Executive Summary

Guatemala, with over 10 million inhabitants, has the largest population and gross domestic product (GDP) in Central America. It also has the most inequitable distribution of income, wealth, and land ownership in the region. It has the lowest spending on education, health care, and other services. Additionally, it has the lowest tax revenue, less than 8% of gross domestic product (GDP) in 1995; in comparison, the average tax rate for Central America is 17% and for Latin America 23%.

During the 1960s and 70s Guatemala experienced an inflation rate below 10% and growth that averaged 6% a year; however, wealth and income remained the most highly skewed in the region, demonstrating that economic growth by itself does not alleviate poverty in a highly unequal society. Between 1980 and 1985 per capita gross domestic product (GDP) fell 20%, macroeconomic instability increased, and the country experienced a fiscal and balance of payments crisis combined with major external debt arrears. By 1990 annual inflation had grown to the extreme level of, for Guatemala, 60%. In 1991 Guatemala attempted a comprehensive stabilization and structural adjustment program, cleared its World Bank arrears and, in 1993, reached a Paris Club agreement to reschedule $540 million of foreign debt arrears. By 1994 inflation had again been reduced to almost 10%. In 1995 Guatemala had external debt totaling $2.95 billion, or 23% of GDP. The IDB held approximately 21% of Guatemala's external debt while the World Bank held approximately 7%. External debt is expected to rise significantly during the reconstruction process due to extensive World Bank and IDB loans.

Guatemala signed a global peace accord on December 29, 1996, ending 36 years of internal war and conflict. The international financial community met in a Consultative Group meeting hosted by the Inter-American Development Bank in Brussels in January 1997 and pledged $1.9 billion in loans and donations to Guatemala for the implementation of the peace accords. A large proportion of these funds are coming from the Inter-American Development Bank and the World Bank in the form of loans (as much as 60%), many with conditions attached.

1.1 Multi-lateral Development Banks

The World Bank was established in 1944 and the Inter-American Development Bank (IDB) in 1959. The Banks have three types of loans:

1) project loans which fund a variety of major projects, for example irrigation systems, educational improvements, roads, and dams,

2) sector adjustment loans (also called policy loans) which provide funding for modernizing sectors of an economy, and

3) economic "structural adjustment loans", or SAPs - Structural Adjustment Programs, which require economic policy changes by the recipient country.

The Inter-American Development Bank (IDB), World Bank, and International Monetary Fund (IMF) require that countries implement economic structural adjustment and sector adjustment programs and IMF stand-by agreements to obtain assistance. Through this conditioning of aid, these institutions exert major influence over the economic and social policies of all the countries in Latin America and the Caribbean. These conditions typically include the privatization of government-owned enterprises, reduction of state budgets (which often result in reductions in social services), and tax increases. To date, the brunt of the cost of these reforms has fallen on the poor and least powerful while the powerful and privileged have been able to protect their positions and even gain from the reforms.

The Inter-American Development Bank, the oldest and (with $100 billion of capitalization) the largest of the regional multi-lateral development banks, focuses on economic and social development in Latin America and the Caribbean. The Bank has 45 members, including the United States, Canada, Japan, Israel, and 15 European nations.

The World Bank is the largest development organization in the world and has extensive experience and research capability. The Bank, which primarily loans to governments, has 180 member countries, all of whom must first be admitted to the International Monetary Fund. The World Bank and IDB each have a Board of Governors composed of one representative from each member country, usually a ministerial-level government official. Each Board meets once a year and operational authority is delegated to a Board of Executive Directors which meet weekly and are responsible for decisions on policies and the approval of all loans. Voting rights on both boards are proportional to a country's share of the Bank's annual contribution.

1.2 The Multi-lateral Development Banks' Strategies for Guatemala, 1996 -1999

The two Banks' strategies for Guatemala during the implementation of the peace accords are similar and complimentary. For the period following the signing of the peace accords, the IDB and World Bank are emphasizing poverty alleviation and human resource development programs. The motivating factor behind this objective is the belief that lasting peace is not possible without a reduction in Guatemala's sharp social and economic inequity. Consequently, the Banks are targeting poverty-alleviation and development loans to the Northwest and Central regions of the country, where the greatest concentration of poor and indigenous groups reside.

A number of Bank documents specifically call for a focus on poverty elimination. However, it must be remembered that Guatemala has been a polarized and racially divided country since the Spanish conquered the Mayas and repressed them into virtual slavery. This division is obvious today when one examines the spending on education and health care; Guatemala's modern history is one of denial of society's benefits to the rural population. Of the rural population, 86% is indigenous and over 70% of the poor rural population over age 15 is illiterate. Close to 40% of the poorest population has no access to formal health care. Even though the Banks call for the alleviation of poverty and a focus on services to the indigenous population, only with independent evaluations of implemented Bank projects will we be able to tell if the Banks' loans live up to their strategy papers and loan documents.

A second objective is the promotion and implementation of the peace accords. Again, the majority of assistance programs will be concentrated in the Northwest and Central regions of Guatemala, the area in which the armed conflict took the heaviest toll, and where the poor and indigenous populations are concentrated.

The World Bank also seeks to improve the public sector's capacity to deliver social services, an area in which the State has been extremely weak, inefficient, and often corrupt. The Bank intends to meet this objective by encouraging greater private sector, NGO, and community-based organization participation in the delivery of basic social services. Again, only independent evaluations of project implementation will determine the Government and Bank successes in this area.

The World Bank will continue to advise on structural adjustment measures as a component of Guatemala's broad macroeconomic stabilization plan. The most recent structural adjustment program (SAP) loan made by the Bank was the Economic Modernization loan for $120 million approved in 1992 and now complete. See the Appendix for a description of the conditions in this loan.

In general, the Banks take a four-pronged approach to the process of development:

1) Inclusion of the poor, indigenous, and rural population in the development process:

The Banks support this effort through community participation programs which are designed to accelerate and consolidate the peace process, through efforts to strengthen civil society organization, and through projects targeted at poverty alleviation and human capital development such as education, health and job training.

2) Expansion and improvement of social services:

The Banks pursue this objective by supporting programs designed to improve the coverage, quality, and efficiency of social services.

3) Modernization of the State:

The Banks pursue this strategy by supporting programs to improve the efficiency of all three branches of government, achieve the improved regulation of public services, and restructure public spending and finance.

4) Development of the productive sectors:

The Banks plan to support this effort through operations to aid the efficient flow of private investment and to increase the competitiveness of exports.

2.0 Anticipated Problems and Criticisms of Bank Policies and Programs

This section discusses the risks the Banks have identified and will accept when they approve financing for a project, as well as problems and inefficiencies which impede the proper implementation of funded projects.

2.1 Bank Criticisms

The Banks admit that the Government of Guatemala does not always allocate funds according to its stated priorities. The most grievous distortions occur in the education and health care sectors, with public spending highly concentrated in the metropolitan area of Guatemala City, much to the detriment of the poor and indigenous populations located in rural areas. The Inter-American Development Bank believes that this lopsided distribution of public funds occurs primarily because of severe administrative and organizational weakness pervasive throughout the public sector. Independent analysts additionally believe that a major problem is that the indigenous population lacks the political power to force the government to address these issues and that the situation will not be rectified until the indigenous population organizes itself politically. This process will be assisted if the government fully implements the Accord on the Identity and Rights of Indigenous Peoples.

The Banks also acknowledge that the Government of Guatemala has proven to be inefficient in executing its budgeted investment projects. The State's inability to implement funded projects is due to insufficient human and technical ability to carry out the tasks needed to fully execute the programs. However the Banks believe that the Government of Guatemala should not be held entirely responsible for these failures. The Banks can be held partially responsible and believe that they must conduct more thorough feasibility studies and deny funding for projects that are too complex for the State or its agencies to implement. The Banks should be responsible for approving only those projects that have a high possibility of being properly implemented. If it is discovered the State lacks the capacity to fully execute the operation, funding for that program should be denied, or the project should be simplified to the point where it is likely to be properly executed.

2.2 Independent Criticisms

Corruption and incompetence within Guatemala's public sector is a major obstacle to the implementation of development projects and is largely responsible for the poor or non-existent results of a number of incomplete and completed projects. Corruption pervades the operations of many of the government ministries, especially in the customs and tax ministries. Without serious and successful efforts to investigate, arrest, and prosecute officials responsible for corruption no reform is possible, regardless of the amount of funds the Banks or international donor community contribute to Guatemala. The Guatemalan government, under the leadership of President Arzú, took major steps to combat corruption in 1996 with the arrest of the Director of Customs and the firing of the Vice Minister of Defense along with police and army officers involved in corruption in the Customs Department. However, for a deterrent effect, these individuals must be prosecuted and punished to the fullest extent of the law -- something that is yet to happen. Other departments must also be investigated with arrests and prosecution of guilty high level officials. In order for the prosecution of corrupt officials to proceed it is necessary for the government to reform and purge the police force and the judicial system. This is an extremely difficult task requiring political will, dedicated and courageous leaders, and financial resources. The government has begun a process of training new civilian police but the effort has yet to show demonstrable changes in the functioning or efficiency of the police. It is possible that the Banks are addressing the issue of corruption and fraud privately with the Government of Guatemala but have been careful to sanitize documents referring to corruption to protect the reputation of the client state.

A second problem is the lack of transparency in Guatemala's state budget. It is often difficult to determine that the approved funding for a Bank operation is being spent on a specific project's development and implementation. Without transparency mechanisms to ensure the proper allocation of financial assistance and the country's own public resources, the country's struggle with corruption and inefficiency is certain to continue.

Neo-liberal economists agree that expenditures on military budgets produce less economic growth than an equal expenditure in other appropriate civilian areas. The counterpart to the issue of Guatemala's lack of budgetary transparency is the Banks' reluctance to require significant reductions in the military budget, as a loan condition. Transparency of the military budget would allow verification of the allocation of public resources, and help to ensure the proper implementation of funded operations. Significant actual reductions in the military budget, a condition of the peace accords, is essential for increased economic growth.

Finally, the Banks' refusal to prioritize a progressive tax structure for Guatemala has been an issue of contention for years. Although the Banks require an increase in tax returns, they allow the Government of Guatemala to utilize a regressive value added tax and do not require a progressive tax on income or wealth. A value added tax is a tax on the increased value of a product at each stage of production which falls disproportionatly on the middle income and poor. The Banks argue that due to fraud and corruption it is impossible for the government to enforce more direct taxes on income and wealth and therefore the value added tax is both more efficient to collect and less regressive than an uncollected income or wealth tax.

3.0 IDB Strategies for Guatemala, 1996-1999

The Inter-American Development Bank's strategy for Guatemala during the initial implementation of the peace accords (1996-1999) takes a four-pronged approach to the process of development:

3.1 Inclusion of the poor, indigenous, and rural population in the development process

The Bank supports this effort through community participation programs designed to accelerate and consolidate the peace process, through efforts to strengthen civil society organizations, and through projects targeted at poverty alleviation and human capital development such as education, health, and job training. A major reason for pursuing this development theme, apart from humanitarian reasons, is the widely accepted hypothesis that the continued success of the peace process and democratic consolidation depend on progress in this area. The IDB is sponsoring several programs specifically targeted to the poor of Guatemala, primarily indigenous groups and rural inhabitants.

3.2 Expansion and improvement of social services

The IDB pursues this objective by supporting programs designed to improve the coverage, quality, and efficiency of social services. Public spending on social services in Guatemala is the lowest per capita in Central America. Existing social services are concentrated in the Guatemala City area, and consequently the poorest segment of the country's population, rural indigenous people, receive the fewest services. This situation is exacerbated by high fertility rates associated with the poor's low-level of education, economic insecurity, and high infant mortality rate. The already inadequate level of spending must cover a growing population.

The Bank believes that if the State is successful in improving the delivery, quality, and efficiency of its social services, the population of Guatemala as a whole, and especially the poor sector, will experience improved living conditions. Better social services, such as higher education and health care, will bring about improved human productivity.

3.3 Institutional and Modernization of the State

The Bank plans to pursue Institutional and State Modernization by supporting programs to improve the efficiency of all three branches of government, achieve improved regulation of public services, and restructure public spending and finance. Guatemala's public sector possesses grave deficiencies in its ability to adequately provide social services to the country's population. A factor aggravating this institutional weakness is the fact that, at 8% of gross national product (GNP), the State's revenues from tax collection are the lowest in the region. The IDB, in recognition of these factors and aware of the crucial role the State must play in the implementation of the peace accords and democratic consolidation, has developed a plan for State and institutional modernization within its 1996-1998 development strategy. The Bank seeks to strengthen the public sector to the extent that a favorable environment for foreign investment is created. Bank loan programs will be designed to promote the creation of a small, efficient, decentralized State apparatus that encourages the growth of the productive sectors, and which has the ability to adequately and efficiently supply the country's social services. These loans often result in a reduction of state workers and the privatization of some state enterprises.

3.4 Development of the productive sectors

The Bank plans to promote the development of the productive sectors through operations designed to aid the flow of private investment funds and to increase the competitiveness of exports. The Bank's general strategy in this area is to fund operations and provide conditioning loans that promote the sustainable development of the productive sector of the country. The strategy for Guatemala has shaped the Bank's actions so that it is either financing, developing, or planning to develop programs in the sectors of:

Ø Agriculture

Agricultural Program

Ø Finance

Financial Sector Modernization Program II

Financial Sector Modernization Program

Ø Transportation

Road Rehabilitation and Modernization Program

Ø Telecommunications, tourism, and the environment

Sustainable Development Program for Peten

Watershed management Program for the Upper Chixoy River Basin,

Strengthening the National Council on the Environment

It should be noted that these types of programs often result in support for large, capital intensive businesses and international corporations with little or no support for small producers of basic foods and domestic products.

3.5 Potential IDB - Guatemala Priority Areas of Development

The Government of Guatemala and the IDB have discussed the need to address reform in the areas listed below. Currently these areas of development are not being pursued by the IDB's loan program to Guatemala, but are future priority areas for both the Government and the IDB. The principal structural reforms addressed in the IDB-Guatemala dialogue, which have yet to be initiated or even developed, are the following:

Modernization of the State

Legislation on the privatization of public enterprises

Public administration reform (civil service)

Structural reforms by sector

Pension fund reform

Industrial sector restructuring

Agricultural sector restructuring

Energy sector restructuring

External sector

Legislation to promote exports

Foreign investment legislation

Labor sector

Modernization of the labor code

Market institutionalization

Property rights

Intellectual property rights

Social sectors

Social security

4.0 World Bank Strategy for Guatemala, 1996-1999

During the period following the signing of the peace accords the World Bank has emphasized poverty alleviation, agrarian reform, human resource development, and indigenous rights. The motivating factor behind this focus is the belief that lasting peace is not possible without a reduction in Guatemala's sharp social and economic inequity. Consequently, the World Bank targeted poverty-alleviation and development loans to the Northwest and Central regions of the country, where the greatest concentration of poor and indigenous peoples reside.

A second objective is the promotion and implementation of the peace accords. The World Bank's specific focus is the implementation of the Socio-economic and Agrarian Accord and the Rights and Identity of Indigenous Peoples Accord.

The World Bank also seeks to improve the public sector's capacity to deliver social services, an area in which the State has been extremely weak and inefficient. The Bank intends to meet this objective by encouraging greater private sector, NGO, and community-based participation in the delivery of basic social services. Independent evaluations of project implementation will be necessary to determine success of the government and the Bank in these projects.

The World Bank divides its strategy into two major areas: Poverty Alleviation and Macroeconomic Sustainability and Structural Reforms.

4.1 Poverty Alleviation and Human Resource Development

The Bank carried out a comprehensive study on poverty in Guatemala and published its recommendations in a publicly available 1995 report, Guatemala: An Assessment of Poverty. The World Bank suggests the best way to address the issue of poverty in Guatemala is by pursuing three primary reforms.

§ The World Bank supports the expansion and improvement of basic social services, including water and sanitation systems, education, health care, and the construction of roads. Bank projects in this area include basic education, municipal development, and the rehabilitation roads.

Ø In 1995 the World Bank conducted a study of the country's education system, Guatemala, Basic Education Strategy: Equity and Efficiency in Education. The report set forth a series of recommendations the Government should pursue to increase the educational level and productivity of the country's workforce. The Bank believes that human capital and productivity can be increased through investment in programs designed to increase the coverage and quality of education at the primary and preschool levels. The report recommends expansion of bilingual education targeted at improving education for indigenous groups, expansion of the Nueva Escuela Unitaria program centered around peer-teaching and community involvement, awareness campaigns to increase girls' enrollment levels, improvements in the use of current infrastructure, support for building construction, and the reform of the Ministry of Education.

§ The Bank also seeks to reduce poverty by improving the productive capacities and opportunities of the poor, primarily through an improved land-tenure system, improved infrastructure, and better support services. World Bank projects addressing these areas include land administration and loan fund, and agricultural services.

§ The Bank supports an increase in tax revenues to finance public investments that would enhance earning potential for the poor, including:

Ø Investments to raise the human capital of the poor, for example education.

Ø Infrastructure and support services to increase the productivity of the existing physical and human capital of the poor.

§ Under the theme of poverty alleviation the World Bank supports the implementation of the peace accords (Socio-economic and Agrarian and Indigenous Accords), strengthening the social safety net through the Social Investment Fund, improving the development of human resources, improving public sector service delivery, natural resource management and rural development, forestry conservation, water supply and protection of the environment, and physical infrastructure repair.

4.2 Macroeconomic Sustainability and Structural Reforms

With the International Monetary fund the World Bank supports macro-structural adjustment. The $120 million Economic Modernization Loan of 1992 is the most recent structural adjustment loan to Guatemala and has been completed. The Bank also focuses on power, financial and public sector reforms, trade and tax administration reform, and privatization of public enterprises. Unfortunately, the Bank does not require the use of a progressive tax structure, but rather allows the use of a value added tax. A value added tax is a tax on the increased value of a product at each stage of production. It is a kind of super sales tax which falls disproportionatly on the poor. The Banks argue that due to fraud and corruption it is impossible for the government to enforce more direct taxes on income and wealth and therefore the value added tax is both more efficient to collect and less regressive than an uncollected income tax.

§ Support for macroeconomic stability and structural reforms is for Guatemala to achieve a higher growth rate. This includes Economic Modernization, Public Sector Modernization Technical Assistance, and Integrated Financial Management. Stability in the macroeconomic environment and economic management make more efficient use of the poor's most abundant asset - labor. Stability supports investment and economic growth, the key element in the Bank's poverty alleviation strategy. In other countries this has included economic structural adjustment programs (SAPs) and restrictions on labor unions.

Center for Democratic Education

The Center for Democratic Education was founded in 1986 to educate the U.S. public about economic and political conditions in Central America. The Multi-lateral Development Bank Reform Project, established in 1993 and now the sole focus of the Center, assists Central American and Caribbean non-governmental and popular organizations shape economic and social policies in their countries. The Center provides information and training to development, environmental, indigenous, peasant, farmer, refugee, and women's organizations. This assistance provides the organizations with tools to analyze and respond more effectively to the economic and social policies being implemented by their governments in order to obtain World Bank and Inter-American Development Bank loans. During 1997 the Center worked with organizations from Guatemala, El Salvador, Nicaragua, Belize, Jamaica, Trinidad and Tobago, Guyana, Surinam, Haiti and the Dominican Republic in the development of strategies to influence the banks and national governments. The Center has Associates in Nicaragua, Guatemala, Belize, and Jamaica.

The author would like to thank Sally Ziejlon of the World Bank and Martin de Moya of the IDB for their comments on earlier drafts of this paper. All errors and omissions are the fault of the author.