Guatemala - Overview of economy

Known for its varied landscape, fertile soil, and tropical climate, Guatemala has its economic roots in the coffee and banana plantations that started up around 1860 and remained the major focus of economic activity for almost a century. Until 1950, coffee and bananas alone accounted for 90 percent of the value of Guatemala's total exports. After World War II, the practice of commercial farming spread, and the production of cotton, sugar, and livestock became an integral part of the national economy. Augmented by mining and manufacturing activity, the economy continued to expand and diversify during the 1960s and 1970s. The debt crisis of the 1980s led to sinking export prices, inflation , and declining product values, but the Guatemalan economy gained new life in the 1990s, particularly after the signing of the 1996 Peace Accords that put an end to Guatemala's 36-year internal conflict. Currently, Guatemala has the highest GDP in Central America and continues to enjoy strong growth rates. The major forces acting upon Guatemala's economy at present are the fluctuating international demand for primary resources, the actions of political elites, and the implementation of liberalization measures (including privatizations , trade and investment reforms, and tax reform).

Guatemala has achieved a fairly good balance between the agricultural, manufacturing, and service sectors of its economy. In agriculture, it is the third largest exporter of coffee in the world and a major exporter of bananas and sugar, while its manufacturing sector depends chiefly on the apparel, construction, mining, and energy industries. The service sector, which composes the largest segment of Guatemala's GDP, embraces telecommunications, tourism, and other technological enterprises. Guatemala, though not a net exporter of petroleum, is the only oil-producing nation in Central America, and the possibility of investing more intensively in oil and natural gas in the future is a viable one. Unfortunately, the infrastructure needed to develop Guatemala's natural resources is sorely lacking at present, with low telephone density, scarce access to electricity, and poor road networks outside of Guatemala City posing impediments to entrepreneurial investments.

The macroeconomic indicators often used to measure a nation's economic status speak well of Guatemala's economy. Inflation and currency devaluation have remained steady (excepting the debt crisis of the 1980s, when they were pushed beyond acceptable levels), the foreign debt of US$4.4 billion is manageable, and the GDP has grown steadily for the last decade, following a period of stunted growth during the 1980s. The political climate is also ripe for foreign investment, as the war between the Guatemalan government and the Guatemalan National Revolutionary Unity (URNG) guerrilla group came to an end in 1996. Recent privatizations have lessened the role of the government in the Guatemalan economy, easing the financial burden on the state and providing an immediate source of income from the sale of the previously state-owned enterprises. Furthermore, the government has adopted plans to dollarize its economy, following the path taken by other Latin American countries, including Ecuador, El Salvador, and Panama. Dollarization (the adoption of the U.S. dollar as the official monetary unit by another country) is generally viewed in a positive light by foreign investors, as it holds interest rates to lower levels and promises to eliminate devaluation.

While macroeconomic indicators paint a hopeful picture of Guatemala's economic situation, the conditions that exist within the nation provide far less cause for optimism. Poverty and inequality are endemic in Guatemala and are linked to the nation's other socio-economic problems, which include an inadequate education system, widespread health and sanitation deficiencies, and high rates of crime and violence. These issues have contributed to political turmoil in the past, and while Guatemala is no longer plagued by civil war, there is still great unrest and tension within the nation that could threaten political and economic stability in the future. International agencies and foreign governments are dispensing aid to Guatemala more willingly now than during the nation's civil war, but these funds are not large enough to promote change in a system that is deeply rooted in unequal distribution of land and wealth.