• I BR D SPECIAL PUBLICATION Sales Number: I BR D. 1951.2 Price, U.S. $5.00 • • • • • • The Economic Development of REPORT OF A MISSION sponsored by the INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT in collaboration with THE GovERNMENT oF GuATEMALA INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT WASlllNGTON, D. c. 1951 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT WASHINGTON 2!5, D, C. OFFICE OF THE PRESIDENT June 15, 1951 His Excellency Coronel Jacobo Arbenz Guzman President of the Republic of Guatemala Guatemala City, Guatemala, CA My dear Mr. President: I take pleasure in transmitting to you herewith the Report of the Mission to Guatemala, headed by Dr. G. E. Britnell, which was organized last year under the sponsorship of the International Bank for Reconstruction and Development in cooperation with the Government of Guatemala. In the opinion of the International Bank, the Report provides an objective analysis of the potentialities and prob- lems in the economic development of Guatemala. The Bank has not had the opportunity to consider fully the many recom- mendations contained in the Report and, therefore, these should be regarded as suggestions for consideration by your Government rather than as positive recommendations of the Bank. Nevertheless, we believe that the analyses and recom- mendations made by the Mission deserve the most careful consideration by the Government and people of Guatemala. The conclusions of the Mission will be fully effective only if they serve as a basis and a guide in the preparation, by the Guatemalan authorities themselves, of a sound, integrated, and well balanced development program. We share the hope expressed by Dr. Britnell in his letter of transmittal that the Report will be widely studied and discussed from an objective, nonpolitical viewpoint, so that V its major implications may be fully understood and so that actions based on it can enlist broad support from the Guate:.. malan people. Only with such full understanding and support can the Mission's recommendations be tranlated into a Guate- malan national development program. The Bank is prepared to provide or to arrange for such other assis'tance as the Gov- ernment might need or wish in studying the Report and work- ing out a development program. The Bank will be greatly interested to follow the progress · made in Guatemala to promote understanding and expedite application of the measures recommended by the Mission. It is our intention to undertake simultaneously a complete study of the Report so that we will be in a position at the appropriate time to discuss with your Government a development program which you may decide to carry out and also to consider pos- sible ways in which the Bank can help in the realization of the program through technical and financial assistance or by other means. It is my sincere hope that this Report may be of positive and lasting benefit to the Republic of Guatemala. Sincerely yours, Eugene R. Black vi UNIVERSITY OF SASKATCHEWAN SASKATOON, SASKATCHEWAN, CANADA DEPARTMENT OF ECONOMIC• AND POLITICAL SCIENCE June · 15, 1951 Mr. Eugene R. Black President International Bank for Reconstruction and Development Washington, D. C. Dear Mr. Black: I take pleasure in submitting herewith the Report of the Economic Survey Mission to Guatemala sponsored by the International Bank for Reconstruction and Development in collaboration with the Government of Guatemala. This Report is based on studies made by the Mission in Guatemala and includes specific analyses of certain fields such as agriculture, industry, mining, transportation, communications and power. A separate summary outlines the major conclusions and recommendations of the Mission. The main Report contains more detailed analyses as well as supporting factual material. I should like, on behalf of the Mission, to record our appreciation of the assistance we received from so many sources to facilitate our work in Guatemala. President Juan Jose Arevalo and a number of his Ministers showed a sustained interest in the work of the Mission. Our hosts in th.e lnstituto de Fomento de la Producci6n, from the President of the Executive Board, Ingeniero Juan Angel Nunez Aguilar, and the General Manager of the Institute, Lie .. Carlos Leonidas Acevedo, to the most modest working levels, left nothing undone to help the Mission carry out its work successfully. The physical arrangements provided by INFOP were admirable, and the cordiality we encountered vu everywhere was most gratifying. In particular, I should like to express our thanks to the Executive Board, the Technical Council, and the staff of INFOP for their splendid cooperation. Dr. Eduardo Montealegre, Manager of the Department of Fomento, and his successor, Dr. Gabriel Orellana, gave us untiring assistance without which the basic material required for this Report could not have been assembled. The Bank of Guatemala also rendered invaluable help. We are deeply indebted to Dr. Noriega Morales and his compe- tent staff, both for their collab'oration and for the wealth of economic information furnished by t'hem. I regret that I cannot list by name the scores of officials and private citizens in all wa1ks of life, as well as the many non-Guatemalans, who offered so generously of their time and knowledge in answering our innumerable questions. I am most g¥,teful to the individual members of the Mis- sion for the enthusiasm, enterprise and cooperation which they brought to their tasks. I particularly wish to express my appreciation to Mr. Georges de Fleurieu, Senior Economist of the Bank, who, following the return of the Mission, carried a double burden in working on the Report as well as perform- ing his regular duties. Dr. Francis Godwin was of invaluable assistance in editing the Report. In studying the Report and in carrying out its recommenda- tions, the Guatemalan authorities will undoubtedly be able to elaborate our findings and to extend them to other fields. I am sure I speak on behalf of the entire Mission in expressing the hope that our Report will contribute, in some measure at least, to the further development of the Guatemalan economy and to' the improvement of the living standards of the Guate- malan people. Sincerely yours, S.~ -...__ Chief of Mission Vlll THE MISSION • GEORGE E. BRITNELL, M.A., PH. D., F.R.S.C. Head, Department of Economics and Political Science, University of Saskatchewan Chief of Mission RALPH H. ALLEE, M.S., PH. D. ................... ... Adviser on Agriculture Director, Inter-American Institute of Agricultural Science, Turrialba, Costa Rica RICHARD F. BEHRENDT, DR. RER. PoL. ... .... ..... Economist Director of Research, Economic Development Ad- ministration, Government of Puerto Rico (formerly Professor of International Affairs, Col- gate University) GEORGES DE FLEURIEU, D.F.S. ..... .. ... ... Economist International Bank for Reconstruction and Development FEDERICO CoNsoLO, M.A., D. Sc ... .... Liaison Officer International Bank for Reconstruction and Development MAJ. GEN. EDMUND H. LEAVEY, U.S.A., C.E. Adviser on Transporta- Transportation Consultant (Recalled to active duty) tion and Communica- tions JULIO 0. MORALES, M.S., PH. D. ··· ······· ······ ···· Assistant Adviser on Inter-American Institute of Agricultural Science Agriculture ALBERT 0 . RHOAD, M.S . ... ......... ..... ..... ........... .. Assistant Adviser on Inter-American Institute of Agricultural Scie11ce Agriculture J. STUART SNEDDON, S.B . .... .. .. .. .. .. ... ... ... .... .... ... Adviser ,on Industry, Industrial Consultant Mining and Power VIVIAN C. OLD Secretary lX • • Introduction The original discussions between the Guatemalan Govern- ment and the International Bank for Reconstruction and Development on the subject of technical assistance took place at the end of 1948, when Mr. John J. McCloy, then President of the Bank, visited Guatemala. About one year later, on January 11, 1950, the Guatemalan Government formally re- quested that the Bank organize an Economic Survey Mission to the Republic, composed of experts in various fields but excluding specialists in finance, balance of payments, exchange control, and public health. The Bank's acceptance of this request was transmitted by Mr. Robert L. Garner, Vice Presi- dent of the Bank, in a letter of February 10, 1950, which stated in part: "The purpose of such a Mission, as I see it, would be to make a survey of Guatemala's potentialities for development, in order to enable the Bank to make recom- mendations with respect to the general directions in which such development could be most fruitfully under- taken and the conditions required for its success. Among other things, these recommendations would be concerned with the appropriate scale, timing and order of priority of investment in the various fields of devel- opment, considering the financial resources of the coun- try and its capacity to assume new foreign obligations. The Mission's survey would also serve as a basis for the Bank to determine the extent and purposes of the financial assistance which it may be able to render to Guatemala's development. "I do not believe that this Mission should undertake detailed technical planning of specific projects; such work would more properly follow its analysis and recommendations as to the general fields of development to be emphasized and the priorities to be signed. I sug- gest, therefore, that the Mission should be composed of a small number of consultants of high caliber, each of whom would be competent to appraise development Xl possibilities in a major sector of the economy, rather than more numerous narrowly specialized experts." The Mission-, which departed for Guatemala on June 13, 1950, consisted of six full-time members whose combined fields of specialization included agriculture, industry, mining, trans- portation, power and economics. This group was assisted in the field by a number of additional specialists for varying periods of time. Studies within Guatemala were completed in the latter part of August, 1950, and were followed by analy- sis of data and preparation of the Mission's report in Wash- ington, D. C. As presented herewith, the Report is divided into ten chap- ters. The first of these analyzes certain general aspects of the Guatemalan economy and its fundamental problems. The six succeeding chapters examine in greater detail the problems in agriculture, industry, mining, transportation, telecommuni- cations, and power. An eighth chapter deals with public poli- cies affecting development. The ninth chapter is an appraisal of the financial resources available to Guatemala for carrying out its development program, and the tenth or concluding chapter offers some alternative broad national programs of public investment which appear practicable under varying circumstances. XU TABLE OF CONTENTS Chapter Page INTRODUCTION ..... . Xl I. OUTLINE OF THE GUATEMALAN ECONOMY ....... . ... ......... 3 The Land .. .......... ...... .... ......... ....... ...... ........ .... ..... .... .. 3 The People . . . .... .... ............ . ..... ... ..... ..... ..... ... . 6 National Income .. .... .. ........... ...... ....... ......... ... ... .......... 10 Foreign Trade ....... . . ... . . ....... .. .......... ... . .. .. ..... 11 Balance of Payments .............................. ............... ....... 14 The Monetary and Banking System ........... . ............. 14 II. AGRICULTURE AND THE RURAL ECONOMY . ... ..... .......... . 22 I. AN INVENTORY . ...... ·· ··· ... ......... .................. ........ . 22 Basic Resources .. 22 Production .... 23 Practices and Problems ...... ......................... .... 25 II. POLI CIES FOR PROGRESS ....... ... . . ... ... .. . 27 Two Concurrent Programs .... ..... ........... 27 Coordination ... ..................................... 29 A~ricultural Research, Extension and Train- mg ........ ... ..... 31 State-Owned and State-Administered Farms 36 III. FIELDS FOR EARLY DEVELOPMENT .... . ... .... ....... . 40 Coffee ................. .................. ....... ......... ... .. 40 Selected Crops ... .. ... ... .. ................. ...... .. .. 44 Mechanization ... .. .... ............ ... ........ ... .......... .... . 54 Marketing ...... ... .'....... .... ... ....... ........ . 57 Agricultural Credit .... ..... .. ..... ........... ..... ...... ... . 59 Livestock .... .... ........... ... ......... ..... ........ ........... ... 61 Forest Products ....... .... .. .......... ... ..... ..... ... .. ... ... . 67 Irrigation ... 71 IV. A LONG-RUN PROGRAM ....... .... . .... .. . ... . .... ... .. . .. . .. 74 Rural Development .... .. .......... .. .... ........ ...... ... 74 Resettlement on the Pacific Coast.... ..... ........... 81 Colonization of Other Areas .............. ............. 84 V. PRIORITIES AND EXPENDITURES .... .. ...... . ... .. ..... . . 88 Xlll Chapter Page III. INDUSTRY .... .. ... ... .. .. .. ... .... ....... ... .... . .... ....... ....... ... ... ... . ... .. 91 I. GUATEMALAN INDUSTRY TODAY ... . ....... .... . . ... ... . 91 II. FACTORS INFLUENCING INDUSTRIAL DEVELOP- MENT ..... ... .. .... ...... ... . .. ..... .. . ... ............. .. ... .. ... 94 Raw Materials .... ..... ...... ........ ...... .. .. .. ...... ... .... .. 94 Labor ..... .......... .......... ... .. ............. .................. .. 95 Technology .......... .... ... .............. .... .... ... ....... ... .... 96 Management ............ .......................................... 96 Capital and Credit.... ....... .. ... ... ........ ... .. .... .. ..... . 97 Transportation . ..... ...... .. ........ ............. .... ... .... ... 98 Government Controls ............ .......................... 98 Markets ....................... ....... .. ....... .............. ...... 99 III. POTENTIALITIES OF SELECTED INDUSTRIES ........ 100 Beverages ...................................................... .... 100 Sugar ............... ............. ..... ........ ................. .... .. 101 Flour ..... .. .. ...... .... .... .... ......... ... .. .. ......... ..... ........ 103 Fish .......... ..... .......... .................................. .... ... 104 Other Food Products......... ...................... ...... .. . 105 Textiles ..... .. ..... ........ ..... ........ ......... ....... ... ........ 106 Shoes and Leather Goods.... ..... ...... ....... ..... ..... 108 Hard Fiber Products... ...... ..... ......... .. .. ............ . 110 Cement ...... .. ..... ..... .... .... ... .. ....... .... .. ... ........... .... 111 Wood Products ... .. .......... ..... ........................ .. .. 112 Paper .......... .. ...... ... .................. ..... 113 Chemicals and Drugs. . .. ........ .................. 113 Miscellaneous Industrial Products.... ..... ... ...... 114 IV. RECOMMENDED POLICIES ···· · · ··· ·· ·· · ···· ·· ·· ·· ···· ··· ···· 116 l V. MINING AND PETROLEUM .. ....... .. ........... .... ...... .. ...... ....... 121 I. STATUS OF DEVELOPMENT ... ... ... ········ ···· ··· · ··· ······· ·121 Historical Background ........ ......... .. ..... ... .... .... 121 · Present Mineral Production... ............ ..... ........ 122 II. FACTORS AFFECTING MINING DEVELOPMENT .. . . 124 Technical Information .. ..... ..... ... ...... ........ .... ... 124 Markets .... .. 124 Transportation ...................... ..... ....... ............ ... . 125 Production Costs ......... ..... ......... .. ........ .... ........ . 125 Legislation .. ... ........... ........ .... ......... ......... ......... . 126 III. RECO M MENDATIONS 129 xiv Chapter Page V. TRANSPORTATION .... .. ... .. ........... .. ....... ..... 132 I. SURVEY OF EXISTING CONDITIONS......... ....... .. . . 132 II. BASIC FACTORS AFFECTING DEVELOPMENT OF TRANSPORTATION ...................................... .. 135 J II. GOVERNMENTAL POLICY ........ ... .................... . .. .. . . 141 IV. HIGHWAYS 151 V. RAILWAYS ................ .. ................ ..... . ....... . .......... .. 168 VI. PORTS AND WATERWAYS.. .......... .... .... . ...... .. ....... .. 180 VII. AIRWAYS ....................................................... . .. .... 194 VIII. PRIORITIES AND EXPENDITURES ...... .................... 199 VI. TELECOMMUNICATIONS .................. ..... ........ .... .... ... ........ . 211 l. INTERNATIONAL SERVICE ...... ... ........... . ....... . .. .... . 211 II. DOMESTIC SERVICE ..... ... ... . ......... ............ .... ... .. .... 212 Present Network .............. ...... ..... ,.. ... ............ ... 212 Local Telephone Systems ....................... .......... 212 Long Distance Service......... .. ................... .... .... 213 Telegraph ........... ..................... .... ... .. ..... ............ 214 Rates .. ..... ...... ........... .... .... ..... ........ .. ...... ........ ... .. 214 III. IMPROVEMENT ................ ... .. ............. .... ... .. ... ... ..... 21.i VII. POWER . ... . ... . . .. . . . . . . . .. .. . . . ... .. . . .. .. .. .. . .. . . .. . . . .. . .. . .. . . . . . . . . . . .. . . .. . . . .. 218 I. PRESENT POWER SITUATION .. ... ... .. .. .... ..... .... .. .. ... 218 Demand ........ ....................... ........ ...... ....... .... .... 218 Production ................. ....................................... 219 Transmission and Distribution.............. .. ........ 224 Rates ....... ......... .. ... ........ .... .. ... ....... .... ....... .. ........ 225 II. FACTORS INFLUENCING POWER DEVELOPMENT 227 Potential Power Sources ............ .. .~ .................. 227 Availability of Technical Data.... ................. ... 230 Specialized Personnel .. .. .. ... .. .. .. .. .. .. .. .. .. .. .. .. .. .. . 230 Planning ..... ........... ..... .............. ...................... ... 231 III. RECOMMENDED POLICIES AND PROJECTS .. .... ... .. . 233 IV. PRIORITIES AND EXPENDITURES .. .. .. .. .. .. .. .. .. .. .. .. . 242 xv Chapter Page VIII. PUBLIC POLICIES AFFECTING DEVELOPMENT . ..... .... .. . .. . 244 Coordination of Effort ... ....... .............. ......... .. ...... ........ . 244 Controls and Restrictions ..... .. .. .~.. .... .... ... ..... ... .. .... . 249 Public Enterprise ..... .......... ..... ... ....... .... ..... ... ... .... .. ...... . 252 Labor Policies ........ ...... ................... .. ....... .. ...... .......... . 254 Health ..... ........ .. ..................... ............ ..... .... ........ ... ' .. .. .. 257 Public Administration ....... ...... ..... ..... ............ ........ .... .. . 262 IX. FINANCIAL RESOURCES AVAILABLE FOR INVESTMENT ... . 265 I. GENERAL OUTLOOK .. .. .... ..... ........ .. .. . ........ ........ . . . 265 II. CENTRAL BANK BORROWING ........ . .. .... . ...... ... .. .. 265 III. INTERNAL SOURCES OF EARLY PROMISE .......... . 267 Taxation ......... ... ......... ... ..... ........... .... .... .... ...... .. 267 Fincas N acionales 273 Government Economies .. ....... ........ .. .......... .... 274 IV. INTERNAL SOURCES OF MORE DISTANT PROMISE 275 Private Savings ... ...... ............... .... ......... .. ...... .. 275 Institutional Savings ..... ............. ... . .. ...... .... ... 276 Domestic Private Investment ............. ....... 278 The Government Bond Market ....................... 280 • V. 282 EXTERNAL SOURCES ······· ·· ······· ·· ···· · · ·· ··· ········ ··· ·· ·· Foreign Direct Investment .... .... ........... .... ..... . 282 International Credit ..... .... ...... ............... .. ...... .. 286 Grants and Direct Financial Aid ..... ..... .. ....... . 290 VI. CONCLUSIONS ............ .. .... ... ........ .. .. .. ..... .. ....... ... .. . . 290 X. THE RECOMMENDED INVESTMENT PROGRAM. .... .. .. . .... .. .. 293 I. AIMS AND ASSUMPTIONS . .... ..... .. ..................... ... 293 II. THE OPTI M UM INVESTMENT PROGRAM . ........... 296 III. THE REDUCED INVESTMENT PROGRAM .. .......... 300 IV. THE PAY-A s-You-Go PROGRAM ....... . .. ...... .. ...... 303 XVl LIST OF TABLES Table Page I. Occupational Distribution of the Population ...... ... ....... . 9 II. Estimate of Gross National Product, 1947-48. .. 10 • III. Foreign Trade in Selected Years, 1927-49.... .. ............ .. 12 IV. Values of Principal Exports .. .. . .... .... .... ..... 12 V. Values of Principal Imports ...... .... ..... ..... . .. .. .... ... 13 VI. Main Items in the Balance of Payments, 1946-49... .. ..... 15 VII. Total Bank Deposits (Outside of the Banco de Guate- mala) as of March 31, 1950............ .... ... ... .. ....... .. .. ..... 18 VIII. Gold and Foreign Exchange Reserves, 1946-50... ... .. .... 19 IX. Tax Receipts and Expenditures, 1949.... ......... ......... ...... 20 X. Budget Deficits, 1947-48 to 1949-50 ............... .. 21 XI. Estimate.cl Output of Principal Agricultural Products, 1947-48 ···· ···· ·· ··· ···· ··· ·· ········ ·· ···· ···· ······· ··· ·· ······ ··············· · 24 XII. Production and Disposition of Coffee, 1936-37 to 1948-49 ·········· ·· ········ ··· ······ ········ ··· ····· · 41 XIII. Banana Exports, 1939-49... .. ........ ............ .. ...... .... .. .. ... ... . 49 XIV. Abaca Production Since Inception, 1945-51.... ....... .. ....... SO XV. Consumption of Livestock, 1938-49. ... .... ... ......... ....... ..... 62 XVI. Proposed Additional Expenditures on Agriculture First Year ................. ............................. ....................... 90 Second Year .......................................... .. ................... .. 90 XVII. Values of Manufactures and Raw Materials Consumed, 1948 ······························· ·········· ···· ······· ·· ······· ·············· ·· ··· 93 XVIII. Comparative Production of Selected Industries in Recent Years ................ ................ ... ...................... ...... 94 XIX. Volume and Value of Mining Output, 1949. .... ......... ..... 123 XX. Estimated Costs of Proposed Highway Development Program ..... .. .... ....... ... ... ... ... .... ....... ..... ... ... ..... .... .. ... ... ... 162 XXI. Cargo Movement Through Puerto Barrios, 1938-48... . 183 XXII. Cargo Movement Through San Jose and Champerico, 1938-48 ............ ... ........ ...... ....... .. .................... ........ .. ..... 192 XVll Table Page XXIII. Traffic Operations of Aviateca, 1944-50. ...... ... ......... ..... .. 195 XXIV. Income of Aviateca, 1946-49.. .. ..... ....... ... ...... ...... .... ... ...... 196 XXV. Suggested Order of Priority for Work Projects.. ... ... .... 210 XXVI. Domestic Telephone Rates for Various Classes, of Service .... .. .... ....... .. .................. ...................... .......... .. ..... 214 XXVII. Principal Power Plants, 1950 .... .. ........ .... ......... .... ....... ... 220 XXVIII. Customers and Connected Load of Empresa Electrica de Guatemala, 1950.. .... .. .. .. .. .. .. .... ... ... ... .... ....... ......... ... .. 221 XXIX. Energy Furnished by Planta N acional de Santa Maria, First Ten Months of 1949..... ....... .... .. .......................... 222 XXX. Selected Average Rates for Electric Service in Various Localities, 1950 .......... ............ ......... .. ........ ........... .......... 226 XXXI. Hydroelectric Sites Reported from Various Sources, 1950 ······· ···· ···· ··· ·········· ····· ······· ··· ········ ············· ····· ····· ··· ··· 228 XXXII. Investments of Banco de Guatemala, as of May 31, 1950 ···················· ·· ··········· ··············· ··········· ··· ···· ·· ··· ······ ·· · 266 XXXIII. Assumption No. 1: Optimum Investment Program .. .. 297 XXXIV. Assumption No. 2: The Reduced Program ..... .. .. ....... 301 XXXV. Assumption No. 3 : The Pay-As-You-Go Program.... 304 MAPS I. Topographical Regions ....... ............ .... ......... before page 5 II. Population Distribution ....................... ... .... " " 7 III. Agriculture and Land Use.......................... " " 25 IV. Recommended Basic Highway Network ... " " 157 V. Railways ...... ...... ........................ .. ... ..... .. ... ... .. " " 169 VI. Recommended Waterway Service-El Estor to Puerto Barrios ...... .. ..... ..... . " " 189 xviii The Economic Development of Guatemala CHAPTER I Outline of the Guatemalan Economy It must be apparent to the most casual observer that Guatemala possesses natural advantages which, if properly utilized, should make it possible for the Republic to achieve a relatively favorable position among the nations of the Americas both in living standards and in financial stability.• Yet actual economic development down to the middle of this century has barely scratched the surface of these latent pos- sibilities. • • Behind this paradox lies the unusual nature of Guatemala's endowment. Geological history has given this mountainous, tropical country extremely fertile, volcanic soils and a range of altitudes which offers a wide variety of climates. Yet, by the same token, the rugged and broken topography has ham- pered transport and created such obstacles to all types of development that potentially productive areas still remain relatively inaccessible. These same factors tend to perpetuate the cultural isolation which continues to characterize large segments of the rural population of the Republic. 1. THE LAND Mountains divide the country into a number of fairly dis- tinct regions. A short distance inland from the 200-mile Pacific coast line the Cordillera of the Andes, the Sierra Madre, traverses the Republic from border to border. From this back- bone other ranges extend as spurs, chiefly toward the Carib- bean side where they descend gradually to the sea. Regions Along the south side of the Sierra Madre is the low Pacific coastal plain - a narrow strip from 20 to 40 miles in width, malarial, but by far the most promising agricultural area in Guatemala. At present, except for the Port of San Jose and the operations of a United Fruit Company subsidiary at Tiquisate, the region is only sparsely populated. 3 4 THE ECONOMIC DEVELOPMENT OF GUATEMALA Above this tierra caliente, on the mountain slopes and foot- hills in altitudes of from 300 to 4,500 feet, lies the Pacific pied- mont region. Here are good cattle ranches and plantations of sugar cane, rice and other tropical crops. Above 1,500 feet, in the rich, volcanic soil, coffee cultivation predominates. Beyond is the Sierra Madre, with several peaks higher than 12,000 feet and numerous volcanoes at present mostly inactive. In and around these mountains are fertile valleys, filled with • soil eroded from the mountain tops. These make up the high- lands. Because of the excellent climate and soils most of the population is concentrated in this zone. The activity is largely subsistence agriculture, mainly corn and beans, with forest and some pastures in the higher altit~des. • North and eastward of the highlands the land slopes off gradually. The region is thickly interspersed with mountain ranges and deep valleys, down which major rivers flow toward the Caribbean. Much of the area is relatively undeveloped; but around Cob.in -almost in the center of the Republic - there are coffee plantations and promising mining develop- ments. On the Caribbean side is another tropical lowland, includ- ing the Lake Izabal region and the lower valleys of the Motagua and Polochic Rivers. Here, in fertile soils, were established Guatemala's first large banana plantations, now partly replaced by abaca because of the spread of banana diseases. To the north lies the plain of the Peten, similar to the Mexican lowlands of the Yucatan Peninsula. Remains of the once populous Mayan civilization in this area still exist, covered with matted jungle. Now the region is only thinly settled and produces only chicle and tropical woods. Climate Throughout the Republic the climate varies with the alti- tude. Both coastal lowlands are hot . and humid the year around, but on the interior plateaus where elevation ranges from 1,500 to 4,500 feet the climate is equable and healthy; in still higher regions the temperature is cool. Map I Topographical Regions M E j jt P,tln ind C1ribb1•n Low/1nds B12 C1ntr1/ Hi.9hl1nds - 3 Cud,ummn,s P1r1mo ind Hit1h Mi,untl,in Pul '-. ·.., ... : .... :_ •• ' · ,,... .-• y ' ., •• - - · ---· • •• \ C:, ... ~.-•..•.. } .......,.·,_.,,, ~;.,,,.:~~ . ...... ..:,. ···~·,··· . ' ·, .......... .,_ . .. • ·-~-- •• "0 ' ..,. •·~=·.:.:~:. . :.•.·:·.:-. .. • ' ,,) ~ "~ . .~~ • "R' " ' ' : / • . . , ,, ,,, • • - • .... , • _.. • · - , ; · .. : · ..·.,- • - . ·os " • .H · • • • , : • . •...~· :. ·~·:-:'tif·ffl':'_.:·1 ~ · ,-1,,•',:--t· ,,, •. / •· •,, ..,,, ,-. ..... •,;. ' :i · · · : .:-:·::::. >',-,;,,, , •,,. • ' • ,,.~~ ._, , ., 0 ' " A • • ..... • \• • •" • ~Q ~ ·,.• • ti \ •, ••:,,:, ""• ' o • J•~ • ~ • '.·, •:: ••••<-~ >,•:.: "· ......·:·.t,""t' -~: ·4J··:~:i~;,;.·.••"'-. O • ~:"'-:::: ,;i4 '., • I•',. '.•--'. · ,: ·; p .. ': • \ ;.,-_ __ . ·,'.\'It ..... ~,~-. ),· ·. O •'." , O A,, / ~o . ;e ~. .... •: •, • ,: J A L ·. : v .r-.,__ ·.-:,,.,. V . ,.. A_, , , • •' ': • I ., _.:-,1;;.,., •• ..-. ,,,.. :;•Ce• o ." - "; ; -<, • _. . !'<-· ..,·-··/ : . ·_.,•..• ,. •·•, ""-"--- ,. --.. ,,.... ' ' ---· . ' ............. · -..- ........ •'/.·:·, ...... • 0 " ' :·· • , ,:-•• • • i.:,.,;;,,,______,., '.o :•: ., ' ' , .· •,,,,:-_.. . . . . ..,_ : .••.<"'.i,. ... ::- ~- .., _.., ~-: ,. ., .._. ' ... .'· . \ -·....•. • ,. ... ... ..... ~ . •• . . . .. .,~ ,,... • ,. - ~ ·-- • ,.... • ' '• •, • • • ,J 0 . '--. ~ "- '-..,. __.,., ' .. " ' " " ' . . .. • • • ,. • • ,• • •• • • • '-. • '"'' • .. • 0 •• • • •" .,.•.,,• !," ••.. .• i .. .... .. .•. ... ·. •· .... . .! ".•. .• ••i/•: • ./• .' '.. .:--:.•... ,~, • .I ' • , . • .. """ !!.-~~d'!·~,-~=:::iia...._ ,,, , ., .,.._..,...... .' / : • E SC V I . ,., Jt T ,. : : .-·· ··.•· • ..... ,.• ,/ 't • ' ·/ I) .. ~ I O 20 40 to 10 100 KI L OMETERS ~" ... OUTLINE OF THE ECONOMY 7 the Republic's total populatfon of 2,787,000, the eight largest urban centers together account for less than 15 percent. Descendants of the old Mayan civilization continue to make up the majority of the population. An official estimate indicates that about 60 percent of the Guatemalans are of pure Indian blood; the rest are principally of mixed Spanish and Indian descent, known as Ladinos.3 While the official language is Spanish, it is not universally understood, and a great many Maya, Quiche, and other languages are spoken in the more isolated sections. Social Conditions The cultural isolation and the defensive attitude of the Indians, remainders of their hard experience in centuries past, constitute one of the Guatemala's basic national problems. 4 Most of the Indians, distrustful of white men, still adhere to their ancient languages, customs and traditions, and par- ticipate only to a very limited extent in the money economy and political life of the nation. The Indian way of life has remained highly resistant to modification by outside influences since the time of the conquest, more than four hundred years ago. The main contribution of the Indians, apart from their subsistence agriculture, has been to provide a labor supply for the large coffee plantations at harvest time. This they do without enterprise or enthusiasm. From the time of the conquest until 1944, various government measures were designed to force the Indian to work in this capacity. The most recent of these were the so-called "vagrancy laws," abolished by the Labor Code of 1947. The most influential group in the country is the Ladino third of the population. Active in politics or as plantation owners, professional people or skilled laborers, this is a group which sustains modern national life, and on whose initiative economic and social development of the country must depe~d. • This term is also used for any person not culturally an Indian, regardless of race. ' B ecause th is problem is of special s ignificance for agricultural development, it has been dealt with principally in Chapter II. 8 THE ECONOMIC DEVELOPMENT OF GUATEMALA Prior to the last war, there ,was extensive participation of foreigners, largely Germans, in the economic life of the country. Activities of foreigners are still important, especially in international trade. There is, however, a trend toward naturalization of the foreign-born business groups. Political Development Ever since the declaration of independence from Spain in 1821, factional divisions have been sharp in Guatemala and the political history disturbed. Nevertheless, stability was maintained and some progress achieved during the long periods of dictatorship. The 1944 revolution marked the beginning of a new epoch in the history of Guatemala. A new constitution came into effect in March 1945. Under this the legislative power is vested in a single-chambered Congress, consisting of repre- sentatives ( one for every 50,000 inhabitants) chosen by direct popular vote for four years. Half the membership is renewed every two years. Deputies may not be reelected until after one term has elapsed. The president is normally elected for six years and barred from reelection for a period of 12 years. With the social provisions of the 1945 Constitution and the creation of the Ministry of Economy and Labor in that year, the Government began an active program to improve the lot of the Guatemalan worker. In 1946, the Organic Law of the Guatemalan Institute of Social Security was passed; opera- tions began in January 1948, with a budget of about ~1.25 million and a coverage of 60,000 workers, to be extended progressively. Labor unions began to organize in 1946.11 A Labor Code was adopted in 1947, providing for collective bargaining, settlement of labor disputes in labor courts, and compulsory arbitration of disputes involving public services. Amendments in 1948 required employers to give severance pay to dismissed employees and permitted agricultural workers to join unions regardless of the size of the enterprise in which they worked. • There are now three national labor federations in Guatemala: The Confederaci6t1 de Trabajadores de Guatemala, the Federacion S indical de Guatemala, and the smaller Federaci6t1 Central Regional de Trabajadores. OUTLINE OF THE ECONOMY 9 Economic problems also received new attention with the reorganization of the Central Bank (1946) and the creation of the "Institute for the Development of Production" (1948). Labor Resources Guatemala's labor supply is commonly considered to be inadequate for the needs of the country. Severe l,abor short- ages exist, especially at harvest times, although certain types of workers, such as clerical help, may experience short periods of unemployment. While occupational statistics from the 1950 census are not yet available, some indication of the distribution of workers may be had from the earlier figures shown in Table I. TABLE I OCCUPATIONAL DISTRIBUTION OF THE POPULATION (Based on the Census of 1940) Percentage Number d'f Percentage of active persons of t ot al population Total population (1950 census) ........ 2,787,030 Active population (1940 census) ........ 1,065,964 38.0 Employed in: Agriculture ................................... . 777,509 27.6 73.1 Industry ... ....................... .. ............. . 136,102 4.9 12.7 Commerce ........... .. ......................... 34,045 1.2 3.1 Transportation ......... ................ .. . 5,517 .2 .6 Domestic services ............ .. ......... . 65,000 2.4 6.2 Miscellaneous .. .. ........ .. .. .............. .. 47,791 1.7 4.3 Sou RCE: I nstituto de Fomento de la Producci6n. Age composition probably explains the relatively small proportion of the total population actively employed. Accord- ing to the 1940 census, 46 percent of the total population were less than 15 years of age, a phenomenon which results from the low average life-expectancy of 36 years. Yet it seems probable that at least some of the women, particularly farmers' wives and others engaged in agriculture, were counted neither in the active population nor in the agricultural labor force. 10 THE ECONOMIC DEVELOPMENT OF GUATEMALA 3. NATIONAL INCOME The latest and only reliable national income calculation available, prepared by experts of the U.S. Federal Reserve System at the request of the Banco de Guatemala, estimates Guatemala's gross national product in 1947-48 at the equiva- lent of @335 million. 6 Its principal sources are shown in Table II. T ABLE II E STIMATE OF G ROS S NATIO N AL PRODU CT, 1947-48 Amount Percent Source (in millions )l of total Agriculture (including fishing and for- estry production) ... ........................... .. 0189.8 56.7 Corn ........ ............................................ 045.0 I 13.5 Coffee ... .. ... .......... ............. ... .. .. ...... ...... 26.1 7.8 Bananas ......... ....... .................. .... 18.2 5.4 Beans .. .. ............... ..... ..................... 12.4 3.7 Livestock .... ........ .......... ...................... 35.1 10.5 Fishing ························- ········ ·· ············ .8 .2 Other agriculture ............................. . 52.2 15.6 Manufacturing and mining .................... 46.3 13.8 Food and beverages .... ..... ....... 16.0 4.8 Textiles ....................... ...................... 8.7 2.6 Lumber ..... ........... .. .............. .. 4.2 1.2 Indian handicrafts ........... .... .. 10.7 3.2 Other manufacturing and mining 6.7 2.0 Private construction 4.2 1.3 Private services 61.1 18.2 Wholesale and retail trade 23.5 7.0 Transportation .... 11.0 3.3 Housing ................ ... ..... 17.5 5.2 Other, including professional and domestic services ...... 9.1 2.7 Government 33.6 10.0 National .. ...... ... ............... 30.4 9.1 Municipal and autonomous entities 3.2 .9 Total gross national product 335.02 100.0 1One quetzal (of 100 centavos) equals one United States dollar. • This estimate of gross nat ional product repr esents the total output of goods and ser vices produced in Guatemala. Since it was derived from production rather than expenditure data, and since for purposes of fiscal analysis a measure of total output rather than total expenditure was desired no adjustment was made to allow for the balance of the transactions of the Guatemalan economy with the rest of the world. The figure thus represents the national product produced, and not the product available. Sou RcE: Study by J. H. Adler, E . R. Schlesinger and E. C. Olson in collaboration with the Research Department of the Banco de Guatemala, Public Finance and Econo,nic Development in Guatemala, October 1950, p. 26. ' • One quetzal equals one U .S . dollar. OUTLINE OF THE ECONOMY 11 According to this study, agriculture (in which were arbi- trarily included fishery and forestry industries) accounted for the major part of the national product, or 56.7 percent. The figure is lower than the percentage of the active population employed in agriculture, which comes close to 75 percent. This discrepancy, common in countries where agriculture has to work with little capital, indicates that over-all productivity in agriculture is lower than in other fields. Manufacturing is of secondary importance, representing .only 13.8 percent. The largest individual industries are bever- ages and distilleries (~ 10.3 million), textiles, (~8.7 million), and food processing industries (~5.7 million). Included in this group are also Indian handicrafts, which amount to ~10.7 million or over one fifth of the total manufactured product. On the basis of a population of 2,700,000, the gross national product of ~335 million equals ~120 per capita. This is higher than the estimated 1947 per capita incomes of El Sal- vador ($85), Nicaragua ($65), and Honduras ($60), but lower than those of Panama ($181), and Costa Rica ($146). The distribution of income is, of course, still very unequal. In an estimate made by the Banco de Guatemala of the income of 550,000 Guatemalan families, 24 percent of the families were found to have an annual income under ~100, and 69 percent had less than ~400. Thus, if the high cost of living is taken into consideration, it is evident that little contribution to capital formation can be expected from the mass of the population. 4. FOREIGN TRADE Guatemala's foreign trade is the largest of any of the six Central American countries. Ordinarily it accounts for one third of the value of their combined exports and about one fourth of their total imports. Coffee is still the most important export product, although there has been some diversification in recent years. In 1949, coffee accounted for about 72 percent of the total value of exports. Bananas, whose share in the late thirties amounted to approximately 27 percent, now represent about 14 percent 12 THE ECONOMIC DEVELOPMENT OF GUATEMALA TABLE III FOREIGN TRADE IN SELECTED YEARS, 1927-49 Exports, F.o.b. (unadjusted) Imports, c.i. f. Year (in millions) (in millions ) 1927...................................................... .... 033.9 025.0 1929................................. :...................... .. 24.9 30.4 1933.......................................................... 9.3 7.6 1938.......................................................... 18.3 20.9 1941.......................................................... 14.5 16.1 1946.......................................................... 36.7 36.2 1947 ................... .................'.. .................... 52.0 57.3 1948.... ...................................................... 50.2 68.3 1949................ .......................................... 52.2 67.9 S0u1tcE: I nstitvto de Fomento de la Prodvccion; International Monetary Fvnd. of all exports on the basis of customs returns. Other items include chicle, essential oils, abaca, minerals, cacao, timber, meat (occasionally) and assorted lesser products (Table IV). TABLE IV VALUES OF PRINCIPAL EXPORTS, F.O. B. 1948 1949 Produced (in thousands) ( in thousands) Coffee 030,916 037,367 Bananas! ........ .. ......... ................... . 10,319 7,585 Chicle ... ....... ............. ... .. ................. . 2,747 1,843 Abaca ...... .. ................. .. ... ............ .. .. 2,184 1,909 Essential oils ... ... .. ............. .......... . 850 1,083 Meat ..... ........ .. ................................. 700 Timber ........................................... . 512 160 Sesame ...... ... .................................. . 333 n.a. Honey .............. ............................ .. .. 295 267 Hides ............................................. . 260 327 Cardemon ..................................... . 121 96 Zacaton root .. .. ............ .. .... .. ......... . 69 54 Cinchona .......... .. ........................... . 52 18 Other ... ............................ ... ... .. ... ,.. . 808 1,517 Total ......... .......... ................ .. . 050,166 052,226 • Unadjusted figures. S0u1tcE: Direccion General de Estadistica. OUTLINE OF THE ECONOMY 13 In contrast to the exports, the Guatemalan imports consist of a great variety of items (Table V). Machinery represents the largest group (24 percent in 1949), followed by textiles (17 percent), foodstuffs (11 percent), iron and steel manufac- tures (seven percent) , and chemicals (seven percent). TABLE V VALUES OF PRINCIPAL IMPORTS, C.I.F. 1948 1949 Produced (in thousands) (in thousands) Machinery and tools ............... ... . 016,893 017,132 Petroleum products .... .. ..... ......... .. 5,729 4,665 Cotton fabrics ................ .. ...... ....... . 4,184 4,114 Iron & steel manufacturing ......... . 4,127 4,942 Foodstuffs & beverages ........... .. .. . 6,253 7,625 Clothing ................................. ... ..... . 3,427 3,832 Paper .. ................ ............................ 2,196 1,884 Rayon fabrics .. .. ...... .... ................ .. 1,599 1,276 Fungicides, etc . ........ .... .... .......... .. .. 1,540 1,019 Ginned cotton ................ .............. .. 1,426 998 Threads, yams, and rope .. ... ...... . 1,043 1,045 Pharmaceutical products ........ .. .. 1,008 1,074 Rubber products .............. .. ........ .. 950 818 Woolen fabrics .. .... .. .... .. .... .. ...... .. .. 905 564 Other .......... .. .......... .... .... . 16,979 16,995 'Total ............. .. .. .. ........... .... .. . 068,349 067,983 SouRCE: Direccion General de Estadistica. Traditionally, Guatemala's biggest customer has been the United States, whose share has increased still further since the last war. In 1938, the value of Guatemalan exports to the United States amounted t~ 69.5 percent of the total, and in 1948, to 92 percent. Germany offered the second largest market for Guatemala in the thirties, taking in 1938 about 15 percent of her exports; at present, of course, this trade is only begin- ning to reappear. Canada now takes second place, with a share of about three percent. Other customers are the United King- dom, Belgium, Sweden and Switzerland, who in recent years have together absorbed from five to six percent. 14 THE ECONOMIC DEVELOPMENT OF GUATEMALA As a supplier, the role of the United States is also pre- dominant. In the late thirties the United States customarily provided 45 percent of Guatemalan imports, while Germany supplied about 35 percent. Since the beginning of the last war, however, the United -States share has increased greatly, accounting for 73 percent of the total in 1949. Latin American countries as a group come second, with a combined share of 13 percent; of these the most important is Mexico, with five percent. Europe now provides only a small part, with the United Kingdom (two percent) the leading supplier. It may be expected that W estem Europe will contribute a greater share as her industrial production increases. 5. BALANCE OF PAYMENTS Guatemala has usually maintained an active trade balance, w hile services and capital accounts show appreciable fluctua- _ tions from year to year. Only for the last four years have adequate balance-of- payments calculations been prepared by the Banco de Guate- mala. For this reason, no direct comparisons can be made with prewar conditions. Main items in the balance of payments for 1946, 1947, 1948 and 1949, as prepared by the International Monetary Fund from data provided by the Banco de Guatemala, are presented in Table VI. Even in these, however, official trade differ substantially from adjusted values. , 6. THE MONETARY AND BANKING SYSTEM Institutional Framework Like other American nations, Guatemala has experienced difficulty in inflationary periods,j he outstanding one being the thirty years from 1895 to 1925. The old Guatemalan peso fell from its value of about half a dollar in 1895 to a low of 60 to the dollar in 1923. A vigorous program for currency reform was put into action in 1923 when the newly established Caja Reguladora began to retire the old paper pesos. In 1925 a new currency, the quetzal, was created at a par with the U. S. dollar. A semiofficial Central Bank was organized in 1926 on OUTLINE OF THE ECONOMY 15 TABLE VI MAIN ITEMS IN THE BALANCE OF PAYMENTS, 1946-49 (in millions) 1946 1947 1948 1949 A. CURRENT TRANSACTIONS: Exports f.o.b....... ...... ... ... 051.5 065.6 067.4 063.2 Imports £.o.b. -31.9 -49.9 -61.5 -60.9 Trade balance 19.6 15.7 5.9 2.3 Transportation - 3.8 - 5.6 - 6.9 - 7.7 Insurance ...... ........ .. ....... ........ ...... . - 0.8 - 1.1 - 1.3 - 1.4 Investment income ...... .......... .. ... . - 8.0 - 5.0 - 6.7 0.1 Foreign travel and tourism ...... .. 0.5 1.3 2.0 0.8 Other services (net) ......... ...... ... .. 0.1 - 0.2 - 0.3 0.2 Balance on services .. .... ... . -12.0 -10.6 -13.2 - 8.0 Balance on goods and services ..... . 7.6 5.1 - 7.3 - 5.7 B. PRIVATE CAPITAL MOVEME N TS: Capital movements ..... .... ... .. ..... ... 3.2 4.7 3.5 - 8.3 C. OFFICIAL FINANCING: Public debt amortization - 0.1 - 0.1 - 0.1 - 0.1 Gold subscriptions to IMF and IBRD .... - 1.3 Grants and contributions to and from international organiza- tions (net) 1 . . .. ...... .. .... .. . .. .. . ... . . 0.9 2.2 2.1 1.7 Balance on capital movements ... . 4.0 5.5 5.5 - 6.7 Total balance ..... .. ...... ..... .. . 11.6 10.6 - 1.8 -12.4 D. ERRORS AND OMISSIONS .. ... .... ........... - 4.4 - 8.2 - 4.5 2.4 E. SURPLUS OR DEFICIT (-) .... ... .... .... . 7.2 2.4 - 6.3 -10.0 ( corresponding to changes in gold and foreign exchange reserves) 1 This item includes small amounts of private donations. SOURCE: Figures for 1946 have been published in the International Monrtary Fund Balance of Payments Yearbook issued in 1950. Figures for 1947, 1948 and 1949 arc taken from the forthcoming IMF Balance of Payments Y carbook. strictly orthodox lines, with exclusive power to issue notes backed by a gold reserve of at least 40 percent. 16 THE ECONOMIC DEVELOPMENT OF GUATEMALA Parity with the dollar has been maintained ever since; but the rigid regulations of the old Central Bank had unfavorable economic consequences arising from violent fluctuations in the money supply, determined by external circumstances. In the three-year period of 1930 to 1932 there was a reduction of over 40 percent in the money supply, while in the six years between 1939 and 1944 it almost trebled. It became clear that some measures were needed to assure monetary and exchange stability and at the same time to or- ganize a financial structure that could support economic devel- opment. New monetary and banking legislation, prepared with the help of specialists of the U. S. Federal Reserve Sys- tem, was adopted by the Guatemalan Congress in 1945 and 1946. This, as it now stands, consists of three main laws: the Monetary Law, the Central Banking Law, and the Bank Law.1 The Monetary Law is the basis of the whole system. Among its many interesting features is a provision for sterilizing cur- rency revaluation profits and losses, and "hot" capital inflow. Another is the "emergency regulation of international trans- fers", providing for exchange restrictions if there is a current nonseasonal drain of more than 25 percent of gold and exchange reserves, or if such reserves fall to less than 40 percent of the average sales of foreign exchange in the preceding three years. Under such an emergency regime, . exchange for non- essential imports is to be sold by auction. The obligation to maintain reserves is thus related to external obligations, not to the internal money supply. The Central Banking Law defines the objectives of Central Bank policy, distinguishing between domestic and international aims. It provides for internal stabilization of the money sup- ply through credit policy, flexible reserve requirements for banks, and open market operations, always with due regard to the exchange reserve situation and external stability of the curren~y. 8 Net international reserves are carefully defined. 1 More detailed descriptions of these laws may be found in the Federal Reurv1 Bulletin, March 1946 and April 1947 isues. 8 As an example of the many restrictions for this purpose, it is interesting to note that public and semipublic securities cannot be purchased by the Banco de Guatemala when international reserves are less than 2 5 percent of the average· sales of foreign exchange in the preceding. OUTLINE OF THE ECONOMY 17 An independent Monetary Board (Junta Monetaria) interprets policy, acts ·as an adviser to the Government, makes major decisions on monetary credit and exchange matters (including emergency exchange restrictions), and has the specific func- tion of coordinating public or semipublic finances with general monetary policy. A "Fund for the Regulation of the Bond Market" is created within the Banco de Guatemala, to assist in the marketing of public and semipublic securities; its resources come from Government contribution, and Banco' de Guatemala profits. Under the Bank Law three main types of banks are recog- nized: commercial, mortgage, and capitalization9 banks. The law relates capital requirements to the quantity and quality of assets rather than to the volume of deposits as is more usual. This affords a new technique that can be used for sele.ctive credit controls and also provides, together with the reserve requirements in the Central Banking Law, adequate instru- ments to limit credit expansion. Credit Facilities Available to the Public Within the satisfactory legal and institutional framework now provided, the banking institutions should be able to de- velop and diversify their activities; but they have hardly begun to do so. The currency crisis of 1920 was .a severe blow to private banks. Only three of importance 10 now operate in Guatemala and these do not engage in any substantial medium- or long-term financing. For fields other than coffee, and to a lesser extent cattle and som~ well-established commercial activities, adequate credit facilities have always been lacking in Guatemala. To relieve this situation, the Government has created several financial institutions. One of these, the Credito Hipote- cario Nacional, is an important lender for agricultural purposes and public works; it also has a department of insurance and • Institutions resembling life insurance companies in the sense that they guarantee the payment of a sum representing the capitalization of periodic payments. JD These are: the Banco A gricola Mercantile, (successor to the old jointly controlled Central Bank, superseded in 1946 by the Banco de Guatemala); a branch of the Bank of London and South America in Guatemala City ; and the Banco de Occidente, in Quezaltenango. 18 T H E ECONOMIC DEVELOPMENT OF GUATEMALA capitalization. Another is the Banking Department of the Instituto de Fomento de la Producci6n (INFOP), established in 1948 to give medium- and long-term credit for agricultural and industrial purposes. 11 TABLE VII TOTAL BANK DEPOSITS (Outside of the Banco de Guatemala) AS OF MARCH 31, 1950 ( in millions ) Banco Agricola Mercantile... .... .. .................................. 010.6 Bank of London and South America....................... ..... 9.9 Banco de Occidente........................................ .. ................ .6 Credito Hipotecario Nacional... ..................................... 8.4 INFOP (Development Institute) ................................ .6 Total ... .............................. .. ... .. .... :............... 030.1 • Money Supply Over the last four years the money supply has remained relatively stable. From the establishment of the Banco de Guatemala in 1946 through June 1950, the money stt'pply (in- cluding government deposits) increased only by 10 percent from 57.6 million quetzales at the end of 1946 to 62.6 million on June 30, 1950. · However, this relative stability conceals a loss in inter- national reserves and an internal credit expansion, illustrated by the percentages showing the origin of the money supply. In 1946, money of internal origin represented only 14 percent of the total. In August 1950, it accounted for more than 40 percent. Internal monetary expansion originated mainly in government activities for public works, housing, and credits to private and national enterprises. Exchange Reserves Guatemala's gold and foreign exchange reserves over recent years are given in Table VIII. The figures show a progressive decline since 1947. In September 1950, the international reserves of the Banco de Guatemala were down to 33.5 million 11 For a description of I N FOP, see Chapter VIII following Recommendation No. 62. OUTLINE OF THE ECONOMY 19 quetzales. By December 1950, however, this downward move- ment had been reversed and the reserves had returned to the level which they held at the end of 1949. Guatemala's private short-term assets in the United States amounted to 14.2 million dollars at the end of 1950. TABLE VIII G OLD AND FOREI GN EXCHA N GE RE SERVES, 1946 TO 1950 ( in mill ions) Sept. Dec. Rc1ervc1 1946 1947 1948 1949 1950 1950 Banco de Guatemala .... 046.7 049.6 046.1 036.7 033.5 037.3 Treasury .... .................. 2.5 2.5 1.4 .4 .3 .3 Other banks ................ 2.7 2.2 1.9 2.8 1.4 2.5 Total 51.9 54.3 49.4 39.9 35.2 40.1 S OUR CE : International Monetary Fund. Public Finance By far the most important elements in Guatema,lan public finance are the receipts and expenditures of the national government, which collects 90 percent of all public revenues. Approximately 80 percent of receipts in 1948-49 were from taxes, the remainder being proceeds from public services or income from public properties and enterprises. Among the latter, the net proceeds to the state budget of the government-owned Pincas Nacionales (whose sales of coffee totalled @7.3 million for 1948-49) cannot be determined with precision. They are estimated at over three million quetzales in the 1950-51 national budget, but at less than @700,000 in the budget of the Pincas, which have been autonomous since June 1949. Sources of tax receipts in 1949, together with budgetary expenditures by broad categories, are shown in Table IX. The largest separate budgetary items were for education ( more than six million quetzales), agriculture (@5.5 million), public works (@5.2 million), and public health (@3.7 million). The internal public debt has risen from less than five miltion quetzales in 1947 to almost 15 million quetzales at the end of 20 THE ECONOMIC DEVELOPMENT OF GUATEMALA 1950. Nonbank investors hold less than 01.3 million of securi- ties guaranted by the Government. The external public debt ({(1670,000) 1s significant; in addition to this, however, a balance of £426,000 is claimed by the British Corporation of Foreign Bondholders. This last claim is not recognized by the Guatemalan Government. TABLE IX TAX RECEIPTS AND EXPENDITURES, 19491 Percentages of Amount total receipts (in millions) total expenditures A. RECEIPTS Direct taxes .................................. 0 3.6 8.3 Property taxes ................................ .7 1.6 Consumption taxes ........................ 8.9 20.5 Import taxes ·································· 14.3 32.9 Export taxes .................................. 2.6 6.0 Licenses and other business taxes 3.2 7.4 Fines and fees .... .......... .................... .3 .7 Other tax receipts .. .................. ...... .2 .5 -- 33.8 Other receipts2 .............. 9.6 22.1 -- -- Total ........................ 043.4 100.0 B. EXPENDITURES Administrative expenditures ...... 015.4 31.3 Social and cultural expenditures 16.5 33.3 Expenditures f~r development.. .. 11.5 23.3 National defense expenditure ...... 5.3 10.7 Public debt services ......... ..... .......... .7 1.4 -- -- Total ························ 049.4 100.0 -- 1 These figures ar e those shown in accounts of the Court and Control Office of Accounts, and are at some variance with figures published by the Banco de Guatllffl4la. 1 Mainly from public services and government enterprises. Sou RCE: Adler, Schlesinger and Olson, op. cil. OUTLINE OF THE ECONOMY 21 For a.long period prior to 1947, budgetary deficits had beea almost unknown in Guatemala. But data published by the Banco de Guatemala (Table X) show that, on the basis of actual receipts and expenditures, deficits amounting to ~9.4 million have been accumulated in the last three years. TABLE X BUDGET DEFICITS, 1947-48 TO 1949-50 (in millions) Years R eceipts Expenditures Deficit 1947-48.................. 9.)39.6 041.5 01.9 1948-49 .................. 44.4 47.0 2.6 1949-50 .................. 42.4 47.3 4.9 9.4 Judging from the decrease in government deposits with the Banco de Guatemala, probably about two thirds of these deficits have been met out of previous surpluses. The increased deficit in the fiscal year 1949-50 does not indicate a deterioration of the budget in that year, but merely the payment of previously incurred expendj tures. Estimates for 1950-51 provide for a balanced budget. CHAPTER II Al!1riculture and the Rural Economy I. An Inventory 1. BASIC REsOUBCES Of all the Central American Republics, Guatemala is per- haps the best endowed for a varied agriculture. In no other country of this group can be found so many different climatic conditions and soil types. What is even more significant, a large percentage of the soils is of volcanic origin and extra- ordinarily productive. Almost any crop known in the Western Hemisphere can be grown in some part of Guatemala. The upper Pacific pied- mont, at altitudes of 1,500 to 4,500 feet, is one of the best coffee regions in the world. Below this, on the alluvial slopes and Pacific lowlands, are some of the best soils in the Latin American tropics 1 now largely wasted on low value crops under inefficient cultivation. Various temperate regions like the Zona Reyna or the southeastern valleys, tropical areas such as the Motagua Valley or the large Peten, offer opportunities for future development. · Rainfall is seasonal but generally adequate; irrigation is necessary in only a few regions or to raise extra crops in the dry season between December and April. Prevailing wind and ocean currents cause the Caribbean lowlands and adjacent valleys to be hotter and wetter than the tropical Pacific coast. Between regions of the country the variations in altitude are, however, actually of greater significance than variations in precipitation in the choice of crops. One adverse factor is that a large part of the land is moun- tainous. Particularly in the highlands-the only overpopulated area-this results in the harmful cultivation of steep slopes. But there is no shortage of arable land and a number of areas more suitable for tillage are still either idle or underutilized. 1 Juan U. Maegli, Guatemala: Problems and Possibilities of Industrialiazlwn; thesis, (Harvard University, Cambridge, Mass., 1949). 22 AGRICULTURE AND THE RURAL ECONOMY. 23 2. PRODUCTION Agriculture is by far the most important productive pursuit. It engages an estimated 75 percent or more of the occupied labor force, .creates nearly 57 percent of the gross national product, and accounts for 95 percent of the value of the country's exports. Although Guatemalan industry, by com- parison, represents only 14 percent of the gross national pro- duct, it depends upon domestic agriculture for more than half of its raw materials. Corn and beans, the principal items in the country's diet, are the leading crops for domestic use, but appreciable quanti- ties of sugar, ri'ce, tobacco, fruits and vegetables are grown. Exports crops are predominantly coffee and bananas, but the importance of abaca and the essential oils is increasing. Live- stock production, although deficient, nevertheless represents over 10 percent of the gross national product. A precise analysis of present agricultural production and land use is difficult, if not indeed impossible, because of notori- ous inadequacies in the existing agricultural statistics. Pre- peration of better statistics has begun only since the 1950 cen- sus, from which full results are not yet available. For some of the principal crops and agricultural commodities, however, Table XI offers rough approximations of the quantities and values of production, with calculated percentage contributions to the gross national product. Such data are not uniformly accurate for all commodities, unfortunately. Those for export crops are more reliable than the others since they can be com- pared with customs and shipping figures. Even from this brief and incomplete statistical picture it is clear that the value of domestic agricultural production, which provides the livelihood of the mass of the population, is very small. The actual output for domestic consumption in 1947-48 was only about ~125 million, which for a population of 2.7 million represents a value of ~46.30 per capita.2 In contrast with the poverty of domestic subsistence agri- culture is the prosperity of export agriculture. This is particu- • The per ca pita income of the Guatemalan Indian is estimated at a round 070 by Messrs. Adler, Schlesinget a nd Ol sen, op. cit., while that of the non-indigenous popula- t ion is calcul ated a t li}246. 24 THE J<;CONOMIC DEVELOPMENT OF GUATEMALA TABLE XI ESTIMATED OUTPUT OF PRINCIPAL AGRICULTURAL PRODUCTS, 1947-481 Est imated Estimated Percent production value of..'Jross Product (metric tons) (0millions) .nation product MAINLY USED DOMESTICALLY: Com ···························· 544,300 45.0 13.4 Beans ................ .......... 45,360 12.4 3.7 Rice ······························ 9,070 2.2 .7 Wheat ........................ .. 13,600 3.0 .9 Sugar .................... ...... 27,200 2.6 .8 Cotton .. .. .. ... ... ...... ..... ... 1,800 1.2 .4 Tobacco ...................... 1,270 1.1 .3 Potatoes ...................... n.a.2 4.2 1.3 Fruits and vegetables n.a. 12.5 3.7 Livestock ... ....... ......... - 3 35.0 10.5 Others ················ ·········· - 14.1 4.2 Total domestic .. --- - -- 133.3 -- 39.9 MAINLY EXPORTED: Coffee .......................... 60,960 26.1 7.8 Bananas .... ....... ...... .. ... 285,8004 18.2 5.4 Abaca ............ .... .. .. ..• .. . 4,870 3.5 1.1 Chicle .......................... 960 2.6 .8 Essential oils .............. 473 .8 .2 Cacao .......................... 91 - 5 - Timber6 ······················ n.a. 4.5 1.3 Total exported .. --- - -- 55.7 -- 16.6 --- -- -- Total ............ - 189.0 56.5 1 Latest year for which most figures have been made available. Data from various sources, and subject to correction. 1 Not available. • For slaughter statistics see Table XV. • Represents 13.4 million stems. • Less than 050,000; included in "others." • Arbitrarily classifi ed as agricultural. larly true of coffee cultivation, which contributes more than 70 percent of total exports and is the basic cash crop on which nearly everything else depends. At present prices, coffee should represent an even greater source of wealth than it does now, 3 since its output could be substantially increased m a few years. • The value of 1950 coffee exports was over 052 million (preliminary figure). Map III I ... AGRICULTURE AND LAND ·usE ... •o• ... 'l.._. ( - - • D PLANTATION AIJIICULTURE•CO"tt PLANTAT 1ON AGR I CUL TUR£ • BANANAS SUBSISTENCE FARMING CATTLE RANCHING ~ CATTLE RANCHING AND SUBSISTENCE FARMING " EZJ FOREST 17• m FOREST PRODUCTS AND SCATTERED SUBSISTENCE FARMING PROVINCIAL 8ouNOARY 0 PROVINCfAL CAPITAi. .•. ~ ~ I' ,:) q.. ... <) ~ 0 ~ '°• .. . .:" ,. 0 0 ·-- r " \...- "" -, C' ; ... .-~~J••• • .•·• .i·· "' 0 IO 20 30 40___ !IO . , • •• •·•• •·· • •. - 4' ; C' • /'I • • .! MIL(S 0 _._....._....,_,..._..:..._ • • • • • : •• . •• _,,.,. ~" 0 e-a 20 Ed '\L 60 e-a 'L •go ceA •• ••• Y ·T~.f KILOMETERS ... N ... 10• ... AGRICULrtJRE AND THE RURAL ECONOMY 25 Bananas, the second largest export, also represent an im- portant source of foreign exchange income. Their influence on the Guatemalan economy is less direct, however, as their production is largely in the hands of foreign enterprises. Other export products such as abaca, essential oils and timber are at present of relatively minor significance, but could be increased substantially; this could be said also of certain products now imported, including milk, ginned cotton and fruit juices. 3. PRACTICES AND PROBLEMS One basic reason for the present inadequacies of agricul- tural production lies in the isolation in which so many Guate- malans live. The larger part of Guatemala's population is Indian, settled in the country long before the coming of the Spanish. It retains its own cultur~ e and languages and main- tains traditionally suspicious attitudes toward outsiders. Cir- cumstances have tended to concentrate the Indian population on the impoverished slopes of the mountains, often on land fundamentally unsuited to the cultivation of cereals. This has been brought about in part by better health conditions in the highlands; but in addition, the choicest coastal and valley lands have been held since early Spanish colonial times by a small number of landlords living in national or departmental capitals. Cultural isolation and the self-perpetuating poverty of the Indians have contributed to the survival of antiquated methods. In the preparation of their land, the Indians rely on fire as the main tool to clear trees and brush, to destroy insects and to kill weeds. The soil is then loosened and cultivated with hoes, machetes and pointed sticks. Contour farming is often used on the steep slopes, and after a few seasons the exposed soils are easily washed away by heavy rains and the weeds and insect pests cannot be kept under control. The land is then aba~doned and another plot is cleared. It is natural that, with this type of cultivation, the central highlands have become seriously deforested and eroded and their available fertile land has become quite scarce. Other factors hampering the development of Indian agri- culture, even in its present location, might be eliminated more 26 THE ECONOMIC DEVELOPMENT OF GUATEMALA easily. Seed quality is poor, tools are rudimentary, and the use of fertilizer and insecticides is practically unknown. Agri- cultural marketing facilities, including transportation and storage, are either lacking or at best inadequate, cumbersome and wasteful. Agricultural credit for the Indian is practically nonexistent; when he borrows money, it is for consumption needs and takes the form of an advance from the farm labor contractors against the sums to be earned during the picking of the coffee crop. Psychological obstacles to progress and antiquated methods are not found among Indians alone. The agricultural practices of the Ladino population could be greatly improved. Many large landowners have the traditional attitudes of absentee landlords, content with one yearly inspection of their farms and interested only in the total amount of immediate cash income however ruinous the production methods used. On many coffee farms the lack of care of the land and trees, as well as outmoded planting practices, have kept output far below the potential maximum. In the lower Pacific coastal region, potentially one of the richest and with fairly adequate railway transportation, some of the best land has been held in complete idleness. That which has been cultivated has not been farmed intensively through modern mechanical and scientific methods, nor have efforts been made to improve sani- tation or to attract and educate a skilled labor force. Problems of education, adaptation to new techniques and the maintenance of soil fertility are infinitely less difficult and can be solved much more rapidly in the non-Indian sectors of the rural economy. The task of increasing the yield and promoting intensive mechanized cultivation of fertile lowland areas probably can be accomplished in a few years, provided that needed improvements are clearly defined and vigorously applied. In the long view, however, the basic proverty of Indian highland agriculture permanently hampers not only agricultural progress but the whole economic growth of Guate- mala; for the Indian population comprises the bulk of the potential internal market, without which inddhy cannot develop adequately. AGRICULTURE AND THE RURAL ECONOMY 27 II. Policies for Progress It is clear that any appreciable rise in Guatemala's standard of living can come only through improvements in agriculture. For Guatemala, this is the basic source of wealth; and it is a fortunate one, since agriculture is the one resource capable of renewing itself indefinitely if managed properly. Yet in its present state this agriculture presents a dis- appointing picture. Some of the most fertiJe soils of Latin America yield only a very meager subsistence of foodstuffs to the mass of laborers living on them while, in terms of money income for development, the possibilities offered by export crops such as coffee are far from being fully exploited. 1. Two CoNCURBENT PROGRAMS This relative stagnation can probably be explained by two different kinds of handicaps. One relates mainly to patterns of culture and human settlement which can be changed only in the long run. The other obstacles are mostly of a technical nature, so that an intelligent utilization of natural resources can eliminate them rather_quickly. The presence of a funda- mental long-term problem together with significant oppor- tunities for short-run improvement has led the Mission to outline in the following recommendations two main develop- ment programs, to be pursued concurrently. Recommendation No. 1: Promote the growth of coffee production and the development of the Pacific coast as the two main immediate objectives of agricultural policy. Recommendation No. 2: As a major aim of long-term policy, adapt agri- culture in the highlands to the new requirements of a p~ogressive economy. Short-Run Development The short-run program seeks to utilize, to a greater extent than now, two particularly promising aspects of Guatemala's Property of the International Bank for Reconstruction and Development 28 THE ECONOMIC DEVELOPMENT OF GUATEMALA agricultural resources. One of these is coffee production; the other is the relatively undeveloped Pacific coast. Coffee production is the one activity in which immediate action can be expected to provide the necessary financing, not only for agricultural development, but for development in other sectors of the economy as well. Like many other things in Guatemala; the whole investment program prepared by this Mission is dependent upon increased returns from coffee. Such emphasis on coffee need not in any way interfere with agri- cultural diversification; for,. in view of the varied resources of the country, diversification is both possible and desirable to mitigate the effects of fluctuation coffee prices. The second fundamental phase of the short-run program is the development of the Pacific coastal area, with the intro- duction of modern agricultural methods. Only by this means can the country achieve a prompt and substantial increase in foodstuffs at reduced prices. These economies in production will, in turn, accelerate the replacement of inefficient highland agriculture by more productive activit;ies in all regions. They will also provide a better supply of raw materials for industry, while the lowering of prices for basic foodstuffs will be an all-important factor in the growth of domestic markets. Long-Run Development It is recognized that these steps by themselves will not solve the basic problem of integrating the population into a single economy. For Guatemala's long-run economic progress, it is indispensable that the productivity of the Indians be raised so as to provide them with purchasing power over and above their subsistence needs. This will require measures aimed at improving their education, health, nutrition and pro- duction methods, as well as finding for them new occupations in agriculture and industry more productive than the present inefficient cultivation of highland corn. Progress may be realized in part by the development of cattle raising or dairy farming in the highlands, by the development of small indus- tries using traditional or new skills of the Indian population, and by resettlement of some of the population in regions better adapted to progressive agriculture. AGRICULTURE AND THE RURAL ECONOMY 29 The prospect of such an adaptation might seem dis- couragingly lengthy. It cannot be expected to show startling results in the immediate future. The Mission feels, however, that it remains the central problem in. Guatemalan agricultural and economic growth, and as such should always be kept plainly in view. Progress, even if slow, should be continuous. Overlapping The two parts of the development program are by no means mutually exclusive and indeed will overlap at many points. In the recommendations which follow, the Mission has addressed itself mainly to the implementation of the short-run program and has dealt with it first. In regard to the long-run plan, the Mission has limited its suggestions to those which can be started immediately, leaving later details to be developed with experience. This should not imply that the long-run program is any less important, but only that from a practical stand- poin"t its full course cannot be charted at once. Without a vigorous and immediate start to bring about the necessary adjustments in the highlands, severe hardship might be experienced in these regions following the development of mechanized agriculture in the lowlands. 2. COORDINATION Recommendation No. 3: Place under the Instituto de Fomento de la Produc- ci6n (INFOP) the national planning of agricultural development and administration of funds for this purpose. Improvement of agricultural production in the shortest possible time requires the prosecution of a large number of projects, separate yet indirectly related. Among others, these include plans for research in a wide variety of fields, extension services, agricultural credit and marketing. For these purposes the resources at the disposal of the Guatemalan Government are limited. This means that dupli- cation and waste must be avoided, and that there must be a 30 THE ECONOMIC DEVELOPMENT OF GUATEMALA schedule of priorities to prevent the draining of funds into projects of purely secondary importance. Obviously such objectives can be achieved only if the planning agency is properly coordinated with those agencies controlling the avail- able funds. Inasmuch as INFOP was designed to serve as an over-all planning and development body and was endowed with funds for that purpose, and since it has assumed (at least tempo- rarily) responsibility for the financing of the Instituto Agrope- cuario Nacional (IAN), it is suggested that INFOP should be designated as the central agency responsible for future agri- cultural development programs. Recommendation No. 4: Create a Section for Agricultural Statistics in the Central Statistical Office. AU efforts at development-including even the work of · this Mission-are made more difficult by the absence of accu- rate and up-to-date statistical information. Future planning will have to depend upon such data in order to determine the country's real needs as the program progresses. It is therefore proposed that a Section of the Central Statistical Office be created for this purpose. The main office of the Section will probably require three or four trained statisticians. A competent representative should be stationed in each Department of the Republic to organize and supervise the reporting. Additional field per- sonnel need not be professional statisticians but will require some training. Assistance of a foreign specialist in crop and livestock reporting may be useful during the first year while the service is being organized. The new Section's first task should be to develop an adequate system of estimating and reporting crops. Close relations should be maintained with the country's technical agricultural services, and their reporting facilities should be utilized fully. AGRICULTURE AND THE RURAL ECONOMY 31 3. AGRICULTURAL RESEARCH, EXTENSION AND TRAINING Recommendation No . 5: Intensify national agricultural research. Important fields for study include: (a) Introduction, selection and adaptation of im- proved plant varieties; (b) Crossbreeding and better feeding of livestock for higher production under local conditions; ( c) Control of plant and animal pests and diseases; ( d) Soil management and conservation; ( e) Economic cultivation and utilization of poten- tially valuable indigenous wild plants. Agricultural development in any country or region depends upon research. Plants and livestock in each area must be selected and adapted to local conditions to yield good returns. Because of the variations in soil, climate, altitude, length of day, focally prevalent insect pests and diseases, and similar factors, it is seldom possible to depend entirely µpon the results of such research in other areas. As an illustration, hybrid corn which gives excellent performance in certain parts of the United States will not grow well in Mexico, while the corn recently developed for Mexico has proved unsatisfactory in Cuba; probably neither will do as well in Guatemala as the Tiquisate Dorado corn recently devdoped for local conditions. The use of fertilizers is popularly discussed as a method for increasing crop production. But fertilization is not a simple treatment to be used uniformly on all soils or for all types of crops. It consists of applying to the land specific elements or components in which the soil may be deficient, in amounts determined by the needs of the particular crops to be grown. Th~se requirements must be determined by analysis and re- search in each case before fertilizers can be used intelligently. There is need for more research on coffee, grains, legumes, vegetable oils, hard fibers, beef and dairy cattle, hogs, sheep, pastures and forage crops, feed storage methods, livestock 32 THE ECONOMIC DEVELOPMENT OF GUATEMALA feed supplements, fertilization, cultivation practices and utili- zation of agricultural wastes, to name only a few of the oppor- tunities for improvement. There should be facilities for submitting all planting ma- terials, whether of local or foreign origin, to a series of field tests to determine regional adaptation, spacing, time of plant- ing, soil requirements, crop yields, and resistance to pests, disease and weeds. For these and other research purposes there should be a number of coordinated agricultural experi- ment stations, situated in various parts of Guatemala repre- sentative of the main soil and climatic conditions of the country an_ d staffed with competent research personnel. As soon as possible a system of seed certification should be established and adequate provision made for distribution of improved seed to farmers. Seed production farms, now chiefly limited to corn, should be extended to wheat, beans and other crops. Agreements may be made with certain farmers to produce seed under supervision, as is practiced with corn and wheat in Mexico through its Comisi6n de Maiz. At Cuyuta an excellent beginning has been made by INFOP, with the help of the Iowa State College Tropical Center, in the production of the Dorado seed corn. A particularly interesting field for research lies in the utili- zation of native or af Agriculture should be absorbed into that of INFOP. By itself, the Ministry's project has been a small one, inadequately financed, and of only limited benefit to a small number of farmers. Any facilities at its disposal can be of greater service if combined with those of the more extensive program. While increased use of mechanical power and improved · farm equipment is essential if increases in output per man are to be realized, it must be recognized that mechanization in- evitably changes the way of life of the people concerned. For instance, other things being equal, mechanization will be taken up first on the best lands and with the larger-sized farm businesses. The advantage which these farmers have over their less fortunate neighbors may be enhanced to a point where the competition is ruinous. On the other hand, it is apparent that investment is mosl justified where .it will produce the AGRICULTURE AND THE RURAL ECONOMY 57 greatest increase in production. There is no complete solution to this problem, but, under conditions existing in Guatemala, resettlement of farmers from poorer lands may solve much of the problem if it is foreseen that mechanization and the appli- cation of technology in general will increase the disadvantage of those farming under naturally adverse conditions. Ma- chinery service supplied by a public agency at cost may provide mechanization to some of those who can use mech- anization but cannot afford to purchase tractors and equip- ment. • 4. MARKETING Recommendation No. 14: Improve facilities for marketing agricultural prod- ucts. EHects qi the Present System Guatemalan marketing methods for farm products are slow, cumbersome and wasteful of both materials and labor. The small producer transports his limited marketable surplus over long distances, frequently under his own power, with great loss of time. He then either spends more time in retailing his goods personally, or else sells them to a middleman at a price over which he has little or no control. The latter is the more common practice. For lack of storage facilities (as well as credit) the farmer is forced to sell his crop soon after harvest. This season, naturally, tends to be a period of depressed prices. The middleman acquires the crop at these prices, perhaps already holding a lien against it for credit advanced to the farmer earlier at exhorbitant rates. The middleman may then take care of transporting the crop to urban markets, reaping a large profit in the process. Later the farmer may have to repurchase some of it for his own needs, paying the increased prices. Slow movement and poor storage results in a large loss of some crops by spoilage, effectively reducing the total agri- cultural output and diminishing the purchasing power of the producer. A major incentive to restore this loss by higher 58 THE ECONOMIC DEVELOPMENT OF GUATEMALA production is lost, because under the marketing system the producer is the last to receive any benefit from increased price. Inadequate and expensive transport (for which remedies are suggested in Chapter V) is perhaps the most basic of marketing problems. Next to this is the unsatisfactory market- ing system itself. In improving it, the objective should be to make it possible for the farmer to sell to competitive buyers, at such time as he may choose. Suggested Improvements One means to this end would be the.;i.doption of cooperative marketing methods. The progress made by the Citronella Association in Guatemala serves as an illustration of what can be accomplished by this method, not only in commanding more satisfactory prices but also in standardizing quality for better market acceptance. In appropriate areas, it is likely that similar cooperatives of small producers of other crops could)>e spon- sored to advantage. Facilities for better crop storage-to reduce losses by insects, molds, germination and rot, and to minimize the effects of seasonal price fluctuations--can be promoted in a number of ways. Individual farmers can build their own if their operations are large enough and if the necessary technical information is made available to them. Farm cooperatives, also, can install them for the collective use of their groups. Others can be erected and operated by INFOP, or by agencies under INFOP financing. Guatemala has already studied what some of the other Latin American countries have done to help this situation. The methods now used in Costa Rica, providing public storage for grains at small charges to cover operating costs, indicate the possibilities. Although central storage in the capital is important, storage on farms and in local communities is the primary need. Such storage serves best to allow producers (or producer associa- tions) to participate in the harvest-to-harvest spread of prices and avoids the necessity of transportation both to and from central storage. AGRICULTURE AND THE RURAL ECONOMY 59 INFOP has made a beginning by establishing a first local unit at Cuyuta, to handle the production of its own farm and its neighbors. This will provide experience for the creation of others. As many as 20 could be constructed over the next five years, the type of each dependent upon the major crops to be accommodated. Drying and disinfecting equipment will be needed in some, moderate refrigeration in others. 5. AGRICULTURAL CREDIT Recommendation No . 15: Plan to develop more effective credit facilities for small agricultural producers, as soon as possible after the forthcoming F AO and UN economic studies in Guatemala. From the foregoing discussion of marketing conditions, it is apparent that existing credit facilities for the small Guatemalan farmer are not satisfactory. He has difficulty in the purchase of better seed, livestock and equipment essential to improved production. The local storekeeper or middleman is usually the farmer's only source of credit and this situation is open to abuses. Nor is it likely that other farm credit on a com- mercial basis will appear in the near future. In recent years, several efforts have been made to extend greater credit facilities to small rural producers through rural credit agencies and credit cooperatives. These have been organized, for the most part, by central government agencies lacking close contact with rural communities and without enough competent personnel. That such attempts have largely failed must be laid not only to 'Jack of experience but to the fact that under existing conditions credit facilities are of little value unless accompanied by improved production and marketing. Further Stuqies Scheduled Specialists of the Food and Agricultural Organization and the Department of Economic Affairs of the United Nations are expected to visit Guatemala early in 1951 to advise the Government, through INFOP, on the development of rural 60 THE ECONOMIC DEVELOPMENT OF GUATEMALA credit programs. Their counsel will be based upon experiences in other Wes tern Hemisphere countries such as Mexico, Para- guay and Venezuela, where problems of a similar nature have been encountered. The Mission feels, therefore, that to em- bark on any large-scale rural credit programs without the benefit of these new studies would be rather premature. By the same token, the Mission feels that its own observa- tions in this field should be presented, not as formal recom- mendations at this time, but as suggestions to be considered finally in the light of those to come from the F AO and UN advisors. Suggestions Responsibility for development of rural credit is at present divided among the Department of Cooperative Development, the Agencies and Branches Section of INFOP, and the Credito Hipotecario Nacional. The Mission feels that the record of the Department for Cooperative Development cannot justify its continued existence as a separate agency. It seems clear that INFOP has superior facilities for bringing about the much- needed coordination of research and extension work, promotion of cooperatives, and the organization of marketing and rural credit. The Mission therefore believes that INFOP should be put in charge of the rural credit program in all its phases. For the same reasons the Mission advises against the creation at this time of a separate Agricultural Credit Bank. Whatever additional funds may be made available for agri- cultural credit to small producers and for mechanization, research or demonstration . work, should be administered through INFOP in accordance with a carefully planned long- term development program. Furthermore, the Mission feels that at this time Guatemala does not have the necessary personnel for an ambitious agri- cultural credit program. Accordingly, for the . time being, INFOP should limit its rural credit operations to a series of experiments in a few selected communities. At the same time, the greatest possible number of rural credit agents and organizers of cooperatives should be trained, either in Guate- AGRICULTURE AND THE RURAL ECONOMY 61 mala or in other Latin American countries. This program should expose the trainees to practical work designed to ac- quaint them with the kind of concrete problems which they will face later. It is suggested, finally, that further efforts to establish credit cooperatives be postponed until experience in the demon- stration communities clarifies the possible functions and neces- • sary procedures for such organizations. 6. l.IvESTOCK Recommendation No. 16: Increase livestock production. ' The principal methods suggested are: (a) Improvement of management practices; (b) Development of feeds and pastures; ( c) Eradication of diseases and pests; ( d) Selection of breeding stock appropriate to each area and use; ( e) Creation of processing outlets; (f) Review of restrictive legislation. Meat consumption by the bulk of the population is ex- tremely low; nor has there been any appreciable increase in consumption per capita over the last decade. As will be seen from Table XV, total slaughter in the Republic has shown very small gains, largely offset by population growth. Further- more, 1949 slaughter of livestock other than beef actually dropped below the level of some early war years. Price controls and export prohibitions on cattle and beef appear to have had, as their most obvious effect, the dis- couragement of producers. Development of the livestock industry has been below normal for the national economy and a loss of foreign markets has not been compensated for by any more meat for the local citizen. It is clear that an expansion of this phase of agricultural production is highly desirable, not only for a greater meat 62 THE ECONOMIC DEVELOPMENT OF GUATEMALA supply but for its effect upon numerous dependent industries such as tanneries, shoe and leather goods factories, wool textile operations, feed mills, dairy product plants and meat canneries. Beef Cattle • Under improved management and with relief from current restrictive legislation, the cattle population could increase rapidly. According to a recent study of the problem, 12 "If about half of the total present and potential area of cultivable land on the south coast were in pasture for rotation, with land m TABLE XV CONSUMPTION OF LIVESTQCK, 1938 TO 1949' , Year Cattle Other Livestock 1938 .. .......................................... 122,600 197,000 1939.................................... ....... . 123,900 193,700 1940 ............................... .. .......... . 113,000 209,000 1941 ..................... .. .... ........ ......... 99,400 238,600 1942.... .. ..................................... . 110,200 256,300 1943 .......... .......................... ... ..... 125,200 259,300 1944........................................ .. . 125,100 226,500 1945 ......................................... .. 137,000 193,600 1946........................................... . 135,800 216,500 1947 ...................................... ...... 143,100 247,300 1948 ........................ .. .............. .. . 155,900 267,400 1949............. ...... ............... .. ........ 159,000 243,300 1 Although slaughter statistics do not distinguish between all types of animals, the 1947 census showed the following livestock population: SouRcE: Ii Direcci6n General de Estadistica. •••••••••••••••••••+••••••••••••• :7r•••••••••••••=••••=•••••• cultivated crops, with adequate prov1s1ons for year-long • •••• l!!:ffl grazing, cattle production could be at least five times as great as it is now . . . Most of the guinea grass pastures ( on the south coast) are very much undergrazed ... Present pastures, generally, should carry twice as many cattle as they are now carrying. Actually, doing this would of course depend upon 11 Arthur T. Semple, Gr1Uing Land Improvement and R elated Problems in Guate• mala, 1949 (Food and Agriculture Organization of the United Nations) . See also, by the same author, Grazing Land Improvement Problems in Guatemala, 1950, • AGRICULTURE AND THE RURAL ECONOMY 63 measures to provide for the cattle during the dry season". On the abandoned banana lands in the lower Motagua Valley on the north coast, according to the same source, "It is pos- sible, with good management to carry one head of cattle to about one acre of guinea grass the year round". For the immediate future the Pacific coast offers the best prospects for beef cattle production, and in fact the in- dustry is at present largely centered in this area. The com- bination of good soil, ample water supply and transportation facilities favor it over the more remote and drier upland· areas. The north coast, of course, has the one advantage of a reason- ably ample rainfall during most of the year. Eventually the development of the Peten may open new grazing areas; but this region cannot become profitable for cattle-raising until its transportation system is built. Cattle can be driven long distances to market on foot, but they often lose so much weight en route that the grower loses money on the trans- action.13 One problem in the lowlands at present is the cost of clearing additional land for pasture. For this it is suggested that INFOP cooperate with equipment suppliers and land- owners, testing the relative costs and advantages of various procedures for clearing. There are new developments in both mechanical and chemical methods. Guinea grass and several other common pastures are popular in Guatemala and serve well. Others, such as Para, Jaragua and Bahia, should be tried for comparison in suitable areas. A supply of tropical Kudzu,, now being tested at Cuyuta and Chocola, should be made available for field planting. Additional legumes and grasses should be tested through IAN experiment stations. Pasture lands should be mowed to prevent weed infestation, whether mowing for hay is desired or not. This should be done at the proper time of year, before these plants can form seed. The practice keeps a purer stand of grass and increases 11 This is not the only loss. The quality of the meat suffers, the hides are damaged, and some cattle ma[. be lost. Long-distance driving of cattle frequently develops hoof troubles, and inter eres with their travel. The practice can also contribute to the spread of tick infestation and other pests and diseases from intervening areas. 64 THE ECONOMIC DEVELOPMENT OF GUATEMALA the carrying capacity of the land. Pastures should not be over- stocked, however, and should be rotated systematically to pre- vent overgrazing and consequent erosion. Cattle of approximately SO percent zebu blood, such as now raised in the Pacific coastal area, are fairly satisfactory for beef ( although not dairy) production and seem well adapted to this lowland region. Yet undoubtedly they can be im- proved by further selection. It is suggested, therefore, that most breeding stock be selected within the existing type, rather than from imported foreign breeds unadapted to the ecological conditions of the Pacific lowlands. It is recommended that a careful study be made of current management practices, with the object of determining what changes would increase the percentage of calves and decrease mortality among growing stock. Corollary studies should be directed toward control of ticks, parasites, and especially cattle diseases. At the present time these improvements are more urgently heeded than improved breeds of beef cattle. Dairy Producta Very little milk is consumed by the rural population of Guatemala. The demand is increasing in the cities, however, and Guatemala City is now reported to have less than half the milk required to meet its minimum requirements. Dairy products valued at about one million dollars were imported in 1949. It is apparent that the country's output of milk and milk products should be increased in volume and quality. In this latitude, dairy cattle probably should be kept in altitudes above 2,000-3,000 feet. The highlands of the Depart- ment of Guatemala are especially suitable, since their climate and soil conditions permit the use of high-producing foreign dairy breeds, the introduction and development of which should be encouraged. Brown Swiss cattle seem to be among the most suitable for crossing with native stock, but in these altitudes in the tropics some dairymen have had good success with Holsteins, which give a much greater ·volume of milk at a slightly lower AGRI CU LTURE AND THE RURAL ECONOMY 65 (3.5-4.0 percent) butterfat content. The so-called "dual- purpose" herds should be avoided; as a rule they are equally unsatisfactory for either meat or. milk. Dairy cows do not produce well unless properly fed and watered. Improved pastures and forage for the dry season will be necessary; but, in addition, cows must receive supple- mentary protein and other elements of a balanced diet. Among the various possibilities, it is probable that a high-protein yeast feed can be made commercially from the coffee wastes of the beneficios (mills) and it is certain that one can be made from molasses. Some local dairymen have recently had discouraging ex- periences in attempting to face a combination of deficient pastures, labor conflicts and ceiling prices for milk. It appe.ars that at least partial relief from these troubles will be required if dairy production is to be increased. The Mission believes that construction of the proposed co- operative pasteurizing plant and creamery, under the auspices of INFOP, should proceed as planned. Its administrative board should work closely with the dairy improvement program of INFOP and IAN. Sheep The sheep industry, tn the temperate highlands, can be expanded, to ad vantage. Wool is the most significant product in this instance, since an outlet for it exists in the local manu- facture of woolen rugs and the Indian handicraft industries. Introduction of imported breeds of sheep should be under- taken with caution. Because the wool from different breeds varies in properties, the aim should be to select the breed which will best satisfy the requirements of the above-men- tioned industries. The improved Navajo breed now being tried offers interesting possibilities. At the same time, if domestic wool production is expected to supplant imports, it will be necessary to promote the estab- lishment of adequate commercial wool-washing facilities. To meet Guatemalan needs a single modern plant-rather than several small ones-would be desirable. In this way it might . 66 THE ECONOMIC DEVELOPMENT OF GUATEMALA be commerci11lly feasible to recover lanolin as a by-product for sale to the cosmetics industry. Inasmuch as both the properties and quantity of wool produced are directly influenced by the nutritional level of the sheep, an appreciable increase in the present wool produc- tion could be expected merely by improving pastures and supplying those minerals in which the diet is deficient. Atten- tion should be given also to control of parasites and particu- larly head grubs, which at times cause severe losses. Small-scale work in these problems has been started near Quezaltenango by IAN and the Ministry of Agriculture and should be continued. The findings already demonstrate that wool improvement can be accomplished through better man- agement techniques and proper feeding in the dry season. Sheep can be raised successfully on relatively low-grade land, and sheep production on the better soil types usually represents an uneconomic use of resources. It is, however, important to avoid overgrazing of mountainous slopes-an everpresent danger with sheep, as they crop the grass at ground level on overstocked pastures. Signs of overgrazing and con- sequent soil erosion are already evident in some zones. Hogs Swine production is not, in general, conducted on a com- mercial basis. Individual farmers frequently maintain a few hogs of nondescript breed and feed them odds and ends or allow them to forage for themselves. Corn is raised for human food rather than for conversion into meat, and its extensin:: diversion to hog feeding is unlikely in the near future. Gains in hog production may be stimulated by the use of off-size, nonsaleable bananas as a carbohydrate feed, to be supplemented with protein and fats from other sources. Oil- seed cake from an expanded vegetable oil industry would be helpful. At Chocola, IAN has had some success in feeding bananas with oil or meal from corozo palm nuts and sesame, in various combinations. 14 "Sec Robert L. S9uibb, "Native Foodstuffs Dcvclo1>_cd by Guatemalan Research", Foreign Agriculture, XIV, No. 2 (Washington, D . C. Feb. 1950), p. 37. • AGRICULTURE AND THE RURAL ECONOMY 67 Poultry Present production of poultry and eggs is essentially con- fined to small farm flocks. It is only recently that a few com- mercial poultry enterprises have been establish~d in the vicinity of Guatemala City and these tend to be handicapped by the high cost of imported feeds. Development of successful commercial poultry plants de- pends upon suitable climate, availability of properly balanced feeds, and accessibility to market, among other factors. The semiarid regions around Salama, Zacapa and El Progreso would be well-adapted to pbultry production-especially the first two, which have frequent air service for delivery of day- old chicks. In its current research program, IAN is attempting to de~elop inexpensive balanced poultry feed mixtures from local materials. The almost complete lack of a fishing industry, which could furnish fish meal as a valuable by-product for this purpose, is a handicap. Research should continue, how- ever, and should lead eventually to the creation of a more satisfactory domestic livestock feed industry. Meanwhile, a better dissemination of information among farmers would allow them to mix their own feeds more intelligently from available materials and should result in higher egg and poultry production from present flocks. 7. FOREST PRODUCTS Recommendation No. 17: Apply modern conservation practices to forests for sustained-yield production of timber and secondary products. A recent authoritative survey report 111 states that, "the future possibilities of forestry developments in Guatemala are almost unlimited," provided that appropriate measures are taken to preserve this important resource and to promote its ,. L. R. Holdridge and others, The Forests of Guatemala, (Turrialba, Costa Rica, 1950) . This report, prepared for INFOP by specialists of the Inter-American Institute of Agricultural Sciences, provides a complete review of the forestry situation in the Republic. 68 THE ECONOMIC DEVELOPMENT OF GUATEMALA systematic utilization. The statement is undoubtedly true. It should be interpreted, moreover, to include not only the cut- ting of virgin wood but also the exploitation of specially planted stands and the extraction of numerous gums, oils, resins, tannins, drugs and similar valuable materials of com- merce. Timber Recommendations of the Holdridge report should serve as the basis for a sound program of forest management and · exploitation. This and other studies suggest that the Peten alone could produce about 20 million board feet of cabinet wood annually on a sustained-yield basis. Extensive government holdings of forests and the forest lands included in the national farms should be utilized for systematic cutting. State acquisition of larger holdings in the coniferous forests at middle and higher elevations would be desirable to make possible more intensive forest exploitation as well as reforestation of denuded areas. More systematic management of communal forest lands would permit their better conservation, and at the same time would supply large quantities of wood products through the normal harvest of thinnings and mature trees. Present activities of the government forestry service (Directorate General of Forestry of the Ministry of Agri- culture) relating to control of cutting, protection against fires and other destructive factors, and the production of nursery stock, should be continued and intensified. For fire control and the replacement of timber resources, it will be essential to obtain the support of landowners and the general public through a broad educational campaign. Demonstration plots along roads and trails and other field demonstrations should acquaint farmers (including those unable to read) with forestry aims and methods. Additional technical forestry information, including data on growth and yield for various species, should be distributed as guides to private landowners and for the spread of a better management policy for the nation's forests. The services of trained foresters from abroad should be sought for assistance in this work. AGRICULTURE AND THE RURAL ECONOMY 69 Basic forestry policies should emphasize constructive work rather t_h an mere excessive restriction as has been tried in some other countries. An army of inspectors stopping lumber trucks will not in itself cause any more trees to be planted, nor will it even stop illegal cutting. The Poptun region should be put under organized forest management; if plantations were established, this could serve as a good lowland center for tropical hardwood forest studies. At the national Finca El Pino, a similar center for highland timber could be developed. Better prices for woods and manufactured wood products can probably be secured with the aid of credit to local lumber- men. Much of the wood is not properly seasoned at present, chiefly, perhaps, because holding it for seasoning ties up large amounts of working capital. Bamboo Increasing interest in bamboo is evident throughout the Western Hemisphere in recent years. Among the many types, some are now utilized commercially for paper-making in India and the Philippines, and others for various structural uses. Bamboo grows rapidly, and certain varieties are espe- cially suitable for reforestation of denuded hillsides. Adaptability of some bamboos to Guatemalan conditions has been shown by the plantings of the United Fruit Com- pany in the lower Motagua Valley, and also by the coopera- tive IAN project in the Polochic Valley. It should be remem- bered, however, that all varieties do not have similar prop- erties. For example, paper can be made successfully from a number of varieties, but with others it is completely un- economical for chemical reasons. Expert advice is essential in contemplating industrial utilization. Chicle and Chilte Chicle, best known as a base for chewing gum, is at present Guatemala's most important forest derivative and is harvested almost entirely for export. Unfortunately, the prospect for continued / production at present levels is not bright. The output of many trees has 70 THE ECONOMIC DEVELOPMENT OF GUATEMALA been reduced or exhausted by repeated tapping without proper rest periods, tapping of branches and under-size trees, and other abuses. Many of these destructive practices were stimu- lated by high wartime prices. Forest fires have also taken their toll. Irregular supplies have led the major foreign buyers to invest heavily in technical research to produce substitutes. The large wartime demand intensified this work. Several suitable natural and synthetic materials emerged and are now in com- mon use, although there is still a slight margin of preference for the natural chicle. If there is any hope for this activity, it seems to lie in the production of certain natural substitutes which might be ob- tained more economically. At the moment the most promising of these is chilte. This tree-a native of Mexico, where it grows wild in profusion-yields a latex rather similar to chicle. \ While the chicle tree ( Achras Zapota) requires 25 years of growth before commercial tapping, chilte is a fast-growing plant which can be tapped in its first year. It lends itself to cultivation in plantations, is propagated from cuttings or seeds, and can be planted at a density of 600 to 800 per trees per acre. A lowland type (Jathropha tepiquensis) is reported best suited to commercial exploitation, growing as much as six feet the first year with from 30 to 50 inches of rainfall. Experimental planting of chilte is being conducted in Cuba, the Dominican Republic, Haiti, Nicaragua and Puerto Rico. The Mission believes that similar experiments should be started in Guatemala, with a view to its cultivation in parts of the Pacific coast region and possibly Poptun. Rubber Nevea rubber is now being grown experimentally at the Firestone rubber station at Retalhuleu, and by the Experi- mental Station of the U. S. Department of Agriculture at Cuyutenango. The Mission is informed that within the next year an initial 100,000 pounds of rubber could be exported from existing stands, with an estimated yield of 1,000 pounds of rubber per acre per year. It is further estimated that within • AGRICULTURE AND THE RURAL E CONOMY 71 the next six years a total of 2,000 acres could be brought into production. At the end of the six year period, assuming a relatively conservative price of 30 cents per pound, the value of crude rubber produced annually would amount to about $600,000. Under present world conditions it seems likely that the United States, Mexico, Cuba and some other nearby coun- tries will offer a remunerative market for any Guatemalan rubber for some time to come. Currently, the Cuyutenango Station is encouraging the growing of rubber trees on small family farms on the west • coast. These are individual plantings of relatively few trees each, with intercropping of other types to help finance the venture until the trees can be tapped. In this form rubber may well be a good complementary crop, for it can be tapped in years when market prices are sufficiently attractive, yet the farmer need not be dependent upon it. The Mission believes that similar operations are desirable in the lower Motagua Valley. Tannins and Extracts Guatemalan forests-especially in the hardwood regions- are known to contain a great variety of trees and plants yield- ing valuable tannins, oils, gums, drugs, natural dyes and ex- tracts. For the most part any present utilization of such products (other than chicle) is limited to crude processes or local herb medications. Development of these potentially important industrial ma- terials will require exploration and research. Such studies should be made a continuing part of any laboratory research program dealing with natural resources, as has been contem- plated by INFOP. 8. huuGATION Recommendation No. 18: Limit public irrigation, for the present, to small experimental projects and collection of basic tech- nical data. ' 72 THE ECONOMIC DEVELOPMENT OF GUATEMALA The Role of Irrigation Irrigation, in many respects, is a last resort to be used only when it is really necessary. In a national development program a country may need it if there is a general shortage of arable land and some of it does not receive sufficient rainfall. Even without a shortage of land, it may be helpful if there is some powerful economic'. or social reason why a certain dry region should be developed ahead of others. Where there is enough total annual rainfall but its distribution is highly seasonal, the crop gain from irrigation in relation to its higher cost usually can be determined only by experiment. In other words, irrigation does not always pay. Guatemalan experience with large-scale irrigation to date has been limited to the operations of the United Fruit Com- pany and its subsidiary, at Bananera and Tiquisate, respec- tively. While the results have been interesting and indicative of the possibilities in these areas, it should be noted that these installations were made under unusual conditions and to meet a very special need. Two irrigation projects-La Fragua, affecting some 40,000 acres, and San Jeronimo with 12,000 acres-have been under study for some time by the Government and others. Some expenditures have already been made on the San Jeronimo project. A third and smaller project at San Pedro Pinula has already been largely completed. As far as could be observed by the Mission, it would appear that the interest of the Gov- ernment in these projects is not motivated primarily by any plan to increase the over-all national production, but by the desire primarily to raise the standard of living in these partic- ular areas by a greater output of the usual subsistence crops. The soils of the San Jeronimo area appear to be of good physical texture and sufficiently uniform to benefit from irriga- tion. A year or two of study, using the small amount of water now available, should demonstrate the extent to which invest- ment in irrigation for the area would be likely to pay. La Fragua is an area of extreme variability in soil type. A careful analysis of the current soil survey will be necessary AGRICULTURE AND THE RURAL ECONOMY 73 before a decision can be reached as to the feasibility of attempt- ing irrigation on a large scale. Limited Prospects The Mission believes that the prospects for national bene- fit from irrigation are brighter in the Pacific coastal area than in other regions. Although one crop per year can be grown by dependence on the rainy season, it is likely that irrigation would eventually pay over much of this area. Aside from obtaining two harvested crops per year, the possibility, under irrigation, bf growing a soil-building crop should be consid- ered. In view of the future importance of the southern coast, it would be desirable to concentrate any irrigation studies and experiments in this· region in the near future, rather than at more doubtful locations as La Fragua and San Jeronimo where the feasibility of commercial cultivation of high-value crops is still unknown. Furthermore, such work should be kept to an experimental scale until there are sufficient data to demonstrate the wisdom of large installations. Tests such as are being made by INFOP at Cuyuta, on the irrigation of cotton, will be valuable guides if complete cost records are maintained. Meantime, the Na- tional Observatory should expand its recording of data on rainfall, run-off, stream flow, humidity and temperature varia- tions over areas which might some day be considered for irrigation. Finally, in analyzing the lack of development in certain coastal areas, it should not be assumed prematurely that irri- gation is the answer. While it is true that dry conditions pre- vail in parts of this region during several months of the year, the frequently swampy condition in the wet season is of at least equal significance. Elimination of the malarial mosquito which breeds in these swamps is a definite prerequisite to devel- opment. Thus, for the immediate program, it is probable that drainage is actually more important than irrigation. 74 THE ECONOMIC DEVELOPMENT OF GUATEMALA IV. A Long-Run Program The recommendations of the preceding sections are aimed at removing what the Mission considers to be the major imme- diate obstacles to Guatemala's agricultural progress. On the whole, these constitute a program of reinforcement at specific weak points of the structure in order that a large development program can proceed on a reasonably productive basis from the outset. The larger problem, however, is more fundamental. Its solution calls for a greater diffusion of knowledge throughout the rural population, a more rational utilization of the country's potential agricultural land, and the ultimate integration of a large but distinct sector of the population into the production and life of a modern economy. This is a big order and it will take a long time. Yet it will take longer if a determined effort is not made now. The Mission has therefore attempted to sketch the broad outlines of a three- point program whose objectives are : (a) rural development, (b) resettlement on the Pacific Coast, and ( c) colonization of other areas. 1. RUBAL DEVELOPMENT Recommendation No. 19: Create, by Presidential appointment, a permanent Committee on Rural Development. Approximately two thirds of Guatemala's population are Indians, most of whom live in a state of semi-isolation in which they contribute relatively little to the national economy. Basic- ally, this is the result of a historical and social situation which has prevented the Indian from developing his inherent abilities under conditions of equality with other social groups. One of Guatemala's main problems, therefore, is to find ways of enabling the majority of its rural population to incor- porate modern knowledge and techniques into its traditional way of life. Only tqe solution of this problem will make it AGRICULTURE . AND THE RO RAL ECONOMY 75 possible to narrow the present gap between living standards in the main urban centers and those in rural districts. Any realistic effort involves treating the problem as a whole and not in disconnected parts. Better methods of crop pro- duction, livestock breeding, disease control, and marketing cannot be learned by people who are illiterate and who have no clear conception of the conditions of the outside world with which they have to deal as purchasers and sellers. These things must be taught in the schools. But the schools can do little for children who are too anemic, undernourished or de- bilitated by disease to benefit from instruction, or are so badly needed in their impoverished households that they attend school only irregularly or not at all. Moreover, school instruc- tion in hygiene, manual arts and home economics will have little effect while parents remain unconvinced of their useful- ness and so long as homes remain unsanitary, crowded and exposed to the elements as most of them are now. Progress in education is dependent upon improvements in health, nutrition, housing and transport, and vice versa. Under existing circumstances, it is clear that the State must assume the major role in the advancement of these underdevel- oped segments of the economy. Yet until now most of the village schools, cultural missions, and other agencies of the national government obviously have been unable to establish a close and effective working relationship with the communities which they are supposed to serve. Progress has been hindered by the traditional aloofness of the Indians and of the rural population generally. At the same time, the programs of schools and other social agencies have not conformed to the practical needs of the rural population. Finally, at the root of the trouble, there has been a scarcity of public servants capable of effective service under the primitive and strenuous condi- tions prevailing in relatively isolated villages; repeatedly, the lure of city life has proved too strong. To develop a comprehensive and realistic program of rurai development, the Mission recommends the formation of a per- manent Committee on Rural Development with appropriate powers and finances. Such a group might be composed of one 76 . THE ECONOMIC DEVELOPMENT OF GUATEMALA or more representatives of each of the following ten organiza- tions, appointed by the President of the Republic: National Indian Institute, INFOP, Ministry of Education, Ministry of Public Health and Social Welfare, Ministry of Agriculture, Ministry of Communications and Public Works, Guatemalan Institute of Social Security, Nutrition Institute of Panama and Central America, Faculty of Economic Sciences of the University of San Carlos, The Armed Forces. Although great care should be taken to appoint to this Committee persons familiar with the conditions and needs of rural life in Guatemala and able to devote sufficient time to this task, the members of the Committee could not be expected . to serve full time. The actual program should therefore be the responsibility of a small full-time staff of, say, six persons headed by an Executive Director and including an agronomist with experience in extension wo'rk, an engineer, a rural sociolo- gist, a home economist, an economist familiar with farm man- agement and rural credit, and an expert in public health and nutrition. This staff would have its headquarters in Guate- mala City and would assume direct charge of organizing, guid- ing, and supervising the work in the communities selected for the experimental program. Recommendation· No. 20: Select three villages for testing of the rural develop- ment program. To test the development program worked out by the Com- mittee on Rural Development, three villages should be selected for initial experiments. In order to facilitate contract between the members of the Committee and field workers, villages might be chosen in areas reasonably accessible to Guatemala City but representative of each of the following regions: (1) the AGRICULTURE AND THE RURAL ECONOMY 77 western highlands, with predominantly Indian population; (2) the Pacific lowlands or piedmont region; and (3) the eastern region. Under an alternative arrangement the first two com- munities might be in the vicinity of Quezaltenango and Cho- cola, respectively, in order to take advantage of the experi- mental work of INFOP in these locations. As a first step, the Committee and the technical specialists would study the requirements of each of these communities in detail. Then, in accordance with the needs of each, a program of action would be carried out along the lines suggested below. The Village School A school would be provided, or an existing one strength- ened, to teach both the children and the adults of the village. Its curriculum would include not only reading, writing and arithmetic, but also simple methods of horticulture, carpentry and other practical arts, as well as principles of hygiene, soil conservation, modern agricultural methods, better nutri- tion, housing, community organization, cooperatives, and the like. Public meetings, with frequent use of appropriate educa- tional movies and other audio-visual aids, would be a part of the program. Thus, the school would become the center of progress for the entire community. The teacher would be considered the principal agent of communication between the villagers and the other personnel of the program, who would inevitably be outsiders. He would endeavor to generate local interest by first contacting the key people of the village, convincing them of the value of the pro- gram, and gradually establishing a close working relationship with the bulk of the population. The teacher would probably have to create suitable local teaching materials, which in most cases are not now available. Agriculture and Health Supporting the effort of the teacher, an agricultural exten- sion agent (with one or several assistants) would be appointed. His specific assignment would be to interest the village in practical means of improving agricultural and livestock output. 78 THE ECONOMIC DEVELOPMENT OF GUATEMALA The agent would maintain a Rural Center at which the villagers could observe efficient-yet simple and inexpensive- crop and livestock practices, and through them see how better results are achieved. Of at least equal importance, the agent would aid progressively minded farmers in testing new methods on their own plots. A trained nurse or social worker would be attached to the school to teach hygiene and ·home economics, to visit homes ( especially those of expectant mothers and those with babies) and to render first aid. Representatives of the various agencies cooperating on the committee would be available for consultation with teachers as well as with village citizens. Through such consultation they would explore and encourage the formation of coopera- tives and other voluntary community efforts designed to im- prove water supply, public health and sanitation, municipal government, social security, transportation and marketing. Local Resources and Traditions In the program as a whole, a special effort would have to be made to secure personnel intimately acquainted with the language and customs of the villagers. Where possible, these should be persons already known in the locality and thus better able to influence the community. Care should be taken to avoid insisting on immediate change from deeply rooted traditions, particularly those of the Indians. It would be unwise to attempt to suppress altogether the growing of corn in the highlands, to interfere openly with the established division of labor between men and women, or to disregard the still strongly surviving belief that age gives wisdom and superior knowledge. Full advantage should be taken of the voluntary community organizations which exist in many Indian municipalities. Pres- ent resources of the villagers themselves should be utilized and developed to the utmost. The use of objects brought from out- side should be limited to those absolutely essential. Materials and techniques which could become available to the local popu- lation only in the distant future should not be introduced. AGRICULTURE AND THE RURAL ECONO M Y 79 In view of the importance of local initiative, an advisory group should be selected within each community to participate in planning. This group should be entirely nonpolitical and represent all sections and levels of the population. It would be helpful, moreover, if a proportion of the expense of th~ program (after it had come to be recognized as beneficial) could be paid by the local community through subscriptions and voluntary contributions in cash, materials, or labor. Gaining Experience Experimentation in the three trial villages should be carried on for several years before being extended to other commu- nities. The experience gathered should be analyzed carefully at every step so as to guide the modification and adjustment of the program before it is applied to more comprehensive work elsewhere. A shortage of trained, experienced and sufficiently moti- vated workers will be found to be one of the greatest difficulties in any comprehensive program of rural development. The greatest possible number of new personnel should be trained by assigning them as assistants to the rural teachers, extension agents, and other representatives engaged in field work. In the course of the experiments some residents of the rural com- munities will be found who, after appropriate training, will themselves make excellent leaders in rural community work. Later, such persons could take over important segments of the program artd release part of the original personnel for similar projects elsewhere. In fact, the first communities should serve not only as test cases but also as training grounds for future community leaders, teachers and extension workers . • Several of the activities outlined above (particularly instruc- tion in schools) are already being carried on. The Mission does not recommend their duplication by new agencies, but simply their coordination with other agencies under a more comprehensive plan through the Committee on Rural Develop- ment. Agencies now carrying on such activities should remain in direct charge of them. 80 THE ECONOMIC DEVELOPMENT OF GUATEMALA Recommendation No. 21: Abolish the present cultural missions. In the campaign described above, the important part which the school must play has been emphasized. Effectiveness of the schools will, in turn, require: (a) a curriculum in which the rural population will be given the practical knowledge which it needs, rather than one in which time .is devoted to sterile memorizing of nonessential subject matter; (b) adequate teach- ing materials drawn from the environment of the people, pre- sented in a realistic way, and sufficient equipment to enable pupils to practice techniques and manual arts which can be really learned only by practice; and (c) teachers who have a command of their subject matter, are motivated by a genuine understanding and enthusiasm for their mission, and are cap- able of establishing relations of mutual confidence with local residents. While the present cultural missions have performed useful services, their total results do not appear to have been suffi- ciently satisfactory to warrant their continuation. Among their principal shortcomings have been insufficient training of per- sonnel and inadequate acquaintance with conditions and needs of individual localities. As a consequence, their relationships with the local inhabitants, particularly the Indians, seldom have been such as to render the missions effective and to make their work of lasting benefit. Accordingly, with the start of the recommended program, the cultural missions now functioning should be discontinued and any funds currently appropriated for them should be made available to the new project. Recommendation No. 22: Expand the work of the Nucleos Escolares Campe- • sinos. The program of special schools known as Nucleos Escolares Campesinos, initiated through the Inter-American Cooperative Service of Education, holds promise even though it is still inadequate. AGRICULTURE AND THE RURAL ECONOMY 81 It must be admitted that the units now functioning are not yet supplied with all desired equipment and do not have the number of teachers and community leaders necessary to make them entirely successful. Among the teachers serving in Indian villages, few have been able to develop roots in the community or to speak the local language. The Patronatos Escolares (Parents and Teachers Organizcftions), which were expected to provide a link between school and homes, often do not operate satisfactorily or have never been formed. Nevertheless, a commendable beginning in the new pro- gram has been made by the Pre-Normal Rural School of Santa Maria Cauque and the Rural Normal School of Alameda, through the training of young Indians as teachers to. be sent back to their home communities after graduation. This effort should be continued. Particular care should be taken to pre- serve in these trainees a genuine taste for rural life, so that they will not go off to the cities at the first opportunity. It is hoped that the recent discontinuation of the Inter-American Cooperative Service of Education in Guatemala will not be permitted to ·i nterfere with this program. 2. ~ ON THE PACIFIC CoAST Recommendation No. 23: Develop methods for resettling . portions of the · highland Indian population in the Pacific coastal regions. Population Pressures Although Guatemala is by no means overpopulated as a whole, local population pressures in certain economically im- portant areas are tending increasingly to depress living stand- ards. Two fifths of the population now live in the western cen- tral highland region, which comprises only one tenth of the country's area. The majority of these people are Indians, living in the state of partial cultural and economic isolation 82 THE ECONOMIC DEVELOPMENT OF GUATEMALA already described. Topography and general ecological factors in most of this region are not conducive to high productivity; neither are the present conditions of land tenure, which in some areas have exerted undue pressure on land resources. In parts of the Departments of Guatemala, Saquatepequez, Chimaltenango, Solola, Totenicapan and San Marcos, over- intensive use of prftnitive methods of production has resulted in soil erosion and depletion. This, coupled with an increas- ing population density, makes improvement of living stand- ards impossible. Underemployment exists because of the sea- sonal nature of subsistence agriculture or the relatively un- productive cultivation of marginal lands. More Productive EHort One method of afieviating this problem would be to pro- mote a somewhat better division of labor. Under this approach a larger proportion of the present highland population would be brought to depend less on the growing of corn, which can be better grown elsewhere. More emphasis would be placed upon livestock and dairy products, fruit production (apples, pears, plums, etc.), truck gardening and indigenous crafts. Guatemalan handicraft products such as textiles, woolen rugs and silverwork have a long and distinguished tradition and should have promising opportunities for export, especially to the United States. 16 At a later stage, with the ample labor supply and cheap hydroelectric power which might be gen- erated, it is possible to visualize small manufacturing plants located in this area. In combination with part-time agriculture or horticulture, these would offer at least a partial solution to the problem of occupying profitably a growing highland population. Colonization Of still greater ultimate value-although more difficult to achieve-would be the permanent resettlement of portions of '" The recently established school of wool carpet-making in Quezaltcnango appears to the Mission to be an excellent step in this direction. To assure adequate markets and profitable prices for original producers, and to safeguard the valuable original patterns, the cooperation of the National Indian Institute and of experienced experts in cooperatives and export trades should be obtained. Moreover, the restoration and improvement of ancient Indian techniques should be attempted, as has been done so successful17 in recent years in Peru by Mr. Truman Bailey. AGRICULTURE AND THE RURAL ECONOMY 83 the highlands population in other areas of the country. For such resettlement the country has ample opportunities. The north coast, the Zona Reyna and perhaps the Peten can in time absorb a substantial increase in population. But the Mission feels that the Pacihc coast and the lower piedmont offer the most satisfactory prospects for this purpose. The Pacific coast region, with its excellent soils and topog- raphy and its favorable climate, has approximately the same land area as the western central region yet only one third of its population. If the threat of malaria were removed as has been done elsewhere, numbers of highland Indians might be settled permanently in these lower regions. Such a step would also reduce the number of seasonal workers who now mttst move each year from the highlands down to the coffee fincas to supplement their insuti.cient earnings with some harvest money. The present seasonal migration wastes much time, interrupts the school attendance of children and contribute,s to the spread of diseases which returning workers carry back to the highlands. Any resettlement project would require a substantial capi- tal investment to acquire land, clear it and provide essential public utilities. It could not be done hurriedly, or the socio- logical problems would doom it to almost certain failure. Therefore, the Mission believes that resettlement should form part of a long-run program, coordinated closely with the Rural Development Program. Planning and Execution Land tenure in the Pacific coast area should be studied carefully in advance to assure that suitable land will be avail- able for any resettlement projects which might be contem- plated. To permit accurate determination of the desirable size and limits of any proposed resettlement effort, land-use capabilities and distribution of population should be examined, using the 1950 population and agricultural census, aerial pho- tographs, soil surveys and other basic infd\"mation. When properly analyzed by an appropriate team of technicians, these data should indicate highland areas which need relief from 84 THE ECONOMIC DEVELOPMENT OF GUATEMALA population pressure, as well as the new areas on which addi- tional population could be settled most profitably. From the administrative standpoint, settlements should be in the form of small villages rather than separate farmsteads. This will permit them to fall nattirally into the framework of the Rural Development Program. It will also facilitate health control, for special safeguards must be taken against the lowland diseases of which the Inclians are justly afraid. Experienced advisors should be called upon to enable the Indians to develop settlements where they can continue their traditional cultural and social pattern of life to the fullest extent compatible with the new methods introduced. Trans- fers should be voluntary. In this way it may be possible to avoid some of the problems of socj;il maladjustmen't which have arisen in the past. 3. COLONIZATION OF 0rm:R AllAs Recommendation No. 24: Confine government colonization work to the Pacific coast and to technical support of existing projects. It appears doubtful to the Mission that the Government should, with present funds, attempt any major colonization or regional development projects outside the Pacific coast area, which appears to be the most promising from the point of view of agricultural production. An exception is the colony already being developed in Poptun, which apparently still requires considerable financial and administrative aid. Even on the Pacific coast experience with the agricultural commun- ities at La Blanca and Montufar indicates that any further immediate projects of this nature might only add to expendi- tures without commensurate returns. Essential services and agricultural. research programs should, however, 'be provided for the population already estab- lished in underdeveloped areas such as the lower Motagua Valley, the Lake Izabal area and the Peten. AGRICULTURE AND THE RURAL ECONOMY 85 Poptun In the Poptun Colonization Project the Mission observed gratifying progress in housing, road construction and experi- mentation with different crops. We believe, however, that a review of the Poptun experience by the proposed Advisory Committee on Rural Development would suggest ways in which government expenditures migh~ be reduced. The Mission believes that more progress can be made by steps designed to attract voluntary permanent settlers instead of attempting to populate the area by administrative measures. Furthermore, funds. should go into aids to production, such as soil surveys, crop trials, farm roads and sanitation, instead of urban development at this time. The 03,000 spent on each of the present Poptun houses would probably have been enough to set a farmer up in business. Except for experimentation and seed production, future development of the area should be based on privately owned farm holdings large enough to supply an adequate living to a family. Otherwise it will be impossible to achieve standards of husbandry necessary to make the area useful in the national economy. Present plot tests of the Poptun project should be . ex- panded. Promising crop material should be placed on farms for testing under normal field conditions. A greater number of varieties of cane, corn, beans, cacao, rice, vegetables, pasture grasses, legumes and livestock now available within the c-ountry should be put under test. Provision should be made for increasing the seed supply of the more successful crops. Possibilities of chilte, too, should be th.o roughly tested. The pine forests around Poptun should be put under a manage- ment plan for lumber production. In the Peten in general, the Mission feels that develop- ment should center about forestry as the basic initial industry. In view of the capital, technical experience and marketing connections needed for the development of this industry, pri- vate logging companies should be encouraged to establish operations in the region. Such industries could provide con- 86 THE ECONOMIC DEVELOPMENT OF GUATEMALA siderable employment, finance the construction of a local road network, and assist in opening the area to agricultural develop- ment. Private companies should, however, be required to conform to a long-term plan for the use and development of the area's resources. There should be safeguards against overcutting, with obligatory replaniing. In regions opened for lumbering, basic food crops should be assured so as to avoid high living costs and local dependence upon a single and possibly unstable source of income. Health, educational and other essential services should be provided eit.her by government agencies, or by the companies themselves, or under a suitable formula for cooperation between them. A nucleus of trained technical men, including a forester, an engineer and a soil specialist, should provide government supervision and research activities in the area. 17 This group should make additional studies and plans for the continual improvement of stands and for the assurance of their per- petuity on sections assigned permanently to forestry. Surveys should follow the development of the roads, so that lands best suited for permanent cultivation may be determined. Atlantic Coast Areas The lower Motagua and Lake Izabal areas are already reasonably accessible by railroad, the lake, and the Rio Dulce waterway. These areas contain a fair-sized population, said to be composed mainly of squatters. While doubtless the in- habitants possess certain land rights which ought to be respected, it is probable that a sounder system of land tenure and more rational land use would yield a larger volume of production. As in the Pacific coast area, malaria control and health services would have to be made more effective. A ready local market is now available for meat, plantains, corn and rice from the lower Motagua Valley. Greater beef production, based on the breeds of cattle now in use, should be assisted. Small drying and storage facilities for rice, corn 11 Holdridge and others, op. cil. AGRICULTURE AND THE RURAL ECONOMY 87 and beans should be considered at a future date, when pro- duction becomes large enough to make these installations self-liquidating. Abandoned banana lands near Bananera ( said to be up- wards of 30,000 acres) have been partially drained and equipped with tramways. Attention should be given to the possibilities of stimulating private use of these lands for large- scale cultivation of abaca, cacao and African oil palms. The cooperation of the United Fruit Company might be enlisted in this, as has been done in the past two years in Costa Rica, Honduras and Panama. The Company and its subsidiaries ha:ve had ample experience with these plants and could be helpful in assuring that Guatemala is not left behind the other countries in supplying the export market for such products. Although agriculture is more limited around Lake lzabal, it is believed that an agronomist and an animal husbandman in full-time residence could help farmers to improve the efficiency of their operations. This could be done within the structure of the Rural Development Program and could in- clude trials of crops less known in the region such as cacao, African oil palm, bamboo, chilte and corozo palm. 18 . Immigration Both on the Atlantic and the Pacific coasts, it is possible that carefully selected immigrants from abroad could make important contributions to the development of thinly popu- lated areas. Guatemala is still without the engineers, me- chanics, artisans and agricultural technicians needed for ex- pansion· of these regions. Such types of personnel in the num- bers desired can only be obtained quickly through immigra- tion. From the point of view of the country's long-term inter- est, it would be preferable to induce such persons to settle in Guatemala permanently and to raise their families there rather than to employ them for short terms at relatively high salaries. 11 Although until now corozo oil has usually been expensive to produce, the cost of cracking the nuts has been a large factor. Sound technical work can probably solve this p~blem, if it has not been solved already. It is also clear that processing closer to the source of nuts will reduce costs. 88 THE ECONOMIC DEVELOPMENT OF GUATEMALA In addition to the specialized categories of immigrants ~uggested above which involve relatively limited numbers of persons, serious consideration should also be given to the pre- paration of a plan for mixed settlements of Ladino-Guatemalan and foreign farmers. Such persons could be extremely useful in helping to develop among the Guatemalan rural population more productive techniques and healthier habits of housing, home economics, hygiene and community organization. Recognizing the past problems in selective immigration attempts, the Mission believes nevertheless that the procedure holds advantages for the country. V. Priorities and Expenditures . Taken together, the various recommendations in this chap- ter constitute what the Mission believes to be an integrated program of agricultural development within the reach of Guate- mala's present and prospective resources. Individually, the recommendations are of varying degrees of urgency. Many are so related to others that they cannot be considered by themselves; for others, some separation is pos- · sible. Should it become necessary to choose between them because of limited resources, a certain order of priority can be established. In this the Mission offers some suggestions. First priority should be assigned to increased production of basic foods, the setting up of the Rural Development Program, establishment of an agricultural research and extension service, reorganization of the Pincas Nacionales, and all measures de- signed to increase coffee production. The first three are basic to any plan for agricultural development, while the others rep- resent sources of increased revenue to help pay for the program. Included in the first group are: the INFOP corn and cotton mechanization project now in progress at Cuyuta, and its special training of operators and mechanics; the projected storage facilities for crops; the several projects for the pro- duction of supplies of improved seed; and the provision of fertilizers, fungicides and insecticides. • AGRICULTURE AND THE RURAL ECONOMY 89 Another recommendation in this category is the establish- ment of the Section on Agricultural Statistics. The work of this office bears. upon all parts of the entire program. Second priority should be given to such projects ( other than those needed for the above-mentioned purposes) as promise early economic returns. Preference should be given to those already under way or well advanced in planning. Develop- ment of cotton, abaca, vegetable oils and cacao, experimental breeding of livestock, dairy products, the Poptun Colonization Project within the limits suggested would, among others, fall in this second group. Third priority should encompass forestry development, fur- ther expansion of small agricultural credit, special facilities for processing agricultural products, irrigation experiments, further land-use surveys and rese~tlement. Of these, forestry might lead the others if the necessary competent personnel can be obtained. Most .of the projects not specifically mentioned above will arrange themselves in logical order in accordance with actual need. Careful scrutiny will show that some may have to be deferred. For example, the larger irrigation projects for the San Jeronimo Valley and La Fragua should be postponed until further information is available. Table .XVI gives a suggested division of additional expen- ditures. These expenditures are, of course, over and above the present or normal expenditures on agriculture and agri- cultural devefopment. It has also been assumed that the Pincas N acionales should be able to provide for their own mod- ernization and equipment.rn These, of course, are merely in- dicative and cover only t he initial period. Also, they refer only to those projects for which specific recommendations have been made in this report. 10 Sec pages 273-4. 90 THE ECONOMIC DEVELOPMENT OF GUATEMALA TABLE XYI PROPOSED ADDITIONAL EXPENDITURES ON AGRICULTURE FIRST YEAR Capital Operating Recommendations expenditures expenditures 1. Personnel, buildings, equipment, breeding stock, etc., for research and extension .. ......................... . 0 50,000 0160,000 2. Farm mechanization : a. Second mechanization center ......... .. ............. .. 100,000 40,000 b. Trained facilities for machinery operators .. .. 30,000 3. Seeds, fertilizers, fungicides, etc., for use on S~ate-.farms, experiment stations, and for dis- tnbut10n ......................................... ......................... .. 150,000 4. Three local storage centers ............. .... ................. .. 60,000 15,000 5. Technical studies on processing of crops ........ .. 10,000 6. Small agricultural credit .... ........ .. .......... .. .. .......... .. 150,000 7. Irrigation ( small projects) .... .. .. .. ........................ .. 100,000 10,000 8. Agr]c~ltural statistics ................ .......................... .. 20,000 9. Trammg programs .. .... .. .... ................................ .. .. .. 40,000 10. Participation in Faculty ....... ............... (Library) 20,000 10,000 of Agriculture ................ .............. (Laboratories) 40,000 11. Technical services in the Peten .... 15,000 15,000 12. Forestry (including reforestation) .. .. .................. 60,000 20,000 13. Advisory Committee on Rural Development.. .. 20,000 40,000 14. Resettlement program (preparation) ...... .. ........ .. 10,000 15,000 625,000 575,000 SECOND YEAR Capital Operating Recommendations expenditures expenditures 1. Personnel, buildings, equipment and breeding stock for research and extension .. .. .. .. .. ............. . 0 45,000 0200,000 2. Farm mechanization : a. Third mechanization center ........................... . 100,000 80,000 b. Training facilities for machinery operators 3. Seeds, fertilizers, fungicides, etc., for use on • 60,000 St.ate .farms, experiment stations, and for dis- tnbuhon .......... .. ................................... ........... .. .. ... .. . 200,000 4. Three new local storage centers ...................... .. 60,DOO 30,000 5. Processing and market preparation of crops .. .. 10,000 6. Small agricultural credit ...................................... .. 150,000 7. Irrigation (small projects) .. ................................. . 100,000 20,000 8. Agr!c~ltural statistics .................................... .. .. .. .. 10,000 50,000 9. Trammg programs ................. ............... ........ ...... .. 60,000 10. Participation in Faculty of Agriculture ..... .. .. .. 10,000 11. Technical services in the Peten .... .. ............. .. 15,000 15,000 12. Forestry (including reforestation) .................. .. .. 20,000 30,000 13. Advisory Committee on Rural Development.... 20,000 40,000 14. Resettlement program (preparation) ................ .. 10,000 15,000 15. Additional unallocated expenditures on items 1 to 14.... ............................ ......................................... . 75,000 75,000 Total additional expenditures ............... . 605,000 895,000 NOTE: As the program develops, expenditures on individual items will naturally vary. If further mechanization centers are not installed, the total of these additional expenditures will be !2)100,000 less for the third and subsequent years. CHAPTER III Industry I.' Guatemalan Industry Today In its present state of development, Guatemalan manu- facturing activity occupies 'a comparatively minor place in the national economy. This fact in itself cannot be taken as a measure of the over- all development of the Republic. It must be borne in mind that the best known natural resources of the country are agri- cultural and that it is toward better utilization of these that the most extensive development must initially be directed. In regard to industry, a significant measure of progress is the degree to which the products of the soil are processed and transformed locally into their ultimate marketable form whether designed for sale at home or abroad. There are, certainly, minerals and other available resources of a nonagricultural nature. There are also underutilized hu- man resources. All of these have already contributed to some of today's industries and will justify a reasonable future ex- pansion in nonagricultural processing industries. At the present time, while Guatemala possesses hydroelec- tric potential, she has neither coal nor petroleum in available form. Unless this situation changes, it is unlikely that many heavy industries will be established; for only a few of the heavy industries can use electric power as a satisfactory sub- stitute for carbonaceous fuel. This does not mean that signi- ficant industrial expansion cannot take place in Guatemala. Development, based largely on agricultural processing can be substantial, and produce a quite substantial increase in na- tional income. A recent summary (1948) shows about 800 so-called indus- trial establishments 1 with a total of 23,000 employees. Their output, combined with that of an unascertained number of 1 Defined here as processing enterprises employing five or more persons, exclusive of mining and the generation of power. 91 92 THE ECONOMIC DEVELOPMENT OF GUATEMALA Indian handicraft workers, totalled ~48.6 million,2 or somewhat over 14 percent of the gross national product. Leading industties are shown in Table XVII. Most of them produce consumer goods typical of industrial develop- ment in its early stages, such as alcoholic beverages, soft drinks, textiles, basic foods, shoes, soap, candles, cigars, cig- arettes and furniture. Production is chiefly for the domestic market. The enterprises tend t~ be small and often employ very simple processes. A very large segment of production is that of the Indian handicrafts which includes especially the colorfully patterned cotton and wool fabrics, blankets, table- cloths and articles of apparel for which the country is famous. Table XVII includes some, but not all, of the processing of Guatemala's main agricultural products. In this it is of course difficult to draw a line between what is truly manu- facturing and what should be classed as a part of actual farm operations. The hulling and washing of coffee has been in- cluded in "agricultural" output (Chapter II), although it may be considered an industry also. Sugar refining, with its large plant investment and highly specialized engineering tech- niques, must be classed _ a s industrial. It is, in fact, in these border-line industries that much of Guatemala's industrial future lies. To a corresponding extent, industrial growth will depend upon increased agricultural production. As may be seen from the production figures given in Table XVIII; practically all of the larger industries have been expanding during the last decade. 8 Yet the rate of growth of manufacturing production has tended to lag behind the rise in per capita income. 4 ' Thus industry has failed to grow as much as it should normally, even without deliberate efforts for development. A relative stagnation exists. It is the purpose of this chapter to examine some of the factors-whether physical, technolog- • A revised calculation of net industrial product ("value added by manufacture") made by U. S. Federal Reserve Board experts indicates a figure of 11)46.3 million. This study apparently includes categories of activity not shown in Table XVII, and some differences in individual totals. • The recent decrease in textiles occurred after an earlier expansion which waa not recorded statistically. • Adler, Schlesinger and Olson, op. cit. INDUSTRY 93 ical, economic or political--which may be at fault. This, in most cases, will be done only briefly, as many of these factors are discussed more fully in Chapter VIII or in other appro- priate parts of the report.S TABLE XVII VALUES OF MANUFACTURES AND RAW MATERIALS CoNSUMED, 1948 (in thousands ) Domestic Imported Production raw raw Product value materials materials FOOD INDUSTRIES Beer and liquors .. ........... .. ................ . 0 5,726 0 1,079 01,460 Carbonated water .. .. ... ................. .... .. 497 131 168 Bakery goods ..................................... . 1,309 491 664 Refined sugar .. ....... .. ................... ....... . 2,591 974 44 Candy ................ ........ ... ........................ . 615 212 82 Vegetable oils ............ .... .. ... .......... ....... 290 36 1 Miscellaneous food products ........... . 2,501 2,197 235 TEXTILE, CLOTHING, SHOES AND INDIAN HANDICRAFT Textile fabrics ................ .. .. ............... . 2,331 1,590 1,696 Textile yarn ....................................... . 566 26 424 Oothing .. ........................ .. ..... .. ............. 838 83 611 Indian-made clothing ..................... ... 4,551 n.a. n.a. Indian handicrafts ................ ........ .. ... . 6,187 n.a. n.a. Tanned leather .... .... ........................... . 1,073 360 70 Shoes ... .................. .. ................. ........... . 633 233 299 Miscellaneous leather products .. ..... . 24 8 3 Straw hats ................. .. ............ ........... 340 61 84 TOBACCO PRODUCTS Cigarettes .... .. ...................... ............... . 3,462 2,294 840 Cigars .................................................. 1,041' 610 4 BUILDI N G M ATERIAL S Cement and products .. ............... ........ . 1,006 339 373 Ceramic products ................................ 166 2 99 W OOD I N DU STRIES Lumber .. .............................................. 792 338 14 Wood furniture ................................. . 190 94 89 O THERS ,Soap and candles ........................... .. 8,546' 853 298 Cordage .... ............... ....... .................... . 17 IO 1 Printing ............ ........ ... .. ............... . 475 36 397 Others ....... ............................ ... ... ..... . 2,859 624 995 Totals ............................... . --- 48,626 12,681 8,951 1 Quest ionable. SOU R CE S : Ministerio de Economla y T rabajo and others. • l!'or an excellent and detailed analysis of some of these aspects see Juan U . Maegli, Guatemala: Problems and Possibilities of I ndustrialieation. In citing this work, the Mission does not, of course, necessarily endorse all of the author's statements. 94 THE ECONOMIC DEVELOPMENT OF GUATEMALA TABLE XVIII COMPARATIVE PRODUCTION OF SELECTED INDUSTIUES IN RECENT YEARS Wheat Prepared flour Aguardiente Liquors Cement (thousand Cigarettes (thousand (thousand index Year quintals) (mill ions) liters) liters) 1937=100 1937................ 112 n.a. 1 n.a. n.a. 100 1938................ 110 607 2,856 302 90.7 1939................ 117 595 2,576 881 89.6 1940............ .... 123 624 2,029 1,316 117.9 1941 ................ 119 583 1,758 1,554 173.8 1942................ 120 656 1,983 1,908 177.3 1943 ................ 132 804 2,648 2,430 188.8 1944.. .............. 146 975 2,635 2,765 206.5 1945 ................ 157 906 2,714 3,231 248.1 1946 ... ............. 204 1,132 2,759 3,398 253.3 1947.. .............. 163 1,249 3,005 3,807 257.3 1948 .. .......... .... 151 1,387 3,103 4,030 288.9 1949................ 153 1,456 3,080 4,195 328.1 Refined Beer sugar Matches Textiles (thousand (thousand index index liters) quintals) (1945 = 100) (1946=100) 1943 ............ ...... .......... 4,358 n.a. n.a. n.a. 1944............................ 5,897 n.a. n.a. n.a. 1945 ........ ................ .... 8,144 n.a. 100.0 n.a. 1946....... .. ................... 8,148 521 96.3 100.0 1947............................ 10,330 583 36.1 103.9 1948 .. .......................... 10,221 574 99.6 98.8 1949............................ 9,739 680 230.7 84.3 1 Not available. SouacE: Ministerio de Economla y Trabajo. II. Factors Influencing Industrial Development I. RAW MATERIALS Preoccupation with the undeniable social effects of indus- try may occasionally tend to obscure its essential purpose: the transformation of raw materials into more useful forms as economically as possible so that the final products can be widely available. A prerequisite for industrial develop- ment is an adequate supply of raw materials at reasonable cost. • INDUSTRY 95 It is immediately apparent that the retarded state of Guatemala's agriculture is a deterrent to her industrial prog- ress. The factor is doubly significant, since agriculture is the country's biggest potential source both of industrial raw materials and of consumer income. Hence, uneconomic pro- duction, high prices and irregular supplies of agricultural products attack industry at both ends. Of the specific industries listed in Table XVII, it will be seen that over 85 percent of the total production is based directly upon agriculture. It is also clear, however, that domestic agriculture contributes only slightly over half the total materials consumed by all Guatemalan industry. Dis- proportionate reliance upon imported materials on which shipping and other added charges must be paid, plus shortages and high prices for some domestic supplies, results in un- necessarily high costs for industrial raw materials. Abnormal costs extend also to other supplies. Building materials, fuel and power are expensive. Construction of in- dustrial buildings is still more costly because of inefficient management of construction labor, with attendant loss of time. Similar construction problems affect the ultimate cost of power. 2. LABOR Cost, availability and adaptability of labor all influence industrial production to a marked degree. Although labor is available, the productivity is not high. The Guatemalan worker is greatly handicapped. His gen- eral level of health is poor. Malaria and intestinal disorders in some regions reduce his capacity and ambition. His nutri- tion often is not such as to permit him to do intensive work for long hours. Although inherently able to learn special skills, the local worker frequently lacks even a good elementary school educa- tion. Without this background his vocational training is made more difficult. Progress is therefore slow, not only in the creation of the necessary class of skilled workers but also in the training of good foremen and supervisors who should be drawn from labor's ranks. • 96 THE ECONOMIC DEVELOPMENT OF GUATEMALA Organized resistance to modernization and mechanization of factories, as well as legal provisions which make it ex- tremely difficult to release unsatisfactory workers, have raised manufacturing costs and impeded development. These things, too, are probably matters of education and will undoubtedly improve when the worker is afforded a better opportunity to understand the economic implications of his role in pro- duction. 3. TECHNOLOGY Present working methods and types of industrial equip- ment in the country vary from industry to industry and even from plant to plant. A good many establishments are not yet beyond the handicraft stage. Others, such as the newest cotton textile mills and a cement plant, compare favorably with industrial installations of more advanced coun- tries. On the whole, however, there is room for a great deal of improvement in efficiency through modernization of methods and machinery. Few factories make any effort at technical control of the quality and uniformity of their products. The numerous small enterprises are unable to provide, individually, the technical service or investment needed for such control and few of their proprietors possess the specialized training to handle it themselves. Even many of the larger operators, who can afford it, do not appreciate the importance of techni- cal control in reduction of their over-all costs and expansion of their markets. Were industry to call for it, on the other hand, the nation now has altogether too few trained technicians to render the necessary aid. Specialized educational facilities are inadequate, and therefore a domestic supply of such personnel will not be forthcoming in the near future. It is evident that at the highest levels of technology Guatemala must rely heavily upon foreign technical skill and training centers for some time to come. 4. MANAGEMENT Guatemalan management has not yet been won over to the economy of high wages, a large volume of production and " .. INDUSTRY 97 low prices. Mark-ups and profit margins are usually high. It is argued that since the market is so small the manufacturer must make a large profit on each sale. Local manufacturers are not easily attracted to the idea that lower prices might broaden their market. It is true that within Guatemala this can happen only slowly in some cases, until income levels rise. · However, even in cases where it appears practicable, there has been reluctance to try it. Broader adoption of some tested m'.anagement principles, such as merit promotion and incentive wage scale, would do much to improve the quality and quantity and to reduce costs of production. The more progressive Guatemalan entrepren- eurs have benefited greatly from their contacts and experience in other countries in this respect. A greater interchange of personnel and publications, as well as the development of for- eign investment (possibly in the form of joint Guatemalan- foreign enterprises) would help to modify some set psycho- logical attitudes. Obviously, such exchange would also be very valuable in the technical field, particularly in those industries which require a high level of technical skill. 5. CAPITAL AND CREDIT Guatemala does not possess more than the embryo of an ordinary capital market (see Chapter IX). Until the creation of INFOP, which offers medium and long-term credit facili- ties, industry has had to rely almost exclusively on its own funds for expansion. In new and locally unexplored industrial fields, mobiliza- tion of sufficient capital funds has been made more diffictflt by the generally conservative attitude of Guatemalan capital- ists. It must be recognized, however, that new ventures require careful scrutiny for which the means are not always available. Meanwhile the opportunities for profit in the traditional fields are large enough to compete strongly for investment funds. Private capital shows a certain reluctance to enter new productive fields. Desire for abnormally high profits as well as political instability and implied threats to property rights have tended to limit opportunity. According to some observers, 98 THE ECONOMIC DEVELOPMENT OF GUATEMALA investors often want to amortize plants in as little as three years to assure recovery of their capital before some unex- pected blow falls. Capital has sought refuge in real estate; and because of alleged fear of expropriation, at least some of it has gone into real estate outside of Guatemala. Finally, charges have been made by many Guatemalan employers, to the effect that industry in recent years has not received the impartial support of Government. It is alleged that labor-management disputes have almost invariably been settled with bias in favor of the worker and that this has discouraged prospective investors. 6. TRANSPORTATION Defects in the national transportation system (see Chapter V) affect industrial development adversely in numerous ways. They contribute at the outset to the high cost of raw materials and supplies. Similarly, they increase the difficulty and cost of distribution of finished products. Lack of highways in some areas effectively shuts off potential markets. Internal transport problems-in addition to the distance from main foreign centers of supply-handicap manufacturers through the large inventories which they must maintain to avoid uncertainties. With capital and credit limited and with funds tied up in inventories, there is less capital available for productive purposes. 7. GoVEBNMENT CoNTBOLS6 Protection afforded by import prohibitions, restrictions and tariffs and the lack of strong domestic competition have re- duced the incentives for improving efficiency. Replacement of obsolete equipment by private capital will make little prog- ress as long as the Guatemalan market is surrounded with these high barriers. Under Guatemalan conditions, protection of an "infant industry" may at times have appeared justified. But experience has shown that some industries which have been developed can • See aho Chapter II and Recommendations Noa. 63 and 64 in Chapter VIII. ,, INDUSTRY 99 survive only on the basis of indefinitely continued protection. Such a policy leads to a waste of national resources at the expense of the general welfare and hampers healthy industrial development. Any step to preserve an outmoded industry or to create an uneconomic one is actually a step to prevent the standard of living from being raised. In some industrial lines, protection from competitive im- ports has merely caused a rise in domestic price rather than an expansion of the internal market. For local producers do not always take full advantage of their protection to increase their sales, but, instead, push their own price up to the level of the duty-paid, imported article. The effect of this is to reduce purchasing power and so to limit the internal market still further. Both import prohibitions and excessively high tariffs make smuggling more profitable and tend to increase its volume. It is reported that substantial amounts of contraband have been entering the country recently. In the present undeveloped state of border regions, this is extremely difficult to control. Manufacturers complain that both their production and movement of goods suffer from excessive controls and other forms of bureaucratic red tape. Some of these controls may be justified for special reasons but in such cases they could be handled with more dispatch to avoid costly delays and harm to industries. Price controls, though designed to protect low-income groups, must also be regarded as dangerous to national pro- duction. It is difficult to induce capital to expand its activities into lines thus made unprofitable. Experiences of this kind are too well known to require illustration here. 8. MAma:Ts Neither shortage of capital nor the other factors mentioned above account entirely for the limited expansion of industry. Lack of demand for most products at their present selling prices is probably the most fundamental obstacle of all. Guatemala's domestic market is small primarily ·because of the extremely low purchasing power of her people. It is 100 THE ECONOMIC DEVELOPMENT OF GUATEMALA clear that this condition can be altered only gradually. Im- provement can come through increased agricultural and industrial productivity and improved transportation-all mea- sures to lower domestic raw material costs-and elimination of excessive profit margins. As these changes take place, with their interrelated and cumulative effects, real wages will rise and local markets will expand in depth. In a small market, specialization and division of labor can- not be pushed very far and production in many fields cannot even be attempted. But geographical expansion of markets is possible. Some form of coordination of industrial development among Central American countries could help significantly to create markets big enough to support optimum production. This should certainly be attempted with new industries, even though it may be more difficult to realize for existing oi'i.es. III. Potentialities of Selected Industries In such a diversified field as industry, only very brief inspection and comment on any single activity is feasible within the scope of a Mission of this kind. It is felt, however, that specific suggestions can be of more immediate application and benefit than mere generalities. Accordingly, in the following pages the Mission has at- tempted to indicate the status and possibilities for development of a number of selected industries, including technical sug- gestions wherever possible . . 1. BEVERAGES Although the making of alcoholic drinks is one of the largest items in Guatemalan industrial production, its present comparative importance stems partly from underdevelopment in other lines. Beer and soft drinlis. Three domestic breweries supply over 90 percent of the beer consumed in the country. It is under- stood that a new plant is soon to be added. BeeT production, which had risen to a peak in 1948, appeared to be tapering off in 1949. ·w ith the contemP.lated expansion, INDUSTRY 101 capacity seems adequate to meet demand. Total beer consump- tion in Guatemala is low in comparison with many other countries. There is room for considerable increase in produc- tion following other economic development, which may well result in larger consumer demand. The development of the soft drink, and particularly of the mineral water industry, is an interesting possibility in Guate- mala where establishments preparing carbonated water are small and often do not meet the highest sanitary standards. The industry could be significantly helped by growth of tourist traffic. Expansion of the soft drink markets, however, depends primarily upon increased purchasing power among the people. Aguardiente and liquors. Guatemala's most popular "hard" alcoholic beverage, aguardiente, is a crude distilled liquor made from the fermentation of unrefined sugar. Factories are located in virtually every departmental capital and in Guate- mala City are centralized in a fiscal zone for easier tax collection. Aguardiente is made under varying sanitary conditions. Bottles are collected by Indians and re-used, often after per- functory washing. In the larger plants conditions are some- what better, but not uniformly so. This situation is equally true of much of the preparation of flavored liquors. Apart from the present aguardiente, rum, a healthier beverage and one generally regarded as pleasanter, could be made from molasses. Irrational selection of raw material (discussed under Sugar) appears to be the chief economic problem in connection with these products. 2. SUGAR Two methods of sugar processing are employed in Guate- mala. One is the. standard factory operation of heavy machine grinding and refining; the other is the old "cottage" method ·of making pane/a, a crude brown sugar containing all of the molasses. 102 THE ECONOMIC DEVELOPMENT OF GUATEMALA The present sugar shortage would appear to be largely attributable to inefficient recovery and to legislation which causes wasteful utilization of the crop. Refined sugar. Most Guatemalan sugar mills are of medium to small size. Their combined capacity, however, exceeds the actual cane output. No additional mills are needed at present. Mill equipment, with some exceptions, is old. Efficiencies of extraction are low on the average (nine percent yield), caus- ing considerable waste of sugar in the poorest ones; not all of them burn their bagasse; much unnecessary supplementary fuel is consumed and some even burn wood to the detriment of the forests. Modernization of some of these mills would be of economic benefit both to their owners and to the nation. Yet the most serious waste is not the fault of the mills. Although in El Salvador, Cuba and other sugar-producing countries aguardiente and rum are made from molasses, Guate- malan law prohibits it. Aguardiente is therefore made from panela, while the molasses by-product from the mills must be discarded. The Mission has no explanation for this unless it is intended to protect the market for the even less efficient panela producers. In July 1950, stocks of panela were nearly exhausted and the Government decreed that liquor distillers could use 50 percent molasses and 50 percent panela for four months; but thereafter they were required to revert to panela entirely. An estimated three million gallons of molasses are wasted annually because of this prohibition. This amount is probably more than enough to make all of Guatemala's aguardiente and liquor and leave an excess for cattle feed. The practice would free the entire production of panela £or food, to make up the domestic sugar shortage, even without improving mill efficien- cies. Manufacture of candy, soft drinks and canned fruits would be facilitated. 7 Panela. In typical panela production, the cane is ground in a small wooden or metal mill, sometimes powered by oxen or a water wheel. Only a fraction of the syrup is obtained. • These suggestions are not new. See M. K. Ovalle, Industrial Report on the Republic of Guatemala, (Washington, D. C., 1946). INDUSTRY 103 This is filtered and limed, then evaporated in simple kettles. When ready to crystallize, the mass is poured into block molds. Retention of panela production is an economic luxury which can be justified if the people prefer the flavor; yet it is expen- sive in time, labor and fuel, and wasteful of national resources. It is possible that improved methods could produce it with less loss, but this would probably require putting it on a factory basis. 3. FLOUR Wheat /four. Guatemalan wheat satisfies less than half the country's wheat flour requirements and the proportion of do- mestic flour consumed has been dropping. The limiting factor has been local wheat production, which is less than the existing milling capacity. Although several new mills have been erected within recent years, these have had to augment their raw material supplies with imported Canadian or United States wheat. Domestic wheat is, in fact, of soft quality and high priced. Millers· normally prefer the foreign hard wheat. Under present conditions domestic flour actually is more expensive than im- ported flour; competition is possible only through special re- strictions, such as the requirement that an importer must pur- chase an equal amount of domestic product. Since very little of Guatemala is natural wheat country, it seems logical to encourage importation of good wheat at rea- sonable prices to be mixed wit_ h domestic soft wheat. Wheat imports can be transported in bulk, while flour im- ports must be sacked and handled much more carefully. Expansion of domestic milling through greater use of imported wheat would mean better use of milling facilities, larger sup- plies of by-product livestock feeds, and a greater opportunity for local manufacture of flour sacks. Corm flour. Industrial preparation of tortilla flour, such as has been developed under the auspices of the Banco de Mexico, may prove feasible in the larger cities. Advantages of this type of flour include efficient milling, sanitation, easier distri- 104 THE ECONOMIC DEVELOPMENT OF GUATEMALA bution and prevention of waste through unused tortilla masa. Blending of extenders and fortification with vitamins are also possible if desired. 4. FISH As an article of the Guatemalan diet, fish has been almost ignored down to the present. Per capita consumption ( esti- mated at 0.1 Kg. per year) is the lowest recorded in Latin America. 8 In spite of this, porduction is even smaller; 378 metric tons of fish products-mostly canned-were imported in 1947. Guatemala has probably made less use of her avail- able fisheries than has any other Central American country. A thorough review of present fishery resources and possi- bilities was made in 1946-47 by a Mission of the Fish and Wildlife Service of the United States, in cooperation with representatives of the Guatemalan Government. 9 The findings and recommendations of this report should be fully studied and utilized. Promising possibilities exist for both fresh water and salt water fisheries, not to mention die opportuni- ties for sport fishing as a tourist attraction. Fish would make a desirable addition to the protein fraction of the local diet. Moreover, if canneries were established, the wastes could furnish fish-meal as an important contribution to balanced livestock feeds. Domestic consumption of fresh fish would probably increase spontaneously if greater supplies brought lowered retail prices. The principal problems at the moment are lack of experi- ence in the field, shortage of equipment, absence of sheltered ports, and inadequate refrigerated transport and storage. 0 Nevertheless, it would seem desirable to attempt to intere st experienced private capital in exploring the opportunities for large-scale off-shore fisheries both for the domestic market 8 It compares with 1.3 kg. in Costa Rica (1947), 1.7 kg. in Mexico (1948/ 49) 2.1 kg. in Panama (1948/ 49), five kg. in the United States, 14.9 kg. in Venezuela (1948)49) and 40 kg. in Jamaica. See Agricultural Req,.isites in Lalin America, Report of the Joint ECLA/ FAO Working Party, (Lake Success, N. Y. ; United Nations 1950) p. 103. • George B. Saunders, Ancil D. Holloway, and Charles 0. Hadley, Jr., A Fish and Wild/if~ s..rvey of Guatemala, (S pecial Scientific Report-Wildlife, No. 5), (Washington, D .C. : U. S. Department of the I nte rior, Fi sh and Wildlife Service, June 1950) pp. III, 162 (processed). • INDUSTRY 105 and for export to neighboring countries where demand already exists. A proposal for in international approach to this problem has also been recently advanced, suggesting that Mexico, Central America, and the Antilles could operate jointly two or three efficient fishery centers. These might properly be under the sponsorship of the Fisheries Division of F AO. The experience of Mexico, Costa Rica and Panama in catching and exporting fish and frozen shrimps to the United States might be made available to Guatemala. 5. 0rm:R FOOD PRODUCTS Meat products. An increase in the livestock supply is a pre- requisite to expansion of the meat packing industry. Ex- cellent experience with small but very modern plants is available in Mexico and Texas. Guatemala could benefit from domestic production of the sausage, ham, bacon, canned meats and animal fats now imported; lower prices would mean greater consumption. An orderly slaughtering and meat-packing enterprise would provide, as by-products, better hides for the tanneries; more tallow for soap makers; t.ankage for animal feeds and other uses; and the raw materials for bating enzymes, neats- foot oil, and (together with hide scraps from the tanneries) glue. Milk products. Markets for good quality milk, in every form, are still very limited. This makes it difficult to create a self-sustaining milk industry, however desirable from the public health aspect. Pasteurization and condensed or powdered milk plants should, nevertheless, be progressively developed. Steps already taken in this direction by INFOP will probably have to be followed up by actually setting up a plant, since it is improbable that neither foreign or domestic private interests will expand the industry under present milk price ceilings. • • Current plans, which call for a milk producers' cooperative to establish a pasteurization plant and finally to purchase it • 106 THE ECONOMIC DEVELOPMENT OF GUATEMALA with INFOP's help, appear sound. The government's policy of rigid price controls may encourage adulteration practices and probably should be eased if the future plant is to function without subsidies. 1 At this stage the Mission cannot recommend expansion beyond what is contemplated, since both supply and demand for milk can grow only gradually. Establishment of a con- densed milk factory in the highlands, as the future center of milk production, should be considered later. Technical assist- ance could do much to improve and develop the production of butter and cheese and the formation of local cooperatives for this purpose should be encouraged in livestock regions. Canned fruits and vegetables. Canning of vegetables, trop- ical fruits and fruit juices could be started, perhaps with INFOP financing. Extensive development in this line will have to await more assured supplies through increased agri- cultural output. It will also be necessary to correct the present poor allocation of the sugar supply, to which reference has already been made. 6. TEXTILES Production of textiles is extensive, as is also the variety of products. Both cotton and )VOOlen fabrics are made. Oper- ations include spinning, dyeing, weaving and knitting, with both modern equipment and hand methods. Raw materials. Until recently only 25 percent of the cotton consumed was produced within the country, the rest being imported. The situation is now being progressively corrected. Guatemala already produces about one third of its cotton needs and may become self-sufficient in the next decade. Storage and ginning capacity-thanks to a recently con- structed plant-is now in excess of requirements, although later expansion must be planned as domestic production increases. Domestic wool supplies a part of the needs. Some local wool is w~shed by prj mitive methods, but a number of the mills find it unsatisfactory for their purposes and prefer to import washed wool from larger producing countries. INDUSTRY 107 Machine-made textiles. Although only a moderate expan- sion of mechanized textile fabric production is indicated at this time, there are several opportunities for economic im- provement in the industry. An expansion of spinning capacity to reduce imports of yarn would tend to make the supply of yarn for the textile indu-stry more secure. From the economic point of view, on the other hand, it might appear sounder to continue importing yarn and utilizing investment resources thus spared in weaving, which creates more employment. A decision on this point can be reached only after a careful examination of costs and supply conditions. Some mills are quite modern while others are using anti- quated equipment which should have been amortized and replaced long ago. Costs could be reduced by the introduction of automatic shuttle-loading looms for white goods. On the other hand, there is only limited justification for such units as pattern-weaving Jacquards at this stage. For textiles as a whole, it would be impractical for Guate- mala to attempt to eliminate imports; for this would call for making too great a variety of products and not enough of each for economical manufacture. Actually it would be advan- tageous to reduce the present variety and to concentrate on a number of principal types such as plain white goods, grey shirting, drills, denims, and appropriate specialities including sheets, blankets, shirting, cotton sacking and knitted articles. Competent observers believe that the present high import duties on textile fabrics could be lowered without harm to the local industry and would tend to limit the excessive profits which restrict the market. The fact that several plants now have difficulty in selling their output is attributed largely to these high profits and their encouragement of competitive contraband. Home weaving. Handicraft weaving, especially in the traditional Indian patterns, is an important segment of the country's textile industry. Its products are attractive largely for their aesthetic value and because they are handmade. Guatemalan patterns are unusually attractive to th,e tourist 108 THE ECONOMIC DEVELOPMENT OF GUATEMALA trade-a fact which will be more widely appreciated when the Pan-American Highway is completed. Production and marketing could be helped by more effec- tive action to certify the quality of the products and, perhaps, by the opening of a wholesale distributing agency in the United States. This applies not only to cotton, but also to hand-woven woolen articles which offer interesting possibilities for expansion. The bulk of ·production is at present sold locally, but the many articles of clothing, the table linen, blankets, shawls and rugs are attractive in design and should be more intensively marketed. An INFOP school for the production of carpets in Quezaltenango is an interesting step towards development of such production. It does not appear, however, that the value and quality of the wool clip would, at present, warrant the expansion of mechanical weaving of woolen fabrics. In the opinion of competent experts, existing mills hardly warrant the protection they receive, particularly in view of the very low wages they are paying despite their protection. 7. SHOES AND LEATHER GooDS Potentially, the manufacture of leather and its products offers an important opportunity for development. Numerous problems-both natural and artificial-now retard its contri- bution to a higher standard of living, but these are not insoluble. Leather. Both vegetable- and chrome-tanned leathers are produced domestically. In general the quality is medium to low, as a result of defective raw materials and poor process control. Much can be done to improve the quality of hides available to the tanneries. They are often badly branded ( on the best part of the flank) and marked with barbed-wire scratches and insect bites. Moreover, careless removal of the hides in the slaughter houses causes an unnecessary number of ruinous "'butcher-cuts". With such defects, production of high-grade upper leather is almost impossible, and shoe manufacturers INDUSTRY l()t ~'.\" ., ~ .... .;. .j. \• -t,~ o,.,, t . . ~ + M E X C 0 ~~ ...,. ·•:. ~ '-"""" I .t .;. . •.... ·~ ,- t t . ~ + ' ·• ·• ·+ ·+·• ·•·+· + · +·+·r·•·• ·+·+ ·+·• ·• ·+-•'+-- . • ' ~,· +.j. · {.., i .r·.._. ...J . J - ·- • - . ...... . ., \ .j. J ~ 0 ,j i . j (' ,· ' """ °'· ·., ""' ·-·1 ·-.11 c•tNAI r ·~·....... .r . l .r· ,.,. / .' I HUEHUETENANGO (' .:!. · -·~ i / ... ............ . . L, ALTA VERAPAZ / _j... / i / :,: IZABAL \ ' ........ ... ' ~ IL ..... j ·" ,t" ' EL QUICHI:: ., COl&N \ ·- ·~ o~-· · =~ ,,../' ... LOI AMAT~· · · " \ ... •·"' ',..... ... . .,. ....... _. • ZACAM , ·- · /'"":. ;.JC / ... ',. \ • CHIIIIMULA • •• . HONDURAS \ CHIQUIMULA .,.... t . ,; ,. . PACIFIC ,.··· ........... OCEAN t··· E L SALVADOR + ···•·" TRANSPORTATION 157 (2) The Pan American (Franklin Delano Roosevelt) Highway between the Mexican and the Salvadorean frontiers via Guatemala City. B. North-South (1) Guatemala City to Escuintla (part of National Route 3) and Guatemala City to the Zacapa-Chiquimula area (part of National Route 4). (2) A connection through Quezaltenango between the Pan American Highway and the south coast highway (parts of National Routes 9-S and 1). (3) From Guatemala City to the Cohan area replacing the present National Route 5. C. Exits to the Ocean (1) To the Atlantic: (a) From Guatemala City to Puerto Barrios, along the general line of National Route 4, extended and partially relocated . . (b) From Co ban to Lake Izabal, along the general line of Route 7-E, connecting southward with the Guatemala City-Puerto Barrios highway. (2) To the Pacific: From Escuintla to San Jose (part of National Route 3). D . Aids to Development (1) From Huehuetenango east to Cohan, along the gen- eral line of Route 7-W, relocated in its eastern part. (2) From the north end of Route 7-E to join the existing road in the southeast corner of the Peten. 158 THE ECONOMIC DEVELOPMENT OF GUATEMALA Supplementary Roads of Importance Other roads of significance in the national economic pic- ture are those tapping important industrial areas or serving as a means of access to mining, agricultural, grazing or other productive regions. While not considered as important indi- vidually as those of the basic highway network, these roads should be kept under consideration for improvement as funds become available. Priorities within this group will, of course, depend upon the relative importance of respective regions at the time funds become available. Since improvements on these roads will probably be de- ferred for some time because of the pressure of higher priority projects and since conditions in any of these areas may change materially during this period, no attempt is made in this re- port to recommend priorities in their construction. Such roads include: a. Route 16 between Chiquimulila and Cuilapa and Route 6-E between Chiquimulila and the border with El Sal- vador. b. Route 19 between Sanarate, Jalapa, and Progreso. c. Route 18 between Jalapa and Quezaltepeque. d. Route 20 between Quezaltepeque and National Route 4 • via Zacapa. e. Route 5 between Cohan and Sebal (with possible exten- sion further into Alta Verapaz). f. Route 9N between Chiantla and Santa Cruz Barillas. g. Route 10 between San Lucas and Antigua. h. Route 11 between Patulul and San Antonio Palopo and National Route 1. 1. Route 6W between Ayutla and Coatepeque. j. Route 8 between Malacatan and Ayutla. k. Route 15 between Sacapulas and Encuentros via Chichi- castenango. 1. Route 1 between Encuantros and Patzicia via Panaja- chel. T R.\ NSPORTATION 159 m. Route 1 between Quezaltenango and San Marcos ( La Union) . n . A new route skirting the south and east shores of Lake Izabal connecting National Route 7-E in the vicinity of Panz6s with Puerto Barrios. General Specifications for Construction In recommending types of highways needed the Mission has considered the prevailing soils, available materials, costs, pres- ent and probable future traffic, and also the kinds of pavement already installed in some areas. Very heavy motor trucks of the type common in the more developed countries are not found in Guatemala. While the use of larger trucks may follow the paving of more highways, it appears probable that the mountainous terrain and unavoid- ably steep grades will tend to discourage rapid increase in this type of traffic. Pavements on most highways, therefore, may safely have somewhat less strength than is required in areas where heavy trucks are common . • A similar situation obtains in connection with road gradi- ents. Specifications for' flat grades increase cost heavily be- cause of the additional rock and earth movement required and the extra road distances sometimes involved. In the interest of lowering cost and in view of the improbability of much heavy truck traffic, therefore, it might be best to allow steeper grades on most highways in Guatemala than the seven percent maximum ordinarily used in first-class highway construction. One of the highways recommended, that from Guatemala City to Puerto Barrios, will probably be required to carry a heavier volume of commercial truck traffic than the others. CotJsequently it should be a first-class highway in all respects except for gradient. The specifications of the Pan American Highway should be used, modified in mountainous 'country to permit grades up to about nine percent compensated for curva- ture, and reduced to a maximum of seven percent in rolling country. This modified specification is intended wherever a "first-class" highway is recommended in this report. Some 160 THE ECONOMIC DEVELOPMENT OF GUATEMALA savings in costs for excavation can also be accomplished by authorizing steeper slopes (approaching the vertical) for side- walls in cuts where local experience indicates there is adequate stability to prevent landslides. International agreements on the Pan American Highway require its completion to the same specifications now being applied. On the other hand, pavement and other specifications on all highways connecting with the paved portions of National Routes 3 and 6 are, to all practical purposes, controlled by those previously adopted on these routes. These roads are of less than first-class quality, but they will carry the traffic which may be expected to use them provided they are given proper and prompt maintenance. Because of the existence of this latter type pavement in the present road network and considering the prevalence of the volcanic sand-ash material in the soil as described elsewhere in this chapter, it is suggested that all paved roads except the Pan American Highway and the Guatemala City-Puerto Barrios Highway could be constructed with the same type of pavement used on National Route 3. Three or four in~hes of crushed stone or good gravel should, however, be incorporated in the base in all areas of soft foundation. Gradient limits, side-wall slopes, etc., should be the same as those for the Puerto Barrios Highway. This specification is intended wher- ever a "second-class" highway is recommended in the present report. Where roads are constructed for temporary use or for very light and infrequent traffic, they should be "third-class" roads. For these purposes a graded, single-lane gravel-surfaced road will serve. It should be constructed with good drainage facili- ties and with traffic "passing points" at frequent -intervals, and its curves and gradients should be held within moderate limits. As has been mentioned, lack of proper drainage has caused most of Guatemala's road damage. The only remedy is to increase the capacity and number of culverts, to improve the road-ditches to carry a heavier flow and permit more frequent TRANSPORTATION 161 discharge, and to design bridges to withstand higher flood waters. Paving of drainage ditches is, in general, too costly to be warranted, although paving of short stretches in par- ticular cases may be desirable. In the event that shortage of funds prevents complete con- struction of a highway at one time, it would be advisable to construct all bridges and drainage structures to full project width and strength, and to full flow capacity, even though paving is omitted or road width reduced. This will eliminate the need for major reconstruction when the final portion of the work is undertaken and will reduce damage in the mean- time. Cost Estimates In order to establish a program to develop the recom- mended highways, some rough estimates of the probable cost of construction or major improvement are necessary. As stated earlier, detailed surveys have not been made and com- plete estimates of cost are therefore not available. The known costs of some existing highways can be used as a general guide for comparative purposes after adjustments have been made for differences in terrain, materials and field conditions. Loca- tions can be assumed from map-studies. Distances can be approximated from data in the Guia Kilometric be crossed in that area will make this an expensive project, it would provide still closer highway access to Puerto Barrios from both the Cohan and the Peten areas. 166 THE ECONOMIC DEVELOPMENT OF GUATEMALA Recommendation No. 39: Provide a paved two-lane highway connecting the Pan American (Franklin Delano Roosevelt) High- way with National Route 6-W near Retalhuleu, via Quezaltenango. (Probable cost: about @2.5 mil- lion) Widening and paving a relatively short stretch of existing road, from the Pan American Highway at a point near San Cristobal T. to Quezaltenango and southward to the piedmont highway (Route 6-W), will open Quezaltenango to the major highway and rail networks of the country. Thus Quezal- tenango and its tributary areas will have access to the seaports of both the Pacific and the Caribbean, as well as to the capital. At the same time this road will provide the western portion of Guatemala with a paved link between the south coastal areas and the western highlands, to replace the present rough and difficult routes. Recommendation No. 40: Provide a light-duty highway between Huehue- tenango and Cohan. (Probable cost: about @2 million) (a) Restore and improve National Route 7-W from Huehuetenango to Sacapulas. (b) Relocate National Route 7-W from Sacapulas to the Coban area, generally fallowing the valley of Rio Negro o Chixoy. A passable all-weather road, capable of carrying a mod- erate volume of light motor traffic in this area, would help the rural population and the national development in general. National Route 7-W already exists but is blocked to through traffic in numerous places because of flood damage to bridges and the highway itself. Between Huehue-tenango and Sacapulas the highway re- quires only restoration of a few bridges and a moderate amount of grading, ditching and surfacing to put it in a con- dition satisfactory for the traffic expected in the immediate TRANSPORTATION 167 future . But from Sacapulas to the Cohan area the location of the existing road is generally unsatisfactory and even dan- gerous. It appears that restoration and improvement of the present road would be both difficult and expensive. Prelimi- nary reconnaissance indicates that a more satisfactory route may be found in the valley of the Rio Negro o Chixoy. The small amount of export traffic currently originating in the I:Iuehuetenango area and the limited flow of domestic commerce between this and the Cohan area, do not at present justify a highway of great capacity. In view of the probable future development of mineral deposits in those areas, how- ever, plans for this highway should provide for future w iden- ing and other improvements. Recommendation No. 41: Construct a light-duty road between El Estor and Cadenas, Petco. (Probable cost: about ~1.5 mil- lion) A second development road that is considered desirable at thi s time would connect El Estor and the Peten, via the Cadenas terminu s of the present Poptun-Cadenas highway. Within the Guatemalan Republic the only surface route by which traffic may now move from the Peten through Cade- nas is via the Sarstun River. This route, which is discussed at greater length elsewhere in this chapter, is not considered suitable for development. The natural route of commerce from the Peten to the Caribbean Sea is through Balice, using the ports of Belice, Stann Creek, and perhaps Punta Gorda. From a strictly technical point of view it would seem desirable to facilitate this flow if possible. Yet an internal road connec- tio_n is needed for domestic movement of goods. A practicable highway route through the Sierra de Santa Cruz appears to lie along the general line of the valleys of the Rio Sauce and Rio Chiruchipec, or the Rio Choc6n. Such a road, joining Cadenas with El Estor, would provide highway- water connection with Puerto Barrios and direct highway connection with the rest of the Republic. 168 THE ECONOMIC DEVELOPMENT OF GUATEMALA A one-lane, gravel-surfaced highway, capable of carrying only light motor traffic, should serve all the needs of the Peten for the present and the near future. Many Guatemalans believe that the resources of the Peten are sufficient to war- rant the immediate expenditure of greater sums for its de- velopment. It should be noted, however, that active explora- tion for petroleum in the region has stopped and that no other new commercial development operations of consequence appear to be in progress or in immediate prospect. Chicle is being successfully transported by air. Logs are being moved by river flotation. The population of the Peten is small and scattered. Even if colonization attempts now in progress are successful, the over-all effect on development of the Peten will be small for a considerable period of time. At present, therefore, there does not appear to be sufficient prospective traffic to justify constructing the El Estor-Cadenas road for more than exploratory purposes. V. Railways Rerommendation No. 42: Place railway freight and passenger rates, together with those of other common carriers, under the jurisdiction of the proposed Public Utilities Com- mission. (See Recommendations Nos. 30 and 31.) Existing Railway Network The main lines of the International Railways of Central America, the principal freight carrier in the Republic, extend from Puerto Barrios on the Atlantic coast to Guatemala City (197 miles) and from Guatemala City via Escuintla and Santa Maria to Ayutla on the Mexican border (178 miles). An im- portant branch carries traffic from Zacapa to Anguiatu (70 miles) on the Salvadorean border and thence into El Salvador; another from Santa Maria serves the port of San Jose on the Pacific coast. Smaller branches connect the main line with the lesser Pacific ports of Champerico and Ocos and with the Map V ,-·-·-·-·-·-·-·-·-·-·-·-·-·-·: I I ~-:..-·-·-·j .-. I "\. I ' \.r. I Railways MEXICO ' ........ ·, I ~,·,....... I ""\ I I 1 JA" IIJAJI I t . .., I ~ POl'r~H ; I -t-+- RAILWAYS ·-·-·-·-·- ·-·-·-·-·-·j ) CHINMA q \ \ ',, ll CAOIN .. I ........ llrllll.y,,., 1.mtit•STOIIIQ I. INTERNATIONAL RAILWAYS OF CENTRAL AMERICA 2 . NATIONAL RAILWAYS OF MEXICO 3. UNITED FRUIT COMPANY BANANA LINES 4. COMPANIA AGRICOLA DE GUATEMALA 5. VERAPAZ RAILWAY HONDURAS - - PRINCIPAL HIGHWAYS J. PORTS INTERNATIONAL BOUNDARIES . ...... " · '-.. '-o. "-,.,. L. tL SALVADOR PACIFIC OCEAN .... TRANSPORTATION 169 inland towns of San Felipe and San Antonio on the south slopes of the mountains near Mazatenango. Except for a short, government-owned line in the Polochic Valley (see Recommendation No. 45) the other railways in Guatemala are private systems of the United Fruit Company. These include the lines of the Compaiiia Agricola de Guatemala on the Pacific coast and the United Fruit Company Railways on the Atlantic side. Operating within the United Fruit Company areas and hauling ~ompany cargo, they are not strictly public carriers. They connect with the main lines of IRCA, however, and use interchangeable equipment. Sched- uled trains are operated by the IRCA over the tracks of these private systems, affording freight and.passenger services to all points. Agreements between IRCA and the United Fruit Company subsidiary, such as that of November 4, 1936, have provided IRCA with additional cars, locomotives and operating cash in exchange for stock, 20-year notes and protective arrange- ments against the use of competing port concessions. Capacity Both IRCA and the United Fruit Company railroads have acquired a substantial amount of rolling stock of all classes in the past two or three years including a number of steam locomotives and additional flat cars, box cars and banana cars. All of these have improved operations. The capacity of IRCA is limited by the fact that it is a single track line and that it operates over very difficult terrain. The movement of all trains is slowed by the necessity for meeting and passing trains at sidings only. Moreover, as density of traffic rises it also increases ,the cost of operation because of the greater number of passings required, each involving a loss of time and fuel consumed in stopping, wait- ing and starting. The need is also increased for the intricate and careful dispatching necessary for hauling heavy two-way traffic on a single track. 170 THE ECONOMIC DEVELOPMENT OF GUATEMALA Steep ruling grades prevent the use of heavy trains with present motive power. The use of more powerful locomotives would help and six large new diesel-electric engines have been acquired. The terms demanded by the Railway Union for their operation long proved unacceptable to the manage- ment of IRCA, and the locomotives were kept out of service pending a mutually aceptable solution to this problem. It is the opinion of the Mission that the railway is nearing the point of saturation in its traffic and that future demands for rail freight movement !an be met satisfactorily only through the use of equipment of greater capacity or by double-tracking. Double-tracking the line would be far too expensive (averaging around ~100,000' to ~150,000 per mile) to be justified by any prospective increases in cargo-haul. It is, therefore, gratifying to learn that the dispute concern- ing the use of heavier diesel locomotives has been resolved. Railway Labor IRCA is one of the largest employers in Guatemala, with a total regular employment of 5,900 persons and a pay roll of some ~5,850,000 annually. By law at least 90 percent of the employees must be Guatemalans and at least 85 percent of the pay roll must go to Guatemalan workers. The rail:way union is the most powerful organized labor group in the Republic. Partly as a result of the activities of this union and partly as a result of various wage and labor laws, wages of employees of the IRC A have ri sen during the past six to ten yers by from 25 to 200 percent. Social security payments by the railway amount to 0180,000 per year; seventh-day pay, holiday pay, vacation pay, and sick pay add another 0210,000 per annum; medical service costs 070,000 per year and pensions (voluntary) 050,000. In addition, many employees receive free quarters, water, light and transporta- tion for members of their families. All of these social benefits have had a profound effect upon railway operating costs and must be taken into account in examining the present rates to shippers. TRANSPORTATION 171 Passenger Rates Ordinary passenger service on the IRCA is div«ied into first and second classes. First class cars are carried on certain trains on the main line and the San Jose branch, generally once daily each way. Second class service is more frequent- usually several times daily each way-and is available on the trains carrying first class passengers as well as on mixed trains on all parts of the system. Special "tourist cars" ( the equivalent of parlor cars) are operated only for steamship tour groups whose itinerary includes Guatemala City. It should be noted that journeys over the IRCA are rela- tively short; in 1949, for exan1t,le, the average revenue per passenger was {?J0.37. Passenger-carrying trains stop at each village that is larger than a cluster of huts. This type of ser- vice is very expensive to a railroad and not very remunerative. It can be financed only by charging high passenger rates or by absorbing passenger service losses in the charges for freight movements. A schedule of maximum rates, established in the original contracts between the government and IRCA's predecessor railway companies, apparently is still in force. It may be presumed, however, that the existing passenger rates reflect the maximum which can be charged by the company without further negotiations with the Government. Present rates for passengers average {?J0.015 per mile for second class passage and {?J0.03 per mile for first class passage. Eighty-four percent of all passengers travel second class. Freight Rates Analysis of freight rates and costs is more difficult than for passenger rates. In addition to the variation in local costs of operation, freight charges must depend upon the individual commodities and must take into account such factors as weight and size of items, average distance hauled, perishability, dangers in handling various types of cargo, value and lia- bility for loss, and in some cases the cost of tying up cars until they can be unloaded. Average rates per ton-mile on the IRCA are quoted at {?J0.073 for local freight and from {?J0.046 \o {?J0.050 for all 172 THE ECONOMIC DEVELOPMENT OF GUATEMALA freight handled. Although direct comparisons are seldom valid in• matters of this kind, inspection shows that these average rates exceed those of many other countries. It is quite possible that they are higher than they should be. A comparison of the factors affecting costs of operation of the IRCA and a typical railroad in the United States, for example, would indicate that IRCA rates should be the lower of the two. Wages are substantially higher in the United States and the railroads there are subject to heavy taxes. Legal requirements for safety measures and for service impose added costs that do not nqw prevail by law in Guatemala. Further, winter condition ~crease operating costs in the colder United States areas. Four basic causes may be responsible for the higher ton- mile rates in Guatemala. These are : (I) the absence of effect- ive competition in freight movement as compared to the keen competition between trucks, waterways and railways of the United States; (2) the lack of any governmental control over IRCA rates, in contrast to the regulatory powers over inter- state rail rates vested in the Interstate Commerce Commission in the United States; (3) the short hauls and heavy grades, whose high costs are not sufficiently balanced by the more economical longer hauls on the level or on lighter grades enjoyed by most railroads in the United States; and ( 4) the necessity for importing practically all equipment and supplies, paying transportation and handling charges which increase both investment and operating costs. It is the conclusion of the Mission that competitive freight hauling, which would of necessity operate over the same gene- ral grade and haul conditions as !RCA (see Recommendation No. 35) should be introduced as one practical means of testing whether rail rates are in fact so high that they would exceed for heavy, long-distance freight movements the normally higher rates of road transport. In this case it might cause a voluntary adjustment to a more equitable level. ' Impartial Rate Regulation Elsewhere the Mission has recommended the creation of a nonpolitical Public Utilities Commission for the purpose of TRANSPORTATION 173 adjudicating rates and services of common carriers and other similar utilities serving the public. A renegotiation of existing IRCA agreements with the Government is also recommended, in part to permit the jurisdiction of the Public Utilities Com- mission to encompass the railway. Such a Commission could examine the allegations, fre- quently heard in Guatemala, to the effect that IRCA maintains rail rates to the public at an unnecessarily high level in order to offset a lower set of rates accorded to one of its principal users and stockholders. It is not within the province of the Mission to enter into that controversy, except to suggest a means of determining the facts and of making adjustments if any prove to be necessary in the public interest. Equally, it should be the responsibility of the proposed Commission to insure that the utilities concerned are permitted to earn enough to cover the proper operation and maintenance of their plant and equipment, to permit compliance with legal requirements and union contracts as to labor and other operat- ing conditions, and to pay a reasonable return on their investments. Recommendation No. 43: Avoid nationalization of the IRCA. It has come to the attention of the Mission that in some Guatemalan circles there is talk of nationalizing the Inter- national Railways of Central America. While there has not yet been any official consideration of such a step so far as the Mission is aware, it seems appropriate to discuss the sub- ject briefly because of its economic importance. The underlying reason for this proposal appears to be discontent with the high level of ton-mile freight rates charged by the IRCA and the common belief that the United Fruit Company is given preferential service. Slow service has been charged also, but otherwise the Mission has heard no serious complaint against the efficiency of actual operations of the railway. 174 THE ECONOMIC DEVELOPMENT OF GUATEMALA It has been suggested that government ownership of IRCA might benefit the public by lowering freight rates and by eliminating the discriminatory practices alleged to exist. With respect to rates, at least, such benefit is extremely prob- lematical, since under government ownership the rates would have to be maintained at a level sufficiently high to pay the cost of operating and maintaining the railway, as well as the costs of its acquistion, particularly since the Government would be expected to be a model employer. A much less expensive and less hazardous method of ac- complishing the same benefits would be through regulation by the Public Utilities Commission recommended above. The introduction of competition in freight hauling, through high- way construction and the provision of more pier facilities, would likewise tend to insure proper rate levels, faster service to ships and prompt handling of merchandise. Both methods would be more certain in their effects than would nationaliza- tion of the railway system and would save the Government the financial burden of acquiring and operating the railway. It is the opinion of the Mission, therefore, that nationaliza- tion of IRCA at this time would be inadvisable. Such action prior to the termination of the present contras:t period would, as a matter of simple justice and recognized principles of law, require that the present owners (stockholders) be com- pensated for their loss at a fair .,-aluation of the property thus expropriated. At a time when so many urgently needed projects remain uncompleted and in need of government financing the Republic cannot afford to devote a large propor- tion of its resources to such purposes. Recommendation No. 44: Reject proposals for electrification of the IRCA. In connection with discussions about nationalization of IRCA the desirability of electrification is frequently mentioned. From an examination of the facts and especially in view of the heavy outlay of funds which would be required, the Mission feels that this proposal is unsound with or without nationalization. TRANSPORTATION 175 Among the reasons which have been advanced for elec- trification are: (1) that · IRCA would then utilize one of Guatemala's undeveloped natural resources (its water power); (2) that the use of imported fuel would be eliminated; (3) that electrification would increase the capacity of the railway; and ( 4) that it would result in lower freight rates because of lower operating costs. Some o'f these arguments might be more valid if the IRCA were not already an established railway with a substantial investment in steam and diesel locomotives, together with maintenance shops and repair parts for these types of equip- ment, and also if Guatemala's hydroelectric power were an actuality instead of a potentiality. The case for electrification, in any event, has been very considerably weakened by the satisfactory experience which many railroads have had with diesel operation. IRCA now has in Guatemala approximately 375 miles of main-line track, 135 miles of branch-line track, and 80 miles of additional track in yards and sidings. Before the latest price increases, electrification of railway trackage in the United States cost in the neighborhood of $85,000 per mile, complete with substations and local distribution equipment but not including power plants or main power-transmission lines. Using this as a rough guide, electrification of the IRCA tracks alone would cost well over @50,000,000. It is also known that new electric locomotives now cost from @175,000 to @235,000 each for road engines and from @90,000 to @210,000 for yard types. IRCA now has in opera- tion 119 steam locomotives-of which 20 were recently pur- chased new-and also six new diesel-electric Jocomotives not yet in service. If only so percent of the present motive power were replaced by electric locomotives, the cost for this alone would _run from @10,000,000 to @15,000,000. In addition to the above costs there would also be the cost of constructing the power plants and main power-trans- m1ss10n lines and of operating and maintaining them. The 176 THE ECONOMIC DEVELOPMENT OF GUATEMALA cost of retooling shops and retraining both operating and shop employees would, of course, be added to the other costs cited. Finally, there is the possibility of petroleum production in Guatemala. As stated elsewhere in this report, it appears that petroleum may eventually be found in the areas north of Lake Izabal. If this proves to be correct, the importation of fuel may be reduced without resort to such extremes as elec- trification of the railway system. R ecommendation No. 45: Abandon the V erapaz Railway after completion of the Cohan-El Estor highway, retaining only its barge towboat service. The Verapaz Railway, an isolated line of 47 kilometers, is owned by the Government and operates between Pancajche and Panzos in the Polochic Valley. It forms a link between • the highway at Pancajche and a river terminal at Panzos, from which barge operations to Puerto Barrios are conducted by the same company. Use of this railway for export shipment from points south of Pancajche, such as Cohan, requires movement by motor truck or other road carrier to Pancajche, transshipment to rail at that point, to barge at Panzos, and to pier or directly to ship at Puerto Barrios. Barge operation down the Rio Polochic is slow and tedious. Only small towboats and barges can make the trip and even these are halted at times by low water below Panzos. Some freight is carried on this system but its movement is slow and hampered by antiquated methods and equipment. Train operation at the time of the Mission's visit to Guate- -mala consisted of two trains each way per week, each train consisting of approximately three cars. While it is difficult to obtain accurate data on tonnage hauled on this railway, it would appear that the annual total over the past 10 years has averaged no more than 5,000 tons. About SO percent of it has been coffee moving from the Cohan area for export. TRANSPORTATION • 177 Rates on the Verapaz Railway are very similar to those on the IRCA, both for export-import freight and for local freight. For example, coffee moving for export over this road (including barge movement to Puerto Barrios) averages from ~0.90 to ~l.10 per 100 pounds, depending on the railway station at which presented for shipment. A 1947 survey report by a private firrµ (Management Asso- ciates) indicates that the railway di~ision of the "Verapaz Railway and Annexed Services" was operating at a loss during a period of years immediately preceding their study while the waterway division (towing and barge service) was operating at a small profit. The Mission has not had the opportunity to verify these findings but in view of the small traffic carried by the railway its earnings at best cannot be appreciable. There appears to be a little justification for retention of this railway. The small volume of traffic does not warrant the heavy expense of placing it in first class condition. Actually, the Verapaz Railway serves a useful purpose at present only because there is no year-round dependable highway to carry the traffic now borne by it and because no barge-loading facilities are available on the Polochic-Izabal waterway north of its wharf at Panzos. Its present utility will disappear for all practical purposes as soon as sufficient repair work has been done on Rbute 7-E to permit safe passage of motor trucks from the Pancajche area as far as Panzos. Coffee and other com- modities can then move, without intermediate transfers or handling, directly to the Panzos barge terminal. Later, when Route 7-E has been made properly passable to motor trucks as far as El Estor, the barge terminal should be moved to that port to eliminate the slow and difficult barge movement between Panzos and Lake Izabal, and to permit through truck-haul from point of origin to El Estor. Abandonment of this railway will relieve the Government of a current operation which has no prospect of becoming either profitable or efficient and every prospect of becoming a financial burden if it is not one already. The rails and equipment, on the other hand, have at least some value if sold as scrap. 178 •THE ECONOMIC 'DEVELOPMENT OF GUATEMALA Recommendation No. 46: Abandon the projected railway from El Estor to Huehuetenango, and from El Estor to the Peten. Unquestionably there is need for more economical move- ment of products from the interior regions. The Mission has proposed positive steps to this end in its Recommendations Nos. 38, 40 and 41. · An alternative proposal now being considered in Guatemala is the construction of a railway between Huehuetenango and 'EI Estor, with a branch from El Estor northward into the Peten. It has even been suggested that from Huehuetenango the line should be extended to connect with the National Rail- ways of Mexico. The project has already received official support through Congressional Decree No. 694, authorizing the establishment of the railway s:ompany with government financial participation. The Mission considers this project completely unsound. One has but to examine the terrain to realize the tremendous difficulty of building a railway through these regions. The costs of construction of roadbed, track, bridges, dispatching and control systems, and other needed operating facilities over these routes would amount to at least ~150,000 per mile. To this must be added the costs for procurement of rolling stock and for the construction and equipping of the ancillary facilities such as freight and passenger stations, administrative offices, repair shops, roundhouses, storage and supply facilities, rail yards and water and fuel supplies. Irrespective of the type of fuel or energy used for traction, facilities for supplying power to the railway at appropriate points would have to be included in the total cost. One ambitious proposal for this project involves complete electrifi- cation, with power furnished by the construction of a series of hydroelectric plants. Although this Mission repeatedly asked one of the principal proponents of this project for a map showing the proposed location of the railway and for other details, no detailed descriptive material was ever received. A complete estimate of TRANSPORTATION 179 costs is impossible without such information, if indeed it actually exists. It is clear, however, that the investment would be enormous. There would also be the problem of recruiting, training, and in many cases housing the large operating, maintenance, engineering, administrative and supervisory forces required for the proper operation of the proposed railway system. Apart from the cost of this, there is grave doubt as to the existence in Guatemala of a sufficient number of qualified persons to form even the nucleus of the necessary personnel without either impairing the present organization of the IRCA or importing a large number of foreign workers for the purpose. The former would cause serious economic repercussions in the important areas served by IRCA, while the wisdom of the latter course would be open to question from the start. A review of present import and export tonnages and pro- duction possibilities in the areas to be served by the new railroad fails to promise sufficient traffic to pay even a sub- stantial fraction of projected operating costs. While mining in the Cohan and Huehuetenango areas, and forest products or possibly petroleum in the Peten, may eventually offer an appreciable tonnage of cargo for transport, these prospects are certainly not for the near future. Finally, there arises the question of comparative cost and flexibility of alternative transport such as trucks. Even if a railroad were built, all heavy cargo reaching it from even short distances would require motor transport for the purpose. Use of trucks in turn would require the construction of roads between the railroad and the sources of supply of cargo. To permit these same trucks to carry this cargo to a water terminus on Lake lzabal would eventually demand the con- struction of a heavy-duty highway. Yet because of the st~eper gradients and the sharper curvatures permissible on a high- way, it 'could be built for a much smaller sum than could a railway along the same general route. Furthermore, a high- way does not call for the construction of the many supple- mentary facilities required by a railway. 180 THE ECONOMIC DEVELOPMENT OF GUATEMALA Motor trucks operating over a good highway would offer at once a more flexible means of cargo movement and one requiring far less initial outlay for rolling stock. Likewise, the number of cargo trucks required for heavy hauling over such runs can be adjusted to the actual cargo much more readily than can the rolling stock and motive power of a railroad. Moreover, a railroad requires a high initial plant and organizational investment before it can operate even a small number of trains, and must maintain its heavy overhead costs as long as it offers any train service at all. Neither the length of haul nor the tonnages currently in prospect in this instance can be considered sufficient to over- come the advantages of motor trucks or to justify the con- struction of a railway. For the same reasons this Mission feels that no other new railway construction projects would be warranted in Guatemala at this time, except for trackage to serve the new pier recommended at Puerto Barrios. VI. Ports and Waterways Seaports Guatemala's ocean ports are limited to one of importance (Puerto Barrios) on the Atlantic coast and two of lesser sig- nificance (San Jose and Champerico) on the south coast. Livingston on the Atlantic and Ocos on the Pacific have lost whatever importance they once possessed and can be dis- regarded as deep-water shipping ports. El Estor, on Lake Izabal, cannot be considered an ocean port because of its inaccessibility to deep-draft ships. Inland Waterways Waterways, other than Amatique Bay and the Lake Izabal system, are currently of little importance in the economy. River transport is used for the movement of logs £tom the Alta Verapaz and some Peten areas, but the traffic is light and is not now increasing enough to demand any material improvements to these channels of transport. TRANSPORTATION 181 Of all of the various rivers used, only four-the Sarstun, the Salinas, the Pasion and the Usumacinta-are significant. The first is of some value because it · reaches the Atlantic within barge-haul distance of Puerto Barrios and connects with an existing road in the southeastern corner of the Peten at Cadenas. The last three are noteworthy because in combina- tion they serve as a usable waterway for canoe traffic and the movement of logs from the western Peten and the northern Quiche and Alta Verapaz areas. The Sarstun River The Rio Sarstun is currently used as a means of carrying intermittent barge traffic to Cadenas for transhlpment to Poptun and for occasional small shipments outward from that area. The Mission has no statistics on this movement but its volume is slight. Nor can any real increase be expected until more commercial or agricultural development takes place in the Peten and better means of transpqrt are provided from developed areas to the river. Still another factor militates against early growth of traffic on this waterway. The Sarstun is a boundary line between Guatemala and Belice, which makes it unlikely that improvements to the river will be made in the near future. Navigation without those improvements is limited to shallow draft boats because of shallow bar conditions ( depths around three feet) at the mouth; moreover, the mouth is exposed to direct wind and wave action from the Caribbean. No. river port facilities worthy of the name exist at Cadenas, nor does the prospective traffic warrant their construction. As long as the controversy over Belice continues and definite development in the southeastern Peten is not assured, the Mission believes that navigational improvement of the Sarstun River is not worth considering. The Salinas, Pasion and Usumacinta Rivers The three principal rivers in the southwestern Peten are potentially much more important than the Sarstun. They serve areas already producing timber for export and capable of 182 THE ECONOMIC DEVELOPMENT OF GUATEMALA producing more; they are longer and of greater potential capacity; and there is no apparent political obstacle if Guate- mala wishes to negotiate agreements with Mexico as to their improvement. Although such improvement has been advocated on various occasions, no adequate justification for expending funds for that purpose has come to the attention of this Mission. At present these streams appear to be carrying satisfactorily all existing traffic, which consists of local dugout canoes and logs floated down stream to the Caribbean coast of Mexico. No statistics are available to indicate either the volume or the value of this commerce, but these rivers will carry in- creased traffic of present types without improvement other than local snag removal. The Chiquimulilla Canal Improvement of the Chiquimulilla Canal on the south coast was completed several years ago, presumably to provide access to the Port of San Jose from the southern coastal areas of the Departments of Escuintla and Santa Rosa. Current traffic seems to be limited to the small boats of local traders and small produce growers. Continued minor maintenance of the canal is justified for local convenience, but material improvement for major trans- port purposes is not. Exports and imports through San Jose move almost entirely over the International Railways or over National Highway Route 3, which is now paved for most of the distance between San Jose and Guatemala City. The recent paving of National Route 6-E, between Escuintla and Taxisco, near the town of Chiquimulilla, has provided motor access from those areas via Route 3 to Port of San Jose. Recommendation No. 47: Construct an additional deep-water pier at Puerto Barrios, after suitable arrangements with IRCA. (Probable cost: about ~2.5 million, preferably as private investment) TRANSPORTATION 183 TraHic Volume Puerto Barrios is the most important port in Guatemala. Through it move the heavy export tonnages of the United Fruit Company and most of the export-import trade. Bananas, coffee, abaca and chicle form the bulk of exports ' while essen- tial oils, timber, honey and miscellaneous locally manufactured items such as leather goods and Indian-made textiles add .a substantial volume. Tonnages moving through the port in recent years are shown in Table XXI. The war years were of course subject to abnormal factors, but since the close of the war annual tonnages of both exports and imports have exceeded the best prewar years of 1938 and 1939. Whether the 1948 drop in tonnages was a return to normal after war shortages had been satisfied or whether it indicates the beginning of a downward trend remains to be seen. TABLE XXI ( ARGO MOVEMENT THROUGH PUERTO BARRIOS, 1938-48 (thousands of metric tons) Y ~ar Export Import T otal 1938 .... ................... 247.0 143.7 390.7 1939........................ 255.1 141.7 396.8 1940 .. .. ................... 213.1 161.3 374.4 1941 ...... .. ........ ... .. ... 188.9 137.7 326.6 1942...................... .. 155.6 119.9 275.5 1943 ........................ 87.4 92.9 180.3 1944........................ 150.6 118.2 268.8 1945 ............... ......... 250.9 164.7 415.6 1946 ........................ 272.2 142.2 414.4 1947 ........................ 342.6 173.5 516.1 1948.... . ............ .... .. 317.8 194.8 512.6 SOURCES: 1938-43 , INFOP, from Direcci6n General de Estadlstica; other yearz, Cuadro Estadistico de Aduanas. Port Conditions Puerto Barrios is the only deep-water port in Guatemala where vessels can tie up alongside a pier. The International Railway Company pier is the only one existing at the port. This pier can handle simultaneously four ships of the Victory 184 THE ECONOMIC DEVELOPMENT OF GUATEMALA type or equivalent plus two smaller ones in an emergency. Improvements now being carried out by the company will assure clearance for vessels of 28-foot draft. Anchorage space in the bay will accommodate others and tug and lighter service is available to handle their cargo. Puerto Barrios is isolated from the rest of the Republic as far as highway traffic is concerned because of the inexplicable failure of the Government to construct the portion of National Route 4 lying between Los Amates and Puerto Barrios. Inside Puerto Barrios the lack of adequately maintained streets is also marked. Access to the pier areas and to the pier itself is lim- ited to railway facilities. This is a natural consequence of the fact that the pier is owned and operated by the Railway Com- pany and that there is no motor vehicle traffic between Puerto Barrios and points inland. The situation has the practical effect of sending all traffic over one pier and all freight movement in this area over one artery, the railroad. In general, service by the Railway Company, both over its pier and in its rail operations, has been excellent despite the many criticisms levelled against it. In common with transport facilities throughout the world during the war and postwar periods, Puerto Barrios and the IRCA lines were overloaded, with resultant congestion and delay. The condition was par- tially relieved by the acquisition of new equipment and an improvement in procedures. Some congestion is still evident in the pier area, however, and in the season of heavy banana shipments it can be expected to increase. Contributing to this are the inadequacy of pier and storage facilities as the port and the inability of the Cus- toms Service to unload and clear railway cars at their Guate- mala City warehouses. Recent action by the Government has placed the responsibility for this unloading on the Railway Company. Nevertheless, until more space is provided for the i;espect of cargo in customs or procedures are changed to eliminate the need for it, congestion in customs will continue and with it the shortage of rail cars and resultant inability to move import cargo out of Puerto Barrios (see Recommenda- tion No. 32). TRANSPORTATION 185 Inherent Dangers A serious national hazard at this port is the fact that most of the export and import tonnage of the entire Republic moves over one pier. Destruction or material damage of this pier could slow such traffic to a trickle or possibly stop it altogether for a time. That this has not occurred in the past is no argu- ment that it could not happen in the future. An even more significant aspect of the situation in Puerto Barrios is that, to all intents and purposes, the area is under the complete control of the United Fruit Company and the International Railway Company. That control extends over the movement of practically all import and export cargo through the Atlantic areas. In the Mis~ion's opinion, notwith- standing a sincere effort on the part of the Railway Company to render satisfactory service to the public, this condition is unhealthy; it would, of course, be mitigated by control under a Public Utilities Commission and construction of a second pier. Back of the•situation lies the agreement, or series of agree- ments, under which the various links in the present railway system were constructed. In brief, Guatemala agreed that until about the year 2004, the Railway Company might operate free of taxation on its properties, free of payment of duties on its imports, free of control on its rates except as to certain very liberal maxima, and free of competition from other railways. Ownership or control of property in Puerto Barrios gives the Railway Company a virtual monopoly on the construction and operation of piers and on the use of the inshore harbor area. It is inevitable that this situation should give rise to charges of discrimination in rates and services between customers and to complaints of excessive charges against the public. Some of these complaints as to charges may be justified, as a re- view of ton-miie rates indicates. Likewise the heavy use of Puerto Barrios by the United Fruit Company, a large stock- holder in the Railway Company, may justify some complaints as to the slow handling of other cargo, even though it be rec- ognized that the perishable nature of the principal Fruit Com- pany export (bananas) requires that it be accorded prompt 186 THE ECONOMIC DEVELOPMENT OF GUATEMALA handling and therefor given right-of-way over less perishable products. Conclusions All the aforementioned factors, taken together, point to the need of additional pier space at Puerto Barrios. The most basic reasons, however, are the growing need for freer movement of cargo and the perils of national dependence upon a single destructible unit of this kind. The actual cost of constructing such a pier and its acces- sory facilities cannot be estimated closely without engineering surveys and plans. Based on the cost of the existing IRCA pier and of its probable replacement cost, however, it is be- lieved that a more modern but somewhat smaller pier to ac- commodate four Victory-type ships or their equivalent, could be constructed for about ~2,500,000. In view of the nature of this investment and the existing agreements between the Government and the Railway Com- pany it would be preferable, if possible, to ha~ e the Railway Company construct and operate this pier and provide the rail connections to it, rather than to have the Government do it. This would permit the Government to use the equivalent funds on other equally essential projects less adaptable to private financing. Construction could proceed without necessarily modifying the portions of the agreement covering ownership or control of lands and shore line. A more efficient terminal operation would be permitted through the placing of both piers under one management dealing with one union, with the flexi- bility in operations and the economy in labor which should result from that arrangement. The IRCA would get the additional business which could be expected to flow over both the new pier and the railway lines. In return with this expansion of port capacity it should be able to provide more rapid handling of all cargo and the prompt accommodation of more shipping, thus removing many of the present grounds for complaint. Creation of the Public Utilities Commission would safeguard the interests of the Gov- ernment and of the users. TRANSPORTATION 187 Recommendation No. 48: • Establish an efficient barge route between El Estor and Puerto Barrios. (Probable total cost: about @750,000.) Specific steps should include: (a) Dredging the Livingston bar to permit passage of barg~s of 500-700 tons and their tugs (@400,000) : (b) Constructing a barge pier at El Estor capable of serving two such barges simultaneously, with suit- able warehouse space (@100,000); ( c) Fostering a barge operating service between El Es tor and Puerto Barrios-possibly by a private company (@250,000). • The Lake Izabal-Rio Dulce waterway at present offers a water connection to the sea for products originating in the Department of Izabal between the Sierra de Santa Cruz and the Montana del Mico and for those portions of the Departments of Alta and Baja Verapaz lying within the broad limits of the Polochic Valley. With usable highway connections to the Peten and to the northern portions of Alta V erapaz, southern Quiche and southern Huehuetenango, this waterway would be of service to those areas also. It should be remembered, however, that cargo movements over this route are at present light. Exports of ore, coffee, and other products from these regions can be expected to increase if ' cheaper means of movement are provided and if proposed agricultural improvements are carried out. But there is no adequate economic justification for any heavy expenditure of funds in the immediate future to provide large-scale highway or waterway improvements in this area. A good barge service, coupled with appropriate portions of the highway network already recommended, would serve all prospective traffic for some time to come. Dredging Even now the Lake Izabal-Rio Dulce waterway itself could be used by small vessels from the sea to the head of the Lake 188 THE ECONOMIC DEVELOPMENT OF GUATEMALA without extensive improvement, although substantial expense would be involved if port facilities and channel markings and improvements adequate for ocean-going ships, even of small tonnage, were attempted. Barges of medium size (500-700 tons and about eight-foot draft) can operate without improvement to the waterway except at Livingston, where a shallow bar at the mouth of the harbor requires dredging. Dredging the Livingston bar sufficiently to permit safe crossing of such tug and barge equipment would be a simple and relatively inexpensive operation. It is estimated that this can be accomplished at a cost of about ~400,000. There is no basis at present for estimating annual maintenance costs there- after, but they should be small. Access to Puerto Barrios from the head of Lake Izabal could be provided in this manner with- out ex\;essive costs and without the necessity for providing facilities on the lake itself other than a small barge-pier or wharf with minor storage facilities for protection of goods in transit. Pier Construction Panzos-on the Polochic River and a terminus of the Vera- paz Railway-is now the head of navigation on this waterway. There is not even a usable barge port on Lake lzabal. Transferring the head of navigation to El Estor and pro- viding highway connections to that point (see Recommenda- tions Nos. 38 and 41), would improve cargo movement ma- terially along this whole route. This would permit abandon- ment of the Verapaz Railway line (Recommendation No. 45) and allow freight movement by truck from the Cohan area directly to El Estor, whence barges would take it to Puerto Barrios. Elimination of the tortuous channel of the Polochic River from the system would in itself expedite movement and would increase the service capacity of the barge equipment now operated by the Verapaz Railway. It is estimated that a small pier accommodating two barges of 500 to 700 tons, together with a modest warehouse or transit storage shed, could be provided at El Estor at a cost within ~100,000. MAP VI Recommended Waterway Service . El Estor to Puerto Barrios -· Mn--- ~ TRANSPORTATION 189 Barge Service If it can be arranged, the barge service between El Estor and Puerto Barrios might well be operated by a private com- pany. The existing equipment could render valuable service at first although it would be best to acquire barges and tugs capable of moving larger pay-loads to permit economit.al and profitable operation. Medium-sized barges and shallow-draft tugboats with adequate power to handle them can be obtained at relatively small cost. It is estimated that four steel barges of the type described above and two suitable tugboats, with the necessary tow-tackle and miscellaneous accessories, could be obtained for not more than ~250,000. Recommendation No. 49: Abandon the project for creating a deep-water sea- port at El Estor. Proponents of the project to convert El Estor into a na- tional port for seagoing vessels point out that it would provide an alternate exit to the sea, freeing export-import trade from the monopoly of the International Railways and the United Fruit Company. This may be true but the cost of such a ven- ture would be so high as compared with the cost of improving connections and service in Puerto Barrios, that it is believed the concept of El Estor as a major seaport should be aban- doned. El Estor is a small settlement of huts virtually isolated from the rest of the Republic by lack of transport facilities. It is almost as isolated from the sea as well; for the waterway to the sea is suitable only for small craft and would require considerable improvement to accommodate large vessels. For a new port to be of commercial value it must have not only piers and anchorages with deep-water access and shel- tered conditions, but also such features as access highways, railways, airways, local living and service facilities and focal labor. More important still is the prospect of a large enough volume of import or export tonnage to pay the cost of pro- viding and operating the port facilities. This last requires a 190 THE ECONOMIC DEVELOPMENT OF GUATEMALA productive hinterland from which access to the new port is easier and cheaper than to an existing port. All of these con- siderations militate against the establishment of a new port at El Estor as long as Puerto Barrios can be made to serve Guatemala adequately.- The cost of providing a deep water channel from the sea to El Estor, capable of carrying ocean-going ships of worth- while capacity, would be very high. So also would be the cost of constructing and equipping piers; providing the fuel, water, and power supplies and the health and sanitary facilities nec- essary for proper operation; providing customs houses and warehouses; housing and office space for personnel employed at the port; expanding the village of El Estor into a town large enough to furnish housing, stores, schools and offices for the personnel employed at the port and their families; and providing adequate transport connections to the only areas (the south coast and the western highlands) at present capable of supplying the traffic necessary to support a port. Puerto Barrios already has most of these facilities and can handle increased traffic with a relatively small increase in investment. While numerous improvements are needed to make Puerto Barrios a proper port city, the essentials for the handling of all current import and export traffic are there. Highway access to the port, faster customs service and the desirability of constructing another pier have been discussed (see Recommendations Nos. 31, 32, 35 and 47). The expenditure of funds for construction of a rival or duplicating facility could not be justified if the needs of the Republic can be met by expending a fraction of those funds on expansion and improvement of the port at Puerto Barrios. Of special note, also, is the possibility that at least a portion of the proposed expenditures on Puerto Barrios may be sup- ported by private capital, thus releasing government funds for use elsewhere . • Recommendation No. 50: A void any large investment of public funds for im- provement of Pacific ports in the near future. TRANSPORTATION 191 San Jose and Champerico are the only two Guatemalan ports now operating on the Pacific Coast. At neither of them can ships tie up alongside the pier. Surf conditions and the unprotected nature of the coastline requires anchorage of ships offshore, to be loaded and unloaded by the use of lighters. Both ports have rail connections with the interior. The pier at San Jose is served by the International Railways of Central America, whose tracks connect it with the rest of the IRCA system. It is operated by the Agencia Maritima Nacional. The pier at Champerico is owned and operated by the latter agency. Combined rail rates and service charges at these two ports are identical within comparable areas. While these two Pacific ports still carry some export and import cargo, that of Champerico is now insignificant. It is possible that better connections with Quezaltenango might revive t~is port to some extent. Traffic seeking entrance and exit on the Pacific coast can be handled through the Port of San Jose, which is currently the more active of the two. The recent completion of a paved highway between Escuintla and San Jose and the pending completion of the paving on this highway between Escuintla and Guatemala City, gives San Jose a still further advantage over Champerico. In recent years San Jose has handled a very low volume of exports but has shown a steady increase in import traffic (Table XXII). Total tonnages are still far too small, however, to warrant extensive improvements to this port. Much, if not all, of the increase in import tonnage is a result of increased consumption of petroleum products, for which storage facili- ties have ~een constructed a short distance north of San Jose. Other ports have been proposed from time to time, chiefly by persons interested in creating competition for the virtual monopoly enjoyed by the International Railways through its ownership or participation in the control of port facilities at Puerto Barrios, San Jose and Champerico. Examination of the Pacific coast line of Guatemala fails to show a natural harbor location, or one where a protected harbor could be con- structed wit~out heavy orig.inal ·expenditure's 'and. the proba- -bility of heavy animal · maintenance dredging costs. Report- 192 THE ECONOMIC DEVELOPMENT OF GUATEMALA edly, the matter has already been investigated by the United Fruit Company and others and has been rejected as an un- economic venture. Total Guatemalan traffic via the Pacific and the Panama Canal, as indicated by recent tonnages pass- ing through San Jose and Champerico, does not appear to warrant heavy investments in Pacific ports at this time. TABLE XXII CARGO MOVE M E N T THROUGH SAN Josi AND CHAMPERICO, 1938-48 ( thousands of metric tons). San Jose Champerico Year Export Import T otal E xport Import T otal 1938. ........... 10.2 40.1 50.3 13.1 2.0 15.1 1939............ ll.3 45.3 56.6 14.5 2.4 16.9 1940 ............ 6.0 61.1 67.l 8.3 1.5 9.8 1941... ......... 4.6 71.3 75.9 11.8 1.1 12.9 1942 ............ 8.4 33.1 41.5 11.1 1.7 ·12.8 1943 ............ 21.1 20.5 41.6 13.4 0.7 14.1 1944... ......... 13.2 31.2 44.4 12.2 0.9 13.1 1945 ............ 17.6 69.9 87.S 10.8 1.3 12.1 1946......... ... 17.0 99.3 116.3 14.1 2.1 16.2 1947 .......... .. 14.2 133.l 147.3 15.2 8.1 23.3 1948 ............ 10.2 179.8 190.0 6.8 4.3 11.1 SouacEs : 1938-43, INFOP, from Direcci6n General de Esladbtica; other years, c..adro Esladislico de Aduanas. Recommendation No. 51: Abandon or defer the creation of a National Mer- chant Marine. A proposal for the establishment of a national merchant fleet has no doubt appealed to some Guatemalans because of their patriotic desire to see the Guatemalan flag flying at sea and the commerce of Guatemala carried in ships of domestic ownership instead of in foreign bottoms. These reasons of national pride constitute about the only points in favor of such a project, although there are many against it. The need for Guatemala to enter the maritim~ business as a means of providing ships to meet her international trade TRANSPORTATION 193 requirements seems remote. When facilities are provided for handling ships in Guatemalan ports without the delays now sometimes encountered at Puerto Barrios, there should be no lack of ships seeking to carry the cargo. If for any reason a shortage of ships should develop, the present operating com- panies could quickly add to the capacity of their fleets and tramp ships would fill in any gap left by such lines. There is an oversupply of cargo-carrying bottoms in the world today and every likelihood that this condition will continue for a long time unless a new world war breaks out. Creation of a National Merchant Marine would require the Government not only to procure the ships but also to establish a government agency to operate them. It would be necessary to recruit and train the personnel to operate the ships, the agency responsible for them and the maritime service. Home port facilities for employment and administration of personnel, repair and other facilities for the ships at home and abroad, and other ancillary services must accompany the establish- ment of a Merchant Marine Service, all of which require sub- stantial funds. Purchase of the ships would be only the initial investment. Unless they were kept in full service and could charge rates adequate to cover their complete cost of operation as well as defray the overhead costs of their management, maintenance and replacement, the Merchant Marine could easily become a continuing drain on the national treasury. There seems to be no justification for such a needless expense at present. The possibility of a shortage of ships in the event of an- other world war may, of course, outweigh other considerations m the eyes of the Government. In that event, it is suggested that a solution more economical than a Guatemalan National Merchant Marine might be a maritime service to be owned and operated jointly by several Central American Republics and, perhaps, Mexico. Such an organization-perhaps similar to the Gran Colombian Merchant Marine-could serve all of these Republics under appropriate agreements as to finances, management and operations. 194 THE ECONOMIC DEVELOPMENT OF GUATEMALA VII. Airways Recommendation No. 52: Expand domestic air lines to serve isolated areas pending construction of land transport facilities. Review of Conditions Guatemala's productive areas are separated by high moun- tains and numerous water barriers. The population is neither large nor evenly distributed. Potentially valuable regions are isolated. Resources are not uniformly developed. Travel and transport between production, population and market centers are generally difficult. Correction of this situation will of necessity be a long and expensive process. Fortunately, air transport, though limited by geographic and climatic conditions, offers an immediate partial relief. It can serve excellently as an interim means of transport during the early development of a potentially rich area, or while other means of transport are constructed. The country is now served by three air lines,1 plus a few domestic taxi-type passenger carriers. Regularly scheduled service within the Republic is confined to one line, Aviateca, owned and operated by the Government. The other two companies, Pan American and T ACA, carry international traffic only. The present discussion is, of course, concerned exclusively with domestic service and its role in national development. Aviateca Originating as a private commercial operation about 1941, the Compania Guatemalteca de Aviaci6n, Aviateca, passed under government control in 1944. At present it has a monopoly on cargo transport and a virtual monopoly on passenger transport between points in Guatemala, although in the latter field a few small independent operators work on a charter basis. 1 A fourth air line, "Skytrain", was closing out its business at the time of the Mission's visit. and is therefore not included as an operating line. .TRANSPORTATION 195 Aviateca has established a remarkable record of safety in its operations. Its flight operations are centralized at the Guatemala City Airport and extend to some 32 fields located throughout the Republic. The company currently uses 11 planes in its operations, more than half of which are of the DC-3 (twin-motor) type. The balance includes C-47, C-46, DC-2 and C-54 types and a N orduya Norseman. Some of these are owned by the company and some are operated under lease agreements. The passenger business of Aviateca is substantial, probably owing in part to the relatively low fares and the difficulty of travel over the highways. This traffic has been built up steadily since 1944, although the first half of 1950 shows what may be a decline in passenger travel. Cargo likewise has increased steadily, except in 1949, the first six months of 1950 indicating a marked increase for the entire year. Mail trans- port also shows a steady increase through the past six years. Recent statistics are shown in Table XXIII. From the financial standpoint, gross income in 1949 was slightly lower than in 1948, obviously as a result of the sharp reduction in freight carried. At least part of this decrease can be attributed to the small chicle harvest in the Peten, to which reference is made elsewhere in this report. Income for 1946, 1948 and 1949 is shown in Table XXIV. TABLE XXIII TRAFFIC OPERATIONS OF AVIATECA, 1944-50 Miles Passengers B agg age Cargo Mail Year flown carried (kilos) (kilos) (kilos) 1944 ·· ··· ····· ··••····· 335,019 6,498 20,316 3,076,958 3,463 1945 369,390 16,260 23,305 3,457,746 4,420 1946 ...... .. .. ...... .. .. 516,356 35,052 54,379 5,027,915 4,570 1947 ........ ............ 647,106 54,370 81,371 5,228,757 5,687 1948 .... ... ... ...... ... 900,289 73,961 76,678 6,006,743 6,069 1949........ 871,449 74,349 72,744 4,141,110 6,844 6 Mo. 1950 ...... 488,265 34,731 88,482 4,136,474 3,339 SOURCE : Compaiiia Guatemalteca de A v iaci on. 196 THE ECONOMIC DEVELOPMENT OF GUATEMALA TABLE XXIV INCOME OF AVIATECA, 1946-49 Passenger Freight and Total Year income other income rrouincome 1946 ........ .... ........ 0337,585 0532,967 0 870,552 1948 .................... 556,535 507,096 1,063,631 1949' ... 550,000 450,000 1,000,000 1 Estimated. SOURCE: c..atemalteca de Aviaci6n. Companla While data on expenses and operating costs of the company are not available, it is understood to be having difficulty in meeting its current operating expenses. This trouble is said to arise, in part, because of delays by various government departments in paying for services received from A viateca. No direct substantiation of this report has been received, although the Government's recent allocation of ~177,600 (from revenue to be. derived from increased coffee taxes) for the reported purpose of enabling the airline to pay its debts, would appear to support the allegation. Both passenger and freight rate charges by A viateca are low. Freight rates vary in accordance with the classification and nature of the articles transported. All freight and express rates seem to be based entirely on weight, rather than on combined weight and volume as is customary elsewhere. Air express rates are from two to five times the air freight rate for the same commodities between the same points, air express being the quicker method of shipment. The entire rate struc- ture appears to be designed to provide low-cost service rather than to make a profit. Viewed as a whole, the operations of Aviateca fill a great need in supplying transportation between points which are otherwise relatively isolated from each other by lack of usable highways. Although it is an expensive means of filling this gap, it is the only practicable way of doing so at the present time. Interim Transportation The resources and condition of industry in various areas, discussed in appropriate sections of this Report, indicate that TRANSPORTATION 197 until there is some real justification for major highway con- struction into the still-undeveloped areas it would be unwise to embark on the heavy expenditures which would be involved in these projects. The existence of Aviateca and the safety and success with which it has operated t'o date demonstrate air transport facilities to be a good interim means of serving these areas during their period of exploration and early development. Reasonable transport rates are essential to any exploration or development project, since high costs of moving personnel and supplies could easily kill the project. If prevailing low air rates make these operations a losing proposition to the aviation company, the Government might subsidize the opera- tions of the company. It can also provide the necessary land- ing fields and navigation facilities as a means of expediting development of these areas. In the case of privately owned air-service companies a portion of this subsidy might well take the form of a reduction or cancellation of the present high tax on gasoline. In short, it would be appreciably cheaper for the Govern- ment to assume a portion of the cost of this air transport service during the exploratory stages of development of new areas, than to commit funds to the construction of an hpen- sive network of highways to and in these areas during that period. It will be time enough to undertake such construction if and when real prospects of the development of an appreciable industry or extensive agriculture appear. Recommendation No. 53: Improve the airfields now used by domestic airlines and construct such added facilities as are needed to meet air transport requirements. (Suggested initial allocation: ~150,000) All commercial airfields except those at Guat~ala City and at Puerto Barrios are unpaved and the majority are of the most primitive type. The number of passengers and the amount of cargo carried justify substantial improvements m the interest of safety and more efficient operation . • 198 THE ECONOMIC DEVELOPMENT OF GUATEMALA While paving of all fields is not needed, an appreciable improvement could be made in the surface conditions and drainage facilities of most of them. Among the fields requiring work are those of Quezaltenango and Cohan where heavy movements occur and local flying conditions are generally poor. Specific project requirements for airfield improvement can- not be recommended without a detailed survey of each existing field and of regional needs for new fields. The Mission there- fore suggests a general allocation. ' of funds for the purpose, to be spent by the Ministry of Communications and Public Works on the recommendation of Aviateca, which would know best the immediate essential requirements for repairs and safety measures at all fields. It is estimated that about ~150,000, to be spent on improve- ments over and above all normal maintenance items will be needed for the most frequently used fields outside of Guatemala City and Puerto Barrios. No other air projects would appear to be justified at this time. This sum would be enough to im- prove drainage facilitie s, remove minor obstacles, level run- ways, and provict'e a sufficient amount of gravel on aprons and taxi strips and good grass or gravel on runways. Addi- tional allocations will, of course, be required as the need devel~ps. Recommendation No. 54: Reorganize A viateca as an autonomous state corpo- ration. Aviateca is one of several government-operated utilities which could probably be made self-supporting if reorganized, given an autonomous charter, and operated on a "company" basis. 2 Reference has already been made to the contrast between the excell~nt service and the precarious financial status of this air line. In its transfer from private to government hands, it has apparently retained the general form of the original com- 1 Since the Mission left Guatemala it has learned that action has been initiated by tbe Congress toward reconstituting Aviateca as an autonomous corporation as con· templated in this recommendation. • TRANSPORTATION 199 pany insofar as its operating departments are concerned although not in its fiscal management functions and methods. Aviateca has had to finance the construction of most of its fields out of operating funds, because the Ministry of Communications and Public Works has lacked funds for the purpose. Procurement of new airplanes depends on Congres- sional approval. It is difficult, at present, to place on any individual or office the responsibility for poor airfields, indebt- edness, unduly low rates, or for the timely replacement of airplanes as those on hand approach the scrapping point. Although reorganization might not solve all problems the Mission feels that the Government, the public and Aviateca itself would benefit if A viateca were reorganized as an autono- mous company or corporation, with complete responsibility for the successful operation of the company vested in a Direc- tor or Manager. Financial responsibility under such conditions would include the establishment of proper transport rates for passengers, express, cargo and mail, all under the general control of the Public Utilities Commission recommended else- where in this chapter. It would also include the establishment of proper sinking funds for replacement of equipment and of other appropriate reserves. Under such an arrangement all operations would be subject to audit by proper authorities and net profits of the company would be deposited in the national treasury if the company remained a government-owned enterprise. The only financial assistance which should thereafter be required from the Gov- ernment would be that necessary to meet specific deficits incurred in operations, for which the company would be ac- countable. The need for such assistance should become progres- sively less, except in the case of specific subsidies granted by the Government to maintain air service in undeveloped areas. VIII. Priorities and Expenditures General Policies Adoption of certain policies on the part of the Government is of first importance and a prerequisite to obtaining the full benefit of many of the projects recommended in this report. 200 THE ECONOMIC DEVELOPMENT OF GUATEMALA Some of these policies involve the clearing away of specific barriers now hindering the movement of goods and the devel- opment of more efficient transport. Others involve the adoption of basic programs and the prosecution of technical studies in order to insure wise expenditure of funds. It seems advis- able to place the abandonment of certain projects ahead of the physical prosecution of others, since this action will serve the double purpose of permitting better fiscal planning and of obviating any duplication or conflict between the projects recommended in this report and those which may have been proposed at other times but which are now regarded as unnecessary. It is essential that the improvement of communications proceed in an orderly and integrated manner and that the scale of improvement be geared to the financial resources of the Republic. A good beginning can be made by early adoption of the recommended policies and general programs concerning highways and air transport, and improvement of procedures and facilities in the customs service. These steps will serve to focus efforts upon well-defined directions of development, while at the same time helping to yield some early and tangible results. Establishment of the Public Utilities Commission might well precede any negotiations with the Railway Company on the matter of rate control, since the establishment of such a Commission would constitute incontrovertible evidence of the fair intentions of the Government in its plan for the adjudi- cation and coordination of rates and services. This order of events would also provide a ready mechanism for handling rate matters after completion of negotiations. Creation of the Public Utilities Commission should be accompanied by a beginning of construction of the highway joining Puerto Barrios and Los Amates because this section of Highway 4 is the key to the solution of many of Guatemala's export-import difficulties. At the present time, any large increase of motor vehicles would add to the burden of highway maintenance and the difficulties of movement over the highways, without commen- TRANSPORTAT10N 201 surate increase in the flow of commodities. Completion of National Route 4 and of the other paved sections recom- mended will, however, provide paved highway mileage suffi- cient to carry a substantial volume of traffic. To gain full advantage from the new roads, action should be taken to lower motor-vehicle import and sales tax barriers in order to encour- age the importation and use of cargo-carrying motor vehicles and commercial-type passenger carriers. Reduction of the gasoline tax will serve to reduce living costs through cheapen- ing of transport and will aid in encouraging tourist travel. Highway Access to Puerto Barrios The weakest link in transport facilities is the total lack of a highway connection between the present northern terminus of Route 4 (Los Amates) and the seaport of Puerto Barrios. It is the first, therefore, that should be strengthened. Early construction of this link will, in spite of the poor condition of the rest of that route, open the way for motor traffic between Puerto Barrios, the capital, and the rich highland and south coastal areas. Without this road-or at least positive proof that it will be constructed in the ·immediae future-there is no real indication that the Government is vitally interested in expediting or cheapening the movement of international freight. Likewise, without it there is no assurance that com- modities ma" move by road to the Atlantic seaboard if rail transport service is inadequate or unsatisfactory or if rail rates are too high. Ultimately, of course, the proposed program contemplates National Route 4 as a heavy-duty pavement extending all the way from Guatemala City to Puerto Barrios. Only then, for the first time, will Guatemala be free of the fear that any interruption of the railway will cut her "life-line". The entire project is large, however, and should not be assigned a single priority. Instead, the very highest priority should be given to the opening of the northernmost portion in partially completed form, because this will at least create a coutinuous road to the Catibbean. Repairing and rebuilding of other sections and the final paving of the whole highway can then be undertaken in logical steps, with the order of 202 THE ECONOMIC DEVELOPMENT OF GUATEMALA priority for each step properly related to the urgency of other national projects. As a first step a compromise should be effected between / the costly first-class paved highway that is contemplated eventually and the present low capacity roads of the exist- ing portions of National Route 4. The initial construction of the important Los Amates-Puerto Barrios link could well be limited to a gravel-surfaced rather than a paved highway. Width of roadway, drainage structures and bridges should be planned so that they will fit into the final project. Temporary substitution of a graded and gravelled surface for the final heavy pavement would permit deferring expenditures of around {?J25,000 per mile at present levels of cost and would also mean earlier opening of this strategic link. Because a long time will probably be required to complete the construction of the southern section of National Route 4 along the relocated route recommended in this report and because traffic must be maintained between Guatemala City and Puerto Barrios once the northern portion of that route is completed, it is important that sufficient maintenance and reconstruction work be carried out on all of existing Route 4 south of Los Amates. This should include strengthening and repair of all bridges and culverts, drainage ditch repair, the provision of occasional vehicle-passing points, and'the addition of sufficient gravel or crushed rock to the surface to permit truck traffic in all weather. Some widening and straightening of the roadway at dangerous or difficult points may also be found necessary. These measures will insure that commercial vehicles can operate over this road to the port while better highway connections are being constructed. This phase of the work is therefore placed high on the scale of priorities (Table XXV), yielding place only to two other highway pro- jects of primary necessity and some small but urgent projects of other types. Circumstances dictate a logical order in which the remain- ing parts of the work on Route 4 s~uld be done, with priorit_ies somewhat lower. Improvement of the southern section before the central section is advisable. Financial limitations suggest TRANSPORTATION 203 that these parts, too, should be constructed at first to final specifications except for paving and put into use with a good gravel surface. Completion of the paving can then await ;,cheduled funds, after the allocations for certain other pro- jects as shown in Table XXV. Because of the rough terrain to be traversed, the southern sectiory of this highway between El Rancho and the capital forms a more difficult obstacle to traffic than does the central section between Los Amates and El Rancho. Elimination of this obstacle should increase the usefulness of the entire high- way more than would similar action in the central section. Furthermore, a substantial portion of the southern section of the highway, if relocated along the upper Motagua and Las Vacas Rivers, will also benefit the Salama-Rabinal Valley area and can serve as a part of a future road connecting Guate- mala City and Cohan, replacing the existing scenic but moun- tainous and narrow highway (National Route 5) connecting those points. This dual use will save a substantial amount of construction funds on the latter project. Reconstruction of the middle section of Route 4 (Los Amates to El Rancho) to full final specifications except pav- ing (but with a gravel surface) deserves priority after the two end-sections. This action will complete the highway route across the continent and give full use to National Route 3, the finished portions of National Route 4 and other routes serving the Capital. The Los Amates-El Rancho road will also improve highway access to Puerto Barrios from Zacapa, Chiquimula, Salama, and Cohan, and will further reinforce the effects of the improved highway system on competitive transport rates and services. South Coastal Highway Although a good paved highway along the southern coast would pass through an area already being served by the lines of the International Railways of Central America, such a highway would probably carry more local traffic and would benefit internal commerce · in general more than would any other paved road in the Republic. Therefore the combined route from the capital to Puente Talisman, via National 204 THE ECONOMIC DEVELOPMENT OF GUATEMALA Routes 3, 6-W, 13 and 1, is given a starting priority second only to the opening (without pavement) of the northern link of the Puerto Barrios Highway. Moreover, because of its local importance and lower estimated cost, it is contemplated that the actual paving of this highway will be finished before that of National Route 4. As in the case of Route 4, this south coastal highway work should be divided into parts, each with its own position in the scale of priorities. The above-mentioned high starting priority applies to completion of the pavement between Guate- mala City and Escuintla. Final completion of the entire road can then be accomplished in two succeeding projects placed lower in the scale: · Some of this highway already has been improved to a point where paving could be done without substantial recon- struction; other sections are in deplorable condition. Because of the type of local traffic expected to use the road and the fact "that portions of it have already been c~vered with a lower-grade pavement than that of the Pan American High- way, it is believed that the entire route could be completed to conform to the character of the section already finished, rather than to first-class specifications. Pan American Highway Completion of the Pan American Highway will provide a connection between Guatemala, Mexico and El Salvador over which should flow heavy motor tourist travel, with attendant economic benefit to Guatemala. It will provide an east-west artery through the Republic, connecting major cities and areas and increasing the flow of commerce. It will assist particularly in the development of the Quezaltenango area and of the Departments of Huehuetenango and Quiche. Continuation of this project at an increased tempo, especi- ally on the section linking Guatemala with Mexico, is urgent. Not only is the highway an important part of the basic road network of the country but it is also clear that some signs of real action may be necessary if Guatemala is to continue to receive the much needed financial contributions (two thirds TRANSPORTATION 205 of the cost) now made by the United States for this con- struction. Among the road-building projects, therefore, connection of the Pan American Highway with the completed Mexican portion of the same route is given the third highest priority. Its completion to the border of El Salvador is placed lower, but before final paving of National Route 4. Coba:n-EI Estor Highway A fairly high priority is assigned to the low-cost initial work required on National Route 7-E, in order to put this road into service. Related and next in order is the construction of the modest barge pier at El Estor. These two steps will allow early abandonment of the unprofitable Verapaz Railway line and the transfer of its barge terminal to El Estor, with great gains in time and utility compared with the present rail-river movement between Pancajche and Lake lzabal. Deferment of the final paving of Route 7-E until later and concentration of initial efforts upon getting the road open, will enable coffee and other moderately light cargo to move by truck to El Estor at an early date. The larger funds which would be needed for paving, meanwhile, can be directed into projects of high priority in the first years of the program. Other Projects Priorities for the remammg projects have , been asi,igne oblige the FINANCIAL RESOURCES AVAILABLE FOR INVESTMENT 267 Bank to subscribe to the issuance of mortgage bonds for popular housing and also to allow rediscounts up to three years instead of one year. These amendments indicate a dangerous tendency to break down the safeguards provided in the original law and a tendency, at least in some public circles to ignore the monetary policy set forth by the "Junta M onetaria": The danger would be aggravated by similar financ- ing of proposed new state development institutions such as the Industrial Bank, the Labor Bank and the National Tourist Corporation. It is apparent that further use of Central Bank funds in this way connot be resorted to now without danger to the currency. To justify such a course would require a project of exceptional merit indeed. III. Internal Sources of Early Promise 1. TAXATION Recommendation No. 73: Reorganize the tax system to increase revenues. Competent observers agree that the Guatemalan tax sys- tem offers substantial opportunities for increases in yields. Specific points in this connection are that: (1) present tax administration could be improved, in some cases greatly; (2) some tax rates are unnecessarily low; and (3) there are several untapped fields of taxation available. Tax Administration Fiscal administration appears to be in need of certain reforms. High collection costs, slow and inefficient processing, inadequate assessments and various forms of evasion are depriving the treasury of large sums which should be avail- able for public use. Administration of the business profits tax could be im- proved. Auditing of declarations is one or two years behind and the number of accountants is not sufficient to handle the accumulation. Moreover, the auditing consists merely in checking the declaration against the figures in the taxpayer's 268 THE ECONOMIC DEVELOPMENT OF GUATEMALA books. No attempt is made to verify the figures by approx- imate checks on volume of business, inventories, mark-ups and similar information. There is apparently a good deal of tax evasion in the valuation of profits on retail sales. This is made easier by poor accounting methods. While little can be done in the short run to improve bookkeeping practices, a more aggressive auditing of tax returns would result in an immediate gain in revenue. The business profits tax was estimated at over five million quetzales in the 1950-51 budget. It does not appear unreasonable to assume that a 10 percent increase in receipts could be accomplished without difficulty, giving addi- tional revenue of ~500,000. Real property taxation is based on an assessment of real estate values made in 1921 and revised upward in 1931. An- other revision was begun in 1945, but by 1949 only 25,000 properties were reassessed out of a total of 125,000. The assessed value of most properties is far below market value, representing no more than 20 percent of the latter for urban property and SO percent for rural holdings. 2 Underassessment is also reflected in losses to the State through lowered taxes on property transfers, such as sales, gifts and inheritance of real estate. Delinquencies on property tax are known to be high. Tax collectors in the departments are often paid under commer~ial contracts, receiving 20 percent of the collections, with a maxi- mum of ~100 per month; this results in a slackening of collections as soon as 0100 have been earned. Delinquencies are also common in property transfer taxes. These showed as estimated total yield of almost ~700,000 in the budget for 1950-51. Upward revision of valuations, to- gether with stricter action against delinquency, could double these proceeds without altering the rates. To pursue this one step further, studies 3 show that the costs of collection of some taxes, including the above-men- • This higher rate on rural property is a result of their frequent need for mortgage borrowing. Under the banking law, such loans cannot exceed 50 percent of the assessed value of the property. 1 Adler, Schlesinger and Ol sen, op. cit. ' FINANCIAL RESOURCES AVAILABLE FOR INVESTMENT 269 tioned ones, ran as high as 47 percent of the yield in 1947-48. It would be advisable to determine how these costs could be lowered, or whether some of them are worth so much effort if they leave so little for the treasury. Another, and perhaps the most important, source of revenue loss is in the field of liquor taxation. It has been estimated that, out of a total of 12 million liters of alcoholic beverages produced yearly in Guatemala, only eight million pay the excise tax. Other sources indicate that, in the departments of the Occidente region, contraband liquor represents about 40 percent of consumption. It is generally believed that loss in reve11ue to the State from evasion of this tax alone amounts to three or four million quetzales. Granting that it would be too optimistic to expect that contraband could be completely eliminated, at least one million more quetzales could be obtained if enforcement were strengthened and penalties increased. Coffee Export Tax Before the recently adopted law creating an additional tax on coffee exports, the rate was 1.65 cents per pound. '.This tax has now been raised to a total of 6.00 cents per pound, or approximately 12 percent ad valorem at present prices. While this effort is slightly less than what has been realized in other countries (such as El Salvador) an important gap in Guatemala's system of taxation has thus been filled. Un- fortunately, however, only a small portion of the proceeds of this tax can be expected to be made available for economic development. The estimated additional ~4,350,000 that this tax will yield have been allocated as follows: To meet unspecified needs of the budget... ......... 02,700,000 For highway improvement..... .. .. .. .. .......... .. .. ...... .. ..... 1,000,000 Contribution to the capital of a new National Coffee Institute (in charge of improving coffee production and marketing) .. .. .. .. .. .. .. .. .... .. .. .. .... .. .. 250,000 To increase the "Fondo de Regulacion de Val ores" of the Banco de G1,atemala.... ........ .. .. 200,000 To be used for extraordinary amortization of treasury letters and treasury bonds.. .. ...... .. ...... .. 200,000 270 THE ECONOMIC DEVELOPMENT OF GUATEMALA It is disappointing to note the small share of these new resources that is earmarked specifically for economic and finan- cial improvement and the large amount to be used for current administrative expenditure. As for the National Coffee Insti- tute, its value has been questioned in Chapter II. For many years the current expenditure of the State has been met without recourse to any high coffee export tax. In the present circumstances, with coffee prices at an all-time peak, the Mission feels strongly that the State's share in coffee profits should be used almost exclusively for development purposes. It would be better to employ these funds in measures which can later help to cushion the consequences of a possible fall in coffee prices, rather than for largely unproductive state expenditure. The present distribution of these resources (62 percent (or general budget purposes and 38 percent for amortization or development) should at least be reversed. At the same time, the Mission suggests that taxation of coffee should be on a progressive ad valorem basis. Since shipments commonly include grades of different prices, admin- istration of a purely ad valorem tax presents difficulties. How- ever, there are ways in which it could be determined by· an average weekly or monthly New York price for all grades, or by some similar periodic adjustment. Furthermore, the Mission believes that the effective tax rate at present coffee prices should be at least equal to that in force in El Salvador, or 15 percent. In this way additional resources from the coffee tax could be put at four million quetzales, assuming no increase in the present coffee exports. If recommendations in Chapter II are carried out successfully, these resources would be further increased within the next six years by an estimated maximum of two million quetzales. Revenue from coffee must play an important role in the national development. In estimating resources available for its proposed program, the Mission has assumed that the effec- tive tax rate will be raised to 15 percent by the end of the fiscal year 1951-52. FINANCIAL RESOURCES AVAILABLE FOR INVESTMENT 271 With these reservations as to the current rate and disposi- tion, the Mission can give wholehearted approval 'to the long overdue rise in the coffee export tax. It is hoped the temporary legislation under which this was done will soon be made permanent, but with amendments providing for more produc- tive use of most of the funds raised. Property Tax Independently of the reassessment of real estate values on which the property tax is based, it appears that the present very low rate of that tax (three quetzales per thousand) could be increased. This would be facilitated if the exemption of small properties-at present those valued at less than {?2100- were raised to {?2300. A rate of four or five quetzales per thousand would be possible, and would result in further in- creases in revenue. The present low rates for inheritance and gift taxes could also be raised with advantage. Luxury Import Tax Duties could very well be raised on certain luxury goods, whose importation is by no means essential to national welfare or development. Increases could apply, for instance, to such articles as gold and silver jewelry, watches, silks, perfumes, fine china, etc., which are purchased only by comparatively wealthy people. Additional ad valorem duties could also be imposed on heavy, luxury-type passenger cars; the equivalent amount of foreign exchange spent for lower-priced cars would buy the nation more transportation capacity. Personal Income Tax The establishment of a personal income tax, as now pro- posed, would be an important modification of the existing tax system. By applying to all incomes at progressive rates (in- cluding agricultural, professional and salary incomes, which at present are tax free) it would be a step towards higher standards of fiscal productivity and justice. From a purely budgetary point of view, however, it is not certain that the · introduction of the personal income tax would result in greatly increased revenues. Important classes of income, such as 272 THE ECONOMIC DEVELOPMENT OF GUATEMALA coffee, export receipts and business profits are now subject to taxation. Collection of the coffee export tax and business profits tax will necessarily have to be credited against the new income tax, thus reducing the net increase in receipts to be expected. Efficient administration of the income tax will be slow to develop. The experience of many countries has shown that the administration of a personal income tax, particularly of professional groups and farmers, is far more complex than administration of a business or corporate income tax. For this reason, it is difficult to estimate the additional funds which might be derived. It seems possible, however, that even after deduction of income already taxed under business profits or coffee export taxes, additional revenues of almost one million quetzales could be obtained during the early years of appli- cation of the new income tax. This yield should increase as the administration of the tax improves. Taxation of Foreign Enterprises Related to the question of the new income tax is the problem of taxation of foreign enterprises, such as Empresa Electrica de Guatemala, United Fruit Company and the Inter- national Railways of Central America, which are now largely exempt. Substantial possibilities appear to exist here. At present the only taxes paid by foreign companies are small export taxes on bananas and other taxable agricultural products, property taxes, and import duties on items other than capital equipment. The railroad equipment and electrical installations of IRCA are exempt from the property tax. Taxation of income earned locally by such companies will not necessarily increase total international tax liabilities of the enterprises. A provision of the United States law allows these corporations to be credited, for income tax purposes, with the amount of taxes on their net income paid to other countries. Thus, additional revenues in the magnitude of at least one million quetzales might readily be obtained without adding to the international tax burden of foreign investors. This question cannot be solved, however, until the more gen- FINANCIAL RESOURCES AVAILABLE FOR INVEST M ENT 273 eral one of readjustment of existing contracts is successfully settled. Summary of Tax Possibilities A recapitulation, intended only to present a rough order of magnitude, shows the following increased gross annual revenues which might be expected to become available for development purposes to be expected from tax reforms : Business profits tax .. ..... .. ...................... .... ..... ... ...... . 0 500,000 Liquor tax ... ..... ......... ... ..... ......... ... ..... ... ..... ...... .. ... . 1,000,000 Proceeds of coffee export tax• .... .......... .......... ... 4,000,000 Income tax ( fir st year) .... ... ........................ ...... . 1,000,000 Increase in property tax ... 700,000 Taxation of foreign enterprises ... .... .... .... ...... 1,000,000 Total ...... . .... ........... .................... ...... 08,200,000 • Based upon suggested increase in r ate and redistribution of resultant revenue, with a higher percentage of the total allocated to development. Admittedly, such tax reforms cannot be realized on short notice. To realize a target for improvement of over eight million quetzales in tax receipts will require several years of sustained effort. Nor can any precise assumptions be made as to the rate of progress towards this target. Yet in deter- mining the sums available for investment, it does not seem unreasonable to assume that approximately one fourth of the target, or two million quetzales, can be realized during the first year. This could be obtained from the coffee tax alone. 2. PINCAS NACION ALES By a decree of February 15, 1949, the Pincas Nacionales e Intervenidas have been given a measure of autonomy. This could be the beginning of administrative reform which would give an important role to the Pincas Nacionales in the financing of economic development. After a thorough administrative reform is successfully carried out (see Chapter II), the receipts to come from the Pincas N acionales could unquestionably be increased. Taking into account coffee only-the simplest product to forecast- we may assume the average cost of production at the finca, 274 THE ECONOMIC DEVELOPMENT OF GUATEMALA exclusive of export tax, to be @18 per quintal oro. 5 At a con- servative sales price at the beneficio of @40 per quintal (as against @52 in August 1950), the net profit per quintal before tax would be @22. With an average crop of perhaps 230,000 quintales, the net profit would be about five million quetzales or two million more than the most optimistic estimate of present profits. This does not take into account the receipts to come from some 150,000 quintales of sugar, 100,000 stems of bananas, and quantities of honey, cacao, citronella, live- stock and other products which, in our opinion, should cover the cost of an accelerated modernization and equipment program. 3. GoVERNMENT ECONOMIES Recommendation No. 74: Create a temporary independent committee, report- ing directly to the President of the Republic, to review public expenditures for possible economies. While the Mission had neither the responsibility nor the opportunity to review the whole field of public expenditures, it could not help but notice that substantial economies could be realized in public administration and public works. Past expenditures on a variety of useful but not directly productive undertakings have perhaps been an obstacle to the completion of projects of greater economic value. The Olympic Stadium is a case in point. Possibly, too, some of the funds spent for new school and hospital buildings, as well as for the coloniza- tion of Poptun, might have been put to a more immediately productive use if economic criteria had been applied. Other fields which might be investigated with profit include the procedure for recruitment and dismissal of government employees, the cost of operating and maintaining government vehicles, direct and indirect expenditures on publicity and propaganda of a- ditures occa- ll kinds, and finally, the expen_ sioned by stoppages in public works through a lack of treasury funds. • Washed and depulped coffee. FINANCIAL RESOURCES AVAILABLE FOR INVESTMENT 275 The Mission is of the opinion that an energetic and non- political ad hoc committee, devoted to the task of realizing justified economies, could point to numerous opportunities for saving government funds. It could at least help to check the natural tendency of government expenditures of an unpro- ductive nature to rise, which diverts funds from more useful economic purposes. Such a committee should be temporary and should render its recommendations within the first year of the new administration. Economies of one million quetzales would be a reasonable target. It may be difficult to accomplish such a cut on purely administrative expenditures, owing to the low salaries of civil servants. But it must be remembered that over 50 percent of budgetary expenditures in recent years have been for social, cultural and economic improvements and that within this 50 percent many expenditures can undoubtedly be found that are' not of the first priority. It seems safe to assume that one million quetzales for investment could come from economies of all kinds. IV. Internal Sources of More Distant Promise 1. PRIVATE SAVINGS Recommendation No. 75: Open depositories for private savings in outlying centers of large employment. Private savings are now very small in Guatemala. Total savings deposits amounted to only ~1,500,000 in February 1950,6 although they had almost doubled since the. end of 1947. Such deposits, which averaged about ~80,000 a year between 1939 and 1947, rose sharply during the years 1948 (an increase of ~151,000); 1949 (an increase of ~387,000), and 1950 (an increase of $137,000 between January and April). This indicates encouraging progress, although the total is still not great. 8 Of these "savings" deposits, 70 percent were, in fact, sight deposits. 276 THE ECONOMIC DEVELOPMENT OF GUATEMALA INFOP, through its special department which recently initiated an educational campaign to promote savings, certainly helped to bring about the increases in 1949 and 1950. One private bank also is beginning to promote savings deposits. Payroll savings organizations have been created among em- ployees of business firms and important, long-term, educational effort has been undertaken in the form of savings organizations in schools. -Nevertheless, large resources remain untapped. Some of the largest individual payrolls in the country are found out- side the capital, in such places as Puerto Barrios, Bananera and Tiquisate. Wage and salary payments of the United • Fruit Company and its subsidiaries totalled 09.7 million in 1949. The percentage of such salaries which could be saved is probably small, but such sums could be significant in the aggregate. It is believed in some quarters that the Indians are hoarding large resources. This is open to question until more tangible evidence is available, and even if true it will take patient education to mobilize such savings. Some progress on this as well as mobilization of savings from smaller local payrolls might, however, be made by establishment of a postal savings system using savings stamps. Though no illusions should be entertained as to the total amount of resources that could come from voluntary savings at present (0500,000 a year would be a satisfactory beginning), there is no doubt that action already initiated in that field should be continued and intensified, particularly outside of Guatemala City, with a view not only to immediate but to future benefits. 2. INSTITUTIONAL SAVINGS Recommendation No. 76: Require insurance companies to invest in Guate- malan securities an appreciable part of the pre- miums collected in Guatemala. Outside of institutions regularly receiving savings deposits (mainly the Credito H ipotecario Nacional and the Savings ·sec- FINANCIAL RESOURCES AVAILABLE FOR INVESTMENT 277 tion of INFOP), there are other institutions collecting savings in an economic sense. Some of the most promising sources of investment funds in Guatemala seem to be offered by insur- ance companies. At present, the only legal requirement that insurance companies invest in the country appears to be the Decree of May 17, 1932, providing that life insurance companies main- tain a deposit of not less than @50,000 in the Bank of Guate- mala and pay a tax of three quarters of one percent on the value of premiums collected. No obligation to maintain a guarantee deposit seems to apply to insurance against fire or accidents. . This situation is anomalous. Premiums collected by insur- ance companies during 1949 included @712,478 for fire and accident policies, out of total premiums amounting to @1,656, 736. The value of fire· and accipent insurance policies as of December 31, 1949, totalled @65,186,297, against @18,936,723 in life insurance policies. In the opinion of the Mission, resources from insurance funds are not now utilized to the best interests of the country. Legislative action in this field could provide sizeable resources in a fairly short time. A project recently presented to the National Congress would require investment in Guatemala of the reserves neces- sary to guarantee risks insured by foreign companies operating in the country. The Mission is of the opinion that the project should be amended to provide for a less drastic and more gradual change, to offer more flexibility in the types of invest- ment offered insurance companies, and also to avoid requesting investments in quetzales as a counterpart of dollar risks. Technical assistance on this matter could readily be obtained. One remaining institution collecting savings (in the broad sense) is the lnstituto Guatemalteco de Segiiridad Social. This institution has, however, no reserves, since it operates under the "repartition" or "social budgeting" system, in which re- ceipts in one year are applied to expenditures of the same year. The organization cannot be expected to contribute funds for general investment, therefor, except as. social security funds 278 THE ECONOMIC DEVELOPMENT OF GUATEMALA are employed for a special class of investment in human improvement. 3. DOMESTIC PRIVATE INVESTMEN'l' Private productive capita:! formation is small. It has been accomplished mainly through the initiative of certain enter- prising individuals rather than through the public marketing of securities or the investment of reserves by large companies. The volume of private productive investment ( excluding resi- dential construction) in 1948-49 did not account for more than 20 percent of total capital formation. Up to one half of the other 80 percent resulted from public investment and the remainder from private nonproductive investment such as real estate speculation. Yet financial resources for productive investment are not lacking in Guatemala. Their importance can be seen from the large amounts of funds belonging to Guatemalans but held outside the country. According to the latest statistics of the Federal Reserve System, private holdings of Guatemalan citizens in the United States alone amounted to around ~14 million in 1950. This figure is probably conservative. It is unfortunate that such an important volume of funds, originating in a country that is so much in need of productive capital, should be kept abroad. This, however, is the result of some basic and long-standing economic and social character- istics of Guatemala. Relations between successive govern- ments and certain elements of the business community have been subject to chronic strains, resulting in a general lack of confidence and an unfavorable climate for private investment. In addition, of course, the country lacks some of the basic conditions in the form of social capital necessary for successful large-scale business enterprise, i.e., transport facilities, power, health, education, etc. The correction of these conditions can be achieved only in time. Yet there are a number of practical steps which could be taken immediately to help offset these shortcomings. In recent years the activities of the Government in foster- ing more progressive social and economic conditions have FINANCIAL RESOURCES AVAILABLE FOR INVESTMENT 279 sometimes created an impression that legitimate profit-seeking business enterprise is not looked upon with favor. The impres- sion is very largely psychological. It can be explained by the large and rapid adjustments that have been asked of business since 1944, in an effort to make up some of the time lost to social evolution under the preceding administrations. The change was abrupt and many businessmen and finca owners were unprepared for it. Many positive features of the regime-particularly taxation -actually favor business enterprise. However, the manner in which the labor laws have been interpreted, and especially some decisions of the labor courts, have been less favorable and not always free from demagogy. Investment could be encouraged by positive declaration by the Government, cal- culated by reassure legitimate business enterprise. Words would, of course, have to be accompanied by action. Some revision of the more controversial features of the labor laws, supported by full enforcement and impartial decision of labor conflicts, could certainly do much to improve the incentives for private capital. Other useful action could be taken in the more limited field of taxation. Taxation incentives to productive investment are, it is true, already provided by the Industrial Development Law of 1947, under which tax exemptions can be granted for limited periods of time to new industries significant in the national economy. Exemptions under this law include the waiving of customs duties on capital equipment and raw materials, sus- pension of the property tax, and reduction of the business profits tax. As an incentive to investment and industry this policy appears to have been moderately successful. Yet it appears necessary not only to encourage productive investments, as has been done so far, but also to discourage unproductive ones. The proportion of relatively unproductive capital formation is very high. Probably one of the most useful correctives would be the capital-gains tax to discourage specu- lative, nonproductive investments, particularly in real estate, and inventory purchases. At present, such activities are taxed 280 THE ECONOMIC DEVELOPMENT OF GUATEMALA only at low rates by the real estate transfer tax and the capital stock transfer tax. Creation of a capital-gains tax is a matter which requires serious technical investigation if the tax is to be successfully enforced. The tax should be collected upon transfers of prop- erty and on the basis of valuations made according to objective criteria, such as an index of construction costs, a coefficient multiplying annual incomes, or other devices. Legislative and administrative practices in other countries offer models of systematic procedures and standards of tax appraisal and technical assistance on the subject can be obtained. The capital- gains tax should later be incorporated in the income tax. It is clear that a deliberate government policy encouraging business and the provision of tax incentives are not in them- selves enough to allow reliance on private capital as the main source of economic development. It would be too optimistic to expect private capital to finance more than a small part of the basic improvements required in transportation, communi- cations, power, warehousing, education or health facilities. These, in the initial stages, must be essentially the task of public authorities in order to facilitate economic development. Experience in other countries indicates that progress in private investment generally follows and supplements judicious in- creases in public investment. Other and somewhat artificial incentives to investment, such as the sales of guaranteed, liquid, high-rate and tax- exempt "participation certificates" in a publicly held invest- ment trust fund might be useful at some later date. But their utilization would probably be premature at present, since the newly created financial instruments would compete for avail- able resources with public bonds of similar characteristics. Needs for investment in the public sector are at present large enough to utilize fully the capacity of any securities market that could be created. 4. THE GoVERNMENT BOND MARKET Development of a Guatemalan market for Government securities is handicapped by the same lack of confidence that FINANCIAL RESOURCES AVAILABLE FOR INVESTMENT 281 is the fundamental obstacle to private investment. This has been further aggravated by the treatment received by creditors of the State in the past and by the attractive returns available from investment in mortgages, trade, or speculation. Between 1899 and the Monetary Reform of 1924, the Gov- ernment had recourse to inflation for financing its current requirements and debt obligations. This resulted in a drastic depreciation of the old peso to 1/60 of its original value. Sav- ings in liquid form were almost totally lost. During the fiscal year 1938-39 the Government, utilizing cash balances accumu- lated in previous years as well as a tax anticipation loan of one million quetzales from the Compania Agricola de Guatemala (United Fruit Company), repurchased in full the outstanding internal bonded debt at the drastically reduced rates prevail- ing in the market. This experience still lingers in the memory of Guatemalan investors. On the technical side, much has been done to try to develop the government securities market. Prices of these securities have been supported in the open market and their effective rate of return has been increased by favorable tax treatment. The law creating the Ba.nco de Guatemala also estaglished a fund for the regulation of the bond market (Fondo de Regula- cion de Valores) which supports most official or semiofficial obligations. The Banco de Guatemala is the fiscal agent of the Government and has scrupulously met its interest and amorti- zation obligations. Ownership, transfer, and income of all government and semigovernment securities are exempt from all existing taxes and from all taxes that may be levied in the future. All this, however, has not been enough to overcome the basic reluctance of investors. As tax administration is · im- proved and if and when the proposed income tax law is passed, tax exemption for public securities should prove a more effect- ive incentive than it has been up to the present. Existing measures seem entirely appropriate and on the purely technical side there is probably little to add to them. It is possible, however, that the creation of government securi- ties in dollar currency might help the repatriation of some 282 THE ECONOMIC DEVELOPMENT OF GUATEMALA funds held abroad and also provide an opportunity for foreign institutions operating in the , country to invest their funds domestically. This question deserves more detailed study. It is also possible, in the case of a specific project for eco- nomic development, that the Government could market securi- ties of the particular government agency charged with execu- tion of the project, provided that the agency is established on a non-political basis and has a management of recognized competence. Current experience in El Salvador seems to encourage the belief that assistance to Guatemala by a competent marketing expert would be very helpful in the development of the govern- ment bond market. The Mission feels, however, that such assistance would be fruitless without either a notable improve- ment in the psychological atmosphere or well-designed and independently managed development projects. V. External Sources I. FOREIGN DIBECT INvEsTMENT F~reign private capital has played an extremely important role in the development of Guatemala. There is no reason why it should not continue to do so. There are still many important fields where the combination of Guatemalan natural and human resources with foreign capital can serve the best interests of both parties. Direct foreign investment can con- tribute to higher living standards for Guatemalans through greater production, technological progress, profitable employ- ment and increased exchange earnings. It must be recognized that foreign investments in Guate- mala have also had some less favorable effects which have not entirely disappeared. This, however, should not obscure the very real and positive advantages that such outside private endeavor offers. The Need for Reasonable Compromise Large obstacles to foreign investment in Guatemala appear to be mostly of a psychological nature. A typical instance is FINANCIAL RESOURCES AVAILABLE FOR INVESTMENT 283 . found in the relations of Guatemala with important foreign companies that have been established in the country for many years. While the foreign companies, in the eyes of the Guate- malans, may have resisted changes in their former position of economic privilege and political influence, it is alleged in turn by the foreign companies that the Government has indulged in unfair practices, particularly in its labor laws and their enforcement. Concrete examples are not lacking on either side in support of the opinion that a fair settlement has been, up to the present, made impossible by the intransigent attitude of the other party. The Mission is not in a position to pass judgment on the merits of each case, but it is strongly of the opinion tliat the psychological atmosphere could be cleared without any really fundamental sacrifices by either side. The Government, without abandoning any of the essential principles of the 1944 revolution now firmly established, should recognize the fact that activities of foreign companies have been instrumental in the development of Guatemala and still contribute greatly to it. The foreign companies should refrain from any direct or indirect political activity against the Government; and they should accept, perhaps less reservedly than they have thus far done, the need to adapt their legal status and their operations to changed conditions. Such a change in attitude would appear to be a prerequisite to more positive measures towards con- structive cooperation. The Mission is aware of the official policy of the Govern- ment regarding foreign investment. This policy, as expressed at the Conference of American States at Bogota in 1948, legiti- mately seeks to protect the permanent interests of the country against wasteful or excessive exploitation of natural resources and to preserve the sovereignty and political independence of the country. No changes .are suggested in this policy. But it is possible that in specific features of the laws, or in certain practices followed in the enforcement of the law, the Government may 284 THE ECONOMIC DEVELOPMENT OF GUATEMALA • have lent color to the accusation of having discriminated against foreign capital, with harmful effects upon the inflow of new private capital into the country. Even the appearance of discrimination should be carefully avoided, because the creation of an atmosphere of confidence is of paramount importance. A specific point to be mentioned might be the provision in the Labor Code for special benefits to workers in agricultural enterprises employing more than 500 workers. It is realized that this provision is not expressly limited to foreign enterprises. Nevertheless, it would be diffi- cult to deny that the number of enterprises falling within the provision is obviously restricted and that the special treat- ment (which, in fact, creates two unequal classes among workers) has been a source of friction with the foreign com- panies. Revision of Legal Status It is the view of the Mission that if a few obvious adjust- ments can be made, both in the general attitude toward foreign investment and in some of the positive aspects governing it, the way might be paved for a successful revision of the legal status governing activities of the United Fruit Company and the International Railways of Central America in Guatemala. The basic philosophy of the present contract with the International Railways of Central America, concluded in 1923 and running until the year 2009, does not appear fundamentally different from that of the first concession granted by the administration of General Barrios as early as 1877. The original contract with the United Fruit Company was con- cluded in 1901. These dates by themselves illustrate the out- moded character of these agreements. There is need to approach their revision in a fair and open-minded manner, rather than in a legalistic way, since no solution can be found if each party stands firmly on what it considers to be its own rights. It is apparent that, even at present, both t.he foreign com- panies and the Government find it in their own interest to maintain working economic relations. Once these relations are FINANCIAL RESOURCES AVAILABLE FOR INVESTMENT 285 put on a firm and mutually satisfactory basis by the revision of. the contracts, an extremely important cause of friction between Guatemala, private foreign investors, and perhaps even some sectors of public opinion in other countries may well have been eliminated. Publicizing Guatemala's Advantages Corrective measures outlined above, aimed at the elimina- tion of existing obstacles to the flow of private capital into the country, should be supplemented by positive action by the Government to preserve and develop the many real attractions Guatemala can offer to foreign capital. One of these advantages is the I-ow level of taxation. New enterprises qualifying under the Industrial Development Law can get special benefits; but even after the initial period of exemption has expired, the normal taxation of foreign enter- prises is moderate. Other features include a variety of climates, rich soils, adequate power potential; forest resources and an adaptable labor force. In the field of minerals and other raw materials of strategic importance, such as abaca, the favorable location of the country near to markets in the Western Hemisphere is a further inducement to foreign capital seeking investment. It is the opinion of the Mission that such attractive char- acteristics of Guatemala are not well enough known abroad. Without suggesting that Guatemala should undertake a costly publicity campaign, it would be useful to counteract in every possible way the unfavorable and largely unjustified impres- sion that has recently been created abroad. This could be done in some measure by emphasizing the positive factors that are favorable to private foreign enterprise and the full co- operation which the Government is ready to extend. Such publicity could be particularly successful at the present time, when capital is seeking refuge from war risks and high taxation in Europe and North America. Potential Foreign Direct Investment It is difficult to evaluate closely what could be accomplished by foreign private investment in the various fields of economic 286 THE ECONOMIC DEVELOPMENT OF GUATEMALA activity. If commercially attractive oil deposits were proven, this would be the largest single field. The capital involved for full-fledged exploitation would certainly run into tens of millions of dollars. A substantial portion of this investment would have to be spent on roads and other permanent im- provements, in the Peten or wherever drillings were carried out. Another important potential development is the recently postponed program of the United Fruit Company for rehibili- tating diseased banana land, requiring an investment of up to eight million quetzales. A large proportion of this sum would be spent locally on payrolls and other services and if revision of the present contract were to be carried out, Guatemala would share in the benefits of the increased activities of the company. Still other opportunities lie in the field of mining, where substantial investments have been made successfully in recent years and where the cooperation of foreign enterprise appears to be quite satisfactory. These experiences can be expected to encourage other foreign investors to develop unexploited resources, particularly after the necessary improvements are made in the transport system. Admittedly, private investment in each of the fields men- tioned could not alone provide the resources that are necessary for the over-all basic social equipment of Guatemala; but it could make a major contribution. 2. INTERNATIONAL CREDIT Recommendation No. 77: Maintain and improve Guatemala's international credit position by efforts to strengthen the balance of payments position and by the adoption of internal financial policies designed to avoid inflation. Balance of Payments Apart from the nonrepatriation of export proceeds, recent deficits in the balance of payments have been primarily caused FINANCIAL RESOURCES AVAILABLE FOR INVESTMENT 287 by increased importation of productive equipment and raw materials. These, of course, reflect a measure of economic development. The deficits have been met out of accumulated reserves. This loss in reserves leaves but little leeway, however, and must be corrected to preserve the stability of the currency. From the point of view of developmert also, an improvement in the balance of payments is essential. Even after the present deficits are corrected, it will be necessary to allow for the direct and indirect effects of additional investment expendi- tures as recommended in this report. According to estimates recently made by experts of the Federal Reserve System, such expenditures may result tem- porarily in additional imports, the value of which could be as high as SO to 60 percent 7 of the total new outlay. On this basis, ~10 million of the additional development expenditures which could be financed from internal sources by noninfla- tionary means would result in the expenditure of some six million dollars of foreign exchange. To the extent that the recent deficits were attributable to accumulated demand for imports, some automatic correction will take place. This recovery is already being aided by the high price of coffee. Yet the foreign exchange needed to meet the requirements of the recommended investment program probably could net be obtained fully and immediately from Guatemala's own earnings. An ample development program thus requires that domestic sources be supplemented by external financing. Present world conditions appear eminently favorable to countries producing raw materials and foodstuffs. Analysis indicates that Guatemala can easily achieve a strong balance cf payments position, even during a period of development, by taking immediate steps toward this objective in both import and export activities. On the import side, the solution does not lie in arbitrary restriction and embargoes, but in stimulating domestic pro- 7 This figure could conceivably be lower for certain types of work (e.g., highway) but it represents the over-all result of experience of the last few years as to the exchange effect of investment expenditures. 288 THE ECONOMIC DEVELOPMENT OF GUATEMALA duction to reduce the necessity for imports of things which the country can produce economically. It is estimated that implementation of the agricultural measures proposed in Chapter II could, at the end of three years, save some three million quetzales in foreign exchange now spent for corn, rice, wheat, milk, hard fiber products and, perhaps, cotton. This can be done without any reduction in the volume of goods available on internal markets. There are other savings of this kind, such as the milling of more imported wheat instead of importing finished wheat flour. An invisible import, the freight-bill, might be reduced if greater competition in inter- national shipping could be obtained. 8 Exports can be increased in various fields. If immediate steps were taken to increase plantings of coffee and cacao, ~10 million in additional earnings might be expected after five years from coffee and an additional ~13 million after 10 years from both commodities. Further exports of essential oils could yield at least one million quetzales and tourist trade perhaps two million quetzales, bringing the total to 013 mil- lion at the end of five years. These figures are no more than rough estimates, but they indicate the substantial potential resources of Guatemala for the future. Nor do they take into account additional potential receipts from bananas, handi- crafts and textiles, meat, minerals, forest products and abaca. Taking into account the whole balance in goods and ser- vices, Guatemala appears capable of obtaining some 16 million in additional dollar resources at the end of five years, without counting possible gains through capital repatriation and sav- ings in external transportation. Any such gains would, of course, be offset to some extent by the increasing imports which result from improved purchasing power and living standards. Internal Financial Policies Despite the promising prospects that have been outlined, the whole purpose of the development program could be frus- trated by a lax internal monetary and fiscal policy. Such a 8 See Chapter V, Recommendations Nos. 30 and 47, and the discussion under Rccom• mendation No. SI. I FINANCIAL RESOURCES AVAILABLE FOR INVESTMENT 289 policy would endanger the stability of internal prices and the external value of the currency, both of which are essential for the realization of all projects and largely govern the deci- sions of potential investors whether domestic or foreign. In past years there has been a con~tant increase in the money supply. Although fairly stable since 1946, it neverthe- less reached a level of over 060 million during the first months of 1950 compared with 038 million at the end of 1944. Al- though much of this expansion may have been a result of the financing of productive operations, either by the Government or by individuals, it was bound to have unfavorable repercus- sions on the balance of payments. In fact, it has probably been one of the major causes of the reduction in gold and for- eign assets of the Banco de Guatemala, which fell from a peak level of 049 million in 1947 to 037 million at the end of 1950. External and internal stability can, at present, be achieved only if monetary expansion for nonproductive purposes is rigidly controlled. A firm budgetary and monetary policy is necessary to achieve these ends. It is bound to be unpopular in some quarters. The international credit position of Guate- mala would certainly be enhanced, however, if some substan- tial evidence were given that such a policy would be enforced. It may suffice to repeat the warning of the Banco de Guatemala, issued in its report of May 1950: "An inflation could appear which would annihilate social and economic achievements of the recent past." Borrowing Capacity There is little doubt that the productive capacity of Guate- mala, if utilized in some of the ways suggested in this report or in an equivalent manner, would allow it to borrow abroad and service its foreign obligations. It is difficult to place a definite figure on Guatemala's present capacity to service foreign debt. The deficits in the balance of payments over the last several years have occurred even without any appreciable foreign obligations to be ser- viced; at the same time, it has been noted that correction of this situation has begun and that the outlook for an eventual bal- ance of payments surplus is good. 290 THE ECONOMIC DEVELOPMENT OF GUATEMALA Assuming that the other recommended economic and finan- cial measures were carried out, it has been envisaged in Chapter X that Guatemala might borrow abroad to speed up the rate of development. The Mission believes that the maximum level of indebtedness thus considered would be well within Guatemala's capacity to repay. 3. GRANTS AND DIRECT FINANCIAL Am During recent years Guatemala has been receiving direct financial aid and grants in various forms. The amounts have been substantial: over two million dollars were received in 1947, and more than $1.7 million in 1949. These have been chiefly for road construction, agriculture, health and educa- tional purposes. Although in the past two years such aids have decreased with liquidation of several of the services concerned, it is always possible that they might be increased again under favorable circumstances. On the other hand, this is a matter which cannot be decided entirely by Guatemalan policy. As resources, the Mission can take them into account only insofar as they affect certain specific projects, such as the Pan Ameri- can Highway. Apart from this aspect these resources remain secondary in importance, even if by no means negligible in size. VI. Conclusions Summary of Additional Resources For purposes of orientation, it may be useful to summarize here the more significant amounts involved in the preceding analysis. It has been found that additional internal resources available would include approximately eight million quetzales from reorganized taxation, another two million quetzales from improved operation of the Fincas Nacionales, and about one million quetzales from ordinary economies in Government expenditures, or a total of ~11 million annually by the end of the sixth year. Increased coffee output, as recommended, should add two million more quetzales in coffee tax, making FINANCIAL RESOURCES AVAILABLE FOR INVESTMENT 291 available in all @13 million per year from internal sources by 1956-57. Resources to come from domestic private investment and savings are likely to be small under present conditions and cannot be estimated. Foreign private investment is also prob- lematical, although its total could be quite large if the obstacles described above were removed. The Mission has preferred to leave these resources out of any actual calculations, since they cannot be determined. As has been explained above, as- sumptions concerning borrowing are made below in Chapter X. General Observations on Capital Formation Guatemala's 1947-48 gross national product has been esti- mated at ~335 million (Chapter I). Total capital formation in the same year was estimated at @34.3 million, of which @17.8 million was private capital formation and @16.5 million public. Allowing for a 20 percent increase in the price level since 1948, the 1950 level of gross national product may be put at about @400 million. It is assumed that under the course recom- mended in Chapter II the volume of coffee exports will rise by about 280,000 quintales by 1957. The gross national pro- duct, on this assumption alone, could then be anticipated at • perhaps @417 million. Total capital formation under this assumption may reach @55 million, or 13 percent of the gross national product. Roughly @35 million of this would be public capital formation and @20 million would be in the private sector. Both the over-all rate and the proportion of public capital formation may appear to be high. Yet several favorable fac- tors support the opinion that they are feasible. In the first place, the current high price of coffee affords considerable opportunity to tax private incomes from that source and to increase revenues from state-operated farms . Secondly, the unusually high proportion of government prop- erty in the form of nationalized fincas justifies a somewhat abnormally high level of public investment; this could com pen- 292 THE ECONOMIC DEVELOPMENT OF GUATEMALA sate to some extent for the present deficiency of private investment. Finally, the unequal distribution of national income in Guatemala tends to make it easier to divert resources to invest- ment purposes. ln more developed countries, where income distribution tends to be more uniform and living standards are appreciably higher, any diversion of resources towards investment by taxation or other means is bound to reduce the real incomes of most consumers with all the difficulties in- volved in any such downward adjustment. In Guatemala, on the contrary, the measures that have been proposed here (including the tax increases) will hardly affect the traditional way of life of the great majority of Guatemalans. • ' CHAPTER X The Recommended Investment Program I. Aims and Assumptions At this point it is appropriate to summarize the financial implications of the numerous recommendations that have been made in the Mission's report and to match these with the financial resources which are likely to be available to Guate- mala for development purposes. An effort to do this will be confined to programs for the next six years (1951-2 to 1956-7), the period for which the Mission has attempted to outline a program of public investment. No attempt will be made to measure in quantitative terms what may be accomplished by private investment. Throughout the report the Mission has suggested fields which could be entered profitably by private investment; but it is impossible, under present conditions, to forecast how much private invest- ment capital will actually become available. This will largely depend upon the success of the measures taken by Guatemalan authorities to implement the recommendations on this subject. It should be kept in mind, however, that any successful public investment program must be closely related to productive activities which attract private investment. For successful planning of economic development it is also essential to take into account the problem of timing. In any relatively underdeveloped country, certain interdependent physical and psychological changes are essential prerequisites to economic progress. Other changes and developments, per- haps more ambitio~s and spectacular, are in fact less funda- mental. For this reason the largest possible segment of the population should feel the direct impact of these first measures, thus stimulating and diffusing the desire for progress. An in- creasing disposition to work, save, invest and take risks, to- gether with a progressive social atmosphere, characterized by a sense of mutual responsibility on the part of labor and management, is vital to any development. 293 294 THE ECONOMIC DEVELOPMENT OF GUATEMALA Such fundamental changes in the traditional, static outlook are not likely to take place without real and widespread im- provements in transportation, communications and power, which create opportunities for enterprise; or without similar progress in health, basic education and technical training, to create opportunities for workers. A number of small but com- plementary improvements in these fields may be much more urgent than a large hospital, a new railway line or other projects designed to secure rapid advances in one field before basic needs have been met in others. This is why, throughout the recommendations, the endeavor has been to maintain a high degree of selectivitY,. The Mission has hoped to focus the limited available resources, by priority, into fields which promise early and cumulative improvements in income and the standard of living, without imposing an excessive strain on the country's ability to maintain a sound balance of payments position. Assumptions Expenditure estimates in this chapter do not cover all national needs. They do cover specific additional requirements for development in those selected spheres of activity which have been examined in preceding chapters. They are made on the assumption that the present level of activities can be sup- ported, in general, by existing sources of funds not included in the Mission's program of additional development projects. The investment programs proposed take into account not only the available funds, but also the ability of Guatemala to pro- vide the necessary skilled labor and technical personnel. Table XXXIII presents an optimum six-year investment program providing for development expe~ ditures of approxi- mately @50 million above the existing level of expenditures. Since the 1948-49 investment in the public sector was roughly ~17 million ( equivalent to ~102 million for a six-year period), our Optimum Program would represent a 60 percent increase over the 1948-49 level of investment. Table XXXIII is based on the assumption that sufficient funds will be made available from abroad to carry out the full THE RECOMMENDED INVESTMENT PROGRAM 295 investment and development program. In 1951-52, the first year, it is estimated that the Government will be able to in- crease its present level of investment by about two million quetzales, using additional revenues from the coffee tax under its proposed redistribution. For the following years of the program, it has been assumed that gradual progress will be made toward the target set for the sixth year, or @13 million above the present level. No allowance has been made for a rise in receipts to be expected from natural growth of the gross national product over the six-year period. In the past six years this growth has occurred at the rate of approximately 2.5 percent per year in real terms; hence, in view of the small sums involved at the beginning of the program, the amount over the six years would not be large. On the other hand it is assumed that, with the measures proposed, coffee exports will begin to increase substantially ·at the end of the fourth year and will reach SO percent above present exports at the end of the tenth year. Consequently the program anticipates additional net revenue of @0.5 million from the coffee tax in the years 1954-55, one million quetzales in 1955-56, and two million quetzales in 1956-57. A total of approximately @41.5 million should thus become available from internal sources for development purposes during the entire six-year period. On this basis, foreign borrowing to the extent of some @20 million would be required, including provision for interest payments of approximately @2.7 million during the first five years. Such an amount would not appear to be out of line with the debt burden that Guatemala could carry under the conditions set forth elsewhere in the report. Assumptions underlying Table XXXIII imply that Guatemala's balance of payments position will enable it to borrow approximately @2.6 million in the fiscal year 1951-52. It should be noted that not all of the @20 million of additional funds required for the full development program would necessarily have to come from foreign loans. If the · balance of payments continues to permit free convertibility of 2% THE ECONOMIC DEVELOPMENT OF GUATEMALA the quetzal, the amount can be reduced to the extent that the Government can cut down expenditures for nonpriority pur- poses, or can collect tax receipts in excess of the estimates. Moreover, limited internal bond issues might prove feasible at some later stage of the development program. Nevertheless, in the optimum investment schedule of Table XXXIII, it is assumed that it will be necessary to borrow abroad the entire amount not covered by anticipated internal resources. Because the most favorable conditions for financing may not be assured, the Mission has prepared two alternative pro- grams based upon modified assumptions. One of these, shown in Table XXXIV, assumes foreign loans of ~14 million; the other, in Table XXXV, assumes no borrowing of any kind. II. The Optimum Investment Program An investment program which the Mission recommends as the optimum under Guatemalan circumstances would involve additional expenditures as described below for each major field. Agriculture Estimates for agriculture are based on the proposed addi- tional expenditures described in detail at the end of Chapter II. The sum of ~1.2 million has been assigned for the first year to cover such items as the following: Research and extension services ... ............................. .. 0 210,000 Mechanization centers .. ...... .. ......................................... . 170,000 Seeds, fertilizers and fungicides ............... . 150,000 Increase in small agricultural credit ............. . 150,000 Small irrigation projects ............................ ... ....... . 110,000 Forestry ....................... ·····················-· ........................ . 80,000 Storage centers .. .... ...... ..................... . 75,000 Faculty of Agriculture (library, laboratory staff) .. 70,000 Other ... .. .................. ... . ............ .. ... . 185,000 01 ,200,000 In the second year, additional expenditures for agriculture reach a peak of ~1.5 million with the opening of a second .., ~ TABLE XXXIII M 11:1 AssuMPTION No. 1: OPTIMUM INVESTMENT PROGRAM M ('j (in millions of quetzales) 0 a:: Fiscal Years a:: M Item 1951-2 1952-3 1953-4 1954-5 1955-6 1956-7 Total z t:! M t:! Agriculture .............................. .... ............ ................. 1.2 1.5 1.4 1.4 1.4 1.4 8.3 .... z Transport ························ ......... ........................ .... .... 2.0 4.0 5.0 5.0 5.0 5.0 26.0 < M .., u, Telecommunications ........ ........ .................. ........ - .3 .5 1.0 .6 .6 3.0 a:: M Power .... ........ ............... ... .... ....... ......... ...... ..... .. ......... . .2 1.0 2.0 3.0 3.0 2.8 12.0 z .., Irrigation' ................. ......... .. ..... ..... ,................ ........... - - - - 1.0 1.0 2.0 '1:1 11:1 0 C') Health ..... ..... ............ .. ........... .......... ....... ..... ....... ........... 1.2 1.4 1.4 1.4 1.4 1.4 8.2 Total cost of projects ... ........................ .... ........ .... .... - 4.6 - 8.2 -- 10.3 -- 11.8 -- 12.4 -- 12.2 -- 59.5 11:1 > a:: Debt service ........... .. ... ........... ...... ... .............. ....... .... - .1 .3 .6 .8 .9 2.72 Total expenditures .................. .......... .. .. .... ....... ......... - 4.6 - 8.3 -- 10.6 -- 12.4 -- 13.2 -- 13.1 -- 62.2 Internal resources available ............... .. ... ....... ......... 2.0 4.0 5.0 1.5 10.0 13.l 41.6 Loans .. ... .... ...... .. ......... ........ ....................... ............. ... . 2.6 4.3 5.6 4.9 3.2 - 20.6 -- 'Small-scale irrigation projects are included under agriculture. • Rounded total . ~ '-J 298 THE ECONOMIC DEVELOPMENT OF GUATEMALA mechanization center, while other expenditures expand as projects pass the initial stages. In subsequent years, such expenditures are stabilized at ~1.4 million. Transportation In Table XXXIII, two million quetzalas have been assigned to transportation for the first year. This includes ~500,000 for surveys and planning. The remaining ~1.5 million can be used to advantage for additional construction work on the Pan American Highway near the Mexican border and for paving the relocated Guatemala City-Escuintla section of Route 3. Transportation expenditures indicated in Table XXXIII for subsequent years assume that such amounts will be avail- able for additional construction, over and above a normal highway budget of four million quetzales. Of the latter, two million quetzales are normally available for construction and two million quetzales for maintenance. The Mission envisages an over-all transportation construc- tion program, as set forth in Chapter V, of approximately ~56 million. The optimum investment schedule, based on estimates of what may be financially and physically possible, provides for the expenditure of ~26 million on additional construction, plus ~12 million from the present annual' high- way budget, making a total of ~38 million. This leaves a deficiency of some ~18 million on the total program. The construction represented by this figure would have to be left until after the completion of the six-year program. The total highway program presented in the report, therefore, repre- sents in reality, a IO-year program. Telecommunications Provision is made in the optimum program for additional expenditures of three million quetzales on certain internal telecommunications for which private enterprise is unlikely to provide funds. These include expansion of the Guatemala City system, rebuilding of the Quezaltenango system, and expansion and modernization of the long distance lines and THE RECOMMENDED I .N VESTMENT PROGRAM 299 plant. It is assumed that, in the first year, @50,000 will be provided from the regular budget for surveys and plans. Pub- lic funds will have to be provided thereafter as follows: 2nd year-@300,000 to extend the Guatemala City sys- tem and to begin the rebuilding of the Que- zaltenango system; 3rd year-@500,000 to continue the program begun in the second year; 4th year-@1,000,000 to complete the extension of the Guatemalan City system and rebuilding of the Quezaltenango system, plus extension and modernization of the long distance plant; 5th and 6th years-@600,000 in each year for extension and modernization of long distance lines and plant. This program does not provide any funds for the local telephone systems in smaller urban centers. It has been assumed that such needs, if sufficiently urgent, may be taken care of by private or local initiative. In any event, !he needs of these small towns would not warrant a sufficiently high priority to include them in a very selective investment program. Power In Table XXXIII, a total of @12 million has been assigned for hydroelectric development as follows: 1st year-@200,000 for surveys and plans of the Samala River (Santa Maria and La Dicha) projects, the Lake Atitlan project and possible projects in the Guatemala City area; 2nd year-@1,000,000, of which @200,000 would be spent on continuation of another plant (probably at construction of another plant (probably at La Di cha) on the Samala River; 3rd year-@2,000,000 to be spent if technical conclu- sions warrant, in initiating a large-scale proj- ect at Lake Atitlan or, alternatively, upon further projects on the Samala River, plus 300 THE ECONOMIC DEVELOPMENT OF GUATEMALA the initiation of construction of power proj- ects in the Guatemala City area; 4th and 5th year-Continuation of projects initiated in the third year ; 6th year-Completion of projects under way at the end of the fifth year. On this basis, no public funds will be available for power development in other parts of the country. Any such develop- ments will therefore have to be financed either from the normal budgetary appropriations or by private interests or municipalities. Public Health Proposed expenditures in the field of health are based on estimates given in Chapter VIII. The sum of ~400,000 per year has been included for DDT-spraying in the malaria eradication program. No allowance has been made for present budget expenditures, because the contributions made in former years by the Inter-American Cooperative Service on Public Health ai'e not being continued. The cost of a minimum permanent sanitation campaign has been estimated at ~1.5 million per year, for 20 years From this has been deducted one million quetzales, which is at present being spent in all fields of preventive medicine. Therefore, the normal additional expenditure under the pro- gram will be ~500,000. For the first year, however, it is felt that not more than an additional ~300,000 could be efficiently used in malaria eradTcation, safe water supply, and related plans and surveys. To these figures has been added a total of ~2.5 million, distributed on the basis of ~500,000 a year for five years, for completion of construction and equipment of the Roosevelt Hospital. III. The Reduced Investment Program The reduced investment program set forth in Table XXXIV is based on the assumption that Guatemala will be '"l ~ t'1 TABLE XXXIV :,:I A ssUM PTION No. 2 : THE REDUCED PROGRAM (with borrowing of 014 million) t'1 (') (in millions of quetzales) 0 a:: Fiscal Years a:: t'1 Total Total z t:, Item 1951-2 1952-3 1953-4 1954-5 1955-6 1956-7 possible desirable t'1 t:, .... Agriculture ... ............... ..... ..... ....... .. .... .9 1.5 1.4 1.4 1.4 1.4 8.0 8.3 z < t'1 Transport ........................................... .4 3.8 5.0 5.0 5.0 5.0 24.2 26.0 Total cost of projects ........... .. ... ..... -- 2.0 -- 7.5 -- 9.7 -- 10.7 -- 10.8 -- 11.8 -- 52.5 -- 59.5 a:: Debt service ...... .......... ..... ................. - - .3 .6 .9 1.1 2.9 Total expenditures ........... -- 2.0 -- 7.5 -- 10.0 -- 11.3 -- 11.7 -- 12.9 -- 55.4 Internal resources available .......... 2.0 4.0 5.0 7.5 10.0 13.0 41.51 Loan ................................................... .. - 3.5 5.0 3.8 1.7 - 14.0 --- 1 Discrepancy due to rounding. - ~ 302 THE ECONOMIC DEVELOPMENT OF GUATEMALA able to borrow from abroad to the extent of 014 million- after attaining at least an equilibrium in her balance of pay- ments-and that such a loan will become available by the end of 1952. Reductions from the optimum program have been effected as explained below. Agriculture In the first year the optimum agricultural program has been reduced by 0300,000. This means a reduction of additional expenditures on small agricultural credit, 0150,000; irrigation, 0100,000; seeds, fertilizers, fungicides, 050,000. Transportation There is no basic alteration of the optimum transportation program: In the first year, however, only 00.4 million could be provided for surveys, abandoning immediate additional expenditures on the Pan American Highway and Route No. 3. In the second year, a reduction of 00.2 million would be obtained by postponing the construction of an additional warehouse in Puerto Barrios. Telecommunications The optimum program of three million quetzales in this field is reduced by 00.8 million over the period of six years. This involves a postponement in rebuilding the Quezaltenango system, and curtailment of the work on the long distance plant. Power The power program is left intact at 012 million, with a reduction of 0100,000 in the amount spent on surveys in the first year, to be compensated in following years. Irrigation Only one million instead of two million quetzales is made available for irrigation. Health A substantial reduction of 03.1 million of health expendi- tures is involved. It is necessary to eliminate all expenditures THE RECOMMENDED INVESTMENT PROGRAM 303 on the Roosevelt Hospital, and to spend in the first year only ~200,000 instead of ~500,000 on the permanent sanitation campaign. IV. The Pay-As-You-Go Program In the event that no foreign borrowing could be arranged, Guatemala would have to rely entirely on new resources coming from the budget, created as a result of the recom- mended reforms in taxation, public finance and operation of the Fincas Nacionales. On this basis, only ~41.5 million would be available for development expenditures during the entire six-year period, compared to the total of ~59.5 million under the optimum and @52.5 million under the reduced program. Agriculture With respect to agriculture, the program of Assumption No. 2 has been maintained because of the essential character of this sector of the economy. A high priority has been given to expenditures for agricultural machinery, research equip- ment and breeding stock during the first year. Transportation In the field of transportation, a drastic reduction will be necessary for the first three years, as compared with the optimum investment. The sum of @400,000 has, however, been assigned to the first year for surveys and the preparation of plans. In the last two years it has been possible to assign the maximum additional amount of five million quetzales to transportation. Telecommunications Any expenditures for telecommunications, in the first four years, will have to be financed from the current budget. In the last two years ~900,000 are allocated; most of this will probably be needed for over-all planning and for expansion of the Guatemala City telephone system. w TABLE XXXV $2 AssUMPTION No. 3: THE PAY-As-You-Go PROGRAM (no borrowing) (in millions of quetzales) --- Fiscal Years Total Total Item 1951-2 1952-3 1953-4 1954-5 1955-6 1956-7 possible desirable ..,i ~ t'1 Agriculture ... .. ...... ..... ........ ..... ... ............. .9 1.5 1.4 1.4 1.4 1.4 8.0 8.3 t'1 (i 0 Transport ........ .. ..... ........ .. ........... ........ .... .4 1.8 2.9 4.0 5.0 5.0 19.1 26.0 z 0 - ... ~ Telecommunications ..... ... ....... ...•:.......... - - - .3 .6 .9 3.0 (i i::, t'1 Power ................. ........... .. ... ....... .......... .... .1 .1 .I 1.5 2.5 4.1 8.4 12.0 < t'1 r 0 Irrigation ......... ... ..... ... ......... ...... ..... ... .. .. - - - - - 1.0 1.0 2.0 "ti ~ t'1 Health .......... ...... ...... .. ..... ..... ..... ... .... .. .... .. .6 .6 .6 .6 .8 .9 4.1 8.2 z Total ..... .. ...... .. .... .... ..... ... -2.0 - 4.0 - 5.0 -7.5 -- 10.0 -- 13.0 -- 41.5 -- 59.5 ..,i 0 "l C1 c > ..,i t'1 ~ > r > THE RECOMMENDED INVESTMENT PROGRAM 305 Power In the field of power development, it has been found possible to make provision only for detailed studies during the first three years, for which ~100,000 per year are assigned. Construction would not begin until the year 1954-55, with substantial increases during the final two years. •Irrigation No funds could be spared for major 1rngation projects until the final year of this program, when one million quetzales would become available. Health Expenditures for completion of the Roosevelt Hospital were eliminated in the reduced program. Further drastic re- ductions in public health expenditures would be necessary in the first four years. Even within the very limited program possible, malaria control and sanitation work in the Pacific lowlands should be maintained at a comparatively high level, since they are essential for the increased production of agri- cultural foodstuffs and raw materials in that region. It is only too apparent, from a comparison between the "possible" and the "desirable" expenditures shown in Table XXXV, that the development program would have to be significantly curtailed if no financial aid could be obtained. Both the highway and power construction programs would suffer seriously. ' The three programs presented, together with their assump- tions, are intended to represent no more than rough bases for refinement. The Mission hopes, nevertheless, that they can serve as a starting point in the Government's own efforts toward sound economic development and a higher level of living for the people of Guatemala.