 6. Investments and projects backed by the World Bank and broad-based, forward and backward linkages to agriculture can other donors in diverse regions of the country need better be strong catalysts of growth. strategic linking and convergence. Specific investments for environmentally and socially sustainable development have 5. Highly differentiated spatial distribution of economic limited growth and poverty reduction impact unless they build potential implies a need for differentiated rural strategies on complementary assets, especially in education, roads and according to an area's specific assets, markets and institu- other market-related infrastructure. Greater complementarity tions (see Box 2). Investment strategies should be formulated and cross-sectoral cooperation of Bank-supported investments on a broad regional basis, but within regions should be tailored could improve the impact on poverty, especially if leveraged by to local asset bases and other conditions. This implies a strong policy, regulatory, and institutional reforms. Box 2 - Spatially Differentiated Development Strategies In the Western Altiplano, the focus should be on land access and productivity enhancements such as forestry and water management, improved market and technical information, and diversification into high value-added activities. Improving feeder roads rather than constructing primary or secondary ones should also be a priority. To reduce constraints to broader participation in the market economy, public interventions should enhance the effectiveness of public services, reduce transactions costs associated with low-quality and scarce transport and communication infrastructure, increase access to technical assistance, and reduce market-related risk (also associated with poor information). In the isolated areas of the Northern and Peten regions, access to basic education, water and sanitation, transportation, and electricity should be expanded. Investments should be focused around market towns and areas where population densities are highest. The quality of the natural resource base should be sustained and programs to enhance economic returns from environmental resources should be explored. In the highly indigenous areas which include much of the Western Altiplano and some areas of the isolated Northern region, programs are needed to lower barriers to access basic services and economic opportunities created by discrimination. Investments in basic literacy and language skills are needed. Productive investments should be delivered through existing community groups, building upon the richness of their social fabric. Access to key assets such as land and public services should be promoted through aggressive public action. In the higher potential areas of the Southern Coast, Central and East regions, agriculture should form the backbone of a broad-based growth effort. Small- and medium-scale exporters will benefit from macroeconomic stability, exchange rate stability, and improved access to market-related information. Traditional large-scale exporters can self-finance technical assistance, finance and group organizations. Public efforts should address problems of small- and medium-scale producers, who need producer groups, technical and market information, and support for value-added innovations (such as dairy production and non-traditional For more details, see: World Bank (2004) Poverty in Guatemala. World Bank Coun- Siegel, P.B. (2005) "Using an Asset Base Approach to Identify try Study. Washington, D.C. Drivers of Sustainable Rural Growth and Poverty Reduction in About the Authors Central America: Conceptual Framework." Policy Research Working Paper Series No. WPS 3475. The World Bank. Jeffrey Alwang is Professor, Department of Agricultural and Ap- www.worldbank.org/research or http://econ.worldbank.org/ plied Economics, Virginia Tech; Paul B. Siegel is a consultant with the Environmentally and Socially Sustainable Development Unit World Bank (2005) Drivers of Sustainable Rural Growth and (LCSES) of the Latin America and Caribbean Region; Francisco Poverty Reduction in Central America: Guatemala Country Pichon is Senior Natural Resources Management Specialist with Case Study, Gray Cover Report No. 31191-GT, Washington, LCSES; and Martin Raine, who retired from the World Bank D.C. Forthcoming. December 2004, was Sector Leader, LCSES. 4