GUATEMALA: STRUGGLING TO SET A NEW ECONOMIC COURSE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84S00552R000300050002-1
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 34
• Document Creation Date: December 22, 2016
• Document Release Date: February 4, 2011
• Sequence Number: 2
• Publication Date: July 1, 1983
• Content Type: REPORT

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Intelligence
Guatemala: Struggling To
Set a New Economic Course
ALA 83-10101
July 1983
Copy 3 2 5
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p" c~ - E. ,.. CI IVI atv V~.vuaav.uww?
djNe Intelligence
Guatemala: Struggling To
kiet a INew rconomic 'ourse
This assessment was prepared b
f the Office of African and
Latin American Analysis, with a contribution by
Albert Gordon, Office of Central Reference. It was
coordinated with the Directorate of Operations and
the National Intelligence Council. Comments and
queries are welcome and may be addressed to the
Chief, Middle America-Caribbean Division, ALA, on
Confidential
ALA 83-10101
July 1983
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Guatemala: Struggling To
Key Judgments The Guatemalan economy-Central America's largest-contracted last
Information available year for the first time in several decades. Even though the military
as of 20 June 1983 government installed following the coup on 23 March 1982 made consider-
was used in this report.
able headway in fighting insurgents and opening the political system, it was
unable to fully offset a variety of economic problems. Internal turmoil and
mismanagement by the previous government had hampered efforts to get
the economy on track following a set of external shocks in 1979.
Continuing low world prices for key crops, the further shrinkage of the
important Central American market for manufactures exports, and the
dearth of international credit precipitated an acute foreign exchange
shortage. The results were a sharp cut in imports that hit construction
activity, manufacturing, and commercial agriculture hardest, and a boost
in the unemployment rate to over 20 percent
Recognizing that Guatemala's ability to control the insurgency and garner
foreign exchange will shape business confidence and drive economic
performance over the near term, we analyzed the impact of these factors
under three scenarios for political and security conditions. If, as we expect,
President Efrain Rios Montt retains power through 1984 but only contains
the insurgency, Guatemala will require new foreign aid totaling $440-545
million in 1983 and roughly $575-680 million in 1984 merely to shore up
imports sufficiently to prevent per capita incomes from falling.
Regardless of which scenario we examined, the same basic limitations
stand out to constrain economic activity through 1984 at least:
? Even if the global economic recovery is stronger than generally expected,
the spectacular rise in commodity prices needed to remedy Guatemala's
foreign exchange bind is unlikely.
? The depressed regional economy is likely to preclude a resurgence in
exports of Guatemala's manufactured goods.
? Under the best of circumstances, tourism would be slow to revive from
the bad publicity ensuing from regional turmoil.
? Businessmen probably will remain chary of sizable investments even if
security continues to improve.
? Any steps toward more cohesive economic policies are likely to be limited
and to have little immediate impact largely because of the government's
lack of will.
Confidential
ALA 83-10101
July 1983
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Confiaenuai
Because foreign funds are unlikely to reach our targeted levels and the
government is unlikely to eradicate the insurgency, we believe the economy
will shrink about 4 percent this year and, perhaps, stabilize in 1984. Even if
the insurgency could be eliminated, the demand for foreign financial
support would remain high. Import needs would continue to be large as
farm owners and businessmen began to replace wornout capital stock and
replenish input inventories. On the other hand, any escalation of the
insurgency could wipe out remaining business confidence and renew the
flight of capital and talent. In this case, Guatemala would require
enormous foreign aid to combat the guerrillas, to meet emergency needs,
and to restart the economy
We judge that Guatemala will be unable to restore any time in the 1980s
the high growth rates of the 1970s. Even a modest recovery would require
the continued success of the government in providing moderate, reform-
oriented leadership. We believe this task, in turn, will become more
difficult as opposition activities grow in the next few years in reaction to
the expected regrouping of the insurgents, the pickup in political and labor
union activity associated with recent reforms, and the prolongation of the
economic recession. Moreover, a spirit of cooperation between the public
and private sectors will be needed to attract and manage the unprecedented
sums of foreign aid that will be critical to sustain recovery. Because some
elements in the military want to push social programs more than business-
men do, frictions between these groups over reforms are likely to spill over
and make national economic management more contentious.
We expect the United States will continue to play an important role in the
Guatemalan economy by virtue of its status as that country's largest trade
and investment partner. Despite the huge amounts of aid needed to
revitalize the economy, US economic and political leverage is unlikely to
grow proportionately. Rios Montt's nationalist streak and the strong and
growing influence of the military would probably preclude Guatemala
from accepting aid with many political or economic strings attached unless
the ,economic deterioration becomes greater than we now foresee.
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..onnuenuai
Key Judgments
iii
Introduction
I
Gains of the 1970s
I
Slackening Growth in 1980-81
2
The Recession Takes Hold in 1982
4
Prospects Through 1984
8
Common Features
8
Case I: Violence Remains Near Present Levels
9
Case II: Insurgents Are Defeated
11
Case III: Insurgents Make Substantial Gains
12
A Longer Term Perspective
12
Implications for the United States
15
B. Key Economic Players
C. Methodological Notes on Economic Forecasts
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Guatemala: Economic Activity.
Press de In
Angostura
MEXICO
~'TO TO'
San \ NICAPAN
arcos. JToto icap5n
Santa Cn}q
.del Guicho
rNn~lco LasnrlaSua
RetelhuIelll
PETALH UL EU
Chimalt
Ag1
Guitam
INDUSTRY
? Cement I Sugar milling
Flour milling '$ Textiles
Food processing 0 Tires
Footwear ::: Oilfield, potential
Hydroelectric plant ...>~:> Oilfield, producing
~? Oil pipeline
Petroleum refining
N1 , Nickel deposit
i Nickel processing
S Sulfur deposit
-?-Departamento boundary
Boundary representation is
not necessarily authoritative.
Gulf of Honduras
-;Puerto
Barrios,`
"Ni tZIABAL ? ,; rF
/'~ ^-~Gago de
`_--+ Izabal
AGRICULTURE
Commercial Principal food
Coffee production area
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Guatemala: Struggling To
Set a New Economic Course
Introduction
The economic decline that started last year, the first
drop in Guatemala's economic activity in 30 years,
has underscored that country's vulnerability to the
problems that have long plagued Central America.
Several factors, including a persistent domestic insur-
gency, the world recession, and restrictive government
policies are responsible for bringing the region's larg-
est economy to its knees. Since the start of the 1980s,
regional and domestic insurgency has virtually dried
up foreign commercial credit, decimated the tourist
industry, stymied private investment, and encouraged
capital flight. Meanwhile, low world prices for Guate-
mala's agricultural products have caused a dramatic
drop in export earnings. The economic deterioration
and growing pressures for political and social change,
in turn, are causing increased bickering within the
oligarchy of industrialists and plantation owners that
has long managed the economy practically as its
private fiefdom, and are deepening the distrust be-
tween it and the military government.
Paradoxically, the economic decline occurs when the
Rios Montt regime is making substantial strides in
fighting the guerrillas. The government also has
begun to lay the groundwork for the political and
social reforms that could break the pattern of violence
and repression that has characterized Guatemala's
turbulent history. Should the economic downturn
continue, it would set back-and possibly smother-
these promising developments:
In light of the deepening economic crisis and its
worrisome implications, this assessment examines the
roots of Guatemala's economic problems and reviews
recent economic performance. The paper also assesses
the foreign financial needs associated with some of the
paths Guatemala could take, bearing in mind the
domestic and foreign limits on its choices, and evalu-
ates the likelihood of possible outcomes over the next
Gains of the 1970s
Guatemala's economy grew at an impressive real rate
of 6 percent annually in the 1970s. While this expan-
sion was little better than the average of the non-
OPEC less developed countries (LDCs), it was note-
worthy because it entailed little of the runup in
external debt that virtually exhausted the cre-
ditworthiness of many LDCs. Instead, foreign trade
and related private investment-three times the level
of public outlays-were the main engines of growth.
Unlike many LDCs, Guatemala resisted the buildup
of inefficient state-run enterprises, which might have
sopped up limited financial resources and expertise.
Thus, even with a fairly low 14 percent of GDP going
to domestic saving because of meager taxation the
business community was able to channel funds into
growth-generating investments that helped to main-
tain the economic momentum. At the same time,
conservative fiscal policies moderated inflation, with
most price hikes reflecting higher import prices that
mirrored inflation rates in the United States.
As a result, because of these structural differences
that set it apart from most LDCs, Guatemala-
particularly its private sector-was able to mobilize
quickly to withstand jolts to the economy and to take
advantage of new opportunities until the end of the
decade. Guatemala's quick adjustment to the 1973-74
oil crisis partly reflected a resurgence of trade with
other Central American countries as the benefits of
the Central American Common Market (CACM)
continued to spread throughout the region. A boom in
coffee and sugar earnings in response to high world
prices, and the tapping of hefty foreign exchange
reserves generated by balance-of-payments surpluses
in previous years, also facilitated growth. Even the
severe earthquake in 1976, which destroyed a large
few years.
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Figure 1
Guatemala: Real Gross Capital Investments
500
Public
Private
aIndexed to 1958 US S.
b Estimated.
1
1973 74 75 76 77 78 79 80 81b 82b
share of the country's social infrastructure but spared
major export-oriented plantations and other produc-
tive assets, failed to interrupt the pace of economic
activity. The attendant spurt in demand for building
materials and replacement consumer durables was
easily covered by an infusion of foreign aid-includ-
ing donations of $120 million-and'record coffee
earnings that helped to underwrite extensive govern-
mental credit programs. (See appendix A.)
When the second major oil price hikes came in 1979,
however, the economy was caught off guard. Oil
production, which had begun in 1976, still met only
5 percent of domestic consumption in 1979; this was
not enough to soften the impact of skyrocketing
import costs. Meanwhile, coffee prices declined sharp-
ly following the boom years of 1976-77, and low world
prices dampened earnings from other export crops.
Manufacturing sales-nearly all of Guatemala's in-
dustrial exports are sold to CACM members-began
to limp as regional turmoil and low commodity prices
hit this market. For the first time in five years,
Guatemala drew down its international reserves but,
nonetheless, retained comfortable holdings equivalent
to six months' import cover. At the same time, adverse
international publicity and a rise in terrorism curbed
foreign and domestic investment. Real economic
growth of 4.7 percent for 1979 as a whole masked a
serious slowdown in the second half of the year
Slackening Growth in 1980-81
By the start of the 1980s, declining world agricultural
prices, regional strife, and domestic political tensions
had begun to undermine economic activity across the
board. All of Guatemala's CACM trading partners
curtailed imports, squeezing the Guatemalan manu-
facturing sector in the process. Although government
spending rose as implementation of large projects
under the 1979-82 development plan slowly took hold,
government revenues, limited by the small tax base
and the economic slowdown, did not keep pace; as a
result, the budget deficit soared to a record 7.4
percent of GDP in 1981. Rather than revert to
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Table I
Guatemala: Selected
Socioeconomic Indicators
Guatemala Average
for
Central
America
Average
for
LDCs
Adult literacy (percent)
46
71
48
Urbanization, 1980 (percent)
39
44
32
Life expectancy at birth, 1980
(years)
59
63
58
Population growth rate, 1970-80
(average annual percent)
3.0
2.8
2.4
Per capita income, 1981 (US $)
1,080
1,060
890
Labor force in agriculture, 1980
(percent)
55
44
54
expansionary monetary policies, Guatemala City
dipped heavily into the local money market to cover
growing deficits. The government, however, lowered
legal commercial bank reserve requirements to pre-
vent a substantial squeeze on credit availability for
the private sector.
Even with the government struggling to play a more
stimulative, role in the economy, growth slowed to 3.5
percent in 1980 and to 1 percent in 1981. Agriculture
was particularly hard hit, expanding only 1.8 percent
in real terms in 1980 and 1 percent in 1981. Low
world commodity prices, reduced credit availability to
the private sector at home and from abroad, and
escalating terrorism placed a heavy burden on com-
mercial agriculture, as did the "war taxes" some
plantation owners paid the guerrillas to ward off theft
and property destruction. Outside of commercial agri-
culture, the production of corn, beans, and other
staples stagnated. Although Guatemala City raised
support prices in 1981, this incentive came too late to
increase that year's crop. Only Salvadoran and Nica-
raguan purchases to rebuild their economies and the
drawdown of inventories allowed Guatemalan manu-
factures to maintain some growth. Construction
lagged as the start of several major public investment
projects failed to offset the deepening recession in the
private sector.
Guatemala's balance-of-payments situation also wors-
ened noticeably. Although nominal export earnings
surged 25 percent in 1980 because of the rise of
industrial sales to neighboring countries, a number of
factors weighed more heavily in 1981 to weaken
Guatemala's trade position. The continuing drop in
world commodity prices triggered tight export quotas
on coffee and sugar under international agreements.
The suspension of nickel operations since September
1980 because of rising petroleum costs and the falling
price of nickel was another blow. Although Guatema-
la began exporting crude oil in 1980, the increase in
export revenues barely began to cover the steep costs
of imported crude and petroleum products. Tourist
earnings shrank from a peak of $82 million in 1979 to
$30 million in 1981. Even though the value of imports
grew only moderately in 1980 and fell in 1981, there
was no substantial relief from this factor.
The worsening payments difficulties necessitated new
financial approaches. On top of plummeting invest-
ment inflows, foreign commercial credit virtually
dried up after August 1981. Capital flight became
more worrisome as investors chased higher interest
rates and a safer haven for their money abroad. As a
result, Guatemala for the first time since 1973 im-
posed foreign exchange controls in 1980 to stem the
capital drain.
More important, Guatemala took its first tentative
steps toward more comprehensive economic manage-
ment to qualify for a $112 million IMF standby and
compensatory financing package. After months of
haggling, Guatemala in late 1981 secured the one-
year IMF program only after the government raised
domestic interest rates, to stem the private capital
outflow and pledged to reduce domestic financing in
favor of foreign funding of the projected 1982 budget
deficit. Still, its foot-dragging on setting priorities and
reorienting imports and in pursuing foreign funds
meant that Guatemala had to draw down its foreign
reserve holdings from $718 million in 1979 to $172
million-equivalent to nearly six weeks' import
cover-in 1981
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Figure 2
Guatemala: Key Commodity Prices
Coffeea
Cottonb
0 1973 75 77 79 81 83d
a Other milds-Arabicas, ex-dock NY, cents per lb.
b Memphis middling 1 1/16 inch, cents per lb.
c World raw London, bulk, cents per lb.
1 1
1973 75 77 79 81 83d
dCommodity prices represent an average for the first quarter; total
export earnings are projected for the entire year.
The Recession Takes Hold in 1982
The Rios Montt government installed following the
coup on 23 March 1982 moved quickly to reverse the
insurgents' momentum, improve Guatemala's interna-
tional image, and restructure the political system:
? Employing a fresh tactic of "Beans and Bullets" to
undermine the insurgency and increase the loyalty
of the peasants, President Efrain Rios Montt used
the Army to give peasants supplies of food, medi-
cine, and building materials, much of which came
from international relief organizations.
? In line with this strategy, the government redirected
its development program away from large-scale
projects to smaller undertakings to strengthen the
economic and social infrastructure in the impover-
ished highlands.
? The formation of peasant civilian defense forces
strengthened popular support of the government,
even though the groups were poorly armed.
? At the same time, Rios Montt implemented a
campaign against political corruption and human
rights abuses; former government officials were
arrested, the police reorganized and civilians dis-
armed. Soon after the coup, the new government
temporarily suspended government payment orders
and canceled a huge highway project to uncover
graft among former officials.
By the end of 1982, the Army had reestablished
authority over much of the population and territory
that had been under insurgent control, and had
regained the loyalty of some Indians who had previ-
ously aided the guerrillas.
Beyond these initial steps, however, the new govern-
ment's focus on military and political priorities divert-
ed its attention from the hard economic decisionmak-
ing needed to avert a further weakening of the
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Figure 3
Guatemala: Economic Indicators
a Estimated.
b Excludes short-term entries.
15.8
Public
Utilities
1.7
Services
53.6
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Table 2
Guatemala: Western Official Development Assistance, 1977-81
Total
1977-81
631.5
121.1
110.9
119.3
157.0
123.2
248.1
57.7
38.8
38.3
78.9
34.4
105.0
27.0
20.0
20.0
18.0
20.0
28.5
11.1
economy.' While laying the.basis for a long-term
economic recovery, the counterinsurgency drive-and
falling revenues-further strained government fi-
nances; this in turn prompted the regime to slash
capital spending over 20 percent below the 1981 level.
A fortunate side effect of the recession-and one that
removed a serious problem for decisionmakers-was
that it eliminated demand pressure for inflation.
Although the government dipped heavily into local
money markets to finance the remaining deficit, the
sharp slowdown in private-sector activity prevented a
liquidity crunch and kept average price increases to
1 percent.
The effects of this turmoil on the economy were
readily evident. Output contracted by 3.5 percent last
year-the first drop in economic activity in several
decades. Construction was hardest hit, falling 18
percent as the revenue shortfalls necessitated deep
cuts in development projects. Real agricultural output
fell 2 percent; rising production of food staples in
response to higher producer prices only partly offset
the 10-percent drop in commercial farming that re-
sulted from low world demand and insurgency-in-
duced disruptions. With import controls hitting manu-
facturers especially hard-foreign purchases of inputs
percent
fell 20 percent-only a rapid drawdown of inventories
kept the 5-percent decline in manufacturing output
from being even steeper. Moreover, the number of
bankruptcies soared. Buoyed by rising oil sales, only
the mining sector sustained rapid growth-over 12
We believe Guatemalan official statistics, which re-
port that the unemployment rate grew slightly to 11
percent, underestimated the jobless rate by 10 or so
percentage points and masked severe and growing
underemployment.' Seasonal agricultural jobs were
hit especially hard. According to US Embassy report-
ing, the government's counterinsurgency effort in the
highlands obstructed the movement of migratory
workers to the plantations on the south coast even as
the guerrillas damaged agricultural production there.
Although the regime implemented a "food-for-work"
program, budget constraints soon limited the size of
this project.
Only the sharp cut in imports and a buildup in foreign
exchange arrears kept Guatemala's foreign financial
needs to a manageable $520 million. Nominal imports
' Consistent and reliable unemployment data for Guatemala are
unavailable. In early 1982 the US Agency for International
Development, using a simple macroeconomic model and assuming
real GDP growth of 4 percent, estimated that Guatemala's unem-
ployment rate would reach 15 percent last year. We adjusted this
estimate to reflect the economic decline that set in during the year.
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Table 3
Guatemala: Foreign Financing Gap
Best
Conditions c
Worst
Conditions d
Best
Conditions -
Worst
Conditions r
Current account balance
-206
-163
-566
-371
-350
-120
-470
-160
Trade balance
-290 .
-78
-246
-200
-250
-20
-370
-60
Exports, f.o.b.
1,221
1,520
1,299
1,200
1,205
1,100
1,220
1,115
Petroleum
0
24
22
46
36
36
40
40
Coffee
432
464
325
375
378
375
378
375
Cotton
188
165
170
95
120
100
120
100
Sugar
54
69
85
44
90
40
90
40
Bananas
18
45
50
71
21
20
26
25
Other
529
753
647
569
560
529
566
535
Imports, c.i.f.
1,511
1,598
1,545
1,400
1,455'
1,120
1,590
1,175
Petroleum
242
344
378
303
230
230
230
230
Net services and transfers
84
-85
-320
-171
-100
-100
-100
-100
Interest, including IMF
charges
-72
-96
-100
-74
-55
-55
-55
-54
Amortization
59
98
109
150
90
90
105
105
Financial Gap
-265
-261
-675
-521
-440
-210
-575
-265
Direct investment (net)
117
111
127
76
Medium- and long-term loans
200
234
398
410
Net short-term capital and
errors and omissions
-81
-330
-154
24
a Estimated.
b For details on the scenarios and the methodology underlying our
projections, see appendix C.
c Projected, assuming 3-percent growth and moderate rise in world
commodity prices.
d Projected, assuming 4-percent economic decline and continuing
low world commodity prices.
c Projected, assuming 3-percent growth in 1983 and 1984 and a
moderate rise in commodity prices.
r Projected, assuming 4-percent decline in 1983 and flat growth in
1984 and continuing low commodity prices.
were slashed 9 percent-the lowest level since 1978- and sugar exports, and cotton sales plummeted, large-
by a quota system that began as a deliberate slow- ly in response to the sharp drop in world prices and
down by the Central Bank in processing paperwork the shortage of imported inputs. Manufacturing sales
but was institutionalized after the IMF standby to the depressed CACM market sagged badly. The
agreement expired in November. Nominal exports only bright spot was petroleum; exports more than
declined 8 percent below already depressed levels.
Tight international quotas continued to restrain coffee
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doubled to $46 million in 1982. Continuing bad
publicity caused tourist earnings to slide to barely
$15 million, half of the low 1981 level.
Even these distressing patterns do not give a complete
sense of the confusion and stress-abetted by govern-
ment mismanagement-that beset the economy.
? The Lucas Garcia regime failed to realize the
seriousness of Guatemala's financial plight until a
foreign bank consortium refused to roll over a
$75 million loan in February 1982. Repayment of
the loan virtually wiped out Guatemala's foreign
reserves.
? Under Rios Montt's leadership, the Central Bank
continued to ration foreign exchange by allowing
logjammed applications to relieve pressures tempo-
rarily rather than vigorously pursuing foreign funds.
? Although the government drafted a new petroleum
law to attract new investors, it has yet to be
implemented, partly because of private-sector oppo-
sition to the portion stipulating the formation of a
national oil company.
? The economic cabinet, drawn almost totally from
the private sector, dragged its feet on a new accord
with the IMF when the standby agreement expired
in November. Fearful that any new accord would
entail harsher austerity-especially higher taxes
and interest rates-that would undermine support
for it within the business community, the Guatema-
lans waited until after the chief opponent, Central
Bank President Gonzalez Del Valle, was fired in
late December before inviting an IMF team to
discuss a new program. By then, however, the
private sector had built up $350 million in arrears to
its foreign suppliers as Guatemala tried to protect
its remaining international reserves-which had
dropped to barely one month's import cove
Prospects Through 1984
Economic performance in 1983-84 will depend pri-
marily on how much control the Guatemalan Govern-
ment can exert over the insurgency and on the
availability of foreign exchange. These critical fac-
tors, in turn, will shape business confidence and
strongly influence investment and production in the
import-dependent agricultural and manufacturing
sectors. World prices and demand for agricultural
commodities and the level of CACM trade will
remain important in determining growth-generating
import levels. In addition, we believe the responsive-
ness of international donors and bankers will weigh
more heavily in this regard than previously.
Recognizing that these factors will drive the near-
term outlook and realizing that numerous variants in
our findings are possible, we analyzed their impact
under three different scenarios for political and mili-
tary conditions.' In measuring Guatemala's foreign
financial needs under these scenarios, we projected a
lower range growth target assuming economic stagna-
tion and an upper range target of 3 percent, the
minimum required to prevent further erosion of per
capita income. These targets are unambitious by
historical standards but could be no easy feat in the
region's changed environment. Moreover, we tem-
pered our analysis by the assumption that Guatemala,
never a recipient of large amounts of aid in per capita
terms, is not likely to receive a sharp increase in
foreign assistance.
Case I The Rios Montt government avoids sud-
den political reversals but cannot do more than
keep the insurgency from escalating.
Case II Rios Montt continues to consolidate his
position and effectively eliminates the
insurgency.
Case III Internal security deteriorates sharply
to the point where Rios Montt might effectively
lose control or be ousted.
Common Features. Regardless of which scenario we
examined, it was clear that an improvement in the
security situation alone would not be enough to
improve depressed Guatemalan living standards any
time soon. At best, real per capita incomes would
' For further description of the sources and methodologies used in
developing these cases, as well as a discussion of our data sources
for 1981-82, see appendix C
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stagnate while the foreign financial gap would widen.
Basic limitations stand out in each case that will
constrain economic activity during the time frame of
this assessment:
? Even if the global economic recovery is stronger
than generally expected, the spectacular rise in
commodity prices and demand needed to remedy
Guatemala's foreign exchange bind is unlikely.
? The regional economy is likely to remain depressed
and preclude a resurgence in Guatemala's CACM
trade.
? Because businessmen probably will remain chary of
sizable investments even if the political and security
outlook substantially improves, needed export and
market diversification will take considerable time.
? Under the best of circumstances, tourism will be
slow to-recover from the bad publicity incurred by
regional turmoil.
? Worried about regional turmoil and their high Latin
American exposure, foreign bankers will be reluc-
tant to increase lending to Guatemala substantially.
? Any steps toward more cohesive economic policies
are likely to be limited and to have little immediate
economic impact. The new value-added tax, to
replace a number of sales and foreign trade taxes,
for example, already is in jeopardy because of
private-sector complaints and would only improve
tax collection and administration over the medium
term.
As we reflected on these basic indicators and expected
patterns, we were also struck by an important and
continuing change in the atmospherics of economic
policymaking. Many business leaders increasingly
fault the government for neither coming to grips
quickly with nor consulting with them on the deterio-
rating economy and are likely to push harder for
direct participation in making economic policy. Gov-
ernment resistance to a currency devaluation and
removal of foreign exchange controls, and its half-
hearted approach to seeking foreign aid, are increas-
ingly irritating some businessmen. Nonetheless, vocif-
erous opposition from key conservative elements
within the business community and the military prob-
ably would thwart Rios Montt or any successor from
steering the government toward a much more direct
role in trying to revitalize the economy or implement
social reforms
Guatemala City already has slashed the 1983 budget
16 percent below the 1982 level, a factor that could
limit its maneuverability on the economy beyond this
year. Further retrenchment (despite the growth in the
government's role since the mid-1970s, its share of
national product barely exceeds 15 percent) could
begin to jeopardize planned public investment cen-
tered on small-scale projects, such as building feeder
roads and creating potable water supplies in the
heretofore neglected Indian highlands. Moreover,
Guatemala City lacks the administrative and techni-
cal skill to design quickly, let alone implement, under-
takings that might be associated with any large
infusion of new foreign project aid.
Case L? Violence Remains Near Present Levels. We
judge this scenario as the most likely. Fluctuating
levels of violence, in our view, will continue to charac-
terize the Guatemalan political scene even if, as we
expect, additional reforms under Rios Montt's tute-
lage further reduce political polarization over the next
two years. We believe the government's aggressive
military tactics and civic action programs will contin-
ue to hold the insurgents at bay but will be unable to
eradicate them. The insurgents probably will play it
safe and attempt to regroup, limiting their thrust to
the sorts of high-visibility, low-risk sabotage that
followed government repression of the insurgency in
1968. We believe they cannot afford to do much more
because their potential sources of outside support are
engaged in El Salvador and Nicaragua. As long as
insurgencies persist in these two countries, we believe
Guatemalan guerrillas can expect only limited help
from Cuba, the USSR, and its allies.
In these circumstances, we judge that foreign and
domestic business confidence will be slow to revive,
postponing the start of economic recovery until 1984
at the earliest. In the absence of much new private
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investment, an economic upturn would occur only if
there is a large infusion of new foreign aid aimed
primarily at easing the shortage of imported inputs-
industrial raw materials, intermediate goods, agro-
chemicals, and replacement parts-necessary to take
up slack in agriculture and industry
Depending on whether world commodity prices re-
main depressed or reach historically moderate levels,
we project that overall exports still will range in a
narrow band between $1.1 billion and $1.2 billion-
well below the 1980 peak-over the next few years:
? We calculate that agricultural export earnings will
range between $675 million and $750 million in
1983 and $680 million and $755 million in 1984.
Even barring bad weather, coffee sales probably will
merely stagnate; Guatemala should be able to fulfill
the tight quota set by the International Coffee
Organization (ICO), but reduced investment,
spreading coffee rust, and a proposed ICO crack-
down will limit sales to non-ICO members. Sugar
sales also will be limited by quotas set by the
International Sugar Organization; the US quota,
pegged higher than the world market price, will
provide some relief. Nearly half the banana crop
was destroyed by high winds in March. Unless the
multinational fruit companies quickly raise the $15
million needed to replant, they may further curtail
their operations. Beef production probably will stag-
nate, but declining domestic consumption could
allow a slight increase in exports. Only cotton
production could slightly improve if a recent US
commercial loan, largely for cotton planters, is
disbursed soon.
? Manufactured exports will contract further in re-
sponse to the shrinking CACM market and import
shortages. Even better administration of import
quotas and licensing probably would allow only a
few producers to conduct business as usual.
? Declining world oil prices will cut Guatemalan
petroleum export earnings-according to US Em-
bassy reporting, it would take nearly a decade to
find, develop, and bring to market any major new
fields-but Guatemala will benefit from the price
drop because it will remain a net oil importer during
1983-84.
Moreover, tourism is unlikely to recover enough to
make a dent in the foreign exchange shortage. Even
with a better promotional campaign, it will take years
to repair the bad publicity incurred by regional
insurgency.
At these export levels, we calculate that the foreign
financial gap would be in the $440-545 million range
in 1983 and the $575-680 million range in 1984, if
Guatemala is merely to support the 3-percent annual
growth needed to protect per capita incomes and to
honor foreign debt service obligations that come due
during this period.4 To achieve this target-
which excludes paying off existing foreign exchange
arrears-Guatemala would need imports worth about
$1.5 billion in 1983 and $1.6 billion in 1984. Alterna-
tively, for the economy just to stabilize in 1983 and to
then achieve 3-percent expansion in 1984, foreign
financing needs would still be $385-490 million in
1983 and $515-620 million next year. Because Guate-
mala's external debt is much lower and more conces-
sional than most of its neighbors', the debt service
burden-projected at $145 million, or less than 15
percent of merchandise export earnings in 1983-will
remain relatively light.
Although financing requirements of these magnitudes
are well within the range covered in the past two
years, Guatemala will be hard pressed to secure
enough new foreign funds to avert a further decline in
economic activity. Having steadily drawn down inter-
national reserves over the past three years to the point
where they presently can barely cover one month's
worth of imports, Guatemala can no longer count on
this cushion.
Although the IMF expects Guatemala to sign a letter
of intent soon for a new $125 million standby loan, we
believe negotiations could drag on and that in any
case an IMF accord would only slightly ease Guate-
mala's acute foreign exchange shortage. A key feature
of the IMF program is the new value-added tax to
`This range is based on various assumptions for world commodity
prices. See table 4 in appendix C for a summary of the full range of
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improve revenue collection. The preliminary agree-
ment calls on Guatemala to achieve a balance-of-
payments equilibrium by the end of the 18-month
accord, gradually eliminate the $350-450 million in
arrears on foreign obligations, and reduce the fiscal
deficit moderately. Despite Guatemalan fears, the
IMF did not demand that the government devalue the
currency, probably because Guatemalan exports have
been crippled more by regional turmoil and low world
commodity prices than by an erosion in international
competitiveness.
Beyond a US commercial loan of $95 million-
expected to be finalized soon after nearly a year of
negotiations-and some World Bank financing, we
judge that even an IMF accord could not prime much
additional foreign financing. Traditional Western
donors will probably retain conditionality on human
rights performance that would keep such aid unpalat-
able. Guatemala's access to funds also will be hurt
because the IMF imprimatur on most LDCs no longer
brings a quick foreign banker response. Worried
about the poor security in Guatemala-as well as
elsewhere in the region-and their overexposure in
Latin America, few foreign commercial banks would
be likely to lift quickly their informal freeze on new
credit. Similarly, foreign investors, discouraged by
foreign exchange restrictions that prevent normal
repatriation of profits and other factors, are unlikely
to expand their operations significantly. Despite these
stringencies, we believe Guatemala's conservative
debt management policies will preclude it from seek-
ing any formal rescheduling of its external obliga-
tions.
The IMF expects Guatemala to reduce its foreign
exchange arrears. Even if we assume no dent is made
in the payments backlog, then the country still would
need $105-210 million, depending on world agricul-
tural prices, to contain the economic shrinkage to the
4-percent rate compatible with the US Embassy's and
our forecast. Timely disbursements from the IMF and
other loans now being negotiated would largely fill the
upper range of this gap. Assuming the economy then
merely stagnates in 1984, the foreign financial gap
still would grow to a projected $160 million to $265
million. In these circumstances, we think better ad-
ministration of import controls that would redistribute
consumer imports into growth-generating purchases
could allow nominal overseas purchases to fall as
much as 20 percent to $1.1 billion in 1983 and barely
rise to $1.2 billion in 1984.
Painful adjustments would be widespread in this
scenario. According to the US Embassy, many busi-
nessmen are losing confidence in their ability to
maintain their operations and are more willing to lay
off employees than in the recent past. We believe the
unemployment rate could reach 30 percent this year.
Urban joblessness will be especially severe, as large-
scale factory layoffs and the deepening construction
slump prompt more workers to look for jobs in the less
productive service sectors. Although the government
is considering make-work projects to generate about
60,000 jobs over the next four years, we believe
budget constraints will severely limit public job cre-
ation. In this environment, consumer hardships will
grow. Cuts in food imports probably will not hurt
much, however, because production of corn, beans,
and other staples is likely to expand in response to
recent official hikes in producer prices.
Case II: Insurgents Are Defeated. Even if the govern-
ment could virtually eliminate the insurgency-highly
unlikely considering its difficulties in redressing in-
tractable economic and social ills-at least several
years of calm at home, and perhaps regionally, would
be required to restore fully the foreign and domestic
business confidence that is pivotal to economic recov-
ery. As the climate for business gradually began to
improve, the demand for foreign financial support
would remain high. Import needs would continue to
be large as businessmen began to replace wornout
stock and replenish inventories of imported inputs
drawn down during the recession. Improved security
also would encourage farm owners to boost imports of
fertilizers and pesticides needed to revitalize commer-
cial agriculture. Because our first scenario already
included a shift in the allocation of foreign exchange
away from consumer goods to purchases needed by
the productive sectors, the government would have
little additional maneuvering room to contain the
overall rise in imports.
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At the same time, the public sector would probably be
in a better financial position to contribute to economic
recovery as a result of diminished defense needs and
slowly rising tax revenues. A lower public-sector
deficit, in turn, could reduce pressure on the domestic
funds market and allow private-sector credit to ex-
pand faster.
Although we would not expect a rapid economic
recovery through 1984, certain factors would give
Guatemala a headstart over its neighbors. The agri-
cultural and industrial sectors-harder hit by disin-
vestment and shortages of working capital typical of
recession than by insurgent sabotage-could revive
stronger and faster than in El Salvador or Nicaragua.
In addition, unlike these countries, the Guatemalan
economy has not suffered a large exodus of skilled
labor.
Case III: Insurgents Make Substantial Gains. In this
scenario, we examined the potential economic damage
that would be inflicted by a substantial escalation in
domestic violence. Although the Rios Montt regime's
successful counterinsurgency drive and recent politi-
cal openings have reduced the prospects for sudden
political and security shifts in Guatemala, any in-
crease in guerrilla activity aimed at oil exports or the
harvest of key crops later this year could be even more
disruptive than previously because of the economy's
weakening ability to absorb shocks. Moreover, the
possibility of this scenario would grow enormously
should increased guerrilla successes on the battlefield
and/or bickering between rightist and moderate fac-
tions in El Salvador result in the toppling of that
country's government. We believe the shift in outside
support to Guatemalan insurgents and the ensuing
governmental preoccupation with fighting the guerril-
las would leave few financial or manpower resources
to prop up the economy. Most small-scale projects in
the highlands, for example, almost certainly would be
scrapped. As in El Salvador since 1980, where real
GDP has shrunk nearly 10 percent each year, the
economy would be on a wartime footing
The loss of remaining business confidence, which
could be even more damaging to the economy than
the direct damage inflicted by insurgents, would
accelerate the flight of capital and technical and
managerial talent. In addition, shortages of food and
consumer goods would be likely to drive up overall .
import and aid requirements. In this case Guatemala
would require much larger sums of foreign financial
assistance than we calculate under Case I to prevent
living standards from slipping too badly.
We see no prospect for large amounts of foreign
assistance, however, even if the Guatemalans were to
pursue aid more vigorously. Moreover, if human
rights abuses grew in tandem with an escalation of the
insurgency-as has happened in the past-potential
donors might again withhold aid. Even at currently
projected levels of foreign funding, economic activity
would decline much faster than at present. In this
case, strict controls on the distribution of available
goods would fuel inflation as black marketeering and
hoarding became more prevalent
Under these circumstances, Rios Montt's hold on
power and even the prospect for the next presidential
election-which we believe might be held in 1986-
could weaken substantially. Increased guerrilla at-
tacks would be likely to strengthen the position of
hardliners in the government, a move that could push
Rios Montt to abandon plans for social reform. At the
same time, relations between the government and the
private sector, an uneasy truce, almost certainly
would become more contentious as the economy dete-
riorates. As dissension among influential groups-
inside and outside the government-and insurgent
violence grow, a climate conducive to an abrupt, and
possibly bloody, change in the government could
develop. Possible successors to Rios Montt, excluding
an unlikely leftist takeover by the guerrillas, probably
would be even further to the right and would be likely
to impose a more authoritarian government in Guate-
mala.
A Longer Term Perspective
We judge that Guatemala will be unable to restore
anytime in the 1980s the high growth rates of the
1970s. Guatemala probably cannot count on rapidly
expanding foreign markets for its cash crops to meet
the country's large foreign exchange needs. Even a
modest recovery that could lay the foundation for
sustained growth would require the continued success
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Insurgent damage to the Guatemalan economy has
not reached the levels encountered in neighboring
El Salvador because the guerrillas in Guatemala are
fewer in number, are less unified, and have not
received as much outside support. Our survey of
reported insurgent incidents in 1981-82 revealed
property damage of some $22 million. This figure,
however, seriously understates the economic impact
of the insurgency because it excludes lost production
owing directly to this damage, investments and pro-
duction forgone because of intimidation, and the
probable numerous unreported incidents. The survey,
nonetheless, indicates a substantial decline in insur-
gency against economic targets after May 1982.
The targets of the various guerrilla groups have been
large farms and plantations, transportation and pow-
er networks, commercial and government buildings,
and petroleum installations. Most of the incidents,
such as burning buses and building roadblocks, have
inflicted little damage to productive assets. Other
favorite guerrilla targets have included burning gas
stations, bombing electrical substations, and damag-
ing bridges. Many large farms were taken over by
guerrillas who then burned vehicles and farm build-
ings. Damage to the country's only pipeline from the
oi1fields has not been extensive and has usually been
quickly repaired. We believe indirect repercussions
have been greater than the direct damage. Publicized
guerrilla attacks on hotels and tourist areas, for
example, precipitated the plunge in tourist earnings,
and guerrilla intimidation tactics persuaded a Guate-
malanfrm to close its barite mine in the Western
Highlands.
Any increase in violence would directly impair major
exports, particularly agricultural products and petro-
leum. In addition to the constraints facing agriculture
under Cases I and II, deteriorating internal security
could be especially detrimental. Depending on where
the insurgents struck, they could seriously damage
both export and staple crops. Only subsistence crops
are grown in the highlands, where most of the
guerrilla strongholds are now located. In addition to
seizing and destroying these crops, the guerrillas
might try to prevent migratory workers from taking
seasonal jobs on the plantations along the Pacific
coast. This action and the fear of financial loss it
would instill in plantation owners would interfere
with the planting and harvesting of key export crops.
The crops themselves would make easy targets for
sabotage. The insurgents, however, would be less
likely to attack the principal-and better protected-
food-growing areas around Guatemala City and far-
ther east but certainly would demand food and
supplies. Petroleum installations would be another
prime target. The insurgents also could step up their
attacks on the country's only pipeline from the
oilfields and expand their operations to include oil
rigs, port facilities, or the refinery in Escuintla; these
installations would take more time to repair than the
pipeline. Oil exploration, already hampered by limit-
ed accessibility, might stop altogether should the
foreign oil companies become sufficiently intimidat-
ed. As in El Salvador, another target for sabotage
would be hydroelectric plants-including the
Aguacapa project near Escuintla.
Damage by the guerrillas probably would not be
limited to the countryside. Urban terrorism could
easily escalate with a variety of targets such as power
stations, government buildings, and commercial
firms. Unemployment could become the government's
biggest economic headache; in neighboring El Salva-
dor the unemployment rate probably exceeds 30
percent, an indication of the enormity of this potential
crisis. Soaring unemployment would bring with it
increased unrest and, in our view, an upswing in
support for the guerrillas. At the same time, the
influx of peasant refugees in addition to mounting
defense costs would overtax the government's ability
to house and feed them.
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Over the years, the United States has played an
important role in the growth of the Guatemalan
economy. The greatest impact, however, has come
more from US trade and investment than from the
modest levels of US foreign assistance.
Investment
The United States also is Guatemala's leading source
offoreign investment. The US Department of Com-
merce reported that US direct investment in Guate-
mala stood at $233 million at the end of 1981. In
recent years, a major portion of US and other foreign
Trade
Historically, the US market has been important to
the Guatemalan economy and a mainstay for that
country's private sector in particular. The United
States buys mostly food-chiefly coffee, sugar, and
bananas-and all of Guatemala's petroleum exports.
In exchange, the United States fills a major share of
Guatemala's import needs for a wide range of manu-
factured goods, such as food products, transport
equipment, lubricants, fertilizers, pesticides, and oth-
er chemical products, as well as such primary prod-
ucts as wood pulp and textile fibers.
of the government in reducing the level of political
violence and polarization and in providing more mod-
erate, reform-oriented leadership. We believe these
tasks, in turn, will become more difficult as domestic
opposition grows in the next few years in response to
the expected regrouping of insurgents, the pickup in
political and labor union activity associated with
recent reforms, and the likely prolongation of the
economic recession. Moreover, it will be hard to instill
the spirit of cooperation between the government and
the private sector that is vitally needed to attract and
help manage the large sums of foreign assistance
necessary to sustain any social and economic progress,
regardless of the state of the insurgency. Because
some elements in the military want to push social
programs more than business leaders do, frictions
between these groups over the pace and substance of
social reform are likely to spill over to make overall
economic management even more contentious, once
again regardless of the state of the insurgency.
Thus, beyond the sheer financial costs and the poten-
tial drag of regional turmoil, we doubt that key
Guatemalan decisionmakers will seriously tackle the
sort of reorientation of the economy that would be the
key to Guatemala's prosperity. The World Bank has
investment has been aimed at the petroleum industry.
Banking
US banks-the single largest source of commercial
lending to Guatemala-have contributed 48 percent
of all credit from Western bankers. The US exposure
in Guatemala at the end of 1982, an insignificant
$200 million by world standards, is vital to the
Guatemalan economy.
recommended an economic restructuring-with
which we concur-that under the best of circum-
stances would take years to implement. Having large-
ly tapped the benefits of CACM even before the
recession took hold, Guatemala needs to diversify
exports and markets. Thus, even if CACM began to
recover over the next few years, we doubt it would
offer a sufficiently large market-once the initial
burst of growth subsided-to undergird much expan-
sion for an economy of Guatemala's size. According
to the World Bank, Guatemala also needs to revise its
industrial incentives to promote more labor-intensive
operations and to reallocate funds from its costly
program to expand industry outside Guatemala City
into efforts that will improve the worldwide competi-
tiveness of Guatemalan products
The World Bank also has made extensive recommen-
dations for increasing and diversifying agricultural
production that will at the same time absorb the
growing numbers of underemployed peasants in the
highlands. Reporting from the US Embassy indicates,
however, that land reform of the kind implemented in
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Table 4
Guatemala: Trade With the United States, 1978-81
Total Chemicals Machinery Manufactured Food Crude Animal, Minerals, Beverages Other
and Goods Products Materials, Vegetable Fuels, and
Transport Inedible Oils and Lubricants Tobacco
Equipment Fats
Guatemalan exports
(million US $)
1979
368.2
0.8
0.6
15.3
326.2
13.7
NEGL
0
6.8
4.8
1980
418.1
1.1
1.9
12.0
347.7
15.2
NEGL
23.7
8.6
7.9
1981
308.5
1.7
0.8
8.6
242.0
16.1
0
22.1
10.7
6.5
US share of total Guatemalan exports
(percent)
1978
29.6
1.3
8.8
6.6
47.0
7.5
0.0
0.0
46.4
31.2
1979
29.7
0.8
2.9
8.2
51.6
5.0
19.0
0.0
47.8
26.3
1980
27.5
0.8
6.1
4.3
47.2
5.7
6.3
89.0
47.5
29.5
1981
25.2
1.3
2.4
4.7
40.6
7.4
0.0
83.0
56.7
32.9
Guatemalan imports
(million US $)
1978 429.0
73.4
192.8
101.7
35.7
10.8
4.5
7.1
0.5
2.5
1979 480.4
92.0
190.7
115.5
40.9
15.7
7.2
15.7
0.5
2.2
1980 546.9
141.6
160.1
133.9
55.4
23.6
9.9
17.7
0.5
4.2
1981 560.8
144.5
142.4
154.7
63.6
22.5
14.6
11.7
0.5
6.3
US share of total Guatemalan imports
(percent)
1978 30.8 27.9 44.7
25.2
41.6
47.8
81.6
4.1
15.1
51.9
1979 32.9 33.7 45.0
26.6
49.2
55.6
85.6
6.5
9.7
33.7
1980 32.7 43.6 44.5
28.7
51.0
54.3
88.4
5.2
7.8
60.3
1981 33.5 46.3 40.4
33.9
60.3
56.5
92.1
3.1
11.9
76.4
El Salvador would be vigorously opposed by most
influential Guatemalans. Although Embassy officials
have said that Minister of Agriculture Sandoval-and
possibly Rios Montt-would like to expand agrarian
reform, objections from Guatemalan landholders
probably will prevail indefinitely. In that case, at-
tempts to reduce population pressures in the highlands
will probably remain limited to colonization projects
in the less populated areas in the north or the jungles
of the Peten and will fall far short of producing
meaningful results.
Implications for the United States
The United States will continue to play an important
role in the Guatemalan economy by virtue of its status
as that country's largest trading partner and major
supplier of foreign investment. At least one-fourth of
Guatemala's total exports-and all of its petroleum
sales-are destined for the United States. About one-
third of Guatemala's imports come from the United
States, with machinery and transport equipment com-
posing the largest category. In a regional context, the
future performance of Guatemala's relatively large
economy-Guatemala contributes more than one-
third of Central American and one-half of CACM
(Panama is not a CACM member) output-is bound
to affect its neighbors. The sheer size of Guatemala's
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private sector will make the pulse of business confi-
dence there an important determinant in the region's
ability to resuscitate business activity
Although the United States has been Guatemala's
largest economic donor, and although that country's
aid requirements-over the next few years at least-
probably will surpass historical levels, US economic
and political leverage would be unlikely to grow
proportionately to any aid package offered. As recent-
ly as in mid-May, Rios Montt publicly reaffirmed his
belief that Guatemala must minimize its dependence
on foreign aid even as Council of State President
Jorge Serrano had just held discussions in Washing-
ton with US and IMF officials about a possible IMF-
led financing program. Some of Rios Montt's postur-
ing may have been bluster to ease both IMF and other
donor conditionality and internal business opposition.
But we believe that Rios Montt's nationalist streak
and the strong and growing influence of the military
would preclude Guatemala from accepting aid with
many political or economic strings attached unless the
economic deterioration becomes deeper than we ex-
pect through 1984.
Although the critical importance of the security situa-
tion has prompted Guatemala to seek US military aid,
it probably does not expect much, if any, US assist-
ance. Guatemala's recent rejection of a US offer
made last January to supply $6.3 million worth of
military spare parts and equipment most clearly dem-
onstrates that country's willingness to "go it alone."
The Guatemalans claimed. they could not afford the
cash-and-carry terms (US military aid has been cut
off since 1976) and probably will continue to look
elsewhere for military support on more generous
25X1
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Appendix A
Guatemala's Unbalanced Growth
Guatemala-with the region's largest economy-
probably has done less with the fruits of its relative
size and impressive economic growth in the 1960s and
1970s to improve the lot of its nearly 8 million people
than any other Central American country. For gener-
ations, the economic oligarchy of plantation owners
and industrialists have resisted even the few govern-
ment initiatives that were made to redistribute income
and land and to decentralize industry. In rural ar-
eas-where almost two-thirds of the population live-
living conditions are especially bad. As a result, life
expectancy is only 59 years, little better than that in
Honduras, the worst country in the region. Adequate
sanitation, potable water, and proper shelter barely
exist outside the cities. Moreover, fewer than 50
percent of the country's adult population is literate;
this is the worst educational record in Central Ameri-
Guatemala has the region's biggest industrial base,
twice the size of second-ranking El Salvador, and
more than one-third of the area's population, but it
remains highly vulnerable to external shocks. Having
largely tapped the limited domestic market, the rela-
tively capital-intensive manufacturing sector-con-
sisting largely of food and beverage processing, tex-
tile, and clothing plants-became increasingly
export-oriented after the establishment of the Central
America Common Market (CACM) in 1960. Its
comparative advantage in size allowed Guatemalan
industry, and much of the commercial farming sector
upon which it is based, to gain inordinately from
CACM benefits. These included the creation of a
Colombia-size market allowing free regional trade in
nonagricultural goods behind a common external tar-
iff. Despite its dynamism, Guatemala's light industri-
al sector remained largely clustered in and around
Guatemala City and Quezaltenango. Moreover, the
concomitant surge in commercial agriculture meant
that Guatemala at the start of the 1980s was nearly as
dependent for foreign exchange on the vagaries of the
world market for coffee, cotton, and sugar as it had
been two decades before. Still, because Guatemala
could fulfill some of its demand for industrial goods
locally, it was relatively less dependent on imports
than its neighbors; imports accounted for only 22
percent of Guatemala's GDP compared with a high of
41 percent in Honduras.
Even less than in most LDCs, the tiny public sector in
Guatemala has done little to smooth the effects of
crop and foreign business cycles. Despite the growing
revenue potential that came with soaring incomes of
the business elites and booming foreign trade, Guate-
malan officials deliberately chose to minimize the
self-stabilizing effects of various tax and social insur-
ance programs and the leverage of public spending.
The shortage of skilled administrators has long caused
large shortfalls in meeting even modest development
targets. Unwilling to submit to conditionalities on
foreign aid and borrowing or to expand the govern-
ment's role, Guatemala has relied much less than
most LDCs on these financial sources to promote
economic progress.
Although the Lucas Garcia government in the late
1970s began to deviate from this pattern by pursuing
a somewhat larger role in the economy, its efforts
were quickly handicapped. Having become more
adept at managing aid inflows following the 1976
earthquake-and, in the view of the US Embassy,
more experienced in pocketing foreign aid for personal
use-the Lucas Garcia regime launched a four-year
development plan (1979-82). The ambitious plan
stressed the improvement of social services and costly
showcase projects in hydroelectric power, port im-
provement, and highways that aimed at spreading
development outside Guatemala City but also offered
greater opportunities for graft and corruption. Guer-
rilla advances and the worsening foreign exchange
bind, however, substantially delayed project comple-
tions. Thus, even with these openings, official develop-
ment aid on a per capita basis to Guatemala remains
among the lowest in Latin America.
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Limited employment opportunities in the cities and
cultural factors, nonetheless, have checked the sort of
rural exodus that has strained public services in many
LDCs and, until recently, kept Guatemala's unem-
ployment rate hovering just below 15 percent. Despite
its fairly large industrial base, Guatemala's level of
urbanization is only 40 percent-the lowest in the
region after that of Honduras. Over half of the rural
population is Indian and lives in the highlands to the
north and northwest of the capital. This population
has grown beyond what the land can support; an
estimated 9 out of 10 peasants live off plots of land too
small to meet even basic needs. As a result, more than
500,000 migratory workers annually descend from the
highlands to work on the commercial plantations
along the Pacific south coast. Other sectors of the
economy have not provided many jobs. For example,
capital-intensive oil production in the Peten began
commercially only in 1976. Although tourism is labor-
intensive and has stimulated some urban employment
in construction and hotel-related services and rural
jobs centered on Indian handicrafts, this sector re-
mains too small to absorb many workers
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Appendix B
Key Economic Players
The Economic Cabinet
The key economic policy makers in the Guatemalan
Government generally are conservative and pragmat-
ic. Since the coup of March 1982 that brought most of
them into the government, these Cabinet officials
have made few changes in Guatemala's economic
policies. Reporting by the US Embassy indicates that
most government economists advocate fiscal restraint,
favor a free enterprise system, and seem to oppose
broad agrarian reform, which to many of them means
the "Salvadorization" of land ownership and destruc-
tion of the fabric of society. Of all his economic
advisers, US diplomats believe that President Efrain
(Jose) Efrain RIOS MONTT
President (since March 1982)
A career military man, Gen. Efrain Rios Montt has little knowl-
edge about economic matters, according to US Embassy officials.
He contributes little to the formulation of economic policies,
although after he gets the concurrence of military power brokers,
he probably makes the final decision on specific policies or pro-
grams. The US Embassy reports that his influence on economic
policy has been most evident through his shaping of the political
process. Indeed, the President's populism, mistrust of big business,
disdain toward foreign assistance, and concern for the dignity of the
poor in Guatemala could determine, in large part, the country's
economic policies. US diplomats believe that Rios Montt might like
to implement an ambitious land reform program, but he will not do
so at this time because Guatemala's landowners would object. In
September 1982 he donated some of his own land to the state for
distribution to the people who work it. He said "I am not a farmer,
and I invite those who own plots of land that they are not working
Rios Montt says that he believes in a free enterprise system with
little government interference, but he has stated publicly that in
Guatemala the system has been abused and the government must
intervene in the economy until all can benefit from the country's
development. A born-again Christian, Rios Montt often punctuates
his economic remarks with lectures on morality. For example,
during one of his weekly sermonettes in February 1983, he said that
"the less the state intervenes in the development of the national
economy, the better .... However, in a time of crisis, when the wel-
fare of the majority has to be taken into consideration, state
intervention is not only a good idea but becomes an obligation for
the ruler." In a November 1982 address to Guatemalan business
leaders, he urged them to join a national campaign of "justice and
might" under three basic principles-"do not lie, do not steal, and
do not abuse authority." Strongly nationalistic, Rios Montt would
like to see Guatemala rely more on its own resources, but he doek
seek some foreign assistance. The President is friendly toward the
United States. Rios Montt joined the Army in 1943 and in 1950
received a degree in science and literature from Guatemala's
Rios Montt probably listens most to Finance Minister
Leonardo Figueroa, who is knowledgeable and usually
respected by his peers. Figueroa is a former military
officer, but this does not seem to hinder his relations
with his economic colleagues. Rios Montt selected
some members of his economic team from lists of
candidates that he requested from the private sector.
We believe that his main goal was obtaining compe-
tent economic administrators, but that he also was
trying to defuse the antagonism and mutual distrust
that has built up over the years between prominent
businessmen and the government
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Leonardo FIGUEROA Villate
Minister of Finance (since March 1982)
A former military man who has a background in economics,
Col. (Ret.) Leonardo Figueroa was president of the Guatemalan
Army Bank before he joined the Cabinet, and he is extremely
knowledgeable about the financial affairs of the military. He has
impressed US Embassy officials, who have said that he grasps the
seriousness of Guatemala's fiscal problems and is acting to resolve
them. They report that Figueroa has accomplished sizable cuts in
the fiscal deficit by reducing public spending. He has done this, in
part, by identifying fraud and mismanagement that resulted in
scrapping some large public works projects inherited from the
previous regime. Figueroa also apparently has been instrumental in
drawing up the tax reform and steep budget cuts that he hopes will
be sufficient to qualify Guatemala for an IMF standby program
soon. Figueroa has studied in Spain and Italy, and he has a
doctorate in economics. He began his career as a line military
officer and once served as an artillery commander. Figueroa, who is
about 50, is close to Rios Montt, according to US Embassy
Leopoldo SANDOVAL Villela
Minister of Agriculture (since July 1982)
A specialist in agrarian reform, Leopoldo Sandoval is one of the
more liberal members of the Cabinet and would perhaps like to see
a land reform program implemented in Guatemala, according to
US Embassy officials. Influential landowners-who, US Embassy
officials say, already view Sandoval as a socialist or even an
extremist-would vehemently oppose any agrarian reform. Al-
though we believe he may privately want to implement an ambi-
tious land reform program, Sandoval has publicly stated that he
opposes the breaking up of productive private landholdings and
turning them into small peasant-owned plots; he considers such
activities politically motivated and potentially destructive to agri-
cultural production. He would like to see both state-owned land
colonized by peasants and land that owners either cannot pay for or
have abandoned sold to farmers. He has mentioned the need for a
holistic approach, preferably cooperatives: agricultural enterprises
must combine all factors of production-land, capital, labor-and
should be an association between landowners and peasants, with the
latter holding income-producing shares in the ventures. USAID
officers in Guatemala consider Sandoval to be articulate and well
trained, and he, in turn, has sought AID's assistance in establishing
a mechanism for a land bank'approach to land reform. Sandoval,
an agricultural engineer, has studied in Guatemala, France, Israel,
Costa Rica, Mexico, Ecuador, and at the University of California.
He spent most of the 12 years before his Cabinet appointment in
Costa Rica, where he worked at the OAS Inter-American Institute
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Armando GONZALEZ Campo
President, Central Bank (since December 1982)
US Embassy officials in Guatemala report that financier Armando
Gonzalez was appointed mainly because he had served since April
1982 as a vice president of the Central Bank. Although he was the
Guatemalan director of the Central American Monetary Council
(with headquarters in Costa Rica) in the early 1970s, he is not as
well known in international financial circles as his predecessor.
Nonetheless, according to US Embassy officials, he is competent,
knowledgeable, honest, and shows flexibility in dealing with people.
He follows current government economic policy and has opposed
devaluation of the currency. Gonzalez supervises management of
foreign exchange allocation, although we are uncertain what
contribution he makes to overall policy regarding the exchange
rate. He has worked hard to acquire a standby agreement with the
IMF, including leading a delegation to Washington in mid-April
1983 for negotiations with Fund officials. Gonzalez has a degree in
economics from San Carlos University. He previously was an
official of the Central Bank during the late 1960s and early 1970s.
According to US economic officials stationed in Guatemala in the
1970s, he played an important role in the preparation of the
country's first five-year plan. As Central Bank president, Gonzalez,
Otto PALMA Figueroa
Minister of Labor (since March 1982)
US Embassy officials report that Otto Palma, 60, was appointed to
the Cabinet after officials of San Carlos University recommended
him for the job because of his expertise in labor law and his service
as a longtime adviser to the university on labor matters. Palma,
however, has not been popular with Guatemalan labor leaders, who
look upon him as a figurehead. The Guatemalans believe that real
power in labor affairs is wielded by Col. Zoel Emilio Estrada-
President Rios Montt's personal adviser on labor matters-and
some of them would like to see the colonel assume the labor
portfolio. US Embassy officials report that Palma has done little
beyond considering the possible implementation of a cluster of
government-sponsored employment projects designed to generate
additional jobs. He is, nevertheless, cooperative with US officials,
and visiting US labor representatives have been impressed with his
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Edgar Leonel ORTEGA Rivas
Minister of Communications and Public Works (since June 1982)
Col. Edgar Leonel Ortega, 39, was Deputy Minister of Communi-
cations and Public Works before his promotion in June 1982. In an
April 1983 conversation with US Embassy officials, a high-level
member of the Guatemalan Government, who generally criticized
the performance of Cabinet members, called Ortega one of the few
effective ministers. He recently assumed responsibility for transpor-
tation from the Economy Ministry, which US diplomats in Guate-
mala consider to be an indication of his increasing status in the
Cabinet. Ortega, a graduate of the Guatemalan Military Academy,
studied civil engineering at the National Autonomous University of
The Private Sector's Role
Although the private business sector in Guatemala
has traditionally served as a key source of ideas and
candidates for the government, it increasingly finds
itself in a largely adversary role regarding economic
affairs. The private sector, however, does not speak
with one voice. US Embassy officials report that it
includes such diverse interests-new industrialists,
commercial farmers, managers, and other business-
men in the past two decades-that consensus is rare.
Instead, a complex coalition of wealthy industrialists
and plantation owners forms shifting alliances with
conservative military officers on particular issue
Although the government does not utilize formal
mechanisms to consult with the private sector, it
periodically seeks advice from business leaders. Many
in the private sector are even more conservative than
those who make government economic policy; some of
them vehemently believe that only a free enterprise
system-free from all unnecessary restraints-will
cure the country's economic problems. The most
prominent organization through which the business
community speaks to the government is CACIF, a
group of 14 business organizations (chambers) that
represent agriculture, commerce, industry, and fi-
nance in Guatemala. Ronald Dent, the president of
the Guatemalan Chamber of Commerce, currently
serves as CACIF president.
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Ronald A. DENT Weissenberg
President, Chamber of Commerce (since March 1982)
As president of both the Chamber of Commerce and CACIF,
Ronald Dent is the unofficial spokesman for the private sector. lie
has opposed government economic policies and leaders alike. Dent
reccntls has led private-sector opposition to the tax reforms that
Finance Minister I igucroa would like to see enacted. lie nearly
broke up it meeting with government officials on 19 Mav by
accusing them of intransigence and acting in had faith, a charge he
based on Iigucroa's refusal to permit business to review a draft of
the tax reform proposals. Dent and like-minded business associates
favor at least sonic devaluation of the qucVal and the dismantling
A cumbersome foreign exchange regulations actions that most
economists in the government oppose. lie publicly proposed in
I-chruarv 1t) 7 that (iuatemala's international monetary reserves
be removed From government control, saying, "since the state
generates no reserves, it has no right to monopolize them." US
I'nrbassN officials consider Dent, who is in his midthirties, intelli-
Manuel Francisco AN At' Cordon
Rector, Francisco Marroquin I..niversity (since 972)
An engaging spokesman for extreme rightist economic views,
Manuel Atiau has lobbied twice in the past year for the lob of
Central Bank president, but Rios Montt passed him over. US
Fmbassv officials believe that he will probably remain on the
sidelines while Rios Montt holds office. They refer to him as a
known quantity who is in general disagreement with the economic
policies of the government. Involved in many business ventures, lie
has made a fortune, especially in the manufacture and retail sales
of various industrial gas products. A strong believer in self-reliance
and the free enterprise system, Avau prefers the removal of all
controls on business operations. In a letter that appeared in the
Wall Street Journal in April 1983, Ayau even criticised the
government's attempt to get an IMF loan. lie said that the loan
would merely be a temp rar_y bailout, and in the long term would
only reduce the country's creditworthiness by increasing its foreign
debt. lie also complained about government policies, particularlc
the government's continued resistance to devaluation and its control
of foreign exchange, which he maintains make capital investment in
export products unprofitable. Educated in the United States and
Canada, Ayau, 57. holds a mechanical engineering degree from
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Appendix C
Methodological Notes on
Economic Forecasts
Economic estimates for 1981-82 and projections for
1983-85 were based primarily on our analysis of
official Guatemalan data supplied to the International
Monetary Fund and World Bank and on reporting by
US and OECD official sources. We also drew on
open-source information to establish world commod-
ity prices and historical import price deflators:
? Foreign Aid. Official data as reported by donors,
particularly OECD members, are our main source
of information on foreign aid flows. Estimates,
extrapolating past trends and utilizing US Embassy
reporting, especially from donor countries, were
used to fill the gaps.
? Foreign Trade. Estimates for 1982 were based on
official Guatemalan data as reported by the US
Embassy and the US Agency for International
Development and were used to derive 1983-84
projections.
? Foreign Debt. Estimates and projections of debt
service payments, with which we concur, were ob-
tained from the US Department of Treasury.
? Agricultural Production. Our estimates were based
on reporting from the US Departments of State and
Agriculture.
Our projections for foreign aid requirements for 1983-
84 were calculated as the financing needed to close a
projected foreign financial gap associated with a
particular track for economic growth. This financial
gap was calculated as:
FG = (I - E) - ST + A
Exports were calculated as the product of projected
volume and international commodities prices. Volume
in 1983-84 was projected to stagnate for coffee and
petroleum. We assumed Guatemala would fill its
export quota under the International Coffee Organi-
zation (ICO) but would be unable to increase sales to
non-ICO countries. We foresee little, if any, growth in
oil revenues because of the prospect of minimal new
investment and the world price outlook. We project a
5-percent increase in cotton exports in 1983 in re-
sponse to improved credit availability but no rise in
1984 because of continued low world demand. Export
volume for sugar was forecast to decline 10 percent in
1983 and level off in 1984 because of the response of
producers to continued low world prices and nonavail-
ability of credit. According to Embassy reporting,
severe wind damage in March destroyed about $50
million worth of bananas in Guatemala. Slow replant-
ing will keep 1984 volume low. Projections of Guate-
malan manufactures exports were derived from our
judgment that poor economic conditions in CACM
will continue through 1984.
Low and moderate farm commodity prices were de-
rived from world market trends since 1980, adjusted
for commodity analysts' expectations based on the.
OECD business cycle and anticipated market devel-
opments. Our low and moderate cases projected com-
modity prices continuing at the 1982 level and at the"
average annual level during 1980-82, respectively. We
also assumed a 25-percent drop in world crude oil
prices in 1983, with a leveling off in 1984.
Imports were derived by inflating with OECD export
price projections the real imports we calculated as
necessary to support our various assumptions about
where FG equals financial gap, I equals import
expenditures, E equals export earnings, ST equals net
services and transfers, and A equals amortization of
medium- and long-term debt.
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Table 5
Guatemala: Projected Foreign Financing Gap, by Scenario
Low
Commodity
Prices
Moderate
Commodity
Prices
Low
Commodity
Prices
Moderate
Commodity
Prices
Low
Commodity
Prices
Moderate
Commodity
Prices
Current account
-120
-15
-400
-295
-455
-350
Trade balance
-20
-85
-300
-195
-355
-250
Exports, f.o.b.
1,100
1,205
1,100
1,205
1,100
1,205
Imports, c.i.f.
1,120
1,120
1,400
1,400
1,455
1,455
Net ser?ices and
transfers
-100
-100
-100
-100
-100
-100
0-Percent GDP Growth
(Following-4-Percent
Growth in 1983)
0-Percent GDP Growth
(Following 0-Percent
Growth in 1983)
3-Percent GDP Growth
(Following 0-Percent
Growth in 1983)
3-Percent GDP Growth
(Following 3-Percent
Growth in 1983)
Low
Commodity
Prices
Moderate
Commodity
Prices
Low
Commodity
Prices
Moderate
Commodity
Prices
Low
Commodity
Prices
Moderate
Commodity
Prices
Low
Commodity
Prices
Moderate
Commodity
Prices
Current account
-160
-55
-455
-350
-515
-410
-575
-470
Trade balance
-60
45
-355
-250
-415
-310
-475 ?
-370
Exports, f.o.b.
1,115
1,220
1,115
1,220
1,115
1,220
1,115
1,220
Imports, c.i.f.
1,175
1,175
1,470
1,470
1,530
1,530
1,590
1,590
Net services and
transfers
-100
-100
-100
-100
-100
-100
-100
-100
Amortization
105
105
105
105
105
105
105
105
Financial gap
-265
-160
-560
-455
-620
-515
-680
-575
economic activity. Real import aggregates' were
linked with economic growth using an incremented
elasticity formula:
In this case, each 1-percentage-point change in real
gross domestic product is associated with a 1.3-
percentage-point change in real imports. We based
our incremental elasticity projection on a comparison
of the calculated values for both 1962-70 and 1970-
81. These broad time frames were chosen to smooth
the wild fluctuations associated with the coffee boom
and bust cycles, the surge in imports after the 1976
earthquake, and the sharp increases in world oil prices
in 1973-74 and 1979-80. Further adjustments to the
ratio .were deemed unnecessary in part because there
were no significant shifts in the various shares of
import categories during the 1970-82 period. More-
over, changes in the government's development pro-
gram and in the deterioration of capital stock and
'This approach is consistent with the limited data showing a
disaggregation of imports by commodity or sector.
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inventories since then probably have been insufficient
to warrant a substantial increase in the ratio. The
track of import elasticities for the period 1962-84 (the
ratios are derived from constant 1975 US $) is as
follows:6
Projected
1962-70 1971-81 1983-84
All goods f.o.b. 1.3149 1.3216 1.3
Real imports calculated with this ratio for economic
growth of 0 percent and 3 percent were converted to
nominal values based on OECD projections for
OECD export price increases (expressed in US dol-
lars). In our scenario predicting economic contraction
in 1983, we used an import elasticity of 5.0 based on
1982 data alone because Guatemala until then had
not experienced an economic decline in years; import
controls last year demonstrated that consumer pur-
chases could be cut substantially, thereby allowing
Guatemala to sustain deeper import cuts than would-
be expected otherwise. For 1983 the OECD predicts
no increase in dollar prices, and for the first half of
1984, a 5-percent jump; lacking additional data, we
extrapolated this six-month figure to our full-year
projections.
Net services and transfers consisted primarily of
known and anticipated direct grants, interest obliga-
tions on foreign debt, and profit remittances. We
included interest payments on public and publicly
guaranteed external debt and on nonguaranteed pri-
vate debt in our calculations.
Scheduled Amortization. The remaining item needed
for our 1983-84 financial gap analysis consisted of
principal payments on medium- and long-term exter-
nal debt. We based our estimates and projections of
public and publicly guaranteed debt payments and
private-sector amortization on lender reporting.
Table 5 summarizes the full range of our financial
gap analyses covered under Case I in the main text.
6 The elasticities presented are ratios of growth in imports to rates
of growth in GDP.
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