Guatemala Closing Gaps to Generate More Inclusive Growth Systematic Country Diagnostic Susana M. Sanchez Kinnon Scott J. Humberto Lopez Latin America & the Caribbean Region Guatemala: Closing Gaps to Generate More Inclusive Growth Systematic Country Diagnostic Susana M. Sanchez, Kinnon Scott and J. Humberto Lopez Central America Country Management Unit Latin America and the Caribbean Region © 2015 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington, DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved 1 2 3 4 18 17 16 15 This work is a product of the staff of The World Bank with external contributions. The findings, interpre- tations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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Cover image: Kobby Dagan / Shutterstock.com Cover design: Florencia Micheltorena Contents Abbreviations and Acronyms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi Acknowledgements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiv About the Authors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xv 1. Understanding Guatemala’s Development Challenges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 a. Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 b. Why is Poverty So High and Persistent?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Low Inclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Low Growth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Social, Fiscal, and Environmental Sustainability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 c. The Legacy of the Past: A Fragmented Social Contract and Weak Institutions. . . . . . . . . . . . . . . . . . . . 5 d. New Pressures on Guatemala. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 e. Priorities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Inclusion Challenges – Towards a More Inclusive Social Contract. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Challenges to and Opportunities of the Growth Model. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Fiscal, Social, and Environmental Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 f. Knowledge and Data Gaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 g. Structure of the Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 2. Poverty and Shared Prosperity 2000-2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 a. How Guatemala Compares to its Peers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Income Poverty Levels and Trends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Shared Prosperity: Income Growth among the Bottom 40 Percent . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Inequality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Economic Mobility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 b. The Divide Between the Poor and the Non-poor within Guatemala . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Official Poverty Levels and Trends (Consumption-Based Measure). . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 The Geographic Divide . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 The Ethnic Divide. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 The Human Capital Divide. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Other Demographic Characteristics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 c. Drivers of Changes in Poverty and Shared Prosperity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Consumption: Growth, Distribution, and Prices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Drivers of Observed Changes in in Income Poverty. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Sources of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 d. Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 iii 3. Inclusion and Exclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 a. Limited Labor Market Opportunities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 b. Constrained Human Capital Accumulation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Malnutrition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Health. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Education. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 c. Limited Opportunities: Infrastructure and Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 d. The Role of Spending and Institutions in Limited Opportunities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Ineffective Spending. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Inadequate Spending. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 Inadequate Institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 e. The Link between Limited Opportunities and Poor Human Capital Outcomes. . . . . . . . . . . . . . . . . . 65 f. Vulnerability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 g. Convergence and Divergence. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 4. Trends and Drivers of Growth in Guatemala. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 a. Growth Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 b. Regional Disparities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 c. Growth Decomposition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 d. A Sector Perspective on Economic Activity, Job Creation, and Informality . . . . . . . . . . . . . . . . . . . . . 89 Job Creation and Informality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 Financial Sector. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 Information Technology and Information Technology Enabled Services. . . . . . . . . . . . . . . . . . . . . . . 95 Energy Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 Agriculture Sector. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 Manufacturing and Construction Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 Tourism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 e. Foreign Direct Investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 f. Exports. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 g. Underlying Constraints on Inclusive Growth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 A Large Education Deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 Infrastructure Gap. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 Crime and Violence. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 Business Regulations and Competition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 Remittances and Exchange Appreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112 Financial Inclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117 iv Contents 5. Sustainability of the Pattern of Growth, Distribution, and Poverty Reduction . . . . . . . . . . . . . . . . 121 a. Fiscal Sustainability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121 b. Social Sustainability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126 Land Tenure Security. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126 Establishing Rights for Indigenous People. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127 How Guatemalans Perceive their Country?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130 c. Environmental Sustainability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132 Vulnerability to Natural Hazards. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132 Deforestation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132 Water Contamination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134 Urbanization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134 d. Institutional Challenges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135 e. Emerging Priorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138 6. Closing the Gaps in Guatemala: An Agenda of Priorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141 a. What are the Implications for Action and the Costs of Inaction?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144 b. Policy Areas. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145 Tackling Malnutrition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146 Providing Quality Education for All . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147 Boosting Agricultural Productivity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148 Reforming Fiscal Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148 Promoting Territorial Planning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149 Addressing Natural Disasters and the Environment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149 Generating Social Accountability and Forging a New Social Contract . . . . . . . . . . . . . . . . . . . . . . . . 150 c. Change and Recent History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150 d. An Agenda for Knowledge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152 Annexes Annex 1.1 Country Comparators. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155 Annex 2.1 Mobility: Guatemala, Central America and LAC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157 Annex 2.2 Poverty by Region. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158 Annex 2.3 Age Pyramid by Ethnicity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159 Annex 2.4 Probability of Being Poor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161 Annex 2.5 Growth Incidence Curve, Consumption. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163 Annex 3.1 Changes in the Probability of Primary School Enrollment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164 Annex 3.2 Sectors and Intragenerational Mobility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166 Annex 3.3 Mincer Equations and Oaxaca Blinder. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167 Annex 5.1 Perceptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170 Annex 5:2 Legislation Supporting Indigenous Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171 Contents v Boxes 1.1 Guatemala’s Development Challenges in 1950. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 2.1 Measurement and Data Issues in Guatemala. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 2.2 The Indigenous People of Guatemala are a Heterogeneous Group. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 3.1 Is it Food Contamination: What Role do Mycotoxins Play in Malnutrition in Guatemala?. . . . . . . . 66 3.2 The Changing Profile of Guatemalan Emigrants to the United States and Mexico. . . . . . . . . . . . . . . . 75 3.3 The Downside of Migration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 4.1 Guate-Latinas: How Guatemalan Firms Have expanded in the Latin America Region? . . . . . . . . . . 93 4.2 The Case of Banrural, Guatemala. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116 5.1 What Insights Can be Gained from the Chiapas and Oaxaca Experiences? . . . . . . . . . . . . . . . . . . . . 129 5.2 The Commission Against Impunity and Accountability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137 Figures 1.1 Low and Volatile Levels of Constraints to the Executive, 1839-2014. . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 1.2 Guatemala’s Fragmented Social Contract and the Interplay between Institutions and Outcomes. . . . 8 2.1 Guatemala Remains One of the Poorest Countries in the Region. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 2.2 Guatemala Has Made Little Progress in Reducing Poverty in Recent Decades. . . . . . . . . . . . . . . . . . . 20 2.3 Increasing Poverty Has Set Guatemala on a Path Contrary to Those of its Peers. . . . . . . . . . . . . . . . . 20 2.4 Income Growth in Guatemala was Negative while in Other LAC Countries it Rose. . . . . . . . . . . . . . 23 2.5 The Income of the Poor Fell Much Less than Overall Incomes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 2.6 The Rate of Decrease in Income Inequality was Higher in Guatemala than in Central America but Lower than in LAC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 2.7 And Inequality Continues to be Higher in Guatemala than in Its Peer Countries. . . . . . . . . . . . . . . . 24 2.8 Total Income is Highly Concentrated in Guatemala. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 2.9 In Guatemala the Share of the Middle Class Has Decreased Unlike in the Rest of the Region. . . . . 25 2.10 Guatemala Has Experienced More Movements into Poverty than Out of Poverty. . . . . . . . . . . . . . . . 26 2.11 Poorest Municipalities Experienced Greater Gains in Poverty Reduction than Those with Lower Poverty Rates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 2.12 The Decline in the Overall Poverty Rate Was Interrupted by the Global Financial Crisis. . . . . . . . . . 27 2.13 Poverty Levels Vary Dramatically by Departments although Poverty Has Risen in Most Areas since 2006. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 2.14 Poverty and Extreme Poverty Rates Are Substantially Higher in Rural Areas. . . . . . . . . . . . . . . . . . . . 29 2.15 But More than Half of All Poor People Now Live in Urban Areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 2.16 Almost Half of the Poor Live in the Northwest and Southwest in 2000, but More Than a Quarter Now Live in the Metropolitan Area. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 2.17 Two-thirds of Guatemala’s Extreme Poor are Indigenous Even Though Indigenous People Account for Only 42 percent of the Population.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 2.18 Ethnic Dispersion and Poverty Are Linked . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 2.19 The Indigenous Are Much More Likely to Be Poor than the Non-indigenous. . . . . . . . . . . . . . . . . . . 30 vi Contents B2.2.1 Rural and Urban Population by Ethnicity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 2.20 Rising Food Prices Affected Poverty. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 2.21 Income Inequality Decreases Mainly Due to Income Reductions at the Top of the Income Distribution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 2.22 More Jobs and Transfers Mitigated the Negative Effect of Earnings on Poverty. . . . . . . . . . . . . . . . . . 35 2.23 Guatemalan Migration Has Risen Rapidly in the Last 35 Years. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 2.24 The Inflow of Remittances Has Also Risen. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 3.1 Rising Levels of Unemployment Among Women and in Rural Areas May be Cause for Concern. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 3.2 There Has Been a Striking Increase in Wage Employment in Recent Years. . . . . . . . . . . . . . . . . . . . . . 42 3.3 The Poor Are Concentrated in Agriculture. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 3.4 The Sectors where the Poor Are Concentrated Have Had Recent Declines in Earnings. . . . . . . . . . . 43 3.5 Employment varies by ethnicity with significant diversification among the Kaqchikel and concentration among the Q’eqchi. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 3.6 Malnutrition Rates Remain Stubbornly High. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 3.7 Changes in Malnutrition Varied with Rates Rising in Three Departments.. . . . . . . . . . . . . . . . . . . . . . 46 3.8 Gaps in Maternal and Child Health Care across Wealth Quintiles Are Large and Not All Changes Have Been Positive. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 3.9 Guatemala Is Not on Track to Meet MDG on Maternal Mortality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 3.10 Changes in Infant Mortality Have Been Uneven across Regions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 3.11 Guatemala’s Level of Education Is Well below Its Peers but Has Been Rising Fast. . . . . . . . . . . . . . . . 50 3.12 Some Progress Has Been Made on Closing the Large Gaps in Schooling . . . . . . . . . . . . . . . . . . . . . . . 50 3.13 Education Levels in Guatemala Remain Low and Unequal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 3.14 Primary Enrollment Became Almost Universal But Shows Signs of Reversal. . . . . . . . . . . . . . . . . . . 52 3.15 Literacy Rates in Both Spanish and Mayan Languages Vary by Groups. . . . . . . . . . . . . . . . . . . . . . . . . 52 3.16 Guatemala Has Low Levels of Educational Attainment Compared to the Rest of Central America. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 3.17 Levels of Completion Are much Lower in Rural Areas, Especially for Girls. . . . . . . . . . . . . . . . . . . . . 52 3.18 Access to Basic Services Usually But Not Always Reflects Monetary Well-Being. . . . . . . . . . . . . . . . 53 3.19 Access to Basic Services Has Improved in Recent Years But This Has Not Led to Convergence . . . . 53 3.20 Circumstances Affect Children’s Access to Basic Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 3.21 Coverage and the HOI for Sanitation Are Particularly Low in Guatemala . . . . . . . . . . . . . . . . . . . . . . 54 3.22 While Location Is Becoming Less Important in Explaining Access to Services, Ethnicity Continues to Be a Key Explanatory Factor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 3.23 The Distribution of Health Facilities Perpetuates Inequities in Health . . . . . . . . . . . . . . . . . . . . . . . . . 56 3.24 The Distribution of Secondary Schools Underserves Poor Areas. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 3.25 The Distribution of Primary Schools Is Pro-Poor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 3.26 Private Schooling Is More Prevalent at Higher Levels. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 3.27 Costs Are a Barrier to Schooling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 3.28 Parental Education Is More Important in Explaining a Child’s Education Than Location or Household Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 Contents vii 3.29 The Role of Parental Education on Enrollment Has Risen While Other Factors Have Fallen. . . . . . 58 3.30 Not All of Public Spending Is Progressive. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 3.31 Despite Improvements, Learning Outcomes below LAC Average. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 3.32 Even the Very Poor Use Private Health Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 3.33 Inefficiency: Health Spending and Outcomes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 3.34 Health Spending Has Little Impact on Malnutrition Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 3.35 Education Spending Is Low in Guatemala . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 3.36 Spending on Education Has Been Effective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 3.37 Spending on Health Is Low and Has Not Changed in per Capita Terms. . . . . . . . . . . . . . . . . . . . . . . . 64 3.38 Private Expenditure on Health Care Is High . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 3.39 Lack of Access to Sanitation Is Highly Correlated with Malnutrition Rates . . . . . . . . . . . . . . . . . . . . . 68 3.40 Food Insecurity Affects Many Households. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 3.41 Increasing Road Access to Markets, Economic Opportunities, and Services Has Helped to Reduce Poverty. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 3.42 Poverty in Indigenous Municipalities Has Been Reduced Less Than in Non-indigenous Municipalities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 3.43 Returns to Education Vary by Ethnicity and Gender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 3.44 Social Protection Spending Is Low and Has Not Changed since 2011. . . . . . . . . . . . . . . . . . . . . . . . . . 73 3.45 The Bulk of Social Protection Spending Goes to Those in the Top Quintile, 2015. . . . . . . . . . . . . . . . 73 3.46 Social Spending Is down from Its 2010 Peak . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 3.47 Guatemala’s Social Protection Spending Levels Are Well below Those of Its Neighbors. . . . . . . . . . . 74 3.48 Remittances Change Seasonally and with Economic Cycles. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 3.49 There Has Been a Sharp Drop in the Share of Households Receiving Remittances. . . . . . . . . . . . . . . 75 3.50 Remittances Have Been Declining in Significance as a Share of Household Consumption . . . . . . . . 75 B3.2.1 Recent Guatemalan Immigrants to the US Are Less Skilled Than the Initial Wave. . . . . . . . . . . . . . 81 4.1 Guatemala Shows Declining GDP Growth in Contrast to the LAC Region . . . . . . . . . . . . . . . . . . . . . 84 4.2 There Has Been Little Economic Convergence with the U.S. in Contrast to LAC, Costa Rica, and Panama . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 4.3 The Department of Guatemala, the Richest, Lags the Latin America Region. . . . . . . . . . . . . . . . . . . . 85 4.4 Labor Is the Main Factor Contributing to GDP Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 4.5 Gross Capital Formation is Low and Declining. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 4.6 Private Consumption is the Main Contributor to Growth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 4.7 The Service Sector Is the Main Driver of GDP Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 4.8 The Share of Manufacturing Is Declining. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 4.9 Agriculture Generates Most of the Jobs in Guatemala. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 4.10 Most Jobs Have Been Created in the Agriculture and Services Sectors Since 2006 . . . . . . . . . . . . . . . 90 4.11 Guatemala Has the Highest Share of Informal Workers in LAC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 4.12 Most Jobs Created Between 2000 and 2014 Lack Social Security Coverage . . . . . . . . . . . . . . . . . . . . . 91 4.13 Most Private Sector Jobs Are in Microenterprises. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 4.14 Informality is Associated with Firm Size and Location . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 4.15 Guatemala Lags Behind Comparators in Terms of Financial Depth. . . . . . . . . . . . . . . . . . . . . . . . . . . 94 viii Contents 4.16 The Share of Consumer Credit Has Expanded. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 4.17 Credit to SMEs Is Growing Slower than Credit to Large Enterprises. . . . . . . . . . . . . . . . . . . . . . . . . . . 95 4.18 Credit in Foreign Currency Is Growing Faster. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 4.19 Four Products Account for Most of Agricultural Exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 4.20 Guatemala’s Agricultural Value Added per Worker is Stagnant. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 4.21 The Earnings Premium for Working Outside Agriculture is Increasing . . . . . . . . . . . . . . . . . . . . . . . . 98 B4.1.1 Globalization Index and Ranking of Pollo Campero . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 4.22 Guatemala Lags Behind in Attracting FDI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103 4.23 Foreign Direct Investment Has Been Growing since 2009. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103 4.24 Electricity and Manufacturing Account for the Bulk of FDI Inflows. . . . . . . . . . . . . . . . . . . . . . . . . . 103 4.25 Trade Openness Declined in Guatemala While It Increased in Most Central American Countries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 4.26 Merchandise Exports per Capita Are Low . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 4.27 Export Diversification Is Reflected in the Large Number of Products. . . . . . . . . . . . . . . . . . . . . . . . . 105 4.28 Exports Lack Sophistication. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 4.29 Crime and Theft Continues to Negatively Affect Private Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 4.30 Gains in Primary Education Attainment Accelerated in Past 14 Years. . . . . . . . . . . . . . . . . . . . . . . . . 107 4.31 Returns to Education are High but Declining . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 4.32 Very Few Guatemalans Complete Secondary Schooling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 4.33 Modest Coverage of Roads and Electricity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109 4.34 The Quality of Infrastructure Has Deteriorated. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109 4.35 Guatemala’s Investment in Infrastructure is one of the Lowest in the Region. . . . . . . . . . . . . . . . . . . 110 4.36 Capital Expenditures by the Central Government Has Been Declining. . . . . . . . . . . . . . . . . . . . . . . . 111 4.37 Homicide Rate Has Been Declining in Guatemala . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112 4.38 Guatemala’s Burdensome Procedures for Doing Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114 4.39 Account Ownership Increased between 2011 and 2014, but Borrowing is Limited. . . . . . . . . . . . . . 115 4.40 Fewer Guatemalan SMEs Use Banks to Finance Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115 5.1 Guatemala’s Tax Burden Was the Lowest in Latin America in 2013. . . . . . . . . . . . . . . . . . . . . . . . . . . 122 5.2 Public Sector Spending Is Low and Declining. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122 5.3 Central Government Fiscal Balance, 2000-2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123 5.4 Public Debt is Low in Guatemala. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123 5.5 Central Government Tax Revenue by Type of Tax, 1995-2014. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123 5.6 SAT Collected only 58 percent of Potential VAT Revenue in 2014. . . . . . . . . . . . . . . . . . . . . . . . . . . . 125 5.7 Tax Expenditures Decreased after the 2012 Tax Reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125 5.8 The Government’s High Approval Ratings After the Peace Accords Has Dissipated. . . . . . . . . . . . . 131 5.9 Three-quarters of Guatemalans Think that Their Country is Stagnating or in Decline. . . . . . . . . . . 131 5.10 Guatemalans Are Concerned about Equity, Access to Jobs, and Crime and Violence. . . . . . . . . . . . 131 5.11 Forest Area is Falling Rapidly in Guatemala. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133 5.12 Guatemala’s Institutions Are Lagging Behind And Not Improving. . . . . . . . . . . . . . . . . . . . . . . . . . . 136 6.1 Guatemala’s Fragmented Social Contract and Interplay between Institutions and Outcomes. . . . . 143 Contents ix Tables 2.1 Despite Remarkable Progress, Guatemala still Lags Behind in the Region and Among Its Peers in Non-monetary Indicators. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 2.2 There Are Sharp Differences Between the Poor and Non-poor in Terms of Demographics, Education, and Informality of Employment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 3.1 Earnings Have Declined Over the Last 15 Years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 3.2 Correlates of Malnutrition, 2008-09 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 4.1 Top Export Products, 2005-2014. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 x Contents Abbreviations and Acronyms ACOFOP Association of Community Forests of Petén ACS American Community Survey ANADIE National Partnership Agency for the Development of Economic Infrastructure ARG Argentina ASAZGUA Association of Sugar Producers of Guatemala ASIES Asociación de Investigación y Estudios Sociales BANDESA National Agricultural Development Bank BCG Bacillus Calmette–Guérin vaccine BPO Business Process Outsourcing CA Central America CACIF Comite Coordinador de Asociaciones Agricolas, Comerciales, Industriales y Financieras CACM Central American Common Market CAFTA-DR Dominican Republic-Central America Free Trade Agreement CEDLAS Center for Distributive and Social Studies CEPAL Comisión Económica para América Latina CICIG Commission against Impunity in Guatemala CNDH National Human Rights Commission COL Colombia NCONAP National Committee of Protected Areas CPO Crude Palm Oil DPT Diphtheria, Pertussis, and Tetanus vaccine ENCOVI National Living Conditions Survey ENEI Labor and Income Survey ENSMI National Maternal and Child Health Survey EXPY Sophistication of Exports FDI Foreign Direct Investment FEWSNET Famine Early Warning Systems Network FUNDESA Fundacion para el Desarrollo de Guatemala GATT General Agreement on Tariffs and Trade GDP Gross Domestic Product GFDRR Global Facility for Disaster Reduction and Recovery HOI Human Opportunities Index IARC International Agency for Research on Cancer IDB Inter-American Development Bank IEP Institute for Economics & Peace IFC International Finance Corporation IGSS Guatemala Social Security Institute IHRIS Integrated Human Resource Information System xi ILO International Labor Organization IMF International Monetary Fund INE National Institute of Statistics INTA Institute of Agrarian Transformation IOM International Office of Migration IT-ITES Information Technology and Information Technology Enabled Services KNOMAD Global Knowledge Partnership on Migration and Development LAC Latin America and the Caribbean LAPOP Latin American Public Opinion Project LPG Liquefied petroleum gas MAGA Guatemala’s Agricultural Ministry MARN Ministry of the Environmental and Natural Resources MDG Millennium Development Goal MFI Microfinance Institution MINEDUC Ministry of Education MP Ministerio Público MSME Micro, small, and medium-sized enterprises MSPAS Ministerio de Salud Pública de Guatemala MUZ Multiple Use Zone NGO Non-Governmental Organization NTBs Non-Tariff Barriers OECD Organization for Economic Co-operation and Development OLADE Latin American Energy Comission PAHO Pan American Health Organization PEC Programa de Expansión de Cobertura PES Payment for Environmental Service PHC Primary Health Care PP Percentage Points PPP Public-Private Partnerships RBB Results Based Budgeting RSPO Roundtable on Sustainable Palm Oil SAT Tax and Customs Administration SCD Systematic Country Diagnostic SEDLAC Socio-Economic Data Base data base for Latin America and the Caribbean SERCE Segundo Estudio Regional Comparativo y Explicativo SIGAP Guatemalan System of Protected Areas SIGSA National Health Management Information System SMEs Small and Medium-Size Enterprises SSEIR Social Sector Expenditure and Institutional Review TERCE Tercer Estudio Regional Comparativo y Explicativo TFP Total Factor Productivity UAM Unaccompanied Minors xii Abbreviations and Acronyms UFCO United Fruit Company UNCTAD United Nations Conference on Trade and Development UNDOC United Nations Office on Drugs and Crime UNDP United Nations Development Program UNEP United Nations Environment Programme UNESCO United Nations Education, Scientific and Cultural Organization UNICEF United Nations International Children’s Fund VAT Value-Added Tax WBG World Bank Group WDI World Development Indicators WDR World Development Report WEF World Economic Forum WEO World Economic Outlook WGI Worldwide Governance Indicators WHO World Health Organization WTO World Trade Organization Abbreviations and Acronyms xiii Acknowledgements We would like to thank the members of the World Bank’s Guatemala Country Team from all Global Practices and IFC, as well as all of the partners and stakeholders in Guatemala, who contributed to the preparation of this Systematic Country Diagnostic (SCD). We are grateful for their inputs, knowledge and advice. We would like to give special thanks for the generosity of the Guatemala Country Office team. The team was led by Susana M. Sanchez (Senior Economist) and Kinnon Scott (Senior Economist) under the guidance of J. Humberto Lopez (Country Director). The following people provided overall guidance: Frank Sader (Principal Strategy Officer, IFC), Fernando Paredes (Acting Country Manager), Oscar Avalle (former Country Manager), Pablo Saavedra (Practice Manager), Oscar Calvo-Gonzalez (Practice Manager), Manuela Francisco (Program Leader), Christian A. Peter (Program Leader), and Maryanne Sharp (Country Operations Adviser). The team that prepared this report consisted of Emma Monsalve (GPVDR), Ana Maria Oviedo (GPVDR), Elizaveta Perova (GPVDR), Liliana Sousa (GPVDR), Laura Moreno (GPVDR), Elisa Malerbi (LCC2C), Marco Antonio Hernandez Ore, Jasmin Chakeri (GMFDR), Sara Francesca Giannozzi, Pablo Acosta (GSPDR), Edmundo Murrugarra (GSPDR), Christine Lao Pena (GHNDR), Meera Shekar (GHNDR), Dianna Pizarro (GSURR), Angelica Nunez (GSURR), Daisy Magaly Lazaro Quesada (GSU04), Alberto Leyton (GGODR), Lisa Bhansali (GGODR), Samantha Abigail Fien-Helfman (LCROS), Luz Berania Diaz (GFADR), Svetlana Edmeades (GFADR), Lorena Rodriguez (CLAPA), Antonio Skarica (CBCCF, IFC), Guillermo Arenas (GTCDR), Lucia Jimena Villaran Elias (GTCDR), Martha Martinez Licetti (GTCDR), Juan Diego Alonso (GEDDR), Rita Almeida (GEDDR), Wendy Elizabeth De Leon Samayoa (LCCGT), Gabriel Esteban Barrientos (GEDDR), Lilian Pena (GWADR), Antonio Manuel Rodriguez Serrano (GWASL), Klas Sander (GENDR), Sarah Guel (GEN04), Caroline Cerutti (GFMDR), Mariano Gonzalez (GEEDR), Javier Posas and Lorena Rodriguez (CLAPA). The team would like to thank the peer reviewers, Luis-Felipe Lopez Calva (GPVDR), David Rosenblatt (DECOS), and Oscar Avalle (SECPO) for their comments. Finally, the team would also like to thank Giselle Velazquez and Desiree Gonzalez for their support to the task and the finalization of the report. xiv Acknowledgements About the Authours Susana M. Sanchez is a Senior Economist in the Macroeconomics and Fiscal Management Global Practice group of the World Bank, where she carries out economic analysis in the Latin American Region. She has also led technical and advisory work on access to finance issues in Mexico, Brazil, El Salvador, Guatemala, Nicaragua, Turkey, and Romania. In addition, she has worked on assessing investment climate constraints and impacts of Free Trade Agreements. She has conducted research on growth determinants, financial markets and poverty, labor markets, and small and medium enterprise development. She has a PhD in development economics and a master’s degree in economics, both from the Ohio State University. Kinnon Scott is a Senior Economist in the Poverty and Inequality Global Practice in the World Bank working in Central America and Mexico on issues of poverty reduction, migration and inclusive growth. Previously she worked in the Research Group in the Development Economics Department of the World Bank. Her research interests are broad, ranging from behavioral economics, to methodological issues around poverty and inequality measurement. Her recent work has focused on developing the means to measure financial capability in developing countries, the links between migration and labor outcomes in Mexico and inequality aversion among the middle class in El Salvador and how this might affect subsidy reform. She holds a Ph.D from the University of Pittsburgh. J. Humberto Lopez is the Director of the Central America Department of the World Bank’s Latin American Region with responsibility for the Bank’s portfolio, lending, strategy, and dialogue for Guatemala, El Salvador, Honduras, Nicaragua, Costa Rica, and Panama. During his years in the World Bank, he has occupied positions of significant responsibility including Director for Economic Policy and Poverty Reduction of the Latin American region; Deputy Chief of staff of the World Bank Group during the first year of President Jim Kim, and Manager for Economic Policy and Poverty Reduction East Africa. Humberto has an extensive publication record in diverse areas such as fiscal policy, optimal currency areas and real exchange rate misalignment, armed conflict and development, and pro-poor growth. He has also been the editor of three books on Free Trade Agreements, Remittances and Development, and the Latin American Investment Climate, and was the lead author of the World Bank 2006 Latin American Flagship on growth and poverty reduction. Before joining the Bank permanently, Humberto was a Professor of Economics at the University of Salamanca (Spain) and a Visiting Professor at Louisiana Stat. About the Authours xv 1. Understanding Guatemala’s Development Challenges Overview younger than 14, and the median age is 21.2 years, the lowest in the Latin American region.2 Guatemala has enormous potential to In some ways, Guatemala has lived up to its generate prosperity for its population. The potential. Guatemalan companies whose reve- country is strategically located, has substantial nues, operations, and resources originate from natural resources, and a young multi-ethnic overseas (“Guate-Latinas”), is one example of the population that could foster growth and shared dynamic process of globalization.3 Guatemalan prosperity. Considered the “gateway” into the entrepreneurs have expanded internationally in Mesoamerican market, Guatemala has ports on an effort to diversify their local exposure. Most of both the Atlantic and Pacific Oceans (and a this expansion has been in search of new markets proposed dry port with Mexico) providing in neighboring countries (Southern Mexico, connectivity to external markets, thus making it Honduras, and El Salvador) rather than to an attractive destination for foreign direct participate in global value chains.4 Guate-Latinas investment. The country’s complex topography, operate in a range of different industries, such as with coastal plains in the southeast, central regional food producers, food franchises, highlands, and northern lowlands, provides a regional commercial real estate developers, range of climatic zones that encompass rich regional banks, and integrated sugar and ethanol biodiversity and economic potential for agricul- producers. Another example of Guatemala’s ture, forestry, and hydropower generation. economic dynamism is the emergence of Guatemala has become a leading exporter of information technology firms, including call agricultural products and is the fourth largest centers and companies specializing in digital exporter of sugar in the world and the largest special effects for movies. Although large firms in exporter of cardamom.1 Large mineral deposits the private sector could be reaching their of gold, nickel, lead, zinc, and iron, among others, potential, this is not the case for the private sector add to Guatemala’s wealth of natural resources. as a whole and its large number of micro, small, And with a young and growing population, and medium-sized enterprises. especially among indigenous people, Guatemala Guatemala has one of the highest poverty rates is in the early stages of a demographic transition in Latin America. The poverty rate (according to that has the potential to yield a demographic the US$4 per day poverty line) increased from 55 dividend. The country has a population of over percent in 2000 to 60 percent in 2014. This 15 million people, of whom half live in urban implies that the number of Guatemalans living areas. Ethnic-cultural diversity makes Guatemala below the poverty line increased from 6.8 million distinct, with 42 percent of the population to 9.6 million people during those 15 years. This belonging to an indigenous group, the highest trend is in striking contrast with the significant share in the Latin America region. At the same overall decline in poverty in both Latin America time, almost 40 percent of the population is as a whole and most of Central America. The lack Understanding Guatemala’s Development Challenges 1 of income growth among the bottom 40 percent malnutrition (stunting) is high throughout the of the population in Guatemala between 2000 country (affecting 47 percent of all children) but and 2014 is also in direct contrast with most the figure is 66 percent among children in the Latin American countries.5 Non-monetary lowest welfare quintile and 61 percent among indicators of welfare also highlight the extent to indigenous children.7 This is much higher than which Guatemala is an outlier in the region. malnutrition rates among indigenous children in Chronic malnutrition (stunting) remains at levels El Salvador (40 percent), Peru-Quechua (15.4 seen only in countries with substantially lower percent), India (25.3 percent), and Brazil (25.7 income levels. Guatemala ranked 106 out of 120 percent).8 The differences in stunting rates among countries on stunting in 2010, almost the exact wealth quintiles are large, ranging from 17 same ranking as it had in 1990.6 Education levels percent in the top quintile to 66 percent in the are also low, with only 18 percent of all 25 to 29 lowest. In education the gaps are also large: rural year olds having graduated from secondary inhabitants have, on average, only 3.7 years of school, half the Central American average and a schooling compared to 6.2 years in urban areas. quarter of the OECD average. In 2006, the gap in sixth-grade reading test scores Tremendous and persistent inequalities can be between the poor and the middle class was the found in Guatemala across ethnic groups, largest in the Latin American region. locations, and economic sectors. The Gini The gaps between the two Guatemalas are also coefficient of income, a common measure to clear in economic terms. Nationally, economic assess income inequality, was 0.49 in 2014. This is activities are carried out by a small formal sector well below previous levels but still ranked at the with social protection (18 percent of workers) on top end of world inequality. Nor is inequality the one hand and, on the other hand, by a large limited to income. Land concentration in informal sector (82 percent of workers). The Guatemala is among the highest in Latin share of workers who are not covered by social America: the Gini coefficient for land in security in Guatemala is among the highest in Guatemala is 0.84. In 2014, the combined wealth Latin America and the Caribbean. In two of the of Guatemalan millionaires amounted to 65 largest sectors, agriculture and commerce, 94 percent of GDP. percent and 86 percent of employment, respec- In a sense, one needs to visualize two tively, is informal. After controlling for workers’ Guatemalas with large gaps in outcomes between endowments, earnings in the informal sector are them to understand the country’s challenges. One almost 60 percent lower than those in the formal Guatemala is rural and the other urban, one is sector. The large informal sector is a symptom of indigenous and the other non-indigenous, one a lack of opportunities, and contributes to the informal and the other formal, and one lacks low productivity of the economy as a whole. access to basic services while the other has the Agriculture, a sector of particular significance to ability to pay for those services when the state the economy, has a dualistic structure with does not provide them. The gaps between the two export-oriented large farms on the one hand and Guatemalas are large. The indigenous peoples of subsistence-oriented small farms on the other. At Guatemala are 1.7 times as likely to be poor as one extreme, Guatemala has become a leading non-indigenous peoples, while at the same time exporter of agricultural products such as sugar they are poorer than indigenous peoples in most and cardamom and has the most efficient other Latin American countries. Chronic sugar-loading terminal in the world.9 At the other 2 Understanding Guatemala’s Development Challenges extreme, small farmers produce for the domestic the poor are most likely to work. The poor tend market and for their own consumption, and their to lack human capital as a result of their limited productivity is declining or stagnant. access to basic services such as education and This Systematic Country Diagnostic (SCD) health, and this negatively affects their ability to looks at why a country with such great potential find the types of productive employment that has not been able to materialize it. The SCD would help them to rise out of poverty. Coverage analyzes four fundamental questions to first of basic and other services is far from universal in understand the factors behind Guatemala’s poor Guatemala, and poor households and ethnic development outcomes, to then reflect on the minorities continue to bear the brunt of unequal causes that have led to the current situation, and, opportunities. The low levels of revenues finally, to propose pragmatic options to move collected by the national government limits its Guatemala to a higher development stage. ability to provide basic public services. At the same time the net result of the existing fiscal • How inclusive is Guatemala’s development policy (direct and indirect taxes and transfers) is model and what are the factors that prevent to actually increase poverty and does nothing to it from being more inclusive? lower inequality. • What does growth look like, what has driven There is very little upward economic mobility it, and what are the bottlenecks that need to in Guatemala. Intra-generational mobility is low: be addressed? the share of households that remained poor • How sustainable is Guatemala’s development between 2000 and 2014 was 37 percent, which is model economically, socially, and environ- about 50 percent higher than the average for the mentally? Latin America region. In net terms, about one in • Are there additional factors that underlie ten households rose out of poverty during that the present Guatemalan economy and what period, but more than that fell into poverty. Not changes have the greatest potential to reduce only are the kind of developmental and educa- poverty and foster shared prosperity? tional opportunities for children that could enable them to rise out of poverty in adulthood unequally distributed, but also the returns to Why is Poverty So High education in the labor market are unequal. For and Persistent? example, returns to endowments for indigenous groups tend to be lower than those for other The high levels of poverty in Guatemala are groups. This exacerbates the disadvantages a function of social exclusion, low growth, and associated with having only limited opportuni- challenges to the sustainability of growth. ties. In short, people are excluded from the benefits of economic growth through both a lack Low Inclusion of endowments and a differential rate of return Labor markets have played only a limited role in on those endowments. The middle class is small improving household welfare in Guatemala. The (constituting less than 10 percent of Guatemalan number of jobs has increased at the same pace as population), which is a reflection of the consider- GDP, which has helped to reduce poverty, but the able barriers faced by people trying to rise out of quality of these jobs has not improved. Earnings poverty. are stagnant, especially in the sectors in which Understanding Guatemala’s Development Challenges 3 Low Growth liberalization of the financial, power, and Aggregate indicators of economic development telecommunication sectors in the mid-1990s. suggest that, rather than catching up with richer Nevertheless, economic growth has been modest, countries, Guatemala has diverged from them. averaging only 3.4 percent between 2000 and Guatemala’s per capita GDP is now 6.7 percent of 2015, and per capita growth has been weak. Nor the per capita GDP of the United States whereas have labor markets been able to generate suffi- the equivalent figure in 1960 was 8.4 percent. cient good quality jobs. Despite pockets of During the same period, other Latin American dynamism created by the private sector, labor and Caribbean countries were able to increase income has played a limited role in reducing their incomes relative to the United States from poverty, which suggests that the private sector is 12.2 percent to 18.1 percent on average. In constrained in its ability to generate quality jobs Central America, Guatemala’s performance in for a largely unskilled labor force. In contrast terms of converging with the United States has with the internationally competitive portions of been similar to that of Honduras, El Salvador, the economy, almost two-thirds of workers and Nicaragua, neighboring countries that share operate in the informal economy, and 82 percent Guatemala’s development challenges. In contrast, of workers lack social security coverage. Panama and Costa Rica, like most Latin American countries, have made headway in Social, Fiscal, and Environmental converging with the United States. Today, Sustainability Guatemala is the fifth poorest economy in terms A range of factors threaten the sustainability of of per capita GDP in the Latin American region, efforts to reduce poverty and increase growth in a drop of five positions from its rank in 1960. Guatemala. Guatemala is among the top ten Guatemala’s ability to maintain a stable countries in the world most affected by extreme macroeconomic framework, which is one of its climate events and is not exempt from geophysi- most recognized achievements, has not translated cal hazards. Its geographic location makes it into high growth or poverty reduction. The prone to frequent and high-intensity geological Central Bank has been successful in keeping the and weather-related shocks such as storms, inflation rate low and stable. Moreover, manage- hurricanes, droughts, earthquakes, and volcanic able fiscal deficits (of around 2.1 percent since eruptions. Moreover, climate change is already 2000) have kept Guatemala’s debt level to below affecting the growing cycles of its key subsistence 25 percent of GDP. Fiscal discipline has been crops, which are beans and corn, and the negative achieved despite Guatemala having one of the effects of climate change disproportionately fall lowest tax burdens in the world (about 10.8 upon poor households. Guatemala’s high levels of percent of GDP in 2014). On the external front, crime and violence also negatively affect house- the current account balance has decreased over holds and businesses by raising the cost of doing the past decade, reaching 2.3 percent of GDP in business. 2014, much lower than the level in the early Given Guatemala’s frequent natural disasters 2000s (5.6 percent). The government’s trade and its high levels of crime and violence, the policies have led to a more open foreign invest- absence of a strong safety net exacerbates ment regime, flexible foreign exchange arrange- households’ vulnerability. The government’s low ments, and the deregulation and the fiscal revenues limit its ability to mitigate the 4 Understanding Guatemala’s Development Challenges effects of exogenous shocks and to create a low development equilibrium. Guatemala’s sustainable development path for the country. development has been hindered by two funda- Guatemala has a low tax-to-GDP ratio and a high mental and interlinked features: (i) a fragmented share of indirect taxes. As early as 1950, social contract, which is the implicit agreement Guatemala had the lowest tax revenue as a between the state and its citizens about their percentage of GDP (6.67 percent) in Central respective roles and responsibilities; and (ii) weak America, a ranking that continues today.10 Social institutions. The economic and social dynamics spending in Guatemala, despite recent increases, of colonial times and the development of an is well below the Central American average. The economy based on large coffee plantations fact that 2.8 million additional people fell into resulted in a fragmented social contract and a poverty between 2000 and 2014 (and more than preference for a small state sector on the part of half of these into extreme poverty) suggests that the populations of both Guatemalas. This, in the government is unable to provide an adequate turn, created weak public institutions that have safety net for its population. not been able to provide the necessary levels and The final challenge to Guatemala’s future quality of public services, thus creating unequal growth and prosperity is that, as a relatively opportunities for individuals and firms. Change young democracy, it is still building the key has been minimal given how little accountability pillars of democratic government, such as there is within the government and how large representation, justice, and equity. Guatemalans segments of the population have little say in have the lowest trust in democracy (33 percent) public affairs. The net result has been the two of all populations in Latin America according to Guatemalas that are evident today. the Latinobarómetro.11 Moreover, voter participa- Today’s high levels of inequality and poverty tion in elections in Guatemala is the lowest in are rooted in history, a history that has resulted Latin America at 56.3 percent in 2015, despite in a fragmented social contract and that shaped having increased from 36.9 percent in 1995.12 The the early development of Guatemala’s institu- political landscape, with its fragmented and tions.13 The start of the coffee boom in the late short-lived political parties, is not conducive for 19th century triggered the enactment of discrim- approving and implementing the structural inatory property right laws and massive land reforms needed to reduce poverty and foster expropriation from indigenous peoples along inclusive growth. It will be necessary to build with the privatization of their communal land. consensus among all groups in Guatemala to Private entrepreneurs established large coffee ensure that change is perceived as feasible. plantations, creating a skewed land distribution pattern between indigenous peoples and the rest of the population. To ensure the supply of labor The Legacy of the Past: for coffee, which was a labor-intensive crop, the A Fragmented Social government legalized the extreme labor repres- sion of indigenous groups through the introduc- Contract and Weak tion of a forced labor system (mandamiento) in Institutions 1877, forced labor for building roads (1873), and debt servitude.14 These forced labor laws contin- The persistence of low growth and high ued to be in effect until the middle of the 20th poverty suggest that Guatemala is trapped in a century. The 1934 Vagrancy Law, which forced Understanding Guatemala’s Development Challenges 5 landless peasants to work at least 150 days per Studies have shown that a high level of fractional- year on plantations, was only rescinded in 1947 ization in a country may limit the ability of state with the enactment of the first Labor Code. institutions to provide public goods, both Nevertheless, the practice of plantation owners generally and specifically. The types of public providing landless workers with subsistence plots goods that are provided also tend to be those for instead of cash wages in exchange for their labor which there is no private substitute, for example, during the harvest season continues today. roads rather than schools and health care.18 In Overall, the economic model of plantation addition to skewing the priorities for investment, agriculture drove growth in the early years of the fractionalization can lead to inefficiencies in state, but in the longer run, this model and the public spending.19 Redistributive policies aimed labor legislation that it spawned created a weak at promoting equity and growth are also rarely social contract that has hindered the construc- adopted in countries with a high degree of tion of effective state institutions. fractionalization.20 In short, Guatemala’s early The ability of Guatemalans to change the economic model and the limited voice and vote system from the inside has been limited due to of the population combined with its cultural and restrictions on voting. The 1879 Constitution linguistic diversity worked against the formation gave the vote to a very narrow segment of the of strong institutions. This has also perpetuated population: literate males with a specific level of inequality over time and undermined the ability wealth and land. With illiteracy very high among of the country to develop. the indigenous population and wealth concen- Historically, there have been few checks and trated in few hands, the Constitution reinforced balances on the executive branch of government the dualistic nature of the economic and social that has further challenged the country’s ability system. Half a century later, suffrage was to build competent public institutions. A combi- extended to women, but the literacy requirement nation of the harsh labor laws designed to remained. It was not until 1965 that universal guarantee a supply of labor for plantation suffrage was voted into law and included in the agriculture and the inequity of their application Constitution. increased the probability of labor rebellions The high degree of ethno-linguistic diversity in occurring. This had two results. First, elites in Guatemala and the absence of a strong social one part of the country were unwilling to pay the contract have meant that state institutions are costs of quelling uprisings in other areas and thus weak.15 The ethno-linguistic diversity in resisted government efforts to raise taxes. Second, Guatemala is so extensive that it translates into a in order to allow the government to react high rating on the “fractionalization index” rating strongly to these costly uprisings, only weak (which measures the probability that a random constraints were put on its executive functions by sample of two people within any given country the segment of the population with voting will contain members of different ethnic or rights.21 Only after the Peace Accords of 1996 did linguistic groups). Guatemala’s rating is 0.64, well the executive constraints on the Guatemalan above the world average of 0.39.16 In highly government become as strong as those in other fragmented societies, individual preferences can democracies (figure 1.1). To put this in context, lead to the under-provision of public goods when Costa Rica had a stronger system of checks and the public goods that benefit one group are balances in the late 19th century than Guatemala undervalued by members of other groups.17 has today. Moreover, Costa Rica was able to 6 Understanding Guatemala’s Development Challenges FIGURE 1.1 Low nd Vol til L v ls of Constr ints to th Ex cutiv , 1839-2014 8 Ex cutiv constr ints (D cision Rul s) 7 6 5 4 3 2 1 0 1971 1977 1875 1839 1845 1851 1857 1863 1869 1881 1887 1893 1899 1905 1911 1917 1923 1929 1935 1941 1947 1953 1959 1965 1983 1989 1995 2001 2007 2013 LAC Av r Gu t m l Cost Ric Source: Polity IV Database, retrieved from: http://www.systemicpeace.org/inscrdata.html. improve its social outcomes more dramatically as numbers of people were displaced internally and well. Between 1900 and 1930, Guatemala’s internationally, many to refugee camps in Mexico literacy rate rose from 12 percent to only 19 and others fleeing further north to the US. The percent, whereas Costa Rica increased its adult provision of services to rural and indigenous literacy rate from 36 percent to 67 percent in the areas was particularly curtailed. Although the same period.22 Checks on the executive function level of economic growth was maintained for a were also inconsistent, jumping from almost nil while at the onset of the war, it fell during the to being somewhat constrained in very short most violent phase of the conflict in the 1980s periods of time. The combination of low funding (the same time when much of the displacement and low constraints on executive functions of populations occurred), which further ham- further undermined the establishment of strong pered service provision. Moreover, the war had and effective public institutions that could bridge other serious short-term and long-term implica- the gap between the two Guatemalas. tions for Guatemala’s structurally fragile devel- More recently, the 36-year civil war further opment, particularly in terms of the level and damaged Guatemala’s social contract.23 This composition of public spending, jobs lost, low conflict between leftist insurgents and the productivity, insufficient output, human capital government and its military lasted from 1960 to deterioration, and the disruption of life at the 1996, Central America’s longest and most violent village level. civil war. It eroded Guatemala’s already weak The underlying dynamics between the two institutions and their ability to provide services Guatemalas are represented in figure 1.2. The and other public goods and intensified social fragmented social contract means that the divisions and inequality as the costs of the war populations of both Guatemalas tend to accept were borne largely by the rural and indigenous the existence of a small and weak state sector. On populations. It is estimated that more than the one hand, those who do not benefit from 200,000 people were killed, 83 percent of whom public spending have little incentive to pay taxes were indigenous. At the same time, substantial or demand greater tax collection. On the other Understanding Guatemala’s Development Challenges 7 hand, those who do benefit from public spending groups of the population has led the voting are unwilling to pay taxes or to expand the state population to feel excluded and disaffected. The apparatus to provide services to all. The low taxes net result has been considerable inequality of ensure that the small public sector does not have outcomes between different segments of the the capacity to improve the management of population starting in childhood and continuing public investment, which, in turn, constrains the into adulthood and the perpetuation of the two provision and lowers the quality of public Guatemalas. services. Economic growth is limited because of This duality and inequality exists in many the limited capacity of the state to invest in the other countries too, but the divisions are particu- infrastructure needed by the private sector and to larly wide in Guatemala. The first difference enforce the rule of law. Private households must between Guatemala and other countries is simply either do without services or pay out of pocket the scale of the exclusion. Only 10 percent of for the services that should be provided by the Guatemalans are neither poor nor vulnerable to government such as security, education, and falling into poverty. The middle class, defined as health care. The history of weak constraints on the share of the population that lives on between the executive has resulted in ineffective controls US$10 and US50 per day, shrunk from 13.2 on spending and on the inefficiencies and percent in 2000 to 9.3 percent in 2014. In Latin corruption that arise in such conditions. The America as a whole during the same time period, inability of the state to provide services to large the size of the middle class actually increased, FIGURE 1.2 Gu t m l ’s Fr m nt d Soci l Contr ct nd th Int rpl b tw n Institutions nd Outcom s Two Guatemalas Poor Access and Quality of Public Services Low Investment Informal, Poor, Subsistence Agriculture, Vulnerable, Rural, Low Human Capital, Coverage Largely Indigenous and Quality Two different levels of Fragmented Weak State bargaining power, Social Contract Institutions voice and influence Formal, Large Firms, Lack of trust Low taxation Urban, High Human Capital, Acceptance of Non-inclusive policies Mostly Non-Indigenous minimal state Weak investment climate Selective Rule of Law Exclusion and Low Growth Historical Legacy Political exclusion Colonial Productive of particular groups Institutions Structures Source: Adapted from the proposed framework for the World Bank’s World Development Report 2017 and Acemoglu (2015, lecture notes) 8 Understanding Guatemala’s Development Challenges leading to an ever-widening gap between per capita GDP between the richest and poorest Guatemala and other countries in the region. region is about 4.8, 6.1, and 6.3 times respec- Only Haiti has a smaller middle class than tively. This shows just how concentrated eco- Guatemala. The limited size of the privileged nomic opportunities are in Guatemala City. groups means not only that the country’s When Guatemala is compared with other resources are highly concentrated but that the tax countries in the region that have significant burden is highly concentrated too. indigenous populations, the gap between The second difference between Guatemala and Guatemala City and its suburbs and the rest of other countries is that those Guatemalans who the country is particularly large. Guatemala and are not benefitting from growth are tremendously Honduras have similar poverty rates, but the heterogeneous. Of all people living in poverty in geographic gap in Guatemala is 35 percentage the country, 52 percent are indigenous, in that points compared with only 22 percentage points they belong to three main indigenous communi- in Honduras. And only Honduras has a gap in ties, the Mayan, the Xinca, and the Garifuna. years of schooling between the metropolitan area Within the Mayan group, there is also substantial and the rest of the country that is larger than diversity, with a total of 21 languages being Guatemala’s.24 In summary, the size and heteroge- spoken, of which the most common are Q’eqchi, neity of the excluded groups in Guatemala and Kakchiquel, Mam, Tzutujil, and Achi. The the geographic concentration of investment and non-indigenous poor are not homogenous either. opportunities makes it clear that increasing Similar to the indigenous poor, the non-indige- growth and shared prosperity in Guatemala will nous poor work in a variety of sectors and live require interventions that are systematic and on a throughout the country in both urban and rural large scale. areas. The lack of uniformity among the excluded groups has made it more difficult for them to take collective action to pressure the state into New Pressures on providing adequate public goods and services. Guatemala A third factor that makes the two Guatemalas In the absence of purposeful change, the story so relevant for this SCD is the geographic present low equilibrium of the economy and concentration of investment and opportunities in society could become a downward spiral.25 New Guatemala City. In many countries, the gap challenges have arisen in Guatemala that are between urban and rural areas in terms of creating new demands on the state and may economic development is substantial, and this is further erode stability: these are crime and certainly the case in Guatemala. Even more violence, demographic changes, the pressures of important, however, are the gaps between the urbanization, and migration. metropolitan area (the capital city and its High levels of crime and violence have environs) and the rest of the county. A 2010 study emerged in the past 15 years as threats to of regional activity found that per capita GDP in inclusive development. Guatemala is one of the the Guatemala department was 7.3 times higher most violent countries in the world: it ranks than in the department with the lowest per capita among the five countries with the highest GDP (Huehuetenango) (see figure 4.3). This is far homicide rates in the Latin American region.26 higher than in, for example, Bolivia (2014), While the murder rate declined from 46.4 Mexico (2010), and Peru (2012) where the gap in Understanding Guatemala’s Development Challenges 9 homicides per 100,000 inhabitants in 2009 to 34 jobs. Conversely, these demographic changes will in 2013, this rate is still higher than the average also lead to growing demand for public services rate for all of Latin America, which is around 25 and the need for better economic opportunities per 100,000 inhabitants.27 In 2012 the homicide in the future. The risk is that the state will be rate in Guatemala City alone was almost three unable to generate sufficient physical and human times higher than the national homicide rate and capital to take advantage of the demographic was the third highest in Latin America. About dividend. Failure to do so could turn the poten- half of all violent deaths in Guatemala take place tial demographic dividend into a demographic in only 5 percent of the country’s municipalities. trap in which high fertility rates, widespread Other regions with high homicides rates, such as poverty, and falling living standards reinforce Izabal, Chiquimula, El Petén, Zacapa, and each other. For example, if Guatemala’s present Jutiapa, are located along the country’s borders rates of poverty and population growth remain with El Salvador, Honduras, Mexico, and Belize. unchanged, by 2030 there will be almost 5.1 While this is indicative of a likely link between additional million people living in poverty, violence and transnational organized crime such increasing the total number of the poor to 14 as drug trafficking, no studies have yet estab- million out of a population of 22.5 million. lished this causality. High levels of robbery and Rapid and unplanned urbanization will put the increased incidence of sexually related further pressures on Guatemala’s already strained crimes, kidnappings and violence-related injuries public services. Although only half of the all make citizens feel increasingly insecure.28 population currently lives in urban areas, the Crime and violence are hampering Guatemala’s urban population is projected to increase from development by limiting the opportunities 8.1 million to 21.1 million by 2050. The process available to individuals, by decreasing incentives of urbanization will expand demand for basic for firms to invest, create jobs, and expand, and services such as security, transportation, water, by undermining the population’s good opinion of sanitation, and waste treatment facilities. state institutions and governance. Historically, Increasing deforestation due to changes in land crime and violence has been ranked by firms as use, agricultural practices, and illegal logging is the main obstacle to doing business in already having detrimental consequences for the Guatemala.29 country’s watersheds and ecosystem. The lack of Demographic pressures will present Guatemala territorial planning by the government is with both opportunities and challenges in the exacerbating the negative impact of urbanization coming decades. Because Guatemala has a very on natural resources and on social cohesion. young population that is growing at the rapid rate Climate change may also increase the rate of of 2.5 percent per year, its working-age popula- internal migration to cities by reducing the ability tion will continue to expand rapidly while its of the rural poor to produce their own food. dependent population will shrink in proportion There is evidence that recent temperature to the working age population. This demographic increases attributable to climate change have transformation presents the Guatemalan govern- risen above the optimal range for important food ment with a crucial window of opportunity for stable such as beans,30 and there is concern for implementing social and economic policies to the future with regard to corn. The recent growth ensure that the young population can accumulate in urban poverty suggests that the urbanization the human capital needed to access higher-skilled process will not be easy. 10 Understanding Guatemala’s Development Challenges Finally, emigration has long been an escape Change has been slow at best: the key findings valve for Guatemalans which has affected the from a 1951 World Bank report still seem economy in several ways. This emigration has relevant today (box 1.1). It is clear that, even with been driven by a combination of civil war, natural the best intentions on the part of the government disasters, and the overall lack of economic and its development partners, making substantial opportunities. Emigration from Guatemala and sustainable improvements in welfare and increased rapidly during the most violent years of economic growth is going to be a long-term the civil war in the late 1970s, continued to grow effort. However, while the current situation in the 1990s, and has been particularly high since reflects a negative dynamic, it could be converted 2012, driven by growing levels of crime and into a positive one. Large groups of Guatemalans violence. In 2014, approximately 8 percent of have not benefitted as much from growth as they Guatemalans were living outside of Guatemala, might have been expected to do and have only and almost 90 percent of these were in the US. been able to make a limited contribution to the Unlike Honduras and El Salvador, Guatemala country’s economic growth. Thus, bridging the also has a tradition of circular migration to two Guatemalas would not only raise the Mexico, primarily for agricultural and domestic standard of living of these groups, thus reducing work. Remittances sent home by these emigrants poverty, but would also increase their potential to is a significant resource for Guatemalan house- make positive contributions to the economy. holds. In 2015 remittances accounted for almost The implications of figure 1.2 and of the 10 percent of Guatemala’s GDP, lower than in analysis undertaken in this SCD are threefold. Honduras (17 percent) and El Salvador (16 The first implication is that there is a need to percent) but still high (in 2013 Guatemala ranked address many problems at once. A narrow focus 25th out of 186 countries worldwide).31 The share on a specific change will have a very limited of households receiving remittances has dropped chance of improving the situation because the since before the global financial crisis, highlight- underlying effects of Guatemala’s fragmented ing the risks of relying on remittances as a social contract and weak institutions permeate all strategy for reducing poverty. At the same time, sectors of the economy and all population while migration has brought in much-needed groups. Second, it will be necessary to identify resources for households, there is some evidence policies that will collectively create synergies and that remittances are having a Dutch disease effect that will multiply the effect of each separate by raising reservation wages and putting pressure action. The country’s resource constraints and the on the exchange rate. These effects could under- range and depth of need must be taken into mine the competitiveness of Guatemalan account when designing these policies. Third, it businesses. will take more than incremental changes even in multiple areas to move Guatemala onto a higher development path. The nature of the self-rein- Priorities forcing dynamic that exists in Guatemala is such The analysis in this report shows that that a “big push” will be necessary to break the Guatemala’s development challenges are country out of it. long-standing and complex. Long-term historical Four fundamental criteria were used to processes have led to the present fragmented identify priority areas for action. First, given the social contract, small state, and weak institutions. array of problems to be addressed in Guatemala, Understanding Guatemala’s Development Challenges 11 it was necessary to start with those problems that tions. The costs to the economy are also high set Guatemala apart from its peers, areas in as malnutrition undermines investments in which it is an outlier. Second, given the country’s public services and deprives the labor market limited resources, which have declined even of productive workers. during the period in which this report was being • Education: Low education levels affect written, the team decided that priority must be malnutrition through the low quality of jobs given to actions that can remove multiple and thus the low earnings that are avail- bottlenecks and that will have a beneficial effect able to households with little education as on other problems and sectors, not just on the well as through the lack of health care that immediate area of action. Third, given that is provided to poor children. Investments Guatemala’s poverty is deep (meaning that the to increase the coverage and improve the extremely poor are truly extremely poor), at least quality of education will be needed to boost some actions need to be taken to improve productivity in the economy and capture people’s welfare immediately. Fourth, the team the demographic dividend associated with gave a high priority to interventions that have the having a growing young population. potential to result in long-term, sustainable change. Challenges to and Opportunities of the Growth Model Inclusion Challenges – Towards a The SCD’s analysis of the trends and drivers of More Inclusive Social Contract growth in Guatemala has found that the country Many segments of the population have few faces long-standing challenges to its competitive- opportunities to participate in the economy and ness, productivity, and the creation of high to contribute to Guatemala’s social and economic quality jobs. Guatemala’s multi-cultural society development. While there has been progress in will need to be explicitly taken into account when some areas that have demonstrated the ability of addressing the two main challenges to growth. the government to effect change, there are still significant gaps in terms of both opportunities • Low investment levels. Investment levels are and outcomes between the two Guatemalas. low in both the public and private sectors. In Concerns exist on many fronts, two of which the the case of public investment, low fiscal rev- analysis has shown to be of critical importance: enue is the critical factor together with weak the high rates of chronic malnutrition (stunting) implementation capacity in the institutions and the continued education gap. involved in Guatemala’s investment climate. Investment in the private sector is con- • Malnutrition: The extent of malnutrition strained by crime and violence, the non-en- along with its historic intractability and links forcement of the laws related to contracts to other welfare outcomes makes solving and property rights, a lack of competition, this problem a high priority. The direct costs and the limited delivery of public services. of malnutrition to individuals are high as it Public-private partnerships, if invested in the leads to a greater risk of mortality, higher right type of projects and paying attention morbidity, and lower cognitive development. to fiscal risks, might be a way to promote It can also perpetuate poverty across genera- and attract private investment, but transpar- 12 Understanding Guatemala’s Development Challenges Box 1.1  Guatemala’s Development Challenges in 1951 A 1951 World Bank report on Guatemala highlighted many features that are largely still relevant today. Untapped potential. The report argued that the country’s natural advantages, properly used “should [have made] it possible for the Republic to achieve a relatively favorable position among the nations of the Americas both in living standards and in financial stability. Yet actual economic development … ha[d] barely scratched the surface of these latent possibilities.” Low labor productivity. The report showed that Guatemala’s overall labor productivity was low, especially in the agricultural sector. Investment. An unfavorable investment climate and the under-provision of public goods were found to have led to low private investment. The report highlighted the fact that under-investment was not only due to a lack of resources: the equivalent of 2 percent of GDP in 1950 was in US accounts held by Guatemalans. Lack of adequate transport infrastructure. The report considered that the topography of Guatemala kept isolated “large segments of the rural population…. and potentially productive markets.” It felt that the “inadequacy of transport facilities probably constitute[d] the greatest single barrier to ... eco- nomic development.” Lack of coordination of public policies. The report highlighted the duplication and competition among agencies that existed in the absence of any mechanism for deciding among them. This was seen to endanger development. Insufficient and inequitable social spending. Social spending was deemed to be insufficient and concentrated in Guatemala City. In the case of health, for example, “public health expenditure at 2.1 percent of the budget [was] much lower than in other Latin American countries, like Panama (12.4 percent), Costa Rica (3.5 percent), or Chile (7 percent).” Within Guatemala, the report called atten- tion to the large ethnic disparities in terms of health, education, nutrition, and income. Financial needs and new revenues. The report raised the issue of the need to increase revenues to finance critical investment. “Deficiencies in tax administration, small tax base, and low rate” were identified as the main areas that needed reform. Ethnic inequalities. Finally, the report highlighted the need to increase the productivity of the indigenous peoples for the country to achieve long term development. “In the long term, to promote development in Guatemala, it is indispensable that the productivity of the indigenous population be raised so as to provide them with purchasing power over and above their subsistence needs. This will require measures aimed at improving their education, health, and nutrition. Moreover, to integrate the population into a single economy and improve standards of living, jobs must move towards sectors with higher productivity.” Source: Adapted from World Bank (1951). Understanding Guatemala’s Development Challenges 13 ent and efficient procedures are essential to has little discretionary income to spend as effectively mobilize private sector finance about 88 percent of its fiscal revenues are and expertise. pre-committed.32 Moreover, the effective- • Low agricultural productivity. A sustainable ness of public spending is hampered by growth strategy in agriculture must involve the weaknesses of institutions. Improving enhancing the productivity of smallholders targeting and making more efficient use of and fostering opportunities for farmers to existing resources can mitigate, in a small adopt high-value-added production. Contin- way, the revenue shortfalls, but the absence ued support will be needed for the formation of a broader tax base and compliance with and consolidation of organizations of small existing tax laws will continue to prevent farmers, mainly those involving indigenous Guatemala from increasing sustainable and peoples, to develop economies of scale, in- inclusive economic growth. Without more crease productivity, and support the diversi- resources, the institutional weaknesses and fication of production. Boosting agricultural lack of service delivery in all sectors cannot productivity is, of course, integrally linked to be rectified as efficiency gains will never be resolving land issues. enough to resolve these issues. • Social monitoring. There is a need to increase Fiscal, Social, and Environmental pluralism in constructive ways. Until recent- ly, Guatemalans have been characterized as Challenges disinterested in public issues or as reluctant Increased fiscal resources will be needed if the to express dissent due to the Civil War, in government is to be able to deliver the basic which over 200,000 people were killed. As public goods and services that the population recently as 2015, 52 percent of the popula- needs. However, it will be difficult to increase tion indicated their belief that freedom of revenues unless the public sector becomes more speech was not well protected in Guatema- transparent. Land has been a contentious issue in la.33 However, Guatemalans have increas- Guatemala for a long time, which puts a strain on ingly been demanding a more transparent social cohesion and public and private invest- and accountable government. In particular, ment. And the vulnerability of the country to young people who did not live through natural disasters continues to set back develop- the conflict have felt empowered to take a ment efforts and to hinder economic growth. stand. The public protests of the past year in reaction to the La Línea scandal34 were orga- • Domestic resource mobilization. Low domes- nized mainly through social media and were tic revenues have been a recurrent constraint instrumental in forcing the resignation of to Guatemala’s development by limiting the the Vice President and several ministers. So government’s ability to use public spending the situation is ripe for the creation of a new as a policy tool. Guatemala’s tax revenues social consensus about the roles and respon- as a percentage of GDP are far below the sibilities of the government in relation to the regional average, in part because of the population. Transparency will be essential small size of the formal economy and in part for the sustainability of this social consensus, because of the fragmented social contract. which will require tools of social monitor- Adding to these constraints, the government ing of government policies, spending, and 14 Understanding Guatemala’s Development Challenges actions through citizen participation. knowledge gaps in the near future. While not an • Land titling and territorial planning. Land exhaustive list, the key gaps are: has been a difficult issue in Guatemala’s • Lack of an up-to-date census. Carrying out history. The very high concentration of land any analysis, either in macro terms (for ownership (which has a Gini coefficient of example, on per capita GDP) or in social 84 percent, well above that for either income terms (for example, on poverty rates or even or consumption) is a source of economic ethnicity), requires accurate figures on the and social stress in Guatemala where 50 number of people in the country and their percent of the population lives in rural areas. characteristics. Population and Housing Another problem is that the lack of territori- Censuses are typically carried out every 10 al planning by the government undermines years in most countries, but Guatemala’s last the country’s environmental sustainability. Census is 14 years old. The new government Therefore, it will be essential to resolve these is beginning to plan for a new Census. Once issues in order to foster economic growth, those data are available, it may be advisable improve social welfare, and protect the to update and revise the analysis in this environment. Land is the major productive report. asset of many Guatemalan households, but • Malnutrition. What new information is those who have no legal tenure over the needed to shed light on malnutrition levels land on which they live have little incentive and their intractability? One question is to invest in its productivity. For the indige- whether there has been any change in the nous peoples, land plays an important role synergies among the main dimensions that in their cosmovision so their lack of tenure affect nutrition-- health, care, environment, and control over ancestral lands often creates and food-- over time.35 Analyzing the data social unrest. from the 2014 ENSMI when they are avail- • Environmental risks. Guatemala is in the able should provide answers to this question. top 10 countries most affected by extreme A second question relates to the role played climate events and is not exempt from geo- by aflatoxin contamination of corn in malnu- physical hazards. The geographic location of trition. Collecting new data (by re-visiting the country makes it prone to frequent and households visited in previous surveys) and high-intensity geological and weather-related collecting data on food sources could be a shocks such as storms, hurricanes, droughts, cost-effective way to answer this question. earthquakes, and volcanic eruptions. More- • Primary school enrollments. After reaching over, the impact of climate change dispro- near universal enrollment in primary school, portionately affects poor households. rates have fallen in recent years. What are the key factors driving this recent decline in primary school enrollments? What role does Knowledge and Data pre-school attendance play in the decline Gaps (and why has this fallen as well?). Has the demand for child labor risen or are migra- The SCD analysis has identified several tion and the worsening security situation the knowledge gaps. It is hoped that further work can key factors? be done to collect and/or analyze data to fill these • Infrastructure financing. What are the insti- Understanding Guatemala’s Development Challenges 15 tutional factors hindering infrastructure fi- National Survey of Maternal and Child Indicators nancing in Guatemala? How can public-pri- (ENSMI). Where relevant and where there are vate partnerships (PPP) help to increase the available data, longer times series have been funding for infrastructure improvements in constructed, but the focus of the report is on this Guatemala? 15-year period. The analysis has some limita- • Fiscal issues and effectiveness of public tions. For example, there are only three years of expenditure. Without additional revenues, data on poverty: 2000, 2006, and 2014. Thus, it Guatemala will not have enough resources was possible to study the macroeconomic impact to finance its development needs. How can of the crisis and the recovery period but not the the government improve its tax collection microeconomic or household-level impact. The system and revise its fiscal policy to make SCD team identified various countries that could public expenditure become more effective in be considered to be Guatemala’s peer and reducing inequalities and increasing security aspirational countries in terms of their income in Guatemala? level and population size, and whenever it is • Urbanization and Intermediate Cities. En- relevant to do so, the report benchmarks suring an orderly and gradual process of ur- Guatemala’s performance against the perfor- banization could help to create “competitive mance of those countries.36 cities” and better employment opportunities The report is organized as follows. After the for the population by ensuring effective overview presented here in Chapter 1, Chapter 2 transport systems, the efficient provision of provides evidence of the trends in poverty, shared social services and minimizing the environ- prosperity, and inequality in Guatemala. The first mental damages. What strategy could the section benchmarks Guatemala’s progress in government pursue to create a network of reducing income poverty against its peer inter-connected intermediate cities to foster countries. This is followed by an examination of private sector development? consumption poverty, which is the official • Bridging the gap between the formal and in- measure of poverty used in Guatemala. The formal sectors. Informality is pervasive in the analysis highlights the gaps between the two Guatemalan economy, and this is detrimen- Guatemalas. The chapter ends with some findings tal to poverty reduction, productivity, and concerning the drivers of poverty, specifically tax collection. What are the determinants of focusing on the roles played by prices, labor, and such extensive informality in the Guatema- transfers. Chapter 3 attempts to answer the lan economy? question of how inclusive economic growth has been in Guatemala, looking first at the limited role played by labor markets in helping people to Structure of the SCD rise out of poverty and at the limited human The analysis in this report focuses on the capital and the dearth of opportunities to 2000 to 2014 period, covering the boom years increase it. The chapter then discusses the before 2008 and the global financial crisis and ineffective and inadequate public spending that recovery years up to 2014. It is based on a rich drives these outcomes and demonstrates the link household data set from the National Living between limited opportunities and poor Standards Measurement Survey (ENCOVI) as outcomes, focusing specifically on malnutrition well as on data on malnutrition from the 2014 and vulnerability. Chapter 4 analyzes the drivers 16 Understanding Guatemala’s Development Challenges of growth and the roles and characteristics of key challenges. Major concerns about tax revenues, sectors. Important changes in trade policies are water resources and land use are highlighted. The then covered, and the chapter ends with a final chapter summarizes the priorities that have detailed discussion of the main constraints to emerged from the analysis and describes a set of increasing investment and productivity and to policies or areas of action that have the potential creating high-quality jobs. 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Oficina de Servicios Economics and Organization 15 (1), pp. 222- para Proyectos de las Naciones Unidas (UNOPS). LAPOP (Latin American Public Opinion Project). 2011. di Lampedusa, Giuseppe Tomasi. 1958. The Leopard: A Novel. Victimization survey. New York: Pantheon Books. Latinobarómetro (2015). Informe 1995-2015. Retrieved from: Easterly, William and Levine, Ross. 1997. Africa’s Growth http://www10.iadb.org/intal/intalcdi/PE/2015/15817.pdf Tragedy: Policies and Ethnic Divisions. The Quarterly Nugent, Jeffrey and James A. Robinson. 2001. Are Journal of Economics, Vol. 112 No. 4, 1203-1250 Endowments Fate? Retrieved from: http://dev.wcfia.har- Hall, Gillete H. and Patrinos, Harry A. 2014. Indigenous vard.edu/sites/default/files/895__jr_Nugent1.pdf Understanding Guatemala’s Development Challenges 17 Schneider, Aaron (2012). State-Building and Tax Regimes in summarizes the different types of laws supporting labor Central America. Cambridge University Press repression. Tay, Karla, 2015. “Guatemala: Sugar Annual: Sustainability 15 Fractionalization indexes vary, but the original measure Approach”, Global Agriculture Information Network was constructed by Easterly and Levine (1997) and Report No. 2015005, Foreign Agricultural Service, United expanded on by Alesina et al. (2003). States Department of Agriculture, Washington, D.C. 16 Alesina et al. (2003) UNDOC (United Nations Office on Drugs and Crime). 2014. 17 Easterly and Levine (1997) and Alesina et al. (1999) Global Study on Homicide 2013. Trends, Context, Data. 18 Kosec (2011) Vienna, Austria: UNDOC. 19 Examples of this can be found in Hall and Leeson (2010) United Nations. 2015. World Population Prospects. Key and La Porta et al. (1999). Findings and Advance Tables. United Nations. New York. 20 Alesina and La Ferrera (2004) Retrieved from: http://esa.un.org/unpd/wpp/publica- 21 See Aguirre (2015) for a theoretical and empirical anal- tions/files/key_findings_wpp_2015.pdf ysis of this connection between labor demand, fraction- World Bank. 2004. Poverty in Guatemala. A World Bank alization, and weak executive constraints. Nugent and Country Study. Washington, DC: The World Bank. Robinson (2001). World Bank. 2015. Agricultura para la Prosperidad de los 22 This description of the civil war is based on CEH (1999). Territorios Rurales en Guatemala. Washington, DC: The 23 This description of the civil war is based on CEH (1999). World Bank. 24 The poverty gap between the Metropolitan area and the rest of the country in Guatemala is not, however, the largest in Latin America; that distinction goes to Peru Notes followed by Panama. In part this is simply because overall poverty is so high in Guatemala. 1 See Tay (2015) for sugar. 25 To paraphrase di Lampedusa (1958) “if things are to stay 2 United Nations (2015) as they are, things will have to change.” 3 See Box 4.1 for details. 26 UNDOC (2014) 4 Casanova and Hoeber (2009) 27 There is no conclusive argument regarding the causes of 5 As will be discussed in Chapter 4, per capita GDP growth the decline in homicide rates in Guatemala. However, has been low (averaging 1.2 percent over the 2000 to 2014 the Government of Guatemala claims that various crime period) but positive. However, household survey data control measures, including the deployment of task forces show no real growth. Such discrepancies between surveys involving joint military and police actions to areas with and national account data are not unusual, and, in this high concentration of crime, has helped to reduce vio- case, the discrepancy is fairly small. The differences may lence associated with competition among criminal gangs be due to measurement errors in either the national over territory, particularly in poor urban neighborhoods. accounts or the household surveys. A further reason for 28 LAPOP (2011) showed that Guatemala has higher overall the discrepancy may be related to the population figures crime victimization rates (which measure crime without being used as these are projections based on a 14-year old specifying its type) than the Latin American regional census. average. 6 Based on data from the World Development Indicators 29 World Economic Forum (2006 and 2015) using the periods 2010 to 2014 and 2000 to 2004. 30 Mora et al. (2010) 7 MSPAS et al. (2015) 31 KNOMAD (2015) 8 Hall (2015) using data from Hall and Patrinos (2014). 32 Cabrera et al. (2015) The data for Brazil’s indigenous people comes from Horta 33 Lapop, 2015. et al. (2013). 34 La Línea refers to a customs scandal at the highest levels 9 Tay (2015) in which government officials accepted bribers from 10 Schneider (2012). firms to reduce or eliminate customs duties. 11 Latinobarómetro (2015). 35 As identified in the UNICEF Unified Framework. 12 IDEA (2016). 36 See Annex 1.1 for a discussion of the comparator, or peer, 13 This point was made in World Bank (2004). countries for Guatemala used in this report. 14 Nugent and Robinson (2010). World Bank (2004, p. 61) 18 Understanding Guatemala’s Development Challenges 2. Poverty and Shared Prosperity 2000-2014 Poverty rates in Guatemala are among the highest in Latin America and the Caribbean and in recent years have been increasing. The middle class is small and shrinking. Inequality has declined but more due to falling incomes at the higher end of the distribution than to growth among the poorest. There is strong evidence pointing to the existence of “two Guatemalas” with the divide being seen along geographic, ethnic, human capital, and even demographic lines. The poor are concentrated in rural areas and among indigenous groups and have low human capital and poor outcomes. Labor income does not drive poverty reduction, and public social policies have had only a limited effect on poverty. How Guatemala the Latin American and the Caribbean (LAC) region. Worse, however, than the very slow rate Compares to its Peers? of reduction is the strong recent reversal. On an annualized basis, overall poverty has risen 1.7 Income Poverty Levels and Trends FIGURE 2.1 Gu t m l r m ins on of th There has been a sharp increase in income poor st countri s in th r ion poverty in Guatemala in recent years. This is of Poverty Headcount Rate, Guatemala and Peers, 2014 particular concern given that such a rising trend 100 has not been seen in neighboring countries nor 8987 among Guatemala’s economic peers.1 Combined 80 Percent of population with its previous high levels of poverty, the recent 60 60 59 increase in poverty makes Guatemala the second poorest country in Latin America and the Carib- 40 3332 31 bean: only post-earthquake Haiti is poorer (figure 31 2827 27 2621 202020 2.1). The poverty headcount —measured with an 20 12 11 8 7 7 5 internationally comparable poverty line of US$4 0 per day per capita—increased from 55 percent El S lv dor Ecu dor H iti M xico l Hondur s Dom. R public Jord n P ru Br il Chil Ar ntin Bolivi Cost Ric Alb ni Colombi P n m L tvi Lithu ni Gu t m l Uru u P r u in 2006 to 60 percent in 2014. Extreme poverty S n —defined internationally as per capita income under US$2.5 per day— followed a similar trend, rising from 33 to 37 percent between 2006 and Source: SEDLAC harmonized database (SEDLAS and the World Bank). 2014. (figure 2.2).2 While poverty trends over Note: Countries classified as aspirational peers (countries that are a good example for Guatemala) are highlighted in orange, the last quarter of a century have shown some structural peers (countries that are a good benchmark for Guatemala) in green, and other Latin American countries in gray. decline, the change is both small—with overall See Annex 1.1 for the selection criteria to identify structural and poverty falling at an annualized rate of only about aspirational peers. The year for each country is the closest to 2013. The Guatemala data are from 2014. Based on a US$4 PPP half a percent per year—and well below that in poverty line. Poverty and Shared Prosperity 2000-2014 19 FIGURE 2.2 Gu t m l h s m d FIGURE 2.3 Incr sin pov rt littl pro r ss in pov rt r duction s ts Gu t m l on p th contr r in r c nt d c d s to thos of its p rs International Poverty Headcount, 1989-2014 Poverty Rate, Guatemala and Peers, 2003-2014 100 70 60 58 60 80 55 Percent of population 67 50 50 60 44 Headcount 60 55 53 42 51 40 40 37 30 31 40 34 33 23 20 17 20 12 10 10 10 0 0 1989 2000 2006 2014 2004 2009 2014 Poor ($4 d ) Extr m Poor ($2.50 d ) Gu t m l Structur l P rs Glob l Extr m Poor ($1.9 d ) C ntr l Am ric LAC Aspir tion l P rs Source: For 1989, World Bank (2003). For other years, calculations Source: Calculations based on the World Economic Outlook. using the 2000, 2006, and 2014 ENCOVI. Note: The dates are indicative (‘circa’). The poverty data for Note: Based on income aggregate. Guatemala are from 2000, 2006, and 2014 ENCOVI. percent per year since 2006. The impact of the Although Guatemala has improved some change in trend is not trivial: if the annualized non-monetary measures of welfare (in education rate of poverty reduction between 1989 and and health), it still lags behind its peers (table 2006 had been maintained through 2014, overall 2.1). In the 1960s, Guatemala’s non-monetary poverty would have been 47 percent and extreme measures of welfare were quite low compared to poverty 29 percent. In human terms, 2 million other countries. Between 1960 and 2013, the fewer people would have been poor in 2014 and country has made substantial progress on many 1.4 million fewer would have been extremely of these indicators, with the rate of progress poor. Guatemala’s extreme poverty rate of 37 per- being similar to those of other peer countries. cent is very high, one and a half times the Latin Primary and secondary school net enrollment American and the Caribbean average (24 per- rates grew dramatically, increasing by 76 and 488 cent). Its overall poverty rate is surpassed only percent respectively over the period. Both of by that of Haiti (87 percent) in Latin America these rates of change were higher than those in and by Senegal (89 percent) among its structural LAC, Central America, and in Guatemala’s peers (figure 2.3). Not only is its poverty rate high comparator countries. However, as Guatemala but the poverty trend has been in the opposite started at much lower levels, it continues to lag direction of the trends in LAC and in both its behind. Secondary enrollment is almost 10 structural and aspirational peers. While there was percentage points lower than the Central a 17 percentage point decline in poverty in LAC American average and almost half the LAC and between 2000 and 2012, Guatemala’s poverty rate peer average. The infant mortality rate is almost increased. At the same time, the gap between twice the Central American and LAC average Guatemala and its structural and aspirational and three times that of its aspirational peers. peers has also grown. 20 Poverty and Shared Prosperity 2000-2014 Box 2.1  Measurement and Data Issues in Guatemala Actual Population Size The population figures used in this report and in official statistics are projections, not actuals. The last Population and Housing Census dates from 2002 so some caution is needed when looking at per capita figures. It is expected that birth and death rates will have changed in the 14 years since the last census: certainly there is evidence of changes in migration patterns. Obviously, any errors in the population projections could affect the analysis of per capita GDP, and, if there are variations in the growth of different population groups, this could affect poverty measures as well, although there is no data to indicate that this particular problem exists. Poverty Measurement The data for the poverty measures come from the National Living Standards Measurement Study surveys (Encuesta Nacional de Condiciones de Vida or ENCOVI) for 2000, 2006, and 2014. There are also data for a 2011 round of the survey but there are some methodological concerns about these data in terms of comparability. The government is currently reviewing this issue and since this review may lead to revisions of the 2011 indicators, we have chosen to use only data from the 2000, 2006, and 2014 survey rounds in the present report. Guatemala uses a consumption-based monetary measure of poverty. This per capita measure covers: (i) the consumption of purchased and non-purchased food (own production, gifts, and donations); (ii) transport and communications; (iii) consumer goods; (iv) household services and legal costs; (v) utilities, education, and health; and (vi) the annual use value of housing and durable goods. The poverty lines used reflect the costs of a minimum level of calories (extreme poverty line) and the cost of obtaining both food and other basic necessities (overall poverty line). We use this official measure of welfare throughout the report. However, the exception is when the focus of the analysis is on benchmarking Guatemala’s situation in comparison with other countries (as is in done in this chapter). In such cases, we use an income-based measure of poverty and an international overall poverty line of US$4 and an international extreme poverty line of US$2.5 per person per day in 2005 PPP terms. While there has been an update to the 2011 PPP for the US$1.25 line, there are no updates for the US$2.5 and US$4 lines. For this reason, the report continues to use the 2005 PPP and the global extreme poverty line of US$1.25 in 2005 PPP. Urban and Rural Definitions A new urban/rural classification was introduced in the 2002 Census by Guatemala’s National Statistics Institute (Instituto Nacional de Estadística, INE). The share of the urban population increased from 38.6 percent in 2000 to 48.1 percent in 2006. However, only 2.9 percentage points of this increase were due to migration and population growth; the remaining 6.6 percentage point increase was due to changes in the urban/rural classification (World Bank, 2009). This dramatic increase in the share of urban areas in the sample explains why extreme poverty decreased between 2000 and 2006, even Box continues next page Poverty and Shared Prosperity 2000-2014 21 Box 2.1  continued though both urban and rural extreme poverty increased. The more recent evolution of poverty between 2006 and 2014 has not been affected by changes in the urban/rural classification. When the rural-urban definition is important for our analysis, the discussion will be restricted to changes between 2006 and 2014 only. Knowledge Gap The lack of a recent census creates uncertainty about actual population figures. In a country like Guatemala with such high fertility rates, constantly shifting migration patterns, and changes in mortality rates, it is crucial to have up-to-date census data. Therefore, a new round of the Population and Housing Census is urgently needed. TablE 2.1  Despite Remarkable Progress, Guatemala still Lags Behind in the Region and Among Its Peers in Non-monetary Indicators Non-monetary Indicators of Welfare, Guatemala and Peer Countries, 1960 and 2013 Enrollment Enrollment, Life Mortality rate, Mortality rate, Immunization, primary secondary expectancy at infant under-5 DPT (% net) (% net) birth 1960 2013 1960 2013 1960 2013 1960 2013 1960 2013 1960 2013 Guatemala 49 86 8 47 46 72 148 26 222 31 43 85 Central 65 89 22 58 52 75 123 17 182 20 44 90 America Latin 83 92 n.a. 76 56 75 117 15 166 18 37 89 America Structural 65 87 12 61 48 71 128 24 214 30 23 92 Peers Aspirational 76 93 27 87 60 76 110 11 159 13 56 92 Peers Source: World Development Indicators. Note: Structural peers are Bolivia, El Salvador, Honduras, Nicaragua, Paraguay, and Senegal. Aspirational peers are Albania, Chile, Jordan, Latvia, Lithuania, Panama, and Peru. 22 Poverty and Shared Prosperity 2000-2014 Only by making faster progress on all indicators that the incomes of the bottom 40 percent of the will Guatemala be able to catch up to its peers. population are much less volatile than those of the overall population, neither growing in good Shared Prosperity: Income years nor declining as much in bad years (figure 2.5).3 Growth among the Bottom 40 Percent Inequality There was little evidence of shared prosperity Inequality in Guatemala is high, but has fallen in Guatemala in the 2000 to 2014 period. As much faster than in either Central America or measured by average growth in the incomes of Latin America as a whole (figure 2.6). As the bottom 40 percent of the population, shared measured by the Gini coefficient, inequality of prosperity was negligible in Guatemala between income in Guatemala was 49 percent in 2014, 2006 and 2014 in contrast with most Latin higher than in most LAC and CA countries, all American countries (figure 2.4). Guatemala and aspirational peers, and all structural peers except Honduras are the only countries in LAC that for Honduras (figure 2.7). Guatemala’s inequality have experienced negative income growth in the ranked in the 91st percentile worldwide (WDI, last few years. Over the full 2000 to 2014 period, 2015). However, while there was no appreciable the poorest 40 percent of Guatemala’s population change between 2000 and 2006, the next eight experienced a decline in income, though this years saw a very substantial decline in the Gini, decline was much smaller than the decline expe- which fell from 0.55 to 0.49 percent. This sharp rienced by the whole population. The data show FIGURE 2.4 Incom Growth in Gu t m l w s FIGURE 2.5 Th Incom of th Poor N tiv whil in Oth r LAC Countri s it Ros F ll Much L ss th n Ov r ll Incom s Income Growth of the Bottom 40 percent Income Growth of the Bottom 40 percent and Overall, 2006-2013 and Overall, 2000-2014 10 M n incom bottom 40% Ov r ll Popul tion 0.5 8 0.0 Annualized growth rate (%) Annualized growth rate (%) 6 -0.5 4 -1.0 2 -1.5 0 -2.0 -2 -4 -2.5 GTM 2006-2014 MEX 2004-2014 SLV 2004-2014 HND 2004-2014 DOM 2004-2013 COL 2004-2014 NIC 2005-2014 CRI 2004-2014 CHL 2003-2013 PRY 2004-2014 ARG 2004-2014 PAN 2004-2014 PER 2004-2014 ECU 2004-2014 URY 2004-2014 BRA 2004-2014 BOL 2002-2014 -6 -3.0 2000-2006 2006-2014 2000-2014 Bottom 40 Ov r ll Source: Calculations based on SEDLAC (CEDLAS and The World Bank). Source: Calculations based on SEDLAC (CEDLAS and The Notes: Data are from the point closest to the years mentioned but are not World Bank). exact: the Guatemala data used here are from 2006-2014 while for most Notes: Shared prosperity here is calculated using income. of the other countries the reference period starts in 2008. Poverty and Shared Prosperity 2000-2014 23 FIGURE 2.6 Th R t of D cr s in Incom FIGURE 2.7 In qu lit Continu s In qu lit w s Hi h r in Gu t m l th n in to b Hi h r in Gu t m l th n in C ntr l Am ric or in LAC Its P r Countri s Income Gini Coefficient, 2003-2013 Gini Coefficient for Guatemala and Peer Countries 60 70 60 60 49 50 Gini coefficient Gini coefficient 55 40 52 51 29 30 50 49 20 10 45 0 Gu t m l CA LAC Ecu dor El S lv dor H iti M xico Br il Hondur s Dom. R public P ru l Jord n Chil Ar ntin Cost Ric Bolivi Colombi P n m Nic r u L tvi Lithu ni Alb ni Gu t m l Uru u P r u S n 2004 2009 2014 Source: SEDLAC harmonized database (SEDLAS and the World Source: SEDLAC harmonized database (SEDLAS and the World Bank), June 2015. Bank), June 2015. Note: The Gini coefficients, based on income, for each country are Note: The Gini coefficients, based on income, for each country are as close to the indicated years as possible. For Guatemala the as close to the indicated years as possible. For Guatemala the data points are 2000, 2006, and 2014. data points are 2000, 2006, and 2014. fall in inequality occurred in both urban and middle class population in LAC, only surpassed rural areas, with urban inequality falling from by Haiti at 4 percent. In LAC as a whole there has 0.55 to 0.48 and rural inequality falling from 0.50 been a dramatic rise in the size of the middle to 0.46.4 As already discussed, these reductions in class, from 21 to 35 percent of the population, income inequality have mainly been due to a fall and poverty (as measured by US$2.50 a day) has in the incomes of the rich rather than to a rise in been halved. In Central America, these changes the incomes of the poor.5 And despite this have been less sharp, but poverty has still fallen. convergence in the income distribution, the total Guatemala has deviated from this regional trend: share of income held by those in the bottom its poverty rate has risen and the share of the deciles remains extremely low. The richest 1 population considered to be middle class fell percent of the income distribution controls 13 from 13 to 9 percent between 2000 and 2014 percent of total income. The middle class, here (figure 2.9). defined as having incomes of US$10 to US$50 in 2005 PPP terms, have 26 percent of total income, Economic Mobility while the poor, or the bottom 60 percent of the Guatemalans have limited economic mobility. population, have only 26 percent between them The country has been less able to translate its, (figure 2.8). admittedly low, economic growth into welfare The trends in Guatemala’s welfare indicators improvements than other countries in Latin diverge from those of other Latin American and America. The significant gains in mobility seen even Central American countries. At 9 percent, in most countries in LAC in the 2000s have not Guatemala has the second lowest proportion of 24 Poverty and Shared Prosperity 2000-2014 FIGURE 2.8 Tot l Incom is Hi hl FIGURE 2.9 In Gu t m l th Sh r of Conc ntr t d in Gu t m l th Middl Cl ss H s D cr s d Unlik in th R st of th R ion Changes in Income Distribution, 2003-2014 100 14 100 13 9 18 20 12 21 80 80 35 Cumulative income (%) Percent of population Poor: 26 % Vuln r bl : 30 10 30 of tot l incom 35% of tot l % of total income 33 60 incom 60 37 8 34 23 6 22 39 40 40 19 19 17 4 20 20 13 2 0 0 0 1 10 19 28 37 46 55 64 73 82 91 100 2000 2014 2000 2014 2000 2014 Gu t m l C ntr l Am ric LAC % of tot l incom (RHS) Extr m Poor ($2.50 d ) Mod r t Poor($4 d ) Cummul tiv Incom (%) Vuln r bl ($4-10 d ) Middl Cl ss ($10-50 d ) Source: SEDLAC harmonized database (SEDLAS and the World Source: SEDLAC harmonized database (SEDLAS and the World Bank) June, 2015 Bank) June, 2015 for LAC and Central America using data from Note: Poverty definitions based on international poverty lines in the 2000 and 2014 ENCOVI US$ in 2005 PPP Note: Poverty definitions based on international poverty lines in US$ in PPP terms of 2005. Income figures are per capita per day. been matched in Guatemala. While about one population had both the lowest levels of chron- in ten households rose out of poverty between ic poverty and the highest share of households 2000 and 2014, a slightly larger number fell into who were not poor in both periods. This analysis poverty (figure 2.10). Compared with the rest of does not address the degree to which churning Central America and LAC in general, Guatema- (movements into and out of poverty) may have la’s gross changes in poverty have been limited occurred over the 15 year period, which limits (see Annex 2.1). The share of households that the extent to which it can be used to understand have risen out of poverty in Guatemala is lower mobility. There is a need for panel data to be col- that the shares for Guatemala’s regional peers. lected in Guatemala to allow for a more in-depth Also, twice as many non-poor households fell analysis of intra-generational mobility. into poverty in Guatemala as in LAC as a whole Poverty at the municipal level has changed and slightly more than in the rest of Central more than the net poverty figures would suggest. America.6 Within Guatemala, chronic poverty There is evidence of convergence among munici- was highest in rural areas and varied strongly by palities in rural areas (no data exist for urban ethnicity. The Mam experienced the highest level areas7), with the poorest municipalities showing of chronic poverty with two-thirds of households greater gains in poverty reduction than those remaining in poverty. While having the lowest with lower poverty rates in 2000 (figure 2.11). level of chronic poverty, the Q’eqchi experienced There were clear winners and losers, with the highest rate of new poverty with 18 percent annualized changes in poverty at the municipal of their households having fallen into poverty level ranging from a decrease of more than 4 between 2000 and 2014. The non-indigenous percent to an increase of over 3 percent. Of those Poverty and Shared Prosperity 2000-2014 25 FIGURE 2.10 Gu t m l H s Exp ri nc d FIGURE 2.11 Poor st Municip liti s Mor Mov m nts into Pov rt th n Exp ri nc d Gr t r G ins in Pov rt R duc- Out of Pov rt tion th n Thos with Low r Pov rt R t s Share of Households by Change in Economic Status, 2000-2014 Poverty Convergence of Rural Municipalities, 2000-2011 100 .1 14 39 22 22 28 30 19 Annual percentage point change 80 11 Percent of households 51 46 13 in Poverty (2011-2000) .05 18 15 10 9 6 60 8 9 18 14 8 3 11 14 40 10 0 11 11 20 -.05 0 .2 .4 .6 .8 1 . l n l us ´ ´ l m hi qu ich r di t no qc b Ru To M in Ur hi K´ Poverty Headcount 2000 n- Q´ qc di No In K Alw s Poor Poor to Non-poor Non-poor to Poor N v r Poor Source: Calculations using data from SEDLAC (CEDLAS and The Source: Baez et al. (2015) World Bank) and the 2000 and 2014 ENCOVI using a lower bound Notes: The graph displays beta-convergence. estimate based on Dang et al. (2011). municipalities that had poverty rates above 75 percent in 2000 (defined as chronically poor The Divide Between the municipalities), those that remained poor as of Poor and the Non-poor 2011 started with higher levels of poverty, averaging 91 percent poverty rates compared to within Guatemala 85 percent in those municipalities whose poverty rates had improved somewhat. Chronically poor Official Poverty Levels and municipalities were more likely to be located in Trends (Consumption-Based remote areas far from departmental capitals and Guatemala City and to have a lower than average Measure) road density. Not surprisingly, people in chron- The official national measures of poverty reveal ically poor municipalities also had less access to the same trends as found using the interna- basic services. Finally, those municipalities with tionally comparable income measure (figure large indigenous populations, those with lower 2.12). The official consumption-based measure labor force participation, and those that were using the national poverty line shows overall most vulnerable to weather shocks had less monetary poverty in Guatemala falling between economic mobility. 1989 and 2006 but then rising by 2014. (See box 2.1 for how poverty is measured in Guatemala.) The changes in consumption poverty between 2000 and 2014, both positive and negative, were greater than for income poverty. Extreme poverty 26 Poverty and Shared Prosperity 2000-2014 grew at a faster rate than overall poverty when FIGURE 2.12 Th D clin in th Ov r ll measured using consumption. At 16 percent in Pov rt R t W s Int rrupt d b th Glob l 2000, the extreme poverty level in Guatemala Fin nci l Crisis was comparable to the rest of Central America.8 Overall and Extreme Poverty However, by 2014, extreme poverty had risen to Headcount Rate, Official, 2000-2014 70 23 percent suggesting that significant numbers of people had consumption very close to the na- 60 62.0 59.3 Percent of population tional extreme poverty line. The growth in both 50 56.2 51.0 overall poverty and extreme poverty in Guatema- 40 la was also accompanied by increases in both the 30 poverty gap and poverty severity for both overall 20 23.4 and extreme poverty. In short, not only were 10 15.7 15.2 more people living in extreme poverty in 2014 0 than in 2006, but these people, on average, were 1989 2000 2006 2011 2014 poorer in monetary terms than they had been Ov r ll Pov rt Extr m Pov rt eight years earlier. Source: World Bank (2004), Cadena et al. (2013) and calculations The gaps between the poor and the non-poor using the 2014 ENCOVI. Note: Based on official measures using consumption and in Guatemala are large. In general terms, the poor nationally calculated poverty lines. are more likely to be informally employed, live in rural areas in specific departments, belong to an point difference between the poverty rate in the indigenous group, and have very low levels of poorest and the least poor departments. In 2014, education. This is not uncommon; many other Alta Verapaz was the poorest department, with countries could also describe the differences an overall poverty rate of 83 percent (and an ex- between poor and non-poor in a similar fashion. treme poverty rate of 54 percent). In contrast, the In Guatemala, the key issue is the size of the gap department of Guatemala had an overall rate of and, as is discussed in the following section, how 33 percent, and only 5 percent of its population difficult it has been to narrow these gaps because lived in extreme poverty. The geographic gap has of the limited socioeconomic mobility in closed somewhat in terms of overall poverty, but Guatemala. There is also a new twist in that the opposite is true for extreme poverty where urban poverty is becoming a new concern. both the absolute gap between the richest and poorest department and the variance between The Geographic Divide departments rose between 2006 and 2014. There are clear geographic patterns of poverty in Poverty is highest in rural areas, but there has Guatemala (figure 2.13). The areas of the coun- been a striking increase in urban poverty. In try with the lowest levels of poverty are in the 2006, rural poverty was more than two times the corridor that stretches from the Pacific port of level of urban poverty overall (71 percent Puerto Quetzal, crosses through the Metropolitan compared to 30 percent) and for extreme poverty, region, and ends at the Atlantic port of Puerto the ratio was 4.8. (See box 2.1 on why the 2000 Barrios. The differences at the department level urban and rural data are not comparable with are enormous: in 2014 for both overall and ex- later years.) Both rural and urban poverty had treme poverty there was close to a 50-percentage risen by 2014, and rural poverty remained much Poverty and Shared Prosperity 2000-2014 27 FIGURE 2.13 Pov rt L v ls V r Dr m tic ll b D p rtm nts lthou h Pov rt H s Ris n in Most Ar s sinc 2006 a. Extreme Poverty Headcount Rate, 2006 and 2014 90 80 Extr m Poor (2006) Extr m Poor (2014) P rc nt of th popul tion 70 60 50 40 30 20 10 0 l é n o os o n u so o ich tl p p to lol ul s té p l b qu qu rc p p Ro ul n Ch n n p in m m r So l ti c Qu lh P cu pé pé r r n n n ui ic Ju I M ro J Z t V V n iq Es nt t t lt lt P n it t Gu R El hu ch t j To im S c S Al t B Su Ch S Hu Qu b. Poverty Headcount Rate, 2006 and 2014 90 80 Ov r ll Poor (2006) Ov r ll Poor (2014) P rc nt of th popul tion 70 60 50 40 30 20 10 0 é n o os o n l u so o ich tl p p to lol ul s p l té b qu qu rc p p Ro ul n Ch n n p in m m r So l ti c Qu lh P cu pé pé r r n n n ui ic Ju I M o J Z t Pr V V n iq Es nt t t lt lt n it t Gu R El hu ch t j To im S c S Al t B Su Ch S Hu Qu Source: Calculations based on the 2006 and 2014 ENCOVI. Note: Based on consumption poverty and national poverty lines. higher than in urban areas. The depth and responsible for the changes. Movements between severity of poverty levels are also worse in rural rural and urban areas were actually poverty-re- areas, although there has been some convergence ducing, albeit on a very small scale.10 in the second half of the decade as these indica- The rise in urban poverty has narrowed the tors declined in rural areas while remaining urban-rural gap and shifted the concentration of unchanged in urban areas.9 However, the increase the poor quite dramatically. In 2000, 7 percent of in urban poverty between 2006 and 2014 was all people in extreme poverty lived in urban much greater (41 percent) than in rural areas (8 areas, while by 2014 this had increased to 24 percent). This does not appear to have been due percent (figure 2.15). While some of the change to rural-urban migration: a Huppi-Ravaillion between 2000 and 2006 can be attributed to a decomposition shows that it has been the poverty post-census reclassification of rural areas, this increases within each area that have been explains only a portion of the observed change 28 Poverty and Shared Prosperity 2000-2014 and does not affect differences between 2006 and The Metropolitan region of the country is now 2014. The larger change has been in terms of home to almost 12 percent of the poor popula- overall poverty. In eight years, the share of the tion: in 2000 the region only accounted for 7 poor living in urban areas has gone up from 28 percent of the poor (figure 2.16). There was also a percent to 57 percent. The regional change in the transformation in terms of the concentration of concentration of the poor is also quite striking. the extreme poor, from just under 1 percent in FIGURE 2.14 Pov rt nd Extr m Pov rt FIGURE 2.15 But Mor th n H lf of All R t s Ar Subst nti ll Hi h r in Rur l Ar s Poor P opl Now Liv in Urb n Ar s Poverty Headcount, Urban and Rural, Share of Urban Population by Poverty Status, Official, 2000, 2006, 2014 2000, 2006, 2014 Share of the (extreme) poor in urban areas 80 74 76 100 71 70 80 Percent of population 60 50 57 42 60 40 35 30 40 30 27 24 24 28 24 20 19 17 11 20 10 5 7 3 0 0 2000 2006 2014 2000 2006 2014 2000 2006 2014 2000 2006 2014 Ov r ll Pov rt Extr m Pov rt Ov r ll Poor Extr m Poor Urb n Rur l Urb n Source: Calculations based on the 2000, 2006, and 2014 ENCOVI. Source: Calculations based on the 2000, 2006, and 2014 ENCOVI. Note: Based on official consumption measure of poverty and Note: Based on official consumption measure of poverty and national poverty lines. national poverty lines. FIGURE 2.16 Almost H lf of th Poor Liv in th Northw st nd Southw st in 2000, but Mor Th n Qu rt r Now Liv in th M tropolit n Ar Where the Poor Live, 2000 (percent of total poor) Where the Poor Live, 2014 (percent of total poor) P tén M trop. P tén 3.9 6.9 4.6 M trop. 11.7 N. W st N. W st North 18.1 18.8 12.1 North 12.9 N. E st 7.6 N. E st 8.2 S. E st 10.7 S. W st S. W st 26.3 S. E st 30.1 7.7 C ntr l 9.8 C ntr l 10.5 Source: Calculations based on the 2000 and 2014 ENCOVI. Poverty and Shared Prosperity 2000-2014 29 2000 to almost 5 percent in 2014 (see Annex 2.2 poverty. While overall poverty among indigenous for details). In contrast, there was a decrease in groups has declined marginally, their share of both poverty and extreme poverty in the majority extreme poverty has risen. While one in three of of the other regions between 2000 and 2014. Only the Northeast had a sharp rise in extreme FIGURE 2.17 Two-thirds of Gu t m l ’s poverty, with the concentration of the extreme Extr m Poor r Indi nous Ev n Thou h poor changing from 5 to 11 percent over the Indi nous P opl Account for Onl 42 period. Despite the Northwest experiencing the p rc nt of th Popul tion highest reductions in both poverty measures, its Share of Poor by Indigenous/Non-indigenous, 2014 large population share and still high poverty rates 100 mean that the extreme poor remain concentrated 7 9 8 8 in the two Western regions, with almost one- 80 9 9 Percent of extreme poor third of the extreme poor living in those regions 13 22 as of 2014. 60 15 19 40 The Ethnic Divide 48 The poverty and extreme poverty rates for indige- 20 34 nous groups are significantly higher than average. 0 Almost 80 percent of the indigenous population Ov r ll Poor Extr m Poor lived in poverty in 2014, and half of these were Non-indi nous K´ich ´ Q´ qchi´ K qchiqu l M m Oth r Ind. extremely poor. In contrast, the overall poverty rate among the non-indigenous was 47 percent, Source: Calculations based on the 2014 ENCOVI. Note: Based on official consumption measure of poverty and and only 13 percent were living in extreme national poverty lines. FIGURE 2.18 Ethnic Disp rsion nd FIGURE 2.19 Th Indi nous Ar Much Mor Pov rt Ar Link d Lik l to B Poor th n th Non-indi nous Department-level Poverty Rates Poverty Rates by Indigenous/Non-indigenous, 2000-2014 and Share of Population by Ethnicity, 2014 100 80 Percent of population Indigenous Non-indg# 60 K´iche Q´eqchi 40 Kaqchiquel Mam Other indig# 20 Poverty 33 - 41 0 42 - 56 M m Q´ qchi´ Oth r Eth. K´ich ´ K qchiqu lNon-Ind. 57 - 64 65 - 71 Ov r ll Pov. 2000 Ov r ll Pov. 2006 Ov r ll Pov. 2014 72 - 83 Ext. Pov. 2000 Ext. Pov. 2006 Ext. Pov. 2014 Source: Calculations based on the 2014 ENCOVI Source: Calculations based on the 2000, 2006, and 2014 ENCOVI Note: Based on official consumption measure of poverty and Note: Based on official consumption measure of poverty and national poverty lines. national poverty lines. 30 Poverty and Shared Prosperity 2000-2014 the indigenous poor used to be extremely poor, and non-indigenous groups is due to different the figure is now one in two. At the same time, endowments, while the remaining third is due to poverty among the non-indigenous has started unexplained differences in the returns to these to rise. However, in terms of the share of the endowments. country’s poor, poverty remains concentrated There are significant differences among the among indigenous groups. They represent 52 ethnic groups in Guatemala, both in poverty percent of the total poor and 66 percent of the levels and in trends. (See box 2.2 for a brief extreme poor, yet constitute only 42 percent of discussion of the differences between the major the population of the country (figure 2.17). Two- indigenous groups of Guatemala.) Areas with a thirds of all extremely poor households have an greater concentrations of indigenous people tend indigenous head of household. A Oaxaca Blinder to be poorer, but many of the ethnic groups are decomposition shows that two-thirds of the dif- spread across departments with varying degrees ferences in poverty between indigenous groups of poverty: this is particularly true for the Box 2.2  The Indigenous People of Guatemala are a Heterogeneous Group It is important to recognize that the indige- FIGURE B2.2.1 Rur l nd Urb n Popul tion nous people of Guatemala do not represent a b Ethnicit , 2014 homogeneous block, any more than does the non-indigeneous population. The multiple 80 ethnicities represented in Guatemala are distinct 70 across a range of characteristics and welfare Population (100,000) 60 outcomes. In terms of population, the K’iche are 50 the largest indigenous group at 1.6 million 40 people, while another 17 Mayan groups plus the 30 51 Xinca and Garifuna populations together 20 37 represent just over 1 million people. The fertility 10 rates of the groups also vary resulting in quite 0 Urb n Rur l distinct population pyramids (in 2002 the Mam Non-indi nous K´ich ´ K qchiqu l was the youngest group and the Garifuna the Oth r indi nous M m Q´ qchi´ oldest) and in different demands for basic Source: INE, based on the 2014 ENCOVI services such as education (see Annex 2.3). Note: The category other indigenous includes Xinka, Garifuna, and other Mayan. Indigenous people are, in general, more likely to live in rural areas—in contrast the rest of the other population, which is split 50-50 between rural and urban areas— which affects their access to services. However, there are large variations between the different Mayan groups. K’iche are the most urban of the groups, with almost 40 percent of their members living in urban areas while the Q’eqchí are the most rural at 84 percent. Indigenous people represent the majority of the population in some departments but only a tiny minority in others (see Annex 2.3). Wherever possible in this report, the analysis is disaggregated by indigenous group. Poverty and Shared Prosperity 2000-2014 31 non-indigenous and the Mam (figure 2.18). The versus 55 percent) may also contribute to the Mam had the highest poverty rate in 2000 at 90 observed dependency gap. percent, and live in both departments with high poverty levels and in others with much lower Other Demographic levels. By 2014, the Q´eqchi had overtaken the Mam, having the highest poverty and extreme Characteristics Poor and non-poor households have significantly poverty rates (87 and 56 percent respectively) different characteristics in terms of their house- and representing 22 percent of the extreme poor. hold structure and employment status (table 2.2). In contrast the Kaqchiquel have the lowest The poor are more likely than the non-poor to poverty rate among the indigenous groups live in male-headed households; in fact, overall despite this rate having increased in both 2006 and extreme poverty rates among female-headed and 2014 (figure 2.19). As noted earlier, the Mam households are lower than the corresponding na- have the highest chronic poverty rate, and none tional figures and, in terms of overall poverty, the of the indigenous groups have fewer chronically rates have fallen.11 Even holding constant the type poor households than the non-indigenous do. of household involved (single adult households with or without children or two adult households The Human Capital Divide with or without children), households headed by There is an important interplay among income, men are more likely to be poor (see full results in labor, and human capital (table 2.2). Poor Annex 2.4). Poorer households tend to be much households in Guatemala have lower levels of younger: in 2014 the proportion of individuals human capital than non-poor households, which aged 14 years old or younger in poor households is reflected in wide monetary welfare gaps. The was twice as large as in non-poor households. heads of poor and extremely poor households Having a younger head of household is also cor- have, on average, slightly over 3.3 and 2.0 years related with greater poverty, with all other char- of education respectively compared with almost acteristics held constant. The poor and extreme seven years of education for non-poor heads of poor tend to belong to larger households than the household. The non-poor have a higher number non-poor. Households in extreme poverty have of dependents per worker, which is a slightly 6.8 members on average while non-poor house- unexpected finding. However, the average per holds have an average of three fewer members. capita income and per capita consumption of Having a head of household who is indigenous the extreme poor is about one -fifth of that of but not one of the four large Mayan groups is the non-poor suggesting that the earnings of linked to a significantly greater risk of poverty, as the poor are significantly lower. Given the wide is living in the North and having less education. gap in education between the poor and non- poor, this is not surprising. Additionally, a large fraction of the extremely poor who are working are only doing so in the capacity of unpaid family workers. The concentration of the poor in agriculture (62 percent of the extremely poor compared to 14 percent of the non-poor) and higher levels of informal sector work (76 percent 32 Poverty and Shared Prosperity 2000-2014 TablE 2.2  There Are Sharp Differences Between the Poor and Non-poor in Terms of Demographics, Education, and Informality of Employment Characteristics of Poor and Non-poor Households, 2014 Extreme Moderate Bottom 40 Top 60 Non-poor poor poor percent percent Household Characteristics Age of head 45.5 45.1 47.1 45.2 47.1 Female-headed household (percent) 12.9 19.5 25.5 17.3 25.7 Single earner without children 2.3 4.4 14.8 3.7 14.9 Single earner with children 44.0 45.0 33.8 44.7 33.6 Two or more adult earners without children 1.0 2.1 5.6 1.7 5.7 Two or more adult earners with children 52.8 48.5 45.8 49.9 45.8 Head indigenous 65.5 43.1 21.2 50.5 20.9 Rural 75.7 56.5 29.3 62.6 29.2 Proportion age 0-14 44.9 36.8 22.7 39.4 22.6 Proportion age 15-64 51.3 56.9 67.9 55.2 68.0 Proportion age 65+ 4.9 6.4 9.8 5.9 9.9 Education of household head (years) 2.0 3.3 6.7 2.9 6.8 Dependency ratio on employed persons 35.7 39.5 50.1 38.3 50.2 Monthly per capita income 468 739 2102 650 2121 Monthly per capita consumption 363 660 1755 565 1768 Household size 6.8 5.3 3.8 5.8 3.8 Total households 544,458 1,084,735 1,722,837 1,653,516 1,698,514 Labor force (percent) Salaried 57.7 60.7 61.7 59.6 61.7 Self-employed 24.1 24.3 23.6 24.3 23.6 Employer 0.4 1.0 4.6 0.8 4.7 Unpaid worker 17.0 12.2 7.6 13.9 7.5 Unemployed 0.9 1.7 2.5 1.4 2.6 Informality (percent) Formal (with social security) 3.1 11.1 29.6 8.3 29.8 Informal (without social security) 96.9 88.9 70.4 91.7 70.2 Employment sector (percent) Agriculture, hunting 61.5 41.3 14.0 48.5 13.6 Mining 0.0 0.2 0.2 0.1 0.2 Manufacturing 9.8 12.2 13.9 11.4 13.9 Electricity, gas and water 0.6 1.0 1.2 0.8 1.2 Construction 5.2 7.9 5.3 7.0 5.2 Wholesale, retail trade 12.8 20.6 32.2 17.7 32.5 Transport, storage, and communications 1.3 3.2 5.0 2.5 5.0 Financial intermediation 1.2 1.8 7.0 1.6 7.1 Public administration 0.6 1.0 4.0 0.9 4.1 Education 0.5 1.6 6.7 1.2 6.8 Health and social workers 1.5 3.5 6.9 2.8 6.9 Domestic services 5.0 5.9 3.7 5.6 3.7 Source: Calculations based on the 2014 ENCOVI. Poverty and Shared Prosperity 2000-2014 33 Drivers of Changes in rising prices. The rise in food prices since 2006 has had a Poverty and Shared substantial impact on poverty levels through the resulting increase in the value of the poverty line. Prosperity Overall, the incomes of the bottom 40 percent of the population (roughly the group living in Consumption: Growth, extreme poverty) stayed the same over the 2006 Distribution, and Prices and 2014 period: consumption was stagnant as The increase in prices, particularly food prices, well. However, the rising prices of food caused is clearly linked to the rise in nationally defined the real value of the food poverty line to increase poverty in recent years (figure 2.20). Changes in by 19 percent over the period, resulting in a large prices affect the real wages that households earn increase in extreme poverty. In contrast, between and the costs of the goods and services that they 2000 and 2006, the real value of the extreme purchase. Figure 2.20 presents a Shorrocks-Kale- poverty line rose by only 9 percent. The overall nikov decomposition that looks at the relative poverty line with its large non-food component importance of changes in consumption growth, (approximately half of the value of the overall line changes in the overall distribution of consump- is for non-food items and services) changed tion, and the changes in prices. It clearly shows much less, growing by only 3 percent between the significant effect that rising prices have had 2006 and 2014, after having fallen by just 1 on poverty since 2006. Without the increase in percent in the previous period. prices, the poverty rate would have been sub- stantially lower. Changes in the distribution of Drivers of Observed Changes in consumption contributed to poverty reduction, especially in the case of extreme poverty in the in Income Poverty The very poorest 10 percent of the population latter half of the last decade as did the changes in was the only group that registered any income growth. However, these gains were mitigated by FIGURE 2.20 Shorrocks K l nikov D composition of Pov rt R t Ch n s, 2006-2014 Overall Poverty Extreme Poverty 30 30 20 20 Percentage points Percentage points 10 10 8.3 5.6 12.2 8.1 10.8 5.9 0 0 -10 -10 -20 -20 -30 N tion l Rur l Urb n N tion l Rur l Urb n Growth R distribution Pric s Growth R distribution Pric s Source: Calculations based on the 2006 and 2014 ENCOVI. Note: Based on the consumption measure of welfare and the national poverty lines. 34 Poverty and Shared Prosperity 2000-2014 growth between 2000 and 2014 (figure 2.21). FIGURE 2.21 Incom In qu lit D cr s s Growth was pro-poor in the sense that the bot- M inl Du to Incom R ductions tom decile saw a small annual growth in their in- t th Top of th Incom Distribution comes over the 2000 to 2014 period while the in- Annualized Growth Incidence Curve come of the higher deciles actually declined. The of Income (constant 2000 prices) 10 negative slope of the growth incidence curves, 8 especially in the 2006 to 2014 period, helped to 6 bring income inequality sharply down. While the P rc nt rowth 4 magnitude of the change seems counterintuitive 2 given the increase in poverty, it is explained by 0 the fact that incomes declined among the highest -2 deciles, which has had the effect of reducing -4 inequality without reducing poverty.12/13 -6 1 10 19 28 37 46 55 64 73 82 91 100 GIC 2000-2006 GIC 2000-2014 GIC 2006-2014 Sources of Income Labor income in Guatemala has played a less Source: For 2000 and 2006, Cadena et al. (2013). For 2014, Calculations based on the 2014 ENCOVI. prominent role in poverty reduction than in the rest of Latin America.14 Changes in poverty rates can be explained by changes in labor earnings, income played a more limited role in poverty employment levels, private and public transfers, reduction as there was a strong negative relation- and other non-labor incomes. Between 2000 and ship between men’s labor income and poverty 2006, the two main drivers of overall and extreme (figure 2.22). This result contrasts with the rest poverty reduction were a growth in employment of LAC where labor income, especially for men, for both men and women and transfers. Labor played a very important role in reducing pov- FIGURE 2.22 Mor Jobs nd Tr nsf rs Miti t d th N tiv Eff ct of E rnin s on Pov rt Contribution of Incom Sourc s to Pov rt R duction (Incom -b s d Pov rt ) Overall Poverty (US$4 per capita per day) Extreme Poverty (US$2.5 per capita per day) Tot l ch n : Tot l ch n : 15 15 3.2 pp Tot l ch n : 4.6 pp 7.6 pp Tot l ch n : sin sin 10 3.5 3.8 pp 10 4.6 Pov rt Incr Pov rt Incr Percentage points Percentage points Tot l ch n : Tot l ch n : 5 -2.9 pp 5 -0.5 pp 8.4 3.3 4.4 0 0 Pov rt R ducin Pov rt R ducin -5 -5 -10 -10 2000-2006 2006-2014 2000-2014 2000-2006 2006-2014 2000-2014 Emplo m nt: m n's sh r L bor incom : m n's Emplo m nt: wom n's sh r L bor incom : wom n's Priv t tr nsf rs Public tr nsf rs Oth r non-l bor incom Source: Calculations based on the 2000, 2006, and 2014 ENCOVI. Poverty and Shared Prosperity 2000-2014 35 FIGURE 2.23 Gu t m l n Mi r tion FIGURE 2.24 Th Inflow of R mitt nc s H s Ris n R pidl in th L st 35 Y rs H s Also Ris n Guatemalan immigrant in the US, 1960-2013 (numbers) Remittance Inflows, 2001-2012 (In current US dollars) 1,197,000 8 7 Billion U.S. Doll rs (Curr nt) 6 5 489,500 4 3 242,500 2 72,200 1 6,100 20,500 0 1976 1978 1974 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 1960 1970 1980 1990 2000 2013 Gu t m l El S lv dor Hondur s Nic r u Bolivi P r u Cost Ric P n m Source: World Bank estimates based on Migration Policy Institute Source: World Bank estimates based on Migration Policy Institute database and US Census and American Community Survey (ACS) database and US Census and American Community Survey (ACS) data. data. erty in that period, to the tune of a 2 percent levels and that targeting of these resources to reduction on average. In the early part of the last poorer households was successful. decade, women’s labor income was associated The distribution of remittances, however, with a decline in poverty but, by 2006 to 2014, appears to have shifted away from poor house- both male and female labor incomes were linked holds. The levels of remittances remain high to higher poverty. In Guatemala, it was primarily (figure 2.24). In terms of the share of GDP, in the increase in the share of men who were em- 2014 remittances accounted for a substantial 10 ployed rather than the level of their earnings that percent of GDP. While this is a lower proportion helped to lower poverty. than in Honduras (17 percent) and El Salvador The contribution of public transfers to poverty (16 percent), it still represented a record for reduction has increased over the last 15 years. Guatemala of US$5.8 billion. Most remittances Between 2000 and 2006, the reduction in poverty originate from the US (US$4.4 billion), followed associated with private transfers (largely remit- by Mexico (US$152.2 million) and Canada tances) and with public transfers was largely (US$100.1 million). Remittance flows grew similar. However, between 2006 and 2014, the substantially during the 2000s, peaking at US$4.5 effect of public transfers grew, especially in the billion in 2008, until they plunged to US$4 billion case of extreme poverty levels, while the effect of in the aftermath of the global financial crisis in private transfers diminished (for overall poverty) 2009 (figure 2.24). Since then, remittances have and grew only slightly (for extreme poverty). This recovered sharply, and the number of emigrants change indicates that the increased spending on continues to grow (approximately 8 percent of transfer programs (to be discussed in the next Guatemalans were living outside of Guatemala in chapter) did have a positive effect on poverty 2013 with almost 90 percent of them living in the 36 Poverty and Shared Prosperity 2000-2014 US (figure 2.23).15 The fact that remittances poor remain, and the country lags behinds its continue to grow but their effect on poverty has peers in terms of its welfare indicators. Several declined or stagnated indicates that there may non-monetary measures of welfare related to have been a shift in the characteristics of recipi- education and health appear to have improved, ent households. and social spending has helped to reduce poverty. However, labor markets have contributed little to poverty reduction. There continues to be a crit- Conclusion ical disconnect between economic growth and In summary, the recent past has not been poverty reduction, with the two having moved favorable to Guatemala. Incomes have in opposite directions in recent years. The next declined as has consumption for all but the chapter addresses the issue of why growth has not poorest. The historical gaps between rich and been inclusive in Guatemala. References Orozco, Manuel, Laura Porras and Julia Yansura. 2016. “The Continued Growth of Family Remittances to Latin Baez, Javier, Kiyomi Cadena and Mara Eugenia Genoni, America and the Caribbean in 2015”, Inter-American Leonardo Lucchetti, 2015. Chronic Poverty in Dialogue, Washington, D.C. Guatemala”: Analysis using Poverty Maps”, World Bank, Ravallion, Martin, and Monika Huppi. 1991. “Measuring Washington, D.C., mimeo. Changes in Poverty: A Methodological Case Study of Cadena, Kiyomi, Adriana Cardoza, Leonardo Lucchetti Indonesia during an Adjustment Period.” World Bank and Kinnon Scott, 2013. Central América en el nuevo Economic Review 5 (1): 57–82. milenio: seis historias diferentes de pobreza y desigualdad, United States Census Bureau, “The American Community Washington, DC: The World Bank Survey”, https://www.census.gov/programs-surveys/acs/. Dang, Hai-Anh, Peter Lanjouw, Jill Luoto, and David World Bank. 2004. Poverty in Guatemala. A World Bank McKenzie. 2011. “Using Repeated Cross-Sections to Country Study. Washington, DC: The World Bank. Explore Movements in and Out of Poverty.” Policy ______. 2009. Guatemala Poverty Assessment: Good Research Working Paper No 550, World Bank, Performance at Low Levels. Report No. 43920-GT, Central Washington, DC. America Department, Poverty Reduction and Economic Elbers, Lanjouw and Lanjouw, 2003. Micro-level Estimation Management Unit, Latin America and the Caribbean of Poverty and Inequality”, Econometrica, Vol. 71, Issue 1, Region, World Bank, Washington, DC. pp:355-364. ______. 2011a. “On the Edge of Uncertainty: Poverty Kolenikov, Stanislav, and Anthony Shorrocks. 2005. “A Reduction in Latin America and the Caribbean during Decomposition Analysis of Regional Poverty in Russia.” the Great Recession and Beyond.” Poverty, Gender Review of Development Economics 9 (1): 25–46. and Equity Unit, Poverty Reduction and Economic International Monetary Fund, multiple years. “World Management Team, Latin America and the Caribbean Economic Outlook Database”, http://www.imf.org/ Region, World Bank, Washington, DC. external/ns/cs.aspx?id=28. ______. 2015. “Global Knowledge Partnership on Migration Migration Policy Institute, multiple years. “Global Remittance and Development (KNOMAD)” http://www.knomad. Guide”, http://www.migrationpolicy.org/programs/ org/. data-hub/global-remittances-guide. ______. Multiple years. “World Development Indicators Migration Policy Institute, multiple years. “International Database (WDI)” http://data.worldbank.org/ Migration Statistics” http://www.migrationpolicy.org/ data-catalog/world-development-indicators. programs/data-hub/international-migration-statistics. Poverty and Shared Prosperity 2000-2014 37 Notes In Mexico the non-response rate in some areas of the country has increased to 25 percent in recent years and 1 See Annex 1.1 for details on countries considered as non-response is correlated to education levels, suggesting Guatemala’s economic peers along with other comparator that it is correlated to income as well.. No assessment has countries used in this report. yet been carried out of the increase in non-responses in 2 The data presented in the first section of this chapter the latest round of the ENCOVI in Guatemala or of its are income-based measures compared to international implications, so until that happens, a degree of skepticism poverty lines. See Box 2.1 for an explanation of official about the magnitude of the fall in the Gini might be poverty measures in Guatemala and when these are warranted. used and when the internationally comparable ones 6 These figures were calculated using a synthetic panel are used in this report. However, as in this section and method (Dang et al, 2011) as there are no real panel data wherever the focus is on international comparisons, an sets in Guatemala that would allow the study of a house- income aggregate will be used as well as international hold’s movements in and out of poverty directly. The poverty lines as follows: US$1.25 per person per day (the overall poverty rates from this analysis will not exactly global extreme poverty line), US$2.5 per person per day match the national poverty figures as, first, the analysts (extreme poverty line for LAC), and US$4 per person per used an international poverty line of US$4 per capita day (overall poverty line for LAC). The lines are in 2005 per day in PPP terms, which is slightly higher than the PPP terms. While there has been an update to the 2011 national line in Guatemala of PPP US$3.17, and, second, PPP for the US$1.25 line, there has been no update for the methodology only incorporated households that were the US$2.5 and US$4 lines. For this reason, we have used formed in 2000, meaning that younger households were with the US$1.25 global extreme poverty line in 2005 under-represented in the analysis compared with stan- PPP. dard poverty analysis. See Annex 2.2 for the comparison 3 In consumption terms, overall growth was similar, but of mobility with Central America and Latin America. growth for the bottom 40 percent was positive - 1.5 per- To ensure that our estimates of mobility are comparable cent over the 2000 to 2006 period and then 0.3 percent in methodologically with the LAC and CA results, we have 2006-2011. This suggests some measurement problems used the 2011 ENCOVI data. The issues of comparabil- related to income among those at the lower end of the ity between the 2000 and 2011 rounds of the ENCOVI distribution, but even the better consumption measures suggest that our analysis may overstate the numbers show very weak shared prosperity in recent years. of households who rose out of poverty. Our mobility 4 As might be expected, a consumption-based Gini analysis within Guatemala is based on the 2000 and 2014 shows much lower levels of inequality but the trend in surveys and thus suffers from no comparability issues. the consumption-based Gini is similar to that seen with 7 The panel of municipalities was created using small area income. The decline in inequality between 2006 and 2014 estimation techniques a la Elbers, Lanjouw and Lanjouw, is even more dramatic in consumption terms. The decline 2001). Given data limitations estimates could only be in both urban and rural inequality can be seen in both made for rural municipalities. See Baez et al. (2015) for income and consumption terms. further details. 5 One hypothesis about the change in the Gini that cannot 8 No figure is available for extreme poverty in 1989. be ignored is that there may have been a deterioration in 9 Changes in the definition of rural and urban areas the quality of data at the top end of the distribution over between 2000 and 2006 make earlier comparisons sus- time. There is always some degree of under-reporting: pect: see Box 2.1. studies of top earner databases from tax records in other 10 Huppi-Ravallion decompositions look at intra-area and countries have shown that the Gini is often under-es- across areas changes in poverty. The within-area increase timated as a result of non-responses from households in poverty was 8 percentage points, but the across-area at the top end of the distribution. The concern is not movements mitigated this effect, resulting in a 7.6 per- so much that this phenomenon exists but that these centage point rise in overall poverty. For extreme poverty, non-responses may be increasing. Given the very sharp the within-area increase in poverty was 4.1 percentage rise in crime and violence in Guatemala, particularly in points, while movements from rural to urban areas led to the cities, it is quite plausible that households are not a small decline in poverty for an overall rate of 3.7. willing to provide information on their wealth to surveys. 38 Poverty and Shared Prosperity 2000-2014 11 World Bank (2009). 12 An alternative hypothesis is, of course, that non-re- sponses may be affecting reported income: crime and violence, particularly extortion, have risen in recent years, which might have reduced people’s willingness to give accurate responses to surveys. 13 The picture is slightly more positive in terms of growth in consumption: consumption inequality decreases mainly because of growth in the bottom of the distribu- tion while income inequality decreases mainly due to income reductions in the top of the income distribution (see Annex 2.5). 14 World Bank (2011a) 15 Other destination countries are Mexico and Canada, with 41,000 and 18,000 Guatemalan immigrants respec- tively (Orozco et al, 2015 and KNOMAD, 2015). Poverty and Shared Prosperity 2000-2014 39 40 Poverty and Shared Prosperity 2000-2014 Inclusion and Exclusion 3.  Labor markets have played only a limited role in changes in welfare in Guatemala. The number of jobs has increased at the same pace of GDP, which has contributed to poverty reduction. However, the quality of these jobs has not: earnings are stagnant, especially in the sectors in which the poor are most likely to work. The lack of human capital affects individuals’ ability to find the types of productive employment that would help them to move out of poverty. This lack of human capital stems from limited access to basic services such as education and health. Coverage of these and other services is far from universal and the influence of geography, ethnicity and household characteristics on inequitable access have changed little in the past 15 years. The poor and ethnic minorities bear the brunt of unequal opportunities and poor outcomes. Spending patterns restrict Guatemala’s ability to provide universal access to basic services as the low levels of revenues collected limit the provision of public services. At the same time the incidence of spending is such that overall fiscal policy actually increases poverty. Inequality is not lowered by the sum of direct and indirect taxes and transfers. On a range of indicators, Guatemala is not catching up to its peers and competitors, which is hindering future economic growth, job creation, and welfare gain and putting its social contract under further stress. Progress on generating an inclusive model of development in Guatemala has Limited Labor Market been slow. Any positive change has often been Opportunities outweighed by structural features that perpetuate Labor markets have played only a limited poverty and inequality. Many Guatemalans are role in changes in welfare in Guatemala. High faced with limited job opportunities and stagnant and rising poverty stands out as a pressing chal- earnings. In part this is the result of an economic lenge for Guatemala. As discussed in Chapter 2, structure that does not facilitate the adequate cre- contrary to the experiences of other countries in ation of well-remunerated jobs (see discussion in Latin America, labor incomes have not contrib- Chapter 4). In part, however, it reflects a lack of uted to poverty reduction in Guatemala. Over human capital. Much of the population has limit- the 2000-2014 period, there has been a decline ed access to the basic services and infrastructure in earnings. In particular, the fall in the labor that would allow them to increase their human income of men contributed to an 8.4 percent- capital and escape poverty. A basic underinvest- age point increase in poverty while increases in ment in public goods is the main reason behind women’s labor incomes only reduced poverty by the story of limited opportunities, while spatial 0.6 percentage points. This trend is particularly inequalities, an inefficient use of resources, and worrisome given the rapid growth of the labor weak institutions exacerbate the situation. force in Guatemala, which presages further declines in earnings unless the country is able to generate better paying jobs for its citizens. There is a small dynamic private sector, but most of the jobs remain informal, without social security Inclusion and Exclusion 41 FIGURE 3.1 Risin L v ls of Un mplo m nt FIGURE 3.2 Th r H s B n Amon Wom n nd in Rur l Ar s M b Strikin Incr s in W Emplo m nt C us for Conc rn in R c nt Y rs Unemployment Rates, 2000, 2006 and 2014 Employment Status by Poverty Level, 2000-2014 3.0 2000 2014 100 2.5 80 2.0 60 Percent Percent 1.5 40 1.0 20 0.5 0.0 0 2000 2006 2014 2000 2006 2014 2000 2006 2014 r n- n-p or or r m l Ex U r l n K´ s Q´ h ´ hi ´ M l m qc chi r poo u l l qu n h No No Po in oo no M r m rb Ru M ic tio Ot K q Extr m poor Mod r t poor Non-Poor F t N di t od Emplo r S l ri d S lf- mplo d F mil work r Source: Calculations based on the 2000, 2006, and 2014 ENCOVI. Source: Calculations based on the 2000, 2006, and 2014 ENCOVI. protection. As discussed in more detail in chapter women, urban workers, and most indigenous 4, productivity is low and declining. groups (figure 3.1). This trend suggests some new The Guatemalan labor force, like the overall constraints on labor demand. population of the country, is quite young and Perhaps the most striking change in the labor growing. In 2014, more than 40 percent of the force in the past 15 years has been the increase in labor force was under age 30.1 The economically wage employment with no accompanying active population grew by 4.4 percent per year, or increase in the share of formal sector employ- about 225,000 people, between 2010 and 2014. ment (figure 3.2). Between 2000 and 2006, there The growth in the economically active population was little change in the composition of the labor in recent years has not entirely been due to force but in the following eight years the share of population changes as some of the growth may the poor and extreme poor in wage employment reflect people moving back into the labor force as increased by 32 and 41 percent respectively the economy recovered from the global financial (figure 3.2). This has largely been driven by a crisis. However, demographic trends guarantee drop in unpaid family work as well as the almost that the supply of labor will continue to grow in complete disappearance of employers among the the near future. The supply of labor could also poor. However, the shift towards wage employ- increase substantially if the labor market were to ment has not been accompanied by a commensu- become more attractive to women: female labor rate change in formality or in earnings. In 2000, force participation in Guatemala is the lowest in informal employment, defined as not having the region. Despite these population pressures, at access to social protection, constituted 72 percent the national level unemployment is low, just 2 of the labor force, and by 2014 this had risen to percent in 2014. However, the rate has risen 82 percent.2 substantially since 2000, particularly among 42 Inclusion and Exclusion Earnings have fallen sharply despite the move TablE 3.1  Earnings Have Declined to greater wage employment, a clear indication Over the Last 15 Years that minimum wage legislation is not binding Percentage change in real median earnings, (table 3.1). Both median monthly and hourly 2000-2014 (2014 Quetzales) earnings have fallen in real terms for the poor Monthly Hourly since 2000. This fall has been substantial: almost Ext. Poor. -18.3 -8.6 9 percent in hourly earnings for the extreme poor Mod. Poor -10.4 0.9 and 11 percent for workers in the bottom Non Poor -2.4 1.6 quintile. Monthly earnings have fallen by even Quintile 1 -19.5 -11.0 more, indicating an increase in underemploy- Quintile 2 -22.7 -2.7 ment as the numbers of hours worked has Quintile 3 -14.4 -0.6 decreased. Again, these findings suggest that Quintile 4 -4.1 4.2 there are new and rising constraints on labor Quintile 5 -9.5 -7.5 demand that will impede poverty reduction. Source: Calculations based on the 2000 and 2014 ENCOVI. Note: Moderate plus extreme poor = overall poor. The poor continue to be concentrated in the agricultural sector —although less so than previously—and the commerce sector (figure 2002) and a subsistence sector of minfundistas 3.3). Between 2001 and 2013, agriculture as a that has experienced declining productivity.3 sector grew strongly in Guatemala at 3 percent, Between 2000 and 2014, median hourly earnings just below GDP growth. However, the sector is in the agriculture sector fell by 12.3 percent from characterized by a dynamic export sector their already low levels (figure 3.4). A 2013 study (exports have grown annually 11.5 percent since that calculated the decomposition of sectoral FIGURE 3.3 Th Poor Ar Conc ntr t d FIGURE 3.4 Th S ctors wh r th in A ricultur Poor Ar Conc ntr t d H v H d R c nt D clin s in E rnin s Sector of Employment by Poverty, 2000 and 2014 Changes in real hourly earnings by sector, 2000-2014 100 25 Median real hourly wages 80 20 60 15 Percent 40 10 20 5 0 0 2000 2014 2000 2014 2000 2014 2000 2006 2014 Extr m poor Mod r t poor Non poor A ricultur M nuf ctur Construction Prim r ctiviti s M nuf cturin Construction R t il Utiliti s S rvic s Dom stic S rvic s R t il Utiliti s S rvic s Dom stic s rvic s Source: Calculations based on the 2000 and 2014 ENCOVI. Source: Calculations based on the 2000, 2006, and 2014 ENCOVI. Note: Services includes: financial services, public administration, Note: Services includes: financial services, public administration, education, and health services. education, and health services. Inclusion and Exclusion 43 effects on poverty reduction showed that a rise in slightly different labor force than their Mayan agricultural employment was associated with an peers. On the one hand, they have a much more increase in poverty.4 An analysis using synthetic diversified labor force than their urban-rural panels showed very high levels of chronic poverty shares would suggest. They are also the group among households engaged in agriculture, both with the lowest share of their labor force (albeit in the 2006 to 2014 period and over the longer still high) working in the informal sector (78 2000 to 2014 period.5 There was a strong rise in percent compared to around 90 for the Mam, earnings in the commerce sector between 2000 K’iche, and Q’eqchi). and 2006, followed by a steep decline by 2014. For households engaged in commerce in 2000, there was a strong movement out of poverty (18 Constrained Human percent of households) by 2006, but this upward Capital Accumulation mobility between 2006 and 2014 was more muted Low levels of human capital in Guatemala (9 percent), reflecting declining earnings in the prevent individuals from accessing high quality sector. The agricultural and the commerce sectors jobs and limit poverty reduction. Human capital account for the majority of informal employment plays an important role in earnings. Hertz et al. (36 and 29 percent respectively). (2008) found that the substantial wage differenc- The sectoral composition of the labor force es between rural and urban areas were largely within each ethnic group largely reflects the explained by the differences in the endowments rural-urban concentration of the groups (figure of the two populations, of which education was 3.5). Among the predominantly rural Q’eqchi, 67 key. The same was true within the rural sector: percent work in agriculture, while the more the substantial earnings advantage of non-agri- urban K’iche have less than half as many working cultural workers was due mainly to differences in agriculture. The Kaqchikel appear to have a in endowments.6 In 2014, 30 percent of the wage gap between rural and urban areas was explained FIGURE 3.5 Emplo m nt V ri s b Ethnicit by differences in education while 37 percent of with Si nific nt Div rsific tion mon th the gap between indigenous and non-indigenous K qchik l nd Conc ntr tion mon th Q' qchi workers was due to differences in education Employment by Sector and Ethnicity, 2014 levels.7 Human capital in the form of health also 100 influences economic outcomes.8 An important 8 4 8 8 11 longitudinal study in Guatemala showed that 12 16 19 80 24 better childhood nutrition had a substantial pos- 6 6 25 24 itive impact on adult earnings. Males with lower 60 12 27 malnutrition as children had earnings, on aver- 40 67 16 20 age, that were 46 percent higher than their more 66 12 malnourished peers.9 In the case of Guatemala, 20 45 33 29 24 where the economy has a limited ability to gen- 0 erate good jobs and the country is characterized Q´ qchi´ M m Oth r K qchiqu K´ich ´ Non-indi by fast population growth, individuals with little Prim r ctiviti s M nuf ctur Construction human capital are at a particular disadvantage. R t il Utiliti s S rvic s Dom stic S rvic s Source: Calculations based on the 2014 ENCOVI. 44 Inclusion and Exclusion The progress that Guatemala has made in Bolivia and Ecuador are the closest, but their terms of human capital accumulation over the last rates are only 27 and 25 percent respectively. 20 years has not been enough to catch up to its Among countries that have data on malnutrition peer countries. The 1996 Peace Accords created since 2010, Guatemala’s rate of chronic malnu- an important impetus toward creating a new trition is lower only than those of Yemen, Papua model of inclusive growth, laying out an overall New Guinea, Eritrea, and Burundi, two of which agenda of inclusive human development with a are low-income countries.11 A smaller but still focus on increasing the capacity of the state and considerable share of children (12.6 percent) is emphasizing the need to promote equity for underweight. indigenous people and women. This has led to a The persistently high chronic malnutrition realignment of the government’s objectives, some rates in Guatemala illustrate a lack of the most re-direction in public spending, and the setting of basic type of human capital - good health. The new revenue targets in the last two decades. There overall change in both indicators of malnutrition has certainly been some evidence of progress and in the past six years has been negligible: stunting better outcomes, particularly in educational declined by only 3 percentage points from its enrollment and child mortality. However, the 2008-09 level of 50 percent and underweight program set out 20 years ago has neither been declined from 13.1 percent to 12.6 percent. Even fully realized nor been enough to break historical within this small positive change, there are some patterns of inequality of opportunities. Levels of worrying signs. In the 0 to 5 month age cohort, health and education in Guatemala remain below 30 percent of children are stunted, and by the age those of its peer countries, and the gaps between of 19 to 23 months, stunting increases to 54 groups within Guatemala are sizeable. In educa- percent, a pattern that has not changed since tion, the notable headway that has been made in 2000. However, stunting among the youngest enrollment rates and test scores has not been group has risen from 22 percent since 2008-09.12 enough to make up for Guatemala’s low starting The differences in stunting rates across wealth point vis-à-vis other countries. In health, the quintiles are large, ranging from 66 percent in the picture is less positive as some measures show lowest quintile to 17 percent in the highest, again progress while other critical ones related to a pattern similar to that of previous years. Of malnutrition and maternal mortality have concern is the fact that, while the level of stunting changed little if at all. For all measures of human among children in the bottom 40 percent has capital, the ethnic gap is striking, and there is fallen since 2008-09, there has been a small often a sizable gender gap as well. increase for those in the top two quintiles. Finally, malnutrition rates have actually Malnutrition increased in several departments: in El Progreso Guatemala is an outlier in the region in terms and Jalapa stunting rose by 15 and 9 percent of chronic malnutrition (stunting). Data from respectively (figure 3.7). However, the gravity of 2014-15 show that almost half of all children in the malnutrition story is best illustrated by the Guatemala (47 percent) are stunted, an indication fact that, even in the department with the lowest of the high levels of poverty and inequality in the levels of stunting, Guatemala, three out of ten country (figure 3.6).10 This rate of chronic mal- children suffer from chronic malnutrition. In nutrition is higher than that of any of its peers. absolute terms, the number of children suffering Inclusion and Exclusion 45 FIGURE 3.6 M lnutrition R t s R m in FIGURE 3.7 Ch n s in M lnutrition V ri d Stubbornl Hi h with R t s Risin in Thr D p rtm nts Stunting Rates among Children 3-59 months; Stunting Rates by Department among Children by Area, Ethnicity and Wealth, 2008 and 2014 3-59 Months of Ag, 2008 and 2014 80 90 82 2008 2014 2014 2008 70 80 72 72 70 Percent of children under 5 Percent of children under 5 60 70 6261 5959 60 54 51 49 50 50 4644 43 42 40 40 37 35 40 3229 30 30 26 25 20 20 10 10 0 0 t ti l hu Q olo n im hiq nhé Al lt uim o o so q s P o I tén nt uin u . 1 2 3 4 5 n- . l pé co tl Ch C t nuic l B t V n ul Qu ch Z l p lt équp El t Ros o l l p R u b J u S S nV r p c M p S Esc hul n j rn Sp di di n Pr m t r r til it c til til til til tio In In n c in p in in in in ni J Qu Qu Qu Qu Qu N to Gu No To Su Hu Source: MSPAS et al. (2015) Source: Data from MSPAS et al. (2009) and MSPAS et al. (2015) Note: The ENSMI has neither an income nor a consumption measure: quintiles here are based on wealth as reported in MSPAS et al. (2015). from stunting has gone up 10 percent since 2008, (ENSMI) are available, it is hoped that analysis of an increase of almost 100,000 children. these data will yield insights into how this was The ethnic and geographic gaps within the achieved and how malnutrition could be reduced country are large although there has been some nationwide. closing of the gap. Rates of malnutrition remain Guatemala’s progress in reducing chronic substantially higher among the indigenous malnutrition has been slow. Between 1987 and population: almost two of every three indigenous 2000, stunting went down at a rate of 2 percent children suffer from stunting (61.2 percent) annually. In contrast, in Brazil over a similar compared to one in three among the non-indige- period (1986-1996) the annual rate of change was nous population (34.5 percent). However, the gap 6 percent. Stunting in Guatemala fell to its lowest has shrunk slightly: since 2008-09, the decline in point in 2000 (44 percent) but rose again by 2008 malnutrition among indigenous people has been and has fallen only slightly since then from 50 to greater than among the non-indigenous group (7 47 percent, an annualized rate well below that of and 4.7 percent respectively). Differences previous years. In terms of underweight (acute between departments continue to be large, with a malnutrition), after a strong positive change in ratio of almost three to one between the depart- the early 1990s progress has also been slow in ments with the highest and the lowest levels of recent years. The slow rate of change in malnutri- malnutrition, but malnutrition has declined tion rates seems to suggest that recent govern- slightly in almost all departments. Izabal stands ment programs have been unsuccessful, out with a stunning one-third decline in stunting particularly the Ventana de los 1000 Días, which in just six years. Once the new data from the was supposed to improve child outcomes through 2014-15 Demographic and Health Survey better pre- and ante-natal care as well as through 46 Inclusion and Exclusion strong nutritional interventions. However, it is tremendous decline from 20.7 to 11.5 per 100,000 possible that the program has played a role in the suggesting that there have been improvements in recent positive changes in child mortality (see many factors, particularly in the provision of below), and this result may be confounding the nutritional supplements and supplementary malnutrition findings. If very malnourished feeding.16 The Zero Hunger program that children who previously died now survive, the explicitly tackles hidden hunger as well as program may be causing mortality rates to fall seasonal hunger may be one of the factors while increasing malnutrition rates. In the contributing to this success. absence of a deeper study of the evolution of malnutrition and child mortality, this remains a Health hypothesis that needs to be tested. Apart from chronic malnutrition, many health What is often called “hidden” hunger also indicators have substantially improved over the affects children and adults in Guatemala. Hidden past 15 years. Guatemala is on track to meet the hunger refers to a lack of micronutrients in MDG for under-5 mortality, although there is children’s diet that impedes their growth and some evidence that the rate of decline in child development. In 2014, 53 percent of households mortality is slowing.17 The share of pregnant reported that, due to a lack of resources, their women who receive pre-natal care has increased children ate an unbalanced diet or a diet limited and is on par with the Central American average in diversity.13 Among extremely poor house- at 93.2 percent. Life expectancy rates rose by 12 holds, this figure rose to 74 percent. Iron defi- years between 1990 and 2013 to 72 years, and ciencies or anemia, which hinder the intellectual the rate of serious infectious diseases such as development of children, affect 25 percent of tuberculosis decreased from 75 to 60 per 100,000 children in Guatemala.14 While high, this level between 1990 and 2013. Between 2008 and 2014, represents a significant decline since 2008 when the share of births attended by doctors or nurses the figure was 48 percent. Iodine deficiency rose as did the share of children who received affects 14 percent of the population. Of seven appropriate post-natal care (figure 3.8). The latter countries studied in Latin America, only indicator changed considerably, again suggest- Honduras had higher levels of deficiency. Fewer ing that recent government programs have been than half of all households (40 percent) have effective in some areas. access to iodized salt. Thirty-five percent of Progress has been made in some measures of children under the age of 5 had levels of zinc maternal and child care, but inequities remain. below accepted norms. Vitamin A deficiencies, Changes have often not benefited the poor as which harm the immune system, affected 16 much as the non-poor and have yet to fully close percent of pre-school children in 2009-10. The the gaps between the “two Guatemalas.” Despite severity of this deficiency had showed up in an improvements since 2008, in 2014 the majority of earlier study,15 which estimated that 1,500 births by women from the lowest quintile were children died annually in Guatemala due to still attended by midwives rather than doctors, Vitamin A deficiencies. With the exception of only one-third of all births were attended by anemia figures, no recent analysis exists to update either a doctor or a nurse, and 15 percent of all these other indicators of hidden hunger. births took place with no trained assistance at all. However, the overall rate of deaths from malnu- In contrast, 96 percent of births in the top trition in Guatemala has undergone a Inclusion and Exclusion 47 FIGURE 3.8 G ps in M t rn l nd Child H lth C r cross W lth Quintil s Ar L r nd Not All Ch n s H v B n Positiv Maternal and Child Health Care, 2008/9 and 2014/5 100 80 60 P rc nt 40 20 0 An tr in d An tr in d Dr/Nurs Dr/Nurs V ccin tion V ccin tion Pr n t l Pr n t l Postn t l Postn t l t birth t birth t birth t birth 2008/9 2014/5 2008/9 2014/5 2008/9 2014/5 2008/9 2014/5 2008/9 2014/5 Q1 Q2 Q3 Q4 Q5 Source: MSPAS et al. (2009 and 2015) based on the 2008/9 and 2014/5 ENSMI. Note: “Any trained at birth” refers to having a doctor, nurse, or midwife in attendance at a birth. “Dr./Nurse at birth” refers to having a doctor, or nurse in attendance at a birth. Full vaccination is defined as a child having received prior to his or her second birthday the measles vaccine, three doses each of DPT and polio (excluding the polio vaccine given at birth), and one dose of BCG. Prenatal care consists of four prenatal care visits. Postnatal is at least one well-child visit after birth. quintile were attended by doctors or nurses. The important gains in child mortality that have been recent substantial rise in post-natal care among achieved to date. all groups has actually led to a widening of the Other health indicators continue to be of gap between the top and bottom quintiles as the concern. Guatemala’s maternal mortality rate is rate of improvement among the 3rd and 4th the highest in the LAC region. The regional quintiles was three times that of the first quintile. average was 87 per 100,000 births in 2013 The only indicator for which the poor appear to compared with 140 for Guatemala (figure 3.9). have an advantage is in vaccinations, but all This rate has held steady for the last 10 years, groups have surprisingly low levels of full meaning that Guatemala is far from meeting the vaccination.18 Levels of vaccination have actually MDG on this indicator. Neonatal mortality, while dropped substantially since 2008 contrary to having fallen fairly steadily since 1972, has been what would have been expected given the resistant to change in the past 15 years, despite intensive government programs to improve child the increase in pre-natal care. The burden of health outcomes and the observed increase in ill-health in the country is also uneven. Almost post-natal care. There has been a particularly three-quarters of maternal deaths are among alarming fall in the rate of measles vaccinations indigenous women, and births by indigenous from 78 percent of all children under the age 2 in women are half as likely to be attended by a 2008 to only 63 percent in 2014. The largest skilled professional as those births by the rest of declines were for those in the bottom three the female population. Indigenous and rural quintiles. Understanding the causes of this women are more likely to suffer from anemia decrease is urgently needed as an outbreak of than their urban counterparts. While infant measles or other diseases could partially erase the mortality rates are falling nationally, they are 48 Inclusion and Exclusion FIGURE 3.9 Gu t m l Is Not on Tr ck FIGURE 3.10 Ch n s in Inf nt Mort lit to M t MDG on M t rn l Mort lit H v B n Un v n cross R ions Maternal mortality rates in Guatemala compared to MDG Infant Mortality Rates by Region, 1977 to 2014 Deaths of infants (< 1 year) per 1,000 live births 300 270 120 250 100 Deaths per 100,000 births 200 80 140 150 60 160 140 140 140 100 40 50 67.5 20 0 0 1990 2000 2005 2010 2013 2015 S.W. North M tro. P t n N.W. N.E. S.E. C ntr l M t rn l Mort lit Lin l (MDG M t rn l Mort lit ) 1977-87 1985-95 1988-98 1992-02 1998-08 2004-14 Source: World Bank (2015a) based on WDI. Source: MSPAS et al. (2009 and 2015) Note: Rates are calculated for the 10 year period prior to each survey date, 1977-1987….2004-2014. much higher in the Northwest and the Northeast 2000, among the 18 to 30-year-old population, regions. The rate of decline varies. The rate for women had only 82 percent of the schooling the Central region has halved since 1997 and the of males, but by 2014 they had 92 percent. The rate for Petén has halved just over the past greatest increase was for indigenous women, decade, but the Metropolitan region has experi- the most disadvantaged group. In 2000 they enced exactly the opposite trend, reflecting the had 35 percent of the schooling of non-indige- rise in urban extreme poverty discussed in the nous males, but by 2014 they had 63 percent. In previous chapters (figure 3.10). absolute terms this remains a wide gap but at the same time represents real and positive change. Education Nevertheless, disparities by location and ethnicity Guatemala’s substantial increases in education remain striking (figure 3.13). Rural inhabitants levels have exceeded those of its peers. Between have, on average, only 5.8 years of schooling, 1970 and 2010, Guatemala’s rate of increase in compared to 8.6 in urban areas. The gap between years of schooling outstripped most of its peers, indigenous and non-indigenous people is 2.4 with only Bolivia, El Salvador, and Brazil having years of education. Overall, the gender gap is rel- improved faster (figure 3.11). Overall there has atively small, just over half a year. However this been a significant improvement in schooling: masks two important features: non-indigenous those who have gone through the school system women have less of a gender gap, having levels more recently (18 to 30 year olds) have 2.3 years of education that are only 0.2 years less than more schooling than the population as a whole. their male counterparts compared to a 1.2 year This progress has been evident across most gap between indigenous men and women. Also, groups, and some of the most disadvantaged have indigenous women have 2.1 years less education had faster rates of improvement (figure 3.12). In than the national average. Despite these short- Inclusion and Exclusion 49 FIGURE 3.11 Gu t m l ’s L v l of FIGURE 3.12 Som Pro r ss H s Educ tion Is W ll b low Its P rs but B n M d on Closin th L r G ps H s B n Risin F st in Schoolin Average years of schooling and change Change in the attainment ratio between groups over time, 2000 to 2014 12 350 1.0 Share of education of higher group 300 Percent change 1970-2010 10 Average years of schooling 0.8 250 8 200 0.6 6 150 0.4 4 100 0.2 2 50 0 0 0.0 DOM F m l / Rur l/ Indi / F m Indi / M l Indi / GTM HND MEX BRA URY ARG COL BOL CHL PAN PRY ECU JOR SEN PER ALB SLV LVA LTU NIC CRI M l Urb n Non Indi F m l M l Non Indi Non Indi Av r rs 2010 Ch n 1970-2010 G p 2000 G p 2006 G p 2014 Source: EDSTATS. Source: Calculations based on the 2000, 2006, and 2014 ENCOVI Note: The share of the groups with the lower level is divided by the share of the group with the higher level. FIGURE 3.13 Educ tion L v ls in Gu t m l R m in Low nd Un qu l Years of Schooling, 2014 10 8.6 8.3 8.2 8.1 rs of duc tion 8 7.3 7.6 7.0 6.2 6.4 5.8 5.8 5.8 5.9 5.7 6 5.2 5.2 5.0 4.8 4.1 3.7 3.7 4 3.3 Av r 2 0 M l F m l Urb n Rur l Non-indi . Indi . Non-indi . Indi . Non-indi . Indi . Tot l G nd r Loc tion Ethnicit M l F m l All 18-30 rs old Source: Calculations based on the 2014 ENCOVI. comings, if these rates of convergence continue, there are few differences by location and ethnicity the historic inequality in education can be erased. as primary school enrollment became almost At the primary education level, Guatemala has universal in 2009. Between 2000 and 2006, the made significant strides, both in increasing schooling gap due to ethnicity in Guatemala went overall coverage and in decreasing inequities in from around 3.5 years to less than a half year, a access. In sharp contrast with earlier periods, significant achievement (Ferreira et al, 2013), 50 Inclusion and Exclusion although literacy rates still vary by ethnicity. In increased the probability of successful comple- 2014, the Q’eqchi had the lowest literacy rates in tion of primary school by only 2.4 percent.21 any language at just under 67 percent (figure Additionally, the primary school enrollment 3.15), compared to a national rate of 84 percent. drop-off preceded that of the pre-school enroll- However, they have the highest literacy rates in a ment drop-off, and the pre-school attendance Mayan language.19 The Kakchikel have the rate has started to recover whereas this is not the highest literacy rate of any indigenous group at case for the primary school rates. This suggests 78 percent, which however is 6 percentage points that, while declining pre-school enrolment may below the national average. have been part of the cause, it is not the only one A cause of concern is that universal primary and, of course this begs the question as to why enrollment has declined since 2009. Even since pre-school attendance fell. A second hypothesis reaching near universal enrollment in 2009 (99 about the changing primary school enrollment percent) enrollment has fallen and, by 2014, net rate is that the denominator, or the number of primary school enrollments had fallen to 82 children of school age, is wrong and has become percent, which was even lower than it had been less accurate over time given the large-scale in 2000. A simple analysis of changes in the role international migration of children. In the of different factors on enrollment shows that absence of a new census this hypothesis cannot there have been changes since 2000 in terms of be tested. It is hoped that the new census will be geographic areas and ethnicities.20 In 2000, fielded soon as understanding and addressing the children outside the Metropolitan region were factors affecting these negative changes in slightly more likely to attend primary school than enrollments is critical if recent gains in schooling those in the Metropolitan region. However, by are not to be lost. Finally, other factors, such a 2014, this has changed for children in the rising demand for child labor or worsening of the Northwest, Southwest and Northeast who security situation may be affecting enrollment. became less likely to attend school than those in Further concerns exist regarding the levels of the Metropolitan region. The probability of educational attainment at the secondary level. enrollment among indigenous children overall The share of children aged 15 to 19 years old also declined slightly, and this decline was higher who have not completed the nine years of than for groups. There are two hypotheses as to schooling mandated in the 1985 Constitution is why this change is occurring. First, pre-school high (figure 3.16).22 And only Nicaragua, among attendance also fell, and there is a link between Guatemala’s peer countries, has a lower second- pre-school attendance and the transition to ary school completion rate. Given where primary school. However, a recent study in Guatemala started, even with the recent increases Guatemala found that pre-school attendance in secondary enrollment rates, secondary Knowledge Gap What are the key factors driving the recent decline in primary school enrollments? What role does pre-school attendance play (and why has this fallen), has the demand for child labor risen, or do migration and a worsening security situation play a significant role? Inclusion and Exclusion 51 FIGURE 3.14 Prim r Enrollm nt B c m FIGURE 3.15 Lit r c R t s in Both Sp nish Almost Univ rs l But Shows Si ns of R v rs l nd M nL n u s V r b Groups Net Enrollment Rates, 2000-2014 Literacy by Language and Ethnicity, 2014 100 100 88.8 76.9 63.0 70.4 67.4 80 80 40.3 P rc nt of popul ton 60 60 P rc nt 40 40 40.3 20 20 63.0 76.9 67.4 88.8 70.4 0 0 Non-indi Oth r Q´ qchi´ K qchiqu K´ich ´ M m 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Pr -prim r Prim r Sp nish M n Low r s cond r Upp r s cond r Source: UNESCO, 2014a and Ministry of Education, 2015. Source: Calculations based on the 2014 ENCOVI. FIGURE 3.16 Gu t m l H s Low L v ls FIGURE 3.17 L v ls of Compl tion of Educ tion l Att inm nt Comp r d Ar much Low r in Rur l Ar s, to th R st of C ntr l Am ric Esp ci ll for Girls Grade Attainment by 15-19 year-olds in Central America Years of Schooling Completed by Gender and Location in Guatemala, 2014 100 100 80 80 roup 60 60 P rc nt P rc nt of 40 40 20 20 0 0 1 2 3 4 5 6 7 8 9 1 2 3 4 5 6 7 8 9 Y rs of schoolin succ sfull compl t d Y rs of schoolin succ sfull compl t d P n m 2013 Cost Ric 2014 El S lv dor 2013 Hondur s 2013 Nic r u 2009 Gu t m l 2014 Rur l-Girls Urb n-Girls Rur l-Bo s Urb n-Bo s Source: World Bank (2015) and calculations based on the 2014 Source: World Bank (2015) and calculations based on the 2014 ENCOVI. ENCOVI. enrollment remains lower than the levels in its very quickly after that. Only half of the enrolled peer countries (see Figure 4.32). In Guatemala, children finish their first year of secondary the drop-off in enrollment is fairly steep: there is school. Gross enrollment in secondary school is almost universal enrollment in the first grade of 65 percent, the lowest in the Central American primary school, but the rates begin to drop off region, and the net rate of 47 percent is well 52 Inclusion and Exclusion below both the LAC and CA averages. High access to basic infrastructure—electricity, water, repetition rates—one in eight primary students and sanitation—and services—education, health repeats a grade—contribute to this low attain- care, and social protection—persists in much of ment. Critically, the educational gaps after the Guatemala. Access to infrastructure has in- primary level begin to divide along ethnic, creased in recent years, but coverage is far from geographic, and gender lines. By the age of 18 the universal. There are clear geographic patterns of enrollment gap between indigenous and non-in- access to services (figure 3.18). Those living along digenous youths is close to 15 percentage points, the corridor linking the Caribbean and Pacific and there is a 20 percentage point difference ports have greater access to electricity, water, and, between the share of rural girls who complete 9th especially, sanitation, while those in the poorer grade and the share of urban boys who do so regions of Northwest, Petén, and the Northeast (figure 3.17). have significantly fewer services. Guatemala’s 90 percent access rate to electricity is the fifth worst in LAC (behind only Honduras, Haiti, Nicaragua, Limited Opportunities: and Guyana). Reflecting the duality in Guatema- Infrastructure and lan society highlighted in Chapter 1, 97 percent of the population in the Metropolitan region has Services access to electricity while only 54 percent of the The human capital outcomes discussed people in Verapaz do. In addition to inequities above are affected by inequities in access to basic in physical access to electricity, high electricity infrastructure and services. Low and unequal prices hinder access to electricity in practice FIGURE 3.18 Acc ss to B sic S rvic s FIGURE 3.19 Acc ss to B sic S rvic s Usu ll But Not Alw s R fl cts Mon t r H s Improv d in R c nt Y rs But This H s W ll-B in Not L d to Conv r nc Access to Electricity by Poverty Levels and Change in Access Status of Department, 2014 to Basic Infrastructure, 2000 to 2014 100 Percentage of households 80 Electicity Less than 70 60 70-80 80-90 More than 90 40 20 Poverty Less than 50 0 50-56 N tion l Non indi . N tion l Non indi . N tion l Non indi . Indi . T60 B40 T60 B40 Indi . Indi . T60 B40 59-65 67-70 More than 73 W t r S nit tion El ctricit 2000 Ch n 2000-2014 Source: Calculations based on the 2014 ENCOVI. Source: Calculations based on the 2000 and 2014 ENCOVI. Note: Access is defined as: having electricity, running water, a flush toilet or improved latrine in the dwelling. Inclusion and Exclusion 53 and perpetuate social exclusion. Lower-income has limited sanitation services and Sololá has households are more vulnerable to high electric- little access to piped water). The initial high levels ity prices because energy expenditures account of inequality in service access mean that ethnic for a larger share of households’ expenditures. In and socioeconomic characteristics continue to be periods of high oil prices, the cost of electricity correlated with access to basic infrastructure, can become unaffordable for the lower strata of despite the positive progress that has been made population. Therefore, the recent drop in prices (figure 3.19). Access to sanitation has increased has been a boon. for all groups. This is the service both with the The share of the population covered by basic lowest coverage and with the largest gains. services has increased in the past 15 years. However, gaps between groups remain. Even if Similar to the trends in enrollment rates, access access continues to expand at recent rates, to infrastructure increased more quickly for the universal coverage is still not going to be bottom 40 percent of the population and for achieved in the short run. indigenous groups, helping to start to close the The extent to which a child has access to basic gap between the “two Guatemalas.” The provision infrastructure in Guatemala depends on the of basic services largely mirrors the concentra- characteristics of his or her household. As shown tion of welfare and population in the depart- above, there is an equity gap in access to services ments around the capital, although geographic in Guatemala due to a lack of universal coverage. patterns of coverage are not completely correlated There is an additional equity gap that occurs with poverty. Suchitepéquez and Sololá, which because access to social infrastructure is not have quite high poverty rates, also have high evenly or randomly distributed but instead is coverage of electricity (although Suchitepéquez correlated with specific characteristics of the FIGURE 3.20 Circumst nc s Aff ct FIGURE 3.21 Cov r nd th HOI for Childr n’s Acc ss to B sic S rvic s S nit tion Ar P rticul rl Low in Gu t m l Human Opportunity Index, 2000 and 2014 99 97 90 HOI Cov r 100 92 92 90 HOI Cov r 87 86 80 90 78 80 73 70 70 68 70 60 60 53 Percent Percent 50 45 44 50 40 40 32 29 30 30 20 20 10 10 0 0 2000 2014 2000 2014 2000 2014 Br or r Ar om o C il Do u u Ni Bol . El m s p do M hil l c in r r Ec Ric c ivi bi u lv l d Co xi r st u .R nt Gu ndu P P El ctricit W t r S nit tion u Co ru Ho r m t U S Source: Based on the 2000 and 2014 ENCOVI. Source: Lac Equity Lab based on SEDLAC and World Bank, Note: Circumstances are location, gender of the child, parental downloaded October 2015. Based on the 2000 and 2014 ENCOVI. education and income, and ethnicity. Note: Circumstances are location, gender of the child, and parental education and income. Ethnicity is not included as a circumstance. 54 Inclusion and Exclusion FIGURE 3.22 Whil Loc tion Is B comin L ss Import nt in Expl inin Acc ss to S rvic s, Ethnicit Continu s to B K Expl n tor F ctor Decomposition of the HOI D-Index by circumstance, 2000 and 2014 El ctricit 2014 S nit tion W t r El ctricit 2000 S nit tion W t r 0.0 0.1 0.2 0.3 0.4 0.5 0.6 K qchik l Kich M m P r c pit incom G nd r G nd r of th hous h Q qchi Oth r indi Urb n or rur l Numb r of Siblin s P r nt's duc tion Pr s nc of P r nts Source: Calculations based on the 2000 and 2014 ENCOVI. population. The World Bank’s Human composition effect is behind the recent improve- Opportunity Index (HOI), an equity-adjusted ments in the HOI. The small equalization effect measure of coverage, shows that the distribution suggests that inequities will persist as there will of service provision is such that household be slow convergence of coverage rates among welfare, ethnicity, parental education, and groups. geographic location, among other things, are The improvements in the HOI reflect changes highly correlated with access (figure 3.20).23 In in the role played by different circumstances in 2014, Guatemala had the third highest gap, as a explaining unequal access (figure 3.22). The share of coverage, in Latin America for electricity, significance of living in an urban area has the fifth highest for water, and the second highest declined, reflecting both the expansion of for sanitation. Levels of sanitation remain services beyond cities and the growing share of particularly low in Guatemala although the 2014 the population living in cities. Parental education figure represented a 17 percentage point increase and income also have decreased in importance. over 2000 (figure 3.21). The influence of these Ethnicity, in contrast, has increased in impor- circumstances on access has diminished over tance: a child of the Q’eqchi people continues to time, in part due to increased service access have a lower probability of accessing services across all circumstance groups (the so-called than other indigenous groups and the gap scale effect) and in part due to a change in the between Q’eqchi children and other indigenous underlying population, most likely due to groups has widened. The evidence for other increased urbanization. The equalization effect, indigenous groups is mixed, with some appearing or increased service provision to previously to have gained and other to have lost in terms of underserved groups appears as an important access to these basic services. factor driving an increase in the HOI for electric- Access to health care is also limited, and ity provision. For water and sanitation, the geographic disparities persist. Health care Inclusion and Exclusion 55 infrastructure has increased in the past 25 years. (figure 3.23). The departments with the lowest The number of primary health facilities, those facility to population ratios are Alta Verapaz used most by the poor, has increased by 44 (0.38 health posts per 10,000 inhabitants, well percent since 1990, and primary health centers below the standard of five health posts per 10,000 with beds for maternal and child health services inhabitants) and Guatemala City (0.26). have increased by 67 percent. The greatest The provision of health care in remote rural increases came after the Peace Accords. However, areas has increased although recent events may the overall provision of health services is still low, have changed this trend. An estimated 4.5 million and there are sharp inequities in this provision. people in remote rural areas rely on a basic The ratio of health facilities to population varies package of health services provided under the across the country, with the Northern and Coverage Expansion Program (Programa de Central regions having the lowest ratios. There Expansion de Cobertura or PEC). Under this are many fewer facilities in the Northwest where program, the government contracted with private a large share of the country’s indigenous and and non-governmental agencies to provide a rural populations lives. In the Petén area, also a basic package of health care via a mobile health poorer region of the country, primary health care system that visits each community once a month. facilities offer only a limited range of services The program has expanded access to health care FIGURE 3.23 Th Distribution of H lth F ciliti s P rp tu t s In quiti s in H lth Distribution of Primary Health Posts in Guatemala, 2013 Source: Ministry of Health, 2015 as cited in World Bank (2015a). 56 Inclusion and Exclusion and may be credited with contributing to the this new PHC model only covered 48 percent of improvements in health outcomes of recent years. communities in Guatemala. At its inception the program was meant to be Education services are also not evenly distrib- temporary, and the government is now rolling uted nor are they accessible to all children. At the out a replacement program. However, the primary school level, public provision of schools transition has not been smooth. In mid-2014 the is fairly even. Bilingual education has increased, government moved to close down the PEC. Of and 24 percent of all primary schools offer the 390 PEC contracts that were signed in 2014, bilingual education.26 Nonetheless, Guatemala 72 contracts were suspended in Huehuetenango, has the third highest HOI coverage gap in Latin Jutiapa, Southwest and Northern Petén, Izabal, America, suggesting that inequities remain. Also, Totonicapán, Quetzaltenango, Quiché, there are many barriers to accessing the second- Chimaltenango, Northwest Guatemala, El ary and tertiary levels. First, the distribution of Progreso, Alta Verapaz, and Chiquimula, leaving secondary schools is less even than that of approximately 2.3 million people with no access primary schools, and, as might be expected, areas to health care.24 As a result, the number of health with low population density are under-served. care visits nationally dramatically declined in Given the correlation between poverty and rural 2014.25 In February 2015, the Ministry of Public areas of low density, this means that the distribu- Health (MSPAS) cancelled the remaining PEC tion of secondary public schools penalizes the contracts, leaving a gap in service coverage until poor. At the departmental level, the poorer the April 2015 when the MSPAS started rolling out department, the lower the number of secondary its new primary health care (PHC) model using schools on a per capita basis (figure 3.24). The mobile health teams comprised of MSPAS staff reverse is true for primary school coverage, rather than NGO staff. By June 2015, however, reflecting in part the smaller size of rural primary FIGURE 3.24 Th Distribution of S cond r FIGURE 3.25 Th Distribution of Prim r Schools Und rs rv s Poor Ar s Schools Is Pro-Poor Lower Secondary Schools per Child of School Primary Schools per Child of School Age Age by Department Poverty Level by Department Poverty Level 0.010 0.016 0.009 0.014 0.008 0.012 schools/age13-20 0.007 schools/age6-12 0.006 0.010 0.005 0.008 0.004 0.006 0.003 0.004 0.002 0.001 0.002 0.000 0.000 10 20 30 40 50 60 70 80 90 10 20 30 40 50 60 70 80 90 D p rtm nt pov rt h d count (%) D p rtm nt pov rt h dcount (%) Source: Calculations based on the Education Census Data from Source: Calculations based on the Education Census Data from the Ministry of Education. the Ministry of Education. Inclusion and Exclusion 57 schools (86 students on average) than urban ones Additionally, at the secondary and tertiary (243 students) (figure 3.25). levels a significant share of schools are run by the private sector (figure 3.26). As of 2014, public FIGURE 3.26 Priv t Schoolin Is Mor FIGURE 3.27 Costs Ar B rri r to Pr v l nt t Hi h r Educ tion l L v ls Schoolin Share of Schooling by Provider, 2014 Reasons for Dropping out of Secondary School, 2014 100 6 100 9 15 15 80 80 54 30 60 60 Percent Percent 68 91 85 40 40 55 46 20 50 20 38 26 23 23 17 0 0 Pr -Prim Prim r Low. Upp r T rti r Gu t . Hond. Nic . C.R. E.S. S c. S c. 2014 2013 2009 2013 2013 No mon Not int r st d H s to work Public Priv t Coop r tiv F mil oth r Source: World Bank (2015) using the 2014 ENCOVI. Source: World Bank (2015) using the 2014 ENCOVI for Guatemala. Note: Other includes: school does not offer appropriate grade, pregnancy, repetition, and illness. FIGURE 3.28 P r nt l Educ tion Is Mor FIGURE 3.29 Th Rol of P r nt l Import nt in Expl inin Child’s Educ tion Educ tion on Enrollm nt H s Ris n Whil Th n Loc tion or Hous hold Incom Oth r F ctors H v F ll n The Decomposition of the D-Index The Decomposition of the D-Index of the HOI by Circumstance, 2014 of the HOI by Circumstance, 2014 50 2000 2014 Chil Arntin Br il Uru u 40 Dom. R p. Share of D-Index P ru P n m 30 Cost Ric Bolivi Colombi Ecu dor 20 P r u M xico El S lv dor 10 Hondur s Gu t m l Nic r u 0 0.00 0.01 0.02 0.03 0.04 0.05 si d r q r Ot m nd G hi .S k l l c. n/ s ld ch nt m du r qc Hh d n rI u No chi co r Gn n M Ki Ur ibli R Both p r nts in hous hold G nd r n Q in h 's ' PC ds K nt G nd r of th hous hold h d Numb r of Siblin s b r P H P r nt's duc tion P r c pit incom Urb n or rur l P Source: LAC Equity Lab based on SEDLAC and World Bank, Source: Calculations based on the 2000 and 2014 ENCOVI. downloaded October 2015. Note: Country data from 2012 or closest year. Guatemala data comes from the 2014 ENCOVI. To allow comparisons with other countries, ethnicity is not included as a circumstance here. 58 Inclusion and Exclusion secondary schools provided education to just the population with the goal of lowering poverty over half of the lower secondary school students. and inequality and equalizing opportunities. In This is the case even though it is mandated in the Guatemala, however, the fiscal system fails to do Constitution that this level of schooling be both this. In part this is because of the very low level of mandatory and free. At the upper secondary revenues that are collected, which puts consider- level, only 26 percent of all students receive able limits on what can be spent. Even within this education provided by the state. At the tertiary tight budget envelope, however, the fiscal system level, there is only one public university, which does little in the way of closing the income gaps accounts for just under half of all tertiary-level or removing inequalities in Guatemala. Fiscal students. The cost of the private provision of policy (direct and indirect taxes and transfers) schooling is a barrier to access. Half of the has no effect on national inequality as measured students who drop out of secondary school in by the Gini coefficient. Only when in-kind Guatemala do so for reasons of money, the benefits from health and education spending highest rate in Central America (figure 3.27). are taken into account does the Gini decline by Parental education continues to be the key 0.024 to 0.53, a very small change. Brazil, which determinant of a child’s school enrollment, which started with a similar level of income inequality reflects a lack of intergenerational mobility in as Guatemala, has achieved a decline of 0.14 in terms of education (figure 3.28). This is not its Gini, and Costa Rica has lowered its inequality unique to Guatemala as other countries in the by 0.12 percentage points. In terms of poverty the region show similar patterns. Nonetheless, given impact is worse. Overall fiscal policy has actually the low levels of education in Guatemala, the led to an increase in poverty. The few transfer effect of this is particularly negative. The impact programs that are progressive (direct transfers of parental education has grown over time, while that are both pro-rural and pro-indigenous) are household income and location have decreased small and have been reduced further since this in importance. Ethnicity continues to explain analysis was done, and their benefits are offset by enrollment although change has varied by the fact that a large share of tax revenues comes indigenous group. The effect has shrunk over from consumption taxes (see Chapter 4 for time for the Q’eqchi but risen slightly for the details). Households whose incomes fall between other Mayan groups (figure 3.29). the international extreme poverty line of US$1.25 per capita per day and the LAC extreme poverty line of US$2.5 per day are net payers into the The Role of Spending fiscal system. Nor does the system close the gaps and Institutions in between ethnic groups. The market income of the indigenous population has been calculated to be Limited Opportunities only 32 percent of that of the non-indigenous, and after all taxes and transfers had been taken Ineffective Spending into account, this only changed by 1 percentage Spending patterns affect the government’s ability point. While the conditional cash transfer pro- to provide universal access to basic services.27 gram is pro-indigenous, total education spend- Typically, governments use fiscal policy to ing and health spending are not and represent redistribute spending to the poorer segments of a much higher level of spending. Finally, fiscal policy does little to equalize opportunities in Inclusion and Exclusion 59 Guatemala, again in contrast with Brazil, where Only the writing of 6th grade students outper- the government was able to use fiscal policy to forms the Latin American average. Data from the equalize opportunities. Ministry of Education (MINEDUC) show that Overall, spending on education is only slightly the quality issues affect all grades: only one in progressive in Guatemala (figure 3.30). As might four upper secondary graduates has achieved the be expected, pre-school and primary spending is standard level in reading, and only 10 percent the most progressive whereas tertiary spending is have achieved the equivalent in mathematics quite regressive. Upper secondary school (World Bank, 2015). Further concerns about spending is skewed toward the non-poor, but it is educational quality are raised by Guatemala’s less inequitably distributed than overall (market) extremely high repetition rates. As will be noted income. However, tertiary education spending is in Chapter 4, one out of every eight primary more unequal than income equality overall. The school students repeats a grade in Guatemala, amount spent on tertiary education is only a almost double the rate in El Salvador, the country one-seventh of total education spending but, with the next highest rate. Only 62 percent of combined with upper secondary spending, children finish sixth grade on time, another benefits the upper income groups to the extent indicator of quality issues. While this represents that it is almost enough to make all education significant progress since 2000 when just 37 spending regressive. percent of Guatemalan children finished sixth There is evidence that public spending on grade on time, only Nicaragua and Honduras education is ineffective and inefficient. Concerns have lower levels. The quality of education about the quality of education center on the poor available to children is also related to the child’s scores that Guatemalan students achieve on circumstances. One proxy for education quality, international tests. Although these scores the share of children who finish 6th grade on improved between 2006 and 2013, Guatemala time, is low in Guatemala. However, the equi- still scores below the Latin American average on ty-adjusted level (using the HOI) was only 56. 3rd and 6th grade reading and math (figure 3.31). Ethnicity is one circumstance that is particularly FIGURE 3.30 Not All of Public Sp ndin Is Pro r ssiv Concentration Coefficient of Public Spending, 2010 Share of GDP 0.34 Condition l C sh Tr nsf r Dir ct C sh Tr nsf rs 0.48 Prim r Educ tion Sp ndin 1.39 Pr -school Educ tion Sp ndin 0.29 Low r S cond r Educ tion (B sicos) 0.44 Tot l Educ tion Sp ndin 2.61 Non-contributor p nsion 0.14 Tot l Soci l Sp ndin 5.79 Urb n Tr nsport tion Subsid 0.12 El ctricit Subsid 0.17 Upp r S cond r Educ tion (Div rs.) 0.15 H lth Sp ndin 2.38 M rk t Incom T rti lr Educ tion Sp ndin 0.35 -0.5 -0.4 -0.3 -0.2 -0.1 0.0 0.1 0.2 0.3 0.4 0.5 Source: Cabrera et al. (2014). 60 Inclusion and Exclusion FIGURE 3.31 D spit Improv m nts, FIGURE 3.32 Ev n th V r Poor Us L rnin Outcom s b low LAC Av r Priv t H lth S rvic s International Test Scores, SERCE Use of Public and Private Health Facilities by Quintile, 2014 and TERCE results in Latin America 540 100 523 520 513 511 508 80 49 50 52 49 Mean performance 500 67 60 Percent 480 460 40 440 51 50 48 51 20 33 420 400 0 3rd r d 6th r d 3rd r d 6th r d Q1 Q2 Q3 Q4 Q5 M n scor M th M n scor R din Gu t m l 2006 Gu t m l 2013 LAC 2006 LAC 2013 Public Priv t Source: EdStats. Source: Calculations based on the 2014 ENCOVI. strongly related to finishing 6th grade on time indigenous communities, the lack of health and whose impact has increased over time.28 professionals in the public system who speak Previous studies have estimated that anywhere indigenous languages is another barrier to between 17 to 69 percent of the gap in schooling accessing good health care. outcomes between indigenous and non-indige- A recent World Bank analysis has also sug- nous children is due to differences in the quality gested that health spending is inefficient. The of schooling that they receive.29 study found that simply increasing the efficiency As shown above, overall public spending on and not the amount of spending could create health care is regressive (figure 3.30).30 This is gains of the order of 12 percent in terms of true despite the fact that the vast majority of decreasing infant mortality and chronic malnu- individuals in the upper quintiles of the income trition and increasing child measles immuniza- distribution use private health care. However, tion coverage (figure 3.33).31 And while public they also use the services provided by the health spending is correlated with decreasing Guatemala Social Security Institute (IGSS) while child mortality, spending levels seem to have little poorer households are much more likely to use impact on malnutrition levels, perhaps reflecting MSPAS facilities for health care. Per capita the myriad factors that affect malnutrition spending by the MSPAS is only one-fifth to beyond access to health care (figure 3.34). one-fourth that of the IGSS, which has led to Inefficiencies stem from a lack of coordination inequities in the quality of care and to the overall among institutions that has led to duplication of regressiveness of public spending in this area. The efforts and a lack of economies of scale that could use of private health care by not only the rich but lower the costs of medical supplies and drugs. In also the poor is high, indicating a lack of access addition, while the MSPAS has been piloting to public health services and, perhaps, to the results-based budgeting for maternal and child perception of quality differences (figure 3.32). In health services since 2012, overall budgeting still Inclusion and Exclusion 61 FIGURE 3.33 In ffici nc : H lth Sp ndin FIGURE 3.34 H lth Sp ndin H s Littl nd Outcom s Imp ct on M lnutrition R t s Health Spending (% of GDP) vs Health Outputs 1.10 CHL BRA 200 3.0 Malnutrition and child mortality % Public health spending (% of GDP) JAM ARG 1.05 2.5 Health sector performance PRY COL URY 150 MEX 1.00 CRI 2.0 DOM PAN ECU SLV HND 0.95 PER 100 1.5 BOL 0.90 1.0 GTM 50 0.85 0.5 0.80 0 0.0 1 2 3 4 5 6 1970 1972 1976 1978 1974 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Public h lth sp ndin s % of GDP M lnutrition pr v l nc , h i ht for (% of childr n und r-fiv ) Mort lit r t , und r-fiv (p r 1,000 liv births) H lth xp nditur , public (% of GDP) Source: World Bank (2015a). Source: Calculations based on World Development Indicators, World Bank (1985) for spending 1978-1985, World Development Indicators for spending 1993-2006, and World Bank (2015) for spending 2007-2014. tends to be historical, based on existing services expansion of coverage, and a slight dip in spend- and infrastructure with some adjustments for ing as a share of GDP. This is unfortunate given inflation, further contributing to inequities. the clear, historical correlation between spending Inadequate controls on procurement and little and outcomes (figure 3.36). accountability have also led to the misuse of The government has made a strong spending funds, with some particularly big cases having commitment to pre-primary and primary been reported recently involving high-level education, but this appears to have come at the authorities such as the IGSS Board and a former expense of secondary education.33 Public Minister of Health. spending on these two lower education levels amounts to 61 percent of total education spend- Inadequate Spending ing, which is higher than that of all but one other A further limitation on human capital formation Central American country. Between 2007 and in Guatemala is simply that spending is too low. 2013, per capita spending on pre-primary and Guatemala spends a significantly lower amount primary students rose, with pre-primary spend- on education as a share of GDP than its peers ing increasing by over 60 percent (from US$272 (figure 3.35). Public education spending has to US$446) and primary increasing by 6 percent increased as a share of GDP, reaching 3 percent at (from US$480 to US$509). Meanwhile, enroll- its peak in 2010, up from 2.7 in 2007.32 Howev- ments also rose (by 11 percent in pre-primary er, on a per capita basis, spending has actually and 2 percent in primary). The net effect was to declined since 2009 by almost 13 percent in real substantially increase the amount of resources terms, which reflects population pressures, the going to these two levels. However, given the 62 Inclusion and Exclusion FIGURE 3.35 Educ tion Sp ndin FIGURE 3.36 Sp ndin on Educ tion Is Low in Gu t m l H s B n Eff ctiv Spending on Education by PC GDP Public Spending on Education (%GDP) vs Educational Output Public expenditure on education as % of GDP 12 100 3.5 Public spending on education, (%GDP) School enrollment, primary (%net) 10 3.0 80 2.5 8 BOL 60 2.0 6 BRA HND CRI MEX OECD 40 1.5 LMC COL URY 4 SLVECU NIC 1.0 GTM PAN 2 20 LKA 0.5 PER 0 0 0.0 0 10000 20000 30000 40000 50000 60000 1978 1979 1980 1981 1982 1983 1999 2000 2001 2002 2003 2004 2005 2006 2008 2009 2010 2011 2012 2013 2014 2007 GDP p r c pit , PPP (const nt 2005 int rn tion l $) School nrollm nt, prim r (% n t) Prim r compl tion r t , tot l School nrollm nt, s cond r (% n t) rowth Public sp ndin on duc tion, tot l (% of GDP) Source: World Bank (2015). Source: Calculations based on World Development Indicators, World Bank (1985) for spending 1978-1985, World Development Indicators for spending 1993-2006, and World Bank (2015) for spending 2007-2014. limited overall budget envelope available for health posts in 2013 was only enough to supply a education, this resulted in a drop in per capita population one-fifth the size of Guatemala’s and secondary spending of 12 percent as enrollments that secondary-level health facilities would be rose while the overall level of spending remained adequate for a population one-quarter the size of the same. The low spending on secondary the present one. In short, even if public health students (just under half of that spent on primary was perfectly targeted to the poor, only one-half students) is a serious barrier to increasing of the poor would have access to secondary secondary enrollment and to improving the health services and even fewer to primary health quality and equity of secondary education. At the care. The government has made an effort to direct lower secondary level, many of the richer more spending to health care: as a share of GDP, students opt for private schooling, an option health care spending has increased from 1.8 which is not available to poorer students. Among percent of GDP to 2.2 percent between 2007 and young people not attending secondary schooling, 2013. However, given the increase in the popula- 46 percent cite a lack of resources as the principal tion during that time, per capita spending cause, well above the 17 to 23 percent figures in remained flat (figure 3.37). This level of spending El Salvador, Costa Rica, and Nicaragua. is among the lowest in Central America. Levels of spending on health are too low to Importantly, private, out-of-pocket expenditures provide adequate health care to the population. in Guatemala are quite high, substantially higher In comparing actual levels of services to the than in LAC and in other lower-middle-income facility-to-population standards, recent data from countries (figure 3.38). the MSPAS have shown that the number of Inclusion and Exclusion 63 FIGURE 3.37 Sp ndin on H lth Is Low FIGURE 3.38 Priv t Exp nditur nd H s Not Ch n d in p r C pit T rms on H lth C r Is Hi h Per capita spending on Health (constant US dollars) Share of Spending by Public and Private 700 100 600 80 500 dollars PPP 2007 60 Percent 400 300 40 200 20 100 0 0 2007 2008 2009 2010 2011 2012 2013 1995 2000 2005 2013 2013 2013 2013 Gu t m l CA LAC LMI Gu t m l P n m El S lv dor Nic r u Hondur s Cost Ric Priv t Public Source: World Bank (2015a). Source: GT MSPAS: National Health Accounts (2015) and WDI (2013) as cited in World Bank, (2015a). Note: CA is Central America, LMI is lower-middle-income countries. Inadequate Institutions below the original approved budget: in 2010 it The negative effects of inadequate social spending had been 23 percent higher. For the Ministry of are compounded by Guatemala’s weak institu- Health, the differences were also large - minus 8 tions. The overall institutional weaknesses in percent in 2008, 11 percent in 2009, and 13 per- the country further limit the ability of the line cent in 2011. This variation in available resources, ministries to provide quality services. The way combined with delays in releasing budget funds in which budgets are determined provides little each year, makes it difficult for the line ministries room for empirically based policymaking.34 to plan and to follow through on their policy Aside from the results based budgeting (RBB) objectives. Budget delays also affect the RBB agreement piloted between the MSPAS and the implementation. Ministry of Finance for child and maternal health The institutions within each sector are frag- and nutrition related services, the budget process mented and have limited oversight. In the case of is largely driven by historical budget trends, thus health, a lack of coordination within the health maintaining traditional inequities in spending sector has contributed to the inefficient use of and impeding efforts to target spending to poorer resources. The MSPAS lacks resources to cover a areas or populations. At the same time, consider- large portion of the population and the IGSS able uncertainty is created by the budget process mainly provides services to Guatemala City. The itself. The variation in the composition of the fragmentation of systems increases costs. While executed budget compared to the original allo- there are recent efforts between the MSPAS and cation was double the international standard in IGSS to jointly purchase certain medicines with 2011. For the Ministry of Education, this meant other countries in Central America, further that the end of year budget in 2008 was 9 percent coordination is needed (e.g. having a single medicines list and standardized bidding 64 Inclusion and Exclusion documents, and having an integrated public terms of creating a unified management informa- policy on medicines) to increase economies of tion system (MIS) and of increasing accountabil- scale in medicines and equipment purchases. In ity. To date, the MIS has linked together the addition, although the MSPAS has piloted Hospital Information System and the Health integrated service delivery networks in some Management Information system (SIGSA). A areas, the overall patient referral and counter-re- new database on staff is being created by MPSPA ferral systems remains weak leading to overuse of to form an Integrated Human Resource expensive tertiary care services. At the same time, Information System (IHRIS). However, there are the MSPAS has neither the resources nor the still gaps in the system that limit both quality and capacity to carry out its supervisory role of the outcomes. Improving monitoring and evaluation sector. A similar situation exists in the education systems is also a key to increasing transparency sector where legal issues are affecting the ability and accountability in the health system, which of the education system to provide high quality continues to face challenges on this front. The services. The 25-year-old Education Law still new census of public employees that is under lacks the bylaws needed to formally define the discussion by the government that will collect responsibilities of the different actors in the and link information on contractors, employees, sector, which has led to fragmentation and and procurement systems is a concrete step inefficiencies in the system.35 The existence of a towards increasing transparency in the sector and series of newer laws enacted since 1991—the also, it is expected, the effectiveness of spending. 1995/96 Peace Accords, the current Law of the Executive Power (Community Participation), and the regulatory framework for decentralization— The Link between further complicates the issue of institutional Limited Opportunities responsibility and also requires institutional strengthening at the local level. and Poor Human Capital Institutions have weak monitoring and Outcomes evaluation systems and this affects the costs and The low levels of services and infrastruc- quality of the services provided and limits ture in Guatemala play an important role in the accountability. Institutional fragmentation is country’s high and persistent levels of malnutri- mirrored in their information and monitoring tion. The UNICEF framework (1990) highlights systems. In the social sectors, for example, there the role that environmental factors such as are pieces of a strong monitoring system but access to water and adequate sanitation play in there is no coordination mechanism. In the determining malnutrition rates, along with food education sector, data are collected and dissemi- security and dietary diversity, health care, and nated on standardized tests scores and on the child care practices.36 (Potentially important data characteristics of all schools. Legislation in is in on food contaminates could not be included; see place for teacher evaluations to be carried out as Box 3.1.) Using data from the 2008/9 ENSMI (as well. However, these systems are not linked, data from the 2014/5 survey round were not yet teacher evaluations do not take into account the available) and following the method developed learning outcomes of their students, and the data in Skoufias (2015), we constructed a measure are not used systematically in policymaking. In of adequacy for each of these four factors and cal- the health sector, progress has been made in Inclusion and Exclusion 65 TablE 3.2  Correlates of Malnutrition, 2008-09 National Urban Rural Bottom 40 Top 60 Adequate Food 0.167* 0.023 0.298** 0.288** 0.002 (0.092) (0.129) (0.123) (0.139) (0.117) Adequate Care 0.239*** 0.133 0.350*** 0.215 0.180* (0.076) (0.118) (0.100) (0.137) (0.095) Adequate Environment 0.546*** 0.312** 0.388* 0.426*** 0.259*** (0.074) (0.140) (0.206) (0.155) (0.089) Adequate Health 0.059 0.127 0.005 -0.101 0.173** (0.054) (0.089) (0.066) (0.071) (0.080) Constant -1.878*** -1.699*** -1.961*** -2.034*** -1.550*** (0.045) (0.131) (0.050) (0.051) (0.070) Observations 3,670 1,376 2,294 1,953 1,717 R-squared 0.044 0.010 0.018 0.014 0.019 Source: Calculations based on the 2008-9 ENSMI. Note: The dependent variable is the height for age z-score for children age 0-23 months. Box 3.1  Is it Food Contamination? What Role do Mycotoxins Play in Malnutrition in Guatemala? One unknown in Guatemala is the role that mycotoxins (aflatoxins and fumonisins, fungi that contaminate corn and other food crops) are playing in chronic malnutrition. Neither the UNICEF framework nor the analysis done in this study address the issue of mycotoxins. Aflatoxins and fumonisins are naturally occurring toxins produced by certain fungi. In high doses, they can lead to serious illness and even death in both humans and animals. These mycotoxins mainly accumulate on crops and grains in tropical regions and contaminate a wide variety of food crops and products, such as maize, peanuts, sorghum, and cassava. In corn, the fungi infect plants both prior to and after harvest. Poor growing conditions as well as inadequate storage conditions promote the growth of the fungi. The toxins pose serious health risks to humans and are closely linked to liver cancer and the suppression of the immune system, thus increasing exposed individuals’ vulnerability to other diseases. More recently, significant negative effects of aflatoxin on child growth have been reported (see Khlangwiset et al, 2015 for a review of the evidence on both child outcomes and livestock, while IITA, 2015 cites studies showing that stunting was 40 percent more frequent in areas with high aflatoxin contamination). Exposure to these mycotoxins can begin in utero and continue throughout life. In 2015 the International Agency for Research on Cancer (IARC) highlighted that, taken together, the few well-documented population-based studies and the mechanistic data in relevant animal models Box continues next page 66 Inclusion and Exclusion Box 3.1  continued suggest that mycotoxin exposure contributes to stunting, both independent of and with other risk factors. IARC suggested the need for further longitudinal studies of mycotoxin exposure and child stunting, including studies of the underlying mechanisms. There is evidence of aflatoxins and fumonisins in Guatemala. A study in 1976 indicated high levels of aflatoxins on the Pacific Coast (De Campos and Olsyzna-Marzys, 1979). A follow-up study in 1979 (De Campos et al, 1980) showed one in six corn samples to be contaminated with levels of aflatoxin well above acceptable levels. A 2002 study (Truckess et al, 2002) found aflatoxin contamination in samples of INCAPARINA, a high-protein, corn and cottonseed-based food supplement given to an estimated 80 percent of children in Guatemala in their first year of life. Most recently, another small study done by the Full Belly Project in 2012 (Pawloswski) found evidence of aflatoxins in peanuts in Estanzuela, Zacapa. A larger study (Torres, 2013) tested corn samples from across the country and found unacceptably high levels of aflatoxins in 27 percent of samples and high levels of fumonisms in 41 percent of the samples. Co-exposures to aflatoxins and fumonisins have also been documented. Recently, maize from 22 districts in Guatemala was analyzed and 36 percent of 572 samples tested positive for aflatoxins and 99 percent of 640 samples tested positive for fumonisins. The contamination levels are well above the permitted levels (Torres et al. 2015). The link between aflatoxins and stunting and other poor growth outcomes among children in Guatemala has not yet been proven. Gathering evidence of the role played by aflatoxins in malnutri- tion is critical. To date, efforts to reduce malnutrition have focused on health care (substantial investment in pre-natal and post-natal attention). Addressing the dangers of aflatoxins would require a completely different set of policy options and targets. Source: Data on Guatemala come from Torres et al. (2015) and Torres (2013). culated the correlation of these with the z-score in areas with limited access to sanitation (figure of height for age (stunting). In addition, we 3.39). Interestingly, the opposite correlation explored the interactions between these measures applies between access to water and the malnutri- of adequacy. Our results highlight how a house- tion rate, suggesting that there are important hold’s lack of access to infrastructure and its food interactions between water and other variables insecurity are both associated with malnutrition linked to malnutrition.37 The correlation is (table 3.2). greater in rural areas and among less wealthy Limited access to basic infrastructure is a key households. correlate of poor nutritional outcomes. At the The relationship between health care services departmental level in Guatemala, a lack of access and malnutrition is not as straightforward. to sanitation is linked closely with malnutrition Adequate health care for children is comprised of rates (stunting), with malnutrition being higher prenatal visits for expectant mothers (the World Inclusion and Exclusion 67 Health Organization’s standard of four visits), FIGURE 3.39 L ck of Acc ss to S nit tion births assisted by a trained medical profession Is Hi hl Corr l t d with M lnutrition R t s (including midwives), follow-up growth moni- Malnutrition and Sanitation by Departments, 2014 toring visits for newborns, up-to-date immuniza- tions, and Vitamin A supplements. For richer 100% Percent of household with santitation households, health care is significantly correlated 80% with taller children, but for other groups, and even nationally, receiving adequate health care 60% has no significant effect. This could be a reflec- 40% tion of lower quality services being available to the poor. Alternatively it may be an issue of 20% demand, in that only the sickest or those at the highest risk visit health facilities given the 0% 20 30 40 50 60 70 80 difficulties and costs of accessing health care for Stuntin R t poor and rural populations. Source: Calculations based on the 2014 ENCOVI and the 2014/5 Child care is a third correlate of malnutrition. ENSMI. Note: Adequate sanitation is defined only as having a toilet facility Adequate child care is difficult to measure. One in the dwelling: it was not possible to distinguish between component affecting childcare is the education of improved and unimproved latrines. a child’s parents, more particularly that of its mother. Evidence from other studies has shown diversity due to a lack of resources at some point that maternal education is highly correlated with in the previous three months. Thirty percent of child health and nutrition outcomes. However, households reported that at least one child in there are multiple ways in which education can their household had eaten less than he or she affect child care, which makes it an imperfect should have, and one in 12 households had at measure of the adequacy of child care. Therefore, least one child who ate only one meal or did not in this analysis child care adequacy includes a eat at all for one or more days (figure 3.40). measure of a women’s empowerment, specifically Among the extreme poor, levels of food insecu- her ability to make decisions about household rity are much higher, with 45 percent of house- purchases. A measure of breastfeeding practices holds reporting that at least one child in the and the timing of complementary foods has also household had eaten less than he or she should been included as part of child care. The greatest have, one-quarter of households reporting that effects of adequate child care can be found in their child(ren) had had to miss a meal, and one rural areas, suggesting that child care may be of in eight extremely poor households reporting particular significance in areas with limited that their children had eaten only one meal a day health care and more inadequate sanitation. or none at some point over the previous three Poverty and food insecurity are fundamental months. Among ethnic groups, the Mam, the correlates of malnutrition. Having access to non-indigenous, and the Kaqchiquel have similar adequate food is correlated with taller children. levels of food insecurity. The group with the However, there is substantial evidence of food lowest food security appears to be the Q’eqchi. insecurity in Guatemala. As noted earlier, slightly These patterns reflect the inability of households more than half of households (53 percent) have to smooth their consumption due to poverty, a reported that their children ate a diet limited in lack of storage infrastructure, and the annual 68 Inclusion and Exclusion FIGURE 3.40 Food Ins curit Aff cts M n Hous holds Food constraints due to lack of resources (percent of households) 50 40 P rc nt of hous holds 30 20 10 0 Extr m Mod r t Non-poor K´ich ´ Q´ qchi´ Oth r indi . K qchiqu l M m Non-indi . Pov rt Ethnicit E t l ss th n should Hous hold r duc d food Miss m l F l hun r without E t onc durin b in bl to t d or not t ll Source: Calculations based on the 2014 ENCOVI Note: The question posed to households was: “Due to a lack of resources, in the last three months did any child….? Moderate poverty refers to those people living under the overall poverty line but above the extreme line. agricultural cycle. April to August are considered being correlated with greater height for age, it is to be the months of greatest food insecurity in expected that the interactions between the factors Guatemala.38 Although the agricultural sector would provide an additional effect beyond the employs a large share of the poor, the vast sum of the two individual effects. However, the majority of households in Guatemala (83 evidence for this synergy effect is mixed. Only percent) are net food consumers and thus are among the poor is there a significant positive sensitive to food price changes. It has been interaction effect, specifically between food and estimated that rural poverty grew by 1 percentage health, and between child care and heath. For point because of the food price increases of 2008 rural populations, there are some synergies, (Robles and Torero, 2010). depending on the specifications of the model, There is limited evidence of positive synergies between environment and health and child care among the four factors. The analysis highlights and health. the significance of each factor with regard to Other health outcomes are affected by a lack of malnutrition. Compared to inadequate levels of access to electricity, especially for cooking. More all four factors (which characterizes a startling 41 than half of the population of Guatemala relies percent of all Guatemalan children), having on solid fuels, mostly wood energy, for cooking adequate levels of both food and health care is and heating. About 2.4 million or more than 70 correlated with the greatest height gain. Having percent of Guatemalan households cook and heat adequate levels of both food and child care is their houses with traditional stoves. More than 50 linked with the next highest level of height, percent cook primarily with wood, while an followed by having both, food and adequacy in additional 20 percent of households cook with environment factors (water and sanitations). wood in combination with other fuels (referred However, in addition to each individual factor to as “fuel stacking”). Using traditional stoves for Inclusion and Exclusion 69 Knowledge Gap The data available for the analysis of the UNICEF framework are from 2008/9. Since then the Government of Guatemala has implemented two important programs aimed at improving child malnutrition. While the overall rate of malnutrition has fallen only slightly, there are large varia- tions across groups and areas, and other health indicators have changed. An analysis of the 2014/5 data of the ENSMI, when they become available, will shed light on these recent changes and provide inputs into the government’s new nutrition policies. Collecting additional data on food contamination, specifically aflatoxins in corn, will also be needed to determine what, if any, role this plays in chronic malnutrition. cooking has negative implications for health as communities to escape the poverty trap. The poor well as being costly for households financially. are disproportionally affected by these effects as Traditional cooking adversely affects the health of they are the most reliant on traditional stoves and women who cook and the children in their care, wood for cooking. causing almost 5,200 deaths every year due to Socioeconomic mobility is affected by indoor air pollution. Traditional stoves also emit infrastructure and human capital. Between 2000 pollutants, with each stove producing approxi- and 2011, those rural municipalities that moved mately three tons of carbon dioxide annually. The up from being among the poorest (those with heavy reliance of Guatemalan households on more than 75 percent of their population in solid fuel for cooking is the highest in Central poverty) to being in the next group (those with America. Guatemala has the highest level of 50 to 75 percent of their populations in poverty) annual mean air pollution exposure in Central had very different characteristics from that stayed America, measured in particulate matter in the poorest group. Access to services, such as (PM2.5). Guatemalan families who use tradi- water, sanitation and electricity, was higher in tional stoves and purchase wood spend an those municipalities with falling poverty, road average of 40 percent more money each month density (and thus access to markets, economic on overall cooking costs than similar households opportunities, and other services) was higher who use improved, higher efficiency stoves. (figure 3.41), and the share of indigenous people Additionally, cooking with traditional stoves has lower (figure 3.42). An earlier study analyzing gender implications since women devote around synthetic panels between 2000 and 2006 had 11 hours a week collecting wood and around 13.5 similar findings.39 The lack of human capital, hours a week cooking. Forest degradation is also along with geographic location, ethnicity, and a a consideration since traditional stoves consume lack of job opportunities had prevented segments more than twice as much wood as improved of the population from benefitting from eco- stoves, and the depletion of natural resources, nomic growth during those years. Households negative health effects, and time devoted to that were poor in 2006 had had very different non-income generating activities hinder rural characteristics in 2000 than those that were not development by limiting the ability of rural poor in 2006. In 2000 they were more likely to 70 Inclusion and Exclusion FIGURE 3.41 Incr sin Ro d Acc ss to FIGURE 3.42 Pov rt in Indi nous M rk ts, Economic Opportuniti s, nd Municip liti s H s B n R duc d L ss Th n S rvic s H s H lp d to R duc Pov rt in Non-indi nous Municip liti s Road Density by Municipality Types, 2000-2011 Municipality Types by Concentration of Indigenous Peoples, 2000-2011 1 7 .8 Index of road density 6 5 .6 Percent 4 .4 3 2 .2 1 0 0 0 .2 .4 .6 .8 1 M jorit M jorit Poverty Rate in 2011 indi nous non-indi nous Chronic ll poor Improv d Below mean Linear fit Chronic ll poor Improv d Source: Baez et al. (2015) Source: Baez et al. (2015) Note: Chronically poor municipalities (orange circles) are those Note: Chronically poor municipalities are those that had an overall that had an overall poverty level of over 75 percent in both 2000 poverty level of over 75 percent in both 2000 and 2011. Improved and 2011. Improved municipalities (brown circles) are those where municipalities are those where over 75 percent of their population over 75 percent of their population were in poverty in 2000 but were in poverty in 2000 but where this figure has been reduced to where this figure has been reduced to under 75 percent by 2011. under 75 percent by 2011. have been working in the informal sector, to have further concern is the fact that, the returns to significantly lower levels of education, and to live schooling vary by both ethnicity and gender in rural areas. The education gap between heads (figure 3.43). The gap between indigenous and of household who were poor in 2006 and those non-indigenous workers in terms of returns to who were in the middle class was 3.5 years in any level of schooling is large and has remained 2000.40 Seventy percent of those who were poor fairly constant in recent years. Earlier analysis in 2006 had been rural residents in 2000, and 80 found that, despite women having more educa- percent had worked in the informal sector. tion than men, they earn less, in what is referred It is important to recognize, however that to as hyper-discrimination.41 This differential in human capital endowments alone do not fully earnings unrelated to endowments may well explain labor market outcomes and welfare explain why female labor force participation in outcomes. A Oaxaca-Blinder decomposition Guatemala has been so low. However, more using 2014 data shows that, while two-thirds of recent data show that, holding all else constant, the wage gap between indigenous and non-indig- women now earn slightly more than men (as of enous populations can be explained by differen- 2014), reflecting both an increase in endowments tial endowments, this leaves one-third (female education levels have risen, particularly unexplained. The wage gap between indigenous among indigenous women) and the returns to and non-indigenous workers is wider than the those endowments.42 gap between rural and urban workers. Returns to schooling are declining across the board, and of Inclusion and Exclusion 71 FIGURE 3.43 R turns to Educ tion V r b Ethnicit nd G nd r Earnings Premium on Education, Earnings Premium on Education Indigenous and Non-indigenous, 2006-2014 for Women and Men, 2006-2015 1.4 1.4 Percent difference compared to no education Percent difference compared to no education 1.2 2006 2014 1.2 2006 2014 1.0 1.0 0.8 0.8 0.6 0.6 0.4 0.4 0.2 0.2 0.0 0.0 Non-indi . Non-indi . Non-indi . Non-indi . Non-indi . nous nous nous nous nous M l M l M l M l M l F m l F m l F m l F m l F m l Indi Indi Indi Indi Indi Primary Primary Secondary Secondary Any Primary Primary Secondary Secondary Any incomplete complete incomplete complete tertiary incomplete complete incomplete complete tertiary Source: Calculations based on the 2006 and 2014 ENCOVI. Vulnerability food distribution schemes such as Vaso de Atol and Bolsas Escolares Solidaridad reach between The absence of a strong safety net in Guatemala 40 and 50 percent of the poor and are reasonably combined with the country’s vulnerability to well targeted. However, there is still substantial natural disasters and crime and violence may also leakage to the non-poor, and the absolute amount be playing a role in the persistence of poverty. spent on social assistance is dwarfed by social Guatemala is one of the countries that is most at security spending, which mainly benefits those in risk of natural disasters and is also afflicted by the top quintile (figure 3.45). A simple account- high rates of crime and violence. While the gov- ing exercise that compares poverty rates with and ernment has increased social spending in recent without the Bono shows very little change in years, the fact that around two and a half million poverty attributable to the Bono. Overall poverty additional people fell into poverty between without the Bono in 2014 would be only slightly 2000 and 2014 (and more than half of these into higher (60 percent compared to the actual 59.3 extreme poverty) suggests that the safety net is percent), and even if the Bono were perfectly inadequate.43 targeted, it would still only reduce poverty to Guatemala has increased social protection 58.1. The program’s effect on extreme poverty is spending in the past seven years, mainly through larger: in the absence of the program, extreme cash transfers and subsidies (figure 3.44). As poverty would be 24.9 percent instead of the shown in Figure 3.30 above, cash transfers are actual 23.4 percent. If existing leakage to non- progressive, with a majority of the benefit going poor beneficiaries could be eliminated, the to the poorest segments of the population. Bono program could lower extreme poverty by another Seguro (a conditional cash transfer program 0.8 percentage points or by almost 125,000 previously known as Mi Familia Progresa) and people.44 Reports about inconsistent payments 72 Inclusion and Exclusion FIGURE 3.44 Soci l Prot ction Sp ndin FIGURE 3.45 Th Bulk of Soci l Prot ction Is Low nd H s Not Ch n d sinc 2011 Sp ndin Go s to Thos in th Top Quintil Social Protection Spending as a Share of GDP, 2007-2014 Public spending by consumption quintile, 2015 8,756 3.5 3.3 8000 7,354 7,249 7,029 7,318 3.0 3.0 3.0 3.0 3.0 3.0 2.5 2.6 1.3 6000 2.5 1.0 1.1 1.1 1.1 1.1 Perecent of GDP Million quetzales 0.6 0.8 2.0 4000 1.5 2.0 1.0 1.9 1.8 2.0 1.9 1.9 1.9 1.9 2000 0.5 0.0 0 2007 2008 2009 2010 2011 2012 2013 2014 Q1 Q2 Q3 Q4 Q5 Soci l S curit Soci l Assist nc nd L bor Educ tion H lth Soci l S c. Soci l Assist. & l bor Source: World Bank (2015). Source: Calculations based on the 2014 ENCOVI. and cuts in benefits suggest that the program’s previous administration to coordinate programs impact may have declined in more recent years; (by creating the Ministry of Social Development the share of GDP spent on cash transfers fell and the new Unique Registry of beneficiaries) from a peak of 0.4 percent of GDP in 2010 to 0.1 and to improve targeting are positive develop- percent in 2013 (figure 3.46) while coverage ments. It is not clear, however, that the efficiency jumped up from 281,000 households to 758,000. gains from these actions can be enough to offset The increase in social assistance has been too the low and, in some cases, declining spending small to have any significant impact on poverty patterns. given the number of households covered by the To some extent remittances have played a conditional cash transfer program. Other cash social safety net function and have facilitated transfer programs, such as the non-contributory human capital accumulation. A study using data pension program, reach only a small share of from the early part of the 2000s found that their target populations (less than 20 percent), remittance-receiving households were more and their effect on welfare has not been studied.45 likely to spend their money on education and Low overall spending limits the ability of social housing than households not receiving remit- assistance programs to reduce poverty and tances.46 Households with emigrants were found promote shared prosperity. Social protection to have stunting rates 6 percentage points less spending has declined in the past four years, with than those for non-migrant households due to cash transfers taking a disproportionate hit the increased food security and lower morbidity (figure 3.46). Spending levels in Guatemala are facilitated by the receipt of remittance pay- below those of all of its Central American ments.47 Households with members who had neighbors: spending as a share of GDP is less migrated had greater food security and dietary than one-half the levels of Costa Rica and diversity.48 Finally, a survey of migrant house- Panama, countries with much higher GDP levels holds in 2005 showed that remittances provided than Guatemala (figure 3.47). Efforts by the 10 percent of equity financing for small Inclusion and Exclusion 73 FIGURE 3.46 Soci l Sp ndin FIGURE 3.47 Gu t m l ’s Soci l Is down from Its 2010 P k Prot ction Sp ndin L v ls Ar W ll b low Thos of Its N i hbors Composition of Social Assistance Social Protection Spending Spending in Guatemala, 2007-2014 as a Share of GDP, 2014 1.5 1.3 10 Soci l S curit 8.7 Soci l Assist nc 1.1 nd L bor 1.2 0.4 1.1 8 1.1 1.0 1.1 1.1 7.0 Percent of GDP Percent of GDP 0.4 6.2 0.1 0.1 1.6 0.9 0.8 0.4 6 0.1 0.3 5.0 0.1 0.1 0.4 2.1 0.4 4.0 0.6 0.1 0.1 0.1 0.6 0.4 4 7.5 0.1 0.3 0.1 2.6 0.8 3.0 0.1 0.4 0.3 0.3 0.3 5.4 1.1 0.3 0.4 2 4.1 0.3 0.3 0.3 3.3 0.1 0.2 0.1 0.2 2.4 1.9 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.0 0 2007 2008 2009 2010 2011 2012 2013 2014 14 13 13 13 3 13 01 20 20 20 20 20 r2 s Sickn ss nd dis bilit C sh Tr nsf rs do c m u l r Ri u m nd n lv Oth r Soci l Assist nc ALMPs Subsidi s r st t Ho P c S Ni Co Gu El Source: World Bank (2015). Source: World Bank (2015). businesses, well above the 2 percent provided by FIGURE 3.48 R mitt nc s Ch n the formal banking sector, and favoring agricul- S son ll nd with Economic C cl s ture where the presence of the banking sector is Seasonality of Remittance Flows particularly limited.49 600 Remittances, however, are a precarious safety net and not an ideal vehicle for human capital 500 accumulation. On the one hand, remittances are 400 Millions of US$ highly seasonal as many migrants work in 300 agriculture and construction, both of which tend to have a notable downward trend in the early 200 part of the calendar year (figure 3.48).50 100 Additionally, and more importantly, evidence 0 from the global financial crisis has shown that 1/1/05 7/1/05 1/1/06 7/1/06 1/1/07 7/1/07 1/1/08 7/1/08 1/1/09 7/1/09 1/1/10 7/1/10 1/1/11 7/1/11 1/1/12 7/1/12 1/1/13 7/1/13 1/1/14 7/1/14 remittances are pro-cyclical, rising with eco- nomic growth and falling during the crisis: the dip in remittances in 2009 was striking (see Source: Coello et al. (2015) based on Cheikhrouhou et al. (2006) chapter 2). In general, the share of households receiving remittances has fallen over time, from a then declined by 2014 (figure 3.50). However, the high of 22 percent of all households in 2000 to importance of remittances for richer households only 9 percent in 2014 (figure 3.49), and richer is greater in 2014 than in it was in 2000, suggest- households are more likely to receive remittances ing that much of the increase in total remittances than the poorest households. Overall, remittances to the country is going to richer households. as a share of household income rose in 2006 and Given this pattern, it is not clear how much the 74 Inclusion and Exclusion FIGURE 3.49 Th r H s B n Sh rp FIGURE 3.50 R mitt nc s H v B n Drop in th Sh r of Hous holds R c ivin D clinin in Si nific nc s Sh r R mitt nc s of Hous hold Consumption Share of Households Receiving Remittances, 2000-2014 Remittances as a Share of Consumption, by Quintile, Among Households Receiving Remittances, 2000, 2006, and 2014 40 40 38 35 34 30 31 Percent of consumption 29 Percent of households 30 30 27 27 24 24 25 23 22 23 23 20 19 19 19 20 18 17 18 20 15 12 11 10 11 9 10 10 4 5 0 0 Q1 Q2 Q3 Q4 Q5 Q1 Q2 Q3 Q4 Q5 2000 2006 2014 2000 2006 2014 Source: Calculations using the 2000, 2006, and 2014 ENCOVI. Source: Calculations based on the 2000, 2006, and 2014 ENCOVI. Box 3.2  The Changing Profile of Guatemalan Emigrants to the United States and Mexico Migration has had many causes in Guatemala. The first wave of emigration of Guatemalans to the US and Mexico began during the second phase of the civil war when large numbers of Guatemalan refugees escaped in the late 1970s. Violence related to the war in this period centered in the western Mayan highlands, forcing the local, mainly Mayan, populations, into refugee camps in Mexico. The negative impact of the war on economic growth also intensified labor emigration to both Mexico and the US. Today, however, the drivers of Guatemalan emigration to the US are different. In addition to a general lack of economic opportunity and high levels of inequality and poverty, a series of natural disasters has also led to Guatemalans leaving the country. In the past two years, the spread of the coffee rust fungus has affected 70 percent of Guatemala’s coffee crop, causing the loss of an estimated 100,000 jobs and a 15 percent decline in output. Hurricanes Mitch (1998), Stan (2005), and Agatha (2010) and a powerful earthquake on the southern coast in 2012 all increased emigration significantly. Crime and violence, connected to gangs, drug trafficking and criminal organizations, constitute additional drivers of emigration, together with Guatemala’s generally weak rule of law. Since 2012 a further characteristic of Guatemalan emigration has consisted of the ballooning number of unaccompanied minors (UAM). In 2013 over 75 percent (approximately 51,000) of UAMs apprehended by U.S. migration authorities came from El Salvador, Guatemala, and Honduras. Most Guatemalan migrants are young males with limited education and financial literacy, trying to support their direct family members at home. Overall, Guatemalan immigrants in the US tend to be Box continues next page Inclusion and Exclusion 75 Box 3.2  continued younger, poorer, and less educated than other US Hispanics, with recent migrants being less skilled than their predecessors. Thus, Guatemalan immigrants and their families tend to be the least well off migrant groups in the US even though they do not come from the poorest classes in Guatemala. Guatemalan immigrants in the US are also FIGURE B3.2.1 R c nt Gu t m l n becoming bimodal in terms of education Immi r nts to th US Ar L ss Skill d levels, suggesting that different factors were Th n th Initi l W v behind the decision to migrate during these Educational Attainment of Guatemalan Migrants at Age of Entry to the US for those who Arrived During two periods. Among both young adults and 1998-2000 and those Arriving from 2010 and Later adults, recent immigrants to the US are more 100 likely than those who arrived after the Peace 20.9 23.7 34.0 Accords to have at most a primary school 80 34.8 18.2 education. Recent immigrants aged between 15 60 16.0 and 24 are more likely than immigrants of the 59.7 40.5 same age from the earlier cohort to have 40 44.5 completed secondary schooling, but immigrants 9.0 45.5 20 7.9 over the age of 25 are significantly less likely to 16.5 15.8 11.6 1.6 have done so compared to their peers in the 0 15-24 25+ 15-24 25+ previous migration wave. In fact, whereas those 1998-2000 2010 Onw rds No school Prim r or l ss with some secondary education accounted for Incompl t S cond r Compl t s cond r or mor the large majority of post-1996 immigrants in Source: Calculations based on the 2013 American Community both age groups, they have accounted for one in Survey (ACS) and the 2000 US Census. Information for the most recent arrival cohort (2010 onwards) comes from the 2013 ACS two young immigrants and four in ten older while information on the post-Mitch cohort (1998-2000) comes from the 2000 US Census. The figure presents workers with three immigrants since 2010. As a result, the job skill levels: the unskilled, who completed primary schooling at most (including those with no formal schooling); the low-skilled, profiles of Guatemalan immigrants in the US who completed some secondary education; and the skilled, who have also changed. Before settling abroad, these have at least a secondary school education. workers were primarily engaged in agricultural activities, services, sales, and no skill activities, and as a result in the US they tend to work as unskilled workers, mostly in construction, services, restaurants, and hotels. This combination of lower educational attainment and concentration in low-skilled jobs of the recent waves of immigrants suggests that it is the less well-off who are increasingly emigrating from Guatemala. In other words, there has been a significant shift in the self-selection of Guatemalans who choose to leave the country in search of work. It remains to be seen what effect this will have on the levels of remittances (which, unexpectedly rose sharply in 2015). massive increase in remittances seen in 2015 (a Recent Guatemalan migrants to the US have 15.2 percent increase over 2014 levels) will affect significantly less education than previous waves poverty.51 A further reason why relying on of migrants, which could have a negative impact remittances as a safety net is precarious is the on the earnings that will be available for remit- changing nature of Guatemala’s migration flows. tances in the future. However, the 2015 76 Inclusion and Exclusion Box 3.3  The Downside of Migration While emigration provides opportunities for individuals and families to escape from violence, to find better economic opportunities, and to send much-needed income to their households in their country of origin, it is not without its costs. In addition to the Dutch disease discussed in Chapter 4, migration can have a high human cost. The migration experience itself can lead to negative outcomes for the Guatemalan emigrant, ranging from death or injury to various forms of labor exploitation. The migration corridor through Mexico is one of the busiest and most dangerous in the world (IOM, 2004). In a six-month period in 2010, more than 11,000 kidnappings of migrants were reported (CNDH, 2011). A 2013 survey on the southern border of Mexico revealed that almost 60 percent of emigrants from Central America suffered from at least one episode of violence while crossing the southern border including robbery, sexual violence, and extortion (Secretaria de Gobernación et al, 2013). Children and adolescents are particularly vulnerable, whether traveling in family groups or alone. Most of the migrants from Guatemala are undocumented in their destination countries. Being undocumented makes migrants vulnerable to exploitation. A recent study of female migrants from Guatemala working in southern Mexico found them to be victims of various forms of labor exploita- tion, from forced overtime, low or unpaid wages, restriction of freedom of movement and/or commu- nication to physical and sexual violence (World Bank, 2016). The families whom migrants leave behind also suffer from their absence. A study in the south-east of Guatemala documented how households whose head had migrated were excluded from social assistance and in-kind programs on the erroneous (as it turns out) assumption that migrant house- holds are better-off. A lack of empowerment and skills and a shortage of labor all can negatively affect the welfare of migrant-sending households as well (Coello et al. 2015). remittance story suggests that other factors, such as the increase in the number of migrants, are Convergence and increasing remittance levels (See box 3.2 for more Divergence details on the changing face of migration). Our analysis of the persistent inequities in Gua- Finally, migration has a downside as well, temala raises concerns not only about the present creating costs for migrants and their households but also about the future of the population. The as well as for the economy (See box 3.3 and the analysis has found that the distance between the discussion in Chapter 4.) “two Guatemalas” is shrinking slowly at best. Despite progress, in some cases quite significant progress, in improving several key indicators of non-monetary welfare, Guatemala’s low start- ing point means that the country will continue to lag behind its peers and, unless it is able to Inclusion and Exclusion 77 generate a faster rate of change than its peers, this tiveness to investors going forward. The lack of situation will continue. At the same time, other basic infrastructure and health care will continue indicators are not changing, leading to a diver- to cost the population in terms of morbidity and gence between Guatemala and other countries, mortality and act as a brake on economic devel- especially its economic competitors. There is a opment. There have been some positive trends risk to Guatemala in diverging from the devel- in terms of convergence on education test scores, opment paths of other countries. The fact that falling infant mortality rates, and better services poverty has not fallen and malnutrition rates related to childbirth, and this suggests that it is remain high creates concerns for the quality of possible to tackle the other problems that are pre- life of the population and for the strength of the venting social inclusion. While more spending economy. The continued large gaps in secondary is needed, institutional reforms are also needed and tertiary education access and attainment are to make spending more effective and to improve reducing Guatemala’s productivity, its ability to service delivery. create well-paid, sustainable jobs, and its attrac- References Case, Anne, Angelica Fertig and Christina Paxton, 2005. “The lasting impact of childhood health and circumstance”, Adams, Richard and Alfredo Cuecuecha, 2010. “Remittances, in the Journal of Health Economics, Vol.24, No. 2, pp: Household Expenditure and Investment in Guatemala” in 365–389. World Development Vol. 38, No. 11, pp. 1626–1641. Cheikhrouhou, Hela, Rodrigo Jarque, Raul Hernandez- Baez, Javier, Kiyomi Cadena and Mara Eugenia Genoni, Coss and Radwa El-Swaify, 2006. “The U.S.-Guatemala Leonardo Lucchetti, 2015. Chronic Poverty in Remittance Corridor: Understanding Better the Drivers Guatemala”: Analysis using Poverty Maps”, World Bank, of Remittancs Intermediation” World Bank Working Washington, D.C., mimeo. Paper, No. 86. World Bank, Washington, D.C. Barros, Racardo Paes de, Francisco Ferreira, Jose Molinas and Coello, Barbara, Maira Emy Reimao, Sophie Theis and Jaime Saavedra Chanduvi. 2009. Measuring Inequality Victoria Stanley, 2015. “The Impact of Migration on of Opportunities in Latin America and the Caribbean. Women’s Agency in Agriculture: Case Study from Palgrave Macmillan and the World Bank, Washington, Guatemala”, paper presented at the Annual World D.C. Bank Conference on Land and Poverty, March 2015, Bastos, Paulo, Nicolas L. Bottan, and Julian Cristiax, 2016. Washington D.C. “Access to Pre-Primary Education and Progression in Comisión Nacional de Derechos Humanos (CNDH), 2011. Primary School: Evidence from Rural Guatemala “, World Ïnforme especial sobre secuestro de migrantes en Bank Policy Research Working Paper 7574. México”, Ciudad de Mexico. Cabrera, Maynor, Nora Lustig and Hilicías Morán, 2014. Dang, Hai-Anh, Peter Lanjouw, Jill Luoto, and David “Fiscal Policy, Inequality and the Ethnic Divide in McKenzie. 2011. “Using Repeated Cross-Sections to Guatemala’, Commitment to Equity, Working Paper No. Explore Movements in and Out of Poverty.” Policy 20, Tulane University, New Orleans, Louisiana. Research Working Paper No 550, World Bank, Cadena, Kiyomi, Adriana Cardoza, Leonardo Lucchetti and Washington, DC. Kinnon Scott, 2013. Central América en el nuevo milenio: De Campos, Marit and A.E. Olsyzna-marzys, 1979. “Aflatoxin seis historias diferentes de pobreza y desigualdad, World Contamination in Grains and Grain Products during the Bank, Washington, D.C Dry Season in Guatemala” Bulletin of Environmental Carletto, Calogero, Katia Covarrubias and John Maluccio, Contamination Toxicology, Vol. 22, pp: 350-356. 2011. “Migration and child growth in rural Guatemala”, De Campos, Marit, J. Crespo Santos, and A.E. Olszyna- Food Policy, vol. 36, issue 1, pages 16-27. Marzys, 1980. “Aflatoxin Contamination in Grains 78 Inclusion and Exclusion from the Pacific Coast in Guatemala and the Effect of Ministry of Education, 2015. “Anuario Estadístico de la Storage upon Contamination”, Bulletin of Environmental Educación, 2014”, Guatemala. Contamination Toxicology, Vol. 24, pp: 789-795. Ministry of Public Health and Social Assistance, National Ferreira, Francisco H. G. Julian Messina, Jamele Rigolini, Statistical Institute, Universidad del Valle de Guatemala, Luis-Felipe López-Calva, Maria Ana Lugo, and Renos United States Agency for International Development, Vakis, 2013. “Economic Mobility and the Rise of the Embassy of Sweden, United States’ Center for Disease Latin American Middle Class”, World Bank, Washington, Control, United Nations Children’s Fund, United Nations D.C. Population Fund, Pan-American Health Organization, Farrell, M. J. 1957. The Measure of Productive Efficiency” USAID Improving Health Care Project, 2009. Journal of the Royal Statistical Society. Vol. 120, No. 3, pp: “GUATEMALA: Informe Final, V Encuesta Nacional 253-290. de Salud Materno Infantil 2008-2009” Guatemala City, Hernandez-Zavala, M., Patrinos, H.A., Sakellariou, C., Guatemala. Shapiro, J., 2006. “Quality of schooling and quality of Ministry of Public Health and Social Assistance, National schools for indigenous students in Guatemala, Mexico Statistical Institute, ICF International (2015), “Encuesta and Peru”, World Bank Policy Research Working Paper, Nacional de Salud Materno Infantil 2014-2015”, No.3982, World Bank, Washington, D.C. Guatemala City, Guatemala. Hertz, Tom, Ana Paula de la O Campos, Alberto Zezza, Carlo Secretaria de Gobernación (Unidad de Política Migratoria), Azzarri, Paul Winters, Esteban Quinones, Benjamin Consejo Nacional de Población, Secretaria de Relaciones Davies, 2009. “Wage inequality in international perspec- Exteriores, Secretaria del Trabajo y Previsión Social, El tive: Effects of location, sector, and gender”, Paper pre- Colegio de la Frontera Norte (2013). “Encuesta sobre sented at the FAO-IFAD-ILO Workshop on Gaps, trends Migración en la Frontera Sur, 2012”, Mexico, http://www. and current research in gender dimensions of agricultural cole.mx/emif. and rural employment: differentiated pathways out of Orozco, Manuel, Laura Porras and Julia Yansura. 2016. “The poverty, Rome, 31 March - 2 April 2009. Continued Growth of Family Remittances to Latin Instituto Nacional de Estadístico, 2010. “Perfil estadístico America and the Caribbean in 2015”, Inter-american de género y pueblos: maya, garífuna, xinka y ladino”, Dialogue, Washington, D.C. Guatemala. Patrinos, Harry, 1997. “Differences in Education and Earnings International Institute of Tropical Agriculture, 2015. across Ethnic Groups in Guatemala” The Quarterly “Aflatoxins: Impacts and Management” Presentation, Review of Economics and Finance, Vol. 37, No. 4, Fall unpublished. 1997, pp: 809-821. International Office of Migration (IOM), 2004. “Encuesta Pawlowski, Colin, 2012. “Full Belly Aflatoxin Testing in sobre Impacto de Remesas Familiares en los Hogares Guatemala: Travel Blog” The Full Belly Project. http:// Guatemaltecos, 2004” Cuadernos de Trabajo sobre fightingaspergillus.blogspot.com/. Migración No. 19, Guatemala. Khlangwiset, Pornsri, Gordon S. Shephard, and Felicia Wu. Luft, Harold S., 1975. “The Impact of Poor Health on 2011. Aflatoxins and Growth Impairment: A Review”, Earnings”, in The Review of Economics and Statistics Vol. Critical Reviews in Toxicology, Vol. 41, No. 9, pp: 57, No. 1, pp. 43-57. 740-755. Martorell R, P. Melgar, J.A. Maluccio, A.D. Stein and J.A. Ramirez-Zea M, P. Melgar, J.A.Rivera, 2010. “INCAP Oriente Rivera, 2010. “The nutrition intervention improved adult longitudinal study: 40 years of history and legacy”, human capital and economic productivity.” Journal of Journal of Nutrition, Vol. 140, No.2, pp: 397-401. Nutrition. 2010 Feb; 140(2):411-4. Skoufias, Emmanuel, 2015. “Synergies in Child Nutrition: Martorell R.1992. “Overview of long-term nutrition inter- Interactions of Food Security, Health and Environment, vention studies in Guatemala, 1968-1989”, Food and and Child Care”, GPVDR, World Bank, Washington, D.C. Nutrition Bulletin, Vol. 14(3), pp: 270-7. (mimeo). McEwan, Patrick J. and Marisol Trowbridge, 2007. “The Torres, Olga. (2013) “Determinación, Caracterización y achievement of indigenous students in Guatemalan Evaluación de Aflatoxinas que Influyen en el Retardo primary schools” International Journal of Educational de Talla para Edad en Niños en Guatemala”, Proyecto Development vol. 27 pp: 61–76. Fodecyt 04-2012, Consejo nacional de Ciencia y Inclusion and Exclusion 79 Tecnología, Secretaria nacional de ciencia y tecnología y Fondao Naciona de Ciencia y Tecnología, Guatemala Notes City, Guatemala. 1 The information on the labor force between 2010 and Torres, Olga, J. Matute, Gelineau,-J. van Waes, J.R.Maddox, 2014 is based on the authors’ analysis of the Encuesta S.G. Gregory, A.E. Ashley-Koch. 2015. “Human health National de Empleo e Ingresos (ENEI). implications from co-exposure to aflatoxins and fumonis- 2 Of the three measures of informality calculated, two ins in maize-based foods in Latin America: Guatemala as showed an increase and one showed no change between a case study”. World Mycotoxin J. 8(2):143–59 2000 and 2014. Trucksess, M. W., M. A. Dombrink-Kurtzman, V.H. Tournas 3 Twenty percent of agricultural land is in the hands of and K.D. White, 1980. “Occurrence of aflatoxins and 92 percent of the farmers. Our characterization of the fumonisins in Incaparina from Guatemala”, Food agricultural sector, unless otherwise noted, is from World Additives and Contaminants, 2002, Vol. 19, No. 7, pp: Bank (2015b). 671-675. 4 See Cadena et al. (2013). United Nations Education, Scientific and Cultural 5 A synthetic panel is generated from multiple rounds of Organization, 2007 “Segundo Estudio Regional cross-sectional data using imputations techniques base Comparativo y Explicativo”, Santiago, Chile. on Dang, et al. 2011. See Annex 3.3 for the details of _________. 2014. “Tercer Estudio Regional Comparativo y this. Note also, the analysis from 2006 to 2014 is likely to Explicativo, Primera Entrega”, Santiago, Chile. be more representative of all households in the country ________. Ministry of Education and United Nations 2014a. today than those households included in the 2000 to 2014 “Informe de la Revisión Nacional de la Educación para analysis as the latter analysis is based on households that Todos, Guatemala, 2000-2013”, Guatemala. http://une- existed in 2000 and thus captures none of the chang- scoguatemala.org/wp-content/uploads/2014/12/FINAL_ ing characteristics related to households formed more Inf.-revision-nacional-Educacion-para-Todos.pdf . recently. UNICEF. 1990. “Strategy for Improved Nutrition of Children 6 The analysis uses an Oaxaca-Blinder decomposition. and Women in Developing Countries”, UNICEF, New Note that the data used for this analysis are from 2000, York. and it is expected that some changes have occurred. An World Bank. 2011. Crime and Violence in Central America. A update of the analysis is planned with the new round of Development Challenge. Washington, DC: World Bank. the ENCOVI. _________. 2013. “Towards better expenditure quality: 7 Based on authors’ calculations using the 2014 ENCOVI. Guatemala public expenditure review”, Report No.78000, There was a total wage gap between urban and rural Central America Country Management Unit, Poverty populations of 18 percent and between indigenous and Reduction and Economic Management, Latin America non-indigenous of 19 percent. and the Caribbean, Washington, DC: World Bank. 8 For general examples of the relationship between health _________. 2015. “Social Sector Expenditure and and earnings see Luft (1975) and Case et al. (2005). Institutional Review”, Social Protection Global Practice, 9 For the studies in Guatemala, see Martorell (1992), Latin America and the Caribbean Region, World Bank, Ramirez-Zea et al. (2010), and Martorell et al. (2010). Washington, DC: World Bank. 10 These figures are from the latest round of the _________. 2015a. “Guatemala Health System Functional Demographic and Health Survey (Encuesta Nacional Review”, Health, Nutrition and Population Global de Salud Materna-Infantil, or ENSMI) carried out in Practice, Latin America and the Caribbean Region, 2014-15 (MSPAS et al. 2015). While some findings of Washington, DC: World Bank. this survey have been published and are used here, the _________. 2015b. “Agricultura para la Prosperidad de los data set itself is not available. Thus, some of the analysis Territorios Rurales en Guatemala: Vincular el desarrollo of malnutrition in this report continues to rely on the agropecuario con la prosperidad del campo”, Informe No. previous round of the ENSMI from 2008-09 (MSPAS et AUS7583, GFADR, Latin America and the Caribbean, al. 2009). Washington, DC: World Bank. 11 Data on malnutrition from the WDI. _________. 2016. “Labor Exploitation of Migrant Women at 12 Marini and Gragnolati (2003) analyzed data from the the Southern Mexico Border”, GPVDR, Washington, DC: 2000 ENCOVI and found that stunting rates grow with mimeo 80 Inclusion and Exclusion age. This is being confirmed by ongoing work (by Scott reporting has improved, suggesting the observed fall in and Vinja) using data from the 2008-09 ENSMI. For visits is probably real even if the magnitude is open for 2014-15, see MSPAS et al. (2015). discussion. 13 Calculated using data from the 2014 ENCOVI. 26 Given that Guatemala has 23 spoken languages, it is 14 The figures are from MSPAS et al. (2009) and MSPAS et not always clear that bilingual education will be able to al. (2015). There are some contradictions in the data for ensure that children are taught in the language that they previous years. World Bank (2012) reported a 40 percent spoke prior to attending school. Further information rate while Paz (2014) reported a 20 percent rate. The is needed on the how bilingual schooling is working in lower rate is based on the 2009-10 micronutrient survey. practice. 15 UNICEF (2004). 27 This section is based on Cabrera et al. (2014). 16 Data from INE at http://ine.gob.gt. 28 See Annex 3.2 for the decomposition of this indicator. 17 World Bank (2015a) 29 McEwan and Trowbridge, (2007) and Hernandez Zavala 18 Full vaccination is defined as a child having received (2006). prior to his or her second birthday the measles vaccine, 30 There are discrepancies between this work and more three doses each of DPT and polio (excluding the polio recent work (World Bank, 2015, SSEIR) that will need vaccine given at birth), and one dose of BCG (MSPAS et to be reconciled. The SSEIR study suggests that health al. 2015). spending is fairly evenly distributed among consumption 19 The sample size of the survey data used in this analysis quintiles. is adequate at best for looking at these groups. The other 31 Based on the Data Envelope Analysis developed by groups are too small to be able to be examined separately. Farrell (1957) as carried out in World Bank (2015a). There are some concerns about the adequacy of the sam- 32 Edstats (2015) as cited in (World Bank, 2015, SSEIR). ple even for the larger groups. 33 This section is based on the data presented in (World 20 See Annex 3.1 for the probit analysis on which this dis- Bank, 2015, SSEIR). cussion is based. 34 The budget discussion is based on World Bank (2013). 21 Bastos et al. (2016). 35 The 1991 law needs to be updated to incorporate this 22 There is a discrepancy between the survey data (from the other legislation as well as to reflect the changing land- 2014 ENCOVI) and the administrative data concerning scape in education in Guatemala in the past 25 years. As the rate of completion of nine years of schooling. The argued in World Bank (2015b), the significant increase survey indicates that two out of three children do not in enrollments at both the primary and secondary levels complete this level, while the administrative data indicate has decreased the needs for the non-formal education that only 55 percent do not. It is not clear what is driving system, and this needs to be brought into alignment with the discrepancy. However, neither figure suggests that the formal system. Guatemala has been able to fulfill its Constitutional 36 This is the basic framework developed by UNICEF obligation regarding education. (UNICEF, 1990). 23 See Barros et al. (2009) for a discussion of the HOI 37 The results cited here are based on ongoing work being methodology. done by Katja Vinha and Kinnon Scott using the 2008-09 24 An additional 12 contracts were also cancelled, five due data. A similar analysis will be carried out on the 2014-15 to the resignation of the health provider and seven in ENSMI once these data become available so that changes Suchitepéquez for other reasons (Informe Metas Fisicas in the importance of different correlates of malnutrition PEC, Ministry of Health). The authors would like to can also be identified. thank Dr. Virginia Moscoso for providing us with this 38 FEWSNET (2014) as cited in World Bank (2015b). information. 39 Ferreira et al. (2013) 25 Data from the national health management information 40 In this study (Ferreira el al. 2013), the middle class is system (SIGSA) show that there was a massive rise in defined as having per capita incomes of US$10 per day in health care visits nationally from 7 million to 23 million 2005 PPP terms. visits annually between 2009 and 2013 followed by a 46 41 Hertz et al. (2009). percent decline in 2014. While there are some concerns 42 See Annex 3.4 for more details. that the SIGSA under-reports visits, in recent years 43 The rise is due both to an increase in the poverty rate as Inclusion and Exclusion 81 well as to an increase in the population. Between 2006 started in 2006 and had 103,000 beneficiaries by 2010, and 2014, the population of Guatemala grew by 2.5 with each eligible senior over 65 years of age receiving million so, even if poverty rates had remained the same around US$51 per month (Cabrera et al. 2014). between 2006 and 2014, the numbers of poor would still 46 Adams and Cuecuecha, 2010 have risen by 1.3 million, 0.4 million of whom would 47 Carletto et al. 2011 have been in extreme poverty. 48 Coello et al. 2015 44 This simple estimation may overstate the impact of the 49 International Office on Migration (IOM), 2004) program on poverty. Households often respond to receiv- 50 Cheikhrouhou et al. (2006) ing public transfers by changing their labor supply or by 51 Guatemala had the highest growth in remittances in sending or receiving remittances. Latin America between 2014 and 2015, reaching a high of 45 The Economic Contribution Program for Older Adults 6.2 billion dollars (Orozco et al. 2016). (Programa de Aporte Economicio del Adulto Mayor) was 82 Inclusion and Exclusion 4. Trends and Drivers of Growth in Guatemala Guatemala has experienced modest economic growth in recent years. Its per capita GDP has failed to converge with those of Latin America (average) and that of the U.S. With a relatively young and growing population, Guatemala will need to achieve much higher economic growth and job creation rates to reduce poverty. Persistently low levels of physical and human capital formation have contributed to a long-term decline in productivity. Like other countries with high poverty levels, Guatemala faces the challenge of creating new and better remunerated jobs for its growing working age population, a challenge that is compli- cated by the prevalence of informality in the economy. Persistent competitiveness challenges related to the under-provision of public goods, rising crime and violence, and weak governance are exacerbated by weak economic institutions, which complicates the investment climate for the private sector and perpetuates inequalities. Guatemala’s demographic trends provide an opportunity for higher and sustained growth provided that the government implements productivity-enhancing investments and policies, such as infra- structure investments to increase connectivity and industrial policies to foster the creation of better jobs. However, given Guatemala’s low levels of public revenues and immense investment needs, spending efficien- cies may not be enough. Growth Trends The current size and future expansion of the working age population provides Guatemala with Guatemala is known for having persistently a window of opportunity to seize a demographic low growth in per capita GDP as a result of a dividend. This dividend is possible because the combination of modest aggregate GDP growth working age population is growing more rapidly and a fast growing population. GDP growth than the dependent population, resulting in more averaged 3.5 percent between 2000 and 2014 people that could potentially contribute to (figure 4.1), slightly above the Latin America growth. The working age population increased average of 3.2 percent but not particularly strong from 51.4 percent in 1960 to 58.1 percent in when compared to other economies in Central 2014, while at the same time the dependency America (4 percent) or to Guatemala’s aspira- ratio declined from 94 percent to 72 percent.3 tional peers (4.9 percent).1 When converted into However, reaping the benefits of this potential per capita growth rates, Guatemala averaged a dividend will depend on the existence of effective very low 1.2 percent in those 14 years, about 1 policies to foster labor productivity (such as percentage point lower than the regional average education) on urban development, and on the (figure 4.1). This is not surprising given the ability of the private sector to create jobs with the population growth rate of 2.1 percent per year, highest development payoff. Without both which is almost two times higher than the productivity-enhancing investments and policies average for Latin American countries (1.1 to remove constraints to private sector growth, percent) and the highest in the region.2 which will be discussed later in this chapter, the Trends and Drivers of Growth in Guatemala 83 FIGURE 4.1 Gu t m l Shows D clinin GDP Growth, in contr st to th LAC R ion GDP Growth (%) GDP per Capita Growth (%) Average GDP per capita growth (annual %) 8 5 Average GDP growth (annual %) 7 4 5.7 6 2.8 3 5 4.1 2 1.6 3.5 1.2 4 1 3 0 2 1.0 1 -1 0 -2 -1.6 1961-1979 1980s 1990s 2000-14 1961-79 1980s 1990s 2000-14 Gu t m l C ntr l Am ric LAC Structur l P rs Aspir tion l P rs Low r middl incom Source: Calculations based on World Development Indicators. Aspirational peers include Albania, Chile, Jordan, Latvia, Lithuania, Panama, and Peru. Structural peers include Bolivia, El Salvador, Nicaragua, Paraguay, and Senegal. FIGURE 4.2 Th r H s B n Littl Economic Conv r nc with th U.S. in Contr st to LAC, Cost Ric , nd P n m Guatemala and LAC Central American Countries GDP per capita as % of US, current US$ GDP per capita as % of US, current US$ 25 25 20 20 15 15 10 10 5 5 0 0 2008 2008 2005 2005 2002 2002 1960 1960 1990 1990 1966 1969 1996 1966 1999 1969 1996 1999 1963 1963 1993 1993 1984 1984 2014 2014 1978 1978 1987 1987 1975 1975 1972 1972 1981 1981 2011 2011 Gu t m l L tin Am ric & C ribb n Gu t m l El S lv dor Nic r u Hondur s Cost Ric P n m Source: Calculations with data from World Development Indicators. majority of the poor will have to continue to other Latin American and Caribbean countries work in low-productivity jobs with low earnings relative to the United States has increased from and be trapped in chronic poverty. 12.2 percent to 18.1 percent. Guatemala’s Meanwhile, Guatemala has not advanced in performance in this respect has been similar to converging with the United States. In 2014, its that of Honduras, El Salvador, and Nicaragua, per capita GDP was 6.7 percent of that of the U.S. neighboring countries with shared development whereas in 1960 it was 8.4 percent (figure 4.2a). challenges (figure 4.2b). In contrast, Panama and Meanwhile, the average per capita income of Costa Rica have made much headway in 84 Trends and Drivers of Growth in Guatemala converging with the United States. Today, in terms of per capita GDP, Guatemala is the fifth Regional Disparities poorest economy in the Latin American region, a Economic activity is concentrated in drop of five positions from its rank in 1960. The Guatemala City, creating a large regional dispari- ever-growing gap between Guatemala and other ties. In many countries, the gap between urban countries raises the question of what the and rural areas in terms of economic develop- underlying causes are behind this divergence. ment is substantial, and this is certainly the case This lack of convergence has occurred despite in Guatemala. Even more important, however, prudent macroeconomic policies. The Central are the gaps between the department of Bank has made efforts to maintain macroeco- Guatemala, which includes the capital city, and nomic stability, keeping inflation low, stable, and the rest of the county (figure 4.3). A 2010 study of well within target ranges. Moreover, manageable regional activity found that per capita GDP in the levels of fiscal deficit (around 2.1 percent since Guatemala department was 7.3 times higher than 2000) have contributed to levels of debt below 25 in the department with the lowest per capita percent of GDP. This fiscal discipline has been GDP (Huehuetenango).4 This is far higher than achieved even though Guatemala has one of the in, for example, Bolivia (2014), Mexico (2010), lowest tax burdens in the world (10.8 percent of and Peru (2012) where the gap in per capita GDP GDP in 2014), an issue that is discussed further between the richest and poorest region is about in Chapter 5. On the external front, the current 4.8, 6.1, and 6.3 times respectively.5 This shows account balance has improved over the past just how concentrated economic opportunities decade, reaching 2.3 percent of GDP in 2014, are in the department of Guatemala, which much lower than the level of the early 2000s (5.6 accounts for almost 50 percent of GDP. percent), and the nominal exchange rate has been Guatemala faces the challenge of not only stable at about Q7.8 per US dollar since 2000. increasing its GDP per capita, but also reducing FIGURE 4.3 Th D p rtm nt of Gu t m l , th Rich st, L s th L tin Am ric R ion GDP per capita as % of U.S., current US$, 2010 GDP per capita as % of US, current US$ 15 12.8 12 8.5 L tin Am ric n R ion (18.6 p rc nt) 9 7.8 6.7 6.5 5.7 5.7 5.7 6 5.0 4.9 4.7 4.6 4.2 3.8 3.7 3.1 3.0 2.7 2.7 2.7 3 1.8 1.8 0 o l t so u o n o to cos n dp ich tl p p s p ul té l b lo qu qu p p Ro ul n n n p in m r r So l ti c Qu lh P cu r r n n n Ch iqui c Ju l I o M J p p Z ni Pr V V Es nt m t lt lt t n t it Ch R El hu ch j t im To t S c S Al t B Su Gu S Hu Qu Source: Calculations based on data from World Development Indicators and Red de Gestores (2011). Trends and Drivers of Growth in Guatemala 85 regional disparities. Differences in GDP per percent average for the world (figure 4.4). This capita are more striking when analyzed relative to low level of gross capital formation is not new as the United States. In 2010, the GDP per capita of back in 1960 Guatemala had the fourth lowest the department of Guatemala was 12.8 percent of ratio in the world with 9.8 percent of GDP. These that of the U.S., about 31 percent below the low levels of investment have not been enough to average for the Latin America and Caribbean accelerate growth and have negatively affected region. The departments with the lowest GDP the productivity and competitiveness of per capita, Huehuetenango, Quiche, and Alta Guatemalan firms. Estimates suggest that Verapaz also have high poverty rates. Guatemala could raise its economic growth by more than 1 percentage point per year by increasing its investment-to-GDP ratio up to the Growth Decomposition average of Mexico, Peru, and Chile.7 What are the drivers behind Guatemala’s Various factors could be affecting overall growth performance? This section examines investment levels. For example, Guatemala’s low the contributions made by three elements: (i) savings rate (only 11.6 percent in 2014, the factors of production; (ii) aggregate demand; and second lowest in the Latin American region after (iii) the supply side. El Salvador) does not help to boost investment Factor accumulation (labor and capital) has levels. According to national account data, public been the main driver of GDP growth. As shown investment, which averaged 1.9 percent between in Figure 4.4, the contribution of labor has been 2010 and 2014, is constrained by the lack of increasing since the 1960s according to growth public resources as well as by inefficiencies in the accounting estimates prepared for this report. public investment process (see Chapter 5). This reflects Guatemala’s growing working age Private investment increased from 5.5 percent of population and high labor force participation rate GDP in 1985 to almost 17 percent of GDP in rather than increases in labor productivity.6 2006, partly as a result of trade liberalization Labor force participation declined from 67.2 policies that attracted foreign direct investment percent in 2000 to 63.3 percent in 2014. and of the privatization of the power and Meanwhile, unemployment is low at about 2 telecommunication sectors. However, private percent of the labor force but is rising, which may investment had declined to 13.3 percent of GDP indicate growing pressures in the labor market by 2014, possibly due to shortcomings in the (figure 3.1). Between 2010 and 2014, the contri- investment climate, such as contract enforcement bution of labor to growth amounted to 2.7 and high transport and logistics costs, in that percentage points, roughly 3.5 times the contri- limit returns to investment and to a lack of bution made by capital. In contrast to labor, the opportunities, as will be discussed later in this contribution of capital to growth has declined chapter. over the same period. Meanwhile, the contribution of total factor Gross capital formation has historically been productivity (TFP) has fluctuated but overall has low in Guatemala. In 2014, Guatemala’s gross been very small. TFP, which captures how capital formation was 13.8 percent, the second efficiently labor and capital are being used, is lowest in Latin America (after El Salvador) and important for boosting living standards. During the 14th lowest in the world, and well below the the 1960s and 1970s, for example, TFP was a 21 percent average for Latin America and the 25 major contributor to Guatemala’s growth, 86 Trends and Drivers of Growth in Guatemala FIGURE 4.4 L bor Is th M in F ctor FIGURE 4.5 Gross C pit l Form tion Contributin to GDP Growth is Low nd D clinin GDP growth decomposition by factors of production, 1951-2014 Gross capital (% of GDP) Gross fixed capital formation (% of GDP) 6 30 5 1.4 1.9 4 25 Percentage points 0.9 0.3 3 2.1 2.0 1.9 2.3 2.7 2 20 2.1 1.9 1 1.6 1.3 1.2 0.8 0 0.4 0.2 15 -1.4 -1 -2 10 1960s 1970s 1980s 1990s 2000s 2010s 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 C pit l L bor TFP Gu t m l L tin Am ric & C ribb n Structur l p rs Aspir tion l p rs Source: Calculations using data from the Central Bank of Source: World Development Indicators. Aspirational peers include Guatemala and World Development Indicators. Albania, Chile, Jordan, Latvia, Lithuania, Panama, and Peru. Note: Labor was adjusted for human capital. The calculations Structural peers include Bolivia, El Salvador, Nicaragua, Paraguay, assume an income share of capital of 35 percent, a 6 percent and Senegal. depreciation rate of capital, and a return to human capital of 7 percent. boosting real growth rates by an average of 1.9 contributed on average, 3 percentage points to and 1.4 percentage points per year, in the two GDP growth between 1950 and 2014. This large decades respectively. After a decline in TFP in the share is the result of low levels of private and 1980s due to the intensification of the civil war public investments. More recently, rising remit- and the debt crisis, TFP contributed an average of tances—around 50 percent of which are spent on 0.9 percentage points to growth in the 1990s. consumption—and expanding consumer credit During the 2000s, the contribution of TFP have fueled an increase in consumption. declined, cutting annual GDP growth by an Meanwhile, the contribution of exports of goods average of 0.2 percentage points per year, but this and services to growth has been offset by imports trend has since reversed, with a marginal increase of goods and services. This is explained by in TFP having added around 0.3 percentage imports amounting to a higher share of GDP points to annual GDP growth since 2010. The than exports rather than by differences in growth overall decline in TFP’s contribution to growth is rates between exports and imports. not unique to Guatemala. Productivity growth On the supply side, the service sector contin- has slowed in most countries in the Latin ues to be the main driver of GDP growth. It American region and in advanced economies accounted for 70 percent of GDP growth between after the global financial crisis.8 2010 and 2014, equivalent to 2.5 percentage On the demand side, private consumption has points (figure 4.7). Within the service sector, been the main contributor to growth in growth has been particularly strong in the Guatemala (figure 4.6). Private consumption, financial sector, followed by transportation and which accounts for over 80 percent of GDP, commerce. Financial services grew by 8.3 percent Trends and Drivers of Growth in Guatemala 87 FIGURE 4.6 Priv t Consumption is th M in Contributor to Growth Contributions to Real GDP Growth, 1951-2014 8 6 Percentage points 4 2 0 -2 -4 1951 1961 1971 1981 1991 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 1960 1970 1980 1990 1900 Priv t consumption Public consumption Inv stm nt N t xports Source: Calculations using data from the Central Bank of Guatemala. FIGURE 4.7 Th S rvic S ctor Is th M in Driv r of GDP Growth Contributions to Real GDP Growth, 1951-2014 8 7 6 Percentage points 5 4 3.1 3.1 4.5 3.9 3 2.4 2.9 2.2 2.8 2.8 2.1 2.4 2 1.9 2.3 2.8 2.7 1.8 1.7 1 0.6 0.7 0 -1 -2 1951 1961 1971 1981 1991 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 1960 1970 1980 1990 2000 A ricultur , fish r , minin M nuf cturin Construction S rvic s Source: Calculations using data from the Central Bank of Guatemala. during the 2010 to 2014 period (or 0.4 percentage As in other countries in the region, points of GDP growth), reflecting the continued Guatemala’s economic structure has undergone a growth in the provision of credit to the private structural transformation with the agriculture’s sector and an expansion of bank branches. share in economic output and employment Although the contribution of the financial sector falling. The share of agriculture in economic to overall GDP remains small (4.6 percent in output fell from 32.6 percent in 1950 to 15 2014), it more than doubled from 2 percent in percent in 2002 and had dropped further to 14.2 2000. The contributions of agriculture, manufac- percent by 2014 (figure 4.8). During the same turing, and construction are smaller because of period, the decline in agriculture employment the account for a smaller share of total GDP. has been much slower, from 69 percent to 32 88 Trends and Drivers of Growth in Guatemala FIGURE 4.8 Th Sh r of M nuf cturin FIGURE 4.9 A ricultur G n r t s Most Is D clinin of th Jobs in Gu t m l GDP by sector, percent Employment by sector, percent 40 70 100 18 20 22 80 3 3 Percent of employment 4 44 47 30 65 11 11 49 13 Percent of GDP Percent of GDP 60 6 7 20 60 6 14 40 17 13 10 55 20 0 50 0 1950 1960 1970 2000 2006 2014 71 76 19 1 56 66 19 1 86 19 1 96 20 1 06 11 19 1 5 6 8 9 0 20 19 19 19 19 19 20 19 A ricultur , fish r , minin M nuf cturin A ricultur , fish r , minin M nuf cturin Construction S rvic s (RHS) Construction S rvic s Source: Calculations using data from the Central Bank of Source: Calculations using data from the 2000, 2006, and 2014 Guatemala. ENCOVI for economically active population 15-64 years old.. Note: The base year for GDP was changed in 2000. Note: Employment data for 1950, 1960, and 1970 come from Baires Martínez (1985) and refers to economically active population 10 years and more. percent (figure 4.10). Changes in the relative some sectors, especially in their use of unskilled contribution of each sector have implications for labor and labor productivity.10 Like other labor productivity. For example, if the bulk of countries with high poverty levels, Guatemala employment moves from high productivity faces the persistent challenge of creating more sectors to low productivity ones, the overall and better remunerated jobs for its population, a productivity of the economy will decline. challenge that is compounded by high informal levels and a fragmented social contract. Firms and workers are informal either because they are A Sector Perspective on excluded from state benefits that have limited Economic Activity, Job coverage or because they opt out because of the poor quality of public services and enforcement Creation, and capability of the government.11 This duality in Informality economic activity and employment matters because informal employment is more prevalent It is important to understand the dynamics among indigenous groups and rural workers and of different sectors in order to grasp the links tends to yield lower incomes. between economic growth and job creation. Labor earnings are the main source of income for the vast majority of people in Guatemala and are Job Creation and Informality a key driver of poverty reduction.9 Whether Employment growth has followed economic growth contributes to poverty reduction depends activity, and the service sector is the main creator on the labor intensity (relative to their size) of of jobs. The number of jobs grew at an Trends and Drivers of Growth in Guatemala 89 annualized rate of 3.1 percent between 2000 and percent for Latin America in 2012. Informality is 2014, while GDP growth averaged 3.5 percent. one way to assess the quality of jobs and the About 60 percent of jobs were created in the engagement of workers and firms with the service sector (figure 4.10). Manufacturing was a government.13 One of the most popular labor- key contributor to job creation during the 2000 based definitions of informality is jobs with no to 2006 period, but its capacity to create jobs social security. Using that definition, Guatemala collapsed between 2006 and 2014.12 In contrast, has the second largest informal sector in the growth in agricultural employment was minimal Latin America region. (figure 4.11). Most of the in the first half of the 2000s, but since 2006 it has net jobs created in Guatemala since 2000 are in contributed 1.2 percentage points to job creation. the informal sector, mainly in agriculture and This increase in agricultural employment after commerce (figure 4.12). 2006 is associated with the expansion of land use Differences in the extent of informality for agricultural production by the private sector. between the department of Guatemala and the Furthermore, as Guatemala moves along the rest of country indicate market segmentation. structural transformation path, it is expected that The main features of formal jobs in the private agribusiness (processed) activities will represent sector are: (i) they are geographically concen- a larger and rising share of GDP as the share of trated in urban areas (76 percent) and in the primary agriculture goes down. Although department of Guatemala (51 percent); (ii) they Guatemalan agribusiness performs well in are offered by large firms (52 percent): (iii) they comparison with other regional and global peers, are held by workers with some secondary or the sector will need to grow faster to be able to tertiary education (83 percent); and (iv) they are significantly increase employment. held by people in the top two income quintiles Guatemala’s private sector creates most jobs, (83 percent). In contrast, informal jobs tend to but few jobs are formal. The public sector be: (i) located in rural areas (50 percent) and accounts for 5.5 percent of the workforce, which outside the department of Guatemala (81 is very small compared with an average of 10.9 percent); (ii) in microenterprises (75 percent); FIGURE 4.10 Most Jobs H v B n Cr t d in A ricultur nd S rvic s S ctors sinc 2006 Contributions to employment growth, percentage points 1.2 1.0 0.9 0.9 0.9 0.8 0.8 0.8 points 0.6 0.4 0.4 P rc nt 0.2 0.1 0.0 0.0 -0.1 -0.2 A ricultur , fish r , minin M nuf cturin Construction Comm rc , hot l, r st ur nts Oth r s rvic s 2000-06 2006-14 Source: Calculations using data from the 2000, 2006, and 2014 ENCOVI. 90 Trends and Drivers of Growth in Guatemala FIGURE 4.11 Gu t m l H s th Hi h st FIGURE 4.12 Most Jobs Cr t d B tw n Sh r of Inform l Work rs in LAC 2000 nd 2014 L ck Soci l S curit Cov r Lack of social security coverage, 2014 (circa) Change in employment by informality and sector, 2000-14 100 A ricultur ,for str , fishin 83 82 80 Minin 78 76 80 M nuf cturin 70 Percent of workers 65 64 El ctricit , s nd w t r suppl 60 Construction Comm rc , hot ls nd r st 45 Tr nsport, stor nd communic. 40 37 34 Fin. int r., r l st t 29 28 25 25 Public dministr tion nd d f ns Formal 20 Educ tion Informal 14 H lth nd soci l work Dom stic s rvic s 0 -200 0 200 400 600 8001000 HND GTM PRY BOL HTI SLV MEX COL ECU BRA ARG DOM CRI URY PER CHL Thousands of jobs Source: Calculations using data from SEDLAC. Source: Calculations using data from the 2000 and 2014 ENCOVI. and (iii) held by workers with no education or offered (76 percent) were in the department of only some primary education (69 percent). With Guatemala. Most registered enterprises (those in respect to economic sectors, most formal jobs are the formal sector) were operating in the com- in manufacturing (24 percent), commerce and merce sector (34.5 percent). The number of hotels/restaurants (25 percent), and financial registered manufacturing enterprises is relatively intermediation (16 percent). In contrast, informal small (6.6 percent of all registered enterprises). jobs are more likely to be in agriculture (38 The majority of registered enterprises are percent), with only 12 percent in manufacturing. microenterprises (64 percent) with one to five Median hourly earnings from formal jobs in the employees. private sector are twice as high as earnings from Some large private firms in Guatemala have informal jobs. been able to expand into foreign markets. The Micro, small, and medium-sized enterprises emergence of “Guate-Latinas” as part of the (MSMEs) play an important economic role in process of globalization is one example (box 4.1). creating jobs. It is estimated that MSMEs employ Guatemalan entrepreneurs have expanded 79 percent of workers in Guatemala City (in the internationally in an effort to diversify their local department of Guatemala) and 92 percent in the exposure. Most of this expansion has been in rest of the country (figure 4.13). At the national search of new markets in neighboring countries level, the smaller the firm, the greater the degree (such as southern Mexico, Honduras, and El of informality, but informal jobs are less common Salvador) rather than to participate in global in Guatemala City than in the rest of the country value chains.14 This shows that the Guatemalan for all firm sizes (figure 4.14). private sector can be dynamic and globally At the firm level, economic activity is concen- competitive. However, while this is true for some trated in the department of Guatemala. larger firms, it does not seem to hold true for the According to the 2013 Directory of Registered country’s private sector as a whole and its large Enterprises and Their Branches, most registered number of MSMEs. enterprises (62 percent) and the jobs that they Trends and Drivers of Growth in Guatemala 91 FIGURE 4.13 Most Priv t S ctor Jobs FIGURE 4.14 Inform lit is Associ t d Ar in Micro nt rpris s with Firm Si nd Loc tion Jobs by Firm Size, Private Sector Firms Informal Jobs by Firm Size 100 100 8 11 21 7 Inform l jobs (% of tot l jobs) 8 80 80 12 P rc nt of jobs 60 60 40 70 40 65 51 20 20 0 0 Gu t m l Dpt Oth r Dpt Tot l Micro Sm ll M dium L r All firms Micro Sm ll M dium L r Gu t m l Oth r Dpt Source: Calculations using data from 2014 ENCOVI. Note: Microenterprises (1 to 5 workers), Small enterprises (6 -19 workers), Medium-sized enterprises (20-96 workers), and large enterprises (more than 96 workers). Although informality is widespread, there is Financial Sector scope for firms to enter the formal sector, thus Guatemala’s financial sector is dominated by expanding the tax base and ensuring a level banks. The supervised financial system comprises playing field between firms.15 A 2010 survey of 103 financial institutions, including 17 commer- informal enterprises in Guatemala found that cial banks, 14 finance companies, and 6 off-shore more than one-quarter of informal business companies. Banks and finance companies owners reported that they would like to register account for 83.3 percent and 2.9 percent of the their firms, and many would be willing to pay to system’s assets respectively, while the remaining learn how to register. However, a substantial 13.5 percent belong mainly to off-shore compa- majority of entrepreneurs in the informal sector nies (8 percent), exchange houses, and insurance stated that they did not want register their companies. Non-regulated financial institutions businesses, citing the associated tax and regula- like cooperatives and microfinance institutions tory burdens as well as exposure to bribery as the (MFIs) have assets amounting to about 2.6 most important reasons for not registering. This percent of GDP and cater to about 2 million suggests that the prevalence of bribery holds back clients.16 Guatemala’s banks are profitable, liquid, the growth of the formal sector both by discour- well-capitalized, and domestically funded. aging existing informal enterprises from register- Guatemala’s robust financial sector is reflected in ing and by constraining the growth of new formal its strong performance in recent years on key sector enterprises. Promoting formalization financial soundness indicators. The banking could potentially expand the tax base and provide system appears to be sound with non-performing benefits for the firms themselves, by increasing loans at 1.3 percent of total credit in December their access to financial investment. 2015 and a capital adequacy ratio of 14.1 percent. The domestic banking sector has been subject to 92 Trends and Drivers of Growth in Guatemala Box 4.1  Guate-Latinas: How Guatemalan Firms Have expanded in the Latin American Region? The emergence of “Guate Latinas” has been a result of the process of globalization and illustrates the strengths of Guatemala’s private sector. The term refers to businesses that have revenues, operations, and resources that originate from overseas. This phenomenon is not recent but has accelerated in the past decade. There are several examples of “Guate-Latina” firms. Pollo Campero, a chicken restaurant chain FIGURE B4.1.1 Glob li tion Ind x nd subsidiary of one of the largest regional con- R nkin of Pollo C mp ro glomerates Corporación Multi-Inversiones, was 70 founded in Guatemala in 1971 and has 60 expanded as a franchise to a network of more 50 than 300 restaurants worldwide, including the 40 United States (55 restaurants) and Asia 30 (Indonesia and Shanghai). The two main reasons why Pollo Campero chose to interna- 20 tionalize were market-seeking (expanding the 10 business in untapped markets with similar 0 2010 2011 2012 2013 2014 2015 consumer characteristics) and macroeconomic R nkin (of 100) Glob li tion Ind x (expanding the business to diversify risk by reducing its dependence on Guatemala alone). Source: América Economía (2015). With operations in 12 countries, Pollo Campero’s sales in 2014 amounted to US$467 million, of which 75 percent was earned abroad. Almost half of its 8,500 employees are located abroad. Grupo Pantaleón, the largest sugar producer in Central America, is another Guate-Latina with investments in Brazil, Nicaragua, Honduras, and Mexico. It produces sugar, alcohol, and molasses and engages in power generation. Planesa is a producer and exporter of berries, snow peas, and sugar snap peas among other products. The company expanded its operations into Mexico and Chile in 2012 to provide a consistent supply to grocery chains in North America in all seasons. Its products are distributed under the brand Pure Fresh. Source: Casanoa and Hoeber (2009). some consolidation with recent purchases of two The provision of credit to the private sector has financial institutions by large Colombian banks. expanded in recent years, but there is scope for Moreover, Banco Industrial and Banrural, the further financial deepening. Guatemala’s financial largest and second largest bank respectively, have depth, measured as the share of private sector expanded into Honduras. credit to GDP increased from 22 percent in 2001 Trends and Drivers of Growth in Guatemala 93 FIGURE 4.15 Gu t m l L s B hind FIGURE 4.16 Th Sh r of Consum r Comp r tors in T rms of Fin nci l D pth Cr dit H s Exp nd d Credit to Private Sector, percent of GDP Composition of bank credit to private sector, percent Domestic credit to private sector (% of GDP) 60 35 2010 2015 32 30 29 50 % of total bank credit 25 40 33 20 20 19 20 30 16 22 15 12 12 11 20 10 9 7 5 6 10 5 4 0 0 2001 2014 r n s rs r or rc in io tu t t ur um ct uc W ul m ct Gu t m l Nic r u El S lv dor ric m tr ns rs & ns Co f Co nu A h it Bolivi P r u Hondur s LAC Co Ot ric M ct El Source: World Development Indicators. Source: Calculations with data from the Superintendency of Banks of Guatemala. to 33 percent in 2014 but remains among the growth and accounted for 55 percent of bank lowest in the Latin American and the Caribbean credit in 2015. SME and microcredit lending have region (figure 4.15). Bank credit remains concen- grown slower, accounting for 10 percent and 2 trated in the department of Guatemala (69 percent of bank credit in 2015, respectively. The percent in 2014). As a result, large regional low levels of SME and microcredit financing disparities exist in financial depth by depart- explain the overall still low ratio of credit to GDP ments. Using 2010 data on GDP per department, in Guatemala. It is worth noting that the the latest estimates available, the department of Guatemalan Congress approved in mid-April Guatemala’s financial depth (38 percent) was 2016 the Microfinance Law which will regulate three times higher than the rest of the depart- the establishment, registration as well as opera- ments (13 percent). tions including risk management, disclosure of Credit growth in the banking sector has been information and supervision of microfinance uneven across sectors and type of firms. In 2015, institutions in general. The legal framework is the portfolio of banks remained concentrated in expected to allow for a sustainable growth of consumers (32 percent) and the commerce sector microfinance lending in the country while (16 percent). Consumer credit rose by 10 percent strengthening and consolidating MIFs with in the period 2010 to 2015, spurred by increased enhanced oversight and more transparency. demand for credit cards. Bank credit in the Dollarization and anti-money laundering manufacturing and agricultural sectors also remains a source of risk for the financial system. expanded faster than other sectors, but they The acceleration of foreign-currency-denomi- accounted for only 12 and 6 percent of total bank nated loans, which accounted for 45 percent of credit in 2015, respectively. The banking sector total outstanding loans in December 2015, targets mainly large enterprises, which saw strong underscores the importance of the government 94 Trends and Drivers of Growth in Guatemala FIGURE 4.17 Cr dit to SMEs Is Growin FIGURE 4.18 Cr dit in For i n Curr nc Slow r th n Cr dit to L r Ent rpris s Is Growin F st r Bank Credit by Type of Borrower or Product (US$ billions) Bank Credit Growth by Currency (percent) 12 11.3 35 10 30 25 Credit growth (%) 8 Billions of US$ 20 18.3 5.7 6 17.6 15 11.3 4 10 9.7 2.0 2 1.0 5 0.3 0 0 L r SMEs Consum rs Microcr dit Mort s 2010 2011 2012 2013 2014 2015 nt rpris s 2010 2011 2012 2013 2014 2015 N tion l Curr nc For i n Curr nc Source: Calculations using data from the Superintendency of Source: Calculations using data from the Superintendency of Banks. Banks. maintaining strong macro-prudential policies to Information Technology and limit risks to financial stability. More importantly, the share of foreign-currency-denominated Information Technology Enabled lending to borrowers with no capacity to generate Services foreign earnings has increased from almost 20 The information technology and information percent in 2011 to 38 percent in 2015.17 The technology enabled services (IT-ITES) industry National Risk Assessment conducted by the has been growing at a fast pace and has signifi- Guatemalan authorities in 2015 highlights drug cant potential to continue to develop. Business trafficking as the main threat, but the assessment Process Outsourcing (BPO), software develop- also identified other money-laundering threats ment services, smart games, digital content, and such as corruption, tax fraud, human trafficking, call centers comprise the main types of busi- and extortion as medium or low risks. The nesses in this industry. The IT-ITES industry assessment identified a need to build the capacity grew by 15 percent in 2014, which was well above of judges, prosecutors, and investigators of the world industry average of 1.6 percent, and financial crimes and to allow them legally to employed 39,000 people with service exports of forfeit the assets of those who commit such US$397 million.18 The industry is supported by a crimes to strengthen their capacity to combat formal IT-BPO association (the Agexport money laundering. Within the financial system, IT-BPO Commission), innovative spaces the National Risk Assessment highlighted the (Campus Tec), and local IT leaders (Studio-C and financial cooperatives sector, remittances, and Fundación CA).19 Moreover, Guatemala offers designated non-financial businesses and profes- competitive wages for international investors/ sions as being most vulnerable to anti-money clients in the sector, while for the local popula- laundering risks. tion wages are well remunerated. One of the main Trends and Drivers of Growth in Guatemala 95 constraints to the growth of the IT-ITES sector is kWh, the lowest in the region according to the the lack of skilled/specialized workers. Latin American Energy Organization.20 This situation may be reversed if the oil prices increase Energy Sector again so it is crucial to develop new capacity from Guatemala’s electricity sector has grown signifi- different sources to diversify the generation cantly over the past five years. Private capital matrix. While certain renewable technologies participation in the generation sector has also have already been in place in Guatemala for increased over the years. Electricity distribution several years (primarily geothermal), others, such is mostly private, with three distribution compa- as solar and wind, have only recently been nies sharing more than 80 percent of the regu- introduced in the country by distribution lated demand. In Guatemala, there are 3,750 companies using long-term Power Purchase kilometers of transmission lines owned by four Agreement bids with criteria for renewable major companies that provide the service. energy. Although renewable technologies Guatemala began expanding its transmission currently account for only a small portion of total system in 2009, and the government has a installed generation capacity, these are expected 10-year plan to support transmission projects to grow in the short term. The integration of awarded to private sector companies on the basis these renewable energy sources in the power of public bids using the lowest annuity as a basis system is a key challenge for the following years. for selecting the winner. The main challenge for In addition to renewable energy, the private the sector is how to meet the growing energy sector installed a coal-fired plant El Jaguar and demand in the long-term. The government the government has signed an agreement with authorities and distribution companies are Mexico to be supplied with natural gas through a currently planning a bidding process for nearly gas pipeline between the two countries, thus 350-400 megawatts in order to ensure energy benefitting from low gas prices in the US and supply needs forecasted for 2021. This will Mexico. require institutional capacity building and the preparation of a strategy as well as addressing Agriculture Sector deficiencies, especially in transmission given that The agriculture and agro-industry sectors have the National Interconnected System does not been key drivers of economic growth via export cover the entire country and that there still are expansion.21 With robust growth rates, agricul- isolated areas and rural systems that are not ture contributed 0.5 percentage points to growth connected to the national grid. between 2002 and 2014, about the same as the In contrast to the well-functioning power manufacturing sector. The expansion of agricul- market, the generation of electricity is still highly tural exports, which have doubled since the late dependent on fossil fuels, which exposes the 1990, has been the leading force behind positive sector to oil price volatility. The recent drop in oil sectoral growth rates. Exports of agriculture prices has dramatically reduced the cost of products represented 32 percent of the country’s energy in Guatemala. While average industrial merchandise export value in 2014, amounting to tariffs in Guatemala reached US$0.3120 per kWh US$3.5 billion. Guatemala now has a world in 2013, the highest in Central America, in 2015 leading export sector that includes sugar, palm the average industrial tariff was US$0.1144 per oil, rubber, cardamom, vegetables, and fruits, 96 Trends and Drivers of Growth in Guatemala particularly bananas and melons. Export expan- agriculture output and at the same time signifi- sion in large commercial crops such as palm oil, cantly reducing the number of people involved in sugar, and bananas has been the result of a agriculture. combination of area expansion and productivity Aggregate increases in overall land productiv- increases. However, in the case of vegetables and ity have been modest and only in some subsec- cardamom, which tend to be produced by tors, which highlights the dualistic nature of small-scale farmers, the gains have been the agriculture production in Guatemala. On the one result of area expansion and in these sectors side, the sector contains a segment of highly productivity has either stagnated or decreased. efficient large commercial producers running Although the agriculture export basket has plantations with large plots and competitive diversified, traditional exports such as coffee, yields (sugar, palm oil, and banana production sugar, bananas, and cardamom still represent covered 21 percent of the cultivated land in about 25 percent of total merchandise export 2013). On the other side, there is a large segment value. of small-scale commercial and subsistence Overall, there have been only very small gains agriculture producers (estimated by Guatemala’s in labor productivity in the agricultural sector, Agricultural Ministry to amount to nearly 0.8 which has caused Guatemala to lag behind the million households), a large proportion of whom Latin American average. Agricultural workers are produce low-value and low-input crops (one- less productive than those in manufacturing and third of the planted agricultural area in services. More importantly, labor productivity in Guatemala is used to produce corn and beans).22 agriculture has been falling behind other Central Thus, while commercial agriculture crops like American and Latin American countries (figure palm oil and sugar have increased their yields to 4.20). Guatemala has been less successful than competitive levels, yields of staple crops like corn other countries in the region in increasing its and beans, which are produced by the vast FIGURE 4.19 Four Products Account FIGURE 4.20 Gu t m l ’s A ricultur l for Most of A ricultur l Exports V lu Add d p r Work r is St n nt 4.0 5000 Agriculture value added per worker 3.5 4000 (constant 2005 US$) 3.0 US$ billions 2.5 3000 2.0 1.5 2000 1.0 1000 0.5 0.0 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 1980 1983 1986 1989 1992 1995 1998 2001 2004 2010 2013 2007 B n n Coff C rdomom Gu t m l El S lv dor Hondur s Su r Oth r ric. Prod. Nic r u LAC Source: Calculations using data from the Central Bank of Source: World Development Indicators. Guatemala. Trends and Drivers of Growth in Guatemala 97 majority of poor farmers, are stagnating. In the employment for another 300,000 people, of case of corn, for example, the average yield per whom 33,000 are cane harvesters. About 50 hectare in 2013 was similar to that in 1990. Small percent of production is exported, mainly to plots, overuse of soils, and a lack of technology South Korea (23 percent), the United States (11 are the main causes of these stagnating yields for percent), and Chile (8 percent). With a yield of corn and beans. A study that analyzed TFP per 12.2 metric tons per hectare, Guatemala’s sugar producer typologies (excluding large commercial industry is the third most productive worldwide, plantations) concluded that only those catego- behind Colombia and Swaziland with 14.6 and rized as large producers reported gains in 13.9 tons per hectare respectively. This is almost productivity, while all types of other agricultural double the industry’s yield in 1985 (6.4 metric households (infra-subsistence, subsistence, tons per hectare). Moreover, Guatemala ranks production surplus, and small commercial) fourth in terms of sugar exports, has the most suffered from declining productivity between efficient sugar loading terminal in the world 2006 and 2011.23 Low productivity in agriculture, (2,200 metric tons per hour), and has the largest especially among subsistence farmers, hampers storage capacity in the Central American region not only agricultural progress but also overall (431,000 metric tons).25 The country has earned a economic growth by depressing wages and reputation for delivering a high quality product lowering internal demand and investments. (with 95 to 98 percent polarization)26 and for Moreover, earnings in the agricultural sector have fulfilling its commitments. These remarkable also been falling behind other sectors in recent productivity increases in the sugar industry are years (figure 4.21). the result of investments in research and develop- The sugar industry is one of Guatemala’s main ment and in the adoption of new technologies. sources of foreign currency. Comprised of 13 The combined efforts of these investments have sugar mills, the industry generates approximately resulted in: (i) improved genetics; (ii) integrated 60,000 full-time jobs, which support around pest management; and (iii) more efficient 250,000 people.24 In addition, it generates indirect irrigation. However, environmental and social FIGURE 4.21 Th E rnin s Pr mium for Workin Outsid A ricultur is Incr sin Earnings premium relative to Agriculture: Indigenous Earnings premium relative to Agriculture: Non-indigenous 1.2 1.2 Baseline category: agriculture Baseline category: agriculture 1.0 0.96 1.0 Percentage difference Percentage difference 0.82 0.8 0.8 0.65 0.59 0.6 0.53 0.6 0.53 0.54 0.45 0.48 0.36 0.38 0.4 0.4 0.34 0.2 0.2 0.0 0.0 M nuf cturin Construction Comm rc M nuf cturin Construction Comm rc 2006 2014 2006 2014 Source: Calculations using the 2006 and 2014 ENCOVI. 98 Trends and Drivers of Growth in Guatemala performance are often cited as areas of improve- sustainable expansion of the palm oil industry are ment for the sugar industry. as follows: (i) palm oil prices had dropped from Palm oil production has emerged as a new US$800 per ton in 2009 to around US$650 by driver of agriculture production, but several June 2015; (ii) palm oil plantations tend to be factors hinder its sustainable expansion. located in hurricane-prone zones, resulting in Guatemala is currently the fourteenth largest endemic flooding of farms; and (iii) risks producer of palm oil in the world and third in associated with land-holding rights have been a Central America. The area planted with palm oil source of uncertainty to expand the total planted increased from about 30,000 hectares in 2003 to area. 115,000 hectares in 2013.27 The crop generates While coffee accounts for only 3 percent of 17,000 direct jobs and some 45,000 indirect jobs. GDP in Guatemala, the sector generates an Guatemala yields of palm oil are among the estimated 500,000 jobs.28 It employs almost 9 highest in the world (7 tons per cultivated hectare percent of the active labor force and accounts for compared to a world average of 3 to 4 tons per 11 percent of Guatemalan exports. The value of cultivated hectare). The majority of crude palm coffee exports grew by an average annual rate of oil (CPO) produced in Guatemala is sold to 9.6 percent between 2002 and 2013. Exports foreign markets, particularly Mexico, but it is also gains have mainly been due to a shift in the acquired by the fats and oils industry within market in the early 2000s towards the specialty Guatemala, which produces vegetable oil (a food segment. It is estimated that the area under staple) at a reasonable price, thus contributing to production has remained relatively stable at the country’s food security. Clearly the sustain- around 260,000 hectares. A large majority of the able expansion of palm oil production is a key coffee producers are smallholders (70,000 priority for Guatemala, but there are some issues producers have less than 0.7 hectares). Seven out that need to be addressed to ensure this happens. of every ten households in coffee-producing Environmental concerns are emerging as a result regions live in poverty, and two out of ten live in of palm oil expansion in Petén and North areas of extreme poverty. Coffee accounts for over the country that could threaten important forest two-thirds of agricultural production in the 50 reserves. Also, in order to support inclusive municipalities that have very high levels of development, the labor and social standards of extreme poverty. Over the last decade, coffee the sector need to improve. Therefore, the yields have stagnated in Guatemala,29 lagging effective use of land planning and the adoption of behind those of Colombia and Brazil, which are international industry standards will be necessary both major coffee exporters. A lack of investment to improve the sector’s social and environmental in variety development and new technologies as outcomes. Although in 2013 Guatemalan palm well as a lack of proper management has con- producers agreed to adopt the international strained productivity improvements in standards laid out in the RSPO (Roundtable on Guatemala with some plantations having not Sustainable Palm Oil) Principles and Criteria, the been renovated since the 1980s. The coffee sector sector has yet to put them into practice. The remains highly vulnerable both to shifts in government might also consider creating special international prices and to exogenous shocks to mechanisms for improving land rights and production including climate and disease risks expanding access to finance to foster the sector’s (such as Roya or coffee leaf rust). Reducing the growth. Other challenges affecting the vulnerability of the sector and increasing Trends and Drivers of Growth in Guatemala 99 productivity will require considerable invest- The refusal rate of Guatemalan products at the ments in R&D and extension services. For US border is among the highest among Latin example, introducing varieties that are resistant American exporters of fresh products. Clearly, to the coffee leaf rust would significantly increase phytosanitary and sanitary issues are main productivity in the sector and reduce its vulnera- constraints to production and export expansion. bility, but in Guatemala, unlike in Honduras and Examples of phytosanitary issues are the recent Colombia, the lack of long-term investment in outbreaks of Thrips (black insect) in cardamom R&D has limited varietal improvements. production and Roya (leaf rush) in coffee. Guatemala has also been able to diversify its Pesticide residue is the most common sanitary agriculture production base and exports by issue facing exporters of fruit and vegetables, expanding into high-value food and agriculture accounting for 44 percent of the refusals received production and exports such as spices, fruits, and by Guatemalan fruit and vegetable exporters to vegetables. Cardamom emerged as an important the U.S. Besides pesticides, the other problems export commodity in the 1990s. By 2009 its cited in the refusals received by Guatemalan export value had reached US$304 million but exporters were inaccurate labeling (29 percent), subsequently declined to US$240 million in 2014 product adulterations (12 percent) and poor as a result of pest outbreaks and declining hygienic conditions (6 percent).30 Although the international prices. Nevertheless, Guatemala government has been encouraging producers and remains one of the biggest exporters of carda- enterprises to adopt quality and food safety mom, holding some 67 percent of the global management systems, it will be necessary to market. Alta Verapaz, one of the poorest depart- introduce incentives for producers through their ments in Guatemala, produces 70 percent of total relationship with exporters, and to strengthen the cardamom exports, with about 350,000 small- certification and inspection services and regula- scale producers involved in cardamom produc- tory frameworks. This is particularly relevant tion. The country’s fruit exports are dominated given that new changes to the U.S. Food Safety by bananas (a traditional sector) and melons. In Modernization Law are imposing new require- the vegetable sector, which mainly consists of ments on foreign suppliers. small-scale producers, exports grew from US$86 The current pattern of growth in the agricul- million in 2002 to US$220 million in 2013. The ture sector is environmentally unsustainable. The fruit and vegetable processed sector in particular duality that characterizes the agriculture sector in has grown remarkably in the last few years, with Guatemala is, to some extent, structural given average annual growth of 14 percent for pro- existing disparities in access to assets and services cessed fruits and 6.6 percent for proceeded (for example, 8 percent of producers account for vegetables between 2010 and 2013. A constraint 92 percent of the productive land). Therefore, for export-oriented agribusiness is the poor, reducing those disparities is critical. costly, and inefficient ports infrastructure on the Furthermore, agricultural growth has been Atlantic coast, the main departure point for driven by crop substitution (from annuals to exports to the eastern US. This translates into a perennials) but also by a cycle that has involved lack of competitiveness for local and multina- cutting down forests to establish extensive tional firms in the sector, particularly with regard livestock systems and then changing from to fruits and vegetables. livestock to crop production. Furthermore, livestock and large commercial production are 100 Trends and Drivers of Growth in Guatemala increasingly being practiced in fragile ecosys- accounted for 50 percent of Guatemala’s mer- tems, while the expansion of subsistence agricul- chandise exports in 2014, but this share was ture has cause land overuse and soil erosion. substantially lower than in 2002 (67.4 percent). Therefore, given that the potential for expanding Clothing exports to the United States rose to production areas in Guatemala is limited, their highest level in 2004 when they exceeded ensuring the sustainable intensification of US$1.5 billion, but they have declined in recent production in the sector is critical. Moreover, the years in large part because in 2005 the U.S. lack of a strong framework to deal with sanitary removed quotas on textile imports from Asian and phytosanitary issues, including making countries where labor costs are significantly relevant investments in R&D, is a major con- lower than in Guatemala. straint to expanding exports. The construction sector is underdeveloped, There is a need for a strategy to promote the which explain its limited contribution to job sustained, sustainable, and inclusive growth of creation. It accounts for a small share of GDP the agricultural sector. Given the growing (2.8 percent), contributes about 0.1 percentage competition among agricultural crops and points to growth, and is underdeveloped com- activities, land and territorial planning need to be pared to the Central American average.31 This key pillars of such a strategy. The over-exploita- underdevelopment can partly be attributed to low tion of workers and the use of child labor are public infrastructure spending, the lack of a growing concerns related to the expansion of functioning framework for public-private plantation crops in Guatemala, so another key partnerships to attract and mobilize private pillar must be improving labor conditions in sector financing, and partly to a weak residential export agriculture. Because the disastrous effects market due to the low incomes of the population. of pests and diseases as well as climate variability (and climate change patterns) are major obstacles Tourism to sustained agricultural growth, reducing the The tourism industry is small, but has lot vulnerability of the sector also needs to be at the potential. In 2014, almost 1.6 million of tourists core of any growth strategy. A final key pillar visited the country. Relative to its population, the should be increasing smallholder productivity number of tourists is about 10 percent, well and expanding opportunities to adopt high-val- below Costa Rica (50 percent) or the Dominican ue-added production. Republic (38 percent). Guatemala ranked 16th in the region and 80th overall according to the Manufacturing and Construction Travel and Tourism Competitive Index. The Sector tourism industry’s direct share in GDP was 3.4 The manufacturing sector is small is Guatemala. percent in 2014 (the indirect share was 8.8 Its share of GDP declined from 19.2 percent in percent), and it contributed directly to 2.9 2002 to 17.7 percent in 2014 because it has been percent of total employment (indirectly, it growing more slowly than other sectors of the contributed 7.9 percent).32 With revenues economy. Manufacturing has contributed 0.6 amounting to 15 percent of merchandise exports percentage points to GDP growth since 2010, in 2013, the tourism industry is one of with food and beverages and textile production Guatemala’s main source of foreign exchange. leading the sector. Manufacturing products The country possesses many attributes for Trends and Drivers of Growth in Guatemala 101 tourists, including Maya ruins, protected areas countries like Nicaragua (7.1 percent), Honduras (29.8 percent of the country), volcanos, wide (5.8 percent), Costa Rica (4.7 percent), and topographic diversity, and pleasant climate. Panama (10.2 percent). Preliminary data as of Despite its attractive attributes, Guatemala has September 2015 show that FDI inflows shrunk by not fully capitalized on its tourism potential, 20.2 percent compared to the same period in partly attributed to high levels of crime and 2014, which can be attributed partly to various violence as well as constraints in the institutional political scandals in 2015. support to advocate and promote the sector. The impact of FDI on the composition of exports and the economy varies depending on the type of investment involved. In Guatemala, Foreign Direct the composition of FDI inflows have gradually Investment shifted from primary sectors such as agriculture, petroleum, and mining to non-tradable sectors, Guatemala has a long tradition of attract- such as electricity, banking and insurance, and ing foreign direct investment, which has contrib- commerce (figure 4.24). Business processing uted to the development of certain industries. (BPO), call centers, and other niche industries The country was one of the pioneers in attracting (such as the production of ornamental plants) FDI with the initial development of coffee have all flourished by relying on FDI. In general, production in the late 1800s and of bananas in the impact of FDI on the development of the the early 1900s.33 After the 1996 Peace Accord, manufacturing sector is difficult to quantity. the privatization of state-owned enterprises However, Honduras is an interesting example of (electricity and telecommunications) accelerated how attracting efficiency-seeking FDI has the inflow of FDI, which was also directed jumpstarted the light manufacturing sector, towards other sectors such as food and beverages, particularly insulated wire for cars.35 textiles, retail, and mining. Other than trade agreements, legislative and institutional changes contributed to the increase in FDI such as: (i) the Exports adoption of the 1998 investment law; (ii) the Trade policies have long been at the center of 1997 enactment of the Mineral Law established Guatemala’s development strategy. In the 1960s, more favorable conditions for foreign investment, Guatemala was one of the original members of and as a result the number of exploration and the Central American Common Market exploitation licenses increased dramatically;34 (CACM), which contributed to the creation of an (iii) the liberalization of the exchange rate in industrial base and promoted regional trade. 2001; (iv) the creation of the agency “Invest in Since the mid-1980s, substantial progress has Guatemala” in 2004; and (v) the creation of the been made in Guatemala in reducing tariff rates National Competitiveness Program in 2004. and non-tariff barriers (NTBs) and removing Nevertheless, Guatemala’s FDI flows are export licenses and taxes.36 In the mid-1990s, the among the lowest in Central America. FDI government deregulated and liberalized the inflows into Guatemala almost doubled between financial, power, and telecommunication sectors 2007 and 2014 (figure 4.23), reaching 2.2 percent and has more recently given tax and duty of GDP in 2014. However, they are still lower exemptions to maquilas and non-traditional than the flows into other Central American exports. Guatemala became a member of GATT 102 Trends and Drivers of Growth in Guatemala FIGURE 4.22 Gu t m l L s B hind in Attr ctin FDI Foreign Direct Investment, Selected Countries, 2014 12 10.2 10 8 7.1 5.9 6 4.7 4.3 4 2.4 2.6 2.1 2 1.1 1.4 1.1 0.8 0.3 0 El S lv dor Gu t m l L tin Am ric Cost Ric Hondur s Nic r u P n m & C ribb n US$ billion % GDP Source: Calculated using data from the World Development Indicators and CEPAL (2015). FIGURE 4.23 For i n Dir ct Inv stm nt FIGURE 4.24 El ctricit nd M nuf cturin H s B n Growin sinc 2009 Account for th Bulk of FDI Inflows 1.6 3.0 100 1.4 2.5 80 Percent of FDI inflows 1.2 2.0 US$ Billions 1.0 60 % of GDP 0.8 1.5 0.6 40 1.0 0.4 20 35.7 0.5 0.2 26.8 32.2 27.7 12.2 14.0 9.8 12.1 14.7 0.0 0.0 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2007 2008 2009 2010 2011 2012 2013 2014 2015 S p S p FDI (billions of US$) FDI (% of GDP) El ctricit A ricultur nd minin M nuf cturin Comm rc T l communic tions B nks nd insur nc Oth r s ctors Source: Calculations using data from the Central Bank of Source: Calculations using data from the Central Bank of Guatemala. Guatemala. in 1991 and the WTO in 1995, joined Central America in 2012 has led to a more open CAFTA-DR in 2006, and has also signed Free foreign investment regime and flexible foreign Trade Agreements or Preferential Trade exchange arrangements. Agreements with the Dominican Republic, Recently Guatemala’s trade openness has been Mexico, Panama, Chile, Colombia, Peru, declining and trails behind other countries of Ecuador, Venezuela, Belize, Taiwan, and Cuba. comparable economic size and conditions. When Additionally, the conclusion of an Association measured as trade flows (exports plus imports of Agreement between the European Union and goods and services as a percentage of GDP), Trends and Drivers of Growth in Guatemala 103 FIGURE 4.25 Tr d Op nn ss D clin d in FIGURE 4.26 M rch ndis Exports Gu t m l Whil It incr s d in Most C ntr l p r C pit Ar Low Am ric n Countri s Exports and Imports of Goods and Services, 2001 and 2014 Merchandise Exports Per Capita, 2014 P n m 155 P n m 3,421 Hondur s Cost Ric 2,365 113 LAC 1,946 Nic r u 102 P r u 1,474 P r u 90 Bolivi 1,161 Bolivi 85 Hondur s 996 Cost Ric 72 2001 Dominic n R. 950 El S lv dor 2014 69 El S lv dor 863 Gu t m l 56 Nic r u 852 LAC 48 Gu t m l 676 0 50 100 150 200 0 1000 2000 3000 4000 P rc nt of GDP Curr nt US$ Source: World Development Indicators Source: Calculations using data from World Development Indicators. trade openness increased by 19 percentage points decline of apparel and textile exports after the between 1960 (27.2 percent) and 1999 (46.4 end of the WTO’s Agreement on Textiles and percent). As shown in Figure 4.25, between 2001 Clothing in 2005 and (ii) the start of important and 2014, trade openness in Guatemala declined mining projects in the mid-2000s that increased by 13 percentage points, reaching 56.3 percent. the exports of precious metals like gold and silver Guatemala’s progress in increasing trade flows is and lately of industrial minerals like zinc, lead, poor in comparison to other Central America and nickel. In terms of markets, Guatemala now countries, which have substantially increased exports its goods to 142 distinct markets, up their trade openness during the same period. from 92 in 1994. Export diversification has Both exports and imports have contributed to softened the impact of the 2008-2009 global this decline in Guatemala’s trade flows. In terms economic crisis on exports from Guatemala.37 of per capita merchandise exports, another However, product diversification has not indicator of trade openness, Guatemala is also boosted export sophistication. The complexity of lagging behind other Central American countries the Guatemalan export basket has remained (figure 4.26). To facilitate trade, the government stagnant over the last two decades while other initiated a project to integrate Guatemala’s countries in the region have increased the customs and other border agency procedures sophistication of their export baskets (figure with those of Honduras. 4.28). Three agricultural products (coffee, Merchandise exports have diversified in terms bananas, and sugar) accounted for 21.6 percent of of products, and Guatemala now has the most Guatemala’s exports in 2014, up from 17.9 varied basket in Central America. The number of percent in 2005 (table 4.1). Efforts to diversify its its export products increased from 1,952 to 3,272 exports of non-traditional products has focused between 1994 and 2014, currently the highest in on fresh, frozen, and processed fruit and vegeta- the region (figure 4.27). Product diversification bles and on flowers, seeds, and ornamental plants can be traced back to two main causes: (i) the to the U.S. and European markets. Growth of 104 Trends and Drivers of Growth in Guatemala FIGURE 4.27 Export Div rsific tion FIGURE 4.28 Exports L ck Sophistic tion R fl ct d in L r Numb r of Products Export Sophistication (EXPY) 4,000 20,000 3,272 3,500 2,997 17,600 3,000 2,812 2,591 2,500 2,113 15,200 2,043 2,000 1,500 12,800 1,000 10,400 500 0 8,000 2000 01 02 03 04 05 06 07 08 09 10 11 12 2013 r s p. do c u l ur Ri .R m nd lv r m t st Ho Gu t m l Cost Ric Dom. R p. c S Do Ni Co Gu El 1994 2005 2014 Hondur s Nic r u El S lv dor Source: World Integrated Trade Solutions (WITS). Number of Source: World Integrated Trade Solutions (WITS). Export Products (HS 6-digit). Note: The Sophistication of Exports (EXPY) uses methodology introduced by Hausman et al. (2005) to estimate the level of techno- logical sophistication embodied in a country’s export portfolio. TablE 4.1  Top Export Products, 2005-2014 2005 2014 Product US$ millions % Product US$ millions % 1 Women's or girls' blouses, etc, of 541.6 10.1 1 Raw cane sugar, in solid form 950.8 8.8 cotton, knit 2 Coffee, not roasted or 464.1 8.6 2 Bananas, including plantains, 721.2 6.7 decaffeinated fresh or dried 3 Bananas, including plantains, 261.6 4.9 3 Coffee, not roasted or 667.2 6.2 fresh or dried decaffeinated 4 Raw cane sugar, in solid form 236.6 4.4 4 Silver ores and concentrates 357.9 3.3 5 Petroleum oils and oils obtained 226.2 4.2 5 Lead ores and concentrates 349.3 3.2 from Bituminou coal Total of top five products 32.2 Total of top five products 28.1 Source: Based on data from COMTRADE. non-traditional exports (such as melons, berries, flowers, and plants) picked up during the last Underlying Constraints decade, but many of these products have failed to on Inclusive Growth become major agricultural exports. Similarly, For many years private firms have reported exports of services remains concentrated in experiencing obstacles within the investment tourism (almost 60 percent), and information climate that have negatively affected their and communication technology service exports productivity. The World Economic Forum, which account for 20 percent of service exports, carries out yearly surveys to construct its index of including computer and information services (1.4 global competitiveness, asks business executives percent) and other business services (7 percent). Trends and Drivers of Growth in Guatemala 105 to identify the most problematic factors that A similar set of challenges was identified in the hinder doing business. About half of the firms in 1951 World Bank report about Guatemala’s Guatemala identified governance (crime and economic development (box 1.1). Although theft, corruption, and an inefficient public sector) Guatemala scores well in the latest Global followed by the low quality of the labor supply as Competitiveness Report from the World the main constraints that they faced (figure 4.29). Economic Forum for its macroeconomic The World Bank Enterprise Survey for Guatemala environment, financial market development, and for 2010, the latest year available, found that business sophistication, it got low scores in the enterprises reported the top five problem areas as areas of institutions, health, and education. crime and theft (21 percent), practices in the Institutional challenges in Guatemala are informal sector (19 percent), political instability discussed in Chapter 5. (16 percent), and corruption (11 percent). These The combination of low human capital and constraints in the investment climate have investment with weak institutions has resulted in harmful effects on firms’ productivity. Using rates of economic growth that are not enough to objective indicators of these constraints, a 2009 reduce poverty levels. Having low revenues study found that improvements in regulatory relatively to its GDP, Guatemala has not been able compliance and governance indicators (proxied to increase its historically low endowments of by crime and security statistics and the incidence human capital. Moreover, public investment is of bribes) would have the largest positive effect too small to be able to attract private investment on firm-level productivity.38 to address infrastructure shortcomings. Weak Guatemala’s growth constraints are not new. institutions have resulted in weak rule of law, Comprehensive growth reports for the past 30 widespread corruption, and high levels of crime years have consistently identified the same and violence. Ultimately, policy inertia and the constraints: low endowments of human capital, lack of a coherent growth strategy reduce the low investment levels, inadequate infrastructure, impact of public policies.40 Addressing these weak institutions, and limited access to finance.39 issues will be crucial in order to enhance growth and prosperity for Guatemala’s citizens. FIGURE 4.29 Crim nd Th ft Continu s to N tiv l Aff ct Priv t Busin ss A Large Education Deficit Guatemala’s education performance is poor, T x s (r t s & r ul tion) 7 which means that it lags behind its peer countries F ctor m rk ts (fin nc & l bor r ul tion) 10 in terms of competitiveness. The only gains In d qu t suppl produced by the government’s low levels of of infr structur 10.5 In ffici nt ov rnm nt investment in education have been in terms of bur ucr c 10.8 In d qu t l duc t d primary school completion. Indeed, between workforc 11.3 2000 and 2014, the share of adults (those who are Corruption 18.1 at least 25 years old) that had at least a complete Crim nd th ft 20.2 primary education increased from 30 percent to 0 5 10 15 20 25 43 percent (figure 4.30). As shown in Figure 4.32, P rc nt of r spons s dropout rates are quite high in Guatemala 2006 2015 compared to other countries. In 2010, only about Sources: World Economic Forum (2006 and 2015). 106 Trends and Drivers of Growth in Guatemala 18 percent of Guatemalans in the 25 to 29 age especially those from indigenous communities. group had completed secondary education, well According to a World Bank analysis of small and below Honduras (30 percent) and the Latin medium-sized enterprises in Guatemala, only 10 American average (51 percent). Returns to percent of their owners had attended tertiary education in Guatemala are high but declining, school and fewer than 50 percent had been suggesting either an excess labor supply or low enrolled in secondary school. In addition, only 3 labor demand for the skills being produced in the percent of their permanent employees had school system (figure 4.31). received a higher education, while 46 percent had Low educational attainment, the limited supply only primary and secondary schooling.41 of skilled labor, and the low quality of education will hinder productivity and the transition to Infrastructure Gap high-value added sectors in Guatemala. The lack Coverage of roads and electricity is modest in of an educated workforce affects firms’ productiv- Guatemala compared with coverage in its ity in different ways. Low levels and the poor structural peers. In terms of road density, quality of education make it more difficult for Guatemala ranks better than Honduras but worse workers to use their existing physical capital than Nicaragua and Panama (figure 4.33). Only efficiently and to adapt to new technologies 89.6 percent of dwellings are attached to the quickly. An inadequately educated workforce electricity grid, the fifth lowest percentage in the hinders technical progress and, thus, productivity Latin America region, though this has improved growth, and curtails the economy’s capacity to in recent years (figure 4.33). Nevertheless, wide develop high-value added sectors. Moreover, the disparities exist between rural and urban areas inadequacy of education prevents the majority of and across departments. For example, dwellings the population from accessing better paid jobs, in the department of Guatemala have almost FIGURE 4.30 G ins in Prim r Educ tion FIGURE 4.31 R turns to Educ tion Att inm nt Acc l r t d in P st 14 Y rs r Hi h, but D clinin Educational attainment of adults 25+ years old Earnings Premium by Education Percentage difference Baseline category: 100 1.5 1.4 incomplete primary or less 80 1.2 1.0 60 0.9 0.7 40 0.6 0.4 20 0.3 0.3 0.1 0 0.0 Prim r S cond r Post s cond r 70 75 50 55 60 65 80 85 90 95 00 06 14 20 19 19 19 19 19 19 19 19 19 20 19 20 No duc tion Prim r (som ) Prim r (compl t d) 2006 2014 S cond r (som ) S cond r (compl t d) T rti r ( n ) Source: Calculations based on data from Barro and Lee (2010) for Source: Calculation using data from Encuesta Nacional de Empleo 1950 to 1995 and from the 2000, 2006, and 2014 ENCOVI. e Ingresos (ENEI). Trends and Drivers of Growth in Guatemala 107 FIGURE 4.32 V r F w Gu t m l n Compl t S cond r Schoolin 120 25-29 100 with s cond r schoolin 81 80 of popul tion 60 51 40 30 18 P rc nt 20 0 El S lv dor Unit d St t s Swit rl nd J p n Sp in , R p. OECD P ru Philippin s l Br il LAC Dom. R public M xico Hondur s por Fr nc Gr c Chil G rm n It l Cost Ric Cro ti Lithu ni Indon si Colombi P n m C ntr l Am ric u Ar ntin Gu t m l Portu Nic r Sin Kor Source: Calculations based on Barro and Lee (2010). universal coverage (99.5 percent) whereas in Alta value of the goods being transported.43 The Verapaz only 43.5 percent have access to electric- main factors that contribute to these high costs ity.42 Besides lowering standards of living, the are: (i) inefficient and costly road freight lack of access to electricity also affects employ- services largely due to a lack of competition; (ii) ment opportunities by hindering firms’ deficient and costly seaport operations and productivity. infrastructure; (iii) costly document and goods The quality of infrastructure in Guatemala has processing, including delays at borders (both deteriorated in recent years. Figure 4.34 presents ports and inland border crossings); (iv) urban the World Economic Forum Index on the overall congestion in Guatemala City; and (v) poor quality of infrastructure, which shows that road conditions, particularly secondary and Guatemala has the highest ranking among all of tertiary networks, due in part to poor its structural peers. However, the quality of its maintenance. infrastructure has worsened in recent years in all The infrastructure deficit raises concerns about sectors, especially in roads, ports, and airports the adequacy of current levels of infrastructure (figure 4.34). The electricity supply is the only spending and the existing implementation kind of infrastructure that has improved and capacity for infrastructure projects. Guatemala significantly grown, but there are significant rural stands out among Latin America countries for its areas, particularly in the northern part of the low levels of infrastructure investment at only 1.6 country, that are still not connected to the percent of GDP (figure 4.35). Public infrastruc- national grid. ture spending (figure 4.35) has declined because In terms of transport and logistics, Guatemala capital expenditures have reached a historic low faces high costs that negatively affect its compet- in recent years and are not sufficient to support itiveness and reduce gains from trade. A recent sustained growth and meet the country’s needs. analysis of four logistics corridors estimated Estimates suggest that Guatemala could increase costs ranging from 6.4 to 11.4 percent of the growth by over 1 percentage point by increasing 108 Trends and Drivers of Growth in Guatemala its investment-to-GDP ratio to the level of the urban and rural, including local transport) and average for Mexico, Peru, and Chile.44 road transport, which together account for about Infrastructure investment spiked in 2007 and 80 percent of the total capital expenditures. 2010 due to private investments in the telecom- While the bulk of public investment was tradi- munications and energy sectors respectively tionally allocated to and handled by the central (figure 4.35b). government, in the last 10 years capital transfers Capital expenditure is currently concentrated to other public sector entities (including regional on community development and transport. The development councils and municipalities) have vast bulk of public investment is allocated to the accounted for more than half of all public budget lines of community development (both investment. FIGURE 4.33 Mod st Cov r of Ro ds nd El ctricit Road Density, 2011 Access to Electricity, 2005-2013 100 Bolivi 7.5 P r u 8.0 80 % of dw llin s Hondur s 12.8 Gu t m l 14.8 Nic r u 18.1 60 P n m 20.3 El S lv dor 34.7 40 0 5 10 15 20 25 30 35 2005 2006 2007 2008 2009 2010 2011 2012 2013 km of ro d p r 100 sq. km of l nd r Gu t m l Cost Ric El S lv dor Hondur s Nic r u P n m Source: World Development Indicators. Source: CEPAL (2014). FIGURE 4.34 Th Qu lit of Infr structur H s D t rior t d Quality of Overall Infrastructure, 1 to 7 Guatemala's Infrastructure Quality: 1 to 7 6 6 5.4 5 5 4.0 4.0 4.0 4.1 3.7 3.9 4 4 3.6 3.3 3.2 3 2.5 3 2 2 1 1 0 0 Gu t m l El Hondur s Bolivi Nic r u P r u Ro ds Ports Ov r ll Airports El ctricit 70 S lv dor 88 105 108 131 87 79 70 80 suppl 69 49 R nkin , out of 140 countri s in 2015 R nkin , out of 140 countri s in 2015 2010 2015 2010 2015 Source: World Economic Forum (2010, 2015). Trends and Drivers of Growth in Guatemala 109 Infrastructure spending has decreased despite Infrastructure (ANADIE) to boost investment high investment needs. Guatemala has relatively levels through public-private partnerships. limited road infrastructure coverage, and its ANADIE has identified seven projects costing electricity coverage ranks among the lowest in more than US$1.3 billion, including a govern- Latin America. Furthermore, Guatemala’s quality ment center (US$180 million), the Tecum Uman of infrastructure, as measured by the World Port (US$40 million), the Pacific Train (US$250 Economic Forum’s competitiveness index, million), solid waste projects (US$75 million), a deteriorated between 2010 and 2015. Frequent north-south road (US$220 million), and an natural disasters have inflicted additional damage urban train (US$420 million). However, so far to the country’s infrastructure, further adding to progress has been made on only one of these the financial strains. For example, the series of projects.46 Another concern is that public-private disasters of 2010 (in Agatha and Pacaya) caused partnerships need to be assessed and regulated, an estimated US$305 million (0.74 percent of for example, to ensure that PPP tenders are GDP) in damages in the transport sector alone. awarded transparently and that contract terms In light of this, the reduction by half of public are effectively specified and regulated, and this investment in road transport from 1.8 percent of will require further investment. Legal certainty GDP in 2011 to 0.9 percent in 2014 is of concern, and respect for rule of law is also a matter of especially considering that this is not compen- concern for domestic and foreign investors. The sated for by private sector investment.45 PPP agenda needs to fact in these elements to It might be possible to increase investment in ensure successful promotion of projects. infrastructure through the use of public-private partnerships (PPPs) without placing greater Crime and Violence pressure on public financing. In 2013, the Crime and violence are among the main chal- government established the National Agency for lenges to growth in Guatemala. For the past 10 the Development of Partnerships in years, it has ranked at the top obstacle to business FIGURE 4.35 Gu t m l ’s Inv stm nt in Infr structur is on of th Low st in th R ion Infrastructure Investment in Latin America Guatemala - Infrastructure Investment 4 Cost Ric 5.5 Infrastructure Investment (% of GDP) Uru u 5.1 Nic r u 4.9 Bolivi 4.5 3 P ru 4.5 Br il 4.1 M xico 3.3 P n m 3.3 2 Ar ntin 2.9 Chil 2.8 Colombi 2.5 El S lv dor 2.3 1 Ecu dor 1.6 Gu t m l 1.6 P r u 1.5 0 0 1 2 3 4 5 6 2000 01 02 03 04 05 06 07 08 09 10 11 2012 Tot l Infr structur Inv stm nt (% of GDP), 2012 Public Priv t Source: CEPAL (2014). Note: Infrastructure investment includes transport, energy, telecommunications, and water and sanitation. 110 Trends and Drivers of Growth in Guatemala operations reported by business executives FIGURE 4.36 C pit l Exp nditur s b th (figure 4.29). Although Guatemala’s homicide C ntr l Gov rnm nt H s B n D clinin rate has declined since 2008, in 2015 the homi- 5 cide rate increased slightly to 33.8 from 31.2 in 2014 (figure 4.37).47 This homicide level is well 4 above the average for all Latin America (around 0.4 Percent of GDP 1.0 3 25 per 100,000 inhabitants). High robbery 0.4 0.4 0.4 1.8 victimization, increased incidence of sexually 2 1.3 1.1 0.9 0.9 related crimes, kidnappings, and, violence-related injuries have also contributed to the strong 1 1.4 1.4 1.5 1.6 1.5 perceptions of insecurity among citizens.48 0 Crime and violence affect specific geographic 2010 2011 2012 2013 2014 areas disproportionately. Over 39 percent of Communit d v lopm nt Ro d tr nsport Oth r Environm nt l prot ction Housin A ricultur national homicides49 between 2003 and 2013 were reported to have occurred within the metropolitan area of the Department of Source: Calculations based on data from the Ministry of Finance Guatemala, which represents about 17 percent of of Guatemala. the population50. Other regions with the highest homicides rates, such as Izabal, Chiquimula, El for firms to invest, create jobs, and expand.56 Petén, Zacapa, and Jutiapa, are located along the Productivity is hampered by absenteeism or by borders with El Salvador, Honduras, Mexico, and the need to limit working hours for workers who Belize.51 Because these areas are part of transship- are concerned about their personal security. ment routes for drug trafficking, this is suggestive Furthermore, crime and violence also could also of a possible link between high homicide rates reduce returns to education, discouraging and organized crime.52 individuals to pursue higher levels of education High levels of crime and violence increase the and thus reducing the pool of skilled labor. costs of doing business and lower returns to Finally, high security costs may be deterring investment. The economic costs of these crimes foreign firms from establishing operations in are high and rising – an estimated 7.7 percent Guatemala or are inducing them to leave to GDP in 2011,53 11.3 percent GDP in 2013,54 and resettle in countries with less crime and violence. 10 percent of GDP in 2014.55 These high costs hinder competitiveness and reduce profit margins and can make the difference between Business Regulations and whether a firm survives or fails. The public’s lack Competition of confidence in the police has meant that private Business regulations and competition policy security personnel now outnumber the police influences growth by facilitating private sector force. The 2010 World Bank Enterprise Surveys participation in the economy.57 One of the showed that on average 70 percent of Guatemalan government’s key functions is to approve and firms pay for their own private security, spending implement sound policies and regulations that about 1.9 percent of their yearly sales on average. will foster private sector development. Moreover, In addition to such direct costs, crime and through business and market regulations and a violence affect the opportunities and incentives commitment to enforcing property rights and Trends and Drivers of Growth in Guatemala 111 contracts, state institutions can affect returns to priority areas that need to be reformed (figure investment and thus how private firms behave. 4.38b).59 This section reviews some current aspects of Guatemala lacks both a clear competition Guatemala’s state institutions that appear to be policy and a competition authority to address hindering private sector activities, including poor anticompetitive behavior and high market business regulations and lack of competition. concentrations.60 Without neither a competition The ease of doing business also influences the law nor an independent competition authority, competitiveness of the economy and investment Guatemala is one of the few countries in Latin decisions of private firms. Guatemala’s ranks America that does not have a competition regime quite high in the World Bank’s 2015-2016 Doing in place. Although the Guatemalan Constitution Business Index - 81th out of 189 countries (figure includes a provision that forbids monopolies, this 4.38a). This is probably because the government provision has not been implemented in practice. has recently implemented some innovative IT Likewise, despite the fact that both the Law of solutions to reduce red tape and modernize the Hydrocarbons and the Electricity Law include interface between the public administration and competition provisions, the government has not the final users, especially in the areas of tax enforced them or sanctioned any uncompetitive payments, customs, and property registration.58 practices. Guatemala also currently lacks a These modernization efforts should be extended merger control regime for both general applica- to other areas of business regulations to facilitate tion and for regulated sectors.61 However, as part investment and increase firms’ productivity. of its commitments under the Association Guatemala’s lower ranking on specific indicators Agreement between Central America and the related to the protection of minority investors, European Union, Guatemala has agreed to enact contract enforcement, resolving insolvency, and a competition law by November 2016.62 dealing with construction permits indicate Examples of restrictive business practices can be found in various sectors of the economy.63 In the sugar sector, one company holds a monopoly FIGURE 4.37 Homicid R t H s B n on the distribution of sugar and thus sets the D clinin in Gu t m l prices for the consumers. There are dominant suppliers of construction materials (cement, steel, 50 45 and bitumen), canned beans production, and Homicide per 100,000 people 40 poultry production. In the road freight service, 35 for example, the lack of competition results in an 30 almost 100 percent markup in freight prices per 25 ton-kilometer.64 20 15 10 Remittances and Exchange 5 0 Appreciation 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 As in El Salvador and Honduras, high migration rates and resulting remittances may be reinforc- Source: National Civil Policy (PNC) and National Institute of Statistics (INE) for 1995 and 2014, and Ramos (2016) for 2015 ing low growth in Guatemala in several ways.65 reporting data from . First, remittances can contribute to the “Dutch Note: Data for 2015 comes from Ramos (2016). 112 Trends and Drivers of Growth in Guatemala Knowledge Gap  What’s the full cost of crime to the Guatemalan Economy? Guatemala, like other countries in the Northern Triangle, is showing signs of increasing gang violence and extortions, and associated closure of business activities. Firms report that extortion demands could range between US$45 to $5,000 per month. Both formal and informal firms are equally affected. Dealing with crime and violence could represent between 8 to 15 percent of business costs. Although there are not statistics about number of business closures due to extor- tions, the question arises of the consequences on entrepreneurial activities and labor incomes. Source: Miranda (2016) and El Periódico (2014). disease” effect because capital inflows can cause in the bottom 40 percent of income earners has real exchange rate appreciation. A rise in house- an account with a financial institution compared hold income as a result of the inflow of remit- to 51 percent of adults in the richest 60 percent of tances leads to an increase in consumer demand, households. In contrast with the regional average, which raises prices for domestic non-tradables, the gap between adults living in the poorest and prompting a reallocation of labor away from the the richest households widened from 16 percent- tradable goods and real exchange rate apprecia- age points in 2011 to 23 percentage points in tion. Second, migration has directly reduces the 2014. size of the labor force, but it may also indirectly Access to loans from financial institutions influence the labor market participation of those remains limited like in the rest of Latin America left behind by increasing reservation wages. The and the Caribbean region. The recent Findex real exchange rate has appreciated by 30 percent survey finds that only 12 percent of adults since 2003, which is detrimental for borrowed from a financial institutions in 2014, competitiveness.66 down from 14 percent in 2011 (figure 4.39). For poorest individuals, only seven percent borrowed Financial Inclusion from a financial institution, below 16 percent Guatemala saw rapid growth in account owner- among the richest one. Family and friends ship, but the gap between the poorest and richest remain the first source of financing for households increased. According to the World Guatemalan adults (20 percent). Bank Financial Inclusion database (Findex), 41 The dearth of financing instruments, particu- percent of adults has an account with a financial larly loans, suitable for small and medium-sized institution in 2014, up from 22 percent in 2011. enterprises (SMEs) and micro-entrepreneurs Guatemala’s account ownership is still below constrains firm investment and growth. About countries in the Latin America and Caribbean one third of Guatemalan (SMEs) are credit region (51 percent of adults), although above El constraint (rejected by financial institutions or Salvador (35 percent), Honduras (30 percent), self-excluded due to inadequate products by and Nicaragua (19 percent). Large disparities financial institutions) in Guatemala, among the exist in account ownership, as 27 percent of those highest levels in the Latin America and the Trends and Drivers of Growth in Guatemala 113 FIGURE 4.38 Gu t m l ’s Burd nsom Proc dur s for Doin Busin ss Ease of Doing Business Guatemala - Doing Business Bolivi 157 Prot ctin Minorit Inv stors 174 S n l 153 Enforcin Contr cts 173 125 R solvin Insolv nc 153 Nic r u D lin with 106 Hondur s 110 Construction P rmits St rtin Busin ss 101 P r u 100 Tr din Across Bord rs 78 El S lv dor 86 R ist rin Prop rt 75 Gu t m l 81 50 P in T x s P n m 69 G ttin El ctricit 21 Cost Ric 58 G ttin Cr dit 15 0 50 100 150 200 0 50 100 150 200 R nkin , out of 189 countri s R nkin , out of 189 countri s Enforcing Contracts Protecting Minority Investors Gu t m l 173 Gu t m l 174 Hondur s 150 Cost Ric 166 P n m 148 El S lv dor 155 S n l 145 S n l 155 Bolivi 136 Nic r u 150 Cost Ric 124 P r u 144 El S lv dor 109 Bolivi 144 Nic r u 94 Hondur s 134 P r u 75 P n m 66 0 50 100 150 200 0 50 100 150 200 R nkin , out of 189 countri s R nkin , out of 189 countri s Source: Doing Business Indicators (2015-2016). Caribbean region.67 Furthermore, when banks are cumbersome and expensive registration proce- used to finance investments, Guatemalan SMEs dures required to do so. The lack of eligible reported bank financing covered between 15 to collateral and efficient credit information results 25 percent of total investment, among the lowest in firms being granted low value loans, thus in the region (figure 4.40). Besides the limited use preventing them from growing into more of bank financing, Guatemalan firms are also not sustainable businesses. Banrural, a state-owned using leasing or factoring to finance their need development bank, is the main provider of for investment or working capital. Leasing and financial services to SMEs and to indigenous factoring represent less than 0.1 percent of populations (box 4.2). banking credit. Seed capital instruments are A stronger regulatory and supervisory almost inexistent in Guatemala. Only one private framework for microfinance institutions (MFIs) equity fund for MSMEs operates in the country and financial cooperatives would ensure sound and only five equity incubators. Firms rarely use growth and facilitate the consolidation of supply. their movable assets as collateral because of the For financial cooperatives, this is particularly 114 Trends and Drivers of Growth in Guatemala FIGURE 4.39 Account Own rship Incr s d b tw n 2011 nd 2014, but Borrowin is Limit d Adults using accounts and borrowing, 2011 and 2014 60 51 Percent of adults (ages 15+) 50 2011 2014 41 40 35 30 27 20 20 12 10 3 0 Poor st 40% F m l All dults Rich st 60% Inform l Fin nci l F mil l nd rs institutions or fri nds Account t fin nci l institution Borrow d from Source: Findex Survey. FIGURE 4.40 F w r Gu t m l n SMEs Us B nks to Fin nc Inv stm nts Percent of firms using banks to finance investments, 2010 70 Sm ll (5-19) M dium (20-99) 60 50 40 30 20 10 0 R r r o s p. ru . il .B do do m xic c ic i d u l bi ic in ,C liv li ur Ri u ,R .R in m m nt P Br n Bo m B nd rin lv u m r lo M n m Ec Gr t r st l Do Co Ho Su c J S Do Ar u Ni Co P Gu Gu El n V Source: World Bank Enterprise Surveys. urgent as they hold the deposits of 10 percent of Recent research undertaken by the World Bank the population. For MFIs, an appropriate on the current financial services market in regulatory framework would help them to grow Guatemala found a lack of transparency (poor by allowing the largest MFIs to take deposits as disclosure of total costs and the existence of well as ensuring adequate consumer protection. hidden fees), unfair practices (collecting twice on Improving the regulatory and supervisory the same loans and seizing property without a framework for financial consumer protection court ruling), and weak redress mechanisms for would protect the most vulnerable from becom- consumers. ing over-indebted when they apply for a loan. Trends and Drivers of Growth in Guatemala 115 Box 4.2  The Case of Banrural, Guatemala Banrural S.A. was created in 1998 as the result of the restructuring of the Guatemalan National Agricultural Development Bank (Banco Nacional de Desarrollo Agrícola or Bandesa). The process of transforming Bandesa into Banrural was part of the modernization process of the Guatemalan financial system approved by the Guatemalan Congress in 1997. Banrural was conceived as a joint public-private venture with 30 percent of its capital provided by the state and 70 percent by the private sector. The mixed ownership structure was designed to facilitate the active participation of civil society groups involved in the rural sector with a strong social commitment. Banrural’s private shareholders include community groups, cooperatives, and organizations. It holds the accounts of all government employees and manages all public trust funds. As of December 2015, Banrural was the second largest bank in Guatemala in terms of assets (valued at US$6.9 billion). The bank relies on an extensive network of almost 1,000 branches and 2,174 agents to serve a loan portfolio of US$4.3 billion, equivalent to 21.3 percent of the Guatemalan banking system. At the end of 2014, Banrural started operations in Honduras, and as a result of the forced liquidation of Banco Continental in Honudras, it purchased assets estimated at US$225 million. Banrural aims to foster economic activity in rural areas of the country in a way that is profitable and sustainable for its shareholders, while maintaining a development objective with an entrepreneurial vision. It offers a diverse array of financial products and has a special focus on indigenous populations. Microenterprise credit, corporate credit, second-tier lending, and international operations as well as a number of payment services (water, electricity, and telephone) are all part of its portfolio. First-tier lending is provided by a specialized microfinance unit, which is responsible for providing loans to individuals or to groups (e.g., solidarity groups, or communal banks). Other loans are tailored to small and medium-sized farmers, consumers, and housing renovations and expansions. 116 Trends and Drivers of Growth in Guatemala References Estudios e Investigaciones, Santiago de Chile: CEPAL. _________. 2015. La Inversión Extranjera Directa en America Agexport. January 6, 2015. Guatemala cierra el 2014 como Latina y el Caribe. Santiago de Chile: CEPAL. mercado emergente de Outsourcing. Guatemala City. Cuevas, Mario, Sigfrido Lee, and Bismarck Pineda. 2010. Retrieved from: http://agexporthoy.export.com. Industrial Policy in Guatemala: A Case of Policy Inertia gt/2015/01/guatemala-cierra-el-2014-como-merca- under Changing Paradigms. Washington, DC: Inter- do-emergente-de-outsourcing/. American Development Bank. América Economía. 2015. Ranking Multilatinas 2015. Doing Business, The World Bank (http://www.doingbusiness. 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What you export Cannock, Geoffrey, and Annie Chumpitaz. 2013. “Análisis de matters. Journal of Economic Growth, 12(1), 1–25. los factores determinantes de la producción y productivi- Hernandez Ore, Marco Antonio; Sousa, Liliana D.; Lopez, dad del sector agropecuario en Guatemala.” In Reflexiones J. Humberto. 2015. Honduras : Unlocking Economic sobre el desarrollo de la economía rural de Guatemala, by Potential for Greater Opportunities. Systematic Country Edna Armendáriz, Roberto de Michele, Osmel Manzano Diagnostic;. Washington, DC: World Bank. Retrieved and Pedro Martel, 55-100. Washington, DC: IDB. from: https://www.openknowledge.worldbank.org/ Casanova, Lourdes and Hoeber, Henning. 2009. Pollo handle/10986/23119 Campero – A Guatemala Chicken Flying Across Global Holden, W. and Jacobson, William N. 2008. Civil Society Borders. in IDB. 2009. “From Multilatinas to Global Opposition to Nonferrous Metals Mining in Guatemala. Latinas The New Latin American Multinationals”. 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MAGA (Ministerio de Agricultura, Ganaderia, y Swinston, Andrew, and Luis-Diego Barrot. 2011. The role of Alimentacion. 2015. El Agro en Cifras 2014. Guatemala structural reforms in raising economic growth in Central City: MAGA. America. Washington, D.C.: IMF. Miranda, Rolando. 2016. “Extorsiones obligan al cierre de UNCTAD (United Nations Conference on Trade and negocios.” Prensa Libre. January 24. Retrieved from: Development) . 2011. Investment Policy Review - http://www.prensalibre.com/guatemala/retalhuleu/ Guatemala. New York and Geneva: UNCTAD. extorsiones-obligan-al-cierre-de-negocios World Bank. 1951. The Economic Development of OECD (Organisation for Economic Co-operations and Guatemala. Washington, DC: World Bank. Development). 2015. The Future of Productivity. Geneva: _________. 1987. Guatemala - Economic Situation and OECD. Prospects. Washington, DC: World Bank. OLADE (Latin American Energy Comission). 2015. Informe _________. 1991. Guatemala - Country Economic de Estadísticas Energética. Quito: OLADE. Memorandum. Washington, DC: World Bank. Palacios, Braulio. 2015. “Agencia para APP sin concretar _________. 1996. Guatemala - Building Peace with Rapid and proyectos.” El Periodico August 11. Retrieved from Equitable Growth. Washington, DC: World Bank. http://elperiodico.com.gt/2015/08/11/economia/ _________. 2005. Country Economic Memorandum: agencia-para-app-sin-concretar-proyectos/ Challenges to Higher Economic Growth. Washington, DC: Perry, Guillermo, William F. Maloney, Omar S. Arias, Pablo World Bank. Fajnzylber, Andrew D. Mason, and Jaime Saavedra- _________. 2011a. Crime and Violence in Central America: A Chanduvi. 2007. Informality: Exit and Exclusion. The Development Challenge. Washington, DC: World Bank. World Bank. Washington, DC. _________. 2011b. Mejores Empleos en Guatemala. Ramalho, Rita, Jorge Rodríguez Meza and Judy Yang. 2014. Washington, DC: World Bank. Obtaining Finance in Latin America and the Caribbean. _________. 2012. World Development Report 2013: Jobs. Latin America and the Caribbean Series Note No.5. Washington, DC: World Bank. Washington, DC: World Bank. _________. 2014a. Ecuador: Informality and the Labor Ramos, Jerson. 2016. Tasa de homicidios aumentó en Market. Washington, DC: World Bank. el 2015. Prensa Libre, January 3. Retrieved from: _________. 2014b. Guatemala Economic DNA : Harnessing http://www.prensalibre.com/guatemala/justicia/ Growth with a Special Focus on Jobs. Washington, DC: 118 Trends and Drivers of Growth in Guatemala World Bank. http://hdl.handle.net/10986/20400 . details. _________.2015. Agricultura para la prosperidad de los 13 Perry et al. (2007) and World Bank (2014a) territorios rurales en Guatemala: vincular el desarrollo 14 Casanova and Hoeber (2009). 15 This paragraph is adapted from World Bank (2014b). agropecuario con la prosperidad del campo. Washington, 16 There are 259 active financial cooperatives and about 150 DC: World Bank microfinance institutions (MFIs) that provide credit. _________. Forthcoming. World Development Report 2017 – 17 SIB (2015). Governance and the Law”. Washington, DC: World Bank 18 Agexport (2015) WEF (World Economic Forum). 2006. The Global 19 The Agexport-IT-BPO Commission aims to increase Competitiveness Report: 2006-2007. Geneva: World and accelerate the availability of a pool of workers with technical and English skills. Campus Tec is a privately Economic Forum. owned and managed space that has transformed a red _________. 2010. The Global Competitiveness Report: 2010- area into a vibrant entrepreneurial space. The facilities are 2011. Geneva: World Economic Forum. growing and the model is being prepared to be exported _________. 2015. Global competitiveness report: 2015-2016. to Honduras and El Salvador. The Guatemalan Studio-C Geneva: World Economic Forum. got world attention by developing digital special effects World Development Indicators (database). n.d. Washington for the Narnia movie with Guatemalan talent and is developing skills in young people along with Fundación DC: World Bank. http://data.worldbank.org/data-catalog/ CA. world-development-indicators. 20 OLADE (2014). WITS (World Integrated Trade Solution) (database). n.d. 21 This section is adapted from the World Bank (2015). Washington DC: World Bank. http://wits.worldbank.org. 22 World Bank (2015). WTTC (World Travel and Tourism Council). 2015. “Travel & 23 Cannock and Chumpitaz (2013). Tourism: Economic Impact 2015 – Guatemala.” London: 24 The sectoral gains from this sector are not captured in the agriculture statistics as they are generally included in World Travel and Tourism Council. the manufacturing category. 25 Association of Sugar Producers (ASAZGUA) Notes 26 Polarization (percent) indicates the sucrose content of the sugar. The higher the polarization the higher the 1 Countries classified as aspirational peers (countries that quality of the sugar. are a good example for Guatemala) are Albania, Chile, 27 INE (2013). Jordan, Latvia, Lithuania, Panama, and Peru. See Annex 28 World Bank (2014b). 1.1 for details. 29 MAGA (2015). 2 World Development Indicators. 30 World Bank (2015) 3 World Development Indicators. 31 World Bank (2014b). The construction sector accounted 4 Red de Gestores (2011). for 6 percent in Honduras and 28.6 percent in Panama. 5 Data from the statistical institutes from Bolivia, Peru, 32 WTTC (2015). and Mexico. 33 German investment accounted for 64 percent of 6 In a regional study, Sosa et al. (2013) reported a similar coffee exports by 1896, and by the 1940s the United finding for the Latin America region, but Guatemala was Fruit Company (UFCO) owned 566,000 acres of the not included in the sample of countries. US-developed banana plantations, roughly 16 per cent of 7 Swiston and Barrot (2011). the total arable land area in Guatemala (UNCTAD, 2011). 8 OECD (2015). 34 Up until 1996, Guatemala’s mineral resources remained 9 World Bank (2012). largely unexplored because of the civil conflict and 10 Loayza and Raddatz (2010). restrictive legislation (Holden and Jacobson, 2008). 11 Perry et al. (2007). 35 Exports of insulated wire multiplied are among the top 12 The slowdown in job creation in the manufacturing five exports products for Honduras and amounted to sector was also captured by the World Bank Enterprise US$624 million in 2014 or 8 percent of merchandise Surveys of 2006 and 2010. See World Bank (2014b) for Trends and Drivers of Growth in Guatemala 119 exports (Fruman, 2016). 56 World Bank (2011a). 36 IDB (2007) and World Bank (2005). 57 World Bank (Forthcoming). 37 Camanho da Costa Neto and Romeu (2011). 58 See UNCTAD (2011) for some of examples of these 38 Fajnzylber et al. (2009) improvements. In the area of tax payment, Guatemala 39 See World Bank (1951, 1987, 1991, 1996, and 2005) and expanded the category of businesses for which electronic IDB (2007). filing and payment of value added is mandatory (2010), 40 Cuevas et al. (2010) introduced a new electronic filing and payment system 41 World Bank (2014b). (2014), and enhanced the electronic system for filing and 42 CEPAL (2014) paying corporate income tax and VAT (2015). 43 Dumitrescu et al. (2015). 59 The World Bank Doing Business Indicators have ranked 44 Swiston and Barrot (2011). Guatemala among the top reformers in several years 45 According to CEPAL (2014), total infrastructure (2014, 2013, and 2012). investment (public and private) in Guatemala reached 1.6 60 UNCTAD (2011). percent of GDP in 2012, the second lowest share in Latin 61 Effective competition authorities have an enormous America after Paraguay. impact on the functioning of markets. Competition agen- 46 Palacios (2015). cies make economy-wide interventions to promote open, 47 There is no conclusive argument regarding the decline transparent, and dynamic markets that serve consumers in homicide rates in Guatemala over the last five years. and improve the business environment. Competition However, the Government of Guatemala claims that a agencies directly focus on tackling anticompetitive combination of crime control measures, including the behavior by firms and encourage them to adhere to the deployment of task forces involving joint military and competition law through a deterrent effect and, more police actions to areas with high concentration of crime positively, through effective advocacy. Several studies has helped to reduce violence associated with competi- show that the effective application of competition policy tion among criminal gangs over territory, particularly in can lead to productivity increases and price reductions poor urban neighborhoods. in key input sectors, thus to boosting GDP growth in the 48 A 2011 Latin American Public Opinion Project short to medium term. (LAPOP) victimization survey showed that Guatemala 62 Moving forward, it will be critical to ensure that the new has overall victimization rates (which measure crime Guatemalan Competition Law includes the provisions to without specifying its type) higher than the regional set up of a competition agency able to effectively tackle average. anticompetitive behavior and regulations that unduly 49 Data from The National Civil Policy, 2012. restrict competition. 50 According to projections by the National Institute of 63 UNCTAD (2011) Statistics in 2011. 64 Dumitrescu et al. (2015) 51 GAM (2016). 65 Hernandez Ore et al. (2015), and Calvo-Gonzalez and 52 Selee et al. (2013). Lopez (2015). 53 World Bank (2011a). 66 IMF (2014a and 2014b) 54 FUNDESA (2014). 67 Ramalho et al. (2014). 55 IEP (2015). 120 Trends and Drivers of Growth in Guatemala 5. Sustainability of the Pattern of Growth, Distribution, and Poverty Reduction Despite its macroeconomic stability, Guatemala has experienced low GDP per capita growth, and this growth has not translated into economic and social gains for the vast majority of the population. The severe disparities in economic and social outcomes between the “two Guatemalas” is hindering Guatemala’s path for inclusive growth. Several factors are getting in the way of efforts to reduce poverty and foster sustained inclusive growth, including Guatemala’s small public sector for the size of the economy paired with limited capacity to provide public goods, weak governance, high levels of crime and violence, growing urbanization, and exposure to natural disasters. However, as a result of social and economic pressures, demand is growing for greater provision of public goods such as education, health care and public infrastructure, and momentum is building behind efforts to seize the opportunities presented by Guatemala’s upcoming demographic dividend. Fiscal Sustainability neglected areas and for increased expenditure, especially on education, health, housing and A low tax burden is one of the main con- justice, to be financed by a gradual increase in tax straints for promoting development in Guatema- revenues. Even without overhauling its tax la.1 As early as 1950, Guatemala had the lowest system and despite a gradual decline in import tax revenue as a percentage of GDP in Central tariffs resulting from trade liberalization and America (6.67 percent),2 a ranking that con- regional integration, Guatemala was able to raise tinues today. In 2014, tax revenue as a share of its tax revenues by implementing incremental tax GDP reached 10.8 percent, which was still well policy measures and improving tax administra- below most countries in the Latin American and tion. The tax-to-GDP ratio increased from 8.8 the Caribbean (figure 5.1). Guatemala has no percent of GDP in 1995 to over 12 percent in the significant non-tax revenue sources in contrast mid-2000s but has since fallen back to 10.8 with other countries with low tax-to-GDP ratios percent in 2014. This increase in revenues was like Mexico and Panama.3 This concentration on accompanied by an expansion in spending to taxes as a source of revenues (94 percent of total meet the commitments of the Peace Accords. government revenues in 2014) makes Guatema- Total central government expenditure increased la’s economy vulnerable to economic shocks. An- from 10.3 percent of GDP to 13.4 percent in the other consequence of the low tax burden is that same period (figure 5.2), with the social sectors the government has a limited amount to spend accounting for a significant share of this increase. on the provision of public goods and services. Guatemala’s public finances have focused on While both tax revenues and expenditures fiscal discipline and low debt levels. In response have increased since the 1996 Peace Accords, the to the crisis of the early 1980s when the overall outcomes have been much weaker than was fiscal deficit averaged 4.9 percent of GDP foreseen in the agreements. The Peace Accords (between 1981 and 1984), the government called for the state to take a stronger role in implemented a comprehensive adjustment Sustainability of the Pattern of Growth, Distribution, and Poverty Reduction 121 FIGURE 5.1 Gu t m l ’s T x Burd n FIGURE 5.2 Public S ctor Sp ndin W s th Low st in L tin Am ric in 2013 Is Low nd D clinin 30 15 25 13 Percent of GDP Percent of GDP 20 11 15 9 10 7 5 0 5 El S lv dor Ecu dor H iti M xico Dom. R p. Hondur s P ru Br sil 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Chil Ar ntin Cost Ric Bolivi V n u l Colombi Nic r u Gu t m l Uru u Dir ct t x s Indir ct t x s Tot l r v nu Tot l sp ndin Oth r t x s Soci l contributions Source: CEPAL - CEPALSTAT. Source: Ministry of Finance, Central Bank of Guatemala. program to promote fiscal consolidation in the integration and, more recently, the DR-CAFTA early 1990s.4 Thereafter, the overall fiscal deficit agreement with the United States have resulted in fell to 1.7 percent in the 2000 to 2007 period. The a significant loss in revenues from import tariffs. 2009 global financial crisis negatively affected In 1995, tariff revenue accounted for 24 percent government finances due to lower tax collection of total tax intake in Guatemala, but this fell to 8 and counter-cyclical spending.5 The overall percent in 2007 (when the DR-CAFTA agree- deficit peaked at 3.3 percent in 2010, and since ment came into effect) and to 4 percent in 2014. then it has gradually declined as a result of As a share of GDP, tariff revenue fell from 2.1 expenditure controls (figure 5.3). As in the past, percent of GDP in 1995 to 0.4 percent in 2014 fiscal consolidation has been achieved by (figure 5.5). This development was accompanied reducing the already low levels of public expendi- by a gradual strengthening of the administration tures on infrastructure and human capital. of domestic taxes as well as by incremental Capital expenditures declined from 4.1 percent of reforms in tax policy, which especially strength- GDP in 2010 to 3 percent in 2014 and are ened the collection of VAT. As a result, the share projected to decline to 2.5 percent of GDP in of VAT in total tax revenues increased from 36 2016.6 Public debt has ranged between 20 and 25 percent in 1995 to 47 percent in 2014, replacing percent of GDP since 2000, with almost half of some of the revenue that was previously gener- that debt held domestically (figure 5.4). However, ated by import tariffs. However, VAT revenues public debt relative to tax revenue is high at 224 remain heavily reliant on imports, which account percent. for 56 percent of all VAT collected. The general Even in the absence of comprehensive reforms, VAT rate also remains low at 12 percent, below economic forces have had some impact on the the LAC average of 15 percent. composition of revenue over the past 20 years. Given the limited size of the budget, the The liberalization of trade through regional composition of taxes and spending does not 122 Sustainability of the Pattern of Growth, Distribution, and Poverty Reduction FIGURE 5.3 C ntr l Gov rnm nt Fisc l FIGURE 5.4 Public D bt is Low B l nc , 2000-2016 in Gu t m l 0.5 25 0.0 20 -0.5 Percent of GDP Percent of GDP -1.0 15 -1.5 -2.0 10 -2.5 5 -3.0 -3.5 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015f 2016f 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Prim r b l nc Ov r ll b l nc Ext rn l d bt Dom stic d bt Source: World Economic Outlook. Source: Ministry of Finance, Central Bank of Guatemala. FIGURE 5.5 C ntr l Gov rnm nt T x R v nu b T p of T x, 1995-2014 15 12 Percent of GDP 9 6 3 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Incom t x s Oth r dir ct t x s VAT Import t riffs Oth r indir ct t x s Soci l s curit Source: Tax and Customs Administration of the Ministry of Finance. reduce inequalities. A study using data from the hand, has a much smaller base, consisting 2009-2010 National Survey of Family Income and primarily of salaried employees in the formal Expenditure found that consumption taxes are so sector. Similarly, the VAT is a flat rate tax applied onerous for the poor that they counteract the to most products, while income taxes tend to be benefits of cash transfer programs.7 In general, designed on a progressive scale (in other words, indirect taxes tend to be less progressive than richer taxpayers pay a larger share of their direct taxes. This is because the most important income than poorer taxpayers). Social security indirect tax, the VAT, is linked to consumption contributions are very low as well. On the and thus captures a wider tax base, including spending side, Guatemala has one of the lowest poorer segments of the population. The most social spending rates as a percentage of GDP in important direct tax, the income tax, on the other Latin American and the Caribbean. As was Sustainability of the Pattern of Growth, Distribution, and Poverty Reduction 123 discussed in Chapter 3, while social spending in In addition to non-compliance, tax rates and Guatemala has increased as a share of total tax expenditures (exemptions) are also key spending, the quality of this expenditure remains factors, albeit less so than in the past. Previous of concern, especially with respect to its geo- estimates by the SAT suggested that tax expendi- graphic targeting and technical efficiency. tures were as high as 8 percent of GDP in 2012, However, given the low levels of tax revenues, but this included a number of items that are not even if the tax system were more progressive, it is typically considered tax expenditures according likely that its distributional impact would be very to internationally accepted criteria. However, limited. Even after the 2012 tax reform, only a even according to the SAT’s revised methodol- small share of salaried workers has had a positive ogy, tax expenditures reached 6.7 percent of GDP income tax bill, which means that the scope for in 2012, with income taxes accounting for the income redistribution through the tax system is bulk of this amount. The 2012 reform drastically small. Any redistribution will thus have to come reduced tax expenditures for the personal income from the expenditure side. tax from 4.8 percent of GDP in 2012 to 0.7 A combination of institutional and behavioral percent in 2013 (figure 5.7). This is because the factors lie behind the low tax revenues in reform included a number of structural changes Guatemala. Tax non-compliance has traditionally to income taxes, including a reduction in been high in Guatemala, as a result of many deductions, changes in the tax thresholds and tax Guatemalans’ perception of the unfairness of the rates, and the elimination of the VAT credit. Of tax system and the lack of government capacity the remaining tax expenditures (2.5 percent of to enforce the rules. Evasion of income tax is GDP in 2014), 0.5 percent of GDP are constitu- estimated at between 60 and 65 percent of tionally mandated. While a further review of tax collections, among the highest rates in Latin expenditures (especially for the VAT) would be America.8 Evasion and involuntary under-decla- useful, the SAT estimates suggest that any ration together are estimated to account for additional revenue gains may be more limited around 40 percent of VAT collections or 25 going forward. percent of potential VAT collections (figure 5.6). The SAT’s weak institutional capacity is a These estimates suggest that improving controls major obstacle to increasing tax revenues and within the Tax and Customs Administration undermines citizens’ trust in the government. (SAT) could lead to significant increases in Implementation and governance problems have revenue collection. For example, for each 10 affected tax collection. The SAT suffers from a percent reduction in VAT non-compliance, VAT dysfunctional governance structure, fragmenta- collections would increase by 0.2 percent of GDP. tion and staff manipulation of information More recently, the SAT has experimented with systems, a lack of effective merchandise control behavioral insights to increase tax collection infrastructure in customs field offices, a lack of without the need for new legislation. It found that information sharing with between internal units improving the way in which the tax authority (such as tax audit and tax collection), and weak communicates with taxpayers could help to tax enforcement. Also, several corruption reduce tax evasion.9 Legal tax avoidance is also scandals in tax collection have contributed to a widespread, with firms and individuals taking culture of tax evasion, which has further compli- advantage of a tax regime that applies different cated the enforcement of the formal tax regime. rates to income derived from different sources. In April 2015 a customs fraud known as La Línea 124 Sustainability of the Pattern of Growth, Distribution, and Poverty Reduction FIGURE 5.6 SAT Coll ct d onl 58 P rc nt FIGURE 5.7 T x Exp nditur s D cr s d of Pot nti l VAT R v nu in 2014 ft r th 2012 T x R form Percent of potential VAT collection 0.4 0.3 7 0.4 0.4 6 1.5 1.6 5 1.4 1.3 T x r form Percent of GDP 4 58.1 17.2 24.7 3 0.3 0.3 4.4 4.7 4.2 4.8 2 1.6 1.6 1 0.7 0.6 0 0 20 40 60 80 100 2009 2010 2011 2012 2013 2014 VAT coll ctions Estim t d t x xp nditur s Incom t x VAT Oth rs Estim t d non-compli nc Source: Calculations based on data from Guatemala’s Tax and Customs Administration (SAT). Notes: Using the SAT’s new definition of tax expenditures. Previous estimates were significantly higher. in which a criminal network diverted millions of increased exceptions and weakened progressivity. Quetzales to private citizens was exposed by the In 2012, the government passed the first substan- Public Ministry (Ministerio Público, MP) and the tive tax policy reform in years, but overall tax International Commission against Impunity in collections have not increased. In fact, after rising Guatemala (CICIG). La Línea had inserted some from 8.2 percent of GDP in 1992 to 12.1 percent its members into the SAT as government officials in 2007, total tax collections fell to 10.8 percent and technical personnel, and these people were in 2014 and to an estimated 10.2 percent in 2015. responsible for carrying out the illegal activities. Moreover, even if the amount of tax collected had This resulted in a considerable fall in the public’s increased, there would have been little extra trust in government institutions, and thus revenue to spend on priority public policies as diminished the amount of tax collected in 2015. long as nothing was done to address the many Efforts to boost revenues through tax reforms existing rigidities in the budget. have faced strong opposition, which has resulted It is critical for the government to find a way to in a cycle of temporary fixes. Tax policy reforms raise revenues not only for Guatemala’s long-term are frequently challenged in the constitutional fiscal sustainability but also to increase social court and subsequently reversed. Opponents of spending and the provision of public goods. tax reform frequently challenge the reforms in Having “two Guatemalas” with different expecta- the Constitutional Court, referring to Article 243 tions and engagement with the state does not of the Constitution that states that taxes should make it easy to reach a consensus about the most not exceed taxpayers’ ability to pay.10 This appropriate size of the public sector. In the debate opposition has meant that successive incoming on tax reforms, some make the argument that the Presidents have faced fiscal difficulties and the main priority should be to increase the efficiency need to introduce short-term fixes. This cyclical of spending as a way to escape the vicious circle introduction of temporary taxes has been of under-provision of public goods. As discussed paralleled by sector-specific laws that have in Chapter 3, some studies have shown that Sustainability of the Pattern of Growth, Distribution, and Poverty Reduction 125 outcomes in the health sector, for example, might with historical origins in the allocation of land improve if expenditures were to become more grants during the colonial period and the pri- efficient. However, regardless of any potential vatization of communal lands during the liberal increase in spending efficiency, with such low reform period (1870-1930). Currently, small levels of tax collection, it will be very difficult to producers make up 92 percent of farms, but they provide the level of health, education, and only have access to 22 percent of the coun- security services that would be needed to try’s agricultural land. In contrast, commercial integrate the “two Guatemalas.” More impor- producers make up only 2 percent of farms but tantly, the ratio of debt levels to tax revenue is control 57 percent of all agricultural land.11 Poor very high (239 percent) and is quickly approach- households either have no land or cultivate less ing dangerous levels that could jeopardize than two hectares of land, often in marginal or Guatemala’s relative fiscal stability. ecologically sensitive areas, which then results in deforestation and soil degradation. Furthermore, about 40 percent of rural land parcels are not Social Sustainability registered with the Land Registry, meaning that To address the main risks to social sustain- their owners have no legally enforceable right to ability, Guatemala must confront the challenges their land. Until recently, there was no cadastre to of land tenure insecurity, lack of progress on the identify the location and boundaries of land par- indigenous agenda, and increasing dissatisfac- cels, which has consequences for land tenure se- tion with the way democracy works. First, land curity. Guatemala’s indigenous peoples are among inequality is high and disputes over competing the most vulnerable to land tenure insecurity. property rights and boundaries have negative Although Guatemalan law recognizes customary consequences on economic and social sustain- land tenure, these rights are often undermined by ability. The existence of separate cadastral and a lack of formal documentation. registry databases continues to fuel insecurity Guatemala has a complex legal and institu- over land tenure. Second, a lack of progress in tional history of agrarian reform. A radical ensuring the rights of the indigenous peoples of attempt at land reform in 1952 (Decree 31) was Guatemala is another source of social tensions. aborted following the overthrow of the govern- Third, Guatemalans have the perception that little ment of Jacobo Arbenz. Several laws were progress is being made on many fronts, reflecting subsequently passed that annulled the Arbenz the shortcomings of the social contract. Another agrarian reform law, replacing it with other source of social vulnerability is the high levels of mechanisms for land re-distribution such as a crime and violence, a challenge that is discussed land tax and an idle land provision (Decree 559). in Chapter 4. The Agrarian Transformation Law (Decree 1551), which was passed in October 1962, established Land Tenure Security the National Institute of Agrarian Transformation Inequality of land ownership and insecurity of (INTA), an agency charged with distributing land tenure are hindering Guatemala’s prospects for to the landless and land-poor, implementing a reducing poverty and increasing shared prosper- titling program, and establishing a land purchase ity. Inequality in the distribution of agricultural program. INTA’s mandate was to expand the land is a structural problem in the countryside program of distributing state-owned land and continued to do so until the supply of these lands 126 Sustainability of the Pattern of Growth, Distribution, and Poverty Reduction was largely exhausted. The government created The implementation of policies for the the Land Fund (Fontierras) after the 1996 Peace allocation, distribution, recognition, and enforce- Accords, initially to allocate land to returning ment of land rights requires strong political will war refugees. Returning refugees were settled on and long-term reform. The struggle for land was land already owned by the state, much of which at the core of Guatemala’s 36-year civil war. The consisted of farms that had been abandoned by 1996 Peace Accords established a new framework their owners and whose ownership had been for agrarian policy centered on redistributing taken over by the state and administered by land, increasing security of tenure, and resolving INTA. When INTA was disbanded, the Land land conflicts. These were major tasks that would Fund took over many of its activities, such as require legal reforms and the collaboration of adjudicating state-owned land and issuing multiple state and civil society actors. The definitive land titles. government has made efforts to implement land Market-based land reform had a limited reform, but these have not been sufficient to impact in land redistribution in Guatemala. After change the overall agrarian structure. In fact, new the Peace Accords, the government introduced a investments on agro-industrial crops are rein- ‘willing seller, willing buyer’ model with the aim forcing existing land concentration dynamics. of redistributing land and improving the effi- Since 1998, the government has invested in the ciency of land markets. Under this model, establishment of a new land administration Fontierras provided loans to groups for the system. One important achievement was the purchase or leasing of agricultural land, as well as approval of the Cadastre Law in 2005. The many grant financing to help establish productive different legal origins of land rights in Guatemala, projects, from which they would generate the including customary, colonial, and republican proceeds to repay the loan. Nonetheless, prob- claims, has resulted in a complicated system of lems emerged due to overvalued land prices and land tenure. Social conflicts often erupt from insolvent farms. these multiple claims on land, and the judicial Meanwhile, peasant organizations have system is often ineffective in resolving them. mobilized to gain access to land. Since the Peace Communal lands are still an important source of Accords, several grassroots initiatives have livelihoods and cultural identity for peasant and emerged in Guatemala to claim and secure access indigenous communities. In recent years, to land. The amount of land secured through government policy has promoted the recognition these initiatives—based on historical land claims, and protection of communal lands. rural labor disputes, and land invasions— rivals the quantity of land transferred through the Establishing Rights for market-based mechanism.12 Historical land claims are based on indigenous peoples’ historic Indigenous People Progress has been made in establishing the rights land rights and customary tenure. Other claims of the part of the population (almost half) that are based on labor demands by former perma- self-identifies as indigenous but many gaps re- nent workers (mozos colonos) of agricultural main. The indigenous population in Guatemala estates. The invasion of agricultural estates is is large, around 42 percent of the total population another strategy to claim land, but these acts or 5.75 million people. It also suffers an unequal often end with violent evictions.13 burden of poverty and limited opportunities. Sustainability of the Pattern of Growth, Distribution, and Poverty Reduction 127 Starting with the Constitutional Reform of Plan on Indigenous Peoples and Inter-culturality. 1993, which contains several articles promoting The multi-sectoral Cabinet has carried out the cultural identity, equity, and protection of national-level consultations on a draft of the indigenous peoples, many additional laws have Policy, which now has to be approved by the been passed to further promote and protect their relevant political authorities. The Action Plan has rights and to recognize Guatemala as a multieth- not yet been prepared because of a lack of nic and multi-linguistic state (see Annex 5.2 for resources to do so. However, the steps taken so a detailed list of legislation affecting the recogni- far have demonstrated the government’s commit- tion of indigenous rights). However, many of the ment to increasing the visibility and political laws that are designed to recognize and promote priority of indigenous peoples in the national the rights of the indigenous peoples lack the nec- development process and have resulted in the essary institutional mechanisms for implement- creation of a platform that will be a critical ing the laws, which means that legislation has not vehicle for addressing the multi-sectoral needs of resulted in better outcomes. Moreover, even in this population. (See box 5.1 for some evidence the case of international legislation, such as the from Mexico on the key components of obtaining Guatemalan ratification of ILO 169 (Indigenous representation for indigenous peoples.) and Tribal Peoples), which allows for indigenous Recent progress on the legal front is a promis- authority over communities and land, indigenous ing development towards the creation of a more authorities have not been able to exercise these cohesive social contract. After four decades, the rights in practice. government agreed on a plan of reparations to Another concern relates to the lack of a the 33 communities displaced by the Chixoy mechanism for consulting indigenous people and dam.14 The plan contains a fairly wide range of acquiring their informed consent to measures activities aimed at improving both the economic that affect them. The absence of this consultation and social well-being of the communities has undermined both the content and the affected. The first payments under the reparations implementation of laws. However, some progress were made in October, 2015. Much rides on the has been made in creating space within the state’s ability of the government to fulfill the plan as institutions to promote the visibility, voice, and agreed, as its failure to do so will undermine any vision of indigenous peoples, including the goodwill that the plan has generated. The second creation of approximately 37 different sectoral recent event, the conviction of ex-military leaders units, commissions, funds, and directorates. This of rape and the enslavement of indigenous process has most recently culminated in the women during the civil war, also demonstrates a creation in 2014 of an Indigenous Peoples commitment to justice. It remains to be seen Presidential Cabinet, a high-level consultative what impact these events will have on the and deliberative organ that reports to the construction of a more inclusive social contract President. The Cabinet’s objective is to coordinate and whether Guatemalans will see these delays the formulation and management of actions and responses as adequate. policies that respect Guatemala’s ethnic and The land rights of indigenous peoples often linguistic diversity. Specifically, the Cabinet is come into conflict with mining operations. charged with promoting research on traditional Guatemala is a signatory of the UN Declaration practices and with coordinating the design and on the Rights of Indigenous Peoples, which management of a National Policy and Action requires the government to obtain the free, prior, 128 Sustainability of the Pattern of Growth, Distribution, and Poverty Reduction and informed consent of indigenous peoples the absence of an official consultation process, before adopting or implementing measures that indigenous organizations have organized their may affect them. Nonetheless, there is no own public consultations based on municipal law. established mechanism for consulting with In these consultations, indigenous peoples have indigenous peoples before such measures are continuously rejected mining operations on their adopted. As a result, there have been numerous lands.15 complaints of inadequate consultations, environ- mental degradation, and human rights abuses. In Box 5.1  What Insights Can be Gained from the Chiapas and Oaxaca Experiences? Given many geographic and ethnic similarities between Guatemala and the two southernmost states of Mexico, Chiapas and Oaxaca, there might be lessons that can be learned from Mexico that can be applied to Guatemala. Both Chiapas and Oaxaca are states with a high percentage of indigenous peoples (36 and 66 percent respectively) and high rates of poverty. In 2008 Chiapas had the highest rate of poverty in Mexico (76.9 percent) with Oaxaca in fourth place at 68.3 percent. While they were both still among the poorest states in 2014, multi-dimensional poverty had declined faster in both states than the median rate in the country. Recent work in Chiapas highlights many of the same barriers to poverty reduction as are found in Guatemala, namely that the limited complexity of the economy leads to low incentives to accumulate more and more productive assets and that there is a lack of coordination among different groups and between the indigenous peoples and the state (Levy et al. 2015). At the same time, dependence on federal aid in Mexico can be attributed to a Dutch disease effect, raising the costs of tradable goods and making the zone less competitive (Hausman et al. 2015), a role that remittances seem to be playing in Guatemala. Various analyses done in the context of Chiapas and Oaxaca (and other countries as well) high- light ways to promote inclusive growth in Guatemala. First, in Chiapas, there is a large gap between the goals and the mechanisms of participatory spaces (local community authorities and organizational structures) and invited spaces (where the government invites the participation of communities and controls the process). Traditional spaces are as concerned with process as with end goals, have a greater focus both on rights in general and on improving the collective and tend to have a long-term planning horizon. In contrast, invited spaces usually reflect the much shorter time horizon of elected governments, have limited capacity or experience with affecting collective outcomes, and, because of their timeframe, and prioritize projects over longer-term changes. (See Cortez Ruiz, 2004 for Chiapas and LaFrance and Nicols, 2010 for a more general overview in a different setting.) Finding a mecha- nism to close this gap is critical. At the same time, there is a need for the indigenous populations to have institutions that are credible both to their constituency and to the broader society (Rosenthal, 2008) and to have access to government institutions (Anaya Muñoz, 2005). A striking difference between Chiapas and Oaxaca is in access to formal government channels. Anaya Muñoz argues that Continue in the next page Sustainability of the Pattern of Growth, Distribution, and Poverty Reduction 129 Box 5.1  continued representatives of the indigenous peoples were heavily engaged in the San Andres agreement in Chiapas, much like the Peace Accords in Guatemala. Both agreements had positive effects, but in terms of the politics of recognition of rights and culture, this was not enough. In Oaxaca the indige- nous peoples also had access to formal power structures. At the municipal level, traditional electoral practices resulted in indigenous peoples being elected to municipal governments and, at the state level, a combination of factors gave them access to the governor’s office, albeit informally. Neither of these channels was available to the indigenous peoples in Chiapas. This lack of access to formal channels has translated into significantly less legislative change in Chiapas than in Oaxaca. Interestingly, in Oaxaca, a state with almost twice the number of indigenous people as Chiapas but with more access to formal channels, income poverty fell (from 41 to 34 percent) rate between 1990 and 2010 whereas in Chiapas it rose (from 46 to 49 percent) (CONEVAL, 2015). How Guatemalans Perceive their Guatemalans are concerned about fairness and opportunity and the factors that prevent them. As Country? seen in Chapter 4, when business executives are Survey results suggest an underlying core of dis- asked to list the main problems of the country, satisfaction among Guatemalans on issues related business executives answered crime and violence, to social cohesion and the social contract. Almost inflation and the economy, and jobs in that 70 percent of the population is dissatisfied with order.16 When citizens were asked about what the way that democracy works in Guatemala (fig- freedoms were most at risk in Guatemala in the ure 5.8). The government’s approval rating was 2015 Latinobarómetro, they reported the just and highest immediately after the Peace Accords were fair distribution of income led the list followed by signed but these expectations were clearly not the difficulty of obtaining a job (figure 5.10). met in subsequent years as the approval rating Close behind in third place came the inability of has since declined. The country ranks in the mid- the state to protect citizens from crime and range of Latin American countries in terms of violence, which is a problem that affects both job the population’s satisfaction with its government. creation and, therefore, a fairer distribution of A significant proportion of the population (24 income. Moreover, the same 2015 percent) also feels that the country is in decline, Latinobarómetro reports that thirty percent of an increase since 2000 (figure 5.9). However, respondents considered the existing income more than half of the population believes that distribution to be extremely unfair, and another the country is stagnating (54 percent). It is not 49 percent thought it was generally unfair clear which changes in the indicators discussed (Annex 5.1). In the 2000 Latinobarómetro survey, in Chapters 3 and 4 have had an effect on these when respondents were asked to rank themselves perceptions, though the increase in poverty on a scale of one to ten with one being the and other ongoing problems are likely to be key poorest and ten being the wealthiest, the average factors. response was 4.7, but by 2015, the average had 130 Sustainability of the Pattern of Growth, Distribution, and Poverty Reduction FIGURE 5.8 Th Gov rnm nt’s Hi h FIGURE 5.9 Thr -qu rt rs of Approv l R tin s Aft r th P c Accords Gu t m l ns Think th t Th ir Countr H s Dissip t d is St n tin or in D clin 100 60 50 80 Percent of respondents Percent of respondents 40 60 30 40 20 20 10 0 0 Ho nt or u or El M il Ar lv co Gu t r s Ni nic ru r R. 19 6 20 8 20 0 20 1 20 2 20 3 20 4 05 20 6 08 20 9 10 20 1 20 3 15 19 7 20 7 n l Co nd in t ic i Br l lo l r bi u Ec m 0 1 P Chi liv 9 0 0 0 0 1 0 9 0 d Ur d 9 0 S xi 20 u u R u P m Co m s u m P 19 20 20 Bo u n i c V Not t ll s tisfi d Not v r s tisfi d Do Quit s tisfi d V r s tisfi d 2000 2015 Source: Calculations based on data from Latinobarómetro. Source: Calculations based on data from Latinobarómetro. FIGURE 5.10 Gu t m l ns Ar Conc rn d bout Equit , Acc ss to Jobs, nd Crim nd Viol nc To what extent do the following freedoms, rights, life chances, and guarantees apply in Guatemala?, 2015 100 80 60 Percent 40 20 0 w uti ir nc of jo of im n rit l tio l nt n m tio 's li om rt t po rit cr tio cu oci p tic sp do or b lth n s n n ch n n w fm p n s of rib d f r d op v nm o io ch lit cu o st c ici li pr Pri S om in c th lid st n rt Po nd o tt n in rot ro of r of Fr oc s lif qu ith So F o di st Ch vi lit o P s E En Ch Ju u Eq w p Not t ll Not n r ll F irl n r ll Full Source: Calculations based on data from Latinobarómetro. fallen to 3.6. In the Latin America Region and the are showing - that incomes are falling and people Caribbean region as a whole, only in Honduras are becoming worse off. However, the perception was there a greater decline as this indicator data also show that there is a high degree of actually increased in most countries. On the one dissatisfaction, which may either serve as a hand, it is not surprising that the perceptions of catalyst for change or may cause people to the population mirror what the empirical data disengage from the political process. Sustainability of the Pattern of Growth, Distribution, and Poverty Reduction 131 Environmental term damage to the well-being of households. A recent study found that between 2006 and 2011 Sustainability per capita consumption plummeted by 5.5 per- Tackling vulnerability to natural hazards cent (12.6 percent in urban areas) and poverty in- and environmental challenges posed by defor- creased by 18 percent, equivalent to 80,000 more estation, urbanization, and water contamination families falling into poverty.21 The manifestations will be critical for Guatemala’s development. of climate change disproportionately affect poor Many of these environmental challenges are households.22 Moreover, climate change also linked to difficulties in enforcing compliance has environmental effects, causing large-scale with existing environmental laws.17 First, Gua- soil loss, contamination of surface water, and temala’s vulnerability to natural hazards exacer- increased sedimentation in rivers and drainage bates environmental problems. Second, deforesta- systems.23 tion is threating one of Guatemala’s main natural In addition, cyclical droughts have a detrimen- resources that can potentially be sustainable tal effect in rural areas by affecting crop yields harvested and contribute to a variety of the qual- and food security. There are recurrent droughts ity of other natural resources, such as water and related to El Niño in the Dry Corridor (Corredor soil quality. The Guatemalan System of Protected Seco), which includes areas of the Quiche, Baja Areas (SIGAP) covers about 31 percent of Gua- Verapaz, Chiquimula, Zacapa, El Progreso, temala, including the Maya Biosphere Reserve.18 Jutiapa, and Jalapa departments.24 Meager rainfall Third, deforestation, agricultural practices, and results in crop losses for farmers but also in lower urbanization are putting pressure on the quality demand for agricultural labor, as in the case of of water resources. Fourth, Guatemala has one of seasonal workers for the coffee harvest. In some the fastest urbanization rate in the Latin Amer- years (for example, 2001 and 2009), farmers have ica region, which will put pressure on natural suffered from a combination of droughts and a resources. global recession. Moreover, the recurrence of droughts, as in the past three years, makes it more difficult for subsistence farmers to cope Vulnerability to Natural Hazards with their crop and labor losses, and thus results Guatemala is among the 10 countries in the in seasonal hunger and increases in cases of acute world most affected by extreme climate events malnutrition (or even death due to malnutrition). and is not exempt from geophysical hazards. In 2014, the government declared a state of The geographic location of the country makes emergency when 236,000 families in 208 munici- it prone to frequent and high-intensity geolog- palities were affected by a severe drought that ical and weather-related shocks such as storms, caused heavy falls in the production of maize (80 hurricanes, droughts, earthquakes, and volcanic percent) and beans (63 percent).25 eruptions.19 In 2010, Tropical Storm Agatha, the strongest tropical cyclone to ever strike Guate- mala in terms of rainfall, produced widespread Deforestation floods and landslides, causing estimated total Another environmental challenge for Guatema- damages equivalent to 2.2 percent of GDP.20 la is deforestation due to changes in land use, Adverse weather events like Agatha combined agricultural practices, and illegal logging. Forest with vulnerable conditions can result in long- cover decreased from 44.3 percent in 1990 to 33.1 132 Sustainability of the Pattern of Growth, Distribution, and Poverty Reduction percent in 2012, with an annual deforestation community forest concessions in the Maya rate of 1.3 percent (figure 5.11). This annual loss Biosphere and through communal forest land has accelerated since 2000. Much of the defor- management by indigenous and peasant groups estation has occurred in the Department of El in the Departments of Alta Verapaz, Petén and, to lesser extent, Izabal. From 2006 Huehuetenango, Izabal, and Quiche, indigenous to 2010, the latest period with data available, El people manage the communal land and the Petén’s forest cover, which accounts for about productive activities within the forest. However, half of the country’s forest mass, decreased by 1.7 the forest concessions consist of a 25-year percent per year (a loss of approximately 124,610 contract with the Government of Guatemala, hectares).26 The main causes of deforestation in which means that the ownership rights actually Guatemala are: (i) the lack of rural employment belong to the state, thereby preventing the opportunities, which forces many households to transferability or sale of concession rights. convert forested land into land used for agri- Deforestation is also having a significant culture or grazing; (ii) illegal logging in forests; negative impact on Guatemala’s watersheds and (iii) uncontrolled growth of existing urban areas ecosystems. There is the potential to implement a and new settlements; (iv) forest fires; and (v) the payment for environmental service (PES) extensive use of firewood for cooking and heat- mechanism within Guatemala’s watersheds to ing.27 The reluctance of rural residents to switch finance biodiversity conservation.29 This potential to alternative fuels is both cultural and economic; varies widely across the country, but overall there has been a significant increase in the cost around 25 percent of all biodiversity conserva- of liquefied petroleum gas (LPG) costs, and most tion priority areas have this potential.30 In fact, rural households prefer food cooked over wood the legal framework to enable PES has existed in fires.28 Guatemala since the mid-1990s (through the Indigenous communities are managing forest Central American Convention on Biodiversity in resources in the northern departments. Through 1992 and the Agreement on Biological Diversity FIGURE 5.11 For st Ar is F llin R pidl in Gu t m l Forest area in Guatemala Change in Forest Area 70 Hondur s 60 Nic r u Forest area (% of land area) El S lv dor 50 44.3 Gu t m l 40 P r u 33.1 30 Bolivi S n l 20 P n m 10 M xico Cost Ric 0 1950 1978 1990 2000 2006 2010 2012 -2.5 -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 Annual change in forest area (percent) 2000-2012 1990-2000 Source: World Development Indicators. Source: Calculations based on World Development Indicators. Sustainability of the Pattern of Growth, Distribution, and Poverty Reduction 133 in 1995), yet no substantial efforts had been made population.35 According to the 2012 strategic to implement this framework in practice.31 plan of the Ministry of Enviromental and Natural Community forestry has been an effective tool Resources (MARN), about 90 percent of Guate- for the sustainable use of natural resources in the mala’s surface water in rivers, water springs, and Petén department. In the early 1990s, community lakes, is contaminated to varying degrees. This groups and conservation NGOs lobbied the level of water contamination contributes to infant government to allow community concessions to mortality as a result of gastrointestinal illnesses, manage the forest in the Multiple Use Zone especially when the majority of municipalities (MUZ) of the Maya Biosphere Reserve in the have taken no action to chlorinate domestic Department of Peten. These groups argued that wastewater.36 Furthermore, out of nearly 24,000 private logging concessions were doing a poor controlled water systems and mechanical wells, job of managing the forest and that the National 33 percent do have adequate levels of residual Council of Protected Areas (CONAP) did not chlorine, while 67 percent have been shown have the operational capacity to monitor compli- to have some bacterial contamination, most of ance with laws governing the preservation of the which can be found in the areas of Escuintla, Alta environment. The government partnered with Verapaz, Petén, El Progreso, Jutiapa, and Chi- local communities in the sustainable use of forest maltenango.37 resources and approved the first concession in 1994. By 2008, concessions grouped under the Urbanization Association of Community Forests of Peten Rapid urbanization is creating environmental (ACOFOP) controlled an area of 426,000 ha.32 challenges for the country. As of 2014, only 51 Concessions have had the right to use and percent of Guatemalans lived in cities, which manage timber and non-timber products for 25 was well below rates in other countries in years. As a result, the MUZ has been significantly Central America and below the average for the less deforested than the buffer zone in South Latin America and the Caribbean region (79.6 Peten and the protected areas to the West (Sierra percent). However, the pace of urbanization is del Lacandón and Laguna del Tigre).33 In the picking up, with an average annual growth rate of highlands, uncertainty over the recognition of 3.3 percent during 1990-2014, and well above the communal lands is hindering the expansion of national average population growth rate of 2.3 the community forestry model. percent. It is projected that continuing popula- tion growth and urbanization will add 13 million Water Contamination people to Guatemala’s urban population by 2050 The uncontrolled discharge of untreated waste- from its current level of 8.1 million.38 At the same water and solid waste and the increasing use time, the proportion of the population living in of agrochemicals have led to a considerable urban areas is expected to increase, reaching 67 contamination of water sources in Guatemala.34 per cent by 2050.39 Major watersheds, such as Lake Atitlán, that are Uncontrolled urbanization and significant essential local sources of water for agriculture population density presents environmental and consumption, have suffered from eutrophi- challenges such as the pollution of water and air cation and other bacterial contamination with with negative consequences for human health. negative implications for the health of the nearby The under-provision of water and sanitation 134 Sustainability of the Pattern of Growth, Distribution, and Poverty Reduction services in urban areas, especially the lack of Guatemala ranks in the lowest 25th percentile of adequate sanitation, is a threat to water quality the world and in five of those (business costs of and ultimately human health, and this is increas- crime and violence, organized crime, public trust ingly the case in Guatemala’s cities. Only 35 in politicians, strength of investor protection, and percent of domestic solid waste in urban areas of diversion of public funds) in the lowest decile. Guatemala is disposed of in sanitary landfills, More importantly, in the past 10 years, the per- while the rest is dumped into the streets and in centile ranking of Guatemala’s institutions appear urban waste dumps. The increase in medical to be deteriorating rather than improving for the waste is also becoming an acute issue. In 2010, majority of the indicators of institutional quality. while 20 of Guatemala’s hospitals made use of Guatemala improved its percentile ranking in proper waste disposal services provided by only three areas, property rights, the burden registered companies, eight still burned their imposed by government regulations and trans- waste in the General Cemetery and 17 even parency, nearing the median ranking. The trends burned it within the hospital building.40 in the WGI and WEF indicators underscore a Urbanization also typically leads to an increase in worrisome picture of the quality of institutions in traffic, as has been observed in countries like Guatemala and the challenges ahead. Costa Rica or Brazil, which in turn leads to a rise The origin of today’s weak institutions are in emission of pollutants with harmful effects on rooted in history. First, as discussed in chapter 1, human health. the expansion of the coffee sector in the late 19th century contributed to a fragmented social contract and society, reflected in the early Institutional Challenges exclusionary land, labor, and education policies.41 Guatemala faces significant challenges with Second, voice and accountability was negatively the quality of its institutions. According to the affected by prolonged restrictions on who is Worldwide Governance Indicators (WGI), Gua- eligible to participate in selecting the govern- temala scores in the lowest quartile of the world ment. The 1879 Constitution restricted the in three of six indicators (government effective- population eligible to vote to literate males and ness, rule of law, political stability) with the rule universal suffrage was enacted only in the 1965 of law indicator in the lowest decile (figure 5.12 Constitution. Third, the combination of histori- Panel a). In all indicators, Guatemala is below the cally low tax revenues and low constrains on world median; only in regulatory quality does executive functions further undermined the the country approach the median (scoring in the establishment of strong and effective public 48 percentile). In terms of control of corruption, institutions. Fourth, the civil war had conse- and voice and accountability, Guatemala is in quences in terms of the level and composition of the bottom third of the ranking. Moreover, the spending, affecting the provision of public goods. country has made no significant improvement in In short, Guatemala’s early economic model any of the six dimensions of governance in the combined with the limited ability to influence past 20 years. The public institutions pillar of the policies through the political system by the vast World Economic Forum’s (WEF) Global Com- majority of the population have worked against petitive Index also show the weakness of Guate- the formation of strong institutions and has mala’s institutions (figure 5.12 Panel b). In nine of undermined the ability of the country to develop. the twelve components of the institutions pillar, Sustainability of the Pattern of Growth, Distribution, and Poverty Reduction 135 Political institutions, such as political parties, to election. A large share of congressional are also weak, further constraining voice and representatives change their party affiliation after accountability. Political parties are vehicles for elections or take positions in the executive.45 In social groups to influence public policies and the last elected congress, about half of the existing institutions.42 Parties contribute to representatives changed their party affiliation. shaping and building a strong social contract The practice of changing party affiliations is through the roles that they perform in mediating detrimental for voice and accountability. In April constituency relations with the state.43 However, 2016, the congress reformed the law to restrict Guatemala stands out for having the most volatile the practice of changing parties. Another feature and fragmented party system in Central that has reduced the effectiveness of political America.44 Political parties are short-lived, with parties to influence public policies is the limited many appearing and disappearing from election participation of indigenous groups in Congress.46 FIGURE 5.12 Gu t m l ’s Institutions Ar L in B hind And Not Improvin a. World Governance Indicators, 2014 100 Gu t m l LAC OECD 80 P rc ntil R nkin 60 48 35 40 28 25 24 20 14 0 Gov rnm nt Control of Politic l St bilit R ul tor Rul Voic nd Eff ctiv n ss Corruption nd Abs nc of Qu lit of L w Account bilit Viol nc /T rrorism Source: World Governance Indicators (2014). b. Institutional Indicators 100 2006 2015 80 63 P rc ntil R nkin 55 60 51 40 25 20 12 14 9 11 1 1 5 5 0 nc of in f ic f io f s nd of nc i l ns t ci ns tio nt nd s o rv o ct h o ici us ht rim nc nd dic n s s ls n ffi sio ol s Fu n lit Tr ul m vi ost p s s ilit ot t ic io dc Ri r t o ci p u r rn bl rs Po lic t s uln pr n b J p nd c ov d in Pub ns rt or tr ov ss Pu Div lic li ov f ni n st S st po R of m i op Tr im in of d Or cr Bus Pr W is In n rit rd vo v in Bu F Source: World Economic Forum (2006 and 2015). 136 Sustainability of the Pattern of Growth, Distribution, and Poverty Reduction Box 5.2  The Commission Against Impunity and Accountability In 2007, Congress approved the establishment of the Commission against Impunity in Guatemala (CICIG). Working under the umbrella of the United Nations, the CICIG was designed to aid local investigators and police in developing prosecutable cases aimed at eradicating criminal networks. With impunity levels then at an alarming 98 percent, the judiciary was seen as too weak to do so on its own. Since its creation, the CICIG has assisted in securing convictions in a number of high-profile cases involving top government officials, most recently, as discussed above, the customs fraud scheme known as La Línea. The Commission’s findings led to the arrest of Guatemala’s President and Vice President as well as other government officials. Thus, the CICIG has managed to change the public’s perception that criminal networks are impregnable. Guatemalans are increasingly demanding a more transparent and accountable government. In the past, Guatemalans have been tended to be either disinterested in public issues or reluctant to express dissent. This culture of fear and silence was a result of the bloody civil war between 1960 and 1996, in which over 200,000 people were killed. Even as late as 2015, 52 percent of the population believe that freedom of speech is still not generally protected. However, this tide of silence appears to be shifting as young people who did not live through the conflict begin to feel empowered to take a stand. The revelations of the La Linea scandal triggered public outrage and sparked a large number of public protests in the streets, organized mainly through social media. These protests have shaken the state’s political stability and resulted in the resignation of the Vice President and several ministers. It will be interesting to see if the results of new opinion polls reflect any change of attitudes. In short, Guatemala’s political parties suffer from various limitations to coordinate policy making Emerging Priorities and that maintain the status quo. As this chapter has demonstrated, there are The weaknesses are reflected in a slowdown in several fiscal, social, and environmental priori- the legislative activity by Congress. Legislative ties that the Government of Guatemala needs to production shows some cyclicality with the focus on. First, fiscal revenues remain a problem. presidential terms. During the past two presiden- While better targeting and more efficient use of tial terms, the number of Decrees approved per existing resources can help to fill the revenue gap, year by Congress has been higher in the first year the overall shortage in revenues will continue of a presidential term, declining afterwards. to impede growth, inclusion, and sustainability Moreover, the share of Decrees approved in the of growth. This will need to be accompanied same year that they introduced is also higher in by changes in earmarks of revenues. Second, the first year of a presidential terms. The number resolving the issues related to land ownership of Decrees approved during the 2008-11 was 2.3 and land management will allow large segments times higher than during the presidential term of of the rural population to realize returns on their 2012-15. individual and collective assets while, at the same time, protecting the biodiversity of the country Sustainability of the Pattern of Growth, Distribution, and Poverty Reduction 137 and mitigating climate risk. Land issues remain hydropower as well as the irrigation of agricul- a critical point of social conflict: settling these tural land. Also, reversing and preventing further issues could have a significant positive effect, pollution of water resources will be critical to especially for indigenous peoples. Finally, proper protect the health of people and of the natural water management linked to land management environment and to aid in the eradication of is needed to ensure the viability of the country’s malnutrition. 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Proceedings World Bank. of the National Academy of Sciences of the United States _________. 2009. Disaster Risk Management in Central of America. America: GFDRR Country Notes Guatemala. GFDRR. Trigueros, M. P. 2014. Tax Expenditures in Latin _________. 2009. Guatemala Poverty Assessment: Good America: 2008-2012. Inter-American Center of Tax performance at low levels. Central America Department, Administrations. Poverty Reduction and Economic Management Unit, United Nations. 2014. World Urbanization Prospects 2014 Latin America and the Caribbean Region. Washington, Revision. Department of Economic and Social Affairs. D.C.: World Bank. New York: United Nations. _________. 2013. Towards Better Expenditure Quality: Sustainability of the Pattern of Growth, Distribution, and Poverty Reduction 139 Guatemala Public Expenditure Review. Washington, Cerro Quemado, and Santiaguito). D.C.: World Bank. 20 Baez et al. (2015). _________. 2015a. Record drought in Central America: four 21 Cadena et al. (2013) and Baez et al. (2015). In order to countries, 40 days without rain, two million facing hun- cope with this shock, rural households withdrew their ger. Retrieved from World Bank: https://www.worldbank. children from school to join the labor supply, which was org/en/news/feature/2014/09/10/sequias-centroamerica also being increased (on the intensive margin) by adults, _________. 2015b. Agricultura para la prosperidad de los especially in urban areas. territorios rurales en Guatemala: Vincular el desarrollo 22 In the case of Tropical Storm Stan, 25.8 percent of poor agropecuario con la prosperidad del campo. World Bank. households reported being affected compared to 16.7 percent of non-poor households (see World Bank, 2009) 23 Joint UNEP/OCHA Environment Unit (2005). Notes 24 FAO (2012) and Rodriguez (2015). 25 See Alvarez (2015) and Action Against Hunger (2014). 1 This section is adapted from Chakeri (2016). 26 CONADUR/SEGEPLAN (2014). 2 Schneider (2012) 27 CONADUR/SEGEPLAN (2014), World Bank (2006), 3 World Bank (2013) and Fundesa and ICEFI (2012) and UN-REDD (2012). 4 World Bank (1996). 28 Ekouevi and Tuntivate (2010) 5 World Bank (2014). 29 World Bank (2010) 30 Pagiola et al. (2010) 6 Barrientos (2015). 31 Máñez Costa and Zeller (2005) 7 Cabrera et al. (2015). 32 Larson et al. (2008) 8 Gomez-Sabaini and Jimenez (2011). 33 Davis (2015) 9 Kettle et al. (2015). 34 Guatemala is in the top 10 countries in the world for 10 IMF (2005). importing hazardous pesticides. 11 INE (2003). 35 Chandra et al. (2014) 12 Granovsky-Larsen (2013). 36 MSPAS (2012) 13 One of the largest invasions in recent years took place in 37 MSPAS (2012) the Polochic Valley during 2010, when approximately 800 38 United Nations (2014). Q’eqchi’ families occupied sugar cane plantations. These 39 United Nations (2014). families were former workers who had been negoti- 40 MSPAS (2012) ating the purchase of land from land owners through 41 In the case of land, the government enacted discrimi- Fontierras since 2002. However, the negotiations with natory property rights laws and supported massive land the communities were dropped when sugar mills from expropriation from indigenous peoples along with the the Pacific region bought the land to expand cultivation privatization of their communal land. In the case of labor, in the Polochic River Valley. In retaliation, the Q’eqchi’ the government legalized different forms of mandatory families invaded the estates in November 2010. They forced labor that affected indigenous groups. Elements of occupied the land for five months before being violently non-inclusive labor laws persisted until the mid-1980s. evicted. In the case of education, the economic model of large 14 CONADUR/SEGEPLAN (2014). plantations and subsistence wage economy reduced 15 Bunch and Loarca (2013). the incentives for both workers and the government to 16 World Economic Forum (2015). invest in education. The education system that developed 17 CONADUR/SEGEPLAN (2014). excluded the indigenous people, with most of them 18 Guatemala has 309 declared areas under different man- (mainly women) remaining illiterate. agement categories, covering 3.5 million of hectares. For 42 Scheneider (2012). details on the Maya Biosphere Reserve, see http://www. 43 Castillejo (2015). stateofthembr.org. 44 Scheneider (2012). 19 Guatemala experiences frequent earthquakes and has 45 Cabrera (2011). four active volcanoes that present a threat (Fuego, Pacaya, 46 Cabrera (2011). 140 Sustainability of the Pattern of Growth, Distribution, and Poverty Reduction 6. Closing the Gaps in Guatemala: An Agenda of Priorities Guatemala is a country with significant percent more than the average for the Latin potential for growth and for improved welfare. America and the Caribbean region. Malnutrition The country’s strategic location vis-à-vis inter- (stunting) rates among Guatemalan children are national trade, its substantial natural resources, high, similar to those found in countries with and its young multi-ethnic population with the substantially lower levels of GDP. Guatemala has associated chance for a demographic dividend ranked 106 out of 110 countries with data on all contribute to this potential. Guatemala has stunting since 2010, which is almost the exact lived up to its promise in many ways. There is same ranking that it had in 2000.1 Shared a dynamic private sector that has benefitted prosperity, as measured by the average growth of from macroeconomic stability and sound trade incomes for those in the bottom 40 percent of the policies. Exports have increased as a result of population, was non-existent in Guatemala substantial growth and increased productivi- between 2000 and 2014. Inequality of income, as ty in the agricultural sector. The emergence of measured by the Gini coefficient, was 0.49 in Guatemalan companies that are able to compete 2014, well below previous levels but still placing internationally (Guate-Latinas) illustrates the Guatemala almost at the top of global inequality strengths of the Guatemalan economy. Hand-in- rankings. The middle class is small (consisting of hand with successes in economic growth, there less than 10 percent of the population), which is a have been impressive gains in some social indica- reflection of the barriers that people face in tors over the past 15 years. In particular, Guate- trying to move out of poverty. mala has been able to substantially lower its child Aggregate indicators of economic development mortality rate to the extent that it has met the suggest that Guatemala’s growth path has diverged MDG goal and it has also expanded educational from the paths of richer countries. Guatemala’s opportunities, particularly at the primary level. current per capita GDP is now 6.7 percent of that Access to basic public services such as electricity, of the US, whereas in 1960 it was 8.4 percent. water, and sanitation has also increased over the Meanwhile, Latin America and Caribbean past 15 years. countries in general were able to improve their However, Guatemala is one of the poorest position relative to the United States from 12.2 countries in the Latin America and the percent of US per capita GDP to 18.1 percent. In Caribbean region. Poverty is both deep and Central America, Guatemala’s lack of convergence persistent. The majority of the country’s popula- with the United States has been similar to that of tion live in poverty, a share that increased from Honduras, El Salvador, and Nicaragua, 55 percent in 2000 to 60 percent in 2014, using Guatemala’s neighboring countries with which it the international poverty line of US$4 per day. shares similar development challenges. In There is little intra-generational socioeconomic contrast, Panama and Costa Rica, like most Latin mobility, with 37 percent of Guatemalan house- American countries, have made headway in holds being chronically poor, which is about 50 converging with the United States. Today, Closing the Gaps in Guatemala: An Agenda of Priorities 141 Guatemala is the fifth poorest economy in the Latin America and the Caribbean. In two of the Latin America region in terms of per capita GDP, largest sectors, agriculture and commerce, 94 a drop of five positions from its rank in 1960. percent and 86 percent of employment is The previous chapters have described the large informal, respectively. After controlling for gaps in outcomes and opportunities that charac- workers’ endowments, earnings in the informal terize the country and have resulted in two sector are almost 60 percent lower than those in Guatemalas. One Guatemala is rural and the the formal sector. The large informal sector is a other urban, one is indigenous and the other symptom of a lack of opportunities and low non-indigenous, one informal and the other productivity in the economy as a whole. formal, and one lacks access to basic services Agriculture, a sector of particular significance to while the other has the ability to pay for those the economy, has a dualistic structure with services when the state does not provide them. export-oriented large farms on the one hand and Indigenous people in Guatemala are 1.7 times as subsistence-oriented small farms on the other. At likely to be poor as non-indigenous people and one extreme, Guatemala has become a leading are also poorer than indigenous people in most exporter of agricultural products such as sugar other Latin American countries. Chronic and cardamom and has the most efficient malnutrition (stunting), is high throughout the sugar-loading terminal in the world.4 At the other country (affecting 47 percent of all children), but extreme, small farmers grow food for the the figure is 66 percent among children in the domestic market and for their own consumption, lowest welfare quintile and 61 percent among and their productivity is declining or stagnant. indigenous children.2 This is much higher than There is an urgent need to close the gaps malnutrition rates among indigenous children in between the two Guatemalas. The success of both El Salvador (40 percent), Peru-Quechua (15.4 Guatemalas depends on recognizing the interde- percent), India (25.3 percent), and Brazil (25.7 pendence between low per capita high inequality percent).3 The differences in stunting rates among and how this affects growth and development wealth quintiles within Guatemala are large, outcomes. Empirical evidence shows that too ranging from 17 percent in the top quintile to 66 much inequality is detrimental to growth. Under percent in the lowest. In education, the gaps are certain conditions, inequality can create benefi- also large: rural inhabitants have, on average, cial pressures on an economy: for example, only 3.7 years of schooling compared with 6.2 inequality of outcomes can provide incentives to year for urban residents. In 2006, the gap in individuals to accumulate human capital and to sixth-grade reading test scores between the poor firms to invest and innovate. However, the and the middle class in Guatemala was the largest evidence suggests that in a country like in the Latin America region. Guatemala with limited upward socioeconomic The differences between the two Guatemalas mobility and a state structure incapable of are also clear in economic terms. Nationally, equalizing opportunities to build human capital economic activities are carried out by a small and create access to basic infrastructure services, formal sector with social protection (18 percent inequality comes at a considerable cost. of workers) on the one hand and a large informal The persistence of low growth and high sector (82 percent of workers) on the other. The poverty suggest that Guatemala is trapped in a share of workers who are not covered by social low development equilibrium. Guatemala’s security in Guatemala is among the highest in development has been hindered by two 142 Closing the Gaps in Guatemala: An Agenda of Priorities fundamental and interlinked features: (i) a equilibrium because neither of the two fragmented social contract (the implicit agree- Guatemalas has the resources or opportunities to ment between the state and its citizens about change it. The more dynamic formal sector of their respective about roles and responsibilities), Guatemala is too small to be able to provide the and (ii) weak institutions. The economic and funding for the basic public goods needed to social dynamics of colonial times and the support the economy, such as transportation development of an economy based on large coffee infrastructure, pollution controls, public health plantations resulted in a fragmented social protections, basic sanitation in urban slums, and contract and a preference for a small state sector the provision of technical assistance to small on the part of the populations of the two farmers or entrepreneurs. Meanwhile, those in Guatemalas. This dynamic, in turn, created weak the informal and excluded sectors of Guatemala public institutions that have not been able to cannot contribute to the economy because of the provide universal access to quality public limited opportunities available to them to services, creating unequal opportunities for both increase their human capital, find good jobs, and individuals and firms. Change has been minimal rise out of poverty. The net result has been the given how little accountability there has been two Guatemalas that are evident today. within the system and how large segments of the The underlying dynamics between the two population have had little say in public affairs. Guatemalas are represented in figure 1.2. The The country is trapped within this low-level fragmented social contract leads to a general FIGURE 6.1 Gu t m l ’s Fr m nt d Soci l Contr ct nd Int rpl b tw n Institutions nd Outcom s Two Guatemalas Poor Access and Quality of Public Services Low Investment Informal, Poor, Subsistence Agriculture, Vulnerable, Rural, Low Human Capital, Coverage Largely Indigenous and Quality Two different levels of Fragmented Weak State bargaining power, Social Contract Institutions voice and influence Formal, Large Firms, Lack of trust Low taxation Urban, High Human Capital, Acceptance of Non-inclusive policies Mostly Non-Indigenous minimal state Weak investment climate Selective Rule of Law Exclusion and Low Growth Historical Legacy Political exclusion Colonial Productive of particular groups Institutions Structures Source: Adapted from the proposed framework for the WDR 2017 and Acemoglu (2015, lecture notes). Closing the Gaps in Guatemala: An Agenda of Priorities 143 acceptance of a small and weak state. On the one of Guatemalans suggests that a major coordi- hand, those who do not benefit from public nated effort - a big push - will be needed to set spending have little incentive to pay taxes or Guatemala on a more inclusive development demand greater tax collection. On the other path. Realistically, marginal or incremental hand, those who do benefit from public spending interventions will not be enough to overcome the are unwilling to pay taxes or to expand the state self-reinforcing dynamic that currently exists in apparatus to provide services to all. The low taxes Guatemala. The underlying effects of the frag- ensure that the small, weak public sector does not mented social contract and weak institutions have the capacity to improve the management of permeate all sectors of the economy and all public investment, which, in turn, constrains the population groups. Underfunded and ineffective provision of public services, lowering its quality. public institutions provide too few services to Economic growth is restricted because of the create the conditions for upward mobility. Low limited capacity of the state to invest in the and inefficient levels of social spending limit infrastructure needed by the private sector and to the population’s access to the basic services that enforce the rule of law. Private households must they need to accumulate human capital. Multiple either do without services or pay out of pocket deficiencies arise as malnutrition combined with for the services that should be provided by the limited access to health and education services government such as security, education, and further undermine human capital accumulation. health care. The history of weak constraints on This reduces employment opportunities and thus the executive has resulted in ineffective controls prevents many households from generating the on spending and the inefficiencies and corrup- income needed to purchase basic services. At tion that arise in such conditions. The inability of the same time, the small size of the middle class the state to provide services to large groups of the and the population’s limited voice and participa- population has led the voting population to feel tion in political life act as a damper on effective excluded and disaffected. The net result has been demand for change. This combined with the considerable inequality of outcomes between long-standing structural problem of low levels of different segments of the population, starting in investment lead to continued low growth in per childhood and continuing into adulthood, and capita GDP. Public investment is constrained by the perpetuation of low growth, high poverty, inefficiencies and a lack of public resources, while and the two Guatemalas. private investment is constrained by crime and a lack of public investment in infrastructure. Low investment reduces productivity, which slows the What are the pace of economic diversification, reduces the so- Implications for Action phistication of exports, keeps Guatemalan firms from being competitive, and constrains growth and the Costs of in job creation, earnings, and savings. Without Inaction? addressing these multiple problems in parallel, there is little possibility of Guatemala’s economy rising out of its present low-level equilibrium. The combination of a low-level equilib- The extent of the policy inertia in the system rium rooted in weak institutions and large gaps should not be under-estimated. Even the Peace in welfare outcomes between different groups Accords of 1996, which were a comprehensive 144 Closing the Gaps in Guatemala: An Agenda of Priorities attempt at change, have not been fully successful. government continues to fail to provide enough The inertia has even started to unravel the basic services of good quality in urban areas, this changes that occurred after the Peace Accords, may create social instability that would hamper with primary education enrollment rates falling investment and increase security tensions. again and access to health care declining. While institutions are resistant to change, there has also Policy Areas been little or no pressure for change from an This section discusses the policy areas where key unengaged population. Poor households have no changes are needed to set Guatemala’s economy voice with which to express their need for better and society on a path to a new model of develop- public goods and services, and better-off house- ment. holds can afford to opt out of the system, Three fundamental criteria were used in this purchasing goods and services from the private report to identify the key policy areas where sector. Neither group sees itself as benefitting changes are needed. The first is that the issue in from the state. There is a need to bring both question must be significant in terms of its groups into the system. In short, what is funda- magnitude or scale. The reasoning behind this is mentally needed is a new consensus on the role that closing the gaps between the two Guatemalas and size of government - a new social contract. will require interventions that will affect broad This cannot be done by small-scale, marginal swathes of the population and that will have interventions because the magnitude of the widespread effects. Given how many significant deprivation and the barriers to development are problems need to be addressed in Guatemala, too large. In Guatemala’s environment of limited however, this criterion was not quite enough to resources, strong historical trends, and policy determine which policy interventions should be inertia, it will not be easy to initiate a big push for prioritized. It was necessary to add a further change. Nor is it clear what would propel it, but it condition - that the priority areas be ones in is possible that the present political environment which Guatemala is an outlier, where the scope of is conducive for just such a push. the problems sets the country apart from its While there is potential for a big push to peers. As discussed in the previous chapters, succeed at this time, the costs of failing to change these areas are malnutrition, education, fiscal now are also greater than in the past. The current policy, and land concentration. rapid urbanization of the country will make it The second criterion was that the actions to be cheaper and more efficient to provide basic recommended within these key policy areas services to the population as service provision in should work together to create synergies and densely populated areas is more cost-effective should multiply the effect of the other actions. than in sparsely populated rural communities. At This is a critical criterion given the small size of the same time, the rapidly urbanizing population the economy and the public sector. The lack of means that pressure on the government to financial resources stemming from low govern- actually deliver quality services can be expected ment revenues, the lack of human capital in the to increase. The demonstrations of the past year public sector, and the weaknesses of the institu- that were sparked by the La Línea scandal have tions themselves make effective policy change shown how easy it can be for the urban popula- difficult. Therefore, it is imperative that each tion (especially the growing youth population) to action taken should make sense in its own right, organize and generate demand for change. If the Closing the Gaps in Guatemala: An Agenda of Priorities 145 tackle fundamental bottlenecks, and yield barrier to the development of both individuals multiple outcomes, while at the same time and the economy. The lack of education limits complementing the investments and activities in opportunities for individuals and undermines the other policy areas. productivity and potential of the economy. To Finally, the third criterion relates to the timing promote economic growth, there is a need to of the policy actions. The policy interventions to increase investment, and, by improving the be chosen need to create some degree of positive investment climate, the returns to investment. In change as soon as possible. Given the depth of particular, given the current dependence of poverty in Guatemala, where the extremely poor households in both Guatemalas on agriculture, are truly extremely poor, at least some interven- investments aimed at increasing productivity in tions need to enhance welfare immediately. The that sector will be key to improving welfare next generation of children needs proper outcomes and increasing growth. Changes in nutrition and education if Guatemala is to be able fiscal policy are needed to promote equity and to take advantage of the demographic dividend. generate sufficient resources to provide needed At the same time, the events of the past year have public goods. Actions are also needed to address led to a drop in already low revenues. Stopping the unequal distribution of land, which con- this downward spiral and finding ways to strains social and economic progress, and to increase revenue collection is fundamental. And make Guatemala less vulnerable to the frequent nothing can be done unless actions are taken that occurrence of natural disasters, which set back will rapidly spur citizen engagement and development efforts and economic growth. strengthen the social contract. Other actions can Above all, there is the need to forge a new be chosen that will have more medium-term pluralism in Guatemala in which all people feel goals such as efforts to improve the overall committed to and included in the social contract. investment climate in order to foster the creation In all of these policy areas, given the unequal of the kind of jobs that will enable people to rise burden of poverty and deprivation borne by the out of poverty. Given the high share of the indigenous peoples, interventions must be population who are dependent on the agricul- designed to be pro-indigenous as well as being tural sector today, it will also be necessary to pro-poor. increase the productivity of investments in the sector, while moving towards a shift out of Tackling Malnutrition agriculture in the medium term. However, even The extent of malnutrition in Guatemala, along for those policies with longer-term goals, actions with its historical intractability and its effects on need to be taken now to begin to the process of other welfare outcomes, puts solving the mal- change. The big push will require that activities nutrition conundrum at the top of any priority are carried out in parallel as taking them sequen- list. With 47 percent of the children under 5 year tially will not move the country forward at the old being chronically malnourished, Guatemala’s necessary speed. level of chronic malnutrition is closer to those in This SCD has identified a critical set of policy poor Sub-Saharan countries than the levels in its areas where actions must be taken to ensure Latin American neighbors. This means that in inclusion, promote growth, and reduce poverty in 2015 around 740,000 Guatemalan children were Guatemala. Malnutrition is the cause of many malnourished and, at this rate, every year another inequities and deprivations as well as being a 146 Closing the Gaps in Guatemala: An Agenda of Priorities 125,000 will be added to the list.5 In 2012, the Providing Quality Education government announced a Zero Hunger Pact in which it called for a decrease in malnutrition of for All Improving education is another key investment 10 percent over three years. The actual decline, 6 with great potential to increase equality of oppor- percent over eight years, has been starkly inad- tunities in Guatemala and to promote economic equate to solve the country’s rampant nutrition development. Guatemala has a long way to go to problem, in even the medium term. bring its education system up to the standard of Malnutrition represents a substantial cost to its peers. In 1970, the average number of years Guatemala. It limits people’s opportunities to of schooling in Guatemala was below any of its participate in the economy and to contribute to peer countries. Forty years later that statement is the country’s social and economic development. still true. The gap has shrunk between Guatemala The direct costs of malnutrition to individuals are and the next closest country, which reflects the high, leading to a greater risk of mortality, higher government’s recent efforts to improve school- morbidity, and lower cognitive development, and ing, particularly among indigenous women, but can perpetuate poverty across generations. Also, relative to the average of all of its peer countries, research in other countries has found that Guatemala is not doing well. The transition rate chronic malnutrition in children leads to a 22 of students between school levels continues to be percent loss of earnings in adulthood.6 Reducing below that of other countries, repetition rates are chronic malnutrition can have a wide range of exceptionally high, and the low scores of Guate- effects from lowering infant mortality and malan students on international tests continue to morbidity to improving child development, highlight the difficulties that the government is learning, and school outcomes to better labor facing in trying to provide quality education for market outcomes and increased productivity.7 A all. The recent decline in primary school enroll- longitudinal study conducted in Guatemala ments raises additional concerns. between 1966 and 1977 demonstrated the Three characteristics of Guatemala make positive impact that better nutrition can have on education a priority. First, the country continues growth, school attainment, and labor capacity to have a high fertility rate. This means that and in terms of higher rates of literacy, numeracy, demand for schooling will remain high for the and information processing.8 The cost of malnu- near future. It also means that there is a potential trition to the economy is also high as it under- economic dividend that can be reaped in the best mines investments in public services and case scenario. In the worst case scenario, the deprives the labor market of productive workers. demographic dividend can become a trap if the Solving the malnutrition challenge will require new generations are not educated. Second, the multi-sectoral interventions in the areas of country is characterized by low productivity. An health, education, water and sanitation, and uneducated workforce hinders growth by agriculture. Evaluating the experiences of the limiting not only economic productivity but also government flagship nutrition program, Zero the pool of taxpayers. Third, education has many Hunger, could provide important insights as will other benefits beyond its immediate economic updating the analysis of the UNICEF framework impact. As shown in Chapter 3, the higher the with data from the 2014/15 ENSMI.9 educational attainment in the household, the better the nutritional outcomes for children. A Closing the Gaps in Guatemala: An Agenda of Priorities 147 lack of education reduces the opportunities Boosting Agricultural available to individuals and can be a threat to social cohesion, especially in the context of Productivity The agricultural sector has created the largest wide-spread crime and violence. Education can number of jobs in the past 15 years, and boost- increase social cohesion by helping to foster a ing its productivity will be critical for improving shared national identity, which is particularly the earnings of the poor. A sustainable growth relevant in Guatemala given its multiple ethnici- strategy in agriculture must focus on enhancing ties, cultures, and languages. the productivity of smallholders and fostering opportunities for high-value-added production. Unlocking Private and Public Large gains should have been realized from the Investment Levels introduction of inclusive export crops such as Achieving higher growth will be an elusive goal coffee and cardamom (which mostly involve in Guatemala without increasing investment lev- small-scale producers). However, growth in these els. Guatemala has one of the lowest private and subsectors has been constrained by the disas- public investment levels relative to GDP in the trous effects of large-scale outbreaks of pests and Latin America region. Access to finance remains diseases, the failure to adopt technology such as a challenge for SMEs as the financial sector does irrigation, and the absence of any strong market not yet provide the kind of instruments that coordination. The government will need to sup- could be used by SMEs, such as factoring and port the formation and consolidation of organi- leasing. Investments in infrastructure that will zations of small farmers, mainly those of indige- increase the connectivity of Guatemalan firms nous peoples, to help them to take advantage of with both internal and external markets will be economies of scale and diversify their produc- critical to fostering the integration of the two tion. Also, increasing agricultural productivity Guatemalas. Other constraints, such as crime and is, of course, integrally linked to resolving the violence, limited connectivity to markets, weak land issues discussed below. Given the extreme enforcement of laws governing contracts and inequality of land distribution in Guatemala property rights, and geographical inequalities (with 8 percent of producers accounting for 92 in the delivery of public services also negative- percent of the productive land), it will be crucial ly affect returns to investments, and thus, the to develop a well-functioning land market and to propensity of firms to invest in the first place. On increase the security of land tenure. the public sector side, capital expenditures have reached a historic low in recent years (2.9 percent Reforming Fiscal Policy of GDP in 2014) and are not sufficient to finance Low domestic resource mobilization has been a much-needed public infrastructure investment. recurrent constraint to Guatemala’s development Public-private partnerships could potentially be by limiting the extent to which public spending an alternative to finance infrastructure projects can be used as a policy tool. Guatemala’s tax given Guatemala’s low levels of tax collection. revenues are far below the regional average as a percentage of GDP and have not increased since the late 1990s, despite several efforts by the government to improve tax administration and to reform the tax system. There is large degree of 148 Closing the Gaps in Guatemala: An Agenda of Priorities informality in the economy, which means that Guatemala (a Gini coefficient of 84 percent, well the potential exists to broaden the tax base but above those for either income or consumption) this will require not only a larger private for- is a source of economic and social stress in a mal sector but also a more educated workforce. country where 50 percent of the population lives Furthermore, the government is hampered in its in rural areas. Meanwhile, the absence of any management of public expenditures. There are systematic territorial planning is undermining extensive rigidities embedded in the Constitu- efforts to protect the environment. tion that pre-commit almost 90 percent of fiscal Introducing nationwide territorial planning revenues.10 Moreover, the effectiveness of public and resolving the conflicts related to tenure will spending is impeded by weaknesses in budget be beneficial for economic growth, social welfare, processes ranging from the practice of preparing and the environment. Land is the major produc- budgets based on past allocations (rather than on tive asset of many Guatemalan households. If sectoral plans and results), to excessive realloca- they do not have secure tenure over that land, tions during the budget year, to the frequent use then they have no incentive to invest in it. of extra-budgetary vehicles and the accumulation Without the legal rights to their land, farmers of payment arrears. The use of non-competitive cannot use it as collateral, thus reducing their procurement practices and frequent cost over- access to financial markets. When land is not runs, especially in public works contracts, also used for agriculture, investors face increased reduce the positive impact of public spending. costs and conflicts with communities who see While better targeting and more efficient use of few options for redress in cases of unclear existing resources can help to fill the revenue gap ownership. For indigenous peoples, land plays an to some extent, these gains will never be enough important role in their cosmovision: thus, a lack to resolve these institutional weaknesses and of tenure and control over their ancestral lands the chronic shortage of available services. Only continues to foment social unrest. Finally, the significantly and consistently higher revenues will current environmental degradation in address these otherwise intractable problems. Guatemala, including water contamination and deforestation, is the result of inadequate land use Promoting Territorial Planning and management.11 Land has played a difficult role in Guatemala’s history. The coffee boom in the late 19th century Addressing Natural Disasters resulted in a series of discriminatory property and the Environment laws and the expropriation of land belonging to Guatemala’s geographic location makes it vul- indigenous peoples along with the privatization nerable to a full range of extreme weather events of their communal lands. The civil war in the and natural disasters. Thus, it is critical to build 20th century had its seeds in the conflict between its resilience to natural disasters, especially for the demand for, and the resistance to, land re- the poor. The government has taken steps to put form. Despite significant attempts by the govern- in place an agenda for disaster prevention and ment to address land tenure issues, communal mitigation, such as mainstreaming disaster risk land ownership was only recently legally recog- management into national development plans nized, and land conflicts continue to be common. and territorial planning addressing disaster risk.12 The very high concentration of land ownership in Two key steps are needed in this area. First, the Closing the Gaps in Guatemala: An Agenda of Priorities 149 government needs to encourage the financial roles and responsibilities of the government in sector to provide instruments to help individuals relation to the population. Transparency will be and firms to cope with risks, such as insurance essential for the sustainability of this new social and savings mechanisms. This will reduce the ex- contract, which will require mechanisms for the tent to which social and infrastructure spending public to monitor government policies, spend- has to be diverted to disaster response activities. ing, and actions. A range of social accountability Second, growing urbanization and the lack of mechanisms will need to be implemented to land management exacerbates the negative effect increase information flows, construct spaces for that natural disasters have on water access and citizen-state interactions and create a process of quality. Water is a crucial resource that affects negotiation for change.14 public health, agricultural livelihoods (through irrigation), and the viability of the country’s hy- dropower. Also, malnutrition cannot be eradicat- Change and Recent ed without clean and plentiful water. Therefore, History it is vital to improve the management of water Effecting real change in Guatemala will not resources and to reverse and prevent further be easy. History, vested interests, and tradition pollution of water resources to protect the health have created a degree of inertia that will be hard of both people and the natural environment. to break. The Peace Accords and the recent La Línea scandal have highlighted both the possibili- Generating Social Accountability ties and the difficulties of making substantive and and Forging a New Social sustainable change. In many ways, the 1996 Peace Accords, which ended a 36-year long armed Contract conflict, represented a turning point towards the There is a need to increase pluralism in con- development of a more inclusive social contract structive ways. Guatemalans are increasingly in Guatemala. The Accords laid out a path for demanding a more transparent and accountable closing the gap between the rich and the poor government. Until recently, they have often been in the country, in part through a set of fiscal characterized as disinterested in public issues or and social targets, including greater and more as reluctant to express dissent due to the Civil targeted social spending (education and health) War, in which more than 200,000 people were and greater domestic revenue mobilization. The killed. As recently as 2015, 52 percent of the Accords also established a new framework for population indicated their belief that freedom agrarian policy centered on market-assisted land of speech was not well protected in Guatema- distribution aimed at increasing the security of la.13 However, there appears to have been a shift tenure and resolving land conflicts. Moreover, the as young people who did not live through the Accords officially recognized that the country is conflict appear to feel empowered to take a stand. made up of four distinct ethnic groups—Maya, The public protests of the past year in reaction Xinka, Garifuna, and non-indigeneous—and to the La Línea scandal were organized mainly also subscribed Guatemala to the ILO’s Conven- through social media and were instrumental in tion 169 relating to indigenous peoples. Despite the resignations of the Vice President and several the consensus reached through the Accords, ministers. So there may be an opening for the however, in 1999 a national referendum held on creation of a new social consensus about the 150 Closing the Gaps in Guatemala: An Agenda of Priorities the question of whether to incorporate certain which the political system responds to the rights specific to indigenous communities into demands of the population, thus spawning a the constitution was defeated. Recent analyses virtuous cycle of citizen engagement and effective have also pointed to several continuing flaws government, and moving the two Guatemalas in national legislation on social justice: (i) laws into alignment. recognize that rights exist but there are no insti- Closing the gaps between the two Guatemalas tutional mechanisms to ensure that the rights can will enable the country to harness its full poten- be exercised; (ii) ILO 169 is not being applied or tial. Breaking the self-reinforcing dynamics of a enforced; and (iii) a continued lack of widespread fragmented social contract, weak state institu- consultation with stakeholders has undermined tions, low growth, and high inequality will the content of the laws in question. Land tenure require a complex and ambitious agenda of issues continue to be a source of conflict, and re- actions. The prerequisite will be the creation of a cent closures of public health facilities in remote high-level political consensus about the need to rural areas suggest that sustaining change is also forge a new social contract. The priorities difficult. In sum, the Peace Accords changed identified in this Systematic Country Diagnostic much but were not enough to move the country focus on closing the gaps in such a way that will onto a path towards lower inequality, higher reve- allow Guatemala and all of its citizens to flourish. nue mobilization, and higher growth. The recent La Línea scandal may have opened a window of opportunity for change. The 2015 Knowledge scandal had the positive effect of galvanizing a and Data Gaps segment of the population to demand account- In the process of carrying out the analy- ability in government and the enforcement of the sis for this report, important knowledge gaps rule of law. Together, the protesters (who held a were identified. Filling these gaps will require weekly vigil in the Plaza in Guatemala City), the the collection of new data and new analyses. It is independent investigation unit (CICIG), and the hoped that further work can be done to increase Justice Ministry have demonstrated that impu- our knowledge about Guatemala and about the nity is not inevitable in Guatemala. Citizen factors that will affect its growth, equity, and engagement, at least by the urban middle class, sustainability: was shown to be effective. The protests and the Justice Ministry’s actions not only resulted in the • Lack of an up-to-date census. Carrying out most senior government officials being held any analysis, either at the macro level (for ex- accountable but also galvanized the population to ample, on per capita GDP) or at the house- engage in the political process, with record high hold or individual level (on poverty rates numbers of voters participating in the recent or even ethnicity), requires accurate figures presidential elections. Whether this state of on the number of people in the country affairs will continue is unknown. And the extent and their characteristics. Population and to which the newly engaged and empowered Housing Censuses are carried out every 10 electorate will generate long-lasting changes in years in most countries, but Guatemala’s last development policies has yet to be seen. In the Census is 14 years old. The new government end, the continuation of this positive trend will is beginning to plan for a new Census. Once depend on creating a new social contract in Closing the Gaps in Guatemala: An Agenda of Priorities 151 those data are available, it may be advisable school enrollments? What role does pre- to update and revise the analysis in this school attendance play in the decline (and report, particularly the analysis based on why has this fallen as well)? Has the demand the 2014 data, if the population shares from for child labor risen or are migration and a the Census are significantly different from worsening security situation responsible for those being used in the present population the fall in enrollments? projections. • Infrastructure Financing. What are the insti- • Malnutrition. What new information is tutional factors hindering infrastructure fi- needed to shed light on malnutrition levels nancing in Guatemala? How can public-pri- and their intractability? One question is vate partnerships (PPP) help to increase the whether there has been any change in the funding for infrastructure improvements? synergies among the dimensions in the • Fiscal Issues and Effectiveness of Public UNICEF framework (health, care, environ- Expenditure. Without additional revenues, ment, and food) over time. Analyzing the Guatemala will not have enough resources to data from the 2014/15 ENSMI when they finance its development needs. How can the are available should provide answers to this government raise enough revenue from taxes question. A second question relates to the to finance its fiscal policies? How can public role played by mycotoxins in malnutrition. expenditure become more effective in terms Collecting new data on food sources and the of reducing inequalities in Guatemala? presence of aflatoxins (by re-visiting house- • The Gap between the Formal and Informal holds visited in previous surveys) could be Sectors. Informality is pervasive in the Gua- a cost-effective and powerful way to answer temalan economy, and this is detrimental this question. to poverty reduction, productivity, and tax • Primary Enrollments. What are the key collection. What are the determinants of this factors driving the recent decline in primary extensive informality? References GFDRR (Global Facility for Disaster Reduction and Recovery). 2014. Guatemala – Country Program Update. Black, Robert E. et al. 2013. «Maternal and child undernutri- Washington, DC: GFDRR tion and overweight in low-income and middle-income Hall, Gillette and Harry Anthongy Patrinos, eds. 2012. countries». Maternal and Child Nutrition Study Group. Indigenous Peoples, Poverty, and Development, Cambridge The Lancet, Volume 382, Issue 9890, pp. 427-451. University Press, Cambridge, UK. Cabrera, M., Lustig, N., & Hilicías, M. 2015. “Fiscal policy, Martorell, Reynaldo, 1995. “Results and Implications of inequality and the ethnic divide in Guatemala”, World the INCAP Follow-up Study” American Institute Devopment Report, Vol. 76, pp: 263-79. of Nutrition, Journal of Nutrition Supplement, Grantham-McGregor, Sally, Yin Bun Cheung, Santiago Cueto, pp:1127s-1138s. Paul Glewwe, Linda Richter, and Barbara Strupp. 2007. Ministry of Public Health and Social Assistance, National “Developmental potential in the first 5 years for children Statistical Institute, ICF International. 2015. “Encuesta in developing countries”, The Lancet, Vol. 369, Issue 9555, Nacional de Salud Materno Infantil 2014-2015”, pp:60-70. Guatemala City, Guatemala. 152 Closing the Gaps in Guatemala: An Agenda of Priorities Horta, Bernando, Ventura, Ricardo, Welch, James; Cardoso, 5 Based on the INE’s population projections, cited in Andrey; dos Santos, Janaina; Oliveira, Ana; Lira, Pedro; Government of Guatemala (2013). and Coimbra Jr, Carlos. 2013. Nutritional Status of 6 Grantham-McGregor et al. (2007) Indigenous Children: Findings from the First National 7 There has been a substantial amount of research on this Survey of Indigenous People’s Health and Nutrition in topic. The list here is from a summary by Black et al. Brazil. International Journal for Equity in Health 2013, (2013). 12:23 8 A longitudinal study designed to measure the effect of Leite, Mauricio S., Andrey M. Cardoso, Carlos E.A. Coimbra consuming a highly nutritious dietary supplement (atole) Jr. James R. Welch, Silvia A. Gugelmin, Pedro Cabral I. on a range of outcomes was implemented in Guatemala Lira, Bernardo l. Horta, Ricardo Ventura Santos and Ana between 1966 and 1977. A follow-up study was carried lucia Escobar, 2013. “Prevalence of anemia and associ- out in 1988-89 to look at the more long-term effects. ated factors among indigenous children in Brazil: results There is an extensive bibliography on these studies. The from the First National Survey of Indigenous People’s information cited here is from the summary report on Health and Nutrition”, Nutrition Journal Vol. 12, Number this bibliography by Mantorell (1995). 1, page 1. 9 In 2012 the government launched the Zero Hunger Tay, Karla, 2015. “Guatemala: Sugar Annual: Sustainability Program and the related First 1000 Days of Life Initiative Approach”, Global Agriculture Information Network to address child mortality and malnutrition. The goal of Report No. 2015005, Foreign Agricultural Service, United the Zero Hunger Program was to reduce chronic malnu- States Department of Agriculture, Washington, D.C. trition in children under-five and child mortality through World Bank, 2006. ”Social Accountability: Strengthening the coordination of multisectoral interventions. The the Demand Side of Governance and Service Delivery”, program targets the 166 municipalities with the highest http://www.worldbank.org/socialaccountability_source- levels of chronic malnutrition. book/, World Bank, Washington, D.C. 10 Cabrera et al. (2015) and ICEFI (2015). 11 The most recent is a 30-mile stretch of a river that is Notes disappearing as a result of being diverted to make room for a plantation. 1 Based on data from the World Development Indicators 12 GFDRR (2014). using the periods 2010 to 2014 and 2000 to 2004. 13 Latinobarometrro (2015). 2 MSPAS et al. (2015) 14 Social accountability mechanisms range from partici- 3 Hall (2015) using data from Hall and Patrinos (2014). patory policy making and planning, citizen involvement The data for Brazil’s indigenous peoples comes from in the monitoring and evaluation of public goods and Horta et al. (2013). services, to citizen participation in oversight functions. 4 Tay (2015). (For an overview, see World Bank, 2006.) Closing the Gaps in Guatemala: An Agenda of Priorities 153 154 Closing the Gaps in Guatemala: An Agenda of Priorities Annex 1.1: Country Comparators To benchmark Guatemala’s performance, this criteria resulted in the following set of countries: report uses six comparable groups of peers: Cen- Bolivia, El Salvador, Honduras, Nicaragua, Para- tral American countries, Latin American peers, guay, and Senegal. lower-middle-income countries, world average, structural peers, and aspirational peers. Under aspirational peers, we want to aggregate countries that may be used as good examples of The structural peers were selected using the development for Guatemala and that Guatemala “Find your friends” tool. The group of structural may emulate. Thus, we set the following crite- peers includes countries that provide appropriate ria for the period 2001 - 2013: (i) lower middle benchmarks for answering SCD-relevant ques- income and upper middle income countries; (ii) tions such as whether or not certain conditions, GDP per capita growth higher than 3 percent; policies, or economic performances in Guatemala (iii) inflation below 5 percent; (iv) maternal mor- are adequate. The criteria and filters for selection tality ratio (per 100,000 live births) less than 100; were the following: (i) lower-middle-income and (v) population below 35 million. Countries countries; (ii) population between 5 million and that are “natural intensive”, landlocked, or islands 25 million people; (iii) Agriculture, value added were excluded. This classification delivers the (% of GDP) less than 20 percent; and (iv) small following group of countries: island states were excluded. The use of these Figure A1.1  Structural Peers for Guatemala Nominal GDP per capita Agriculture, value added Country Population (millions), 2014 (US $), 2013 (% of GDP), 2001-13 Guatemala 3,512 15.9 13.0 Bolivia 2,700 11.2 14.0 El Salvador 3,875 6.4 11.1 Honduras 2,323 8.3 13.4 Nicaragua 1,840 6.2 18.1 Paraguay 4,170 6.9 19.3 Senegal 1,073 14.5 16.3 Source: Find my Friends Tool 2014. Annex 1.1: Country Comparators 155 Figure A1.2  Aspirational Peers for Guatemala Nominal GDP Population GDP per capita Maternal Inflation (%), Country per capita (US (millions), growth (%), mortality ratio, 2001-13 $), 2013 2014 2001-13 latest data point Guatemala 3,512 15.9 0.9 6.3 140 Albania 4,610 2.8 5.4 2.9 21 Chile 15,776 17.7 3.3 3.1 22 Jordan 5,174 6.7 3.1 4.3 50 Latvia 15,205 2.0 5.5 4.7 13 Lithuania 16,003 3.0 5.9 3.0 11 Panama 10,839 3.8 5.3 3.2 85 Peru 6,674 31.4 4.1 2.6 89 Source: Find my Friends Tool 2014. 156 Annex 1.1: Country Comparators Annex 2.1: Mobility: Guatemala, Central America and LAC FIGURE A2.1 Th countr h s xp ri nc d r t r mov m nts into pov rt th n out of pov rt Share of households by Change in Economic Status, 2000-2011 100 80 60 P rc nt 40 20 0 Gu t m l 2000-2011 R st of C ntr l Am ric (2003-2012) LAC 2003-2013 Alw s poor Non-poor to poor Poor to non-poor N v r poor Source: Calculations with data from SEDLAC (CEDLAS and The World Bank) and ENCOVI 2000 ad 2011, using lower bound estimate based on Dang et al, 2011. For comparability with Central America and LAC, the analysis of Guatemala uses the 2011 data despite some concerns about comparability between the 2000 and 2011 data. However, given what is known about the 2011 dataset, it is expected that the analysis will overstate movements out of poverty and understate movements into poverty. Annex 2.1: Mobility: Guatemala, Central America and LAC 157 Annex 2.2 Poverty by Region FIGURE A2.2 Distribution of Poor nd Extr m Poor b R ion, 2000,2006 nd 2014 Overall Poverty, 2000 Extreme Poverty, 2000 P tén, M trop. P tén, M trop. 3.9 6.9 2.7 0.9 North, North, N. W st, 12.1 20.1 18.8 N. W st, 25.9 N. E st, N. E st, 7.6 4.7 S. E st, S. E st, 11.2 10.7 S. W st, 30.1 C ntr l, C ntr l, S. W st, 9.8 6.0 28.6 Overall Poverty, 2006 Extreme Poverty, 2006 P tén, M trop. P tén, M trop. 3.8 7.3 3.3 0.7 North, North, N. W st, 13.5 N. W st, 22.8 20 21.0 N. E st, 8.6 N. E st, 10.9 S. E st, 8.5 S. W st, S. E st, 28.1 S. W st, C ntr l, 7.3 26.8 10.1 C ntr l, 7.4 Overall Poverty, 2014 Extreme Poverty, 2014 P tén, M trop. P tén, M trop. 4.6 11.7 3.9 4.8 North, N. W st, N. W st, 19.8 18.1 North, 21.5 12.9 N. E st, 8.1 N. E st, 10.6 S. W st, S. E st, 26.2 7.7 S. E st, S. W st, 6.4 C ntr l, 25.6 C ntr l, 10.7 7.3 158 Annex 2.2 Poverty by Region Annex 2.3: Age Pyramid by Ethnicity FIGURE A2.3.1 A P r mid b Ethnicit Maya Garifuna 65+ 65+ 60-64 60-64 55-59 55-59 50-54 50-54 45-49 45-49 40-44 40-44 35-39 35-39 30-34 30-34 25-29 25-29 20-24 20-24 15-19 15-19 10-14 10-14 5-9 5-9 0-4 0-4 -0.10 -0.08-0.06-0.04 -0.02 0.00 0.02 0.04 0.06 0.08 0.10 -0.10 -0.08-0.06-0.04 -0.02 0.00 0.02 0.04 0.06 0.08 0.10 M l F m l M l F m l Xinka Non-indigenous 65+ 65+ 60-64 60-64 55-59 55-59 50-54 50-54 45-49 45-49 40-44 40-44 35-39 35-39 30-34 30-34 25-29 25-29 20-24 20-24 15-19 15-19 10-14 10-14 5-9 5-9 0-4 0-4 -0.10 -0.08-0.06-0.04 -0.02 0.00 0.02 0.04 0.06 0.08 0.10 -0.10 -0.08-0.06-0.04 -0.02 0.00 0.02 0.04 0.06 0.08 0.10 M l F m l M l F m l Source: INE, 2010. Annex 2.3: Age Pyramid by Ethnicity 159 FIGURE A2.3.2 Indi nous Popul tion b D p rtm nt, 2011 96.5 97.8 88.6 89.7 90 P rc nt of Popul tion b D p rtm nt 78.4 80 70 60 55.8 57.5 51.7 50 36.4 40 30.3 32.4 26.8 30 23.4 20 13.7 15.4 7.1 7.2 10 1.8 3.0 3.2 0.1 0.9 0 l n o u s n o o so o ich nd Gu ntl p ul l ol p s p b qu qu rc p p Ro ch hul t n n p l im m r So l c ti i Qu P cu r r n n n ic Ju I l o M qu J p p Z t pr V V ot Es nt t lt t lt n i it t Ch n R El hu j t t To m S c S Al B Su i Qu Ch S Hu Source: INE, calculations based on the 2011 ENCOVI. 160 Annex 2.3: Age Pyramid by Ethnicity Annex 2.4 Probability of Being Poor Probability of Being Poor, 2014 Extreme poor Moderate poor Non-poor Bottom 40 Top 60 coef t coef t coef t coef t coef t Age of head -0.004*** 0.000 -0.006*** 0.000 0.010*** 0.000 -0.011*** 0.000 0.011*** 0.000 Male-head 0.103*** 0.004 0.067*** 0.002 -0.098*** 0.003 0.110*** 0.003 -0.110*** 0.003 household Single adult, no 0.016** 0.007 -0.570*** 0.004 0.312*** 0.004 -0.333*** 0.004 0.333*** 0.004 child. Two adults, no child. 0.119*** 0.010 -0.136*** 0.005 -0.016*** 0.006 -0.026*** 0.006 0.026*** 0.006 Two adults, with 0.040*** 0.003 0.052*** 0.002 0.072*** 0.003 -0.077*** 0.003 0.077*** 0.003 children Yrs. Educ. Of Hhld -0.097*** 0.000 -0.077*** 0.000 0.130*** 0.000 -0.129*** 0.000 0.129*** 0.000 Head Proportion age 0-14 0.013*** 0.000 0.002*** 0.000 -0.011*** 0.000 0.012*** 0.000 -0.012*** 0.000 Proportion age 15- 0.001*** 0.000 -0.002*** 0.000 0.001*** 0.000 0.001** 0.000 -0.001** 0.000 64 Proportion age 65+ 0.006*** 0.000 0.004*** 0.000 -0.007*** 0.000 0.009*** 0.000 -0.009*** 0.000 Dependents per -0.004*** 0.000 -0.004*** 0.000 0.003*** 0.000 -0.003*** 0.000 0.003*** 0.000 employed Household size 0.182*** 0.001 0.003*** 0.000 -0.220*** 0.001 0.219*** 0.001 -0.219*** 0.001 K´iche´ 0.503*** 0.004 0.060*** 0.003 -0.460*** 0.003 0.464*** 0.003 -0.464*** 0.003 Q´eqchi´ 0.620*** 0.005 -0.111*** 0.004 -0.636*** 0.005 0.652*** 0.005 -0.652*** 0.005 Kaqchiquel 0.533*** 0.004 0.099*** 0.003 -0.365*** 0.004 0.377*** 0.004 -0.377*** 0.004 Mam 0.140*** 0.005 0.292*** 0.004 -0.398*** 0.004 0.445*** 0.004 -0.445*** 0.004 Other indigenous 0.289*** 0.005 0.143*** 0.004 -0.427*** 0.005 0.446*** 0.005 -0.446*** 0.005 Employer -0.971*** 0.009 -0.606*** 0.005 1.190*** 0.006 -1.216*** 0.006 1.216*** 0.006 Self Employed -0.143*** 0.002 -0.044*** 0.002 0.220*** 0.002 -0.215*** 0.002 0.215*** 0.002 Unpaid Family -0.334*** 0.017 -0.286*** 0.011 0.644*** 0.012 -0.673*** 0.012 0.673*** 0.012 Worker Unemployed 0.545*** 0.016 0.144*** 0.013 -0.243*** 0.014 0.209*** 0.014 -0.209*** 0.014 North 0.725*** 0.006 0.004 0.004 -0.234*** 0.005 0.242*** 0.005 -0.242*** 0.005 North East 0.901*** 0.005 -0.029*** 0.004 -0.399*** 0.004 0.404*** 0.004 -0.404*** 0.004 South East 0.531*** 0.006 0.215*** 0.004 -0.341*** 0.004 0.364*** 0.004 -0.364*** 0.004 Central 0.247*** 0.005 0.237*** 0.003 -0.266*** 0.003 0.302*** 0.003 -0.302*** 0.003 South West 0.390*** 0.005 0.150*** 0.003 -0.204*** 0.003 0.205*** 0.003 -0.205*** 0.003 North West 0.502*** 0.005 0.059*** 0.003 -0.267*** 0.004 0.312*** 0.004 -0.312*** 0.004 Peten 0.392*** 0.006 0.123*** 0.004 -0.089*** 0.005 0.103*** 0.005 -0.103*** 0.005 Rural 0.377*** 0.003 0.109*** 0.002 -0.373*** 0.002 0.354*** 0.002 -0.354*** 0.002 _cons -2.753*** 0.015 0.221*** 0.011 0.609*** 0.017 -0.711*** 0.021 0.711*** 0.021 R2 Number of 9,824 9,824 9,824 9,824 9,824 observations Source: Calculations based on the 2014 ENCOVI. Notes: Based on all households. Significance: .01 - ***; .05 - **; .1 - *; Annex 2.4 Probability of Being Poor 161 Probability of being poor, non-poor, in bottom 40 or top 60 percent of population, 2014 Extreme Poor Overall Poor Non-Poor Bottom 40 Top 60 percent percent coef t coef t coef t coef t coef t Age of head -0.007*** 0.000 -0.008*** 0.000 0.019*** 0.000 -0.019*** 0.000 0.019*** 0.000 Male-head household 0.107*** 0.007 0.072*** 0.004 -0.068*** 0.005 0.086*** 0.005 -0.086*** 0.005 Yrs. Educ. Of Hhld Head -0.154*** 0.001 -0.109*** 0.000 0.194*** 0.000 -0.193*** 0.000 0.193*** 0.000 Proportion age 0-14 0.022*** 0.000 0.005*** 0.000 -0.021*** 0.000 0.022*** 0.000 -0.022*** 0.000 Proportion age 15-64 0.000 0.000 -0.004*** 0.000 0.001** 0.000 0.002*** 0.000 -0.002*** 0.000 Proportion age 65+ 0.010*** 0.000 -0.000* 0.000 -0.012*** 0.000 0.014*** 0.000 -0.014*** 0.000 Dependents per -0.007*** 0.000 -0.007*** 0.000 0.006*** 0.000 -0.007*** 0.000 0.007*** 0.000 employed Household size 0.328*** 0.001 0.037*** 0.001 -0.407*** 0.001 0.407*** 0.001 -0.407*** 0.001 K´iche´ 1.005*** 0.007 0.053*** 0.005 -0.821*** 0.006 0.826*** 0.006 -0.826*** 0.006 Q´eqchi´ 1.000*** 0.009 -0.242*** 0.007 -1.064*** 0.009 1.093*** 0.009 -1.093*** 0.009 Kaqchiquel 1.037*** 0.008 0.124*** 0.005 -0.563*** 0.006 0.582*** 0.006 -0.582*** 0.006 Mam 0.192*** 0.008 0.413*** 0.006 -0.589*** 0.008 0.678*** 0.008 -0.678*** 0.008 Other indigenous 0.492*** 0.008 0.195*** 0.006 -0.692*** 0.008 0.723*** 0.008 -0.723*** 0.008 Salaried 1.726*** 0.018 0.975*** 0.009 -2.061*** 0.010 2.100*** 0.010 -2.100*** 0.010 Self-empl 1.416*** 0.018 0.904*** 0.009 -1.673*** 0.010 1.726*** 0.010 -1.726*** 0.010 Unpaid Worker 1.121*** 0.037 0.527*** 0.020 -1.103*** 0.022 1.098*** 0.022 -1.098*** 0.022 Unemployed 3.231*** 0.028 0.985*** 0.018 -2.847*** 0.020 2.807*** 0.020 -2.807*** 0.020 Agricult. 0.796*** 0.006 0.194*** 0.004 -0.752*** 0.004 0.742*** 0.004 -0.742*** 0.004 Light Manuf. 0.885*** 0.020 0.153*** 0.012 -0.611*** 0.014 0.563*** 0.014 -0.563*** 0.014 Other Manuf. -0.152*** 0.018 -0.104*** 0.009 -0.022** 0.010 -0.014 0.010 0.014 0.010 Construction -0.326*** 0.025 -0.458*** 0.011 0.466*** 0.012 -0.525*** 0.012 0.525*** 0.012 Commerce 0.177*** 0.028 -0.218*** 0.018 0.271*** 0.020 -0.252*** 0.020 0.252*** 0.020 Utility -0.029*** 0.010 0.374*** 0.005 -0.359*** 0.006 0.412*** 0.006 -0.412*** 0.006 FIRE (dropped) -0.289*** 0.018 0.135*** 0.020 -0.074*** 0.020 0.074*** 0.020 Pub. Adm. & Defense (dropped) (dropped) (dropped) (dropped) (dropped) Education, Health, -0.160*** 0.013 -0.205*** 0.007 0.186*** 0.007 -0.174*** 0.007 0.174*** 0.007 Social work Priv. hhlds as empl. 0.710*** 0.015 0.255*** 0.009 -0.612*** 0.010 0.614*** 0.010 -0.614*** 0.010 North 1.288*** 0.012 0.010 0.007 -0.374*** 0.009 0.390*** 0.009 -0.390*** 0.009 North East 1.621*** 0.010 -0.074*** 0.006 -0.667*** 0.007 0.677*** 0.007 -0.677*** 0.007 South East 0.852*** 0.011 0.310*** 0.006 -0.463*** 0.007 0.503*** 0.007 -0.503*** 0.007 Central 0.272*** 0.011 0.362*** 0.005 -0.362*** 0.006 0.429*** 0.006 -0.429*** 0.006 South West 0.626*** 0.009 0.224*** 0.005 -0.271*** 0.005 0.277*** 0.005 -0.277*** 0.005 North West 0.807*** 0.010 0.087*** 0.006 -0.358*** 0.007 0.445*** 0.007 -0.445*** 0.007 Peten 0.646*** 0.012 0.161*** 0.007 -0.071*** 0.008 0.101*** 0.008 -0.101*** 0.008 Rural 0.497*** 0.005 0.094*** 0.003 -0.438*** 0.004 0.406*** 0.004 -0.406*** 0.004 Constant -6.858*** 0.034 -0.948*** 0.020 3.655*** 0.036 -3.845*** 0.038 3.845*** 0.038 R2 Number of observations 2,853,771 2,891,502 2,891,502 2,891,502 2,891,502 Source: Source: Calculations based on the 2014 ENCOVI. Notes: Based on households with the head working. 162 Annex 2.4 Probability of Being Poor Annex 2.5: Growth Incidence Curve, Consumption FIGURE A2.5 Growth Incid nc Curv , Consumption Consumption Growth Incidence Curve, 2000- 2014 4 3 2 1 0 -1 -2 -3 -4 -5 -6 -7 1 10 19 28 37 46 55 64 73 82 91 100 GIC 2000-2006 GIC 2000-2014 GIC 2006-2014 Source: Calculations based on ENCOVI 2000, 2006, and 2014. Annex 2.5: Growth Incidence Curve, Consumption 163 Annex 3.1: Changes in the Probability of Primary School Enrollment Probability of Primary School Enrollment 2000 2006 2014 coef t coef t coef t Male 0.268*** 0.002 0.123*** 0.001 0.093*** 0.001 Age -0.180*** 0.000 -0.084*** 0.000 -0.089*** 0.000 Indigenous 0.014*** 0.002 0.051*** 0.002 -0.068*** 0.002 Education of father 0.038*** 0.000 0.016*** 0.000 0.027*** 0.000 Education of mother 0.052*** 0.000 0.060*** 0.000 0.024*** 0.000 No. of children 0-6 -0.052*** 0.001 -0.104*** 0.001 -0.188*** 0.001 No. children 7-15 0.101*** 0.001 0.178*** 0.001 0.167*** 0.000 Number of adults 0.032*** 0.001 0.022*** 0.000 0.008*** 0.000 Quintile 2 0.341*** 0.002 0.203*** 0.002 0.160*** 0.002 Quintile 3 0.507*** 0.003 0.372*** 0.002 0.342*** 0.002 Quintile 4 0.646*** 0.003 0.711*** 0.003 0.498*** 0.002 Quintile 5 1.277*** 0.004 1.019*** 0.004 0.748*** 0.003 Urban 0.209*** 0.002 0.110*** 0.002 0.119*** 0.001 North 0.406*** 0.004 0.322*** 0.003 0.207*** 0.003 Northeast 0.184*** 0.004 0.218*** 0.003 -0.085*** 0.003 Southeast 0.387*** 0.004 0.201*** 0.003 0.172*** 0.003 Central 0.258*** 0.004 0.209*** 0.003 0.107*** 0.003 Southwest 0.472*** 0.003 0.249*** 0.002 -0.003 0.002 Northwest 0.294*** 0.004 0.069*** 0.003 -0.032*** 0.003 Peten 0.331*** 0.005 0.344*** 0.004 0.191*** 0.003 _cons 1.149*** 0.006 0.104*** 0.004 0.680*** 0.004 R2 Number of observations 10,320 22,812 16,934 Source: Calculations based on the 2000, 2006, and 2014 ENCOVI. Notes: .01 - ***; .05 - **; .1 - * 164 Annex 3.1: Changes in the Probability of Primary School Enrollment Probability of Primary School Enrollment, ethnicity 2000 2006 2014 coef t coef t coef t Male 0.268*** 0.002 0.123*** 0.001 0.093*** 0.001 Age -0.180*** 0.000 -0.084*** 0.000 -0.089*** 0.000 Kíche -0.171*** 0.003 -0.015*** 0.003 0.026*** 0.002 Q'eqchi -0.003 0.004 0.115*** 0.004 -0.157*** 0.003 Kaqchiquel 0.043*** 0.003 0.005* 0.003 -0.070*** 0.003 Mam 0.068*** 0.004 0.065*** 0.003 -0.164*** 0.003 Other Indig. 0.184*** 0.004 0.160*** 0.003 -0.018*** 0.003 Father's educ. 0.038*** 0.000 0.017*** 0.000 0.027*** 0.000 Mother's educ. 0.051*** 0.000 0.059*** 0.000 0.024*** 0.000 No. children 0-6 -0.050*** 0.001 -0.103*** 0.001 -0.189*** 0.001 No. children 7-17 0.102*** 0.001 0.179*** 0.001 0.166*** 0.000 No. working adults 0.032*** 0.001 0.022*** 0.000 0.008*** 0.000 Quintile 2 0.347*** 0.002 0.209*** 0.002 0.165*** 0.002 Quintile 3 0.522*** 0.003 0.380*** 0.002 0.343*** 0.002 Quintile 4 0.666*** 0.003 0.720*** 0.003 0.500*** 0.002 Quintile 5 1.302*** 0.004 1.029*** 0.004 0.748*** 0.003 Urban 0.211*** 0.002 0.111*** 0.002 0.110*** 0.001 North 0.399*** 0.005 0.255*** 0.004 0.267*** 0.004 Northeast 0.186*** 0.004 0.201*** 0.003 -0.074*** 0.003 Southeast 0.392*** 0.004 0.189*** 0.003 0.165*** 0.003 Central 0.254*** 0.004 0.222*** 0.003 0.102*** 0.003 Soutwest 0.508*** 0.003 0.257*** 0.003 -0.017*** 0.002 Northwest 0.251*** 0.004 0.049*** 0.003 -0.057*** 0.003 Peten 0.342*** 0.005 0.324*** 0.004 0.202*** 0.003 _cons 1.129*** 0.006 0.098*** 0.004 0.687*** 0.004 R2 Number of observations 10,320 22,812 16,934 Source: Calculations based on the 2000, 2006, and 2014 ENCOVI. Notes: .01 - ***; .05 - **; .1 - * Annex 3.1: Changes in the Probability of Primary School Enrollment 165 Annex 3.2: Sectors and Intragenerational Mobility FIGURE A3.2 S ctors nd Intr n r tion l Mobilit Intragenerational Mobility, by Sector of Employment, 2000-20014 100 90 80 70 60 50 40 30 20 10 0 A r M nuf. Const. Comm rc Tr ns&Comm F.I.R.E. Pub.Adm. Soc.S rv. Dom sti Poor,Poor Poor, Non-poor Non-poor, Poor Non-poor, Non-poor Intragenerational Mobility, by Sector of Employment, 2006-20014 100 90 80 70 60 50 40 30 20 10 0 A r M nuf. Const. Comm rc Tr ns&Comm F.I.R.E. Pub.Adm. Soc.S rv. Dom sti Poor,Poor Poor, Non-poor Non-poor, Poor Non-poor, Non-poor Source: Calculations based on ENCOVI 2000, 2006 and 2014. 166 Annex 3.2: Sectors and Intragenerational Mobility Annex 3.3: Mincer Equations and Oaxaca Blinder Mincerian Wage Equation (dependent variable ln of hourly wages) Indigenous NonIndigenous Ethnic Groups coef t coef t coef t Male 0.153*** 0.018 0.122*** 0.011 0.130*** 0.010 Primary Incomplete 0.139*** 0.019 0.146*** 0.017 0.165*** 0.012 Primary Complete 0.209*** 0.024 0.237*** 0.018 0.249*** 0.014 Secondary Incomplete 0.243*** 0.028 0.308*** 0.020 0.298*** 0.016 Secondary Complete 0.532*** 0.033 0.612*** 0.020 0.591*** 0.017 Tertiary 0.835*** 0.049 1.050*** 0.023 1.006*** 0.020 Age 0.044*** 0.003 0.049*** 0.002 0.047*** 0.002 Age squared -0.000*** 0.000 -0.001*** 0.000 -0.000*** 0.000 Urban -0.072*** 0.016 -0.077*** 0.012 -0.075*** 0.010 North -0.149*** 0.030 -0.147*** 0.033 -0.191*** 0.022 Northeaset -0.265*** 0.052 -0.180*** 0.017 -0.190*** 0.017 Southeast -0.202*** 0.065 -0.270*** 0.018 -0.243*** 0.018 Cnetram -0.280*** 0.031 -0.133*** 0.016 -0.156*** 0.015 Southwest -0.227*** 0.026 -0.199*** 0.015 -0.185*** 0.013 Northwest -0.306*** 0.029 -0.160*** 0.022 -0.217*** 0.017 Peten 0.060 0.057 -0.064*** 0.024 -0.051** 0.023 Year 2014 -0.172*** 0.015 -0.274*** 0.010 -0.240*** 0.008 Manufacturing 0.370*** 0.024 0.367*** 0.018 0.387*** 0.014 Construction 0.558*** 0.031 0.407*** 0.021 0.490*** 0.017 Retail 0.715*** 0.022 0.496*** 0.017 0.599*** 0.013 Utilities 0.590*** 0.045 0.419*** 0.023 0.493*** 0.021 Services 0.792*** 0.031 0.589*** 0.019 0.681*** 0.016 Domestic services 0.469*** 0.039 0.386*** 0.028 0.438*** 0.023 Informal -0.305*** 0.020 -0.284*** 0.013 -0.278*** 0.011 Salaried 0.597*** 0.046 0.679*** 0.026 0.649*** 0.023 Self-employed -0.365*** 0.020 -0.147*** 0.015 -0.252*** 0.012 Unpaid (dropped) (dropped) (dropped) K´iche´ -0.153*** 0.015 Q´eqchi´ -0.003 0.023 Kaqchiquel -0.198*** 0.016 Mam -0.123*** 0.020 Other -0.233*** 0.019 _cons 1.152*** 0.069 1.175*** 0.046 1.164*** 0.038 R2 0.326 0.390 0.407 Number of observations 13,000 24,568 37,568 Source: Calculations based on ENCOVI 2014. Note: .01 - ***; .05 - **; .1 - Annex 3.3: Mincer Equations and Oaxaca Blinder 167 Oaxaca Blinder Decomposition of Earnings, Indigenous and Non-indigenous Overall Explained Unexplained coef t coef t coef t Non Indig. 2.521*** 0.000 Indigenous 1.958*** 0.001 difference 0.563*** 0.001 explained 0.402*** 0.001 unexplained 0.160*** 0.001 Male -0.008*** 0.000 -0.021*** 0.001 Primary Incomplete -0.012*** 0.000 0.003*** 0.000 Primary Complete 0.004*** 0.000 0.004*** 0.000 Secondary Incomplete 0.017*** 0.000 0.007*** 0.000 Secondary Complete 0.059*** 0.000 0.013*** 0.000 Tertiary 0.082*** 0.000 0.012*** 0.000 Age 0.007*** 0.000 0.159*** 0.009 Age squared -0.001** 0.000 -0.014*** 0.005 Urban -0.017*** 0.000 -0.001* 0.001 North 0.020*** 0.000 0.004*** 0.000 Northeaset -0.016*** 0.000 0.002*** 0.000 Southeast -0.022*** 0.000 -0.003*** 0.000 Cnetram 0.000*** 0.000 0.016*** 0.000 Southwest 0.030*** 0.000 0.008*** 0.001 Northwest 0.039*** 0.000 0.019*** 0.000 Peten -0.001*** 0.000 -0.003*** 0.000 Year 2014 0.003*** 0.000 -0.059*** 0.001 Manufacturing 0.000*** 0.000 -0.000*** 0.000 Retail -0.007*** 0.000 -0.001*** 0.000 Utilities 0.003*** 0.000 -0.000*** 0.000 Services 0.005*** 0.000 -0.012*** 0.000 Domestic services 0.033*** 0.000 -0.049*** 0.000 Informal 0.012*** 0.000 -0.007*** 0.000 Salaried 0.022*** 0.000 -0.006*** 0.000 Self-employed 0.014*** 0.000 -0.001*** 0.000 Unpaid 0.017*** 0.000 -0.014*** 0.000 K´iche´ 0.021*** 0.000 -0.010*** 0.000 Q´eqchi´ -0.000 0.000 -0.004*** 0.000 Kaqchiquel 0.054*** 0.000 0.019*** 0.001 Mam 0.009*** 0.000 0.003*** 0.000 Other 0.032*** 0.000 0.071*** 0.001 Retail (dropped) (dropped) _cons 0.028*** 0.005 R2 Number of observations 37,568 Source: Calculations based on ENCOVI 2014. Note: .01 - ***; .05 - **; .1 - 168 Annex 3.3: Mincer Equations and Oaxaca Blinder FIGURE A3.3 Blind r O x c d composition b indi nous popul tion Explained vs Unexplained Factors explaining Differences 0.40 3.0 0.40 contributions to explained difference 0.35 2.5 0.6 0.4 0.30 0.2 0.22 2.0 ln hourly wage 0.25 1.5 0.20 0.04 0.15 1.0 0.10 0.5 0.15 0.05 0.0 0.00 Non-indi nous Indi nous Expl in d Un xpl in d D mo r phics Loc tion L bor Expl in d Source: Calculations based on ENCOVI 2000, 2006 and 2014. Annex 3.3: Mincer Equations and Oaxaca Blinder 169 Annex 5.1: Perceptions FIGURE A5.1 How f ir do ou think incom distribution is in Gu t m l How fair do you think income distribution is in Guatemala? How fair do you think income distribution is? % Very unfair 100 60 80 50 40 60 Percent 30 40 20 20 10 0 0 2001 2002 2007 2009 2010 2011 2013 2015 P ntin r r r P u o Co Ch il R s p. Ar lv ru do c do lo il n ic m ond ic u i V Mxi Gu r l Do H R l E m B u Ur oliv b ic r u u m Co t m in u P Br n Ni cu V r unf ir Unf ir st S El F ir V r f ir 2015 2001 Imagine a staircase with 10 steps where the poorest people are on the first step and the richest on the tenth step. Where would you put yourself on this staircase? 5.5 5.0 4.5 4.0 3.5 3.0 2.5 r r o il ru s do do il xic c i m l bi u l in liv Ch ur Ri u u u m nt m P Br Bo nd n lv u u r lo M Ec t r Ur st n Co Ho P c S Ar Ni P Co Gu V El 2000 2006 2013 Source: Calculations based on Latinobarómetro. 170 Annex 5.1: Perceptions Annex 5:2: Legislation Supporting Indigenous Rights Legal Instruments Año Artículos Tema relacionados a los derechos indígenas Constitución Política Reforma 1, 2, 3, 4, 5, Artículos que promueven la equidad ética y de género. 1993 36, 58, 59, 60, 61, 62, 65, 66, 67, 68, 69, 70 58 Identidad Cultural 66 Protección a Grupos Étnicos Ley de idiomas 2003 - Reconoce, promueve y respeta los idiomas de los pueblos Nacionales maya, garífuna y xinka Ley de Consejos de 2002 1 Estipula que el sistema de Consejos de Desarrollo es el medio Desarrollo Urbano y principal de participación de los cuatro pueblos Rural guatemaltecos Ley General de 2002 4 instituye el respeto a la realidad multiétnica, pluricultural y Descentralización multilingüe de Guatemala Código Municipal 2002 2 que el municipio se caracteriza primordialmente pro sus relaciones permanentes de vecindad, multietnicidad, pluriculturalidad y multilingüismo organizado para realizar el bien común de todos los habitantes de su distrito Ley Marco de los 2002 - Compromisos del Estado cuyo complimiento requiere de Acuerdos de Paz acciones a desarrollar por las instituciones públicas y por las personas individuales y jurídicas de la sociedad Acuerdo sobre 1995 - El acuerdo define la nación guatemalteca como pluricultural, identidad y derechos de multiétnica y multilingüe. 3Años más tarde, en 2003, se los pueblos indígenas promulgó la Ley de Idiomas Nacionales (decreto 19-2003), la cual reconoció la diversidad de comunidades lingüísticas Ley de Registro e 2005 - Reconoce tierras comunales –tanto para grupos indígenas Información Catastral como no indígenas Source: FIDA/ CLADPI, 2012 Annex 5:2: Legislation Supporting Indigenous Rights 171 DICTÁMENES FAVORABLES Emitidos desde el año 2004 a la fecha INICIATIVA No. PROCESO 2699 “Ley de Reconocimiento de la Competencia del Comité para la Eliminación de la Discriminación Racial”. Dictamen favorable, emitido por la Comisión de Pueblos Indígenas el 05 de mayo del año 2004. Pendiente en su tercer debate y redacción final. 4087 “Ley de Medios de Comunicación Comunitaria”. Dictamen favorable, emitido por la Comisión de Pueblos Indígenas el 11 de Enero del año 2010. Pendiente lo conozca el Pleno. 4051 “Ley de Consulta a los Pueblos Indígenas”. Dictamen favorable, emitido por la Comisión de Pueblos Indígenas el 23 de septiembre del año 2009. Pendiente lo conozca el Pleno. 3835 “Ley de Lugares Sagrados de los Pueblos Indígenas”. Dictamen favorable, emitido por las comisiones de Pueblos Indígenas y De la Paz y Desminado, el 19 de agosto del año 2009. Pendiente lo conozca el Pleno. 4084 “Ley del Sistema Nacional del Desarrollo Rural Integral”. Dictamen favorable, emitido por la Comisión de Agricultura, Ganadería y Pesca el 30 de septiembre del año 2009. Pendiente lo conozca el Pleno. 3551 “Ley del Programa Nacional de Resarcimiento”. Dictamen favorable de la Comisión de la Paz y Desminado, el 18 de noviembre del año 2008. Pendiente en su tercer debate y redacción final. Source: Lineamientos, Agenda Indígena 2016-2020 en Guatemala, draft DICTÁMENES FAVORABLES Comisión de Pueblos Indígenas 2012-2013 INICIATIVA No. PROCESO 3946 “Ley de Jurisdicción Indígena”. Dictamen favorable, emitido por la Comisión de Pueblos Indígenas el 17 de abril del año 2013. Pendiente que conozca el Pleno del Congreso de la República para su primer debate. 4047 “Ley General de Derechos de Pueblos Indígenas de Guatemala”. Dictamen favorable, emitido por la Comisión de Pueblos Indígenas el 06 de junio del año 2012. Pendiente que conozca el Pleno del Congreso de la República para su primer debate. 4412 “Ley Orgánica del Instituto de Desarrollo Indígena Guatemalteco”. Dictamen favorable, emitido por la Comisión de Pueblos Indígenas el 14 de marzo del año 2012. Pendiente lo conozca el Pleno. 172 Annex 5:2: Legislation Supporting Indigenous Rights Status of Treaties, Declarations and Agreements Nombre del Fecha de Fecha de Reservas en la Resumen sobre el instrumento instrumento aprobación ratificación ratificación Convención 1965 1982 (Guatemala) La Convención reafirma que la discriminación entre Internacional Ningún seres humanos por motivos de raza, color u origen sobre la derecho étnico constituye un obstáculo a las relaciones Eliminación de adquirido será amistosas y pacíficas entre las naciones y puede Todas las Formas afectado con perturbar la paz y la seguridad entre los pueblos, así de Discriminación la vigencia de como la convivencia de las personas aun dentro de Racial este Convenio. un mismo Estado. Por lo que: “Los Estados partes tomarán, cuando las circunstancias lo aconsejen, medidas especiales y concretas, en las esferas social, económica, cultural y en otras esferas, para asegurar el adecuado desenvolvimiento y protección de ciertos grupos raciales o de personas pertenecientes a estos grupos, con el fin de garantizar en condiciones de igualdad el pleno disfrute por dichas personas de los derechos humanos y de las libertades fundamentales.” Convenio 169 1989 1995 Esta Convención transforma la visión del C107 de sobre Pueblos 1994 integracionista y proteccionista a una Convención Indígenas y que incluye la participación activa de los pueblos Tribales en países indígenas en la construcción de su propio desarrollo, independientes cada vez que los Estados apliquen las disposiciones de las legislaciones nacionales tengan en consideración el contenido del Convenio 169. Uno de sus artículos importantes destaca: Artículo 2: 1. Los gobiernos deberán asumir la responsabilidad de desarrollar, con la participación de los pueblos interesados, una acción coordinada y sistemática con miras a proteger los derechos de esos pueblos y a garantizar el respeto de su integridad. 2. Esta acción deberá incluir medidas: a) que aseguren a los miembros de dichos pueblos gozar, en pie de igualdad, de los derechos y oportunidades que la legislación nacional otorga a los demás miembros de la población; b) que promuevan la plena efectividad de los derechos sociales, económicos y culturales de esos pueblos, respetando su identidad social y cultural, sus costumbres y tradiciones, y sus instituciones; c) que ayuden a los miembros de los pueblos interesados a eliminar las diferencias socioeconómicas que puedan existir entre los miembros indígenas y los demás miembros de la comunidad nacional, de una manera compatible con sus aspiraciones y formas de vida. Otros aspectos que también incluye el C169 es la consulta con los pueblos indígenas a través de sus instituciones y otras formas de organización propia, cada vez que se adopten medidas que afecten sus intereses, asuntos y convivencia. El consentimiento previo de los pueblos indígenas también se constituye aspecto fundamental de carácter transversal en el contenido de las normas y por consiguiente de los derechos que allí se tutelan. Annex 5:2: Legislation Supporting Indigenous Rights 173 Status of Treaties, Declarations and Agreements Nombre del Fecha de Fecha de Reservas en la Resumen sobre el instrumento instrumento aprobación ratificación ratificación Convenio sobre 1992 1995 Lo más importante que desarrolla este Convenio es la Diversidad reconocer la importancia que representa para la Biológica, CDB conservación de la biodiversidad y los ecosistemas del planeta, los conocimientos tradicionales, la práctica de las comunidades locales e indígenas en mantener la conservación desde sus formas tradicionales y la función decisiva que desempeña la mujer en la conservación. Un extracto de la Convención es la siguiente: “Reconociendo la estrecha y tradicional dependencia de muchas comunidades locales y poblaciones indígenas que tienen sistemas de vida tradicionales basados en los recursos biológicos, y la conveniencia de compartir equitativamente los beneficios que se derivan de la utilización de los conocimientos tradicionales, las innovaciones v las prácticas pertinentes para la conservación de la diversidad biológica Y la utilización sostenible de sus componentes. Reconociendo asimismo la función decisiva que desempeña la mujer en la conservación y la utilización sostenible de la diversidad biológica y afirmando la necesidad de la plena participación de la mujer en todos los niveles de la formulación y ejecución de políticas encaminadas a la conservación de la diversidad biológica,…” Declaración 2005 1. El fomento de la no discriminación y de la inclusión sobre el II de los pueblos indígenas en la elaboración, aplicación y Decenio evaluación de los procesos internacionales, regionales Internacional y nacionales relativos a la legislación, las políticas, los sobre los recursos, los programas y los proyectos. Pueblos 2. El fomento de la participación plena y efectiva de Indígenas del los pueblos indígenas en las decisiones que afectan Mundo directa o indirectamente a sus estilos de vida, tierras tradicionales y territorios, a su integridad cultural como pueblos indígenas que poseen derechos colectivos o a cualquier otro aspecto de sus vidas, teniendo en cuenta el principio del consentimiento libre, previo e informado; 3. La redefinición de las políticas de desarrollo para que incluyan una visión de equidad y sean culturalmente adecuadas, con inclusión del respeto de la diversidad cultural y lingüística de los pueblos indígenas; 4. La adopción de políticas, programas, proyectos y presupuestos que tengan objetivos específicos para el desarrollo de los pueblos indígenas, con inclusión de parámetros concretos, e insistiendo en particular en las mujeres, los niños y los jóvenes indígenas; 5. La creación de mecanismos de supervisión estrictos y la mejora de la rendición de cuentas a nivel internacional y regional y particularmente a nivel nacional, en lo tocante a la aplicación de los marcos jurídicos, normativos y operacionales para la protección de los pueblos indígenas y el mejoramiento de sus vidas. 174 Annex 5:2: Legislation Supporting Indigenous Rights Status of Treaties, Declarations and Agreements Nombre del Fecha de Fecha de Reservas en la Resumen sobre el instrumento instrumento aprobación ratificación ratificación Declaración 2007 Instrumento internacional aprobado por las Universal sobre Naciones Unidas, el 13 de septiembre de 2007. El los Derechos de mismo instrumento es uno de los más importantes los Pueblos en la protección y salvaguardia del los derechos de Indígenas los pueblos indígenas, también se constituye en el primer instrumento que en su formulación durante más de 2 décadas, contó con la participación de representantes de los pueblos indígenas en el Grupo de Trabajo constituido en el seno de las Naciones Unidas para su elaboración. En este instrumento se reconocen derechos colectivos fundamentales para la existencia de los pueblos como el derecho a la libre determinación que ubica a los pueblos indígenas en el mismo estatus de cualquier pueblo en el mundo, en todo lo que implica este término en el derecho internacional, con su plena autonomía y el ejercicio del autogobierno, para su pleno desarrollo. Otro aspecto fundamental como derecho humano inherente a la existencia de los pueblos son los derechos existentes sobre las tierras y los territorios indígenas, que debe incluir los derechos al subsuelo y los demás elementos que incluye el término territorio, como garantía a la existencia de las futuras generaciones. Source: FIDA/CLADPI, 2012 Annex 5:2: Legislation Supporting Indigenous Rights 175 Guatemala has enormous potential to generate prosperity for its population. Although some pockets of dynamism and successes exist, the country has one of the highest poverty rates in Latin America. Moreover, tremendous and persistent inequalities can be found across ethnic groups, locations, and economic sectors. In a sense, one needs to visualize “two Guatemalas” with large gaps in outcomes between them to understand the country’s development challenges. This Systematic Country Diagnostic looks at why a country with such great potential has not been able to materialize it, addressing the following questions: • How inclusive is Guatemala’s development model and what are the factors that prevent it from being more inclusive? • What does growth look like, what has driven it, and what are the bottlenecks that need to be addressed? • How sustainable is Guatemala’s development model economically, socially, and environmentally? • Are there additional factors that underlie the present Guatemalan economy and what changes have the greatest potential to reduce poverty and foster shared prosperity?