The Poverty Trap in Guatemala

Guatemala's capitalization will not increase without attracting foreign investment, and it will remain a relatively poor country in the world.

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Only South Asia has less foreign direct investment than Guatemala. (Photo: Flickr)

Spanish – Although poverty has declined in recent years and quality of life indicators in Guatemala are continually improving, Guatemalans’ living standards are, unfortunately, still far below those of most countries. Thus, we can see how Guatemala has a per capita income clearly below the world average and also below the Latin American average.

Source: the World Bank. Data for 2016.

The principal reason: lack of capital

The basis of economic growth is capital accumulation. More capital means workers are working with more resources (including intellectual resources in the case of human capital) and higher output per work hour. There is no possibility of economic growth without capital accumulation.

In this regard, the Guatemalan economy has suffered from a chronic shortage of capital accumulation. Guatemala is the 160th country out of 182 countries in the percentage of GDP devoted to gross fixed capital formation. In Latin America, only El Salvador has a lower fixed capital formation than Guatemala. Gross fixed capital formation is so small in Guatemala that it barely covers capital depreciation.

The perfect marriage: capital and savings

Countries that do not accumulate capital are also those that grow the least economically. However, we might wonder where capital comes from. The basis of capital accumulation is savings. Unfortunately, the savings rate in Guatemala is minuscule, so much so that it cannot support the accumulation of capital needed to escape poverty. Thus, if we compare the average savings rate in different regions, we see that Guatemala does not fare very well. From 1977 to 2016, Guatemala ranks 146th in the world (out of 177 countries) in terms of the percentage of income saved. In Latin America, only the island of Barbados and Guyana are below Guatemala.

Source: the World Bank. East Asia and the Pacific have had data only since 1996.

Developing countries still have the problem of low income, which prevents them from devoting a substantial part of their income to savings. It is one of the so-called poverty traps. However, poverty traps are not insurmountable. The simple fact that there are countries that have emerged from these traps suggests that poverty traps are not insuperable.

The way out of the poverty trap: foreign direct investment

One way to avoid the low savings capacity trap is to attract foreign savings. One of the advantages of saving is that it can “travel” in the form of foreign investment.

Given the low national savings and the difficulty of generating more considerable savings in the short and medium-term due to insufficient income (we could be asking for superhuman efforts from people with very little pay), a perfect solution is to attract foreign savings. Thus, we could accumulate capital not through national savings, but through attracting foreign investments.

Moreover, foreign direct investment has the advantage of promoting technological, administrative, and managerial transfer. Domestic companies come into contact with (and compete with) good practices that are implemented in other countries. Many times foreign direct investment provokes a certain distrust in the areas that adopt it. However, this distrust is unjustified and the result of ignorance than of plausible reason.

How does Guatemala perform in this rubric? If we compare the level of foreign direct investment received from 1977 to 2017, Guatemala lags far behind in comparison with various economic regions. Only South Asia has less foreign direct investment than Guatemala (and we have to remember that the savings in this part of the world are more than double those in Guatemala).

Source: the World Bank.

If we zoom in and focus on the Central American region, we realize that Guatemala, despite being the largest country in the area, only attracts 11% of foreign investment going to Central America since 1990. Much smaller countries such as Panama or Costa Rica receive much more of the investment for Central America, even Honduras, a much lower and more impoverished country that Guatemala gets a similar amount of foreign direct investment as Guatemala.

Source: United Nations Conference on Trade and Development.

Conclusion

Guatemala is immersed in one of the best-known poverty traps: the impossibility of accumulating more capital due to insufficient national savings. However, many other countries have circumvented this trap only by attracting foreign savings in the form of foreign direct investment. Unfortunately, neither the Guatemalan authorities nor the Guatemalan people seem very concerned about this issue. Guatemala’s capitalization will not increase without attracting foreign investment, and it will remain a relatively poor country in the world. The country is doing very little to nothing to encourage foreign investors. We could argue that often they do the opposite: undertake measures that cause the little foreign investment that exists in Guatemala to return to its country of origin.

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