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Guatemala: An Assessment of Poverty

 

Guatemala FY95 PA

Main Report (9.8Mb PDF)

Poverty Profile

Poverty in Guatemala is both widespread and severe. Approximately 75 percent of the population is estimated to live below the poverty line, which is defined as an income that is insufficient to purchase a basic basket of goods and services. Almost 58 percent of the population have incomes below the extreme poverty line, which is defined as the amount needed to purchase a basic basket of food. Poverty is especially prevalent in rural areas in the North, Northwest, and Southwest and occurs primarily among the poorly educated and indigenous members of the population. More than 90 percent of the indigenous population live on an income that is lower than the poverty line.

There is also a high degree of inequality in income, consumption, and, most acutely, land. According to the most recent agricultural census (1979), only 2.5 percent of Guatemala's farms control 65 percent of the agricultural land, while 88 percent of the farms control only 16 percent of the land. The Gini Index for land distribution was calculated to be 85.9. This unequal pattern dates back to the colonial era when the Spanish crown granted large extensions of land to colonizers.

All of Guatemala's social indicators reflect this widespread poverty and severe inequality. For example, literacy rates are dismal, and gross school enrollment rates are low – 77 percent for primary school and dropping drastically thereafter. In health, the infant mortality rate is 55 per 1,000 live births and the maternal mortality rate is 110 per 100,000 live births. In addition, approximately 16 percent of infants suffer from low birth weight, and approximately 50 percent of all children are malnourished.

The latest World Bank projections are that Guatemala could grow at a sustainable rate of 4.5 percent a year between 1995 and the year 2000. Because of the country's high population growth rate, GDP per capita is projected to increase by only 1.7 percent a year. If this GDP growth happens in a distributionally neutral way, any reduction in poverty will be minimal. A study carried out as part of the poverty assessment suggests that, if the per capita income of every household in the 1989 Household Survey were to grow at a rate of 1.7 percent a year without interruption for 10 years, poverty would decrease from 75 to 69 percent.

Incentive and Regulatory Framework

During the 1960s and 1970s, the incentive structure, as represented by tariffs, taxes, and the exchange rate, was biased in favor of a capital-intensive production structure that was highly import-dependent. In the mid-1980s, the incentive structure began to change, mainly as a result of exchange rate reform and trade liberalization. Government policies that reallocated and reduced expenditures induced a change in the structure of relative price products to the extent that the real exchange rate depreciated by about 40 percent between 1986 and 1990. This was an important trend as it implied that in the long run the structure of prices would favor the production of exports and efficient import substitutes as opposed to nontradables. The tariff reforms of 1986 and 1990 reduced the average level of nominal protection and compressed dispersion rates, thus reducing to some extent inherent production distortions. The priority now is to work towards eliminating non-tariff barriers.

Public Expenditures

Both households and the government have failed to invest enough in education, health, and nutrition. About three-quarters of Guatemala's population are poor and, given their low incomes, the poor tend to underinvest in the human capital of their children. At the government level, whenever a financing crisis has occurred, as happened in the early 1980s and again in 1989-90, social sector expenditures have usually been the first targets for cuts. As a result, the level of social sector investments fell sharply from 1980 to 1992. By 1992, the cumulative effect of these cuts was to push real health expenditure down to 80 percent below its 1980 level, while real education expenditure was down to some 33 percent below its 1980 level. Infrastructure investment also declined considerably, which has constrained the viability and productivity of producers and, thus, has indirectly affected labor demand. There is a particularly desperate need for investment in rural roads.

Years of underinvestment have been aggravated by low internal efficiency and an inequitable and inefficient allocation of expenditures biased towards urban areas and the nonpoor. For example, the 1986 Constitution earmarks 5 percent of all tax revenue to San Carlos University, and in 1990, the operating expenses of the two largest hospitals in the metropolitan area exceeded the operating costs of all of the country's health posts and clinics.

It is important to identify the key source of Guatemala's low social expenditures. In fact, as a percentage of total government spending, Guatemala's health and education expenditures are similar to those of other Latin American countries because it raises much lower taxes as a percentage of GDP than do its neighbors. This should be borne in mind in devising a poverty reduction strategy.

Safety Net

Because such a large proportion of Guatemala is population is poor, broad-based social initiatives rather than targeted safety nets are the most effective mechanism for reducing poverty in the short term. However, two recent developments present promising approaches to financing infrastructure improvements and supporting rural areas, both of which primarily benefit the poor. The government has established the Fondo de Inversion Social (FIS), supported by the World Bank, which finances but does not run labor-intensive projects proposed by local groups. The Fondo Nacional para la Paz (FONAPAZ) does a similar job but targets those affected by the armed conflict in the country. Both funds offer assistance in the areas of social services, economic and social infrastructure, and institutional strengthening.

Poverty Strategy

During the late 1980s and early 1990s, an explicit poverty reduction strategy began to be implemented, although much fundamental change is still needed. The first concern is to pursue policies that generate macroeconomic stability and to manage the economy so as to make efficient use of the poor's most abundant asset – labor. This objective cannot be achieved unless the government is able to raise taxes and to make good use of the revenue it does receive. At present, the private sector is understandably reluctant to give resources to a public sector that it views as inefficient at best and corrupt at worst. A second key element is to increase the access that the poor have to land. This requires not only making it easier for the landless poor to acquire land but also strengthening the tenure of smallholders who already own land. Experience in other countries in the region shows that consensus-building is likely to be an important element in making this possible.

A third element is to structure public investment so that it enhances the earning potential of the poor, either by increasing their human capital or by making their existing human capital more productive. Ideally, there should be increased public financing of human capital investments, which may or may not be feasible in the short term. In terms of service delivery, the government should explore ways to make providers more accountable for the quality of the services they provide. These mechanisms can include: (i) subcontracting the provision of health and education services to private companies through open competitions, (ii) operating public facilities under management contracts; and (iii) introducing performance-based budget allocations, internal markets, and greater community participation in local budget decisions.

Statistical Systems

The principal deficiency in the national information system with respect to poverty reduction is the lack of a permanent system of household surveys to collect socioeconomic data. However, currently there are no plans to develop such a system. Because the latest poverty figures date from 1989, it is impossible to tell whether the major policy changes that have taken place since 1989 are associated with an increase or a decrease in poverty levels.

The National Statistical Institute (INE) was planning to conduct a census in April of 1994 although, as of November 1993, funding had not been secured. Also under consideration for 1994 were an agricultural census, an income and expenditure survey (last fielded in 1980/81), and a repeat of the health, nutrition, and family planning survey previously conducted in 1984 and 1987. A large portion of the funding for the health survey would come from USAID, while the financing for the other surveys was not clear at the time the poverty assessment was written. INE also carries out the National Socio-Demographic Household Survey and its companion module, the National Employment Survey, but this survey was last fielded in 1989 and did not contain any data on consumption.

The inability of INE to produce current socioeconomic data is a reflection of several factors. First, the severe budgetary restrictions that characterize the entire public sector limit funding for statistical data gathering. Second, relatively low priority is given to collecting socioeconomic data. Third, insufficient consideration is given to using the data as an input for policy decisions once they have been collected.

From a poverty reduction perspective, the highest priority should be to conduct the census and to institute a permanent system of household surveys. Issues of design and efficiency will be important considerations for maximizing the usefulness of data collection given the prevailing budget constraints. Deficiencies in the administrative records and management information systems in the line ministries should also be corrected.

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