Guatemala and the MCC

UNCLAS SECTION 01 OF 03 GUATEMALA 002511

SIPDIS

DEPT PASS USTR FOR FARARZ SIDDIQI
DEPT PASS MILLENIUM CHALLENGE CORPORATION FOR JIM VERMILLION
AND FRAN MCHAUGHT
TREASURY FOR JAMIE FRANCO
DEPT PASS TO USAID
USAID FOR STEPHEN BRENT

AIDAC

SENSITIVE

E.O. 12958: N/A
TAGS: EAID ECON SOCI ETRD PGOV PREL KCOR GT MCC
SUBJECT: Guatemala and the MCC


1. (SBU) Summary: Going by MCC statistical procedures,
Guatemala is unlikely to be selected to negotiate an MCC
compact in FY 2006. But Guatemala's suitability for a compact
should be evaluated in a more basic sense: is the Berger
administration making progress toward MCC goals, and how do
Guatemala's results in the MCC categories compare to similar
countries such as Nicaragua and Honduras. Using these
criteria Guatemala comes out well. It is important that we
recognize the success the Berger administration has achieved
in time to have some impact on the developing campaign for the
November 2007 presidential elections. With reconstruction and
CAFTA implementation looming, now is the time to begin
negotiations for an MCC compact with Guatemala. End summary


2. (SBU) For FY 2006, Guatemala was placed in the Lower-
Middle Income Country category for MCC eligibility, where it
does not yet meet most Ruling Justly and Investing in People
indicators. But stepping back from the statistical exercises
there is a strong case to be made for selecting Guatemala for
an MCC compact. Under President Berger Guatemala has made
important progress in each of the three MCC categories.

DRAMATIC TURN AROUND ON CORRUPTION AND PROGRESS ON RULE OF LAW


3. (SBU) In the Ruling Justly category, President Berger has
engineered one of the more dramatic turnarounds in Latin
America. While Portillo and his top officials pilfered state
coffers, Berger has gone to war against corruption. He has
passed legislation against money laundering and terrorist
financing, and has prosecuted, fired or jailed officials from
the previous administration, from the Vice President, Finance
Minister, Tax Director and Comptroller, to 48 top police
officials and 500 officers. His administration has developed
a proposal for a new Civil Service Code, signed off on a
Freedom of Information Decree for the Executive Branch, and
undertaken institutional assessments to improve transparency
and internal controls. In addition, his government has
outsourced issuing of drivers permits and passports,
instituted a public web-site for government procurement,
started publishing its budget on the internet, and implemented
an Integrated Financial Management System to control public
resources.

POLITICAL RIGHTS AND CIVIL LIBERTIES


4. (SBU) Guatemala has a good record on Political Rights and
Civil Liberties, with its citizens enjoying free and fair
elections and unhindered freedom of expression. The political
opposition is free to organize and criticize, and does so.
Under the Berger administration, there have been no political
killings, disappearances or arrests, nor have there been
restrictions on civil liberties. The 2004 Human Rights Report
correctly concluded that the "Government of Guatemala
generally respected the human rights of its citizens."
Berger's team has done an admirable job in reaching out to
Guatemala's marginalized indigenous population, inviting
prominent indigenous leaders, including Nobel laureate
Rigoberta Mench, to join his administration. Despite the
many problems which still need to be addressed, if the latest
qualitative data on the Berger -- and not the Portillo --
administration were used for the Ruling Justly indicators,
then Guatemala would likely qualify in four of the six
categories.

HEALTH AND EDUCATION PROGRESS AND COMMITMENTS


5. (SBU) In its strategic plans, from the economic program
"Vamos Guatemala" to the ten-year "Competitiveness Agenda,"
the government firmly commits to socio-economic programs very
similar to MCC goals. This has already resulted in positive
trends in education completion and immunization rates (now
about 90%). Overall expenditures on education for FY 2006
will reach 2.5% of GDP, with education and health receiving
the largest line item increases in the budget.

DATA SKEWED BY TAX TO GDP RATIO AND NATIONAL INCOME ACCOUNTING


6. (SBU) The Investing in People indicators are low in part
because Guatemala has one of the lowest tax to GDP ratios in
the world (10.1%). This also skews the percentage of GDP
devoted to education and health. However, in 2006, the GOG's
50 year-old baseline for national accounts will be updated to
the year 2001, which the IMF expects will result in a downward
revision of official GDP by 15%. For MCC statistical purposes
this will raise the percentage of GDP spent on education and
health. In addition, a new tax bill, better enforcement, and
CAFTA inspired economic growth should increase government
revenues and social spending in the medium term. The GDP
revision could also drop Guatemala from the Lower-Middle
Income category.

PROVIDE FUNDING NOW IN ANTICIPATION OF ELECTIONS


7. (SBU) With further follow-through by Berger on his
programs, Guatemala could meet MCC criteria as a Lower Middle
income country by FY 2007 (if it stays in this category after
GDP is revised downward). However, we need to move more
quickly. Average Guatemalans, outraged by corruption under
Portillo, elected Berger for his honesty and integrity, while
the private sector championed his pro-business policies.
Negotiation of an MCC contract in the next year would bolster
his image with voters during the campaign for the 2007
elections, and facilitate the election of a like-minded
candidate -- not necessarily someone from the Berger
coalition, but someone who would support government reform and
economic liberalization. Guatemala, with its large
impoverished indigenous community, remains vulnerable to
populist inroads, either home grown or inspired by Chavez and
his allies. Supporting the Berger administration now would
help keep the populists at bay and avoid the kind of political
problems Venezuela, Nicaragua, Bolivia and Ecuador have faced.

NATURAL DISASTER MAKES FUNDING MORE URGENT


8. (SBU) Guatemala has just suffered its worst natural
disaster since the 1976 earthquake. Hurricane Stan affected
about 30% of the population of 13 million, leaving at least
700 dead, over 1,000 missing, and dozens of bridges and roads
destroyed. Estimates have put the damage between $2-3
billion, equivalent to around 10% of GDP. 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. Reconstruction depends largely on
donor assistance and may take years.

GUATEMALA SHOULD NOT BE THE ONLY COUNTRY LEFT OUT


9. (SBU) Guatemala has the lowest per capita US aid level in
the region. It receives only a third of what Nicaragua does
and half or less than half of what the other Central American
countries do, in spite of having worse social indicators.
Nicaragua and Honduras have already negotiated MCC compacts
and El Salvador is a strong candidate for FY 06. Omission of
Guatemala would be widely noted here. Moreover, it does not
make political or economic sense to ignore Central America's
largest economy and most populous country at a time when we
are trying to implement CAFTA and pull the entire region
firmly into the camp of good governance and equitable,
sustainable economic development. In fact, if "importance to
the US" were made an MCC criteria, then surely the poorer
Central American countries, with pressing socio-economic
problems that directly affect the US through increased
migration and trans-national crime should deserve special
attention. As Secretary Rice and USTR Portman stated in their
letter to Senator Bingaman, "CAFTA strengthens these
countries' ability to receive MCC funds, because CAFTA
reinforces the statutory criteria for funding under the MCC
law."

GUATEMALA SHOULD BE COMPARED TO LOW-INCOME COUNTRIES


10. (SBU) While Guatemala is on the way to meeting MCA
criteria as a Lower Middle-Income country, we believe that its
placement in this group does not reflect economic and
statistical reality. Guatemala is far from meeting the MCC
assumption that lower middle income countries are close to
"graduating" from foreign aid, since they have private capital
flows and relatively high savings and tax rates to combat
poverty. There is little long-term credit in Guatemala, the
savings rate is minimal, and the tax to GDP ratio is one of
the lowest in the world. Guatemala has far more in common
with its "poorer" neighbors, Nicaragua and Honduras, and
should be compared to them and not to Lower Middle-Income
countries such as Brazil and Bulgaria.


11. (SBU) Looking at the median ratings for the Low Income
group and considering the qualitative improvements engineered
by the Berger administration since January 2004, as well as
the upcoming revision of GDP figures, Guatemala would be above
the median in all indicators except possibly Rule of Law and
Health and Primary Education expenditures. Moreover, even
here, the Berger Administration's commitments and overall
positive trends should be given substantial weight. For
example, Guatemala's Transparency International rating for
2005 improved 13% over 2004, and is only 0.1 points below
those of Nicaragua and Honduras. If Guatemala's excellent
record on Economic Freedom and macroeconomic stability is
taken into consideration -- which is far above that of other
Low Income countries -- it would be a top MCC candidate in the
Low Income group.


12. (SBU) In sum, setting the standards for MCC assistance
through a process that does not adequately take into account
Guatemala's economic reality and the progress made towards
meeting MCC criteria does not serve our regional political and
economic goals. We have a unique chance to support a
government now that is making a sincere and successful effort
to tackle inherited socio-economic problems and inequality.

Derham