US embassy cable - 05GUATEMALA2483

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