Top economists' views on Guatemala

UNCLAS SECTION 01 OF 02 GUATEMALA 002483

SIPDIS

DEPT PASS USTR

E.O. 12958: N/A
TAGS: ECON EFIN ETRD EINV PGOV EAGR GT
SUBJECT: Top economists' views on Guatemala



1. (SBU) Summary: Guatemalan economists generally agree that
to address the country's socio-economic problems institutions
must become more effective. However, for this the government
will need more revenue, and tax increases have been repeatedly
blocked by special interest groups, including business
associations. Stronger presidential leadership would help, as
would a reprioritization of budget earmarks. CAFTA will not
break the power of those advocating the status quo, but could
help establish policy continuity. End summary


2. (U) Recently we met with four of Guatemala's top
economists, Jorge Lavarreda and Hugo Maul of CIEN, the
foremost economic think tank, Pablo Rodas, frequent media
commentator and former economic director of ASIES, the
principal institute for social studies, and Juan Jose Arevalo,
former Minister of Finance, President of the Central Bank and
current university President and economics commentator for the
leading daily La Prensa Libre. We queried them on their views
on Guatemala's economy, in particular on how to improve socio-
economic conditions and promote equitable and sustainable
economic growth.

WEAK INSTITUTIONS


3. (SBU) Lavarreda, President of CIEN and director of its
social policy area, stated that Guatemala's main problems are
weak rule of law, poverty, low investment in human capital,
corruption and insecurity. A first step to solving these
problems would be to strengthen Guatemala's institutions, for
example the Comptroller's Office and Congress. (Note: The
Comptroller has responsibility for the efficacy and
transparency of government spending, and was weakened by a
corruption scandal under the Portillo administration.) In
addition, the state must invest more in education, health, and
sanitation. Pablo Rodas also stressed institutional
strengthening and bemoaned the lack of a professional civil
service to provide continuity between administrations. He
added that there are too many ministries and state
secretariats for a small country, many of which have become

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"feudal" chiefdoms. Arevalo also emphasized the development
cost of Guatemala's weak institutions, and criticized the lack
of technocratic expertise within the government. In the
commercial area, he cited a similar lack of a solid
professional class with the technical skills to compete in a
globalized economy. (Note: Arevalo is a member of a free
trade group that is seeking private sector and university
support for more relevant training programs and educational
career tracks.)

NEED TO INCREASE GOVERNMENT REVENUES


4. (SBU) Hugo Maul focused on the fiscal situation.
Increases in government revenues are difficult because
interest groups such as labor unions and private sector
organizations have "captured the state" in order to preserve
the status quo. Some labor unions are wedded to antiquated
socialist ideals, while business groups oppose almost all tax
increases. To increase revenues the government must carry out
a more forceful political negotiation and improve transparency
in the use of public funds. Rodas agreed that the Berger
administration, while relatively honest and well meaning, has
not effectively dealt with interest groups and Congress. He
added that better enforcement and efforts to increase the tax
base could help alleviate chronic government underfunding.


5. (SBU) Maul said that the tax measures and budget cuts
(notably in military spending) of 2004 were emergency actions
to compensate for revenues lost as a result of taxes suspended
by the Constitutional Court. He explained that there are
800,000 workers registered in the Social Security Institute,
but only 120,000 pay Income Tax. He is pessimistic about
increasing government revenues only through better
enforcement. For example, the government cannot control or
eliminate the informal economy, since large numbers of people
depend on it for their livelihood. If fact, most of the
country lives almost entirely outside of the institutional
framework, claimed Maul. Moreover, the tax authority (SAT)
does not have the have enough resources for effective
enforcement.

CONSTITUTIONAL COURT AND NON-DISCRETIONARY ITEMS ARE PROBLEMS


6. (SBU) According to Maul, one solution to the fiscal
problem is to better prioritize scarce government resources.
However, this is difficult to implement since about 70% of the
budget is earmarked through constitutional allotments. For
example, public San Carlos University may receive no less than
five percent of the total budget, sports no less than three
percent, and the judicial system two percent. Rodas,
meanwhile, complained about the competence of the
Constitutional Court, which has frequently overturned new tax
measures on dubious "constitutional" grounds of double
taxation. He criticized the justices for being lawyers with
no economic experience. This, he added, is also a problem in
Congress.

OUTLOOK FOR THE ECONOMY


7. (SBU) Maul appeared quite pessimistic on long-term
improvements in the Guatemalan economy or the institutions
that underlie it. He pointed out that population growth
usually keeps pace with GDP growth, so per capita income,
especially for the poor, remains stagnant. Rodas, on the
other hand, proved optimistic, stating that there has been
positive diversification of the economy. There are now
several economic engines besides traditional agriculture.
They include agricultural specialty products and increasingly
services and industry, notably textiles.

NEED STRONGER PRESIDNETIAL LEADERSHIP

8. (SBU) Nonetheless, Rodas and the CIEN economists were
adamant about the need for more forceful executive action to
address the country's pressing problems. If Berger wants a
like-minded candidate to win the 2007 election, said Maul, he
will have to take dramatic steps to improve the security
situation and focus on visible infrastructure projects such as
roads. The recent natural disaster gives him another chance
to prove his leadership. According to Rodas, should Berger
fail to instill public confidence in his administration it
will leave the door open for more populist leaders such as
Alvaro Colom, his challenger in the last election. Colom,
said Rodas, is a "caudillo," who is disliked by the business
sector. Concerning the effects of hurricane Stan, Rodas said
that he has seen studies that suggest such calamities can
reduce GDP growth rates by up to 2% in the first year.

CAFTA


9. (SBU) The economists' views on CAFTA's ability to
alleviate Guatemala's socio-economic problems were mixed.
Maul believes CAFTA will not obviate the need for
institutional reforms. Furthermore, well-organized and
financed interest groups will not lose power, in spite of
CAFTA. Rodas hopes that CAFTA will provide urgently needed
policy continuity, since it enjoys strong enough support so
that no major political group can challenge it. Arevalo
agreed, pointing out that international treaties such as CAFTA
are a good way of lessening economic policy discretion, which
is too often manipulated for political purposes. CAFTA should
help to lock-in progressive economic policies.

COMMENT


10. (SBU) The four economists we spoke with all fall into the
centrist mainstream and their views represent most
commentators' thinking on current economic issues. None
offered any dramatic new ideas on how to address the root
causes of Guatemala's socio-economic ills - such as income
inequality and low government revenues. The solutions, as
promulgated by the IFIs and others - including the present
government - are well known.

Derham