DEVELOPMENT IMPACT OF STAN

UNCLAS SECTION 01 OF 03 GUATEMALA 002504

SIPDIS

FOR DHS FOR SECRETARY CHERTOFF AND AMBASSADOR ARCOS
AID FOR ADMINISTRATOR NATSIOS, DEPUTY ADMINISTRATOR SCHIECK,
LAC ASSISTANT ADMINISTRATOR FRANCO
NSC FOR KIRSTEN MADISON

E.O. 12958: N/A
TAGS: ET EAID SENV PGOV KPAO EAGR GT
SUBJECT: DEVELOPMENT IMPACT OF STAN

REF: A) GUATEMALA 2428 B) GUATEMALA 2418, C) GUATEMALA 2402,
D) GUATEMALA 2395


1. Summary: Still gripped with the immediate concerns of
disaster relief, GOG officials have not yet tallied the
economic costs of Tropical Storm Stan and the accompanying
rains that drenched more than one third of Guatemala's
territory in the first two weeks of October. Some estimates
have put the damage between USD 2-3 billion, equivalent to
around 10 percent of GDP. Whatever the numbers, the effects
on human life, property and economic infrastructure are
devastating. According to the GOG, an estimated 30 percent of
Guatemala's 13 million people suffered with loss of life,
property or access to basic services. About seven hundred
have been confirmed killed with close to a thousand more still
missing. Disaster related disease and impoverishment are
expected to claim even more lives. As the GOG moves from
relief to reconstruction, the impact on Guatemala's
development will become clearer. The storm was a tremendous
blow to recent progress in the GOG's development plan,
including ambitious efforts to turn around the long-stagnant
rural economy. End summary.

The Economic Damage: Threat to Rural Survival
--------------


2. Floods and landslides devastated the southern coast and
the heavily populated and impoverished Central and Western
Highlands. The medium to long-term effects on Guatemala's
marginal rural economy may be as devastating as the initial
impact. Economic activity, particularly in the highlands,
will suffer from the loss of key infrastructure including
bridges, roads, telecommunications and energy distribution in
the short to medium term.


3. Much of the population of the areas most affected already
live day-to-day, depending on subsistence crops and informal
economic activity for their livelihood. It is unclear how the
more than 150,000 people made homeless by the storm - some
just now returning from temporary shelters - will survive the
coming months. The Vice Ministry for Housing has requested
USD 125 million for housing replacement and repair assistance.
The potential benefits of CAFTA along with the Berger
Administration's ambitious development plans are at risk as
key growth sectors such as non-traditional exports,
agriculture, tourism and transportation services are severely
damaged by the storm. An ECLAC-led team is currently
developing a formal damage assessment, to be completed
November 8, which will serve as a basis for the government's
reconstruction plans.

The Macro Picture: Hitting Where it Hurts Most
-------------- -


4. On paper, Guatemala's macro-economic outlook will remain
stable as economic losses, primarily in the agricultural and
distribution sectors, will likely be somewhat offset by
increased spending on infrastructure and rebuilding efforts.
With the help of anticipated international assistance, the
GOG, which had been on track to significantly outperform
fiscal deficit projections, should be able to increase
spending on disaster relief and still meet initial deficit
projections of 1.8 percent of GDP. However, Guatemala suffers
from the second worst income distribution in the hemisphere
and is the most densely rural country in the region. With
most people in rural areas (where storm damage was worst)
getting by on annual per capita income of less than USD 1,000,
even a temporary loss of income may make life in some affected
areas unsustainable.

Infrastructure: People and Services Inaccessible
-------------- ---


5. More than 25 percent of the country's paved roads and 50
percent of dirt roads were damaged or made inaccessible.
Seventeen bridges collapsed, leaving large parts of
Guatemala's rugged countryside unreachable. Some particularly
remote areas are still beyond the reach of aid workers.
Ministry of Infrastructure initial estimates of the costs of
repairing roads and bridges are over USD 350 million. The
energy sector suffered heavily in both generation and
distribution. Hydro generators alone suffered well over USD 2
million in losses, some southern coast thermal generators were
flooded, and line damage repairs in the distribution network
are ongoing. Most of the heavily populated western portion of
the country was left without power immediately following the
storm and international grid links to Salvador were cut off.
It is too early to tell the extent of ongoing economic losses
as a result of key infrastructure damage. The impact of this
damage will undoubtedly increase initial losses in other
sectors such as agriculture, tourism and transportation as the
country struggles to rebuild.

Agriculture: Subsistence Crops Threatened
--------------


6. The Ministry of Agriculture's initial estimates put losses
at over USD 250 million. This includes substantial damage to
major employers such as sugar cane, which lost approximately
10 percent of the current harvest, coffee, which is reporting
some USD 14 million in losses, and shrimp and sesame, both
reporting total losses due to the sensitivity of their product
to flooding. Perhaps most worrying but least quantifiable
economically is the damage to subsistence crops, on which
Guatemala's most marginal populations rely. Many rural
agricultural workers depend on their small corn harvest to
feed them in between seasonal work on the major cash crops
such as sugar and coffee. With less to live on now and
anticipated losses in seasonal employment, Guatemala's rural
populations will continue to suffer severe hardship from the
storm.

Tourism: Growth Industry Hit Hard
--------------


7. The Guatemalan Tourism Institute (Inguat) estimates a drop
of 100,000 tourists this year at a cost of USD 80 million to
the industry. Particularly damaging will be losses around
Lake Atitlan. This already poor, densely rural area of Solola
not only suffered some of the most dramatic damage from the
storm, including the deadly burying of the village of Panabaj,
but the economy depends on many micro-businesses that cater
entirely to tourists. It is unclear how people will adjust
even after roads and access are restored, as tourism will
likely suffer for years to come. Losses to the bigger tourism
businesses in the lakeside town of Panajachel alone are
costing over USD 250,000 per week.

Threat to Medium and Long Term Development
--------------


8. The Berger administration's ambitious development program
was based on several key initiatives aimed at bringing the
long-ignored rural populations into the economic fold. An
aggressive international free-trade agenda including CAFTA
promotion and trade capacity building, along with domestic
efforts to shift government spending toward education and
healthcare sought to better prepare the average Guatemalan to
participate and compete in an open economy. These efforts
were combined with localized projects to use infrastructure
and education to link up small rural producers to the global
market. The non-traditional export chamber (Agexpront) along
with the Ministry of Economy had been having some success with
local artisans and farmers of specialty crops such as snow
peas, specialty coffee and winter vegetables. Efforts at
improving education, expanding access to credit, reducing
bureaucracy and otherwise facilitating small business
development showed great promise for increasing formal sector
participation in the rural highlands. Inguat had been
aggressively pushing sector development in some of the hard-
hit areas such as Solola, Quetzaltenago, San Marcos and the
southern coast.


9. The ambitious goals of the development plan "Vamos
Guatemala" have not changed, but the economic climate and the
government's capacity to implement the plan suffered a
potentially lethal blow by Stan. With GOG and international
energy and resources focused on helping people survive the
immediate effects, their ability to continue to promote
development is in question. There is a potential for rural
economic collapse far worse than that which followed Hurricane
Mitch and the coffee crisis. Those crises dramatically set
back rural development, worsening all major poverty indices,
and drove a surge in migration to the slums of Guatemala City
and to the United States.

Rural Destabilization and Migration
--------------


10. Stan was a blow to the part of Guatemala that could least
absorb it. The GOG's rural development plan not only lost
momentum but leapt backwards in some of the most desperately
poor areas of the hemisphere. It is unclear how the resource-
strapped government will be able to rebuild what was lost and
simultaneously continue to develop the human and physical
resources needed to put rural Guatemala on a sustainable path
of job creation. It is also unclear what impact the disaster
will have on the political climate and the prospects of a
like-minded government succeeding the Berger administration to
provide much-needed policy continuity.
DERHAM