Guatemala - Economy

Since the Spanish conquest, the economy of Guatemala has depended on the export of one or two agricultural products. During the colonial period, indigo and cochineal were the principal exports, but the market for them was wiped out by synthetic dyes in the 1860s. Cocoa and essential oils quickly filled the void. Coffee and bananas were introduced later, and in 1999, the chief exports were coffee, sugar, and bananas. Guatemala's economy, the largest in Central America, is dominated by the private sector, which generates nearly 90% of GDP.

Since World War II, the government has encouraged light industrial production (such as tires, clothing and pharmaceuticals). Nevertheless, in 1995, agricultural pursuits occupied 58% of the national labor force and accounted for some two-thirds of Guatemalan foreign exchange earnings. Living standards and personal income remain low, and no significant domestic market exists, except for subsistence crops.

The economy boomed from 1971 thorough early 1974. Then, as a result of inflation (21.2% in 1973), the world energy crisis, and an annual population growth of 2.9%, the economic growth rate slowed from 7.6% for 1973 to 4.6% for 1974. During the second half of the 1970s, Guatemala's economic performance slowed further; during 1974–80, the average annual growth rate was 4.3%. By the early 1980s, the civil war, coupled with depressed world commodity prices, had led to decreases in export earnings and to foreign exchange shortages. The GDP dropped by3.5% in 1982, the first decline in decades, and the GDP declined or was stagnant through 1986. The annual inflation rate, which averaged 11% during 1979–81, dropped to no more than 2% in 1982. It rose thereafter, reaching 31.5% in 1985 and about 40% in the first half of 1986.

In the 1990s the Guatemalan economy grew at a healthy pace, propelled by nontraditional exports and investment. Inflation was reduced through fiscal and monetary policies to an average of 12% in 1993. Economic growth accelerated to an estimated5.0% in 1993 compared with 4.6% in 1992. In a sudden shift that was perceived as a recession by the private sector, GDP growth decelerated in 1996 to 3.1%. The slowdown reflected a combination of factors: windfall profits from coffee exports; a slowdown in most Central American countries causing a significant decline in Guatemalan exports, and a severe competition of domestic products by Mexican imports. In addition, domestic demand cooled off as private sector credit demand ran out of steam, and tax increases were designed to strengthen the fiscal situation ahead of the signing of the peace accords. Growth for 1997 had improved to 4% thanks to greater domestic and trade liberalization; despite Hurricane Mitch, which destroyed a large portion of the country's agricultural produce for the year, GDP growth reached 5% in 1998.