Report No. 29145-GT No. Report Report No. Guatemala 29145-GT Country Economic Memorandum Guatemala Country Economic Memorandum Challenges to Higher Economic Growth Public Disclosure Authorized Public Disclosure Authorized March 9, 2005 Central America Department Latin America and the Caribbean Region Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of the World Bank Public Disclosure Authorized Public Disclosure Authorized EGEE Empresa de Generacion de Energia ElCctrica EMAX Empresa Municipal de Aguas de Xelaju EMPAGUA Empresa Municipal de Agua ENCOVI Encuesta de Condiciones de Vida ENSMI National Survey on Maternal and Child Health ETCEE Empresa de Transmisibn y Control de Energia ElCctrica FDI Foreign Direct Investment FENACOAC Federacion Nacional de Cooperativas de Ahorro y Credit0 FFBC Fiduciary fund to help finance mergers and acquisitions offinancia institutions FONACYT Fondo Nacional de Ciencia y Tecnologia FONDETEL Fondo para el Desarrollo de la Telefonia (Rural Telephone Fund) FOPA Deposit insurance fund FTA Free Trade Agreement FTAA Free Trade Area ofthe Americas FTZ Free-Trade Zone FUNSIN Association created to raise funding for engineering research projects GATT General Agreement on Tariffs and Trade GDP Gross Domestic Product GNP Gross Nacional Product GTM Guatemala GUATEL Empresa Guatemalteca de Telecomunicaciones HHI Herfindahl-Hirschman Index IAAC Inter-American Accreditation Cooperation ICA Investment Climate Assessment ICAITI Instituto Centroamericano de Investigacion y Tecnologia Industrial ICs Investment Climate Survey ICT Information and Communication Technologies IDA International Development Association IDB Inter-American Development Bank IGSS Guatemalan Social Security Institute IMAE Indice Mensual de la Actividad Economica IMF International Monetary Fund INCAE Instituto Centroamericano de Administracion de Empresas INDE Instituto Nacional de Electrificacion INDECOM Association for Consumers Defense INECIP Instituto de Estudios Comparados en Ciencias Penales y Sociales INFOM Institute of Municipal Promotion INTECAP Technical Institute for Training and Productivity IPR Guatemala’s Intellectual Property Rights IPR Intellectual Property Rights IS0 International Organization for Standardization ITU International Telecommunications Union IV Instrumental Variables LAC Latin America and the Caribbean MAGA Ministry ofAgriculture, Livestock, and Food MCIV Ministry ofCommunication, Infrastructure and Housing MDG Millennium Development Goals MEM Ministry ofEnergy and Mining MFA Multilateral Fiber Agreement MFIs Microfinance Institutions MFN Most Favored Nation MINUGUA Mision de Verificacion de las Naciones Unidas en Guatemala MSE Medium and Small Enterprises MSPAS Ministry ofPublic Health and Social Action NAFTA North America Free Trade Agreement NEU New Unitary Schools NGO Non-Governmental Organization NIS National Innovation System NSST National System of Science and Technology NTB Non-Tariff Barriers OECD Organisation for Economic Co-operation and Development OGA Guatemalan Accreditation Organization OLS Ordinary Least Square PAOT Technological supply adaptation plan PAYSA Proyecto de Agua Potable y Saneamiento del Altiplano PC Personal Computer PEC Programa de Extension de Cobertura PER Rural Electrification Plan PNC Nacional Civil Police PPA Power Parchase Agreement PRONADE National Program ofEducation R&D Research and Development RAMOS Reproductive Age Mortality Studies RCA Revealed Comparative Advantage REDIMIF National microfinance industry association RER Real Exchange Rate RGP Registro General de la Propiedad RIC Registro de Information Catastral S&T Science and Technology SAC Central American Tariffs System SAT Superintendencia de Administracih Tributaria SEGEPLAN General Secretary ofPlanning SENACYT National Secretary of Science and Technology SIAF Sistema Integrado de Administracih Financiera SIECA Secretariat for Economic Integration ofCentral America SIMA World Bank's Statistical Information Management & Analysis SINCYT Sistema Nacional de Ciencia y Tecnologia SME Small and Medium Enterprise TELGUA Telecomunicaciones de Guatemala, S.A. TELMEX Telefonos de Mexico, S.A. TFP Total Factor Productivity TFPG Growth ofTotal Factor Productivity TIMSS Trends in International Mathematics and Science Studies TIMSS-R Trends in International Mathematics and Science Studies - Repeat TRIPS trade-related aspects ofintellectual property rights UNCOMTRADE United Nations Commodity Trade Statistics Database UNDP United Nations Development Programme UNEPAR Unidad Ejecutora del Programa de Acueductos Rurales UNESCO- United Nations Educational Scientific, and Cultural Organization OREALC Regional Office for Education in Latin America and the Caribbean UNICEF United Nations Children's Fund UNICRI United Nations Interregional Crime & Justice Research Institute UPOV Intemational Union for the Protection ofNew Varieties of Plants USAC Universidad de San Carlos de Guatemala USAID United States Agency for Intemational Development USTR United States Trade Representative VAL Value Added per Worker VAT Value-Added Tax W&S Water and Sanitation WB World Bank WBES World Business Environment Survey WDI World Development Indicators WEF World Economic Forum WHO World Health Organization WIPO World Intellectual Property Organization WTO World Trade Organization GUATEMALA COUNTRY ECONOMIC MEMORANDUM Table of Contents EXECUTIVE SUMMARY AND RECOMMENDATIONS ..................................... i RESUMEN EJECUTIVO Y RECOMENDACIONES ........................................... xx Chapter I: INTRODUCTION STYLIZED FACTS AND DETERMINANTS OF GROWTH ................................................................................. 1 I. Introduction .................................................................................... 1 I1 Background .................................................................................... 1 A . General Context ......................................................................... 1 B. Historical Economic Performance..................................................... 3 C . Policy Reforms ........................................................................... 8 D. Recent Developments .................................................................. 9 E. Near Term Outlook and Macroeconomic Concerns ................................. 12 I11 Accounting for the Sources of Economic Growth......................................... 14 A . Growth Accounting ...................................................................... 15 B. The Factors Contributing to Growth.................................................. 19 IV. Growth, Poverty Reduction and Inequality ............................................... 23 V . Conclusion ..................................................................................... 27 Chapter 11: HUMAN CAPITAL AND GROWTH IN GUATEMALA ...................... 30 I. Introduction .................................................................................... 30 I1 The State of Human Capital Development in Guatemala ................................ 31 Education ..................................................................................... 31 Health and Nutrition ........................................................................... 40 I11. Structure of the Labor Force ................................................................ 46 IV. Human Capital, Productivity, and Growth in Guatemala ............................... 49 Education ...................................................................................... 49 Health and Nutrition ........................................................................ 55 Inequality in Human Capital and Growth................................................ 56 V . Implications for Policy ...................................................................... 56 Completion the Unfinished Primary Education Agenda - Raising Primary School Quality, Retention and Completion Rates ................................................ 57 Strengthening People’s Productive Capacity Through Better Nutrition ............. 58 Expanding Access to and Participation in Secondary Education ..................... 59 The Issue of Skills Training ................................................................ 60 Financing Human Capital Development for Growth.................................... 60 V . Conclusion .................................................................................... 63 Chapter 111: THE INVESTMENT CLIMATE IN GUATEMALA ............................ 65 I. Introduction .................................................................................... 65 I1 The Investment Climate in Guatemala: An Overview .................................... 65 I11. The State of Governance .................................................................... 70 IV. Crime and Violence .......................................................................... 80 VI. Infrastructure 86 .................................................................................... Telecomunication.............................................................................. 86 Electricity...................................................................................... 90 Logistic: Transport, Ports and Customs ................................................... 94 Ports ........................................................................................... 97 Customs