CO U N T RY P R I VAT E S E C T O R D I AG N O S T I C CREATING MARKETS IN GUATEMALA Unlocking Private Sector Potential to Achieve Sustainable and Inclusive Growth and Economic Development September 2023 About IFC IFC—a member of the World Bank Group — is the largest global development institution focused on the private sector in emerging markets and developing economies. We work in more than 100 countries, using our capital, mobilization capacity, expertise, and influence to create jobs and raise living standards, especially for the poor and vulnerable. In fiscal year 2023, IFC committed a record US$43.7 billion to private companies and financial institutions in developing countries, leverag- ing the power of the private sector to improve people’s lives as economies grapple with the impacts of global compounding crises. For more information, visit www.ifc.org. © International Finance Corporation 2023. All rights reserved. 2121 Pennsylvania Avenue, N.W. Washington, D.C. 20433 The material in this work is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. IFC does not guarantee the accuracy, reliability or completeness of the content included in this work, or for the conclusions or judgments described herein, and accepts no responsibility or liability for any omissions or errors (including, without limitation, typographical errors and technical errors) in the content whatsoever or for reliance thereon. The findings, interpretations, views, and conclusions expressed herein are those of the authors and do not necessarily reflect the views of the Executive Directors of the International Finance Corporation or of the International Bank for Reconstruction and Development (the World Bank) or the governments they represent. Photos: Cover, © Salmonnegro/Adobe Stock; p. 1, © Christian Hartmann/Shutterstock; p. 9, © Maria Fleischmann/World Bank; p. 14, © Hurst Photo/Shutterstock; p. 37 © Maria Fleischmann/World Bank. iii CONTENTS Acknowledgments iv Executive Summary v Abbreviations and Acronyms xvii 1 INTRODUCTION AND COUNTRY CONTEXT 1 1.1 Modest Economic Growth and High Levels of Poverty and Inequality 2 1.2 Low Productivity, FDI, and Export Growth 6 1.3 Vulnerability to Climate Change 8 2 THE STATE OF THE PRIVATE SECTOR 9 2.1 High Level of Informality 10 2.2 Low or Stagnant Labor Productivity 12 3 CROSS-CUTTING CONSTRAINTS TO PRIVATE SECTOR DEVELOPMENT 14 3.1 Limited Access to Finance by MSMEs 15 3.2 Infrastructure Gaps 22 3.3 Legal Framework, Dispute Resolution, and Governance 30 4 SECTOR ASSESSMENTS 37 4.1 Sector Selection Framework 38 4.2 Agriculture Sector 40 4.3 Light Manufacturing 65  84 iv ACKNOWLEDGMENTS The Guatemala Country Private Sector Diagnostic (CPSD) was prepared by a team led by David Cal MacWilliam (Senior Economist, World Bank) and Denny Lewis-Bynoe (Senior Economist, IFC) as co-Task Team Leaders (TTLs) and including former co-TTLs Johannes Herderschee (Senior Economist, World Bank) and Miguel Pereira Mendes (Economist, IFC). The team is thankful for the robust engagement of the following members who contributed to the sector assessments: Rita Ramalho (Lead Economist), Rafael Chelles Barroso (Senior Economist), Fausto Andres Patiño Peña (Economist), Viviana Maria Eugenia Perego (Agriculture Economist), Tomas Ricardo Rosada Villamar (Senior Finan- cial Sector Specialist), David Bassini Ortiz (Extended Term Consultant [ETC]), Rodrigo Leonel Castillo Perez (ETC), Anjali Kishore Shahani Moreno (Opera- tions Officer), Maria Asuncion Rodenas Caparros (Operations Analyst), Fabian Hinojosa Couleau (Senior Transport Specialist), and Ana Silvia Aguilera (Trans- port Consultant). Thanks are extended to Tatiana Nenova (Regional Manager, IFC) and Doerte Doemeland (Practice Manager, World Bank) for their guid- ance throughout the process. The team also thanks Giselle Velasquez for ed- iting and formatting the document and providing administrative support and Zakia Nekaien-Nowrouz for support in editing and formatting the document. In addition, the team is thankful for the sector-specific knowledge provided by external consultants, including Lisardo A. Bolaños Fletes; Roberto Bermejo; and the group at the Universidad del Valle de Guatemala, particularly Carla Catali- na Galdamez Vanegas, Isabel Alonzo Flores, Benjamin Nicolas Leiva Crispi, Ed- win Josue Castellanos Lopez, Florencio Rolando Cifuentes Velasquez, and Juan Fernando Díaz Lara. The team is grateful to Marco Scuriatti, Fernando Paredes, Mariela Alpirez Gar- cia Araujo, Juan Francisco Ron, and other staff of the Guatemala Country Office Administrative and Client Support team, who made the necessary arrangements for the extensive series of mission meetings and provided critical administrative support. The team appreciates the comments provided by peer reviewers Thomas Farole (Lead Economist, World Bank), Winston Dawes (Senior Agricultural Economist, World Bank), Mia Rodriguez (Country Officer, World Bank), and Lina Sun Kee (Senior Operations Officer, World Bank). Finally, the team expresses its sincerest gratitude for the excellent contributions received from representatives of the Guatemalan public and private sectors during the preparation of this report and the involvement of La Fundación para el De- sarrollo de Guatemala (FUNDESA), which helped facilitate this engagement. v EXECUTIVE SUMMARY This Country Private Sector Diagnostic (CPSD) is a joint undertaking of the World Bank and IFC to identify policy reforms that will catalyze private sector investment and economic development in Guatemala over the next 3 to 5 years. It aims to sup- port the Guatemalan government's efforts to facilitate the growth of a robust and competitive private sector. The intent is to identify barriers and opportunities for an increasingly dynamic private sector so as to boost its contribution to economic growth, job creation, poverty reduction and shared prosperity. The selected areas of focus, policy conclusions, and recommendations are consistent with the ana- lytical framework presented in the Guatemala Systematic Country Diagnostic up- date,1 which highlights the advantages of more spatially diversified development. Guatemala, Central America’s largest economy, continues to struggle with mod- est rates of economic growth and high levels of poverty and inequality. Between 2000 and 2019, annual gross domestic product (GDP) growth averaged 3.5 per- cent amid tight fiscal and monetary management,2 but improvements in poverty and social development indicators were slow and uneven. The national poverty head count rate remains high at 56 percent,3 the Gini coefficient is 0.45 percent, and 48.2 percent of the population lives in rural areas. Guatemala has among the highest gender inequality index scores and lowest rates of female labor force participation in Latin America and the Caribbean. With a small public sector, the primary role in driving growth and job creation must fall to the private sector. However, private sector development and growth in Gua- temala are constrained by several factors. As detailed in this report, these barriers in- clude a weak business-enabling environment, lack of access to finance, infrastructure constraints, and governance constraints, among others. This challenging private sec- tor-enabling environment creates substantive barriers to entry for both domestic and foreign firms, lowers returns to entry, limits competition as firms exert market dom- inance, and reduces innovation, thus significantly reducing potential private sector employment and productivity growth. Furthermore, these barriers lead to a flour- ishing low-productivity informal sector, which hinders growth in income per capita. Formal firms in Guatemala suffer from low levels of dynamism and innovation, which constrain their development and competitiveness. The 2020 Global Com- petitiveness Report ranked Guatemala 98th out of 141 countries in business dy- namism and 98th in innovation capability.4 Because of low rates of firm entry, the average firm age increased from 17.5 to 28.5 years between 2006 and 2017, one of the oldest age structures globally. Rates of firm entry are also affected by the lack of antitrust regulation or a competition law in the country, which cre- ates further barriers to entry for new companies, affects competitiveness, and di- minishes the country’s potential to participate in investment markets. The lack of dynamism is also reflected in businesses’ reluctance to grow their workforce. Similarly, firms face an adverse innovation environment, as evidenced by the small and decreasing share of firms that report spending on research and devel- opment (15.5 percent) or process innovation (37 percent). vi GUATEMALA  COUNTRY PRIVATE SECTOR DIAGNOSTIC The economy has undergone a shift from predominantly low-productivity agri- cultural activities to manufacturing and services, but quality jobs are limited. De- spite increasing employment, the growth of the services sector, which is focused mainly on the domestic market, has not generated the quality of jobs needed to sustain and improve economic outcomes. The sector is characterized by a large number of small firms that export little and operate mostly informally with low levels of productivity. Since 2014, employment opportunities in the formal sec- tor have plateaued, leading to a decline in average income. Guatemala’s large in- formal sector represents an average of 46 to 48 percent of GDP and provides 80 percent of total employment.5 As the supply of workers seeking formal jobs rose while demand stagnated, wages fell by more than 10 percent during 2014–19, continuing a longer-term pattern.6 Total investment remained low at an average of 13 percent of GDP during 2014–19, and a growing current-account surplus underscored the increasing movement of capital abroad. Consequently, creating better jobs for more people and decreasing incentives for economic migration will require a more dynamic and competitive private sector. Although unemployment in Guatemala is relatively low, high rates of underem- ployment pose a significant challenge. For workers to be enticed out of inactivi- ty, out of the informal sector and other low-productivity activities, and into the formal sector, more-attractive jobs are needed. Creating more and better private sector jobs will also reduce the incentives for migration, limit brain drain, and help the country capitalize on its demographic dividend. Migration in Guatema- la is strongly associated with economic factors, specifically with unemployment and underemployment. Emigration, primarily to the United States, has increased in recent years, boosting remittance inflows, but migration and remittances are not a durable model for long-term growth, and accelerating domestic private sec- tor job creation remains a critical policy objective. The jobs challenge in Guatemala is thus one of increasing both access to waged-em- ployment opportunities and the quality of employment and wage levels. The CPSD and the analysis that follows are therefore focused on addressing these two employment-related challenges by fostering and facilitating an increasingly dynamic, growing, and more productive private sector. Limited private sector growth and competition also limit nearshoring opportu- nities in expanding trade with Mexico and the United States. Guatemala’s de- pendence on a limited number of low-value-added exports restricts its growth potential. Guatemala’s economy is at an intermediate level of diversification, pro- ducing relatively simple goods and services that many countries are capable of ex- porting competitively. Guatemala is also less integrated into the world economy than other countries with similar levels of income per capita. Economic transfor- mation, facilitated by addressing the constraints noted in this report, would en- able Guatemala to capitalize on greater gains from trade, while also generating more and better-quality private sector jobs linked to higher-productivity growth. The current administration is committed to a private sector-led development agenda aimed at boosting the country’s social and economic recovery. The Gua- temala Moves Forward (Guatemala No Se Detiene) program, launched in 2021, includes an ambitious strategy to boost the output of 20 major export products by as much as US$5 billion while creating 2.5 million formal jobs by 2030. The initiative establishes a roadmap to attract more foreign direct investment (FDI) Executive Summary vii in high-potential sectors and key export-oriented industries over the medium term, particularly to benefit from apparent nearshoring opportunities. The plan also places a renewed emphasis on tackling skill mismatches through programs led and coordinated by the Ministry of Economy and by Programa Nacional de Competitividad (PRONACOM). While the private sector will remain the primary economic driver, the government must also address long-standing challenges in fiscal policy and public adminis- tration to better support robust private sector development. Guatemala’s public revenues and expenditures are among the lowest in Latin America and the Carib- bean, amounting to just 12.2 and 13.4 percent of GDP, respectively, in 2021. Key laws and regulations are enforced unevenly or not at all. Private firms in Guate- mala face a challenging business climate that impedes their growth and develop- ment. World Bank’s Enterprise Survey and the World Economic Forum’s annual Global Competitiveness Report highlighted the adverse impact on the private sec- tor of political instability, corruption, crime, an inefficient government bureaucra- cy, and asymmetrical competition from the large informal sector.7 Another World Bank report found that deficiencies in the regulatory environment limit the entry, growth, and competitiveness of formal firms.8 High administrative costs, weak rule of law, time-consuming and costly contract enforcement processes, and cum- bersome insolvency procedures are among the major obstacles facing Guatema- lan firms. With an improved business environment, Guatemala could benefit from investment in strategic sectors, namely, in agriculture, recreational services, and light manufacturing, especially those related to food, such as production of meat and oils, which would reduce not only poverty, but also disparities among disad- vantaged groups such as women, Indigenous people, and youth. Cross-Cutting Constraints In the aftermath of the pandemic, the CPSD is timely in supporting the country to identify key constraints for private investment and formulate appropriate pol- icy reforms. The CPSD focuses on three cross-cutting issues that are long-stand- ing fundamental constraints facing the private sector: (a) limited access to fi- nance for micro, small, and medium enterprises (MSMEs), (b) infrastructure gaps, and (c) weak governance, corruption, and ineffective dispute resolution systems. Limited Access to Finance for MSMEs Access to finance, particularly for agricultural producers and MSMEs, is critical to employment generation, productivity gains, and inclusive economic growth. Many MSMEs and agricultural producers in Guatemala struggle to access fi- nancing that meets their needs, constrained by high costs, excessive collateral requirements, rigid product design, and limited consumer protections. Accord- ing to IFC estimates, the MSME financing gap in Guatemala is equivalent to 22 percent of GDP, more than six times the current volume of MSME financing.9 The MSME financing gap in Guatemala is larger than that of several regional peers (such as Costa Rica and Honduras) as well as the regional average. Rural areas in particular have limited access to finance, with many commercial banks viii GUATEMALA  COUNTRY PRIVATE SECTOR DIAGNOSTIC concentrating their operations in the metropolitan area. Indeed, credit to the ag- ricultural sector accounts for less than 5 percent of the banking system´s total portfolio.10 Channeling greater volumes of financing through the formal finan- cial sector requires: documentation and collateral requirements that correspond to the population’s socioeconomic conditions, accelerated decision-making pro- cesses, convenient financing conditions (that is, amount, rate, term, and frequen- cy of payment), long-term certainty of welfare gains from a good credit reputa- tion, and long-term certainty of a sustainable supply of formal-sector financing. Reform efforts and investments are needed to improve access to finance for MS- MEs and agricultural producers. Recent reforms, including new leasing and in- solvency laws, hold promise for improving the enabling environment for access to finance for MSMEs and agricultural producers. However, a more ambitious reform program is needed to address persistent barriers to access to finance, in- cluding to enhance and expand credit and payment infrastructures; further de- velop leasing and electronic factoring products; promote competition and im- proved product design through innovation and financial technology; mitigate risks associated with lending to MSMEs, including via expansion and develop- ment of insurance products; accelerate the digital transformation of cooperatives and microfinance institutions; and strengthen financial consumer protections. Large Infrastructure Gaps Firms in Guatemala face significant infrastructure constraints that hinder them from taking advantage of strategic access to both the Atlantic and the Pacif- ic Oceans. According to the Global Competitiveness Report, Guatemala ranks 114th of 141 countries in terms of transport infrastructure because of poor road connectivity and quality of road infrastructure.11 About 19 percent of firms in Guatemala identified weaknesses in the transportation system as a major con- straint to activity, above the Central America regional average of 16.7 percent.12 Guatemala’s transport connectivity deficiencies and poor-quality transport infra- structure pose major constraints to firms and private sector development more broadly. Guatemala´s transport infrastructure relies mainly on a road network that consists of approximately 28,000 km of registered and nonregistered roads. In relation to the country’s surface area, the density of roads is below average for the Latin American region (15.5 versus 22 km/100 km2).13 This translates into low road network coverage, which limits access to markets and public services, especially in the poorest areas. While Guatemala City enjoys a slightly greater quality of infrastructure, firms located outside the capital experience significant transport constraints. The national port infrastructure also plays an important role in the country’s exports and imports and has seen a significant increase in mobilized volumes, which have risen 77 percent in 15 years to reach 28 million metric tons in 2019.14 However, the country’s two main ports, Puerto Quetzal and Santo Tomás de Castilla, have now reached their capacity and are regular- ly saturated, forcing the country to increasingly use Puerto Cortés, in Honduras. Guatemala also lacks logistics centers designed to support ports, airports, and urban distribution, and the logistical infrastructure is concentrated primarily around the Guatemala City metropolitan area. This limits access to markets in Executive Summary ix rural areas by increasing costs and time associated with logistical inefficiencies, severely undermining the competitiveness of agricultural products, and limiting their export capacity, especially for small-scale producers. Addressing this gap will require more investment in refrigerated-cargo handling, trucker rest stops, logistics centers to reduce transport inefficiencies and bottlenecks, and cold-stor- age infrastructure in port vicinities and near major agricultural production areas. Rural areas also suffer from major gaps in electric, digital, and water infrastruc- ture. Guatemala has a liberalized electricity market, with 86 percent private sec- tor participation in electricity generation.15 However, rural electrification rates remain low: 16.3 percent of the rural population lacks access to electricity, far more than the share of the urban population (3.4 percent).16 Furthermore, ac- cess to digital infrastructure, including computer and internet access, is limited, with accessibility in rural areas lagging that in urban areas and the Guatemala City metropolitan area.17 Water and sanitation services are also deficient: 14.7 percent of the rural population lacked access to improved water services in 2018, compared to 4.6 of their urban counterparts.18 Public investment in infrastructure in Guatemala is low by regional and global standards, averaging 0.6 percent of GDP over 2015–2019 (above only that of Brazil).19 Relatedly, stagnant tax revenues hinder the government’s ability to in- vest more.20 The InfraSAP study emphasized that budget execution in road in- frastructure has increased recently, but there are concerns about the quality of spending.21 The lack of an overall inventory establishing the state and level of damage across the road network is a major knowledge gap limiting the govern- ment’s ability to independently establish priorities for road maintenance.22 The COVID-19 pandemic and natural disasters have reduced public spending on in- frastructure and have damaged or reduced the stock of infrastructure. This pub- lic infrastructure financing constraint further emphasizes the need to foster and enable private sector investment in infrastructure. Weak Governance, Corruption, and Ineffective Dispute Resolution Systems Guatemala’s performance on global indexes of governance quality, econom- ic competitiveness, and public sector integrity has worsened significantly since 2015. The steady weakening of institutions has continued to erode trust in the state: in 2020, about half the population believed that corruption had recently increased, from 40 percent in 2016. A weak contractual and institutional envi- ronment hinders the development of the private sector, slowing job creation and undermining firm-level productivity. A World Enterprise Forum survey identi- fied crime and corruption as the most important challenges to doing business in Guatemala.23 In addition, political fragmentation has contributed to an increas- ingly sluggish and unresponsive legislative process. Furthermore, perceptions of corruption and abuse of power have increased over the last six years, undermin- ing an already weak social contract. Corruption weakens the business and in- vestment climate, and more than 70 percent of firms consider corruption to be a major constraint on growth.24 Recent reports by LAPOP and the World Jus- tice Project indicate that political corruption and undue influence are growing as limits on government powers weaken.25 In addition, the extortion rate has dou- x GUATEMALA  COUNTRY PRIVATE SECTOR DIAGNOSTIC bled in recent years, driven by the growing prevalence of gangs and drug traf- ficking. Crime-related costs are estimated at about 3 percent of annual GDP.26 This weak governance environment poses challenges in attracting FDI in Guate- mala, largely because of the failure to implement a legal system that aligns with international standards. Many of the issues that Guatemala faces in attracting FDI are structural, including a lack of institutions and codes of conduct to en- able juridical certainty for investment. Although Guatemala has created specif- ic institutions to deal with and promote FDI,27 evidence indicates that the heavy bureaucracy has been a deterrent to investment.28 Rent seeking in such an envi- ronment is endemic. Potential investors or their agents are often required to per- sonally visit numerous offices to obtain proper and complete information.29 This becomes extremely burdensome and costly for investors. Alternate dispute resolution (ADR) instruments can be part of the solution to attract FDI. ADR, as a transparency-enhancing tool, can provide mechanisms for accountability and redress, not only for states and investing companies, but also for Guatemalans and Guatemalan firms. Creating new types of contracts for concessions of public goods and commodities, and harnessing the potential of ADR as a way to improve governance, could be an important step in attract- ing FDI and facilitating domestic investment. Identifying Sector-Specific Opportunities The CPSD also identifies sector-specific opportunities to attract private investment over a 3- to 5-year horizon. Prospective investment opportunities were evaluated according to six selection criteria, which assessed their potential to (a) increase economic growth, (b) foster inclusiveness, (c) support climate change mitigation and adaptation, and (d) improve governance, as well as their consistency with (e) Guatemala’s investment attraction strategy and (f) World Bank analytical exper- tise. The CPSD prioritizes investment opportunities that foster inclusive job cre- ation, especially among female workers, as well as those that promote progressive formalization of informal activities. The climate change and environmental im- pacts of prospective opportunities are assessed in terms of forest protection, the reduction of CO2 emissions, and enhanced resilience to weather-related shocks. The selection process also incorporates the feasibility of various measures. Final- ly, the investment opportunities are evaluated in terms of their consistency with the government’s priorities for attracting investment and with the body of anal- ysis underpinning World Bank operations in Guatemala. The selection process is supported by two quantitative tools and a desk review of key World Bank an- alytical work on export competitiveness in Guatemala. Arising from this analysis, two primary sectors of focus are identified: agricul- ture and light manufacturing. These two sectors are priority sectors for the gov- ernment and have significant potential to drive more inclusive development. The agriculture sector, in which Guatemala has a comparative advantage, could boost job creation, especially in rural areas, and exports. Light manufacturing has sig- Executive Summary xi nificant employment generation possibilities, export potential, economic inclu- siveness, and potential to foster innovation. Agriculture The agrifood sector is central to Guatemala’s economic development, employ- ment, and food security. Agricultural production in 2022 made up 10.6 percent of GDP and employed over 2.5 million people, equivalent to 32 percent of all workers.30 Agriculture is also the main source of income in rural areas, employ- ing 70 percent of rural workers and 81 percent of Indigenous workers in rural areas, most of whom are employed in primary agriculture.31 Agricultural exports show significant potential. Exports of nontraditional agri- cultural products, particularly fruits such as papayas, avocados, and berries, have increased and have considerable room to grow. Furthermore, apart from produc- ing and exporting raw material, there are opportunities to increase value add- ed by improving product quality, engaging in additional processing, or develop- ing new commercial uses for traditional and nontraditional products. Improving quality or expanding the portfolio of specialty, organic, fair trade, or environ- mentally friendly products offers new market opportunities for traditional prod- ucts such as coffee, cardamom, and bananas. Increased processing capacity could enable the production of dehydrated or frozen fruits and vegetables. Secondary processing such as making vegetable paste, sauces, canned products, and vege- table chips could also generate opportunities for job creation and diversification. The sector’s competitiveness is constrained by low levels of diversification and sophistication and the limited adoption of new and more productive technolo- gies. In addition to the cross-cutting constraints noted above, agriculture is fur- ther constrained by low and stagnant labor productivity—about one-third of that in services and industry, particularly in rural areas.32 In 2019, 80 percent of the sector’s workers were employed in primary agriculture and the remaining 20 per- cent worked in processing. The sector’s low value added per worker reflects an environment where 90 percent of workers are informal, 80 percent of farms are smallholdings of less than 0.7 hectares, and 60 percent of farmers are engaged in subsistence production with few or no agronomic plans or technical support.33 Postharvest losses present an important constraint. This hindrance is caused by in- sufficient investment in storage and preservation facilities, including cold storage; limited market information; and lack of uptake of improved handling and manage- ment practices. Guatemala loses 20 million tons of food annually, equivalent to 38 percent of total production. These losses correspond to 15 percent of the available agricultural land, 9 percent of the country’s total greenhouse gas emissions, and 4.2 percent of annual GDP.34 In addition, infrastructure constraints noted above and a lack of information about market locations and prices lead to high levels of food loss at the farm level and additional upstream losses along the value chain. Light Manufacturing The manufacturing sector accounts for approximately 20 percent of GDP and shows significant growth potential. Light manufacturing benefits from preferen- xii GUATEMALA  COUNTRY PRIVATE SECTOR DIAGNOSTIC tial trade agreements, proximity to the United States, and recent reforms to im- prove the overall business environment. Guatemala benefits from strong compar- ative advantages in some of its light manufacturing exports, but unfortunately, most of Guatemala’s exports are of low complexity. Manufactured exports have stagnated at around 15 percent of GDP. Most manufacturing activities are con- centrated in the Guatemala City metropolitan area, although some decentral- ization has been enabled by infrastructure improvements and industrial parks in other parts of the country. Importantly, the manufacturing sector has been key in including traditionally marginalized groups in the economy, although it has historically represented only between 12 and 14 percent of the total workforce, which contrasts with close to 30 percent in sectors such as agriculture and retail. However, about 53 percent of workers in manufacturing activities are women and 46 percent of workers identify as Indigenous (Maya, Xinca, or Garífuna), greater proportions than those observed in the rest of the economy. Further developing the light manufacturing sector could help unleash Guatema- la’s growth. Light manufacturing has significant employment generation potential with positive impacts on marginalized and vulnerable groups. While the sector has been pivotal in positioning Guatemala as a strategic actor in regional val- ue chains, there are opportunities for further integration in global value chains. Guatemala is in a unique position to expand its light manufacturing sector, build- ing on government reforms and policy priorities and leveraging the ongoing near- shoring trend. To leverage the country’s geographic advantages, authorities should continue to support initiatives aimed at attracting new investments and retain- ing existing ones. Numerous opportunities present themselves. Fostering the de- velopment of domestic inputs for the light manufacturing sector could enhance Guatemala’s strategic relation to North America and presents growth opportuni- ties for higher-value textile and apparel products. Allowing for flexibility in the minimum wage could help increase the competitiveness of regions beyond Gua- temala City; one way to do so could be to institute different minimum wage cat- egories to reflect the significant differences in productivity across Guatemala’s geography. Alleviating congestion on key trade routes would reinforce Guatema- la’s position as a nearshoring partner. Introducing measures to help firms comply with the tax authority’s requirements would help smaller firms be more produc- tive and competitive. Advancing workers’ skills would help attract new invest- ments in more sophisticated stages of the light manufacturing value chains. The various industrial land regimes could benefit from greater clarity and transpar- ency regarding the regulations governing each area and would support efforts to attract foreign investment in manufacturing amid the ongoing nearshoring trend. Finally, greater banking sector engagement with light manufacturing firms (es- pecially apparel) could help unleash greater growth for the sector. Summary of Key Recommendations Table ES.1 presents a summary of the key recommendations. More-detailed rec- ommendations are included in subsequent sections. Executive Summary xiii TABLE ES.1 Recommendations Challenge Recommendations Implementing Short or medium term agencies LIMITED ACCESS TO FINANCE BY MSMES Weak enabling Implement the leasing law and building MINECO and Short environment for access to capacity of industry to develop and scale association of leasing finance for MSMEs. leasing products. entities Amend the banking law to allow MFIs and SIB, MINECO, Medium cooperatives to access the credit registry, BANGUAT, Junta push forward the draft law on credit bureaus, Monetaria, and and identify the institution that will be Congress responsible for the oversight of credit bureaus. Limited availability of Strengthen the ecosystem for electronic MINECO, SAT, and SIB Short diverse and innovative factoring, including through capacity financial products for building with financial institutions. MSMEs. Enact an activity-based and proportionate SIB, BANGUAT, and Medium legal and regulatory framework to enable Congress the development of fintech, including e-money operators and crowdfunding platforms. INFRASTRUCTURE GAPS Weak regulatory Revisit discussions to introduce changes to Congress Short frameworks and the regulatory framework regarding governance procurement processes and contract types, acquisition of the right of way, and dispute settlement, among others. Little investment in Develop funding arrangements that include MINFIN, MICIVI Medium infrastructure by regional private participation and risk-sharing standards contract modalities such as output- and performance-based road contracts to complement budget resources in line with the needs of the Road Development Plan (2018–2032). Rigid public-private Revise and reform the purchasing power CONADIE, ANADIE, Short to medium partnership framework parity law and related institutional and municipalities framework to create institutional (for licenses) procedures and interinstitutional coordination arrangements that facilitate the purchasing power parity project preparation and approval process (with clear roles).a LEGAL FRAMEWORK, DISPUTE RESOLUTION, AND GOVERNANCE Weak adherence to Strengthen legal units and ADR offices in Procurador General Medium international judicial certain ministries and government de la Nación and norms, bureaucracy around entities so that they can provide sound Congress enforcement, and advice to the public administration on contractual disputes and contractual issues. settlements Consider the creation of specialist courts, or Procurador General Medium a chamber within a court, to deal with FDI de la Nación and issues. Congress Include clauses in contracts that provide Procurador General Medium greater legal certainty, particularly those de la Nación and contracts that may be subject to Congress international FDI standards. (Table continues next page) xiv GUATEMALA  COUNTRY PRIVATE SECTOR DIAGNOSTIC TABLE ES.1 Recommendations (continued) Challenge Recommendations Implementing Short or medium term agencies Allow introduction of ADR mechanisms, Medium including arbitration, for both domestic and FDI-related contracts, and promote negotiation and conciliation as means of conflict resolution. AGRICULTUREb Small farmers lack access Support the integration of small farmers into MAGA and COCODES Medium to profitable markets. cooperatives which can increase farmers’ access to finance, as well as allow them to increase exports and reach new markets by sharing costs of these among small- and medium-scale producers. Low technical capacity Provide training in agricultural and business MAGA, ICTA, AGREQUIMA, Medium weakens export practices and technologies. and academia such as competitiveness. IARNA and CEAA Inadequate infrastructure Promote and implement MAGA’s National MICIVI Short limits production, quality, Policy of Irrigation, to facilitate small transport, and market producers’ access to investment strategies in access. the field. Improve roads throughout the country, with MINECO and Medium special focus on connecting main highways AGEXPORT to production areas. Lack of access to finance Design agricultural insurance products and MAGA Medium hampers productivity schemes for small farmers and extend them growth in the agriculture to biological risks, such as pests and sector. diseases. In addition, encourage private participation in agricultural insurance by addressing provisions or policies on agricultural insurance. Lack of R&D hampers the Identify the potential impact of climate SIB, MAGA, and Short development of adequate change on existing cultivations, and insurance companies vegetative material, pest climate-smart agriculture techniques to control, and compliance mitigate and adapt to such effects. with phytosanitary requirements. Establish long-term agriculture and MAGA, MINECO, and Short agribusiness policies for strategic PRONACOM products, with specific attention to climate change. MAGA Medium Fragile institutional and Enhance regulation and compliance MAGA, OIRSA, and Medium regulatory systems regarding pesticide use in accordance with AGREQUIMA undermine the efficiency export markets and provide alternative and efficacy of public products alongside restrictions. spending and public policy design. LIGHT MANUFACTURING Limited domestic Ensure that the GNSD or a similar public- MINECO, MINFIN Short production of key inputs private dialogue remains in place to attract private investment. Create local supplier development programs MINFIN Short to link local suppliers with foreign investors and existing leading firms in Guatemala. (Table continues next page) Executive Summary xv TABLE ES.1 Recommendations (continued) Challenge Recommendations Implementing Short or medium term agencies Labor costs, due to a high Review and adjust the minimum wage to Ministerio de Trabajo Short minimum wage, are high reflect the significant differences in compared to the productivity across Guatemala’s geography. productivity of the average Guatemalan worker. High logistics and tax Modernize DIPAFRONT’s drug inspections. Ministerio de Medium compliance costs, along Gobernación with delays in international Congreso trade. Introduce uniform criteria that firms can Empresa Puerto Medium follow with regard to purchasing goods at Quetzal discount and coexporting. Insufficient technical skills Organize training for entrepreneurs, MSMEs, SAT Short across the workforce for and university students to help them increasingly sophisticated leverage the electronic invoice system to manufacturing sectors. prepare their own tax returns. Develop worker skills in the electronics INTECAP, MINECO Short sector via makerspaces, technology transfer program, and a program to rent INTECAP machinery to start-ups to help workers develop skills required to build products and prototypes. Long delays to approve Develop clear, transparent, and MINFIN, SAT Short ZDEEP and zonas francas. comprehensive guidelines on the requirements to become a zona franca or a ZDEEP user and developer. Insufficient knowledge of Identify nongovernment risk management MINECO, SIB, Short financial instruments by financial instruments for banks to provide BANGUAT banks in the MSMEs sector. financing options to the light manufacturing subsectors. Note: AGEXPORT = Guatemalan Association of Exporters; AGREQUIMA = Association of Agricultural Chemical Guilds; ANADIE = National Agency of Alliances for the Development of Economic Infrastructure; BANGUAT = Banco de Guatemala; CEAA = Center for Agricultural and Food Studies; COCODES = Consejos Comunitarios de Desarrollo; CONADIE = Consejo Nacional de Alianzas para el Desarrollo de Infraestructura Económica; DIPAFRONT = Division of Ports, Airports and Border Areas; GNSD = Guatemala No Se Detiene; IARNA = Instituto de Agricultura, Recursos Naturales y Ambiente; ICTA = Institute of Agricultural Science and Technology; INTECAP = Instituto Técnico de Capacitación y Productividad; MAGA = Ministry of Agriculture, Livestock and Food; MFIs = microfinance institutions; MICIVI = Ministry of Communications, Infrastructure and Housing; MINECO = Ministry of Economy; MINFIN = Ministry of Finance; PRONACOM = Programa Nacional de Competitividad; R&D = research and development; SAT = Superintendency of Tax Administration; SIB = Superintendency of Banks; ZDEEP = Special Public Economic Development Zones. a. Changes suggested by National Agency of Alliances for the Development of Economic Infrastructure (ANADIE) in its proposal to reform the purchasing power parity law (Decree no. 16-2010) from June 2020 may guide the implementation of this recommendation, although it may require a medium-term horizon. b. Specific crop recommendations are included in section 4.1. Notes 1. World Bank, “Guatemala SCD Update: Building a Stronger Social Contract through Produc- tive, Inclusive and Sustainable Growth” (Systemic Country Diagnostic update, World Bank, Washington, DC, 2022). 2. Data from World Bank national accounts and Organisation for Economic Co-operation and Development (OECD) national accounts data files. 3. The poverty rate is calculated at the international poverty line of US$6.85 per person per day in 2017 purchasing power parity terms. 4. K. Schwab and World Economic Forum, ed., The Global Competitiveness Report 2019 (Co- logne: World Economic Forum, 2019). 5. Hulya Ulku and Gabriel Zaourak, Unleashing Central America’s Growth Potential (Wash- ington, DC: World Bank, 2021), http://hdl.handle.net/10986/35503. 6. Labor market survey data report falling wages; national accounts data report a stable labor share in GDP. xvi GUATEMALA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 7. World Bank, “Enterprise Surveys,” (Washington, DC: World Bank, 2017), https://www.en- terprisesurveys.org/; Schwab, Global Competitiveness Report. 8. World Bank, “Guatemala: Policies for Business Recovery, Jobs and Economic Transfor- mation” (Washington, DC: World Bank, 2021). http://documents.worldbank.org/curated/ en/099800512082125310/P172557045791502b0ab0c03eaa078408cc. 9. IFC , MSME Finance GAP Database, updated 2018. Online: https://www.smefinancefo- rum.org/data-sites/msme-finance-gap. 10. SIB (Superintendency of Banks), 2022. 11. Schwab, Global Competitiveness Report. 12. The latest data for Guatemala were released in 2017. The Central America regional average is a simple average, constructed with data from 2016 for the following countries: the Domin- ican Republic, El Salvador, Honduras, and Nicaragua. Costa Rica and Panama were not in- cluded in the regional average, as their data date back to 2010. 13. IDB (Inter-American Development Bank), “Guatemala to Improve and Rehabilitate the Na- tional Road Network with IDB Support,” news release, February 7, 2019, https://www.iadb. org/en/news/guatemala-improve-and-rehabilitate-national-road-network-idb-support#:~:tex- t=Despite%20this%20high%20traffic%2C%20the,of%20operation%20and%20transit%20 times. 14. InfraSAP Guatemala (Guatemala Transport Infrastructure Sector Assessment Program), “Im- proving Transport Connectivity” (Washington, DC: World Bank, 2017). 15. Plaza Publica, https://www.plazapublica.com.gt/content/el-olvido-de-pigmalion-otra- forma-mas-justa-de-tarifar-el-vad. 16. de la Fuente and Gomez, Rural Electrification Analysis Paper, forthcoming. 17. Data from Instituto Nacional de Estadísticas, 2019. 18. de la Fuente and Gomez, forthcoming. 19. Data from INFRALATAM. 20. Tax revenue fell slightly from 11.1 percent of GDP in 2013 to 10.5 percent in 2019; World Bank, “Indicators,” http://data.worldbank.org/indicator. 21. World Bank, Guatemala Transport InfraSAP, key findings and recommendations, 2022. 22. Carlos Kestler, “Conectividad Rota: Causas y Soluciones para Una Red Vial casi en Abandon,” Prensa Libre (June 22, 2022), https://www.prensalibre.com/pl-plus/guatemala/comunitario/ conectividad-rota-causas-y-soluciones-para-una-red-vial-casi-en-abandono/?utm_source=pock- et_mylist. 23. World Economic Forum, 2017. 24. Data from World Bank, 2017. 25. LAPOP (Latin American Public Opinion Project), World Justice Project, 2021. 26. Laura Jaitman, ed., The Costs of Crime and Violence (Washington, DC: Inter-American De- velopment Bank, 2017). 27. See, for example, Programa Nacional de Competividad de Guatemala (PRONACOM), https:// www.pronacom.org/sobre-pronacom/. 28. Benjamin Roseth et al, “El fin del tramite eterno” (Banco Interamericano de Desarrollo, 2018). 29. Roseth et al., “El fin del tramite eterno,” 126. 30. Bank of Guatemala, 2022. 31. Verónica Zavala et al., “BIDeconomics Guatemala: Crecer Más y para Todos” (Washington, DC: Inter-American Development Bank, 2019), http://dx.doi.org/10.18235/0001708. 32. World Bank, “Guatemala: Food Smart Country Diagnostic” (Washington, DC: Inter-Amer- ican Development Bank, 2021). 33. Zavala et al., “BIDeconomics.” 34. Zavala et al., “BIDeconomics.” xvii ABBREVIATIONS AND ACRONYMS ADR alternate dispute resolution AGEXPORT Asociación de Exportadores de Guatemala; Guatemalan Association of Exporters AGREQUIMA Asociación del Gremio Químico Agrícola; Association of Agricultural Chemical Guilds ANADIE Agencia Nacional de Alianzas de Desarrollo de Infraestructura Económica; National Agency of Alliances for the Development of Economic Infrastructure APHIS Animal and Plant Health Inspection Service BANGUAT Banco de Guatemala; Bank of Guatemala BPO business process outsourcing CAFTA-DR Dominican Republic–Central America Free Trade Agreement CARDEGUA Association of Cardamom Producers of Guatemala CATIE Centro Agronómico Tropical de Investigación y Enseñanza; Tropical Agricultural Research and Higher Education Center CBI Caribbean Basin Initiative CEAA Centro de Estudios Agrícolas y Alimentarios; Center for Agricultural and Food Studies CEPAL Comisión Económica para América Latina y el Caribe; Economic Commission for Latin America COCODES Consejos Comunitarios de Desarrollo; Community Urban and Rural Development Councils CONADIE Consejo Nacional de Alianzas para el Desarrollo de Infraestructura Económica; National Council of Alliances for the Development of Economic Infrastructure COVIAL Unidad Ejecutora de Conservación Vial; Road Conservation Executing Unit COVID-19 coronavirus disease of 2019 CPSD Country Private Sector Diagnostic DIPAFRONT División de Puertos Aeropuertos y Puestos Fronterizos; Division of Ports, Airports and Border Areas EU European Union FAO Food and Agriculture Organization of the United Nations FDI foreign direct investment FEDECOVERA Federation of Cooperatives of the Verapaces; Federation of Cooperatives of the Verapaces xviii FENACOAC Federación Nacional de Cooperativas de Ahorro y Crédito; Federation of Savings and Credit Cooperatives of Guatemala FSAP Financial Sector Assessment Program FUNDESA Fundación para el Desarrollo de Guatemala; Foundation for the Development of Guatemala GDP gross domestic product GNSD Guatemala No Se Detiene; Guatemala Moving Forward Initiative IARNA Instituto de Agricultura, Recursos Naturales y Ambiente; Institute of Agriculture, Natural Resources and the Environment ICTA Instituto de Ciencia y Tecnología Agrícolas; Institute of Agricultural Science and Technology IFC International Finance Corporation ILO International Labor Organization INE Instituto Nacional de Estadísticas; National Statistics Institute InfraSAP Guatemala Transport Infrastructure Sector Assessment Program INTECAP Instituto Técnico de Capacitación y Productividad; Technical Institute of Training and Productivity ISO International Organization for Standardization LAPOP Latin American Public Opinion Project MAGA Ministerio de Agricultura, Ganadería y Alimentación; Ministry of Agriculture, Livestock and Food MARN Ministerio de Ambiente y Recursos Naturales; Ministry of Environment and Natural Resources of Guatemala MICIVI Ministerio de Comunicaciones Infraestructura y Vivienda; Ministry of Communications, Infrastructure and Housing MICOOPE Cooperativas de Ahorro y Crédito; Savings and Credit Cooperatives MINECO Ministerio de Economía; Ministry of Economy MINEX Ministerio de Relaciones Exteriores; Ministry of Foreign Affairs of Guatemala MINFIN Ministerio de Finanzas Públicas; Ministry of Finance MSMEs micro, small, and medium enterprises NFIS National Financial Inclusion Strategy OECD Organisation for Economic Co-operation and Development OIRSA Organismo Internacional Regional de Sanidad Agropecuaria; International Regional Organization for Animal and Plant Health OPRCs output- and performance-based road contracts PIPAA Integral Program of Agricultural and Environmental Protection PPP public-private partnership Abbreviations And Acronyms xix PRONACOM Programa Nacional de Competitividad; National Competitiveness Program R&D research and development SAR special administrative region SAT Superintendency of Tax Administration SCD Systematic Country Diagnostic SEGEPLAN Secretaría de Planificación y Programación de la Presidencia; Planning and Programming Secretariat of the Presidency of Guatemala SENACYT Secretaría Nacional de Ciencia y Tecnología; National Secretariat of Science and Technology SEZs special economic zones SIB Superintendencia de Bancos; Superintendency of Banks SIECA Sistema de la Integración Centroamericana; Secretariat for the Economic Integration of Central America SIVIAL Superintendencia de Infraestructura Vial; Superintendence of Road Infrastructure USDA United States Department of Agriculture VAS Vía Alterna del Sur VAT value added tax ZDEEP zonas de desarrollo económico especial pública; special public economic development zones ZOLIC zona de libre comercio; free trade zone for industry and commerce xx GUATEMALA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 1 INTRODUCTION AND COUNTRY CONTEXT 2 GUATEMALA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 1.1 Modest Economic Growth and High Levels of Poverty and Inequality Guatemala is the largest economy in Central America, with a population of 17 mil- lion, but with a poverty rate of 56 percent (US$6.85 per day at 2017 purchasing power parity) and a per capita gross domestic product (GDP) of US$5,341 in 2022, it is among the poorest in Latin America and the Caribbean. Despite sound macro- economic policies, Guatemala continues to struggle with modest rates of econom- ic growth and high levels of poverty and inequality. Guatemala has experienced a modest but steady economic expansion since the late 1990s. Between 2000 and 2019, annual GDP growth averaged 3.5 percent amid tight fiscal and monetary manage- ment, but improvements in poverty and social development indicators were slow and uneven. Emigration, primarily to the United States, has increased in recent years, boosting remittance inflows, but migration and remittances are not a durable mod- el for long-term growth. Domestic job creation remains a critical policy objective. The government has long maintained a prudent macroeconomic stance and had experienced a prolonged period of macroeconomic stability and growth prior to the COVID-19 pandemic. In the decade prior to the pandemic, real GDP growth averaged 3.5 percent (figure 1.1), while per capita GDP grew at approximately 1.8 percent annually. This performance was underpinned by prudent fiscal management and credible monetary policy and propelled by private consumption supported by remittances inflows. Nevertheless, growth has been below that of structural and aspirational peers,1 all of which outperformed Guatemala, except for Serbia (fig- ure 1.2). In addition, growth was not sufficient to narrow the income gap with the United States: real GDP per capita has remained around 7 percent of US GDP per FIGURE 1.1 FIGURE 1.2 GDP Growth in Guatemala Average GDP Growth in Peer Nations, 2010–19 10 Average (2000–19) Dominican Republic 5.6 8 Sri Lanka 5.3 Georgia 4.9 6 Senegal 4.8 4 Peru 4.5 Percent Paraguay 4.3 2 Honduras 3.7 0 Guatemala 3.5 Latin America and the 2.3 Caribbean average −2 Serbia 1.9 −4 0 1 2 3 4 5 6 7 2000 2005 2010 2015 2020 Percent Source: Central Bank of Guatemala. Source: World Development Indicators. 1  INTRODUCTION AND COUNTRY CONTEXT 3 capita since 2010. Service sectors were the main drivers of growth during this pe- riod. Wholesale and retail contributed 0.6 percentage points to the annual growth rate; finance, insurance, and real estate also contributed 0.6 percentage points, fol- lowed by manufacturing, which contributed 0.5 percentage points. Guatemala suffered one of Latin America and the Caribbean’s smallest COVID-19-re- lated GDP contractions in 2020 and returned to prepandemic growth levels in 2021. The administration’s swift response to the crisis, including the suspension of nonessential activities, mobility restrictions, and fiscal expansion of 2.7 per- cent of GDP to support households and firms, resulted in a real GDP contraction of only 1.8 percent in 2020 (table 1.1). The recovery in economic activity during 2021 was fast, with growth estimated to have reached 8.0 percent, supported by an increase in remittances of around 35.0 percent resulting from the US labor market rebound. Private consumption is estimated to have been the main driver of growth, contributing 8.4 percentage points to growth, while investment is es- timated to have contributed 3.9 percentage points. The increase in domestic de- mand boosted goods imports, which outpaced export growth (which contribut- ed −5.0 percentage points to growth). Tight fiscal and monetary policies sterilized rising remittances. Remittances in- creased from an average of 10.0 percent of GDP during the first half of the 2010s to 17.7 percent in 2021, a record high. The current account balance turned positive in 2016, with the surplus growing to over 5 percent of GDP in 2020, while the financial account also showed a surplus as foreign direct investment (FDI) and portfolio investment inflows were larger than capital outflows. Foreign exchange interventions stabilized the exchange rate, and international reserves increased from US$7.8 billion at the end of 2015 to US$20.9 billion (24 per- cent of GDP) at the end of 2021. Inflation averaged 4 percent over the past 10 years, thanks to the gradual implementation of an inflation-targeting regime by the Central Bank. Fiscal policy bolstered aggregate demand, and the deficit rose from a low of 1.1 percent of GDP in 2016 to 2.2 percent in 2019 and reached 4.9 percent during the pandemic in 2020 before declining sharply to 1.2 percent in 2021. Fiscal revenues remained low as tax revenues declined from 11.0 per- cent of GDP in 2010 to 10.6 percent in 2019. Despite the increase of the tax rev- enue-to-GDP ratio to 12.3 percent of GDP in the wake of the postpandemic re- covery and implementation of tax administration reforms, this ratio remains the second lowest in the region, above only that of Haiti. The public-debt-to-GDP ratio rose from an average of 25.0 percent in the 2010s to 30.8 percent at the end of 2021, still among the lowest in the Latin America and Caribbean region. Despite stable economic growth, there has been little progress in reducing pov- erty or inequality since 2000. Guatemala has one of the highest rates of social and economic exclusion in the region. Contrary to regional and global trends, the poverty rate increased from 45.0 percent in 2000 to 49.1 percent in 2014 (US$5.50 per day in 2011 purchasing power parity). The poverty rate is estimat- ed to have decreased to 47.8 percent in 2019, which is still above the 2000 level. While the impact of the pandemic increased poverty to an estimated 52 percent in 2020, this increase could have been two to three times greater without the government’s policy response targeting the poor. The country is characterized by chronic child malnutrition: stunting affects almost half of all children, particularly 4 GUATEMALA  COUNTRY PRIVATE SECTOR DIAGNOSTIC TABLE 1.1 Key Macroeconomic Indicators 2018 2019 2020 2021 2022 REAL ECONOMY % CHANGE Nominal GDP in local currency 4.7 7.7 0.9 11.0 7.9 Real GDP 3.4 4.0 −1.8 8.0 4.1 Contributions of: Consumption 3.9 4.4 −1.1 8.4 4.4 Investment 0.8 1.1 −1.1 3.9 0.6 Exports −0.1 0.0 −1.6 2.2 1.2 Imports −1.3 −1.7 1.9 −7.2 −2.4 Imports 3.9 5.0 −5.7 22.1 6.5 Exports −0.4 0.2 −7.7 11.7 6.3 Consumer price index (eop) 2.3 3.4 4.8 3.1 9.2 FISCAL ACCOUNTS AS % OF GDP (central government) Expenditures 13.2 13.4 15.6 13.5 14.7 Revenues 11.3 11.2 10.7 12.4 13.0 Primary balance −0.3 −0.6 −3.2 0.5 −0.1 Overall balance −1.9 −2.2 −4.9 −1.2 −1.8 Central government gross debt 26.5 26.5 31.6 30.8 30.9 Public external debt 11.5 11.8 13.6 12.9 12.3 BALANCE OF PAYMENTS AS % OF GDP (unless otherwise indicated) Current account balance 0.9 2.4 5.1 2.5 1.1 Imports 28.9 27.9 25.1 32.0 37.8 Exports 18.2 17.6 16.5 17.8 20.1 FDI, net 1.1 1.0 1.0 3.8 1.3 Remittance inflows 12.7 13.7 14.7 17.7 19.4 Gross reserves In billion US$ (eop) 12.8 14.8 18.5 20.9 20.0 As % of GDP 17.4 19.2 24.0 24.3 23.8 Exchange rate to US$ (average) 7.5 7.7 7.7 7.7 7.8 MEMORANDUM ITEM Nominal GDP (in billion US$) 73.3 77.2 76.9 86.2 92.7 Sources: World Bank and International Monetary Fund. Note: FDI = foreign direct investment; GDP = gross domestic product; eop = end-of-period. among Indigenous Peoples and those living in rural areas. Human capital indicators are like those of much poorer countries: curbed productivity and growth potential. Guatemala’s capacity to improve human capital and social development outcomes is constrained by its weak institutions and low domestic revenue mobilization. Despite weak investment, GDP growth has been driven primarily by factor accu- mulation rather than increased productivity. Investment has been below that of its peers and other Central American countries for the past two decades. In ad- dition, the gap has been growing as the share of investment over GDP declined, whereas in peer countries the share increased (figure 1.3). Low revenue mobili- zation has translated into low levels of public investment and poor infrastruc- 1  INTRODUCTION AND COUNTRY CONTEXT 5 FIGURE 1.3 Gross Fixed Capital Formation, 2000–22 Aspirational Structural Central America average Latin America and the Guatemala peers peers (excluding Guatemala) Caribbean average 30 25.4 25.4 25 22.7 22.1 20.0 20.5 20.0 20 19.2 16.8 16.1 % of GDP 15 10 5 0 2000 2022 2000 2022 2000 2022 2000 2022 2000 2022 Source: World Development Indicators. Note: Structural peers include Honduras, Paraguay, Peru, and Senegal, while aspirational peers include the Dominican Republic, Georgia, Serbia, and Sri Lanka. ture, hindering the private sector and affecting productivity growth. Demographic changes have swelled the size of the working-age population, and recent growth has been driven by a growing labor force supported by a modest degree of human and physical capital accumulation (figure 1.4). Meanwhile, the contribution of total factor productivity turned negative over 2010–19, undermining per capita income growth and slowing Guatemala’s convergence with the United States and other Organization for Economic Cooperation and Development (OECD) countries. FIGURE 1.4 Growth Accounting, 2000–19 4.0 3.7 3.6 3.5 3.5 3.1 3.0 1.8 2.2 2.2 2.5 2.0 Percent 2.0 1.5 0.9 0.8 0.8 1.0 1.2 1.1 0.5 0.7 0.7 0.0 −0.2 −0.05 - −0.1 −0.1 −0.5 2000–04 2005–09 2010–14 2015–19 Real GDP growth Capital Human capital Average Labor Total factor productivity Source: World Bank staff calculations based on Banco de Guatemala (Banguat) data and Penn World Table 10.0. 6 GUATEMALA  COUNTRY PRIVATE SECTOR DIAGNOSTIC Emigration, primarily to the United States, has long helped ease demographic pressure on the domestic labor market, and remittances are an increasingly vital component of demand and foreign exchange, though they have reduced the la- bor supply in the country. Between 2015 and 2020,2 the number of Guatemalans residing abroad rose by 20 percent to a peak of 1.36 million.3 Migration has been linked to low living standards, a lack of economic opportunities, extreme weath- er events such as droughts and hurricanes, food insecurity, and violence.4 Emigra- tion and related remittance inflows have helped insulate domestic demand from economic shocks, including the effects of the COVID-19 pandemic, but uncertainty around US immigration policy poses a major exogenous risk to emigration and remittances. Migrant outflows underscore the need to accelerate the creation of higher-quality jobs in the domestic labor market and to improve the employment prospects of young people and workers from vulnerable households. 1.2 Low Productivity, FDI, and Export Growth Low productivity growth has translated into declining exports and a lack of in- vestment opportunities to attract FDI inflows. Merchandise exports as a share of GDP declined to 13 percent in 2020 after peaking at 22 percent in 2004. Total exports have been around half of the Central American average since 2010 (fig- ure 1.5). This decreasing trend contrasts with those of peers which have main- tained exports as share of GDP constant, especially with aspirational peers that have increased exports almost 10 percentage points over 10 years. In addition, despite market access to the United States, FDI inflows have also experienced a declining trend since 2013, from a peak of 2.7 percent of GDP to 1.0 percent of GDP in 2019. Subsequently, amid the strong recovery in the United States and the increased global demand for goods, FDI reached a record high of 3.8 per- FIGURE 1.5 Exports as Percent of GDP, 2010–20 Central America average Aspirational Structural (excluding Guatemala) peers peers Guatemala 50 41.3 40.0 40 38.5 33.0 32.5 % of GDP 30 26.6 20.2 20 19.0 10 2000 2022 2000 2022 2000 2022 2000 2022 Sources: World Development Indicators and Macro Poverty Outlook, Spring Meetings 2022. 1  INTRODUCTION AND COUNTRY CONTEXT 7 cent of GDP, though this was largely because of the acquisition of a domestic telecommunications firm by its partner firm for US$2.2 billion. The decline in exports as a share of GDP was accompanied by a decrease in the complexity of the export basket, which is concentrated in low-value-add- ed products. Commodities remained competitive, and exports are increasingly dominated by agricultural goods (bananas, sugar, coffee, and cardamom) and other low-complexity products (figure 1.6), while more-complex export-orient- ed products, such as chemicals, textiles, and apparel, have stagnated.5 Between 2010 and 2019, Guatemala’s export complexity ranking fell from 77th to 79th of 133 countries.6 A heavy dependence on commodity exports renders the econ- omy vulnerable to exogenous shocks ranging from adverse weather conditions to global price volatility, while also limiting the gains from trade. FIGURE 1.6 Main Export Products, 2010–21 40 3.9 2.9 35 5.9 2.8 9.0 5.8 3.4 3.1 4.7 30 3.0 2.5 8.6 3.2 2.9 7.7 6.2 2.5 25 Share in total exports (%) 2.8 2.6 7.8 3.1 6.4 9.3 2.9 2.7 8.7 7.9 3.4 2.8 20 8.9 7.2 4.6 4.4 5.2 3.0 3.5 5.2 5.5 5.6 4.7 3.6 15 4.8 3.6 3.7 3.7 4.6 3.1 3.6 9.5 6.1 10 10.5 7.1 6.2 6.1 5.5 5.3 5.1 6.1 6.1 8.4 5 8.0 7.3 7.5 7.5 6.5 6.6 7.2 7.2 6.1 6.1 4.6 4.7 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Bananas Garments and clothing of cotton Co ee Sugars Palm oil Lead ores Nutmeg, mace, and cardamom Ores of precious metals Ferroalloys Petroleum oils Jerseys, pullovers, etc. Natural rubber latex Refined sugars Source: United Nations Commodity Trade Statistics Database (UN-COMTRADE; Standard International Trade Classification Rev2). 8 GUATEMALA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 1.3 Vulnerability to Climate Change Guatemala is vulnerable to the long-term effects of climate change and unsus- tainable resource use. Guatemala’s forests cover 38.67 percent of its land area, serving as a carbon sink while providing crucial ecosystem services.7 Neverthe- less, the country is susceptible to the effects of climate change, including extreme weather events such as cyclones, heat waves, landslides, and floods, which can se- verely reduce agricultural production and damage critical infrastructure. In 2020, Hurricanes Eta and Iota caused extensive flooding and dozens of landslides and mudflows that affected 16 of Guatemala’s 22 departments, with damages and losses close to 1 percent of GDP.8 The most vulnerable groups are also the most exposed to disaster-related shocks, which contributes to school dropout rates, child labor, and household poverty, increasing social exclusion and encouraging emigration. Adapting to climate change will require significant public and pri- vate investment, while net carbon emissions can be limited through the protec- tion and sustainable use of the country’s vast forests.9 Notes 1. Structural peers include Honduras, Paraguay, Peru, and Senegal, while aspirational peers in- clude the Dominican Republic, Georgia, Serbia, and Sri Lanka. 2. Peter J. Meyer, “Central American Migration: Root Causes and US Policy (IF11151),” in Rise in US Immigrants from El Salvador, Guatemala and Honduras Outpaces Growth from Else- where (Washington, DC: Congressional Research Service [CRS]), retrieved April 22, 2021, from https://sgp.fas.org/crs/row/IF11151.pdf. 3. United Nations Department of Economic and Social Affairs (UN-DESA), 2022, retrieved from https://www.un.org/en/development/desa/population/migration/data/index.asp. 4. Aguilera, Anna I., et al., Migration in El Salvador, Honduras, and Guatemala: A Stock- taking Exercise to Inform WBG Engagement (Washington, DC: World Bank Group [forth- coming]); Ariel Ruiz Soto et al., Charting a New Regional Course of Action: The Complex Motivations and Costs of Central American Migration (Washington, DC: Inter-American Development Bank, 2021). 5. UN-COMTRADE database, trade data, https://comtrade.un.org/. 6. CID’s “Atlas of Economic Complexity” https://atlas.cid.harvard.edu. 7. Ministry of Environment and Natural Resources, “National Strategy for the Approach of De- forestation and Degradation of Forests in Guatemala (ENDDBG)” (preliminary document, Inter-American Development Bank and Forest Carbon Partnership Facility, 2021). 8. World Bank estimation based on event-specific damage and loss assessments from the Eco- nomic Commission for Latin America and the Caribbean and post-disaster needs assessments (PDNA) from the World Bank, the UN, and the European Union (EU). 9. Climate Investment Fund, “Forestry Investment Plan for Guatemala” (presentation, 18th Meeting of the FIP Sub-Committee [FIP/SC.18] Forest Investment Program [FIP], Washing- ton, DC, June 9, 2017). 2 THE STATE OF THE PRIVATE SECTOR 9 10 GUATEMALA  COUNTRY PRIVATE SECTOR DIAGNOSTIC Domestic demand-driven growth has fueled development of both a modern for- mal sector and a large, traditional informal sector. In Guatemala, a small but rel- atively sophisticated formal private sector coexists alongside a large, low-pro- ductivity informal sector that provides livelihoods for some 75 percent of the population. Formal firms have greater productivity than their informal counter- parts and pay their employees an average of 2.4 times as much.1 Most formal firms operate in the real estate (32 percent), retail and wholesale commerce (29 percent), and private services (20 percent) sectors, but a small number of formal firms also dominate the manufacturing sector. In addition, most formal workers are concentrated in these sectors; manufacturing employs 16.6 percent of formal employees, and wholesale and retail employ 16.2 percent. In contrast, around 95 percent of workers in agriculture and other primary activities are informally em- ployed, and these sectors engage almost half of all informal workers (43 percent).2 Services firms in Guatemala are smaller and on average tend to export less than manufacturing businesses, though firms in all sectors have worsened their ex- port performance since 2010. According to a World Bank Enterprise Survey,3 ser- vices firms had on average 28.8 employees while manufacturing firms had 57.0 employees in 2017. In addition, companies in both sectors became smaller, ser- vices and manufacturing firms having had 58.5 and 81.1 employees on average, respectively, in 2010. What’s more, services firms tend to export less: 16.1 per- cent of manufacturing firms exported (directly or indirectly) 10 percent or more of their sales, whereas only 8.2 percent of services firms had done so in 2017. Once again, the proportion of exporting firms decreased from 2010, when 27.4 percent of manufacturing businesses were exporting more than 10.0 percent of their sales and 10.9 percent of service sector firms were doing so. Furthermore, between 2004 and 2018, hourly labor earnings declined across almost all eco- nomic sectors, apart from mining. Wages in construction, retail, and finance and business services declined more than 30 percent.4 Hence, not only has the shift to the service sector affected overall productivity, but also firms across the board have become smaller, enjoyed less market access, and paid lower wages. 2.1 High Level of Informality Since 2014, employment opportunities in the formal sector have plateaued, and the country’s growing labor force has relied increasingly on self-employment and informality, leading to a decline in average income. The number of con- tract-based jobs (formal employment) increased from about 0.9 million in 2010 to 1.45 million in 2014.5 Since then, contract employment has remained broad- ly unchanged, while the labor force has increased from 3.8 to 4.5 million work- ers (figure 2.1). Thus, the informal sector has grown considerably, with nearly all net new workers entering the informal sector, with about half of new labor force entrants being self-employed in the informal sector. Guatemala’s large in- formal sector accounts for an average of 46 to 48 percent of GDP and provides 80 percent of total employment.5 As the supply of workers seeking formal jobs rose while demand for jobs stagnated, wages fell by more than 10 percent during 2014–19, continuing a longer-term pattern.6 This high level of informality is re- flective of a business-enabling environment with significant constraints to the formation and growth of formal business. 2  THE STATE OF THE PRIVATE SECTOR 11 FIGURE 2.1 Self-Employment and Informality, 2004–19 3.0 Number of workers (millions) 2.5 2.0 1.5 1.0 0.5 2004 2010 2014 2018 Wage employees w/ contract Wage employees w/o contract Self-employed Source: Andreas Eberhard-Ruiz, “Guatemala Jobs Diagnostic” (Job Series 27, Washington, DC: World Bank, 2021), https:// openknowledge.worldbank.org/handle/10986/35367. Informality, partially a function of barriers to entry in the formal sector, has been identified as a business constraint by formal enterprises. Informality is associated with low productivity and low wages and is the result of numerous constraints to firm growth and technological adaptation, and of low levels of investment. It also is a sign of firms’ capacity to access financial services and innovate and it lim- its government tax revenues. Unfortunately, this environment has not improved over recent years and continues to limit entry into formal firms and to limit for- mal private sector competition. Nonetheless, the percentage of firms that declared that they have been competing with informal firms increased almost 12 percent- age points since 2006, to over 75 percent in 2017, which is above the regional average, with an increasing proportion of firms identifying informality as a ma- jor constraint (figure 2.2). From 2006 to 2017, the percentage of firms stating that competition from informal firms was a major constraint increased from 34.6 to 48.3 percent, almost double the regional average of 27.1 percent (figure 2.2). FIGURE 2.2 Informal Firms Identified as a Major Constraint, 2006–17 % of firms competing % of firms identifying practices against unregistered or of competitors in the informal informal firms sector as a major constraint 90 80 70 60 Percent 50 40 30 20 10 0 2006 2010 2017 2017 2006 2010 2017 2017 Guatemala Latin America and the Caribbean average (2017) Source: World Bank Enterprise Surveys. 12 GUATEMALA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 2.2 Low or Stagnant Labor Productivity Overall productivity has declined, even with the shift away from low-productiv- ity agriculture. The fastest-growing sector is low-productivity services—whole- sale and retail, food services, and accommodation—sectors in which productiv- ity has declined since 2010 (figure 2.3). In addition, the share of services in total value added has increased, whereas the shares of agriculture and industry de- creased (figure 2.4). Overall, the economic transition and sectoral transformation have not moved workers into higher-productivity activities. Manufacturing firms whose productivity has increased have reduced their share in total employment. Formal firms in Guatemala suffer from low levels of dynamism and innovation, which constrain their development and competitiveness. In the 2019 Global Com- petitiveness Report, Guatemala ranked 96th of 141 countries in business dyna- mism and 98th in innovation capability.7 The concentration of firms in the cap- ital, Guatemala City, has led to increasing congestion and elevated land prices, limiting competitiveness. Due to low rates of firm entry, the average firm age increased from 17.5 to 28.5 years between 2006 and 2017, one of the oldest age structures globally.8 Rates of firm entry are also affected by the lack of an- titrust regulation or a competition law in the country, which creates barriers to entry for new firms, affects competitiveness, and diminishes the country’s poten- tial to participate in investment markets.9 The lack of dynamism is also reflect- ed in firms’ reluctance to grow their workforce in response to rising sales. Sim- ilarly, firms face an adverse innovation environment, as evidenced by the small and decreasing share of firms that report spending on research and development (R&D) (15.5 percent) or process innovation (37 percent).10 FIGURE 2.3 Structural Transformation, 2010–19 Utilities 2 Financial intermediation, real estate Sectoral productivity/aggregate productivity, 2019 Mining 1 Transport, storage, and communications Public administration Manufacturing 0 Education and health Construction Wholesale, restaurants, and hotels −1 Agriculture −4 −2 0 2 4 Change in employment shares, 2010–19 (%) Source: World Bank staff using data from Bank of Guatemala (Banguat) and the International Labor Organization (ILO). Note: The size of the bubbles represents the share of employment. 2  THE STATE OF THE PRIVATE SECTOR 13 FIGURE 2.4 Gross Value Added by Sector, 2010–20 30 64 63 Agriculture and industry share (%) 25 62 Services share (%) 20 61 15 60 59 10 58 5 57 0 56 2010 2015 2020 2022 Agriculture Industry Services Source: World Development Indicators. Achieving Guatemala’s development aspirations will require shifting to a more inclusive, productive, and sustainable development model. Investing in human capital, particularly among poor and marginalized groups, will be vital to max- imize the productive potential of Guatemala’s population, while an increasingly decentralized, accountable, and transparent government is required to ensure an adequate supply of basic services, increasingly respond to the needs of citizens, and provide incentives to young Guatemalans to stay in the country. Howev- er, Guatemala continues to face enormous challenges in these areas, and an ac- celerating demographic transition underscores the urgency of creating adequate job opportunities for a young and rapidly growing workforce. Private sector de- velopment will be key to facilitating necessary job growth and employment cre- ation, as well as to generating resources for strengthened human capital devel- opment and the delivery of social services. Notes 1. Andreas Eberhard-Ruiz, “Guatemala Jobs Diagnostic” (Job Series 27, Washington, DC: World Bank, 2021), https://openknowledge.worldbank.org/handle/10986/35367. 2. ILO-STATISTICS estimations based on Guatemala’s Labor Survey (2015–19 average). 3. World Bank Enterprise Surveys, http://www.enterprisesurveys.org. 4. Eberhard-Ruiz, “Guatemala Jobs.” 5. Hulya Ulku and Gabriel Zaourak, Unleashing Central America’s Growth Potential (Wash- ington, DC: World Bank, 2021), http://hdl.handle.net/10986/35503. 6. Labor market survey data indicate falling wages; national accounts data show a stable labor share in GDP. 7. Klaus Schwab and World Economic Forum, ed., The Global Competitiveness Report 2019 (Geneva: World Economic Forum, 2019). 8. World Bank Enterprise Surveys. 9. García Mancilla, Claudia, “Ley de la competencia ideal según los principios de la Economía Social de Mercado y Caso Guatemala” (Ciudad de Guatemala: Asociación de Investigación y Estudios Sociales [ASIES], 2015), http://www.asies.org.gt/download.php?get=2015,revis- ta_4.pdf. 10. World Bank Enterprise Surveys. 3 CROSS-CUTTING CONSTRAINTS TO PRIVATE SECTOR DEVELOPMENT 3  CROSS-CUTTING CONSTRAINTS TO PRIVATE SECTOR DEVELOPMENT 15 Private firms in Guatemala face a challenging business climate that impedes their growth and development. The World Bank’s 2017 Enterprise Survey and the World Economic Forum’s annual Global Competitiveness Report highlighted the adverse impact on the private sector of political instability, corruption, crime, an inefficient government bureaucracy, and asymmetrical competition from the large informal sector.1 A forthcoming World Bank report on policies for business recovery in Guatemala has found that deficiencies in the regulatory environment limit the entry, growth, and competitiveness of formal firms.2 High administra- tive costs, weak rule of law, time-consuming and costly contract enforcement processes, and cumbersome insolvency procedures are among the major obsta- cles facing Guatemalan firms. Uncertainty arising from the legal system’s unpre- dictability, bureaucracy, and limited capacity for dispute settlement presents sig- nificant challenges for firm operations.3 This section examines the three main cross-cutting constraints to private sector development: (a) limited access to finance by micro, small, and medium enter- prises (MSMEs); (b) large infrastructure gaps; and (c) weak governance (corrup- tion), legal framework, and dispute resolution systems. These are long-standing issues in Guatemala; there is consensus among both the authorities and the pri- vate sector that these are the primary binding constraints. Firms cite corruption, political instability, and competition from the informal sector as the most sig- nificant barriers to growth. Over 21 percent of firms identified corruption and political instability as the top business environment obstacles for firms, and 17 percent noted the informal sector as the biggest obstacle. A total of 13 percent of firms cite access to finance as a major constraint to growth, with 5 percent identifying it as the biggest obstacle. Infrastructure constraints also loom large, as 19 percent of firms in Guatemala pointed to weaknesses in the transporta- tion system as a major constraint to activity and 3.7 percent cited this issue as their biggest constraint. 3.1 Limited Access to Finance by MSMEs Access to finance, particularly for MSMEs, is critical to employment genera- tion, productivity gains, and inclusive economic growth. Unfortunately, Gua- temala’s underdeveloped financial sector hinders the ability of MSMEs to ex- pand their operations. A well-developed, deep, efficient, and inclusive financial sector is necessary to steer financial resources toward their optimal use and to drive growth and productivity in the real economy. Yet MSMEs in Guatemala have often struggled to access affordable financing that meets their needs from the formal financial sector. From the perspective of an MSME in Guatemala, a range of factors have historically constrained access to finance, including limit- ed credit histories, high interest rates, poor financial product design, and a lack of acceptable collateral. According to IFC estimates (2018), the MSME financing gap in Guatemala is equivalent to 22 percent of GDP. The financing gap of the MSME segment—an estimate of the potential demand for financing by MSMEs relative to the current supply of financing—was estimated at greater than US$14 billion, more than six 16 GUATEMALA  COUNTRY PRIVATE SECTOR DIAGNOSTIC times the current volume of MSME financing.4 As a share of current volume, the MSME financing gap in Guatemala is larger than those of several regional peers (such as Costa Rica and Honduras, which have financing gaps of 9 and 15 per- cent of GDP, respectively). 3.1.1 Current Trends in MSME Finance Domestic credit to the private sector is below the average of peer countries and has been stagnant in recent years. The total volume of credit to the private sector is 35 percent of GDP as of 2021, which is significantly less than the Latin Ameri- ca and the Caribbean average of 54 percent, behind that of peers like Bolivia (76 percent) and Honduras (70 percent), and has been stagnant, increasing only four percentage points since 2012. In contrast, across all Latin American countries, this ratio has increased by more than 10 percentage points over the same period. Lending to MSMEs specifically has been stagnant since 2016, with most lending directed to corporate and consumer segments. While the overall credit portfolio increased by more than 25 percent since 2016, this increase was driven main- ly by corporate and consumer lending. Lending to small and medium enterpris- es (SMEs) has been flat and decreased as a share of the total credit portfolio. As of September 2022, lending to SMEs accounts for just 6 percent of banking sec- tor credit portfolio volumes and less than 1 percent of the total number of loans. Microcredit portfolios from the Superintendency of Banks (SIB)5 financial insti- tutions account for just 3 percent of credit portfolio volumes and 4 percent of the total number of loans. Lending volumes are dominated by corporate loans (53 percent), while most loans are allocated to consumer lending (95 percent). Manufacturing and agriculture borrowing accounts for approximately 16 per- cent of lending. As of June 2022, lending to the manufacturing sector accounted for 12.3 percent of lending, while the agricultural sector accounted for 4.1 per- cent. Lending to both sectors has been increasing over the past five years, with lending to the manufacturing sector showing particularly strong growth (18.3 percent annual growth). Approximately 42 percent of firms in Guatemala have a loan or line of credit from a financial institution, according to 2017 data from the World Bank En- terprise Survey. This places Guatemala below the regional average of 48 percent (figure 3.1). Small firms and those in the retail sector are less likely to report borrowing from financial institutions. There is significant variation in access to finance across firm size in Guatemala: among small firms (those with 5 to 19 employees), just 34 percent report having a loan or line of credit, but this value rises to 53 percent among medium-size firms (20–99 employees) and to 84 per- cent among large firms (100+ employees). This variation is significantly greater than the average observed across Latin America, which ranges from 41.5 per- cent among small firms to 69 percent among large firms. The loan portfolio is also highly concentrated in the Metropolitana region, including Guatemala City, with over 70 percent of total loan volumes. Firms report high collateral costs. Firms report that 67 percent of loans require collateral, with an average collateral value equivalent to 190 percent of the loan 3  CROSS-CUTTING CONSTRAINTS TO PRIVATE SECTOR DEVELOPMENT 17 FIGURE 3.1 Use of Financing by Firms and Individuals, 2016–18 50 48 48 47 45 42 40 40 30 Percent 20 10 7 6 5 5 4 4 0 Guatemala Honduras Nicaragua El Salvador Bolivia Latin America and Caribbean % of adults borrowing from a financial institution to start, operate, or expand a farm or business % of firms with a loan or line of credit from a financial institution Source: World Bank Enterprise Surveys (2016–18) and Asli Demirguc-Kunt et al., Global Findex Database 2017: Measuring Financial Inclusion and the Fintech Revolution (Washington, DC: World Bank, 2018), http://hdl.handle.net/10986/29510. amount. Relative to the region, although Guatemalan firms require more collat- eral (62 percent of firms in Latin America and the Caribbean require collater- al), the average collateral value is lower (regional average of 202 percent of the loan amount). Medium-size firms (those with 20–99 employees) report the larg- est share of loans requiring collateral (72 percent) and the highest value of col- lateral (217 percent). This may indicate a bottleneck that constrains firm growth. 3.1.2 Providers and Products: Innovation and Diversification The limited amount of formal MSME financing that is available is delivered large- ly through loans from commercial banks. The financial system in Guatemala is concentrated in and dominated by the banking sector: banks hold approximate- ly 91 percent of total financial sector assets, and within the banking sector, the five largest banks hold 81 percent of total assets. Outside the supervisory perim- eter of SIB, financial cooperatives, nonprofit microfinance entities, and financial technology (fintech) firms also provide financing tools to the MSME segment. Factoring and leasing offered by private sector firms were regulated in 2018 and 20216 and must be registered in the movable collateral registry to make them an enforceable right against third parties. Financial cooperatives in Guatemala have a strong presence throughout the coun- try, with an estimated membership base of over 2 million individuals (around 15 percent of the adult population). Financial cooperatives play an important role in financial inclusion, MSME finance, and economic productivity, particularly in ru- ral areas and among Indigenous populations, which are not well served by com- mercial banks. Most members and assets in the cooperative sector are associated 18 GUATEMALA  COUNTRY PRIVATE SECTOR DIAGNOSTIC with the 25 cooperatives federated under the Federación Nacional de Cooperati- vas de Ahorro y Crédito (FENACOAC, also known under the name Cooperativas de Ahorro y Crédito; MICOOPE). MICOOPE’s credit portfolio has been growing and is focused on commercial, consumer, and housing loans. SME financing plays an important role here, since the commercial portfolio targets SMEs—for example, for the acquisition of products and immovable assets. The total credit volume of MICOOPE represents approximately 3 percent of the financial system’s total cred- it portfolio, with annual growth of around 10 percent over the past several years. The microfinance sector has significant reach and comprises mostly nonprofit insti- tutions. The 2016 Law on Microfinance and Nonprofit Microfinance Entities es- tablishes three types of microfinance institutions.7 Most microfinance institutions operate as nonprofits and do not take deposits, given the relatively low costs of funding via credit lines from banks. Some microfinance entities consider aspects of the 2016 law onerous and a disincentive to pursuing a license with SIB (since 2016, only one deposit-taking license has been issued to a microfinance entity). The largest microfinance entity in Guatemala (Fundación Génesis Empresarial) has ap- proximately 320,000 clients, of whom approximately 90 percent live in rural areas. Factoring is an important tool to support the financing needs of MSMEs but has not reached its potential. Factoring can increase MSMEs’ working capital, opti- mize cash flows, and increase MSMEs’ capacity to produce and commercialize goods and services. Factoring products can also ease access to finance for MSMEs based on the payment history and solvency of the buyer (rather than the MSME). In 2018, a law regulating factoring and discount contracts was passed, together with changes in the movable collateral law. The legal reforms and subsequent reg- ulation governing the collateral registry permit the assignment and/or financing of invoices and the registration of this assignment. The movable collateral regis- try is centralized online with regulated fees; all factoring transactions must be reg- istered by use of a special registration form. The Superintendency of Tax Admin- istration (SAT) revamped the regulation for electronic invoicing and established a plan for its adoption for all taxpayers that should be completed by 2023. Despite significant progress over the past few years to align the legal, regulatory, and in- stitutional frameworks to the best international standards, the use of factoring has not increased as expected: by September 2020, there were only 67,715 borrowers using factoring, of over 1.2 million total borrowers. The volume of factoring was about Q1 million, representing about 0.01 percent of the total loan portfolio. De- spite the recent communication campaign undertaken by the, movable collateral registry) the opportunities and requirements for factoring are not known by many relevant stakeholders. Businesses using factoring may not understand how to reg- ister a factoring transaction in the collateral registry. Anecdotal evidence indicates that eligibility requirements determined by the factor are too restrictive. More-transparent and simplified rules governing the registration of a factor- ing transaction in the movable collateral registry are needed. The existing re- quirement to obtain proof of the communication regarding a credit right trans- fer makes the process costly and cumbersome; the registration of the transfer in the movable collateral registry should be sufficient. The current requirement to fill in every feature of the collateral in the registry to perform a risk assessment could also be simplified.8 3  CROSS-CUTTING CONSTRAINTS TO PRIVATE SECTOR DEVELOPMENT 19 Reforms to regulations on electronic invoices as well as some specific financial and tax regulations could enable the expansion of electronic factoring. Although the electronic invoice regulation follows international standards, currently it in- cludes only tax and accounting information, leaving aside commercial and finan- cial information, which can be useful to enable efficient factoring transactions. Information on whether an invoice has been traded is not recorded in the doc- ument, which could be easily solved by using a dynamic .xml file allowing the registration of all relevant features for tax and trading purposes. There should be a field to register the endorsement or transfer of the document to a financial institution following a factoring transaction. There should also be a mechanism to differentiate immediately payable invoices from invoices purchasing products or services on credit.9 The Banking Law (art. 51) does not recognize accounts receivable or invoices as valid and independent guarantees for a loan require an additional guarantee from the assignor. Amendments to tax regulations could establish rules for circumstances in which a company pays an entity other than the one who issued the invoice as a result of a factoring transaction. Also, the tax authority could clarify the way in which an assignment should be document- ed so that the assigned debtor can pay the assignee smoothly and not encounter obstacles in the use of value added tax (VAT) for tax credit. The fintech ecosystem is nascent and unregulated. Services are focused on pay- ments, financing products, and automation (of internal processes by financial institutions). The system is self-organized under Guatemala’s fintech association and, as of November 2022, it had 32 fintech companies as members. There is no legal or regulatory framework for fintech companies, although SIB and the Bank of Guatemala (Banguat) have been jointly developing a legal framework since 2019. Banks appear to be increasingly willing to close deals with fintech compa- nies, although the process is still very long (about one year), which significantly limits growth opportunities. Seven institutions offer mobile wallets and remit- tances, nine companies offer financing products, three companies work in the area of insurance technology, and two companies manage payment platforms. SIB has created the SIB Innovation Hub to support innovation and financial in- clusion.10 Digital transformation is a strategic goal of SIB’s. For that purpose, it created a unit (UNIDE) responsible for connecting SIB with fintech companies, generating knowledge on new market trends, and creating a better understand- ing of the applicable regulatory framework for new products and services.11 Many fintech providers focus on tools to improve access to finance by SMEs. In the payment space, a few fintech companies are providing tools for e-commerce, such as payment gateways or electronic payment instruments (prepaid cards, wallets, and so forth). Regarding financing tools to increase lending, there are a couple of companies that are using alternative data to complement traditional credit scoring assessments and are working with banks and microfinance enti- ties. In the financing space, there are three factoring companies, five firms work- ing with alternative finance platforms and one company working with crowd- funding. Since the network and its members are so young (the movement started in late 2019), they are likely still developing their business models and setting up deals with financial institutions. Many of these activities should be regulat- ed and supervised by SIB or other public sector entities because of potential op- 20 GUATEMALA  COUNTRY PRIVATE SECTOR DIAGNOSTIC erational and consumer protection risks. It is advisable to enact a legal frame- work that allows for market entry and growth of fintech companies, including e-money issuers and crowdfunding platforms. In some cases, this process would imply a strengthening of existing laws, such as the Securities Market Law in the case of crowdfunding. 3.1.3 National Policies and Access to Finance for MSMEs Improving access to finance for the MSME segment is a key objective of the Min- istry of Economy (MINECO) and one of the priorities of the National Financial Inclusion Strategy 2019–2023 (NFIS). MSME financing is one of the four poli- cy areas of the NFIS. The goals in this policy area are to increase access to finan- cial products and to use and expand their supply, supported by innovation, the use of nonconventional collaterals, and comprehensive credit information sys- tems. The action plan includes many legal and regulatory changes in the areas of movable collaterals, credit information systems, consumer protection, cred- it bureaus, credit unions, and other laws to promote the development of financ- ing tools for the MSME segment.12 The NFIS also includes financial education as a cross-cutting area, highlighting the importance of ensuring that consumers understand the parameters and pricing of available products in the market. MI- NECO manages various programs to support access to finance for the MSME segment, all of them in collaboration with financial institutions and nonregulat- ed providers. Currently, the ministry manages the National Program for the De- velopment of the MSME, which is responsible for executing all projects in this area. It is supported by a national council formed by private sector representa- tives (MSMEs and nongovernmental organizations) who manage, implement, and oversee the execution of the national program.13 Since 2015, MINECO has also administered the Fondo de Garantía for MSMEs to support their access to financing. Banks, financial companies, cooperatives, and industry associations can access these funds (housed in a trust in Banco de los Trabajadores) to provide services to the MSME segment.14 Previous diagnos- tic work by World Bank has highlighted the need to strengthen the sustainabil- ity and impact of the guarantee fund, with operational and governance mod- els in line with international good practice. The guarantee fund has historically been undercapitalized, with capitalization of less than US$2 million prior to the COVID-19 support legislation. Onerous document requirements and a guaran- tee delivery approach that does not facilitate scale-up (for example, a low lever- age ratio and a cumbersome approval process) further constrain the guarantee funds’ effectiveness. 3.1.4 Enabling Environment, Market Infrastructure, and Recommendations Credit information systems in Guatemala present important opportunities to in- crease access to finance by MSMEs. The flow of credit information is incomplete, inefficient, and fragmented, given the lack of a regulatory framework for credit bureaus, among other reasons. Coverage ratios for credit bureaus and the credit registry are low, at 37 and 23 percent of the population, respectively, in 2019.15 3  CROSS-CUTTING CONSTRAINTS TO PRIVATE SECTOR DEVELOPMENT 21 Nonbanks cannot access the credit registry, and credit bureaus have only par- tial information about the nonregulated sector. There is also scope to incorpo- rate alternative sources of data to inform credit decisions and value-added ser- vices for MSMEs. Needed regulatory reforms include changes in the banking law to allow microfinance institutions and cooperatives to access the credit reg- istry, push forward the draft law on credit bureaus, and identify the institution that will be responsible for the oversight of credit bureaus, among other adjust- ments. Table 3.1 summarizes the recommended changes. The legal and institutional infrastructure for the use of movable collaterals is in place. Guatemala has a unified legal framework for secured transactions that ex- tends to the creation of publicity and enforcement of security interests in movable assets.16 More recently (2018), the Movable Collaterals Registry was revamped. Managed by MINECO, this movable collateral registry is responsible for creating, modifying, executing, and publicizing movable collaterals. It covers a wide range of assets, such as inventory, stocks, raw materials, intangible assets, and others. Prices for the usage of this registry are advertised through its website and can vary from US$1.29 for online searches in the database to US$39 to register a leasing contract.17 Guatemala recently enacted its first comprehensive law on insolvency, and regu- lations are forthcoming. Congress approved the insolvency law in February 2022. A comprehensive legal framework for insolvency can support access to finance and productivity growth for MSMEs by ensuring that viable firms are not forced into liquidation and that the assets of nonviable ones can be put back into pro- ductive use. The recently enacted law is Guatemala’s first legal framework to fa- cilitate restructuring for households and firms in financial distress. However, the law also contains provisions that are inconsistent with international good prac- tice (such as the limited ability of creditors to enforce secured collateral during insolvency proceedings) that should be addressed, as well as several gaps (such as cross-border insolvency and dedicated provisions for micro and small enter- prises). The World Bank is providing technical assistance to develop secondary regulations in line with international good practices on insolvency. A lack of transparency in prices creates an uneven playing field among financial consumers and providers, reduces price competition, and limits the uptake of formal financial products. The 2015 World Bank-IMF Financial Sector Assess- ment Program (FSAP) and an internal 2016 financial consumer protection diag- nostic noted a number of practices that are not aligned with international good practices for financial consumer protection.18 For example, information on prod- uct prices and features available to MSMEs and other consumers is limited and inconsistent, making effective comparison shopping nearly impossible. For the most part, loan documents provide only monthly nominal interest rates, apply flat interest rates, and are not sufficiently transparent about up-front commis- sions and costs for overdue loans. Many lenders also engage in product bundling, limiting consumer choice. Reforms are necessary to clarify institutional arrange- ments for financial consumer protection and put in place a comprehensive regu- latory framework with adequate supervisory and enforcement capacity that ap- plies to all financial providers, regardless of whether they are regulated by SIB. 22 GUATEMALA  COUNTRY PRIVATE SECTOR DIAGNOSTIC TABLE 3.1 Access to Finance Recommendations Challenge Recommendations Implementing Short or agencies medium term Weak enabling Issue regulations to support implementation of MINECO Short environment for the 2021 insolvency law (for example, related to access to finance for processes and administrators). MSMEs Amend the banking law to allow MFIs and SIB, MINECO, Banguat, Medium cooperatives to access the credit registry, push Junta Monetaria, forward the draft law on credit bureaus, and Congress identify the institution that will be responsible for the oversight of credit bureaus. Include financial cooperatives in credit and SIB, INGECOP, Medium payment infrastructures. Congress Improve financial consumer protections by SIB, MINECO, Banguat, Medium strengthening institutional mandates for them; Junta Monetaria, establishing a legal and regulatory framework Congress to promote transparency, fair practices, and dispute resolution; and building supervisory and enforcement capacity. Limited availability of Implement the leasing law and building MINECO, association of Short diverse and capacity of industry to develop and scale leasing entities innovative financial leasing products. products for MSMEs. Strengthen the ecosystem for electronic MINECO, SAT, SIB Short factoring, including through capacity building with financial institutions. Enact an activity-based and proportionate legal SIB, Banguat, Congress Medium and regulatory framework to enable the development of fintech, including e-money operators and crowdfunding platforms. Source: World Bank elaboration based on diagnostics results. Note: INGECOP = Inspección General de Cooperativas. 3.2 Infrastructure Gaps 3.2.1 State of Infrastructure Services Infrastructure constraints affect private sector performance in Guatemala and limit the integration of domestic markets and access to international markets. The poor state of the road network is consistently identified as a key constraint by firms and entities surveyed as part of the CPSD consultations. Trade and lo- gistics are affected by long travel times and traffic congestion, which are expect- ed to worsen in the absence of adequate investment to improve mobility. More- over, the lack of transport reliability19 is especially problematic in the Guatemala City metropolitan area, where the country’s largest firms operate and which is a route for reaching main ports and customs for trade. Equally, Guatemala’s limit- ed accessibility in rural areas has hampered competitiveness, productivity growth, and access to global and regional value chains. World Bank surveys show that firms in Guatemala grapple with significant infra- structure deficiencies, particularly in transportation.20 About 19 percent of firms in Guatemala identified weaknesses in the transportation system as a major con- 3  CROSS-CUTTING CONSTRAINTS TO PRIVATE SECTOR DEVELOPMENT 23 straint, and 3.7 percent cite this issue as their biggest constraint, above the Cen- tral America regional averages of 16.7 and 1.1 percent, respectively.21 Electrici- ty outages are estimated to have affected more than half the firms in Guatemala and the broader Central American region (54.4 and 55.4 percent, respectively). However, firms in Guatemala appear more resilient to electricity deficiencies: 29.1 percent of firms in Central America identified electricity as a major con- straint, while only 11.7 percent of Guatemalan firms did so. Similarly, 6.6 per- cent of firms in the region reported electricity as their biggest constraint, above the 4.0 percent in Guatemala. Water insufficiencies appear to affect 10 percent of firms in Guatemala and 20 percent in the rest of Central America. Infrastructure gaps hinder the country from taking advantage of its strategic ac- cess to both the Atlantic and the Pacific Oceans. Guatemala ranks 114th of 141 countries in terms of transport infrastructure because of poor road connectivity and the quality of road infrastructure.22 The perception of road quality has de- teriorated at least since 2010, unlike the case of other Central American coun- tries. Of the 65 percent of the registered network that is surveyed, two-thirds is in good condition according to the Plan de Desarrollo Vial 2018–32. The pri- mary and secondary road infrastructure, in general, is in average or good con- dition, but the road network in rural areas is mostly unpaved and often in poor condition. Furthermore, much of the rural network is not receiving routine or periodic maintenance. Guatemala also scored poorly in the 2023 Logistics Per- formance Index (2.6 out of 5; rank, 88th of 139 countries), which measures coun- tries’ performance on trade logistics, the second lowest among Central American countries. Guatemala underperformed in all categories across the board, with the quality of infrastructure and customs efficiency being the weakest areas. At present, there is no railway service. The rail network was concessioned in 1998, but low levels of transported cargo, coupled with an arbitration case that start- ed in 2005, contributed to its suspension in 2007.23 The underdeveloped road network limits people’s access to markets and public services, especially in the poorest areas. While Guatemala City enjoys a slight- ly better quality of infrastructure, firms located outside the capital experience large transport inefficiencies. The road network, which consists of approximate- ly 28,000 km of registered and nonregistered roads, also has a low density. In re- lation to the country’s surface area, the density of roads is below the average for the Latin American region (15.5 versus 22 km/100 km2).24 The registered road network is approximately 1.0 meters per capita, while the nonregistered net- work is 1.6 meters per capita, which reflects a limited provision of road infra- structure in relation to the population. The country is also highly vulnerable to natural disasters, leading to infrastructure disruptions that yield average year- ly losses of approximately US$500 million. This is associated mainly with road network disruptions, especially among gravel roads.25 Rural areas are particu- larly vulnerable to climate risk because of the poor resilience of the rural road network. Between 2015 and 2020, the impact of natural hazards on infrastruc- ture averaged 4 percent of the investment budget, but it can reach 8.5 percent or more, as was the case in 2019. Market connectivity, particularly in rural areas, is hindered by the lack of logis- tics infrastructure. Guatemala lacks logistics centers designed to support ports, 24 GUATEMALA  COUNTRY PRIVATE SECTOR DIAGNOSTIC airports, and urban distribution. Furthermore, the existing logistical infrastruc- ture is primarily concentrated around the Guatemala City metropolitan area. This creates a gap for markets in rural areas by increasing costs and time asso- ciated with logistical inefficiencies, severely undermining the competitiveness of agricultural products and limiting their export capacity, especially for small-scale producers. Addressing this gap requires more investment in refrigerated cargo handling, trucker rest stops, logistics centers to reduce transport inefficiencies and bottlenecks, and cold storage in port vicinities and near major agricultur- al production areas. Guatemala’s Pacific agricultural corridor has several collec- tion and distribution centers supported by the Guatemala City metropolitan area, and some have cold storage facilities. However, access to the facilities through the tertiary road network, coupled with distrust among buyers, sellers, and in- termediaries, poses challenges.26 The limited use of information and communi- cation technology in the logistics sector hinders traceability practices, which are key for competitive exports.27 In rural areas, private sector performance is hampered by major gaps in digital and water infrastructure, as noted in the agriculture section below. Access to dig- ital infrastructure is severely limited and unequal. While 62 percent of the coun- try has access to mobile telephones, only 29 percent has internet access and just 21 percent has access to a computer,28 with accessibility in rural areas lagging urban areas such as the Guatemala City metropolitan area. Water and sanita- tion services are also deficient: 14.7 percent of the rural population lacked ac- cess to improved water services in 2018, compared to 4.6 of their urban coun- terparts.29 Guatemala is the only country in Latin America except for El Salvador that doesn’t have a law regulating water management, treatment, and use.30 The lack of data related to water resource inventories and land management plans has created a knowledge gap, hindering efforts to mitigate losses and address risks in water-intensive industries and businesses, such as smallholder farming, that are highly vulnerable to climate change.31 Most public investment in infrastructure is allocated to transport, but these re- sources are insufficient to cope with the infrastructure gap. Public investment in infrastructure in Guatemala is among the lowest in the Latin America and the Caribbean region, averaging 0.6 percent of GDP in 2015–19 (above only Bra- zil).32 As a proportion of GDP, public infrastructure investment declined in the last decade, mainly as a consequence of the fall of investment in the transport sector (figure 3.2 and 3.3). Relatedly, stagnant tax revenues hinder the govern- ment’s ability to invest more.33 The Guatemala Transport Infrastructure Sector Assessment Program (InfraSAP) study emphasizes that budget execution in road infrastructure has increased recently, but there are concerns about the quality of spending. The lack of an overall updated inventory establishing the state of and level of damage across the road network is a major knowledge gap limiting the government’s ability to spend more efficiently.34 Further, road maintenance is an issue that also contributes to the infrastructure gap; maintenance services lag and contracts are difficult to monitor.35 Maintenance of the primary and secondary road networks is the responsibility of Unidad Ejecutora de Conservación Vial (COVIAL), while the Ministry of Communications, Infrastructure and Housing (MICIVI) is in charge of maintaining the registered rural network. In practice, the funds allocated to MICIVI to maintain suitable traffic conditions on rural 3  CROSS-CUTTING CONSTRAINTS TO PRIVATE SECTOR DEVELOPMENT 25 FIGURE 3.2 FIGURE 3.3 Public Investment in Infrastructure, Regional Public Investment in Infrastructure by Sector Comparison Average, 2017–21 (% 0f GDP) 2.5 Guatemala 2.64 Paraguay 2.0 0.76 0.78 Ecuador 1.90 1.5 Panama % of GDP 4.58 Belize 1.34 Uruguay 1.0 0.92 Argentina 5.18 0.5 Bolivia 1.00 Honduras 0.96 1.32 0.0 El Salvador 1.10 2010 2015 2020 2021 1.28 Dominican Guyana Total Telecommunications Republic Trinidad and Energy Water Tobago Transport Source: INFRALATAM . Note: Only countries for which there are data for 2021 are shown. Source: INFRALATAM. roads are insufficient, limiting local producers’ access to regional and nation- al markets. Regarding the primary and secondary networks, COVIAL relies on multiple small annual maintenance contracts (input based) that require a high level of planning and management. This results in a suboptimal use of available resources, limiting COVIAL’s ability to ensure a sustainable level of service from its infrastructure. The government has undertaken efforts to invest more in reha- bilitation, supported by the Law for Emergencies (Decree 35-2022) and the Law for Strengthening the Maintenance and Construction of Strategic Infrastructure (Decree 21-2022). However, these efforts are focused mostly on primary and sec- ondary networks, leaving rural areas largely unaddressed. Greater private par- ticipation in infrastructure could not only help bridge the infrastructure gap, but also provide more cost-efficient practices for road maintenance. 3.2.2 Weak Project Implementation Framework There are deficiencies in the infrastructure project cycle process, which are high- lighted in the GNSD program. Public infrastructure plans are not well coordinat- ed with government policy instruments (Política General de Gobierno) or public budget execution. The involvement of multiple government entities in the execu- tion process extends the procedure to obtain permits and right-of-way, directly affecting project execution. The GNSD program also notes that the public ten- dering process could be improved, particularly by better defining terms and re- sponsibilities in the contract notice. Although Guatemala has a public-private partnership (PPP) framework in place, it does not allow for unrequested propos- als, which limits private participation in the project cycle process. 26 GUATEMALA  COUNTRY PRIVATE SECTOR DIAGNOSTIC PPPs and long-term performance-based contracts can help address gaps in con- nectivity and increase the effectiveness of public infrastructure spending. Private sector participation through PPPs in the road sector in Guatemala remains limit- ed to a few cases. There has been only one road concession implemented in Gua- temala from 1998 to 2023: the Palin-Escuintla Road concession, which was bid under the public procurement law (Ley de Contrataciones del Estado) before the PPP law was created in 2010. More recently, in 2022, the Escuintla-Puerto Quet- zal Road concession was the first and only project to be approved under the new PPP framework.36 In addition, the Via Alterna del Sur (VAS) project, which ini- tiated operations in 2016 with a 14-kilometer-long road section, is worth men- tioning.37 The VAS is a toll road which is privately owned, designed and built (in- cluding the acquisition of land and release of the right-of-way) without public involvement. Note that these toll roads, Palin-Escuintla and VAS, have present- ed better conditions and provided greater service than publicly managed roads.38 Other privately developed projects are in the pipeline.39 However, despite these recent efforts, it is important to mention a step back regarding the Palin-Puerto Quetzal Road concession. Following the expiration of the concession contract, in April 2023, after 25 years of operation through a private company, the asset´s op- eration came back under MICIVI responsibility. Toll charging was removed, and maintenance must now be carried out by COVIAL, as for any other public road.40 Output- and performance-based road contracts (OPRCs), although currently not used in Guatemala, offer an alternative to traditional input-based contracts in road rehabilitation and maintenance.41 OPRCs can increase efficiency and contribute to cost savings while improving the quality of the network and user perception. In addition, key stakeholders, including from the private sector, are support- ing changes to the legal framework that allow the private sector to play a larger role in providing infrastructure. The PPP framework aims to provide a mecha- nism through which the private sector can play a role in infrastructure develop- ment for transportation and energy projects (box 3.1). Unlike energy projects, BOX 3.1 Guatemala’s PPP Framework Public-private partnerships (PPPs) are a tool through which the framework has a limited track record partly because of the in- private sector can help address the infrastructure gap and increase admissibility of private and unsolicited initiatives and the need the effectiveness of public infrastructure spending through part- for congressional approval after the project is awarded. InfraSAP nerships in investment projects and service provision. Guatema- outlines other constraints that have hindered the development of la’s PPP law was approved in 2010 and its regulatory guidelines PPP projects, such as ANADIE’s insufficient budget for structuring were approved in 2011, creating the National Agency of Allianc- projects, the lack of standardization and specialized guidelines es for the Development of Economic Infrastructure (ANADIE), a at the national and municipal levels, and complex institutional government office responsible for coordinating and promoting arrangements. The government is considering addressing these PPPs. Despite these efforts, only one project has reached the ten- shortcomings. InfraSAP also finds that the PPP framework is in der stage—namely, the Escuintla-Puerto Quetzal highway, after a line with good practices through a balanced institutional frame- three-year process. Other PPP transport projects under prelimi- work and is supportive of a friendly business environment. Key nary study include a dry port at the border with Mexico (Puerto features of the framework include a competitive procurement Seco Intermodal Tecún Umán II), modernization of the capital’s procedure, structured delivery capacities, public commitments airport (Aeropuerto Internacional La Aurora), and a light metro and contractual incentives for project financing, and the oppor- line (Metro Riel) in the Guatemala City metropolitan area. The tunity for international arbitration. Source: World Bank staff, with information from the PPP law and the Guatemala Transport Infrastructure Sector Assessment Program (InfraSAP). 3  CROSS-CUTTING CONSTRAINTS TO PRIVATE SECTOR DEVELOPMENT 27 all transport projects that provide services to the public require congressional approval. In consultations with key stakeholders, this was cited as a limitation and a reason for delays in the development of new projects. The private sector is sponsoring a bill proposal for a new road infrastructure law (Ley General de Infraestructura Vial) that has been under congressional review for over 2 years.42 This proposal offers a large institutional reform for the road sector that could enable more private sector participation in road development.43 Notably, it aims to improve the regulatory framework regarding procurement processes and con- tract types, acquisition of the right-of-way, and dispute settlement, among others. 3.2.3 Guatemala’s Main Economic Corridors are Also Affected by Weak Infrastructure Guatemala’s key cross-border economic corridors that facilitate its integration into global value chains are affected by infrastructure shortcomings.44 The At- lantic economic corridor runs from Guatemala’s and Honduras’s Atlantic ports into El Salvador and is central to trade among these countries. The portion of the corridor located in Guatemala (CA13 toward the Honduran border) needs major maintenance work that is already identified in the country’s Road Devel- opment Plan 2018–2032. Transport along the Guatemala-Honduras corridor, where tropical fruit, bananas, vegetables, oil palm, and maize come from, can be made more efficient with maintenance (CA13) and capacity expansion (CA09).45 The second major corridor, which runs between Guatemala City and El Salva- dor’s western cities (via CA01 and CA08), is important for the trade of agricul- tural and food products but is heavily affected by congestion. This corridor could benefit largely from bypasses to avoid the flow of freight transport through the city, potentially reducing transit time by 12 percent on routes through Guatema- la City. There are two initiatives that would alleviate congestion: (a) Beltway 50 (Anillo 50), which is to be approximately 180 kilometers long and built in eight sections of four lanes, and is financed and managed by MICIVI;46 and (b) ANA- DIE, which has an expressway (Via Express) project with a radius smaller than that of Beltway 50, approximately 28 kilometers of four lanes.47 In both corri- dors, there are textile production centers that would benefit from improvements in the infrastructure. Transport along these corridors is further constrained by the lack of any dedicated public logistics centers in Guatemala, as the existing capacity is inside free trade zones and industrial zones, many of which are pri- vate and provide on-site infrastructure. Furthermore, only 40 to 60 percent of the rural population along the corridor con- necting Guatemala with Honduras and El Salvador has access to an all-season road. Access to all-season roads in Guatemala’s portion of this agricultural corridor is less than 60 percent in some municipalities. While some products exported by land from Guatemala must be temperature controlled, their proportion is currently small.48 Some cold storage facilities can be found along the Guatemala-El Salvador corridor, al- though dedicated cold storage infrastructure is not common in the rest of the country. Perishable products are particularly affected by excessive border crossing wait times. The airport (Aurora International Airport) and the seaports of Quetzal and Santo Tomás de Castilla, which facilitate trade along these corridors, also suffer from 28 GUATEMALA  COUNTRY PRIVATE SECTOR DIAGNOSTIC significant deficiencies. The international airport could optimize its operations by relying on physical traceability systems and a deconcentrated cargo area, thereby improving the flow of cargo, which includes pharmaceuticals, electronics, and, increasingly, agricultural products. The national port infrastructure also plays an important role in the country’s exports and imports and has seen a significant increase in mobilized volumes, which have risen 77 percent in 15 years to reach 28 million metric tons in 2019.49 However, the country’s two main ports, Puer- to Quetzal and Santo Tomás de Castilla, have now reached their capacities and are regularly saturated, forcing the country to increasingly use the port of Puer- to Cortés in Honduras. On the Pacific coast, Puerto Quetzal, the country’s most important bulk port, is affected by congestion in its road access. While the port has seen innovations to meet growing demand for exports such as fruit through the establishment of new cold storage facilities, it is affected by the lack of effi- cient controls and long inspection processes. Guatemala’s major port on the At- lantic coast, Santo Tomás de Castilla, a privately managed port and major point of export for products such as cardamom, coffee, textiles, and light manufactures, has experienced congestion problems in recent years, despite being the most effi- cient port in the national port system. Guatemala could increase its exports per capita by 45 percent if its roads, railroads, ports, and airport infrastructure were to match those of its East Asian emerging-markets competitors.50 3.2.4 Recommendations to Close the Infrastructure Gap Strengthening sector governance, coordination, and planning could yield better infrastructure. Improving governance requires actions in many areas and tight coordination of the multiple stakeholders involved. Changes in the regulatory framework, such as the ones suggested in the proposed road infrastructure law, could help mobilize more resources to unlock greater investment to expand and support the road network. Although the sector is centralized, there are deficits in terms of coordination, which call for efforts to review and improve transport planning and coordination practices. Ports, which are key to the competitiveness of the country’s economic corridors, also grapple with the absence of coordina- tion among the actors involved and lack a comprehensive development strategy. Guatemala’s trade takes place mainly through seaports, so maintaining and up- grading these ports (including private ones) are important to continue and grow the country’s participation in global value chains. Reducing the connectivity gap will require more resources from the budget and us- ers. Leveraging the Road Development Plan 2018–2032 could help address some of the country’s infrastructure needs. However, the plan is not binding, and re- sources are not guaranteed. Authorities should consider allocation of further bud- get resources in line with the plan’s requirements. Authorities could also develop a funding program that leverages alternatives that could raise revenues associated with the sector (for example, fuel, vehicle, and carbon taxes) but also explore land value capture through the development of transport projects and review of land use and parking fees. Similarly, promoting blended finance solutions through de- velopment bank financing could help increase the flow of resources to infrastruc- ture. Introduction of the use of OPRCs in Guatemala for road rehabilitation and maintenance would create more efficiency in the use of public resources and risk 3  CROSS-CUTTING CONSTRAINTS TO PRIVATE SECTOR DEVELOPMENT 29 sharing with the private sector and better results for the road users. Exploration of the issuance of thematic bonds linked to the Sustainable Development Goals, building from the successful experience of the social bond issued in April 2020, is also recommended. The legal and institutional frameworks to develop PPPs are in place, but reform is needed. Private investment through PPPs is an alternative mechanism for in- frastructure development, but it has yet to materialize in the transport sector. In 2020, ANADIE, Guatemala’s PPP agency, prepared an initiative to reform the PPP law, but the proposal was not officially presented to Congress for approv- al. Indeed, the current PPP framework could be modified to be friendlier to the private sector, while establishing procedures and terms that favor transparency and competition in the procurement process. Key areas to consider include op- timizing procedures along the project cycle and allowing for unsolicited propos- als, especially if aligned with development and socioeconomic priorities. Table 3.2 lists recommendations aimed at closing Guatemala’s infrastructure gap from the three areas discussed (regulatory and institutional, funding, and PPPs). TABLE 3.2 Infrastructure Recommendations Challenge Recommendations Implementing Short or agencies medium term Weak regulatory Revisit discussions to introduce changes to the Congress Short frameworks and regulatory framework regarding procurement governance processes and contract types, acquisition of right-of-way, dispute settlement, and more. Low investment in Develop a binding national road infrastructure SEGEPLAN, MICIVI (DGC Medium infrastructure by plan spanning the national and municipal levels, and COVIAL), ANADIE regional standards as well as the maintenance of roads.a Develop funding arrangements that include MINFIN, MICIVI Medium private participation and risk-sharing contract modalities to complement budget resources in line with the needs of the Road Development Plan 2018–2032: → Exploring cost-efficient and risk-sharing contract modality (such as OPRCs) for the rehabilitation and maintenance of road assets. → Studying options to implement land value capture and transport-oriented developments that can bring more resources to the sector. → Reviewing land usage and parking fees. Rigid PPP framework Revise and reform the PPP law and related CONADIE, ANADIE, Short to institutional framework to create institutional municipalities (for medium procedures and interinstitutional coordination licenses) arrangements that facilitate PPP project preparation and approval process (with clear roles).b This includes → Customizing a public investment assessment CONADIE, ANADIE Short methodology for PPPs, especially cost- benefit analysis and socioeconomic assessment, including a method of screening for PPP suitability and a tool for the prefeasibility stage. (Table continues next page) 30 GUATEMALA  COUNTRY PRIVATE SECTOR DIAGNOSTIC TABLE 3.2 Infrastructure Recommendations (continued) Challenge Recommendations Implementing Short or agencies medium term → Reforming the PPP law to enable unsolicited CONADIE, state Short proposals from private initiatives within a contracting agency clear framework that is consistent with investment plans and public sector priorities. Source: World Bank elaboration based on diagnostics results. Note: DGC = Director General of Roads; SEGEPLAN = Planning and Programming Secretariat of the Presidency of Guatemala. a. The proposed road infrastructure law under discussion in Congress establishes the creation of a national road infrastructure plan; this recommendation could be the basis for development of such a plan, if and when the law is approved. b. Changes suggested by ANADIE in its proposal to reform the PPP Law (Decree no. 16-2010) from June 2020 may guide the implementation of this recommendation, although a medium-term horizon may be required. 3.3 Legal Framework, Dispute Resolution, and Governance Firms require a stable, transparent, rule-based, and enforceable legal framework to reduce uncertainty and facilitate investment and contractual arrangements. Unfortunately, the absence of reliable, impartial, and equitable enforcement of rules and regulations governing the private sector is a major challenge in Guate- mala. Guatemalan firms are more likely than their regional peers to cite institu- tional and governance problems as a main obstacle to doing business, and they regularly list political instability and corruption as among the most important challenges. Weak governance and pervasive corruption undermine firm opera- tions, discourage innovation, and act as a regressive tax, particularly on the small firms that are least able to surmount governance challenges or defend themselves from official predation. Guatemala’s performance on global indexes of quality of governance, econom- ic competitiveness, and public sector integrity has worsened significantly since 2015. The steady weakening of institutions has continued to erode trust in the state: in 2020, about half the population believed that corruption had recent- ly increased, up from 40 percent in 2016.51 Poor governance quality has un- dermined public service delivery, particularly in disadvantaged regions, while a weak contractual and institutional environment hinders the development of the private sector, slowing job creation and undermining firm-level productivity. In 2017, crime and corruption were identified as the most important challenges to doing business in Guatemala, with more than 70 percent of firms considering corruption a major constraint on growth.52 Recent reports53 indicate that polit- ical corruption and undue influence are growing as limits on government pow- ers weaken. In addition, the extortion rate has doubled in recent years, driven by the growing prevalence of gangs and drug trafficking; crime-related costs are estimated at about 3 percent of annual GDP.54 In addition, political fragmenta- tion has contributed to an increasingly sluggish and unresponsive legislative pro- cess, and fewer laws were passed in 2019 than at any other time in the last 20 years. These setbacks pose a considerable threat to the country’s long-term so- cial stability and reform efforts. 3  CROSS-CUTTING CONSTRAINTS TO PRIVATE SECTOR DEVELOPMENT 31 This weak governance environment also poses challenges in attracting FDI, largely because of the failure to implement a legal system that aligns with international standards. Many of the issues that Guatemala faces in attracting FDI are structural, including a lack of institutions and codes of conduct to enable juridical certainty for investment. Since the 1960s, Costa Rica has been a leading example in Central America in safeguarding the rights of individuals and firms against abuses by gov- ernment by providing a clear, detailed, and efficient legal system.55 It has one of the largest bodies of laws addressing administrative decision-making, and the legisla- ture continuously updates it.56 Other countries in the region—Ecuador, El Salvador, and Peru—have all enacted new legislation to attract FDI. Ecuador enacted the Organic Law for Productive Promotion, Investment Attraction, Employment Gen- eration, and Fiscal Stability and Balance (the Productive Development Law, passed in August 2018). This law introduced a series of amendments to reform taxes and exceptions for basic industries.57 Peru passed a new administrative procedures act in 2019—texto único ordenado de la Ley no. 27584, Ley que Regula el Proceso Contencioso Administrativo58—that provides clear procedures and rights against potential abusive government administrative action. In 2017, El Salvador enact- ed its own administrative procedures act, Ley de la Jurisdicción Contencioso Ad- ministrativa,59 which was informed by the need for new procedures that could effectively enhance the rights of individuals and firms and accelerate adminis- trative and judicial procedures. Despite Guatemala’s laws governing commercial contracts, the contractual and dispute resolution landscape remains uncertain and reduces investor confidence for both domestic and foreign firms. Perceived risk levels are increased by regula- tory instability and the history of breach of contract by government. Guatemala has a law for foreign investment, Ley de Inversion Extranjera,60 and an arbitra- tion law, Ley de Arbitraje, which regulates how private parties may submit and settle disputes. However, Guatemala does not legally recognize other methods of dispute resolution.61 The Guatemalan Constitution nonetheless allows con- siderable discretion on the part of the government to settle disputes with third parties.62 In terms of private commercial contracts, Guatemala’s code of com- merce regulates the types of commercial contracts that private parties can enter into with each other. Guatemala’s code of commerce also regulates the types of companies that may be established in the country, and the procedures to register companies, industries, and patents are regulated by other local laws.63 The laws regulating the country’s investment environment suffer from signifi- cant limitations that hold investment growth back despite proinvestment govern- ment policies. Guatemala has taken many measures to attract investment. Orig- inally, Guatemala created free-trade zones for commerce and industry.64 As part of its liberalization process, the country expanded its FDI incentive policies by legislating a tax-free zones regime for the importation, transformation, assem- bly process, and exportation of goods.65 These zones are used for the maquila industry, which has its own legal regime66 and also has a salary structure differ- entiated from those of other industries in the country. More recently, Congress enacted laws to improve working conditions in industrial areas.67 In Congress’s docket of law initiatives, there are several ILO conventions waiting to be ap- proved. Moreover, Guatemala has a very old (1947) labor law code.68 This code has rarely been reformed or updated. Although Guatemala has subscribed to 32 GUATEMALA  COUNTRY PRIVATE SECTOR DIAGNOSTIC and approved many ILO conventions on the recognition and protection of new forms of labor, they have yet to be translated into laws. Therefore, companies and lawyers are unaware of these international labor laws, which has pushed many to rely on informal labor. Guatemala’s legal system also faces limitations in complying with certain inter- national conventions, such as the United Nations Declaration on the Rights of Indigenous Peoples, as well as competition laws under the EU-Central America Association Agreement. A conflict repeatedly observed through case law is Gua- temala’s failure to nationally regulate the right of prior and informed consent of Indigenous groups. Although there has been strong jurisprudence recognizing the right of prior and informed consent, the Guatemalan Constitutional Court has interpreted the need for Congress to enact a law to regulate it and in 2017 gave Congress one year to enact a law on the topic.69 In the view of the court, Congress has yet to enact a law that would comply with international standards. Nonetheless, the court has sometimes established precedents and rulings that have contradicted previous judgments, thus creating problems of interpretation. Again, this legal uncertainty imposes constraints and disincentives for both do- mestic and foreign investment. Furthermore, under the EU-Central America As- sociation Agreement, Guatemala committed itself to adopting competition laws.70 These laws would require regulatory institutions to protect consumer rights and avoid discrimination and predatory business practices.71 However, Guatemala remains the only Central American country without laws protecting consumer rights and has very limited regulatory institutions and legal provisions to ensure healthy competition practices.72 Another issue exhibited in Guatemala’s arbitral case law is the concept of de- nial and delay of justice by domestic courts. The Constitutional Court is over- burdened with cases and faces endemic delays.73 This is the result of customary malpractice by local litigants and corruption issues within the judiciary.74 Such is the case of Kappes, in which the Constitutional Court took several years to judge an issue related to the consultation process with Indigenous groups.75 This placed the investor in an uncertain situation as to whether it could continue with its mining project. Although Guatemala has created specific institutions dealing with and promot- ing FDI, evidence indicates that a heavy bureaucracy has been a deterrent to in- vestment.76 Guatemala is a paper-driven country. The use of digital means for investment—to apply for and secure contracts and projects, obtain access to gov- ernment offices and courts, make contracts between private parties, and other activities— is limited.77 This forces investors to create a presence in Guatema- la and hire locals with the requisite knowledge and time to navigate the proce- dures, costs, and delays. In addition, excessive bureaucracy has led to the estab- lishment of numerous government agencies, each with its own procedures and decision-making outcomes. The result is a lack of coordination between govern- ment agencies, duplication and redundancy in procedures, and different require- ments frequently not established in law. Rent seeking in such an environment is endemic. Potential investors, or their agents, are often required to personally vis- it each office and obtain proper and complete information.78 This becomes ex- tremely burdensome and costly for investors. 3  CROSS-CUTTING CONSTRAINTS TO PRIVATE SECTOR DEVELOPMENT 33 Alternate dispute resolution (ADR) instruments may provide a short-term solu- tion for FDI by providing mechanisms for accountability and redress, not only between states and investor companies, but also for Guatemalans and Guate- malan firms. ADR may also pave the way for taking medium- and long-term state action at the legislative, administrative, and judicial levels. ADR is a trans- parency-enhancing tool. Concession or state contracts with clear transparency provisions provide a means for clarity, openness, and accountability to the pub- lic and civil society. Creating new types of contracts for concessions of public goods and commodities, and harnessing the potential of ADR to improve gov- ernance, could be an important step in attracting FDI and facilitating domestic investment. Table 3.3 summarizes the recommendations. TABLE 3.3 Legal Framework, Dispute Resolution, and Governance Recommendations Challenge Recommendations Implementing Short or agencies medium term Limited adherence to Strengthen legal units and ADR offices in certain El Procurador General Medium international judicial ministries and government entities so that they de la Nación and norms, reduce can provide sound advice to the public Congress bureaucracy around administration on contractual issues. enforcement, and streamline contractual Consider the creation of specialized courts, or Medium disputes and a chamber within a court, to deal with FDI settlements. issues. Contracts, while respecting unique Medium circumstances and requirements, should include clauses that provide greater legal certainty. These could include: → Reflecting the context of Guatemala in contracts, particularly conflict with Indigenous peoples and the need for free prior and informed consent in mining and energy projects. → Introduction of transparency and openness clauses in contracts so that local stakeholders have access to the concession or state contracts. → Making clear in all FDI-related contracts that Guatemala is subject to international FDI standards, so that future governments understand and realize that any action taken in relation to the contract may be subject to international FDI standards. → Determination of the obligation for companies to undertake regular due diligence reports in relation to the impact of their investment on local communities and the environment. This includes avoiding informal labor relations with domestic labor and encouraging the transmission of technical and professional knowledge. → Developing schemes for revenue sharing that are clear and open to the local population, with shared-accountability between government and companies. → Allowing the introduction of ADR mechanisms, including arbitration, and promoting negotiation and conciliation as means of conflict resolution. Source: World Bank elaboration based on diagnostics results. 34 GUATEMALA  COUNTRY PRIVATE SECTOR DIAGNOSTIC Notes 1. World Bank Enterprise Surveys, https://www.enterprisesurveys.org; Klaus Schwab and World Economic Forum, ed., The Global Competitiveness Report 2019 (Geneva: World Economic Forum, 2019), https://www3.weforum.org/docs/WEF_TheGlobalCompetitivenessReport2019. pdf. 2. Forthcoming World Bank report on policies for business recovery in Guatemala. 3. CPSD team discussions with Fundación para el Desarollo de Guatemala (FUNDESA), March/ April 2022. 4. IFC, MSME Finance GAP Database, updated 2018, https://www.smefinanceforum.org/ data-sites/msme-finance-gap. 5. These figures do not include institutions not supervised by SIB, such as credit unions and mi- crofinance institutions. 6. Decreto 1-2018, Ley de los Contratos de Factoraje y de Descuento, y decreto 2-2021, Ley de Leasing. 7. Deposit-taking microfinance institutions (microfinanciera de ahorro y crédito), which can be funded by deposits from the public or by issuing debt (a microfinance entity regulated and su- pervised by SIB); non-deposit-taking microfinance institutions (microfinanciera de inversión y crédito), which can be funded by issuing debt (a microfinance entity regulated and super- vised by SIB); and nonprofit microfinance entities, which cannot take deposits or issue debt (registered with MINECO). 8. Guatemala’s authorities are working on a reform of the current framework for the collateral registry. 9. Recent changes in the e-signature framework might also help to increase uptake and usage of this tool. - 10. See the SIB Innovation Hub online: https://www.sib.gob.gt/SIBInnovationHUB/web/sib/ini� cio and https://www.youtube.com/watch?v=Cw-1h_3ZF84. 11. There is another innovation hub managed by Imágenes Computarizadas de Guatemala, which allows fintech companies to make transfers and receive funds using the services of an auto- mated clearing chamber (privately owned). It works under a scheme of indirect participation, since the fintech company has to enter an agreement with a direct participant to access these services. Three fintech companies are using this service at present. 12. Estrategia Nacional De Inclusión Financiera Para Guatemala, ENIF 2019–2023, Ministerio de Economia, Guatemala, agosto de 2019. 13. MINECO, “Elección y Nombramiento de Delegados de Organizaciones no Gubernamental- es y de Beneficiarios/Empresarios ante el Consejo Nacional para el Desarrollo de la Micro- empresa, Pequeña y Mediana Empresa,” 2019, https://www.mineco.gob.gt/. 14. MINECO, “Reglamento para Operaciones Financieras del Programa Nacional para el De- sarrollo de la Microempresa, Pequeña y Mediana Empresa,” 2015, https://www.mineco.gob. gt. 15. World Bank World Development Indicators 2019. 16. See decrees 51-2007 and 69-2014, regulating the movable collaterals law. - 17. The exchange rate used is Q1 = US$0.13 (https://www.xe.com/, September 14, 2020). See ap� plicable prices here: https://www.rgm.gob.gt/informacion-arancel. 18. International Monetary Fund, “United States Financial Sector Assessment Program” (Wash- ington, DC: International Monetary Fund, 2015). 19. World Bank InfraSAP, 2022. 20. World Bank Enterprise Survey 2017. 21. The latest data for Guatemala were released in 2017. The Central America regional average is a simple average, constructed with data for countries from 2016 and includes the Domin- ican Republic, El Salvador, Honduras, and Nicaragua. Costa Rica and Panama were not in- cluded in the regional average, as their data date back to 2010. 22. World Economic Forum and Schwab, Global Competitiveness Report. 23. Existing lines connect Puerto Barrios in the Caribbean Sea with the Pacific Coast and also reach Tecún Umán at the border with Mexico. Elizabeth Whitsitt, “Tribunal Hears Addition- al Challenges to Its Jurisdiction in Railroad Development Corporation v. Republic of Gua- temala,” Investment Treaty News, April 8, 2010, https://www.iisd.org/itn/en/2010/04/07/ tribunal-hears-additional-challenges-to-its-jurisdiction-in-railroad-development-corpora- tion-v-republic-of-guatemala-3/. 3  CROSS-CUTTING CONSTRAINTS TO PRIVATE SECTOR DEVELOPMENT 35 24. Inter-American Development Bank, “Guatemala to Improve and Rehabilitate the National Road Network with IDB Support,” news release, February 7, 2019, https://www.iadb.org/en/ news/guatemala-improve-and-rehabilitate-national-road-network-idb-support#:~:text=De- spite%20this%20high%20traffic%2C%20the,of%20operation%20and%20transit%20 times. 25. World Bank InfraSAP, 2022. 26. Aiga Stokenberga et al., Economic Corridors to Promote Trade and Sustainable Develop- ment in Central America (English), Mobility and Transport Connectivity Series (Washing- ton, DC: World Bank). 2022. 27. World Bank InfraSAP, 2022. 28. Instituto Nacional de Estadísticas, 2019. 29. de la Fuente and Gomez, forthcoming. 30. Elisa Colom: “Solo un plan para garantizar el acceso universal al agua podrá evitar un e s t a l l i d o s o c i a l ”. 2 0 2 1 , h t t p s : / / a g u a c e r o . p l a z a p u b l i c a . c o m . g t / c o n t e n t / elisa-colom-solo-un-plan-para-garantizar-el-acceso-universal-al-agua-podra-evitar-un. 31. Gabriel Woltke, “Elisa Colom: ‘Solo un Plan para Garantizar el Acceso Universal al Agua Podrá Evitar un Estallido Social,’” July 5, 2021, https://aguacero.plazapublica.com.gt/content/ entre-el-mitch-y-eta-una-ley-se-posterga-tormenta-tras-tormenta. 32. Information from INFRALATAM. 33. Tax revenue fell slightly from 11.1 percent of GDP in 2013 to 10.5 percent in 2019. World Development Indicators, World Bank. 34. Carlos Kestler, “Conectividad Rota: Causas y Soluciones para Una Red Vial casi en Abandono,” Prensa Libre (June 22, 2022), https://www.prensalibre.com/pl-plus/guatemala/comunitario/ conectividad-rota-causas-y-soluciones-para-una-red-vial-casi-en-abandono/. 35. For more information regarding the issues surrounding road maintenance, see InfraSAP. 36. The concession was awarded in 2018 but not approved by Congress until November 2021. 37. The VAS has built two more sections since, 8 kilometers in Guatemala City and 9 kilometers toward Carretera, El Salvador. 38. Henry Bin, “Xochi: Una Carretera Privada, por Favor, porque el Camino Público no Hay Modo que Llegue,” Con Criterio, May 5, 2022, https://concriterio.gt/xochi-una-carretera- privada-por-favor-porque-el-camino-publico-no-hay-modo-que-llegue/. 39. A new toll road connecting Retalhuleu to Suchitepéquez, a stretch of 31 kilometers connected to the CA02 main road, is in the planning phase and is expected to be finished by 2025. To fund the US$150 million project, the road will be financed by private investors as well as by a new in- vestment fund through which local communities can invest in the project. See https://concriterio. gt/xochi-una-carretera-privada-por-favor-porque-el-camino-publico-no-hay-modo-que-llegue/. 40. Sandra Vi, “Guatemala Elimina Cobro de Peaje para Autopista Palín-Escuintla,” República, May 2, 2023, republica.gt. 41. The current legal framework prevents multiyear maintenance contracts and would not allow the implementation of such contracts in the present state. Maintenance practices are still input oriented (quantity contracts), which is the most common and traditional practice. 42. The proposal was submitted to Congress in April 2018, the first review happened in March 2019 after changes were introduced by Congress, and the second review happened in Octo- ber 2020. A third review is needed for the law to be approved. 43. The bill proposes the creation of the Superintendence of Road Infrastructure (SIVIAL), a new technical governing body within the MICIVI to oversee the road network. The proposal also institutionalizes a National Road Infrastructure Plan (Plan Nacional de Infraestructura Vial) with a 30-year horizon that should be binding (the projects to be assessed and for which stud- ies are prepared and developed should be taken from this plan), creates a new mechanism to provide right-of-way and declare public utility without need for Congress approval, creates a road infrastructure fund that enables leveraging of additional resources, and introduces availability-based management contracts which would enable the implementation of OPRCs. 44. World Bank, “Guatemala Transport Infrastructure Sector Assessment Program: Key Find- ings and Recommendations,” 2022. 45. There is an Inter-American Development Bank—financed project in preparation to expand CA09 from El Rancho to Teculutan (37 kilometers), but there are still 175 kilometers from Teculutan to the ports in the Atlantic that need to be converted to four lines. 46. Beltway 50 goes from Sanarate municipality, approximately km 54 of Route CA09 North, passing Sansare-Sanyuyo-Mataquescuintla-Laguna del Pino-CA01 Oriente-El Jocotillo-El Obrajuelo-Guanagazapa-CA02 Oriente-Escuintla. Of the eight sections, one is under con- struction, one is under contract, and two are being procured. 36 GUATEMALA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 47. The expressway would go from approximately km 10 of Route CA09 North to CA01 Ori- ente, passing San Jose Pinula and Fraijanes. 48. World Bank, “Guatemala Transport Infrastructure Sector Assessment Program.” 49. World Bank, “InfraSAP Guatemala, Improving Transport Connectivity” (Washington, DC: World Bank, 2017). 50. Refers to nonhydrocarbon or mineral exports. East Asian emerging market competitors are as follows: China; Indonesia; Macao SAR, China; Malaysia; the Philippines; Thailand; and Vietnam. For more information, see Gonzalo Salinas, “Proximity and Horizontal Policies: The Backbone of Export Diversification” (IMF Working Paper WP/21/64, IMF, Washing- ton, DC, 2021), and IMF, Guatemala: Selected Issues (IMF Country Report 22/164, Wash- ington, DC: IMF, 2022). 51. Data from Corporación Latinobarómetro, 2020. 52. World Bank, 2017. 53. Latin American Public Opinion Project (LAPOP 2021) and the World Justice Project (2021). 54. Laura Jaitman, ed., The Costs of Crime and Violence (Washington, DC: Inter-American De- velopment Bank, 2017). 55. Código Procesal Contencioso-Administrativo, no. 8508. 56. The last reform was April 28, 2006. 57. IFC, Creating Markets in Ecuador: Country Private Sector Diagnostic, Fostering a Dynam- ic and Resilient Private Sector (Washington, DC: IFC, September 2021), 18. 58. Decreto Supremo no. 011-2019-JUS. 59. Decreto no. 760 of 2017. 60. Congreso de la República de Guatemala, Decreto no. 9-98. 61. Congreso de la República de Guatemala, Iniciativa no. 3126, https://www.congreso.gob.gt/ detalle_pdf/iniciativas/4563. 62. Constitution of Guatemala, art. 171 (L). 63. Congreso de la República, Decreto no. 2-70. 64. Congreso de la República de Guatemala, decreto 22-73, Ley Orgánica de la Zona Libre de Industria y Comercio Santo Tomás de Castilla. 65. Congreso de la República de Guatemala, Decreto 65-89, Ley de Zonas Francas. 66. Congreso de la República de Guatemala, Decreto 29-89, Ley de Fomento y Desarrollo de la Actividad Exportadora y de Maquila. 67. Congreso de la República de Guatemala, Decreto no. 19-2016, Ley Emergente para la Con- servación de Empleo. 68. Decreto no. 1441, Código de Trabajo de Guatemala. 69. Corte de Constitucionalidad, Expedientes Acumulados 90-2017, 91-2017, and 92-2017, Sen- tencia, 26 May 2007. 70. Article 279 of the EU-Central America Association Agreement, https://eur-lex.europa.eu/ LexUriServ/LexUriServ.do?uri=OJ:L:2012:346:0003:2621:en:PDF. 71. Article 279. 72. Since 2016, Congress has been debating the latest law initiative on the topic. See https://www. congreso.gob.gt/detalle_pdf/iniciativas/5245. 73. Human Rights Watch, “Running Out the Clock: How Guatemala’s Courts Could Doom the Fight against Impunity,” Human Rights Watch, 2017, 11–12. 74. Carlos Arturo Villagrán Sandoval, “Guatemala: The State of Liberal Democracy,” in Rich- ard Albert et al. (ed.), Global Review of Constitutional Law (I-CONnect-Clough Center, 2018), 126. See also “Risk & Compliance Portal, Guatemala Corruption Report,” https:// www.ganintegrity.com/country-profiles/guatemala/. 75. Kappes case, Notificación de Intención de Conformidad con el Tratado de Libre Comercio entre la República Dominicana, Centroamérica y los Estados Unidos, https://www.mineco. gob.gt/sites/default/files/carta_de_intencion-mayo_2018-esp.pdf. 76. See for example the Programa Nacional de Competividad de Guatemala (PRONACOM), https://www.pronacom.org/sobre-pronacom/; Benjamin Roseth et al., ed., El Fin del Trámite Eterno: Ciudadanos, Burocracia y Gobierno Digital (Washington, DC: Inter-American De- velopment Bank, 2018), 126. 77. Roseth et al., El Fin, 126. 78. Roseth et al., El Fin, 126. 4 SECTOR ASSESSMENTS 38 GUATEMALA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 4.1 Sector Selection Framework Prospective investment opportunities were evaluated according to six selection criteria, which assessed their potential for (a) increasing economic growth, (b) fostering inclusiveness, (c) supporting climate change mitigation and adaptation, (d) improving governance, (e) consistency with Guatemala’s investment attrac- tion strategy, and (f) alignment with World Bank analytical expertise (table 4.1). The selection process also sought to prioritize investment opportunities that fos- ter inclusive job creation, especially among female workers, as well as those that promote progressive formalization of informal activities. Climate change and the environmental impact of prospective opportunities are assessed in terms of forest protection, the reduction of CO2 emissions, and enhanced resilience to weather-related shocks. The selection process also incorporates the feasibility of various measures and those that allow private firms to operate effectively in an environment with governance challenges. Finally, investment opportunities are evaluated in terms of their consistency with the government’s priorities for at- tracting investment and with the existing body of analysis underpinning World Bank operations in Guatemala. On the basis of the selection criteria summarized in appendix A, the CPSD focus- es on and analyzes investment opportunities in two primary areas: agrifood pro- duction and (b) light manufacturing. Private sector investment and growth play a vital role in job creation and improvement in labor productivity that can benefit the poor and those in the bottom 40 percent of the income distribution. Model estimates indicate that investments in the agriculture sector and light manufac- turing have the greatest impact on poverty and shared prosperity. Furthermore, investment in agriculture and light manufacturing benefits largely the most disad- vantaged groups, such as women, youth, and Indigenous populations. This ben- efit to the poorest people arises through three main channels: creating jobs for the unemployed, generating sectorwide increases in productivity, and thus pro- viding higher-paid jobs for employed workers. The development of light manu- TABLE 4.1 Sector Selection Criteria Criterion Light manufacturing Agriculture and and industrial agricultural parks processing a Economic growth ✓ ✓ b Inclusive job creation ✓ ✓ c Climate change adaptation and mitigation ✓ ✓ d Good governance ✓ e Alignment with government priorities ✓ ✓ f Consistency with World Bank expertise ✓ ✓ Source: World Bank analysis. 4  SECTOR ASSESSMENTS 39 facturing and industrial parks, the latter of which can act as business accelera- tors, can also increase direct and indirect employment, boost exports, promote innovation, and strengthen legal and regulatory frameworks with broader econ- omywide and private sector development implications. A broad cross-section of sectors and activities was considered in the analysis. In ad- dition to agriculture and light manufacturing, these included, among many others, food manufacturing, construction, warehousing, communications, financial and business services, and fisheries, and numerous related subsectors. A significant im- pact on poverty was also observed for investments in recreation and other activi- ties, and traded sectors (estimated at around 90,000 and 80,000, respectively, in- dividuals moving out of poverty), but with lower income gains for the bottom 40 percent (around 0.4 to 0.5 percent) than for agriculture and light manufacturing. Mining sectors such as coal, gas, and oil were among the industries with the lowest welfare gains, with an estimated poverty reduction for fewer than 40,000 individ- uals and average income gains for the bottom 40 percent of less than 0.35 percent. To complement the analytical assessment, the team also conducted internal and external consultations which validated investment opportunities related to agri- food and light manufacturing. The CPSD team met internally with World Bank and IFC sector experts and held virtual consultations with key stakeholders in Guatemala. From these discussions, light manufacturing, cold-chain infrastruc- ture, fresh-food processing, construction, electronics assembly, business process outsourcing (BPO) services, and textiles were identified as areas in which the pri- vate sector showed especially strong interest. The government’s GNSD strategy prioritizes the development of more-productive crops (such as vegetables, avo- cados and other fruits, and coffee) and the apparel industry in the near term. In the medium term, the authorities aim to attract investment in pharmaceuticals, medical equipment, electrical components, and BPO services. Discourse clarified that food processing requires cold chain infrastructure and that manufacturing could benefit from industrial parks. Guatemala’s trade and investment agency (PRONACOM) highlighted the importance of light manufacturing and industri- al parks as components of its nearshoring strategy. The agency plans to leverage the current incentives framework for special economic zones (SEZs) to attract cornerstone foreign investors. Within the light manufacturing sector, industrial parks can provide the necessary infrastructure and security conditions required by private firms in the textiles, agro-industry, electronics, and BPO sectors. Other investment opportunities were evaluated but not prioritized as CPSD fo- cus areas because of the presence of binding constraints and demand-side fac- tors. High levels of insecurity and crime, coupled with an inadequate road net- work, discourage large-scale investments in Guatemala’s tourism and recreation services sector. A small domestic market, weak regulatory framework, and poor infrastructure limit opportunities in the telecommunications sector. The BPO sub- sector faces connectivity constraints and strong competition from neighboring countries and established players, such as Costa Rica, which are already mov- ing up the value chain. The industrial textile sector suffers from labor cost con- straints due to the elevated minimum wage, even though consultations indicat- ed that Guatemalan textile workers tended to be highly productive by regional standards. The pharmaceutical and medical equipment sectors, which are high- 40 GUATEMALA  COUNTRY PRIVATE SECTOR DIAGNOSTIC lighted in the government’s program, require major changes in the regulatory framework for product registries as well as better logistics infrastructure to con- nect suppliers—and these reforms are beyond the five-year horizon of the CPSD. Process standards, digital financial services, access to finance for MSMEs, and remittance channels are key areas for productivity, jobs, and financial inclusion, but they will be examined as elements of the enabling environment within the sectoral assessments rather than as stand-alone investment opportunities. 4.2 Agriculture Sector Guatemala is a predominantly agricultural country. Agriculture production in 2019 reached US$8.6 billion, representing 11 percent of GDP and employing over 2.5 million people, equivalent to 32 percent of all workers.1 Agriculture employs 70 percent of rural workers and 81 percent of Indigenous workers in rural ar- eas.2 Since 2013, the sector has grown value added at an average annual rate of 4.6 percent (lower than the average nominal GDP growth of 6.1 percent), and the labor force has grown by a yearly average of 1 percent.3 Agriculture is also central to the country´s export-led economic model. In 2021, exports of agriculture products reached US$3.1 billion, representing 4 percent of GDP and 30.4 percent of all exported goods. The largest markets for Guate- malan agriculture products are the United States (56.41 percent), Saudi Arabia (4.95 percent), and Japan (3.53 percent). The most important products are ba- nanas (9.3 percent of total exports), coffee (9.0 percent), palm oil (6.9 percent), and cardamom (5.0 percent).4 Guatemala accounts for 55.15 percent of glob- al cardamom exports, 6.8 percent of banana exports, and 2.0 percent of global sugar exports. Exports have been boosted by various trade agreements, especially the Dominican Republic–Central America Free Trade Agreement (CAFTA-DR) and the European Union–Central America Association Agreement, as well by Guatemala’s proximity to the United States. Agriculture exports are essential, but their competitiveness and revenues are con- strained by low levels of diversification and sophistication and by limited adoption of new, more productive technologies. Guatemala’s top five exports are bananas, cardamom, coffee, raw sugar, and palm oil, all products of relatively low economic complexity. Between 2010 and 2020, Guatemala’s export complexity ranking fell from 77th to 82nd of 133 countries. Among the country’s top five exports, banan- as and sugar are constrained by low prices in destination markets because of poor quality. The palm oil is also considered to be of poor quality and sells for average prices. Coffee and cardamom, on the other hand, have a reputation for good quali- ty that allows them to garner higher prices in international markets. The limited ad- aptation of technology, such as irrigation and optimal genetic varietals, also renders producers vulnerable to increasingly frequent and adverse weather conditions. Heavy dependence on commodity exports and limited crop diversification leave producers exposed to global price volatility, while also limiting the gains from trade. Guatemala has the potential to expand and diversify agricultural exports through nontraditional products such as papayas, avocados, berries, and others. Exports 4  SECTOR ASSESSMENTS 41 of nontraditional agricultural products have increased in recent decades and have considerable room to grow. The GNSD strategy prioritizes development of more-productive crops (such as vegetables, avocados and other fruits, and cof- fee). Apart from producing and exporting raw material, there are opportunities to increase value added by improving product quality, engaging in additional processing, or developing new commercial uses for traditional and nontradition- al products. Improving quality or expanding the portfolio of specialty, organic, fair trade, or environmentally friendly products offers new market opportuni- ties for traditional products such as coffee, cardamom, and bananas. Increased processing capacity could enable the production of dehydrated or frozen fruits and vegetables. Secondary processing, such as making vegetable paste, sauces, canned products, and vegetable chips, could also generate opportunities for job creation and diversification of local production. Agriculture is constrained by low and stagnant labor productivity.5 Nonethe- less, agriculture is key to the country’s export basket, as noted above, and plays a crucial role in employment, supports the country’s domestic food system, and is the backbone of food security. The sector´s low value added per worker en- gaged in primary agriculture is largely the result of 90 percent of workers being informal. A total of 80 percent of operations is done by smallholders with less than 0.7 hectares, and 60 percent of farms are involved in subsistence produc- tion with limited or no agronomic plans or technical support.6 Productivity is further hindered by inadequate infrastructure, a lack of financing, and climate change–induced risks. As a result, an estimated 40 percent of agriculture pro- ducers live below the poverty line, which is closely linked to the country´s on- going and worsening food security crisis7 (see box 4.1). In 2019, 80 percent of the sector’s workers were employed in primary agriculture and the remaining 20 percent worked in processing. The value added per worker in agriculture aver- aged US$3,337, while those employed in primary agriculture averaged US$2,269 and those in processing averaged US$7,741. These values are very low compared with an average of US$23,600 for Latin America and the Caribbean.8 These av- erages also hide vast differences between traditional production, generally found for cereals and beans, which remains below US$650 in value added per worker, and more technical operations, such as for sugar cane and bananas, which sur- pass US$7,000 in value added per worker. Postharvest losses also present an important constraint that cannot be overstated. Guatemala loses 20 million tons of food annually, equivalent to 38 percent of to- tal production. These losses correspond to 15 percent of the available agricultur- al land, represent 9 percent of the country’s total greenhouse gas emissions, and cost 4.2 percent of annual GDP.9 More than 35 percent of beans and maize spoils because of poor harvest management, pests and animals, and salmonella and af- latoxins. This is largely the result of insufficient investment in storage and pres- ervation facilities, inadequate transport logistics, extended transport times due to weak road infrastructure, and lack of uptake of improved handling and manage- ment practices. In addition, a lack of information about market locations and prices leads to large amounts of food loss at the farm level and additional upstream losses along the value chain. Addressing these substantive loss issues could lead to signif- icant increases in rural incomes, export quantities and quality, and associated GDP. 42 GUATEMALA  COUNTRY PRIVATE SECTOR DIAGNOSTIC BOX 4.1 Food Insecurity in Guatemala Guatemala ranks 80th of 113 countries in the Global Food Secu- ment is gender discrimination. Food security and nutrition improve rity Indexa and has the highest level of child malnutrition in the considerably when women, especially rural women, are protect- Western Hemisphere. While agriculture is a major source of sup- ed from discrimination and have adequate access to protection, port for Guatemala’s domestic food system, 77 percent of fam- education, productive inputs, and employment opportunities.f ilies consume a poor or inadequate diet, characterized by high The COVID-19 pandemic increased the levels of poverty and consumption of cereals (maize) and low consumption of animal food insecurity in Guatemala, especially among vulnerable groups foods, fruits, and vegetables.b Protein consumption is low, with such as rural households, women, and Indigenous people.g More- vegetable protein providing on average 68.5 percent of intake over, the war in Ukraine has further worsened global and nation- and animal protein the remaining 31.5 percent.c al food security, especially because of its impact on global maize, In its western highlands region, where most Indigenous Mayan fertilizer, and oil markets.h As World Bank states, support to sus- people live, 48 percent of the population is chronically undernour- tainably expand social safety nets and increase food security will ished.b Chronic child malnutrition (stunting) affects 47 percent of be critical to protect families with young children from hunger all Guatemalan children under five years of age, 58 percent of In- and food insecurity caused by both temporary shocks and struc- digenous children, and 66 percent of children in the lowest income tural conditions.i quintile.d Malnutrition in rural areas can rise to greater than 70 Guatemala’s food system, which relies heavily on the coun- percent, particularly in regions with large Indigenous populations. try’s agricultural production, can play a key role in more efficiently Food access is constrained by three main factors. The first hin- delivering food and nutrition security. Strengthening and mod- drance is low real wages that make buying enough nutritious food ernizing the food system can help cover gaps in food security a challenge. The minimum wage, which is higher than the aver- and nutrition, meet future incremental needs, improve farmers’ age income in rural areas, is sufficient to cover only 63 percent welfare, and reduce dependency on agricultural imports. These of a household’s Basic Food Basket costs.e The second problem measures would involve increasing productivity, enabling imports is location, as remote places with poor road infrastructure make and a robust export market, and expanding market opportuni- transportation complex and food more expensive. The third ele- ties for isolated regions. a. The Economist Group, “Global Food Security Index 2021,” https://impact.economist.com/sustainability/project/food-security-index/. b. Viviana M. E. Perego et al., DIGITAGRO— Investing in Digital Technology to Increase Market Access for Women Agri-preneurs in Guatemala (Washington, DC: World Bank, 2022). c. FAO, FIDA, OMS, PMA, and UNICEF, Versión Resumida de el Estado de la Seguridad Alimentaria y la Nutrición en el Mundo 2022: Adaptación de las Políticas Alimentarias y Agrícolas para Hacer las Dietas Saludables más Asequibles (Rome: FAO, 2022), https://doi.org/10.4060/cc0640es. d. World Bank, “Responding to COVID-19: Modern and Resilient Agri-Food Value Chains Project,” December 7, 2020. e. Food and Agriculture Organization of the United Nations ( (Santiago: FAO, 2019). f. “La Autonomía Económica de las Mujeres en la Recuperación Sostenible con Igualdad,” Informe Especial, February 10, 2021, 1–15, https://www.cepal.org/es/ publicaciones/46633-la-autonomia-economica-mujeres-la-recuperacion-sostenible-igualdad. g. Secretaría Técnica de la Mujer del Consejo de Ministras de la Mujer de Centroamérica y República Dominicana (STM-COMMCA), “Impacto y Efectos Socio- Económicos Diferenciados de COVID-19, en la Vida de las Mujeres Rurales y Recomendaciones Emanadas del Mismo” (San Salvador, STM-COMMCA, 2021). h. FAO et al., “Adaptación de las Políticas Alimentarias.” i. World Bank, “Guatemala SCD Update: Building a Stronger Social Contract through Productive, Inclusive and Sustainable Growth” (Washington, DC: World Bank, March 2022). 4.2.1 Identification of Opportunities The analysis identified key value chains for further focus: peas, French green beans, avocados, papayas, and cardamom. Among commodities in Guatemala’s horticulture production, both peas and French green beans, often considered as a single chain because they are often produced and marketed together, were select- ed for their high trade volumes. For fruits, Guatemala has seen a major increase in papaya exports, growing from US$3.6 million to US$23.8 million between 2010 and 2021. As an avocado producer, Guatemala also has great potential to supply a larger share of a commodity that is rapidly growing in world imports. Evaluating the competitiveness of agricultural products, their growth poten- tial, and external demand for them can be important proxies for investment po- tential. This was measured using two main indicators: the average growth rate 4  SECTOR ASSESSMENTS 43 of Guatemalan exports of a selected good and the average growth rate for the commodity’s world imports. The dynamism and trade positioning of Guatema- lan produce in foreign markets were further analyzed through three specific cri- teria: the share of each commodity in total Guatemalan exports to the United States, the degree of trade complementarity for each commodity between Gua- temala and the United States, and the level of Guatemalan export specialization for each type of produce regardless of the destination of trade flows.10 The in- dicators used to measure these criteria, respectively, were the monetary value of Guatemalan exports to the United States in 2019, the trade complementarity in- dex between Guatemala and the United States in 2019, and the revealed com- parative advantage index of Guatemala for each commodity in 2019. This analysis indicates that Guatemala shows investment potential for fresh pro- duce, most notably in horticulture and fruit products. To date, low-quality pro- cessing methods and fragmented distribution logistics have impeded the develop- ment of Guatemala’s fresh-fruit value chain. Opportunities to leverage revealed comparative advantages were identified in the spice, fruit, and horticulture sub- sectors. These value chains could be further developed, but doing so will require sizeable investments to expand capacity, such as the development of cold chain infrastructure. The analysis identified the top two products for each of the fruit and horticulture categories and one product among spices, and examined the in- vestment opportunities and challenges for these crops. 4.2.1.1 Cardamom Current State of Production Guatemala is the largest exporter and second largest producer of cardamom in the world, and its exports have surged over the past decade. Between 2021 and 2022, production of parchment cardamom reached an estimated 37,000 tons. Most of this is exported, representing more than 60 percent of the total interna- tional cardamom supply and 3.8 percent of Guatemalan exports in 2021.11 Car- damom exports have grown from US$308 million to US$520 million between 2010 and 2021. Volatility for cardamom exports has been high in recent years, partly because of variability in the international price of cardamom and short- ages in production from key world suppliers, as in the case of India.12 The five main destinations for Guatemala’s cardamom exports are the Arab Republic of Egypt, Bangladesh, Jordan, Saudi Arabia, and the United Arab Emirates. Cardamom production is concentrated around smallholder producers in poor re- gions of the country. Around 95 percent of cardamom production in Guatemala is undertaken by smallholders in farms usually smaller than 2 hectares that also produce subsistence crops such as corn, beans, and, in some cases, coffee or ba- nanas for self-consumption.13 Studies estimate that the average cardamom plan- tation in the department of Alta Verapaz is 0.65 hectares. The departments of Alta Verapaz and Quiché represent 82 percent of production and 90 percent of the area under cardamom production. However, the populations of these depart- ments also face very high poverty rates, 89 and 77 percent, respectively.14 Around half of smallholders participate in an active cooperative or other kind of associ- ation, and the other half operate alone either formally or by being part of an in- 44 GUATEMALA  COUNTRY PRIVATE SECTOR DIAGNOSTIC active organization. Inputs are largely sourced directly by smallholders, as most cardamom producers obtain seeds from their own plantations or their neighbors. The cardamom supply chain has several intermediaries. Farmers sell their pro- duce to a wholesale buyer (commonly named “coyote”), or the producer trans- ports their product to collection centers. Local collectors or retailers then sell the product to processors who transform cherry cardamom into parchment car- damom. Some farmers also process cardamom themselves through the estimat- ed 2,000 drying systems installed on farms, though capacity is limited.15 A note- worthy example is the industrial plant for cardamom processing installed by the Federation of Cooperatives of the Verapaces (FEDECOVERA) in 2016 in Cobán, Alta Verapaz. After processing, regional buyers and wholesale intermediaries buy parchment cardamom from processors and sell it to exporters. On occasion, pro- cessors sell directly to exporters, which necessitates that the product meet spe- cific color and size requirements related to quality as well as adequate transfor- mation process standards. The storage and drying process of cardamom require precise and timely tech- niques. Speed and quality of storage are key to keeping the cardamom capsule green, which is a key determinant of cardamom quality. Greenness can be re- tained by storing the product within the first 12 hours after harvest, and jute bags are used to maintain a temperature of 22° to 24°C.16 The drying process is the most complex stage of the conversion of cherry cardamom into parchment cardamom, as it demands a continuous temperature of between 40 and 50°C to retain the green color. An increase in temperature significantly increases the per- centages of yellow or split capsules and heat injury,17 and lower temperatures cause cardamom to lose its color and become white. Quality is also compromised by the lack of use of fertilizers and pesticides and by smallholders’ use of seeds from their own plantations. Limited use of fertil- izers leads to low yields, while limited use of pesticides leads to problems with thrips and picudo. Producers tend to select seeds from the best plants in terms of capsule size and resistance to diseases among their own plantation or those of their neighbors. However, they largely ignore the specific genetic variety and characteristics of the seeds they possess, which are often suboptimal because of their edaphoclimatic conditions. This in turn compromises product quality and resilience to external factors. Moreover, the small scale of operations means that an individual farm’s best seeds might not be enough to cover the entire planta- tion, thereby requiring the use of lower-quality seeds. Lack of strategic planning and sanitary control over cardamom production is an- other constraint. Farmers generally do not employ adequate and timely nutrition and phytosanitary control programs, partly because of ignorance of what, when, and how fertilizers and pesticides should be used and the profitability of such in- vestments. The producers also do not strategically plan their planting and pro- duction. This is because many smallholders consider cardamom production as secondary to other activities, such as working in coffee plantations or producing corn, bananas, or other crops. However, this is changing as an increasing num- ber of farmers learn about the profit potential of cardamom. 4  SECTOR ASSESSMENTS 45 The drying process for cardamom entails logistical and quality difficulties. To dry a batch of cardamom, processors need to gather enough cherry cardamom with- in a strict time frame after harvest. This is a challenge, since production is large- ly decentralized and not strategically planned. While cardamom does not require cold chain infrastructure, it must be processed quickly after harvest to retain its color. As a result, small producers face an urgency to sell once the cardamom is harvested, leaving cherry cardamom producers at a disadvantage with intermedi- aries. Wood is used to dry an estimated 90 percent of the country’s cardamom but taints it with soot and changes its smell and taste. The use of wood also creates difficulty in maintaining a constant temperature. Furthermore, reliance on wood fosters deforestation and associated negative social and environmental impacts. Recommendations The drying process could benefit from more efficient and sustainable methods. This could take different forms, but switching from wood to gas would allow faster, safer, and more uniform drying. Finding more efficient, cleaner, and more uniform ways of drying is hampered by low human capital, inadequate materials, and a lack of extension services and standardized procedures. For example, al- most all machines use black steel instead of stainless steel, which would be more appropriate for food processing. Despite existing awareness of these challeng- es, there remains a need to systematize experiences and standardize processes so that drying is carried out in the best possible way.18 Other specific improve- ments include reducing batch sizes so processing can occur with fewer logistic hurdles, optimizing drying designs, and validating the use of sodium carbonate for washing prior to drying. Improved access to finance would help improve cardamom quality and the re- turns to smallholder producers. Since cardamom production is concentrated among smallholders, access to credit and financial resources is limited. Farmers usually work on land accredited by a communal agreement with the landowners, leading to a lack of legal certainty.19 Irregular or informal land tenure arrange- ments limit access to finance and government support, since land is commonly the main collateral requisite. Furthermore, with insecure property rights, incen- tives for investment in irrigation, soil regeneration, and land leveling, among oth- ers, are low. A lack of finance also impedes access to fertilizers, pesticides, and equipment needed to process cardamom and secure better prices. Standards and certification are an opportunity to ensure the production of high-qual- ity cardamom for export. Guatemala could work on strengthening compliance with increasingly strict standards from cardamom-importing countries, espe- cially in terms of maximum limits for pesticide residues.20 While access to pesti- cides is limited by unaffordability, producers who can afford pesticides still re- quire awareness of the appropriate quantities of pesticide to be used. This issue has not been critical to date because of the relatively lax standards in the Mid- dle East but is poised to become increasingly central as standards in that region are raised, consumption shifts to Europe, and stronger competition arises from countries such as El Salvador, Honduras, Sri Lanka, Tanzania, and others. In- vestment in national laboratories and certifying firms by the private and public sectors is needed for analysis and quality control to produce and enforce stan- dards in cardamom production. 46 GUATEMALA  COUNTRY PRIVATE SECTOR DIAGNOSTIC Better vegetative material is also needed. Nurseries capable of selecting and re- producing the best varieties in terms of cherry size, color, resistance, and yield should be encouraged. Although they could operate as conventional private com- panies, they could also operate through subsidy schemes following the Starbucks model with Marseillaise coffee, in which millions of coffee plants with the de- sired characteristics are bred and delivered free of charge. Alternatively, nurser- ies could operate through PPPs to provide incentives for this type of investment. Large organizations such as the Association of Cardamom Producers of Guatema- la (CARDEGUA) and FEDECOVERA would be best suited to play a leading role. Training for farmers in the design and implementation of high-yield operations in agro-forestry systems can improve cardamom quality. Such training involves proper and timely nutrition, pest and disease control, adequate shade and soil management, and selection of enhanced cardamom varieties alongside trees. This can be achieved by expanding the National Rural Extension System, strength- ening national agricultural development strategies led by the Ministry of Agri- culture (MAGA), and reinforcing the capacities of extensionists as promoters of rural development. In addition, with the expansion of this program, agronom- ic plans for land use, seed selection, water use, fertilizers, and pesticides can be developed. A research center for cardamom involving the private sector, univer- sities, and the public sector could address these gaps in training and technical knowledge. This would require the capacity to evaluate and develop vegetative material, establish best production and manufacturing practices, study plant re- sponses to soil and altitude, and set strategies to deal with pests and diseases. Closer ties between producers and exporters could help increase the produc- tion of high-quality cardamom. Being closer to producers could allow exporters to secure larger quantities and a better quality of cardamom, with traceability and in compliance with future more stringent standards by importing countries. Moreover, exporters could be key to providing producers with training, produc- tion plans, inputs, and credit, as seen in other value chains. This becomes cru- cial as competition from other producing countries intensifies and standards in consuming countries rise. Greater output does come with a potential trade-off in the international cardamom price, given Guatemala’s share of world exports, but the trade-off will decrease as competition intensifies and is potentially off- set by higher quality and greater sustainability of the supply. Lastly, connecting producers with exporting companies could help producers to generate more val- ue added by increasingly eliminating intermediaries. Commercialization can be enhanced through new channels at the community, municipal, and regional levels. Examples of these new channels include incorpo- rating cardamom in food and beverages on the local market, finding new destina- tions for parchment cardamom, or integrating cardamom into other food prod- ucts, such as cardamom-based essential oils, chocolate, coffee, or others. Having real-time access to price information on the diverse commercialization channels and locations through information and communication technologies would add benefit by reducing price volatility at the national level. Recommendations for cardamom are summarized in table 4.2. 4  SECTOR ASSESSMENTS 47 TABLE 4.2 Recommendations to Support the Cardamom Industry Challenge Recommendations Implementing Short or agencies medium term Low efficiency and Foster development of agronomic plans for MAGA Short lack of innovation in land use, seed selection, water use, fertilizers, agricultural practices. and pesticides. Strengthen national agricultural development strategies through programs like the National Rural Extension System. Establish nurseries to select and reproduce the CARDEGUA, Medium best varieties of cardamom, operationalized FEDECOVERA, MAGA through PPPs or subsidy schemes that breed and provide cardamom plants to farmers. Develop a research center for cardamom that CARDEGUA, Medium to long increases the capacity to evaluate and develop FEDECOVERA, USAC, vegetative material, establish best production academia, private and manufacturing practices, study plants’ sector firms with response to soil and altitude, and set strategies research institutes to deal with pests and diseases. Deficient market Link producers and export companies to AGEXPORT, PRONACOM, Short linkages and inadequate increase quality and quantity of cardamom exporting firms, production techniques. exports in light of rising competition. cardamom producer associations Develop training programs for processing MAGA, INTECAP Medium practices for drying cardamom and using gas drying equipment rather than wood. Limited market Increase commercialization of cardamom in PRONACOM, Medium opportunities. secondary products. companies working with related products such as chocolate and oils Note: AGEXPORT = Guatemalan Association of Exporters; INTECAP = Instituto Técnico de Capacitación y Productividad; USAC = Universidad de San Carlos de Guatemala. 4.2.1.2 Peas and Green Beans Current State of Production Guatemala is a major exporter of peas and French green beans.21 Guatemala is the world’s leading exporter of peas (18 percent of total world exports in 2021) and the sixth largest exporter of French green beans (5 percent of total world exports in 2021).22 French green bean production increased by 115 percent over the past 10 years. In 2020, Guatemala exported 32,659 tons of peas, with an annual growth rate of 1.6 percent, despite the pandemic. Exports of green beans reached 31,751 tons, with an annual growth rate of 7 percent.23 In 2021, the val- ue of exports of both products reached US$160 million (figure 4.1). These plan- tations involve around 60,000 families in 200 communities.24 The three main destinations of peas and French green beans exports in 2021 were the United States (61 percent of total), the United Kingdom (14.9 percent), and the Neth- erlands (11.1 percent). The value chains for peas and green beans require close coordination between seed suppliers, smallholder farmers, wholesale distributors, and exporting firms. The seed supply for both products is dominated by a few seed-producing enter- prises that invest heavily in research and innovation and sell high-quality prod- ucts through export agencies on the Guatemalan market, such as Popoyán, Prose- 48 GUATEMALA  COUNTRY PRIVATE SECTOR DIAGNOSTIC FIGURE 4.1 Total Exports of Peas and French Green Beans from Guatemala 90 80 70 60 US$ (millions) 50 40 30 20 10 0 2000 2005 2010 2015 2020 ‘21 French green beans Peas Source: Trade Map, 2022. millas S.A., and Agrosemillas S.A. Peas and green beans are grown by many smallholders and a few large agricultural companies that are usually associated with smallholders and also act as exporters. Under strict export requirements, smallholders and export companies work closely to achieve high-quality prod- ucts that comply with regulations in destination countries. Producers who sign a sales agreement with export firms or cooperatives deliver the product to sup- ply centers, where the products that satisfy the required quality standards are selected, while those showing signs of damage are rejected.25 Guatemalan firms and brokers that own or lease refrigeration plants where vegetables are selected, washed, cleaned, and packed undertake the processing and packaging operations. The need for refrigeration renders the cold chain essential for postharvest logis- tics. The susceptibility of both crops to temperature makes refrigeration the most important postharvest element and transportation the most difficult part. Peas are easier to handle and have a longer life than green beans, but both products need to be transported in refrigerated trucks with a constant temperature of 4° to 7°C and 95 percent relative humidity to ensure that the products remain in good condition for 7 to 10 days. Very low temperatures can cause mechanical damage to the pod dermis, whereas high temperatures can cause accelerated rip- ening. There are differences in the storage of peas and green beans, specifical- ly in the method of cooling on a small or large scale as well as in direct contact with ice or water. In addition to the export of fresh peas and green beans, these products are also exported frozen, which allows larger volumes and lower risk.26 There are insufficient cold storage centers within agricultural production areas. This negatively affects postharvest handling and product quality and forces pro- ducers to harvest during the morning, when ambient temperatures are relatively 4  SECTOR ASSESSMENTS 49 low. Given the lack of cold storage facilities and the cost of refrigerated trucks, exporters use trucks without cold services at dawn or at night to take advantage of cool ambient temperatures. However, this technique does not ensure prod- uct quality as well as cold systems would. Only in some instances is the prod- uct transported in trucks equipped with cold systems. Furthermore, the export of frozen peas and green beans, which allows export in larger volumes and with lower risks, is severely limited by the greater investment requirements for the re- quired infrastructure, as well as the cost of electricity. Poor seed quality constrains the quality of small farmers’ products. Except for producers working with exporting firms that provide them with seeds, indepen- dent small producers often use seeds from lower-quality plants for reproduction, since those of higher quality are sold to export firms. This causes a progressive deterioration in the quality of peas and green beans due to genetic degeneration, which negatively influences the final price.27 Additionally, seed production is not subject to any official control. Pea and French green bean exports have experienced high rejection rates due to microbiological contamination and pesticide overuse. Insects and pests also af- fect the quality of the pods of snow peas and French beans for export, most no- tably in the case of thrips. These insects scrape the epidermis of the leaves, pro- ducing deformations and color changes in the leaf area,28 causing a decrease in their commercial value or rejection for export.29 In response, producers use large amounts of chemicals to ensure high standards of visual quality, even though some of these inputs are prohibited in international markets.30 The primary rea- son the country’s pea and green bean industry has had difficulty addressing san- itary and phytosanitary quality control concerns is the persistence of unregulat- ed supply channels. Recommendations Increasing the supply of certified seeds and access to them by small producers is needed and would create new opportunities. This requires the development of nationally certified laboratories to improve and guarantee the quality of seeds, as well as the strengthening of supervision, inspection, and registration. Similarly, supervision and inspection of the types and quantities of pesticides used should be improved. Training programs for seed producers and marketers on the fulfill- ment of technical standards or on procedures and protocols can be used to pro- mote production of enhanced plant varieties. Application of new strategies for pest and disease control could allow Guatema- la to achieve high crop quality standards, remain well positioned in export mar- kets, and enter into new markets. Development and implementation of pest man- agement programs that include support for producers and training on the use of approved chemical products, the importance of their adequate use for food se- curity, and the fulfillment of sanitary and phytosanitary measures are necessary to reduce rejection rates. Additionally, more-sustainable options such as organ- ic fertilizers and pesticides could be promoted and regulated. Implementing controlled conditions could help increase productivity and reduce vulnerabilities. Cold storage, which could be fostered through associations or co- 50 GUATEMALA  COUNTRY PRIVATE SECTOR DIAGNOSTIC operatives with enough space and resources, prevents damage to the pods from thermal shock. Macro-tunnels or greenhouses and efficient irrigation systems could better protect crops from climatic conditions and pests. Irrigation systems reduce water waste and water stress and improve fertilizer absorption, thereby reducing input costs and increasing productivity. Finally, finding new markets for chopped or chunked green beans could help achieve high-value exports and reduce waste and rejection levels. There are op- portunities in these value chains to produce by-products with rejected produce, such as frozen vegetables, freeze-dried products, fertilizer production, plant- based meat, and high-protein pea-based supplements. Substandard peas and green beans can be used in production of alternative food products, for exam- ple, soups, broths, frozen chopped vegetables, and chips through dehydration or baking. Lastly, wasted and discarded peas and French green beans can be pro- cessed as compost or vermicompost. Recommendations for peas and green beans are summarized in table 4.3. TABLE 4.3 Peas and Green Bean Recommendations Challenge Recommendations Implementing Short or agencies medium term Low yields and Implement training programs and regulations MAGA, INTECAP Short quality of production. on the use of approved chemical products and sanitary and phytosanitary measures. Develop national certified laboratories to MAGA, academia Medium improve and guarantee the quality of seeds. Strengthen supervision of certified seeds and inspection over pesticide use. Control conditions, such as by use of macro- MINECO, MAGA, Medium tunnels or greenhouses, efficient irrigation ANADIE, cold storage system, and cold storage, to increase yields and companies productivity throughout the value chain. Limited market Find markets for chopped or chunked green AGEXPORT, MAGA, cold Medium opportunities. beans, such as frozen vegetables, freeze-dried storage and products, fertilizer production, or plant-based dehydrated-food meat, to reduce rejection levels. companies 4.2.1.3 Avocado Current State of Production In Guatemala, avocado exports have been increasing in recent years (figure 4.2) as the product has gone from an exotic fruit to commonplace in several coun- tries. Production is centered in the departments of San Marcos (15 percent), Chi- maltenango (12 percent), Quiché (10 percent), Huehuetenango (7 percent), So- lolá (7 percent), Sacatepéquez (7 percent), Alta Verapaz (6 percent), and Petén (6 percent). In 2015, 3,500 producers and 22 exporting farms were registered by the government.31 Until 2016, Central America was the most important mar- ket for avocado exports from Guatemala, especially to Costa Rica, El Salvador, and Honduras. After 2016, Europe became the principal market, particularly the Netherlands and the United Kingdom. 4  SECTOR ASSESSMENTS 51 FIGURE 4.2 Total Exports of Avocados from Guatemala, 2000–21 10,116.2 10,000 8,000 US$ (thousands) 6,000 4,000 2,000 0 2000 2005 2010 2015 2020 ‘21 Source: Secretariat for the Economic Integration of Central America (SIECA), 2022, http://www.sec.sieca.int/. Although small producers play a crucial role in the avocado export value chain, large traders are becoming increasingly important. Generally, small and medium producers have limited access to information, inputs, and training. To overcome these constraints, some small farmers establish verbal or written agreements with exporting companies, with the latter providing inputs such as fertilizers, chemicals, and technical training that are then deducted from the final payment to the produc- er. In other cases, producers buy the necessary inputs directly and do not receive financing credit, but the exporter details a list of permitted inputs and amounts that can be used to ensure that the product meets the quality requirements. How- ever, according to interviews, larger producers prefer to control their own produc- tion and be more independent. Intermediaries, or brokers, often oversee supplies to the domestic market and Central American buyers. Brokers are either wholesale or retail collectors. Whole- sale collectors generally operate in the formal market, identify the product, en- sure its quality, and typically provide less price variability to producers. Retail collectors, on the other hand, operate in the informal market, where negotiations generally take place at the plantation, quality and other requirements are lower, and prices are more variable. To skip intermediaries and secure higher profits, some producers supply avocados to wholesale buyers located in market centers or directly to restaurants, whereas in other cases producer cooperatives gather the products of affiliates to achieve greater volumes and negotiate directly with final buyers. In general, small producers do not have stable commercial relation- ships with large companies, so they sell their fresh produce to whomever offers the best price in the local market. This reduces their revenues and the commer- cial margins they could obtain if their production were focused on the foreign market. In sum, access to international markets is difficult for smallholders, re- stricting their ability to earn higher revenues through exports. 52 GUATEMALA  COUNTRY PRIVATE SECTOR DIAGNOSTIC Avocado production requires abundant water supplies. With irrigation, ideal- ly a drip system, fruit volume and vigor could be increased, but few smallhold- ers have the means to invest in irrigation systems. However, improper irrigation management can harm the crop, causing deterioration of soil quality and reduc- ing profits.32 Furthermore, drought management techniques can increase resil- ience to climate change for small producers. Quick postharvest handling is essential for avocados because it is a fruit that ma- tures on the tree but ripens off the tree. Avocados are perishable, taking five to seven days after ripening for quality to begin deteriorating.33 As a result, avocado harvesting and postharvest handling must be done in the shortest possible time, in order to extend shelf life. Postharvest losses can range from 10 to 60 percent of production.34 The major causes of losses are mechanical injury during harvesting, field handling, and transportation; overripe or desiccated fruit; postharvest dis- eases (anthracnose and stem-end rots); pest damage; physiological disorders; chill- ing injury because of improper storage temperatures; and breakage of skin due to poor packaging. These factors affect the appearance, texture, taste, and nutrition- al value of the fruit. For example, during a simulation of shipping and handling of the fruit, loss of firmness and chilling injury were the main limitations in the retail quality of avocados subjected to fluctuating temperatures (too cold or too warm).35 Vulnerability to pests also constrains the capacity for export of Guatemala’s av- ocados. There is an insufficient number of certified nurseries with pest-free avo- cado trees that guarantee high yields over time. This is important, since quality management systems are the only way to ensure the purity and quality of seed- lings capable of producing large quantities of high-quality fruits. In turn, the re- sultant need for intensive use of pesticides hinders compliance with maximum residue limit regulations and makes rejection in destination countries more likely. There is also a lack of knowledge of scientific criteria for crop management among small and medium producers. A structural bottleneck often mentioned by inter- viewees is the lack of standardization of harvest and postharvest processes. Most small and medium producers produce avocados with significant variations in size, appearance, and quality, which makes them unattractive to large exporters subject to long-term export agreements. Inconsistencies in quality also hamper exports to Europe because of noncompliance with multiple quality and safety standards there.36 Regional trade for fresh avocados is limited by logistical and phytosanitary chal- lenges. Guatemala has a nontariff barrier for avocado exports to the United States. The main quarantine barrier that prevents Guatemala from exporting to the Unit- ed States is the potential vulnerability to the seed borer (Conotrachelus persea Barber), an insect that is introduced to the avocado fruit in its larval stage and damages the pulp on its way to the seed. It is unknown whether this pest exists in Guatemala, yet the lack of evidence is enough to prevent exports. Since 2019, a technical roundtable with MAGA has been attempting to develop methodol- ogies to inventory the pest. Intraregional trade is further constrained by weak trade facilitation measures. According to SIECA,37 transport of avocados in the Pacific corridor of Central America38 has an average speed of 18.5 kilometers per hour. In addition, delays at the border between Guatemala and El Salvador can be up to nine hours if the product needs verification by customs administra- tions or four hours if there is no need for verification.39 4  SECTOR ASSESSMENTS 53 Recommendations Training programs and traceable certification standards could help improve producers’ compliance with multiple standards required by importing coun- tries. The basic characteristics of Guatemalan avocado quality and standard- ization of harvest and postharvest processes should be agreed upon by input suppliers, producers, packers, traders, and consumers. Standardization at the national level could help the entire value chain by increasing productivity and reducing losses and transaction costs. Nursery plant certification programs, which can be carried out with MAGA, the private sector, and crop specialists, could guarantee farmers quality trees. Costa Rica’s implementation of a cer- tification program for avocado seeds and complementary phytosanitary over- sight processes that guarantee the quality of the plants can serve as a basis for this strategy.40 Technical accompaniment could be led by AGEXPORT so that large, medium, and small producers could meet international certifications re- quired by European markets. Some low-cost techniques, such as gravity irrigation systems, could be employed by small producers facing financial constraints to mitigate the impact of droughts on their crop yields. These systems basically consist of barrels or drums 1 or 2 meters above the ground, which is the height necessary to distribute water along bamboo or polyvinyl chloride pipes. This could help the soil-water-nutrient envi- ronment for optimum crop growth and increase crop yields. Extension services could promote the use of such low-cost systems. Studies and programs to guarantee pest-free areas could help increase avocado exports, particularly to areas with strict pest management standards, such as the United States. Private enterprise could play a leading role in their development, but it is also necessary to involve and train small producers to perform field sam- pling to carry out laboratory diagnostics coordinated by the Plant Health Direc- torate of MAGA. This type of research requires large investments, in which the private sector can play a role through PPPs. International and national cooper- ation could also help finance research initiatives. Pest-free areas can be delineat- ed through public programs such as Mexico’s incentive program, which desig- nated pest-free zones as focus points for studies and interventions to reduce the presence of pests.41 This could improve the trade potential of local avocados and could additionally reap external economies of scale. Associations that include small producers could provide an opportunity to in- crease access to foreign markets. Whether horizontal, through cooperatives or associations of small producers, or vertical, through a close relationship with ex- porting companies, these associations are indispensable for inserting their mem- bers’ products into more competitive markets. The public sector could also pro- vide incentives for small and large producers and exporters to work together. Promoting food products derived from avocados could increase the gains from fresh produce that cannot be exported. The production of such foods could re- duce postharvest waste. Instead of simply exporting raw avocados, food prod- ucts such as avocado oil, guacamole, and chips could be made from avocados. Recommendations for avocados are summarized in table 4.4. 54 GUATEMALA  COUNTRY PRIVATE SECTOR DIAGNOSTIC TABLE 4.4 Avocado Recommendations Challenge Recommendations Implementing Short or agencies medium term Low yields and Promote refinement and adoption of low-cost MAGA, producer co-ops Short quality of production. gravity irrigation systems. and associations Develop a technical certification standard to Avocado-exporting Medium create a nursery plant certification program that companies, MAGA, guarantees quality trees for farmers. academia, avocado crop specialists Improve harvest and postharvest processes by MAGA, AGEXPORT, Medium developing training programs with product INTECAP specialists and avocado producers to increase knowledge and skills. Implement systematic technical accompaniment to AGEXPORT, MAGA’s Plant Medium ensure compliance with international certifications, Health Directorate, large such as are required by European markets. avocado producers Develop pest risk studies and train small MINECO, MAGA Medium producers to perform field sampling to carry out laboratory diagnostics. Limited market Enact trade facilitation measures in the region MINECO, SIECA, MINEX Short opportunities. through organizations such as SIECA. Promote the formation of horizontal MINECO, MAGA Medium cooperatives or associations of small producers and vertical associations between producers and exporting firms. Build storage centers (with cold rooms) in rural MICIVI, MINECO, Medium production zones or move processing centers ANADIE, MAGA closer to production zones. Note: MINEX = Ministry of Foreign Affairs of Guatemala. 4.2.1.4 Papaya Current State of Production Recent growth in papaya exports has shown the product’s export potential. Papa- ya exports grew from US$3.6 million to US$23.8 million between 2010 and 2021 (figure 4.3). The United States constitutes an important market for the product, ac- counting for 86.4 percent of all of Guatemala’s papaya exports. Other main desti- nations are El Salvador (12.8 percent of total papaya exports), Honduras (0.8 per- cent), and Nicaragua (0.02 percent), highlighting the potential for regional trade. Production of papaya is concentrated in the northern department of Petén. Pa- paya grows best in warm climates and locations less than 600 meters above sea level with frequent and moderate rains, for which Petén is well suited. The culti- vated area in the country has increased dramatically, from 614 hectares in 2003 to 13,079 hectares in 2022. Since most deforestation in Guatemala occurs in this department, the expansion of cultivation in Petén raises some concerns, al- though at the time of writing there was no available evidence of a direct contri- bution of papaya expansion to deforestation. Papaya prices differ between the domestic or regional markets and the US mar- ket. Domestic and regional prices in 2022 averaged Q12,208 (US$1,585) per ton. 4  SECTOR ASSESSMENTS 55 FIGURE 4.3 Total Exports of Papayas from Guatemala, 2010–21 35 30.1 30 23.8 25 US$ (millions) 20 15 10 5 3.6 0 2010 2015 2020 ‘21 Source: SIECA 2022, http://www.sec.sieca.int/. Prices of export to the United States are almost twice as high, averaging Q22,139 US$2,875) per ton in 2022. This considerable difference is a strong incentive to export most product to the United States and drives important profit differenc- es between producers who export and those who do not. Large-scale exporters of papaya in Guatemala have more direct access to inter- national markets. Direct exports are done by four large enterprises that have the cold chain and logistics infrastructure that allows them to reduce postharvest losses and achieve desired export quality standards. These enterprises also have business contracts with foreign intermediaries and retailers. Medium-scale pro- ducers often sell their prime produce to medium and big intermediaries for ex- port, whereas rejected produce is sold to domestic consumers. Exports to desti- nations such as other countries in Central America and the United States have been possible through compliance with sanitary requirements facilitated by the declaration of Petén as a pest-free zone for the Mediterranean fruit fly through the Mediterranean Fruit Fly Program. Despite recent growth, there is limited marketing of Guatemalan production. Guatemalan papaya producers have a limited presence at international agricul- tural fairs, which limits export potential. Access to such fairs generally depends on resources from large-scale producers or international cooperation. Papaya is susceptible to high temperatures. Papayas have a short shelf life (three to five days); hence, they require cold storage to ensure quality. The average tem- perature for storing papayas is 7° to 13°C, and relative humidity must be main- tained between 85 and 90 percent. Higher temperatures accelerate the maturation of papayas and compromise product quality. Temperature also affects some fea- tures that are key to consumer preferences such as fruit size and color. In particular, consumers prefer papayas that don’t have spots, are hard, and are not very ripe. 56 GUATEMALA  COUNTRY PRIVATE SECTOR DIAGNOSTIC Temperature increases induced by climate change may result in lower-quality prod- ucts and greater postharvest losses. The most important effect of climate change for papayas is related to higher temperatures because they accelerate matura- tion and compromise the quality of the product. As more fruit ripens at the same time, there are more postharvest losses alongside spikes in supply with resultant lower prices, followed by a cycle of smaller supply and higher prices. Moreover, abrupt changes in temperature create morphological problems such as carpello- dy (deformed papayas) that lead to significantly reduced commercial acceptance. Diseases are also a major driver of losses in papaya production. The most dam- aging pathogen is the Brazilian meleira virus. The principal effect of this virus is a glueyness that makes the fruit hard and rough. This virus heavily affects the region of Petén, causing serious damage to production and reputation. The me- leira virus disincentivizes cultivation of the fruit, and affected producers aban- don the cultivation process, causing shortages in both the domestic and the ex- port markets. Recommendations Strengthened producer organizations could enable growers to improve fruit qual- ity and increase production and could increase access to international markets. Such organizations could take the form of cooperatives or associations of small- er producers, or farmers could work with anchor firms that can provide tech- nical assistance, financing, and connection with external markets. AGEXPORT offers possibilities for producers to associate and benefit from technical sup- port, focused on innovation and specialized-skill development opportunities. The benefits include market access as well as a platform to generate new businesses and to obtain adequate support to promote competitiveness and representation among public and private stakeholders. For example, Agropecuaria Popoyán, S.A., sells inputs to producers and serves as a cooperative through which pro- ducers export various fruits. Training programs can bridge gaps in skills and harvesting techniques and thus can improve production quality and quantity, especially for medium-scale pro- ducers. At present, technical assistance to papaya producers, especially from MAGA, is scarce. Most technical assistance is provided by large-scale produc- ers and intermediaries that often charge market prices or condition the training on a membership fee that can be prohibitive for producers. Training programs facilitated through PPPs would improve production. Training sessions for pro- ducers and technical-knowledge transfer forums between experienced and less experienced producers can serve as valuable learning experiences. Likewise, ag- ricultural extension programs, usually provided by anchor companies or coop- eratives, are important for communicating good practices. Universities can play a valuable role in researching good practices for disease management. Development and enforcement of certifications could increase opportunities for export of papayas. Increased awareness and implementation of certifications, such as those offered by Global G.A.P., the Integral Program of Agricultural and Environmental Protection (PIPAA), and the International Organization for Standardization (ISO), could increase access to international markets, most im- portantly the United States.42 This could reduce dependency on the few inter- 4  SECTOR ASSESSMENTS 57 mediaries that have certifications, while also supporting compliance with phy- tosanitary requirements established in the General Treaty of Central American Economic Integration for trade within Central America. An official network of accredited laboratories (public or private) is essential to provide certifications. Universities also play an important role by providing technical expertise and in- frastructure for these laboratories. Papaya-based dietary supplements and health industry products provide an op- portunity to develop higher-value products that can reduce postharvest losses. Because of its high nutritional value, dehydrated and processed papaya can be in- cluded in various dietary supplements, ranging from juices, papaya enzyme pills, and concentrated formulas to jams and jellies. Other food products could in- clude flour, teas, meat tenderizers, and beer clarifiers. Papayas could also be used in health industry products such as shampoos, body lotions, soaps, hydrant oils, exfoliants, and depigmenting solutions.43 Setting this production close to farms has the potential of reducing losses and/or the need for cold chain services. Lo- cal producers could use this opportunity to create new alliances with large-scale food companies such as Mahler (a Guatemalan food production company ac- quired by Nestle) that produce meat tenderizers and food complements. Recommendations for papaya are summarized in table 4.5. TABLE 4.5 Papaya Recommendations Challenge Recommendations Implementing Short or agencies medium term Low yields and Provide training sessions to impart technical MAGA, anchor Short quality of production. knowledge and skills to producers, while companies or working with universities researching good cooperatives, practices for disease management. academia Develop cold chain infrastructure and increase MICIVI, MINECO, Medium access to these services for medium-scale ANADIE, MAGA producers. Limited market Promote formation of horizontal cooperatives or MINECO, MAGA Short opportunities. associations of small producers and vertical associations between producers and exporting firms. Create an official network of accredited Academia, AGEXPORT, Medium laboratories to create certifications that meet laboratories, large international sanitary and phytosanitary agricultural producers requirements for papayas. Foster papaya demand through secondary Processed food Medium products or subproducts, including oils and companies, cosmetic lotions. companies, PRONACOM 58 GUATEMALA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 4.2.2 Cross-Cutting Constraints in the Agriculture Sector The agricultural regulatory environment is broadly adequate, but low levels of public investment in agricultural programs and research limit the sector’s devel- opment. A 2019 World Bank report rated the quality of Guatemala’s agricultur- al regulatory environment at 65.11, almost equal to that of Mexico (69.45) and well above the score of neighboring Honduras (49.13).44 Nevertheless, Guatema- la’s regulatory framework could more effectively enable the growth of the agri- food sector. Public spending on agricultural R&D equals less than 0.2 percent of Guatemala’s agricultural value added, far below both the levels of regional peers and the 1 percent recommended by the United Nations.45 Significant infor- mation asymmetries in agricultural markets, lack of investment in on-farm and postharvest technologies, and a range of logistical and market access barriers (including low cluster interconnection)46 lead to an abundance of intermediaries, who capture a large share of the agricultural value. Government investment and support to address the risks and challenges faced by producers, such as volatil- ity in fertilizer prices, could reduce the negative impact of these constraints on production and food security. Furthermore, according to the analysis described above for each value chain, sev- eral cross-cutting factors are hindering the competitiveness of agrifood products in Guatemala. These include access to finance, climate change, infrastructure and logistics, and technical knowledge and skills. 4.2.2.1 Finance Access to finance for investment and working capital is a pressing issue for agri- culture producers. Rural areas have limited access to finance, partly as a result of the scarcity of banks, since they remain concentrated in the metropolitan ar- eas. Guatemala City accounted for 30 percent of total access points in the coun- try in 2022. Credit for the agricultural sector amounts to less than 5 percent of the banking system´s total portfolio.47 According to another study,48 this pau- city of access to banks, coupled with high transaction costs, lack of collateral (most notably real estate assets and trusts), and the documentation required to open a bank account, has led to the low rate of financial inclusion in rural areas. Small and medium producers in particular have limited access to finance. These producers often cannot access formal financial services through banks because they lack the required collateral (namely, land and property), and alternative credit options have high interest rates. Apart from not having sufficient assets to serve as collateral, the tedious processing and paperwork involved in credit applica- tions turns farmers off. Other reasons include not having access to banks in far- flung areas and having no information on bank lending programs or procedures.49 As a result, microcredit institutions, savings, and credit cooperatives are import- ant providers of banking services in rural areas and credit for agriculture pro- ducers. These institutions bridge the gap in access to finance for the sector, but they are not subject to regulation and supervision by SIB. In the case of savings accounts, they offer services with minimum opening requirements and without charges for account maintenance or debit card fees. Cooperatives and microcre- 4  SECTOR ASSESSMENTS 59 dit institutions have been key to the development of agricultural value chains, as they offer annual interest rates as low as 10 percent. Because of the importance and presence of these microfinance companies in rural areas, international coop- eration financing programs are often involved. As for payments, they offer trans- actional channels with internet, mobile banking, and remote access. However, the functionalities of these channels are limited, as they are not authorized enti- ties for critical payment infrastructures, such as transfers to third parties outside the cooperative or microcredit system. In addition, alternative credit options for small and medium producers from associated exporters play an important role in supplying inputs and training. Notwithstanding the above, informal providers play a prominent role in bridg- ing the finance gap. Most demand for savings and credit services in rural areas is met by informal providers, such as family members, friends, value chain ac- tors (for instance, input suppliers and exporters), and loan sharks.50 The Glob- al Findex 2021 indicates that 67 percent of adults who received a loan in 2017 in rural areas obtained it from a nonformalized agent.51 According to FUNDE- SA,52 the annual interest rate set by such nonformalized providers can reach 200 percent. In contrast, private banks offer interest rates of 80 to 120 percent for loans up to Q5,000 (US$650) and between 6 and 18 percent for loans above Q20,000 (US$2,597). Nongovernmental organizations offer rates of 80 percent for loans below US$649 and rates ranging between 36 and 52 percent for loans above that amount. Ensuring a preference for the formal over the informal fi- nancing sector will require that services be characterized by reasonable docu- mentation requirements corresponding to the population’s socioeconomic con- ditions, accelerated decision-making processes, convenient financing conditions (that is, amount, rate, term, and frequency of payment), long-term certainty of welfare gains from a good credit reputation, and long-term certainty of a sus- tainable supply of formal-sector financing. Agricultural insurance in the country is also poorly developed. The main agricul- tural insurance is provided by MAGA and Crédito Hipotecario Nacional de Gua- temala and is activated in case of catastrophes associated with extreme drought or storms (for example, storms Eta and Iota). An estimated 40,000 small staple crop producers will be covered by MAGA’s agricultural insurance in 2022, with the aim of adding another 20,000 by 2023.53 4.2.2.2 Climate Change Climate change vulnerability poses a major threat to Guatemala’s agricultur- al production. The country ranks 14th in the world among the countries most at risk from climate-related events, such as temperature variation, floods, and droughts.54 New patterns in temperature and rainfall and the recurrence of ex- treme events will make it difficult to maintain productivity.55 Excess water can lead to fungi and diseases, as well as plant wilt, water fungus, root rot, and sil- ver or brown spots, which can cause death or wilt. On the other hand, lack of water can reduce productivity by causing sterility (no plant flowering) and can make plants more prone to pests. Net water availability is expected to decrease between 5 and 29 percent by 2050 and rainfall by 17 percent.56 The impact on 60 GUATEMALA  COUNTRY PRIVATE SECTOR DIAGNOSTIC monoculture farms would be more pronounced than on agro-forestry farms. Re- duced rainfall and higher temperatures are already leading to steady declines or stagnation in productivity for smallholders. Key staple crop yields are expected to see declines of up to 14 percent by 2050, as is the case for maize and beans.57 Large, export-oriented commercial producers will face challenges adapting to new climate conditions, placing Guatemala’s export market in a vulnerable po- sition. A previous study found that by 2030, temperatures will increase more in the department of Petén and coastal areas (1.6°C) and less in the highlands (Si- erra Madre and Cuchumatanes) and the east of the country (1.4°C). Along with the intensification of dry and hot periods and less precipitation, this may cause water deficits and changes in suitable crop areas. The areas most affected are expected to be the Atlantic coast, the Pacific coastal plain, and the eastern parts of the Dry Corridor (which includes parts of Quiché, Baja Verapaz, El Progreso, Zacapa, Chiquimula, and Jutiapa). Areas suitable for crops in these regions are expected to shift to the Sierra Madre, the Cuchumatanes, the eastern part of the Pacific coastal plain, and Petén. Since the country’s key agricultural exports are climate sensitive, this would leave large producers in a vulnerable position. The crops most sensitive to the expected changes in Guatemala are beans and coffee, and areas suitable for their cultivation are expected to decrease. Natural disasters are causing considerable losses in the agricultural sector. An estimated 136,761.20 hectares and 204,500 families were affected by the rains and winds of storms Eta and Iota in fall 2020, with economic losses of US$119.6 million. The crops most affected by these storms were corn, beans, bananas, to- matoes, onions, and broccoli, in addition to cardamom and coffee.58 Climate resilience in the sector is low, as few farmers have access to controlled production environments such as irrigation, greenhouses, and other technolo- gies. This leaves producers vulnerable to crop losses due to reduced or excessive rainfall, increased hailstorms, and extreme temperatures.59 For example, only 15 percent of the country’s irrigation potential has been developed.60 In this re- gard, MAGA is updating the national irrigation policy 2022–2032 and invest- ment plan in order to make strategic investment decisions.61 4.2.2.3 Infrastructure and Logistics As noted previously, poor connectivity between cities and rural areas, as well as poor road quality, is a major barrier affecting the competitiveness and quality of the agrifood sector. Much of the rural population (70 percent) does not have ac- cess to all-season roads. The worst rural accessibility is found in the center and north of the country, where for 64 percent of the population it takes more than an hour to reach a city of 50,000 or more inhabitants. Difficulties in accessing main agricultural production areas lead to the creation and predominance of in- termediaries in the marketing process, which appropriate some of the value pro- duced by small farmers. Low connectivity also limits the participation of small producers in implementing strategies for linking up with international markets. In addition, problems associated with inadequate and delayed transport to pro- cessing plants have an impact on the quality of perishables such as fruits and veg- etables, making it difficult to achieve high export standards. 4  SECTOR ASSESSMENTS 61 Guatemala also has one of the lowest installed cold chain infrastructure capac- ities in Latin America. The country´s refrigerated-warehouse capacity is around 0.012 m3 per urban resident, 11.5 times lower than Mexico’s (0.138 m3).62 The lack of cooling facilities for storage and transportation leads to lower product quality, barriers to accessing local and foreign markets, and food safety hazards (see box 4.2). Apart from the cost of this infrastructure, the lack of electricity is an important barrier for the development of cold chain storage capacity. In the departments of Petén and Alta Verapaz, electricity coverage is less than 70 per- cent, and in 17 municipalities the coverage rate is between 20 and 50 percent.63 The two departments combined represent 27 percent of the total national agri- cultural area. Additionally, 220V three-phase power systems are unavailable in some relatively isolated regions.64 Storage facilities and infrastructure are also insufficient, creating major loss- es and waste for the sector. Guatemala’s losses and waste make up 38 percent of its total food production each year and contribute 9.1 percent of the coun- try’s greenhouse gas emissions.65 Losses are due mainly to postharvest mishan- dling associated with lack of adequate storage facilities (particularly cold stor- age), transportation problems due to inadequate roads and cold services, and the distance from the field to logistics centers, which are usually located in in- dustrial zones and free economic zones. MAGA has built several collection and BOX 4.2 Cold Chain Infrastructure in Guatemala A product’s shelf life after harvest depends on the correct management of precooling temperatures and the product’s conservation. The cold chain is a preservative agent that inhibits the growth of microorganisms and enzymatic action.a This infrastructure is key to maintaining the quality of the product until it reach- es the consumer and to preserving a product’s shelf life.a Guatemala does not have adequate logistics centers dedicated exclusively to cold storage and cold transportation services. Logistics centers are located in industrial zones and especially in SEZs. Furthermore, the high cost of refrigerated transport is unaffordable for many producers, forcing them to transport their products at night or early in the morning, when the temperature is low. The lack of cold chain infrastructure lim- its development of a cold chain per crop per market combination. Developing this infrastructure would involve storage of seasonally produced foods to allow them to be available year-round, short-term storage staged in strategic locations to meet retail distribution needs, and import-ex- port logistics facilities along global transportation routes.b In Guatemala, the supply of cold chain infrastructure is private, but there is an opportunity for PPPs to play a role in reducing costs and increasing cold storage capacity. According to Edu- ardo Solares, CEO of Polartika, one of the main cold storage enterprises in Guatemala, there is an increased need to guarantee the cold chain in strategic departments of the country where agriculture is predominant, such as Chimaltenango. The average cost of a cold room is estimat- ed at US$40,000, which is prohibitive for small and medium producers without access to finance. According to Solares, a soft financing agreement from the government could encourage an in- crease in this type of business and reduce the cost for the service. These services could be offered in municipal markets to avoid losses and waste generated at that level of the agricultural chain. For this, building small storage centers in rural production zones or moving processing centers closer to production zones is crucial to minimize losses suffered by farmers without cold storage or access to electricity. Market solutions that bring farmers together into cooperatives to share refrigerated facilities can minimize losses en route to distribution centers. a. World Bank, “Guatemala: Food Smart Country Diagnostic,” 2020. b. Victoria Salin, “2018 GCCA Global Cold Storage Capacity Report” (Arlington, VA: Global Cold Chain Alliance, 2018), https://www.gcca.org/legacy-system/2018%20GCCA%20Cold%20Storage%20Capacity%20Report%20final.pdf. 62 GUATEMALA  COUNTRY PRIVATE SECTOR DIAGNOSTIC distribution centers in various areas of the country, some of which have cold storage facilities. However, their use has been hampered by the difficulties pro- ducers face when transporting their products through the tertiary road network and by the distrust of buyers, sellers, and intermediaries in the government man- agement of this service. 4.2.2.4 Technical Knowledge and Skills A lack of training and technical assistance is affecting productivity and resil- ience in the agriculture sector. Guatemala ranks 74th of 141 countries on the relative ease of finding skilled workers, as well as in the skills and abilities of high school graduates. The low quality of Guatemala’s vocational training sys- tem, which ranked 48th of 141 countries in 2019, also hinders the development of the country’s labor productivity. Almost half of agricultural heads of house- hold have no education and 97 percent of adults in these households have not re- ceived any training, yet 72 percent express an interest in developing other skills. 66 Cooperatives and government institutions have programs to improve technical knowledge and skills in the field; however, capacity and coverage remain high- ly insufficient. Although MAGA has training programs, there is still insufficient training in integrated pest management, selection of quality seeds or plants, food loss and waste, climate change, pollution, and business development. Many co- operatives have developed training activities to meet the needs of their mem- bers. However, training programs are not customizable and are often delivered in Spanish rather than in Indigenous languages, limiting the participation of a large segment of Indigenous producers who do not speak Spanish. Also, coop- eratives usually lack detailed data on agronomic practices used by their mem- bers, making it difficult to identify areas of strength or areas for improvement. 4.2.3 Recommendations Table 4.6 presents recommendations designed to address cross-cutting constraints for agribusiness, to accelerate private sector development in the agrifood sector. Several actions to increase agribusiness competitiveness across value chains, by focusing on productivity, finance, trade promotion, institutional development, and social inclusion, are proposed. A possible set of stakeholders that could be engaged in moving these changes forward and the time frame to achieve it are also suggested. 4  SECTOR ASSESSMENTS 63 TABLE 4.6 Agribusiness Cross-Cutting Recommendations Challenge Recommendations Implementing Short or agencies medium term Small farmers lack Improve and expand the productive alliances model MAGA, MINECO, AGEXPORT Short access to profitable (small farmers and exporters) that shifts the nature markets. of intermediary relationships and the degree of contractual uncertainty. Explore the possibility of expanding digital platforms MAGA, AGEXPORT Short to connect producers, off-takers, and end markets. One initiative that can be extended to the participation of small producers is the Connecting Best Markets platform developed by AGEXPORT, which serves as a space for linking Central America’s export supply with international buyers from different markets. Support integration of small farmers into MAGA, COCODES, Medium cooperatives which can increase farmers’ access to ICTA, AGREQUIMA, finance, as well as allow them to increase exports academia such as IARNA and and reach new markets by sharing the costs of these CEAA among small- and medium-scale producers. Low technical Technically and financially support initiatives of Telecommunication Short capacity weakens climate-smart technologies and practices associated companies, MICIVI export with soil management, fertilization, irrigation competitiveness. systems, efficient use of resources, and production models that improve productivity and build climate resilience. Currently, these initiatives are supported mainly by academia along with international coop- eration funds such as the plan developed by IARNAa Improve agronomic capacity in terms of soil Exporters, INTECAP, Medium management, genetic material, plant nutrition, pest international cooperation and disease control, and postharvest handling through training courses. Provide training in agricultural and business MINECO, AGEXPORT Medium practices and technologies. Provide training to MSMEs to ensure access to MAGA, cooperatives, IARNA, Medium external markets, especially in food safety standards CEAA, international and import requirements of destination markets cooperation such as sanitary and phytosanitary measures and safe disposal procedures for agrichemicals. Create private partnerships to provide extension MICIVI Medium services enabled by information and communication technology, especially in rural areas. Inadequate Promote and implement MAGA’s National Policy of MAGA Short infrastructure limits Irrigation to facilitate small producers’ access to production, quality, investment strategies in the field. transport, and market access. Improve and expand the coverage of information MINECO Medium and communication technologies to provide access to market and price conditions in real time. Design a cold storage capacity and transportation MINECO, ANADIE, cold Medium investment program between farms and processing storage companies and plants through PPPs. This program should include complementary equipment cold storage at ports and airports. To support cold companies storage, the investment program must also consider a productive development plan for complementary cold chain equipment across industries, such as cold boxes, thermos flasks, cold packs, and thermometers, among others, to support the investment plan for refrigerated storage and transportation. (Table continues next page) 64 GUATEMALA  COUNTRY PRIVATE SECTOR DIAGNOSTIC TABLE 4.6 Agribusiness Cross-Cutting Recommendations (continued) Challenge Recommendations Implementing Short or agencies medium term Productivity of the Promote access and usage of savings and SIB, Banguat, microcredit Short agricultural sector is checking accounts in productive rural areas institution affected by lack of through transactional cost simplifications, access to finance. financial education programs, and development of digital financial services adapted to the technologies used by the unbanked. Provide accurate information to farmers on SIB, Banguat, FENACOAC Short formal credit institutions, especially those associated with cooperatives or microcredit to reduce information asymmetries and prevent overindebtedness. Design agricultural insurance products or SIB, MAGA, insurance Medium schemes for small farmers and extend them to companies biological risks, such as pests and diseases. In addition, encourage private participation in agricultural insurance by addressing such provisions or policies. Lack of R&D hampers Identify potential climate change impacts on MAGA, CRIA, SENACYT, Short the development of existing cultivations and climate-smart agriculture academia such as CEAB, adequate vegetative techniques to mitigate and adapt to such impacts. CEAA, and IARNA material, pest control and compliance with Establish public and private laboratories to SIB, Banguat, FENACOAC Medium phytosanitary improve genetic material, provide requirements. phytosanitary certificates, foster transformation opportunities for industry, and establish safety and quality standards. Create a national seed institute specializing in MAGA, ICTA, OIRSA Medium seed development and improvement as a joint public-private venture to take advantage of resource pooling. Develop a native variety archive documenting MAGA, CRIA, and academia Medium the conservation and productive potential of such as CEAB and CEAA these plant varieties. Develop a preventive strategy to identify and CRIA, ICTA, OIRSA, CEAB, Medium mitigate pests and diseases. and CEAA Undertake periodic analysis and delimitations MAGA, CRIA, ICTA, OIRSA, Medium of suitable areas for the strategic cultivation of academia such as CEAB and agricultural goods, anticipating climate change CEAA effects, with updated information on expected yields and costs for investors, policy makers, and financial institutions. Fragile institutional Increase national funding for MAGA to provide MAGA, Ministry of Finance, Short and regulatory technical support programs to strategic Congress systems undermine traditional and nontraditional crops. the efficiency and efficacy of public Establish long-term agriculture and MAGA, MINECO, PRONACOM Short spending and public agribusiness policies for strategic products, policy design. with a specific attention to climate change. Develop a regular schedule of disaggregated MAGA Short statistics on agriculture to provide accurate information to stakeholders. Focus mainly on publishing a yearly “Agro en Cifras” report that provides information on cultivated area, production, national distribution, yields, trade, and prices. This has not been updated since 2017. (Table continues next page) 4  SECTOR ASSESSMENTS 65 TABLE 4.6 Agribusiness Cross-Cutting Recommendations (continued) Challenge Recommendations Implementing Short or agencies medium term Promote market access by supporting and PRONACOM, MINECO, Short increasing the presence of producers at MINEX international events and fairs, and help bridge small- and medium-scale producers with international export markets along with compliance on the required product standards and certifications. Improve the regulatory environment in the MINECO, MAGA Medium agricultural sector by accelerating the harmonization of national legislation with Central American Technical Regulation in areas including pest and disease management and use of fertilizers and agricultural amendments, certified seeds, and nutritional labeling. Enhance regulation and compliance regarding MAGA, OIRSA, Medium pesticide use in accordance with export markets and AGREQUIMA provide alternative products alongside restrictions. Enact a water law that establishes responsibilities MARN, Congress Medium and competencies of private and public actors related to water. Note: Short term = 1–2 years; medium term = 3–5 years. AGREQUIMA = Association of Agricultural Chemical Guilds; CEAA = Center for Agricultural and Food Studies; CEAB = Center for Environmental Studies and Biodiversity; COCODES = Community Urban and Rural Development Councils; CRIA = Regional Agricultural Research Consortia; FENACOAC = Federation of Savings and Credit Cooperatives of Guatemala; ICTA = Institute of Agricultural Science and Technology; MARN = Ministry of Environment and Natural Resources of Guatemala; MINEX = Ministry of Foreign Affairs of Guatemala; NTECAP = Technical Institute of Training and Productivity; OIRSA = International Regional Organization for Animal and Plant Health; SENACYT = National Secretariat of Science and Technology; SIT = Superintendency of Communications. a. IARNA, “Creation of Research-Action Networks for Territorial Development and Adaptation to Climate Change in Guatemala,” IARNA, Rafael Landívar University, Guatemala City, Guatemala. 4.3 Light Manufacturing 4.3.1 Market Overview The manufacturing sector is Guatemala’s second largest economic activity and shows significant growth potential. The development of the manufacturing sec- tor has followed a series of industrialization periods since the 1940s. These pe- riods were triggered, or at least catalyzed, by legislation and reforms aimed at improving the business environment and attracting foreign investment, as well as trade policies facilitated by other Central American countries and the United States. However, the sector has also been affected by internal crises and growing international competition. The manufacturing sector accounted for 14 percent of GDP in 2021, behind only retail67 despite falling 2 percentage points since 2001. The largest manufacturing sector is food products, which accounts for 42 percent of total manufacturing output, while apparel makes up 8 percent, textiles rep- resent 3.5 percent, and the broad electronics sector68 makes 3.5 percent (see fig- ure 4.4, panel a). Manufacturing exports are relatively dynamic, growing at an annual rate of 5 percent between 2002 and 2021 to reach US$8.6 billion, or 59 percent of total exports (figure 4.4, panel b). As a percentage of GDP, however, manufactured exports have stagnated at around 15 percent. Most manufacturing activities are concentrated in the Guatemala department, which houses the Gua- temala City metropolitan area, although some decentralization has been enabled by infrastructure improvements and industrial parks in other parts of the country. 66 GUATEMALA  COUNTRY PRIVATE SECTOR DIAGNOSTIC FIGURE 4.4 Size and Recent Economic Performance of the Textiles, Apparel, and Electronics Sectors over Time, 2013–20 a. Output as % of manufacturing output b. Yearly growth rates 10 10 9 8 5 7 6 0 % of GDP Percent 5 4 −5 3 2 −10 1 0 −15 ‘13 2015 2020 ‘14 2015 2020 Textiles Apparel Electronics GDP Textiles Apparel (and others) Manufacturing Electronics (and others) Source: World Bank with data from the Central Bank of Guatemala. Note: Based on Guatemala’s national accounts classification of economic sectors, textiles correspond to code AE038, apparel to AE039, and electronics to AE053 (other activities are grouped as well). The original data are expressed in local currency for base year 2013. The manufacturing sector has been key in including traditionally marginalized groups in the economy, although it employs only a small fraction of the labor force. Employment in the manufacturing sector has historically accounted for 12 to 14 percent of the total workforce, which contrasts with close to 30 percent in sectors such as agriculture and retail. However, about 53 percent of workers in manufacturing activities are women and 46 percent of workers identify as Indige- nous (Maya, Xinca, or Garífuna), greater proportions than those observed for the rest of the economy. In recent decades, the distribution of manufacturing work- ers has shifted away from urban to rural areas, which suggests that more jobs are reaching areas beyond the Guatemala City metropolitan area. The country’s tex- tile and apparel association estimates that those sectors employ about 107,000 workers, of whom 51 percent are women, which is not atypical in this sector. Av- erage wages in manufacturing and the rest of the economy are roughly the same. Guatemala’s light manufacturing benefits from preferential trade agreements, proximity to the United States, and recent reforms to improve the overall busi- ness environment. The Mercado Común Centroamericano was a Central Amer- ican integration project aimed at developing a regional economy by providing a larger market and incentives to stimulate the manufacturing sector. Regional integration continues to benefit Guatemala, as 44 percent of the country’s man- ufacturing exports go to Central America. The United States is the destination for 23 percent of Guatemala’s manufacturing exports, and it remains a strategic partner. The United States has promoted and continues to promote the develop- ment of Central America, with trade preference programs such as the Caribbean Basin Initiative, later replaced by the Dominican Republic–Central America Free Trade Agreement (CAFTA-DR), which stimulates export-oriented manufacturing. 4  SECTOR ASSESSMENTS 67 At present, 73 percent of Guatemala’s manufacturing exports go to CAFTA-DR members. In addition to trade programs, Guatemala has implemented domestic policies to promote the development of light manufacturing. Its liberalized elec- tricity market enables Guatemala to offer energy prices that are competitive by regional standards. Various frameworks to develop industrial parks, SEZs and equivalents,69 and maquilas (typically foreign-owned factories that produce and/ or assemble products primarily for export) have fostered export-oriented man- ufacturing, particularly of textiles and apparel. Between 2010 and 2020, the manufacturing sector was the most attractive sector for FDI in Guatemala, av- eraging 20.6 percent of the total FDI.70 Recent reforms to reduce administrative burdens and add more flexibility to Guatemala’s SEZ regimes are expected to attract more manufacturing investments, leveraging the current nearshoring op- portunity and Guatemala’s proximity to North America. Most of Guatemala’s exports are of low complexity, but the country has a strong comparative advantage in some of its light manufacturing exports. Between 2000 and 2020, Guatemala’s economic complexity index remained practical- ly unchanged at around 0.35, but its ranking fell from 77 to 82 worldwide (of 133 countries). The country’s export basket comprises mainly low- to medi- um-complexity products, a trend that is mirrored when only textiles and appar- el are considered. In 2020, only a small share (1.8 percent) of Guatemala’s tex- tiles and apparel exports had relatively high complexity.71 On the other hand, all of Guatemala’s electronics exports had relatively high complexity, but they account for less than 1 percent of the country’s exports. However, Guatemala had a revealed comparative advantage for two electronics products—namely, primary cells and primary batteries. In contrast, among its textiles and apparel exports, Guatemala had a revealed comparative advantage for 47 products (of 119). There is an ongoing public-private effort to increase the complexity of ex- ports under the GNSD program. The GNSD program provides the framework for public-private collaboration to boost growth in light manufacturing. The GNSD brings together governments and the private sector to address challenges facing Guatemala with a long-term vision. Among other sectors, it supports the development of textiles, apparel, and electronics with measures aimed at attracting investment and growing exports. By 2030, the program expects that apparel exports will increase by up to US$3.5 billion and will create 472,000 additional jobs. For electronics, with firms al- ready operating in the country, an increase in exports of up to US$47 million and 6,300 additional jobs are expected. Additionally, a leapfrogging proposal to in- troduce more-sophisticated exports in Guatemala, including medical equipment and electronics, could generate up to 25,000 additional jobs. Industrial park and maquila regimes have an over-30-year policy history in at- tracting investment and fostering a more export-oriented economy. Guatemala has five legal regimes supporting the development of industrial parks (see box 4.3). However, only three of them are key in the development of light manufac- turing and the country’s export-oriented economy, and each offers some fiscal in- centives: free zones (zonas francas), special public economic development zones (ZDEEP), and maquilas (regime 29-89s). While slightly different, these regimes provide 100 percent income tax exemption for 10 years for export activities, re- 68 GUATEMALA  COUNTRY PRIVATE SECTOR DIAGNOSTIC fund export VAT (as is the case for all exports), and offer a one-year suspension of VAT and tariffs on imported inputs, among other benefits. Ventures under these regimes have proven to be successful in creating growth opportunities for Guatemala’s private sector, as they provide land and most infrastructure services for participating firms, proximity to workers, and direct access to intermediate and final markets, while facilitating the development of clusters and economies of scale. The industrial land now under export-oriented regimes is estimated at 70 hectares and is expected to rise to 420 hectares in the coming years. Further developing the light manufacturing sector could help unleash Guatemala’s growth. A sector that has employment generation potential and positive impacts on marginalized and vulnerable groups, Guatemala’s light manufacturing pres- BOX 4.3 Economic Zone Regimes and Industrial Parks in Guatemala Guatemala has 50 years of history in developing special regimes to verify each input entering the factory, unlike zonas fran- to attract foreign direct investment and foster an export-oriented cas and ZDEEP. The 29-1989 regime also suffered following economy. The country offers five regimes under which firms can the 2016 reform, which limited the income tax exemption carry out economic activities and benefit from tax incentives and to only three sectors: apparel, textiles, and BPO. a special customs regime. Some of them have been modified and 3. Régimen de Zonas Francas, Decree no. 65-1989. Zonas fran- restricted in scope, which affected the private sector’s perception of the country’s commitment to these regimes. However, many cas, or free zones, in Guatemala did not get the same trac- of the changes, particularly those affecting zonas francas, were tion as in other Central American countries, partly because reversed, and the government has been promoting the various the existing 29-1989 regime was so flexible, allowing compa- regimes to position Guatemala as an attractive destination amid nies to operate anywhere, as long as they owned or rented the nearshoring trend. While it is too early to assess the impact the land. Following the reform in 2016, many firms relocat- of these efforts, there is already one success story of a firm that ed elsewhere in the CAFTA-DR region, and some free zones is relocating some of its production to the Western Hemisphere: closed. In 2021, however, another reform reversed the 2016 automotive components producer Yazaki North America, which changesa and gave SAT a more active role in authorizing us- started operations early in 2023, is installed in an industrial zone ers, unlike ZDEEP and 29-1989. established under a special regime. Each regime is described below. 4. Régimen de Zona de Desarrollo Económico Especial Públi- 1. Régimen de Zona Libre de Industria y Comercio (ZOLIC) co, or ZDEEP, Decree no. 30-2008. A reform in 2008 enabled “Santo Tomás de Castilla,” Decree no. 22-1973. This is the ZOLIC to expand its influence by creating similar develop- oldest of the existing regimes. It is a public free trade zone ments without geographic restrictions.b These developments located next to the port Santo Tomás de Castilla. ZOLIC is (ZDEEP) carry the same benefits offered at ZOLIC. governed by a public-private board. 5. Zona Franca Champerico, Decree no. 27-1996. The port of 2. Régimen de Maquila, Decree no. 29-1989. This regime has Champerico was one of Guatemala’s main export ports in three key advantages that made it the preferred alternative the Pacific Ocean in the late 19th century. Authorities tried for the garment and textile sectors until the 2016 reform: first, location flexibility without having to be installed in an to replicate the ZOLIC model in this port in the 1990s and industrial park; second, VAT exemption on locally produced 2000s, but efforts to improve the port overlooked key design inputs; and third, a more agile mechanism for incorporating aspects and it is now unusable.c In August 2022, the Ministry locally produced inputs and for carrying out coproduction of Economy approved the zone’s regulation, which, among or complement operations with other companies, which do other items, establishes specific guidelines for the opera- not require the physical presence of the tax authority (SAT) tions and development of the zone.d a. The sectors that qualify for zona franca regime incentives now include the following: processed foods, cookies, oils, margarine, pasta, sauces, dairy products, soups, and beverages; animal feed; leather and footwear; plastics and articles thereof; medicines; cosmetic industries; paints; furniture; toys; and electronics and household appliances. b. Only ZDEEP legislation has included the possibility of benefiting from local government support, by allowing them to open a ZDEEP in local government land (art. 5). Also, the national government is allowed to do it. A public zona franca needs a law enacted by Congress, as is the case of Zona Franca Champerico. As of now, there is no ZDEEP using national or local government land. For 29-1989, the legislation does not provide a mechanism for the local or the central government to provide land to install factories. c. The risk of sedimentation was not adequately considered during the design phase. For more information, see Niek de Jong et al., “El Puerto Que No Debió Construirse. ORET Evaluation 2007–2012—Case Study of Project ‘Champerico Fishery Port, Guatemala’” (ORET Transactions GT00017 and GT00018). d. This is an entirely public zona franca . The port does not support cargo operations, so firms in the region export via Puerto Quetzal. The zona franca in this case consists of land, with no industrial shells available for rent, lease, or purchase. 4  SECTOR ASSESSMENTS 69 ents significant room for growth. While the sector has been pivotal in positioning Guatemala as a strategic actor in regional value chains (namely, the CAFTA-DR region), there are areas of opportunity for further integration into global value chains, as evidenced by a relatively low manufacturing-exports-to-GDP ratio.72 Guatemala is in a unique position to expand its light manufacturing sector, build- ing on government reforms and policy priorities and leveraging the ongoing near- shoring trend. By stimulating the development of industrial parks, Guatemala could attract new investments, especially those that are mindful of environmen- tal and social standards. Some industrial parks can help firms meet these per- formance standards, as compliance tends to be facilitated by the park’s manage- ment (for example, eco-industrial park operators play a pivotal role in promoting and incorporating principles of the circular economy and green technologies).73 The supply of industrial parks in Guatemala is geographically tied to two main corridors. Most industrial parks are located along the corridor that connects Puerto Santo Tomás de Castilla (Atlantic) and Puerto Quetzal (Pacific), crossing through Guatemala City. A few others are in the corridor that connects the Mex- ican and Salvadorean border crossings. Industrial parks along these corridors of- fer direct access to infrastructure, proximity to intermediate and final markets, and access to a relatively large labor force. There are five zonas francas hosting 132 users, three fully approved ZDEEP with one active user and another expect- ed to start operations in 2023, and ZOLIC, which hosts 46 users. Among sectors benefiting from these regimes are textiles, apparel, and electronics. At the time of writing, there are plans for developing 11 additional ZDEEP with various de- grees of readiness. Most of these developments are private sector initiatives and are located along the port-to-port corridor (see map 4.1). The Guatemalan private sector sees access to industrial land as a constraint for their investments. A short survey undertaken to understand local firms’ percep- tion of industrial parks suggests that these developments can indeed be attractive for businesses but must have certain characteristics. Location near key infrastruc- ture, affordable land prices, and tax incentives are the top factors highlighted by firms. Other important features include support for environmental standards and going beyond maquila-oriented industrial parks toward more R&D and high- tech industrial parks. While the light manufacturing sector has grown without much attachment to in- dustrial parks, the lack of them can be a constraint for future growth. Companies in the apparel sector that have no vertical integration with textiles can continue to rely on the maquila regime (29-1989) since it provides location flexibility and such firms do not have specific infrastructure needs. These companies do not need to operate under a special regime other than 29-1989, but the infrastructure is essential for their operation.74 Reliable access to such infrastructure becomes a problem when firms consider migrating away from Guatemala City, where it is difficult to secure land and guaranteed access to water and electricity. Firms pro- ducing synthetic fibers benefit greatly from the shared infrastructure and other value-added services provided at an industrial park. Firms in the electronics sec- tor also require large amounts of land which are not usually readily available in areas beyond the capital or the two main ports. For many of these firms, espe- 70 GUATEMALA  COUNTRY PRIVATE SECTOR DIAGNOSTIC MAP 4.1 Location of Free Zones and ZDEEP, Current and Expected Departments that host an FZ/ZDEEP Approved FZ/ZDEEP Pending approval FZ/ZDEEP Petén Huehuetenango Alta Verapaz Izabal Quiché San Marcos Totonicapán Baja Verapaz Zacapa El Progreso Quetzaltenango Chimaltenango Guatemala Sololá Chiquimula Jalapa Sacate- Retalhuleu Suchitepéquez péquez Jutiapa Escuintla Santa Rosa Source: World Bank, based on publicly available information. Note: FZ = free zones; ZDEEP = special public economic development zones. Only FZs and ZDEEPs that host manufacturing activities are included. cially foreign ones, access to an industrial park could be the difference between starting operations in Guatemala or setting up somewhere else. Industrial parks can provide the appropriate infrastructure for the light manu- facturing sector to comply with environmental performance standards. Vertically integrated textile and apparel firms benefit from the infrastructure services pro- vided in an industrial park, including water treatment plants to comply with en- vironmental standards at lower cost to firms due to economies of scale and re- liable access to electricity. In fact, many firms seek to locate in industrial parks where the developer has certain environmental performance standards in place (for example, eco-industrial parks). 4.3.2 Apparel and Textiles Guatemala is a strategic country for Central America in the textiles sector, act- ing as a key supplier to the region. Guatemala’s textile exports are estimated at US$354 million, and about 87 percent goes to members of CAFTA-DR while only 5 percent reaches the United States. Rising demand in the United States for apparel manufactured in Central America, especially from El Salvador and Hon- duras, led to an increase in demand for Guatemala’s textiles. Guatemala has been able to satisfy the demand for its textiles, enabled largely by increasingly compet- itive electricity prices in the country. Following supply chain disruptions associ- 4  SECTOR ASSESSMENTS 71 ated with COVID-19, many firms shifted their purchases from Asia to Central America,75 and as the largest economy in the region,76 Guatemala can harness this opportunity. Guatemala’s textile inputs are valued in Central America because they fulfill CAFTA-DR’s rule of origin (yarn forward) and are exempt from the 32 percent ad valorem tariff when exported to the United States. Guatemala is well integrated in global value chains through its apparel exports, but it still has potential to grow its market share. Guatemala’s apparel exports reached US$1.46 billion in 2021, with over 90 percent going to the United States. Nonetheless, Guatemala’s apparel exports to the United States lag those of its re- gional peers, including El Salvador, Honduras, and Nicaragua. Guatemala’s main apparel exports are knitted clothing. Top garments exported include the follow- ing: (a) jerseys, pullovers, cardigans, and waistcoats; (b) shirts; (c) T-shirts; and (d) blouses. The sector boasts a well-integrated value chain, including accesso- ries, finish, and services, as well as the presence of renowned American brands and Korean firms, which have been key in driving technological improvements over the years. The apparel sector was key in absorbing the shocks associated with the COVID-19 crisis, as Guatemala was well positioned to manufacture and export personal protective equipment. Although cotton was once abundant in the country, Guatemala now imports most of it, in addition to synthetic fibers. Cotton was an abundant product in Guate- mala in pre-Hispanic times, but the commercial benefits of using American cot- ton granted by the Caribbean Basin Initiative led to a halt in its production in the 1990s. Guatemala imports most of its cotton from the United States and pro- duces large amounts of cotton yarn, which it exports to other Central American countries. Synthetic fibers are imported mainly from China, India, Mexico, and Türkiye, while less than 1 percent comes from Central America. The synthetic fiber with the greatest import value is polyester not processed for spinning (81 percent), followed by filament tow of acrylic (16 percent). Smaller amounts of synthetic fiber (nylon and polyester) are produced in Guatemala by a few firms using recycled polyester. Representatives from the apparel sector cite the low sup- ply of synthetic fiber in Guatemala, and in the broader CAFTA-DR region, as a growth constraint. Guatemala could produce semisynthetic fibers, given its ac- cess to wood from rubber, cacao, and pine trees and seaweed from both coasts. Guatemala’s textile and apparel association supports firms in meeting labor and environmental standards. The textile and apparel sectors are subject to labor and, increasingly, environmental standards required by international retailers and consumer awareness. Auditing companies visit factories in Guatemala and pro- duce reports that determine whether the factories can supply particular brands. VESTEX, the textiles and apparel association, provides training, guidelines, and assistance to its affiliates to improve and fulfill these and other standards.77 In- terviews with local stakeholders in the context of the CPSD suggest that there has been significant progress in satisfying labor standards. However, complying with environmental standards has been more challenging, since firms are required to improve and invest in wastewater quality. Setting up shop in industrial parks can help firms comply with environmental standards, as the park developer can undertake the investments required to fulfill environmental standards for firms that would otherwise struggle to fulfill them. 72 GUATEMALA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 4.3.3 Electronics Guatemala is well positioned to build on its established base of electronics man- ufacturing. Although small and relatively new, the electronics sector in Guatema- la comprises various subsectors, including the manufacture of electronic compo- nents and boards for computers and peripheral equipment and communication equipment.78 The sector is focused predominantly on the domestic market, sup- plying inputs to other sectors, such as agribusiness and health care, as well as to other manufacturing industries.79 Sectoral exports are modest and amount to only US$137.5 million, with El Salvador and Honduras being the country’s main trade partners (each absorbs about 16 percent of these exports). A small number of companies is responsible for the lion’s share of electronics exports. As the on- going nearshoring trend calls for greater production of electronics inputs in Lat- in America, the country’s revealed comparative advantage in primary cells and batteries is a signal in favor of Guatemala’s electronics sector. Few firms spearhead the development of the electronics sector in Guatemala, and there is potential to develop inputs domestically. Firms in the sector import most of their inputs, so they are unlikely to have business ties with local firms. One of these firms, a foreign refrigerated-equipment manufacturing company, relies primarily on imports from China, Türkiye, and the United States and exports fi- nal goods to countries in the Western Hemisphere and Europe. Another firm— in the process of starting operations at the time of writing—will be manufactur- ing wire harnesses for export to the North American market but will also rely on imported inputs. Campus TEC hosts a cluster of SMEs that design electronics that are prototyped and produced in China.80 This private platform stands out for having palpable ties with local firms, but the companies lack the equipment required to start prototyping or manufacturing products on their own. The COVID-19 crisis shook the electronics landscape in the country. The larg- est electronics producer in the country expanded and consolidated operations in Guatemala after closing its factory in Colombia in 2021 for reasons associat- ed with the pandemic. However, after 60 years in Guatemala, a zinc-carbon bat- tery manufacturing plant ended operations in December 2020 and relocated to Brazil and Indonesia. While the pandemic was a key reason behind closing, it is likely that increasing international competition also contributed to this decision.81 4.3.4 Key Barriers and Constraints A minimum wage, at present set at a level higher than average labor productiv- ity, has been noted as limiting the pace of formal job creation across all manu- facturing activities.82 Guatemala’s minimum wage has historically been higher than its market median wage, which has resulted in a segmented labor market with few medium to large firms able to afford the minimum wage and numer- ous smaller and informal firms paying below minimum wage.83 Average wage levels also vary by region, with that of Guatemala City greatly exceeding those of other urban and rural areas.84 Furthermore, Guatemala’s minimum wage ex- ceeds the average wage, which, in tandem with a high ratio of minimum wage to GDP per capita,85 has increased the competitiveness gap between Guatemala 4  SECTOR ASSESSMENTS 73 and other countries in Central America. This has been identified as a core issue behind the lack of dynamism of the manufacturing sector, especially for appar- el, which has not been able to fully benefit from Guatemala’s strategic location and trade agreements. While many firms supplying the domestic market do not always comply with the minimum wage, export-oriented light manufacturing firms and their suppliers are more likely to comply, largely because of increasing awareness among consumers about labor conditions in more advanced economies. Trade logistics are affected by road and port congestion, as well as by prolonged port inspections. Guatemala’s strategic location advantages are partially offset by infrastructure shortcomings, with road and port congestion increasingly of con- cern to manufacturers. Areas along the border-to-border and port-to-port corri- dors offer appealing locations for manufacturing operations, but frequent road and port congestion leads to delays and costs. These issues are especially com- mon in the corridor from Guatemala City to Puerto Quetzal, where traffic in and around Guatemala City often results in delays. Inspections done at ports, on the import side, can delay merchandise by about four days, according to inter- views made in the context of the CPSD. For example, the textile sector is prone to delays, as some chemicals imported for the production process are frequent- ly subject to drug inspections. Administrative difficulties hinder the competitiveness of Guatemala’s exporters and importers. Firms often face delays and additional costs due to issues with the tax authority (SAT). Discrepancies often arise when firms purchase goods at a discount and the tax authority contests how the goods are priced. Accord- ing to some interviewees, auditors’ criteria are not uniform, and firms do not al- ways keep orderly accounting books. In some cases, the capacity of firms to ex- port and import is also affected by the lack of documentation, such as a missing supplier’s invoice, as the companies are often not aware of all SAT requirements. Discrepancies also occur because of the time-sensitive tax exemption window set in the 29-1989 maquila regime for imported inputs, since exports do not get reg- istered right after the coexporter has sent the goods to the exporting firm, so any delay from the first step affects the second. These issues disproportionately affect small firms, which often lack economic and human resources to cover administra- tive penalties, and suppliers of exporters who are subject to tight delivery dates. Skills needed for more-sophisticated manufacturing activities are limited. World Bank Enterprise Surveys found that 40 percent of manufacturing firms think that the inadequately educated workforce is a major constraint. Education outcomes vary considerably across administrative departments, ethnicities, and urban ver- sus rural areas because of high levels of segregation.86 The average adult work- er in Guatemala has 7 years of schooling, not enough to be eligible to start vo- cational training. Although INTECAP, the country’s technical training agency, has done an important job training part of the workforce, companies note that there are still skill gaps associated with an unawareness of technical skills re- quired by manufacturing industries. This has been especially challenging in the electronics and synthetic-textile sectors, in which firms rely on foreign expertise and little skill transfer has permeated to Guatemala’s entrepreneurs and workers. 74 GUATEMALA  COUNTRY PRIVATE SECTOR DIAGNOSTIC Governance issues and uncertainty have hindered the growth and availability of industrial parks. While legal and regulatory constraints were a problem be- fore 2020 for both zonas francas and ZDEEP, the main bottleneck at present is SAT, the tax authority. SAT authorizes industrial land (ZDEEP or zonas francas) and approves the users of the various regimes, but the approvals are usually de- layed. These holdups affect industrial land developers, who often liaise with au- thorities on behalf of users, take on loans to develop the industrial facility, and require permits to develop the land and start construction. Although most reg- ulatory uncertainty was addressed through recent reforms, the impact has yet to be seen. At present, depending on the sector, firms still prefer to apply to the 29-1989 regime because it allows them to start operations faster and to interact with fewer government entities. Firms’ access to finance appears to be constrained by lack of knowledge or pref- erence around financial instruments and a conservative banking system. The lat- est Enterprise Surveys found that almost one-quarter of manufacturing firms in Guatemala identify access to finance as a major constraint, more than any other sector. Interviews suggest that the banking sector has perceived the apparel sec- tor as too risky after some companies facing financial issues left the country in 2005. Since then, firms in the sector have not engaged much with banks or vice versa. Authorities have revamped the legal framework governing factoring and leasing in recent years as part of a broader effort to improve the business environ- ment. While it is too early to determine the effect of these changes, the average number of leasing contracts registered (for all sectors) each month between Jan- uary and June of 2022 was 65, well above the 15 from the same period in 2021. Given the significant working capital needs of sectors like apparel and electron- ics, the number of contracts seems low. SMEs often lack the resources and ex- pertise to put together their projects’ technical information, which leads to re- jections from banks. Foreign firms face an additional hurdle, since local banks require domestic guarantees even if a firm owns assets abroad. 4.3.5 Opportunities and Recommendations The ongoing nearshoring trend presents an opportunity for growth in the light manufacturing sector. As companies try to consolidate their supply chains close to their assembly plants and final markets, Guatemala has lowered its energy costs and introduced various reforms to improve the business environment. Com- panies in the sector are looking at Guatemala as an appealing investment desti- nation, given its strategic location. To leverage the country’s geographic advan- tages, authorities should continue to support initiatives aimed at attracting new investments and retaining existing ones. It is important to tackle the barriers and constraints identified above, as overcoming them could lead to a new period of sustained growth in Guatemala’s manufacturing sector. Fostering the development of domestic inputs for the light manufacturing sector could enhance Guatemala’s strategic relation with North America. Production of higher-value textiles and apparel is an opportunity for growth in Guatemala and in the CAFTA-DR region. This would allow for an increase in the variety of apparel designs being produced while fulfilling the CAFTA-DR’s yarn-forward 4  SECTOR ASSESSMENTS 75 rule of origin benefit of the region. Guatemala’s electronics sector relies on im- ported products, leaving firms vulnerable to supply chain disruptions. Local-sup- plier development strategies could enable firms in the sector to replenish their stock as needed. For the SME cluster hosted at Campus TEC, the lack of do- mestic inputs limits their ability to scale up, making them dependent on imports from Asia. Developing an R&D laboratory could boost the electronics sector’s competitiveness and signal the country’s commitment to further develop the sec- tor.87 Efforts such as the Investment and Construction One-Stop Shops88 should be leveraged to attract new investments in these sectors, which could be host- ed in industrial parks that facilitate vertical integration and economies of scale. Flexibility in the minimum wage, particularly to reflect the significant differences in productivity across Guatemala, could help increase the competitiveness of re- gions beyond Guatemala City. The government could consider institutional and legislative reforms that prevent future increases in minimum wage from being set above labor productivity growth. This will ensure that minimum wage revisions do not further deteriorate firm competitiveness or disincentivize formalization. The government should also explore how previous efforts to allow for region- al differentiation in minimum wages could be aligned with constitutional provi- sions of equal pay to reflect differences in labor productivity across the country. Alleviating congestion along key trade routes would reinforce Guatemala’s com- mitment as a nearshoring partner. As companies look for potential places to relo- cate suppliers, delivery times become increasingly important. To exploit its stra- tegic location close to North America, Guatemala should make its infrastructure ready to accommodate increased movement of goods and people. Specific actions to address infrastructure deficiencies are already contained in the GNSD pro- gram. A good starting point would be to expand road capacity along the port- to-port and border-to-border corridors, which are key international trade routes in the country, as well as to maintain and expand the ports of Quetzal and San- to Tomás de Castilla. Modernizing the inspections by the Division of Ports, Air- ports and Border Areas (DIPAFRONT) at ports to expedite the flow of goods is also recommended. Introducing measures to help firms comply with SAT’s requirements would help smaller firms be more productive and competitive. The tax authority could in- troduce guidelines and training to create uniform criteria for auditors for aspects such as documentation required to comply with audits in general and specific issues such as coexporting and purchasing goods at a discount. The online elec- tronic invoicing system is a step in the right direction because it allows firms to keep track of all issued invoices, which also facilitates tax return filings. Howev- er, interviews with stakeholders suggest that many firms still grapple with their records and tax returns. SAT could also organize training for entrepreneurs and MSMEs, as well as university students, to help them navigate the invoicing plat- form and use it to prepare their own tax returns. More compliant firms would help increase the appeal of engaging with domestic firms as suppliers among large multinational firms. Advancing workers’ skills would help attract new investment in more-sophisticat- ed stages of the light manufacturing value chains. Three strategies can help move 76 GUATEMALA  COUNTRY PRIVATE SECTOR DIAGNOSTIC the needle regarding worker skills. First, the government could introduce a schol- arship program to support youth, using existing efforts such as Oportunidad89 to stimulate young people and professionals to learn English (or other foreign lan- guages) and develop technical skills. Second, worker skills could be developed to meet the demands of more-sophisticated economic activities along the textile, ap- parel, and electronics value chains. INTECAP, universities with a more technical focus, and leading firms in the sectors could develop a time-framed plan to define goals and shared commitments to update and expand the current supply of tech- nical and professional training. Third, attainment and quality of schooling could be improved as a long-run policy but with periodic revisions, focusing on middle- and high-school education while closing the rural-urban gap in education. The various industrial land regimes could benefit from greater clarity and trans- parency regarding the regulations governing them. Interviews with stakeholders revealed concerns over lengthy delays and insufficient information on the requi- sites for obtaining SAT clearance to operate as a zona franca or ZDEEP. Greater clarity on the expectations and requirements could enable industrial land devel- opers to fulfill the requirements faster and increase the appeal of these regimes to investors. This would support government efforts to attract foreign invest- ment in manufacturing amid the ongoing nearshoring trend. Greater banking sector engagement with light manufacturing (especially appar- el) firms could help unleash greater growth. Interviews with local companies re- vealed that banks are concerned about the lack of long-term contracts between international brands and domestic manufacturers. Introducing instruments that allow banks to share the risk with international brands, or with export trading companies, could help alleviate some of the bank’s concerns about the riskiness of the apparel sector. While this perception appears to be improving, accord- ing to consultations, only a few banks of foreign origin are proactive in offering credit to firms in the sector. Ensuring that the Insolvency Act is effectively im- plemented, including the corresponding registry and specialized courts, will also help increase banks’ confidence in light manufacturing firms and more. Univer- sities and business associations could offer training aimed at developing finan- cial skills and knowledge to construct financial statements and credit applica- tions for firms and entrepreneurs seeking finance. The government of Guatemala will need to continue supporting a shared frame- work and workspace for the public and private sectors to overcome growth con- straints. Since 2020, the national government, the city of Guatemala, and the private sector embarked on a project to identify and address growth constraints. Public and private efforts are coordinated under the GNSD framework, which promotes specific proposals to unleash Guatemala’s growth. Maintaining the continuity of this program, or a successor that builds on this public-private dia- logue, will be key to gathering support to harness the opportunities and advance the policies required to overcome growth constraints. The country’s investment promotion agencies (namely, PRONACOM [public] and Invest Guatemala [pri- vate]) have an important role to play and should be better resourced and engaged. Table 4.7 lists recommended actions to address challenges in the light manufac- turing sector in Guatemala. 4  SECTOR ASSESSMENTS 77 TABLE 4.7 Light Manufacturing Recommendations Challenge Recommendations Implementing Short or agencies medium term KEY DOMESTIC INPUT BARRIERS Limited domestic Ensure that the GNSD or a similar public-private MINECO, MINFIN Short production of key dialogue remains in place to attract private inputs investment. Create local-supplier development programs to MINFIN Short link local suppliers with foreign investors and top firms in Guatemala. Insufficient synthetic Consider textile and apparel leapfrogging, Congress, MINECO Short and yarn and textile including local production of synthetic fibers. medium production for apparel potential in the CAFTA-DR region Lack of an ecosystem Develop a public-private R&D lab for electronics. Congress, MINECO Medium to foster the development of the Simplify and streamline the bureaucratic Congress, MINECO Medium electronics sector process for development of state-of-the-art industrial parks. LABOR CONSTRAINTS Due to a high Review and revise the minimum wage to reflect Ministerio de Trabajo Short minimum wage, high the significant differences in productivity across labor costs compared Guatemala. to the productivity of the average Guatemalan worker TRADE LOGISTICS AND INFRASTRUCTURE BARRIERS SPECIFIC TO LIGHT MANUFACTURING High logistics and tax Modernize DIPAFRONT’s drug inspections. Ministerio de Medium compliance costs and Gobernación, Congress delays involving international trade Road congestion Expand road capacity, port to port and Mexico Congress Medium to El Salvador, including the Regional Beltway. Port congestion Maintain and expand Puerto Quetzal and Puerto Empresa Santo Tomás Medium Santo Tomás de Castilla. de Castilla ADMINISTRATIVE CONSTRAINTS Administrative Introduce uniform criteria that firms can follow SAT, MINFIN Short hurdles affecting with regards to purchasing goods at discount exporters’ and and coexporting. smaller firms’ competitiveness Organize training for entrepreneurs, MSMEs, SAT Short and university students to help them use the electronic invoicing system to prepare their own tax returns. SKILL CONSTRAINTS Insufficient technical Develop worker skills in the electronics sector INTECAP, MINECO Short skills across the via makerspaces, a technology transfer program, workforce for and a program to rent INTECAP machinery to increasingly start-ups to help workers develop skills required sophisticated to build products and prototypes. manufacturing sectors (Table continues next page) 78 GUATEMALA  COUNTRY PRIVATE SECTOR DIAGNOSTIC TABLE 4.7 Light Manufacturing Recommendations (continued) Challenge Recommendations Implementing Short or agencies medium term Low education Build a scholarship program to develop INTECAP, MINECO Short attainment and poor technical skills responsive to sophisticated quality of education manufacturing sectors. Approach universities to adjust their curricula in MINECO, SIB, Banguat Short consideration of knowledge and skills required to either finance or seek finance for new projects. Invest in higher technical skills via international MINECO, MINFIN, Medium scholarships with a clear focus on Congreso manufacturing engineering. Continue improving education attainment and Ministerio de Medium quality. Educación Firms’ lack of Approach business associations to suggest MINECO, SIB, Banguat Short knowledge to present sharing with their associates the skills required bankable projects to finance new projects. when seeking finance REGULATORY BARRIERS TO DEVELOPING INDUSTRIAL LAND Long delays to Develop clear, transparent, and comprehensive MINFIN, SAT Short approve ZDEEP and guidelines on the requirements to become a zonas francas zona franca or ZDEEP user and developer. FINANCIAL BARRIERS SPECIFIC TO LIGHT MANUFACTURING Insufficient Identify nongovernment risk management MINECO, SIB, Banguat Short knowledge of financial instruments for banks to provide financial instruments financing options to the light manufacturing by banks in the MSME subsectors. sector Note: MINFIN = Ministry of Finance. Notes 1. Bank of Guatemala (Banguat), “Estadísticas Macroeconómicas,” 2022, http://banguat.gob. gt/inc/main.asp?id=111348&aud=1&lang=1. 2. Verónica Zavala et al., “BIDeconomics Guatemala: Crecer Más y para Todos,” 2019, http:// dx.doi.org/10.18235/0001708. 3. Bank of Guatemala, “Estadísticas.” 4. SIECA, “Monitor de Comercio de Centroamérica: Cuarto Trimestre 2020,” 2021, https://es- tadisticas.sieca.int/documentos/ver/2021617175410768_Monitor%20de%20Comercio%20 de%20Centroamérica_Cuarto%20Trimestre%202020.pdf. 5. World Bank, “Guatemala: Food Smart Country Diagnostic” (World Bank: Washington, DC, 2020), http://hdl.handle.net/10986/34524. 6. Zavala et al., “BIDeconomics.” 7. Food Security Information Network (FSIN), “2022 Global Report on Food Crises: Joint Anal- ysis for Better Decisions. Mid-Year Update: In Brief” (Rome and Washington, DC: Food and Agriculture Organization [FAO)], World Food Programme [WFP], and International Food Pol- icy Research Institute [IFPRI], 2022), https://ebrary.ifpri.org/digital/collection/p15738coll2/ id/136365. 8. Zavala et al., “BIDeconomics.” 9. World Bank, “Guatemala’s Growth Diagnostic,” 2020. 10. These criteria consider the relevance of the United States as the main destination of Guate- malan exports within the CAFTA-DR region. 4  SECTOR ASSESSMENTS 79 11. AGEXPORT, “Cardamomo,” 2022, https://export.com.gt/publico/comite-de-cardamomo. 12. COPADES, “Ventas de Cardamomo Crecieron un 75,4%. Comercio Exterior,” 2021, https:// copades.com/monec/?p=46138. 13. Héctor Erasmo Cruz Taracena, “Estudio del Sistema Agrario del Cultivo de Cardamomo (Elettaria cardamomum), Diagnóstico y Servicios Realizados en el Caserío Xalitzul, Muni- cipio de San Miguel Tucurú, Departamento de Alta Verapaz, Guatemala” (PhD diss., Uni- versidad de San Carlos de Guatemala, 2014). 14. MAGA, Determinación de la Cobertura Vegetal y Uso de la Tierra a escala 1:50,000 de la República de Guatemala, Año 2020 (Ciudad de Guatemala: MAGA, 2021). 15. Centro Agronómico Tropical de Investigación y Enseñanza (CATIE), “Análisis de La Cadena de Cardamomo Región Norte de Guatemala” (report based on contract IICA-CRIA-011-2016) (Turrialba, Costa Rica: Instituto Interamericano de Cooperación para la Agricultura and Pro- grama Consorcios Regionales de Investigación Agropecuaria, 2016). 16. M. Douglas, J. Heyes, and B. Smallfield, “Herbs, Spices and Essential Oils: Post-Harvest Op- erations in Developing Countries” (Rome: Food and Agriculture Organization of the United Nations [FAO], 2005). 17. Douglas et al., “Herbs.” 18. CATIE, “Análisis de La Cadena de Cardamomo.” 19. Cruz Taracena, “Estudio del Sistema Agrario del Cultivo de Cardamomo.” 20. Valentín Díaz, “Perfil Comercial Cardamomo” (Ciudad de Guatemala: Gobierno de Guate- mala, 2014), https://precios.maga.gob.gt/archivos/perfiles/Perfil%20Cardamomo.pdf. 21. The value chains of peas and French green beans are considered as a single chain because they are often produced and marketed together. As the links and actors involved in the value chain are the same, the present analysis describes them together. M. Cordero, “Non-Tradi- tional Export Vegetable Chain in Guatemala,” in Strengthening Value Chains as an Indus- trial Policy Instrument, ed. Ramón Padilla-Pérez (Santiago: Economic Commission for Latin America and the Caribbean [ECLAC], 2014), 253–300; Gerardo Jiménez and Wim Pelupessy, “Manejo Estratégico de la Calidad Ambiental en las Cadenas Agroalimentarias. Aplicaciones a la Arveja China Guatemalteca,” Revista Iberoamericana de Economía Ecológica 3 (2006): 17–33. 22. Trade Map, 2022. 23. Trade Map, 2022 24. AGEXPORT, 2021 https://www.export.com.gt/publico/cifras-exportacion. 25. Cordero, “Non-Traditional Export.” 26. Confirmed through interviews conducted for this diagnostic. See also MAGA, “Perfil Comer- cial Arveja China” (Ciudad de Guatemala, Gobierno de Guatemala, 2014). 27. Cordero, “Non-Traditional Export.” 28. Sandra Garcés, Luis Lomas, and Eduardo Peralta, “Manejo de Trips (Thysanoptera: Thrip- idae) en el Cultivo de Frejol (Phaseolus vulgaris L.)” (Quito: Repositorio Digital, Instituto Nacional de Investigaciones Agropecuarias [INIAS], 2008), https://repositorio.iniap.gob.ec/ handle/41000/2625. 29. C. Toledo-Perdomo and H. Sagastume-Mena, 2018. “Diversidad de los Tisanopteros (In- secta: Thysanoptera) Presentes en el Cultivo de Arveja China (Pisum sativum L.), Santa Apolonia, Guatemala. Espirales Revista Multidisciplinaria de Investigación,” https://www. researchgate.net/profile/Claudia_Toledo-Perdomo/publication/328616219_Diversidad_ de_los_tisanopteros_InsectaThysanoptera_presentes_en_el_cultivo_de_arveja_china_ Pisum_sativum_L_Santa_Apolonia_Guatemala/links/5c3683e992851c22a368bd5f/ Diversidad. 30. Jiménez and Pelupessy, “Manejo Estratégico de la Calidad Ambiental.” 31. MAGA, “El Agro en Cifras” (Ciudad de Guatemala: MAGA, 2017). 32. Vladimir Humberto Baíza Avelar, “Guía Técnica del Cultivo del Aguacate” (San Salvador: Ministerio de Agricultura y Ganadería, 2003), http://repiica.iica.int/docs/B0218e/B0218e. pdf. 33. Carlos Neftalí Palacios Xutuc, Manual Técnico para el Aseguramiento de la Calidad e In- ocuidad de la Cadena de Valor de Aguacate (Ciudad de Guatemala: Programa Mipymes y Cooperativas, 2018). 34. Ruano, Manejo de Cosecha y Poscosecha del Aguacate, video, 6:59, 2017, https://www.you- tube.com/watch?v=34GrW_6LT8Y. 80 GUATEMALA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 35. Vélez Mayen and Daniel Antonio, “Evaluación del Manejo Postcosecha y Logística del Agua- cate Hass de Exportación, para el Desarrollo de Propuestas de Mejora para la Reducción de Pérdidas en la Cadena de Suministros” (master’s thesis, Universidad del Valle de Guatemala, 2021), https://repositorio.uvg.edu.gt/handle/123456789/4133. 36. CBI (Caribbean Basin Initiative), Multisectoral Value Chain Analysis: ‘Connecting Central America’ (Turrialba, Costa Rica: CATIE, 2018), http://www.oie.sieca.int/documentos/ver/ Multisectoral%20VCA%20CA%20-%20Final%20report.pdf. 37. SIECA, Monitor de Comercio de Centroamérica: Cuarto Trimestre 2020 (Ciudad de Guate- mala: SIECA, 2021), https://estadisticas.sieca.int/documentos/ver/2021617175410768_Mon- itor%20de%20Comercio%20de%20Centroamérica_Cuarto%20Trimestre%202020.pdf. 38. The Pacific Corridor of Central America represents approximately 30 percent of transit opera- tions in the region and consists of six borders (Tecún Umán, Pedro de Alvarado–La Hachadu- ra, El Amatillo, Guasaule–El Guasaule, PeñaBlanca–Peñas Blancas, and Paso Canoas) and the Colon Free Zone, considering both north-south and south-north directional travel. See SIECA, “Metodología de medición de velocidades para el tránsito terreste de mercancías en el Corredor Pacífico de Centroamércia, , Segunda edición, resultados 2016–2020 (Ciudad de Guatemala: SIECA, 2021), http://estadisticas.sieca.int/documentos/ver/202171417447662_ Metodología%20de%20medición%20de%20velocidades.pdf. 39. SIECA, “Informe de resultados ETD Regional: Plan de Acción Regional 2021” (Ciudad de Guatemala: SIECA, 2021), http://estadisticas.sieca.int/documentos/ver/20221201531537_ ETD_Completo_091221_compressed%20(1)%20(1).pdf. 40. OFINASE (Oficina Nacional de Semillas), “Certificación de Semillas, Yemas y Plantas de Vive- ro de Aguacate: Certificación de Semillas,” 2019, http://ofinase.go.cr/certificacion-de-semillas/ certificacion-semilla-aguacate/. 41. https://osiap.org.mx/senasica/sites/default/files/CAMPA%C3%91A%20PLAGAS%20REGLA- MENTADAS%20DEL%20AGUACATE_0.pdf. 42. GLOBAL G.A.P. is a farm insurance program that translates consumer requirements into good agricultural practice. The standard was developed using the Hazard Analysis and Crit- ical Control Points (HACCP) guidelines published by the United Nations Food and Agri- culture Organization and is governed according to ISO/IEC 17065 for product certification schemes. PIPAA stands for the Spanish acronym of The Comprehensive Agricultural and En- vironmental Program of the Ministry of Agriculture of Guatemala. This program provides phytosanitary services for farms, packing plants, and shipments of fresh fruits and vegeta- bles. The program is especially used by mango and papaya producers and intermediaries that wish to export with hydrothermal treatment in accordance with USDA/APHIS requirements to minimize the risk of introduction of the Mediterranean fly. 43. See https://www.descubre.cr/wp-content/uploads/2020/11/papaya_ficha.pdf. 44. World Bank, Enabling the Business of Agriculture 2019 (Washington, DC: World Bank, 2019), http://hdl.handle.net/10986/31804. The Enabling the Business of Agriculture indica- tor score is calculated on a scale from 0 to 100 (where 100 is best), on the basis of data for eight quantitative indicators: supplying seed, registering fertilizer, securing water, register- ing machinery, sustaining livestock, protecting plant health, trading food, and accessing fi- nance. The score is computed for 101 countries across all regions, and data are standardized to ensure comparability across countries and over time. 45. Michael Morris, Ashwini Rekha Sebastian, and Viviana Maria Eugenia Perego, Future Food- scapes: Re-imagining Agriculture in Latin America and the Caribbean (Washington, DC: World Bank, 2020), https://elibrary.worldbank.org/doi/epdf/10.1596/34812. 46. Guatemala ranks 82nd of 140 countries in the “state of cluster development” indicator in the 2019 Global Competitiveness Report, highlighting the low concentration of firms, suppliers, producers, and related services for industries. 47. Superintendencia de Bancos de Guatemala (SIB), “No. 36 Boletín Trimestral de Indicadores de Inclusión Financiera a Septiembre 2022,” https://www.scribd.com/document/618056711/ No-36-Boletin-Trimestral-de-Indicadores-de-Inclusion-Financiera-a-septiembre-2022. 48. Asli Demirgüç-Kunt et al., Global Findex Database 2021: Financial Inclusion, Digital Pay- ments, and Resilience in the Age of COVID-19 (Washington, DC: World Bank, 2022), https:// doi.org/10.1596/978-1-4648-1897-4. 49. Ivory Myka R. Galang, “Land Tenure, Access to Credit, and Agricultural Performance of ARBs, Farmer Beneficiaries, and Other Rural Workers” (Discussion Paper Series 2020-44, Quezon City, the Philippines: Philippine Institute for Development Studies, 2020), https:// pidswebs.pids.gov.ph/CDN/PUBLICATIONS/pidsdps2044.pdf. 50. Benni, 2020. 51. Demirgüç-Kunt et al., Global Findex Database 2021. 4  SECTOR ASSESSMENTS 81 52. FUNDESA, “Acceso a Financiamiento y Créditos para el Sector Agrícola” (Presented at VI Congreso Agrícola Nacional, March 9, 2017, Agrequima, Ciudad de Guatemala, Guatemala). 53. MAGA, “Retos para la Recuperación de la Agricultura y la Agroindustria desde la Perspec- tiva del Desarrollo Rural” (Ciudad de Guatemala: Guatemala Adelante, 2022). 54. World Bank, “Guatemala: Food Smart Country Diagnostic.” 55. Chi Xu et al., “Future of the Human Climate Niche,” Proceedings of the National Academy of Sciences 117, no. 21 (May 4,2020): 11350–55, https://doi.org/10.1073/pnas.1910114117. 56. CEPAL (Economic Commission for Latin America), La economía del cambio climático en Guatemala. 2018. 57. World Bank, “Guatemala: Food Smart Country Diagnostic. 58. MAGA, “Informe de Daños Ocasionados por las Depresiones Tropicales ETA e IOTA y Análisis de las Principales Variaciones de Precios en Mercados Mayoristas en Guatemala” (Ciudad de Guatemala: MAGA, 2020), https://precios.maga.gob.gt/novedades/informe-de-daños-ocasiona- dos-por-las-depresiones-tropicales-eta-e-iota-y-análisis-de-las-principales-variaciones-de-pre- cios-en-mercados-mayoristas-en-guatemala/. 59. Jon Hellin, Rachael Cox, and Santiago López-Ridaura, “Maize Diversity, Market Access, and Poverty Reduction in the Western Highlands of Guatemala,” Mountain Research and Devel- opment 37, no. 2 (2017): 188–97, https://doi.org/10.1659/MRD-JOURNAL-D-16-00065.1. 60. Zavala et al.,“BIDeconomics.” 61. MAGA, Retos para la Recuperación de la Agricultura.” 62. Victoria Salin, “2018 GCCA Global Cold Storage Capacity Report” (Arlington, VA: Glob- al Cold Chain Alliance, 2018), https://www.gcca.org/legacy-system/2018%20GCCA%20 Cold%20Storage%20Capacity%20Report%20final.pdf. 63. Zavala et al., “BIDeconomics.” 64. CBI, Multisectoral Value Chain Analysis. 65. World Bank, “Guatemala: Food Smart Country Diagnostic.” 66. Zavala et al., “BIDeconoomics.” 67. According to the International Standard Industrial Classification, used by the Central Bank of Guatemala to report GDP. 68. Unless specified otherwise, the electronics sector includes the following: general industry ma- chinery and equipment, and machine parts; office machines and automatic data-processing machines; telecommunications and sound-recording and reproducing apparatus and equip- ment; and electrical machinery, apparatus, and appliances, and electrical parts thereof. 69. Zonas francas, ZOLIC, and ZDEEP. 70. With figures from the Central Bank of Guatemala, which classifies sectors according to the International Standard Industrial Classification, 4th revision. The database does not disag- gregate beyond the broad sector of manufacturing, so no data are available for textiles, ap- parel, or electronics. Data for 2020 are preliminary. 71. Greater than 50 when normalized to a scale of 0–100. 72. Hulya Ulku and Gabriel Zaourak, Unleashing Central America’s Growth Potential (Wash- ington, DC: World Bank, 2021), http://hdl.handle.net/10986/35503. 73. World Bank, Circular Economy in Industrial Parks: Technologies for Competitiveness (Wash- ington, DC: World Bank, 2021), http://hdl.handle.net/10986/35419. 74. Firms can operate under the 29-1989 regime within an industrial park so long as the 29-1989 regime does not overlap with another one (namely, ZDEEP or zona franca). 75. Equípo Centroamérica, “Tecnología e Innovación en la Industria Textil de Guatemala,” May 28, 2020, https://www.bizlatinhub.com/es/tecnologia-innovacion-industria-textil-guatemala/. 76. According to World Bank Development Indicators, Guatemala has the highest GDP (constant in 2015 in US dollars) in Central America. 77. Alejandra Mazariegos, “Comisión de La Industria Del Vestuario y Textiles. Memoria de Labores 2021,” In Memoria de Labores 2021 (Ciudad de Guatemala: AGEXPORT, 2022). 78. Proyecto Creando Oportunidades Económicas de USAID, “Manufactura de Equipos Elec- trónicos (EMS),” 2021, https://guatemalanosedetiene.gt/wp-content/uploads/2022/10/Man- ufactura_de_Electronicos_resumen.pdf. 79. “Proyecto Creando Oportunidades Económicas de USAID, “Manufactura de Equipos Electrónicos.” 82 GUATEMALA  COUNTRY PRIVATE SECTOR DIAGNOSTIC 80. Campus TEC is a private platform that provides space, makerspace, and an entrepreneurial community to software and hardware start-ups. The community of firms includes agricul- tural drones, decentralized solar energy services, telemedicine via cabins with sensors, and consumer electronics, such as smartwatches, earphones, and digital cameras. 81. Natiana Gándara, “Rayovac Cierra Operaciones en Guatemala (y Esta Es la Situación en la que Deja a los Trabajadores,” December 20, 2020, Prensa Libre, https://www.prensalibre.com/economia/ rayovac-cierra-operaciones-en-guatemala-y-esta-es-la-situacion-en-la-que-deja-a-los-trabajadores/; Jessica Gramajo, “Rayovac Cierra Operaciones de Manufactura en Guatemala,” December 18, 2020, https://www.soy502.com/articulo/rayovac-cierra-operaciones-manufactura-guatemala-100931. 82. For a more detailed discussion on jobs, wages, and formality, see Andreas Eberhard-Ruiz, “Jobs Diagnostic Guatemala,” Job Series (Washington, DC: International Bank for Recon- struction and Development/World Bank, 2021). 83. Andreas Eberhard-Ruiz, “Jobs Diagnostic Guatemala.” 84. Information from Encuesa Nacional de Empleo e Ingresos (ENEI). 85. For a more in-depth discussion of the relationship between the minimum wage and GDP per capita, see IMF Country Report 22/165, Guatemala (Washington, DC: International Mon- etary Fund, 2022). 86. For example, the department of Quiche, with one of the highest concentrations of Indigenous populations, has the lowest literacy rate (62.9 percent), compared with 91.4 percent in the department of Guatemala. Years of schooling for poor students and those from rural areas are approximately half of those for students from urban areas and the wealthy. Ulku and Zaourak, Unleashing Central America’s Growth Potential. 87. A study published by Deloitte highlights the relevance of R&D investments to foster the de- velopment of an innovative ecosystem that facilitates advanced manufacturing. See https:// www2.deloitte.com/us/en/pages/manufacturing/articles/advanced-manufacturing-technolo- gies-report.html. 88. The Investment One-Stop Shop is an effort to simplify and convey all operational require- ments for investments and to provide up-to-date information for investors’ decision making. The Construction One-Stop Shop aims to simplify and digitize all administrative procedures to carry out an investment in the construction sector. 89. Oportunidad is a government-sponsored program that provides scholarships to those inter- ested in learning English and nursing. The program includes financial support for tuition and other learning-related expenses, as well as for purchasing an electronic device and inter- net access. APPENDIX A  SECTOR SELECTION OUTCOMES 83 APPENDIXES 84 GUATEMALA  COUNTRY PRIVATE SECTOR DIAGNOSTIC APPENDIX A SECTOR SELECTION OUTCOMES Investment in agriculture and recreational services was estimated to generate the largest gains in terms of poverty reduction and inequality reduction. A macro-mi- crosimulation model that imitates the effect of a US$100 million investment in each sector was used (figure A.1). A US$100 million investment in agriculture, such as vegetables, fruits, and nuts or oil seeds, directly creates opportunities and income benefits for poor households and reduces poverty by around 70,000 individuals while also increasing per capita household income for the bottom 40 percent by an average of 0.5 to 0.6 percent. A significant impact on poverty is also observed for investments in recreation and other activities and in trade sectors (around 90,000 and 80,000 individuals moving out of poverty, respectively), but with smaller in- come gains for the bottom 40 percent (around 0.4–0.5 percent). Mining sectors such as coal, gas, and oil are among the industries with the lowest welfare gains, with an estimated poverty reduction of fewer than 40,000 individuals and average income gains for the bottom 40 percent of below 0.35 percent. The largest contributor to income gains for the bottom 40 percent and pover- ty reduction is sectorwide wage increases, followed by job creation for previ- ously unemployed workers and provision of better jobs for currently employed low-income individuals. New jobs for previously inactive workers would con- tribute to about 30 percent of the per capita income increase across all sector in- vestments, ranging from 20 percent in agriculture sectors to 35 to 40 percent in mining, manufacturing, and service sectors. Job creation also allows active work- ers to move from low-income employment to higher-paid jobs either in formal sectors such as business services and mining or in informal but better-paid sub- sectors such as communications. Finally, sectorwide wage increases due to labor productivity improvements have the greatest impact: about 55 percent on the per capita income increase across all sector investments, accounting for 70 per- APPENDIX A  SECTOR SELECTION OUTCOMES 85 FIGURE A.1 Number of Individuals Who Exit Poverty and Income Gains for Bottom 40 Percent by Investment Sector 100,000 Impact Recreation and other activities 90,000 Low Average High Number of individuals who exit poverty 80,000 Trade Cereal grains nec Plant- Transport equipment nec based Oil seeds Fishing fibers Warehousing Meat Wool, silk-worm cocoons 70,000 Communication Dairy products Wheat Paddy rice Basic products nec Rubber and plastic products pharmaceutical Raw milk Leather products products Accommodation, food, and service activities Machinery and equipment nec Sugar cane, sugar beet Textiles Vegetable oils and fats Crops nec 60,000 Electrical equipment Manufactures nec Wood products Food products nec Wearing apparrel Business Paper products, publishing Sugar services nec Beverages and tobacco products 50,000 Consruction Chemical products Forestry Dwellings Other extraction Processed rice Metals nec 40,000 Gas Oil Metal products Coal Ferrous metals 30,000 Mineral products nec Petroleum, coal products 20,000 0.10 0.20 0.30 0.40 0.50 0.60 0.70 % change in per capita income for bottom 40% Agriculture Nonfood manufacturing Financial and business services Mining Trade Warehousing and communications Food manufacturing Construction Other services Source: World Bank. Note: Each marker represents the total impact on poverty and income after a $100 million investment in that sector increases the domestic output in the sector. This sector-specific output increase leads to job creation and wage increases across all sectors of the economy through backward and forward production linkages and increased household consumption. nec = not elsewhere classified. cent in agriculture and 35 to 50 percent in most manufacturing and service sec- tors. Overall, the wage channel contributes more than 80 percent of the effect on poverty across various sectors, with investments in recreation services and trade having the largest impact. In addition to poverty reduction and increased income for the bottom 40 percent of the population, private sector investments benefit disadvantaged groups, such as women and youth (figure A.2). These groups benefit from economywide job creation because most new jobs (77 percent on average) are allocated to previ- ously unemployed individuals who are likely to be women, young, and/or poor. Women take advantage of close to 60 to 70 percent of jobs newly created jobs following investments in most sectors. Specifically, they benefit the most from investment in trade and other services, taking 81 percent of new jobs, followed by light manufacturing sectors, such as food manufacturing, with women tak- ing 76 percent of new jobs. Finally, other disadvantaged groups such as Indige- nous people, rural dwellers, and individuals with primary education or less take advantage of 35, 39, and 50 percent of new jobs, respectively. Finally, there is also substantial variation across sectors among Indigenous groups and individ- uals with primary or less education (ranging from 17 to 73 percent), with the lowest shares observed in the finance and business service sectors. 86 GUATEMALA  COUNTRY PRIVATE SECTOR DIAGNOSTIC FIGURE A.2 Demographics of Job Takers by Sector and Job 90 81 82 80 76 73 71 70 68 68 63 63 60 60 60 60 56 57 57 54 55 55 52 50 48 47 Percent 44 43 40 41 40 39 40 38 38 36 34 33 33 34 31 31 30 28 25 26 23 20 17 10 1 0 Women Poor Young (ages 15-24) Rural Primary or less Indigenous Agriculture Nonfood manufacturing Trade and other services Business services, Food manufacturing Construction Storage and communications finance, and others Source: World Bank. Note: Each US$100 million investment in a sector creates jobs across the labor force. The shares shown are for individuals with the respective characteristic among job takers in each of the broad sectors, on average, for the jobs created in that sector. Percentages can exceed 100 since an individual can be represented by more than one characteristic; for example, data for a young Indigenous woman with primary or less education would appear in several categories. Bus. = business; Comm. = communications; Fin = finance; Manuf. = manufacturing; Serv. = services. The selection process was further supported by two quantitative tools and a desk review of key World Bank analytical work on export competitiveness in Gua- temala. The IFC Global Unit conducted a sector scan1 to identify tradeable sec- tors that present opportunities for private investments. The scan evaluated six dimensions of opportunity—capability, demand, scale, pricing, green benefits, and spillovers—according to a standard methodology. According to an analysis of each sector’s performance, Guatemala has gained market shares globally in sectors such as information technology, communications, and tourism, while the textile and agrifood sectors have experienced robust domestic growth. The ag- riculture, forestry, and paper sectors present strong growth opportunities, while food products and beverages hold the greatest export potential.2 The textile sec- tor scores high in all categories except pricing. The sector scan was used as a starting point to inform the identification of export promotion opportunities. The team combined the sector scan with a distributional impact assessment of private sector interventions. From the results, selected investments in warehous- ing and support services, water and transport equipment, and activities that can be developed within the light manufacturing sector are identified as having the potential to generate high levels of employment and strong effects on income. Similarly, the production of vegetable oil, fats, and food products could have a significant effect on development, as boosting productivity would increase earn- ings for farming households in rural areas. Selected World Bank analytical work in Guatemala further informed the sector selection process, including “Central America SME Competitiveness and Global APPENDIX A  SECTOR SELECTION OUTCOMES 87 Value Chain Upgrading,”3 Guatemala: Policies for Business Recovery, Jobs and Economic Transformation,4 and “Guatemala: Food Smart Country Diagnostic.”5 These studies concluded that improving competitiveness and export diversifica- tion is a key priority for Guatemala, where agricultural products account for 65 percent of total export value for the country’s 20 most exported products. Op- portunities to leverage revealed comparative advantages in the spice and fruit subsectors, as well as in textiles. Moreover, agricultural, textile, and apparel val- ue chains contribute heavily to job creation, especially for less skilled workers. Notes 1. The sector scan does not provide an exhaustive assessment of trade opportunities, either at the sector or the product level. Instead, it is a starting point in an export promotion deci- sion-making process that was followed up with further desk research and consultations with public and private sector stakeholders in the country. 2. The Information and Telecommunications export potential map indicates that additional ex- ports could total $958.7 million. 3. Criscuolo, Saraf, Ho, and Rudolph, “Central America SME Competitiveness and Global Value Chain Upgrading,” 2019. 4. World Bank, Guatemala: Policies for Business Recovery, Jobs and Economic Transforma- tion (Washington, DC: World Bank, 2021). 5. World Bank, “Guatemala: Food Smart Country Diagnostic” (Washington, DC: World Bank, 2020). IFC 2121 Pennsylvania Avenue, N.W. Washington, D.C. 20433 U.S.A. Contacts David Cal MacWilliam cmacwilliam@worldbank.org Denny Lewis-Bynoe dlewisbynoe@ifc.org ifc.org