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05. Banco Mundial 2008 Guatemala Investment Climate Assessment Volume 1-2

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					Public Disclosure Authorized



                               Report No. 47193-GT


                               Guatemala
                               Investment Climate Assessment
                               (In Two Volumes) Volume I

                               June 26, 2008
Public Disclosure Authorized




                               Finance and Private Sector Unit
                               Poverty Reduction and Economic Management Unit
                               Latin America and the Caribbean Region
Public Disclosure Authorized
Public Disclosure Authorized




                               Document of the World Bank
                                                  Programa de Evaluacidn del Sector
FSAP       Financial Sector Assessment Program
                                                  Financiero
           Foundation for Guatemalan              Fundaci6n para el Desarrollo de
FUNDESA
           Development                            Guatemala
GDP        Gross Domestic Product                 Product0 Nacional Bruto
GE         General Electric                       General Electric
GSP        General System o f Preferences         Sistema Generalizado de Preferencias
GWh        Gigawatt Hour                          Hora Gigavitio
           Hazardous Analysis Critical Control    Peligrosos Anilisis de Puntos Criticos
HACCP
           Points                                 de Control
ICA        Investment Climate Assessment          Evaluacion de Clima de Inversiones
           International Civil Aviation           Organizaci6n de Aviaci6n C i v i l
ICAO
           Organization                           Internacional
           Information and Communications         Tecnologias de Informaci6n y
ICT
           Technologies                           Comunicaci6n
                                                  Instituto Guatemalteco de Seguridad
IGSS       Guatemalan Social Security Institute
                                                  Social
IMF        International Monetary Fund            Fondo Monetario Internacional
           National Institute for Technical
INATEC                                            Instituto Nacional Tecnol6gico
           Training
INDE       National Electrification Institute     Instituto Nacional de Electrificacibn
INE        National Statistics Institute          Instituto Nacional de Estadistica
INFOM      Municipal Development Institute        Instituto de Foment0 Municipal
INTECAP    Technical Training Institute           Instituto TCcnico de Capacitacidn
INVEST     Invest in Guatemala                    Invertir en Guatemala
IS0        International Standards                Estindares Internacionales
           United States International Trade      Comisi6n de Comercio Internacional
ITC
           Commission                             de Estados Unidos
kWh        Kilowatt Hour                          Hora Kilovatio
LAC        Latin America and the Caribbean        America Latina y el Caribe
           Ministry of Agriculture, Livestock,    Ministerio de Agricultura, Ganaderia, y
MAGA
           and Food                               Alimentacih
           Ministry o f Communications,           Ministerio de Comunicaciones,
MCIV
           Infrastructure, and Housing            Infraestructura, y Vivienda
           Micro, Small, and Medium
MSME                                              Micro, Pequefia, y Mediana Empresa
           Enterprise
Mw         Megawatt                               Megavatios
NGO        Non-Governmental Organization          Organizaciones N o Gubermentales
           Organization for Economic              Organizacih de Desarrollo y
OECD
           Cooperation and Development            Cooperacih Econ6mica
           Financial Private Development          Organizaciones Privadas de Desarrollo
OPDFs
           Organizations                          Financiero
PPA        Power Purchase Agreement               Acuerdo de Compra de Energia
           Office o f National Competitiveness
PRONACOM                                          Programa Nacional de Competitividad
           Promotion
R&D        Research and Development               Investigacih y Desarrollo
                                                   Superintendencia de Administracibn
SAT      Tax Administration Superintendency
                                                   Tributaria
SME      Small and Medium Enterprise               Pequefia y Mediana Empresa
TEU      Twenty-foot Equivalent Unit               Unidad Equivalente de Veinte-pies
TFP      Total Factor Productivity                 Productividad Total de Factores
         United Nations Conference on Trade        Conferencia de Naciones Unidas de
UNCTAD   and Development                           Comercio y Desarrollo
WEF      World Economic Forum                      Foro Econ6mico Mundial
WTO      World Trade Organization                  Organizacih Mundial de Comercio




                    Country Director   : Laura Frigenti
                    Sector Director    : M a r c e l 0 Giugale
                    Sector Manager     : Lily L. Chu
                    Task Manager       : Stefka Slavova




                                                                                   ...
                                                                                    l
                                                                                   ll
                                  CLIMATEASSESSMENT
                              INVESTMENT
                      GUATEMALA

ACKNOWLEDGMENTS  ........................................................................................................                                                V
EXECUTIVE SUMMARY .....................................................................................................                                                  VI
CHAPTER 1 OVERALL INVESTMENT CLIMATE FINDINGS...................................
         .                                                                                                                                                                1
   1.         INTRODUCTION  ................................................................................................................................              1
   2.         MACROECONOMIC      PERFORMANCE                   ...............................................................................................            3
   3.         GOVERNANCE REGULATION ................................................................................................
                           AND                                                                                                                                            8
   4.         INFRASTRUCTURE    ..........................................................................................................................               12
   5.         SKILLS AND TECHNOLOGY              ..........................................................................................................              14
   6.         ACCESS FINANCE
                      TO             .....................................................................................................................               16
   6.         FIRM PRODUCTIVITY      .....................................................................................................................               17
   7.         CONCLUSIONS ................................................................................................................................               18
CHAPTER 2            .     TRADE AND THE EARLY IMPACT OF CAFTA O N FIRMS                                                                                 ...............19
   1.         INTRODUCTION..............................................................................................................................     19
   2.         WHAT FREETRADE      OFFERS GUATE                  IZ.WL;I ................................................................................     19
   3.         EARLYEXPERIENCEH CAFTA ............................................................................................
                                   W  I
                                      T                                                                                                                      21
   4.         THEPERSPECTIVE OF GUATEMALAN                        EXPORTERS              ................................................................... 31
   5.         RECO~LMENDATIONS:       IMPROVING COMPETITIVENESS IN THE AGE OF CAFTA ................34

CHAPTER 3            .     FIRMS’ ACCESS T O INFRASTRUCTURE SERVICES                                                                      ...........................    36
   1.         INTRODUCTION   .............................................................................................................................. 36
   2.         PHYSICAL INFRASTRUCTURE FOR TRADE          ....................................................
                                              AND TRANSPORT                                                                                                     37
   3.         TRANSPORT RELATED           SERVICES ................................................................................................. 41
   4.         TRADE FACILITATION         ................................................................................................................... 44
   5.         POLICY RECOMMENDATIONSON TRANSPORT LOGISTICS                          AND                           ............................................. 45
   6.         ELECTRICITY.................................................................................................................................. 46
   7.         POLICY RECOhLVENDATIONSON ELECTRICITY                                   ....................................................................... 56
CHAPTER 4 .                GOVERNANCE IN GUATEMALA                                               ...........................................................             57
   1.             ..............................................................................................................................
              INTRODUCTION                                                                                                                                               57
   2.         RED TAPEAND CORRUPTION......................................................................................................                               58
   3.            ...............................................................................................................................................
              LAND                                                                                                                                                       62
   4.         COURTS AND CONTRACT ENFORCEMENT                                       ..................................................................................   63
   5.         CRIME AND INSECURITY...............................................................................................................                        64
   6.                                       .....................................................................
              POLICY RECOMMENDATIONSGOVERNANCE
                                  ON                                                                                                                                     68
CHAPTER 5            .     FIRMS’ ACCESS T O FINANCIAL SERVICES                                                         .........................................        71
   1.             ..............................................................................................................................
              INTRODUCTION                                                                                                                                               71
   2.         ACCESS FINANCE
                   TO       .....................................................................................................................                        76
   3.         OBSTACLES AND POLICY RECOMMENDATIONS........................................................................                                               80
RECOMMENDATIONS SUMMARY TABLE                                  .....................................................................                                     84
BIBLIOGRAPHY....................................................................................................................                                         89



                                                                                                                                                               iv
                               Acknowledgments


The Second Guatemala Investment Climate Assessment was written by a team led by
Stefka Slavova. The team comprised Veronica Alaimo, Michael Goldberg, Paola
Granata, Tatsuji Hayakawa, Fernando Lecaros, Yira Mascar6, Ana Maria Oviedo,
Thomas Haven, Bujana Perolli, Susana Shchez, Naotaka Sawada and Jordan Schwartz.
Jorge Pefia did the productivity analysis. Wolfgang Mostert prepared a background paper
on the energy sector in Guatemala. Otto Samayoa prepared a background paper on the
early effects o f DR-CAFTA. Jorge Meza was in charge o f survey implementation.
Monica Rivero, M i c k y Ananth, Patricia Melo, Eric Palladini and Jane Hwang provided
editorial assistance.
Lily Chu provided overall guidance and advice throughout the preparation o f the report.
Useful comments were also received from Jane Armitage, David Gould, JosC Luis
Guasch, Pablo Fajnzylber, Humberto L6pez, Neeta Simr, Mario Marroquin and Waleska
Garcia-Corzo.
A presentation o f preliminary survey findings was delivered to representatives o f the
Government and the private sector in July 2007. Feedback was received from the
Ministries o f Finance and Economy, FUNDESA, the National Competitiveness Program
(PRONACOM), and the National Competitiveness Council. The team i s particularly
grateful to the Commissioners for Competitiveness Miguel Ferngndez and Emmanuel
Seidner for all their support and inputs during the preparation o f the report.
Peer reviewers are Mary Hallward-Driemeier and Paulo Correa.




                                                                                           V
                                   Executive Summary


1.         Guatemala has achieved substantial progress in improving i t s investment
climate since 2004. This has been reflected in improvements in Doing Business indicators
(World B a n k 2006, 2007) a n d the 2007-2008 G l o b a l Competitiveness R e p o r t (World
E c o n o m i c Forum 2007) rankings. For instance, Guatemala ranked a m o n g the top 10 Doing
Business reformers in 2005-2006 out o f 175 countries worldwide a n d i t was the top
reformer in Central America in 2006-2007. Firm perceptions about m a j o r obstacles also
i m p r o v e d substantially in recent years. Compared with 2003, far fewer f i r m s considered
corruption, macroeconomic instability, crime, i n f o r m a l competition, tax rates, access to
finance, a n d courts to b e m a j o r or severe obstacles according to the World Bank's 2007
Enterprise Survey.

2.        Despite these achievements, Guatemala continues to face significant
challenges. Guatemala's overall Ease o f Doing Business ranking i s s t i l l relatively low-1 14*
out o f 178 countries-and     i t falls w e l l b e h i n d the rankings o f comparator countries such as
El Salvador (69), Nicaragua (93), a n d Panama (65). E c o n o m i c growth in Guatemala over the
past 25 years has been very modest, even by L a t i n American standards. P e r capita GDP
growth between 1980 a n d 2005 averaged only 0.2 percent p e r year, compared with between
1.2 a n d 2.2 percent for Costa Rica a n d Panama.
3.       Productivity and export growth has been disappointing. Guatemala h a d negative
growth in output p e r worker between 1980 a n d 2003. In large measure, t h i s was caused by a
decrease in total factor productivity (TFP), although a reduction in physical capital also made
a small negative contribution. E d u c a t i o n levels-the third determinant o f output p e r
worker-improved,       partially offsetting the negative changes in TFP a n d physical capital.
Export performance has not k e p t up with comparator countries such as El Salvador, Costa
Rica, a n d Chile. During the 1960s, Guatemalan exports o f goods a n d services averaged 15
percent of GDP, a n d t h i s percentage has barely changed since (it averaged 16 percent in
2006). In contrast, Chilean exports grew from a n average o f 14 percent o f GDP in the 1960s
to a n average o f 36 percent during the 2000s. Moreover, Guatemalan exports are dominated
by basic commodities such as coffee, sugar a n d bananas, m a k i n g t h e m m o r e vulnerable to
external demand a n d price shocks.

4.        T h e Central America Free Trade Agreement (CAFTA) brings new
opportunities as well as competitive pressures. With i t s export mix, tourism, service
sector, a n d potential for foreign direct investment, Guatemala has a lot to offer-and a lot to
lose if i t fails to invest in the systems, technology a n d worker s k d s required in the n e w world
o f free trade. T h e f i r s t twelve months o f CAFTA have begun to yield encouraging results as
w e l l as some structural weaknesses that need to b e addressed. M a n y Guatemalan f i r m s have
begun to adapt to the m a j o r changes represented by CAFTA, both in terms o f finding
                                         n
export market niches and investing i I S 0 a n d other certifications, but they l a g far b e h i n d
m a n y regional competitors. W h i l e FDI a n d exports have increased, the trade gap persists,
with imports jumping significantly. T h e easy access to markets in the U n i t e d States, Central
America, and the D o m i n i c a n Republic i s balanced by a n increase in foreign penetration o f




                                                                                                      vi
the national market. T h e benefits to the country c o u l d include employment, w o r k e r training,
management know-how, a n d access to n e w technologies. T h e risks to the country are clear:
as some sectors a n d regions lose their share o f the national markets, unemployment m a y
grow.

5.       T o be competitive, Guatemala needs to aggressively tackle reforms in 3 main
areas: infrastructure, governance, and access to finance. These areas have been
identified through analysis of a variety o f data sources, including Doing Business in&cators,
the G l o b a l Competitiveness Report, a n d Enterprise Surveys. Besides data on firm
perceptions, the Enterprise Surveys were used for cross-country benchmarking a n d a n
econometric analysis o f the drivers of firm productivity. For instance, the econometric
analysis found that r e d tape, c o r r u p t i o n a n d crime variables have the highest relative effect
on average firm productivity (5 1 percent). Infrastructure-related variables h a d a cumulative
contribution o f 17 percent-the             second highest (see Figure 1.7). Skills, technology adoption,
                                                                                                 n
a n d i n n o v a t i o n are also significant areas for improvement, but they are not covered i d e p t h
in t h i s r e p o r t (see instead World B a n k 2008).
6.          Reforms in these areas, as well as other targeted initiatives, will better
position Guatemala to take advantage o f CAFTA. Investments i roads, ports, a n d     n
                                                                              n
airports would facilitate access to overseas markets. Reductions i c o r r u p t i o n a n d crime a n d
i m p r o v e d electricity service would reduce costs for exporters a n d m a k e t h e m m o r e
competitive internationally. Reducing r e d tape for imports a n d exports-e.g.,           through a one-
stop shop for required licenses-would help as well. Developing the national quality system
would make i t easier for f i r m s to attain the p r o d u c t quality levels required by export markets.
Quality system improvements relate to standards, firm certifications (e.g. I S 0 a n d HACCP),
laboratory accreditation, metrology, a n d outreach to specific sectors with a n export record or
export potential. Strengthening r u r a l competitiveness and outreach programs to small a n d
m e d i u m f i r m s can also b e a n effective way to build export capacity a n d encourage internet
use, foreign licensing, n e w p r o d u c t a n d service development, etc.

7.        T h e Government should also build o n what has been working in trade
promotion. CAFTA guides for SMEs, the alliance with INTECAP for w o r k e r training, the
                                                                                 n
increasingly effective investment promotion approach, a n d investments i the development
o f Guatemala’s i m p o r t a n t tourism assets all contribute to a n i m p r o v e d outlook. T h e
leadership role o f the Commissioner o f Investment a n d Competitiveness a n d the M i n i s t r y o f
E c o n o m y should b e maintained, as w e l l as the strong operational leadership o f the office of
the N a t i o n a l Competitiveness Promotion (Pronacom). A final recommendation related to
trade i s to review the effects o f the w h i t e c o r n exclusion in CAFTA in light o f the growing
food price surge locally a n d internationally. O p e n trade in w h i t e c o r n c o u l d h e l p the majority
o f low i n c o m e households, especially indigenous communities.
Infrastructure
8.      Road, port, and airport quality could all be improved, with private sector
                                                                     n
participation playing a key role. Despite the progress made i r o a d density, r o a d quality
has declined. Investments are needed to rehabilitate existing roads a n d to build n e w roads to
h k remote areas. Port capacity a n d efficiency need to anticipate the increasing demand from
importers and exporters and continued investment i software a n d port staff training i s
                                                           n
needed. For both ports a n d airports, the legal/institutional framework a n d private sector
participation c o u l d b e improved. Public expenditure levels have not been enough to keep up
with infrastructure needs, therefore possible ways to attract private investment should b e
explored.

9.        Electricity subsidies should be targeted in a more efficient manner and the
social tariff system should be reconsidered. E l i m i n a t i n g the social t a r i f f altogether a n d
replacing it with social support p a i d to low-income families by municipalities would make
socio-economic sense. I t would i m p r o v e targeting (reducing the number o f beneficiaries)
a n d also i m p r o v e the financial situation o f the national electricity company (INDE), thereby
enabling i t to accelerate planned investments in transmission a n d hydropower.

10.   More effective mechanisms to promote investments in renewable energy
should be adopted. T h e impact o f the Incentive L a w on N e w Investments in Renewable
Energy a n d i t s regulation has been limited: most investments are very attractive without the
added benefits. A local community tax on hydropower that provides local communities with
i m p r o v e d financial benefits would serve as a n effective instrument to accelerate investments
in hydropower.

Governance
11.           Guatemala should continue reforming i t s regulation o f private business
activity-especially in firm registration, construction permits, and tax and customs
administration. A c t i o n plans that have already been developed by the country’s Credit R i s k
                            e
Task Force (Mesa d Riesgo delPais) should b e implemented in the short term. T h e one-stop
shop for firm registration should b e replicated to municipalities outside o f Guatemala City.
I n t r o d u c i n g online submission o f tax declarations a n d m a k i n g it possible to pay taxes online
c o u l d i m p r o v e tax administration. Customs c o u l d b e i m p r o v e d by streamhung
documentation a n d introducing performance incentives for customs officials.

12.        T h e government should attack corruption directly. Building on current efforts
c o u l d go a long way to further reducing the incidence of corruption. O n e example i s the
Public Sector Modernization a n d Management Project, w h i c h works to i m p r o v e government
procurement practices, c i v i l service performance a n d incentives as w e l l as fiscal
management. Strengthening institutions such as the judiciary a n d the police c o u l d also h e l p
reinforce c o n t r o l mechanisms at the national a n d municipal levels.

13.     A concerted, long-term effort i s needed to strengthen contract enforcement
and the judiciary. T h e Justice Sector Modernization Project underway with World B a n k
assistance should h e l p with c o u r t case management, training o f judges, improving c o u r t
infrastructure a n d performance a n d incentive schemes for judges. To reduce times to case
disposition, backlogs should b e dealt with. O t h e r areas o f judicial r e f o r m would include a
review o f the Civil Procedure Code a n d alternative dispute resolution mechanisms, such as
mediation.

14.   T o lower crime, the strategy should be to emphasize preventive measures and
support greater police enforcement. T h e quality o f the police a n d the criminal justice
system c o u l d b e improved, with targeted interventions to reduce crime in high-risk
communities in t h e short run, a n d work t o w a r d a h u m a n development strategy w h i c h aims
to l o w e r the underlying tendency for criminality in the m e h u m - to long run. M a n y o f the
targeted short-term interventions i n v o l v e working with youth-at-risk groups, gang members
a n d strengthening self-policing by communities. A n u m b e r o f Guatemalan NGOs have
programs workmg with gang members to disarm a n d find employment.




                                                                                                          Viii
Finance
15.      Creditor     rights and insolvency proceedings should be strengthened.
E n h a n c i n g the institutional framework for the enforcement o f creditor rights a n d insolvency
proceedings would foster credit growth, decrease i t s cost a n d increase the efficiency o f
collateral by increasing the probability o f recovering funds in the event o f default.

16.     Sources of financing that can address the specific needs of MSMEs should be
promoted. Currently external financing i s c o m i n g almost exclusively from companies
(through trade credit) a n d private banks. Promoting access for MSMEs would require
encouraging the development o f non-banking sectors, including micro-finance institutions,
capital markets, a n d leasing a n d factoring f i r m s . Specialized legal-regulatory frameworks
would have to b e developed for both leasing a n d factoring to grow.
17.     T h e growth o f commercially oriented microfinance institutions (MFIs) should
be promoted through an adequate regulatory and supervisory framework. Larger
MFIs are already mature enough to b e m o v e d into a regulated environment to preserve a n d
reinforce their development. T h i s would encourage prudent accounting a n d risk
management practices among larger institutions a n d enhance their access to long-term
commercially priced funding.

18.     Accounting and auditing practices, financial information infrastructure, and
regulatory norms for movable collateral should be strengthened. Currently, there i s
                                                                               n
insufficient financial i n f o r m a t i o n about f i r m s due to weaknesses i accounting a n d auditing
practices a n d incomplete databases o f credit registries a n d credit bureaus. Adherence to
credit bureaus i s typically voluntary-except             for t h e system o f the Superintendency o f Banks
(S1RC)-and,         therefore, i n f o r m a t i o n tends to b e partial. To increase the availability of
accurate financial i n f o r m a t i o n on debtors it would b e convenient, a m o n g other things, to
p r o v i d e legal backing to the adoption o f international financial standards. This would
increase transparency a n d ensure systematic reporting o f debtors’ financials to t h e
Superintendency o f Banks. Greater acceptance o f movable collateral by financial i n s t i t u t i o n s
would help u n l o c k access to credit for enterprises, especially MSMEs. To increase the
viability o f their c r e d t proposals i t i s i m p o r t a n t to have the appropriate legal-regulatory
framework for movable collateral a n d a n efficient judicial system to execute it.
         Chapter 1.                  Overall Investment Climate Findings


1.       INTRODUCTION

1.1   This chapter reviews the investment climate in Guatemala using data from
the Enterprise surveys of 2003 and 2007 and complementary sources such as the
World Bank Doing Business reports, World Economic Forum (WEF) data, and other
sources. I t compares the results o f the two Enterprise surveys on investment climate in the
country. I t further provides a benchmark for Guatemala’s investment climate indicators-
governance       and      regulation,     finance,  infrastructure  (energy,     transport,    and
telecommunications) a n d s k i l l s a n d technology-compared    to the relevant comparator
countries in L a t i n America (Costa Rica, El Salvador, Honduras, Nicaragua, Panama, Bolivia,
Chile). In addition, Guatemala i s compared with Mauritius (with trade a n d tourism-based
growth) a n d S r i L a n k a (with manufacturing-led growth). Finally t h i s a n d the following
chapters present selected variations o f the investment climate indicators within Guatemala
accordmg to firm size, economic sector a n d region.

1.2    One of the main findings of the 2004 Guatemala Investment Climate
Assessment (which was based on the 2003 Survey) was the failure to continue with
the business climate reforms initiated in the 1990s. In particular, the r e p o r t identified
unnecessary regulations that were causing delays a n d increasing f i r m s ’ costs, harassment o f
the private sector through i n f o r m a l payments, inefficient courts, a n d a high incidence o f
crime. T h e recommendations made a t that t i m e included: (1) to continue efforts to
modernize the judicial system; (2) to review business operating regulations; a n d (3) to
streamline administrative processes by eliminating unnecessary regulations.

1.3    Since 2004, Guatemala has achieved substantial progress in improving i t s
environment for private business. This has been captured by different international
benchmarking publications. O v e r the past f e w years, Guatemala recorded a notable
improvement in i t s ranking on the Doing Business indicators (World B a n k 2006, 2007) a n d
the 2007-2008 G l o b a l Competitiveness Report (World E c o n o m i c Forum 2007). For
instance, Guatemala ranked a m o n g the top 10 reformers i 2005-2006 out o f 175 countries
                                                               n
                                                   n
worldwide (and a m o n g the top 3 reformers i L a t i n America a n d the Caribbean) according
to the Doing Business 2007 report. Although i t was not a top-10 reformer in the Doing
Business 2008 report, the r e p o r t shows that between M a y 2006 a n d June 2007 Guatemala
introduced 5 n e w reforms, b e c o m i n g the top reformer i Central America’. Similarly, on t h e
                                                             n



  In addition to the usual Central American comparator countries (Honduras, El Salvador, Nicaragua, Costa
Rica and Panama) Chile, Mauritius and Sri Lanka were chosen because: (1) Chile has been a leader in
economic development in Latin America for the past 25 years; (2) Mauritius serves as an example o f how
trade and openness can contribute to growth; and (3) Sri Lanka doubled i t s per capita income between 1980
and 2005 by growing manufacturing exports.
2 In recognition o f the Government o f Guatemala’s commitment to reform, former hlinister o f Finance, Hugo
Beteta, was invited to the inaugural D o i n g Business Reformers’ Club meeting in Washington D C in April 2007.



                                                                                                              1
WEF’s G l o b a l Competitiveness Index, Guatemala i m p r o v e d in the past two years. T h e
2007-2008 index ranks the country 87* out of 131 countries ~ o r l d w i d e . ~

1.4     Despite these achievements, Guatemala continues to face significant
challenges. For instance, i t ranks only 114* out o f 178 countries on the overall Ease of
Doing Business index, w h i c h i s better t h a n Costa Rica (115), Honduras (121), a n d Bolivia
(140), but substantially worse than the rest o f the comparator countries included in Table 1-
1. A similar pattern i s observed in the G l o b a l Competitive I n d e x 2007-2008. In that index,
Guatemala outperforms only Bolivia (105) a n d Nicaragua (111) a m o n g the same comparator
countries.

                     Table 1.1: International Investment Climate Rankings


                         Number of positive              Ease of Doing            Global Competitiveness
                         (negative) reforms              Business 2008            Index 2007-2008 (rank
                             2006-2007                 (rank out of 178)               out of 113)


      Guatemala                      5                          114                            87
      Bolivia                        0                          140                            105
      Chile                          0                          33                             26
      Costa Rica                     1                          115                            63
      El Salvador                    1                          69                             67
      Honduras                       4                          121                            83
      Mauritius                      6                          27                             60
      Nicaragua                      0                          93                             111
      Panama                         0                          65                             59
      Sri Lanka                    2 (1)                        101                            70
      Source: W o r l d Bank D o i n g Business in 2008; W o r l d Economic Forum, Global
      competitiveness Report 2007-2008



1.5   This report utilizes newly-available data from f i r m s collected in 2007 through
the Guatemala Enterprise Survey. T h e Enterprise Surveys reflect both the subjective
,perceptions of entrepreneurs a n d objective assessments o f the importance of various
 investment climate constraints-for       example, in terms o f the monetary costs that they
 represent for f i r m s . This complements the Doing Business indicators, w h i c h measure the
 time, cost a n d procedures associated with different areas o f government regulation of
 businesses as per laws a n d regulations in effect. T h e survey presents f i r m s ’ perceptions,
 w h i c h m a y b e biased by recent events reported in the media, by recent macroeconomic
 performance, or by other cultural factors. T h e perceptions m a y also reflect specific cultural
 and socioeconomic backgrounds o f firm managers. For instance, managers o f f i r m s that
 concentrate on local as opposed to national or international markets m a y lack the necessary

3 T h e n u m b e r o f countries covered by the G l o b a l Competitiveness I n d e x varies f r o m year to year, so
comparisons across times are not straightforward. T h e WEF provides a comparison between the last t w o years
                                                        n
available. Considering the same countries included i t h e 2006 report, Guatemala i m p r o v e d f r o m 91St to 81st
position.



                                                                                                                    2
benchmarks to judge the severity o f the problems existing in their cities or provinces, a n d
compare t h e m to national or international best practices. Bearing these caveats in mind, firm
managers’ perceptions provide a n i m p o r t a n t assessment o f the importance o f different
obstacles to business activity. These are t h e n weighted against m o r e objective measures
w h i c h derive from the Enterprise Surveys themselves.

1.6       Overall perceptions of the business environment improved substantially
between 2003 and 2007. For example, corruption, the top constraint i both years, felln
from 81 percent to 61 percent o f f i r m s that found i t to b e a m a j o r obstacle (see Figure 1.1).
C r i m e showed a n even m o r e impressive improvement-from              80 percent in 2003 to 37
percent in 2007. Macroeconomic instability, i n f o r m a l competition, a n d access to finance also
i m p r o v e d substantially. Of the 15 measurements used, only electricity, transport, a n d access
                                                                                          n
to l a n d worsened between 2003 a n d 2007. Electricity was not a m a j o r concern i 2003, but
now appears as the second m a j o r obstacle. T h e rest o f t h i s chapter reviews t h e perceptions
i m o r e detail a n d seeks to establish whether t h e general i m p r o v e m e n t i s matched by
 n
improvements in m o r e objective, quantitative measures.

        Figure 1.1: Guatemala: Perceptions of firms have improved in nearly all areas
         (percent of firms that consider each area to be a major or severe obstacle)
                            Corruption
                            Electricity
             Macroeconomic instabihty                                        61
                                Crime                                                   80
                  Informal competition
                             Tax rates
     Inadequate education of wor!dorce
                    Tax administration
                             Transport
                    Access to Finance
                        Access to land
         Customs & Trade Regulations
                  Licensing & Permits
                                Courts
                     Labor regulations

                                          0       30                    60

       Source: Enterprise Surveys 2003 and 2007

2.                    PERFORMANCE
             MACROECONOMIC

1.7         Guatemala’s economic growth performance over the past 25 years has been
very modest, even by Latin American standards. Per capita GDP growth between 1980
and 2005 averaged only 0.2 percent p e r year-a          very low rate compared to the 0.7 percent
for the region as a whole, and the 1.2 to 2.2 percent for Costa Rica, Panama a n d the
D o m i n i c a n Republic, a n d the 4.2 a n d 3.0 percent in Mauritius a n d S r i Lanka, respectively.
                                 n
Average per capita GDP i Guatemala i s w e l l b e l o w the Central American average a n d the
overall L a t i n American regional average. Indeed, t h e gap between Guatemala’s p e r capita
GDP a n d that of the rest o f Central America widened between 1980 a n d 2005 (from


                                                                                                       3
US$375 in 1980 to US$821 in 2005). Likewise, while in 1980 Mauritius h a d about the same
level of per capita GDP as Guatemala, by 2005 i t s i n c o m e h a d triple, a n d Guatemala's h a d
stayed practically the same. Sirmlarly, S r i Lanka's p e r capita GDP, although less than
Guatemala's, m o r e than doubled in the same p e r i o d (see Figure 1-2).

                         Figure 1.2: Per Capita GDP Comparisons, 1980-2005
               I        5000

                        4500

                        4000

                        3500
                   VI
                   64




                   8 11
                        3000
                                                         I   -
                                                                                                     I
                        2500
                   2
                   d
                   .

                   2 2000
                   6
                        1500




                                l+Central   America +Guatemala   +LAC   +Mauritius   *Sri   Lankal

                        Source: World Bank World Development Indicators 2006

1.8         Guatemala-like most of LAC-recorded negative growth rates of output per
worker between 1980 and 2003. T h e annual average was negative 0.5 percent p e r year. Only
Costa Rica a n d Panama registered positive average growth o f output p e r w o r k e r during the
same period. In contrast, Guatemala, El Salvador a n d Honduras all h a d negative growth per
w o r k e r o f about 0.5-0.6 percent, a n d Nicaragua's average rate was a negative 2.2 p e r ~ e n t . ~

1.9         In large measure, the negative growth in output per worker in Guatemala was
caused by an average decrease in total factor productivity (TFP) of 0.7 percent
between 1980 and 2003. Changes in physical capital made a small negative c o n t r i b u t i o n o f
0.1 percent, while improvements in education levels partially offset the negative effects o f
TFP a n d physical capital-with a 0.3 percent positive average annual contribution to growth
in output per worker over the same period. By comparison, positive growth in output p e r
w o r k e r in Costa Rica a n d Panama was largely due to higher growth in physical capital, while
the high growth rates o f output p e r w o r k e r in Mauritius, S r i L a n k a a n d Chile, resulted in
great p a r t from increases in TFP (e.g., a 3.4 annual average growth in output p e r w o r k e r in
Mauritius over the same p e r i o d can b e decomposed into a 2.3 percent average growth in
TFP, 0.8 percent o f growth in physical capital, a n d 0.3 growth in education). In Chile, TFP
increases explained about h a l f o f the growth in output p e r worker. In S r i L a n k a the driving
                                                                                           n
factor was growth in physical capital (explaining about two-thirds o f growth i output p e r
worker) (Figure         1.3).



4   Based on data from Bosworth and Collins (2003).



                                                                                                         4
           Figure 1.3: Components of Growth in Output per Worker 1980-2003


                       IPhysical Capital




          Source: Author's calculations using an updated database from Bosworth and Collins
          (2003). The data show the average annual percentage point contribution o f total factor
          productivity (TIT), education and physical capital to growth in output per worker. The
          numbers i n white squares next to the circle icons denote the compound annual growth
          rate o f output per worker between 1980 and 2003.


1.10 Export performance in Guatemala has been disappointing-with                          lower
growth in exports between 1980 and 2005 than in El Salvador, Costa Rica, Chile,
Mauritius or Sri Lanka. During the 1960s Guatemalan exports o f goods a n d services
averaged 15 percent o f GDP. During the n e x t decade, exports grew to 21 percent o f GDP.
Since 1980 t h i s share has fallen to 16-18 percent of GDP. In contrast, Chilean exports
averaged 14 percent o f GDP in the 1 9 6 0 ~ ~ doubled within the n e x t three decades, a n d
                                                but
averaged 36 percent o f GDP between 2000 a n d 2005 (as opposed to 18 percent in
Guatemala during the same period. In Mauritius, exports of goods a n d services also
increased the share o f GDP, from 46 percent in the 1970s to 60 percent in the 1990s a n d
between 2000 a n d 2005. Figure 1-4 shows that Guatemalan export growth was very modest
 n
i the 1990s, a n d has stagnated since 2000. A p a r t from disappointing export growth, the
                                n
v o l u m e of realized exports i real terms i s low. Indeed, countries with substantially l o w e r
populations a n d economies, such as El Salvador a n d Mauritius, generated about the same
volume of exports in 2005 (in real terms) as Guatemala.

1.11 Basic commodities such as coffee, sugar and bananas. These constituted
roughly 30 percent o f t o t a l merchandise exports in 2005 (Figure 1-4). T h e y o f f e r less value
added a n d are susceptible to external demand a n d price shocks. Since the mid-1990s maqzda
exports (based on apparel assembly in the Free Trade Zones) have increased, a n d gross
maqada exports accounted for US$2.5 billion o f exports in 20045, but d r o p p e d to US$2.2
billion in 2005. T h e majority o f these are bound for the U S market, but i t has been difficult


  In 2003 the Bank o f Guatemala changed t h e methodology for registering external trade to standard IhIF
practice. Since then i t includes gross maquila flows in total exports (and not n e t flows as previously done).
Thus, in 2005 n e t maquila exports (value-added) were only US3543.3 million, while their gross value was
US$2.2 billion. 95 percent o f maquila exports are for the U market.
                                                            S


                                                                                                              5
                                 n
to increase market share i the face o f growing competition from China. W h i l e coffee a n d
sugar have recently recovered from the crisis o f the late 1990s as a result of strong demand
a n d high international prices, a n d exports o f non-traditional agricultural products a n d
manufacturing goods have risen, there i s s t i l l too strong a dependence on agricultural
c o m m o d t i e s for foreign revenue earnings.

  Figure 1.4: Exports of Goods and Services, 1980-2005 (in billions o f constant 2000
                                                 US$)




                    +Guatemala

                    +Costa Rica
                    +El Salvador




1.12 Since the signing of the 1994-1996 Peace Accords, Guatemala has enjoyed
considerable improvements in macroeconomic stability. T h e WEF World Executive
Opinion Survey for 2006 found that macroeconomic factors such as i n f l a t i o n or foreign
currency regulations were not considered a p r o b l e m by interviewed domestic a n d foreign
f i r m s (with less than 1 percent expressing concern over them, Figure 1-5). T h e challenge
now-which         confronts m a n y L a t i n American countries-is  to create the micro-foundations
for economic growth, such as the climate for investing a n d doing business. Investors were
not concerned with government instability or tax rates. However, investors perceived crime
a n d theft, policy instability, the inefficient government bureaucracy, the inadequate supply o f
infrastructure a n d the inadequate education o f the w o r k f o r c e as m a j o r obstacles. N e x t on
the l i s t were corruption a n d access to financing. Therefore, there i s a strong sense from these
data that growth i s stifled by investment climate issues, but not by macroeconomic factors.




                                                                                                        6
                                F nure 1.5: PerceDtions o f Doing. Business in Guatemala
                                                            Cnme and theft
                                                           Policy instability
                                        Inefficient government bureaucracy

                                         Inadequatesupply of infrastructure
                                            Inadequately educated worldorce
                                                                 Comptlon
                                                        Access to financmp
                                                Resmcuve labor regulations
                                                            Tax regulations

                                      Poor work e b c m nauonal labor force

                                                                   Tax rates

                                               Gavernmeni mstabilitylcoups
                                                                    Innatlon

                                                Foreign currency regulations

                                                                                0   2    4      6       8       10      12      14    16   18
                                                                                             percent o f responses (weighted)


                                  iurce: World Economic Forum, Executive Opinion Survey 2006
                                 Global Competitiveness Report 2006-2007, World Economic Forum, 2006

1.13 A productivity analysis carried out with the new Guatemala data found that
red tape, corruption and crime variables have the highest relative effect on average
firm productivity (51.4 percent). Infrastructure-related variables had a cumulative
contribution o f 16.7 percent-the  second highest (Figure 1.6). Finance-related and quality,
innovation and skills variables have a far lower contribution to average productivity (13.1
and 8.7 percent respectively).

Figure 1 6: Relative ICA effects on average productivity (Mixed Olley and Pakes
        .
decomposition)
                      hfrastructures                   Mtap, cornpticn&crime                        Finance &cap. gw.                Qlality irrmation           Cths contrd
    Yo
                                                                                                                                       &labor skills              Variables


    50-


    40-


    a-
                                                        242

    m-     67                                            n

1          T.l   11   12   13    14    15     16 T 2 2.1 22 2 3                 2.4 2 5 2.6 2.7 T.3 3 1 32 3.3 3.4 35 T.4 4.1 4 2                      4.3 T.5    5.1 52   5.3 5.4   1
          T . l Total infrastructures                               23Dumyforconfiicts in courts                                1.4 Total quality, innov. and labor skills
         1lD;gsto cisarcustonstoeqort-interaction                   2.4Dumyforsecurityeq~ees                                    4.1 Dumyfor Wqualitycatification
         rJthfimthatcb q u r t                                      2.5 Dumyforcrlme                                            4 2 S&f- femsleworkers
         12 O E c t r l c i t y f m m a g o r                       2.6Ma~-a#s timespent in bur. issues
                                                                                                                                4.3 Trainirgto m r y x o M i o nworkers
         13 Durmyfor 'Eifts'to obtain dectrlcitys@y                 2.7 Ps
                                                                         -     to s p d Lpbureaucracy
         14MBtHOUtagaS
         1 5 W 8 r frompkiic sources
         16Sip-& losses, inports
                                                                    1.3 Total finance and corporate governance
                                                                    3,Ilnitialinvestment:pivadetanks
                                                                                                                                :,fc:"d,    variables

                                                                    32\hborking~al         fi-edbinromalsources                      f
                                                                                                                5 2 p ~ e n t a g e omionidworkforce
                                                                                                                5.3Dufmyfor FDi
         T.2 Total red tape corruption and crime                    3,3\hborking~alfi~eddmnorrbanWngfirancial   5,491areof qurts
         2.lSalesrqmrtedtotaQs                                      institutions
         22 Durmyforconfiictsvjthclients                            3.4 Dvnmyfor c h k i r g or savi- ~ccount
                                                                    3 A D u m y f o r c r d t line

Source: Background analysis and paper on productivity, 2008



                                                                                                                                                                             7
3.                GOVERNANCE REGULATION
                           AND

1.14 T h e quality of governance and regulation o f business activity can be
addressed from several perspectives. O n e perspective looks at the prevalence of the rule
of law, w h i c h includes issues such as corruption, crime a n d i n f o r m a l activities. A n o t h e r
perspective refers to the efficiency o f the legal a n d regulatory framework, as reflected in the
quality o f the services p r o v i d e d or regulated by the government a n d the b u r d e n that f i r m s
face in complying with regulations in taxation, entry a n d exit, labor relations, a n d other
legitimate public interests. Previous studies suggest that to i m p r o v e firm performance in
L a t i n America, policies should b e oriented toward both strengthening the rule o f the l a w a n d
improving government i n s t i t u t i o n s a n d regulatory frameworks.6

1.15         Evidence from the Enterprise Surveys and other cross-country data sources
point to shortcomings in corruption, crime, and informality. Although the proportion
o f f i r m s perceiving these issues as m a j o r constraints has fallen between 2003 a n d 2007, those
areas s t i l l remain a m o n g t h e top obstacles for Guatemalan entrepreneurs. A c c o r d m g to
K a u f m a n n et al. (2007), Guatemala did not make progress between 2003 a n d 2006 in the
rule of l a w a n d c o n t r o l o f c o r r u p t i o n indexes.’ Compared to the selected comparator
countries, Guatemala i s in the worst position in the rule o f law; a n d i s only better than
Honduras a n d Nicaragua in c o n t r o l of corruption (Figure 1-7).

                                 Figure 1.7: Governance Indicators, 2003 versus 2006
                              a. Rule of Law                        b. Control of Corruption
         Chde                                                                          Chile

     Mauntius                                                                    Costa R i a




                                       d
     Costa Wca                                                                    MBYIltlUS

      Sri h k a                                                                  E l Salvador
       Panama                                                                       Panma
  El Salvador                   -O   ?o-0 5                                       Sri Lanka
     Nicaragua                                                                   Gua!eUlalB

     Honduras     1                                                               NlCXagW
     Guatemala    I                                                                Hondwas

              -2.w    -1.50   -1.00      4.50   0.00   0.50   l.w   1.50   2.w              .zoo   -150   -100   -050   000   050   IO0   150   200

                                              pGiiiG
Source: Kaufmann et al.                       (2007)

1.16 Guatemalan f i r m s continue to suffer more from crime than their counterparts
in other countries. There are several costs associated with crime, such as the direct cost o f
security to protect the f i r m s ’ private property or losses due to theft, robbery or vandalism.
                                                                             n
On average, Guatemalan f i r m s lose 4 percent o f their annual sales i security expenses or
theft, and t h i s percentage increases to 8 percent w h e n the sample i s restricted to those f i r m s
                                    n
that were victims of crime i the period. This figure i s the highest a m o n g comparator
countries. D e p e n d i n g on their size, region o f operation or exporter status, crime affects
f i r m s differently (see Chapter 4 for m o r e details).



 See Lopez et al. (2007).
 K a u f m a n n et al. (2007) produce indicators known as “Governance Matters” indicators. These are indexes that
go f r o m -2.5 to 2.5 (the higher the index, the better the outcome), w h i c h can b e transformed i n t o a percentile
measure (0-100) for a n easier interpretation.



                                                                                                                                                      8
1.17 T h e proportion of firms that pay bribes to “get things done” or to obtain
public services fell dramatically between 2003 and 2007-from                         35 percent to 16
percent.’ Despite t h i s impressive decline (see Chapter 4), corruption remains a concern for
Guatemalan f i r m s . Moreover, the 2007 figure i s s t i l l higher t h a n in Panama, El Salvador, S r i
                                                                                     n
Lanka, Chile a n d Mauritius (Figure 1-8). Corruption should b e addressed i conjunction with
other problems such as regulatory compliance a n d the judicial system, as various studies
have l i n k e d these to corruption. On the judiciary front, the 1997 World D e v e l o p m e n t
R e p o r t focused on the quality of the judiciary a n d found that, controlling for other factors,
the p r e l c t a b i l i t y o f the judiciary appears to l o w e r the level o f corruption. Ades a n d Di Tella
(1996) present a similar correlation between c o r r u p t i o n a n d the independence of the judicial
system. O t h e r studies have found that c o r r u p t i o n i s negatively correlated with both
regulatory compliance (proxied by the percentage of sales that f i r m s report for tax purposes)
a n d t r u s t in the courts’ enforcement power.

            Figure 1 8: Bribe payments in Guatemala and comparator countries
                    .
                         (to get public contracts and/or “get things done”)

              4                                               0                                  34.4       .   a
                                                                                                                    ’
              35
              30
           2  25
          LFI 20
          k3 15
              10
               5
               0




       Note: Bribe payments are measured as a variable that equals 1 if the firm’s manager answers
       with a percentage greater than zero to the following question: “When establishments like this
       one do business with the government, what percent o f the contract value would be typically
       paid in additional or informal payments or gifts to secure the contract?”, or if the firm answers
       affirmatively to any o f the questions “Was an informal gift or payment expected or requested
       to obtain the [service]?” in reference to a telephone, water, or electricity connection; an
       import, or operating license; or a construction permit.
       Source: Enterprise Survey.

1.18     Practices of competitors in the informal sector are a major concern among
Guatemalan firms. Enterprise surveys interview only f o r m a l f i r m s . On average, formally
registered f m s r e p o r t 73 percent o f their sales for tax purposes. This figure i s not
significantly different from the regional average (71 percent). However, t h i s figure can b e
improved; within Central America t h i s average i s l o w e r only in Nicaragua (59 percent) a n d
Panama (63 percent). T h e other comparator countries r e p o r t a higher proportion o f their
sales for tax purposes. Firms are also asked about the proportion o f workers reported for tax
a n d social security purposes. Guatemalan f i r m s report, on average, 76 percent o f their

8                                                                                                     n
 T h e difference increases w h e n w e compare the same (panel) f i r m s w h i c h were interviewed i b o t h 2003 a n d
20007: 42% paid bribes “to get things done” in 2003 a n d 18% -- in 2007.



                                                                                                                        9
workforce, slightly higher t h a n the Central America average o f 74 percent, but far b e l o w
Chile (82 percent). There are no available data on t h i s issue for Mauritius or S r i Lanka.

1.19 In 2003 Guatemala had the highest share of informal workers among Central
American countries. Gasparini a n d T o r n a r o l l i (2007) use household surveys to measure the
share of i n f o r m a l workers in L a t i n America a n d the Caribbean. They define as “productive
informality” the share o f workers that b e l o n g to any o f the following categories: (1) unskilled
self-employed; (2) salaried workers in a small private firm; a n d (3) zero-income workers.
Table 1-2 summarizes their estimations for Guatemala a n d the avadable comparator
countries. Guatemala has the highest share in Central America (69.5 percent), a n d i s only
surpassed by Bolivia (76.9 percent) a m o n g the comparator countries used in t h i s report. This
i s also in line with a study by the Center for N a t i o n a l E c o n o m i c Research of Guatemala
 (CIEN), w h i c h estimated that in 2004,75 percent of the economically active p o p u l a t i o n was
engaged in i n f o r m a l a ~ t i v i t y . ~

                                        Table 1.2: Share o f informal workers, 2003
                     Bolivia                76.9            El Salvador                                 57.0
                     Guatemala              69.5            Panama                                      50.2
                     Nicaragua              64.7            Costa Rica                                  41.4
                     Honduras               63.8            Chile                                       37.0
                       Source: Gasparini and Tornarolli (2007)

1.20            Informality i s not an isolated problem. Schneider (2005) points out that heavy tax
a n d social security burdens are one of the m a i n causes for the existence o f a n i n f o r m a l
economy. In addition, the intensity o f regulation a n d the complexity o f the tax system are
also found to b e i m p o r t a n t determinants o f the shadow economy.

                                Figure 1 9: Regulation Indicators, 2003 versus 2006
                                        .
                    Regulatory Quality                                              Government Effectiveness
       Chile                                                                Chile
  Mauntius                                                             Mauntius
  Costa R c a                                                         Costakca
    Panama                                                               Panama
 ElSalvador                                                           El Salvador
  Guatemala                                                             S Lanka
                                                                         n
   S Lanka
    n                                                                  Honduras
  Honduras                                                            Guatemala
  Nicaragua                                                            Nicaragua

            -200   150   -100    -050   000   050   100   150   200             -200   -150   -100   -050   000   050   100   I50   200

                                  /zEGz
Source: Kaufmann et al. (2007)

1.21 Guatemala has made a significant improvement in terms of regulatory quality
during the past four years. A c c o r d i n g to Doing Business 2007, Guatemala was a top 10
reformer in 2005-2006, w h e n i t introduced reforms to facilitate starting a business, dealing
with licenses, a n d registering property. In addition, the Doing Business 2008 r e p o r t indicates
that during 2006-2007 “Guatemala expedited a number of formalities by m a k i n g t h e m
electronic. By allowing registrars to submit electronic signatures, the t i m e to register p r o p e r t y


 CIEN 2006.


                                                                                                                                      10
has been reduced from 37 to 30 days. T h e implementation o f a n e w Electronic D a t a
Interchange (EDI) system for electronic submission o f customs declarations a n d the
i n t r o d u c t i o n of risk-based inspection regime decreased the t i m e for exporting procedures by
o n e day. With the full implementation of the one-stop shop, t i m e for n e w company
registration was c u t from 30 to 26 days, a n d 13 procedures were reduced to 11. Guatemala
focused on increasing efficiency across the board, expediting the decision processes for
construction, reducing the t i m e from 286 to 235 days, as w e l l as r e f o r m i n g the courts:
increasing the n u m b e r of cases to b e decided by justices o f peace hereby expandmg their
 small claims

1.22    Alternative measures o f regulation, such as those used by Kaufmann et al.,
indicate improvements but not along all dimensions o f the regulatory regime. As
Figure 1-9 shows, Guatemala’s i m p r o v e m e n t in the Regulatory Quality indicator from -0.24
to -0.09 implies a m o v e m e n t from the 44’ to the 5 l S tpercentile in the entire distribution.
However, the index of G o v e r n m e n t Effectiveness has worsened for Guatemala during the
same period. A c c o r d i n g to the Enterprise Survey, Guatemalan firms r e p o r t tax rates as m a j o r
obstacle for the operations o f their business. O t h e r issues as tax administration, access to
land, customs a n d trade regulations, permits a n d licensing, courts, a n d labor regulations are
not a m o n g the top 5 obstacles, but combined, regulatory issues remain a m a j o r concern for
the private sector.

1.23 T h e proportion of Guatemalan f i r m s that perceive the functioning of the
courts as a major or severe obstacle for business has significantly declined-from 31
             3
percent to 1 percent. Perhaps f i r m s do not perceive the courts as m u c h o f a p r o b l e m
because very f e w o f t h e m use the courts-only 49.6 percent-the lowest percentage a m o n g
the comparator countries. T h e percentage o f commercial disputes that are taken to court,
less than 50 percent, i s the lowest a m o n g comparator countries. Furthermore, only 24
percent o f f i r m s consider the c o u r t system to b e fair, impartial, a n d uncorrupted (Figure 1-
10).

                         Figure 1.10: Courts in Guatemala and comparator countries
A. Percentage of firms that Consider the Court System to    B. Percentageof Firms that Consider that Courts are
           Be Fair, Impartial, & Uncorrupted                                     Quick

             Chlle

          Panama

  Guatemala 2007     I               1744              I
       El Salvador                                          Guatemala 2007

        Nicaragua                                              El Salvador

           Bolivia                                                 Bohvia

        Honduras                                                Honduras

                     0     IO   20      30   40   50   60                    0     10            20           30
                                         i
                                      % fm                                              Ii i
                                                                                         f




l o Doing Business 2008.



                                                                                                                  11
                                         C. Percentage o f disputes that use courts


                                     Bohvia

                                   Nlcaragua

                                     Panama

                                   Honduras

                                    Salvador

                                   Guatemala

                                               0    10   20   30       40         50    60      70   80
                                                                   '*o dlsputes


                                          Source: Enterprise Survey

1.24 Guatemala has the lowest number of procedures required to enforce contracts
among comparator countries, but the longest time to do so-an average o f 208 weeks
(Table 1-3). Overall, Guatemala performs slightly better t h a n the Central A m e r i c a n average,
a n d i s even better t h a n Chile in terms of the n u m b e r of procedures a n d enforcement costs
(as a percentage o f the amount disputed), but trails the other countries as far as the time to
enforce a contract, probably the most i m p o r t a n t measure o f contract enforcement.

                                      Table 1.3: Contract enforcement
                                                              Enforcing Contracts
                                                          Procedures                    Time            cost
                                           Rank            (number)                    (days)        (% o f debt)
                     El Salvador               54              30                       786               19.2
                     Chile                     64       36           480                28.6
                     Nicaragua                 69       35           540                26.8
                     Mauritius                78        37           750                17.4
                     Guatemala                98        28           1459               26.5
                     CA                        99       36           674                30.1
                     Bolivia                  112       37           59 1               33.2
                     Panama                   116       31           686                50.0
                     Honduras                 124       45           480                30.4
                     Costa R i c a            130       40           877                24.3
                     Sri Lanka                133       40           1318               22.8
                      Source: D o i n g Business 2008. Sorted by country's r a n k o n the i n d e x o f
                      E n f o r c i n g Contracts

4.        INFRASTRUCTURE

1.25 A c c o r d i n g to the G l o b a l Competitiveness R e p o r t 2007-2008, infrastructure i s
perceived as the s i x t h most problematic factor for doing business in Guatemala." Thus,
foreign investors thought that Guatemala h a d a n overall competitive disadvantage due to i t s
inadequate infrastructure. Overall infrastructure quality was ranked 63rd a m o n g 131



11 F r o m a l i s t o f 15 factors, respondents were asked to select the five most problematic for d o i n g business a n d
to rank t h e m between 1 (most problematic) and 5 (least problematic. T h e responses are weighted according t o
the rankings and summarized in a final ranking. According to the G l o b a l Competitive R e p o r t 2007-2008, the
five most problematic factors are crime and theft, policy instability, corruption, inefficient government
bureaucracy, and inadequately educated workforce.



                                                                                                                        12
countries in 2006, better than the regional average, S r i Lanka, a n d Bolivia, but worse t h a n
Chile a n d Mauritius (Table 1-4)."

                            Table 1.4: Infrastructure indicators in Central America
                                                   Notable Competitive Advantages and Disadvantages (RanW131 countries) (*)
                                                                       El
                                       Bolivia   Chile  Costa Rica Salvador  Guatemala Honduras Mauritius Nicaragua Panama    SriLanka
Overall infrastructure quality          123       30       110       40        63       72        44        108       51        74
Roads quality                           125       22       121       31        56       62        43        102       52        77
Railroad infrastructure quality         102       66       115       117       120      114       101       129       63        60
Port infrastructure quality             87        34       125       81        73       40        41        124       15        62
Air transport infrastructure quality    118       31       66        34        67       69        39        80        38        70
Electricity supply quality              87        39       40        57        63       86        45        117       56        81
Telephone lines (hard data)             94        59       37        74        88       95        42        105       76        98
Source: World Economic Forum, Global Competitiveness Report 2007-2008. (*) The rankings in bold and
italics are considered notable competitive advantages, while the rest are notable competitive disadvantages.

1.26 According to the survey data, manufacturing f i r m s in Guatemala rely o n the
country's system of roads to transport their m a i n product to i t s primary destination
(see Chapter 3, Figures 3-6 a n d 3-7 for m o r e details). Firms use transportation to buy inputs
a n d sell their outputs. T h e vast majority o f interviewed Guatemalan f i r m s use l a n d transport
for getting their main p r o d u c t to the market, w h c h i s similar to elsewhere in Central
America, with the exception o f Panama (where maritime transport has a very high share). In
                                                                                 n
the context of CAFTA and regional integration with other countries i Central America,
improvements in roads a n d logistics can generate a n i m p o r t a n t boost for the private sector.
Only 9 percent o f interviewed Guatemalan f i r m s r e p o r t another country as their m a i n
market destination. Of those, the average percentage of shipment lost due to breakage or
spoilage i s about 0.3 percent, w h i c h puts Guatemala in a better position relative to the rest o f
the comparator countries, with the exception o f Chile.

1.27 Access to reliable electricity supply i s a major concern for f i r m s in Guatemala.
A l o w e r share o f f i r m s suffered p o w e r outages i 2007 than in 2003 (34 versus 73 percent
                                                           n
respectively). But for the affected firms, outages lasted longer (17 hours per month i 2007    n
                                                   n
compared to seven hours per month i 2003). In line with the longer duration, losses
                                                               n
associated with p o w e r cuts were higher in 2007 t h a n i 2003 across f i r m s that suffered from
them.

1.28       Guatemala has been a net exporter o f electricity to other Central American
countries, although increased domestic demand has decreased the exportable
surplus recently. In the last three years there have been problems satisfying peak demand
lasting up to four hours-and        the p r o b l e m m a y b e even m o r e severe i f current economic
growth forecasts are fulfilled. This issue should b e addressed promptly, since the addition o f
n e w generation plants requires at least four years (four to five years for a coal plant, a n d five
or s i x years for a hydroelectric p l a n t with a seasonal dam).




l2 However, there i s a relative improvement in the Guatemalan infrastructure rankings with respect to the
previous report. The 2006-2007 report ranked 117 countries, while the 2007-2008 report ranked 13 1
countries. Table 1-6 reports the ranking among 131 countries. I t i s possible to compare rankings across
years b y computing the percentile position o f Guatemala in each report. Guatemala moved from the 23rd
percentile in 2005 to the 52"d percentile in 2006.



                                                                                                                                     13
1.29 Competition in the telecommunications industry has increased over the past
eight years. T h e privatization o f Guatel in 1998 a n d the aggressive expansion of m o b i l e
networks have l e d to a n increase in penetration from 5.8 telephones p e r 100 inhabitants in
1998 to 45.7 in 2005. Broadband internet access i s available in all major municipal towns
through the incumbent's DSL service, a n d alternative broadband providers in Guatemala
                                     n
City are expanding to other cities i the country. At the firm level, the proportion o f f i r m s
that use own email or own w e b pages to communicate with suppliers a n d clients has grown
from 67 percent in 2003 to 75 percent between in 2007. However, there i s s t i l l room for
further expansion, since these figures are b e l o w the levels observed                         in most comparator
countries.

5.        SKILLS    AND    TECHNOLOGY

1.30 Overall Guatemalan education performance is poor. T h e country has a high rate
o f illiteracy (the highest in L a t i n America), a n d the g r o s s enrollment rates at both the primary
                                                          n
a n d the secondary levels are low (the lowest i L a t i n America). In addtion, the level o f
                       n
public expenditure i education i s low, a n d it i s not compensated by a larger presence of the
private sector (relative to other L a t i n American countries). There are three ways that the
investment in education can contribute to economic growth: ( )                idemand for skilled labor to
                                  i)
use m o d e m technology, (i the creation o f stronger government a n d private sector
institutions, and (ii) p r o v e d efficiency of the education system.13
                        im

1.31 Despite the relatively l o w level o f education, f i r m s seem less inclined t o
absorb additional worker training costs than before. A c c o r d i n g to the survey, the
percentage o f manufacturing f i r m s providing training to their employees has decreased from
58 percent in 2003 to only 42 percent in 2007. T h e 2007 level i s l o w e r than the percentage o f
f i r m s providing training in the comparator countries, with the exceptions o f Nicaragua a n d
S r i L a n k a (Table 1-5). T h e share o f f i r m s providmg training i s unevenly d s t r i b u t e d across
d f f e r e n t types o f f i r m s (by size, region, a n d exporter status). Small f i r m s p r o v i d e
significantly less training than m e d i u m a n d large h s . Firms are m o r e likely to provide
worker training w h e n they are located in the capital city or are exporting products.

               Table 1.5: Percentage of manufacturing firms providing training
                    Mauritius                       62.4         Honduras                43.6
                    Guatemala 2003                  57.8         Panama                  42.3
                    Bolivia                         57.0         Guatemala 2007          41.5
                    Chile                           53.4         SriLanka                32.6
                    El Salvador                     48.5         Nicaragua               30.5
                    CostaRica                       46.4
                    Source: Enterprise Survey. The difference between Guatemala 2003
                    and 2007 s t i l l persists if we restrict the sample to firms interviewed in
                    both years (panel sample).

1.32        Guatemala has r o o m to improve in innovation a n d technology. Figure 1-11
shows that 34 percent o f Guatemalan firms invest in research a n d development (R&D),
w h i c h i s significantly higher t h a n t h e Central American regional average o f 26 percent. In


13 Enterprise surveys do n o t provide enough i n f o r m a t i o n to analyze h u m a n capital performance. T h i s analysis
relies o n Artana, et al. 2007.



                                                                                                                           14
contrast, there i s no significant difference between Guatemala a n d the rest o f Central
           n
America i terms of I S 0 certifications. I t i s i m p o r t a n t to n o t e that the latter has significantly
increased in Guatemala between 2003 a n d 2007, from 3 percent to 16 percent, even w h e n
w e restrict the sample to the f i r m s surveyed in both years. Nevertheless, Guatemala s t t l l has
                               n
room for i m p r o v e m e n t i t h i s area w h e n compared to Chile (26 percent) and Mauritius (28
percent).

                  Figure 1.11: Innovation in Guatemala and comparator countries
          Percentage of Firms that invest in R&D                         Percentage o f Firms that have I S 0 certifications
           SnLanka
          COStaRlCa
          Honduras
          Nicaragua
            Panam
              Chde
         ElSalvador
      Guatemla 2037
      Guaiewla 2003
             Bohvia
          M8""tL"S                                                                                                                    4

                      0   10      20            30   40   50                        0      5         10        15      20      25    30
                                       ck frm                                                             sr   fum;



bource: Enterprise Survey

1.33 Guatemala still faces challenges with respect to i t s technological readiness
and innovation capacity. I t s only competitive advantage (Table 1.6) i s foreign direct
investment a n d technology transfer, where it ranks 40* out o f 131 countries. Among the
Central American countries, it also comes second only to Costa Rica in terms o f capacity for
i n n o v a t i o n (59* compared to Costa Rica's 37* rank).

                  Table 1 6: Technological Readiness and Innovation Indicators
                         .
                               Notable Competitive Advantages and Disadvantages (RanW131 countries) ( * J
                                                                           El
                                                            Costa Rita Salvador Guatemala Honduras Nkaragua                 Panama
          Technological readiness
          Availnbiliry of latest technologies                    12       75       62          96               118          18
          Firm-level technology absorption                       56       86       60          IO0              126          19
          Laws relating to ICT                                   60       74       91           86              106          51
          FDI and technology transfer                            7        88       40           52              111          29
          Innovation
          Capacity for innovation                               37        87       59          85               107          104
          QuaIi1) of scienrifrc research in3titutions           34        I21      103         I20              125          95
          Company spending on R&D                               30        loa      64          101              121          19
          CN! ersit) -industr) research collaborarion           35        1I5      51          94               I I?         83
          Government procurement of advanced technology pro     61        90       85          88               II 2         19
          Availability of scientists and engineers              39        I19      99          107              115          97

                                                               Bolivia   Chile   hlauritius Sri Lmka
          Technological readiness
          A i ailability of latest technologies                 I24       34       51          68
          Firm-le! e l technolog) absorption                    131      38        73          61
          L a u s relating to ICT                               122      25        44          6.5
          FDI and technolog) transfer                           IO1      30        68          55
          Innolation
          Capacity for innovation                               II7       50       96          36
          Quality of scientific research institutions           I26       SI       69          41
          Company spending on R&D                               122       60       83          39
          L'ni! ersity-industr) research collaboration          122       13       71          39
          Go\ernment procurement of advanced technology pro     130       40       61          51
          Aiailability of scientists and engineers              124       31       I06         44
Source: World Economic Forum, Global Competitiveness Report 2007-2008. "The rankings in italics are
considered notable competitive advantages, while the rest are considered notable competiti\,e disadvantages.



                                                                                                                                          15
6.       ACCESS FINANCE
              TO

1.34 Domestic credit to the private sector has increased in the past few years-
from 19.8 percent of GDP in 2000 to 26.8 percent in 2006. However, i t remains w e l l
b e l o w the Central American average (almost 47 percent in 2006). In addtion, interest rate
spreads are relatively high w h e n compared to other countries in the region-an  average o f
                       n
10 percentage points i Guatemala during 2001-2005, only surpassed by the average o f Costa
Rica (almost 14 percentage points between 2001-2006) (Table 1.7).




Chile              71.16            78.41              82.40           5.64           3.45           2.89
Costa Rica         24.01            31.17              39.29           11.51          15.17          12.42
El Salvador        45.24            43.52              43.66           4.64
Guatemala          19.79            22.57              26.78           10.71          10.20          8.26
Honduras           40.70            40.92              48.99           10.89          9.32           8.10
Mauritius          60.66            16.49              78.01           11.16          11.48          11.53
Nicaragua          33.18            22.94              33.35           7.34           10.00          6.71
Panama             101.89           91.81              88.56           3.41           5.95           4.56
Sri Lanka          28.83            29.93                              6.99           4.34
CA                 44.13            42.15              46.77           8.08           10.13          8.01
     Source: World Bank, World Development Indicators

1.35 A similar picture arises from the survey data, which quantify the demand for
credit by interviewed firms. T h e percentage o f f i r m s with checking or savings accounts in
Guatemala i s significantly lower than t h e regional average. T h e same i s observed for the
percentage of f i r m s with c r e d t lines or loans, but there are no significant differences in the
percentage o f firms with overdraft facilities. In terms o f the demand for credit, only 32
percent o f Guatemalan f i r m s applied for a l o a n a n d t h i s percentage i s sigmficantly l o w e r
than the regional average (Table 1-8). T h e majority o f loans require collateral, but collateral-
to-loan values have declined since 2003 (Figure 1.12).

                      Table 1.8: Access to Finance in Central America
                                                    % fiims with
                                                                                                 % rejected
                 checkinglsavings
                                        Overdraft         Credit linedloans applied for loans   applications
                     accounts
Costa Rica                                  43.15              47.81             12.85
El Salvador           92.34                 54.21              62.12             43.54             12.53
Guatemala             84.36                 52.90              43.99             31.98             10.29
Honduras              91.49                 51.88              54.27             42.43             10.49
Nicaragua             73.32                 30.03              40.93             36.69             12.1 1
Panama                97.68                 63.65              57.29             32.76             3.86
    Source: Enterprise Survey




                                                                                                               16
                                         Figure 1.12: Access to Finance 2003-2007
                                                                                                                     I

                                                120
                                                100
                                                  80
                                            8
                                                  60
                                                 40
                                                  20

                                                   0
                                                           % Loans requiring            Collateral as % loan
                                                                collateral                     value



                                        Source: Enterprise Survey

6.             FIRMPRODUCTIVITY

1.36 An econometric model was estimated to yield concrete details about the
effects o f the investment climate on firm performance and other economic
performance variables such as workers’ earnings, following the econometric methodology
o f Escribano and Guasch (2006), a n d using survey data for Guatemala only.l4 T h e results
were consistent with other findings indicating that governance issues a n d crime negatively
correlated with productivity. Firm productivity i s also higher w h e n there i s access to financial
services a n d a well-functioning legal system. This result i s captured by the positive effect o f
having a credit line a n d using non-bank financial sources to finance working capital, a n d the
negative effect between using i n f o r m a l sources to finance working capital. As far as other
c o n t r o l variables are concerned, f i r m s that chose to b e incorporated are m o r e productive.
This i s i m p o r t a n t because, as Demirguc-Kunt, Love, a n d Maksimovic (2006) point out, firms
are m o r e likely to b e incorporated in countries with a well-functioning legal system.
Therefore, a n i m p r o v e m e n t in the judiciary m a y i m p r o v e f i r m s ’ productivity indirectly
through t h i s channel. Finally, exporters have higher productivity t h a n non-exporters, w h c h
i s consistent with the literature on exporter premiums (see Olarreaga et al., 2007).

1.37 B y solving a system o f simultaneous equations, i t i s possible to estimate the
contribution o f each area o f the investment climate toward different measures o f economic
firm performance, such as productivity, employment, real wages, exports a n d foreign direct
investment (FDI). Figure 1-13 confirms the regressions in background note; t h e largest
contribution to firm productivity i s given by improvements in r e d tape, c o r r u p t i o n a n d crime
(51 percent). This area i s also i m p o r t a n t to attracting FDI (34 percent), increasing
employment (13 percent), and increasing exports (9 percent). T h e gains in productivity, in
turn, have a large positive effect on real wages, exports a n d FDI, t h u s further increasing the
importance o f governance a n d infrastructure i n h c a t o r s for the economic performance o f
Guatemalan firms.




1‘   T h e m e t h o d o l o g y a n d d e t a i l e d tables are available in a b a c k g r o u n d p a p e r (World B a n k , 2008b)



                                                                                                                                         17
 Figure 1.13: Contribution of investment climate variables to economic performance
                                     measures




                      Prcductidty                           Real wages
                    rn lnfrast ructures                     Red tape, corruption and crime
                      Finance and corporate gownance        Quality, innovation and labor skils
                      Other control variables

               Source: Background paper, Pena (2008)

7.      CONCLUSIONS

1.38 T h e analysis of firm level data and intemtional benchmarks confirms the
importance of the investment climate for productivity in Guatemala. T h e i m p a c t vanes
according to the investment c h a t e factor. Since the f i r s t ICA based on 2003 data,
Guatemala has a c h e v e d significant progress in the regulatory front, but i t needs to persist
with the regulatory reforms o f the past four years. In addition, c o r r u p t i o n a n d crime s t i l l
remain m a j o r bottlenecks for firm productivity. There i s a substantial scope for
                n                                n
improvement i infrastructure, especially i the energy sector, a n d the country needs to
invest further in i t s h u m a n capital. Addressing these challenges will b e crucial to p r o m o t e
sustainable growth a n d create the conditions for Guatemala’s integration i the globaln
economy a n d take advantage of trade agreements, such as CAFTA.




                                                                                                        18
      Chapter 2.                 Trade and the Early Impact o f CAFTA on
                                            Firms


1.          INTRODUCTION

2.1     I t i s too early to attribute recent gains in foreign direct investment, exports
a n d sectoral development to CAFTA, but i n i t i a l indications reveal some concrete
benefits. A review o f trade trends, enterprise survey results, a commissioned background
paper based on Central B a n k o f Guatemala data, a n d available research finds that significant
benefits have already been generated. M o r e than n e w incentives, CAFTA offers permanent
favorable access to the U.S. market along t h e lines o f the 1993 Caribbean Basin Initiative a n d
the General System o f Preferences. T h e value-added effects o f CAFTA are tempered by
already low tariffs, a n d the success o f efforts to integrate the Central American economies
that pre-date CAFTA. CAFTA benefits can also b e swamped by volatihty in the U.S.
demand for Guatemalan exports, high levels o f crime a n d corruption that can affect national
a n d international investment decisions, a n d the relatively slow adoption o f n e w technologies
by f i r m s .

2.2         With i t s diversified export mix, t o u r i s m a n d services potential for foreign
direct investment, Guatemala has a lot to offer-and                   a l o t to lose i f i t fails t o invest in
the systems, technology a n d worker skills required in the n e w world of free trade. To
fully understand recent trends in international commerce for the country, t h i s chapter
                ia n
provides ( ) assessment o f the promise a n d early results o f Guatemala’s participation in
                i)
CAFTA, ( ithe perspective o f Guatemalan exporters on the business environment (from
ICA surveys), a n d (i)   iirecommendations for using CAFTA as a way to increase employment,
p r o m o t e regionally balanced growth, a n d i m p r o v e private sector competitiveness.

2.3    T h e government a n d the private sector face different challenges, if they are to
take full advantage of the CAFTA opportunity. T h e government must build on strong
competitive advantages (includmg the n e w A u r o r a airport, a large domestic market, a n d
attractive tourism assets)-and           b d d confidence w i t h the private sector a n d in
international markets that macroeconomic stability a n d fiscally responsible behavior will b e
continued. An efficient productive infrastructure system i s necessary to take advantage o f
CAFTA, attract foreign direct investment, a n d increase exports, including transportation
infrastructure, availability o f energy, a n d communications. Finally, government efforts to
c o n t r o l crime a n d corruption will need to bear fruit to take advantage o f the CAFTA
window. For i t s part, the private sector must increase investments in labor training, quality,
market research a n d international p r o d u c t a n d process certifications, if it i s to prosper from
CAFTA’s opportunities.

2.                  TRADE
            WHAT FREE   OFFERS GUATEMALA

2.4    T h e empirical literature shows that e x p o r t i n g firms are m o r e productive,
innovative, grow faster, a n d create employment with higher wages, especially for


                                                                                                             19
                                                                              n
skilled ~ 0 r k e r s .T h e benefits can b e even m o r e pronounced i small domestic economies
                          l~
like that o f Guatemala, thanks to the exporting f i r m s ' greater capacity utilization, economies
o f scale, w o r k e r training, a n d technological know-how. T h e literature states that free trade
agreements should create a d d t i o n a l economic activity by encouragmg specialization, rather
than merely redistributing wealth. In fact, for a sample o f 16 L a t i n American countries,
enterprise survey results c o n f i r m that there i s a p r e m i u m for exporter f i r m s as measured by a
positive total factor productivity contribution."

2.5    There are two possible links between productivity and exporting firms. H i g h e r
productivity c o u l d b e a result of exporting, with f i r m s learning how to i m p r o v e productive
processes a n d resource use by interacting with foreign markets. T h e second causation chain
c o u l d b e that, as f i r m s become m o r e productive, it i s natural for t h e m to increase p r o d u c t i o n
a n d begin to export. T h e data in the enterprise survey shows that firms that export are m o r e
productive in terms o f t o t a l factor productivity, but t h i s data does not p r o v i d e t h e basis for
understandmg the causal link between productivity a n d f i n n s that are exporters.

2.6    When free trade agreements lead to increased investment in equipment and
human capital, there can be improvements in total factor productivity (TFP). TFP has
been identified as one o f the leading contributors to economic growth, proving to b e m o r e
i m p o r t a n t than capital accumulation.17 Structural policies, including trade openness, are also
identified as a n i m p o r t a n t determinant o f growth. A calculation o f Guatemala's t o t a l factor
productivity based on the Enterprise Survey shows that there i s a positive correlation
between the share of exports a n d TFP, but does not answer the question o f causality." (For
m o r e detailed analysis, see Chapter 1 on Guatemala's total factor productivity calculations.)

2.7          However, the benefits from free trade agreements are not automatic.
Experience also shows that there are winners a n d losers in free trade agreements, o f t e n
based on the sector, geographic location, firm size a n d i n c o m e strata. I f CAFTA i s going to
contribute to faster growth, greater productivity, a n d jobs creation, Guatemalan f i r m s must
                                                                                                  n
adopt n e w technologies a n d p r o d u c t i o n processes, obtain certifications, a n d invest i w o r k e r
training. T h e benefits o f free trade in terms o f faster economic growth, technology transfers,
a n d capital inflows derive from countries' ability to s h i f t labor a n d other resources t o w a r d
the sectors that are most productive a n d reflect their economies' comparative advantage.

2.8          CAFTA reduces barriers to imports, exports and financial flows on a
permanent basis. U n d e r CAFTA, tariffs on about 80 percent o f U S exports to the
participating countries will b e eliminated immediately, a n d the rest will b e phased out over
the next decade. U S trade barriers also fall, but because the vast majority o f goods produced
in the participating countries already entered the U S duty-free under the Caribbean Basin


lj Bernard and Jensen, 1995,1999,2004; Clerides, Lach, and Tybout, 1998.
l6Chapter        7, BOOK, Carlos Casacuberta, Nestor Gandelman, Marcelo Olarreaga, Guido Porto, and Eliana
Rubiano, 2007.
                                                               n
l7 Loayza, Fajnzylber, and Calderbn, Economic Growth i L a t i n America and the Caribbean, The World

Bank, 2005, pages 91-94.
     D i f f e r e n t policy implications would arise from a causality assumption. I f exporting causes higher
productivity, the government should consider additional incentives to stimulate first-time exporters. I f higher
productivity causes greater export potential, incentives could be linked to productivity-enhancing investments
b y firms.


                                                                                                                  20
Initiative (CBI) o f 1983, U S barriers h a d less to decline. T h e CBI was a unilateral trade
preference subject to p e r i o l c review a n d approval by the U.S. Congress. CAFTA builds on
the General System of Preferences a n d CBI, m a k i n g duty free access to the giant U.S. market
                                                                  n
permanent. This should facilitate long-term investments i the region. W h i l e t h i s i s excellent
news €or Guatemalan exporters, the effects on non-exporting national producers c o u l d b e
negative over time, since U.S. a n d Central American f i r m s gain i m p r o v e d access to the
domestic market (See t h e l s c u s s i o n b e l o w for additional analysis). In addition, given the
economic slowdown o f the U.S. economy a n d the inroads o f Chmese a n d other low-cost
exporters to both the US. a n d Central American markets, CAFTA’s short t e r m effects m a y
b e limited.

2.9     CAFTA requires changes in a w i d e range of business topics a n d government
                                                      n
regulations. These include practices a n d policies i market access, agriculture, intellectual
property rights, antidumping regulations a n d practices, cross-border trade, financial services,
investment, government procurement, dispute resolution, environmental protections, labor
standards, a n d transparency requirements.

2.10        Finally, there are i m p o r t a n t poverty repercussions f r o m CAFTA m e m b e r s h i p
that should m a k e up p a r t of the “complementary agenda” of programs t o h e l p the
m o s t vulnerable producers a n d households. A c c o r d i n g to specific research carried out as
p a r t o f the World B a n k study on CAFTA, “84 percent in Guatemala.. .are n e t consumers o f
sensitive agricultural commodities, a n d as such can b e expected to benefit from the decrease
in food prices.. . (while only) 16 percent (of households) in Guatemala.. .are n e t producers
o f sensitive c ~ m m o d i t i e s . ” ’ ~

2.11 A t t e n t i o n should b e focused on n e t producer low i n c o m e households, since
they are the m o s t vulnerable to changing trade a n d investment patterns in the l o n g
term. Specifically, c o n d t i o n a l cash transfers, technical assistance to i m p r o v e productivity
a n d adjust the household’s investment strategies a n d p r o d u c t mix would b e beneficial.
Investments in r u r a l infrastructure a n d well-designed r u r a l credit c o u l d also h e l p such
households to make the necessary changes.

2.12 T h e r e are also i m p o r t a n t regional a n d socioeconomic effects that c a n arise
f r o m free trade agreements. T h e CAFTA opening c o u l d help m o r e productive r u r a l areas
to develop rapidly. Guatemalan has emphasized the development o f n o n - t r a l t i o n a l exports,
such as artisan products, cardamom, a n d a variety o f agricultural outputs. Non-traditional
exports in Guatemala t e n d to b e m o r e labor-intensive, creating local employment
opportunities a n d lessening the pressure for out-migration (to Guatemala City a n d to other
countries).

3.        EARLY E P RE C W I T H CAFTA
                 X E I N E

2.13   CAFTA has only b e e n in effect for Guatemala since July 1 2006, so it i s not
                                                                          ,
possible to measure t h e direct effects in terms o f productivity, jobs creation, a n d
contributions to economic growth. I f CAFTA opens export opportunities to large
markets, i t seems reasonable to expect that existing a n d n e w Guatemalan exporters would


 J a r a d o , et. al. 2005



                                                                                                      21
become engines of growth a n d innovation. However, to take full advantage o f the n e w trade
regime, there are m a n y requirements for the government - including i m p r o v e d institutional
efficiency, simplification of business registration a n d licensing processes, effective support
for labor mobhty, and macroeconomic stabihty. T h e B a n k o f Guatemala has developed a
simulation o f the impact o f CAFTA on the gross domestic p r o d u c t (GDP) in 2006, w h i c h
shows that 0.62 points would b e added to the GDP for the twelve months that CAFTA i s in
effect. T h i s growth would b e caused by the combination o f increased exports, increased
imports, foreign duect investment a n d a decrease in tax income?’

2.14 CAFTA comes at an important time for the country. Guatemalan economic
growth was stagnant from 1990 to 2002, averaging only 3.8 percent per year compared to a
robust 5.5 percent recorded from 1960 to 1979. As the Guatemala ICA o f 2003 revealed,
“structural reforms have i m p r o v e d economic growth i Guatemala, [but] they have h a d a
                                                                    n
l i m i t e d i m p a c t on p e r capita income. Contributing to t h i s l o w e r p e r capita growth trajectory
were low investment levels a n d relatively lower levels o f integration with the world
economy.’’21 Therefore, Guatemalan policy makers have high expectations for CAFTA as a
means o f attracting investment a n d improving regional economic integration.

2.15         Based on economic advantages reinforced by CAFTA, foreign direct
investment has increased dramatically since 2002, and represents an increasing share
of GDP (Table 2-1). Chapter 10 o f the CAFTA agreement guarantees that foreign investors
                                                                  n
will b e treated equally to their domestic counterparts, i terms o f expropriation a n d
                                                     n
indemnity. But the real attraction for investing i Guatemala in the past five years has been
the economic factors-sugar          for the candy industry, affordable labor for the clothing
assembly industry (maqzlih), a range o f vegetables a n d spices produced year-round, a n d a
                                                                           n
combination o f m o d e m a n d historic tourism assets. Investments i some sectors have
increased value added content, as shown by a $45 million a l u m i n u m factory investment
l i n k e d to a n $86 million investment in fruit juice a n d canned vegetable processing. N e w
sectors have also sprung up in recent years, a n d are likely to grow rapidly as CAFTA takes
hold. These include call centers a n d business process outsourcing.

2.16     A n econometric model developed by the Bank of Guatemala determined that
the trade effects of CAFTA were largely positive. Without CAFTA, the r e p o r t estimated
that foreign direct investment would have been US$200.6 million, a n increase o f only US$7.4
million (representing negative growth in real terms). However, with CAFTA, the actual
investment was US$325.0 million, almost 60 percent higher than without the free trade
treaty’s incentives (Table 2.2).




2O                                                   n $
     B ank o f Guatemala calculations, presented i S o XXI, June 12,2007 and at a conference on CAFTA, i          n
July, 2007. I t i s worth noting that the tax effects o f CAFTA are projected to be minimal (-0.10 percent)), given
the already low level o f customs duties.
21 Guatemala ICA, page 7, World Bank, 2004




                                                                                                               22
    Year                 Foreign direct             Annual              Percentage        Share of
                         investment                 increase            increase          GDP
    2002                 110.6                      5.1                 4.8               0.47
    2003                 131.0                      20.4                18.4              0.53
    2004                 154.7                      23.7                18.1              0.57
    2005                 208.0                      53.3                34.5              0.66
    2006 (estimated with 325.0                      117.0               56.3              0.92
    CAFTA)
    2006 (estimated      200.6                      7.4                 (-3.5)            0.57
    without CAFTA)
                               I                I                      I 56.0"
                                                                                     ~




    2007 estimate        507.0                      182.0                                 ---



    2.17 Even before CAFTA, Guatemala offered incentives to international investors
    through the services of the public/private investment promotion agency (INVEST).
    Incentives included assistance with visa requirements, arrangements with municipal
    governments, and a special training fund. The National Competitiveness Program
    (Pronacom) and I N V E S T established a special fund to provide a training subsidy on a per
    worker basis to international investors establishing plants in the country. I N V E S T
    management directly attributes recent large investments by GE Money, Envases Mexico, and
    Parras Textiles to t h i s innovative worker training fund. Together, these investments
    represent 2,980 new jobs. In addition, t h e CAFTA Tours initiative o f I N V E S T brings
    private sector leaders from Guatemala to niche markets with potential investors. T h i s
    outreach approach has begun to bear fruit, with new investments from Indiana and Illinois
    under development.

    2.18    Guatemala has implemented a number o f free-trade agreements. These
    agreements have contributed to a n expansion in Guatemala's level o f total exports over t i m e
    and a gradual diversification o f i t s export markets. The four free trade agreements, in
    addition to CAFTA, include those with Taiwan, Mexico (northern triangle), t h e Dominican
    Republic, and Chile.



    Table 2.2: Importance of Foreign Direct Investment on GDP in 2006 (US$ millions)
I   Investment without     I
                         A c t u a l Investment       I                          I
                                                Increase attributable Increase attributable
    CAFTA (estimated)       with CAFTA               to CAFTA           to CAFTA (in %)
            200.6                    325.0                     124.2                     59.7%



    2.19    Investment opportunities and specific incentives are attracting a diversified
    group of investors from Taiwan, Colombia, India, Canada and Europe, in addition to
    traditional investors from Central America, Mexico and the United States (Table 2-3).
    Guatemala's free-trade agreement with Taiwan came into effect on July 1 2006, and t h e
                                                                                    ,
    country i s expected to pursue other bilateral trade agreements in the near future. I t should b e



                                                                                                     23
n o t e d that these figures do not capture reinvestment by foreign companies a n d their national
subsidiaries. T h e B a n k o f Guatemala i s developing a system to capture t h i s additional
Investment.




        Source:   * 2007 statistics are for the period January-June.

2.20 T h e rewards to capturing an increased share of FDI are most notable in terms
of jobs creation, but there i s no central monitoring of such gains. There i s no central
registry o f all foreign direct investment, or the jobs created by such investments, so data i s
only partial. In 2006, FDI registered with INVEST in Guatemala directly created 14,685
jobs, not including jobs from reinvestment a n d indirect jobs created through links to
national suppliers. Call centers a n d business process outsourcing (BPO) offer the least
expensive investment p e r job created, building on a large pool o f English-speaking university
students to p r o v i d e services to overseas f i r m s . An example of a call center i s a n alliance
between GE M o n e y o f General Electric a n d Banco de America Central (BAC). T h e call
                                                                                n
center wdl provide services to Spanish-speaking clients o f GE M o n e y i the U n i t e d States
a n d Mexico, as w e l l as BAC clients in Guatemala. In addition to t h i s n e w entrant, there are
around 50 Call Centers o f m e d i u m a n d large companies, employing 3,000 workers. To satisfy
the increased demand for fluent English language speakers, the government has signed a n
agreement with the government’s Institat0 Tecnico de Capacitarion (INTECAP) to deliver a
bilingual technical training program. (Table 2.4).

             Table 2.4: Tobs created bv F o r e i m Direct Investment in 2006
                  Sector                                               Jobs created
                  Manufacturing                                           2,540
                  Call Centers and BPO                                    3,850
                  Agro-industrial production                               1,750
                  Others                                                  6,390
                  Total all sectors                                       14,685


2.21   Despite these gains, Guatemala still lags far behind other Central American
countries in FDI as a share of GDP. E x c e p t for 1998, w h e n a large privatization affected



                                                                                                    24
the trend, Guatemala has steadily under-performed in percentage terms, with foreign direct
investment w e l l under 1.0 percent o f GDP. At the same time, Costa Rica, El Salvador,
Honduras a n d Nicaragua are in the 3 to 6 percent range (Figure 2.1).

                                   Figure 2.1: FDI as a share of GDP
                 Net Inflows of FDI as a Percent of GDP in Guatemala and Comparator
                                  Countries, 1995-2005 (Source: WDI)




                                                                                                   -Costa     Rica
                                                                                                   --e El Salvador
                                                                                                       Guatemala
                                                                                               ~       Honduras
                                                                                                   -Nicaragua




       Source: World Development Indicators

2.22 Whether caused by opportunities, investment promotion strategies or market
changes, investment in various sectors o f the economy has shifted. Investors seem to
b e moving out o f clothing assembly (mapila) a n d other manufacturing to services, such as
call centers a n d business processing (Table 2-3). W h i l e clothing manufacturing represented
52.2 percent o f the n e w foreign direct investment in 2005, i t h a d d r o p p e d to only 45.6
percent by June o f 2007. E v e n taking into account that investment i s “lumpy,” there are
i m p o r t a n t short t e r m employment challenges. W h i l e exports have grown remarkably, up 24
percent year-on-year for January a n d February o f 2007, there are sectoral changes.

2.23    There are labor dislocation issues caused by such changes in sectoral
participation in international trade. For instance, the employment level o f workers in
clothing assembly fell from a peak o f 113,200 in 2004 to j u s t 88,250 in early 2007 (a decline
o f 22 percent). T h e maqzdu industry’s changing fortunes are l i n k e d to increased Asian
competition, tempered partially by i m p r o v e d access to the U.S. market through CAFTA a n d
greater vertical integration (using the complete package p r o d u c t i o n model).’’ E x c e p t for i t s
employment benefits a n d foreign exchange earnings, t h i s sector does not offer m a n y
advantages: i t uses known technologies a n d has few backward linkages to local producers.
Exporters in other sectors have made m o r e r a p i d adjustments. For instance, changes in
coffee m a y reflect a gradual s h i f t from low value b l e n d coffees to greater export o f organic
a n d certified “free trade” coffee.

2.24   Such shifts have direct implications for the education system, technical
training, and infrastructure investments. In addition, a key question for policymakers
would b e to assess whether the “winners” under CAFTA are exporting products with higher
value added content, or m o r e extractive in nature (such as i s the case with mining). A n o t h e r

22   T h e entry o f Vietnam into the WTO poses a specific challenge t o the Guatemalan maquila industry.



                                                                                                                 25
issue would b e how to develop a safety net, private a n d public sector retraining capacity, a n d
                                                                 n
a n i m p r o v e d labor market to help f i r m s a n d workers i adversely affected, less competitive
sectors a n d regions to adjust to the n e w realities under the free trade r e g m e . T h e increased
demand for local labor has begun to translate into higher salaries, as productivity increases
over time.23



Sector                                2005                        2006                         2007
Agro-industry                         24.6                        23.7                         30.5
  Coffee                               7.4                         7.1                          8.5
  Banana                                8.7                        7.2                          7.8
  Other products                       8.5                         9.4                          14.2
Manufacturing                         66.4                        65.9                         58.5
  Clothing mfg.                        52.2                       51.6                         45.6
  Sugarlcandies                        2.8                          1.9                          1.2
  Other products                       11.4                        12.4                         11.7
Mining sector                          8.9                        10.5                          11.0
Total                                 100.0                       100.0                        100.0


2.25     These regional gains are most evident in the Central and Southwestern parts
                                                                                   n
of the country. K e y reasons for these gains include investments i n e w transportation
infrastructure, the i n t r o d u c t i o n o f electricity a n d communications, strong l o c a l leadership,
irrigation, a n d interest i adopting n e w technologies. With the signing o f CAFTA, n e w
                              n
programs were launched in the Western Highlands, includmg the departments o f QuichC,
A l t a Verapaz, Huehuetenango a n d San Marcos. N i n e t y percent o f the vulnerable p o p u l a t i o n
lives in these departments, a n d the poverty alleviation effects o f n e w programs to i m p r o v e
productivity a n d commercial viability o f local producers c o u l d b e enormous.

2.26    Several non-traditional products showed increased export value from 2006 to
2007. Among the leaders were rubber (31 percent increase), vegetables (25 percent), flowers
(9 percent), a n d shrimp (32 percent). Processed products also increased significantly, l e d by
traditional foods (“productos nostalgicos”, 32 percent) a n d electrical machmery (37 percent).

2.27     CAFTA has reinforced a longstanding trend of trade balance deficits with the
United States. With the exception o f 2003, the trade balance has worsened every year since
2002. T h e gap in 2006 amounted to almost 10 percentage points, a n d m o r e t h a n US$1.6
billion. W h i l e exports jumped about 7.3 percent during the f i r s t three months o f 2007,
imports also grew. I t i s unclear whether imports are growing to fuel exporters (with
increased supplies of inputs a n d capital goods, for instance) or are a reflection of increased
consumption. O n e analyst estimates that exports would have to grow at a n annual rate o f 12
percent (in value) to begin to close the trade deficit.24 As Table 2.6 reveals, C h m a has b e g u n




*3 Medici6n del Impact0 Socioecon6mico de las Actividades de Producci6n y Comercializaci6n de Productos
Agricolas no tradicionales de E x p o r t a c i h Estud~opreparado por E C O D E S X R R O L L O , bajo convenio
AGEXPORT/AID -520-0403. Guatemala, octubre 1997.
24 Samayoa, C A F T A Background study for Guatemala Investment Climate Assessment, June, 2007




                                                                                                            26
to eat into Guatemala’s small share o f t h e U.S. market, while Chile and Brazil have managed
to slightly increase t h e i r participation in the U.S. market over the past five years.25




 Year                    Imports                 I     Exports       I   Trade balance    I      Imports    I   Exports
 2003                     3372.8                       2384.2                -988.6               43.8           29.9
 2004                     3673.3                       2660.4               -1012.9               40.9           29.3
 2005                     3982.4                       2686.4               -1296.0               39.4           30.9
 2006                     4414.8                       2781.8               -1633.0               35.4           26.6
 2007                     4075.9                       3032.2               -1043.7

                    Fieure 2.2: Guatemala’s Trade Balance Deficit. 2002 to 2007
                                                       Guatemala International Trade
                            15,000

                            10,000

                     g        5,000

                     f             o
                             -5,000

                           -10,000
                                                2002     2003       2004         2005     2006       2007


                                     of
                 S O ~ r ~ e B a n k GUBIwmIa
                                                         IImports   rn Exports   Trade Balance
             I

                         Source: Bank o f Guatemala

2.28        T h e United States International Trade Commission’s (ITC) figures on
imports of consumer goods reveal that China, Brazil and Chile have gained a bigger
share of the U.S. market, at the expense of the Central American countries. Chinese
exports to t h e United States. (for consumer goods) grew 18 percent in 2006 and 12.6 percent
in 2007, while European (OECD 27 Group) exports to t h e United States jumped by 7.2
percent (2006) and 6.4 percent (2007). These increased trade flows compare to only 3.1
percent for Guatemala in 2006 and 3.0 percent i 2007 (U.S. Census figures on imports).
                                                       n
W h i l e t h e value o f exports o f consumer goods was stable (about US$3.0 bitlion per year), t h e
share for Guatemalan exporters dropped from 0.18 percent o f the U.S. market in 2003 to
only 0.16 percent by 2007. (Table 2.7)

2.29    CAFTA has substituted for the previous trade preference systems, but not
created new opportunities. The ITC’s data for imports from Guatemala confirm that
CAFTA has only substituted for GSP and CBI preferential entry for certain goods, and t h e
share of imports covered by these has remained steady at around 40 percent from 2003 to
2007 F a b l e 2.8).




* j O x f o r d Analytica, M a y 1, 2006, “The recent evaluation o f trade and investment relations between L a t i n

America and China”.



                                                                                                                          27
                      Table 2.7: U S Imports from CAFTA, EU and China




                      TOTAL                16.9            17.7            18.0        18.6           18.8
                Percentage Change                         4.7%            2.1%        3.0%            1.1%

                                      EU 27 GROUP ( I n US$ Billon)
                                       I              I               I           I               I
                 Country                   2003            2004           2005        2006            2007
                 TOTAL                     251.6          281.1           308.6       330.9           352.2
                 Percentage Change                        11.7%           9.8%        7.2%            6.4%



                         Countr




                  Sources: USITC (U.S. Department o f Commerce and the U.S. International
                  Trade Commission)



    Table 2. 8: Participation of Guatemalan exporters in U.S. Preferential Duty Programs




I                   Percentage GT imports
                    under trade preference        I       38%     I       40%     I   42%     I       41%     I   42%        1
    CAFTA’s effects on the Public Sector
    2.30   In anticipation of the approval o f CAFTA, the pace of reform was so dramatic
    that Guatemala was listed as one of the Top Ten Reformers by Doing Business 2007.
    There have been i m p o r t a n t institutional changes, spearheaded by the Ministry o f Economy,




                                                                                                                        28
Pronacom, the T a x Administration Superintendency (SAT), the N a t i o n a l Statistics Institute
(INE) a n d the N a t i o n a l Institute for Technical Training (INATEC). Private sector leaders,
such as chambers of commerce a n d the N o n - T r a d t i o n a l Exports Association (Agexport),
have also made i m p o r t a n t contributions. N e w programs that i m p r o v e the country's export
potential a n d attractiveness as a n investment location include: (1) a one-stop registration
office (Ventunilla Agil"); (2) fairs to encourage investment by the Guatemalan emigrant
community; (3) international conferences for sectors ranging from wood./furniture a n d call
centers to corporate social responsibility; (4) practical guides for CAFTA; (5) streamlined
import a n d export services; a n d (6) special cluster formation a n d training programs for
SMEs.

2.31   Free trade agreements affect the public sector significantly, in terms o f taxes
generated, taxes forgone, and trade balance issues. T h e tax b u r d e n o f CAFTA a n d
increased exports i s relatively low because Guatemala has maintained low customs duties.
T h e B a n k o f Guatemala's analysis o f CAFTA effects found that the expected gains from
value added tax are slightly l o w e r t h a n the expected losses from foregone customs duties.
                                                 n
Table 2.9 reveals that the decline i customs duties collection due to CAFTA-related
liberalization i s only a n e t l o s s o f 0.1 percent o f GDP.

                                Table 2 . 9 : Customs duties from CAFTA




     Source: Samayoa, 2007, using data p r o v i d e d by the Bank o f Guatemala a n d the hlinistry o f Finance




2.32        T h e institutional environment for business and investment has improved in
many areas over the last several years. T h e N a t i o n a l Agenda for Competitiveness
provides a ten year roadmap for a national competitiveness effort, bringing together t h e
private sector, public sector, c i v i l society, a n d academic leaders in a n inclusive approach
covering u r b a n a n d r u r a l sectors. T h i s ambitious agenda i s coordinated by the N a t i o n a l
P r o g r a m O f f i c e for Competitiveness (PRONACOM), supported by the Bank's Guatemala
Competitiveness Project.26 PRONACOM has taken the lead by building alliances with m o r e
t h a n forty ministries, private sector chambers a n d associations. PRONACOM a n d i t s allies
have undertaken a long l i s t o f activities to i m p l e m e n t the s i x strategic axes o f the N a t i o n a l
Competitiveness Agenda. Topics have included infrastructure (airports, ports, roads, a n d
energy), taxation, business registration a n d licensing, a n d r u r a l competitiveness (in alliance
with Agexport, AGER a n d a n u m b e r o f sector-specific clusters)



26   Guatemala Competitiveness Project,     #7044-GU, for US$20.3 million, scheduled t o close on June 30,2008.


                                                                                                                   29
2.33  Guatemala continues to provide incentives and investment facilitation
through i t s investment promotion agency, “INVEST in Guatemala”. T h i s agency
assists international investors with visa requirements, coordination with local governments,
and w o r k e r training. INVEST i s complemented by PRONACOM, the N a t i o n a l
Competitiveness Program, in promoting sound competitiveness policy a n d a favorable
investment climate. For example, INVEST a n d PRONACOM partnered to create a special
fund o f US$500,000 to support w o r k e r training for international investments to establish
                                       n
plants a n d increased manufacturing i Guatemala. This facility was a decisive factor in the
investment choices of GE M o n e y a n d t h e Mexican firm Envases Mem’co.

2.34  T h e Ministry of Economy has undertaken a number of important institutional
reforms in support of CAFTA implementation. A m a j o r example i s the creation o f the
one-stop shop (Ventanilla Agil) for business registration, w h i c h reduced the average time to
register a business by four days a n d was cited by Doing Business 2007 as a n i m p o r t a n t
reform. T h e M i n i s t r y of E c o n o m y has also created a n i n f o r m a t i o n center to p r o m o t e access
to i n f o r m a t i o n on best practices for Guatemalan enterprises.”

CAFTA and Poverty Alleviation
2.35      CAFTA has the potential to help alleviate poverty. A study by the World B a n k
provides a statistical projection o f consumption, employment, i n c o m e a n d welfare benefits
for indigenous households, using ENCOVI 2000 data. T h e study concludes that “on
average, a typical indigenous household would enjoy gains equivalent to nearly 15 percent of
i t s average per capita expenditure”. This i s the result o f lower prices for food (indigenous
f a d e s devote 42 percent of household i n c o m e to food, while non-indigenous households
only use 31 percent for these purchases). Estimated food price savings ranged from 3
percent to fruit, 20 percent for cereal, 14 percent for fish, a n d 48 percent for dairy
products.28

2.36 Income effects are also likely to be positive, although the magnitude i s not
projected to be as large. As exports increase thanks to CAFTA, there should b e a positive
effect on employment creation, both directly a n d indirectly, especially given the low levels o f
                 n
unemployment i the country (a 2000 estimate was 1.4 percent). On the other hand,
increased demand for labor i s a factor in raising wages, m o r e so if the labor productivity also
                                                             n
increases. This seems to b e happening relatively m o r e i the Central a n d Southwestern
region o f the country. T h e estimated gain for indigenous households would b e about 0.26
percent, using the ENCOVI 2000 survey.

2.37    CAFTA i s generating similar incentives in departments with high levels of
poverty, such as Quiche, Alta Verapaz, Huehuetenango, and San Marcos. Recent
                                                n
efforts to strengthen productive infrastructure i the priority regions are expected to
enhance productive activities a n d export products commercialization, hence leading to
poverty reduction.

2.38 T h e analysis of the positive effects on indigenous and all households masks
one important flaw in the CAFTA design-the        exclusion of white maize from the

27   Samayoa (2007), p 13; Doing Business 06/07 l i s t o f reforms
28   Porto 2006.



                                                                                                                     30
tariff liberalization framework. T h e CAFTA exclusion o f w h i t e c o r n was based on a
concern that low i n c o m e producers in Central America would b e adversely affected by trade
liberalization, as low costs from subsidized imports drove national prices down. However, as
the food crisis has materialized rapidly in the country a n d the region in 2008, i t i s clear that
international prices are spiraling rapidly a n d o p e n trade would benefit the country.
Additionally, the n u m b e r of white c o r n producers who trade s u r p l u s i s quite small, m a k i n g i t
easy to develop well-targeted transfers during a transitional period.29

4.         THEPERSPECTIVE OF GUATEMALAN
                                      EXPORTERS

2.39    In 2003, Guatemalan exporters reported that they were more affected by
customs and trade regulations, business licensing, transportation, and property
rights and the legal system than f i r m s that did not export. With the exception o f
financing (cost a n d access to credit), corruption a n d legal systems, f i r m s with foreign
ownership claimed to b e significantly m o r e constrained t h a n domestic f i r m s along most
             n
dimensions i the business climate. T h i s was especially true for trade a n d customs
regulations, tax administration a n d business l i ~ e n s i n g . ~ ’

2.40          In 2003, formal barriers to trade were insignificant. With a n average of 7.2
percent in 2002, Guatemala’s t a r i f f rates are close to those o f El Salvador a n d Costa Rica,
a n d a m o n g the lowest in the region. In addition, the use of n o n - t a r i f f barriers appears to b e
l i m i t e d in Guatemala. N o recourse o f anti-dumping, countervailing or safeguard measures
has been made in recent                     T h e 2003 Guatemala ICA cited direct costs from
inadequate infrastructure a n d indirect costs from corruption as possible causes of low trade
levels a n d poor international integration. However, since 2004, there have been notable
improvements in infrastructure, such as ports, airports, a n d highways.32

2.41    B y 2007, Guatemalan exporters were reporting far fewer problems with
infrastructure, corruption, and macroeconomic instability. Perceptions o f “major or
                                                                               n
severe problems” no longer d f f e r significantly from other firrns, except i the area of taxes
(both tax rates a n d tax administration). Table 2.10 reveals that barriers for exporters a n d
non-exporting f i r m s face similar constraints. However, exporting f i r m s were m o r e likely to
cite i n f o r m a l payments (corruption) for construction permits a n d operating permits. T w e n t y
five percent o f exporters cited obtaining these permits as a significant problem, compared to
only 8 percent o f non-exporting f i r m s . This was also m o r e o f a p r o b l e m for firms outside
Guatemala City. However, i n f o r m a l payments represented a smaller share o f sales a n d
percentage o f contracts for exporters than for other f i r m s . Bribes for exporters were
reported to b e 9.5 percent o f a contract a n d 6.2 percent o f sales, w h i l e other firms reported
15 percent of contract value and 9.4 percent o f sales in i n f o r m a l payments.




29    For a further analysis, see J a r a d o and Lederman, World Bank, 2006; Also Porto, World Bank, June, 2006.
30   Guatemala I C A 2003, Appendix C
31   Guatemala Country Economic Memorandum, 2004, cited in Guatemala ICA, World Bank, 2005.
32   Guatemala I C A 2003.



                                                                                                              31
                    Table 2.10: Concerns of ExDortinn and Non-ExDortinn Firms

    Corruption                                                60                                        61
    Political Instability                                     53                                        47
    Electricitv                                               50                                        45
    Macroeconomic Instability              I                  43                                        43
    Taxes                                                     39                                        27
    Informality                                               38                                        37
I
    Crime                                                     37                                        37                       I

    Source: Enterprise Survey

    2.42 The trade environment remains a significant challenge. Guatemala ranks last
                                                              n
    a m o n g CAFTA members in trading across borders i the 2008 Doing Business survey (see
    Table 2.11). This low rating does not appear to b e due to specific trade policies, as
    Guatemala maintains low average t a r i f f rates a n d the use o f n o n - t a r i f f barriers by the
    government i s limited.33 Guatemala has also made m a j o r investments in i t s trade
    infrastructure, w h i c h have succeeded in reducing import a n d export costs compared to
    previous years. Despite t h i s investment, i t continues to have the highest import costs, the
    second highest. export costs, a n d a m o n g the highest n u m b e r of documents required for both
    importing a n d exporting a m o n g CAFTA members. A d d i t i o n a l improvements are required in
    trade infrastructure a n d customs management to reach regional norms in terms o f the ease
    of cross-border trade. M o r e details on customs delays are covered in Chapter 3.

                                                           across borders in CAFTA countries
                                                                                                                   cost to
                              Documents         Time for               to       Documents        Time for
                                                                                                                   import
     Economy        Rank      for export         export      export             for import        import
                                                                                                                  (US$ per
                               (number)                          Per             (number)
                                                 (days)       container)                           (days)        container)
    Dominican
    Republic       35          6                   12             8 15               7               13             1015
    Costa Rica     54          7                   18             660                8               25             660
    El Salvador    68          8                   21             540                11              18             540
    Nicaragua      87          5                   36            1021                5               38             1054
    Honduras       103         7                   20            1065                11              23             975
    Guatemala     116         11                   19            1052                11              18             1177
    Source: Doing Business 2008. Rankings         are out o f 178 countries.

    2.43      Perceptions of crime reduce the attractiveness of Guatemala as an investment
    location. Eighty-five percent o f exporters r e p o r t investing in security services a n d systems,
    compared to only 59 percent o f non-exporting firms. Exporters are m o r e likely to suffer
    from theft (41 percent, compared to 34 percent for other f i r m s ) a n d absenteeism caused by
    crime (23 percent, versus 15 percent). Security expenses represent 2.1 percent o f sales,
    compared to only 1.8 percent for other f i r m s . However, exporters r e p o r t losses due to theft
    are h a l f o f that o f other firms (1.2 percent o f sales, compared to 2.5 percent for n o n -
    exporting firms). Adding another 1.3 percent for t h e f t during export processes, t h e total cost


    33World Bank, “Guatemala Country Economic Memorandum,” Washington, D.C., 2005, pg. 144. One
    exception to t h e low t a r i f f rates i s in the area o f agriculture, where quotas and tariffs rates may be higher for
    certain goods.



                                                                                                                           32
for all kinds of crime amounts to 6.1 percent o f sales. (For m o r e details on firm losses from
theft a n d breakage, see Chapter 3.) A recent U n i t e d Nations review o f crime i Central    n
America estimated m o r e than 6,000 deaths due to violent crime in the country i 2006,           n
c o n f i m i n g t h i s to b e a m a j o r issue for the public a n d for potential investors.

2.44 Infrastructure problems make Guatemala less competitive and less attractive
for FDI. Infrastructure affects the cost, timeliness a n d reliability o f delivery o f products,
                                                                                        n
m a k i n g it a critical area for exporting f i r m s . Infrastructure issues reviewed i the sample
include electricity, transportation, a n d telephone lines. In 2007, h a l f o f t h e Guatemalan
exporters interviewed stated that a n unreliable supply o f electricity was a n obstacle to their
operations. However, o n e in four exporters overcame t h i s p r o b l e m by purchasing their own
generators (twice as m a n y as non-exporters). Exporters m e n t i o n e d that there were a n
average of 28 outages each year, a n d each event lasted about 2.8 hours. Non-exporters only
suffered about 17 outages, lasting a n average o f 3.2 hours. For telecommunications,
exporting f i r m s waited a n average o f 46 days for telephone a n d internet installation,
compared to j u s t 27 days for non-exporting f m s . O n c e they h a d internet service, exporters
used i t routinely to reach suppliers (96 percent) a n d through websites (89 percent). For m o r e
details on infrastructure, see Chapter 3.

Innovation, Skills Training and Quality Issues

2.45          Few Guatemalan firms possess the necessary quality certifications, compared
with other Latin American countries. Quality a n d process certifications such as
International Standards (ISO) a n d Hazardous Analysis Critical Control Points (HACCP) are
o f t e n required to gain access to international markets. Efforts to p r o m o t e national quality
certification, l e d by AGEXPORT, have not yet yielded significant results. Efforts by the
M i n i s t r y of E c o n o m y a n d the Chamber o f Construction to develop metrology systems also
seem to b e lagging b e h i n d the private sector’s needs.34

2.46    More importantly, many Guatemalan f i r m s are not expressing interest in I S 0
certification. On the other hand, the private sector, l e d by the exporting f i r m s , i s investing
in innovation (Table 2-12). Such investments range from purchasing foreign licenses to
adding n e w products a n d processes a n d investing in research a n d development activities.
However, the amount invested in research a n d development i s extremely low as a share o f
sales. In fact, non-exporting f i r m s r e p o r t investing m o r e in research a n d development, both
in terms o f their own a n d subcontracted activities.

                          Table 2.12: Innovation investments in 2007




Source: Enterprise Survey results


34   I S 0 Survey 2005.


                                                                                                     33
2.47      Guatemalan exporters are less l i k e l y to report losses f r o m c r i m e a n d
transportation a n d import delays t h a n exporters in the comparator countries. T h e y are
m o r e hkely to cite export delays as barriers to growth. All exporters i the sample mentioned
                                                                         n
                             n
senior management t i m e i dealing with regulations as a constraint. W       e businesses in the
comparator countries p e r f o r m e d w e l l in terms o f internet use, foreign licensing, research a n d
development, a n d n e w product/service development, Guatemalan exporters did not show
such characteristics. Therefore, i t i s not surprising that Guatemalan exporters lagged b e h i n d
                             n
the comparator countries i key productivity measurements, i n c l u d m g sales p e r w o r k e r and
value added per worker.

5.       RECOMMENDATIONS: IMPROVING COMPETITIVENESS IN THE AGEOF C N T A

2.48 With i t s diversified export mix, t o u r i s m a n d services potential for foreign
direct investment, Guatemala has a lot to offer-and a lot to lose if it fails to invest in
the systems, technology a n d worker skills required in the n e w world of CAFTA trade.
T h e f i r s t twelve months o f CAFTA have begun to yield encouraging results-but             have
revealed some structural weaknesses that need to b e addressed. M a n y Guatemalan f i r m s
have begun to adapt to the m a j o r changes represented by CAFTA, both in terms o f findmg
export market niches a n d investing in I S 0 a n d other certifications, but they lag far b e h i n d
m a n y regional competitors. W h i l e FDI a n d exports have increased, t h e trade gap persists,
with imports jumping significantly. T h e easy access to markets in t h e U n i t e d States, Central
America a n d the D o m i n i c a n Republic i s balanced by a n increase in foreign penetration of
the national market. T h e benefits to the country c o u l d include employment, w o r k e r training,
management know-how, a n d access to n e w technologies. T h e r i s k s to the country are clear:
as some sectors a n d regions lose their share o f the national markets, unemployment m a y
grow.

2.49 T h e m a i n barriers to growth for e x p o r t i n g firms are corruption, p o l i t i c a l
instability, electricity, a n d macroeconomic instability. However, while the 2003 survey
showed 65 percent to 80 percent of the f i r m s shared the top four “major or severe barriers”,
the average in 2007 for exporters a n d non-exporting f i r m s has declined by 20 to 30
percentage points in these areas. In addition, while not h g h h g h t e d by the survey, other
sources find that there i s a need for streamlined export-oriented financing mechanisms a n d
i m p r o v e d training for workers (given a lack o f personnel with m o d e m p r o d u c t i o n s k i l l s in
the national labor market).

2.50 W h i l e short t e r m improvements in the business climate faced by exporters are
encouraging, there i s a r i s k of m e d i u m t e r m dislocations affecting low i n c o m e
households a n d workers with low skills training. W h i l e tourism should continue to
grow, other industries are not i m m u n e from the demands for greater efficiency, i m p r o v e d
quality, a n d increased scale o f production. Competitors from the r e g i o n a n d b e y o n d (notably
China a n d Vietnam) c o u l d negatively affect certain sectors, such as magz4iila, leather a n d
furniture a n d other wood products. There are also structural puzzles that should b e
investigated. For instance, although foreign direct investment i s growing rapidly, Guatemala
s t i l l lags significantly in terms o f FDI as a share of GDP.

2.51T h e r e are five recommendations that promise t o build o n the early gains from
CAFTA a n d a n i m p r o v e d business climate for exporters. First, i t would b e i m p o r t a n t to


                                                                                                              34
make i t easier for exporters to obtain I S 0 a n d HACCP certifications. Lessons can b e learned
from the regional leaders in certifications, such as Brazil, Colombia, Argentina, C u e ,
Ecuador a n d El Salvador. T h e M i n i s t r y o f E c o n o m y should accelerate the development o f a
national quality system, with laboratories, metrology, a n d outreach to specific sectors with a n
export r e c o r d or export potential. Specific recommendations to i m p r o v e quality systems in
Central America can b e found in World B a n k (2008). T h e financial sector m a y hold t h e key
to certifications, since Guatemalan f i r m s need to update p r o d u c t i o n technologies to remain
competitive. Details on financial sector recommendations are contained i Chapter 5.   n

2.52 T h e second recommendation i s to prioritize the government's investments in
ports, airports, and roads to facilitate access to overseas markets. (A complete
discussion o f infrastructure shortcomings a n d recommendations i s contained in Chapter 3).
Along with physical infrastructure, the survey finds that import a n d export times have been
increasing in the past four years, despite significant investment by the government i              n
software a n d port staff training. Guatemala has created a one-stop shop for company
licensing, w h i c h helped to make i t o n e o f the top t e n reformers according to Doing Business
2007. Exporters would benefit from a s d a r s t r e a k e d approach for documentation a n d
handling o f i m p o r t e d inputs a n d products to b e exported. An evaluation o f the systems
complemented by a one-stop shop approach to documentation would likely contribute to
i m p r o v e d results a n d less complaints by exporters.

2.53      T h e third recommendation i s to review the effects o f the white corn exclusion
in CAFTA, in light o f the growing food price surge in the country and the region.
Available data reveal that the expected effects on producers (caused by cheap food imports)
are, in fact, cutting in the opposite direction. To i m p r o v e the welfare o f the great majority o f
low i n c o m e households, especially indigenous communities, o p e n trade in white c o r n would
b e a n i m p o r t a n t short t e r m measure.

2.54        T h e fourth recommendation i s to strengthen rural competitiveness and
outreach programs to small and medium firms. For r u r a l areas, existing programs with
N o n - T r a d i t i o n a l Exporters Association (Agexport), the Asoaaaon Guatemalteca de Empresarios
hrales (AGER), FUNDESA (with tourism centers), the N a t i o n a l Coffee Producers
Association (Anacafk) a n d other organizations with p r o v e n outreach a n d attractive products
should b e expanded. For SMEs, emphasis should b e placed on outreach programs to small
a n d m e d i u m f i r m s to encourage internet use, foreign licensing, research a n d development
investments, a n d n e w p r o d u c t a n d service development. At the same time, industry specific
tracking o f key productivity measurements (sales to w o r k e r a n d value added p e r worker)
would h e l p to measure the success o f such measures.

2.55     Finally, the Government should build o n what has been working in trade
promotion. CAFTA guides for SMEs, the alliance with INTECAP for w o r k e r training, the
increasingly effective investment promotion approach, a n d investments in the development
o f Guatemala's i m p o r t a n t tourism assets all contribute to a n i m p r o v e d outlook. Most
importantly, the leadership r o l e o f the Commissioner o f Investment a n d Competitiveness
a n d the M i n i s t r y o f E c o n o m y should b e maintained, as w e l l as the strong operational
leadership o f the office o f the N a t i o n a l Competitiveness Promotion (Fronacom).




                                                                                                      35
      Chapter 3.                 Firms’ Access to Infrastructure Services


1.      INTRODUCTION

3.1   This chapter presents an overview of Guatemala’s transport and logistics
using available information and the findings of the survey. T h e chapter discusses
physical infrastructure for transport (roads, airports, a n d ports), transport related services,
a n d trade facihtation issues. T h e findings o f the chapter identify the areas o f intervention
needed to make transport a n d logistics k e y contributors to growth.

3.2      Infrastructure i s a major contributor to economic growth, particularly for
developing countries. T h e approach to understanding t h i s linkage has varied. K r u g m a n
(2004), for example, considers the i m p a c t of infrastructure on aggregate T o t a l Factor
Productivity. Roller a n d Waverman for telecommunications a n d F e m a l d for roads consider
the i m p a c t o f indmidual sectors on growth. Calder6n a n d Servkn (2003) review the L a t i n
American region-specific i m p a c t o f infrastructure stocks. Esfahani a n d Ramirez (2002) a n d
Calder6n a n d Servtn (2004) discuss the separate i m p a c t o f service quality on growth. T h e
cumulative result o f t h i s growing literature i s a robust demonstration o f infrastructure’s role
as’a driver o f growth. Underlying the “direct linkage literature” (infrastructure a n d growth),
i s the recognition that infrastructure i s a n i m p o r t a n t determinant o f firm productivity. T h a t
is, the supply, quality a n d price o f infrastructure are defining elements o f firm
competitiveness.

3.3   With the spread of trade liberalization, logistics has become more relevant for
developing countries as a strategic source of competitiveness. Firms require moving
inputs from providers to their factories a n d after the p r o d u c t i o n process they also need to
m o v e their outputs to distributors or the end client. To that end, firms rely on physical
infrastructure for transport (e.g., roads a n d ports), transport related services (e.g., logistic
operators, trucking industry), trade facilitation regulation (e.g., customs, b o r d e r agencies,
tariffs), a n d their inventory processes as w e l l as their transport endowments. Logistics costs
alone tend to b e higher than duties i m p o s e d on imports as w e l l as the cost o f quotas a n d
other non-tariff barriers. (Table 3.1).

3.4     In the context of the implementation of CAFTA, Guatemalan firms are
identifling the relevance of transport issues for growth. In 2007, about 20 percent o f
surveyed manufacturing f i r m s perceived transport as a m a j o r or severe constraint to growth.
At the regional level, Guatemalan firms (20 percent) r a n k a m o n g the top 5 countries where
transport i s perceived as a m a j o r or severe constraint. However, only 7 percent of f i r m s
indicate that transport i s one o f the top 3 constraints. Large f i r m s are m o r e likely to perceive
transport as a n obstacle to growth t h a n small a n d m i c r o f i r m s . C o m p a r e d to 2003,
Guatemalan f m s , as w e l l as their counterparts in Central America, perceived that transport
i s becoming a m o r e i m p o r t a n t barrier to growth. In the case o f Guatemala, non-exporters




                                                                                                        36
are the ones that r e p o r t a n increased worsening o f transport as a n obstacle for   Itis
important to n o t e that firms' perception m a y not coincide with actual changes made in the
ti-ansport sector.

               Table 3.1: Transport as a Major or Severe Constraint to Growth




              Small   Medium      Large   All firms




      Source: Enterprise survey

3.5     In addition to the immediate impact o n firm competitiveness, Guatemala's
ability to attract foreign investment may also be affected by i t s low marks in overall
infrastructure quality. As n o t e d in Table 1.4 (Chapter l),        Guatemala ranked b e l o w the
average o f comparator countries in terms o f overall infrastructure quality in the survey o f
business executives contained in the World E c o n o m i c Forum's G l o b a l Competitiveness
Report, even though i t i m p r o v e d between 2004 a n d 2006, but it ranks b e l o w El Salvador a n d
Honduras. In the area o f air transport, Guatemala's score was b e l o w the peer group average.
However, i t showed m a r k e d improvements in recent years, partly attributed to technical
support to upgrade L a A u r o r a airport a n d improvements i safety standards.
                                                              n

2.                             AND TRANSPORT
                       FOR TRADE
                 INFRASTRUCTURE
          PHYSICAL

Roads
3.6       Guatemala has made some improvements in increasing i t s road endowment.
In r o a d density, measured as the length o f paved roads p e r worker, Guatemala ranks better
than El Salvador a n d Honduras, but worse than Costa Rica, Panama, a n d Mexico.
Guatemala's paved r o a d density has i m p r o v e d s t e a d y since 1996 partly attributed to m o r e
rapid growth in kilometers o f paved r o a d t h a n in the labor force. Improving r o a d access a n d
quality were considered essential by 1996, after the end o f the c i v i l conflict in Guatemala.
For r u r a l areas, the G o v e r n m e n t carried out a pilot p r o g r a m to integrate poor r u r a l
communities into the m o d e r n economy, through the construction o f r u r a l areas. As such,
the share o f r u r a l roads has been increasing, partly because r u r a l roads that were previously
unclassified (not p a r t o f t h e official inventory of roads) have been c l a ~ s i f i e d .T h e quality o f
                                                                                                 ~~
the r o a d n e t w o r k shows significant deterioration in recent years. In 1999, 75 percent or



                                                                                                   n
35 T h e share o f firms reporting transport as a constraint for growth increased from 12 percent i 2003 to 23
percent in 2007 among Guatemalan non-exporters. However, there was n o t significant change for exporters.
                                                          n
T h e same result holds for the set o f firms interviewed i b o t h years.
36 I t i s estimated that unclassified rural roads amount t o around 15,000 kilometers (World Bank, Guatemala -
ICR - Rural Roads Project).


                                                                                                             37
roads were classified in good condition. By 2003 that n u m b e r h a d declined to 45 p e r ~ e n t . ~ ’
Since 2003, there have been some notable gains, i n c l u d m g the expansion o f the m a j o r
coastal highway through a concession system. (Figure 3.1)

                              Figure 3.1: Paved Roads and Rural Roads
        Paved Roads and Growth in Paved Roads                  Stock of Classified Paved and Rural Roads, 1985-2006


                                                                    4m
                                                                   1.                                                                              40%

                                                                                                                                                   35%
                                                                   12,033
                                                                                                                                                   30%
                                                                   10,033

                                                                 i
                                                                 - 8,033
                                                                                                                                                   25%

                                                                                                                                                   20%
                                                                 E 8,033
                                                                                                                                                   15%
                                                                    4,m                                                                            10%

                                                                    2,033                                                                          5%
                                                                       0                                                                           0%
                                                                            1985             1990        1995        2033                  2035

                                                                                   I-Tafal      mad length t %-A-%
                                                                                                             paved mads          I
                                                                                                                            ~ R mads   1



            Guatemala’s road system presents some important challenges. First, the
system i s vulnerable to natural disasters as illustrated by the substantial damage caused by
Hurricane Stan in October 2005. Second, the r o a d system needs to r e f o r m i t s regulatory a n d
supervisory f r a m e w 0 1 - k . ~To start, there are several agencies i n v o l v e in r o a d rehabilitation
                                   ~
                                                e
a n d maintenance, such as Direcridn d Caminos, Fonapaz, FIS, INFOM, a n d COVIAL,
resulting in duplication o f efforts a n d lack o f coordination. Third, the r o a d n e t w o r k does not
integrate m a n y regions o f the country. A recent completion r e p o r t o f the pilot project o f
r u r a l roads points out that the decentralized management o f the rehabilitation o f r u r a l roads
has i m p r o v e d access to roads a n d reduced travel time a n d transport costs for the r u r a l
                n
population i the D e p a r t m e n t o f San Marcos. T h e government i s replicating t h i s pilot in
Huehuetenango. Finally, there are issues o f security in domestic shpments, with about 24
percent o f f i r m s reporting theft for domestic cargo.39

3.8     Public expenditure levels for road maintenance seem insufficient, and the
private sector has not been allowed to play a compensatory role. G e t t i n g estimates o f
level of public expenditures i s complicated by the fact that several agencies are i n v o l v e d in
r o a d rehabilitation a n d maintenance. T h e most recent estimates on r o a d expenditures put i t
                               n
at 1.3 percent o f GDP i 2002, w h c h i s substantially l o w e r t h a n in Nicaragua.40 This
situation also requires a good level o f coordination that has not materialized, resulting in a
deterioration o f the r o a d n e t w 0 1 - k . ~ ~ o v e r n m e n t agencies i n v o l v e d in r o a d rehabilitation
                                                  G
and maintenance have l i m i t e d resources for investment a n d face budget challenges. An




37 See Pronacom 2005.
38 Ernst and Young 2005.
39 See section on losses from theft and breakages for more information.
Jo Ernst and Young (2005)
11 See Pronacom (2005)




                                                                                                                                                  38
example i s COVLAL paying contractors with arrears.42 In terms o f projects with private
                                                 n
sector investments, the private participation i infrastructure database indicates that there
were two concessions in the late 1990s in Guatemala. A recent study prepared for the
N a t i o n a l Competitiveness Program (Pronacom) indicates that Guatemala m a y need around
US$2.3 billion for roads projects.43 G i v e n the budget constraints o f the government, i t i s
unlikely that investments o f the amount required will b e forthcoming in the short-term.
Thus, creating the conditions for attracting private investment for r o a d infrastructure will
become crucial for Guatemala’s r o a d infrastructure network.

Airports

3.9      Guatemala has many airports and heliports distributed around the country,
but L a Aurora Airport concentrates most o f the traffic volume. L a A u r o r a operates as
a n origin a n d destination airport. Passengers must go through i t w h e n entering or leaving the
country or w h e n traveling between interior cities. T h e smaller airports do not operate as a
network.&

3.10 T h e government has embarked o n a modernization process o f airport
i n f r a ~ t r u c t u r e . ~ ~ e overall p r o g r a m will invest about $92 million in s i x airports (La
                              Th
A u r o r a $80 million, San JosC $3 million, T i k a l $2.5 million, Puerto Barrios $2 million,
Retalhuleu $0.5 million, a n d Quetzaltenango $3.5 million). T h e p r o g r a m i s b e i n g managed
a n d supervised by the Technical Cooperation Bureau o f International Civil A v i a t i o n
Organization (ICAO). T h e modernization process also included meeting LATA’Snorms a n d
regulations. InJune 2007, Guatemala’s Civil A v i a t i o n Authority (DGAC) was upgraded from
a Category 2 to Category 1 FAA (Federal A v i a t i o n Administration) rating, opening the skies
for Guatemalan air carriers to the U n i t e d States. T h e DGAC envisions the creation o f a n
autonomous q o r t authority (the l a w i s currently p e n d i n g in Congress) as w e l l as a private
concession (pending a concession law). There i s w i d e debate regarding concessions in
Guatemala, a n d i t i s not clear whether a n agreement will b e reached regarding private sector
participation in the form o f concessions.

Ports

3.11    Because a significant share of Guatemala’s exports i s directed outside Central
America, ports play a strategic role in the logistics system for cargo transport. T h e
country’s largest trading partner, the U n i t e d States, provides 39.6 percent o f Guatemala’s
imports a n d receives 28.9 percent o f i t s exports.

3.12   Guatemalan ports manage about one-sixth of the containers in Central
America (including Panama). A c c o r d i n g to data from the American Association Port
Authority (AAPA), Guatemalan ports managed 16 percent o f cargo traffic i 2006, slightly
                                                                         n

42 See for example, the annual reports o f the Guatemalan association o f construction reports that C O V W L
pays with arrears ($http:/ /~~~,c0n~trug~1ate.com/negocios/publicaciones/Web%20113/3.htm).
43 According t o the publication in the Prensa L i b r e on N o v e m b e r 30,2007, the r o a d projects identified by the
study were: A d o Metropolitano PS$l      billion), Franja Transversal d e l N o r t e (US$300 d o n s ) , ejes troncales
CA-2 y CA-9 (US$400 d o n s ) , and ampliation o f existing roads (US$600 d o n ) .
a N a t h a n Associates (2005, p. 80)
45 See World B a n k (2006).




                                                                                                                       39
                                                             n
l o w e r than in 1997 (18 percent). T h e cargo v o l u m e i TEUs grew at a n average growth rate
o f 11 percent per year, higher only than Costa Rica (7 percent) a n d Honduras (5 percent).
Representing a n i m p o r t a n t channel for regional commerce, Puerto Santo Tomis de Castilla
on the Caribbean side accounts for the largest share a m o n g Guatemalan ports (50 percent).
Overall, Guatemalan ports managed 840,367 TEUs in 2006, very similar to Costa Rica
 (Figure 3.2). In terms o f quality, Guatemalan ports have i m p r o v e d as measured by two
indicators: the port infrastructure quality i n d e x a n d the L i n e r Connectivity Shipping I n d e x
 (see Figure 3-3).

        Figure 3.2: Port Activity in TEUs in Ports in Central America and Guatemala
                                    Rate 01 C p a t n l a u p                                       P




                                                                      I 20

                                                                     4




3.13         Guatemalan ports present some striking features and growth prospects. In
terms o f ownershp, the Ports o f Puerto Quetzal a n d Puerto Santo Tomas de Castillas are
autonomous government agencies w h i l e Puerto Barrios i s privately owned. Puerto Quetzal
has become the most dynamic port in Guatemala, increasing i t s container traffic by 77
percent between 2003 a n d 2006. During the same period, Puerto Barrios reduced i t s
container traffic (a 12 percent drop) w h i l e Puerto Santo Tomis de Castilla grew by seven
percent. Puerto Quetzal has been for various years a n example o f effective private-public
partnership, a n d i t i s known as the most efficient port in Central America for container
traffic as w e l l as wholesale operations for certain products.46

      Figure 3.3: Liner Connectivity Shipping Index for Central America and Panama,
                                         2004-2006
                                                       C32004 R2005 02006 HGNI per capita

                                                                                                             6,000 8
                                                                                                                     c
                                                                                                                     0
                                                                                                             5,000 5
                                                                                                                     E
                                                                                                                     v)
                                                                                                             4,000
                                                                                                                     4
                                                                                                             3,000   5
                                                                                                                     b9




                                                                                                             2,000
                                                                                                                     0

                                                                                                             1,000

                                                                                                             -
                                                                                                                     z
                                                                                                                     0
                          El Salvador      Nicaragua            Honduras     Costa Rica Guatemala   Panama

               The Liner Shipping Connectivity Index is a composite index that includes fleet assignment,
               liner services, and vessel and fleet sizes.
               Source: UNCTAD (2006) and WDI


46   N a t h a n Associates (2005, p. 22)



                                                                                                                          40
3.14   Forecasts of maritime trade from the ports o f Central America (excluding
Panama) undertaken by UNCTAD anticipate Guatemala’s leadership in the area o f
cargo shipment. Indeed, Guatemala i s expected to nearly double Costa Rica’s East Coast
shipping movements by the year 2020 while even Honduras i s expected to surpass Costa
Rica over the same period. At current performance levels, Caldera (Costa Rica) will b e a n
                                 n
even less significant player i Pacific cargo movements w i h 10 years.47 Two o f
Guatemala’s key advantages are t h e declining costs p e r container (using the standard Doing
Business defintion) a n d t h e modernization efforts underway at Puerto Quetzal a n d Puerto
Barrios. (Figure 3.4).

     Figure 3.4: Projected Port Output by Country and Coast (million of metric tons)
                   a. Caribbean Ports                                                     b. Pacific Ports
              - - Guatemala
                                  -       /
                                              /
                                                              u)


                                                              +
                                                              .-
                                                              0

                                                              s
                                                                   24


                                                                   18--
                                                                        -   --
                                                                            -E
                                                                            -
                                                                            __ Nicaragua
                                                                            -Caldera,
                                                                                        Guatemala
                                                                                         Salvador
                                                                                        HOnduraS


                                                                                               CR
                                                                                                      /
                                                                                                           /
                                                                                                               /
                                                                                                                   /
                                                                                                                       /
                                                                                                                           /
                                                                                                                               ,




        5 !                                                         01                                                             I
                2003          2010            2020                            2003                  2010                   2020

Note: Pacific ports’ forecasts do not include development of the Port of Cutuco at L a Unih, El Salvador.
Source: Authors’ calculations based on forecasts of UNCTAD (2006)

3.15 T o meet this increasing demand, Guatemalan ports need to address certain
challenges. T h e m a i n challenges for Guatemalan ports include a n obsolete legal framework,
high operating costs, restrictions to private sector participation, lack o f incentives for
investments a n d efficient port operation, a n d a lack o f competition. Addressing those
challenges will determine whether Guatemalan ports will i m p r o v e their r o l e in Central
America.48

3.        TRANSPORT    SERVICES
                 RELATED

Mode of Transportfor Exports

3.16 Each mode of Guatemala’s transport endowment-roads,                 ports and
airports-serves as a critical component o f the logistics network for exporters. T h e
survey provides i n f o r m a t i o n about the relative importance o f each transport m o d e in terms
o f number o f exporters a n d the value o f the last shipment o f the m a i n product. (Figure 3.5).

3.17       Maritime transportation i s the primary transport mode for exporters. Figure 3.6
b e l o w shows use o f transport m o d e by n u m b e r o f firms-thus giving equal weight to all


-17 I m p o r t e d volumes in Caldera w e r e seven times export volumes in 2003. This suggests that a l l Asia a n d most
W e s t Coast-bound exports must travel to Panama to find a port of exit.
.M N a t h a n Associates 2005.




                                                                                                                                       41
f i r m s regardless o f how m u c h they ship or the value o f their shipments. I t shows that about
24 percent o f f i r m s that exported their m a i n p r o d u c t shipped their m a i n products through
the Atlantic ports. Surface transportation was reported by 39 percent o f f i r m s exporting
their m a i n product. T h e data using the value o f the last shipment, w h i c h reflects importance
in terms o f national trade, also shows that maritime transportation i s the primary transport
mode. T h e fact that the share o f Port Santo Tomas i s three-times higher w h e n measure i      n
terms of value suggests that t h i s port i s used for exporting high-value goods. At the regional
                                   n
level, there i s w i d e variation i the transport mode, depending on the geographical location
o f the primary destination as w e l l as the conditions o f maritime, surface, a n d air corridors.
Finally, because o f the small share o f f i r m s exporting directly, these transport m o d e shares
should b e interpreted with caution.

                                               -
       Figure 3.5: Guatemala Transport mode for firms exporting their main product
                                     Percent of Firmg                                                 Percent of Value of Last ShiDment
                                                        Airport &other              Port Quetzal               Airport &other




        Port Sto Tomas
              21%

                                                                Land
                                                                 40%

                                                                               port Sto Toma



                                ~




Source: E n t e r p r i s e Survey

                                                   -
 Figure 3.6: Latin America Transport mode for f i r m s exporting their main product
                           Percent ot Firms.                                                   Percent 01 Value of Last Shloment

   I
   3                       mLmd #Air60ther~Port60lh.r                                                 0 Land .Air   6 0th 0 Port 6 01
   U
   g 100.0
   c
                                                                         f    100
                                                                         9
  't    75.0                                                             5
                                                                         -
                                                                              75
   c
   g    50.0
                                                                         m

                                                                         -6   50
   0                                                                     2
   I
                                                                         B
  e     25.0                                                             5    25
  F                                                                      L



   E     0.0                                                             E     o




Source: E n t e r p r i s e Survey

3.18     AU three modes are important but for different reasons. T h e r o a d n e t w o r k
surfaces m a y b e i m p o r t a n t for smaller firms w h i c h are trying to export; the ports are v i t a l
because they handle the vast majority o f Guatemala cargo movements; and the r o l e o f
international airport m a y increase due to the ongoing upgrade o f the infrastructure. A
logistics or transport strategy intended to increase t h e competitiveness o f Guatemala's
exports will t h u s have to pay due respect to all three modes as w e l l as their interconnectivity.




                                                                                                                                          42
Type of Transport

3.19    Guatemalan f i r m s rely o n a combination of own and third party transport
services. Guatemalan f i r m s transport the equivalent o f 57 percent o f annual revenue using
their own transport-similar     to Nicaragua (54 percent) but l o w e r than Panama (70 percent).
H o n d u r a n a n d Nicaraguan f i r m s were m o r e likely not to use transport w h e n s e h g their
primary p r o d u c t (24 percent a n d 19 percent, respectively). A small share o f Guatemalan
f i r m s (8 percent) do not use transport services as they produce a n d sell their goods in the
same place. Small Guatemalan f m s t e n d to rely m o r e on their own transport than m e d i u m
or large-sized f i r m s . See Figure 3.7.

            Figure 3.7: Type of transport use for main product, all industries
            0 lOO%shipped with own transport                   H Use own and third party transport
            0 Tranport main product using third party providers Don't use transport


                 --________---__-----------------------------------_




              El Salvador           Guatemala             Honduras             Nicaragua             Panama

  Source: Enterprise Survey

Losses from Theft and Breakage

3.20 Transport quality and security affect the cost of production and shipment,
and thus the competitiveness of Guatemalan firms. One indication of the costs
associated with logistics i s that of theft and breakage for domestic or direct export
shipments. At the regional level, Guatemalan f i r m s reported the highest incidence o f theft
w h e n transporting their cargo for either domestic or direct export shipments: 22 percent o f
direct exported a n d 24 percent of f i r m s ship domestically. This hghhghts issues o f security
in the r o a d network, point o f exit, transport a n d shipping companies, and/or firm
employees. T h e incidence o f breakage for domestic shipments (28 percent o f f i r m s that ship
domestically) i s roughly sirmlar than other countries in the region (e.g., M e x i c o (28 percent)
or Panama (30 percent)), but a m o n g the lowest for direct export shipments (15 percent o f
f i r m s that export directly).

3.21 Because of the incidence o f theft and breakage, Guatemalan firms incur
losses that influence their ability to compete in foreign markets, as well as their costs
of production in the domestic market. For domestic shipments, their losses a m o u n t to
7.6 percent of domestic cargo value for firms that experience either theft or breakage, w h i c h
i s a m o n g t h e highest in Central America (after Nicaragua with 7.9 percent). For duect
exports, the losses associated with theft and/or breakage reaches 2.9 percent o f consignment
value, substantially lower than for Nicaraguan firms (12 percent) a n d El Salvador (7.4
percent).




                                                                                                              43
3.22    Damage and theft in transit cost Guatemalan direct exporters about 0.8
percent o f their total sales. For those exporters that reported breakage (15 percent) or
theft (22 percent), losses rose to over 1.8 a n d 2.6 percent o f export value. Losses from
breakage were smaller than other countries          n
                                                    i Central America as w e l l as M e x i c o for f i r m s
reporting breakage.

4.      TRADE
            FACILITATION

Perceptions regarding regulation

3.23 About 15 percent of firms reported that custom and trade regulations as a
constraint to growth in 2007.4' As shown in Figure 3.8, almost 15 percent of
manufacturing f i r m s in Guatemala i n d c a t e d custom a n d trade regulations as a m a j o r or
severe constraint to growth in 2007.

                Figure 3. 8: Custom and Trade Regulations as a Constraint
        m:
         ExDorters & NOn-eXDOrlelp                                        !.atin America: 2006
                    0 Non-exporiera   Exporters




Source: Enterprise Survey



3.24 An indication o f the performance o f custom services in Guatemala i s the
number o f days i t takes to clear customs when either exporting or importing. 50
Guatemalan exporters take a n average o f 4.2 days to clear customs, a n d r e p o r t having taken
at most 8 days to p e r f o r m the corresponding procedures during the year precedmg the
survey. This i s along the line o f other Central American countries. For importers, the average
a n d longest delays reported by importers were about 16 a n d 32 days. Guatemala continues
to have the highest average wait for imports to clear customs a m o n g Central America
countries. (Figure 3.9).




49 W e did n o t include a comparison with the 2003 survey because the questions are not comparable for both
surveys.
50 W e did n o t include a comparison with the 2003 survey because the questions are n o t comparable between
the two surveys.



                                                                                                          44
                   Figure 3.9: Custom Delays for Exports and Imports, Guatemala
                                                                                                                 lmMds

                     IAverage period. 2006 ILongest period- 2006                           HAverage period- 2006 ILongest period-2006

                                                                              35
                                                                                                       I
         30                                                                   30

     -
     n
     t 20
         25                                                               2 25
                                                                          m
                                                                          2 20
                                                                                       I
                                                                                                                       I
                                                                                                                                        I

     L                                                                    L

     f 15                                                                 2 15
     z 10                                                                 2 10
          5                                                                    5
          0                                                                    0
              El Salvador    Guatemala        Honduras        Nicaragua            El Salvador     Guatemala       Honduras        Nicaragua


 ource: Enterprise survey

5.            POLICY REXOMMENDATIONS O N TRANSPORT LOGISTICS
                                                AND

3.25    While Guatemala has made some achievements in transport and logistics, it
faces some important challenges to remain competitive. Although Guatemala has
attained some progress in i t s classified r o a d density, there i s decay in the quality o f such
roads. Port capacity a n d efficiency will need to anticipate the increased demand to address
the logistics need o f exporting a n d importing firms. Security issues are also affecting loglstics
for domestic a n d international shipments.                               T h e administrative b u r d e n o f exporting a n d
importing will need to b e further reduced to make Guatemalan firms m o r e competitive vis-
                         n
h-vis their counterparts i the rest o f Central America.

3.26 T o address these logistics challenges, Guatemala will need to explore all
possible ways to attract private investment in infrastructure. Public expenditure levels
have not been enough to keep up with the infrastructure needs and the private sector has
not been allowed to play a compensatory role. To reverse t h i s trend, public resources will
have to b e re-dedicated to selective rehabilitation a n d expansion w h i l e some reforms that
will b e needed to allow private sector participation.

3.27  Various recent studies offer specific recommendations to upgrade
Guatemala’s physical infrastructure for trade. All o f those studies indicate that the
sector with the greatest investment needs i s that o f the roads. T h e m a i n recommendations
emerging from the various studies are:

         Roads: Investments are needed to rehabilitate existing roads a n d to build n e w roads to
         link remote areas. T h e recent m u l t i - m o d a l infrastructure transport p l a n estimated
         investment needs o f US!$l.S billions for the r o a d sector alone. Resource allocation can b e
         improved: (1)        strengthening M C W s planning capacity to better coordinate the
         prioritization o f r o a d construction a n d maintenance (especially in r u r a l areas) a n d
         i m p r o v e budget preparation a n d execution; (2) establishing a proper regulatory a n d
         institutional framework to p r o m o t e private sector participation; a n d (3) i n t r o d u c i n g




                                                                                                                                               45
       m o r e efficient r o a d maintenance mechanisms based on results-oriented contracts that
       combine rehabilitation with maintenance activities over a multi-year period.51

e      Ports: I m p r o v e the legal framework for port administration a n d private sector
       participation. Prepare master plans for all ports. P r o m o t e competition, a n d p r o v i d e
       incentives for investment a n d efficient port operations. T h e report prepared by N a t h a n
       Associates (2005) contains detailed recommendations.

e      Airports: I m p r o v e the institutional framework a n d p r o m o t e a division o f responsibilities
       for policy, regulation, a n d operation functions, i m p r o v e private sector participation to
       attract investments through the concessions. T h e r e p o r t prepared by N a t h a n Associates
       (2005) contains detailed recommendations.

a      Security: Design a n d implement a strategy to i m p r o v e security for domestic a n d
       international shipments. Guatemalan f i r m s reported the highest incidence o f theft for
       domestic a n d international shipments.

6.         ELECTRICITY

Demand for Electricity

3.28 Access to reliable electricity at a reasonable price i s important for all f i r m s .
Poor electricity supply i s costly as f i r m s are forced to self-supply at a higher price, or to
suffer damage to their equipment due to voltage fluctuations. Indeed, earlier reports have
found that a reliable electricity supply raises f i r m s ' p r o d ~ c t i v i t y . ~ '

3.29    In 2007, Guatemalan f i r m s complained more about access to electricity as an
obstacle to business than they did in 2003. In 2007, 47 percent o f interviewed f i r m s
considered electricity a serious obstacle. In 2003, only 27 percent made the same complaint.
This i s a serious deterioration in perceptions, especially given the i m p r o v e m e n t in
entrepreneurs' perceptions on almost all other investment climate dimensions (Figure 3.10,
Panel A). Compared to the rest o f Central America, Guatemala i s only p e r f o r m i n g better
than Nicaragua (Figure 3.10, Panel B).

3.30  Perceptions have worsened especially among f i r m s located in the Guatemala
City metropolitan area. In 2003, 23 percent of f i r m s located in the capital city area
                                                                                n
considered electricity a serious obstacle. T h a t figure m o r e than doubled i 2007-to     48
percent (Figure 3.11). For firms located i t h e rest of the country perceptions did not change
                                         n
                                                                              n
m u c h (39 versus 41 percent). Since the sample i s made of mostly f i r m s i the Guatemala
                                                   n
City area (80 percent in 2003 a n d 78 percent i 2007) overall perceptions appear to have
worsened.




51   See Pronacom (2007).
52                                                    &port 2005: A Better Investment Climate for Eueyone,
     See Chapter 6, World Bank (2004), World Development
World Bank and Oxford University Press: Washington D.C. and New York, N.Y.


                                                                                                           46
                      Figure 3.10: Perceptions of electricity as an obstacle
          (percent of firms that agree electricity i s a major or severe obstacle to doing
                                            business)
                    A. 2003 vs. 2007                           B. Central America


 cn
 2"
      .
                            Eleunaty IS a senous obstade
                                                                                      I    Nicaragua

                                                                                          Guatemala

 43
                                                                                             Panama
 30
                                                                                          El Salvador
 20
                                                                                           Hondurac
 10
                                                                                           Costa bn
  0
                Guatemala (2003)                           Guatemala (2007)                             0   10   20     30    $0   50         60   70


      Source: Enterprise survey


            Figure 3.11: Perceptions of electricity as an obstacle, by year and location
          (percent of firms that agree electricity i s a major or severe obstacle to doing
                                                                                  business)

            I   60    I                                                                                                                 1 1

                50
                40
                30
                20
                10
                 0
                                            Guatemala City                                                  Rest of country

                                                                              1     2003 W 2007         1
3.31    Out of 15 Latin American countries surveyed in 2007, Guatemala ranks quite
favorably in reliability of power supply, measured by the incidence o f power outages.
In 2006, j u s t over a third o f interviewed Guatemalan f i r m s h a d experienced a p o w e r
outage-considerably    less t h a n Nicaragua (68 percent), Panama (66 percent), Honduras (62
percent) a n d El Salvador (47 percent) (Figure 3.12, Panel A). Furthermore, t h e incidence o f
outages a m o n g Guatemalan firms declined between 2003 a n d 2007. In t h e 2003 ICA, 73
percent of interviewed firms in Guatemala h a d been through at least o n e p o w e r cut. T h a t
share was reduced by m o r e t h a n h a l f in 2007 - to 34 percent, the same as in M e x i c o a n d
Chile. In light o f these objective improvements in the reliability o f supply, i t i s puzzhng as to
why perceptions o f electricity have worsened so sharply. M o r e importantly, t h e share o f
f i r m s reporting energy-outage-related losses has fallen since 2003 - from 66 to 26 percent In
almost all cases, f i r m s that reported outages reported losses associated with those. (Figure
3.12, Panel B).




                                                                                                                                                   47
                                                 Figure 3.12: Power Outages

  A. Percent of firms that experienced                                   B. Percent of firms that incurred losses
                         power outages                                           due to power outages
   Ki,camgua                                                                  hlC2ragua

    Paniguay                                                                  Honduras
     Panama                                                                    PW2gudV

   Hondunir                                                                    Ecuador
    Ecuador                                                                     P%"2.llU
  El Salvador                                                                E l Sahadar
      hieuco                                                                     hleuca
   Guatemala                                                                 Guatemla
        ClUlC                                                                      Chde
      B O h S                                                                    Bolivia
   .Lgentma                                                                   4rgentma
    Colambii                                                                  Colombia
   V."CZ"&                                                                    Ve"eZd2

         PW                                                                        Peru
     Urvguay                                                                    Lruguay

                0   10    20   30    40    50     60      70                               0   IO     20         30       40   50   60   1
Source: Enterprise Survey



3.32    One of the possible explanations for the deterioration in entrepreneurs'
perceptions about the electricity sector, from the Enterprise Survey data, i s that the
frequency o f power outages has increased since 2003. T h e average n u m b e r o f outages
per month (for those firms that did experience them) increased from 1.5 times a month i             n
2003 to 5 times a month in 2007 (Figure 3.13). W h i l e the average duration o f a single outage
                                                                                n
actually declined, from 4.6 hours in 2003 to 3 hours in 2007, the increase i the incidence of
outages resulted in a greater n u m b e r o f total hours o f outages. Therefore, w h i l e the overall
share o f Guatemalan firms subject to p o w e r outages has dropped, the n u m b e r o f cuts for
those who bear outages has actually increased, w h i c h perhaps explains why f i r m s are m o r e
negative about the p o w e r sector as a n obstacle to business.

                    Figure 3.13: Number and duration of power outages per month


                         15
                         10
                          5
                         0
                                N u m b e r of         Average duration                             Total duration of
                                outages p e r          o f a single outage                           p o w e r outages
                                    month                                                                  (hours p e r
                                                                                                            month)


                                                   Guatemala (2003)             Guatemala (2007)

                         Source: Enterprise Survey




                                                                                                                                         48
3.33   In 2007, generator ownership among Guatemalan f i r m s was comparable to
the level of other Central American countries, but self-generation was among the
highest in Latin America. Usually, generator o w n e r s h p a n d self-generation (which i s m o r e
expensive) signal that energy supply i s unreliable, or expensive, or both. For those f i r m s that
o w n e d or shared a generator, 28 percent o f their energy needs on average were m e t through
that generator, i.e. through self-generation. This i s a m o n g the h g h e s t levels o f self-
                                                                                 n
generation a m o n g L a t i n American f i r m s (Figure 3.14). In addition, i 2007, i m p o r t a n t
                                                                            n
hfferences existed in self-generated energy consumption for firms i the Guatemala City
area a n d the rest of the country-24                                             n
                                           percent o f energy needs for f i r m s i t h e capital area
                                                                               n
were m e t through self-generation as opposed to 39 percent for f i r m s i the interior of the
country (See Figure 3.14).

                  Figure 3.14: Generator Ownership and Self-Generated Energy

A: Percent of Firms with Own or Shared B: Percent of Energy from O w n or Shared
                                       Generator
  Ecuador                                                Bolivia                                      47
   Panama                                                \leuco                                  43
      Chile                                           Guatemala                           128
El Salvador                                  23       \1caragda                           21
 Honduras                                              Pacaguar                      25
 Argentsna                              18             Ecuador                  21
Guaremala                            1I 7             Honduras                 21

      PeN                            17                 Panama            14
                                                                               d
 Nlcaragda                      15                         Chle           14

   Utuguay                 12                        El Salvador          14

  Paragq 1            IO                                   PeN           I?

    hieuco 1          9                                Colombia -7

 Colombia     '   8                                   Argentina -6

                                                        Uruguq       3




 3.34   T h e impact of power outages are the losses that firms suffer due to lost
 production opportunities and these losses rose for those f i r m s that suffered outages
 in 2003 and 2007. W h i l e across the w h o l e sample o f interviewed f i r m s , average losses have
declined since 2003, reflecting that less f i r m s suffer outages in the aggregate, if the sample i s
                                                     n
restricted to those that did experience outages i both years, losses have actually increased-
from 3.7 to 6.1 percent of annual sales between 2003 a n d 2007 (Figure 3-15). This finding i s
in line with the one that total duration o f outages has increased (again for t h e subset of f i r m s
with p o w e r cuts). This could b e another potential explanation about the deterioration in
perceptions o f the electricity sector. Also, losses reported by Guatemalan firms are quite
high, compared to the rest o f L a t i n America in 2007.




                                                                                                      49
                        Figure 3.15: Losses Incurred due to Power Outages: 2003 vs. 2007

                        I 7.0                                                                                        6.1
                                                                                                                                I
                          6.0
                          50
                          4.0
                          3.0
                          2.0
                          1.o
                          0.0
                                   Losses due to power outages (across a l l        Losses due to power outages (across affected
                                                     im
                                                    fr s)                                              f i r m s only)

                                                         0 Guatemala (2003)           Guatemala (2007)

                                Source: Enterprise Survey

       3.35     Obtaining an electricity connection i s still a problem. T h e t i m e to obtain a n
       electricity connection declined after 2003 by 8 days on average, but s t d l remains high-at       54
       days on average in 2007. This i s similar to Honduras a n d Nicaragua, but w e l l above Mexico,
       Panama a n d Bolivia (Figure 3.16, A). T h e incidence o f bribe requests to get a n electricity
       connection shows substantial i m p r o v e m e n t since 2003 (Figure 3.17, A a n d B), a n d in 2007
                                                                     n
       the share of f i r m s that reported a request for bribes i the process o f getting electricity
       connections was w e l l b e l o w that in Honduras, Paraguay a n d Ecuador.

                              Figure 3.16: Time to Get an Electricity Connection
                  A. Latin America, 2007                         B: Guatemala: 2003 vs. 2007
 Honduras

Guatemala                                                                      70                 62
 fuicaragua
      Peru

 Argentm

  Umgual.
 Venezuela

      Chde

  Ecuador

  Paragua)

El Sahador

 Colombia

    Bohr la

   Panama

   Mexico
                                                                                            Guatemala (2003)               Guatemala (2007)
              0    10    20       30      40       50       60


Source: Enterprise Survey

       3.36    Disparities in terms o f access to electricity, incidence of outages and losses
       due to outages exists among different locations within Guatemala. Two-thirds o f firms
                                                                   n
       outside o f the Guatemala City area suffered p o w e r cuts i 2007; less t h a n h a l f experienced
       the same in Guatemala City a n d i t s surroundmg area (Figure 3.18). F i r m s in r u r a l areas h a d




                                                                                                                                          50
      to also wait longer to get connected to the gnd, as w e l l as h a d m o r e frequent a n d longer
      lasting p o w e r interruptions.

              Figure 3.17: Bribes Requestedfor Electricity Connections, % of firms that applied
                -   A. Latin America; 2007                   B. Guatemala: 2003 vs. 2007 -
 Honduras                                                                         17

  Paraguay
                                                                                             20   1
  Ecuador

 Nicaragua

Guatemala

    Meuco

    Bolivia

 Colombia

      Peru

   Umguay

El Salvador

   Panama

      Chile
 Argentina

 kenezuela
              ,          ,            ,   ,                                                                       Guatemala (2003)         Guatemala (2007)
              0         2             4   6   8   10       12       14       16


      Source: Enterprise Survey

              Figure 3.18: Access to Electricity and Incidence o f Outages: Guatemala City vs.
                                              Rest of Country

              70 1


              60


              50

              40                                                                                                                                      37


              30


              20


              in

              0
                     \Vat t o o b t a n           Share o f firms                       N u m b e r of                       Average          Durauon o f
                        electrical                 with power                          power outages                       durauon o f a    p o w e r outages
                      connecuon                     ougges, O/o                          per month                         single outage      (hours p e r
                             (days)                                                                                          (In hours)         month)


                                                                         FA Metropolitan Area     Rest o f C o u n t r y


                     Source: Enterprise Survey

      3.37     This also helps explain why f i r m s outside of Guatemala City suffered higher
      losses due to power interruptions and received a greater share of their energy supply
      from own generators. Across the subset o f affected f i r m s , losses were nearly twice as high
      in the r u r a l areas t h a n in the Guatemala City area (9.1 vs. 4.9 percent o f sales). G i v e n the



                                                                                                                                                                51
higher frequency and losses associated with p o w e r supply interruptions in r u r a l areas, i t i s
also not surprising that a larger portion of their energy consumption was from own or
shared sources, that is, generators. (Figures 3.19).

                     Figure 3.19: Losses D u e to Power Supply Interruptions
                                                                                                   I

                40
                35
                30
                25
                20
                15
                10
                 5
                 0
                       Losses due to              Share o f F i r m s              Permt o f
                      power outages                 with Own                    power mming
                      (across affected            Generator, Y     o              from own
                      h    s only), Yo                                          generator (for
                          of sales                                                f i r m s with
                                                                                 generators)




                  Source: Enterprise Survey

Supply of Electricity

3.38  Until the beginning of the 1990s, the electricity sector in Guatemala was state-
owned and vertically integrated (generation, transmission, distribution). Constant
growth from the demand side a n d stagnant generation with h t e d financing options for
n e w investments, gave a clear signal that the state-run m o d e l needed a structural reform. T h e
G o v e r n m e n t reoriented the electricity sector development policy towards a m i x e d system
with private sector participation. T h e Electricity L a w o f 1993 a n d i t s regulatory framework
introduced a market with low barriers to entry into generation, transmission a n d
supply/sales, emphasis on incentives for operational efficiency, and free access to the
trans6mission a n d distribution grids. Both system operation a n d wholesale p o w e r m a r k e t
                           n
administration being i the hands o f the same private organization.

3.39    T h e reforms led to the establishment of the Wholesale Market Administrator
(AMM), (Admritistrador del Mercado Mayorhta), which i s the core o f the present
energy market structure. I t i s also the system operator for transmission, distribution a n d
international connections. T h e AMM determines the hourly spot market prices a n d i s
responsible f o r the reliability a n d availability o f energy provision. All market agents fulfilling
minimum size requirements have a right to participate in the AMM a n d select i t s Board.53




j3Changes introduced in 2007 lowered the size requirement for: generators (> 5  hfiv?, transmission (contracts
> lOhfiW), distribution (> 15,000    customers), suppliers (“cornerciakpdore?”, > 2 hTW), large consumers (>
lOOk\v, importers a n d exporters (contracts > 10 h1w).


                                                                                                           52
3.40       In 2007, the agents operating on the wholesale market included 31 generators, 3
transmission companies, 3 private a n d 17 municipal dstribution companies, 21 suppliers
(“comer~a~i~adores”of c h 14 are members o f the AMM) a n d 800 large consumers, most o f
                           whi
w h i c h get their p o w e r through a contract with a supplier. T h e distribution companies have
2.3 million regulated “captive” consumers. T h e M i n i s t r y of Energy a n d Mines, MEM
(ibfinisterio de Energia y Minas) has final oversight responsibility, issues authorizations to
generators, transmission a n d distribution companies, prepares national energy plans a n d
indicative generation plans a n d the ten-year national transmission p l a n that i s to b e prepared
bi-annually .

3.41    T h e national power sector regulator CNEE (Comkidn Nacional de Energia
Elkctn’ca) receives and processes requests for authorization of projects (including
expansion o f plants) for final approval by MEM. I t also supervises compliance with the
l a w on the AMM, defines the formulas for the adjustment o f regulated dstribution a n d
transmission tariffs, approves tariffs, monitors service quality a n d issues norms for these.

3.42 T h e Government owns INDE (Znstituto Nacionaf de Electn’ficacidn), which
has two subsidiaries: INDE-Generation and INDE-Transmission. Prior to 1998,
consumers in Guatemala were served by two publicly-owned distribution companies.
Consumers in the Guatemala City area were served by Empresa Elktrica d Ggatemala S A .
                                                                        e
(EEGSA). EEGSA was privatized in 1998. In the rest o f the country, t h e mostly r u r a l
consumers were served by INDE. In 1998, INDE’s distribution business was split into two
                                                       e
companies covering the eastern (Distn’baidoraEkctrica d Oriente, DEORSA) a n d the westem
                        e
(Distrihidora Ekctrica d Occzdente, DEOCSA) parts o f the country. DEORSA a n d DEOCSA
were privatized through a 50-year concession to Uni6n Fenosa Intemacional, S.A., w h i c h
owns a n 80 percent stake in the two companies.54

3.43    T h e Guatemalan Government subsidizes electricity consumption through the
                                               n
so-called “social tariff.” I n t r o d u c e d i 1999 as support for p o w e r purchases o f low-income
families (families with monthly electricity consumption o f 30-40 kwh per month), the t a r i f f
expanded in 2000 to include residential consumers with consumption u n d e r 300kWh p e r
month a n d 1OOkwh for businesses. In 2004, 94 percent o f residential consumers were
beneficiaries o f t h i s scheme.

3.44     T h e consumer response to this artificial distortion of the market led to a
cascade o f repercussions. Households split their h o m e consumption into several meters to
qualify for the social tariff; it i s estimated that t h i s fraud amounts to 31 MW. Small
businesses switched to joint metering to qualify for the 100 kW lirmt. INDE saw i t s fmancial
situation undermined by the low tariffs on i t s supply contracts for social-tariff customers;
                                                 n
and was forced to postpone investments i maintenance o f sub-stations a n d in the
expansion o f i t s transmission system. INDE’s subsidies during 2004-2006 are estimated at
1.3 billion quetzal (US$173 million); o f these INDE’s subsidies to the social t a r i f f amounted
to 554 million quetzal (US$73 million), or 42 percent o f total subsidies.55




54  For a full description o f t h e energy m a r k e t structure, see M o s t e r t , W o l f g a n g (2007), B a c k g r o u n d P a p e r for
t h e Guatemala ICA.
                                                              e
j j Source: T a b l e 18, I11Infome Presidential al Congreso d la Rtptrblica




                                                                                                                                            53
3.45    These developments forced the Government to change the implementing
regulations for the Social Tariff L a w in 2007. Changing the L a w was considered
unrealistic, not the least because of the Presidential elections during the second h a l f o f 2007.
A key change was the re-interpretation o f the 300 kWh per month eligibility criterion:
consumers in the 300 kWh/month consumption category get the f i r s t 100 kWh-not                         as
previously 300 kWh-at        the social t a r i f f price. As a result o f t h i s a n d other developments,
the prices o f p o w e r to industry in the free contract market witnessed a n increase of 40
percent from the year before. T h e difference in price between the price o f comerrialiqadora
a n d a bstribution company was almost eliminated in 2007. T h e increase in the prices on the
free-contract market made self-generation m o r e competitive a n d l e d companies to increase
investments in own generation capacity. In general, industrialists now prefer to set up their
own generation plants.

3.46     By 2008, the peak demand for capacity i s expected to reach around 1600 MW.
A c c o r d i n g to data from INDE energy demand i s expected to grow by 7 4 % per year. By
year 2020, peak demand for generation should grow to 3,125 MW. 100 MW o f n e w capacity
per year will b e required to cover the growth in demand. In addition, approximately 50 MW
o f n e w capacity p e r year will b e needed to replace existing generating capacity w h i c h i s
becoming obsolete a n d inefficient.

3.47 Guatemala has important renewable energy resources, such as wind,
geothermal and biomass In 2007, installed generation capacity was 1,837 MW, o f w h c h
654 MW came from hydropower plants that during the dry season have a m u c h l o w e r
generation capacity due to water shortages. To lessen t h i s effect, the establishment of wind
energy farms that reach better p o w e r factors i the dry season should b e considered. Hydro
                                                   n
p o w e r a n d geothermal have m e d i u m to long t e r m lead times a n d capital requirements p e r
installed MW. 56

                           Table 3.2: Composition of Generation 2006

 Generation Technology                                   GWh                                 %
 Hydropower                                              3,246                             43.6%
 Diesel engines                                          2,226                             29.9%
 Steam turbines                                          1,013                             13.6%
 Co-generation                                            804                              10.8%
 Geothermal                                               142                               1.9%
 Imports                                                   8                               0.1%
 TOTAL                                                   7,445                             100%


3.48    Guatemala has the highest power tariffs in Central America. Whereas in
                                                                    n
Guatemala the tariffs charged by comerrialiqadores h a d m o v e d i 2007 to 16 U S cents/kWh
(versus 12 U S cents in 2006), the tariffs charged to corresponding consumers in Honduras
were 9 U S cents/kWh a n d in El Salvador 11.5-12 U S cents/kWh. T h e causal factors for the
                       iPolitical interference i the t a r i f f setting in the form o f a “social
high tariffs include: ( )                       n


56T h i s i s the case o f the Costa Rica generation matrix, where wind farms (62.25 LEV) compensate for the low
energy output o f hydro projects during t h e dry months o f N o v e m b e r t o May.



                                                                                                            54
t a r i f f ’ that sets higher prices for regulated users such as large consumers, a n d the social t a r i f f
itself;57 (i    i) inherited problems in the form of h g h - c o s t power-purchase agreements (PPAs)
negotiated in the early 1990s, (i)         iiweaknesses in sector governance, (iv) the absence o f
complementary initiatives to facilitate private investments in renewable energy, a n d (v)
inherent vulnerabilities in the regulatory m o d e l applied in Guatemala.

3.49    T h e textiles and plastics industries are “electricity intensive” and heavily
exposed to foreign competition either on the export markets, or by i m p o r t e d goods on
the national market. For some specific products in these industries, the cost o f electricity can
amount to 20 percent a n d m o r e o f value-added.

3.50   T h e relatively electricity-intensive manufacturing sector i s hit by the high
power prices in two ways. T h e most electricity-intensive industries resort to self-
generation. To the extent that the capacity to invest of these industries i s restrained by their
debt-sustaining capacity, investments in p r o d u c t expansion suffer. All relatively electricity
intensive industries are affected by having to pay tariffs that are higher than the tariffs p a i d
                                                            n
by their competitors. For instance, the textile industry i Guatemala i s mainly a processing
industry o f products under foreign b r a n d names; independent national brands - where the
price elasticity of demand i s lower - have a l o w e r share in total national value added. T h e
                                                                       n
textile industry i s i cut-throat competition with manufacturers i China a n d Bangladesh,
                     n
where electricity tariffs charged to industry are m u c h lower. There is, therefore, no doubt
that the growth prospects o f the Guatemalan textile industry are impaired by the high p o w e r
tariffs.

3.51      Options to reduce the high energy prices in the short run are limited. This
means that there i s little interest in Guatemala to change the p o w e r market m o d e l as such.
                            n
Agents prefer stability i the market. T h e possibilities o f the current government-at least in
the initial years of i t s mandate-to     revoke the Social T a r i f f L a w are limited. T h e option for
replacing the social t a r i f f by social support to low-income f a d e s by municipalities c o u l d
make socio-economic sense, and the benefit i s two-fold: i m p r o v e the targeting (reducing the
number o f beneficiaries), a n d i m p r o v e the financial situation o f INDE, providing resources
                               n
for planned investments i transmission a n d hydropower.

3.52 Various studies o f Guatemala’s energy sector conclude that the risk o f energy
shortage i s likely to increase considerably over the next two years. I t i s necessary to
consolidate the implementing regulation o f the Incentive L a w for Renewable Energy
Investment. T h e i n t r o d u c t i o n of long-term PPA-tenders i s o f paramount importance. This
should secure competitive financing models for a n i m p o r t a n t n u m b e r o f projects. T h e
government should set forth a n indicative generation investment p l a n with i t s corresponding
physical investment p l a n for the expansion o f the national transmission system.

3.53 In the short to medium term, it i s important to reassess the State subsidy
mechanisms towards an appropriate target population5’. In the m e d i u m to long term,
the political agenda for Central American integration should include the topics of the


57 T h e social t a r i f f l a w of 2000, liberated users with a consumption o f b e l o w 300 k W h / m o n t h (94% o f
regulated market) from co-paying the high PPAs and f o r purchase o f capacity by obliging the distribution
companies to organize tenders for the satisfaction o f their consumption
58 O n e option w o u l d b e t o target consumers o f less than 150 k W h / m o n t h .




                                                                                                                      55
regional energy market a n d propose the approval o f the correspondmg protocols that would
make regional transactions feasible.

7.       POLICY RECOMMENDATIONS O N ELECTRICITY

3.54 In 2007, the Government i m p l e m e n t e d a n u m b e r o f reforms a i m e d a t
accelerating investments in n e w generation. T h e p l a n for accelerated investments in
transmission i s likely to have the greatest i m p a c t on the market.

3.55 T h e Government s h o u l d re-consider the Social Tariff, a n d attempt to target
subsidies in a m o r e efficient manner. Elirmnating the social t a r i f f altogether a n d replacing
i t by social support p a i d to low-income f a d e s by municipalities would make socio-
economic sense: it would i m p r o v e the targeting (reducing the n u m b e r of beneficiaries) a n d
also i m p r o v e the financial situation of INDE, thereby enabling i t to accelerate planned
investments in transmission a n d hydropower. Yet, there are presumably no prospects for a
repeal o f the Social T a r i f f L a w in the i n i t i a l years o f the current Government.

3.56   T h e Government c o u l d consider m o r e effective mechanisms to p r o m o t e
investments in renewable energy. T h e i m p a c t of the Incentive L a w on N e w Investments
in Renewable Energy a n d i t s regulation i s limited: most investments are very attractive
without the added benefits. A m o r e effective instrument to accelerate investments in
hydropower would b e to introduce by l a w a local community tax on hydropower producers
that provides local communities with m o r e financial benefits t h a n i s the case now.

3.57    Accelerated investments in hydropower, geothermal energy a n d in wind-
farms are expected to not only reduce generation costs, but also p u s h out of the
market high-cost generation units. Estimates show that the cost o f n e w generation for all
types o f p l a n t - peak, shoulder a n d base l o a d - would b e lower t h a n the present cost of
generation on the market in Guatemala estimated at 11.6 U S cents/kWh. An additional
effect i s that n e w renewable energy generation will push out o f the market extraordinarily
high cost generation u n i t s that at present determine the hourly price.

3.58 In a d d i t i o n the Government m a y introduce a cap o n how m u c h additional
payment a generator c a n receive from the spot m a r k e t on top of i t s stated variable
cost o f production. T h e present high hourly tariffs are caused by structural factors - such
                                                             n
as the unexpected loss o f pet-coal - that cannot b e solved i the nearest years. T h e situation
creates extra-high profits for market participants without giving reliable price signals for
investors in n e w plants.




                                                                                                   56
                 Chapter 4.                Governance in Guatemala


1.      INTRODUCTION

4.1     Guatemala’s governance system-its             institutions regulating private business,
i t s courts and the elements of i t s security environment-has                 shown improvements
over the past four years. W h i l e the 2003 ICA revealed serious deficiencies in the area o f
governance, especially r e d tape a n d corruption, several i m p o r t a n t aspects of the governance
environment have begun to show s i g n s o f improvement. For example, the malung o f
i n f o r m a l payments to government officials in relation to business services has declined
                                                                                 n
dramatically. Fewer f m s found i t necessary in 2007 to bribe officials i order to get awarded
a government contract, or to obtain licenses, permits or other business-related government
services. This i s good news, no doubt reflecting the Government’s efforts to make business
regulations simpler a n d easier to comply with.

4.2         An important and well-documented success with respect to easing business
regulations was the Government’s effort to reform several areas captured by
international benchmarking reports, such as Doing Business, the World
Competitiveness Report, Transparency International’s rankings and several others.
T h e country won i t s 2007 Doing Business designation as o n e o f the world’s top t e n
                               n
reformers through reforms i three areas: (1) easing starting a business through the creation
o f a one-stop shop for firm registration; (2) easing the process o f obtaining a construction
p e r m i t through introducing statutory time h t s for issuance o f permits; a n d (3) easing the
process of property registration by simplifying registration procedures a n d hiring m o r e staff
at the Registry Office. These reforms-effected between June 2005 a n d M a y 2006-reduced
                                                     n
significantly the time, costs a n d procedures i the three areas, a n d afforded Guatemala a n
impressive jump in i t s O v e r a l l Ease o f Doing Business index.

4.3     More importantly, the impetus of the above reforms was sustained and Doing
Business-related reforms were even farther-reaching in 2006-2007. For example, the
                                                          n
government continued pushing further reforms i regulations o f entry, construction
permitting a n d property registration, but also added reforms in two n e w areas-cross-border
trade and contract enforcement. M a k i n g firm a n d property registration procedures electronic
has reduced times to register, a n d c u t procedures even further. Allowing electronic
signatures in the transfer of real property has cut the time from 37 to 30 days, a n d on the
Registering Property indicator Guatemala ranked 23 out o f 178 countries w o r l d w i d e in 2008,
a significant achievement.

4.4     Progress has also been made since 2003 in the area o f security and crime,
although concerns remain as to increasing violence in some parts o f the country.
Crime was perceived by Guatemalan businesses as less o f a p r o b l e m in 2007 t h a n in 2003.
Fewer f i r m s were victims o f criminal action in 2007 t h a n in 2003. Losses due to crime were
also lower, compared to 2003. This i s good news. But challenges in t h i s critical area remain,
as shown in section 4.5.




                                                                                                    57
4.5    T h e courts-as a venue to resolve business disputes-are also perceived to be
functioning better than in 2003. T h i s i s a m a j o r result given the notoriously lengthy times
to deliver a judgment and enforce a judgment w h i c h both the 2003 survey data a n d the
Doing Business reports from recent years point to. T h e i m p r o v e m e n t in perception i s in line
with reforms captured by the E n f o r c i n g Contracts indicator of the Doing Business in 2008
r e p o r t (with data as o f June 2007). This was one o f the areas where Guatemala was cited as
having reformed-by          expanding the jurisdiction of Justices of the Peace to small claims.

4.6        Nevertheless, governance challenges remain. Despite r e f o r m i n g aggressively for
two years in a row, Guatemala s t i l l ranks quite low on the global Ease o f Doing Business
i n d e x (114 out o f 178 countries in 2007). In some areas-such           as construction licenses a n d
starting a business, Guatemala ranks very low-167            a n d 128 in 2007 respectively. Several
successes o f the past two years - such as the establishment o f the one-stop shop for
business registration (the Ventanilla Agid, the i n t r o d u c t i o n into operation o f a n electronic
property transfer system, the advances in tax administration - c o u l d b e further strengthened
a n d also expanded to areas outside o f Guatemala City. With trade as a n i m p o r t a n t source o f
i n c o m e (see Chapter 2), Guatemala has begun improving i t s customs administration-
implementation o f a n e w Electronic D a t a Interchange (EDI) system for electronic
submission of customs declarations a n d the i n t r o d u c t i o n o f a risk-based inspection regime
decreased the t i m e for exporting a n d importing, a n d also the associated costs.

2.      RED TAPE
               AND CORRUPTION

4.7    Guatemala lags behind most o f the other Central American countries in
                                                                                    n
overall governance indicators. I t i s particularly weak in the area o f confidence i the
government’s interpretation o f business laws a n d regulations. Two-thirds of Guatemalan
f i r m s do not believe that business laws wdl b e applied in a predictable a n d consistent manner
(Figure 4.1). In the area of bribery, 23 percent o f f i r m s in Guatemala believe that bribes are
c o m m o n in order to do business, which, while less t h a n in Honduras (43 percent), i s m o r e
t h a n the other countries in the region. Of the subset o f f i r m s who say that bribes to get
things done are common, 58 percent report that they are aware o f the amount needed to pay
w e l l in advance (Figure 4.2). This i s similar to El Salvador a n d less than in Honduras a n d
Nicaragua (over 65 percent in both cases). W h e n i t comes to actual incidence o f i n f o r m a l
payments, however, Guatemalan f i r m s r e p o r t a rate o f incidence sirmlar to the other Central
American countries, with the exception o f El Salvador where the incidence i s l o w e r (Figure
4.3). 9 percent o f interviewed firms in Guatemala who h a d applied for a n operating license
h a d been asked for a bribe. 6 percent o f f i r m s w h i c h h a d tax inspections h a d been asked for
a n i n f o r m a l payment.




                                                                                                       58
            Figure 4.1: Perceptions o f Governance across Central America
                        I
                        1         701                                                                                         I




                                             Panama       Costa %m      El Salvador   Hondum        Niaragua    Guatemala

                                               E Govt lnterpretatianr oflaws and regulations are mmns~tent
                                                                                                         &unprediaable

                                Source: Enterprise survey

                Figure 4.2: Perceptions o f Bribery across Central America
 (percent o f firms that consider bribes common and percent o f those that say bribes
                     are common w h o k n o w the exDected bribe size)
                                 80   ,                                                                                           l


                                'O
                                60    i                                                                                  66




                            2   j0
                            E a
                            E 30
                                20

                                 10

                                 0
                                             Panama           Nm g
                                                               i ar            El Salvador       Guatemala       Honduras
                                                                                                                                  1
                                                      ~It~smmmontopa~~nformdpa~mentsto"getth~ngsdone"
                                                      0 People h o w m advance how mu& to pay to "get thing done"

                                Source: Enterprise Survey. Comparable data for Costa Rica
                                are not available (questions not included in the Costa Rican survey)

           Figure 4.3: Percent o f F i r m s Asked to M a k e Informal Payments



                   14
                   12
                   10
                   8
                   6
                   4
                   2
                   0
                                 Panama                 El Salvador          Honduras             Nicaragua         Guatemala

                                          dunng tay mspeaions         to o b t m unpoa h m s e   to o b t m opmnng I i m s e


                                Source: Enterprise Survey

4.8     Since 2003, the overall cost o f bribes in Guatemala has fallen. Average b r i b e
size has not changed much: the average reported bribe to obtain a public contract d r o p p e d
from 13 to 11 percent o f the contract value, but bribes "to get things done" has slightly



                                                                                                                                      59
increased since 2003: from 7.3 to 8.4 percent o f annual sales59. However, the incidence o f
bribes has dropped dramatically. In 2003, 33 percent o f interviewed f i r m s reported paying
bribes to get a government contract; i 2007, t h i s had fallen to 15 percent (Figure 4.4, Panel
                                     n
A). Even more striking was t h a t while i 2003 nearly h a l f o f interviewed f i r m s reported
                                         n
paying bribes to "get things done"; in 2007 that number had dropped to 12 percent. The
lower incidence of bribes has resulted i a lower average cost o f bribes across a l l f i r m s
                                         n
(Figure 4.4, Panel B).

                        Figure 4.4: Costs o f Corruption: 2003 vs. 2007
            A. Incidence of informal payments          B. Average costs of informal
            payments




                      Percentoffimspayngfor   PemtofGmspayngto      Guatemala (2003)        Guatemala (2007)
                          public mntraas        "get things done"
                                                                       %
                                                                      I mntraa value forproarement



           Source: Enterprise Survey

4.9      While the number of tax inspections in 2007 was similar to the number
reported in 2003, there was a substantial reduction in the incidence o f bribe-seeking
by tax officials. In 2002, 19 percent of large f i r r n s had to pay tax inspectors something
                                       n
extra; t h i s went down to 6 percent i 2006. These results are in l i n e with t h e generally
observed trend o f lower incidence o f informal payments in 2007 (Figure 4.5, Panels A and
B)*

        Figure 4.5: Average Number o f T a x Inspections in Previous Year                                      / Informal
                                 payments requested




Source: Enterprise Survey



59   B o t h averages are calculated for the subset o f firms that report bribes for public contracts and for "getting
things done".


                                                                                                                            60
4.10   For the panel of f i r m s (227 manufacturing firms) interviewed in both the 2003
and 2007 surveys, the improvements o n the governance indicators are striking. For
         n
example, i t h e 2003 survey these f i r m s reported, on average, 9 v i s i t s by tax officials in the
preceding tax year; in 2007-this         n u m b e r h a d dropped to 3. N o t surprisingly, tax
administration was seen as less o f a p r o b l e m in 2007. In 2003, 16 percent of the panel f i r m s
saw tax administration as a very serious problem. T h a t n u m b e r fell to 7 percent &d s o in
                          n
2007. Improvements i perceptions across t h i s subset o f firms interviewed in both surveys
were n o t e d across all indicators. 72 percent of t h e m viewed corruption as a very grave issue
in 2003, a n d only 44 percent of the same l d so in 2007. T h e objective measures do support
t h i s perception: in 2003 38 percent o f the same f i r m s p a i d to get a public contract; in 2007-
only 13 percent did so. In the same vein, in 2003 m o r e t h a n h a l f o f the same group o f 227
f m s (52 percent) reported paying in general for public services; only 10 percent o f the same
group reported s o in 2007. This i s p o w e r f u l evidence that the governance arena, broadly
speaking, has been improving at a fast pace since t h e n - something largely evident in the
progress in the different Doing Business indicators w h i c h measure government regulations
o f entry, permits, l a n d registration, a n d trade, a m o n g others."

4.11   B y definition, the Enterprise Surveys cover only formal, registered firms.
Informality, however, i s a serious issue in Guatemala, with estimates that 75 percent
of the economically active population (about 5 million in 2004) i s engaged in
informal and unregistered activity In r u r a l areas t h i s n u m b e r i s even higher - 90 percent
of the labor force. Informality affects m o r e Guatemala's indigenous peoples: w h i l e 67
percent o f non-indigenous citizens are engaged in i n f o r m a l businesses, the n u m b e r goes up
to 89 percent for the indigenous population a n d higher for geographic areas o f the country
where indigenous communities are concentrated. I n f o r m a l i t y i s usually associated with m o r e
                                                                          n
burdensome government regulations a n d m o r e corrupt practices i business regulations."

4.12   T h e share of sales that f i r m s report for tax purposes and the share of the labor
force reported for social security purposes gauge the level of tax evasion and under-
                                                                   n
reporting by formal firms. T h e survey results i n d c a t e that i 2007 Guatemalan f i r m s
reported on average 73 percent o f their i n c o m e to the tax authorities, a n d 76 percent o f their
workforce62. These numbers are not l s s i m i l a r to t h e rest o f Central America. There are,
however, i m p o r t a n t regional differences within Guatemala. For firms located in the
Guatemala City area the share o f reported sales i s 76 percent; f i r m s located in the rest o f the
country (where informality i s higher) reported 64 percent o f their sales income. Similarly,
f i r m s in the Guatemala City area reported 79 percent o f their w o r k f o r c e for tax a n d social
security purposes compared to 68 percent for f i r m s elsewhere in the country.

4.13  T h e quality of business services provided by the government varies between
the Guatemala City metropolitan area and the remainder of the country. Firms a r o u n d
                                                                                                 n
the capital city waited longer to get a construction p e r m i t in 2007 than their counterparts i
the rest o f the country (Figure 4.6). On the other hand, f i r m s in the interior waited
considerably longer for a n operating license (close to 3 months on average) a n d for a n



6o Corruption was not covered by D o i n g Business reports t h u s far, but i s a new topic area for the f o r t h c o m i n g
report Doing Btlsiness in 2009.
     CIEN 2006.
62   Since all surveyed firms are formal, actual compliance i s m u c h lower.



                                                                                                                           61
import license. Aside from this, utility connections (electricity, telephone a n d water) also take
longer in the interior than i the Guatemala City area (see Chapter 3). On balance, f i r m s in
                            n
the interior are facing m o r e challenges with respect to the investment climate, especially
where infrastructure and r e d tape are concerned.

       Figure 4.6: Regional Differences in T i m e to Get Licenses and Permits 2007

                                                                                                                           I
                                                                        87                                                 I




                     Days to obtain import liosnse    Days to obtain operatinglianse     Days to get amnnstmction permit

                                                     0 Guatemalaaty    Rest of m u n q

       Source: Enterprise Survey

3.        LAND

4.14 L a n d i s an important factor of production. Secure land titles guarantee rights
of ownership and allow a land market to develop. In 2007, interviewed Guatemalan
f i r m s o w n e d slightly m o r e t h a n h a l f o f the l a n d they occupied, a n d leased the rest. This i s
less than the average for Central America, where the percentage o f l a n d ownership was 65
percent on average in 2007. Firm l a n d ownership i s higher in r u r a l areas compared to
Guatemala City (66 percent vs. 54 percent).

4.15        Access to land has begun to be perceived as more of a problem. Along with
electricity it was one of the few areas in which there was a worsening of perception
since 2003. This i s in h e with a n increase i the average t i m e i t took to get a construction
                                                 n
p e r m i t between 2003 a n d 2007 (Figure 4.7). Access to l a n d (as measured by the Enterprise
Survey) could potentially reflect perceptions o f both titling a n d transfer o f ownership, as w e l l
as matters related to construction on owner-occupied land. Easing access to a n d transfer of
l a n d ownership i s i m p o r t a n t as l a n d ownership i s associated with a higher likelihood that a
f will get a b a n k loan. For instance, in 2007, one h a l f of Guatemalan f i r m s who o w n e d at
  m
                                                                                                n
least some portion of the l a n d where their business operated h a d a b a n k loan; i contrast,
only a h d of non-owners h a d a n existing l o a n or credit line by a f o r m a l financial institution
(Figure 4.8). Therefore, secure l a n d titling a n d ownership i s a way to secure b a n k loans a n d
increase access to finance. L o a n applications were also m o r e likely to b e rejected a m o n g
f i r m s with no l a n d ownership.

4.16     Given improvements in the land registration and real property transfer (as
captured by the Doing Business report) it i s puzzling why perceptions of access to
land have worsened. A regional decomposition o f these perceptions yields interesting
results. W h i l e in 2003 14 percent o f interviewed f i r m s i Guatemala City a n d 19 percent o f
                                                                n
        n
those i the interior considered l a n d a m a j o r or severe problem, the proportions were
reversed in the 2007 survey, that is. 20 percent o f firms in the Guatemala City metropolitan



                                                                                                                               62
                                                                                      n
area considered access to l a n d a serious issue as opposed to 15 percent o f those i the rest of
the country. As m a j o r economic activity i s concentrated in a n d around the capital city area,
f i r m s located there might indeed find it m o r e difficult to acquire suitable l a n d for their
establishments’ operation a n d potential expansion.

                    Figure 4.7: L a n d and Construction Permits: 2007 vs. 2003




                              Amss to land i s a problem, O h o f h      s          Days to get a mnstrudon permit

                                                      @ (2003) H Guatemala (2007)
                                                            I
                                                      Guatemala

                    Source: Enterprise Survey



         Figure 4. 8: L a n d Ownership and Access to Finance: Guatemala, 2007

           I        71)   ,                                                  66
                    60
               ; 50
               2 40
               Li
               c 30
                    20
                    10
                     0
                              Percent of fms with a loan       Percent o f f i r m s with loans Percent o f films with rejected
                                      or credit h e            that used land and buildings           loan applications
                                                                      to guarantee the loan




               Source: Enterprise Survey

4.      COURTS
             AND CONTRACT                             ENFORCEMENT

4.17    Guatemalan courts are routinely rated as among the slowest in the world. For
example, according to the Doing Business 2008, a standard debt collection case involving a
claim of 200 percent o f i n c o m e p e r capita, would take 1459 days to resolve, one of the
longest in the world. This measure has not changed since Doing Business began publishing
i t s annual reports a n d gathering data on contract enforcement in 2003. T h e Enterprise
Survey data, however, are not so clear. Although on average, the time to obtain a c o u r t
judgment was reported as 50 weeks in 2007, closer review o f the data shows that the average
i s skewed by one outlier. T h e minimum reported time was 3 weeks; t h e m a x i m u m reported
time was 313 weeks. Dropping the observation o f 313 weeks lowers t h e average time in



                                                                                                                                  63
Guatemala to 33 weeks. Similarly, the simple average for t i m e to execute a judgment was 40
weeks; removal o f one outlier (the same f ) drops the average to 12 weeks. Guatemala
                                                  m
therefore would r a n k slightly better than i t s Central A m e r i c a n comparators.

4.18     Perceptions of the court system have improved substantially since 2003. For
example, 31 percent o f interviewed f i r m s in the 2003 survey identified the courts as a m a j o r
                                      n
problem; only 13 percent did so i 2007. However, t r u s t in the courts measured along
several dimensions, such as fairness of process, speediness, affordability a n d ability to
enforce judgments, i s not unlike that of other Central A m e r i c a n neighbors (Figure 4.9). Only
Panamanian f i r m s have consistently higher confidence in the judicial system.

                                     Figure 4. 9: Trust in the Judiciary, 2007
                                                                                                    A 7
              50   I         f,                " C                                             ._


              40
         8

         1
         G
         b
              30
              20
         s
              10


               0
                       El Salvador        Guatemala      Honduras        Nicaragua         Panama




             Source: Enterprise Survey

5.       CRIME AND INSECURITY

4.19         Guatemala's crime problem affects the business community and the citizenry.
Building a strong judiciary a i d police becomes a n even m o r e urgent &k. A 2007 United
N a t i o n s study on crime in Central America reveals the severity o f the problem. T h e 2007
survey data demonstrate that perceptions of crime as a n obstacle to business have i m p r o v e d
considerably a n d that, in line with them, fewer f i r m s have experienced crimes against their
                  n
businesses i the year preceding the survey. In 2003, 80 percent o f interviewed firms h a d
identified crime as a serious obstacle to business, in 2007-this                  share h a d shrunk by m o r e
t h a n a h a l f - 37 percent. Similarly, in 2003 m o r e t h a n h a l f o f interviewees reported h a v i n g
suffered losses as a result o f criminal activity directed at their businesses; i 2007-only  n              36
percent o f f i r m s h a d been victims o f crime a n d incurred business losses in the process.
(Figure 4.10). These are remarkable improvements in both subjective perceptions a n d
objective measures, such as crime incidence.




                                                                                                            64
                           Figure 4.10: Perception and Incidence of Crime
                                                             2003,2007
                           100
                   ~




                                                                                                                        j
                            80


                       2    60
                       I
                       L

                       s    40


                            20


                             0
                                 Percent of respondents that see cnme as a   Percentage of tm that erpenenced losses as a
                                                                                             i s
                                         malor or severe obstacle              result of theft, robbev, vandalism or anon




                           Source: Enterprise Survey




                           Figure 4 . 1 1 Crime Incidence in Latin America
                             (Percent of firms reporting losses as a result
                                of theft, robbers, vandalism or arson)




4.20    Despite the reduction in crime reported by f i r m s , Guatemala still ranks
among the countries where private f i r m s are worst affected by crime. Only El Salvador
                                                    n
a n d Honduras in Central America do worse i terms o f crime incidence (Figure 4.11).
Overall, Guatemala ranks a m o n g the worst hit countries in L a t i n America. Guatemalan f i r m s
incurred the h g h e s t costs associated with crime a m o n g their Central American counterparts
(Figure 4.12). On average, a typical Guatemalan firm registered losses due to crime equal to
2.23 percent o f annual sales. In Panama, the same firm reported losses o f 0.4 percent o f
annual sales. T h e difference i s enormous. A n o t h e r 1.9 percent o f sales was spent on
preventive measures, such as private security personnel, cameras a n d equipment, a n d others.
In Costa Rica, costs spent on private security averaged only 1 percent o f annual sales, nearly
h a l f o f w h a t was being spent in Guatemala, Panama a n d Nicaragua F i g u r e 4-12).




                                                                                                                            65
                                       Figure 4.12: Costs o f Crime
                    (Percent of Sales Lost due to Crime and Spent on Private Security)


        4.0

        3.0

        2.0

         1.O

         0.0
                        Guatemala     El Salvador          Nicatagua             Honduras                 Panama               CostaRia


                                           I sales spent in semrity I sales lost due to theft
                                            ?b                       YO
                                                                                                                                                 I

            Source: Enterprise Survey

4.21 Criminal activity such as theft o f cargo being shipped within or out of the
country, also affects Guatemalan f i r m s more than most of their Latin American
peers. Only El Salvador a n d B o l i v i a (for domestic shipments) r e c o r d similar losses o f
consignment cargo as Guatemala does (Figure 4.13). In direct exporting, losses related to
theft in Guatemala are 10 times higher on average than those for exporters in Chile,
Argentina, Uruguay, Paraguay a n d Colombia. These losses are i m p o r t a n t as they impede the
international competitiveness o f Guatemalan exporters.

                              Figure 4.13: Theft-Related Losses in Transit of Goods
                                      (for exports and domestic shipments)
   El S a l v a d o r

    Guaternala

     Nicaragua

     Costa R ~ c a

        Panama

               Peru

         Mexim

    Honduras

       Eolador

          Bolivia

               Chile

     Argentina

       Paraguay

     Colombia

       Uruguay

                        0.0         0.2             0.4             0.6               0.8                1.0               1.2             1.4       1.6


                                            0 % m n s i g n m e n t value o f d o m e s t i c s h i p m e n t l o s t d u e to t h e f t
                                            I       m n s i g n m e n t value o f direct exports l o s t d u e to t h e f t

            Source: Enterprise Survey

4.22 Crime also induces worker absenteeism due to security concerns-and this
reduces productivity. In Guatemala, a larger share o f firms (17 percent in 2007) reported



                                                                                                                                                       66
suffering from crime-related worker absenteeism, m o r e t h a n the average for Central America
(15 percent) a n d L a t i n America overall (10 percent). Only interviewed H o n d u r a n a n d
Salvadoran f i r m s reported a higher level o f crime- a n d security-related w o r k e r absenteeism
(Figure 4.14). For the subset o f Guatemalan f i r m s , w h i c h reported experiencing criminal
activity against their businesses, w o r k e r absenteeism was even higher-27   percent.

                             Figure 4.14: Share of Firms reporting increases in
                            worker absenteeism due to crime and lack of security

                      Honduras

                     El Salvador

                      Guatemala

                        Paragu*"
                       ACgRlClnC,

                             BoLvla

                       Nleragu*

                            Emador

                            Umguay
                              Chde
                              C m
                             MW

                       Colombia

                              PR-U
                            Pallama

                                      0                     5              10                 15                20                     25

                      Source: Enterprise Survey

4.23     In 2007, medium-sized and large f i r m s were more likely to be victims of
criminal activity, and spend more on security and crime prevention. T h e h g h e s t
crime-related costs, however, were b o r n e by small f i r m s (3 percent of sales as opposed to 0.9
percent o f sales for large firms). Firms in Guatemala City a n d i t s surrounding metropolitan
area were m o r e likely to experience crime than f i r m s elsewhere in the country (39 percent vs.
25 percent). There were no significant differences, however, between crime losses incurred,
a n d only marginal ones in terms o f security expenditures for f i r m s in a n d outside of the
capital city area.(Figure                 4.15).

                                    Figure 4.15: Crime incidence and cost by Size
       A. Percent of firms, victims of crime B. Costs of Crime, by size
         50                                                                 4
                                                                                       3.0
         4c

         30

         20

         10

         0                                                                      Small (<19)          hledium (20-99)         Lvge (>loo)
              Small (<19)           .\lediurn (20.99)       large (>100)
                                                                                 0 9.0 sales spent on seolnty
                              Q O'o finns reporting m   e                        I o sales lost due to theft, r o b b q nmdalism orarson
                                                                                  ?,


    Source: Enterprise Survey




                                                                                                                                            67
4.24 At present, firms of all sizes are spending significantly less than in 2003 on
preventive security measures (Figure 4-16). Across the w h o l e sample, costs of crime
prevention declined from 5 to 1.7 percent o f sales i n c o m e between 2003 a n d 2007 - a
statistically significant difference. Crime-related costs, however, declined only for large f i r m s
(from 1.4 to 0.7 percent o f sales), a n d actually increased for small a n d m e d i u m f i r m s . At 2.2
percent of annual sales, these costs remained practically the same. A possible explanation i s
         n
that i 2003, w h e n a n e w wave o f rising crime started in Guatemala (especially related to
drug-trafficking a n d gang violence), m a n y f i r m s h a d been forced to invest in security
measures that are fured costs (reinforcing walls, windows, cameras a n d other equipment).
O n c e incurred, these costs need not b e repeated, except for the variable costs o f salaries o f
security personnel. In other words, w h a t the survey i s capturing c o u l d potentially b e that
f i r m s have already “walled themselves o f f ’ a n d are therefore spending less on security
compared to 2003, but are by no means suffering less from crime as the losses incurred
indicate (even with l o w e r incidence o f crime).

                         Figure 4.16: Costs of Crime by Size and Year
                                                                                                                   I
          7.0

          6.0

          5.0

          4.0
                                                                                                      3.0
          3.0

          2.0

          1.o

          0.0
                      2003             I            2007         I          2003               I            2007
                         96 sales spent on s m r i t y           I              ‘10   sales lost due to theft
                                                                                                                   I
                                                                                                                   I
                                           H Small (<19) 0 Medium (20-99) H Large (>loo)

           Source: Enterprise Survey

6.       POLICY RECOMMENDATIONS O N GOVERNANCE

4.25     Guatemala should continue reforming i t s regulations of private business
activity--especially in firm registration and issuing construction permits, where there
i s huge potential for moving up the rankings o f the D o i n g Business report. Analyses
a n d action plans developed by the country’s Credit Risk Task Force (Mesa d Riesgo delpais),
                                                                            e
with participation from the think tank FUNDESA a n d other government a n d private sector
organizations, should b e put into action.

4.26     T h e country’s National Competitiveness Program can continue to play a n
important coordinating and supporting role. T h e one-stop shop for firm registration
should b e replicated to municipalities outside o f Guatemala City. This would take some t i m e
                                                                          n
a n d resources but i s necessary to make services available to f i r m s i the interior. T h e same
applies to the Property Registry.




                                                                                                                       68
4.27       There i s also potential for further improving customs administration. Customs
c o u l d b e improved, for example, by reducing redundant documentation or by consolidating
i n f o r m a t i o n onto one customs declaration form. T h e steps adopted last year to introduce
risk-based cargo inspections a n d a n Electronic D a t a Transfer system for exporting or
transiting cargo are steps in the right direction. But m o r e remains to b e done, includmg
introducing performance incentives a n d performance monitoring o f customs officials.

4.28   T a x administration could also be further strengthened. For example, currently a
standard l i m i t e d liability medium-sized company must make 39 separate payments o f
corporate i n c o m e taxes a n d social security contributions due over one fiscal year. This i s
high relative to other countries such as M e x i c o (27 payments) or reformers worldwide.
I n t r o d u c i n g online submission o f tax declarations a n d m a k i n g it possible to also make tax
payments online c o u l d i m p r o v e tax administration. W e l l done tax administration reforms
lead to higher compliance rates a n d m o r e revenue (especially if taxes rates are lowered to
broaden the base). Such reforms can also reduce opportunities for bribery.

4.29    T h e 2007 survey points to a dramatic shift in both perceptions and incidence
of corrupt practices in regulation o f business activity. Nevertheless, corruption
continues to b e a m a j o r concern. Current efforts can go a long way to further reduce the
incidence o f corrupt acts. O n e example i s the Public Sector Modernization a n d Management
Project, w h i c h works to i m p r o v e government procurement practices, c i v i l service
performance a n d incentives as w e l l as fiscal management. Strengthening institutions such as
the judiciary and the police c o u l d also h e l p put a check on the Executive, at the national
government, a n d municipal levels.

4.30     Guatemala has started some reforms in contract enforcement and the
judiciary, but a more concerted, longer-term effort will be needed, possibly with
support from donors. T h e Justice Sector Modernization Project underway with World
B a n k assistance should help with c o u r t case management, training o f judges, improving
court infrastructure a n d performance a n d incentive schemes for judges. To reduce times to
case disposition, backlogs should b e dealt with. For example, C o l o m b i a adopted a l a w
allowing the dismissal o f c i v i l cases that have been inactive (with no action by either plaintiff
or defendant) for 6 months or longer. This i s expected to reduce backlogs i half.n

4.31    More sweeping reforms o f the justice system would require time, sustained
effort and resources. O n e r e f o r m i s the review o f the Civil Procedure C o d e to see where
innovations aimed at faster resolution o f disputes c o u l d b e made. Alternative dispute
resolution, especially mediation, c o u l d also serve to alleviate c i v i l courts from certain claims,
such as over small amounts.

4.32 Finally, in the crime area, the strategy advocated i s to accompany preventive
measures with active police enforcement, especially since a lot of crime i s linked to
alleged drug trafficking of cocaine from South America to the U S and European
markets63. A c c o r d i n g to a recent World B a n k Policy N o t e on C r i m e a n d Violence i
                                                                                                  n
Guatemala, the best approach would b e for the n e w administration to focus on improving



63   United Nations, Office on Drugs and Crime (2007), Cthe and Development in CentralAmerica: Caught in the
Crossjre, New York, NY.



                                                                                                         69
the quality o f the police a n d the criminal justice system, with targeted interventions to reduce
crime in high-risk communities in the short run, a n d work t o w a r d a h u m a n development
strategy w h i c h aims to l o w e r the underlying tendency for criminality in the medium- to long
     64
run.

4.33          M a n y of the targeted short-term interventions involve working with youth-at-
risk groups, gang members and strengthening self-policing by communities.
D i f f e r e n t Guatemalan NGOs have already ongoing programs tacking gang members a n d
working with t h e m to help t h e m find employment, as w e l l as working toward disarmament.




rj4 D r a f t Policy N o t e on Crime and Violence in Guatemala, prepared as a background n o t e for the Central

America ICA, 2008.



                                                                                                              70
          Chapter 5.                 Firms’ Access to Financial Services


1.       INTRODUCTION

5.1    Satisfaction with access to financial services has improved in Guatemala in
the last few years. In the 2003 survey, 47 percent o f surveyed f i r m s indicate that they
                                                               n
thought access to finance was a m a j o r or severe obstacle; i 2007, the n u m b e r h a d d r o p p e d
to 19 percent. W h i l e only 44 percent o f surveyed f i r m s have loans, 84 percent have a
checking or savings account. Of the f i r m s that did not have loans, most reported that they
h a d not applied for a l o a n because they &d not need it. Ths higher level o f satisfaction with
access to finance, however, does not m e a n that access problems are resolved. Guatemala has
the lowest financial depth in Central America a n d o n e o f the lowest in L a t i n America, even
w h e n considering the level of income. Guatemalan f i r m s finance most o f their needs with
internal sources a n d there i s little diversification o f external sources of financing. T h e
financial system shows deficiencies in terms o f outreach, with cre&t b e i n g concentrated in
larger enterprises a n d u r b a n areas. T h e system i s dominated by commercial banks that
operate at the center o f financial conglomerates. N o n - b a n k i n g sectors, w h i c h c o u l d address
the specific need of underserved f i r m s (including micro-finance institutions, factoring a n d
leasing companies) are little developed. Nevertheless, microfinance institutions have been
growing fast and offering a wide set o f financial products a n d services to underserved
sectors. Overall, the diversity of financial products in the system i s l i m i t e d though, with
banks providing most lending, largely in dollars a n d short term.

5.2    There have been considerable advances in the financial system and i t s
enabling environment recently, but some weaknesses s t i l l h m d e r the development o f t h e
financial system. Stability a n d solvency have i m p r o v e d considerably a n d now leave m o r e
room to tackle access to finance issues a n d t h e remaining agenda to consolidate
improvements. Weaknesses o f the infornational framework include, for instance, problems
with auditing a n d accounting standards that affect the quality of enterprises’ financial
statements and low coverage o f private credit bureaus. Within the contractaal framework,
problems with collateral a n d bankruptcy laws, judicial independence a n d protection of
minority shareholder’s interests restrict financial development. T h e regzllation and sapemision
o f the financial system also faces challenges, the largest b e i n g related to b a n k i n g a n d
consolidated supervision laws (even w h e n they are currently under continuous
improvement) and the development o f regulation to foster non-banking sectors.

5.3    Bank efficiency s t i l l remains low. Interest rate spreads have decreased from 10.2
percent in 2003 to 8.26 percent in 2007, but that spread i s one of the highest in Central
America, a n d substantially higher t h a n m o r e developed financial systems such as Chile
(interest rate spread of 2.9 percent).

5.4      I n this context, measures to increase the size of the financial system while
benefiting smaller firms seem a priority. Ths includes: ( )      istrengthening creditor rights
a n d insolvency proceedings to foster credit growth a n d increase the efficiency o f collateral,



                                                                                                         71
                                                     i)
w h i c h i s m o r e scarce at smaller f i r m s ; ( ipromoting the development o f t h e non-banking
sector a n d sources o f financing that are better able to address the specific needs o f MSMEs,
like microfinance institutions, factoring a n d leasing; a n d (i)         ii promoting a business
environment that increases the chances o f approval o f MSMEs l o a n applications by
encouraging formality, a n d improving accounting a n d auditing practices a n d financial
i n f o r m a t i o n infrastructure.

5.5    T h e most important issues o n access to finance at the firm level in Guatemala
are reviewed in this chapter, with a discussion of the most important obstacles and
suggested policy recommendations to address them. Section I1 reviews the m a i n
features a n d structure o f the financial sector in Guatemala, based on public financial market
i n f o r m a t i o n a n d the International Monetary Fund a n d World Bank's 2006 Guatemala
Financial Sector Assessment P r o g r a m (FSAP) Update. Section I11 presents the m a i n
findings o f the on access to finance that can b e derived from the 2006 World Bank's
Enterprise Survey. Based on the background set by Sections I1 a n d 1 1 Section I V derives
                                                                          1,
the main obstacles for access to finance in the real sector a n d relevant policy
re'commendations to address them.

5.6     Guatemala's financial system i s small compared with other countries in the
region, it has outreach problems and lack of diversity.                    Guatemala compares
                                      n
unfavorably with other countries i the region in terms ,of domestic financing to the private
sector (see Figure 5.1). Problems o f size a n d outreach are accompanied with lack o f
diversity o f financial institutions, markets a n d products. T h e development o f non-banking
sectors a n d the range o f available products a n d services are limited, with most financing
being short-term a n d in dollars.

            Figure 5.1: Bank lending to the Private Sector as percent of GDP
                                          Bank Lending to Private Sector/ GDP

                         0.8
                         0.7
                         0.6

                     -
                     a
                     p
                     5
                         0.5
                         0.4
                         0.3
                         0.2
                         0.1
                          0
                               Costa &a   E Salvador   Guatemla   Honduras   Nicaragua   Panama    Central
                                                                                                  America
                                                                                                  average




5.7   Although the financial system includes several types of supervised and
unsupervised institutions, it i s dominated by banks. T h e supervised system comprises
banks (onshore a n d offshore); finance, insurance a n d bonding companies; foreign exchange
houses; warehouses; a n d leasing, factoring a n d credit card companies. As o f M a r c h 2008,
the banking sector accounted for 89 percent o f the assets o f the financial system.
Supervised non-banking sectors are all small. Finance a n d insurance companies account




                                                                                                             72
only for 6.7 percent o f the system’s assets a n d the participation o f bonding companies,
warehouses a n d exchange houses does not reach 1 percent. T h e insurance a n d pension
sectors are s t i l l underdeveloped a n d a proper securities market barely exists. As o f M a r c h
2008 credit card companies accounted for 2.7 percent o f the financial system’s assets
(US$0.5 bill~on).~~ unregulated sector, microfinance i n s t i t u t i o n s have grown in recent
                        In the
years reaching a total lending portfolio o f about US$770 million or 4.3 percent o f the
banking system’s credit portfolio (based on rough estimates as o f M a r c h 2008).

5.8    The banking sector i s mainly domestic and privately owned. As o f M a r c h
2008, 20 onshore banks operated in the system, with three banks holding about 60 percent
of the system’s assets. In addition, 9 banks operated offshore a n d belonged to financial
conglomerates associated with onshore banks. In terms o f ownership, n i n e onshore banks
h a d foreign capital, a n d there i s one fully-owned state b a n k (plus another with a minority
participation o f the state). T h e most notable foreign participation i s in the Citibank Group,
w h i c h now includes Citibank, Banco Cuscatlhn a n d Banco Uno. In combined assets, the
group represents 6.0 percent o f b a n k m g sector assets. There are now no majority state-
o w n e d banks in the system. T h e government holds a minority position in Banrural, a n
institution with about 17 percent o f the financial sector’s assets.

5.9      Lending in foreign currency i s declining, but still high. As o f 2005, 42 percent
o f loans a n d 35 percent for deposits were in foreign currency; as o f M a r c h 2008, 30 percent
o f loans a n d 15.6 percent o f deposits were in foreign currency. T h e productive sector,
particularly agriculture a n d manufacturing, i s mostly financed by short-term loans o f up to
one year. B a n k credit remains concentrated in Guatemala City, w h i c h accounted for 79
percent o f loans as o f February 2008. B a n k lending i s also concentrated in larger enterprises
but as o f June 2005 some banks (largely Banrural but also Bancafe)66 p r o v i d e d micro-credit
                                                                                         n
(for about US$130 million). Interest rate spreads have fallen from 10.71 percent i 2000 to
8.26 percent in 2007, but s t i l l remain a m o n g the highest in the region (Table 1.9).
Surprisingly, the share o f consumer lending has d r o p p e d from 52 percent o f total lending in
2005 to 25.4 percent in M a r c h 2008). T h e share o f agriculture a n d commerce loans 6
percent in 2005 to 26% in M a r c h 2008.

5.10       Finance companies represent a small a n d declining share o f the system a n d t e n d to
b e p a r t o f financial conglomerates or economic groups. As o f M a r c h 2008 there were 17
active finance companies with a lending portfolio o f about US$172 million (2 percent o f
total b a n k lending). Twelve finance companies were related to financial conglomerates a n d
the other seven were dedicated to support their controlling economic group. T h e y take
deposits from individuals, offer savings products as “pension funds” (not permitted to
banks) a n d manage approximately US$700 million in guarantee t r u s t funds a n d wealth from
high i n c o m e individuals. In terms o f assets, finance companies t e n d to invest in non-rated
securities (e.g. government debt, mortgages, notes from non-regulated financial entities a n d
project finance) a n d also extend loans to their bank‘s large debtors.



65   Superintendency o f Banks o f Guatemala, h i a y 2008 database.

66 Banrural i s a m e d i u m size b a n k with the largest branch n e t w o r k (and minority government shares). Bancaf.4,
was the 4” largest bank in Guatemala but i t failed i 2006, with i t s assets being b o u g h t by three local banks,
                                                              n
including Banrural (See B o x 1).



                                                                                                                         73
5.11 T h e insurance sector i s small (although increasing) and heavily oriented
toward non-life insurance and the pensions sector i s small and largely public.
                                                                                                                 n
I n s u r a n c e p e n e t r a t i o n (total p r e m i u m to GDP) s t o o d only at 1 p e r c e n t i 2004 and t h e
sector h a s l i m i t e d s c o p e to grow d u e to legal, technical, and e n v i r o n m e n t a l constraints."
Within i t s o p e r a t i o n a l l i m i t s t h e s e c t o r i s highly c o m p e t i t i v e . T h e n u m b e r o f i n s u r a n c e
c o m p a n i e s h a s r e m a i n e d stable, dropping from 18 in 2005 to 17 in 2008, with m o s t
o p e r a t i n g i both l i f e a n d n o n - l i f e i n s u r a n c e business lines. T h e p e n s i o n s e c t o r h a s a mix o f
                  n
pay-as-you-go, p a r t i a l l y p r e - f u n d e d mandatory schemes and s o m e smaller f u n d e d plans.68

Box 5-1. Resolution of Bancafk and Banco de Comercio- October 2006 and January
2007

As o f September 2006, Banco del Cafe.S (Bancafk) was p a r t o f the fourth largest financial group in
                                                  A
the country, with a very large n e t w o r k o f branches focusing on both retail a n d corporate segments.
I n particular, it p r o v i d e d financial services to a b r o a d set o f clients through the country, i n c l u d m g
S M E s , microenterprises, a n d l o w e r i n c o m e individuals.

Bancafk was p a r t o f the Grupo Financier0 d e l Pais, w h i c h included a n offshore b a n k in Barbados
(BIB). BIB h a d investments securities for a b o u t US$196.3 d o n h e l d at R e f c o Capital Markets
(Refco), a N e w York based financial services company primardy known for commodities a n d future
contracts. T h e financial statements o f BIB also indicated cash assets h e l d in R e f c o for US$4.9
d o n , w h i c h resulted in total BIB assets in R e f c o for US$201.2 million. T h e assets r e p o r t e d were
eventually found to b e partly pledged against other liabhties, w h i c h became known after R e f c o filed
for Chapter 11in the US. T h e bankruptcy process froze R e f c o assets, including those o f BIB. G i v e n
the extent o f exposure to the domestic bank, rhrough i t s ownership linkages with BIB, t h e
Guatemalan authorities took a series o f supervisory measures that l e d to the request o f suspension o f
the Bancafk license in O c t o b e r 19*, 2006.

InJanuary 2007, B a n c o de Comercio, a small b a n k that was also subject to suspension o f license due
to problems with i t s previously undsclosed offshore affhate.

T h e resolution o f Bancafk was successfully implemented with the transfer o f all deposits a n d a n
equivalent a m o u n t o f assets to three other domestic banks (Banrural, Agromercantil, Reformador),
with deposits available within 3-4 working days. T h e resolution also preserved the m a j o r i t y o f
banking jobs. T h e resolution o f B a n c o de C o m e r c i o was successfully implemented with the transfer
o f all deposits a n d a n equivalent a m o u n t o f assets to the largest domestic b a n k (Industrial), also
preserving the majority o f banking jobs. These are the f E s t resolution cases ever implemented with
the n e w legal a n d regulatory framework (2002) without going through liquidation. T h e r e were some
b a n k runs, but no m a j o r systemic effects.



5.12 T h e capital market barely exists. T h e r e i s no e q u i t y m a r k e t a n d t h e p r i v a t e d e b t
m a r k e t consists m a i n l y o f s h o r t - t e r m p r o m i s s o r y notes, m o s t l y i s s u e d by c r e d l t c a r d
c o m p a n i e s and a f e w enterprises. T h e g o v e r n m e n t and t h e B a n k of G u a t e m a l a (Banguat,



68 This includes a d e h e d benefit pay-as-you-go scheme for civil servants, about 12 separate defined benefit
pension schemes for autonomous public institutions and members o f the military, a mandatory scheme for
private sector workers, and some products offered to the high-end market by finance companies and banks.
Among these, the pay-as-you-go public scheme and the mandatory private scheme present serious imbalances
and products offered by banks and finance companies resemble savings more than retirement products.



                                                                                                                                       74
the central bank) are the primary bond issuers. There i s no reference curve or mark-to-
market by any investor class -includmg funds managed by brokerage houses. Companies
                                                      n
r e p o r t little interest in raising debt or equity i local capital markets as bigger firms obtain
financing from financial conglomerates.

5.13  T h e universe of microfinance institutions comprises a wide range o f mostly
non-regulated entities. This includes Savings a n d Credit Cooperatives, NGOs, Private
Development Finance Organizations, banks a n d producer cooperatives. Savings a n d CreQt
                                                                      n
Cooperatives are the most relevant microfinance institutions i terms of lending a n d p r o v i d e
a wide range o f financial services like micro-savings, remittances payments, micro-insurance,
a n d housing loans to mostly un-banked, moderate-income G u a t e m a l a n ~ . ‘ ~There are close
to 300 registered Savings a n d Credit Cooperatives organized under federations but there i s
considerable variability in size, with the top 30 representing about 85 percent o f t o t a l assets.
Private Development Finance Organizations are mostly NGOs a n d include 40 organizations,
o f w h i c h the top five supply m o r e t h a n h a l f of their lending. Producers’ Cooperatives
                                                                   n
comprise 1,200 registered entities a n d are also organized i federations, some o f w h i c h have
been key to channel subsidized funds from MAGA (Ministeno d Agricultara, Ganaden’ay
                                                                            e
Alimentacidn). T h e i r lending portfolio was estimated at $770 d o n as 2007.

5.14 Although small, leasing and factoring could be important channels for
improving access to credit for S M E s . In 2005 there were eight unregulated leasing f i r m s
that served meQum to large firms, but they represented less than 1 percent o f t h e financial
sector’s total assets. Factoring i s also under-developed, representing US$170 million on
                                                                               n
banks’ balance sheets. Both financial instruments have h a d success i other countries but
they need a favorable legal-regulatory framework, w h i c h i s lacking in Guatemala. Leasing i s
                                                 M
a potentially significant financing tool for S E capital expenditure. International experience
                                                         Ms
shows leasing can offer competitive financing to S E for the acquisition o f machinery a n d
equipment, but i t s development requires, inter alia, having the ability to seize assets extra-
judicially in the event of default, h a v i n g a clear priority ranking, a n d the existence o f
secondary markets. Factoring has h a d notable success in the region (e.g., Brazil, Chile,
Mexico) providing working capital for SMEs, but i t also needs a n adequate legal-regulatory
framework to grow; the framework in Guatemala s t d l i s deficient, as it has a k t e d
definition of receivables a n d lack o f clarity on the i t s tax txeatment. See section on obstacles
a n d policy recommendations for m o r e details.

5.15   In recent years there have been notable improvements in some areas o f the
financial system and i t s enabling environment. Reported ratios o f performance a n d
solvency o f onshore banks have i m p r o v e d after the banking sector crises o f 2001.
Macroeconomic stability, a key pdlar for financial development, has increased considerably
based on prudent macroeconomic policies, with higher economic growth, low i n f l a t i o n a n d a
s u r p l u s o f the balance of payments (IMF 2007).                O t h e r improvements include the
strengthening o f the legal a n d regulatory f r a m e ~ o r k , ’ ~
                                                                   initial supervision o f off-shore banks
a n d payment systems a n d liquidity management a m o n g others.



69  They have m o r e than US$300 m i l l i o n in lending, compared with Private Development Finance
Organizations’ U S $ l O O m i l l i o n a n d Producers Cooperatives’ US$170 d o n .
70 In fact, according to the latest Doing Business Report, the regulation affecting access to crecht i s one o f the
areas where Guatemala performs better in terms o f the regulatory framework f o r d o i n g business. G e t t i n g



                                                                                                                75
5.16   Nevertheless, some weaknesses of the enabling environment still hinder
financial sector development. These include problems with the informational a n d
contractual frameworks, regulation a n d supervision, a n d informality a m o n g f i r m s :

     0    Within the informational framework, there are weaknesses in auditing a n d
          accounting standards that affect the quality of financial statements o f enterprises71
          and, low coverage o f private credit bureaus that typically have incomplete a n d
          segmented i n f o r m a t i o n on enterprise^.^'

     0    T h e contractual framework includes problems with the regulation o f collateral                                        .

          (particularly movable collateral), the bankruptcy law? judicial independence a n d
          protection o f minority shareholder’s interests.74

          Notwithstanding ongoing improvements, regulation a n d supervision (particularly
          banking a n d consolidated supervision laws) s t i l l need to b e strengthened.
          Additionally, non-bank financing c o u l d b e fostered through regulatory changes,
          including the development o f factoring a n d leasing laws a n d the regulation a n d
          supervision o f larger micro-finance institutions (MFIs).

          High informality, particularly a m o n g smaller enterprises, hinders their access to
          credit by both increasing the risk they represent to lenders a n d m a k i n g it m o r e
          difficult to estimate it.

2.        ACCESS FINANCE
               TO

5.17 This section presents the main findings o n access to finance derived from the
2007 Enterprise Survey. T h e survey collected data from 524 f o r m a l enterprises in
Guatemala a n d included enterprises with different size, location a n d economic sector. Thus,
the analysis presented in t h i s chapter does not apply to i n f o r m a l enterprises (which are
numerous a n d relevant in Guatemala) but i t provides a general picture o f access to finance
issues and disparities across size, location a n d industry. Differences are reported only w h e n


Credit, w h i c h measures the legal rights o f borrowers and lenders a n d the sharing o f c r e h t information, i s the
                                                         n
second highest ranking index f o r Guatemala i the 2007-2008 D o i n g Business Report. Guatemala compares
favorably with L A C on some o f the G e t t i n g Credit components (credit i n f o r m a t i o n sub-index a n d the coverage
o f the public credit bureau) but unfavorably on others (the legal rights index a n d the coverage o f the private
credit bureaus).
71 T h i s encompasses divergence from the International Financial Reporting Standards (IFRS),                     tax oriented
financial statements, lack o f publicly available a u l t e d financial statements a n d the non-existence o f a regulatory
agency t o enforce financial reporting
72 T h e D o i n g Business R e p o r t (World B a n k 2007) calculates that the coverage o f private credit bureaus i       n
                                                                                 n
Guatemala (measured as a percentage o f individuals or f i r m s listed i the credit bureau and expressed relative
t o total adult population) i s 13 percent compared with 32 percent in L A C .
73 D o i n g Business (World B a n k 2007) finds that collateral and bankruptcy regulation in Guatemala has the
following drawbacks in Guatemala: a n a r r o w (specific) description o f assets a n d debt permitted in collateral
agreements, lack o f a unified r e g i s t q f o r all security rights on movable collateral, lack o f absolute priority to
                        n
secured creditors i bankruptcy proceedhgs, lack o f suspension o f management c o n t r o l on assets during a
reorganization, lack o f legal authorization to parties to agree on out o f c o u r t enforcement, lack o f legal
authorization t o creditors to seize a n d sell collateral out o f court w i t h o u t restrictions.
74 T h e G l o b a l Competitiveness R e p o r t (Porter et. al. 2006) includes the protection o f minority shareholders and
judicial independence as two notable competitive disadvantages i Guatemala. n


                                                                                                                           76
t h e y are statistically significant (with certainty of 5 p e r c e n t or more). C o v e r e d topics i n c l u d e
f i r m s ’ access to saving a n d c r e d i t products, t h e i r perceptions on access to financing, sources
o f f i n a n c i n g a n d t h e m a i n features of credtt a n d i t s demand.75 In Guatemala, f i r m s h a v e
greater access to savings t h a n to c r e d i t products, with micro-enterprises b e i n g t h e most
restricted in t e r m s o f access to credit. A p p r o x i m a t e l y 84 p e r c e n t o f G u a t e m a l a n f i r m s r e p o r t
to h a v e c h e c k i n g or saving accounts but only 44 p e r c e n t r e p o r t to h a v e loans from financial
institutions (Figure 5.2). Access to saving p r o d u c t s i s widespread across d i f f e r e n t firm types
                      n
but i s h i g h e r i Guatemala City.76 Access to c r e d i t vanes considerably across enterprise size,
with large enterprises b e i n g considerably m o r e l i k e l y also to h a v e credit p r o d u c t s from
financial institutions versus smaller enterprises (see F i g u r e 5-2). 77

     Figure 5.2: Proportion of f i r m s with finance products in Guatemala, Latin America
                                      and Central America ( O h )
                 I                                                                                                 I
                 I   100 7      PA     88    90
                      80
                     60
                     40
                     20
                      0
                              Checkingkavings             Overdraft facilities              Credi thoans

                                                  H Guatemala (2007) H L A C        CA

                       Source: Enterprise Survey




75 Firm categories have been defined based on the sample composition o f the enterprise survey, which
provides greater weight to firms that are small, located in Guatemala City and belong to the manufacturing
sector. Micro-enterprises (MIS),     which are usually defined as firms with 5 or less employees, are estimated
to be the most numerous in Guatemala and employ the most people in                 Nevertheless, probably due
to their higher level o f informality, they have a smaller participation in the sample. To cope with the small
number o f micro-enterprises (MI), the scope o f the definition was enlarged to include firms with up to 10
employees. Thus, the findings that are presented in this chapter for MI are also applicable to small
enterprises (SEs) o f lower scale. In turn, small and medium enterprises (SMEs) are presented as a single
category including enterprises with 11 to 100 employees and large enterprises are considered be those with
more than 100 employees. Following the distribution o f economic activity (particularly formal economic
activity) in the country, the sample provides greater weight to firms in Guatemala City. All the other firms
were categorized as “Other Cities. Finally, and following the categorization o f the enterprise survey, the
chapter w i l l differentiate between three industry-categories: manufacturing, services and other (the latter
including construction and transport industries). Please note that the description-analysis o f the features o f
credit from the financial system are based on 44 percent o f surveyed Guatemalan firms which currently
report to have credit from financial institutions.
                                          n
76 Approximately 73 percent o f firms i O t h e r Cities have checking or saving products versus 88 percent in
Guatemala.
77Access to credit i s varies across different locations and economic sectors. Service firms receive
relatively less credit than manufacturing firms (38 percent o f service firms have credit versus 47 percent o f
manufacturing firms). 46 percent o f firms in Guatemala City have loans, versus 36 percent o f firms in
other cities.


                                                                                                                                  77
             Figure 5.3: Proportion of f i r m s with finance products by size (%)

                  100
                   80
                   60
                   40
                   20
                    0
                            C heckinghavings           Overdraft facilities            Creditfloans

                                                                    M
                                                     0 M i c r o 0 S E 0 Large
              -




5.18 Although access to finance lags other countries, firm perceptions have
improved. T h e proportion of surveyed f i r m s w h i c h viewed access to finance as a m a j o r or
severe obstacle to the current operation o f their establishments d r o p p e d considerably, from
47 percent in 2003 to 19 percent in 2007. In the last fiscal year m o r e t h a n two thirds o f
f i r m s did not apply for creht, a n d most o f those f i r m s reported they did not need credit
(which i s also the case i L a t i n America). All other reasons that are traditionally thought to
                           n
play a n i m p o r t a n t role in credit demand, like high interest rates, insufficient collateral,
complex application procedures a n d insufficient maturity appear as largely irrelevant in
comparison (see Figure 5.4). MSMEs a n d f m s located outside of Guatemala City demanded
less credit a n d also reported lack o f need as the main reason for not applying for credit.78



           Figure 5.4: Applications for credit and reasons for not applying (YO)
                  la Applied creditfloan                         No need f o r loan
                  0 Application procedires are complex        0 Interest rates n o t favorable
                    Collateral requirements are unattainable Bl Size o f loan and maturity are inssuficient
                  W D i d not think i t would be approved     0 Other




                            32%




              I

                    Source: Enterprise Survey

5.19   Rejection of credit applications by financial institutions i s a less relevant
explanatory variable for lack of access to financing, but i t i s more important for
smaller firms. About 12 percent o f l o a n applications were rejected during the last fiscal


78During the last fiscal year 21 percent o f MI and 29 percent o f SMEs applied for credit compared with 52
percent o f large enterprises and 25 percent o f firms located out o f the capital applied for credit compared
with 34 percent in Guatemala. From those which did not apply, most report not to need it.



                                                                                                              78
year in Guatemala, w h i c h i s line with the r e g o n . Unfortunately, given the small n u m b e r o f
responses, i t i s not possible to determine why financial institutions are rejecting credit
applications with any degree o f confidence. For illustrative purposes, a m o n g the f e w firms
that provided data, problems with collateral a n d insufficient profitability appeared as the two
most c o m m o n reasons for r e j e ~ t i o n . ' ~High debt levels, problems with credit history, a n d
incomplete l o a n applications were less relevant. Credit applications o f smaller enterprises
were m o r e likely to b e rejected. During the last fiscal year preceding the survey, no credit
application from a large enterprise was rejected, while a third of applications from MISa n d
almost 15 percent o f SMEs' applications were t u m e d down by financial institutions.

5.20     Guatemalan f i r m s finance most of their working capital and investment needs
with internal funds. During the last fiscal year, the most relevant sources o f financing were
internal funds, followed by private commercial banks (more relevant for investment
financing), a n d trade credit (more relevant for working capital financing) O t h e r sources o f
financing, like non-bank financial institutions a n d family and friends were largely irrelevant
in comparison. T h e structure o f financing of Guatemalan f i r m s does not vary m u c h across
 firm size, location or economic sector, with a f e w exceptions (Figure 5.5)."

                                   Figure 5.5: Sources of Financing 2007
                                                 Fixed Assets Investments                  Working capital
          Internal funddretained earning                                                        1% 3%




       rn New debt
                                                                               I
          Source: Enterprise survey

5.21 T h e use of trade credit i s widespread in Guatemala but there are some
differences across enterprise size (most important), location and industry. Firms
receive trade credlt mainly by buying inputs on c r e d t (on average, 50 percent o f inputs are
bought on credit) a n d p r o v i d e financing mostly by allowing their customers to pay after
delivery (on average, 49 percent o f total annual sales are on credit). In contrast, paying for
inputs or receiving payment for sales in advance (i.e. before delivery) i s less common."
                                           n
Larger enterprises a n d those located i Guatemala City engage to a greater extent in trade
financing, receiving m o r e financing by their suppliers a n d providmg m o r e fmancing to their



79   T h e importance o f collateral seems plausible given the high level o f collateralized lending in the country.
'OPrivate banks play a relatively larger role in the structure o f financing o f large enterprises (vs. MSMEs)
and Construction & Transport firms (vs. other industry-categories). Construction and transport firms also
rely relatively more on trade credit and less on internal financing than the manufacturing and service
industries.

81   Approximately 10 percent o f total annual sales a n d 14 percent o f total annual purchases are p a i d in advance.



                                                                                                                       79
clients.82 Construction a n d transport f i r m s p r o v i d e d m o r e financing to their clients (63
percent of their annual sales are on credit) t h a n service a n d manufacturing f i r m s (41 percent
a n d 50 percent correspondingly). In general, f i r m s providing m o r e trade credit also received
m o r e trade credit, reducing the changes o f mismatches. Moreover, those providing m o r e
trade credit (larger enterprises) should b e better able to handle liquidity problems emerging
from delays in payments. Nevertheless, the importance o f accounts receivable highlights the
need to develop factoring to a greater extent.

5.22 Almost all credit coming from the financial system i s provided by private
banks, highlighting the underdevelopment of non-banking sectors. Private banks
represent 91 percent of outstanding loans i                 n Guatemala, compared with non-bank
i n s t i t u t i o n s ’ 5 percent and state banks’ 3 percent. This disparity i s also observed in L a t i n
America a n d i s to b e expected to some extent from bank-based financial systems but i t
reflects the low level of diversity in the financial system a n d presents access problems for
f i r m s that do not constitute the target clientele o f private banks, particularly M I s . ~ ~

5.23       Loans in Guatemala are relatively small, even when considering the size of the
economy.84 As expected, the average value o f loans increases considerably with enterprise
size.85 A c c o r d i n g to the Superintendency o f Banks, as of M a r c h 2008, 64 percent o f the
a m o u n t o f loans outstanding a n d 85 percent of the n u m b e r o f loans h a d t e r m of l o a n of 3
years or less. This compares to a n average maturity o f 3.2 years in L a t i n America a n d 4.8 in
Central America (but the latter difference i s statistically irrelevant). Most loans (69 percent)
are collateralized in Guatemala (less than in Central America) a n d collateral value matches
l o a n value on average, w h i c h i s lower than the regional average. T h e most used types o f
collateral are l a n d a n d buildings (the most relevant one), machinery a n d equipment a n d
personal assets o f the owner. Large enterprises a n d manufacturing industries, w h i c h
generally are in a better position to provide collateral, use collateralized lending m o r e o f t e n B 6

3.       OBSTACLES AND POLICY RECOMMENDATIONS

5.24 T h e previous sections have argued that the domestic financial system
provides relatively little credit to firms and tends to be concentrated o n larger

82  Large enterprises buy 65 percent o f their total annual purchases on credit and sell 57 percent o f their annual
sales on credit. In contrast, MIS     buy 37 percent o f their inputs on credit and sell 37 percent o f their annual
sales on credit, while S h i E s lie in-between large a n d m i c r o enterprises. In terms o f location, f i r m s in
Guatemala City buy roughly h a l f o f their total annual purchases on credit a n d also sell approximately h a l f o f
                                                            n
their annual sales on credit. In contrast, firms located i other cities pay 41 percent o f their annual purchases
after delivery and receive payments f o r 36 percent of their sales after delivery.
83 Private banks finance 97 percent o f outstanding loans o f large enterprises and 91 percent o f S 5 E s ’ versus 77
percent of MI’S.
    Average value o f loans granted during 2000-2006 in Guatemala was approximately US$ 336,000 versus US$
            n
500,000 i Central America (excluding Costa Rica).
83 During 2006-2006 the average value o f loans (at the time o f approval) was USD 22,465 for MI, U D 112,210
                                                                                                         S
f o r S X E s and USD 925,120 f o r large enterprises. In terms o f differences among economic sectors, even w h e n
there are differences on the average size o f loans, these are not statistically significant.
86While 56 percent o f loans for MIS collateralized, the equivalent percentage for large enterprises i s 78.
                                     are
In the manufacturing industry 75 percent o f loans have collateral versus 61 percent in the service industry
and 44 percent in construction & transport.




                                                                                                                   80
enterprises. This emerges from the low d e p t h o f the financial system (;.e. size o f the “pie”)
a n d t h e way credit i s being distributed a m o n g different groups o f enterprises (or “sliced”
a m o n g the dtfferent players). B e l o w are the most relevant initiatives that would foster
financial depth, with a n emphasis on measures that would benefit MSMEs, given that they
appear as the most underserved by the financial system. T h e y emerge from the findings o f
the previous sections, a n d are also based on the Background N o t e on Developmental Issues
for Corporate Sector a n d N o n - b a n k Financing from the Guatemala FSAP, w h i c h provides
a n analysis on the potential causes for the low level of b a n k credit to the private sector, small
participation o f micro-finance institutions a n d incipient development of alternative financing
instnxments @e leasing a n d factoring) a n d capital markets.

5.25          Creditor rights and insolvency proceedings should be strengthened. Problems
with creditors’ rights a n d insolvency proceedings have a negative effect on the cost a n d
availabllity o f credit in Guatemala, particularly for MSMEs. T h e framework for credttor
rights shows deficiencies related to the creation, regstration, a n d enforcement o f secured
a n d unsecured rights. Liquidation proceedings i n v o l v e lengthy a n d o f t e n costly judicial
proceedings with a low prospect for recovery for creditors. T h e legal framework for
insolvency has scarcely been used a n d i s perceived as ineffective as courts in charge of
insolvency proceedings lack expertise a n d specialization a n d are overloaded with cases.
E n h a n c i n g the institutional framework for the enforcement o f creditor rights a n d insolvency
proceedmgs would foster credit growth, decrease i t s cost a n d increase the efficiency o f
collateral by increasing the probability o f recovering funds i the event o f default.
                                                                n

5.26         Promote the growth of commercially oriented microfinance institutions. G i v e n
that micro-enterprises are the most restricted, the development o f microfinance institutions
that target smaller enterprises should b e encouraged.. Microfinance i n s t i t u t i o n s have l o a n
technology a n d products tailored to the needs a n d characteristics o f MISa n d can cope with
the typical problems these f i r m s represent for tradttional banks, &e informality, lack o f
collateral and financial illiteracy.

5.27  In Guatemala, the largest microfinance institutions (Savings a n d Credit Cooperatives,
CACs, a n d OPDFs) play a meaningful r o l e in serving micro-enterprises. But, their future
growth a n d financial stability would require a n adequate regulatory a n d supervisory
framework. Larger MFIs are mature enough to b e transformed into a regulated environment
to preserve a n d reinforce their development.” This would encourage p r u d e n t accounting
a n d r i s k management practices a m o n g larger institutions a n d enhance their access to
funding.

5.28     Framework issues remain related to cooperatives a n d to the credtt i n f o r m a t i o n
system for micro-enterprises. T h e 1978 General L a w o f Cooperatives has become a n
ineffective framework for regulating CAC. I t provides a registry (Inacop) a n d a surveillance
body (Ingecop) that are not equipped to support a l l registered entities a n d does not allow the
orderly resolution of inoperative cooperatives. T h e latest two draft laws on micro-finance
entities (the Micro-Finance Companies L a w a n d the Non-Profit Micro-Credit Entities draft
laws) m a y yield l i m i t e d impact.       Additionally, i t would b e convenient to create a
                                                                                 e
comprehensive credit i n f o r m a t i o n system on micro-enterprises (Central d Riesgos) to mitigate


8’   T h e r e are ongoing efforts to regulate M F I s , with relevant d r a f t laws u n d e r review.



                                                                                                          81
the risk o f over-indebtedness as the n u m b e r o f b a n k a n d non-bank entities   supplying m i c r o -
credit grows.

5.29       Promote the development o f financial instruments adjusted to the needs o f
SMEs. Currently, there i s little diversification o f financial services tailored to SMEs, like
leasing a n d factoring, w h i c h can b e offered by specialized f i r m s . Although factoring a n d
leasing are currently small in Guatemala, they would have good growth potential with the
right legal framework. Further development o f leasing would imply, primarily, sanctioning a
specialized leasing l a w to eliminate the uncertainties created by the legal void. Reforms to
the legal-regulatory framework should include: ( )    iadopting accounting practices in line with
L 4 S a n d approved by tax authorities, with clear distinctions between operational a n d
financial leasing, ( igranting the capacity to repossess the leased goods extra-judicially in
                      i)
case o f default; (i)  ii establishing the transferability o f ownership rights in case o f
collateralization o f leasing contracts; a n d (iv) conferring clear priority rights in case o f
bankruptcy. Additionally, leasing c o u l d also b e p r o m o t e d by decreasing informality so that
f i r m s can take advantage o f tax breaks a n d counting with a n efficient registry system a n d
propitious jurisprudence.

5.30     On the other hand, a n d in the context o f w i d e use of trade financing, factoring c o u l d
become a p o w e r f u l tool for financing SMEs’ working capital needs by using accounts-
receivable as liquidity generating assets. T h e development of factoring would mainly require
establishing a n adequate legal framework to: ( )   iadopt a wider definition o f receivables to
include services, credit cards, leasing contracts a n d international documents; ( i   i)clarify that
factoring does not consist on the transfer o f credit a n d give judicial strength to the ‘ffuct~ru”;
  ii clarity that factoring o f receivables should not b e subject to VAT since i t i s not a n
(i)
additional sale for the supplier; a n d (iv) adopt electronic signature a n d security for the
development o f e-factoring a m o n g others.

5.31    Promote the development of the capital market. Guatemala has a very h t e d
domestic capital market. This emerges from lack o f demand from economic conglomerates
that obtain financing from financial conglomerates a n d a n incipient universe o f institutional
investors (derived from small issuers’ demand a n d a n inadequate legal a n d regulatory
framework for asset managers). T h e main investors in issued promissory notes are finance
companies and investment funds. T h e latter are unregulated entities, w h i c h m a y limit their
growth as investors can perceive t h e m as r i s k y vehicles. On the pension side, the social
security institute (IGSS) i s not authorized to invest in private papers. As for insurance
companies, they only buy public domestic debt.

5.32     Given the right framework there could be potential for the development of
debt instruments to improve MSMEs access to credit. This would include mortgage-
backed securities, debt issuance by large companies, a n d leasing, factoring a n d cre&t card
companies. T h e development o f capital markets would require: improving the regulatory
a n d supervisory framework for financial conglomerates, the existing exchange, brokers a n d
contractual saving vehicles.

5.33    Reduce informality by improving the cost-benefit decision for unregistered
firms. I t i s estimated than m o r e t h a n 80 percent of Guatemalan firms are i n f o r m a l a n d h s
affects micro-enterprises m o r e sharply. I n f o r m a l i t y harms enterprises’ access to cre&t by



                                                                                                          82
increasing the risk they represent for financial i n s t i t u t i o n s as debtors, having the effect of
l o c k i n g t h e m out o f creQt (as financial i n s t i t u t i o n s can decide to avoid riskier segments) or
increasing their risk adjusted interest rate. I n f o r m a l f i r m s face uncertain liabilities (e.g. tax
debts) a n d financial i n f o r m a t i o n i s less transparent. Decreasing informality implies tackling
both the costs a n d benefits that f i r m s take into account w h e n deciding i f they should
become f o r m a l or not. In Guatemala, the costs o f b e i n g f o r m a l are high. According to the
World Bank‘s 2007 Doing Business database, the country s t i l l has a relatively low ranking in
L a t i n America (23 out of 31 L A C countries) on the Ease o f Doing Business. T h e most
problematic areas for doing business are dealing with licenses a n d starting a business.@

5.34    Improve the regulatory norms for movable collateral. Guarantees on b a n k loans
are mostly fiduciary. Greater acceptance of movable collateral by financial i n s t i t u t i o n s would
help u n l o c k access to credit for enterprises, especially MSMEs. Smaller enterprises,
particularly micro-enterprises, have less acceptable collateral t h a n larger companies. W h i l e
the latter can generally offer real estate as collateral, smaller companies not only have less
collateral (as a percentage o f l o a n value) but i t consists m o r e c o m m o n l y on movable
collateral. To increase the viability o f their credit proposals i t i s i m p o r t a n t to have the
appropriate legal-regulatory framework for movable collateral a n d a n efficient judicial system
to execute it. O n e positive step was the passage o f the l a w on movable collateral (Ley de
Garantias Real’esMobiLiari6s) to develop other types o f collateral a n d i m p r o v e the availability o f
l o w e r cost credit for MSMEs by correcting current deficiencies in the regulatory framework.

5.35      Improve accounting and auditing practices and financial information
infrastructure. Currently, there i s insufficient financial i n f o r m a t i o n from f i r m s emerging
from weaknesses in accounting a n d auditing practices a n d incomplete databases of creQt
registries a n d creQt bureaus. Adherence to credit bureaus i s typically voluntary-except               for
the system of the Superintendence o f Banks called the Sistema d Inzma&n de Riesgose
Creditici;os, SIRC- and, therefore, i n f o r m a t i o n tends to b e partial. To increase the availabhty
o f accurate financial i n f o r m a t i o n on debtors i t would b e convenient, a m o n g other things, to
provide legal backing to the adoption o f international financial standards to increase
transparency a n d c o u n t with systematic reporting o f m o r e accurate debtors’ financials to the
Superintendency o f Banks.




88 Starting a business requires 11 procedures and 26 days and costs 47 percent of income per capita.
Dealing with licenses i s requires 22 procedures, 235 days and 1142 percent of income per capita.




                                                                                                              83
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II.   *   .
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                                oo




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                               BIBLIOGRAPHY


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(2007), The Global Competitiveness Report 2007-2008. World Economic Forum:
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                                                                                     91
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                               Report No. 47193-GT


                               Guatemala
                               Investment Climate Assessment
                               (In Two Volumes) Volume II: Background Notes on Productivity

                               June 26, 2008
Public Disclosure Authorized




                               Finance and Private Sector Unit
                               Poverty Reduction and Economic Management Unit
                               Latin America and the Caribbean Region
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                               Document of the World Bank
                                                               TABLE CONTENTS
                                                                   OF



SECTION 1.                         METHODOLOGICAL NOTES                                                      ...................................................................                                1
     1.             R E P L A C E M E N T STRATEGY FOR M I S S I N G P R O D U C T I O N F U N C T I O N V A R I A B L E S                                                            ......................   1
     2.                      PROBLEMS .............................................................................................................
                    ENDOGENEITY                                                                                                                                                                                6
SECTION 2.                         PRODUCTIVITY RESULTS........................................................................ 8
SECTION 3.                         INTERPRETATIONS OF THE PRODUCTIVITY RESULTS ...............40
     1.             S E C U R I T Y COSTS AND THEIR E F F E C T ON P R O D U C T I V I T Y                                              ........................................................               40
     2.             EFFECTSI C BLOCKVARIABLES P R O D U C T r V ITY ...........................................................
                          OF                                       ON                                                                                                                                          42
     3.             GENDER P A C T ............................................................................................................................
                          IM                                                                                                                                                                                   43
     4.             DIFFERENCESIN SAMPLING (2003 VS. 2007 DATI) ..................................................................                                                                             44



                                                                                           n
Table 1.1: Observations available f o r regression analysis i Guatemala by Industry a n d size a n d percentage o f
observations lost                                   .............................................................................................
                                                                                           n
Table 1.2: Observations available f o r regression analysis i Guatemala by Industry and region a n d percentage
o f observations lost ..
Table 1.3: Extended
Table 2.1: General Info
Table 2.2: Investment climate (IC) a n d control (C) variables ....
Table 2.3: Investment climate (IC) and c o n t r o l (C) variables (c
Table 2.4: Investment c
Table 2.5: Investment climate (IC) and control (C) variables
Table 2.6: T o t a l number o f observations before and after cleaning missing values a n d outliers i p r o d u c t i o n                                           n
function CpF) variables .......................................................................................................................................................... 14
Table 2.7: Representativeness of production function variables before and after cleaning f o r m i s s i n g values
and outliers                                    ...............                       ...........................           .............                     ......               15
Table 2.8: T o t a l n u m b e r o f observations and response rate o f I C and C variables i the original sample ..........16         n
Table 2.9: Correlation matrix among productivity measures....
Table 2.10 Correlation
Table 2.11: I C A elastic
Table 2.12: I C A elas
industry, region and size                                                                    ..................
Table 2.13: Percentag
Aggregate Productivity
Table 2.14: I C impact on the decomposition by inputs o f the efficiency t e r m o f the Olley a n d Pakes
decomposition i logs ...........................................................................................................................................................
                  n                                                                                                                                                                24
Table 2.15: Two-stage least squares (2SLS) estimation o f employment equation.
Table 2.16: Two stage least squares (2SLS) estimation o f real wages equation ......
Table 2.17: T w o stage least squares (2SLS) estimation o f probability o f exporting equation ................................ 27


Table 3.2: Percentage o f female workers in staff, average b y industry
Table 3.3: Percentage o f female workers i staff, average by size ...........................................
                                          n




Table 3.6: Differences i Sampling (2003 vs. 2007)
                       n                                                            ......................................................................................................     44



                                                                                                                                                                                                  i
Figures
Figure 2.1:                Olley and Pakes Decomposition in Levels by Industry and Region o f Aggregate Productivity
                                                                      ................................................................................... 29
                                                                                           .....................................................   .......................
                                                    .........................................................................................

Figure 2.5:   Relative I C effects by groups o f variab
efficiency (mixed O&P decomposition and simulations o f a 20% improvement in I C and C variables) .............30
Figure 2.6: Relative I C effects on aggregate productivity @fixed O&P decomposition) ..
Figure 2.7: Relative I C effects on average productivity (Ahxed O&P decomposition) ........................
Figure 2.8: Relative I C effects on efficiency @fixed O&P decomposition) ...........................................
Figure 2.9: Relative I C effects by groups of variables on average productivity (Decomposition in Logs); b y
s u e ...........................................                ............................
Figure 2.10:  I C A Percentage Absolute Contrib
Figure 2.11:  Relative I C effects on average log-e
Figure 2.12:  Relative I C effects on average log-r                                               ...................................................................        35
Figure 2.13:  Relative I C effects on the probab
Figure 2.14   Relative I C A effects on the probab
Figure 2.15:  Relative I C effects by groups o f va
Figure 2.16:  Relative I C A effects by groups o f variables on average log-real wages; by size ................................                                             37
Figure 2.17:  Relative ICA effects by groups o f variables on the probability o f exporting; b y size
Figure 2.18:  Relative ICA effects by groups o f variables on the probability o f rece
Figure 2.19:  Managers’ perceptions; percentage o f f i r m s that considers each one of the
a severe obstacle to f i r m s ’ economic performance .................................................




This r e p o r t was prepared by Stefka Slavova a n d Jorge Peiia.




                                                                                                                                                                             ii
                          Section 1.               NOTES
                                         METHODOLOGICAL


   1.     REPLACEMENT STRATEGY FOR MISSING PRODUCTIONFUNCTION VARIABLES

  The sample size o f the Guatemala Enterprise Survey used in productivity regressions (see
  Appendix 2) i s augmented by approximately 20% through replacing missing information
  on sales/workers/capital/materials with the corresponding location-sector-size averages
  (Tables 1.6 and 1.7) in Appendix 2. Such replacement i s problematic in cross-sectional
  data as i t could be biasing the estimates.

   Incomplete data i s a common problem that standard econometric and statistical methods
   have nothing to say about or how to solve it, and constitutes a continuous source o f
   problems for researchers. The problem o f having too many missing values in a dataset
   may bias the representativeness o f the data, causes losses o f efficiency in regression
   analysis and, like in the case o f Enterprise Surveys, implies losing a large number o f very
   expensive interviews, both in pecuniary and time terms.

   The Guatemala ICA i s not an exception. Table 1.1 shows the distribution o f the missing
   values by industry and size. From this table i t i s clear that for instance in the food sector
   we would have lost 26.3% o f observations for small firms, while after replacing missing
   values, we only lose 5%. This problem i s common to all sectors and sizes, and i t i s clear
   that the pattern o f missing values does not follow a clear correlation by size of firms or
   industries; all the industries and sizes suffer from this problem.

  Table 1.1: Observations available for regression analysis in Guatemala by Industry and
                         size and percentage of observations lost




              Without
Total
              replacing        116      17.1     93       21.8      53      23.2      262     20.1
              With replacing   136      2.9      117      1.7       65       5.8      318      3.0




                                                                                                1
The same can be said about the pattern o f missing values by industries and regions o f
Table 1.2. Again, the pattern o f missing values i s uncorrelated with the distribution o f
industries and regions. Both firms located in Guatemala City and f i r m s located in the rest
o f the country refused to answer the productivity questions o f the I C survey. For instance
we lost 21% o f ‘food’ firms located in Guatemala City and 21.4% o f firms o f the same
sector located in the rest o f the country, while after replacing missing observations we
only lost 4.8% o f the food f i r m s in Guatemala City and 3.6% in the rest o f the country.

 Table 1.2: Observations available for regression analysis in Guatemala by Industry




There are a number o f approaches to deal with the problem o f missing data. These
approaches may be grouped into two different families o f methods: maximum likelihood
and multiple imputation, see Allison (2001) and Little and Rubin (1987) for a review.
The objective of these methods i s not to augment the sample size, but to maintain the
sample representativeness and to gain efficiency in the estimation.

Our method o f imputing missing data, which we call ZCA method, shares the expectation
step o f the Expectation-Maximization (EM) algorithm proposed in the seminal paper o f
Dempster, Laird and Rubin (1977), method that, within the maximum likelihood
approaches, has been widely applied in several scientific fields, see McLachlan and
Krishnan (1997). In particular, the replacement strategy used in the ICA o f Guatemala
departs from the expectation o f the production function variables conditional on the
industry, region and size the corresponding observation belongs to, in other words we
replace the missing value with the expectation o f the distribution o f the variable,
conditional on the information on industry, region and size according to the equation:

      E (Ji   I   DT,i   7   OI,i 7 DS,i   = P + P T ,J DT,i + PT,J OI,i + P T , DS,i
                                             O                                  .I      =   ‘ 9   L,   7


(1)
Y, L, M and K represent output, labor, materials and capital and DT,DI and Ds are time,
industry and size dummies respectively. Estimated values to replace incomplete data are
given by




                                                                                                           2
The ICA method has the advantage o f imputing missing data without a population model,
which i s the main advantage over EM algorithm.' Imputation o f missing data without a
population model i s the main characteristic o f the second family o f approaches: the
multiple imputation methods. Our strategy is, in fact, a general multiple imputation
method in which we assume that each imputed variable can be represented as a linear
function o f other variables (dummies o f industry, region and size) and therefore the fitted
values can be used to replace missing data. The second condition that needs to hold for
the multiple imputation method to work well i s that all the variables, including those
replaced and those used to replace them, have normal distributions. Although these are
strong assumptions the multiple imputation method seems to work well even when the
variables have distributions that are manifestly not normal, see Schafer (1997).

Therefore, under these assumptions our method leads to a consistent estimation o f the
ICA parameters, but at the same time i t can be argued that a more efficient method can be
used. Notice that by imputing missing values we are modifying the population
distribution o f replaced variables. In particular, if the two conditions mentioned in the
previous paragraph hold, the sample average o f the modified distribution of the variable
converges to the population expectation. Unfortunately, this does not hold for the case o f
the standard deviation. With the replacement strategy we are reducing the variability of
the distribution and therefore any statistical inference will be based in downward-biased
standard errors.

To correct for this, a plausible and elegant solution i s to do a re-sampling a given number
of times and to replace the missing data in each sample so we can obtain a distribution o f
the estimators of interest under different replacements o f the missing data, and thus use
the bootstrap standard errors to do statistical inference. As Escribano et al. (2008) show,
the replacing strategy proposed introduces enough variability in the distribution which
allows making correct statistical inferences. The variability comes from the number o f
industries used multiplied by the number o f regions and sizes.

When the two assumptions mentioned above do not hold, our replacement strategy i s no
longer consistent. Very little can be said about the asymptotic distributions o f the
estimators obtained under such circumstances. In general, in these cases we can treat our
replaced variables as variables measured with error. Thus, the parameters obtained from
the regression analysis would be consequently downward biased, and the magnitude o f
the bias w i l l depend on the standard deviation o f the error term relative to the standard
deviation o f the variable and the proportion o f replaced values.

Another question that needs to be taken into account i s the nature of the mechanism that
generates the missing data. Our replacement strategy leads to unbiased results when the
pattern o f missing values i s completely missing at random (CMAR), missing at random
(MAR) (no relation with the population model), and in the exogenous sampling selection,
in which the pattern o f missing values depends on the explanatory variables o f the


1
 T h e EM algorithm imputes missing data conditional o n a given population model, a n d therefore chooses the
candidate values to replace the missing cells that maximize the likelihood f m c t i o n conditional o n a vector o f
parameters of that model.



                                                                                                                   3
population model. To see it, let us suppose the next extended production function as in
Escribano and Guasch (2005 and 2008):

           +a                             +...+P,ic,,,
yi, =a,+aLlj, M m j ,+aKki, +P,ic,,, +P2i~2,it                     +qc,,,     +62~2,it
                                                                                  +...+6jcj,it+ui,
     (3)

where y, 1 m and k represents output, labor, materials and capital all in logs, i c are the
           ,
investment climate variables and c are other control variables. Let the pattern o f missing
values for each observation i at moment t be given by sit, where sir=O if missing value and
1 otherwise. So what we observe is:




I f the pattern of missing values i s M.A.R, then the necessary conditions for equation (4) to
be identified are

E(s,u,,) = 0

E[(si,Jit)(si,uil)] E[(sitJituil)] 0
                 =              =      J = l,m, k , ic, ,...,ic,,c, ,...,ck

And in the case o f exogenous sample selection we need that




That is, for the identification condition in this case to hold we need to control for any
exogenous variable affecting the pattern o f missing values, and this i s the way we shall
proceed in the estimation o f the productivity equations. Note that in these cases the
complete case (deletion o f observations with any missing value) also leads to unbiased
I C A parameters, although at the cost o f losing efficiency and in some cases the
representativeness of the original sampling frame.

I f the pattern of missing values i s endogenously determined (it i s correlated with output
('y) in equation (4)) and there i s self-selection in our model, the replacing strategy may
lead to inconsistent estimates. In these cases one has to implement the Heckman model to
correct for self-selection, since OLS applied either on the complete case or on the sample
with replacement estimates biased parameters.

Table 1.3 offers a review o f the different methods that can be used to estimate the
parameters o f equation (4). The first column uses our method or the ICA method, the
second column i s the same method with bootstrap standard errors with 1500 replications.
The third column i s the complete case and the last column i s the Heckman model. There
are no great differences in the standard errors between column 1 and 2, which supports
the idea that the ICA method can be used to make inferences .when there i s enough
variability by industry, region and size. The complete case of column 3 leads to slightly


                                                                                                4
different production function and ICA parameters, what poses some doubts about the
representativeness o f the complete case, notice that in this column the significance o f I C
variables i s generally reduced, although there are no significant changes in the magnitude
o f the parameters. Finally, Heckman's Lambda in the last column i s not significant,
indicating that the selection model does not make sense. Anyway, even in this case the
Heckman model lead to s i m i l a r results as the ICA method.



                   Table 1.3: Extended production function of Guatemala


                                                                  ard      Complete    Heckman
                                                                             case   selection model




                                                                 [0.014]    [0.002]          i0.002
                                                                  -0.097     -0.084           -0.06!
                                                  [0.050]        rO.0651    [0.054]          r0.054
  ter from public sources (b)                    0.002**           0.002 0.002***          0.003**:
                                                  [0.001]        [0.002]    [0.001]          [0.001
                                               -O.OlO***          -0.010 -0.011***         -0.011*:


                                                 [0.006]         [0.007]       [0.006]       [0.006
                                                  -0.073          -0.073        -0.179        -0.16~
                                                 [0.116]         rO.1161       [0.128]       [0.125
                                                   0.208       0.208***         0.262"         0.25)
                                                 [O. 1511        [0.049]       [0.155]       [0.176
                                               0.524***        0.524***     0.386***       0.405 * * :
                                                 [O. 1241        [0.053]       [0.109]       [0.098
                                                  -0.097          -0.097        -0.046        -0.03~
                                                 [0.0791         [0.151]       [0.084]       [0.086
  nager's time in bureaucratic issues (a)      -0.026**       -0.026***       -0.017'      -0.019*'




  rking capital financed by informal sources

    ng capital financed by non-bank                0.004           0.004     0.005**           0.001
   cia1 institutions                             [0.003]         [0.021]      [0.003]        [0.006
 m m y for checking or saving account              0.166           0.166        0.142          0.16:
                                                 [0.102]         [0.115]      [0.119]        [0.118
 mmy for credit line                              0.161*       0.161***         0.126          O.llr
                                                                 [0.057]      10.0821        [0.085



                                                                                                  5
                                                               I C A method.
                                                             Bootstrap standard      Complete    Heckman
                                             ICA
                                               method           errors, 1500           case   selection model
                                                                 repetitions.
Dummy for I S 0 Certification (b)                  0.297'                  0.297*     0.499***       0.422***
                                                  [0.176]                 [0.160]       [0.182]        [0.154]
Percentage of female workers in staff (b)          -0.002                -0.002*          -0.002        -0.002
                                                  [0.001]                 [0.0011       [0.0021        [0.002]
Training to non-production workers (b)              0.002                0.002**           0.002        0.002*
                                                  [0.001]                 [0.001]        [O.OOl]       [0.001]
Share of imported inputs (b)                     0.003**                    0.003         0.002*      0.003**
                                                  [O.OOl]                 [0.0021        [0.0011       [0.001]
Percentage of unionized workforce               -0.021**               -0.021***        -0.019*         -0.015
                                                  [0.009]                 [0.007]        [0.011]       [0.015]
Dummy for FDI                                         0.25              0.250***           0.111         0.084
                                                  [0.190]                 [0.024]        [0.196]       [0.175]
Share of exports                                 0.006**                0.006***       0.006**       0.006***
                                                  [0.002]                 [0.002]        [0.002]       [0.002]
Dummy for large firm                            0.446***                0.446***       0.441**       0.447***
                                                  [0.169]                 [0.035]        [0.175]       [0.161]
Constant                                         1.845**                     1.845         1.346     1.441***
                                                  [0.928]                                [0.986]       [0.753]
Observations                                           318                    318             263          277
R-squared                                           0.891                   0.891            0.91
Heckman's Lambda (inverse of Mill's ratio)                                                               0.46C
                                                                                                       [0.408]




 2.        ENDOGENEITY
                   PROBLEMS

 Our regressions o f TFP in IC variables might suffer from endogneity problems, i.e. the
 use o f explanatory variables which might be correlated with the error term and thus result
 in biased and inconsistent estimates. Some o f the literature emphasizes the potential
 endogeneity o f access to finance variables to firm productivity and other measures o f
 firm performance.

 Endogeneity i s yet an unresolved issue in econometrics. In fact i t i s difficult to test
 whether a variable i s endogenous or not, and too often one has to rely in economic
 intuition and to make aprioristic assumptions on the plausible exogeneity o f the variables.
 Moreover, in the context o f I C data i t i s difficult to use Hausman-type tests to check for
 the presence o f endogeneity given the l o w power o f these tests and the high rejection rate
 of the null hypotheses.

 A possible solution to the endogeneity o f I C variables i s to use the industry-region-size
 averages. While this endogeneity correction has been proven to work well when there are
 no industry-region-size (I-R-S) processes correlated with the error term, sometimes i t i s
 difficult to get good instruments o f crude plant-level I C variables. Some o f the
 explanatory variables in table 2.11 in Appendix 2 are in this form. For other variables
 their I-R-S average i s not a good instrument and we have to rely on the crude variable.
 Note that excluding these variables from the regression, although they were endogenous,



                                                                                                           6
i s not a good solution provided we are modeling the expectation o f TFP on the whole
investment climate firms are facing and the exclusion o f any relevant variable may result
in a omitted variables problem which i s another serious problem that causes biases in the
rest o f the parameters o f the model.

Our models should be interpreted in terms o f conditional expectations. What we are
doing i s modeling the conditional expectation o f productivity given all the firm-level
information we have on the investment climate which has an effect on firms’
performance and efficiency. This means that the coefficients o f I C variables cannot be
interpreted in causal terms; the term reverse causality does not make sense in our model,
the data lack the optimal properties to do Granger-causality inference. Rather, the
coefficients should be interpreted as marginal effects on the conditional expectation o f
productivity. Whether this effect i s driven by a simultaneous effect i s something we a
priori do not know and a more thorough analysis should be made to provide more
insights into this. A possible solution would be to model TFP and finance in a
simultaneous model and estimate it by 2SLS or 3SLS techniques. Nevertheless this
solution should imply an enormous system o f simultaneous equations. W e prefer our
model for i t s parsimony and simplicity.

Therefore, even though i t could be true that the effect o f finance variables may be driven
by simultaneous forces, the relative contribution on productivity of this group o f
variables holds in terms o f conditional expectations although i t does not do so in terms o f
causal relations.




                                                                                            7
                           Section 2.                       RESULTS
                                                 PRODUCTIVITY


   Table 2.1: General Information at Plant Level and Production Function Variables'
General          Industrial classification       (a) Food; (b) Apparel and Textiles; (c) Other manufacturing.
Information at                                                                                    ~   ~~




Plant Level      Regional classification         (a) Guatemala City; (b) Rest o f the country
Production       Sales                           Used as the measure o f output for the production function
Function                                         estimation. Sales are defined as total annual sales in 2005. The
Variables                                        series are deflated by using the Producer Price Index (PPI), base
                                                 2002.
                 Employment                      Total number o f permanent and temporary workers.
                 Total hours worked per          Total number o f employees multiplied b y the average hours
                 year                            worked per year.
                 Materials                       Total costs o f intermediate and raw materials used in production
                                                 (excluding fuel). The series are deflated using the Producer
                                                 Price Index (PPI), base 2002.
                 Capital stock                   Net book value o f machinery and equipment. The series are
                                                 deflated using the Producer Price Index (PPI), base 2002.
                 User cost o f capital         The user cost o f capital i s defined in terms o f the opportunity
                                               cost o f using capital; it i s defined as 15% o f the net book value
                                             I o f machinery and equipment.
                 Labor cost                  I Total expenditures on personnel. The series are deflated using
                                               the Producer Price Index (PPI), base 2002.
Dependent        Exports                       Dummy variable that takes the value o f 1 if exports are greater
Variables in                                   than 10%.
Regression       Foreign Direct                Dummy variable that takes the value o f 1 if any part o f the
Equations and    Investment                    capital o f the firm i s foreign.
Linear           Wages                         Real wage i s defined as the total expenditure on personnel
Probability                                    (deflated by the Producer Price Index, base 2002) divided by the
Models                                         total number o f permanent and temporary workers.
                 Employment                    Total number o f permanent and temporary workers.




                                                                                                                8
Table 2.2: Investment climate (IC) and control (C) variables

                                      Description of the variable




                                                                    9
                 Table 2.3: Investment climate (IC) and control (C) variables (continued)
Blocks of I C      Variable name                   Descriptionof the variable
Variables
Red tape,          Sales reported for tax          Percentage of total annual sales that a typical firm operating in plant's sector reports
corruption and    purposes                         for tax purposes.
crime             Workforce reported for tax       Percentage of total workforce that a typical firm operating in plant's sector reports
                  purposes                         for tax purposes.
                  Dummy for conflicts with         Dummy taking the value o f 1 i f the plant has conflicts with clients with a third party
                  clients                          involved.
                  Dummy for conflicts in           Dummy taking the value of 1 i f the plant has conflicts with clients with a court
                  courts                           involved (conditional on having conflicts with clients with a third party involved).
                  Weeks to judgment                Number of weeks that took the court to deliver judgment in the latest conflict with
                                                   clients (conditional on having conflicts with clients with a third party involved).
                   Dummy for security              Dummy taking the value of 1 if the plant has security expenses.
                   Security cost                   Security expenses as a percentage of total annual sales.
                   Dummy for crime




                   Dummy for gifts to obtain a     Gifts expected or requested to obtain a construction permit, conditional on applying
                   construction permit             for a construction permit.
                   Wait for an operating license   Days to obtain a main operating license (conditional on applying for an operating
                                                   license).
                   Dummy for gifts for             Gifts expected or requested to obtain an operating license, conditional on applying
                   operating license               for an operating license.




                                                                                                                                10
                      Table 2.4: Investment climate (IC) and control (C) variables

Blocks of I C
                             Variable name                                      Description of the variable
variables

Finance and         Largest shareholder                 Percentage o f firm's capital owned b y the largest shareholder.
corporate           Initial investment: private         Percentage o f the investment needed to start operations received from
governance          banks                               private commercial banks.
                    Initial investment: public banks    Percentage o f the investment needed to start operations received from
                                                       Istate-owned banks and/or government agencies.
                    Purchases paid before delivery     IPercentage o f annual purchases paid for before delivery.
                I   Purchases paid on delivery         I Percentage o f annual purchases paid for on delivery.                         I
                    Purchases paid after delivery       Percentage o f annual purchases paid for after delivery.
                    Sales paid before delivery          Percentage o f annual sales paid for before delivery.
                    Sales paid on delivery              Percentage o f annual sales paid for on delivery.
                    Sales paid after delivery           Percentage o f annual sales paid for after delivery.
                    Working capital financed by         Percentage o f firm's working capital financed with internal funds.
                    internal funds
                    Working capital financed b y        Percentage o f firm's working capital financed b y private commercial
                    private banks                       banks.
                    Working capital financed b y        Percentage o f firm's working capital financed b y state-owned banks.
                    state-owned banks
                    Working capital financed b y        Percentage o f firm's working capital financed b y family/friends.
                    famil y/friends
                    Working capital financed b y        Percentage o f firm's working capital financed b y non-banking financial
                    non-bank financial institutions     institutions.
                    Working capital financed b y        Percentage o f firm's working capital financed with credit from suppliers.
                    credit from suppliers
                    Working capital financed b y        Percentage o f firm's working capital financed b y informal sources.
                    informal sources
                    New fixed assets financed b y       Percentage o f investments in new fixed assets financed with internal
                    internal funds                      funds.
                    N e w fixed assets financed b y     Percentage o f investments in new fixed assets financed b y private
                    private banks                       commercial banks.
                    N e w fixed assets financed b y     Percentage o f investments in new fixed assets financed b y state-owned
                    state-owned banks                   banks.
                    N e w fixed assets financed b y     Percentage o f investments in new fixed assets financed b y family/friends.
                                                                -
                    familylfriends
                    New fixed assets financed b y       Percentage o f investments in new fixed assets financed b y non-banking
                    non-bank financial institutions     financial institutions.
                    N e w fixed assets financed by      Percentage of investments in new fixed assets financed with credit from
                                                                 L



                    credit from suppliers               suppliers.
                    N e w fixed assets financed b y     Percentage o f investments in new fixed assets financed b y informal
                    informal sources                    sources.
                    Checking or savings account         Dummy taking the value o f 1 i f the plant has a checking or savings
                                                        account.
                    Owner o f the land                  Percentage o f the land on which the plant operates owned b y the firm.
                    Dummy for credit line               Dummy that takes the value o f 1 i f the firm has access to a credit line or
                                                        overdraft facility.
                    Dummy for loan                      Dummy that takes the value o f 1 i f the firm has access to a loan.
                    Dummy for loan with collateral      Dummy that takes the value o f 1 if the firm has access to a loan which
                                                        requires collateral (conditional on having a loan).
                    Value o f collateral                                                 -
                                                        Value o f collateral as a Dercentaee o f the loan value (conditional on
                                                        having a loan with collateral).
                    Dummy for debt                      Dummy taking the value of 1 i f the number o f rejected loan applications
                                                        i s larger than the number o f applications for a loan.
                    Dummy n o loan because              Dummy that takes the value o f 1 if the firm did not apply for a loan
                    complexity                          because o f complexity.



                                                                                                                               11
Blocks of I C
                        Variable name                                  Description of the variable
variables

                Dummy n o loan because cost    Dummy that takes the value o f 1 i f the firm did not apply for a loan
                                               because o f i t s cost.
                Dummy n o loan because         Dummy that takes the value o f 1 i f the firm did not apply for a loan
                collateral                     because o f the collateral required.
                Rejected credit applications   Percentage o f rejected credit applications.
                Accepted credit applications   Percentage o f accepted credit applications.
                External audit                 Dummy that takes the value o f 1 i f the firm has i t s annual financial
                                               statements externally audited.




                                                                                                                          12
                       Table 2.5: Investment climate (IC) and control (C) variables
   Blocks of I C
                           Variable name                                         Description of the variable
    variables
Quality,            Dummy for quality               Dummy taking the value o f 1 i f the firm has any k i n d o f quality certification.
innovation and      certification
labor skills        Dummy for foreign               Dummy taking the value o f 1 if the plant uses technology licensed from a
                    technology                      foreign-owned company.
                    Dummy for product               Dummy taking the value o f 1 i f the plant has introduced any product innovation
                    innovation                      in the last 3 years.
                    Dummy for process               Dummy taking the value o f 1 if the plant has introduced any production process
                    innovation                      improvement in the last 3 years.
                    Outsourcing                     Percentage of total annual sales subcontracted.
                    Dummy for R&D                   Dummy that takes the value o f 1 i f the firm performed R & D activities during the
                                                    last year.
                    R&D expenditures                R&D expenditures as a percentage o f total annual sales.
                    Staff - production workers      Percentage o f production workers out o f a l l staff.
                    Staff - female workers          Percentage o f female workers out o f a l l staff.
                    Staff - skilled workers         Percentage o f skilled production workers out o f all staff.
                    Staff - university education    Dummy taking the value o f 1 if the typical production worker has at least one
                                                    year o f university education.
                    Dummy for training              Dummy taking the value o f 1 i f the firm provides formal (beyond on-the-job)
                                                    training to i t s employees.
                    Training to production          Percentage o f production workers receiving formal (beyond on-the-job) training
                    workers
                    Training to non-production      Percentage o f non-production workers receiving formal (beyond on-the-job)

                   I Manager experience            I Manager experience in years.
Other control       Age                             Age o f the firm in 2005.
variables           Capacity utilization            Percentage o f total firm productive capacity utilized.
                    Trade union                     Percentage o f workforce unionized
                    Dummy for incorporated          Dummy that takes the value o f 1 i f the firm i s an incorporated company.
                    company
                    Dummy for limited liability    I Dummy that takes the value o f 1 i f the firm i s a limited liability company.
                    company
                    Dummy for FDI                   Dummy that takes the value o f 1 i f any part o f the firm's capital i s foreign.
                    Dummy for public capital        Dummy that takes the value o f 1 i f any part o f the firm's capital i s public.
                    Exporting experience           I Number o f years o f exporting experience.
                    Dummy for local monopoly       I Dummy taking the value one o f 1 i f the firm i s a local monopoly.
                    Dummy 5 or more                 Dummy taking the value o f 1 if the plant has 5 or more competitors in the local
                    competitors                     market.
                    Dummy less than 5               Dummy taking the value o f 1 if the plant has less than 5 competitors in the local
                    competitors                     market.
                    Dummy increased sales           Dummy taking the value o f 1 if the plant has increased i t s sales.
                    Dummy decreased sales           Dummy taking the value o f 1 if the plant has decreased i t s sales.
                    Dummy for importer              Dummy taking the value o f 1 if the firm imports more than 10% o f the total
                                                    purchases o f intermediate materials.
                    Share o f imports               Share o f imported inputs over total purchases o f intermediate materials and

                    Dummy for exporter              Dummy taking the value o f 1 i f the firm exports more than 10% o f i t s total
                                                    annual sales.
                    Share o f exports               Share o f exports in total annual sales.
                    Small                           Dummy taking the value o f 1 if the firm has less than 20 employees.
                    Medium                          Dummy taking the value o f 1 if the firm has 20 or more, but less than 100




                                                                                                                                  13
  Table 2.6: Total number of observations before and after cleaning missing values
                 and outliers in production function (PF) variables

                                                              Observations before               Observations after
                                                                   c1eaning                         c1eaning




Missing observations                                                     61                               4
Of which:
firms w i t h one PF variable missing                                     33                              0
firms with two PF variables missing                                       21                              0
firms with three PF variables missing                                      3                              0
firms with four PF variables missing                                      4                               4

Outliers                                                                  5                                6
o f which:
outliers only in materials (ratio of materials to
                                                                          5                                6
sales > 1)
outliers only in labor cost (ratio o f labor cost to
                                                                          0                                0
sales > 1)
outliers in both materials and labor cost                                 0                                0

Useful observations (outliers and missing
                                                                         262                             318
excluded)
The cleaning process i s performed in three steps.
I.         Those firms with missing values in all the PF variables (sales, materials, labor cost and capital) are dropped
from the sample. For the rest of the missing values we apply the procedure described in I1 and 111.
II.        We replace those observations with ratios of materials to sales or o f labor cost to sales greater than one
(outliers) following step 111.
Ill.       We replace the missing values of the PF variables by their corresponding industry-region-sizemedians. I f we
do not have enough observations in some cells, we replace them by the corresponding industry-size medians. I f we s t i l l
do not have enough observations in those cells, in the next step we replace the missing values by the region-size
medians. I f still necessary, in the last step we compute the medians only by size andor by industry to replace those
missing values.
The last row of the table summarizes the number of useful observations for regression analysis before and after the
cleaning process.




                                                                                                                         14
    T a b l e 2.7:    Representativeness o f p r o d u c t i o n f u n c t i o n variables before a n d after
                             cleaning for m i s s i n g values a n d outliers

                                                             y
                                                            B industry and region
                                                            Guatemala City           Rest of the country              Total
                Industry
                                                          #Obs            Perc.       #Obs        Perc.        #Obs        Perc.
Food                                                       62              24.3        28         38.4          90          27.4
                                                           59              24.0        27         37.5          86          27.0




                                                              By industry and size

                                                                  I     Medium       I          -
                                                                                             Large         I          Total
                                                                                                                                    II
                Industry
                                                                      #Obs   Perc.       #Obs    Perc.         #Obs        Perc.
                     p e f o r e cleaning   I   38    I   27.1         27    22.7         25      36.2          90          27.4
I                    h f t e r cleaning     I   36    I   26.5    I    261 I 22.2    I    24   I 36.9      I     86     I 27.0      I
                                                                       34    I
                                                                             28.6         16      23.2           83     I   25.3
                                                                       33    I
                                                                             28.2         16      24.6           82     I   25.8
Other         Before cleaning                   69        49.3         58    48.7         28      40.6          155         47.3
manufacturing After cleaning                    67        49.3         58    49.6         25      38.5          150         47.2
Total         Before cleaning                   140       100.0        119   100.0        69      100.0         328         100.0
              After cleaning                    136       100.0        117   100.0        65      100.0         318         100.0




                                                                                                                      15
        Table 2.8: Total number of observations and response rate o f I C and C variables in
                                      the original sample
   Blocks of I C
     variables
                               Name of the variable            1   #Observations   I   Responserate   I
Infrastructure




R e d tape,
corruption and
crime




                                                                                              16
   Blocks of I C
                                       Name of the variable       #Observations       Response rate
    variables
Finance and        Largest shareholder                                 --"
                                                                       376                ,. .
                                                                                          99 A
corporate          Initial investment: private banks                   324                98.8
governance
                   Initial investment: public banks                    325                99.1
                   Purchases paid before delivery                      328                100.0
                   Purchases paid on delivery                          338                innn




Quality,           Dummy for quality certification                     317                96.6
innovation and     Dummy for foreign technology                        312                95.1
labor skills
                   Dummy for product innovation                        312                95.1
                   Dummy for process innovation                        312                95.1
                   Outsourcing                                         2737               aa   -I

                   Dummy for R&D                                       312                95.1
                   R&D expenditures                                    in5                37   n
                   Staff - production workers                 I        312        I       95.1
                   Staff - female workers                              311                94.8
                   Staff - skilled workers                             312                95.1
                   Staff - university education                        ?in                94 5




                                                                                               17
  Blocks of I C
                  Name of the variable   #Observations
   variables




Other control
variables




                                                         18
                   Table 2.9:      Correlation matrix among productivity measures

                                        1     TWO         -
                                                    steps solow        1      Single step     -          Single step   -
                                                    residual                   Restricted                Unrestricted
                                            Restricted Unrestricted        Dou las
                                                                            ‘Obb-      I   Translog   ‘Obb-
                                                                                                      Doug1as
                                                                                                                1   Translog



Single step -      Cobb-Douglas 0.89                          0.92             1
Restricted         Translog     0.91                          0.93           0.97             1
Single step -      Cobb-Douglas 0.08                          0.04          -0.22           -0.17        1
Unrestricted       ~~~~~l~~     0.11                          0.09          -0.15           -0.11      0.80            1




b) EstimatedProductivity i n logs i s obtained from Cobb-Douglas and Translog production functions of sales with inputs
labor, materials, and capital estimated by OLS under two different environments:
(1) Restricted: a single set of production function coefficients i s obtained using data on plants, for all industries
(excluding outliers).
(2) Unrestrictedby industry: a set of production function coefficients i s obtained for each one of eight industries using
data on a l l plants (excluding outliers).




                                                                                                                           19
                Table 2.11: ICA elasticities and semi-elasticities with respect to productivity, robust
                                                White standard errors

Blocks of ICA
                            Explanatory ICA variables




governance




       * significant at 10%; ** significant at 5%; *** significant at 1%; Each regression includes a set of industry dummies and a constant term.
      (a) Variables instrumented with the industry-region-size average. (b) Variables approximated with a proxy (only missing values replaced
      by the industry-region-sizeaverage).
      Estimation of I C elasticities and semi-elasticities:
      A) Two steps: In the first step compute the Solow residual with restricted (or unrestricted) input-output elasticities. In the second step
      compute the I C coefficients by regressing the set o f I C variables on the Solow residual by OLS.
      B) Single step:
      i) Cobb-Douglas: Compute the IC coefficients jointly with the restricted (or unrestricted) input-output elasticities by OLS i n an extended
      Cobb-Douglas production function of the form:
                l o g Y, = a , l o g L, t a,w g M ,
                                            lo        + a x l o g K , + a’,cIci+ a;c,+
                                                                                     (Y;Jl,   + ap+ u ,
      where L, M and K denote the inputs employment, materials and capital respectively, I C and C denote the investment climate and other
      control variables and Dj, denotes the industry dummies.
      ii) Translog: Compute the IC coefficients jointly with the restricted (or unrestricted) input-output elasticities by OLS in an extended
      Translog production function of the form:
                                          1         1             1
               lQ3Y=qlQ34 +4%Y+%1%42%k4)2t,%kY,’t,%oopgi + ~ ~ ( l o g q ) o C 9 Y ) + % ( 4 ~ Q 3 4 ) + ~+&++$D,Q 3 ~+Y+ ~ ~ ~
                                        +                                                                        k ~ ~ +4)
      Restricted estimation: equal input-output elasticities for all firms in the country.
      Unrestricted by industry estimation: equal input-output elasticities for a l l firms in the same industry.




                                                                                                                                    21
      Dummy for large firm                                   0.117        0.106           0.446**     0.462**     0.419*     0.308**
      Observations                                           318          318             318         318         318        318
      R-squared                                              0.273        0.257           0.891       0.897       0.912      0.925




Note: We employ a general correction for heteroskedasticity: the robust White standard errors (Table 1.10). T h i s
method corrects for any general pattern o f heteroskedasticity in the residuals o f the productivity regressions. In fact,
clustering standard errors i s a particular case o f the White standard errors which allow for common variation within
clusters. Table 2.11 shows the estimation results with ‘White’ robust standard errors and Table 2.12 shows the results
with standard errors clustered b y industry, region and size. I t i s clear that the significance o f the ICA variable
coefficients     does      not       change      significantly     if    we      cluster    the      standard      errors.




                                                                                                                       22
          Table 2.13: Percentage Contribution of I C and C Variables to the Olley and Pakes
          Decomposition o f the Aggregate Productivity in Logs; Restricted Solow Residual



     Infrastructure




     Red tape,
     corruption
     and crime
                                  Dummy for security (b)                                                      0.36             0.23        0.13
                                  Dummy for crime (b)                                                         -0.06            -0.06       -0.01
                                 Manager's time in bureaucratic issues (a)                                    -0.21            -0.21        0.00
                                 Payments to speed up bureaucracy (b)                                         0.00             -0.01        0.01

     corporate                    W o r k i n g capital financed by informal sources                          0.00             -0.01       0.01
     governance                   ~T-..L:^-       *1
                                                ,.:,         C,"..,,A   l.
                                                                        .,I^-    L,.-lr   c ^ ^ ^ ^ :"1   I           I                I

                                -
                                 Dummy for credit line                                                        0.12             0.07        0.05
     Quality,                    Dummy for I S 0 Certification (b)           _   I
                                                                                                              0.16             0.05        0.11
     innovation                  Percentage o f female workers in staff (b)                                   -0.04            -0.05       0.01
     and labor                   Training to non-production workers (b)
I    skills                                                                                                   0.08             0.08        0.00
     Other control               Share o f imported inputs (b)                                                 0.09            0.06        0.03
     variables                   Percentage o f unionized workforce                                           -0.01            0.00        -0.01
                                 Dummy for FDI                                                                 0.08            0.02        0.06
                                 Share o f exports                                                             0.30            0.13        0.17
                                 Dummy for large firm                                                          0.10            0.02        0.08
     Industry                    Apparels and textiles                                                        -0.01            -0.02       0.01
     dummies                      Other manufacturing                                                         -0.08            -0.07       -0.01
                                 Constant                                                                      0.72            0.72        0.00
                                 Residual                                                                     0.14             0.00        0.14
                         Total                                                                ~~
                                                                                                               2.33       ~~
                                                                                                                                1.65       0.67
    Notes:
    * Results presented are relative to aggregate productivity (mixed: share of sales in levels and productivity in logs).
    ** The productivity measure used to construct the tables i s the restricted Solow residual and hence the elasticities and semi-elasticities
    used are obtained from the first column o f Table 2.1 1.
    *** Each term of the Olley and Pakes decomposition of aggregate productivity (PJ can be expressed in terms of the investment
    climate variables according to the following expression:

                  -
    PI. = & ' , I C j                         ~5 ~
                        + f ~ ' , C ~ + & ' ~ +&, 6 + i Ji      +Njd',~~ov(sj,i,ICj,i)+NJfL'c~ov(sjj,C,,~)iNj&'D~~ov(sj,i,Dj)+Nj~ov(sj,i,,~J,i)

    I C i s the vector of investment climate variables, C the vector of other control variables, Dj the vector of industry dummies, ui and up
    are the residual and the constant of the productivity regression of the restricted Solow residuals on the I C and C variables (see
    Escribano et al. (2007) for details). Table 2.13 presents the percentage contributions to aggregate productivity (in logs).




                                                                                                                                              23
            Table 2.14: I C impact on the decomposition b y inputs of the efficiency term of the
                                 Olley and Pakes decomposition in logs




                    Share o f exports                                         5.66           6.53          1.02           7.16            20.37
                    Dummy for large firm                                      2.72           3.99         0.64            1.18             8.52
 Industry           Apparels and textiles                                     0.02           0.58         0.15           -0.18             0.57
 dummies            Other manufacturing                                       0.55          -0.54         -0.09           0.13             0.06
                    Residual                                                 -3.68         -36.12         -1.04          71.07            30.23
                    Total                                                    12.71         -13.18          2.70          97.77            100.00




Where I C i s the vector o f investment climate variables, C the vector o f other control variables, D, the vector of industry dummies, ut and
are respectively the residual and the constant of the productivity regression on the I C and C variables and using the restricted Solow residual
as dependent variable (see Escribano et. al. (2007) for details). Table 2.14 presents the percentage contributions to efficiency w h i c h are
obtained from the next equation:




                                                                                                                                     24
                  Table 2.15: Two-stage least squares (2SLS) estimation of employment equation
     Blocks of I C A                                                                                         %                                  %
                                      Explanatory I C A variables                    Coefficient                        Coefficient       Contribution
       variables                                                                                        Contribution
    Productivity                                                                    -0.377*            -27.31          -0.369'            -25.50
    Real wages
    Infrastructure




    Red tape,
    corruption and
    crime

    Finance and
    corporate
    governance
    Quality,
    innovation and
    labor skills




    Other control
    variables
                        Trade union                                                10.049**        10.34               I0.049***      10.46              I
                        Dummy for FDI                                               0.692**            1.27            0.681**            1.47
                        Share o f exports                                           0.005 * *          1.90            0.005*             2.01
    Instruments
    evaluation
                       I First stage R-sauared
                       I Partial R-souared
                       I U-value o f uartial R-sauared
                                                                                   10.29


                                                                                   10.00
                                                                                                   I
                                                                                                   1
                                                                                                   I
                                                                                                                       pi
                                                                                                                       0.00
                       I Hansen test (U-value)                                     10.61           I                   10.6           I
I                       I Observations                                             I316          I                I316            I               I
    Notes:
    * significant at 10%; ** significant at 5%; *** significant at 1% (robust standard errors).
    Each regression includes a set o f industry and year dummies and a constant term.
    (a) Variables instrumented with the industry-region-size average.
    (b) Variables approximated with a proxy (only missing values replaced b y the industry-region-size average).
      Productivity i s endogenous and the l i s t o f variables used as excluded instruments is: days to clear customs to export, dummy for gifts in
    inspections, electricity from generator, shipment losses in exports (Industry-Region-Size average), dummy for conflicts with clients, dummy for
    crime, working capital financed b y informal sources, working capital financed b y non-banking financial institutions, dummy for checking or
    current account, dummy for credit line, staff - female workers, training to non production workers.
      The percentage contributions o f productivity, I C and C variables to average l o g employment are computed according to the next expression:



    I C i s the vector o f investment climate variables, C the vector o f other control variables, Dj the vector o f industry dummies, vL and pL are
    respectively the residual and the constant o f the real wages 2SLS regression.
      First stage R-squared from the regression o f productivity on both the included and the excluded instruments.
      The partial R-squared measures the squared partial correlation between the excluded instruments and productivity.
      F-test o f joint significance o f the excluded instruments that corresponds to the partial R-squared.
      The Hansen test i s a test o f overidentifying restrictions. The null hypothesis i s that the instruments are valid instruments, that is, uncorrelated
    with the error term, and therefore the excluded instruments are correctly excluded from the estimated equation.




                                                                                                                                           25
          Table 2.16: T w o stage least squares (2SLS) estimation of real wages equation
        Blocks of I C A                                                                        %                            %
                                 Explanatory I C A variables           Coefficient
           variables                                                                     Contribution                  Contribution
    Productivity            0.608**                                    13.75             0.530*         11.92
    Infrastructure          Losses due to power outages (b)            -0.023*           -0.72          -0.023*        -0.72
    Red tape, corruption    Sales reported to taxes (a)                0.002*            2.49           0.002*         2.05         ~




    and crime               Payments to obtain a contract with the     -0.036*           -0.89          -0.035         -0.87




    evaluation



                           I Hansen test (U-value)                    10.93          I                  10.93      I
I                          I Observations                             I316           I                  I316       I                    I
Notes:
* significant at 10%; ** significant at 5%; *** significant at 1% (robust standard errors).
Each regression includes a set of industry and year dummies and a constant term.
(a) Variables instrumentedwith the industry-region-sizeaverage.
(b) Variables approximated with a proxy (only missing values replaced by the industry-region-size average).
 Productivity i s endogenous and the l i s t o f variables used as excluded instruments is: days to clear customs to export, electricity from
generator, water from public sources, dummy for security, payments to speed up bureaucracy, working capital financed by non-
banking financial institutions.
* The percentage contributions of productivity, I C and C variables to average log real wages are computed according to the next
expression:



I C i s the vector of investment climate variables, C the vector of other control variables, D the vector of industry dummies, vw and
                                                                                              ,
are respectively the residual and the constant of the real wages 2SLS regression.
  First stage R-squared from the regression of productivity on both the included and the excluded instruments.
  The partial R-squared measures the squared partial correlation between the excluded instruments and the productivity.
  F-test of joint significance of the excluded instruments that corresponds to the partial R-squared.
  The Hansen test i s a test of overidentifying restrictions. The null hypothesis i s that the instruments are valid instruments, that is,
uncorrelated with the error term, and therefore the excluded instruments are correctly excluded from the estimated equation.




                                                                                                                               26
   Table 2.17: T w o stage least squares (2SLS) estimation of probability of exporting
                                        equation




                           Hansen test (p-value)


Notes:
* significant at 10%; ** significant at 5%; *** significant at 1% (robust standard errors).
Each regression includes a set o f industry dummies and a constant term.
(a) Variables instrumented with the industry-region-size average.
(b) Variables approximated with a proxy (only missing values replaced b y the industry-region-size average).
  Productivity i s endogenous and the l i s t o f variables used as excluded instruments i s : Security expenses, crime losses, initial
investment: private banks, dummy for process innovation, staff- skilled workers, trade union.
  The percentage contributions o f productivity, I C and C variables to the probability o f exporting are computed according to the
next expression:



I C i s the vector o f investment climate variables, C the vector o f other control variables, Dj the vector o f industry dummies, vExpand
6Exp respectively the residual and the constant o f the probability o f exporting 2SLS regression.
       are
  First stage R-squared from the regression o f productivity on both the included and the excluded instruments.
  The partial R-squared measures the squared partial correlation between the excluded instruments and the productivity.
  F-test o f joint significance o f the excluded instruments that corresponds to the partial R-squared.
  The Hansen test i s a test o f overidentifying restrictions. The null hypothesis i s that the instruments are valid instruments, that is,
uncorrelated with the error term, and therefore the excluded instruments are correctly excluded from the estimated equation.




                                                                                                                            21
         Table 2.18: T w o stage least squares                 (2SLS) estimation of probability of exporting
                                                               equation
            Of IC*
       variables
                       I
                     Explanatory ICA variables
                                                                     Coefficient
                                                                                             %
                                                                                        Contribution
                                                                                                        Coefficient
                                                                                                                                %
                                                                                                                           Contribution
    Productivity                                                     0.106*             357.26          0.11*              367.63
    Infrastructure Dummy for own generator (b)                       0.086"             21.43           0.087*             21.60
                   Wait for a water sumh (b)                         -0.013*            - 10.44         -0.013"            -10.15
    Red tape,
    corruption
    and crime



    corporate


    innovation
    and labor
    skills
    Other control
    variables


    Instruments            First stage R-squared                     0.19                              10.18           I
                           Partial R-squared
                           D-value o f partial R-sauared
                       I Hansen test (p-value)
                                                                     0.07
                                                                     0.00
                                                                    10.95           I
                                                                                                       HI
                                                                                                       10.94
I                        I Observations                              I318         I                 I318           I                 I
    Notes:
    * significant at 10%; ** significant at 5%; *** significant at 1% (robust standard errors).
    Each regression includes a set of industry dummies and a constant term.
    (a) Variables instrumented with the industry-region-size average.
    (b) Variables approximated with a proxy (only missing values replaced by the industry-region-sizeaverage).
                                                                   s
      Productivity i s endogenous and the list o f variables used a excluded instruments is: dummy for gifts in inspections, electricity from
    generator, water from public sources, sales reported to taxes (I-R-S avg.), working capital financed by informal sources, dummy for
    I S 0 certification, staff - female workers, training to non-production workers, share of imported inputs.
    * The percentagecontributions o f productivity, I C and C variables to the probability of exporting are computed according to the next
    expression:



    IC i s the vector of investment climate variables, C the vector of other control variables, DJthe vector of industry dummies, vExpand
    3xp respectivelythe residual and the constant of the probability of exporting 2SLS regression.
      are
     First stage R-squared from the regression of productivity on both the included and the excluded instruments.
     The partial R-squared measures the squared partial correlationbetween the excluded instruments and the productivity.
     F-test o f joint significance o f the excluded instrumentsthat corresponds to the partial R-squared.
     The Hansen test i s a test o f overidentifying restrictions. The null hypothesis i s that the instruments are valid instruments, that is,
    uncorrelated with the error term, and therefore the excluded instruments are correctly excluded from the estimated equation.




                                                                                                                                    28
 Figure 2.1: Olley and Pakes Decomposition in Levels by Industry and Region of
               Aggregate Productivity (Restricted Solow Residual)

  18.0

  16 0

  14 0

  12 0

  10 0

   80

   60

   4.0

   2.0

   00




Figure 2.2: Olley and Pakes Decomposition in Levels by Size and Age of Aggregate
                     Productivity (Restricted Solow Residual)
                      size                                   nse
    14.0

    120


    iao

        a0

        60

       40

        20

        ao




  Figure 2.3: M i x e d Olley and Pakes Decomposition by Industry and Region of
               Aggregate Productivity (Rt itricted Solow Residual)
                  lnduay
  3.0
                                                               B
                                                               n
  25


  20


  15


  1.o


  05


  00




                                                                                  29
 Figure 2.4: M i x e d Olley and Pakes Decomposition by Size and Age of Aggregate
                        Productivity (Restricted Solow Residual)

    25 1
                             size
                                              N                     I               ase

    20


     1.5


     1.0


    05


    00
               small          Medurn              LerBe             I           -furrs             a d




  Figure 2.5: Relative I C effects by groups of variables on aggregate productivity,
average productivity and efficiency (mixed O&P decomposition and simulations o f a
                      20% improvement in I C and C variables)




                                              A               E               A                E
                                          ai
                                           r-    to the nixed Ulev and Bles t c n C i i of the
                                                                             % c o stm                   I
   Assfsate Raluctivii (WedW c l e c : RoductivR y measured in  w,    share af sales -wed   in levds).
   R Snulatiorrs of a Charge in IC4 Vars and % change m Aggfsate Rocclciity and m the cbrrponsnts d
   the a y and we^ -Rim.
        e
        l

             Irrh-astructures                             IW tape, comption and crime
           rnFimeandcaporategoLernance                    0 Cbality, innmation and labor skils
           I h e r e r d dables
             a




                                                                                                             30
I                                                                     I Aggregate productivity I Average productivity I Efficiency term 1
 Infrastructures                                   15.3          25.7           16.7        23.9          22.6        17.4
 R e d tape, corruption a n d c r i m e            45.2          37.3           51.4        45.4          25.1       38.7
 Finance a n d corporate governance                 9.1           6.3            9.8         7.8           8.5        5.3
 Quality, i n n o v a t i o n and l a b o r skills  9.9           6.2            8.7         7.4          12.2        5.9
 Other c o n t r o l variables                     16.4          24.3           10.1        12.8          26.5       29.7
 Total                                             100            100           100          100           100        100
Notes:
A: The percentage contributions o f I C and C variables o f table C.2a were transformed such that the relative impact o f the
group ‘s’ to aggregate and average productivity and efficiency may be expressed according to the next expressions

          [il
( 1.A) Wsngg =             l%LTil+l% cov(s, ,icf,p )I     1[j l                  l+l%    cov(si ,icf,p   I + x jx=l.). I+1d;r
                                                                                                           vrts i ’       -I
                                                                                                                    a r i c J’ r        cov( s! ,ic;,jr   I]
(2.A)wsmg [ 5
                                                                                    -1

                =    p=l   ~d&I][       5 I%‘pl$ + v!’#$ ? lqrE;,1]
                                       p=1          C          J r l




                                               ll[IN%
                                                 LI
                                   cov(sir . i ~ f , ~
                                                        C          cov(s, ,icf,p         )I + C    ? lNqr
                                                                                             Vr#s j =
                                                                                                  , l
                                                                                                             COV(S~,.icS.jr )
                                                                                                                                   I]
For all s,r=infrastructures; red tape, corruption and crime; finance and corp. gov.; quality, innov. and labor skills; other
control variables, and p=l,..,n are the number o f variables belonging to the group s, and jr=l,..,mr are the variables in the
group r, such that r#s.
B: The relative impact o f each group o f I C and C variables i s expressed in terms o f the % change o f each term o f the O&P
decomposition from t=O (before simulation) to t=l (after simulation) (see Escribano et. al. (2007) for details) according to
the following expressions

          [i I] [il
                                                                            -1

( 1.B) yngg
          =   l            AIPp’         AI Pp”l   + Vr#s j,=? Alp;
                                                      X 1              I]
(2.B)wsmg [ 5
                                                                            -1

               = 2  ?=I    AlFil][    ? AlFil
                                       = I         + Vrtr j3 AIl F i l ]
                                                      1 =


(3.B)yeff = [ ~ l A ~ ~ ~ ~ ( ~ : , . P p ” , i i ~ ] [
                                                  j,Alc~v(~;,i.Pp’,i)I                     ~,A~CO”(~~,.i~~~,t)~    I
Note that the industry dummies and the constant are excluded from the computations o f both cases A and B.




                                                                                                                                                               31
                  Figure 2.6: Relative I C effects on aggregate productivity (Mixed O&P
                                               decomposition)
-,               Infrastructures            F&i tape, corrytim & c r i m             ~i-         & corp. p. Clcalb inmatim                     hr
                                                                                                                                              a e contrd
70                                                                                                            &I&    sldlls                    variables
x)




=i
                                       I
                                       I   452
                                                                                                                  I
                                                                                                                                       II


                                                                                   0.3


                                                                                          3.4
                                                                                          n     00   00

      T.l   11   12    13   14   15   16   T 2 2.1 2 2 2.3    2.4 2.5 2.6 2.7      T.3 3.1 3 2 3.3         3.4 3.5 T.4     4.1 4 2 4.3 T.5 5.1 52 5.3 5.4
     T.l Total infrastructures                         2.3 Dummyfor conflicts in courts                        T.4 Total quality, innov. and labor skills
     I l w t o ciedrcustomSt0 exp3rt-interaction       2.4DummyforseurityRTms€s                                4.1Dummyfor iSOqualityce!tification
     w t h f i n s t k t c b eqmtt                     2.5 Dummyfor crime                                      4 2 Staff -femelemrkers
      2
     1 OEctricityfmmaQma-ator                          2.6Mana@stimespentintu.issues                           4.3Trainingto mn-pocbctionmrkefs
     13 Dummyfor'Ejfts'to o h i n eleztncitysupply     2.7 P a p e m to speed up tureaucmcy
     14vIclteroutages                                                                                          T.5 Total other control variables
     15vIclterfromplblicsources                        T.3 Total finance and corporate governance              5,191areof imp3rtedirputs
     16Wp-nent losses, imptts                          3.1Initial investment:privatetenks                      52 Percentageof unionizslmrkforce
                                                       32Vlbrkingcapitalfimdbyinfodsources                     5,3Dummyfor FDi
     T.2 Total red tape corruption and crime           3.3Vlbrkingcapitalfimdbymrrbankingfimial                5,4-of     exp3tts
     PlSelesrep3rldtOtaES                              institutions
     2 2 Dummyforconflictswth clients                  3.4Dmmyforcheckingorsa\n'rgaccount
                                                       3.4 Dummyforcrejt line




     Figure 2.7: Relative I C effects on average productivity (Mixed O&P decomposition)
                 Infrastructures             Fed tape, corrlptim & crim                          & cap. p. W i imovatim                           aher contrd
                                                                                                            &labor sldlls                          variables

                                           514




                                                 242

       87
                                                                                    Ql
                                                                                                                      a7
                                                                                                                                                                62

                                                                                                                                                      0.1 09
                                                                                                                           n
      T.l   11    12   13   14   15   16 T2 2 1 2 2 2.3 2 4 2 5 2 6 27 T.3 3.1 3.2                   3.3   .
                                                                                                           4
                                                                                                           2   3 6 T.4      .
                                                                                                                           41   42   4.3    T.5    5.1 52       .
                                                                                                                                                            53 54
     T.l Total infrastructures                     2.3 Dummyforconflictsincourts                               T.4 Total quality, innov. and labor sklils
     11Daysto clear customs to eqmtt - interaction 2.4 D u m m y f o r s e u r i t y e e s                     4.1Durnmyfor iSOqualityce!tification
     nithfimsthadcb eqmtt                              2.5 Dummyfor crime                                      4.2Staff - femalemhers
     12 Eetricityfrom agenemor                         2.6M~stimespentinbur.issues                             4.3Trainingto mrquductionwrkers
     13 Dummyfor 'gifts' to ottain de3ticitysupFiy     2.7 Payrents to speed up burmuracy
     14V&erOuta+                                                                                               T.5 Total other control variables
     15V&erfrom plblic sources                         T.3 Total finance and corporate governance              5,,Shareof impttdiws
     16 shipment losses, imptts                        3.1 initial iwestment: private banks                    5.2 Percentawof unionizslmrkforce
                                                       32Vlbrkingcapitalf i m d b y i n f o d sources          5,3Dummyfor FDI
     T.2 Total red tape corruption and crime           3,SVlbhingcapitalfimdbymrrbankingfimial                 5,4Shareof wtts
     2.lSelesrepottdto taxs                            institutions
     22 Dummyforconflicts dthclients                   3.4 DummyforcheMrg or saving account
                                                       3.4Dummyforcre3itline




                                                                                                                                                             32
                 Figure 2.8: Relative I C effects on efficiency (Mixed O&P decomposition)
                 Infrastructures                 F k i t a p , corrlption &crirre    f i m e &cap. q,w. W i innovation a k r cct-itrd variables
6                                                                                                        &labor skills




     T.l    11    12   13    14    15    16 T2       2 1 2 2 2.3   2.4 2.5 2.6 2 7               ..
                                                                                     T.3 3.1 3.2 33   3.4 3.5 T.4 4.1 42                 .
                                                                                                                            4.3 T.5 5.1 52    5.3 5.4
    T . l Total infrastructures                             2.3Dummyforconflictsinmutts
                                                                                                         T.4 Total quality, innov. and labor skills
    11Daystoclearcustomsto              ewrt-interaction    2.4Dummyforsecurityexperses
                                                                                                         4.lDummyfor ISOqditycertification
    Mithfirrnsthatdo wt          t                          25Dummyforcrime
                                                                                                         4.2Staff -femalenorkern
    12 E e c t r i c i t y f r o m a g o r                  2.6 Mampfstimespent in bur. issues
                                                                                                         4.3Tminingto mmprochtionuorkers
    13Dummyfor'gifts'toobtalndectricitysupply               2JPa)nnentstospeedupbureawracy
    14VIBteroutages
    15Waberfromplblicsources
    16Ship~lent     losses, imprts
                                                            T . 3 Total finance and corporate governance
                                                            3.1 Initialiwestrnent:privateb k s
                                                                                                         'f Ad
                                                                                                         ,z " ,    ~~~~~~          variables
                                                                                                ~
                                                            3pMbrkingcapital f i - e d ~ i ~ osources      5.2Percentapof unionizednorkforce
                                                                                                           53 DummyforFDI
    T.2 Total red tape corruption and crime                 3.3Mbrkingcapitalfinancedbyrambankingfinancial 5,4Shareof e ~ t t s
    2.1Salesreprtedtotax%                                   institdions
    22Dumrnyforco~lictsMiithclients                         3.4 Dumnyfor checkkg or saving account
                                                            3.4Dummyforcredit line




            Figure 2.9: Relative I C effects by groups o f variables on average productivity
                                   (Decomposition in Logs); by size




            lnfrastuctures                 Fi?dtape, corruption           Finance and corporate W i t y , innovation and Other control variable3
                                                and crime                      governance              labor skills




                                                                                                                                                33
        Figure 2.10: ICA Percentage Absolute Contribution on Economic Performance
                                        Variables
   ._..                                                                                                                     -




              Roductivity            Errploy rnent          Real wages                &ports                      FDI
                                                                                               ~-
                                                                            Real wages
                                                                            Red tape, corruption and crime
              Finance and corporate gowrnance                           0 Quality, innovation and labor skils
              Other control variables




I Total
  Notes:
                                               I   100            I   100             I   100           I   100      I   100    I
  Let the percentage contribution o f the I C variable i, the average value o f the dependent variable of equation q be given by
                                                         to
  (1)




  where q = logP, lo&, ZogW, EXP, FDI, (see notes on tables D.l-D.4). From (l),relative percentage contribution o f the
                                                                             the
  group 's' of I C variables to the average value o f the dependent variable of equation q (e:   ) i s therefore given by
  (2)




  For all s,r=infrastructures; red tape, corruption and crime; finance and corp. gov.; quality, innov. and labor skills; other control
                      ...,                                                                   ...,
  variables, and i=ln are the number of variables belonging to the group s, and jr=l mr are the variables in the group r, such
  that r#s.
  * n.s. means that n o variables o f this group of variables were significant in the corresponding regression.


                                                                                                                               34
                                             Figure 2.11: Relative I C effects on average log-employment
         -~                                                                                                                                                                                      ___-
         o
         ,         Prod. W.                        Infrastructures                     Red tape, corr. &             Fin &                 Quality inn. & labor skills                   Other ctrl vars
                                                                                             crime                 corp gov.



         '     1
         '5 O ' 22 I
                 I                I

                                                                           78




                   T.l    T.2     1
                                  '.3

                     T . l Productivity
                                        i
                                        i  3.1    3.2   3.3   3.4    3.5   3.6     T.4      4.1     4.2   4.3
                                                                                                                 3.5




                                                                                                                 T.5     5.1   5.2

                                                                                         T.4 T o t a l red tape corr. a n d crime
                                                                                                                                      T.6     6.1     6.2    6.3

                                                                                                                                                     6.3DummyforR&D
                                                                                                                                                                      6.4   6.5    T.7     7.1    7.2     7.3   7.4


                                                                                         4.lWorkforce reported to taxes                              6.4 Staff - skilled workers
                     T . 2 R e a l wages                                                 4.2 Securityexpenses                                        6.5 Dummy fo r t raining
                                                                                         4.2 Crime losses
                     T.3 T o t a l infrastructures                                                                                                   T . 7 T o t a l o t h e r c o n t r o l variables
                     3.1Days to clearcustoms to import - interaction                     T.5 T o t a l finance and c o r p o r a t e                 7.1Shareof imported inputs
                     with firms that do import                                           governance                                                  7.2 Trade union
                     3.2 D u m m y f o r o m generator                                   5.3 initiai investment: private banks                       7.3DummyforFDI
                     3.3 Water outages                                                   5.2 Dummyfor ioan wth collateral                            7.4Shareof e w o r t s
                     3.4 Water from public sources
                     3.5 Dummyfor internet                                               T.6 T o t a l quality, innovation a n d
                     3.6 Dummyfore-maii                                                  labor skills
                                                                                         6.lDummyfor I S 0 qualitycertification
                                                                                         6.2 Dummyfor process innovation




                                                 Figure 2.12: Relative I C effects on average log-real wages
1%                 Prod         Infrast.            Red tape,                           Finance &                      Quality innovation &                        Other control variables
                                                     ptton & c r t m               cc      rate gov                         labor slulls
    70


    60


    50


    40


    30


    20


     M
                                                         57     42

     0
               T I          Ti!             21          T.3         3.1          3.2          T.4          4.1          4.2          T.5            5.1         5.2          T.6           6.1           6.2
1            T . l Productivity                                             T . 4 T o t a l finance and corporate
                                                                            governance
                                                                                                                                               T.6 T o t a l other c o n t r o l variables
                                                                                                                                               6.1 Exporting experience
             T.2 T o t a l infrastructures                                  4.1Purchases paid before delivery                                  6.2 Dummyfor large firm
             2 l i o s s e s d u e t o poweroutages                         4.2 Working capital financed by informal sources

             T.3 T o t a l red tape corruption and                          T . 5 T o t a l quality, innovation and labor
             crime                                                          skills
             3.1Sales reported to taxes                                     5.1Staff -femaie workers
             3.2Paymentstoobtainacontractwththe                             5.2 Staff -production workers
             government




                                                                                                                                                                                                           35
                                              Figure 2.13:               Relative I C effects on the probability of exporting
______
6 Rod                               Infrastructures                     Red tape, corr, &crime                       Finance &                   Quality inn. & labor skills           Other ctrl variables
                                                                                                                    corn. aov


5 {
      ,
0
                                                                    I
                                                                                                                                             I
15                   13 7



K)




5


0
           T.l      T2        2.1       2.2     2.3   2.4     2.5       T.3   3.1    3.2     3.3      3.4     T.4     4.1     4.2      4.3       T.4      4.1    4.2     4.3     4.4    T.5     5.1        52   5.:
          T.l Productivity                                                    T.3 T o t a l r e d tape corr. and c r i m e                         T.5 T o t a l quality, innov. and l a b o r s k i l l s
                                                                              3.1Workforce reported to taxes                                       5.1 Dummy f o r R&D
          T.2 T o t a l i n f r a s t r u c t u r e s                         3.2 Dummyfor absenteeism due to crime                                5.2 Staff - production workers
          2.lDays to clear customs to import -                                3.3 Number of inspections                                            5.3 Dummyfor training
          interaction with firms that do import                               3.4 Dummyfor gifts in inspections                                    5.4 Manager's experience
          2.2 Average duration of p o w r o u t a g e s
          2.3 Water from public sources                                       T.4 T o t a l finance and c o r p o r a t e gov.                     T.6 T o t a l o t h e r c o n t r o l variables
          2.4 Dummy f o r internet                                            4.1Largest shareholder                                               6.1Share of imported inputs
          2.5 Shipment losses in exports                                      4.2 Working capitai financed byfamilyifriends                        6.2Dummymore5competitors
                                                                              4.3 Dummyfor loan with collateral                                    6.3 Dummyformedium firms




                                    Figure 2.14:                    Relative ICA effects on the probability of receiving FDI
           Rod.             Infrastructures                 Red taDe. corruDtions & c r i m e                       Finance &                    Qualitv innovation               Other control variables




                                                                                                                                                                                 34     25


                                                                                                                                                                                T6        61          62        63

          T.l P r o d u c t i v i t y                                         T.4 T o t a l finance and c o r p o r a t e gov.                         T.6 T o t a l o t h e r c o n t r o l variables
                                                                              4.1 Initial investment: private banks                                    6.1Share of exports
          T.2 T o t a l infrastructures                                       4.2 Working capital financed bynon banking                               6.2 Dummyfor local monopoiy
          2.lDummyforowr generator                                            financial institutions                                                   6.3 Dummyfor largefirrns
          2.2 Waitforawatersupply
                                                                              T.5 T o t a l quality, i n n o v . and l a b o r s k i l l s
          T.3 T o t a l r e d tape corr. and crime                            5.1 Durnm y f o r foreign technology
          3.lDummyforconflicts with clients                                   5.2 Staff - skilled workers
          3.2 Dummyfor conflicts in courts
          3.3Dummyforgifts in inspections
          3.4Cost of entry




                                                                                                                                                                                                                36
                Figure 2.15: Relative I C effects by groups of variables on average log-employment;
                                                        by size

0
        I                                                     27.0




                                                                            17.3




                                                                                                    4.2   -
                                                                                                          5.1




                Productivity           Real Wages        Infrastructures     Red tape,           Finance and               Quality,         Other control
                                                                           corruption and         corporate            innovation and         variables
                                                                               crime             governance              labor skills


            I                  &# S m l l firm                             0 Mediumf irms                                   0 Large firms                  I
            I                                                                                                                                              I




                Figure 2.16: Relative ICA effects by groups of variables on average log-real wages;
                                                      by size
c
/
'5
70                                                                                                              67.3
35

30
55
50
L5
LO
35
3
0                         27 3

15
10
15
IO
    5                                                                                 28    31    2.9                                          2.9   4'3
                                                 1.0   0.7
0
                Productivity            Infrastructures          Red tape,            Finance and                   Quality,            Other control
                                                               corruption and          corporate                innovation and            variables
                                                                   crime              governance                  labor skills

            ~                     Small firm                                 Mediumfirm                                     0 Large firms                   I
                   Figure 2.17: Relative ICA effects by groups of variables on the probability o f
                                                exporting; by size

~   zo
    25                                                                        N
                                                                              P
                                                                             I.




    20




115


        10



        5




    i o
    I         Productivity           Infrastructures       Red tape,         Finance and            Quality,         Other control        1
                                                        corruption and        corporate         innovation and         variables
                                                            crime            governance           labor skills

    I                                                                                                     0 Large firms
    I




                   Figure 2.18:              Relative ICA effects by groups of variables on the probability o f
                                                          receiving FDI; by size
        k
        io
                                                                                                 P

        1.5                                                                                      x
        1.0

        15

        io
        !5

        !O

        5

        0

        5

        0                                                                                                                            -

              Productivity           Infrastructures      Red tape,          Finance and            Quality,         Other control
                                                        corruption and        corporate         innovation and         variables
                                                            crime            governance           labor skills

                             0 Small firms                        0 Medium firms                          0 Large firms
                                                                                           -_


                                                                                                                                     38
          Figure 2.19: Managers' perceptions; percentage of f i r m s that considers each one of
             the following problems as a severe obstacle to firms' economic performance
               Infrastructures               R e d tape, co rruption and c r i m e                       finance               Labor skills                  Total"




          11      1.2    1.3     2.1   2.2    2.3      2.4    2.5     2.6     2.7     2 8   2.9    3.1     3.2       3 3        4.1      4.2                  5       6

       1 Infrastructures.                           2 R e d Tape, C o r r u p t i o n and Crime.         3 . Finance.
       1.1 Electricity                              2.1 Corruption                                       3.1 Access t o Land
       1.2 Transportation                           2.2 Crime. theft and disorder                        3.2 Access to Finance
       13 Customand traderegulatiom
        .                                           2.3 Anti-conpeitiveor Informal PracticeS             3.3 Macroeconomc uncertainty
                                                    2.4 Legal SystenVConflict ReSolUtion
                                                    2.5 Regulatory Policy Uncertainty                    4. L a b o u r S k i l l s .
                                                    2.6TaxRats                                           4.1 Labor Regulations
                                                    2.7Tax Administration                                4.2 Skillsand Educationof Avalable Workforce
                                                    2.8 Business Licensing and Operating Permits
                                                    2.9 Environmental regulations                        5. T o t a l r e l a t i v e w e i g h t s .
                                                                                                         &. A v e r a g e g r o u p r e l a t i v e w e i g h t s .


1   E Infrastructure           E3 Red tape, corruption and crime                     Finance and corporate governance                                Labor skills         1
      'Totalsarecomputed astherelative weighof eachgroup of perceptlomoverthesumof all perceptiom'weights




                                                                                                                                                                      39
      Section 3.      INTERPRETATIONS OF T H E PRODUCTIVITY RESULTS



1.      SECURITY COSTS AND THEIR EFFECT ON PRODUCTIVITY

The regression results show a significant positive effect o f security costs on productivity
compared to declines in productivity associated with speed payments and time dealing
w i t h officials. One interpretation i s this as declines in crime improving productivity.
However, i t seems that a plausible interpretation i s that security costs rise w i t h crime and
this positive association w i t h productivity i s then puzzling. There i s also a concern that
the measure might be endogenous.

The interpretation o f the dummy for security costs i s as follows: those f i r m s having any
security costs are on average 37% more productive that the remaining firms. This positive
effect on productivity i s independent o f the amount o f money spent o n security, i t only
matters whether the f i r m s spend some money on security or not. The interpretation that
'security costs rise with crime' would be true if the significant variable would have been
the total amount spent on security as a percentage o f total sales. This variable i s available
in the survey and has been incorporated in the selection o f significant variables, but
finally i t was not statistically significant. In fact, in other productivity analyses done for
other countries (Africa, Asia, Latin America) where the percentage o f security costs i s
significant on TFP, the effect i s negative. That i s in line with the interpretation above,
where more crime implies more security expenses and less productivity.

W e can put more empirical underpinning to this issue by going one step further and
computing the interactive effect o f having security expenses (dummy) and losses due to
crime in the productivity regressions. This effect i s significant, w i t h the coefficient
ranging from -0.015 to -0.019, depending o n the productivity specification we are using,
see Table 2.19. The interpretation in this case i s straightforward. Let productivity
equation be given by:

        P=bO+bl *durn_secur+b2 *(dum-secur*crime-loss)+b3 *IC3+. ..+bn *ICn+e

where P i s productivity, dum-secur i s a dummy for security expenses, crime-loss i s
losses due to crime, IC3, ...,ICn represent other I C and C variables and e i s a error term.
Here b 2 measures the interaction effect and b l the direct effect o f the dummy for security
on productivity. The effect o f having security expenses i s given by:

        AP=(bl +b2 *crimeJoss) *Adum~secur=(0.518-0.015*crime~loss)*Adum~secur

That is: if a firm incurs any security expenses, holding everything else constant,
productivity increases on average by 0.5 18-0.015*crime-loss. This indicates that the
positive effect o f security expenses decreases as the intensity o f criminal activity
increases (more losses due to crime). For some firms w i t h a large proportion o f sales lost
due to crime the effect o f having security expenses may be even negative.



                                                                                              40
        So far the effect o f security expenses on crime losses i s s t i l l unresolved. The linear
        correlation between 'dummy for security expenses' and 'losses due to crime' i s negative (-
        0.27). Although no causal relationships can be derived f r o m the correlation, i t indicates
        that security may prevent crime, since those firms with security expenses are less likely
        to suffer criminal attempts. Another plausible interpretation i s that the more losses due to
        crime (as percentage o f sales) the less probability o f having security expenses. The linear
        regression o f crime-loss on dum-secur and a constant i s


        crime-loss    1     CoefSicient Standard error                    T-stat
        dum-segur      I    -6.124                 1.333                -4.6
        constant      1     12.828                 1.173                10.9


        This linear regression shows an intuitive negative linear relation between the percentage
        o f sales lost due to crime and dummy for security expenses, so having security expenses
        reduces losses due to crime. Or, in other words, those f i r m s spending some money
        preventing crime reduce the losses due to crime. Obviously, this i s a naive linear
        regression that does not take into account possible endogenous problems and many other
        econometric issues. Instead i t i s pretty intuitive on the nature o f the relation we are trying
        to clarify.


                 Table 3.1: I C elasticities and semi-elasticities with respect to productivity
                                                        TWO     steps estimation   1                Single step estimation




                   Water from public sources (b)     0.003***        0.003***          0.002""     0.002""     0.002""       0.002**
                   Shipment losses, import (b)       -0.009""        -0.009""          -0.009***   -0.008**    -0.009**      -0.012***
Red tape,          Sales reported to taxes (a)       0.008           0.008             0.013**     0.013""     0.008         0.005
corruption and     Dummy for conflicts with          -0.18           -0.185            -0.085      -0.096      -0.112        -0.118
crime              clients
                   Dummy for conflicts in courts     0.126           0.129             0.198       0.127       0.185         0.214
                   Dummy for security (b)            0.518***        0.519***          0.703***    0.619***    0.695***      0.643***
                   Interaction (Dummy for            -0.015***       -0.015*"*         -0.019***   -0.017**"   -0.018***     -0.017***
                   security*Losses due to crime)
                   Dummy for crime (b)               -0.151          -0.15             -0.093      -0.034      -0.094        0
                   Manager's time in bureaucratic    -0.01           -0.006            -0.021**    -0.016"     -0.022"       -0.013
                   issues (a)
                   Payments to speed up              -0.006          -0.006            -0.007      -0.006      -0.006        -0.004




                                                                                                                             41
governance




                in staff (6)
                Training to non-production   I 0.001   Io.001     I0.002    I0.002    10.002    Io.001




       Finally, the dummy for security expenses may be an endogenous variable. Unfortunately
       the industry-region-size average o f this variable i s not a good instrument so we had to use
       the crude plant-level variable in the regressions.


       2.     EFFECTS I C BLOCK
                   OF          VARIABLES ON PRODUCTIVITY

       The effects are accumulated in absolute terms across variables in a block (rather than
       allowing for some variables to have offsetting effects). Thus the positive effect o f having
       security costs i s added to the absolute effect o f management time, speed payments and
       sales reported to authorities to make “red tape, corruption and crime” the block o f I C
       measures with the biggest impact.


       The idea i s to add up all the effects in each group in absolute terms and to compute the
       absolute percentage relative contribution o f each group with respect to the absolute
       contribution o f the investment climate as a whole. This way, we do not offset the positive
       effects o f some variables with the negative effects of other variables. By using the
       absolute contributions we measure what the productivity gain i s the investment climate
       factors improve, and this implies reducing the I C constraints with negative effects and
       increasing the I C factors with positive effects.




                                                                                                 42
3.     GENDER
            IMPACT

The survey questionnaire includes information on the gender o f the principal owner. I t
would be interesting to note the sector and size distributions o f where women are more
economically active, whether women report differences in constraints or whether there
are differences in the impact o f objective conditions on performance.

The following two tables show the average o f the percentage o f female workers in staff
by industry and size. The sectors where women are more active are garments, textiles,
food and chemicals.

             Table 3.2: Percentage of female workers in staff, average by industry
               I Foods                                        I        34.38   I
               I Garments                                     I        53.09   I
               I Textiles                                     I        34.29   I
                Machinery and equipment                                20.00
                Chemicals                                              31.55
                Non-metallic min                                       10.55
                Other manufacturing                                    18.98

By size the distribution o f the percentage o f women among firm staff i s very uniform. In all
categories o f size the percentage o f female workers in staff i s close to 30%.

           Table 3.3: Percentage of female workers in staff, average by size

                               Small          28.89

                              Medium          31.33

                                              30.85


W e can compute the absolute percentage contribution o f the variable percentage of
female workers in staff by industry and size. Table 3.4 shows that the sectors where
women are more economically active the relative absolute contribution o f this variable i s
larger.

 Table 3.4: Percentage o f female workers in staff, percentage absolute contributions
                      to average log-productivity by industry
                            Foods                     12.93
                            Garments                  13.91
                            Textiles                   2.59
                            Machinery and equipment    1.41
                            Chemicals                  2.19
                            Non-metallic minerals      1.27
                            Other manufacturing        1.65




                                                                                           43
Table 3.5 shows the relative contributions by sizes. In this case the contributions are uniformly
distributed among categories o f sizes.

 Table 3.5: Percentage o f female workers in staff, percentage absolute contributions
                         to average log-productivity by size

                                          Small
                                          Medium
                                      I   Large    12.02


4.     DIFFERENCESSAMPLING (2003 VS. 2007 DATA)
                IN

A legitimate question i s whether differences in perceived constraints between 2003 and
2007 are driven by differences in the sampling. The latest survey includes services as
well as manufacturing firms. There may also be differences in the geographic / size /
sectoral distribution o f respondents.

W e include the same percentages computed with the sample that we have used to
construct the 2003-2007 panel and test changes in the I C coefficients. The panel uses the
same sectors, industries and regions in both 2003 and 2007. So the results shouldn’t be
driven by sampling differences. The percentages are very similar to those o f Figure 1.1
(Chapter 1) in almost all the cases, except by some minor changes in the second decimal.
So we would conclude that the sampling differences are not affecting the results.

                            Table 3.6: Differences in Sampling (2003 vs. 2007)
                                                               2003        2007
                 Corruption                                    84.07       62.3 1
                 Electricity                                   26.64       5 1.68
                 Macroeconomic instability                     62.83       45.99
             I   Crime                                     I   84.07   I   33.64    1




                                                                                          44

				
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