Public Disclosure Authorized Guatemala Closing Gaps to Generate More Inclusive Growth Public Disclosure Authorized Systematic Country Diagnostic Susana M. Sanchez Kinnon Scott J. Humberto Lopez Public Disclosure Authorized Public Disclosure Authorized Latin America & the Caribbean Region Guatemala: Closing Gaps to Generate More Inclusive Growth Systematic Country Diagnostic Susana M. Sanchez, Kinnon Scott and J. Humberto Lopez Central America Country Management Unit Latin America and the Caribbean Region © 2015 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington, DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved 1 2 3 4 18 17 16 15 This work is a product of the staff of The World Bank with external contributions. 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All queries on rights and licenses should be addressed to the Publishing and Knowledge Division, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@ worldbank.org. Cover image: Kobby Dagan / Shutterstock.com Cover design: Florencia Micheltorena Contents Abbreviations and Acronyms ................................................................xi Acknowledgements ........................................................................xiv About the Authors .........................................................................xv 1. Understanding Guatemala’s Development Challenges ......................................1 a. Overview .............................................................................1 b. Why is Poverty So High and Persistent? ...................................................3 Low Inclusion .........................................................................3 Low Growth ...........................................................................4 Social, Fiscal, and Environmental Sustainability ............................................4 c. The Legacy of the Past: A Fragmented Social Contract and Weak Institutions ...................5 d. New Pressures on Guatemala ............................................................9 e. Priorities .............................................................................11 Inclusion Challenges – Towards a More Inclusive Social Contract ............................12 Challenges to and Opportunities of the Growth Model .....................................12 Fiscal, Social, and Environmental Challenges .............................................14 f. Knowledge and Data Gaps .............................................................15 g. Structure of the Report ................................................................16 References .............................................................................17 2. Poverty and Shared Prosperity 2000-2014 ...............................................19 a. How Guatemala Compares to its Peers ...................................................19 Income Poverty Levels and Trends .......................................................19 Shared Prosperity: Income Growth among the Bottom 40 Percent ...........................23 Inequality ............................................................................23 Economic Mobility ....................................................................25 b. The Divide Between the Poor and the Non-poor within Guatemala ..........................26 Official Poverty Levels and Trends (Consumption-Based Measure). 26 The Geographic Divide ................................................................27 The Ethnic Divide .....................................................................30 The Human Capital Divide .............................................................32 Other Demographic Characteristics .....................................................32 c. Drivers of Changes in Poverty and Shared Prosperity ......................................34 Consumption: Growth, Distribution, and Prices ..........................................34 Drivers of Observed Changes in in Income Poverty ........................................34 Sources of Income ....................................................................35 d. Conclusion ...........................................................................37 References .............................................................................37 iii 3. Inclusion and Exclusion ...............................................................41 a. Limited Labor Market Opportunities ....................................................41 b. Constrained Human Capital Accumulation ...............................................44 Malnutrition .........................................................................45 Health ...............................................................................47 Education ............................................................................49 c. Limited Opportunities: Infrastructure and Services ........................................53 d. The Role of Spending and Institutions in Limited Opportunities .............................59 Ineffective Spending ...................................................................59 Inadequate Spending ..................................................................62 Inadequate Institutions ................................................................64 e. The Link between Limited Opportunities and Poor Human Capital Outcomes .................65 f. Vulnerability .........................................................................72 g. Convergence and Divergence ...........................................................77 References .............................................................................78 4. Trends and Drivers of Growth in Guatemala .............................................83 a. Growth Trends .......................................................................83 b. Regional Disparities ...................................................................85 c. Growth Decomposition ................................................................86 d. A Sector Perspective on Economic Activity, Job Creation, and Informality ....................89 Job Creation and Informality ...........................................................89 Financial Sector. 92 Information Technology and Information Technology Enabled Services ......................95 Energy Sector ........................................................................96 Agriculture Sector. 96 Manufacturing and Construction Sector ................................................101 Tourism ............................................................................101 e. Foreign Direct Investment .............................................................102 f. Exports .............................................................................102 g. Underlying Constraints on Inclusive Growth