US embassy cable - 05GUATEMALA2511

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